Fitch Ratings has upgraded Edison International's (EIX) and Southern California Edison Company's (SCE) Long-Term Issuer Default Rating (IDR) to 'BBB'/Outlook Stable from 'BBB-'/Outlook Positive.

Fitch has also upgraded EIX's senior unsecured debt to 'BBB' from 'BBB-' and its preferred and junior subordinated debt securities to 'BB+' from 'BB'. Fitch has also upgraded SCE's first and refunding mortgage bonds to 'A-' from 'BBB+', senior unsecured debt to 'BBB+' from 'BBB' and preference securities to 'BBB-' from 'BB+'. EIX's and SCE's Short-Term IDRs have been affirmed at 'F3'. A full list of rating actions is included below.

The EIX and SCE rating actions primarily reflect the meaningful decline in major wildfires linked to SCE's equipment post-2018, despite elevated wildfire activity in California in 2020 and 2021, and ongoing efforts to enhance system resilience while mitigating reliance on and frequency of public safety power shut-offs. Cumulative structures destroyed by SCE-linked wildfires declined more than 90% during 2019-2022 compared to the number of structures destroyed during 2017-2018. This was achieved despite high wildfire risk conditions and elevated wildfire activity in 2020 and 2021 as evidenced by a record of approximately 4.3 million acres burned state-wide in 2020 and more than 2.5 million acres in 2021. After four wildfire seasons, the Assembly Bill (AB) 1054 wildfire insurance fund that was created in 2019 by the anti-wildfire law has not seen any claims filed through YE 2022, a constructive development from a credit perspective, in Fitch's opinion, as premature depletion of the fund is a key credit concern.

Key Rating Drivers

Significantly Lower Wildfire Liabilities: Post-2018, SCE-linked wildfires have been significantly smaller and exposures in terms of third-party liabilities much more manageable from a credit perspective compared to the Thomas and Koenigstein Fires and Montecito Mudslides (TKM - 2017) and Woolsey (2018) liabilities, supporting the one-notch upgrade. SCE estimates gross losses from the 2017/2018 wildfire and mudslide events of $8.8 billion, whereas losses associated with post-2018 wildfire liabilities are not expected to be material after insurance and regulatory recoveries.

With the large majority of 2017/2018 wildfire liabilities resolved, Fitch expects EIX's and SCE's 2023-2026 credit metrics to improve significantly, averaging better than 5.0x and 4.0x, respectively, compared to 9.2x and 7.2x in 2022. Fitch's projections assume no 2017/2018 wildfire liability cost recovery. In the intermediate to longer term, further upward momentum to EIX's ratings is limited by Fitch's expectations of growing parent-only leverage in the absence of future recovery of 2017-2018 wildfire liabilities by SCE.

Wildfire Cost Recovery Filing: Fitch expects SCE will file for recovery of TKM and Woolsey liabilities with the California Public Utilities Commission (CPUC) starting later this year. SCE currently plans to file for rate recovery of pending liabilities in multiple future applications. SCE is targeting 3Q23 for the first of such cost recovery applications, which would be for TKM. Recovery of these wildfire liabilities, which is not included in our projections, would be a credit supportive development and could lead to future upgrades in the long term.

Wildfire Risk Update: Fitch believes wildfire risk at SCE remains a key challenge to EIX's and the utility's creditworthiness. SCE has made meaningful progress strengthening the grid's fire resilience in light of materially reduced wildfire activity over the past four years despite challenging wildfire conditions. Fitch notes the significant decline in acres burned post-2018 due to fires linked to SCE equipment, despite heightened wildfire activity across California during 2020 and 2021. Based on data compiled by the California Department of Forestry and Fire Protection (CAL FIRE) and company data, Fitch calculates average annual acres burned and structures destroyed by SCE-linked wildfires declined 80% and 96%, respectively, during 2019-2022 compared to 2017-2018.

Less Destructive Post-2018 Wildfires: The significant reduction in the number of structures destroyed by SCE-linked wildfires during 2019-2022 compared to 2017-2018 is the primary catalyst of the EIX and SCE rating upgrade and Stable Outlook. SCE's ongoing efforts to enhance wildfire resilience along with state and local efforts, credit supportive elements of wildfire legislation enacted in California, including the AB 1054 wildfire fund, and improving projected credit metrics are additional, important factors supporting the upgrade and Stable Outlook. While Fitch believes efforts underway to minimize wildfire destruction may be taking root, sustained recurrence of similarly destructive firestorm activity as 2017-2018 cannot be ruled out and would result in adverse credit rating actions.

California Regulatory Compact: In Fitch's opinion, regulatory practices in California are generally balanced and credit supportive. However, SCE and other California investor-owned utilities are subject to an active legislature and prone to a relatively high degree of political risk dating back to the energy crisis of 2001-2002. In Fitch's view, legislative actions and rate regulation in recent years have generally been credit supportive. The durability of a balanced regulatory compact in California is a key credit determinant, especially in light of SCE's large projected capex program.

Regulatory support for timely recovery of SCE investment to further wildfire resilience and safety and California's ambitious clean energy policy goals and other costs will be a critical determinant of future credit quality for SCE and its corporate parent, along with recovery of 2017-2018 wildfire liabilities.

Focus on Resilience and Clean Energy: Capex at SCE is driven by wildfire mitigation and spending to support state greenhouse gas reduction targets and is expected by management to approximate $27 billion-$30 billion 2021-2025, 22%-32% higher than the $22.5 billion invested by SCE during 2016-2020. Approximately 89% of SCE's 2021-2025 capex budget of $27 billion-$30 billion targets investment in its distribution grid and the remainder transmission and generation investment. SCE expects to spend roughly 20% of its total 2021-2025 capex budget on wildfire mitigation and 30% targets distribution infrastructure replacement.

Wildfire Hardening Efforts Continue: SCE has made significant progress hardening its system to mitigate wildfire risk, with approximately 44% of bare conductor in high fire risk areas (HFRA) covered at YE 2022 and plans to harden a total of 8,700 miles (87%) in HFRA by the end of 2028. SCE expects to add 1,200 miles of covered conductor in 2023, bringing the total hardening tally to 74% of total distribution lines in HFRA. Covered conductor is highly effective against wildfire risks impacting SCE's service territory and is less costly and installed more quickly compared to undergrounding. Approximately 7,000 circuit miles in HFRA are already underground and SCE plans to underground an additional 600 distribution circuit miles 2025-2028.

These efforts are augmented by installation of state-of-the-art equipment to enhance situational awareness in HFRA, including meteorological equipment and surveillance cameras. Operational changes include risk-informed inspections, increased line clearing and hazardous tree management, as well as ongoing efforts to reduce and improve public safety power shutoff performance.

Credit Supportive Legislation Enacted: AB 1054, Senate Bill (SB) 901 and a number of other laws were enacted in California to protect the public against deadly wildfires. AB 1054 creates a $21 billion wildfire insurance fund for the three large electric investor-owned utilities (IOUs) in California, including SCE, to defray prudently incurred wildfire-related liabilities under inverse condemnation (IC) in excess of $1 billion. The legislation also modified California's burden of proof standard with regard to wildfire costs although the new standard is yet to be implemented and is subject to interpretation and implementation risk, in Fitch's opinion. The legislation also caps liabilities limiting exposure to 20% of T&D equity rate base.

Wildfire Insurance Fund: California applies IC to IOUs when their equipment is deemed to have ignited a wildfire, holding them strictly liable even if they complied with all rules and regulations. Under IC, payments to wildfire victims are made relatively quickly and may not be recovered by IOUs until long after payments have been made, if at all. The AB 1054 insurance fund is designed to address this mismatch in cash recovery and liability payments, providing a robust source of funds to buffer SCE and the other large IOUs from liquidity and funding challenges associated with large firestorm-related liabilities.

Premature exhaustion of the AB 1054 fund due to elevated wildfire activity and related claims is a concern. Through YE 2022 no withdrawal requests, to Fitch's knowledge, have been submitted to the fund, underscoring the durability of the fund since its inception, a credit positive.

Securitization of Wildfire Costs: Both SB 901 and AB 1054 include provisions authorizing use of securitization of wildfire costs in certain circumstances to minimize their impact on customer rates. SCE issued $871 million of securitization bonds in 2021 and 2022 and $775 million earlier this year to repay certain wildfire-related expenditures as authorized under California law. Fitch adjusts its financial ratios removing securitization related revenue, amortization, interest expense and debt from EIX's and SCE's financials reflecting protections and commitments granted by state law creating a transferable, nonbypassable special tariff to a ring-fenced SPE with no recourse to the utility.

EIX Debt: Fitch believes EIX's consolidated balance-sheet debt is manageable, totaling $36 billion as of Dec. 31, 2022, including holding company and utility preferred and preference securities of approximately $3.9 billion. EIX parent-only debt and preferred was $6.5 billion or 18% of total EIX consolidated debt and preferred securities. EIX parent-only debt has increased sharply from approximately $400 million at YE 2013. Higher EIX debt is due to funding requirements primarily at SCE for capex and catastrophic wildfire costs and, to a lesser extent, payments to creditors of former subsidiary Edison Mission Energy under its bankruptcy court-approved reorganization plan.

In the intermediate to longer term, further upward momentum to EIX's ratings is limited by Fitch's expectations of growing parent-only leverage in the absence of future recovery of 2017-2018 wildfire and liabilities by SCE.

Parent-Subsidiary Rating Linkage: Fitch has determined a parent-subsidiary relationship exists between EIX and SCE and, based on the companies' standalone credit profiles (SCPs), their issuer default ratings are the same. EIX subsidiary SCE accounts for virtually all of EIX's consolidated earnings and cash flows. As such, Fitch would apply a stronger subsidiary, weaker parent approach to rating SCE and EIX under Fitch's parent-subsidiary linkage criteria should their SCPs diverge, reflecting EIX's dependence on cash flows from SCE to meet its obligations. In that scenario, both legal ring fencing and access and control would be deemed by Fitch to be porous, resulting in a maximum two-notch differential in SCE's and EIX's IDRs.

Derivation Summary

EIX compares favorably with peer utility holding company PG&E Corp. (PCG; BB+/Stable) and is similarly positioned to Cleco Corporate Holdings (Cleco; BBB-/Stable) and Puget Energy Inc. (PE; BBB-/Stable). Both EIX's and PCG's business risk profiles are seriously challenged by outsized wildfire-related liabilities with significantly greater adverse effect historically for PCG. Post-2018, wildfires in SCE's service territory have been smaller and more manageable than the 2017-2018 wildfires and the 2021 Dixie Fire which occurred in PG&E's service territory.

EIX, PCG, Cleco and PE are single utility-holding companies operating in parts of California (PCG and EIX), Washington (PE) and Louisiana (Cleco). EIX and PCG are significantly greater in size and scale than PE or Cleco and parent-only debt is significantly lower - with both EIX and PCG below 20% compared to 30% for PE and 50% for Cleco. Virtually all of EIX's, PCG's and PE's consolidated EBITDA is provided by regulated operations and approximately 75% for Cleco. Fitch estimates FFO leverage will average just under 5.0x in 2022-2026 for EIX, better than Fitch's estimate of 5.0x-6.0x for PE and Cleco. EIX FFO leverage of 4.4x is better than estimated PCG leverage of approximately 5.0x in 2024. For 2023-2026, Fitch expects EIX FFO leverage to average 4.5x.

Uncertainty regarding the magnitude, frequency and destructive force of California wildfires and associated third-party liabilities heighten regulatory and operating risks for EIX and PCG, in Fitch's view, in comparison to its peers.

Key Assumptions

No rate recovery of 2017-2018 wildfire liabilities;

SCE pays approximately $8.8 billion of total wildfire-related third-party liabilities;

No equity return on the first $1.6 billion of wildfire mitigation plan capex;

Capex spend during 2022-2025 of approximately $6 billion per year on average;

Credit supportive federal and state economic regulation;

Securitization of approximately $1.3 billion of AB 1054 capital and financing costs 2022-2023;

Timely recovery of memo account balances 2022-2025;

Balanced funding of SCE's capex program.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade for Edison International:

Utility-sparked wildfire activity in SCE's service territory consistent with historic 2019-2022 experience in the intermediate term along with supportive California rate regulation, especially with regard to 2017-2018 wildfire liabilities.

An upgrade at EIX is unlikely without recovery of 2017-2018 wildfire liabilities in rates.

FFO leverage of 4.5x or better on a sustained basis.

Factors that could, individually or collectively, lead to negative rating action/downgrade for Edison International:

Significantly greater than expected debt issuance;

A downgrade of SCE due to deteriorating rate regulation or other factors would likely result in a downgrade of EIX;

FFO leverage of greater than 5.0x on a sustained basis.

Factors that could, individually or collectively, lead to positive rating action/upgrade for Southern California Edison:

Consistent, incremental progress reducing firestorm risk in the intermediate-to-long term;

Regulatory approval to recover 2017-2018 wildfire costs in rates;

More manageable utility-triggered wildfire activity consistent with post-2017/2018 levels in the intermediate term;

Successful implementation of A.B. 1054, with regard to resiliency initiatives, durability of the wildfire insurance fund and CPUC interpretation of standards and procedures;

Better than expected regulatory outcomes with respect to timeliness and substance;

FFO leverage of 4.5x or better on a sustained basis.

Factors that could, individually or collectively, lead to negative rating action/downgrade for Southern California Edison:

Continuing catastrophic wildfire activity leading to depletion of the wildfire fund more quickly than expected and resulting exposure to incremental wildfire liabilities;

Execution risk associated with AB 1054, including safety certification issuance, implementation of the wildfire insurance fund or unexpectedly large prudence disallowance by the CPUC;

Ineffective operating response to wildfires;

Poor PSPS execution, communication and management;

Adverse political, legislative or regulatory developments;

Increases to FFO-adjusted leverage to greater than 5.3x on a sustained basis.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Fitch believes EIX has ample consolidated liquidity. EIX negotiated $4.9 billion of consolidated revolving credit facilities (RCFs) composed of a $1.5 billion revolver at the corporate parent and a $3.4 billion revolver at SCE. On a consolidated basis, EIX had total available YE 2022 borrowing capacity of $4.1 billion and cash and cash equivalents of $914 million YE 2022. EIX had borrowings outstanding totaling $0.1 billion on its $1.5 billion RCF. SCE ended the year with $2.7 billion available to be borrowed under its RCF and $766 million of cash on hand. At YE 2022, cash at the parent-only level was $148 million.

Like most utilities, SCE is expected to be FCF negative based on Fitch's assumptions and its large capex program. Negative FCF is a function of high capex driven by spending to mitigate catastrophic wildfire activity and meet California's greenhouse gas reduction goals. Fitch expects cash shortfalls to be funded with a balanced mix of debt and equity. EIX and SCE have access to debt capital markets and Fitch believes debt maturities are manageable.

Issuer Profile

Holding company EIX's core utility, SCE, is one of the largest investor-owned electric utilities in the U.S. SCE provides electricity services to 15 million people through five million customer accounts across a 50,000 square-mile service territory in Central, Southern and Coastal California.

Summary of Financial Adjustments

Fitch adjusts EIX's and SCE's financials to remove securitization-related revenue, interest and amortization expense and debt. Fitch also provides 50% equity credit for certain hybrid securities issued by EIX and SCE in accordance with Fitch criteria and consistent with the equity-like features of the relevant hybrid instruments.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

EIX and SCE have ESG Relevance Scores (RS) of '4' for exposure to environmental impacts due to the threat of catastrophic wildfire activity offset by the constructive impact of AB 1054, including creation of the wildfire fund, and ongoing efforts by EIX, SCE and the State of California to improve system resilience against firestorm activity. This has a negative impact on the companies' credit profiles and is relevant to the ratings in combination with other factors.

EIX and SCE have ESG Relevance Scores (RS) of '4' for exposure to social impacts which are also related to wildfire activity and its adverse impact on the utility's relationship with customers. This has a negative impact on the companies' credit profiles and is relevant to the ratings in combination with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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