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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
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,
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.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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