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Rating Action:

MOODY'S UPGRADES EDISON INTERNATIONAL'S SENIOR UNSECURED DEBT TO Baa3; ALSO UPGRADES SOUTHERN CALIFORNIA EDISON COMPANY'S RATINGS (Sr. Sec. TO A3 FROM Baa2); RATING OUTLOOK IS STABLE

06 Aug 2004
MOODY'S UPGRADES EDISON INTERNATIONAL'S SENIOR UNSECURED DEBT TO Baa3; ALSO UPGRADES SOUTHERN CALIFORNIA EDISON COMPANY'S RATINGS (Sr. Sec. TO A3 FROM Baa2); RATING OUTLOOK IS STABLE

Approximately $7 Billion of Debt Securities Affected

New York, August 06, 2004 -- Moody's Investors Service upgraded the ratings of Edison International (EIX: senior unsecured to Baa3 from Ba2) and upgraded the ratings of subsidiary Southern California Edison Company (SCE: senior secured to A3 from Baa2). This rating action concludes a review for possible upgrade that was initiated for both entities on March 22, 2004. The rating outlook for EIX and SCE is stable.

The rating action for SCE reflects continued evidence of a more constructive regulatory environment in California. This is evidenced by the California Public Utilities Commission's (CPUC) resolution of the company's general rate case in early July and the CPUC's support of the company's investment in the Mountainview generation project. Of particular importance in the general rate decision is the CPUC's award of attrition revenues of $144 million and $163 million for test years 2004 and 2005, respectively, which signals a constructive approach and helps to support SCE's credit quality as the company's capital expenditure program increases over the next several years. Most of the increase in capital expenditures is tied to infrastructure and reliability related investments, principally distribution and transmission expenditures and Mountainview related costs. Improvement in the regulatory environment has accompanied a substantial improvement in SCE's financial profile. Aided by regulatory decisions, the utility has now retired more than $3.6 billion in power procurement related debt over the past 30 months. The company's ratio of funds from operations to total debt is expected to be about 25% over the next several years, and SCE's funds from operations coverage of interest expense is expected to exceed 5 times during that period.

While the regulatory environment in California has noticeably improved, regulatory and market-related challenges still remain for SCE and other constituents operating in the state, including decisions on long-term power procurement, whether some form of competition will be reintroduced into the state, and the degree to which utilities will own and operate new generating resources. While generating resources have been added in the state and other parts of the Western US, the regional power market remains somewhat tight. The state's high reliance on imports, including hydro resources, exacerbates this challenge. Like other California investor-owned utilities, SCE continues to have high electric rates, which could complicate the regulatory environment as the company adds infrastructure and reliability related resources to its rate base.

Moody's notes that as a result of this rating upgrade, the California Department of Water Resources (CDWR) may now have the right to assign to certain power purchase contracts to SCE. Moody's does not believe that CDWR will execute this contract right in the near term and we anticipate that SCE would challenge any such assignment. To the extent, however, that the assignment occurred, there could be a negative credit impact particularly if the CPUC did not provide regulatory support to SCE that would be consistent with its new contract obligations.

The rating action for EIX reflects management's stated plans to de-lever EIX over the next twelve months, and considers the significant amount of liquidity that currently exists at the holding company. EIX intends to repay a $571 million senior note obligation due at EIX in September 2004 from internal sources. The rating action also considers the announcement by EIX subsidiary, Edison Mission Energy (EME) that it had entered into two agreements to sell its 51.2% interest in Contact Energy Limited to Origin Energy for about $750 million and to sell the remaining 5,381 MW international power generation portfolio to a joint venture owned by International Power PLC (70%) and Mitsui & Co. Ltd. (30%) for approximately $2.3 billion. Together, these asset sales, along with other restructuring initiatives undertaken at EME, should provide nearly $2.8 billion of net cash proceeds to EME over the next several months that will be used for debt reduction at EME and certain of its affiliates. Given the potential for significant debt reduction within EIX, Moody's views the announcement of these transactions as favorable from a overall credit perspective.

The stable rating outlook for SCE reflects the continuation of strong predictable cash flows derived from the company's large and diverse service territory, and incorporates an expectation that SCE will be able to manage its growth while maintaining a conservative capital structure, particularly given the size of the capital budget for both generation and delivery related assets. The stable outlook further reflects an expectation that the current trend of constructive regulatory and legislative support from the CPUC and the California legislature will continue, as key constituents work to strengthen the durability and predictability of the California electric marketplace.

The rating of SCE could be upgraded if the company's financial performance further improves and the supportive regulatory trend in California continues, with greater clarity for the major regulatory and marketplace issues, including long-term power procurement, the manner in which competition may be reintroduced, and whether utilities or generators will own and operate new in-state generation. The rating of SCE could be downgraded if the company's elects to finance its growing capital expenditure more aggressively with higher leverage, if certain CDWR contracts are assigned to SCE without supportive action from the CPUC, or if there is a reversal of the current trend of increasing regulatory consistency.

The stable outlook for EIX considers the stability and financial improvement of its principal subsidiary, SCE, the parent's strong cash position, and anticipates that financial pressures on some of EIX's unregulated subsidiaries will be greatly eased by the planned sale of EME's international business.

As a holding company that is dependent upon SCE, its principal subsidiary, for a substantial portion of its cash flow in the form of dividends, any change in SCE's rating is likely but not certain to result in a similar rating action at EIX. In addition to a degree of linkage to the rating of SCE, EIX 's rating could be positively impacted if its non-regulated businesses improve more than expected following the execution of EME's proposed asset sale and a successful refocus of EIX's non-regulated businesses. EIX's rating could be negatively impacted if the company substantially increased its payments to shareholders or provides material direct credit support for some of its weaker non-regulated businesses. To date, EIX has been able to remain reasonably insulated from these businesses as it provides no direct financial support for its non-regulated operations.

Ratings upgraded include:

- SCE's first mortgage bonds to A3 from Baa2;

- SCE's senior unsecured debt and Issuer Rating to Baa1 from Baa3;

- SCE's preferred stock to Baa3 from Ba2;

- Shelf registration for SCE's issuance of first mortgage bonds, senior unsecured debt, junior subordinated debt and preferred stock to (P)A3, (P)Baa1, (P)Baa2, and (P)Baa3 from (P)Baa2, (P)Baa3, (P)Ba1, and (P)Ba2, respectively.

- EIX senior unsecured debt to Baa3 from Ba2;

- EIX trust preferred debt to Ba1 from Ba3;

- EIX shelf registration for issuance of senior unsecured debt and trust preferred debt to (P)Baa3 and (P)Ba1 from (P)Ba2 and (P)Ba3, respectively.

Moody's also affirmed the Ba1 senior unsecured rating of Edison Funding Company (EFC), an EIX wholly-owned subsidiary, and maintained the stable outlook. The rating affirmation and stable outlook reflect the strength of EFC's investment portfolio, which continues to perform well. A majority of the portfolio is supported by credit enhancement and collateral that is pledged to EFC. The company's current liquidity position continues to be strong, given the amount of cash on EFC's balance sheet. However, EFC anticipates operating its business with a lower level of balance sheet cash than has been the case in the recent past.

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

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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