New York, Oct. 1, 2002 — Moody’s Investors Service downgraded the ratings of Sempra Energy (senior unsecured to Baa1 from A2) and the ratings of San Diego Gas and Electric Company (senior secured to A1 from Aa3).
This action concludes the review for downgrade that was initiated on April 22, 2002. The rating outlook is stable for both issuers.
Ratings downgraded and removed from review include:
“- Sempra’s issuer rating and senior unsecured debt to Baa1 from A2;
“- Trust preferreds issued by Sempra Energy Capital Trust I to Baa2 from A3;
“- Sempra’s short term rating to Prime-2 from Prime-1;
“- Sempra Energy Global Enterprise’s (SEGE) short-term rating to Prime-2 from Prime-1. Sempra unconditionally guarantees the obligations of SEGE;
“- Sempra Energy Employee Stock Option Plan, guaranteed by Sempra, to Baa1 from A2 for long term debt, and to Prime-2 from Prime-1 for short term debt;
“- Shelf registration for the issuance of unsecured debt, subordinated debt or trust preferreds, and preferred stock, by either Sempra or SEGE, to (P)Baa1, (P)Baa2, (P)Baa3, from (P)A2, (P)A3, (P)Baa1, respectively.
San Diego Gas and Electric Company (SDGE)
“- SDGE’s senior secured debt and secured pollution control bonds to A1 from Aa3;
“- SDGE’s issuer rating, senior unsecured debt, and unsecured pollution bonds to A2 from A1;
“- SDGE’s preferred stock to Baa1 from A3;
“- Shelf registration for SDGE’s issuance of secured debt, unsecured debt, and preferred stock to (P)A1, (P)A2, (P)Baa1from (P)Aa3, (P)A1, (P)A3, respectively.
SDGE’s short-term rating for commercial paper, and variable rate demand bonds, is confirmed at Prime-1, and VMIG-1, respectively.
The rating action at Sempra reflects the continuing shift in the company’s business mix, which includes a greater reliance on non-regulated cash flows, including cash flows from its trading and marketing, international, and wholesale power businesses.
Moody’s views the cash flow generated from the non-regulated platform, and in particular, the marketing and trading business, as significantly more volatile than the cash flow historically generated from the regulated businesses, Southern California Gas Company (Senior Secured Debt – A1; Stable Outlook) and SDGE.
Sempra’s non-regulated businesses have increased in importance, representing 30% of net income in 2001 from 5% in 1999. Sempra’s marketing and trading business has been the biggest source of growth of unregulated activity.
While Sempra’s marketing and trading portfolio is relatively short-dated (over 80% of the portfolio matures within 24 months), with the majority of the portfolio represented by natural gas positions, the business requires substantial capital to operate, exhibits large swings in working capital, and is subject to substantially greater risk than Sempra’s regulated activities.
The company has expanded its marketing and trading platform with the acquisition of the metals trading business from Enron. Other 2002 acquisitions, along with the capital requirements for constructing power plants that will be used to sell electricity to the California Department of Water Resources (CDWR), have resulted in greater near term reliance on external financing to satisfy these requirements.
Sempra issued $600 million in equity-link securities in April 2002 to help fund this program. Prospectively, Sempra estimates that the non-regulated businesses will represent more than 50% of its consolidated results by 2005, with the largest contributor being revenues that it expects to receive from contracted sales to CDWR.
The rating action for SDGE reflects the still challenging and less predictable regulatory environment that exists for the electric business within the state of California.
While the balance of SDGE’s uncollected power costs continues to decline (approximately $318 million) and the passage of Senate Bill 265 should ensure the utility’s recovery of any remaining undercollected amounts, a number of unresolved state and federal regulatory and marketplace issues remain for all electric participants in California.
Going forward, Moody’s believes that financial results will be more consistent with the lowered rating, particularly considering the challenging regulatory landscape that exists in the state.
Moody’s expects the passage of Assembly Bill 57 (AB57) to help place guidelines around the recovery mechanism and any prudency reviews for power procurement in the future. SDGE is required under Assembly Bill 1X to begin taking over “net short” power needs for CDWR beginning in January 2003.
Purchases of the “net short” should be manageable for SDGE and expected to be around 5% of SDGE’s total power needs. SDGE’s liquidity appears to be strong, with no short-term debt and sizeable cash balances at the utility.
The stable rating outlook for Sempra reflects the financial stability of its regulated subsidiaries, as well as the company’s business plan to grow its non-regulated businesses. The stable outlook for SDGE incorporates the expectation that the California Public Utilities Commission (CPUC) will implement a procurement plan that is consistent in all substantive ways with AB57.
Headquartered in San Diego, California, Sempra is an energy company whose principal subsidiaries are SDGE and Southern California Gas Company (Senior Secured Debt – A1; Stable Outlook).