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Price Volatility, Asset Sales Windfall Keep Sempra on Roll, CEO Says

San Diego-based Sempra Energy is betting that energy price volatility will remain, making its growing energy trading business even more profitable. Commodities profits ($504 million) and several hundred million dollars more than expected in asset sales gains last year more than offset earnings decreases among its utility and merchant generation businesses, Sempra CEO Don Felsinger told financial analysts on a conference call Thursday.

The company also raised earnings guidance for 2007 as it noted that 2006 is its eighth year of record earnings.

For the next five years, Sempra will be concentrating on its capital programs in the utility, liquefied natural gas (LNG) and pipeline/storage businesses, but beyond that period the holding company may attempt to take its growing expertise and major gas marketing position in North America and globally into upstream projects, including LNG liquefaction infrastructure, Felsinger said.

Noting this would not happen in the near term when Sempra's capital project plate is full, Felsinger said that beyond the 2011 timeframe, "given our strengths and the fact that we are one of the largest gas marketers in North America with a large presence in Europe and Asia, it would be natural for us to take our skill sets upstream. Whether it is investment in liquefaction plants to get access to more supply, or it is some other arbitrage opportunities, we're looking where we go beyond the coming five-year period. It would be taking the skill sets we have and applying them in the markets we see emerging."

While Felsinger would not confirm Peru's newly announced liquefaction project as a potential supply source for Sempra's Costa Azul LNG receiving terminal on the North Baja, Mexico Pacific Coast, he made it clear that is the type of project Sempra is now actively negotiating for regarding the proposed expansion of Costa Azul from its fully subscribed 1 Bcf/d capacity to 1.5 Bcf/d.

Noting in response to another question that Sempra has no plans to issue any new stock to raise funds for its five-year $11 billion capital program, Felsinger said that last year's asset sales brought a windfall that now puts the company in a strong position as it moves forward along with having continued higher-than-expected profits in its trading unit that can be plowed back into that unit to grow it even more.

"One of the reasons that our asset sales, and the way they were executed, were so important, was the fact that we were heading down the path of having to issue new equity [for the capital expenditures program], but the fact that we got more money than we anticipated from the sales has put us in a very nice position," Felsinger said.

Will Sempra look to sell its whole merchant power generation fleet, the Sempra CEO was asked. "As we look around at what is happening in infrastructure, all assets are going up as all construction costs are rising whether it is pipeline, LNG receipt facilities, or power plants," Felsinger said. "The absolute capital costs are going up, so really what drives the values of these assets in electric generation is the forward curve, so we keep a close eye on that. If we felt there was an opportunity to create value above and beyond what we can do by transacting these assets, I think you have seen our past actions, and we will sell assets when they demand a premium in the marketplace."

Overall, net income topped $1.4 billion, or $5.38/diluted share, last year, compared with $920 million, or $3.65/diluted share, in 2005. These robust results belie the fact that for the fourth quarter earnings were down by $230 million on a year-to-year basis ($125 million for the fourth quarter in 2006 vs. $355 million for the same period in 2005). Overall, 2006 revenue was $11.8 billion, compared to $11.5 billion for 2005, and in the fourth quarter that total was $3.2 billion, compared with $3.9 for the same period in 2005.

Generation results were off last year as reported Thursday: $189 million for 2006, compared with $209 million for 2005 (excluding a $204 million gain on the sale of the Topaz plant last year). For the fourth quarter, net income was $58 million, compared to $108 million for the same period in 2005.

Similarly, the Sempra utilities -- San Diego Gas and Electric Co. and Southern California Gas Co. -- reported lower profits last year, compared to 2005. In the fourth quarter and full year last year net income was $110 million and $460 million, respectively; in 2005 for the same periods the totals were $120 million and $473 million, respectively.

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