Continuing-operations profit soars at Sempra

By Craig D. Rose, staff writer
San Diego Union Tribune August 3, 2007

Sempra Energy said yesterday that second-quarter earnings from continuing operations surged 51 percent to $280 million, driven by strong results in the company's commodities trading business.

Still, the San Diego company reported a decline in net income to $277 million, or $1.05 a share, down 26 percent compared with last year, when Sempra enjoyed a $188 million one-time gain from asset sales.

Revenue grew 7 percent to $2.7 billion.

The company also said yesterday in a filing with the Securities and Exchange Commission that its San Diego Gas & Electric subsidiary is unlikely to meet a state mandate that it derive 20 percent of electricity from renewable energy sources by 2010.

Sempra said the utility may fall short because of delays in the review of the proposed Sunrise Powerlink transmission line, as well as delays in technology development, the approval of renewable contracts and the ability of renewable suppliers to obtain financing for their projects.

A delay in meeting the California renewable mandate could subject Sempra to fines of up to $25 million annually from the California Public Utilities Commission.

"We're going to have difficulty meeting our goal," said Sempra Chief Executive Officer Don Felsinger.

SDG&E had said it hoped to have an approval of Sunrise in hand by early next year and have it built by 2010. But last month a PUC commissioner, citing errors she blamed on SDG&E, said the commission's review had been delayed by at least five months, making it impossible to build the line by 2010, if it were approved.

A critic of Sunrise said yesterday that the SEC filing may be at odds with testimony SDG&E has presented at PUC hearings into the project.

Michael Shames, executive director of the Utility Consumers' Action Network, said the utility has testified at those sessions that it is capable of bringing in sufficient quantities of renewable energy to meet the mandate without Sunrise.

"We will cross-examine them about this filing," Shames said.

The company's second-quarter results showed that Sempra Commodities, the company's trading business, was again its star performer, recording net income of $155 million, or more than double last year's net income of $69 million.

While the commodity business scored a large earnings gain, other units suffered declines.

Sempra Utilities, which includes San Diego Gas & Electric and Southern California Gas Co., saw quarterly income slide to $105 million, down from $123 million last year.

Earnings for SDG&E fell to $51 million, down from $65 million, at least partly because last year's second-quarter earnings included $16 million in one-time gains.

Net income at SoCalGas dipped to $54 million, down from $58 million.

Sempra Generation, which sells electricity on the open market, had net income of $10 million, down from $16 million. The company said much of the generation units' earnings decline came from mark-to-market losses on transactions with its sister commodity trading business.

The company's pipeline and storage business also had a decline in earnings, which fell to $17 million from $28 million last year. Here again, Sempra said 2006 second-quarter earnings were positively affected by a one-time gain.

Sempra's LNG business trimmed its loss in the second quarter to $13 million, down from $17 million last year. The LNG unit develops receiving terminals for liquefied natural gas, including one near Ensenada in Baja California that is set to open early next year.

Michael Heim, an analyst with A.G. Edwards & Sons in St. Louis, said all product lines within Sempra's commodity trading business posted improved margins, when other traders are reporting weaker results.

Heim rates Sempra's shares as "buy/aggressive."

The analyst said he detected management displeasure with the stock market reaction to Sempra's recent announcement that it had taken on the Royal Bank of Scotland as a partner in its commodity business. Sempra's shares have declined about 6 percent since the announcement, Heim said, compared with a 3 percent decline for the Dow Jones utility average.

During a conference call with analysts, Sempra management repeated that it will receive net proceeds of $1 billion to $1.2 billion in cash when the transaction closes. Felsinger also said its new bank partner will assume a large amount of the risk associated with the trading business.

Bud Leedom, editor of The California Stock Report, said he applauded Sempra for taking on a partner in trading, a move he sees as reducing the local company's risk in that business.

"At the end of the day, success in the commodity trading business can last only so long," Leedom said. "The volatility in the trading business swings both ways - and so far it has only swung positively for Sempra."

Sempra's shares closed yesterday at $56.35, up $1.50 for the day.