Fitch Rates SCE Trust IV Preference Securities 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB+' rating to Southern California Edison Company's (SCE) SCE Trust IV fixed-to-floating trust preference securities. The preference securities are subordinated to SCE's senior debt. Proceeds to SCE will be used to repay the series A preference shares and for general corporate purposes. The Rating Outlook is Stable.

KEY RATING DRIVERS

SCE's ratings and Stable Outlook 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). An administrative law judge proposed order and final California Public Utilities Commission (CPUC) decision is expected later this year with rates retroactive to Jan. 1, 2015.

SCE filed its 2015 GRC in November 2013 and currently supports a $121 million 2015 test year rate reduction and 2016 and 2017 attrition-year rate increases of $236 million and $319 million, respectively. The May 2015 update filing reflects changes in tax repair deductions and the jurisdictional allocation adjustments of certain tax items between the CPUC and the Federal Energy Regulatory Commission (FERC).

The updated 2015-2017 rate increase request totals $434 million, approximately $247 million or 36% lower than the $681 million 2015-2017 rate hike supported by SCE previously.

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 concern regarding the state's aggressive carbon reduction and renewable energy policy goals and SCE's large capex program. SCE's 2015-2017 capex is expected to approximate $11.5 billion-$13.1 billion. Fitch believes capex is likely to remain elevated through the end of the decade driven by investment to modernize and strengthen the grid to facilitate low carbon infrastructure initiatives under consideration by the CPUC.

Fitch estimates that SCE's adjusted debt-to-EBITDAR will be 3x or better in 2015-2017 which is consistent with the utility's current credit profile. 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 in the near to intermediate term is a low probability event.

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. Assembly Bill (A.B.) 327, enacted in 2013, provides authority to the CPUC to adjust residential tariffs to address rate design and cost-shifting issues relating to net energy metering (NEM) and provide appropriate incentives to balance the interests of customers, suppliers and investor-owned utilities.

The CPUC issued a final Phase 1 decision in its rate design order instituting rulemaking (OIR) that will reduce the number of residential rate tiers from four to two while increasing the minimum bill to $10 per month from $1.80 currently. Fitch believes the outcome in phase 1 of the residential OIR is neutral to modestly constructive from a credit point-of-view.

In July 2015, SCE filed its proposal in the CPUC's NEM tariff proceeding and distribution resource plan (DRP). The NEM proceeding is expected to result in new tariffs addressing subsidies effective in 2017. SCE's DRP proposes capital investment for grid modernization and reinforcement totalling $350 million-$560 million during 2015-2017 and $1.4 billion-$2.6 billion 2018-2020.

The NEM and DRP proceedings will be important milestones in implementing the state's low-carbon energy policy vision and in a way that balances the interest of all relevant constituent groups. Fitch believes competitive and regulatory challenges associated with the process will be resolved without undue pressure to SCE's credit profile.

In November 2014, the CPUC approved a stipulation regarding recovery of costs related to the retirement of the San Onofre Nuclear Generating Station (SONGS) that included The Utility Reform Network (TURN) and Office of Ratepayer Advocate (ORA) among other signatories. Following SCE's late ex-parte communication disclosure to the CPUC, both TURN and ORA have indicated that they no longer support the SONGS stipulation and are also seeking to have the CPUC reopen the SONGS investigation.

Separately, the administrative law judge ruled earlier this month that SCE engaged in 10 ex-parte communications related to SONGS. While the ex-parte disclosures, expected, associated penalties and potential reopening of the SONGS investigation are sources of uncertainty and headline risk for SCE, it seems unlikely, in Fitch's view, to trigger future credit rating downgrades.

In addition, the ratings recognize CPUC regulations that limit dividends and cash distributions from SCE to EIX.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for SCE include the following:

--Capex approximating $4 billion per annum 2015-2017.

--Continued regulatory/policy support for SCE's evolving grid strengthening and modernization plans.

--A balanced outcome in the pending net metering proceeding before the CPUC.

--No equity issuance over the forecast period.

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.

LIQUIDITY

As of June 30, 2015, SCE had consolidated cash and cash equivalents on its balance sheet totalling $53 million. SCE's liquidity is strong, with $1.78 billion available under its $2.75 billion committed bank facility. SCE's bank facility terminates July 2019. Approximately $1.6 billion of SCE debt matures during 2015-2018, including $300 million of first and refunding bonds that matured April 1, 2015. Debt maturities in 2016-2018 range from $400 million to $500 million per annum. Leverage is manageable as measured by debt/EBITDAR, which is estimated by Fitch at 2.8x to 3.0x during 2015-2017.

Date of Related Committee: March 4, 2015.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosures

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Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Committee Chairperson
Peter Molica
Senior Director
+1-212-908-0288
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Committee Chairperson
Peter Molica
Senior Director
+1-212-908-0288
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com