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Sempra Might Sell Profitable Trading Unit

Posted on: Friday, 19 May 2006, 12:10 CDT

By Craig D. Rose, The San Diego Union-Tribune

May 19--Sempra Energy Chief Executive Donald Felsinger says the company's profitable commodity trading unit could be put up for sale as early as 2008.

Despite the unit's 29 consecutive quarters of profits, Felsinger is concerned that some investors may be reluctant to put their money in the company because they worry about volatility in the trading business.

So Sempra will consider spinning off or selling its commodities trading unit to become more appealing to investors attracted to Sempra's utility and natural gas businesses, Felsinger said in a New York interview this week.

Sempra Commodities, a unit based in Stamford, Conn., that trades in energy and metals, accounted for 45 percent of the company's first-quarter profits.

Sempra also owns San Diego Gas & Electric and Southern California Gas Co., along with a growing fleet of businesses involving natural gas.

Any decision on selling the trading business is at least two years away, Felsinger said. By that time, the liquefied natural gas terminals and pipelines that Sempra is building will begin generating cash and the locally based company will have greater cash flow, he said.

Doug Kline, a Sempra spokesman, emphasized that Felsinger's comments didn't represent a change for the company.

"We have always said any piece of the business is for sale at the right price," Kline said. "The commodity business is very valuable to us, not only because it has been a key contributor to earnings but also because it has provided a window on the marketplace.

"(But) we don't think the market is giving us enough credit for the commodity business."

That causes "frustration," in Felsinger's words. He said the commodity unit's 29 straight quarters of profitability should justify a higher share price.

The question in 2008 will be, "Are the sum of the parts worth less or more than what's reflected in our stock price?" said Felsinger, 58, who joined the company in 1972 and became its chairman and CEO this year.

Options include an initial public offering or spinoff of the unit or partnering with another company, he said. "Everything's on the table."

Shares of Sempra rose 28 cents yesterday to close at $43.65 in New York Stock Exchange trading. They are down 2.7 percent this year, compared with a 4.3 percent gain for PG&E Corp., the largest California utility owner. Sempra's stock hit a 52-week high of $48.72 on Feb. 22.

Analysts say Felsinger may be on to something.

Bud Leedom, San Diego-based editor of the California Stock Report, said many individual investors are confused by the array of Sempra operations, which also include Southern California Gas Co.

"If you have companies with disparate operations or divisions, that has been a negative on Wall Street for a long time," Leedom said.

Sam Brothwell, of Wachovia Securities in New York, also seemed to agree in a May 3 note about the company.

"Despite Sempra's undeniable success in its commodities trading unit, we believe at least some of Sempra's investor base is scratching its head," Brothwell wrote.

Morgan Stanley utility analyst Scott Soler, based in Houston, wrote in a May 2 note to clients that trading "represents too high a percentage of the company's earnings."

Soler rates Sempra "underweight," the only sell rating among 16 analysts tracked by Bloomberg. The stock has nine "buy" recommendations and six to "hold."

Sempra built its trading unit, acquired eight years ago from American International Group, into one of the country's largest.

It's one of two utility companies that expanded in trading after Enron Corp.

collapsed in 2001. Constellation Energy Group is the other. The unit competes with energy producers, including BP Plc, and investment banks such as Morgan Stanley.

"The natural host for a commodities business like ours is a financial institution, somebody that has good credit ratings and a cheap cost of capital," Felsinger said.

In March, Felsinger announced a $10 billion, five-year expansion of power lines, pipelines and gas terminals to capitalize on rising energy demand.

Sempra expects to complete an LNG import terminal near Ensenada in 2008. The company is also building a terminal in Louisiana.

"We're in the LNG business because we had an early signal from our commodities business" that showed the need for North American natural gas import capacity, Felsinger said.

Sempra plans to build pipelines near its LNG terminals and is teaming up with Kinder Morgan Energy Partners to build a pipeline for transporting gas from Wyoming to Ohio. The company sold two Texas power plants and plans to sell its oil and gas production unit to help finance the expansion.

Bloomberg News contributed to this report.

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Source: The San Diego Union-Tribune

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