OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to Southern California Gas Company's (SoCalGas) \$250 million first mortgage bonds, series QQ, due 2018 and \$350 million first mortgage bonds, series RR, due 2025. The Rating Outlook is Stable.

KEY RATING DRIVERS

--Supportive regulatory environment;
--Significant capital investments;
--Strong credit metrics;
--Parent subsidiary linkage.

Supportive Regulatory Environment

SoCalGas' predictable earnings and cash flows are supported by various recovery mechanisms, including revenue decoupling, bifurcation of general rate case (GRC) and cost-of-capital proceedings, forward-looking test years, and the use of balancing accounts. SoCalGas' credit quality is also supported by authorized rate increases through 2015 in the 2012 GRC. SoCalGas has filed its 2016 GRC in November 2014. Fitch's projections assume no material changes in the new rate case order with regards to the existing allowed 10.1% for SoCalGas, and the 52% equity ratio. The existing cost-of-capital (CoC) rates will remain in place until the end of 2016.

Significant Capital Investments

SoCalGas' capex began ramping up in 2013 and is expected to total \$6.0 billion from 2015 to 2019, nearly doubling the capex spending from 2009 to 2013. The execution and timely recovery of the capex program could be a modest credit concern. Fitch believes that risks associated with the program including the pipeline safety investments are reasonably mitigated by the balanced regulatory structures at both the state and federal levels, including pre-approval of construction projects.

Strong Credit Metrics

SoCalGas' credit metrics are expected to weaken noticeably in the next five years given the sizeable capex. To offset such decline, the company plans to decrease upstream dividend significantly. Despite FFO adjusted leverage increasing to an average of 3.3x from 2x and FFO fixed-charge coverage declining to an average of 8.8x from 11.8x, SoCalGas's credit profile remains well-positioned for its rating category.

Parent Subsidiary Linkage

The relatively wide notching between SoCalGas and its corporate parent, Sempra Energy (Sempra; IDR 'BBB+'/Stable Outlook)is supported by regulatory restrictions in California that limit SoCalGas' distributions to Sempra and the view that maintaining a sound capital structure at its California utilities continues to be in the best interest of the parent from an economic perspective. Conversely, SoCalGas' ratings are upwardly constrained by its parent due to Sempra's investments in the unregulated U.S. Gas and Power segment and in the international operations, as well as by the degree of leverage that exists at the parent to support these investments.

KEY ASSUMPTIONS

--Total capital expenditure \$6.0 billion from 2015 to 2019;
--Annual dividend ranges from \$50 to \$100 million from 2015 to 2019;
--Maintain existing allowed ROE of 10.1% and attrition of 2.75%.

RATING SENSITIVITIES

Positive:
--In light of SoCalGas' large capex program and absent an upgrade at Sempra, it is unlikely that its ratings will be upgraded in the foreseeable future.

Negative:
--If the capex program is not prudently financed, experiences significant cost overruns or regulatory delay in cost recovery, thus causing the FFO adjusted leverage to be above 4.5x during construction; Post-construction, if the FFO adjusted leverage is above 4x on a sustained basis;
--If there is a downgrade of the parent;
--A downgrade at its utility affiliate San Diego Gas & Electric could result in a downgrade at SoCalGas.