Fitch: Sempra's MLP Pursuit Likely Credit Neutral

NEW YORK--(BUSINESS WIRE)-- Fitch believes the recent announcement by Sempra Energy (Sempra, IDR 'BBB+'/Outlook Stable) that it will pursue the formation of a master limited partnership (MLP) will likely not affect its credit quality in the near to intermediate term.

Fitch expects the MLP to start small and management will likely take a balanced approach towards redeployment of the MLP IPO proceeds. In addition, Fitch believes Sempra will continue to manage its businesses conservatively with a focus on regulated operations and stable, long-term contractual projects, somewhat offsetting the concerns around MLP formation that typically weighs on a sponsor's credit quality. At Sempra's 'BBB+' rating level, structural subordination is less of a concern due to sufficient and diversified sources of earnings to service parent level debt.

Generally, an MLP provides a sponsor with an alternative source of financing at usually a lower cost of capital to fund growth and reduce sponsor debt leverage which Fitch views positively. However, MLPs often create multilayer debt and equity subordination, incentivize the pursuit of high risk expansion opportunities, and could increase cash and earnings volatility.

For Sempra, the size of the MLP is expected to be fairly small for several years based on management's public disclosure around the initial assets that will be dropped down. The MLP is expected to hold a right of first offer (ROFO) on certain LNG-related infrastructure projects, including Sempra's 50-percent interest in the first three trains of the Cameron natural gas liquefaction terminal (Cameron). Cameron, which Fitch believes will be the primary earnings contributor for the MLP, is not expected to generate meaningful earnings until the 2019-2020 time frame. By then Cameron is expected to produce approximately $300 to $350 million in earnings contribution (Sempra's share), which Fitch estimates to represent approximately 15%-20% of Sempra's total earnings. Sempra will own the general partner of the MLP. Additionally, Fitch believes that, like several other utility holding companies who pursued MLPs, Sempra will likely retain the majority of limited partnership units for the intermediate term, thus preventing substantial cash leakage to MLP's public shareholders.

Fitch believes that management will take a measured approach when utilizing the MLP IPO proceeds. Fitch will view positively if Sempra uses IPO proceeds partially to reduce parent debt or general corporate purposes including funding the large capex program at the California utilities. Conversely, a sizeable share buyback program or disproportionately large dividend increase could have negative rating implications.

For more information on Fitch's analysis of an MLP's impact on a utility holding company sponsor, see Fitch's special report titled 'MLP Formation Has Rating Implications for Utility Sponsors' published July 31, 2014.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Julie Jiang
Director
U.S. Corporates - Utilities, Gas and Power
Fitch Ratings
+1-212-908-0708
33 Whitehall Street
New York, NY 10004
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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