OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to Southern California Edison's (SCE) SCE Trust V fixed-to-floating trust preference securities. The Rating Outlook is Stable. Proceeds from the debt offering will be used by SCE to redeem all of the outstanding shares of SCE's 6.50% series D preference stock and for general corporate purposes.

KEY RATING DRIVERS
SCE's ratings and Stable Rating Outlook reflect its strong and relatively predictable earnings and cash flows, manageable debt and balanced regulatory compact. The ratings and Outlook also considers SCE's large capex program and assumes a credit supportive regulatory compact in California. SCE is a wholly-owned subsidiary of Edison International (EIX; Issuer Default Rating 'A-'; Outlook Stable).

SCE filed its 2015 general rate case (GRC) in November 2013 and, at the time of the issuance of the California Public Utilities Commission (CPUC) final decision, supported a $121 million 2015 test year rate reduction and 2016 and 2017 attrition year rate increases of $236 million and $319 million, respectively. The commission in its final decision granted SCE a test year rate decrease of $451 million. The CPUC decision also granted 2016 and 2017 attrition year rate increases of $209 million and $272 million, respectively. Fitch believes the final CPUC decision SCE's 2015 GRC is supportive from a credit point-of-view.

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 and the Federal Energy Regulatory Commission (FERC) mitigates concern regarding California's aggressive carbon reduction and renewable energy policy goals and SCE's large capex program. The California legislature approved Senate Bill (S.B.) 350, which was signed into law by Governor Gerry Brown in October 2015. The law increases California's renewable standard to an ambitious 50% by 2030 from 33% by 2020. 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.

SCE's capex is estimated at $4 billion-$4.1 billion in 2016 and $4.1 billion-$4.2 billion in 2017. Post-2017 capex is estimated by the company to approximate $4 billion per annum or more, driven by investment to modernize and strengthen the grid to facilitate low carbon infrastructure initiatives.

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. Fitch believes a material deterioration in California regulation in the near-to-intermediate term is a low probability event.

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). Under the law, the CPUC is charged with providing appropriate incentives to balance the interests of ratepayers, suppliers and investor-owned utilities. Proceedings before the commission will also consider grid investment required to support the state's low carbon strategy.

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 by 2019. The cost differential will reduce to 25%. The CPUC also raised the minimum bill to $10 per month from $1.80. Fitch believes the outcome in Phase 1 of the residential OIR is neutral to modestly constructive for SCE from a credit point-of-view.

In August 2015, SCE filed its proposal in the CPUC's NEM successor tariff proceeding and distribution resource plan (DRP). The CPUC issued a final decision on Jan. 27, 2016 continuing net metering with relatively modest changes. The commission will conduct a Phase 2 review of net energy metering in 2019.

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.If authorized by the CPUC, Fitch expects SCE will seek recovery of its DRP investment in its 2018 GRC. Fitch expects SCE to submit its 2018 GRC application with the commission in September 2016.

The residential rate review process, including the anticipated 2019 CPUC review of NEM and the introduction of time-of-use rates for residential customers, and DRP proceedings will be important milestones in implementing the state's low-carbon energy policy in a balanced manner. 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 CPUC in December 2015 issued a final decision ordering SCE to pay a $16.7 million penalty for SONGS related ex parte communications violations. Fitch does not expect SONGS-related ex parte communication issues to adversely affect SCE's credit ratings.

In October 2015, the three owners of SONGS announced that they had reached a $400 million settlement with Nuclear Energy Insurance Limited. SCE's share of the proceeds is $313 million of which 95% will be returned to customers and 5% retained by the utility. The settlement resolves insurance claims related to SONGS outages due to the failures of replacement steam generators at the nuclear plant.

SCE has alleged contract and tort claims and is pursuing $4 billion in damages on behalf of the utility and its customers from Mitsubishi Heavy Industries, Ltd. (MHI), which has denied liability. MHI designed and supplied the SONGS replacement steam generators, whose failure led to the decision to retire SONGS units 2 and 3. In June 2013, SCE announced that it would permanently close and decommission SONGS units 2 and 3.

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 approximates $4 billion in 2016 and 2017.
--Continued regulatory/policy support for SCE's evolving grid strengthening and modernization plans.
--A 10.45% authorized ROE and 48% equity ratio through 2017.

RATING SENSITIVITIES
A rating upgrade for SCE is challenged by its 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 SCE's current ratings.

However, constructive outcomes regarding rate structure issues to be addressed in proceedings related to A.B. 327 along with sustained EBITDAR and funds from operations (FFO)-adjusted leverage of better than 3.25x and 3.5x, respectively, could result in future positive rating actions.

Deterioration in the California regulatory environment, would likely lead to future credit rating downgrades for 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.

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 Dec. 31, 2015, SCE had consolidated cash and cash equivalents on its balance sheet totalling $26 million. SCE's liquidity is strong, with $2.576 billion available under its $2.750 billion committed bank facility. SCE's revolver terminates in July 2020.