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The Fortnightly 40 Financial Ratings

Which is the best energy company?

Fortnightly Magazine - September 2005

we did in 2000 is we simultaneously repurchased stock and lowered the dividend—that in turn preserved some of the cash that was being generated internally for reinvestment, which in turn allowed us to make the type of investments that have succeeded," he says.

Like Sempra, many of the companies that made the 40 are companies that effectively tapped in to new revenue and new businesses following the restructuring of the industry.

"If you look at the $895 million in earnings we had last year, almost exactly half of that was from [utilities] San Diego Gas & Electric and SoCal Gas combined. The other half was from businesses that were developed since the merger in 1998," says Schmale. The Sempra CFO explains that its successful investments in energy trading and the generation business now make up more than half of earnings. But such success hasn't stopped the company from looking ahead. Sempra, he says, also is investing heavily in liquefied natural gas terminals, which he believes has a lucrative future.

"…The trading business is closer to a $200 million per-year business. LNG certainly has the capability to be in the $150 million per-year range. It could be many, many years from now [Sempra's LNG terminals do not come on line until 2008]. But it has the potential to be in the same league as the generation business and maybe the commodity business," he says. Certainly, Schmale has good reason to believe in the future prospects of imported natural gas. Those companies that had natural gas to sell or move this year, danced all the way to the bank, and dotted the top ranks of this year's Fortnightly 40 .

A Gas Man Prospers

Keith O. Rattie, chairman, president and CEO of Questar (No. 3), is having a good year. In Questar's second quarter 2005, the company reported net income was up 43 percent compared to a year ago. "The key drivers were higher production and realized prices for natural gas, oil and natural gas liquids and increased volumes and improved margins in gas gathering and processing," said an earnings release.

Rattie believes that his company's current success comes from the transformation the company has gone through over the last 10 years.

"We anticipated that the fundamentals for natural gas were strong and it was likely that it was going to be better to be a producer of energy than a pure consumer," he explains in an exclusive interview. Questar, he says, is viewed today largely as an E&P company. But that was not always the case. "Investors thought of Questar as a utility that also had a fledgling E&P business. Today, many investors see us as an E&P company that also owns an interstate pipeline and a regulated utility," Rattie notes.

Moreover, the CEO says that soaring natural gas prices are not going to his head. He points out that at the end of the day the winners are going to be those companies that consistently generate the best returns on reinvested capital: "Companies that run their businesses mindful that natural gas is