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Sempra Sees California Utility Growth Opportunities, More Trading Profits

Signaling a marked change four years after the depth of the western energy crisis, Sempra Energy's top utility executive said Tuesday that California offers some good growth opportunities for utilities in an "improving regulatory environment."

The statewide "energy action plan" and strong support from the governor on building new electric infrastructure are causing the renewed push by utilities, Sempra's Ed Guiles told the Credit Suisse First Boston (CSFB) energy summit in Vail, CO.

As an aside at the same conference, another Sempra executive confirmed his company's commitment to its energy trading unit as part of its growing nonutility businesses.

Noting that his company continues to trade mostly "on the physical side," Sempra's Dennis Arriola, vice president of communications/investor relations, reiterated that the company is very bullish about its energy trading operations that are now included under its newly named "Sempra Commodities" global business unit. In response to questions that cited other companies pulling back from trading because of decreased volatility, Arriola said the majority of Sempra's trading business is "on the physical side with customers," taking positions based upon that business.

Sempra's two utilities -- Southern California Gas Co. and San Diego Gas and Electric Co. -- received a combined first phase cost-of-service rate decision last December from the California Public Utilities Commission, setting a revenue base of $2.5 billion, and Guiles is expecting the CPUC's second phase decision on utility incentive mechanisms and revenue indexing to be "good for" the two utilities. A proposed decision from the CPUC administrative law judge is expected "any day now," Sempra's utility group president said.

"Both utilities have good growth opportunities, particularly SDG&E, and that is a big change," Guiles told analysts at the CSFB annual energy meeting. He said new utility generation, headed by its 550 MW Palomar power plant about 45% built in north San Diego County, represents about $600 million of added rate base that will come on line before the summer of 2006 for SDG&E.

Guiles cited Gov. Arnold Schwarzenegger's state-of-the-state address last month that called for increased generation and transmission being developed, and the outline in the state action plan for both new infrastructure and stepped up demand-side management as reasons for this heightened optimism. He called 2005 a "really important year for us."

For its overall operations, which include a big push in the liquefied natural gas (LNG) receiving terminal business, Sempra Energy will report fourth quarter 2004 results Feb. 23 and will hold a Wall Street analysts conference March 8, Guiles said.

Contrary to other utility holding companies, Arriola said Sempra's trading operation has "enjoyed the recent volatility -- not just in the natural gas market, but also with what has been going on with oil. As far as we see it, with the (more recent) entrance of investment bankers providing more liquidity, we like the market. We think it is a robust market and when the market gives us the opportunity, we'll make money there."

Arriola said Sempra recognized that some other utility-based holding companies (such as Dominion Resources) are backing out of that business, but Sempra "likes the business; it's a good one for us."

In response to another question, the executive said Sempra's trading operation has not been hit by any substantial loss on individual transactions, and it has maintained a tolerance level of $5-7 million on all transactions. "Obviously, when there is more volatility in, for example, the natural gas market, we may on individual books be a little higher, but consistently since we bought the (trading unit) and grew it, we have been in the $5 million to maybe $8 million range, and we haven't seen any deviation from that."

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