Fitch Upgrades EIX's IDR to 'BBB+; On Rating Watch Positive; SCE Ratings Affirmed
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Edison International's (EIX) Long-term Issuer Default Rating (IDR) and senior unsecured notes to 'BBB+' from 'BBB' and placed them on Rating Watch Positive. EIX's short-term IDR has been affirmed at 'F2'.
Fitch has also affirmed Southern California Edison's (SCE) ratings. The Rating Outlook for SCE is Stable. A complete list of rating actions for EIX and SCE follows at the end of this release.
Approximately $11.2 billion of EIX and SCE long- and short-term debt outstanding as of Sept. 30, 2013 is affected by the rating actions.
KEY RATING DRIVERS: EIX and SCE
--Bankruptcy court approval of the amended Edison Mission Energy (EME) plan of reorganization and EIX - EME settlement agreement;
--The balanced regulatory compact in the state of California and the ability to timely recover prudently incurred costs in rates;
--Strong projected utility operating cash flows, earnings and credit metrics;
--SCE's tiered rate structure and long-term concerns around competitive inroads from alternative energy supply.
The EIX upgrade reflects the company's proposed settlement between it and EME bondholders, resolving all issues between them associated with EME's bankruptcy. The settlement, if approved by the bankruptcy court, is expected to be earnings and cash flow positive to EIX. The placement of EIX on Rating Watch Positive anticipates bankruptcy court approval in March or April of this year. Fitch expects to resolve the Rating Watch around the time EME's third amended plan of reorganization is approved by the bankruptcy court and becomes effective, equalizing EIX and SCE's IDRs at the 'A-' level.
EME filed for protection under the U.S. Bankruptcy Code in Dec. 2012. In October 2013, NRG announced that it would acquire virtually all of EME's assets for $2.6 billion and assume $1.6 billion of debt.
Under EME's plan of reorganization filed prior to the EIX - EME settlement, EME would have continued to pursue claims against EIX related primarily to tax and pension issues.
The settlement, if approved by the bankruptcy court, would extinguish all claims between EIX and EME. An amended plan of reorganization reflecting the settlement was filed with the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division yesterday, Feb. 19, 2014. The plan of reorganization is expected to be effective around the end of the first quarter 2014.
Under the terms of the agreement EIX will continue to own EME and consolidate it for tax purposes. EME holds tax attributes of approximately $1.2 billion. In addition, EIX through EME will own a small investment in Capistrano Wind Holdings and a lease associated with a hydroelectric generating asset.
The amount of tax benefits currently estimated at $1.2 billion are expected to be finalized within six months of the effective date of the plan of reorganization and shared 50 - 50 with EME bondholders. EIX will make three payments, currently targeted for March 2014 and September 2015 and 2016. In addition, EIX will assume $350 million of joint and several pension and tax liabilities.
Amortization of tax benefits would more than fully fund the sharing of tax benefits with EME bondholders and the joint and several liabilities to be assumed by EIX under the settlement. As structured, EIX expects to record an incremental $200 million of net earnings to discontinued operations.
There is tax risk in the settlement to EIX if tax rates are lowered or bonus depreciation is extended, that Fitch believes is manageable especially in light of EIX's strong consolidated credit profile and metrics.
The EIX and SCE ratings also consider the strong credit profile of the holding company's core operating electric utility subsidiary, SCE.
The utility benefits from a balanced state and federal regulatory environment that includes, among other credit-supportive features, revenue decoupling, forward test years in regularly scheduled general rate cases (GRC), 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 be approximately $18 billion-$21 billion during 2013-2017. Fitch estimates that EIX and SCE's EBITDA-to-interest and debt-to-EBITDA ratios will be better than 7.0x and 3.0x, respectively, during 2013 - 2017.
Fitch's 2013 and 2014 estimates reflect revenue increases approved by the California Public Utilities Commission (CPUC) in SCE's 2012 GRC. In addition to a test-year rate increase of $272 million, the CPUC's final decision in the 2012 GRC approved attrition-year rate increases of $358 million and $356 million, respectively, in 2013 and 2014.
In its final 2012 GRC decision, the CPUC approved total rate increases during 2012 - 2014 representing approximately 54% of the utility's request.
Going forward, Fitch assumes that the final decision in SCE's pending 2015 GRC will be generally consistent with the balanced outcome in the utility's 2012 GRC.
Fitch notes that an unexpected, significant deterioration in the regulatory compact in California that would result in debt-to-EBITDA weakening to 3.4x or worse on a sustained basis could trigger future credit rating downgrades for SCE. Fitch believes a material deterioration in California regulation is a low probability event in the near- to intermediate-term.
The utility and its parent company'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).
Fitch's ratings for SCE and EIX consider the utility's investment in the retired San Onofre Nuclear Generating Station (SONGS) and the commission's pending order instituting investigation (OII) to consider related cost recovery issues. Fitch believes precedent in the state supports full recovery of SCE's prudently incurred costs related to the utility's investment in SONGS. SONGS related operating issues are not expected by Fitch to trigger future credit rating downgrades.
Fitch notes that SCE recorded a pre-tax impairment charge of $575 million ($365 million after tax) in second quarter 2013 due to the early retirement of SONGS and its reclassification as a deferred asset.
The retired nuclear facility represents approximately $1.2 billion of rate base and $2.1 billion of net investment, which compares to a year-end 2013 expected SCE rate base of more than $20 billion and total assets as of Sept. 30, 2013 of $46.3 billion.
SCE announced its decision to permanently retire SONGS Units 2 and 3 in June 2013 due to unexpected heat transfer tube wear in replacement generators at both units. SONGS had been out-of-service since January 2012 when a tube leak was discovered in Unit 3.
The ratings for EIX and SCE also consider CPUC regulations that limit dividends and cash distributions from the utility to EIX. EIX relies on dividends from SCE and benefits from its tax-sharing agreement to meet its obligations. There are no cross defaults, inter-company loans or guarantees between EME and either EIX or SCE.
The following might lead to an upgrade:
Approval of EIX's settlement with EME bondholders and finalization of EME's amended plan of reorganization would likely trigger an EIX upgrade. A credit rating upgrade seems unlikely for SCE at this juncture.
The following might lead to a downgrade:
Significant deterioration in the regulatory compact in California could result in credit rating downgrades at EIX and SCE. In addition, an unexpected change in EIX management strategy that tilted toward aggressive diversification and/or shareholder-friendly actions, including debt-funded share repurchases, could lead to future credit downgrades. In the longer term, increasing competitive pressure from alternative technologies could result in future credit downgrades.
Fitch has upgraded the ratings of EIX as follows and placed them on Rating Watch Positive:
--Long-term IDR to 'BBB+' from 'BBB';
--Senior unsecured to 'BBB+' from 'BBB'.
In addition, Fitch has affirmed EIX's short-term IDR at 'F2'.
Fitch has also affirmed SCE's ratings as follows:
--Long-term IDR at 'A-';
--Short-term IDR at 'F1';
--Senior secured at 'A+';
--Senior unsecured at 'A';
--Senior secured pollution control revenue bonds at 'A+';
--Senior unsecured pollution control revenue bonds at 'A';
--Preferred at 'BBB+';
--SCE Trust II 5.10% Trust Preference Securities at 'BBB+';
--Commercial paper at 'F1';
--Short-term secured at 'F1'.
The Rating Outlook for SCE is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including short-Term Ratings and Parent Subsidiary Linkage' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);
--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
Short-Term Ratings Criteria for Non-Financial Corporates