New York, April 23, 2002 — Moody’s Investors Service on Monday placed the long-term and short-term ratings of Sempra Energy (Sempra: Senior Unsecured Debt at A2; negative outlook) under review for possible downgrade, and placed the long-term ratings of subsidiary, San Diego Gas and Electric Company (SDGE: Senior Secured Debt at Aa3; negative outlook) under review for possible downgrade.
SDGE’s short-term rating for commercial paper and for variable rate demand bonds is confirmed at Prime-1 and VMIG-1, respectively, and it is not under review for possible downgrade. Separately, Moody’s confirmed the ratings of Southern California Gas Company (SoCalGas: Senior Secured Debt at A1; stable outlook), a wholly-owned subsidiary of Sempra.
The rating action at Sempra reflects the gradual shift in the company’s business mix and a greater reliance on non-regulated cash flows, including cash flows from its trading and marketing, international, and wholesale power businesses. Over the past two years, Sempra’s non-regulated businesses have taken on a growing importance in the company’s consolidated business mix representing less than 5% of net income in 1999 and increasing to more than 30% of net income in 2001, with marketing and trading being the largest contributor of this change.
While Sempra’s marketing and trading portfolio is short-dated (90% of the portfolio matures within 24 months), Moody’s believes that the cash flow generated from this business and its other non-regulated businesses is more volatile than the cash flow historically generated from the regulated businesses, SoCalGas and SDGE.
Prospectively, Sempra estimates that the non-regulated businesses will represent more than 50% of its consolidated results by 2005. Ratings under review for possible downgrade at Sempra include:
* Sempra’s issuer rating and senior unsecured debt at A2; * Trust preferreds issued by Sempra Energy Capital Trust I at A3; * Sempra’s short-term rating of Prime-1; * Sempra Energy Global Enterprise’s (SEGE) short-term rating of Prime-1 for commercial paper. Sempra unconditionally guarantees the obligations of SEGE.; * Sempra’s guarantee of the debt associated with Sempra Energy Employee Stock Option Plan rated A2/Prime-1; * Shelf registration for the issuance of unsecured debt, subordinated debt or trust preferreds, and preferred stock by either Sempra or SEGE rated (P)A2, (P)A3, or (P)Baa1, respectively.
The rating action concerning SDGE reflects lingering concern about the regulatory environment for the electric business within the state of California. While SDGE was able to manage through the power crisis reasonably well and the passage of Senate Bill 265 ensures the utility’s recovery of any remaining undercollected amounts, unresolved regulatory and marketplace issues remain for SDGE, including future power procurement. Moody’s notes SDGE’s current strong liquidity position characterized by no short-term debt and sizeable cash balances at the utility.
Ratings under review for possible downgrade at SDGE include: * SDGE’s senior secured debt and secured pollution control bonds at Aa3; * SDGE’s issuer rating, senior unsecured debt, and unsecured pollution bonds at A1; * SDGE’s preferred stock at A3; * Shelf registration for SDGE’s issuance of secured debt, unsecured debt, and preferred stock rated (P)Aa3, (P)A1, or (P)A3, respectively. SDGE’s short-term rating for commercial paper and for variable rate demand bonds is confirmed at Prime-1 and VMIG-1, respectively.
The rating confirmation for SoCalGas reflects strong cash flows, modest historical capital requirements, and good regulatory support for the gas distribution business. While SoCalGas’ capital requirements are expected to increase somewhat over the next few years, internal cash flow is expected to satisfy the lion’s share of all internal requirements.
Rating confirmed at SoCalGas include: * SoCalGas senior secured debt at A1; * SoCalGas senior unsecured debt at A2; * SoCalGas short-term rating for commercial paper at Prime-1; * Shelf registration for SoCalGas issuance of secured debt and unsecured debt rated (P)A1 and (P)A2, respectively.
The rating review will largely focus on the growth in Sempra’s non-regulated businesses, including trading & marketing and international, and will examine the appropriateness of liquidity for these businesses.
Headquartered in San Diego, CA, Sempra is an energy services company, whose principal subsidiaries are San Diego Gas and Electric Company and Southern California Gas Company.