Posted on 10/23/2002 10:46:01 PM PDT by Ernest_at_the_Beach
Sempra's profits up 56%, top estimates
Contract with California propels company's growth
By Dean Calbreath
STAFF WRITER
October 23, 2002
Fueled by a controversial contract with the state of California, profits at Sempra Energy jumped 56 percent during the third quarter, a period when many competing energy companies were losing money.
Sempra, the nation's largest natural-gas distributor, generated $150 million in net income during the third quarter, or 73 cents a share, compared with $96 million, or 46 cents, in the same period of 2001. Analysts polled by Thomson First Call had been forecasting profits of 62 cents a share.
The profit growth boosted Sempra's shares on Wall Street. The company's stock rose 65 cents, or more than 3 percent, to close at $20.21.
Stephen Baum, Sempra's chairman and chief executive, attributed the rising profits to the firm's ability to keep a solid balance sheet and maintain strong ratings from credit agencies.
"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 conference call with analysts.
The key component of Sempra's growth came from a controversial contract Sempra signed with the state's Department of Water Resources to resolve last year's energy crisis.
Last year, Gov. Gray Davis signed $43 billion in long-term power contracts with Sempra and other energy companies. Davis now says the contracts were substantially overpriced, committing the state to higher-than-market prices.
Under Sempra's $7 billion contract, the energy company's wholesale-power generation unit agreed to sell to the state at below-market prices last year in return for gaining steady increases over the next decade. The unit lost $9 million during the second quarter of 2001 but generated $29 million in profits this year. Profits of the unit should continue to grow as the contract goes forward.
Michael Shames, who heads the Utility Consumers' Action Network, said the contract is "almost singlehandedly propping up" Sempra during a time of lackluster growth.
In fact, the profits generated by the wholesale power unit represented the core of the increase in Sempra's profits. Other units did not fare so well.
Profits at Sempra's power trading unit dropped from $31 million to $10 million. Sempra's international unit climbed from a $7 million loss last year to a $13 million profit this year, but last year's loss was created by a one-time $25 million charge from a Canadian gas franchise.
Profits at Sempra's core businesses – Southern California Gas Co. and San Diego Gas & Electric – crept up from $100 million to $102 million, representing a small fraction of the profit growth.
The state is currently trying to renegotiate the contracts. The governor's office argues that they were signed under duress during an energy crisis that was largely manufactured by the nation's biggest power companies, such as Enron, Dynegy, Reliant and Williams.
"With lack of intervention on the part of federal energy regulators, there was little that the governor could do but to sign the contracts," said Frank Wolak, a Stanford professor who chairs the market surveillance committee of the Independent System Operator, which oversees the state's power grid.
Despite the high costs of the contracts, Wolak said, they have served a valuable purpose.
"One reason things have been so quiet in the energy market recently is that energy suppliers are committed to the market for the long-term, so it's not in their interests to drive prices up," Wolak said.
Nevertheless, the state is trying to renegotiate all the contracts it signed last year. So far, it has reached new deals with such companies as Williams, Calpine and Constellation. State officials express a bit of frustration that negotiations with Sempra are going slowly.
"Needless to say, we're seeking to lower the cost to the state," said Steve Maviglio, a spokesman for Davis. "We've been able to renegotiate a few other contracts with some of the other suppliers. But not yet with Sempra."
Last month, Baum said that one of the key sticking points in the negotiations is that Davis wants Sempra to sell its power to Southern California Edison rather than to the state. Baum has been balking at the idea, since the state's credit rating is much higher than Edison's.
In yesterday's conference call, Baum said that if the state and Sempra do not reach an agreement by mid-December, the dispute would go to the Federal Energy Regulatory Commission, which might hold hearings in December and January and produce a preliminary finding in mid-February.
FERC has been criticized by state officials for not blocking energy companies from profiteering during the state's energy crisis.
But Baum said it is possible that the contract dispute will be resolved before it ever reaches FERC.
"If this goes the way many settlements go, you might expect them most likely to settle on the courthouse steps or the eve of an election," he said.
In the meantime, Baum plans to take advantage of Sempra's superior financial position by buying properties from its weaker competitors, ranging from bankrupt Enron Corp. to less high-profile power providers.
"More than 40 properties are coming up for sale from companies that are in distress," he told investment analysts. "We're looking at a number of these opportunities. . . . I'd expect any buyer of these (properties) would buy them at a substantial discount."
Dean Calbreath: (619) 293-1891;
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