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Value of NatGas Storage Slowly Increasing, Sempra Energy CEO Says

When an analyst asked her during Sempra Energy's Wednesday conference call when rates would increase for natural gas storage services, the first thing CEO Debra Reed did was chuckle. However, there is some light at the end of the tunnel for storage rates that have long been held down by the shale-shifted gas market.

Earlier this year Sempra hired consultants to provide input on the outlook for storage rates. "...[W]e actually cut some of their forecasts when we did our own projections this year," Reed said. "They're projecting that as the LNG [liquefied natural gas] facilities come online [on the Gulf Coast] and as you get more of the coal-to-gas conversion [among power generators] that you're going to start seeing some storage rate increases occurring.

"But what we've seen in reality is it's been slower than what their projections have been, so we took a conservative view in our planning."

Still, Sempra is looking ahead to a day when increased LNG sendouts from the Gulf Coast region, more gas-fired power plants and industrial demand will make for a greater call on storage.

 "Year to year, we're starting to see some price movement upward from where we were last year, not huge amounts, but we are starting to see some upward movement in pricing," Reed said. "So I think that as more load comes on that we'll start seeing better storage rates."

The company is considering Gulf Coast storage and pipeline development as the need emerges, Reed said. "There's going to be a need for more robust infrastructure in the Gulf region as the LNG comes on."

Farther south, a number of things are coming together for Sempra and its investments in Mexico's developing natural gas market.

Sempra Energy's Mexican subsidiary, IEnova, announced a restructured agreement to purchase Pemex's 50% interest in its joint venture. Originally announced last year, the estimated $1.1 billion transaction involves IEnova's acquisition from the joint venture of three natural gas pipelines, an ethane pipeline, a liquid petroleum gas pipeline and a LPG storage terminal. The transaction is expected to close in the third quarter, subject to regulatory approvals and customary closing conditions (see Daily GPIJuly 12).

In June Mexico unit IEnova announced that its Infraestructura Marina del Golfo joint venture with TransCanada Corp. -- owned 60% by TransCanada and 40% by IEnova -- was awarded a contract by Mexico's Comisión Federal de Electricidad (CFE) to build, own and operate a 497-mile, $2.1 billion marine pipeline to transport natural gas between Tuxpan, Veracruz and Brownsville, TX. The project, which has an anticipated in-service date of late 2018, will provide gas to new and existing CFE power plants under a 25-year capacity contract (see Daily GPIJune 13).

Reed said Sempra is watching mergers and acquisition activity in Mexico, renewable energy development, and it is anticipating bidding in future project offerings. "And so if you kind of look at all of those, that we have a several billion dollars worth of new projects that we're going to be working on over the next few years," Reed said.

Sempra Mexico's second quarter earnings increased to $57 million from $50 million in 2015, due primarily to favorable foreign currency effects.

Overall, Sempra reported second quarter earnings of $16 million (6 cents/share) compared with $295 million ($1.17/share) in the year-ago quarter. Adjusted earnings were $200 million (79 cents/share) compared with $259 million ($1.03/share) in the second quarter of 2015.

The lower adjusted earnings in this year’s second quarter were due primarily to $19 million of after-tax losses in the second quarter 2016, compared with gains of $5 million after-tax in second quarter 2015, both resulting from natural gas price movements on inventories sold forward at Sempra U.S. Gas & Power. The majority of these losses related to natural gas prices are expected to reverse by year-end, the company said.

Additional items affecting second quarter results were lower equity earnings of $8 million after tax related to the sale of the company's stake in the Rockies Express Pipeline (REX) (see Daily GPIMarch 30) and recording by Southern California Gas Co. (SoCalGas) of an after-tax impairment of $13 million associated with the final decision by the California Public Utilities Commission (CPUC) on the proposed North-South Pipeline (see Daily GPIJuly 14). In last year's second quarter, SoCalGas had $13 million higher after-tax earnings from a retroactive rate base increase approved by the CPUC in April 2015.

Sempra's SoCalGas updated its estimate of certain costs related to the Aliso Canyon natural gas leak to $717 million, $679 million of which has been recorded as an insurance receivable at June 30, 2016. SoCalGas has begun collecting insurance recoveries, with $34 million collected to date (see Daily GPIJuly 20).

Stay up to date on 2Q2016 earnings and projections for the remainder of the year with NGI's Earnings Call and Coverage sheet.

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