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Rating Action:

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

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 utilities.

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, respectively.

- 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 2004.

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.

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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