Sempra's Golden State

The California energy player figured out how to prosper while its rivals floundered

The damage from California's three-year-old energy crisis lives on. Rocked by tumultuous swings in power prices, giant utility PG&E Corp. (PCG ) saw its two major business units collapse into bankruptcy. Neighboring Edison International rang up billions of dollars in debt. The crisis even helped fuel the campaign to recall Governor Gray Davis.

In San Diego, complaints were so loud among Sempra Energy's (SRE ) 22 million customers that Chairman and CEO Stephen L. Baum watched as consumers burned their bills in front of the company's headquarters. "It was the French Revolution syndrome," Baum recalls. "They were looking for somebody's head."

Baum didn't just escape the guillotine -- he figured out how to profit from the energy fiasco. While the utility sector has floundered, Sempra's profits have jumped by 50% since 1999. The company expects to earn $600 million on sales of $6.6 billion this year. The stock, recently at $30 per share, returned 99% to shareholders from Dec. 31, 1999, through Sept. 30, 2003, vs. an 11% drop for the Standard & Poor's Utility Index.

Now, Baum, an affable 62-year-old former Marine Corps captain, is using that financial strength for an ambitious expansion. Since 2001, Sempra has spent $1.5 billion to build three power plants. Baum is also looking to invest $1.3 billion over the next five years to stake out a leading position in the emerging market for liquefied natural gas (LNG), the nonpolluting fuel of choice for utilities.

SHREWD DECISIONS. Critics -- and there are plenty -- say Sempra inflated the cost of energy while at the same time signing a lucrative contract to sell power to the state at high prices. It still faces state and federal investigations. But it now seems possible that Sempra will sail through the crisis largely unscathed. "It's tough not to conclude the worst is well behind them," says Michael R. Peevey, president of the California Public Utility Commission.

The roots of Sempra's success lie in a decision Baum made in 1998 as he was considering how Sempra could prosper under California's new energy-deregulation law. He chose to sell the company's plants, a move that allowed Sempra to get out from under a state-imposed cap on what it charged consumers.

The second shrewd move came in early 2001, when a desperate Governor Davis signed long-term contracts with 27 energy companies to supply power. Sempra snared a 10-year deal worth $6.6 billion. Wholesale electricity prices have fallen 85% since then, and Davis pressured most of those providers to renegotiate. Sempra refused -- and has so far withstood challenges from California in state court and federal regulators. Says Baum: "These weren't babes in the woods that we negotiated with."

The California contract helped Baum to finance the three gas-fired power plants he opened last summer in Arizona, California, and Mexico. Now, he has his sights set on liquefied natural gas. With gas prices high, Sempra is racing to open facilities in Mexico and Louisiana that will convert imported LNG back into a gas. Big guns such as Royal Dutch/Shell Group (RD ) and Marathon Oil Corp. (MRO ) are also chasing LNG, but Baum got an early start.

Sempra hasn't completely put the crisis behind it. It's one of several dozen companies negotiating settlements with federal regulators over charges that it benefited unfairly from California's energy crisis. The betting among energy experts is that Sempra may have to refund tens of millions of dollars. But considering the battering that most utilities and power plant builders have taken, Sempra could still emerge looking like a winner.

By Christopher Palmeri in San Diego

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