Approximately $16 billion of debt affected
New York, March 05, 2019 -- Moody's Investors Service ("Moody's") today downgraded
Edison International's (Edison) ratings, including senior
unsecured rating to Baa3 from Baa1 and the ratings of its principal subsidiary
Southern California Edison Company (SCE) including its senior unsecured
rating to Baa2 from A3. At the same time, we have downgraded
Edison's short-term ratings for commercial paper to P-3
and affirmed SCE's at P-2. The outlooks for Edison
and SCE are negative. This concludes the review of these companies
ratings initiated on January 24, 2019. See the list below
for all the rating actions taken on Edison and its subsidiaries.
RATINGS RATIONALE
"We downgraded Edison and SCE given the potential for multi-billion
dollar exposure related to wildfire risk that is unique to investor-owned
utilities in California", said Toby Shea, VP --
Senior Credit Officer, "Both companies ratings could fall
further if California fails to pass legislation or enact regulatory changes
that substantively mitigates the financial impact of wildfires on SCE
by the end of this year's California legislative session in the
third quarter of 2019, or the utility experiences additional large
fires."
Wildfires have become a significant risk to SCE and other California utilities
over the past few years. California's wildfires (include
utility and non-utility related) have become more damaging,
as seven out of the ten most damaging fires have occurred in the past
five years. While the severity of wildfires can vary dramatically
from one year to the next, the size of the wildfires has been growing
larger and could continue to grow.
California is in a unique situation because its wildfires are on average
much more destructive because of its higher population density compared
to other western states. Moreover, the resulting property
damages have an outsized effect on investor-owned utilities because
of California courts' application of the inverse condemnation legal
doctrine. In cases where utility equipment is a substantial cause
of a wildfire, inverse condemnation holds electric utilities to
a strict liability standard on third-party property damages caused
by the wildfire, regardless of fault.
SCE and other California-based investor-owned utilities
may seek cost recovery from ratepayers if the California Public Utility
Commission (CPUC) deems the utility to have acted prudently. However,
there is a significant amount of uncertainty associated with the cost
recovery process because in 2017 the CPUC disallowed the entire $379
million wildfire cost request for wildfires that occurred on San Diego
Gas & Electric's territory in 2007.
SCE had relatively minor wildfire exposures prior to 2017, but because
of major wildfires in both 2017 and 2018, the company booked an
accounting charge of $1.8 billion at the end of 2018.
Because of the cost recovery uncertainty introduced by the precedent SDG&E
wildfire cost recovery decision, SCE did not record a regulatory
asset related to CPUC cost recovery to offset the accounting charge.
In 2018, California passed Senate Bill 901 that could significantly
improve the prospect for recovery but its effectiveness has not been established
through a regulatory framework or tested.
In our base case scenario for SCE, we have assumed that the CPUC
allows for a 50% cost recovery and estimated the total wildfire
earnings impact, historical and projected, to be around $5
billion. If there is no recovery, the total cost doubles
to $10 billion. As a reference point, SCE and Edison's
CFO to debt ratios would fall from the low-twenties to the mid-teens
if SCE has to absorb an additional $5 billion of debt. A
CFO to debt level in the mid-teens is typical of utilities that
are rated in the Baa category.
We view reforming or eliminating inverse condemnation either through a
constitutional amendment or a change to statutory law as unlikely this
year. However, the governor and other policymakers in California
are actively discussing legislation that could reduce the financial impact
of wildfire costs on utilities. In particular, Assemblyman
Chad Mayes proposed the California Wildfire Catastrophe Fund Act in January
2019. This act would set up an insurance fund that will cover utility-related
wildfire damages. If it is funded adequately and can be accessed
efficiently, it could provide significant credit support because
it would reduce liquidity risk and the risk of rate shock on utility customers.
Outside of wildfire risk, SCE and Edison's credit profiles
primarily reflect SCE's business fundamentals as a stable regulated
utility with mainly transmission and distribution (T&D) operations
and moderate debt leverage. Edison is rated one notch below SCE
because Edison has an additional $1.75 billion of parent
holding company debt, which is structurally subordinated to SCE's
$13.1 billion of long-term debt and $2.25
billion of trust preferred shares.
Liquidity analysis
Despite a large negative free cash flow forecast and potentially significant
wildfire liabilities, SCE and Edison have a healthy level of liquidity
based on a total of $4.5 billion of revolving credit facilities
($1.5 billion at Edison and $3 billion at SCE) that
mature in May 2023. Edison has a short-term commercial paper
rating of Prime-3, and SCE, Prime-2.
Edison and SCE's credit facilities were largely undrawn as of December
31, 2018. Drawing on the credit facilities are not subject
to a MAC representation. The debt covenant in SCE and Edison's
credit facilities limits their debt to total capitalization ratio to less
than or equal to 0.65 to 1 and 0.70 to 1, respectively.
At December 31, 2018, SCE's debt to total capitalization ratio
was 0.50 to 1 while Edison's was 0.55 to 1.
Due to its large capital expenditure program and growing dividends,
we expect the organization to generate significant negative free cash
flow in the order of $1.2 billion at SCE and $1.5
billion at EIX on a run-rate basis. Edison and SCE have
a minor amount of cash holdings on hand.
As of December 31, 2018, Edison did not have any commercial
paper outstanding and SCE had approximately $720 million outstanding.
Upcoming major debt maturities include $400 million of senior notes
at Edison due April 2020 and $950 million of first mortgage bonds
due in 2021 at SCE.
Regardless of any ultimate losses, the resolution of potential exposures
from past wildfires will be slow and drawn out. We, therefore,
do not expect wildfire liabilities to result in a near term demand on
cash. SCE currently has the potential for material exposure to
two large wildfires, one in 2017 and one in 2018. So far,
the company has not yet received a determination from the California Department
of Forestry and Fire Protection (CalFire) on the causes of the 2017 and
2018 fires, which will be important in the determination of an inverse
condemnation claim.
Rating outlook
The negative outlook reflects the uncertain political and regulatory environment
in California and execution risk associated with pending legislative and
regulatory efforts to mitigate the liability, cost recovery and
liquidity risks of wildfires and inverse condemnation, and the potential
that they may not be successful, as well as the risk of future wildfire
exposures.
Factors that could lead to an upgrade
We could stabilize the outlooks or upgrade the ratings if the financial
impact of the wildfires is largely mitigated through regulatory,
legislative, or judicial action.
Factors that could lead to a downgrade
SCE and Edison's ratings are likely to fall further without additional
legislative or regulatory action by the end of this year's California
legislative session in the third quarter 2019 or if SCE's cumulative wildfire
exposure continues to grow.
Downgrades:
..Issuer: California Pollution Control Financing Auth.
....Senior Unsecured Revenue Bonds,
Downgraded to Baa2 from A3
....Underlying Senior Unsecured Revenue Bonds,
Downgraded to Baa2 from A3
..Issuer: California Statewide Communities Dev.
Auth.
....Senior Secured Revenue Bonds, Downgraded
to A3 from A1
....Underlying Senior Secured Revenue Bonds,
Downgraded to A3 from A1
..Issuer: Clark (County of) NV
....Senior Secured Revenue Bonds, Downgraded
to A3 from A1
....Senior Unsecured Revenue Bonds,
Downgraded to Baa2 from A3
..Issuer: Edison International
.... Issuer Rating, Downgraded to Baa3
from Baa1
....Senior Unsecured Bank Credit Facility,
Downgraded to Baa3 from Baa1
....Senior Unsecured Commercial Paper,
Downgraded to P-3 from P-2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa3 from Baa1
....Senior Unsecured Shelf, Downgraded
to (P)Baa3 from (P)Baa1
..Issuer: Farmington (City of) NM
....Senior Secured Revenue Bonds, Downgraded
to A3 from A1
....Senior Unsecured Revenue Bonds,
Downgraded to Baa2 from A3
....Underlying Senior Unsecured Revenue Bonds,
Downgraded to Baa2 from A3
..Issuer: Maricopa (County of) AZ, Poll.
Ctrl. Corp.
....Senior Secured Revenue Bonds, Downgraded
to A3 from A1
..Issuer: SCE Trust II
....Pref. Stock, Downgraded to
Ba1 from Baa2
..Issuer: SCE Trust III
....Pref. Stock, Downgraded to
Ba1 from Baa2
..Issuer: SCE Trust IV
....Pref. Stock, Downgraded to
Ba1 from Baa2
..Issuer: SCE TRUST V
....Pref. Stock, Downgraded to
Ba1 from Baa2
..Issuer: SCE Trust VI
....Pref. Stock, Downgraded to
Ba1 from Baa2
..Issuer: Southern California Edison Company
.... Issuer Rating, Downgraded to Baa2
from A3
....Senior Secured Shelf, Downgraded
to (P)A3 from (P)A1
....Senior Unsecured Shelf, Downgraded
to (P)Baa2 from (P)A3
....Pref. Shelf, Downgraded to
(P)Ba1 from (P)Baa2
....Pref. Stock, Downgraded to
Ba1 from Baa2
....Senior Secured First Mortgage Bonds,
Downgraded to A3 from A1
....Underlying Senior Secured First Mortgage
Bonds, Downgraded to A3 from A1
....Senior Unsecured Bank Credit Facility,
Downgraded to Baa2 from A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from A3
Outlook Actions:
..Issuer: Edison International
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SCE Trust II
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SCE Trust III
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SCE Trust IV
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SCE TRUST V
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: SCE Trust VI
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Southern California Edison Company
....Outlook, Changed To Negative From
Rating Under Review
Affirmations:
..Issuer: Southern California Edison Company
....Senior Unsecured Commercial Paper,
Affirmed P-2
Headquartered in Rosemead, Edison International is a California
based electric utility holding company with its principal subsidiary Southern
California Edison 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
