State Contract Helps Fuel Sempra’s Earnings
Sempra Energy posted a 56% jump in third-quarter earnings Tuesday, thanks largely to a controversial long-term electricity contract that California officials say hurts consumers.
The company reported earnings of $150 million, or 73 cents a share, up from $96 million, or 46 cents a share, in the same quarter a year ago. Revenue was $1.38 billion, down slightly from $1.42 billion last year.
The San Diego-based company has 21 million customers through its utility subsidiaries, Southern California Gas Co. and San Diego Gas & Electric -- more than any energy utility in the country. But its strong third-quarter showing was due mainly to the performance of its wholesale power generating subsidiary, Sempra Energy Resources.
Sempra Energy Resources reported earnings of $29 million for the quarter, a turnaround from the $9-million net loss in 2001, the company said.
The gain was primarily from the sale of power to the California Department of Water Resources under a 10-year power-supply contract signed last year, said Sempra Energy spokesman Doug Kline.
That contract, signed when harried state bureaucrats were trying to cope with the energy crisis, contributed to the unit’s third-quarter loss last year. The company sold power at a loss, under the condition that the deal would become more profitable in future years.
Given that arrangement, said Michael Heim, a St. Louis-based analyst with A.G. Edwards & Sons Inc., “this is not a contract that Sempra is anxious to walk away from” at this point.
State officials, however, have been renegotiating long-term contracts with Sempra and other power suppliers, saying they were signed in 2001 amid the chaos of the energy crisis and are too expensive. The state passes on the power that it buys to Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric, the first two of which ran into severe financial troubles stemming from the state’s deregulated power market. High wholesale energy prices are then ultimately absorbed in the rates of business and residential customers.
Although some companies have reached accords, Sempra still is in talks with state officials on a resolution. The Federal Energy Regulatory Commission is expected to convene settlement hearings on the issue as early as December if the two sides are unable to come to terms in the weeks ahead.
Sempra’s contract with the state is valued at $6.6 billion. The state signed a total of $43 billion in long-term deals with power providers.
Separately, the Department of Water Resources in July asked a San Diego Superior Court judge to void the deal with Sempra on the grounds the company committed fraud by failing to complete by this summer the first phase of a new power plant in Bakersfield.
The DWR’s suit alleges that Sempra violated the contract terms by buying power on the open market and reselling it to the state, instead of providing it from the Bakersfield plant. Sempra bought power on the open market, where prices averaged $30 to $40 per megawatt hour, the state says, and resold it at the contract price of $160 per megawatt hour, profiting on the spread.
“We’re seeking to have the contract voided,” said DWR spokesman Oscar Hidalgo. “In general, we’re looking at a different market today than when we negotiated the contract. We’re looking to improve the contract for the state, and ultimately, for the consumer. We need to get a better deal on costs.”
Sempra’s Kline said the contract allowed the company to provide power from a range of sources, including the market. “We have a solid binding contract and we’re very confident that the contract will be upheld by federal regulators and the state court.”
Sempra Energy Resources is set to bring power plants on line next year in Bakersfield; Arlington, Ariz.; and Mexicali, Mexico. The three would produce 2,135 megawatts by the end of next year, Kline said. That’s enough to power 1.6 million homes for one hour.
More than 85% of Sempra Energy Resources’ power capacity is under medium- to long-term contract, and analyst Heim said that fact separates Sempra from other troubled energy generators that “have nowhere to sell the power.”
Sempra Chief Executive Stephen L. Baum also took note of the company’s rare position in the sector. “We are pleased to continue strong financial and operating performance at a time when many of our peers in the energy sector have struggled,” he said in a statement Tuesday.
Touting the company’s “strong investment-grade credit ratings,” he reaffirmed the company’s earnings guidance for 2002 of $2.55 to $2.65 a share and provided guidance for 2003 of $2.60 to $2.80 a share.
Sempra shares rose 65 cents to $20.21 Tuesday on the New York Stock Exchange.
