Fitch Rates Sempra Energy's Senior Unsecured Notes 'BBB+'

NEW YORK--()--Fitch Ratings has assigned a 'BBB+' rating to Sempra Energy's (SRE) $500 million 1.625% senior notes due 2019. The Rating Outlook is Stable.

KEY RATING DRIVERS

--Predictable earnings and cash flows from regulated utility operations and contracted energy infrastructure investments;

--Regulatory environment and recent general rate case (GRC) approval constructive at its California utilities;

--Cameron project provides stable earnings;

--Balanced expansion in the international and unregulated business segments;

--Sizeable capital expenditure at the California utilities;

Sempra's ratings primarily reflect its financial strength supported by its regulated utilities in California and South America and its contracted energy infrastructure investments. Approximately 80% of the earnings in the next several years will be regulated including California and South America. Additionally, the approval of SDG&E and SoCalGas' 2016 general rate case provides stable earnings and cash flows through 2018.

Fitch believes that Cameron's train 1-3 will provide stable earnings given the low commodity price exposure and long-term contracts with high-investment-grade off-takers. Sempra estimates that its share of the three trains will provide earnings of $300 million to $350 million beginning 2019.

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 frameworks. In September 2016, Sempra's Mexican subsidiary IEnova closed its acquisition of Petroleos Mexicanos' 50% equity interest in the Gasoductos de Chihuahua for $1.14 billion, including $388 million of debt. The joint venture (JV) primarily holds long-term contracted pipeline assets, and the acquisition increased IEnova's ownership interest to 100%.

Overtime, Fitch expects Sempra's international subsidiaries to increasingly tap local debt and equity markets, reducing future funding needs from Sempra and parent level debt as a percentage of total debt.

Fitch estimates that Sempra's funds from operations (FFO) fixed-charge coverage will range from 4.5x to 5.5x in the next five years. FFO adjusted leverage is expected to range from 3.8x - 4.8x for the same period. Fitch's projections include $1.5 billion share buybacks from 2019 to 2020 but exclude Sempra's portion of Cameron's project debt guarantee due to a remote likelihood of the guarantee being exercised.

KEY ASSUMPTIONS

Sempra:

--$1.5 billion share repurchase from 2019 to 2020.

SDG&E:

--Total capital expenditure $6 billion over five years;

--Incorporates the California Public Utilities Commission's - final decision in SDG&E's 2016 GRC, including attrition year rate increases of 3.5% in 2017 and 2018.

SoCalGas:

--Total capital expenditure $5.9 billion over five years;

--Incorporates the California Public Utilities Commission's final decision in SoCalGas's 2016 GRC, including attrition year rate increases of 3.5% in 2017 and 2018.

U.S. Gas and Power:

--$1.5 billion capex spending over five years

--Cameron to achieve commercial operation of all three trains in 2018, and begin first year of full operations in 2019.

International:

--$3.3 billion capital investments over five years including acquisition of Petroleos Mexicanos' 50% equity interest in the Gasoductos de Chihuahua.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--In light of the large capital spending program at its California utilities, it is unlikely that Sempra's ratings will be upgraded in the foreseeable future.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--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 5x on a sustained basis;

--If its California utilities are downgraded.

Date of Relevant Rating Committee: April 20, 2016

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)

https://www.fitchratings.com/site/re/878264

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Contacts

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Philip W. Smyth, CFA
Senior Director
+1-212-908-0531
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com