OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to San Diego Gas and Electric Company's $500 million issue of first mortgage bonds series QQQ due 2026. The Rating Outlook is Stable. SDG&E's Long-Term Issuer Default Rating (IDR) is 'A' with a Stable Outlook.

KEY RATING DRIVERS

SD&E's ratings and Outlook benefit from California's regulatory framework, which Fitch considers constructive overall despite the less than expected settlement amount of the 2016 general rate case. The ratings are also supported by projected credit metrics that are expected to be in line with the company's rating level, although capex continues to exceed $1 billion per year. Q1 2016 earnings declined partially due to the delay of 2016 GRC approval. An order is expected soon. SDG&E currently operates under a 10.3% return on equity (ROE) with 52% equity ratio authorized by the California commission. The next cost of capital filing deadline has been extended to April 2017.

SDG&E's stand-alone coverage ratios are expected to be strong with FFO fixed-charge coverage projected to average 6.3x from 2015 to 2019; FFO adjusted leverage is projected to average 3.5x over the same period. These ratios have incorporated the $5.8 billion capital spending program and the expected increase in upstream dividend (average of $360 million annually).

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--In light of the capital program and/or absent an upgrade at Sempra Energy (Sempra; IDR 'BBB+'/Stable Outlook), SD&E's corporate parent, it is unlikely that SDG&E's ratings will be upgraded in the foreseeable future.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--If the large capex program is not prudently financed or experiences significant cost overruns or regulatory delay in cost recovery, thus causing the FFO adjusted leverage to exceed 4.5x during construction. Post-construction, if the FFO adjusted leverage is above 4x on a sustained basis;
--If there is a downgrade at Sempra;
--A downgrade at SDG&E's affiliate Southern California Gas Company (IDR 'A'/Stable Outlook) could result in a downgrade at SDG&E.

KEY ASSUMPTIONS

--Total capital expenditure $5.8 billion from 2015-2019;
--Incorporates the settlement rate increase and escalation of 3.5% from 2017-2018.