Sempra's LNG Projects Require New Credit Look, S&P Says
Its strategic move to become a major North American liquefied natural gas (LNG) conduit means San Diego-based Sempra Energy's credit ratings must be reassessed, a research report released Thursday by Standard & Poor's Ratings Services (S&P) said. Sempra's relatively strong ratings (BBB+/Stable/A-2) currently do not consider it being in the LNG business.
"Ratings of Sempra could change, depending on the specifics of the projects," said Swami Venkataraman, a San Francisco-based S&P analyst in a research report, "Sempra Energy Set to Emerge As Major LNG Player in the U.S."
S&P noted Sempra's recent announcements on potential supplies from Indonesia for its proposed North Baja receiving terminal, and a separate deal to partner with Shell, which has a competing North Baja terminal proposal to build one facility along the Pacific Coast at Costa Azul on a 50-50 basis. The S&P report said that the current Sempra investment is limited to land and permitting expenses both in Mexico and at a second site in Louisiana which the company bought from Dynegy last year at Cameron, LA.
With announcements that it intends to begin construction at both sites by the end of the first quarter, S&P's report said the company is facing capital costs in the $600-$700 million range. Initially Sempra likely will finance this off its own balance sheet, S&P said, noting that the holding company has large cash flows from two of the nation's largest utilities -- San Diego Gas and Electric Co. and Southern California Gas Co.
"If the projects proceed, wholesale gas market exposure would be the single-most important risk to Sempra's credit quality," said Venkataraman in the S&P report. "An arrangement whereby a gas major with a marketing presence in the U. S. uses Sempra's regasification facilities for a fixed fee would be the least risky option." But he noted that even in the latter case, "an element of risk" can be found if the fee is linked to gas prices.
"Sempra's credit rating could weaken if Sempra does not contract for all its capacity and decides to retain a certain fraction of its capacity as a merchant operation. In addition, volume risk could also arise if Sempra buys LNG at a hub price less a fixed spread and assumes responsibility for marketing the gas in the U. S., although this is less of a concern owing to the availability of a liquid Nymex market and gas-trading expertise at Sempra's trading operations. Assumption of price risk will be the greater concern."
Besides its two utilities, S&P noted that Sempra's 10-year, $6 billion power supply contract with California's Department of Water Resources (DWR) is another source of large amounts of cash. However, that contract is still subject to renegotiation, something the new governor, Arnold Schwarzenegger, has said is a top priority.
"The extent of debt financing on these projects would depend on the variability of Sempra's cash flows over the next few years," Venkataraman said. "If Sempra does elect to build out these facilities, S&P would consolidate the LNG operations with the rest of Sempra's businesses. The resulting business and financial risk profiles would determine the credit quality of all entities in the Sempra family."
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