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Rating Action:

MOODY'S PLACES THE SECURITIES OF SOUTHERN CALIFORNIA EDISON COMPANY UNDER REVIEW FOR POSSIBLE UPGRADE FOLLOWING APPROVAL OF THE SETTLEMENT AGREEMENT WITH THE CPUC.

09 Oct 2001
MOODY'S PLACES THE SECURITIES OF SOUTHERN CALIFORNIA EDISON COMPANY UNDER REVIEW FOR POSSIBLE UPGRADE FOLLOWING APPROVAL OF THE SETTLEMENT AGREEMENT WITH THE CPUC.

New York, October 09, 2001 -- Moody's Investors Service has placed the ratings of Southern California Edison Company (SCE: Senior Unsecured Debt at Caa2) under review for possible upgrade following Judge Ronald Lew's approval of a Settlement Agreement between SCE and the California Public Utility Commission (CPUC) which settles the filed rate doctrine lawsuit filed by SCE in federal court.

The Settlement Agreement provides SCE with the ability to use the expected surplus cash that should exist after meeting its recoverable costs to repay all associated procurement obligations largely incurred during the second half of 2000. The accumulation of cash along with an anticipated bridge financing at SCE should provide sufficient cash resources to repay all past due bills, including defaulted debt, and provide a predictable stream of cash to repay the anticipated bridge financing and debt previously issued to finance procurement related activities.

TERMS OF THE SETTLEMENT AGREEMENT

Under the terms of the Settlement Agreement, SCE will establish a Procurement Related Obligation Account (PROACT) as of August 31, 2001. The initial size of the PROACT will equal SCE's procurement related liabilities as of August 31, 2001 (estimated to be $6.35 billion) less the amount of cash on SCE's balance sheet at August 31, 2001 less $300 million, and estimated to be approximately $3.3 billion as of October 2nd, the date of the Settlement Agreement. SCE will apply any surplus cash to reducing the size of the PROACT from existing rates beginning on September 1, 2001 and continuing through the recovery period, which lasts until the PROACT is paid down or until December 31, 2003, whichever comes first. In the event that a balance in the PROACT exists at the end of December 31, 2003, the Settlement calls for SCE to recover these remaining costs over the next two-year period ending December 31, 2005.

SCE's current plan is to accumulate sufficient cash over the next few months to repay all past due obligations which aggregate $2.7 billion and all past due debt which aggregate $2.6 billion (including bank debt). Included in the amount are payments to the qualifying facilities (approximately $1.2 billion), payments to the California Power Exchange (CalP/X) and California Independent System Operator (CalISO) for payment onto the generators (approximately $950 million), and payments to defaulted financial creditors including banks, commercial paper holders, and bondholders (approximately $2.6 billion). SCE and the CPUC both acknowledge in the Settlement Agreement that SCE should be able to recover the entire PROACT prior to the end of 2003, but stipulate that any balance in the PROACT at December 31, 2003 can be recovered over a two-year period ending December 31, 2005. Any refunds received by SCE from Federal Energy Regulatory Commission or other proceedings will be used to reduce the PROACT balance.

Under the Settlement Agreement, SCE is precluded from paying any dividends to parent company, Edison International (EIX: Senior Unsecured Debt at Caa3; on review for possible upgrade) prior to the end of the PROACT recovery period. SCE does have the ability to apply to the CPUC for approval and recovery of up to $250 million in hedges to mitigate fuel costs associated with SCE's retained generation, qualifying facilities (QF), and interutility contracts. Importantly, both parties agree not to contest the validity and the enforceability of the Settlement Agreement and both parties agree that the agreement is intended to be enforceable under federal law.

KEY IMPLEMENTING ISSUES RELATING TO THE SETTLEMENT AGREEMENT

While the Settlement Agreement provides SCE with the ability to satisfy past due obligations relating to power procurement, there are a number of events that must be completed in order for creditors to brought current. Among these issues include working with the now bankrupt CalPX and the CalISO to reconcile unpaid past due bills owed to them for the payment of electricity provided by the generators. Additionally, the QF forbearance agreements, which expire January 1, 2002, need to be amended to incorporate, among other things, the fact that the enabling legislation did not pass, which was a condition of the forbearance agreements for certain events to occur. While both of these endeavors should be achievable, both will require discussions with many parties, given the number of generators and QFs that SCE has not yet paid. Additionally, extensions to the bank credit facilities will need to be obtained as the current extension expires on October 19, 2001 and most importantly, bridge financing will need to be arranged to help complete SCE's financing plan. Of the three groups, Moody's has the greatest concern about SCE's discussions with the QFs given the somewhat difficult negotiations that occurred during the past year, which resulted in the current set of forbearance agreements.

One indirect issue that could impede the completion of the Settlement Agreement is the unsettled nature of the financing plan for the California Department of Water Resources (CDWR). The CPUC's decision to reject the Rate Agreement between the CDWR and the CPUC creates uncertainty for the completion of the $12.5 billion financing, the viability of the CDWR power contracts, and the credit quality of the state of California. While these events do not directly impact the Settlement Agreement, they do create additional uncertainty about the power markets and the ability of California policy makers to effectively manage this problem.

SCOPE OF THE RATINGS REVIEW

The ratings review for SCE will focus on the above outlined Settlement Agreement including the ability of SCE to successfully conclude the necessary discussions with the generators and the QFs. The review will also analyze SCE's financing plan, including an assessment of the utility's ability to raise bridge financing. The review will also assess the feasibility of SCE collecting sufficient and predictable surplus cash to reduce procurement obligations over the next two years including sensitivity analyses around the plan's ability to cover increases in fuel costs and variations in sales.

Moody's notes that the Settlement Agreement, if adopted and implemented fully, should materially improve SCE's credit rating as it has the potential to address SCE's past due obligations in their totality. Clearly, this is an important development and a good first step. However, additional regulatory or legislative support will be needed to address future procurement related expenditures, particularly if California policymakers intend to have the utility reenter the power procurement business for their customers.

Ratings under review for possible upgrade include:

· the first mortgage bonds and the secured pollution control bonds of SCE at B3;

· the issuer rating, the senior unsecured notes, the unsecured debentures, and the unsecured pollution control bonds of SCE, at Caa2;

· the guaranteed notes of SCE Capital at Caa2;

· the junior subordinated debt of SCE at Caa3;

· the preferred stock of SCE at Ca;

· a shelf registration for issuance of preferred stock by SCE Trust I and SCE Trust II at (P)Ca; and

· a shelf registration for SCE's issuance of senior secured debt, senior unsecured debt, and preferred stock, at (P)B3, (P)Caa2 and (P)Ca, respectively.

SCE's short-term ratings of Not Prime and Speculative Grade are confirmed.

Separately, the long-term debt ratings of parent company, EIX, remain under review for possible upgrade. The ratings were placed under review for possible upgrade on June 12, 2001 following the announcement that financing at Mission Energy Holding Company (MEHC) was being completed to help EIX repay approximately $1.2 billion in debt that matures in 2001. Proceeds from the $1.185 billion in financings at MEHC were used to repay approximately $850 million of EIX debt in June and July 2001 with the remainder available for repayment of the $350 million note due in November 2001.

Headquartered in Rosemead, California, SCE is a vertically integrated electric utility and a wholly-owned subsidiary of EIX.

New York
A.J. Sabatelle
VP - Sr. Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

New York
Susan D. Abbott
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

No Related Data.
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