NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Sempra Energy's (SRE) $500 million issue of senior notes due 2020. The Rating Outlook is Stable.
KEY RATING DRIVERS
--Predictable earnings and cash flows from regulated utility operations and contracted energy infrastructure investments;
--Credit metrics consistent with rating category;
--Constructive regulatory environment at its California and South America utilities;
--Balanced expansion in the unregulated segment;
--Sizeable capital expenditure program at the California utilities;
--Significant parent level debt.
Sempra's ratings primarily reflect its financial strength supported by its regulated utilities in California and its contracted energy infrastructure investments. Approximately 80% of the earnings in the next several years will be regulated.
Sempra's California utilities San Diego Gas and Electric (SDG&E) and Southern California Gas Company (SoCalGas) benefit from the California regulatory framework which includes bifurcation of general rate case (GRC) orders and cost-of-capital proceedings, forward-looking test years and attrition rate increases, revenue decoupling, and the use of balancing accounts to manage cost fluctuations and reduce regulatory lag.
SDG&E and SoCalGas currently operate under the 2012 GRC order which expires at the end of 2015. They filed the 2016 GRC in November 2014 with the California Public Utility Commission (CPUC). Fitch expects no material changes in the new rate case order with regards to the existing authorized 10.3% Return on Equity (ROE) for SDG&E and 10.1% for SoCalGas, and the 52% common equity ratio for both utilities. The existing cost-of-capital (CoC) rates will remain in place until the end of 2016.
In November 2014, the CPUC approved an amended settlement involving the closure of San Onofre nuclear generation plan (SONGS). The settlement is somewhat more in favor of the ratepayers by increasing the refund ($1.45 billion) by $145 million compared to a previous proposal. As SDG&E is 20% owner of the plant and SONGS only represented approximately 11% of SDGE's generated and contracted power supply (2011), Fitch believes that SDG&E's portion of the refund, the unrecovered steam generator project costs, and the energy replacement costs are manageable. The completion of the Sunrise Power Link - a 500kV transmission line linking San Diego to Imperial Valley, a renewable-rich region in the state - helps relieve the loss of SDG&E's portion of power from SONGS. The line brings 800MW to 1,000MW of power into San Diego.
Sempra's Ratings and Outlook also assume that the Cameron LNG project will be completed and that Sempra's international segment will continue to experience robust growth while maintaining proper consolidated capital structure. Sempra is currently considering a master limited partnership (MLP) or a Yieldco-like strategy, potentially combining Cameron LNG along with existing and prospective pipeline projects and renewable assets. Fitch also expects that future investments in the non-regulated businesses including the expansion of Cameron LNG will be financed in a manner consistent with the current capital structure and supported by long-term contracts.
The international operations are expected to represent an increasing share of Sempra's consolidated earnings, driven primarily by robust economic growth, energy infrastructure expansion and relatively supportive regulatory framework. Sempra is expected to repatriate $200 million to $300 million per year in earnings from Mexico and Peru, which represents approximately 30% of dividends it receives from all subsidiaries. Meanwhile, Fitch expects Sempra's international subsidiaries to increasingly tap local debt and equity markets, reducing future funding needs from Sempra.
Sempra's funds from operations (FFO) fixed-charge coverage is expected to range from 5x-5.5x in the next five years, consistent with its rating. FFO adjusted leverage is expected to range from 4x-4.3x for the same period. These ratios exclude Sempra's portion of Cameron's project debt guarantee at Cameron. If Sempra's share of Cameron debt is included in Sempra's total debt, the FFO adjusted leverage could increase to mid-5x during the forecast period.
RATING SENSITIVITIES
Sempra:
Positive:
--A positive rating action seems unlikely given its relatively high parent-level leverage and large unregulated and regulated capex programs.
Negative:
--Sempra could be downgraded if the Cameron LNG project experiences substantial cost overrun or delays requiring a substantial amount of equity, or the project is terminated, resulting in the exercise of the guarantee;
--If the consolidated FFO adjusted leverage is above 4.8x on a sustained basis;
--If the company executes an aggressive stock buyback program or acquires a substantial amount of unregulated businesses and finances the transactions mostly by debt, thus causing the credit metrics to deteriorate to the level aforementioned;
--If its California utilities are downgraded.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 13, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Rating U.S. Utilities, Power and Gas Companies, (March 9, 2014).
Applicable Criteria and Related Research:
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective 3 May 2012 to 14 August 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677740
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981086
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.