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Rating Action:

Moody's downgrades Southern California Edison to A3 from A2 and Edison International to Baa1 from A3; outlooks stable

06 Sep 2018

Approximately $17.3 billion of Debt Securities Affected

NOTE: On September 12, 2018, the press release was corrected as follows: In the list of downgrades, added “SCE Trust III: Pref. Stock Preferred Stock, Downgraded to Baa2 from Baa1” and “SCE Trust V: Preference Stock Preference Stock, Downgraded to Baa2 from Baa1". Revised release follows.

NOTE: On September 7, 2018, the press release was corrected as follows: The fourth line of the debt list under Southern California Edison Company was changed to “Preferred Shelf, Downgraded to (P)Baa2 from (P)Baa1.” Revised release follows.

New York, September 06, 2018 -- Moody's Investors Service ("Moody's") today downgraded Southern California Edison Company's (SCE) senior unsecured rating to A3 from A2 and its commercial paper rating to Prime-2 from Prime-1. At the same time, Moody's downgraded the senior unsecured rating of Edison International (EIX), SCE's parent company, to Baa1 from A3 and affirmed EIX's commercial paper rating at Prime-2. The rating outlooks for both SCE and EIX were revised to stable from negative. See rating list below for the complete list of ratings for SCE and EIX.

"The continued existence of inverse condemnation and exposure to political agendas is the principal rationale behind today's rating downgrade. SB901 failed to address the most important risk factor, inverse condemnation, and the benefits it provides are dependent on implementation by state regulators," said Toby Shea, Vice President -- Senior Credit Officer, "the bill is nevertheless an improvement over the existing situation for all of California's regulated utilities and it is evidence of extraordinary legislative intervention to address material risks faced by the state's critical infrastructure utility companies."

Downgrades:

..Issuer: California Pollution Control Financing Auth.

....Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

....Underlying Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

..Issuer: California Statewide Communities Dev. Auth.

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

....Underlying Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

..Issuer: Edison International

.... Issuer Rating, Downgraded to Baa1 from A3

....Senior Unsecured Bank Credit Facility, Downgraded to Baa1 from A3

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3

....Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3

..Issuer: CLARK (COUNTY OF) NV

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

....Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

..Issuer: Farmington (City of) NM

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

....Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

....Underlying Senior Unsecured Revenue Bonds, Downgraded to A3 from A2

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

....Senior Secured Revenue Bonds, Downgraded to A1 from Aa3

..Issuer: SCE Trust II

....Pref. Stock Preferred Stock, Downgraded to Baa2 from Baa1

..Issuer: SCE Trust III

....Pref. Stock Preferred Stock, Downgraded to Baa2 from Baa1

..Issuer: SCE Trust IV

....Pref. Stock Preferred Stock, Downgraded to Baa2 from Baa1

..Issuer: SCE Trust V

....Preference Stock Preference Stock, Downgraded to Baa2 from Baa1

..Issuer: SCE Trust VI

....Pref. Stock Preferred Stock, Downgraded to Baa2 from Baa1

..Issuer: Southern California Edison Company

.... Issuer Rating, Downgraded to A3 from A2

....Senior Unsecured Shelf, Downgraded to (P)A3 from (P)A2

....Senior Secured Shelf, Downgraded to (P)A1 from (P)Aa3

....Preferred Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Preferred Stock, Downgraded to Baa2 from Baa1

....Senior Secured First Mortgage Bonds, Downgraded to A1 from Aa3

....Underlying Senior Secured First Mortgage Bonds, Downgraded to A1 from Aa3

....Senior Unsecured Bank Credit Facility, Downgraded to A3 from A2

....Senior Unsecured Commercial Paper, Downgraded to P-2 from P-1

....Senior Unsecured Regular Bond/Debenture, Downgraded to A3 from A2

Outlook Actions:

..Issuer: Edison International

....Outlook, Changed To Stable From Negative

..Issuer: Southern California Edison Company

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Edison International

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

RATINGS RATIONALE

The A3 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 an additional $1.7 billion of parent holding company debt, which is structurally subordinated to SCE's $13.3 billion of debt and $2.2 billion of trust preferred shares. EIX's debt at the holding company accounts for about 12% 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 a supportive authorized return on equity 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.

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 the 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.

For years, the California legal system has applied a legal theory of inverse condemnation to wildfire cases. This exposes a utility to liabilities 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.

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 has 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 San Diego Gas & Electric's disallowance in its 2007 wildfire case.

Credit Impact of New Legislation

The wildfire legislation SB 901 passed last week provided some improvement over the existing situation because it established the framework for wildfire mitigation practices and expanded the California Public Utility Commission's (CPUC) discretion on the amount of cost that utilities can pass on to ratepayers. However, it failed to address the strictly liability standard created by the application of inverse condemnation legal theory and leaves a considerable amount of uncertainty regarding cost recovery stemming from exposure created by inverse condemnation.

In December 2017, SCE's service territory experienced several wind-driven wildfires. According to the California Department of Insurance, insurers have received $1.77 billion of claims for the December 2017 wildfires and $421 million of claims for the Montecito Mudslides, which may have been caused in part 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 downgrade. For EIX, we project its 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, $2 billion of additional debt would drive SCE's CFO pre-WC to the high teens, and EIX, to the mid-teens.

Liquidity Analysis

The downgrade of SCE's commercial paper rating is driven by the downgrade in its long-term senior unsecured rating. As of June 30, 2018, SCE had approximately $300 million in commercial paper outstanding. EIX and SCE have strong liquidity. For both companies, the short-term commercial paper rating is Prime-2. For year 2017, SCE generated negative free cash flow of $712 million and EIX generated negative free cash flow of $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 $4.5 billion of revolving credit facilities ($3 billion at SCE and $1.5 billion at EIX) that mature in May 2023. As of June 30, 2018, these credit facilities were largely undrawn.

The credit facilities are not subject to a MAC representation. The debt covenant in SCE and EIX's credit facility limits their debt to total capitalization ratio to less than or equal to 0.65 to 1 and 0.70 to 1, respectively. At June 30, 2018, SCE's debt to total capitalization ratio was 0.46 to 1 while EIX was 0.51 to 1.

Upcoming debt maturities include $400m of senior notes at EIX due April 2020 and $450m of first mortgage bonds due March 2021 at SCE.

Outlook

SCE and EIX's stable outlook reflects the stability of its T&D operations and overall supportive regulatory environment. The heightened business risk created by the inverse condemnation exposure is incorporated into the rating and would further affect the rating or outlook only if there are new wildfires. The stable outlook incorporates our view that SCE should produce a ratio of CFO Pre-WC to debt in the low-20% range over the next few years.

Factors that Could Lead to an Upgrade

An upgrade of SCE could occur if the inverse condemnation exposure from wildfires is substantially mitigated and SCE maintains a CFO Pre-WC to debt ratio of 22% or above. An upgrade of SCE could lead to an upgrade of EIX.

Factors that Could Lead to an Downgrade

We may downgrade SCE rating should its CFO pre-WC to debt ratio fall below 20% on sustained basis or if there is a large increase in wildfire exposure. A downgrade of SCE will result in a corresponding downgrade of EIX. EIX may also be downgraded should its CFO pre-WC to debt ratio fall to the mid-teens on a sustained basis.

Company Profile

Headquartered in Rosemead, California, Edison International (EIX) is a California based electric utility holding company with its principal subsidiary Southern California Edison Company (SCE) 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
Infratructure 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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