Although there are lingering risks, San Diego, CA-based Sempra Energy received a boost in its outlook Wednesday from Credit Suisse First Boston (CSFB). Analysts at CSFB predicted that the company will “outperform” previous estimated earnings and stock prices in 2003.

CSFB includes Sempra in its Natural Gas Group and notes its core business is its two Southern California-based utilities that account for about two-thirds of its $11.8 billion in hard assets. Emphasis was placed on Sempra’s utilities — Southern California Gas Co. and San Diego Gas and Electric Co. — which collectively are skewed toward natural gas distribution businesses with performance-based ratemaking (PBR) mechanisms in place for both, which have benefited shareholders since the mid-1990s even before the utility holding company merger that formed Sempra in 1998.

“Our 2003-04 estimates imply a 5%-6% growth rate combined with a 4% yield for a total return of 9%-10% on a longer term basis,” CSFB said in a report that also pointed out the realities of some challenges still facing Sempra such as the potential $6/share in long-term power contracts with California’s Department of Water Resources (DWR) that could be restructured to current market values, resulting in a 30-cent/share loss of earnings in 2004.

CSFB pointed out that through a balanced portfolio in the merchant and trading sectors and greater emphasis on natural gas in the utility sector, Sempra has “outperformed” the investment bank’s Natural Gas Group and the market. “While the Natural Gas Group declined 26% and 31% in 2001 and 2002 (S&P index down 13% and 23%, respectively), Sempra gained 6% and declined 4% during the same periods,” the CSFB report said.

CSFB places this against a backdrop of four risk areas: (1) pending general rate cases asking for $210 million in increases beginning next year, (2) the $6.6 billion in DWR 10-year power deals, (3) charges in the outstanding federal regulatory cases of Sempra’s merchant units being part of the alleged market manipulations two years ago, and (4) the trading unit’s assumption that market volatility and demand for risk management services will continue in the gas and power markets.

Regulatory uncertainty and financial risks still confront Sempra, including the estimated $6/share value of the DWR power contracts, but CSFB doesn’t see them as of the same magnitude facing others in the energy sector. “Stable cash flows from the utility, demonstrated earnings from trading and marketing growth from commercial/industry outsourcing, and cash flows from generation (including the DWR contracts) give visibility to our 2003 and 2004 estimates of $2.85 and $3/share,” the report said.

Comparing the company to its two larger California utility holding companies — PG&E Corp. and Edison International — CSFB noted that 83% of Sempra’s utility customers are natural gas users, so it avoided the large undercollections on the electric side suffered by the PG&E and Edison utilities, and Sempra’s trading unit has “required large amounts of collateral or complex structured transactions,” and has not entered long-term contracts.

In its analysis of Sempra’s book value, CSFB noted that most of its hard assets are in utility gas/electric infrastructure and merchant power plants ($7.1 billion and $2.7 billion, respectively), against a total debt on its balance sheet of $4.4 billion. Based on this assessment, CSFB assigns an adjusted book value-per-share of common stock of $30.26 for Sempra.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.