Sempra Makes Major Baja LNG Sale; Class Action Lawsuit Set for Trial
Despite the dark shadow of a multi-billion-dollar, class-action lawsuit, alleging wholesale natural gas price manipulation, set for trial, San Diego-based Sempra Energy found plenty of reason to celebrate last week. The company negotiated a 15-year, $1.4 billion agreement to deliver to Mexico's federal power agency a large portion of the liquefied natural gas (LNG) supplies that will arrive at its proposed North Baja receiving terminal.
The juxtaposition of the sweet and the bitter was not lost on Sempra, which chose to emphasize its commercial triumph. Comision Federal de Electricidad (CFE), which operates the Presidente Juarez plant among several electric generation plants in North Baja, made the initial announcement, and Sempra followed late last Tuesday afternoon with its own public statement on the deal.
The cost of the natural gas to CFE will be priced based on the natural gas index prices at the Southern California border, Sempra said. Up to 1 Bcf/d eventually will come through its North Baja terminal, which is supposed to start construction later this month with a formal groundbreaking, the Sempra spokesperson said.
"As the energy needs continue to grow in Baja and the U.S. Southwest, we anticipate many others will follow CFE's lead and tap the resources of the West Coast's first LNG facility," said Sempra's Mark Snell, group president of Sempra Global.
Less than 24 hours earlier last week, a trial date was set for June 3 in the heated class action lawsuit against Sempra and its two major California utilities. It is scheduled to open in a San Diego state Superior Court hearing room. For the first time in the long legal proceedings, the utility holding company last Monday took the initiative -- rather than the plaintiffs -- to announce the court's action, predicting confidently that the companies will win.
"After years of legal discovery, including the review of millions of pages of documents, Sempra and our utility subsidiaries -- Southern California Gas Co. and San Diego Gas & Electric -- are confident of refuting the plaintiffs' fictional theories and insupportable allegations," said W. Davis Smith, general counsel for the Sempra utilities.
"The filings in this case make it clear there is no factual basis for the plaintiffs' claims. When appropriate, we expect to demonstrate in court that the plaintiffs' unfounded theories are contradicted by their own evidence. We also expect to prove that their monetary claims -- grossly inflated to attract media attention -- are baseless."
Sempra said that additional information on what is called the "Continental Forge" case for one of largest Sempra utility customers that is a plaintiff in the case is available on the company web site, www.sempra.com/legal.htm.
Merrill Lynch's Sam Brothwell said that although he thinks Sempra has a good case, "We expect it is likely the company will seek a negotiated settlement." He wouldn't speculate on the amount. Meanwhile, he said the CFE LNG supply contract gives Sempra "an early lead on the Pacific Coast with Costa Azul," and the contract will take a little more than one-quarter of Sempra's 500 MMcf/d share of the terminal's total capacity.
"Should demand for the facility warrant, it's possible that Costa could very economically be expanded beyond its current 1 Bcf/d plan," Brothwell said.
In the CFE deal, Sempra said volumes will vary between a peak of 280 MMcf/d and as low as 45 MMcf/d, with overall volumes building over the life of the contract. On average for the 15 years, 130 MMcf/d of Sempra's 500 MMcf/d contracted Indonesian LNG supplies will be used to fulfill this deal with the Mexican government.
Sempra officials expressed pleasure with their first marketing of Indonesian supplies they lined up last October, noting that the contract demonstrates "the strong demand for reliable competitive-priced natural gas" in the region. The company said this contract "validates" its strategy and the fact that it has the lead in bringing new LNG imports to North America -- first with the receiving terminal and pipeline at Costa Azul along the Pacific Coast of North Baja, about 60 miles south of the U.S.-Mexican border at Tijuana.
A Sempra spokesperson said most of the pre-construction and access road work in recent weeks has been completed.
CFE said its 15-year contract begins in 2008, the year that Sempra expects to begin operations of the Costa Azul facilities, just north of Ensenada, Mexico along the North Baja coast. The Mexican agency also said it expected to save an average of $20 million annually on its power plant fuel bills with the imported LNG supplies.
The imports are cheaper than CFE's current natural gas supplies from its sister federal agency, Pemex, Mexico's national oil/gas company. Some of the CFE power plant supplies now come through the United States through Sempra's North Baja Pipeline as supplies to cover shortfalls in the Pemex contract.