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25 Nov 2003
MOODY'S UPGRADES SOUTHERN CALIFORNIA EDISON COMPANY TO INVESTMENT GRADE (Sr. Uns. to Baa3) AND UPGRADES EDISON INTERNATIONAL (Sr. Uns. to Ba2); RATING OUTLOOK IS STABLE
Approximately $6.6 Billion of Debt Securities Affected
New York, November 25, 2003 -- Moody's Investors Service upgraded the ratings of Southern California
Edison Company (SCE: senior unsecured to Baa3 from Ba3), and
its parent company Edison International (EIX: senior unsecured to
Ba2 from B3). Moody's also upgraded EIX subsidiary Edison Funding
Company (EFC: senior unsecured to Ba1 from B2). The rating
action concludes a review for upgrade that was initiated on August 25,
2003. The rating outlook for SCE, EIX, and EFC is stable.
The rating action for SCE reflects the following developments:
1. Full collection by SCE of $3.6 billion in procurement-related
obligations (PROACT) and the California Public Utilities Commission (CPUC)
decision in September 2003 that recognized the appropriateness of the
collected PROACT amounts.
2. Strong historical and projected financial credit metrics that
reflect the collection of PROACT and the underlying financial strength
of SCE's core utility business.
3. Decisions by the California Supreme Court (in August 2003 and
October 2003), which further codified the SCE-CPUC settlement
of the filed rate doctrine lawsuit.
4. An improved regulatory environment within California,
reflective of recent constructive CPUC decisions for SCE and other investor-owned
5. California Department of Water Resources (CDWR) contracts and
legislative actions, including passage of Senate Bill 57,
which mitigate SCE's power procurement risk in 2004 and 2005.
Ratings upgraded and removed from review for possible upgrade:
- SCE's first mortgage bonds, secured revolving credit,
and secured Term Loan B to Baa2 from Ba2;
- SCE's senior unsecured debt and issuer rating to Baa3 from Ba3;
- SCE's junior subordinated debt rated to Ba1 from B2;
- SCE's preferred stock rated to Ba2 from B3;
- Shelf registration for SCE's issuance of first mortgage
bonds, senior unsecured debt, junior subordinated debt and
preferred stock to (P)Baa2, (P)Baa3, (P)Ba1, and (P)Ba2
from (P)Ba2, (P)Ba3, (P)B2, and (P)B3, respectively.
- EIX senior unsecured debt to Ba2 from B3;
- EIX trust preferred debt to Ba3 from Caa2;
- EIX shelf registration for issuance of senior unsecured debt
and trust preferred debt to (P)Ba2 and (P)Ba3 from (P)B3 and (P)Caa2,
- EFC senior unsecured debt to Ba1 from B2.
SCE's financial profile has rebounded from the aftermath of the
California energy crisis, largely due to the full collection of
the PROACT balance in July 2003, which was acknowledged by the CPUC
in September 2003. Collection of PROACT has enabled the utility
to retire more than $3.6 billion in power procurement related
debt, rebalance its capital structure, and improve its access
to the capital markets. Moody's notes the continuing improvement
in the regulatory environment within California, including the CPUC's
full support of the SCE settlement as well as other actions taken by the
CPUC and its staff relating to other energy related matters for Edison
and other utilities, such as the commission's position on
SCE's Mountainview generation project.
While the regulatory environment has noticeably improved, Moody's
also acknowledges that regulatory challenges still remain for SCE,
including resolution of its general rate case, decisions on long-term
power procurement, and the form in which the electric market will
operate in California in the future. Also, while SCE's
average electric rate has declined by 12% following SCE's
collection of PROACT, SCE's average electric rate of 12.4
cents/kwh remains high relative to the national average and to other regional
utilities, creating pressure on regulators, legislators,
and the company to find ways to reduce rates. Moody's notes
that nearly 60% of the average rate charged to customers relates
to power procurement costs of other third parties, including payments
to the qualifying facilities and to the CDWR. As such, SCE's
ability to reduce electric rates may be constrained, given the high
dependence on third party purchased power obligations, and the limited
flexibility associated with reducing these obligations in the future.
The rating action further considers Moody's view that SCE is highly
insulated from the activities of EIX's non-regulated business
due to the degree of separateness which has existed through the organization
since the formation of the holding company, the strict affiliate
rules that remain in place for all California utilities, and the
legal ring fencing that exists between EIX, the parent, and
the businesses operated under Mission Energy Holdings Co. (MEHC:
Caa2 Senior Secured Debt; Negative Outlook).
The rating action for EIX reflects the significant amount of holding company
liquidity that currently exists due to its receipt of $945 million
in cash dividends from SCE and $225 million in cash dividends from
Edison Capital, an EIX subsidiary. EIX intends to use the
holding company cash to repay $205 million of deferred arrearages
on trust preferred securities issued by EIX Trust I and II on December
1, 2003, to repay a $618 million senior note obligation
due at EIX in September 2004, and to resume dividend payments on
its trust preferred securities. Additionally, EIX's
management has announced plans to consider resumption of its common dividend
during the first quarter of 2004. The rating action also considers
Moody's view that EIX is insulated from MEHC's businesses
as EIX does not provide any direct or indirect support for these operations
and it has publicly stated that it does not intend to provide any additional
capital for these non-regulated businesses. While there
is no legal direct or indirect recourse to EIX's debt, the
EIX rating incorporates the parent's continued ownership of MEHC
and Moody's belief that the failure to maintain ownership of MEHC would
likely result in a sizeable accounting write-off for EIX.
The rating action for EFC reflects a degree of rating linkage between
EIX and its other subsidiaries due to the operation of the tax allocation
agreements. The rating also considers EFC's low leverage,
strong liquidity, its relatively stable, but lumpy investment
portfolio, and substantial collateral for several of the largest
investments within EFC's portfolio. Moody's notes that
EFC has operated in a cash conservation mode during the past two years,
but the company could begin making additional modest investments during
The stable rating outlook for SCE reflects the continuation of strong
predictable cash flows derived from the company's large and diverse
service territory. Moody's expects that SCE will continue to manage
its growth and maintain a conservative capital structure, particularly
given the expected increases in capital expenditures anticipated for both
generation and delivery related assets. The stable outlook anticipates
that the trend for more constructive regulatory support from the CPUC
will continue, particularly as it relates to key outstanding issues:
including the general rate case, the Mountainview case, and
long-term power procurement.
The stable outlook for EIX and EFC reflect their strong cash positions
as well as the underlying financial strength and predictable cash flows
at the utility. Future rating actions at EIX will depend,
in part, upon the progress being made towards strengthening the
company's non-regulated businesses. Future rating
actions at EFC will depend on a clearer articulation of the company's
longer-term business strategy.
Headquartered in Rosemead, California, SCE is a vertically
integrated utility and a wholly-owned subsidiary of EIX.
EFC is a wholly-owned subsidiary of Edison Capital and EIX.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
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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