Sempra Energy $450 million mandatory convertibles talked at 8.5-9.0% yield, up 18-22%

By Ronda Fears

Nashville, Tenn., April 23 - Sempra Energy launched $450 million of three-year mandatory convertibles talked to yield 8.5% to 9.0% with an 18% to 22% initial conversion premium, via joint lead managers Merrill Lynch and Salomon Smith Barney. The deal is set to price Thursday.

San Diego-based Sempra Energy, the holding company for San Diego Gas & Electric and Southern California Gas Co., intends to use proceeds to repay short-term debt, including debt used to finance the capital expenditure program for Sempra Energy Global Enterprises.

Sempra Energy shares closed down 50c top $25.06.

Also Tuesday, Sempra reported first quarter earnings, which were 18% lower but beat the analyst consensus of 65c per share.

First-quarter earnings of $146 million, or 71c per diluted share, was down from $178 million, or 88c per diluted share, for first quarter 2001 but the year-ago quarter benefited from a one-time 10c per share gain from the sale of the company's stake in Energy America, a retail energy-marketing firm, as well as increased volatility in energy markets. Excluding the one-time gain, earnings per share for first quarter 2001 were 78c.

Revenues totaled $1.5 billion in first quarter, compared with $3.2 billion in the first quarter 2001, reflecting higher energy commodity costs in the 2001 period in California.

Stephen L. Baum, chief executive of Sempra, said the company is on track to meet its target of $2.65 earnings per share by year-end and expects earnings of $2.90 per share in 2003. Beyond that, he said, the company forecasts earnings growth of 8% to 10% annually through 2006.

In addition to better market conditions since the California energy crisis and the downfall of Enron Corp., Baum said Sempra had picked up energy trading business as a result of Enron's absence in the marketplace and has acquired some of Enron's assets.

In February, Sempra Energy Trading completed the acquisition of London-based Enron Metals Ltd., the leading metals trader on the London Metals Exchange, for $145 million. In March, Sempra Energy Trading announced an agreement to acquire the metals concentrates business of New York-based Enron Metals & Commodity Corp., which is subject to approval by the U.S. Bankruptcy Court. On April 2, Sempra Energy Trading announced an agreement to acquire the Liverpool, England-based Henry Bath Ltd. and subsidiaries, which provide warehousing services for non-ferrous metals in Europe and Asia.

The energy trading unit is expected to contribute $150 million to $200 million to 2002 earnings, Baum said on the company's conference call, and the acquisitions are expected to contribute about $20 million to $25 million in earnings this year.

Sempra's convertible is expected to be rated A-/A2, but the company's ratings have come under pressure recently. Last week, S&P downgraded Sempra and on Monday, Moody's put the credit on review for possible downgrade.

Baum said the company is committed to retaining an investment-grade credit rating.

"It's one of our objectives to maintain a strong investment-grade rating," Baum said.

"At any cost? Probably not, but I would prefer it. I think it's very important."

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