While noting his company’s good fortune to be thriving currently in the otherwise troubled energy sector, Sempra Energy’s CEO Stephen Baum last week reiterated in a third quarter financial results conference call that the company wants to stay “flexible” so it can go after assets that are increasingly being sold at deep discounts. Baum specifically mentioned trading books as being on Sempra’s radar screen.

In response to a question from a financial analyst during the conference call, Baum noted that Sempra has no plans to sell new equity next year, but that if it — hypothetically — were going after Enron Corp.’s Portland General Electric Co., for which an auction is now ongoing in the Enron bankruptcy court proceeding, it would need to sell stock. He prefaced the example by saying he is not hinting that this is an asset Sempra is going to try to buy. “That is a transaction of the size that would likely require the issuance of some equity,” he said.

“There are more than 30 or 40 properties coming available from companies wanting to strengthen their balance sheets, and we’re looking at a number of good opportunities, and the screen in which they need to fit includes: (1) do they fit with our view of natural gas prices, and (2)do they include trading books that are for sale that fit with our assets,” said Baum, noting that he thinks Sempra has the necessary expertise to value trading books, and he thinks they will be bought for “substantial discounts.

“Any acquisitions would have to be fully financeable and understandable to the credit rating agencies within the context of investment grade credit ratings, or we won’t do it.”

Sempra’s CFO Neal Schmale said the company’s projected capital budget for next year will be about $1.3 billion, including some $800 million for Sempra’s two major utility companies and $500 million in the merchant energy sector, that will be kept flexible to be able to react to “the opportunities that are going to be available to us to make acquisitions.”

In response to another question, Baum characterized the current state of energy trading as one of turmoil and constriction, but that Sempra approaches that sector from a diversified standpoint, and is not heavily dependent on power trading as some of the firms now in retrenchment were.

“We trade a wide number of energy-related commodities in a number of different parts of the world, and so that diversity tends to allow us to prosper where others have been hit, particularly if they were the type of trading business that is just the marketing arm for a long electric position,” Baum said.

“Secondly, the major part of our business is done on behalf of customers — end-use customers. What we’re seeing is a little less interest in commodity services when prices are low and relatively stable. That is not news to anybody — that with the decline of volatility and absolute price levels, there is somewhat of a decline in customer interest.”

Sempra Earnings Rise 26%

Sempra rode the consistency of its two large utility subsidiaries and solid growth in its merchant energy units, except trading, to increase its net income by 26% to $150 million, or 73 cents/diluted share, for the third quarter, compared to $96 million, or 46 cents/diluted share, the same period last year, which included a 12-cent/share charge for the sale of its Nova Scotia natural gas project. Energy trading, while remaining profitable, was the only business line with substantially decreased earnings.

Ahead of previous schedules, nonutility operations accounted for nearly a third of the profits, and Sempra reaffirmed its estimate of 2002 full-year earnings in the range of $2.55-$2.65/share, and set next year’s earnings in the range of $2.60-$2.80/share.

Sempra said earnings for the first nine months of the year were $443 million, an 8% increase over the $410 million for the same period in 2001, including the 12-cent/share charge.

Baum said the company has set itself apart from most of its industry competitors who are struggling, noting that through “strong financial and operating performances” Sempra is growing a “balanced portfolio of businesses while maintaining a solid balance sheet with strong investment-grade credit ratings.”

While energy trading profits dropped to $10 million for the quarter from $31 million for the third quarter last year, Sempra’s merchant generator/marketer unit, Sempra Energy Resources, counteracted the fall by showing $29 million in net income for the quarter, compared to $9 million for the quarter last year. Sempra’s international and energy services businesses also showed increased profits for the quarter (collectively $18 million, compared to $7 million the third quarter of 2001).

Sempra utilities, Southern California Gas Co. and San Diego Gas and Electric Co., collectively earned $102 million in the third quarter, compared to $100 million for the same period last year. Broken down, SoCalGas showed net income slightly down at $56 million (vs. $57 million for the quarter last year), and SDG&E was slightly up to $46 million (vs. $43 million last year).

Baum stressed the consistency of the utilities’ earnings and even the trading unit at a time when most of Sempra’s competitors “have either downsized or eliminated their energy-trading operations.” He stressed that Sempra’s trading operation will continue to set itself apart from the industry by basing its business on “transparency, liquidity and tight management controls.”

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