Fitch: EnergySouth Purchase a Credit Neutral for Sempra
Sempra Energy’s announced purchase of EnergySouth, Inc. (ENSI, not rated by Fitch) has no ratings impact on SRE or its subsidiaries, according to Fitch Ratings. Fitch expects SRE to use new parent-level debt to finance the acquisition. The transaction is expected to close by year-end 2008.
Fitch currently rates SRE as follows:
–Rating Outlook Stable.
Adding the EnergySouth assets will not change SRE’s operating risk profile. The gas storage assets provide stable cash flows under long-term, fee-based contracts. The storage facilities are located on major pipelines that deliver to areas where gas demand is increasing, driven largely by increased electric utility usage. Fitch expects SRE to fund in a ratings supportive manner the capital investment needed to increase the capacity of the storage assets. Cash flow from the gas LDC is considered stable and the operating risk is low.
SRE’s ratings are based on the stability and predictability of cash flows from its California operations, credit metrics consistent with the ‘A’ rating category and disciplined approach to investing and capital spending. The ratings consider the financial strength of the regulated utilities San Diego Gas & Electric Co. (IDR rated ‘A+’ with a Stable Rating Outlook by Fitch) and Southern California Gas Co. (IDR rated ‘A+’ with a Stable Outlook), which generate approximately 60%-65% of SRE’s consolidated funds from operations and benefit from a supportive regulatory environment, a strong regional economy and minimal commodity price exposure.
The Stable Rating Outlook is based on Fitch’s expectation that SRE’s credit metrics, which may weaken slightly over the next several years as the company completes an $11 billion capital spending program, will remain within parameters for its current rating category. The capital spending program is expected to increase the regulated rate base and build gas pipelines, gas storage facilities and liquefied natural gas (LNG) terminals. Ratings concerns include material cost overruns or significant counterparty default on the LNG, storage and pipelines construction projects.