Fitch Rates Sempra Energy's Senior Notes 'BBB+'
NEW YORK -- November 19, 2013
Fitch Ratings has assigned a 'BBB+' rating to Sempra Energy's (SRE) $500
million proposed issue of senior notes offering due 2023. The Rating Outlook
KEY RATING DRIVERS
--Predictable earnings and cash flows from regulated utility operations
exemplified by GRC order;
--Reasonably constructive regulatory environment at its core California
--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
million 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
5.1x over the past five years. For the same period, the company produced
FFO-to-debt of 20%.
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
--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
--If the consolidated FFO-to-Debt during the heavy capex period is below 16%
or below 20% thereafter;
--If the company 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
--A downgrade at its California utilities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Julie Jiang, +1-212-908-0708
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Philip W. Smyth, CFA, +1-212-908-0531
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, New York, +1-212-908-0549
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