Chicago, IL, Jan. 5, 2006 — Fitch Ratings does not expect to take rating action as a consequence of the announcement by Sempra Energy (SRE) that it has reached settlements relating to the Continental Forge class-action lawsuit, Nevada antitrust litigation, and California price reporting litigation.
The ratings and Outlooks of SRE and its subsidiaries, San Diego Gas & Electric Co. (SDG&E) and Southern California Gas Co. (SoCalGas) incorporate expected costs roughly similar to the announced settlements.
Under the terms announced, SRE will make pre-tax cash payments totaling $377 million over eight years, and unilaterally lower by $300 million its fixed profit margin on the power sales agreement with the California Department of Water Resources (CDWR) that expires in 2011.
Approximately $110 million in cash payments would be paid within 30 days of final approval of the settlement with a similar amount paid during 2007. Subsequently, annual payments of approximately $26 million will be required through 2013. Lost pre-tax cash flow on the CDWR contract will average $50 million annually through 2011. The other settlements terms, including selling liquefied natural gas to SDG&E and SoCalGas at a discount to index and filing with the California Public Utilities Commission for integration of its utilities’ gas transmission and storage assets, are of benefit to other market participants but are not expected to have a material cash flow impact on SRE or its subsidiaries.
SRE has reserved $250 million after-tax for these legal matters, and an additional 2005 write-down of approximately $100 million after-tax at the parent company is expected. Adjusting for the settlement, SRE’s consolidated credit metrics are still expected to remain strong over the next several years. Additionally, the company has substantial liquidity in the form of cash and available credit facilities. As of Sept. 30, 2005, SRE had $500 million in cash and available liquidity of approximately $5 billion under multiple revolvers and lines of credit that mature in 2009-2010.
Although this settlement will reduce cash flow in the short term, it removes a significant overhang from the company. A materially adverse jury verdict in the Continental Forge case, though of low probability, could have been significant, and a ‘worst-case’ scenario would have severely damaged SRE’s credit profile.
While Fitch assessed the implications of unfavorable judgments in the lawsuits under stress scenarios, SRE’s current ratings and Outlook did not assume substantial negative rulings. The cash cost of the settlement was at the low end of the range of Fitch’s scenarios.
The settlements remain subject to certain approvals and do not resolve other ongoing litigation, including disputes with the CDWR, State of California, and Federal Energy Regulatory Commission.