While continuing to be a rare island of financial strength and stability in turbulent energy times, San Diego-based Sempra Energy, faces some large financings and increased risks because of the “California effect” on power market deals, difficulties in energy trading and problems with some South American distribution utility ventures, according to a report issued Tuesday by CreditSights, a London-based independent financial analysis firm.

Sempra’s strength is centered in its two major utilities — San Diego Gas and Electric Co. and Southern California Gas Co. — and the fact that it avoided the calamities faced by the other two large utility holding companies in the state, PG&E Corp. and Edison International. The natural gas distribution business, with 5.9 million meters serving a population of about 12 million, is the strongest part of Sempra’s utility operations, according to the analysis by Dot Matthews and Andy DeVries.

“Overall, the gas distribution utilities are a stable source of earnings and cash flow over the long term.” Conversely, the analysts think the electricity side continues to be riskier in California because of the “political and economic history” of the power business in the state in recent years. “This uncertainty is one of the reasons we view Sempra as more risky credit than the rating agencies do.”

CreditSights is skeptical about Sempra’s nonutility units, although they have all shown a profit in recent quarters. It would not be surprising if there were further write-downs related to the interests in two Argentine natural gas utilities that Sempra estimated as a $350 million investment, the analysts said.

“In addition, SEI has a history of partnering with companies whose investment judgment is suspect, to say the least,” the CreditSights’ analysis said, listing CMS, PG&E and PSEG as companies that have had their share of financial problems in recent years. “If there were no other reason to question the ultimate wisdom of these investments, the choice of partners alone would give us pause,” the two analysts said.

In the merchant sector, although still a relatively modest player in the market-based power plant business, Sempra has what CreditSights called “a very lucrative” deal with California’s Department of Water Resources (DWR) to provide up to 1,900 MW over a ten-year period that began in 2001. It is about a $6.7 billion deal. In addition, Sempra is aggressively pursuing liquefied natural gas (LNG) receiving terminals in North Baja California and Louisiana with time frames for beginning operations in 2006-2007.

For the energy sector currently, Sempra’s financial profile is relatively strong, although CreditSights said its debt-to-capital ratio stood at 67.2%, higher than its group average of 63.1% for comparable companies.

“Given Sempra’s proportionally larger share of earnings and cash flows from unregulated businesses, especially trading, we view leverage as too high,” the analysts said, noting that Sempra had $803 million in cash and $2.3 billion in unused credit lines available at the end of the first quarter this year.

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