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Rating Action:

Moody's affirms Edison and Southern California Edison ratings; outlooks changed to stable from negative

29 Jul 2019

Approximately $16 billion of debt securities affected

New York, July 29, 2019 -- Moody's Investors Service ("Moody's") today affirmed the ratings of Edison International (Edison), including its Baa3 senior unsecured rating, and the ratings of its principal subsidiary Southern California Edison Company (SCE), including its Baa2 senior unsecured rating. The outlook of both entities has been changed to stable from negative. Please see below for a complete list of ratings affirmed.

Outlook Actions:

..Issuer: Edison International

....Outlook, Changed To Stable From Negative

..Issuer: SCE Trust II

....Outlook, Changed To Stable From Negative

..Issuer: SCE Trust III

....Outlook, Changed To Stable From Negative

..Issuer: SCE Trust IV

....Outlook, Changed To Stable From Negative

..Issuer: SCE TRUST V

....Outlook, Changed To Stable From Negative

..Issuer: SCE Trust VI

....Outlook, Changed To Stable From Negative

..Issuer: Southern California Edison Company

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: California Pollution Control Financing Auth.

....Senior Unsecured Revenue Bonds, Affirmed Baa2

....Underlying Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: California Statewide Communities Dev. Auth.

....Senior Secured Revenue Bonds, Affirmed A3

....Underlying Senior Secured Revenue Bonds, Affirmed A3

..Issuer: CLARK (COUNTY OF) NV

....Senior Secured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: Edison International

.... Issuer Rating, Affirmed Baa3

....Senior Unsecured Bank Credit Facility, Affirmed Baa3

....Senior Unsecured Commercial Paper, Affirmed P-3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa3

..Issuer: Farmington (City of) NM

....Senior Secured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed Baa2

....Underlying Senior Unsecured Revenue Bonds, Affirmed Baa2

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

....Senior Secured Revenue Bonds, Affirmed A3

..Issuer: SCE Trust II

....Pref. Stock, Affirmed Ba1

..Issuer: SCE Trust III

....Pref. Stock, Affirmed Ba1

..Issuer: SCE Trust IV

....Pref. Stock, Affirmed Ba1

..Issuer: SCE TRUST V

....Pref. Stock, Affirmed Ba1

..Issuer: SCE Trust VI

....Pref. Stock, Affirmed Ba1

..Issuer: Southern California Edison Company

.... Issuer Rating, Affirmed Baa2

....Senior Secured Shelf, Affirmed (P)A3

....Pref. Stock Shelf, Affirmed (P)Ba1

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Pref. Stock, Affirmed Ba1

....Senior Secured First Mortgage Bonds, Affirmed A3

....Underlying Senior Secured First Mortgage Bonds, Affirmed A3

....Senior Unsecured Bank Credit Facility, Affirmed Baa2

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

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

RATINGS RATIONALE

"With the establishment of insurance-like fund as a part of the recently enacted wildfire mitigation legislation AB 1054, we expect SCE's future wildfire liabilities will be capped," said Toby Shea VP -- Senior Credit Officer, "we view this liability cap, along with a more favorable prudency standard put in place, to be sufficient to stabilize Edison and SCE's credit profiles."

The liability cap on cost disallowance is the most credit supportive feature of the insurance fund. The liability cap is calculated at 20% of the equity portion of the company's rate base over any three consecutive calendar years. The 20% applies to SCE's transmission and distribution (T&D) system. The cap will not, however, cover any gross negligence.

If and when the insurance fund's claims-paying capability is exhausted, all of these benefits will disappear, though the more favorable prudency standard, which is similar to the standard applied by the Federal Energy Regulatory Commission (FERC), will remain in place. Pending application of this revised standard by the CPUC, its implementation would likely strengthen our view of the credit supportiveness of the regulatory environment in California.

The size of the insurance fund is an important consideration for SCE's credit quality. Even though the fund is capitalized with $21 billion of capital, assuming Pacific Gas & Electric Company (ratings withdrawn) also participates, it should be able to address over $40 billion of gross claims. The actual net usage of the insurance fund should be considerably lower than the gross claim amount because the utilities are expected to maintain $1 billion of wildfire insurance each and the fund is designed to only pay subrogation claims that are settled at 40 cents on a dollar or less.

It is notoriously difficult to model wildfire risk because it is hard to quantify the effects of weather, climate change and the utilities' risk mitigation measures. Nonetheless, we believe the insurance fund will be large enough to cover all but the most extreme downside scenarios over the next decade. According to Filsinger Energy Partners, a consultant to California Governor Newsome's office, this funding level has only a 0.9% chance of being exhausted by 2030. The calculation assumes that the wildfire experience of the past five years continues, utilities maintain $1 billion of wildfire liability insurance, and 75% of wildfire costs are disallowed in 2020 but this falls steadily to 25% by 2030.

We forecast that the insurance fund option will result in a CFO pre-WC to debt ratio averaging 15% over the five year forecast period for SCE and 13% for EIX. These ratios are supportive of their current respective senior unsecured ratings of Baa2 and Baa3. These ratios incorporate a large $2.2 billion cash flow from operations decline in 2019 as part of the contribution to the insurance fund, as well as $1.8 billion of payments associated with wildfire claims in 2017 and 2018.

Outlook

The passage of AB 1054 and the subsequent establishment of the insurance fund has had a strong stabilizing effect on SCE and Edison's credit profiles. However, SCE's credit profile could still evolve, to a stronger position or a weaker position, depending on the implementation of the wildfire legislation and the company's success in containing and eventually reducing the underlying wildfire risk.

Factors that could lead to an upgrade

We could upgrade Edison and SCE's ratings if SCE's wildfire risk diminishes and the provisions under AB 1054 are implemented on a timely basis and successfully tested. A higher rating would also require a CFO pre-WC to debt ratio in the high teens for SCE and mid-teens for Edison.

Factors that could lead to a downgrade

Failure by the regulators to successfully implement the provisions of AB 1054 associated with the insurance fund in a consistent and credit supportive manner would likely trigger negative action on the rating. We could also take a negative rating action if SCE's underlying wildfire risk worsens or if the insurance is exhausted well ahead of its expected life. Downward pressure is also likely if SCE records a ratio CFO pre-W/C to debt below 15% on a sustained basis and Edison falls below 13%.

Company Profile

Headquartered in Rosemead, Edison is a California based electric utility holding company with its principal subsidiary SCE supplying electric energy to 5 million customers in central, coastal and southern California. SCE is predominantly a transmission and distribution company. SCE's earnings are regulated by the 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

Michael G. Haggarty
Associate Managing Director
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.
© 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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