Sempra’s outlook downgraded to negative by Moody’s, SDG&E and SoCalGas outlooks remain stable

Investing.com -- Moody’s Ratings has revised the outlook for Sempra from stable to negative, while affirming the company’s Baa2 rating. Approximately $34 billion of debt securities have been affected by this change. This decision reflects Sempra’s weak credit metrics and potential risks associated with the company’s planned sale of an interest in its subsidiary, Sempra Infrastructure Partners, LP, and its natural gas distribution assets in Mexico.

In contrast, Moody’s has affirmed the ratings for San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas), maintaining their stable outlooks. This is due to the expectation that their financial metrics will remain supportive of their current ratings, despite some regulatory challenges in California.

The ratings agency anticipates that the ratios of CFO before changes in working capital (CFO pre-W/C) to debt for both SDG&E and SoCalGas will continue to exceed 20% and 21%, respectively. These ratios are the financial metric thresholds that Moody’s has cited could result in a downgrade.

Sempra’s financial performance has not met Moody’s expectations, with a ratio of CFO pre-W/C to debt, calculated on a proportional consolidated basis, hovering around 14% at both year-end 2023 and 2024. This is below the ratio threshold of close to 15% that Moody’s has cited is supportive of its current Baa2 rating given its business risk profile.

Despite this, the affirmation of Sempra’s Baa2 rating considers the potential that the company’s recently announced strategic actions could ultimately lead to improved financial metrics and lower business risk. These initiatives include the sale of an additional interest in Sempra Infrastructure, the disposal of some of Sempra Infrastructure’s assets, and cost savings initiatives.

However, the negative outlook takes into account the uncertainty associated with these initiatives due to execution risk related to their implementation, the impact on Sempra’s business risk profile, and whether the net proceeds will be enough for Sempra to generate financial metrics that are supportive of its Baa2 rating going forward.

Moody’s also outlined factors that could lead to an upgrade or downgrade of the ratings. For Sempra, the prospects of an upgrade are limited due to the negative outlook, but a stabilization of the outlook is possible if the company can generate financial metrics that are supportive of its Baa2 rating.

For SDG&E, positive momentum on the ratings is possible if it is able to generate a CFO pre-W/C to debt ratio in excess of 24% on a sustained basis. For SoCalGas, an upgrade of the ratings is possible if it is able to generate stronger financial metrics, specifically if its ratio of CFO pre-W/C to debt exceeds 25%, on a sustained basis.

Conversely, a downgrade for Sempra could occur if it fails to improve its financial metrics over the next 12-18 months. For SDG&E, a downgrade is possible if the company generates weaker credit metrics such that its ratio of CFO pre-W/C to debt falls below 20%. For SoCalGas, a rating downgrade is possible if its ratio of CFO pre-W/C to debt falls below 21%, on a sustained basis.

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