NEW YORK--(BUSINESS WIRE)--Fitch has assigned a 'AA-' rating to San Diego Gas and Electric Company's (SDG&E) $350 million 3.0% First Mortgage Bonds, Series JJJ, Due 2021.
The Rating Outlook is Stable.
Key Rating Drivers
--Predictable earnings and cash flows from regulated utility operations;
--Solid financial profile, including strong interest coverage metrics and modest debt leverage;
--Balanced regulatory environment in California;
--Significant capital expenditure program in progress, although risks mitigated by regulatory pre-approval.
Solid Financial Profile: SDG&E's credit profile remains strong with latest 12 month EBITDA to interest expense and debt to EBITDA ratios for the period ended June 30, 2011 at 6.7 times (x) and 3x, respectively. Over the next several years as significant investments in rate base continue, Fitch expects financial measures to remain strong and consistent with the current ratings.
Sizable Capital Expenditure Program: Over the next five years, SDG&E plans to invest $6.7 billion in rate base, including electric and natural gas distribution and electric transmission infrastructure, the Sunrise Powerlink transmission project, its smart meter program, renewable power, and the El Dorado natural gas combined cycle power plant transfer later this year. Risks associated with the large capital investment program are mitigated by the balanced regulatory structures at both the state and federal levels, including pre-approval of construction projects.
Supportive Regulatory Framework: In addition to balanced treatment of capital investments, the California framework also includes bifurcation of general rate case 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.
Parent Rating Linkage: SDG&E's ratings reflect the underlying strength and stability of the California utility's financial profile. The notching between SDG&E's ratings and that of its parent, Sempra Energy, (SRE, Issuer Default Rating, 'BBB+') is supported by the regulatory restrictions in place in California that limit distributions to SRE and the view that maintenance of the capital structure at SDG&E continues to be in the best interest of the parent from an economic perspective.
Potential Customer Rate Pressure: Longer term credit concerns also include the potential for customer rate pressure given the significant planned expenditures and relatively high renewable goals. Currently such rate pressure is limited by depressed power prices in California given recent strong hydro conditions and historically low natural gas prices. In addition, it is worth noting, that SDG&E's capital program targets projects that support state and federal energy policy.
Stable Rating Outlook: The Stable Outlook reflects the expectation that financial results will continue to be strong despite the pressures of the significant capital expenditure program. SDG&E continues to benefit from constructive regulation in California that includes various mechanisms providing for timely recovery of costs and provide reasonable opportunity to earn their authorized return on equity.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Utilities Sector Notching and Recovery Ratings' (March 16, 2010);
--'Parent and Subsidiary Rating Linkage' (July 14, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648449
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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