Fitch Affirms EIX and SCE's Ratings; Outlook Stable
KEY RATING DRIVERS
EIX and SCE's ratings and Stable Outlooks primarily reflect the core utility's strong and relatively predictable cash flows, manageable leverage and balanced regulatory compact. SCE accounts for virtually all of EIX's consolidated earnings and cash flow.
Balance sheet debt is manageable at EIX totalling \\$12.4 billion as of Sept. 30, 2015 and includes parent-only debt of \\$1.4 billion. In addition, SCE had approximately \\$2.1 billion of hybrid securities on its balance sheet as of Sept. 30, 2015. SCE's hybrid securities are assigned 50% equity credit, consistent with Fitch criteria.
Fitch estimates EIX's FFO adjusted leverage will approximate 2.9x - 3.5x and debt-to-EBITDAR-to-debt 3.0x - 3.2x during 2015 - 2017, consistent with its 'A-' IDR. Similarly, SCE's FFO adjusted leverage is estimated by Fitch Ratings to approximate 2.8x - 3.7x and debt-to-EBITDAR 2.8x - 3.0x during 2015 - 2017.
EIX retains tax shields approximating \\$1.2 billion at Edison Mission Energy (EME) following its emergence from bankruptcy in 2014. Fitch expects EIX will use the tax benefits to reduce parent-only leverage over time. However, the recent five-year extension of bonus depreciation is expected by Fitch to reduce SCE's tax burden, delaying monetization of EME tax benefits by EIX.
EIX's current ratings and Stable Rating Outlook also consider SCE's large capex program and final California Public Utilities Commission (CPUC) decision in SCE's 2015 general rate case (GRC). The CPUC issued its final 2015 GRC decision Nov. 2015, with rates retroactive to Jan. 1, 2015.
SCE filed its 2015 GRC in November 2013 and, at the time of the issuance of the CPUC final decision, supported a \\$121 million 2015 test year rate reduction and 2016 and 2017 attrition year rate increases of \\$236 million and \\$319 million, respectively. The commission granted a test year rate decrease of \\$451 million and 2016 and 2017 attrition year rate increases of \\$209 million and \\$272 million, respectively.
SCE benefits from a balanced state regulatory environment that includes, among other credit-supportive features, revenue decoupling, forward test years in regularly scheduled GRCs, bifurcation of cost-of-capital proceedings from GRCs, pre-approval of capex, and riders for recovery of key expense items outside of GRC proceedings.
The balanced regulatory compact in California and the Federal Energy Regulatory Commission (FERC) mitigates concern regarding the state's aggressive carbon reduction and renewable energy policy goals and SCE's large capex program. The California legislature approved Senate Bill (S.B.) 350, which was signed into law by Gov. Jerry Brown in Oct. 2015. The law increases California's renewable standard to an ambitious 50% by 2030 from 33% by 2020. In addition, the legislation mandates a doubling of energy efficiency in existing buildings in California by 2030 and includes transportation electrification and integrated resource planning requirements.
SCE's 2015 - 2017 capex projections are expected to approximate \\$11.6 billion - \\$11.8 billion. Post-2017 capex is estimated by the company to be \\$4 billion per annum or more, driven by investment to modernize and strengthen the grid to facilitate low carbon infrastructure initiatives.
Fitch's estimate of SCE's adjusted debt-to-EBITDAR of 2.8x - 3.0x 2015 - 2017 supports the utility's current credit rating. Unexpected, significant deterioration in the regulatory compact in California or other factors that would result in adjusted SCE debt-to-EBITDAR weakening to 3.6x - 3.75x or worse on a sustained basis would likely trigger future credit rating downgrades. Fitch believes a material deterioration in California regulation in the near-to-intermediate term is a low probability event.
California's aggressive carbon reduction and renewable energy policies are a long-term source of uncertainty for SCE, in Fitch's opinion.
Assembly Bill (A.B.) 327, enacted in 2013, provides authority to the CPUC to adjust residential tariffs to address rate design and cost-shifting issues relating to net energy metering (NEM). Under the law, the CPUC is charged with providing appropriate incentives to balance the interests of ratepayers, suppliers and investor-owned utilities. Proceedings before the commission will also consider grid investment required to support the state's low carbon strategy.
The CPUC issued a final Phase 1 decision in its rate design order instituting rulemaking (OIR) that will reduce the number of residential rate tiers from four to two by 2019. The cost differential will reduce to 25%. The CPUC also raised the minimum bill to \\$10 per month from \\$1.80. Fitch believes the outcome in Phase 1 of the residential OIR is neutral to modestly constructive for SCE from a credit point-of-view.
In July and August 2015, SCE filed its distribution resource plan (DRP) and its proposal in the CPUC's NEM successor tariff proceeding, respectively. The CPUC issued a final decision on January 27, 2016 continuing net metering with relatively modest changes. The commission will conduct a Phase 2 review of net energy metering in 2019.
SCE's DRP proposes capital investment for grid modernization and reinforcement totalling \\$350 million - \\$560 million during 2015 - 2017 and \\$1.4 billion - \\$2.6 billion 2018 - 2020. If authorized by the CPUC, Fitch expects SCE will seek recovery of its DRP investment in its 2018 GRC. Fitch expects SCE to submit its application in its 2018 GRC with the commission in September 2016.
The residential rate review process, including the anticipated 2019 CPUC review of NEM and the introduction of time-of-use rates for residential customers, and DRP proceedings will be important milestones in implementing the state's low-carbon energy policy in a balanced manner. Fitch believes competitive and regulatory challenges associated with the process will be resolved without undue pressure to SCE's credit profile.
In November 2014, the CPUC approved a stipulation regarding recovery of costs related to the retirement of the San Onofre Nuclear Generating Station (SONGS) that included The Utility Reform Network (TURN) and Office of Ratepayer Advocate (ORA) among other signatories.
Following SCE's late ex-parte communication disclosure to the CPUC, both TURN and ORA have indicated that they no longer support the SONGS stipulation and are also seeking to have the CPUC reopen the SONGS investigation. Separately, the CPUC December 2015 issued a final decision ordering SCE to pay a \\$16.7 million penalty for SONGS related ex parte communications violations. Fitch does not expect SONGS-related ex parte communication issues to adversely affect SCE or EIX's credit ratings.
In October 2015 the three owners of SONGS announced that they had reached a \\$400 million settlement with Nuclear Energy Insurance Limited. SCE's share of the proceeds is \\$313 million of which 95% will be returned to customers and 5% retained by the utility. The settlement resolves insurance claims related to SONGS outages due to the failures of replacement steam generators at the nuclear plant.
SCE has alleged contract and tort claims and is pursuing \\$4 billion in damages on behalf of the utility and its customers from Mitsubishi Heavy Industries, Ltd. (MHI), which has denied liability. MHI designed and supplied the SONGS replacement steam generators. In June 2013, SCE announced that it would permanently close and decommission SONGS units 2 and 3.
In addition, the ratings recognize CPUC regulations that limit dividends and cash distributions from SCE to EIX.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for SCE include the following:
--Capex approximating \\$4 billion per annum 2015 - 2017;
--Continued regulatory/policy support for SCE's evolving grid strengthening and modernization plans;
--A 10.45% authorized ROE and 48% equity ratio through 2017;
--No equity issuance over the forecast period.
RATING SENSITIVITIES
A rating upgrade for EIX and SCE is challenged by the utility's relatively large capex program, higher than industry average rates, and secular concerns regarding competitive inroads from alternative energy suppliers. Policy-driven changes to the grid including increasing two-way power flows, digitization and the incorporation and role of new and developing technologies injects a measure of long-term credit uncertainty, in Fitch's view. Fitch believes these challenges are manageable within the current rating categories for EIX and SCE.
However, constructive outcomes regarding rate structure issues to be addressed in proceedings related to A.B. 327 along with sustained EBITDAR and FFO-adjusted leverage of better than 3.25x and 3.5x, respectively, could result in future positive rating actions.
Deterioration in the California regulatory environment, would likely lead to future credit rating downgrades for both EIX and SCE. The inability to effectively execute its large capex program and fully recover costs in a timely manner could also result in adverse credit rating actions.
EIX's ratings would likely be downgraded if these or other factors were to result in EBITDAR leverage of 3.6x-3.75x or worse on a sustained basis.
LIQUIDITY
As of Sept. 30, 2015, EIX had consolidated cash and cash equivalents on its balance sheet totalling \\$134 million.
EIX's liquidity is strong, with \\$2.85 billion available under a total \\$4 billion of consolidated EIX committed bank facilities.
Total EIX borrowing capacity is composed of EIX's \\$1.25 billion and SCE's \\$2.75 billion committed bank facilities. EIX and SCE's revolvers terminate July 2019 (EIX - \\$68 million and SCE \\$150 million) and July 2020 (EIX - \\$1.182 billion and SCE \\$2.6 billion).
FULL LIST OF RATING ACTIONS
Fitch has affirmed EIX's ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'A-';
--Short-term IDR at 'F2'
--Senior unsecured at 'A-'
--Commercial paper at 'F2'.
Fitch has affirmed SCE's ratings as follows:
--Long-term IDR at 'A-';
--Short-term IDR at 'F1';
--Senior secured at 'A+';
--Senior unsecured at 'A';
--Senior secured pollution control revenue bonds at 'A+';
--Senior unsecured pollution control revenue bond at 'A';
--Preferred at 'BBB+';
--SCE Trust I 5.625% Trust Preference Securities at 'BBB+';
--SCE Trust II 5.10% Trust Preference Securities at 'BBB+';
--SCE Trust III Fixed-to-Floating Rate Trust Preference Securities at 'BBB+ --SCE Trust IV Fixed -to-Floating Rate Trust Preference Securities at BBB+.
--Commercial paper at 'F1'
The Rating Outlook for EIX and SCE is Stable.
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