Rebates Weigh on Profit at Sempra
Sempra Energy on Thursday reported that its second-quarter net income fell 21% because of higher rebates to utility ratepayers and lower earnings from wholesale electricity sales.
But the San Diego company -- which owns Southern California Gas and San Diego Gas & Electric -- said profit for the year should reach the previously announced target of $2.60 to $2.80 a share.
In addition, Sempra disclosed that the Internal Revenue Service was auditing the company’s small synfuels business as part of a broad examination of the validity of such ventures, which turn coal into a cleaner-burning fuel.
“This was a solid quarter for Sempra Energy,” Chief Executive Stephen L. Baum told investors and analysts, pointing to improved results from the company’s trading and international energy businesses. “Overall, Sempra Energy remains financially strong.”
Sempra has fared better than most in an industry buffeted by the California energy crisis, the bankruptcy of Enron Corp., the near-collapse of energy trading and the profit crunch from low electricity prices and high natural gas costs. Sempra’s Southern California Gas unit is the nation’s biggest natural gas utility.
Even though Sempra’s quarterly earnings, released before the market opened, were slightly below Wall Street’s expectations, investors pushed the stock price up 31 cents to $27.90 on the New York Stock Exchange. Sempra’s stock has climbed 18% this year.
“They’re doing OK,” said analyst Douglas Christopher of Crowell, Weedon & Co. “I think they’re doing a really good job in trading and in sticking to their knitting.”
In June, the IRS said it was investigating possible abuse by many companies of a corporate tax credit for investments in synthetic fuel plants. The IRS is questioning the scientific validity of tests showing that coal has been chemically altered by the process, and is considering revoking dozens of IRS rulings that allowed companies to claim the synfuel tax credit.
Sempra owns an interest in six synthetic fuel plants.
Christopher said he wasn’t troubled by the synfuels probe because the business is a tiny part of Sempra’s operations. And Sempra executives said Thursday that they were confident the IRS would rule in the company’s favor. If the ruling is unfavorable, the maximum effect on earnings this year would be $40 million, or about 20 cents a share, they said.
For the quarter ended June 30, Sempra posted net income of $116 million, or 55 cents a share, compared with $147 million, or 71 cents, a year earlier. Last year’s quarter included a $25-million benefit from the settlement of tax issues and a $2-million gain from the purchase of a metals trading business.
Revenue for the latest quarter reached $1.8 billion, up 20% from $1.5 billion.
Earnings from Sempra’s two utilities, which together serve 6.6 million customers, fell to $78 million from $102 million in the year-earlier quarter. Sempra blamed the decline on higher operating costs and larger refunds set aside for customers to pass along savings tied to the 1998 merger that created Sempra.
When state regulators approved the $6.2-billion merger of Pacific Enterprises, parent of Southern California Gas, and Enova Corp., parent of SDG&E;, the state required that savings from the combination be split between ratepayers and shareholders for five years.
Beginning this year, all of the savings go to ratepayers, and the payout in 2003 is expected to be $124 million. Sempra is asking regulators to allow it to lower rates rather than credit the amount directly to customer bills.
Sempra’s wholesale power subsidiary saw quarterly earnings fall to $5 million from $34 million because of lower prices on electricity sold under a 10-year contract with the California Department of Water Resources and costs from putting three new power plants into operation.
Sempra’s energy-trading business posted income of $35 million, up from $21 million in the year-earlier quarter.
