Richard Farman chuckles quietly and exchanges glances with Sempra Energy's second in command, Stephen Baum, when asked how he's spent his leisure time since moving to La Jolla last summer. "I must say this past year has been the busiest of my business career," Farman replies. "It’s been wonderful. It’s been challenging, but it’s been all-consuming."
    Banish thoughts of frequent rounds of golf or anything more than an occasional fly-fishing escape to Jackson, Wyo. For Farman and Baum, 1998 was consumed with work, much of it surrounding the merger that resulted in Sempra Energy's official start of business last July. It was exciting, risky, lucrative work, and 1999 has unfolded at about the same pace.
    Running a new company, in a new business, in a developing marketplace whose future is the subject of wild speculation isn’t the usual way a long-time executive slips into retirement. Farman didn’t exactly plan it that way. Nonetheless, the 63-year-old Sempra Energy chairman and CEO plans on covering many miles before he hands over the corporate reins to Baum a year from now.
    No one expects Sempra's future to be determined with certainty during his term. But Farman's responsibility when he took over as chief architect of the new Sempra was "putting down the roots, building the foundation of Sempra Energy." The specific goals are pretty predictable: set the right corporate strategies, hire good people and pay them well, set financial goals and keep the company from going broke. Implementing them is far from easy.
    Piecing together the $10 billion Pacific Enterprises-Enova Corp. patchwork from separate corporate quilts required some skilled stitchery.
    "I think putting together two major publicly held companies always involves some degree of cultural differences." Farman says. "What we did, and I think it’s working very effectively, is to say it doesn’t matter how it was done in Pacific Enterprises or how it was done in Enova Corp." Instead the companies asked, "What is the best answer for Sempra Energy going forward? Once you get people to look at the cultural differences on that level, you begin to see some really creative and productive results — but that took some time and effort."
    A focus on corporate strategy helped smooth the transition for the two leaders. Baum, who had briefly sipped from the nectar of the gods as Enova CEO following Tom Page's December 1997 retirement, became second in command. Not an easy situation for Farman to walk into. Their common military background — Baum was a Marine captain and Farman served in the Navy — helped. "I believe firmly that you have to have one captain in a ship," Baum explains. "I was the CEO of Enova and he was the CEO of Pacific Enterprises, and we need to have one CEO and we agreed on that. ... I am quite satisfied with the outcomes, notwithstanding that I had to recognize for a period of time we had to have one captain of the ship. That's a function of the shared views that we had about the right direction to take this company."
    Hard work, yes, with compensation and merger bonuses to match. Farman last year pocketed a cool $3.4 million. Baum's compensation totaled $3.06 million.

    Certainly a Sempra success story would give both Farman and Baum a personal sense of accomplishment. But beyond tales of individual achievement, Sempra's survival has implications that reach far past the company itself. Locally, San Diego has a lot to gain from Sempra-as-energy-powerhouse. The community already has benefited from the prestige of hosting its first Fortune 500 company in years — now one of four — and is home to 3,800 of Sempra's 12,000 employees. Although the praise is not universal, numerous community groups applaud volunteers and money donated by Sempra and its local utility, San Diego Gas & Electric Co. Sempra also is active in local economic development campaigns and is a key stakeholder in efforts to develop a planned regional economy spanning the U.S.-Mexico border. The success or failure of the regional economy on both sides of the Tijuana border, many say, will have a major bearing on San Diego’s own economic future. The interests of SDG&E ratepayers are at stake as well.
    Envisioning the future of the energy industry is like gazing into a crystal ball. Images abound; predictions are iffy. Many analysts believe that future energy companies will combine natural gas and electric services, telecommunications, Internet services, home entertainment, security systems and other home-based products and services. Others question such a massive multiproduct combination. But most agree energy companies of the future will be big; active in most, if not all, aspects of the energy industry and international in scope. (The word "utility" will be relegated to the companies that deliver power and natural gas to houses and businesses.)
    The clearest industry trend thus far is consolidation. In a speech to the San Diego Rotary Club last month, Farman alluded to the mergers and acquisitions involving some of the largest and choicest of the country's utilities. In 1997, 15 energy companies tied the knot. In 1998, 18 joined hands. A dozen unions — not counting Sempra's aborted merger with a Colorado-based natural gas company — are pending so far this year. The action to date is "a mere prelude of what is to come," Farman predicts. A decade from now, only 20 or 25 of the nation's several thousand utilities will remain in the marketplace, guesses energy analyst Ed Tirello of Deutsche Banc Alex. Brown in New York.
    Sempra Energy could be a target; or it could continue to grow. At the moment, Sempra's low stock price — a thorn in the side of shareholders — makes it potentially attractive. Since opening trading at $28.25 a year ago, Sempra's shares have fallen, down 5.69 percent to $22.56 as of June 23. By comparison, in that same period the Dow Jones Utilities average rose 11.7 percent while the widely-followed Dow Jones Industrials was up 18.5 percent. Michael Shames of Utility Consumers Action Network says Sempra's "safe" growth strategy makes the company attractive for a takeover. Shames predicts an independent Sempra won’t last more than five years.

    But mergers like the proposed combination with KN Energy — if not canceled in late June it would have created a 15,000-employee company with assets of more than $20 billion — mean a buyer would need a lot more cash than it would take to buy Sempra alone. Farman and Baum decline to comment on any inquiries or offers, but say they aren’t interested in selling unless, of course, the offer's too good to refuse. "If one of them wanted to pay enough, then we would have to consider the offer," Baum says. "Everything is ultimately for sale."
    "An awful lot of utilities are targets," says Gary Miller, CEO of Aragon Consulting Group in St. Louis. Asked about Sempra's chances for survival, the consultant, who lists Sempra as a client, declined specific comment. To survive, a company "must have both scale and scope ... breadth and depth of product offerings," he says. "I believe that’s what Sempra's trying to do."
    Like an electron floating down the path of least resistance, Sempra is not bucking emerging energy industry trends but going with the flow. The merger of Enova Corp. and Pacific Enterprises was a first step. The KN Energy merger would have furthered its bigger-is-better aspirations and given Sempra a major presence in the Midwest and Rocky Mountain states.
    The cancellation of the KN deal hardly puts Sempra out of the acquisition game. Deutsche Banc's Tirello predicts Sempra will continue to expand on its own by buying a choice utility in New England or the Midwest. Farman and Baum agree acquisitions are probable, but growth also could come in the form of alliances and partnerships with smaller utilities or as-yet-unenvisioned opportunities. Sempra alliances with natural gas distribution companies in Maine and North Carolina, and a bid to build the first natural gas distribution system in Nova Scotia, extend the company’s reach as do ventures in northern Mexico and South America. A new, small oil trading office in London is keeping watch on electric and natural gas possibilities as they develop in Europe. "The opportunities to be in the utilities business without owning the pipes and wires are just now unfolding," Baum says.
    The "scope" concept of the future energy company is more elusive. Key to scaling up is the adding of links from each of the critical revenue areas along the energy chain, from power generating to wholesale fuel trading, and transmitting and delivering electricity or natural gas to the home or business. Or, in gas parlance, as Baum puts it: "from the well head to the burner tip."
    Analyst Miller, however, professes a certain frustration over the lack of innovation from the new breed of energy companies. "Same-ol, same-ol," he says of the products and services offered by energy companies to date. Nonetheless, he predicts the residential market will explode with a wide variety of offerings — from energy to entertainment to communications, home security and beyond — in the not-too-distant future. "It’s not just offering light bulbs, for God's sake," he says. "It’s the whole enchilada."
    Sempra can thank the politicians of California for a windfall of cash to fund diversification. The company has about $1 billion in its pocket due to a generous stranded-cost reimbursement policy. Some call it fair, others use the term "highway robbery," but the fact stands that the Competition Transition Charge funded by ratepayers put plenty of cash in the hands of the state utilities' parent companies.
    Sempra, for example, has invested tens of millions in the fast-growing border region of Mexico. Winning three bids to build natural gas distribution systems along the border and a 23-mile natural gas pipeline has put Sempra Energy International at the forefront of the new energy marketplace in northern Mexico. Later this year Sempra hopes to win the franchise to build Tijuana's natural gas distribution system, and expects to bid on electric opportunities as the government releases its federal monopoly.
    While a five-year projected customer base of 125,000 may not sound like a cutting edge business, Baum points out that Mexico's border region is growing at 7 percent annually compared to Southern California's natural gas growth of 1 percent to 2 percent. The Mexican business will be at minimum a good one for Sempra and could prove far more important in the company’s business portfolio, Farman and Baum predict.
    Sempra's unregulated ventures jumped into the black in the first quarter of 1999, ahead of Farman's projections of combined profitability for competitive affiliates by the end of the year. Farman expects Sempra's competitive companies — now satellites orbiting the two large regulated utilities that have guaranteed stable profits for decades — eventually to reach planetary size. He predicts the new businesses will contribute a third of earnings within five years and continue to grow.
    Sempra's success could come at the expense of the San Diego Gas & Electric and Southern California Gas companies, UCAN's Shames warns. He criticizes the company for unpaid use of utility resources and expertise in unregulated ventures. Record keeping of so-called affiliated transactions is poor, Shames says. Additionally, Sempra is seeking special tariff exemptions for the natural gas its unregulated subsidiary sells to Mexico, again at U.S. ratepayer expense, he claims.

    As head of Downtown’s only Fortune 500 headquarters company, Farman made a few ripples in the San Diego business community this year. Warmly welcomed by hundreds of San Diego business and government's best and brightest, he slid into local leadership as founding chair of Forum Fronterizo, a regional planning group confronting joint Mexican-U.S. regional economic and social issues.
    "Dick is patient, thoughtful, yet eager to see substantial long-term results," says Chuck Nathanson, executive director of San Diego Dialogue, a program of UCSD Extension. "He has the wit and the charm even though he doesn’t speak Spanish. He sets the right tone for discussing potentially contentious issues."
    Farman says his role with Forum Fronterizo is both business and personal. He describes the San Diego-Tijuana area as "one region with a line drawn down the middle known as the border. There are many issues and many opportunities that are vital to our company’s interests and of personal interest to me." Not surprisingly, those interests include infrastructure — not just energy, but water and transportation, by sea, air and rail — "and all the other issues that I think are fundamental to the continued growth and standard of living that’s needed for this region."
    Julie Meier Wright, president and chief executive of the San Diego Regional Economic Development Corp., also gets Farman's — and Sempra's and SDG&E's — help when she needs it. "For a nonprofit organization to be able to call on people and count on them is a wonderful benefit," she says. "Dick and Steve are wonderful resources for counsel and guidance because obviously they are very smart executives." A large company like Sempra has numerous skilled executives and managers who support community activities, she says.
    As a recent recipient of a HumanUnity Award from the National Conference for Community and Justice, Farman also earns praise for his support of diversity in leadership and employment. NCCJ executive director Ashley Phillips lauds Farman's hiring record at Pacific Enterprises. The company was named best utility employer for African-Americans, Asian-Americans and Latinos under Farman's watch, she says. When he arrived in San Diego, "he brought such a strong reputation as a leader in corporate diversity, in not just talking the talk but walking the walk," Phillips says. The award also honored San Diego Gas & Electric Co.'s strong support of NCCJ programs.

    Sempra could fail for several reasons. Projections are risky in this emerging business and neither Farman nor Baum has recent experience in the competitive business world. Both are lawyers and products of two of the country's best universities — Farman's a Stanford man; Baum hails from Harvard and the University of Virginia law school. Both have been in the utility industry since 1978. True, they have worked within competitive sidelines of both utilities. But for the most part those ventures — and similar ones tried by numerous utilities across the country — suffered significant losses.
    Both Tirello and Miller, however, give the two high marks. "I think they understand the game," says Tirello. "I see them as a stayer."