Remember California's long, hot summer of 2000? The state was struggling with sky-high energy prices, steamy temperatures, failed deregulation, and Enron-led market manipulation. The markets supplying its vast power grid were hurled into chaos, leading to a statewide drive to boost efficiency and promote alternative energy. Today, California utilities and energy generators face some of the strictest green rules in the country.
But what others saw as onerous, Sempra Energy (SRE ) saw as opportunity. Chairman and CEO Donald E. Felsinger seized the moment to reinvent the company, turning it into a fast-growing energy utility with few parallels. Building on Sempra's stable business selling power in Southern California, Felsinger has been on an $11 billion spending spree that will extend the company's reach into booming markets in energy trading, gas pipelines, and offshore liquefied natural gas terminals. Last year, Sempra netted $1.4 billion on sales of $11.8 billion, and returns from the new investments could add $1 billion in pretax earnings by 2011. Its stock is up 40%, to over 60, in the year to May 30.
Lately, Sempra's regulated utilities are focused on efficiency, using advanced technology to coax millions of customers to consume less energy. For instance, its San Diego Gas & Electric (SRE ) utility is replacing 1.3 million "spinning disc" meters—a century-old analog technology—with wireless digital versions that relay data back to utility managers. For $572 million, the smart sensors will help Sempra keep track of demand spikes and see early signs of outages. Down the road, they can be linked to big household energy hogs such as central air conditioners. Then Sempra will be able to offer a discount to customers who allow the utility to reach in remotely and nudge their thermostats up when power demand peaks.
Sempra's unregulated activities are the real growth engine. The biggest success is a trading operation that takes positions in natural gas, oil, electricity, and other commodities. It's a high-risk business that has leveled the likes of Enron and Dynegy (DYN ), which is why Felsinger has labored to keep the trading unit from outgrowing Sempra's regulated businesses. Even so, that division is now the largest nonbanking player in many of the energy markets where it trades, and it has delivered 33 consecutive quarters of profitability. "No other energy player has been as successful with this," says Swami Venkataraman, a utilities analyst at Standard & Poor's (MHP ), which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP ).
The trading business has helped Sempra pinpoint opportunities. A few years ago, when natural gas sold for just a third as much as it does today, Sempra traders began to see price spikes and spot shortages. The signals guided Felsinger to make some of the industry's biggest bets on natural gas infrastructure in decades. In Mexican waters off the coast of Baja California, just south of San Diego, and in the Gulf of Mexico, Sempra will soon complete two multibillion-dollar terminals able to hook up to high-tech ships carrying liquefied natural gas to U.S. markets. "Our traders help us see further out than our competitors," says Felsinger.
These LNG terminals come at a time when U.S. demand for natural gas is surging, and North American sources are drying up. Of more than 50 gas terminals proposed, only Sempra and Cheniere Energy Inc. (LNG ) have been able to start building new facilities.
Sempra is also plowing investment into gas storage facilities and has a big stake in a pipeline that taps some of the last big reserves of natural gas in the U.S. With Kinder Morgan Energy Partners (KMP ) and ConocoPhillips (COP ), Sempra is building the $4.4 billion "Rockies Express" pipeline, a 1,679-mile link from the Rockies to Ohio that will feed the gas-starved Northeast.
From now through 2020, natural gas consumption will rise by 15.8% nationally. The Energy Dept. figures the share met by imports will rise to 21% from 16% today. Most of the new imports will come via LNG terminals, like Sempra's. Meanwhile, Merrill Lynch & Co. (MER )expects natural gas prices to hit near-record highs in the year ahead. With stakes in pipelines, storage tanks, and import terminals, Sempra is poised to profit no matter where the gas comes from.
By Adam Aston