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Sempra Energy: Wall Street 'Undervalues' Trading, Overall Results

Reiterating what its senior executives have been saying in recent quarters, Sempra Energy officials Thursday said the marketplace is not giving the company enough credit for the results it has achieved, particularly in the energy trading sector. Therefore, sale of any of its major business units, including Sempra Commodities, is unlikely to occur before 2008 when some of the company's major liquefied natural gas (LNG) and pipeline/storage projects begin providing new revenue streams.

"None of this is anything we haven't said before, but the context of a Wall Street business interview was whether we are getting credit in the marketplace for the success of our trading operation, and our feeling is that we are not -- at least right now," said San Diego-based Sempra spokesperson Doug Kline. "In 2008 we'll have new earnings streams that will give us more flexibility.

"If we are still not getting credit in the marketplace for the pieces of Sempra, we could look at doing any number of things -- from selling one of the [nonutility] units to taking on a partner [in one of the units] to doing an [initial public offering, or spinning off one of the units]. We have said over time that any piece of our business would be for sale at the right price."

Pending multi-billion-dollar litigation against the company, the majority of which is concentrated in a pending class action (Continental Forge) settlement, should not be a factor in the market's undervaluing of the stock, Kline said. Sempra expects a Superior Court Judge in San Diego County to approve the class action lawsuit settlement June 8, and the rest of the outstanding 2000-2001 lawsuits to be cleared up by the end of this year, he said.

Sempra CEO Donald Felsinger told Wall Street business media sources that he does not think the financial community properly values the commodities business. "We think it is worth a lot more than others may," Kline said.

Trading continues to be "a key contributor" to Sempra's earnings, and during the first quarter it provided roughly half of the Sempra profits, even against its two large affiliated utilities, San Diego Gas and Electric Co. and Southern California Gas Co.

"It has also given us a very good windshield on the marketplace," said Kline, noting that the company's initial incentive to pursue its joint venture participation in the Rockies Express interstate natural gas pipeline proposal and in LNG were both sparked by its commodities unit.

Although the holding company does not entirely rule out the California utilities being sold, Sempra senior executives, when asked about it in the past, indicated that was unlikely to happen because of the need to gain California Public Utilities Commission approval for such a sale, Kline said. "It would be difficult for an outside party to acquire one of the California utilities."

Wall Street analyst views, as reflected in a Bloomberg business wire report Thursday, are that Sempra is more appropriately an energy utility holding company, with energy related merchant businesses; and commodity trading is more appropriate for the investment banks, such as Goldman Sachs Group Inc. and Morgan Stanley, both of which have gotten heavily into energy trading. Felsinger agreed they are the "natural host for a commodities business," given their strong credit ratings and cheap cost of capital.

The financial analysts are leery of trading operations in companies such as Sempra because the commodity business "is difficult to understand and a more volatile business than traditional ones," Kline said. "They require a lot of capital in the long run. If the commodity business was going to grow significantly, it might need more capital than we might want to provide it."

Kline would not put a level on the frustration among Sempra's senior executives regarding the company's stock price (which has been in the $43-$46/share range in recent months), but he said, "The stock deserves more credit in the marketplace, especially since we have been so successful in implementing our strategy. We have delivered results quarter-after-quarter, meeting or exceeding Wall Street expectations."

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