Sempra Energy

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Sempra Energy

101 Ash Street
San Diego, California 92101-3017
U.S.A.
(619) 696-2034
Fax: (619) 696-1814
Web site: http//www.sempra.com

Public Company
Incorporated: 1998
Employees: 12,000
Sales: $5.0 billion (1997 est.)
Stock Exchanges: New York
Ticker Symbol: SRE
SICs: 4911 Electric Services; 4922 Natural Gas Transmission; 4924 Natural Gas Distribution; 4931 Electric & Other Services Combined

Sempra Energy is a Fortune 500 energy services holding company which was formed by the 1998 merger of Pacific Enterprises and Enova Corporation. Sempra Energy’s eight subsidiaries provide electricity, natural gas, and value-added products and services. After the merger was completed. Sempra possessed the largest regulated utility customer base in the United States. The Sempra name is derived from the Latin word for “always.”

Early History

Pacific Enterprises was formed in 1988, two years after Pacific Lighting Corporation bought Thrifty Corporation, which owned drug, discount, and sporting-goods stores. Pacific Lighting’s main business had been through Southern California Gas Company—the largest gas utility in the United States—which supplied about 15 million people in a 23,000-square-mile territory that included the Los Angeles area. Pacific Enterprises also engaged in oil and gas exploration and drilling.

Pacific Lighting Corporation’s roots, however, ran much deeper. The company was founded in San Francisco in 1886 as Pacific Lighting Company by C.O.G. Miller and Walter B. Cline. Both men, who had worked for Pacific Gas Improvement Company—a company owned by Miller’s father—saw an opportunity to start their own business when their employer decided not to use the newly invented Siemens gas lamp. Miller and Cline began buying Siemens lamps in San Francisco and soon expanded into the southern California utility business, buying a one-half interest in a gas manufacturing plant in San Bernardino, California. Their business flourished, and in 1889 Pacific Lighting Company bought three Los Angeles-area gas and electric firms with combined assets of more than $1 million. Miller and Cline created a subsidiary, called the Los Angeles Lighting Company, to consolidate the three formerly competing firms. Pacific Lighting’s attention remained focused on the Los Angeles area for most of the next century.

Pacific Lighting supplied the gas and lighting for the small but rapidly growing city of Los Angeles. Los Angeles Lighting immediately began to make needed improvements in the Los Angeles gas system, which subsequently led to a decrease in prices. The company faced stiff competition from numerous small utilities during the 1890s, however, that retarded its growth. To help increase profits, Los Angeles Lighting began importing and selling coal and gas-powered appliances, hoping to stimulate the demand for gas. Pacific Lighting then bought a controlling interest in Los Angeles Electric Company in 1890, and in 1904 it combined all of its Los Angeles lighting and electric operations to form Los Angeles Gas and Electric Company (LAG&E). In 1907 Pacific Lighting Company was incorporated and changed its name to Pacific Lighting Corporation.

Pacific Lighting’s gas sales increased tenfold between 1896 and 1906 as Los Angeles expanded. Sales grew further, after the San Francisco earthquake of 1906 caused many to move from northern California to Los Angeles. The city grew so fast that Pacific Lighting could not meet demand, and some parts of the city went without gas for days during cold spells in the winter of 1906 to 1907. Seeing an opportunity, a group of Los Angeles businessmen created the City Gas Company in an effort to win Pacific Lighting’s dissatisfied customers. The City Gas Company could not match the resources of the older Pacific Lighting, however, and in 1910 it sold out to Pacific Light and Power, which owned Southern California Gas Company, one of Pacific Lighting’s largest competitors. A conservatively run company, Pacific Lighting concentrated on supplying its service area and collecting its rates while rivals Southern Gas and Southern Counties Gas Company of California worked on new gas technology.

By 1915, the Los Angeles utility industry was dominated by Pacific Lighting Corporation and three other firms. These utilities were extremely unpopular with the public and had to continually fight off the threat of municipal ownership and government regulation. Pacific Lighting and the other utilities fought Los Angeles’s attempts to build a municipal electric system by trying to block the financing and by launching timeconsuming lawsuits. In 1917, the utilities came under the jurisdiction of the newly-formed California Public Utilities Commission (CPUC).

Because Pacific Lighting supplied its services to Los Angeles’s densely populated downtown area, where operating costs were low, another municipal utility would not be able to match its rates. This situation slowed the momentum of the municipal ownership movement, and the battle remained stalemated throughout the 1920s. Meanwhile, southern California continued to grow rapidly, and Pacific Lighting put its resources into expanding its services, spending $10 million to build a new electric plant and to enlarge its substations. To fight off municipal ownership, Pacific Lighting began a public relations campaign and sold stock.

The Depression and the Years That Followed

After the Great Depression began in 1929, the tide shifted toward municipal ownership of utilities, partly because cash-starved citizens hoped municipal ownership would lower their bills, and partly due to the anti-corporation political climate. In 1929 the city of Los Angeles announced it was going to buy Pacific Lighting’s electrical properties. The city had contracted to buy a share of the hydroelectric power produced by the new Hoover Dam and wanted to use Pacific Lighting’s power grid to deliver it. The company’s electric properties provided one-sixth of its revenue, so it fought the move as long as it could. Pacific Lighting, however, needed to renew its gas franchise, and the city would do that only if the company agreed to sell its electric properties. The properties were sold to the city in 1937 for $46 million.

Though stung by the loss of its electric operations, Pacific Lighting continued to grow as a gas utility. It ran its operations conservatively, initially expanding its services only to regions that could be served by existing gas generating plants. As natural gas became more widely available in California, Pacific Lighting’s gas operations expanded.

Pacific Lighting had acquired control of the gas distribution systems of Southern Counties Gas in 1925, Santa Maria Gas Company in 1928, and Southern California Gas in 1929. These companies had expanded more aggressively than Pacific Lighting—particularly around Los Angeles—in some cases quadrupling output during the 1920s. Part of this expansion came from the rapid growth of Los Angeles, and part from new uses for gas, such as space heating and water heating. By 1930, Los Angeles led the United States in natural gas consumption, and Pacific provided gas to half the population of California. It was the largest gas utility in the United States, serving nearly two million people. Pacific Lighting made broad policy decisions for its new subsidiaries, but left the day-to-day operating decisions to the management of the individual firms.

Natural gas was a more efficient and less expensive fuel than manufactured gas. Because Pacific Lighting and its subsidiaries had switched to natural gas during the 1920s, both gas rates and gas consumption had dropped. To compensate for the loss in volume, Pacific Lighting successfully promoted gas for industrial use. Industrial customers were attracted to the low rates and ease of handling associated with natural gas, as well as to the fact that natural gas did not require storage facilities. Industries used natural gas primarily during the summer to absorb Pacific Lighting’s excess capacity, while during the winter Pacific Lighting required industries to use more energy from other sources. To maintain natural gas sources as the fuel became more scarce in the Los Angeles area, Pacific Lighting built longer pipelines, aided by improvements in technology.

Pacific Lighting worked on advertising campaigns with other gas utilities during the Great Depression to counter the belief that gas supplies would soon run out, and to promote the sales of gas-fueled appliances. This successful campaign helped the company weather the Depression, despite decreased use of its gas by industry.

In 1933 an earthquake caused extensive damage to Pacific Lighting’s gas pipeline system, as did torrential rains in 1938. In an attempt to help recoup some of the losses suffered during the 1930s, Pacific attempted to combine Southern Counties Gas and Southern California Gas. The request was denied by California regulators, however, on the grounds that two companies, even if owned by the same holding company, would produce more competition than would one company.

Company Perspectives:

We are excited about creating a new kind of company with the resources to offer our customers innovative solutions and a full menu of energy-related products and services. Critical to our success will be the strong asset base we have put in place, along with our wholesale commodity trading and risk management capabilities, and our expanding retail and commercial marketing network.

A Changing Industry Environment After World War II

During World War II Pacific Lighting diverted energy to defense manufacturers and converted an old gas plant to the manufacture of war-related chemicals. The demand for natural gas increased dramatically during and after the war, and Pacific Lighting sought new means of keeping pace. Because new defense industries drew even more people to southern California, conditions for the company during the late 1940s and 1950s were similar to those during the 1920s, requiring large capital outlays for new construction.

In 1947 Pacific Lighting spent $25 million to build the Biggest Inch pipeline, which brought large amounts of natural gas to California from southern Texas. Demand grew so quickly that an extension to the large gas fields of the Texas panhandle was built in 1949. The company also built vast underground storage areas in southern California. Over the next ten years, Pacific Lighting greatly increased the volume of its interstate delivery system, and out-of-state gas made up 90 percent of the company’s supply. In addition, the company had promoted gas-powered appliances so effectively that 90 percent of all cooking ranges and 98 percent of water heaters and home heating systems in southern California used natural gas. To meet demand, Pacific Lighting offered industries low rates in exchange for using other energy sources when demand peaked on cold winter days.

By 1950 the cost of bringing gas to customers had doubled since the years before World War II, but rates had risen only 15 percent. Pacific Lighting repeatedly sought unpopular rate hikes during the 1950s, and it increased its public relations efforts to help improve its image. Prices stabilized in the early 1960s as a result of regulatory changes that gave Pacific Lighting and its suppliers greater pricing flexibility. By the mid-1960s Pacific Lighting had become the largest gas supplier in the world, and its prices were among the lowest in the United States. Company head Miller died in 1952, and his son Robert Miller became chairman.

Restructuring in the 1960s and 1970s

In 1965 Pacific Lighting restructured its pipeline subsidiary—Pacific Lighting Gas Supply Company—and changed its name to Pacific Lighting Service and Supply. In 1967 the firm moved its headquarters from San Francisco to Los Angeles. Three years later, Pacific Lighting received regulatory permission to merge Southern California and Southern Gas into one company, called Southern California Gas Company. Pacific Lighting created another subsidiary in 1972—Pacific Lighting Coal Gasification Company—to build a coal gasification plant.

Meanwhile, despite the new pipelines, by the late 1960s gas supplies were dwindling again. Paul Miller, who became president of Pacific Lighting in 1968, sought additional supplies across an increasingly wider area, including Alaska, the Canadian Arctic, and the Rocky Mountains. In 1970 the company created another subsidiary called Pacific Lighting Gas Development Company, to find new gas sources. It soon signed a contract with Gulf Oil Canada to purchase large amounts of gas from a new pipeline that the company was building in Canada’s Northwest Territories. Pacific Lighting also got involved in the Alaska Natural Gas Transportation System approved by the U.S. government in 1976, although more than a decade passed before any gas from the project was transported to southern California.

Energy Crisis of the 1970s

The energy crisis in the 1970s presented grave problems. Energy needs were increasing while Pacific Lighting’s gas suppliers began cutting back the company’s supplies. Pacific

Lighting considered bringing in liquid gas from overseas, while working with Pacific Gas & Electric, another California utility. The two firms began construction of a liquid natural gas plant at Little Cojo Bay, California, in 1979, although construction was halted in 1984 because the natural gas shortage had eased. The shortage ended because of conservation efforts and a federal law passed in 1978 that partially deregulated prices for new gas finds. The deregulation led to higher prices, which in turn caused widespread complaints. The company launched another public relations campaign on radio and television to explain why prices were rising.

The price increases, fuel shortages, and slowing population growth in southern California convinced Pacific Lighting executives to begin diversifying. At first Pacific Lighting’s new affiliates were gas-related, but soon the company branched into real estate, air conditioning, agriculture, alternative energy, and retailing. In the early 1970s, Southern California Gas began two major solar energy research projects. More importantly, the company moved into gas and oil exploration and development. In 1975 Pacific Lighting Exploration Company invested in drilling in the Dutch sector of the North Sea. The ventures into agriculture and air conditioning were sold off in the late 1970s and early 1980s. In 1987 the firm sold its real estate operations for $325 million, believing the money could be more profitably invested elsewhere.

Expansion in the 1980s

In 1983 Pacific Lighting bought Terra Resources, which owned oil and gas property in 18 states. Five years later it bought Sabine Corporation, a Dallas, Texas-based exploration firm. By the late 1980s, oil and gas exploration provided 11 percent of Pacific Lighting’s revenue. Pacific Lighting still wanted to move into areas unrelated to the utility business, however, and in 1986 it bought Thrifty Corporation, a chain of Los Angeles-based retail stores. The purchase gave Pacific Lighting ownership of 500 Thrifty Drug Stores, 27 Thrifty Jr. Drug Stores, and 89 Big 5 sporting goods stores. Pacific acquired Thrifty in a stock swap valued at $886 million, or 25 times Thrifty’s annual earnings.

Thrifty had been founded in 1919 by two brothers, Harry and Robert Borun, and their brother-in-law, Norman Levin. Initially the firm sold drugs and sundries wholesale. After the stock market crash in 1929, the firm opened its own cut-rate drugstores. By World War II the firm operated 17 stores in the Los Angeles area. In the 1950s, with strip malls appearing and Thrifty’s sales dropping, the firm switched to larger stores with a broader selection. In the 1970s, with competition increasing, Thrifty adopted a more aggressive marketing strategy, switching from low-end promotions to a policy of total discounts. By the mid-1980s the firm feared a hostile takeover. When Pacific Lighting offered to buy Thrifty, the company reluctantly accepted, partly because Pacific Lighting had a reputation for allowing its subsidiaries great freedom.

Pacific Lighting moved further into retailing in the next two years, buying more sporting-goods retailers in the Midwest and in Colorado, more than 100 Pay’n Save drugstores, and 37 Bi-Mart general merchandise stores. These purchases made Pacific Lighting the second-largest sporting-goods retailer in the United States and the largest drugstore chain in the western United States. To reflect its increasing diversity, Pacific Lighting changed its name to Pacific Enterprises in 1988. Paul Miller retired in 1989, and James R. Ukropina became chairman and CEO, ending 103 years of leadership by the Miller family.

In buying Thrifty, Pacific Enterprises had decided to trade short-term profits for long-term growth. The purchase left Pacific Enterprises short of funds, while its retail operations suffered from price wars, shoplifting, increased competition from supermarkets, and changing economics. The company also failed to find any large oil or gas deposits, and its core business suffered. To pay its stock dividends, Pacific Enterprises borrowed money and raised it by issuing stock—a move which worried some Wall Street analysts. To deal with the situation, Ukropina restructured management and temporarily cut back on oil and gas drilling. Revenue for 1990 was $6.92 billion, though the firm suffered a net loss of $43 million due to write-offs incurred by both its retail and gas and oil exploring operations.

The 1990s and the Birth of Sempra Energy

Willis B. Wood Jr. was named CEO in 1991 and led the company through restructuring that refocused on the core utility business and restored the parent company to a sound financial footing. Wood was succeeded by Richard D. Farman near the end of the decade, shortly before Pacific Enterprises’ announced a merger with Enova Corporation.

Having announced the merger plans in October 1996, Pacific Enterprises and Enova Corporation awaited approvals by the California Public Utilities Commission, the Federal Energy Regulatory Commission, and the Securities and Exchange Commission. The merger was completed in June 1998, and the entity that resulted from the combined operations of both companies was named Sempra Energy. The new board of directors was comprised of 16 members, with eight representatives from each of the merging companies.

Enova Corporation, a leading energy management company providing electricity, gas, and value-added products and services in the United States and Mexico, joined Pacific Enterprises to form the largest public company headquartered in San Diego. Prior to the merger, Enova boasted the ownership of San Diego Gas & Electric Company, which had 1.2 million electric meters and 715,000 natural gas meters, serving 3 million consumers. Pacific Enterprises’ contribution to the deal included its interstate and offshore natural gas pipelines, centralized heating and cooling facilities, and natural gas distribution operations in Latin America. Thus, at its inception, Sempra Energy had the largest regulated gas and electric utility customer base in the United States, serving 21 million customers.

After reorganizations, the new corporation was the parent company of eight subsidiaries based in the United States, including Sempra Energy Solutions. That subsidiary’s vice-president, Amy Reece, was elected by the National Energy Marketers Association (NEMA) to serve as chairperson. NEMA is a non-profit trade association which works with government entities, consumer representatives, and utilities to devise impartial ways to realize deregulation for natural gas and electricity markets.

Former Pacific Enterprises shareholders received 1.5038 shares of Sempra Energy common stock for each share of Pacific that they had owned prior to the merger deal. The new company’s annual dividend rate was set initially at $1.56 per share. Sempra Energy’s market value was deemed to be $6.2 billion on the day of its founding. Its stock remained in the mid-$20 range throughout its first three months. Given this solid financial base, and the combined assets of two of the largest regulated utility providers in the United States, Sempra’s future potential looked to be strong.

Principal Subsidiaries

Southern California Gas Company; San Diego Gas & Electric; Sempra Energy Solutions (Los Angeles); Sempra Energy Trading (Greenwich, Connecticut); Sempra Energy International (San Diego); Sempra Energy Resources (San Diego); Sempra Energy Utility Ventures (Los Angeles); Sempra Energy Financial (San Diego).