An economic reality of the energy sector’s ongoing woes is that companies with cash and creditworthiness will be buying the assets of troubled companies who have been forced to sell to restore their tattered balance sheets. San Diego-based Sempra Energy’s CEO said his company will be among the buyers.

“We’re not under any pressure to sell assets, unlike others in our energy sector are,” said Stephen Baum, Sempra’s CEO, during a financial analysts conference call last Tuesday. “We have $2.6 billion in cash and an investment-grade credit rating. We’re studying a whole lot of opportunities.

“Although we prefer to have healthy competitors because that makes for a more robust market, the distress of many others will cause assets to be sold,” Baum said. “Things are developing rapidly and I think you will see some firms forced to sell assets. So we’re looking at a number of opportunities that we can go about doing without issuing stock in this distressed market.”

Baum also stressed his strong belief in Sempra’s trading business, which was down compared to last year in its second quarter results announced Tuesday. He said the trading unit is “differentiated” from the many other energy trading units now experiencing deep problems in the post-Enron times. Sempra’s trading unit, he said, is different on five basic points:

In addition, Baum said he thinks that Sempra Energy Trading, which is headquartered in Connecticut, has “the best people in the business — experienced, focused and compensated properly and prudently. We do not execute trades that we do not understand or can’t get out of if market conditions change unfavorably.”

Baum said investors should — and he thinks eventually will — value these attributes he applies to Sempra’s trading. He is sticking by the lower-end of his May estimate that trading would have profits in the $150 to $170 million range for this year, which now will require a better second half than the first-half-year results of $63 million cumulatively.

“The current energy market may make it difficult for us to hit the high-end of that range, but based upon the first-half performance, I still think we can meet the lower-end of the range this year,” Baum said. “We will need to see an increase in volatility and continued improvement from our European gas, power and metals businesses in the second half, if we are to hit these numbers.”

Sempra Energy Trading results were down to $21 million for the second quarter 2002, compared to $69 million for last year’s second quarter; similarly international operations had net income of $9 million for the quarter, compared with $14 million during the same period last year. But Sempra Energy Solutions, an energy services unit serving the large commercial/industrial sector, more than doubled its second quarter results ($5 million vs. $2 million in the second quarter last year); and Sempra Energy Resources, a merchant energy provider, had net income of $34 million, compared to a loss of $9 million for the second quarter, 2002. The latter turnaround was attributed almost entirely to the company’s currently disputed wholesale electricity supply contract with California’s state power buying agency, the Department of Water Resources (DWR).

Sempra rode its California utility, energy services and power sales operations to increased profits in the quarter, reporting total net income of $147 million, or 71 cents/diluted share, compared with $137 million, or 66 cents/diluted share for the second quarter of last year.

A great portion of the earnings came from Sempra’s two large utilities — Southern California Gas Co. ($51 million, compared to $47 million a year earlier) and San Diego Gas and Electric Co. ($51 million, compared to $37 million in the same quarter in 2002). Sempra noted, however, that the increase for SDG&E was due “primarily” to a $25 million after-tax benefit from favorable resolution of tax issues from prior years, and partially offset by increased depreciation expense. The combination utility’s second-quarter 2001 results included a $7 million after-tax benefit from incentive awards, the timing of which varies.

Overall, Baum said he was “pleased” that the company is continuing to deliver “solid financial results quarter after quarter,” and is demonstrating “consistency in meeting financial targets.”

The company “reaffirmed” its earnings-per-share targets of $2.65 for 2002 and $2.90 for 2003. “Despite the current uncertainty in the energy industry, companies like Sempra Energy with solid track records of meeting earnings targets, strong and transparent balance sheets and investment-grade credit ratings ultimately will be properly valued by the market,” Baum said in Sempra’s formal earnings announcement.

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