NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Southern California Edison's (SCE) aggregate $1.3 billion offering of first and refunding mortgage bonds (FMBs). Proceeds from the offering will be used to finance construction expenditures, refund approximately $400 million of outstanding debt and for general corporate purposes. The Rating Outlook for SCE is Stable.
KEY RATING DRIVERS
--SCE's strong consolidated credit metrics;
--Strong and relatively predictable utility earnings and cash flows;
--A balanced regulatory compact in California.
SCE's ratings and Stable Outlook primarily reflect the utility's relatively predictable earnings and cash flows, low debt leverage, and balanced regulatory compact. The ratings and Outlook also consider SCE's large capex program and assumes a reasonable outcome in its pending 2015 general rate case (GRC).
The state of California's aggressive carbon reduction and renewable energy policies are a long-term source of uncertainty for SCE, in Fitch's opinion. In his recent inauguration speech Governor Brown called for an increase the state's current renewable standard to 50% from 33% by 2030 and further energy efficiency gains.
Fitch believes the final California Public Utilities Commission (CPUC) decision adopting the amended San Onofre Nuclear Generating Station stipulation is a constructive credit event, removing a source of headline risk. Separately, the CPUC also granted SCE's request for a one-year extension to file its next cost of capital (CoC) application.
As a result, SCE's next CoC will be due April 20, 2016, a modest positive development from a credit point-of-view.
SCE benefits from a balanced state regulatory environment that includes, among other credit-supportive features, revenue decoupling, forward test years in regularly scheduled GRCs, bifurcation of cost-of-capital proceedings from GRCs, pre-approval of capex, and riders for recovery of key expense items outside of GRC proceedings.
The balanced regulatory compact in California mitigates concerns regarding SCE's large capex program, which is expected to approximate $15 billion-$17 billion during 2014-2017. Fitch estimates that SCE's adjusted debt-to-EBITDAR will be 3x or better in 2014-2016.
SCE filed its 2015 GRC in November 2013, updating it in April 2014 to remove costs related to Four Corners and SONGS as directed by the administrative law judges assigned to the GRC. SCE currently supports in update testimony an $82 million increase over currently authorized base rates and 2016 and 2017 attrition-year rate increases of $295 million and $313 million, respectively.
Fitch notes that an unexpected, significant deterioration in the regulatory compact in California or other factors that would result in adjusted SCE debt-to-EBITDAR weakening to 3.6x-3.75x or worse on a sustained basis would likely trigger future credit rating downgrades at SCE. Fitch believes a material deterioration in California regulation, however, is a low probability event in the near to intermediate term.
The utility's credit ratings reflect potential secular risks associated with California's strong commitment to low-carbon energy policy and technologies. In this regard, Fitch believes that enactment of A.B.327 is a constructive development.
The legislation provides authority to the CPUC to adjust residential rates and implement fixed charges, among other things, to address residential cost-shifting issues and provide appropriate incentives to balance the interests of customers and the investor-owned utilities (IOU).
Implementation of the legislation resulting in more balanced rate design would be a positive development for SCE's creditworthiness, in Fitch's view. In addition, the ratings recognize CPUC regulations that limit dividends and cash distributions from SCE to EIX.
RATING SENSITIVITIES
A rating upgrade for SCE is challenged by its relatively large capex program, higher than industry average rates, tiered rate structure, and secular concerns regarding competitive inroads from alternative energy suppliers.
However, constructive outcomes regarding rate structure issues to be addressed in proceedings related to A.B. 327 along with sustained EBITDAR leverage of better than 3.25x could result in future positive rating actions at SCE.
Deterioration in the California regulatory environment, would likely lead to future SCE credit rating downgrades. The inability of SCE to effectively execute its large capex program and fully recover costs in a timely manner could also result in adverse credit rating actions.
SCE's ratings would likely be downgraded if these or other factors were to result in EBITDAR leverage of 3.6x-3.75x or worse on a sustained basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent Subsidiary Linkage' May 28, 2014;
--'Recovery Ratings and Notching Criteria for Utilities' Nov. 19, 2013;
--'Rating U.S. Utilities, Power, and Gas Companies' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813608
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=968395
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