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Rating Action:

Moody's Changes Edison International and Southern California Edison's Rating Outlooks to Negative

11 Apr 2018

Approximately $14 billion of Debt Securities Affected

New York, April 11, 2018 -- Moody's Investors Service, ("Moody's") today revised the rating outlook for Edison International (EIX) and its principal subsidiary, Southern California Edison Company's (SCE), to negative from stable. At the same time, Moody's affirmed the A3 Issuer Rating of EIX and the A2 Issuer Rating of SCE. See rating list below for the complete list of ratings for EIX and SCE.

"SCE's credit profile is weighed down by the potentially large contingent exposure created by the application of strict liability standard in California in the case of wildfires where utility equipment was determined to be the source of the fire," said Toby Shea VP -- Sr. Credit Officer. "The increasing inverse condemnation risk exposure has caused us to reassess our view of the credit supportiveness of the regulatory environment in California", added Shea. "In addition, cash flow to debt metrics are expected to be lower due to tax reform."

Outlook Actions:

..Issuer: Edison International

....Outlook, Changed To Negative From Stable

..Issuer: Southern California Edison Company

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: California Pollution Control Financing Auth.

....Senior Unsecured Revenue Bonds, Affirmed A2

....Underlying Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: California Statewide Communities Dev. Auth.

....Senior Secured Revenue Bonds, Affirmed Aa3

....Underlying Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: CLARK (COUNTY OF) NV

....Senior Secured Revenue Bonds, Affirmed Aa3

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Edison International

.... Issuer Rating (Local Currency), Affirmed A3

....Senior Unsecured Bank Credit Facilities, Affirmed A3

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debentures, Affirmed A3

..Issuer: Farmington (City of) NM

....Senior Secured Revenue Bonds, Affirmed Aa3

....Senior Unsecured Revenue Bonds, Affirmed A2

....Underlying Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Maricopa (County of) AZ, Poll. Ctrl. Corp.

....Senior Secured Revenue Bonds, Affirmed Aa3

..Issuer: SCE Trust II

....Pref. Stock Preferred Stock, Affirmed Baa1

..Issuer: SCE Trust IV

....Pref. Stock Preferred Stock, Affirmed Baa1

..Issuer: SCE Trust VI

....Pref. Stock Preferred Stock, Affirmed Baa1

..Issuer: Southern California Edison Company

.... Issuer Rating, Affirmed A2

....Pref. Stock Preferred Stocks, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed Aa3

....Senior Unsecured Bank Credit Facility, Affirmed A2

....Underlying Senior Secured First Mortgage Bonds, Affirmed Aa3

....Senior Unsecured Commercial Paper, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

RATINGS RATIONALE

The A2 rating for SCE reflects its business fundamentals as a low risk regulated utility with mainly transmission and distribution (T&D) operations. The credit profile of EIX and SCE are closely linked as the vast majority of EIX's cash flows are generated from SCE. EIX is rated one notch below SCE because EIX has additional $1.8 billion of debts and they are structurally subordinated to SCE's $12 billion of debt and $2 billion of trust preferred shares. EIX's debt at the holding company accounts for a little more than 10% of the consolidated amount.

The primary driver of SCE's business risk is California's regulatory environment, which has some strong positives as well as some significant negatives. On the positive side, SCE has access to an extensive suite of recovery mechanisms, including decoupling and a forward test year. SCE also benefits from an above average authorized return on equity and equity layer in the capital structure that bolsters its financial risk profile and provides a strong incentive for investment. On the negative aspects, California has a higher degree of political risk than most other jurisdictions in the US. California's utilities tend to receive a higher level of attention and scrutiny from both the media and public and issues can quickly become contentious and litigious.

As a component of longer term climate change risks, wildfire events have become a significant concern for all of California's utilities, regardless of whether they are investor or publicly owned, including SCE. Wildfires have become more frequent and more damaging due to effects of climate change, including more severe and prolonged droughts and stronger winds. In addition, California has witnessed a proliferation of real estate developments in fire-prone areas.

We still see California regulation as credit supportive for utilities, but overall the supportiveness has weakened. The rising risk associated with the wildfires and other severe weather events have translated into higher regulatory risk for investor-owned utilities in California due to inverse condemnation exposure and the uncertainty that they will be able to recover related costs from ratepayers, as evidenced by the SDG&E's disallowance in its 2007 wildfire case. For years, the California legal system has applied a legal theory of inverse condemnation to wildfire cases. This exposes a utility to liabilities from property damage claims if their equipment is determined to be the source of the fire, regardless of fault. This application of strict liability subjects Californian electric utilities to material contingent liabilities related to wildfires, a unique risk factor across the sector.

In December 2017, SCE's service territory experienced several wildfires. According to California Department of Insurance, insurers have received $1.77 billion of claims for the December 2017 wildfires and $422 million of claims for the Montecito Mudslides, which were partly caused by the December 2017 wildfires. SCE's exposure is unclear at this point, but if SCE equipment is found to be the source of the December 2017 wildfires, SCE could be liable for the wildfire claims and mudslides. SCE may offset its liability with its $1 billion insurance coverage and seek recovery from ratepayers for amounts in excess of the insurance coverage.

Historically, SCE generated a ratio of CFO pre-WC to debt in the mid-20% range but will be in the low twenties going forward. This erosion of the financial profile is mainly attributed to tax reform, but is occurring against the backdrop of higher risks associated with inverse condemnation and is a key contributor to the negative outlook. We project EIX CFO pre-WC to debt to be around 20%. Tax reform will only have a minor effect on EIX's cash flows because EIX, unlike SCE, will have net operating losses that can be used to offset tax liabilities. We do not know if SCE would be held liable for wildfire damages or how the liability will be financed. However, as an indication of the potential impact, a $2 billion of additional debt would drive SCE's CFO pre-WC to the high teens, and EIX, to mid-teens.

Liquidity Analysis

EIX and SCE have comfortable liquidity, as indicated by their commercial paper ratings of P-2 and P-1, respectively. For year 2017, SCE generated a negative free cash flow of $712 million and EIX, a negative $1 billion on a consolidated basis. This trend is expected to continue due to its large capital expenditure program and a growing dividend.

Despite the large negative free cash flow forecast, SCE and EIX have a healthy level of liquidity based on a total of $4 billion of revolving credit facilities ($2.75 billion at SCE and $1.25 billion at EIX) that mature in July 2022. These facilities were heavily used towards the end of 2017 but we expect them to only have minor usage going forward.

The credit facilities are not subject to a MAC representation. The debt covenant in SCE and EIX's credit facility limit their debt to total capitalization ratio to less than or equal to 0.65 to 1. At the end of 2017, SCE's debt to total capitalization ratio was 0.45 to 1, and EIX, 0.51 to 1.

Upcoming debt maturities include a $400 million first mortgage bonds at SCE due in August 2018 and $400m senior notes at EIX due April 2020.

Outlook

SCE and EIX's negative outlook reflects the combination of falling cash flow to debt metrics as well as the heightened business risk created by the inverse condemnation exposure created by wildfires.

Factors that Could Lead to an Upgrade

An upgrade for SCE or EIX is unlikely until the inverse condemnation exposure from wildfires is substantially mitigated. Should inverse condemnation exposure no longer exist, we will consider an upgrade or positive outlook if SCE's CFO Pre-WC to debt ratio rises to high 20% and its CFO Pre-WC less dividends to debt ratio exceeds 25% for a sustained period of time.

Factors that Could Lead to an Downgrade

We may downgrade SCE's ratings should its CFO pre-WC to debt ratio fall below 24% on a sustained basis. We may take a negative rating action on SCE if SCE is found to be liable for wildfire damages in the billions of dollars or if California policymakers failed to make sufficient progress on addressing the inverse condemnation risk before the end of this year's legislative session in August. A downgrade of SCE will result in a corresponding downgrade of EIX.

Company Profile

Headquartered in Rosemead, California, Edison International (EIX; A3 negative) is a California based electric utility holding company with its main subsidiary Southern California Edison (SCE; A2 negative) supplying electric energy to 15 million people in central, coastal and southern California. SCE is predominantly a transmission and distribution company. SCE's earnings are regulated by California Public Utility Commission and the Federal Energy Regulatory Commission.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Toby Shea
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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