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Rating Action:

Moody's downgrades Sempra Energy to Baa2 from Baa1; stable outlook

09 Jun 2020

Approximately $9 billion of debt securities downgraded

New York, June 09, 2020 -- Moody's Investors Service, ("Moody's") downgraded the ratings of Sempra Energy (Sempra), including its senior unsecured and Issuer rating to Baa2 from Baa1 and its junior subordinate rating to Baa3 from Baa2 (see full debt list below). The rating outlook of Sempra is stable. This rating action concludes the review of Sempra's long-term ratings initiated on 15 April 2020. Concurrently, Moody's assigned Baa2 ratings to the unsecured bank credit facilities of Sempra ($1.250 billion) and Sempra Global ($3.185 billion), which are both scheduled to expire in May 2024. Moody's also affirmed Sempra Global's P-2 short-term rating for commercial paper and assigned Sempra Global a stable outlook. Sempra Global is an intermediate holding company for subsidiaries other than the group's regulated utilities. Sempra guarantees Sempra Global's commercial paper and bank credit facility.

RATINGS RATIONALE

"Sempra's downgrade reflects weak consolidated financial metrics, which have been consistently below our Baa1 downgrade threshold for the past few years, and are expected to remain below that threshold at least through 2022" said Nati Martel, VP-Senior Analyst. "We see Sempra's ratio of cash flow to debt hovering in the 16% range, which is more appropriate for the Baa2 rating category, given Sempra's consolidated risk profile."

Today's rating action also factors in the recent downgrades of key subsidiaries Infraestructura Energetica Nova S.A.B. de C.V (IEnova; Baa2 negative) and Southern California Gas Company (SoCalGas; A2 stable). For IEnova, the rating action largely reflected the deterioration in the creditworthiness of its government related counterparties. In addition, SoCalGas' exposure to a regulatory environment that exhibits above average volatility requires stronger credit metrics compared to similar rated utility peers.

Sempra's downgrade also considers that it has some exposure to emerging market risk through IEnova's operations in Mexico (Government of Mexico, Baa1 negative), and that its California utilities are subject to a high level of political risk and public scrutiny.

Sempra's Baa2 rating and stable outlook reflect that the regulated utility subsidiaries' cash flows will represent around 80% of cash flow with the non-volumetric long-term contracted operations of IEnova and Cameron LNG, LLC (Cameron; A3 stable) accounting for the balance. Moody's considers that the cash flows of SoCalGas and San Diego Gas & Electric Company (SDG&E; Baa1 positive) benefit from credit supportive recovery mechanisms and the outcome of the 2019 regulatory proceedings. The diversification of the non-regulated operations along with a growing rate base in Texas, through its 80.45% owned subsidiary Oncor Electric Delivery Company LLC (Oncor; A2 senior secured stable), partially offsets the group's significant exposure to California.

The stable outlook considers Sempra's planned repayment of holding company debt using the net proceeds of around $4.7 billion received from the sale of its Latin American subsidiaries. The stable outlook also recognizes that incremental debt to fund Sempra's material investment program of $32 billion between the 2020-2024 period will continue to constrain consolidated financial metrics.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

Assuming no material increase in Sempra's business risk profile, an upgrade of Sempra's rating is possible if it improves its consolidated credit metrics, including a consolidated cash flow from operations before changes in working capital (CFO pre-W/C) to debt ratio of at least 17%, on a sustained basis. This threshold assumes a material reduction in the group's construction risk following the completion of the Cameron LNG project's train three expected during the third quarter of 2020 with no additional LNG projects beyond Energía Costa Azul, S. de R.L. de C.V. (ECA) regasification terminal in Mexico. ECA is expected to achieve a Financial Investment Decision (FID) later this year. If Sempra moves forward with the construction of additional LNG projects beyond ECA, Moody's would view this incremental effort as a credit negative and require a higher CFO pre-W/C to debt ratio of 18% for an upgrade to mitigate the resulting increase in the business risk profile.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

Assuming no material increase in Sempra's business risk profile, including construction risk, a downgrade of Sempra's rating is possible if its consolidated CFO pre-W/C to debt ratio falls below 14%, on a sustained basis. The deterioration in the business risk profile associated with Sempra moving forward with additional LNG projects beyond ECA, could lead to a downgrade if CFO pre-W/C to debt falls below 15%.

Downgrades:

..Issuer: Sempra Energy

.... Issuer Rating, Downgraded to Baa2 from Baa1

....Senior Unsecured Shelf, Downgraded to (P)Baa2 from (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Assignments:

..Issuer: Sempra Energy

....Senior Unsecured Revolving Credit Facility, Assigned Baa2

..Issuer: Sempra Global

....Senior Unsecured Revolving Credit Facility, Assigned Baa2

Affirmations:

..Issuer: Sempra Global

....Senior Unsecured Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: Sempra Energy

....Outlook, Changed To Stable From Rating Under Review

..Issuer: Sempra Global

....Outlook, Changed To Stable From No Outlook

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in San Diego, Sempra Energy (Sempra) is a diversified holding company that owns regulated electric and gas utilities as well as subsidiaries that operate long term contracted assets in the United States and Mexico. In April 2020, Sempra completed the sale of its Peruvian operations, largely consisting of its 83.6% interest in the utility Luz del Sur S.A.A, while completion of the sale of its Chilean subsidiaries, including the utility Chilquinta Energia S.A., is expected during the 2Q2020. Sempra estimates that the net proceeds from the sale of these operations could range between $4.55 and $4.85 billion, pending its tax optimization initiatives, subject to adjustments and closing conditions.

In May 2019, Sempra and Sempra Global entered into separate five-year credit agreements, both expiring in May 2024. Under these agreements, Sempra is permitted to borrow up to $1.25 billion while Sempra Global is allowed to borrow up to $3.185 billion. Sempra Global is an intermediate holding company for subsidiaries other than the group's regulated utilities. Sempra guarantees Sempra Global's CP program.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Michael G. Haggarty
Associate Managing Director
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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