NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDR) of Edison International (EIX) at 'A-'and 'F2', respectively. In addition, Fitch has affirmed the long-term ratings of Southern California Edison (SCE) at 'A-'. Fitch has also downgraded SCE's short-term IDR and commercial paper rating to 'F2' from 'F1'.
The downgrades to SCE' Short-Term IDR and commercial paper ratings are the result of Fitch's updated 'Criteria for Rating Non-Financial Corporates' master criteria, which was published on Sept. 27, 2016. The updated criteria clarifies that Fitch will assign 'F2' Short-Term ratings to issuers with 'A-' Long-Term ratings.
The Rating Outlook is Stable. A full list of rating actions for EIX and SCE follows at the end of this release.
KEY RATING DRIVERS
EIX and SCE's ratings and Stable Outlooks primarily reflect the core utility's strong and relatively predictable cash flows, manageable leverage and balanced regulatory compact. SCE represents virtually all of EIX's consolidated earnings and cash flow.
Strong Projected Credit Metrics
The ratings and Outlook are also supported by strong underlying credit metrics. Fitch estimates that SCE's adjusted debt-to-EBITDAR will approximate 3.2x during 2016 to 2020. These projections incorporate the California Public Utilities Commission's (CPUC) final decision in SCE's 2015 general rate case (GRC).
2015 GRC Decision
SCE filed its 2015 GRC on Nov. 12, 2013 and supported a $120.9 million 2015 test year rate decrease and 2016 and 2017 attrition year rate increases of $236 million and $320 million, respectively, in updated testimony filed in May 2015. The May 2015 update filing reflected changes in tax repair deductions and the jurisdictional allocation adjustments of certain tax items between the CPUC and the Federal Energy Regulatory Commission (FERC). On Nov. 5, 2015, the CPUC issued a final decision reducing SCE's 2015 test year rates $450 million (retroactive to Jan. 1, 2015) and authorizing attrition year rate increases of $209 million and $272 million, respectively, in 2016 and 2017. SCE filed its 2018 GRC with the commission September 2016.
2018 GRC Filed
SCE filed its 2018 GRC Sept. 1, 2016, seeking a $222 million (2.7%) base rate increase and 2019 and 2020 attrition year rate hikes of $533 million and $570 million, respectively. The most recent schedule in the proceeding calls for intervenor testimony in the second quarter of 2017 and proposed and final decisions by year-end 2017. In addition, SCE forecasts $85 million in 2018 operating and maintenance expense reductions as part of the utility's ongoing effort to minimize rate increases for customers and maximize operating efficiency. Separately, SCE has requested commission approval of a memorandum account to facilitate $210 million of grid modernization capital expenditures in 2016 to 2017 in support of the utility's $2.1 billion of planned grid modernization expenditures in the 2018 GRC.
Balanced CA Regulatory Environment
SCE benefits from a balanced state regulatory environment that includes, among other credit supportive features, full 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. These regulatory mechanisms generally enable California based investor-owned utilities (IOUs) to earn their authorized ROEs. Moreover, Fitch believes the CPUC views strong IOU creditworthiness as being essential to the utilities' ability to further state policy goals and the provision of fair and just rates.
FERC Regulation
Fitch believes FERC regulation is relatively supportive from a credit perspective. FERC generally provides utility assets under its jurisdiction with a reasonable opportunity to earn relatively attractive returns. Through 2020, Fitch believes FERC jurisdictional rate base at SCE will remain just under one-fifth of the total SCE rate base, estimated at $24.9 billion in 2016, rising to $35 billion in 2020.
Aggressive CA Environmental Policy
In October 2015, Senate Bill (S.B.) 350, The Clean Energy and Pollution Reduction Act of 2015, was enacted in California. The legislation is consistent with Gov. Jerry Brown's executive order issued in 2015, requiring that 50% of customer energy sales be provided through renewable power by 2030.
In addition, the legislation mandates a doubling of energy efficiency in existing buildings in California by 2030 and includes transportation electrification and integrated resource planning requirements. Enactment of the legislation strengthens California's leadership role in reducing carbon emissions. SCE's strategic vision is focused on strengthening and modernizing its grid to facilitate state energy policy.
Fitch believes that the essential role of SCE and the other IOUs in the achieving California's energy policy goals supports continued regulatory support from a credit perspective. Barring disruptive technological change, which cannot be ruled out, Fitch believes California's energy policy goals are manageable within the regulatory compact.
Large Capex Program
The balanced regulatory compact in California mitigates concern regarding SCE's large capex program. Fitch expects SCE's 2016 to 2020 capex to average $4.7 billion per year, approximately 22% above historic 2011 to 2015 levels, which averaged $3.8 billion.
The stability of the regulatory compact in California and, to a somewhat lesser degree FERC, is particularly important to EIX and SCE's creditworthiness in light of the utility's large capex program.
SCE is targeting total capex of $23.3 billion for 2016 to 2020. Fitch assumes effective execution of SCE's capex program and timely recovery of anticipated infrastructure investment. SCE's large capex is expected to drive five-year average rate base growth of 8.5% during 2016 to 2020.
SCE's capital investment program is focused on infrastructure spending to accommodate growth, reliability and a more technologically advanced grid capable of facilitating two-way energy flows to support distributed energy, micro-grid and storage development consistent with California energy policy goals. Pre-approval of projects either in single issue rate proceedings or GRCs mitigates concern regarding SCE's large capital program. Nonetheless, execution risk, unexpected cost overruns and related potential charges could lead to future adverse credit rating actions.
SONGS Update
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 Advocates (ORA) among other signatories. Following SCE's late ex-parte communication disclosure to the CPUC, both TURN and ORA sought to have the CPUC reopen the SONGS investigation.
In May 2016, the CPUC issued a joint ruling reopening the record in the commission-approved 2014 settlement. The ruling established a briefing schedule to address whether, in light of the ex parte rules violations, the SONGS settlement remains reasonable and in the public interest. SCE continues to support the settlement. However, several parties have filed comments requesting that the CPUC modify or vacate the settlement agreement. Fitch does not expect opposition to the SONGS settlement to result in credit rating downgrades at either EIX or SCE.
EIX Debt: Balance sheet debt is manageable at EIX totalling $12.3 billion as of June 30, 2016 and includes parent-only debt of approximately $1.3 billion. Parent-only EIX debt of $1.3 billion as of June 30, 2016 was virtually unchanged from year-end 2015 levels. EIX parent-only debt increased meaningfully in 2014 from approximately $400 million at the end of 2013. The sharp increase in parent level debt was due primarily to execution of Edison Mission Energy's (EME's) bankruptcy court approved plan of reorganization (POR). The increase in parent-only EIX debt reflects a mismatch in the funding of payments to creditors under the POR and monetization of retained EME tax benefits under the POR due to the extension of bonus depreciation.
In Fitch's opinion, EIX parent level debt is manageable, representing approximately 9% of consolidated EIX debt outstanding of $14.6 billion as of June 30, 2016, including preferred securities.
Adjusted debt as calculated by Fitch has grown at SCE from $10.1 billion in 2012 to 12.3 billion in 2015, reflecting high capital spending and rate base growth at the utility. Fitch believes the increase in utility debt is manageable, balanced by supportive rate decisions at CPUC and FERC and solid leverage metrics.
SCE had approximately $2.2 billion of hybrid securities on its balance sheet as of June 30, 2016. SCE's hybrid securities are assigned 50% equity credit, consistent with Fitch criteria, in calculating the operating utility's leverage ratios. However, equity credit is not included in the calculation of EIX consolidated leverage.
EIX subsidiary Edison Energy (EE) provides energy services to commercial and industrial customers nationally and has acquired several relatively small businesses. EE is not a significant contributor to consolidated EIX financials. However, significant expansion of unregulated business lines could weaken EIX's business risk profile potentially pressuring creditworthiness at EIX and SCE. EIX through Edison Mission Group owns EME and Edison Capital (EC).
EME emerged from bankruptcy in 2014. EME's results are consolidated with EIX for tax purposes and its financial results included in discontinued operations in EIX's financial statements. EME exists primarily to facilitate the sharing of tax benefits between EME creditors and EIX. EC is in wind-down mode.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for SCE include the following:
--Capex approximating $4.7 billion per annum 2016 to 2020;
--Continued regulatory/policy support for SCE's evolving grid strengthening and modernization plans;
--A 10.45% authorized ROE and 48% equity ratio through 2017;
--No equity issuance over the forecast period.
RATING SENSITIVITIES
Future developments that either individually or combined could lead to positive rating actions include:
--A rating upgrade for EIX and SCE is challenged by the utility's relatively large capex program, higher than industry average rates, and secular concerns regarding competitive inroads from alternative energy suppliers.
--Policy-driven changes to the grid including increasing two-way power flows, digitization and the incorporation and role of new and developing technologies injects a measure of long-term credit uncertainty, in Fitch's view.
--Fitch believes these challenges are manageable within the current rating categories for EIX and SCE.
--However, constructive outcomes regarding rate design issues to be addressed in proceedings related to A.B. 327 along with sustained EBITDAR and FFO-adjusted leverage of better than 3.25x and 3.5x, respectively, could result in future positive rating actions.
Future developments that either individually or combined could lead to negative rating actions include:
--Deterioration in the California regulatory environment, would likely lead to future credit rating downgrades for both EIX and SCE.
--The inability to effectively execute its large capex program and fully recover costs in a timely manner could also result in adverse credit rating actions.
--EIX'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 2016, EIX had consolidated cash and cash equivalents on its balance sheet totalling $111 million. EIX's liquidity is strong, with $3.1 billion available under a total $4 billion of consolidated EIX committed bank facilities.
Total EIX borrowing capacity is composed of EIX's $1.25 billion and SCE's $2.75 billion committed bank facilities. EIX and SCE's revolvers terminate July 2021 (EIX $1.23 billion and SCE $2.72 billion) and July 2020 (EIX $16 million and SCE $34 million).
HYBRID TREATMENT
Fitch's 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' states that equity credit assigned to an operating subsidiary's hybrid may not be assigned to the parent if the subsidiary's hybrid structurally subordinates senior debt at the parent company. Prior to this rating action, Fitch inadvertently applied SCE's equity credit to EIX's financial ratio calculations, historic and projected. This error has been corrected and is reflected in EIX's current ratings and Stable Outlook.
FULL LIST OF RATING ACTIONS
Fitch has affirmed EIX's ratings as follows:
--Long-Term Issuer Default Rating (IDR) at 'A-';
--Short-Term IDR at 'F2';
--Senior unsecured at 'A-';
--Commercial paper at 'F2'.
Fitch has affirmed SCE's ratings as follows:
--Long-term IDR at 'A-';
--Senior secured at 'A+';
--Senior unsecured at 'A';
--Senior secured pollution control revenue bonds at 'A+';
--Senior unsecured pollution control revenue bond at 'A';
--Preferred at 'BBB+';
--SCE Trust I 5.625% Trust Preference Securities at 'BBB+';
--SCE Trust II 5.10% Trust Preference Securities at 'BBB+';
--SCE Trust III Fixed-to-Floating Rate Trust Preference Securities at 'BBB+;
--SCE Trust IV Fixed-to-Floating Rate Trust Preference Securities at 'BBB+';
--SCE Trust V Fixed -to-Floating Rate Trust Preference Securities at 'BBB+'.
Fitch has downgraded SCE's short-term ratings as follows:
--Short-Term IDR to 'F2' from 'F1';
--Commercial paper to 'F2' from 'F1'.
The Rating Outlook for EIX and SCE is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
https://www.fitchratings.com/site/re/878264
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013299
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013299
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https://www.fitchratings.com/regulatory
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