It looks like the smartest guys in the room were not at Enron but at Sempra Energy. The San Diego–based energy services holding company does what the cowboys from Houston could not do: generate an honest profit. In fact, says CFO Mark Snell, who joined Sempra in 2001, net income from the company’s energy-trading unit has done nothing but climb since he’s arrived. The company’s transformation from sleepy utility to commodity-trading company couldn’t have come at a better time. The increased volatility in the energy markets “bodes well for our business,” says Snell. In fact, the CFO says the trading mentality permeates all units of the once-staid utility company. For example, Sempra’s trading operation was able to identify areas of the country where the demand for natural gas and electricity is growing. To take advantage of the forecast demand, the company plans to spend about $2 billion building new assets — including a 1,663-mile natural-gas pipeline running from the Rocky Mountains to Ohio — to cash in on the country’s thirst for energy. These days, says Snell, “most everything we do has a commodity component to it.”
Sempra is not a classic utility. Where does the bulk of its net income come from?
Five years ago, two California utilities, SoCal Gas and San Diego Gas and Electric, accounted for nearly 100 percent of our net income. [Today] they’re less than 50 percent, even though they’re still contributing more than $400 million a year. The rest comes from our trading business, our generation business, ice and storage business, and [eventually] the liquid-natural-gas business. The nonutility driver is clearly our commodities business.
What commodities do you deal in?
We actually are the largest metals trader in the world. We bought our metals business out of Enron’s bankruptcy. We also trade oil and some other commodities, but our primary [trading] focusÂ is gas and electricity. [That unit is] much bigger and much more profitable, too. The first year I got here, they made about $100 million. In 2006, the figure topped $500 million.
What accounts for the dramatic uptick?
For one, the market got a lot bigger. All of the energy traders in the United States — Goldman Sachs, Morgan Stanley, Entergy, Koch (which is now part of Merrill Lynch) have grown significantly over the past five or six years. [More important,] we stuck with the business. During the energy crisis in 2002, most utilities that were in this business got out. Some lost a lot of money. Our approach was quite a bit different. The number-one thing — and it is a testament to the management team that predated me — was their recognition that they weren’t experts at energy trading. A lot of utilities tried to convert their procurement groups [into] energy-trading groups, with fairly disastrous results. We bought AIG’s energy-trading group, which was formerly Drexel’s energy-trading group. So a lot of our energy traders have been together since about 1982.
What’s the secret of their success?
We didn’t change their culture. We kept them on the East Coast headquartered in Stamford, Connecticut, and we’ve kept them relatively autonomous. We have very strict oversight controls, but we have kept a Wall Street style of trading. If you work for Sempra Commodities and you’re a good trader, you get paid as well as or better than if you worked at Goldman Sachs or Morgan Stanley.