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Rating Action:

Moody's downgrades San Diego Gas & Electric to A2 from A1; outlook stable

06 Sep 2018

Approximately $5 billion of Debt Securities Affected

NOTE: On September 11, 2018, the press release was corrected as follows: The third and fourth lines of the debt list under San Diego Gas & Electric Company were changed to “Preferred Shelf, Downgraded to (P)Baa1 from (P)A3” and “Non-Cumulative Preferred Shelf, Downgraded to (P)Baa1 from (P)A3,” respectively. Revised release follows.

New York, September 06, 2018 -- Moody's Investors Service ("Moody's") today downgraded all the long-term ratings of San Diego Gas & Electric Company (SDG&E), including its Issuer rating to A2 from A1 and senior secured rating to Aa3 from Aa2. Concurrently, Moody's affirmed the Prime-1 short-term commercial paper rating. The rating outlook is stable.

"The continued existence of inverse condemnation and exposure to political agendas is the principal rationale behind today's rating downgrade. SB901 failed to address the most important risk factor, inverse condemnation, and the benefits it provides are dependent on implementation by state regulators," said Nati Martel, Vice President -- Senior Analyst, "the bill is nevertheless a net credit positive over the existing situation for all of California's regulated utilities and it is evidence of extraordinary legislative intervention to address material risks faced by the state's critical infrastructure utility companies."

RATINGS RATIONALE

Today's rating action reflects that Senate Bill (SB 901), recently passed by both California legislative houses, did not repeal or change inverse condemnation such that all Californian utilities remain exposed to strict liability standards in the case of wildfires where utility equipment was determined to be the source of the fire, regardless of fault. The application of inverse condemnation is a unique risk factor affecting all California investor owned utilities that has weakened our assessment of the credit supportiveness of the California legislative and regulatory framework compared to other US regulatory environments.

SDG&E's credit quality benefits from having a smaller service territory and effective wildfire mitigation and prevention programs. However, as a component of longer term climate change risks, wildfire events are an increasing concern for all of California's utilities, regardless of whether they are investor or publicly owned, including SDG&E. Wildfires have become more frequent and damaging due to the effects of climate change, including more severe and prolonged droughts and stronger winds. In addition, California has witnessed a proliferation of real estate developments in fire-prone areas which has also affected the utilities' ability to access the insurance market.

Credit impact of the new legislation

Today's rating action to downgrade SDG&E's ratings by one notch to A2 does consider that SB 901 offers some constructive tools for the California Public Utilities Commission (CPUC) to utilize going forward in conducting their reasonableness review on catastrophic wildfire related costs. Compared to the prudency standard used historically, these regulatory tools outlined under SB 901 appear to offer the CPUC more flexibility and discretion in determining the reasonableness of the costs. Pending their implementation, the tools could enhance the utilities' ability to recover the costs and protect their credit quality.

According to SB 901, the CPUC is expected to consider several key factors in its reasonableness review including whether the utility disregarded indicators of wildfire risk; failed to design, operate and/or maintain its assets in a reasonable manner; findings of government agencies including CAL Fire; whether the utility was in compliance with regulations, its wildfire risk mitigation plans, and the regulators orders including the utility's history of compliance and, whether single or multiple violations caused the costs. Importantly, the CPUC is also expected to consider additional factors, including whether climate conditions exacerbated the extent of the damages or whether circumstances beyond the utility's control caused in part the costs. The bill includes the opportunity for affected utilities to issue securitization bonds to recover costs from ratepayers, however, the issuance is subject to CPCU's authorization under a financing order. However, the reasonableness review will apply to wildfires that occur after 1 January 2019. This leaves a gap in coverage for any potential fires in 2018, a credit negative, particularly as the peak period of the wildfire season recently started. Moody's expects Governor Brown to sign SB901 into law in September.

RATING OUTLOOK

SDG&E's stable outlook reflects the low business risk profile of its regulated transmission and distribution (T&D) operations, which account for the majority of its business, and are subject to the regulatory overview of the Federal Energy Regulatory Commission (FERC) and the California Public Utilities Commission (CPUC). The stable outlook also assumes that no major wildfire will affect SDG&E's service territory and a credit supportive outcome of SDG&E's ongoing general rate case (GRC) for the 2019-2022 period. The stable outlook anticipates that, despite the implementation of tax reform, SDG&E will continue to generate a ratio of cash flow from operations before changes in working capital (CFO pre-W/C) to debt of at least 25%, aided by the GRC outcome along with its regulatory financial parameters and suite of cost recovery mechanisms as well as some moderation in the utility's future capital investment program compared to historical levels. The stable outlook acknowledges the financial benefits from belonging to a large diverse corporate family but assumes that the completion of the ongoing review of parent Sempra Energy's (Sempra, Baa1 ratings under review for downgrade) ratings will not result in more than one notch downgrade as previously indicated.

LIQUIDITY ANALYSIS

SDG&E's Prime-1 rated commercial paper (CP) program reflects its liquidity reserves, which, including its sister company Southern California Gas Company (SoCalGas, A1 stable) are co-borrowers under a $1 billion committed credit facility that back-stops their CP-programs. This facility is currently scheduled to expire in October 2020 (amended in 2016). Under this joint facility, each utility can borrow up to a maximum of $750 million subject to the $1 billion in total combined availability. It also provides for the issuance of letters of credit for up to $250 million.

Shared credit facilities are viewed as being less ideal from a credit perspective compared to separate facilities, particularly considering the significant scale of the utilities' capital expenditures. However, around 59% of the liquidity arrangements remained available at the end of June 2018. Borrowings under the facility are not subject to any conditionality, such as rating triggers and material adverse clause representations for borrowing. The credit facility contains one financial covenant requiring SDG&E and SoCalGas to maintain a debt-to-total capitalization ratio of no more than 65%. We expect both utilities will remain in compliance with these covenants.

During the rest of 2018 and 2019, we anticipate that SDG&E will continue funding its capital requirements including capital expenditures (2018: nearly $1.3 billion) and dividends (2QLTM2018: $275 million) largely with internally generated cash flows (2QLTM2018: nearly $1.6 billion), along with incremental long and short-term borrowings (limited at the holding company). SDG&E's next debt maturity consists of $350 million first mortgage bonds (FMB) due in 2021.

FACTORS THAT COULD LEAD TO AN UPGRADE

An upgrade of SDG&E's ratings could occur following a repeal or material change in inverse condemnation that significantly reduces the utilities' wildfire risk exposure and strengthens our view of the legislative and regulatory environment in California. Assuming a significant change to inverse condemnation, an upgrade could be also considered if SDG&E maintains a CFO Pre-WC to debt ratio of 25% or above.

FACTORS THAT COULD LEAD TO A DOWNGRADE

A downgrade to SDG&E's ratings is likely upon a deterioration in its credit metrics such that its CFO pre-W/C to debt falls to the low-20% range for a sustained period of time or if there is a substantial increase in wildfire exposure.

Downgrades:

..Issuer: Chula Vista (City of) CA

....Senior Secured Revenue Bonds, Downgraded to Aa3 from Aa2

....Underlying Senior Secured Revenue Bonds, Downgraded to Aa3 from Aa2

..Issuer: San Diego (City of) CA

....Senior Secured Revenue Bonds, Downgraded to Aa3 from Aa2

..Issuer: San Diego Gas & Electric Company

.... Issuer Rating, Downgraded to A2 from A1

....Senior Unsecured Shelf, Downgraded to (P)A2 from (P)A1

....Preferred Shelf, Downgraded to (P)Baa1 from (P)A3

....Non-Cumulative Preferred Shelf, Downgraded to (P)Baa1 from (P)A3

....Senior Secured Shelf, Downgraded to (P)Aa3 from (P)Aa2

....Senior Secured First Mortgage Bonds, Downgraded to Aa3 from Aa2

Outlook Actions:

..Issuer: San Diego Gas & Electric Company

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: San Diego Gas & Electric Company

....Senior Unsecured Commercial Paper, Affirmed P-1

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

SDG&E is a vertically integrated electric utility operating in San Diego County and part of Orange County (nearly 1.5 million electric customers). It also renders natural gas transmission services in San Diego County (nearly 0.9 million customers). It service territory covers 4,100 square miles. SDG&E direct parent company is Sempra Energy (Baa1 ratings under review for downgrade), a multi-subsidiary group that includes Southern California Gas Company (A1 stable), Cameron LNG, LLC (50.2%; A3 stable), Infraestructura Energética Nova S.A.B de C.V. (66.4%; Baa1 stable) and Oncor Electric Delivery Company LLC (80.25%; senior secured rating: A2 stable).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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