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Sempra Sees Continued Trading Growth; Could Seek Partner

Reflected again in the latest financial results, Sempra Energy has a growing "problem" of success in the energy commodity trading business that a lot of other firms would like to emulate, and its senior executives told financial analysts Friday they are constantly evaluating what to do with the business longer term, including taking on a partner that would expand it on a worldwide basis.

Volatility and performance have exceeded expectations, and the industry is now fully recovered from the devastation of the 2000-2001 wholesale market meltdown, Sempra executives said.

Sempra ended the third quarter with $1 billion in cash and $6 billion in credit lines in its commodity trading business, said CEO Donald Felsinger, who credits trading with performing "very well" for Sempra for eight straight years, even including the 2000-2001 period that devastated most companies in the power trading sector.

"Trading is strategic to us, and as it continues to grow there is a point in time when it will get bigger [in a capitalization sense] than what Sempra is prepared to deal with," Felsinger said in response to a question during an earnings conference call last Friday. "So we have been thinking about strategic partners, and the good news [for us] is that we have time [ through 2008, perhaps]."

Felsinger and Sempra CFO Mark Snell said the $200 million to $300 million range of projected earnings this year and next for the trading unit did not anticipate the level of volatility and profitability that has been realized so far in 2006, even though third quarter results were down compared to the same quarter last year ($105 million vs. $161 million for the third quarter in 2005). The revival of power trading has been one of the biggest surprises, they indicated in response to questions.

"Certainly our performance to date is better than we anticipated at the beginning of the year, and most of that can be attributed to increased volatility," Snell said. "What you can really conclude [from our experience] is that the power business has really recovered from the energy crisis. That business dropped way off after the energy crisis; and at that time, we were effectively not doing much power trading at all, and around the country it was really dampened. Then, in the last couple of years we have seen a real return to active trading in the power business."

Nevertheless, Felisinger said he anticipates a point in time when Sempra will be unable to fund the trading unit's working capital needs, if it keeps growing as it has been in recent years, although he cautioned that "this is not going to be the case for several years.

"As we look out to 2008--2009 and beyond, there could be a time when we would need a strategic partner to let this business grow at the rate it can grow. That is sort of what we think about; it is not to exit the business, but look at how we can allow it to have unfettered growth in the next decade."

Felsinger said as the operator of one of the "most successful commodity trading businesses in the industry," Sempra is in a position to have companies that want to get into the business coming to it regularly, so it can choose very carefully who it eventually partners with. "Those people who would like to be in the business come and talk to us."

Noting that he sees no constraints on the business over the near term of the next few years, Felsinger said that longer term it would be good to expand Sempra's trading into a global operation.

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