Fitch Affirms Sempra, Southern California Gas & San Diego Gas & Electric's Ratings; Outlook Stable
Fitch Ratings has affirmed Sempra Energy's (Sempra) Long-Term Issuer
Default Rating (IDR) at 'BBB+'. In addition, Fitch has affirmed the IDRs
of Sempra's subsidiaries, Southern California Gas Company (SoCalGas) and
San Diego Gas & Electric Company (SDG&E) at 'A'. The IDR of Sempra
Global, whose obligations are guaranteed by Sempra, has also been
affirmed at 'BBB+'. The Outlook for all ratings is Stable. A complete
list of affected ratings follows at the end of this release.
KEY RATING DRIVERS
Predictable Earnings and Cash Flows
Sempra's credit quality is supported by its stable regulated utilities
in California and South America, as well as long-term contracted energy
infrastructure investments. Fitch estimates that approximately 80% of
the earnings in the next several years will come from regulated
utilities in California and South America. Sempra's unregulated business
is largely focused on energy infrastructure, including natural gas
transportation and storage and liquefied natural gas assets. The level
of contractual support and other mitigants to market, credit and
operational risks at the unregulated segment will remain key rating
factors for Sempra.
Supportive California Regulations
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) proceedings 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. Fitch considers the
2016 GRC final order as constructive. The order adopted substantially
all of the terms of the settlement agreements and provides financial
stability for 2016 to 2018. The existing cost-of-capital (CoC) rates
will remain in place until the end of 2017 and the utilities are
required to file for a new CoC proceeding by April 2017. The two
utilities currently operate under the authorized 10.3% return on equity
(ROE) for SDG&E and 10.1% for SoCalGas, and 52% common equity ratio.
Impact of Cameron Delay Manageable
Fitch believes the delay of the Cameron liquefaction project (Cameron
LNG) has no material impact on Sempra's credit profile at this juncture.
Sempra has diversified earnings sources and should be able to absorb the
impact without stressing its credit metrics.
The project is currently facing a potential four- to six-month
construction delay on all three trains, raising concerns that project
completion would occur past the original substantial completion dates
when all three trains were expected to be in service by the end of 2018.
While the cause of delays has not been fully determined, the project has
had to cope with early soil instability affecting the earthen works and
extreme weather conditions (i.e. flooding in Louisiana). Cameron is
reviewing a proposal for a revised schedule from contractors and has
indicated that the working relationship with the contractors remains
cooperative. As part of mitigation efforts, contractors have deployed
additional resources to make up for some of the lost time.
For the construction of the three trains, Sempra guarantees its portion
of the project debt until completion. The expectation is that the
contractors will be able to complete the project before this date. Fitch
views the mitigation techniques implemented by the contractors as
reasonable, but will continue to monitor Cameron's progress as
construction advances and an updated schedule is developed.
Cameron LNG provides stable earnings for Sempra given its 20-year
availability-based tolling agreement with costs passed through to the
revenue counterparties, no commodity price exposure and
high-investment-grade sponsors and off-takers. The total cost of the
project is estimated to be approximately $10 billion with 70% project
financing. Sempra's ownership in the project is 50.2%.
Aliso Canyon Leak Resolution Making Progress
The resolution of the SoCalGas' Aliso Canyon gas storage leak incident
continues to make progress. On Nov. 1, 2016, SoCalGas submitted a
request to the California Department of Conservation's Division of Oil,
Gas, and Geothermal Resources (DOGGR) to resume injection at the Aliso
Canyon storage facility. As of Sept. 30, 2016, SoCalGas recorded $763
million of estimated costs related to the leak, 70% of which covered
temporary relocation program including cleaning costs and labor costs.
The relocation program ended in July 2016. Twenty percent of the cost is
to stop the leak, control the emissions, and the estimated cost of the
root cause analysis. A root cause report is expected in the first half
of 2017. Sempra indicated that it has insurance policies that could
potentially provide $1.2 billion to $1.4 billion coverage. $94 million
of insurance proceeds has been received in the second and third quarters
of 2016. Although injection is not currently allowed, Aliso Canyon
currently holds approximately 15bcf natural gas with withdrawal
permitted to meet the reliability needs.
Balanced International Expansion
The international operations are expected to grow at a CAGR of 8.3% from
2017 to 2020 (midpoint estimate), driven primarily by relatively strong
energy demand, the needs to grow electric and gas infrastructure, and
supportive regulatory frameworks, despite macroeconomic headwinds
particularly in Mexico and Chile.
At Sempra's South America utilities, energy costs and transmission
charges are pass-through, tariffs are set based on geography, population
density and average demand, reviewed periodically, and can be adjusted
to reflect inflation.
Earnings growth in Mexico is supported by expansion in natural gas
pipeline infrastructure and electric transmission, and also by the
energy reform to increase hydrocarbon production and transportation
capacity. The weakened financial profile of Sempra's state-sponsored
counterparties such as Pemex is a source of concern. Sempra Mexico's
recent acquisition of 50% equity stake in Gasoductos de Chihuahua (GdC)
reduces some exposure to Pemex from an operational standpoint. GdC
primarily holds long-term contracted, USD-denominated pipeline assets,
which fits Sempra's growth strategy in the non-utility segment.
President-elect Trump's victory in the U.S. election could increase
economic uncertainties for Mexico because of the close ties between the
two countries. However, the likelihood and feasibilities of executing
some of his trade protectionism policies are currently unclear at this
time and Fitch will closely monitor the progress.
Consistent Credit Metrics
Sempra's funds from operations (FFO) fixed-charge coverage is expected
to average in the mid-4x in the next five years. FFO adjusted leverage
could range from 3.7x-4.7x for the same period. These ratios incorporate
the expected delay at Cameron and a $1.5 billion share buyback program
in 2019 and 2020, but exclude Sempra's portion of Cameron's project debt
guarantee due to the remote likelihood of the guarantee being exercised.
SDG&E's stand-alone coverage ratios are expected to remain strong with
FFO fixed-charge coverage projected to average 6.3x from 2016 to 2020.
FFO adjusted leverage is projected to average 3.3x over the same time
period. These ratios have incorporated the $6 billion capital spending
program and the expected increase in upstream dividend totalling $2.2
billion over five years.
SoCalGas' ratings reflect the utility's strong credit metrics and a
balanced California regulatory environment, while also considering risks
associated with significant planned capital expenditures. As SoCalGas'
capex began to ramp up in 2013, and is expected to total $5.9 billion
over the next five years, its credit metrics are expected to weaken
noticeably compared to 2012. To offset such decline, Fitch expects
SoCalGas to continue to upstream a relatively small amount of dividends.
Despite FFO adjusted leverage increasing to an average of 3x from 2x in
2012 and FFO fixed-charge coverage declining to an average of 6.7x from
11x, SoCalGas' financial profile remains strong for its rating. No
additional insurance proceeds associated with Aliso Canyon are assumed
in these ratios.
Notching Difference Between Sempra and Utilities
The 2-notch difference between the IDRs of California utilities and
Sempra reflect a relatively high level of parent debt (parent-only debt
includes Sempra Global debt which is guaranteed by Sempra), representing
approximately 42% of consolidated debt. The relatively wide notching is
supported by the regulatory restrictions in place in California that
limit distributions to Sempra and Fitch's view that maintenance of the
capital structure at both entities continues to be in the best interest
of the parent from an economic perspective. Conversely, SDG&E and
SoCalGas' ratings are upwardly constrained due to Sempra's investments
in the unregulated segment and in the international operations, as
reflected by the degree of leverage at the parent. Over time, however,
we expect the parent-level debt as a proportion of the total debt to
gradually decline, as Sempra's foreign operations will continue to fund
their operations by accessing local capital markets.
--$750 million share buyback annually in 2019 and 2020;
--Sempra's completion guarantee of Cameron's project debt is not
included in the total debt due to the remote likelihood of the guarantee
--Total capital expenditure $6 billion over five years;--Incorporates
the 2016 GRC final order and escalation of 3.5% from 2017-2018;
--Total dividends $2.2 billion over five years.
--Total capital expenditure $5.9 billion over five years;
--Incorporates the 2016 GRC final order and escalation of 3.5% from
U.S. Gas and Power and International:
--Cameron to achieve commercial operation of all three trains in 2019,
and the first year of full operations in 2020;
--Total dividends $600 million from international operations in
--In light of the sizeable capex programs at the California utilities
and the ongoing Cameron LNG project, it is unlikely that Sempra's
ratings will be upgraded in the foreseeable future.
--Negative rating pressure could mount if Cameron LNG experiences cost
overrun or delays requiring substantial amount of equity injection from
Sempra, or if the project is highly likely to be delayed beyond the
long-stop completion date with low likelihood of extension, or likely to
be terminated, making the exercise of the completion guarantee highly
--If the consolidated FFO adjusted leverage is above 4.5x on a sustained
--If the company increases its risk profile by acquiring substantial
unregulated and uncontracted businesses and financing the transactions
mostly by debt, thus causing the credit metrics to deteriorate to the
level mentioned above;
--A downgrade at its California utilities.
SDG&E & SoCalGas:
--In light of the capital program and relatively high leverage at their
parent, it is unlikely that their ratings will be upgraded in the
--If the capex program is not prudently financed or experiences
significant cost overrun or regulatory delay in cost recovery, thus
causing the FFO adjusted leverage to be above 4.5x during construction
orpost-construction, if the FFO adjusted leverage is above 4x on a
--A downgrade at Sempra.
Fitch has affirmed the following ratings, with a Stable Outlook:
Sempra Energy (Sempra)
--Long-Term IDR at 'BBB+';
--Senior unsecured at 'BBB+'.
--Long-Term IDR at 'BBB+';
--Bank facility (unsecured) at 'BBB+';
--Short-Term IDR and CP at 'F2'.
San Diego Gas & Electric (SDG&E)
--Long-Term IDR at 'A';
--Senior secured at 'AA-';
--Senior secured pollution control and industrial revenue bonds at 'AA-';
--Senior unsecured at 'A+';
--Senior unsecured pollution control and industrial revenue bonds at
--Short-Term IDR and CP at 'F1'.
Southern California Gas (SoCalGas)
--Long-Term IDR at 'A';
--Senior secured at 'AA-';
--Senior unsecured at 'A+';
--Preferred stock at 'A-';
--Short-Term IDR and CP at 'F1'.
Date of Relevant Rating Committee: Nov. 30, 2016
Additional information is available on www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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