Fitch Affirms EIX and SCE's Ratings; Outlook Stable
Key rating drivers for EIX and SCE include:
--Solid consolidated EIX credit metrics;
--Improved EIX consolidated business risk profile with the emergence of Edison Mission Energy (EME) from bankruptcy;
--Strong and relatively predictable utility earnings and cash flows;
--A balanced regulatory compact in the state of California;
--Effective execution of SCE's large capex program and timely recovery of related costs in rates;
--SCE's tiered rate structure and long-term concerns around competitive inroads from alternative energy supply.
The affirmation at EIX considers EME's Bankruptcy Court-approved plan of reorganization (POR). EME's emergence from bankruptcy resolves all EIX exposure to EME creditor claims, substantially improving EIX's consolidated business risk profile, in Fitch's opinion. SCE accounts for virtually all of EIX's consolidated operating earnings and cash flows.
Under the bankruptcy court approved EME reorganization, EIX will continue to own the company, which emerged from bankruptcy free of liabilities, and consolidate it for tax purposes. Tax attributes of approximately \$1.2 billion will be shared by EIX with EME creditors under the terms of the POR and related settlement with EME creditors.
EIX paid \$225 million earlier this year to a trust formed under the terms of the restructuring and controlled by EME creditors. EIX issued notes payable to the EME creditor trust totaling \$418 million, of which \$204 million and \$214 million mature in September 2015 and 2016, respectively. In addition, EIX assumed \$350 million of joint and several pension and tax liabilities.
EIX as of Dec. 31, 2014 retained \$1.1 billion of net operating loss and tax credit carryforwards held at EME, that Fitch expects to be used by EIX to fully fund payments to EME creditors under the POR.
The POR settlement with EME creditors is not without risk to EIX. The 2014 extension of bonus depreciation delayed monetization of EIX tax credits and future extensions (if any) could lead to further delay. Moreover, tax reform with an attendant reduction in the current corporate tax rate would permanently reduce the value of net operating losses (NOLs).
Parent-only EIX debt increased to \$1.4 billion as of Dec. 31, 2014 from approximately \$400 million a year earlier. Fitch assumes EIX will use proceeds from the monetization of tax credits through 2018 to reduce debt to 2013 levels.
EIX and SCE's ratings also reflect the utility's strong, projected earnings and cash flows, relatively low debt leverage, a balanced regulatory compact in California and strong projected credit metrics. The ratings and Outlook also consider SCE's large capex program (approximately \$4 billion per annum) and assumes reasonable outcomes in its pending 2015 general rate case (GRC).
In Nov. 2014, the CPUC approved a modified stipulation reached by SCE, San Diego Gas & Electric Co. and other parties to the San Onofre Nuclear Generating Station (SONGS) proceedings before the CPUC. Fitch believes the CPUC decision authorizing recovery of certain SONGS related costs is a constructive event from a credit point-of-view.
The utility 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.
Fitch believes the balanced regulatory compact in California mitigates concerns regarding California's ambitious greenhouse gas reduction goals and SCE's large capex program. Fitch expects SCE's capex to average \$3.9 billion - \$4.5 billion per annum during 2015-2017. Fitch estimates that EIX and SCE's adjusted debt-to-EBITDAR will approximate 3.2x or better in 2015-2017.
In SCE's 2012 GRC, the CPUC authorized a test-year rate increase of \$272 million and attrition-year rate increases of \$358 million and \$356 million, respectively, in 2013 and 2014. The CPUC approved total rate increase during 2012-2014 represents approximately 54% of the utility's request in the base rate proceeding.
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.
SCE filed its 2015 GRC in Nov. 2013 and currently supports an \$80 million rate increase over currently authorized base rates in the 2015 test year and 2016 and 2017 attrition year rate increases of \$286 million and \$315 million, respectively.
Significant deterioration in the regulatory compact in California or other factors that would result in EBITDAR leverage weakening to 3.6x or worse on a sustained basis could trigger future credit rating downgrades for SCE. Fitch believes a material deterioration in California regulation, however, is a low probability event in the near- to intermediate-term.
The utility and its parent company's credit ratings consider 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 address net metering and residential rate cross-subsidization issues.
A CPUC approved Phase 2 settlement in the commission's residential rate design order instituting rulemaking (OIR) modified tiered rates increasing lower usage Tier 1 and Tier 2 customer rates 12% and 17%, respectively.
Phase 1 of the residential rate design OIR is expected to reduce the number of tiers from four currently to two or three while further narrowing rate differentials. In addition, the CPUC will consider implementing time-of-use rates and adopting fixed rates and/or minimum monthly bill. A final Phase 1 decision in the residential rate design OIR is expected later this year.
The commission has also initiated a separate OIR to determine a successor to current net energy metering tariffs. A commission decision is expected by Fitch in the fourth quarter 2015.
Implementation of A.B. 327 resulting in more balanced rate design and net metering contracts would be a positive development for SCE and its parent's creditworthiness, in Fitch's view.
The ratings for SCE also consider CPUC regulations that limit dividends and cash distributions from the utility to EIX.
Liquidity at EIX is solid with \$132 million of cash and cash equivalents on its consolidated balance sheet at year-end 2014. In addition, available borrowings under EIX and SCE's committed credit facilities approximated a combined \$2.9 billion. Total borrowing capacity under EIX and SCE's credit agreements is \$4.0 billion (EIX \$1.25 billion and SCE \$2.75 billion).
KEY ASSUMPTIONS
--Fitch anticipates a revenue increase approximating 55% or \$375 million of the utility's requested 2015-2017 rate increase request in its pending 2015 GRC.
--Capex approximating \$4 billion per annum 2015-2017.
--Continued regulatory/policy support for SCE's evolving grid strengthening and modernization plans.
--A narrowing of rate differentials and tiers in the pending residential rate design OIR.
--A balanced outcome in pending net metering proceeding before the CPUC.
--No equity issuance over the forecast period.
RATING SENSITIVITIES
A rating upgrade at EIX and/or SCE is challenged by the utility's 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 design and net metering 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.
Deterioration in the California regulatory environment, would likely lead to future 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.
EIX and SCE's ratings would likely be downgraded if these or other factors were to weaken the issuers' earnings leverage to worse than 3.6x on a consistent basis.
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-';
--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 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+'.
--Commercial paper at 'F1'
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