Fitch: SoCalGas/SRE Completes Relief Well; No Ratings Impact
Fitch believes that SoCalGas currently has sufficient headroom in its credit metrics to absorb potential costs associated with the gas leak that are not covered by insurance policies, which total more than \\$1 billion according to the company. The utility's credit measures are strong with funds flow from operations (FFO) lease adjusted leverage at 3.0x as of Sept. 30, 2015. Prior to the incident, Fitch projected that FFO lease adjusted leverage will weaken moderately, averaging 3.2x through 2019, primarily due to SoCalGas' large capex program.
SRE announced yesterday, Feb. 11, 2016, it completed the initial relief well and has controlled the gas leak on a temporary basis. SRE will inject cement at the well-base to permanently seal the well over the next several days. Fitch believes this is a constructive development from a credit point-to-view. Permanently sealing the well will allow the root cause analysis to proceed, which is expected to be completed several weeks after the sealing process is completed. Fitch expects greater clarity regarding SoCalGas and SRE's financial exposure to emerge with completion of the root cause analysis and investigations into the companies' role in causing the leak.
SoCalGas expects total costs of approximately \\$250 million - \\$300 million will be incurred to address the leak, the value of lost gas and mitigate emissions and community impacts. The company believes that the vast majority of these estimated costs will be covered by insurance. Additional, potential exposure for SoCalGas and SRE not included in the \\$250 million - \\$300 million estimate discussed above include fines, penalties and remedies related to civil and criminal investigations, legal costs, environmental remediation costs, as well as potential operational impacts.
SoCalGas' ratings could come under pressure if unrecovered costs significantly exceed Fitch's expectations, with FFO lease adjusted leverage rising above 4.5x. Fitch generally views California regulation as balanced, providing a reasonable opportunity for utilities operating under the California Public Utilities Commission's (CPUC) jurisdiction to earn their authorized ROEs. Any meaningful deterioration to the regulatory compact in the state as a result of the incident would also be an adverse development.