Fitch Ratings has assigned a 'BBB+' rating to Sempra Energy's (SRE) $500 million issue of senior notes due 2020. Fitch said that the rating outlook is stable.
Sempra's ratings primarily reflect its financial strength supported by its regulated utilities in California and its contracted energy infrastructure investments. Approximately 80% of the earnings in the next several years will be regulated.
Sempra's California utilities 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) orders 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.
SDG&E and SoCalGas currently operate under the 2012 GRC order which expires at the end of 2015. They filed the 2016 GRC in November 2014 with the California Public Utility Commission (CPUC). Fitch expects no material changes in the new rate case order with regards to the existing authorized 10.3% Return on Equity (ROE) for SDG&E and 10.1% for SoCalGas, and the 52% common equity ratio for both utilities. The existing cost-of-capital (CoC) rates will remain in place until the end of 2016.
In November 2014, the CPUC approved an amended settlement involving the closure of San Onofre nuclear generation plan (SONGS). The settlement is somewhat more in favor of the ratepayers by increasing the refund ($1.45 billion) by $145 million compared to a previous proposal. As SDG&E is 20% owner of the plant and SONGS only represented approximately 11% of SDGE's generated and contracted power supply (2011), Fitch believes that SDG&E's portion of the refund, the unrecovered steam generator project costs, and the energy replacement costs are manageable. The completion of the Sunrise Power Link - a 500kV transmission line linking San Diego to Imperial Valley, a renewable-rich region in the state - helps relieve the loss of SDG&E's portion of power from SONGS. The line brings 800MW to 1,000MW of power into San Diego.
Sempra's Ratings and Outlook also assume that the Cameron LNG project will be completed and that Sempra's international segment will continue to experience robust growth while maintaining proper consolidated capital structure. Sempra is currently considering a master limited partnership (MLP) or a Yieldco-like strategy, potentially combining Cameron LNG along with existing and prospective pipeline projects and renewable assets. Fitch also expects that future investments in the non-regulated businesses including the expansion of Cameron LNG will be financed in a manner consistent with the current capital structure and supported by long-term contracts.
The international operations are expected to represent an increasing share of Sempra's consolidated earnings, driven primarily by robust economic growth, energy infrastructure expansion and relatively supportive regulatory framework. Sempra is expected to repatriate $200 million to $300 million per year in earnings from Mexico and Peru, which represents approximately 30% of dividends it receives from all subsidiaries. Meanwhile, Fitch expects Sempra's international subsidiaries to increasingly tap local debt and equity markets, reducing future funding needs from Sempra.
Sempra's funds from operations (FFO) fixed-charge coverage is expected to range from 5x-5.5x in the next five years, consistent with its rating. FFO adjusted leverage is expected to range from 4x-4.3x for the same period. These ratios exclude Sempra's portion of Cameron's project debt guarantee at Cameron. If Sempra's share of Cameron debt is included in Sempra's total debt, the FFO adjusted leverage could increase to mid-5x during the forecast period.