TEXT-Fitch affirms Sempra, and subsidiaries ratings
Aug 9 - Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Sempra Energy (SRE) at 'BBB+'. Fitch also affirmed the IDR of its subsidiaries Southern California Gas Company (SoCal Gas) and San Diego Gas & Electric Company (SDG&E) at 'A'. The IDR of Sempra Global, whose obligations are guaranteed by SRE, is also affirmed at 'BBB+'. The Outlook for all ratings is Stable. A complete list of affected ratings is included below. Key Rating Drivers --Predictable earnings and cash flows from regulated utility operations; --Financial metrics consistent with rating category and relative to peers; --Balanced political and regulatory environment at its core California utility operations; --Significant capital expenditure program at the utilities and for renewable power projects. Sempra Energy The ratings at SRE primarily reflect its financial strength underpinned by its regulated utilities in California and by its contracted energy infrastructure investments. SRE's interest coverage measures are strong with EBITDA-to-interest projected to be approximately 5x and funds flow from operations (FFO)-to-interest expected to range from 4.8x to 5.2x over the next several years. Leverage ratios are modestly affected by the sizeable capital investments at the utilities and the renewable business. Debt-to-EBITDA is expected to be in the low 3x range for the forecast period while FFO-to-debt should stabilize in the low 20% range for the same period. The Stable Outlook for SRE 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. At the same time, it is expected that future investments in the non-regulated businesses will be financed in a manner consistent with the current capital structure and supported by long-term contracts, particularly for investments in renewable power projects. San Diego Gas & Electric SDG&E's stand-alone coverage ratio remains strong with EBITDA-to-interest expense ratios for the latest 12-month (LTM) period ended June 30, 2012 at 6.6x, while the debt-to-EBITDA ratio rose to 3.6x over the same period primarily due to increased leverage to finance the Sunrise Powerlink transmission project. The transmission line was put in service in June 2012. Over the next five years, SDG&E plans to invest $5.8 billion, mostly in rate-base growth projects, including electric and natural gas distribution and electric transmission infrastructure, its smart meter program and renewable power. 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. In addition, the California framework 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. Longer term credit concerns also include the potential for customer rate pressure given the significant planned expenditures and relatively high renewable goals. Additionally, the notching between SDG&E and SRE 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 both entities continues to be in the best interest of the parent from an economic perspective. Southern California Gas Company SoCal Gas' ratings reflect the gas distribution utility's strong credit metrics and a balanced California regulatory environment, while also considering risks associated with significant planned capital expenditures. Concerns related to currently anticipated capital expenditures and those related to potential incremental pipeline safety investments are generally mitigated by regulatory pre-approval of capital spending plans, single-issue rate proceedings, and forward-looking test years. Balanced regulation supports predictable earnings and cash flows through various recovery mechanisms, including decoupling of sales and earnings and balancing accounts, which limits commodity cost exposure. Debt leverage at SoCal Gas is low, and credit metrics are expected to remain stable at strong coverage levels. For LTM ended June 30, 2012, SoCal Gas' interest coverage relative to EBITDA was very strong at 10.2x while debt-to-EBITDA remained low at 1.6x. Over the next five years as capital expenditures are expected to total $5 billion, financial metrics are expected to weaken modestly. Nevertheless, despite debt-to-EBITDA increasing to mid-2x and EBITDA interest coverage declining to 7x, SoCal's financial profile is expected to remain strong and consistent with the current ratings. Additionally, the notching between SoCal Gas and SRE 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 both entities continues to be in the best interest of the parent from an economic perspective. Liquidity and Capital Resources SRE and its subsidiaries continue to maintain adequate liquidity despite the high level of planned capital expenditures. On a consolidated basis SRE has $4.1 billion in committed credit facilities supporting commercial paper and variable-rate demand notes. These facilities comprise a $1.067 billion facility at the parent, $2.189 billion at Sempra Global (guaranteed by SRE) and a combined $877 million at the utilities ($658 million sublimit for each), all of which mature in March 2017. As of June 30, 2012, $3.2 billion revolving credit was available. Debt maturities are considered manageable and Fitch would expect that Sempra, SoCal Gas and SDG&E will continue to maintain sufficient access to the capital markets to refinance maturing debt as needed. What Could Trigger A Rating Action Negative: -- Unexpected regulatory outcomes that prevent timely recovery of costs or adequate return on capital; -- Investments in non-regulated assets that alter and lead to a higher business risk profile. Positive: -- Unlikely, due to sizeable capital spending program. Fitch has affirmed the following ratings: Sempra Energy (SRE) --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+'; --Preferred stock at 'A-'; --Short-term IDR and CP at 'F1'. Southern California Gas (SCG) --Long-term IDR at 'A' ; --Senior secured at 'AA-'; --Senior unsecured at 'A+'; --Preferred stock at 'A-'; --Short-term IDR and CP at 'F1'. The Rating Outlook for all outstanding ratings is Stable. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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