While its top utility executives were in San Francisco testifying in state regulatory hearings in support of future cost-of-service rate increases, San Diego-based Sempra Energy announced Tuesday it plans to sell 15 million shares of common stock, which has been hovering near its 52-week high market price.

The dilution will not impact its estimated earnings range for the year, the company said. (Sempra stock closed Tuesday at $30.40/share; its 52-week high had been $30.90.)

Standard & Poor’s Ratings Services (S&P) quickly issued a statement that the equity sale will not affect Sempra’s credit ratings; however, that rating earlier in the day Tuesday had been lowered by S&P to BBB+ with a “stable” outlook. The corporate credit rating was lowered from A-, along with a lowering of the two Sempra utilities, Southern California Gas Co. and San Diego Gas and Electric Co., from A+ to A. The ratings for the utilities’ senior secured debt was affirmed at A+.

Apparently the continued emphasis on trading and the growing contribution of Sempra’s earnings from unregulated businesses caused S&P to decide on a downgrade, albeit still at solidly investment-grade.

It was not abundantly clear why S&P chose to lower some ratings now, given an overall positive review of the Sempra operations and the fact that the current ratings do not reflect the company’s venture into liquefied natural gas (LNG) imports at two North American locations. Generally, S&P noted that the utilities, which last year accounted for 70% of Sempra’s consolidated earnings, and its merchant activities are all basically strong.

S&P said that it considered Sempra’s trading unit as the company’s “most volatile business,” but noted that its risk profile is “partly mitigated” by the short-term nature of its book. Sempra Energy is among 37 firms that received show-cause notices from the Federal Energy Regulatory Commission last March regarding its trading practices during the California energy crisis, but S&P said “no penalty or other downside has been factored into the current ratings.”

Although its 55% leverage to total capitalization may be “a little weak for its rating,” S&P said Sempra has maintained “comfortable liquidity throughout the turmoil in the western power markets the last three years.”

In announcing the stock sale, Sempra reaffirmed its earnings guidance for 2003 in the $2.70-2.90/share range, and kept 2004 in the $2.60-2.90 range. For the third quarter that will be announced Nov. 6, earnings should be 90 to 95 cents/share, with some previously announced one-time contributors, according to what Sempra CEO said at Wall Street analysts’ conferences last month.

S&P described the stock sale as 15 million shares, along with a so-called “greenshoe option” for another 1.5 million shares, in affirming that the newly lowered ratings would not change. The rating agency said that the ratings downgrade factored in the anticipated stock sale and its approximately $500 million in equity. Citigroup, JP Morgan and Morgan Stanley will act as joint book-running managers for the offering.

S&P said it believes that “the additional balance sheet strength brought about by the equity issue is necessary to sustain the BBB+ rating given the risks assumed in the energy trading business and the growing contribution of the unregulated business vis-a-vis the utilities.”

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