News Column

Amendment: Fitch Revises EIX's Outlook to Positive; Affirms EIX & SCE's Ratings

January 29, 2014

NEW YORK --(BUSINESS WIRE)-- (This announcement amends the release published on Jan. 8, 2014 to explicitly include language affirming the SCE Trust II Preference Securities . ) Fitch Ratings has revised Edison International's (EIX) Rating Outlook to Positive from Stable. Fitch has also affirmed the ratings of EIX and its core utility operating subsidiary, Southern California Edison (SCE), as follows: EIX --Long-term Issuer Default Rating (IDR) at 'BBB'; --Short-term IDR at 'F2'; --Senior unsecured at 'BBB'. SCE --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. 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 for EIX and SCE include: --Uncertainty regarding claw-backs in Edison Mission Energy's (EME) bankruptcy proceeding; --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 Positive Rating Outlook at EIX reflects the meaningful improvement to its consolidated creditworthiness as greater clarity emerges during pending EME bankruptcy proceedings. While the timing of the acquisition of EME by NRG Energy, Inc.(NRG), targeted by NRG to close by the end of first quarter 2014, is uncertain, the proposed acquisition, in Fitch's view, moves EME closer to resolution of its restructuring in bankruptcy. Fitch believes a reasonable outcome regarding claw-back efforts by certain EME creditors later this year would support improving EIX credit ratings and a potential equalization of EIX and SCE's IDRs over time in a reasonable worst-case scenario. Future adverse developments in the EME bankruptcy from an EIX credit point-of-view cannot be ruled out and are a source of uncertainty for investors. Nonetheless, a reasonable solution to pending claw-back issues is a likely catalyst for future EIX credit rating upgrades and supports the Rating Outlook revision to Positive at EIX. The affirmation of EIX and SCE's ratings primarily reflects 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 would likely 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. RATING SENSITIVITIES Greater clarity with regard to EIX's exposure to the EME restructuring in bankruptcy could result in an upgrade for EIX. The following might lead to a downgrade: Conversely, 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. 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 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139 Short-Term Ratings Criteria for Non-Financial Corporates http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714415 Rating North American Utilities, Power, Gas, and Water Companies http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129 Recovery Ratings and Notching Criteria for Utilities http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818151 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM . PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst: Philip W. Smyth , CFA, +1-212-908-0531 Senior Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst: Glen Grabelsky , +1-212-908-0577 Managing Director or Committee Chairperson: Shalini Mahajan , +1-212-908-0351 Senior Director or Media Relations: Brian Bertsch , +1-212-908-0549 brian.bertsch@fitchratings.com Source: Fitch Ratings


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