Marking Sempra’s Methods
When Sempra Energy Chief Executive Stephen Baum recently took stock of his years at the helm of the nation’s largest utility owner, he was characteristically blunt about the milestones.
“We didn’t bankrupt the company,” the ex-Marine said.
Sempra is the parent of Southern California Gas Co. and San Diego Gas & Electric Co. -- two utilities that played key roles in California’s 2000-01 energy crunch. To Baum, in his final year as chief executive, merely keeping Sempra solvent is noteworthy, especially compared with the state’s other investor-owned utilities.
PG&E; Corp.’s Pacific Gas & Electric went through a bankruptcy reorganization, emerging from a three-year stay in Chapter 11 last year. Edison International’s Southern California Edison came perilously close to the same fate.
San Diego-based Sempra, whose 22.8 million California customers stretch from San Luis Obispo to the Mexican border, has had its own problems grappling with the crisis and its aftermath. The company at times has infuriated its customers, vexed Wall Street analysts, drawn the ire of consumer advocates and repeatedly battled with California lawmakers and regulators.
Last week, for instance, state Sen. Joe Dunn (D-Santa Ana) accused Sempra of lying to legislative investigators when Sempra denied that it participated in electricity trading schemes during the state’s energy crisis.
Sempra also faces a class- action lawsuit that accuses the company of manipulating the natural gas market and exacerbating the state’s electricity problems, because most power plants are fueled with gas. Sempra’s potential liability if it loses is $24 billion. The company strongly denies both allegations.
Through it all, Sempra has maintained profitable growth under a multi-prong strategy devised by Baum and Sempra President Donald Felsinger, who is set to become CEO when Baum retires Jan. 31.
With 13,000 employees, Sempra not only delivers electricity and gas via its two traditional utilities, it also runs power generation plants; trades electricity, gas and other commodities; operates energy pipelines and storage; and is expanding into the liquefied natural gas market. The company’s relative good health in recent years, when other energy suppliers and traders were struggling to survive, helped Sempra snap up assets on the cheap.
SDG&E; and Southern California Gas remain heavily regulated in what they can charge ratepayers. But Sempra’s trading, generation and LNG businesses aren’t -- providing Sempra with potential growth well above the single-digit rates forecast for SDG&E; and Southern California Gas.
“The decision to get into the trading business was a seminal decision for the corporation,” Baum said in an interview.
Indeed, gains from commodities trading are why Sempra this month raised its forecast for its 2004 profit to about $3.80 a share from earlier guidance of $3.15 to $3.25 a share. Sempra is scheduled to announce its 2004 results Wednesday.
That would extend Baum’s streak of lifting Sempra’s earnings every year since he became CEO in 2000. Its stock price has more than doubled over that period; it closed Friday at $39.50, down 50 cents for the day, on the New York Stock Exchange.
“We’ve liked Sempra for a long time,” said Doug Christopher, an analyst with Crowell, Weedon & Co. in Los Angeles who rates Sempra a “buy” but doesn’t own the stock. “It has a slow and steady approach, a safe dividend, diverse businesses, a strong financial position and a proven management team.”
Sempra was created in 1998 when Enova Corp., which owned SDG&E;, merged with Pacific Enterprises, parent of Southern California Gas. (The name is a derivative of the Latin word “semper,” or always.) As the deregulation of California’s energy market began unraveling in 2000, Sempra was able to sidestep the deep financial problems that befell Edison and PG&E.;
In a nutshell, San Diego Gas & Electric took the necessary steps -- such as selling off power-plant assets -- required to remove a cap on its customers’ rates mandated by the state’s 1996 deregulation law.
Edison and PG&E; didn’t take those steps as quickly, so their customer rates remained frozen when, in 2000, wholesale power prices skyrocketed. While SDG&E; was able to pass along most of the higher costs to its customers, the others couldn’t.
That forced Edison and PG&E; to run up huge debts buying electricity for their customers. PG&E; filed for bankruptcy protection and Edison teetered on the edge for months.
But in avoiding that problem, SDG&E; ran headlong into others. When its 1.3 million electricity customers saw their power bills soar, they were livid, and SDG&E; and Sempra became targets of ratepayer hostility.
“There is still deep-seated resentment toward SDG&E;” because its “customers were used as human shields” to help the utility survive the crisis, said Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego, a frequent Sempra critic.
Baum said he regretted that “for a period of time we accelerated [electricity] prices beyond people’s comfort level. But there was nothing we could do about it. The alternative would have been to have the company go bankrupt.”
Sempra executives realized they needed to do more that outlast the market meltdown; they needed to find new ways to prosper.
Now, Sempra is staking its growth on areas such as trading and importing liquefied natural gas. Last fall, it won approval to build North America’s first West Coast LNG terminal about 14 miles north of Ensenada. It is scheduled to open in 2008. Sempra also is developing plans to bring Alaskan LNG to the West Coast.
Sempra and others see LNG -- which is converted to liquid form for transport by tankers and then reconverted to gas upon arrival -- as a way to meet California’s soaring gas demand and to profit from the surge in gas prices in recent years.
The same run-up in gas prices has helped burnish profit at Sempra’s trading division. But the volatility of commodities prices makes Wall Street leery that Sempra’s trading arm can generate reliable earnings growth.
The stock market “doesn’t value trading income as highly as profits from other businesses,” Value Line Investment Survey said in a report two weeks ago. In addition, Sempra’s dividend yield of 2.5% is “subpar” for a utility and “another limiting factor” for investors, analyst Daniel Ford of Lehman Bros. said in a recent report.
Felsinger said Sempra was haunted by the ghosts of rogue traders such as Enron Corp. that went bust. Sempra’s trading unit is “carrying the burden of a lot of companies that had these businesses and ran them into the ground,” he said.
Another drag on the stock: The class-action suit in which some municipalities, companies and consumers alleged that Southern California Gas rigged the gas market and added to the power crisis.
The suit’s “overhang” is one reason Merrill Lynch & Co. analyst Sam Brothwell gives Sempra’s shares a “neutral” rating. The “prospect of a utility being put on trial for overcharging its customers is not pleasant,” he said in a report last month, adding that Sempra is likely to seek a settlement before the trial starts in June.
That might add another milestone to Baum’s list as he prepares to leave. Regardless, Baum said he had few regrets despite Sempra’s ongoing controversies with regulators, lawmakers and customers.
“A major driver for me was to make sure our employees’ jobs were protected and their families were protected and that the shareholders didn’t lose their investment,” he said. “I’m very proud of the fact that’s been the case.”
