NEW YORK--(BUSINESS WIRE)--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.
KEY ASSUMPTIONS
Sempra:
--$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 being exercised.
SDG&E:
--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.
SoCalGas:
--Total capital expenditure $5.9 billion over five years;
--Incorporates the 2016 GRC final order and escalation of 3.5% from 2017-2018.
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 2017-2018.
RATING SENSITIVITIES
Sempra:
Positive:
--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:
--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 probable;
--If the consolidated FFO adjusted leverage is above 4.5x on a sustained basis;
--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:
Positive:
--In light of the capital program and relatively high leverage at their parent, it is unlikely that their ratings will be upgraded in the foreseeable future.
Negative:
--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 sustained basis;
--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+'.
Sempra Global
--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 'A+';
--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
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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