NEW YORK (CNN/Money) - While the whole group of energy stocks has been under the Enron-induced cloud lately, one portfolio manager thinks there is a silver lining for investors.

San Diego-based Sempra Energy signed an 11-year contract with the state of California, which should mean stability for the energy provider and trader, said Paul Freemont, a utility analyst at Jefferies and Co.

Sempra distributes natural gas to about 5.9 million customers and electricity to 1.3 million customers in Southern California. It also provides power for about 2.6 million abroad, mostly in Latin America. Its Sempra Energy Trading focuses on Asia, Europe, and North America, according to business research company Hoovers.

While there are several disputes over alleged violations of its contract with California -- including the company's intentions to build another plant and its scheduled output deadlines -- Freemont said legislators have a weak case that poses minimal risk for the company.

After Enron declared bankruptcy last year, Sempra Energy bought the company's London-based metals trading unit for $145 million in cash.

In April, the power company reported first-quarter earnings of $146 million, or 71 cents per diluted share, down from $178 million, or 88 cents a share, for the same period of 2001. The company posted revenue of $1.5 billion, down from $3.2 billion in the same quarter last year, attributing the decline to higher energy commodity costs incurred by its California utilities.

The company also said it was on track to earn $2.65 per share in 2002 and $2.90 per share in 2003.

Last week, the U.S. Federal Energy Regulatory Commission ordered Sempra's competitors Williams Energy Marketing & Trading Co., Portland General Electric Co., El Paso Electric Co. and Avista Corp. to comply with its investigation into the possible manipulation of power prices in California or have their authority to issue market-based rates revoked.

Shares of Sempra Energy (SRE: down $0.01 to $23.92, Research, Estimates) are in a 52-week trading range of $28 to $22.

Freemont explained his reasons for choosing the company as a top stock pick.

What draws you to this stock? What do investors need to know about it?

Paul Freemont

We think it is trading at a very significant discount. They were able to withstand the pressures others came under that caused PG&E to declare bankruptcy. The quality of the trading group has been underrated -- it's been one of the most profitable and best managed trading entities in the country. Other companies have run into the problem where traders don't have the understanding or skills to run that type of business.

Why will it do well? What do you attribute it to?

The company signed an 11-year contract with the state of California, and the state has a weak (alleged contract violation) case against the company. If you look at the history of management and its ability to deal with state regulators, it has done a good job of protecting shareholders' interests and has still maintained a good relationship with the politicians it has to deal with. Betting against performance has been a bad bet in the past.

Are there any risks unique to the stock?

With the 11-year contract with the state -- state politicians are posturing going into this election, which creates headline risk. The states use some very strong language to characterize management of resources. There is weakness in the state's position -- the specific complaint that they've made to the company (about the violation) is different than what's in the press.

What other companies are a threat?

On the regulation side, those are, by definition, monopolies. On the trading side, Dynegy (DYN: up $0.08 to $8.33, Research, Estimates), Williams Cos. (WMB: down $0.51 to $8.08, Research, Estimates), El Paso (EP: up $0.05 to $21.05, Research, Estimates) and Duke (DUK: up $0.10 to $29.19, Research, Estimates).

What about the concerns arising in the industry about ethical trading practices?

So far really none of the concerns that have surfaced -- the additional information requested hasn't caused one to be concerned about the trading practices or ethics of Sempra. More than half of the business comes from outside the state -- the company is less focused on a California/West market for trading.

What growth prospects do you expect over the next 12 months?

The stock is trading at eight times forward earnings, which leaves room for improvement in valuation, and are in the range of 6 percent or 7 percent growth -- which puts this company in line with the market. You're getting a 4 percent yield.

What is your financial interest in the stock? Do you or you company own it?

No, it's just one of the stocks we cover. We have a "buy" rating on it.