NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Sempra Energy's (SRE) $500 million proposed issue of 3.55% senior notes due 2024. The Rating Outlook is Stable.
KEY RATING DRIVERS
--Predictable earnings and cash flows from regulated utility operations;
--Reasonably constructive regulatory environment at its core California utility operations;
--Sizeable capital expenditure program;
--Cameron liquefaction project a potential earnings driver though pressures metrics over the intermediate term.
SRE's ratings primarily reflect its financial strength supported by its regulated utilities in California and its contracted energy infrastructure investments. Approximately 90% of the earnings in the next several years will be regulated or contracted.
The Cameron liquefaction project will potentially provide another source of stable earnings. Sempra estimates that it will provide earnings of $300 to $350 million beginning 2019. In May 2013, Sempra signed a 20-year tolling agreement and joint venture agreement with three customers and partners: GDF SUEZ, Mitsubishi Corporation, and Mitsui & Co., LTD. Sempra will contribute the existing terminal and provide a small amount of additional cash equity to the project which Fitch views favorably. Along with the partners, Sempra will guarantee the financing of the project until construction is completed, which will pressure its credit metrics in the next several years.
Despite the heavy capex spending from 2010 to 2012 at its subsidiary San Diego Gas & Electric (SDGE), SRE's credit metrics have been in line with the rating and has produced an average funds flow from operations (FFO)-to-interest of 5.2x over the past four years. For the same period, the company produced FFO-to-debt of 19.5%.
Going forward, the credit ratios will be affected by the sizeable capital investments at the California utilities and international operations. Excluding the Cameron guarantee, FFO interest coverage is expected to range from 4.8x to 5.2x. FFO-to-debt is expected to decline to the high teens. With the guarantee, based on Fitch's preliminary assessment, the FFO-to-debt could decline to the mid-teens.
The Stable Outlook for SRE assumes that the Cameron liquefaction project will be completed and the likelihood of the guarantee to be exercised is low. The Outlook also reflects the expectation that financial performance will continue to be driven by the consistent performance of the regulated utilities, both of whom benefit from constructive regulation in California that includes various mechanisms providing for timely recovery of costs. Fitch also expects that future investments in the non-regulated businesses will be financed in a manner consistent with the current capital structure and supported by long-term contracts.
--In light of the large capital spending program at its California utilities and investments in the non-regulated segment, it is unlikely that Sempra's ratings will be upgraded in the foreseeable future.
--Sempra could be downgraded if the Cameron liquefaction project experiences substantial cost overrun or delays requiring substantial amount of equity, or the project is terminated resulting in the exercise of the guarantee highly probable;
--If the consolidated FFO-to-Debt during the heavy capex period is below 16% or below 20% thereafter;
--If Sempra executes aggressive stock buyback program or acquires substantial amount of unregulated businesses and finances the transactions mostly by debt, thus causing the credit metrics to deteriorate to levels mentioned above;
--A downgrade at its California utilities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2013);
--'Rating U.S. Utilities, Power and Gas Companies, (March 9, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Utilities
Parent and Subsidiary Rating Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)