Fitch Rates Sempra Energy's Senior Unsecured Notes 'A'

SRE's ratings reflect the strength and relative predictability of its California-based electric and natural gas distribution utility cash flows and a balanced California regulatory environment. The ratings also consider SRE's investment strategy, which is centered on its California-utility businesses and regulated and unregulated natural gas infrastructure projects in North America. Debt leverage at SRE is low and consolidated credit metrics have been stable and are consistent with the current rating category. For the trailing 12-month period ended June 30, 2009, SRE's funds-from-operations-to-interest ratio was 6.0 times (x), which compares favorably with Fitch's target median for the 'A' rating category.

Sempra's California-based electric and gas utilities benefit from moderate growth and a constructive regulatory environment. General rate case proceedings are generally filed on a three-year cycle with a forward test year and inflation adjustments in years two and three. San Diego Gas & Electric Co. and Southern California Gas Co. both have authorized revenues set through the end of 2011. In addition, regular cost-of-capital adjustments, balancing accounts, commodity cost adjustment mechanisms, single-issue rate proceedings and pre-approval of construction plans provide a reasonable opportunity for the utilities to earn their authorized returns (which are above the industry average). California is one of the few states to have implemented decoupling mechanisms for both gas and electric (variance in earnings due to sales volumes is deferred and collected from or refunded to customers subsequently).

The ratings also recognize management's strong track record in implementing its diversified-natural-gas-infrastructure strategy focused on managing risk exposures through contractual obligations that minimize commodity price and volume risk. Generally, SRE does not undertake pipeline, LNG or other projects without first negotiating long-term contracts that ensure minimal hurdle rates of return.

Sempra Energy's capital expenditures are estimated at $12 billion in 2009-2013, three-quarters of which is earmarked for investment in its utility business and the remainder in its unregulated infrastructure business. Planned utility investment is focused on electric and natural gas transmission and advanced meters and is consistent with state policy initiatives focused on conservation and renewable energy programs.

The ratings also consider a somewhat improved business risk profile following the formation of the RBS Sempra Commodities LLP joint venture in 2008, which included the sale of a 51% ownership interest in its commodities business to the Royal Bank of Scotland (RBS). Importantly, the transaction transfers responsibility for the joint venture's growth capital, working capital and credit support to RBS, significantly improving SRE's liquidity profile.

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SOURCE: Fitch Ratings

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