NEW YORK, April 24, 2002 — Fitch Ratings has assigned an ‘A’ rating to the senior notes embedded in the equity units to be issued by Sempra Energy.
The equity units consist of the senior notes due May 17, 2007 issued by Sempra Energy (Sempra) and a purchase contract requiring the holder to buy Sempra common stock on May 17, 2005. Sempra will make fixed quarterly payments on the purchase contract (contract adjustment payments) and on the senior notes, which rank pari passu with other senior unsecured debt of Sempra Energy. Proceeds from the issuance will be used to reduce short-term debt outstanding, primarily related to capital expenditures at unregulated subsidiaries. The Rating Outlook is Stable.
While Sempra has the option to defer contract adjustment payments until the equity purchase date, interest on the senior notes may not be deferred. The senior notes will serve as collateral to secure the equity unit holders’ obligation to purchase common stock under the purchase obligation. The notes are subject to remarketing in 2005 and will remain outstanding until their maturity in 2007. The return to investors will depend upon the value of the Sempra common stock at the contract settlement date. The rating does not comment on the expected performance of the common equity of Sempra.
Sempra Energy’s ratings reflect the company’s conservative capital structure, solid cash flow from operations, and the large and prosperous customer franchises of its utility subsidiaries Southern California Gas and San Diego Gas & Electric. While the California regulatory and political environment remains unsettled, Sempra’s utilities face considerably lower financial and business risk than other investor-owned utilities in the state and have demonstrated strong financial performance.
The ratings also consider the risks associated with Sempra’s increasing focus on unregulated businesses, such as power generation and a growing energy marketing and trading business. For the year-ended Dec. 31, 2001, the California utilities together contributed 64% of net income, while energy trading, non-regulated generation, and other lines of business contributed approximately 36%.
Capital expenditures through 2004 are expected to be significant, primarily associated with the building of new unregulated generating facilities in the Western United States to support power sales to the California Department of Water Resources (DWR). Sempra subsidiary, Sempra Energy Resources (SER) entered into a long-term contract with the DWR at the height of the energy crisis to supply up to 1,900 megawatts (mw) of power to the state, representing a concentration of counterparty risk. The California Public Utilities Commission (CPUC) has since asked the Federal Energy Regulatory Commission (FERC) to determine that DWR’s contracts with several energy providers, including SER, do not provide just and reasonable rates and should therefore be abrogated or adjusted in some manner.
Fitch considers it unlikely that FERC will abrogate the contract with SER. In any case, power plant and pipeline construction at SER is expected to be financed initially with bank debt guaranteed by the parent. Sempra’s ratings also anticipate the issuance of appropriate levels of equity to maintain the consolidated capital structure during the expansion program.
Sempra Energy is a holding company headquartered in San Diego, California. It owns two electric and gas utilities in California and other subsidiaries engaged in energy marketing, power generation, and ownership of international energy investments.