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08 Feb 2002
MOODY'S ASSIGNS A (P)Ba2 SENIOR SECURED RATING TO SOUTHERN CALIFORNIA EDISON COMPANY'S CREDIT FACILITIES
Approximately US$1.5 Billion of Debt Securities Affected.
New York, February 08, 2002 -- Moody's Investors Service has assigned a (P)Ba2 rating to the $1.5
Billion of secured credit facilities being arranged by Southern California
Edison Company (SCE). Proceeds from this financing along with cash
on hand at SCE will be used in part to repay creditors and power suppliers
approximately $5.5 billion of past due amounts owed to them.
Moody's notes that the rating for these credit facilities is provisional
and a final rating is contingent upon a review of final documentation
as well as the company being able to successfully arrange the secured
credit facilities such that all past due claims can be fully satisfied.
The (P)Ba2 rating reflects the ability of SCE to repay all past due obligations
at closing and to generate sufficient excess cash flow over the next two
years to repay the bridge facility, all procurement related debt,
and other SCE debt and preferred securities that mature in this timeframe.
SCE's prospects for achieving this level of free cash flow have been fortified
by the California Public Utilities Commission (CPUC) January 23rd approval
of the Procurement Related Obligations Account (PROACT) that codifies
the October 5, 2001 settlement of a federal filed rate doctrine
lawsuit between CPUC and SCE.
The settlement agreement enables SCE to recover in cash from ratepayers
previously uncollected power procurement costs. Under the settlement
agreement, SCE retains all cash flow that it collects after satisfying
its current operating cash requirements, making required payments
to the California Department of Water Resources (CDWR) for supplying the
"net-short" energy requirements and making energy and capacity
payments to the qualifying facilities. This excess cash,
which will vary each month, will be used for debt retirement.
ANALYSIS OF PROACT
The settlement agreement states that SCE shall recover in retail electric
rates its procurement related obligations recorded in PROACT by no later
than December 31, 2005. SCE currently predicts that it should
fully collect sufficient cash flow to recover PROACT by the end of 2003.
The settlement agreement also states that the CPUC agrees to maintain
retail electric rates at no less than the current rates through the earlier
of PROACT recovery or December 31, 2003 and further states that
should procurement related obligations recorded in PROACT not be fully
recovered by December 31, 2003, the remaining balance shall
be recovered in rates over a two-year period that ends on December
The establishment of the PROACT account ($3.6 billion) also
helps to repair SCE's balance sheet. Previously, a CPUC order,
issued in March 2001, caused SCE to incur a $2.5 billion
after-tax write-off at year-end 2000, resulting
in SCE's total debt to total capitalization ratio to spike to 85%.
With the January 23rd CPUC approval of PROACT, much of this write-off
will be reversed in the company's 2001 year-end statements and
as such, the company's total debt to total capitalization ratio
at year-end 2001 is expected to be around 62%. Moreover,
with SCE applying all excess cash to the retirement of procurement related
debt, SCE's total debt to total capitalization is expected to decline
rapidly during 2002 landing at 52% at year-end 2002 and
declining to less than 40% by year-end 2003.
ANALYSIS OF PROACT CASH FLOWS
While the collection of PROACT cash flows is subordinate to SCE satisfying
its own obligations as well as its obligations to CDWR and the qualifying
facilities, Moody's views the PROACT cash flows to be fairly predictable.
For one, most of the volatility that could reduce the amount of
PROACT cash flows has been either eliminated or reduced by actions taken
by SCE and others. For instance, SCE has entered into five
year contracts with the renewable qualifying facilities at an energy price
of 5.37 cents thereby eliminating the volatility in that component
of their cost structure. SCE has also hedged its exposure to increases
in natural gas prices for the next two years thereby reducing greatly
the volatility around payments to natural gas fired qualifying facilities.
Together, kilowatt-hour (Kwh) purchases from qualifying facilities
represent about one-third of the SCE's generation requirements.
Little volatility in fuel costs is likely to surface from SCE's owned
generation (represents 33% of SCE's total generating requirements),
which includes interests in hydro, nuclear, and coal assets.
The remaining third represents payments that SCE makes to CDWR.
These payments are based upon CDWR's revenue requirement, an amount
that is scheduled to be finalized at a CPUC hearing on February 21,
2002. While the amount of CDWR's proposed revenue requirement could
change, Moody's does not expect any change to materially impact
the timing for collection of these PROACT cash flows. Moreover,
once the CDWR revenue requirement is established, subsequent changes
to the CDWR revenue requirement should not affect PROACT cash flows.
Other vulnerabilities to the timing of the PROACT cash flows include lower
demand for electricity, which would have the effect of reducing
the amount of Kwhs sold by SCE thereby reducing the amount of excess cash
flow. Mitigating this issue is the fact that SCE's electric sales
during 2001 have already declined by 4.5% due to higher
prices and attractive conservation incentives. These conservation
incentives offered by the state have terminated and the company has modeled
relatively flat electric sales for 2002 and 2003 in determining the 2003
timeframe for PROACT recovery. Additionally, the level of
PROACT cash flows could be impacted by a forced outage at one of SCE's
generating plants. Under this scenario, SCE's operating costs
would increase, and SCE would be relying more heavily on wholesale
purchases by CDWR to meet their customer load. While this scenario
is indeed plausible, all of SCE's plants have very strong operating
histories. Lastly, the state contemplates SCE being in the
position to assume power procurement from CDWR beginning in 2003.
While a number of regulatory issues need to be implemented for that to
occur, SCE's exposure to this potential issue is mitigated by the
fact the CDWR has contracted for significant portions of the net short.
Moreover, in all of these cases, SCE has the ability to continue
to collect the remaining amount of PROACT cash flows through 2005 should
the procurement related obligations recorded in PROACT not be fully collected
by year-end 2003.
REGULATORY & MARKET UNCERTAINTIES ARE REFLECTED IN THE RATING
Prospectively, SCE's financial metrics are quite strong for the
provisional rating contemplated in this transaction. Strong predictable
cash flows are expected to materially reduce debt by more than $2.6
billion over the next two years. Moody's expects SCE's operating
cash flow to cover both interest expense (including payments on subordinated
notes) and lease expense on average by 5.3x annually through 2006,
and expects annual operating cash flow to represent at least 35%
of SCE's total debt. While these metrics could arguably support
a higher rating, the (P)Ba2 rating incorporates the challenging
and highly volatile regulatory environment and uncertain marketplace that
exists within California.
While the settlement between SCE and CPUC represent the first tangible
step towards helping to fix the energy markets in California, a
number of key market and regulatory issues remain unresolved, many
of which can indirectly affect SCE. For one, the CPUC still
remains an unpredictable regulatory body. Deregulation has effectively
halted in the state and no clear road map exists as to what the California
market place will become. The involvement of CDWR adds another
layer of uncertainty for SCE and other market participants. CDWR's
ability to complete the $12.5 billion bond offering is an
important step towards continuing to repair the California marketplace
but uncertainties still persist around the timing and the completion of
this transaction. Related to the CDWR financing is the possibility
that contracts entered into by CDWR and generators may be renegotiated,
all of which adds more uncertainty to the outlook for the California marketplace.
Beyond that, Moody's believes that the utilities will be under pressure
to lower rates so that the impact of the CDWR contracts are more manageable
to ratepayers. Also, the CPUC and the utilities need to address
a number of regulatory matters including the establishment of power procurement
procedures, which among other things, insulates the utilities
from changing prices should the utilities return to the power procurement
business as outlined under AB1X. Finally, the outcome of
the Pacific Gas and Electric Company bankruptcy adds another unknown to
the equation as the company's plan of reorganization contemplates that
a portion of the company's assets will no longer be regulated by the CPUC.
LEGAL CHALLENGE BY TURN
Moody's also notes while SCE's settlement with the CPUC was unanimously
approved by the commission and has received broad support from key legislators
including the governor, the attorney general, and the legislature,
one of the consumer groups, TURN, is opposed to the settlement
of this federal lawsuit. TURN has filed an appeal of the Federal
District Court judgment approving the settlement arguing, among
other things, that the CPUC did not have the authority to enter
into the settlement and that TURN's rights had been harmed since they
did not have ample time to respond to the settlement. TURN's efforts
to stay the settlement have not been successful as the appellate judge
denied their stay ruling that the settlement did not result in any irreparable
harm to them. SCE, CPUC, and TURN have each filed their
arguments and the hearing is scheduled for March 4th. The governor
and the legislature have each filed amicus briefs in support of the settlement.
A ruling from the appellate court will likely take months and any ruling
is likely to be appealed. The appellate court could remand the
case back to the District Court. As such, final resolution
of this issue could take years. While legal outcomes are difficult
to predict, Moody's believes that the settlement of the federal
lawsuit will likely stand in its current form given the consensual nature
of the agreement between SCE and the CPUC, the broad support that
it has within the state, and the fact that it represents a first
step towards repairing a broken market in the state.
STRUCTURE AND USE OF PROCEEDS
The credit facilities will be secured by a first lien on the company's
plant perfected through the pledge of first mortgage bonds provided to
the lenders. The credit facilities will rank pari passu with SCE's
other first mortgage debt, which aggregates approximately $1.6
billion at year-end 2001. In addition to the $1.5
billion in credit facilities, SCE plans to secure additional financing
of up to $500 million from an accounts receivable conduit financing
and/or remarketing a portion of SCE's pollution control bonds.
If required, a short term interim bridge facility to the issuance
of these capital markets transactions will be provided by agents Citibank
and JP MorganChase and will also be secured by a pledge of first mortgage
Collateral coverage for the credit facilities are very strong at more
than 2.0 times coverage with book bondable property being at $9.9
billion and total first mortgage debt (including the $1.5
billion credit facilities and, if required the $500 million
bridge facility) being at $3.5 billion. The credit
facilities will have a standard covenant package and will include both
a cash coverage of interest covenant and a debt to total capital covenant.
At closing, which is expected to occur on February 28, 2002,
monies raised from the credit facilities and from cash on hand will be
used to repay creditors and generators past due amounts owed. Current
uses of funds which aggregate $5,452.7 billion is
expected to repay the following creditors and generators:
· $400.0 million of long-term unsecured debt
(1995 and 1996 series);
· $530.7 million of commercial paper;
· $1,650.0 million to bank creditors;
· $2,872.0 million to power suppliers.
As mentioned, SCE's cash flow over the next two years is projected
to generate approximately $2.6 billion of free cash flow
that will be used to repay the bridge financing, procurement related
debt incurred during 2000 and other debt and preferred securities that
mature during 2002 and 2003. Importantly, the settlement
agreement precludes SCE from paying a dividend to parent company,
Edison International. Dividend payments can resume once the PROACT
balance is fully collected. SCE intends to recapitalize the utility's
balance sheet after the PROACT balance is collected since the capital
structure is likely to have a 60% common equity ratio at that point.
IMPACT ON SCE'S OUTSTANDING SECURITIES
Moody's notes that once the (P)Ba2 rating become a final rating,
the credit facilities close, and SCE repays the above-mentioned
past due obligations, the debt ratings of SCE's outstanding securities
will be upgraded to the following levels. As expected, SCE's
first mortgage bonds would be upgraded to Ba2; its senior implied
rating, senior unsecured rating, and issuer rating would be
upgraded to Ba3; its junior subordinated debt would be upgraded to
B2; and its preferred stock would be upgraded to B3. Again,
this rating action is contingent upon a successful closing of these credit
facilities and repayment of past due obligations.
Headquartered in Rosemead, California, SCE is a vertically
integrated utility serving southern California and a wholly-owned
subsidiary of Edison International.
VP - Senior Credit Officer
Moody's Investors Service
Susan D. Abbott
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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