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 January 12, 2016 - 6:17 PM EST
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Fitch: No Imminent Rating Impact on SoCalGas/SRE from Gas Leak

Fitch Ratings believes that the Aliso Canyon natural gas leak and subsequent government actions do not warrant an immediate change to the ratings for Southern California Gas Company (SoCalGas; 'A'/Stable Outlook) or its parent Sempra Energy (SRE; 'BBB+'/Stable Outlook) at this time.

Fitch believes that SoCalGas currently has sufficient headroom in its credit metrics to absorb potential costs associated with the gas leak that are not covered by insurance policies, which total more than $1 billion according to the company. The utility's credit measures are strong with funds flow from operations (FFO) lease adjusted leverage at 3.0x as of Sept. 30, 2015. Prior to the incident, Fitch projected that FFO lease adjusted leverage will weaken moderately, averaging 3.2x through 2019, primarily due to SoCalGas' large capex program.

Costs associated with the leak may not be quantifiable until after the injection/withdrawal well is plugged and a root cause analysis completed. Legal claims, environmental remediation, fines and penalties could depend upon the cause of the leak and whether company negligence played a role. Through Dec. 31, 2015, SoCalGas has incurred costs of approximately $50 million to address the leak and mitigate environmental and community impacts. Several agencies have issued notices directing SoCalGas to stop the leak and control the release of natural gas into the atmosphere.

Headline risk for SoCalGas and SRE is expected by Fitch to remain elevated at least until the well is plugged. SoCalGas estimates that the relief well will be completed between the end of February and the end of March 2016.

SoCalGas' ratings could be under pressure if unrecovered costs significantly exceed Fitch's expectations, with FFO lease adjusted leverage rising above 4.5x. Fitch generally views California regulation as balanced, providing a reasonable opportunity for utilities operating under the California Public Utilities Commission's (CPUC) jurisdiction to earn their authorized ROEs. Any meaningful deterioration to the regulatory compact in the state as a result of the incident would also be an adverse development.

On Oct. 23, 2015, SoCalGas discovered a leak at one of its injection and withdrawal wells at its Aliso Canyon gas storage facility. In early December 2015, the company began drilling a relief well to stop the leak by plugging the well base. The company is also preparing to drill a backup relief well as a precaution. On Jan. 6, 2016, California Governor Jerry Brown declared a state of emergency at the request of residents and local officials. On Jan. 11, 2016, California Senator Pavley introduced a package of bills calling for increasing inspection and safety measures for natural gas infrastructure.

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

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


Source: Business Wire (January 12, 2016 - 6:17 PM EST)

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