San Diego-based Sempra Energy announced plans last week to sell 15 million shares of its common stock priced at $28/share, which is near its 52-week high market price. The dilution will not impact its estimated earnings range for this year, the company said, but in 2004 earnings are expected to drop to $2.60-$2.90/share. Sempra stock closed Friday at $28/share after setting its 52-week high of $30.90 earlier in the week.

Standard & Poor’s Ratings Services lowered the company’s credit rating to BBB+ with a stable outlook prior to the announcement and said the stock sale would have no additional impact on ratings. Sempra’s corporate credit rating was lowered from A- and the ratings of its two utilities, Southern California Gas and San Diego Gas & Electric, were lowered to A from A+. The ratings for the utilities’ senior secured debt was affirmed at A+.

Credit Suisse First Boston said last Friday it was maintaining its “Outperform” rating, pending additional information from Sempra in its third quarter report early next month. “This is based on business unit performance that is resulting in better than expected third-quarter earnings per/share (in the $1.12-$1.17 range, compared to CSFB’s earlier estimate of 90 cents/share) after adjustments and non-recurring items.”

It was not abundantly clear why S&P chose to lower the company’s 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 its “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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