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Sempra CEO: Emphasis on Utilities; Watch Gas Prices

While not shying away from active trading, independent generation and merchant natural gas pipeline/storage plays, it's a sign of the economic downturn that Sempra Energy is charting a course led by its two sizable California utilities, CEO Don Felsinger told financial analysts.

Speaking at a company meeting in New York City, Felsinger also sounded a bullish tone on gas prices, noting that the current mix of global economic doldrums, low wholesale natural gas prices and dampened demand may just be the right alchemy that can turn into higher prices and demand.

"We spend a lot of time thinking about where will gas move from and how will it get to markets, and where are the pipelines today that are disadvantaged that in the future would be advantaged by new sources of gas that will come into play at some point in time in North America," Felsinger said.

"This is not a good time to be in the natural gas drilling business in North America. We have seen a tremendous dip in the rig count, and that is why when we look at how prices have changed, it is not going to be a gradual bottom and then a slow turn again."

Regardless of commodity prices, Sempra's new, increased five-year capital expenditure program calls for spending $12 billion, 75% of which, or $9 billion, will be for its utilities -- San Diego Gas and Electric Co. (SDG&E), Southern California Gas Co. and its recently acquired small Alabama utility that was part of a larger gas storage/pipeline purchase of Energy South.

More than $2 billion of the added capital expenditures are tied to Sunrise Powerlink, a proposed 120-mile, 500-kV transmission line, approved the end of last year in a split (4-1) vote at the California Public Utilities Commission. Felsinger said Sunrise will be Sempra's largest capital project to date, and that is for a company that has major interests in the Rockies Express natural gas pipeline and three separate liquefied natural gas (LNG) receiving terminal projects.

Felsinger said Sempra has raised its estimated average annual growth in earnings for the next five years to slightly more than 7%, and a lot of the projected growth is what Sempra expects to get out of the utilities. He said they are showing "strong growth, and offer a high degree of certainty."

"It is all based upon the constructive regulatory compact that California affords us," Felsinger said. "Generally, our plan is grounded on proven results and a focus on execution. We are going to continue to be a partner with the state as we operate in this constructive regulatory environment. And we are going to continue to look at [utility] rate base investment opportunities."

In response to questions about what kind of acquisitions Sempra is considering, Felsinger said it could be combination of utilities, pipelines and generation plants. "Look at the acquisition we made of Energy South," a Mobile, AL-based company, for $510 million in cash, greatly expanding the company's storage infrastructure in the Gulf of Mexico (see Daily GPI, July 29, 2008).

In terms of SDG&E meeting California's renewable portfolio standard (RPS) goals of 20% in 2010 and 33% in 2020, Felsinger said he is confident that his utility -- and the rest of the private-sector ones in the state -- will meet the RPS goals because the state standard allows leeway for the companies "that do all the right things." In Sempra's case, Felsinger said SDG&E has made every reasonable effort to meet the goal and it will have 20% of its power supplies under contract from renewables by next year.

"I'm not concerned about getting to 20% by 2010 or anything around that," he said. "Getting to a higher number in 2020 is going to be a challenge. It will be function of what the state's economy is like and other variables."

Meanwhile, Felsinger reiterated that the gas price turnaround will be more like a sharp bounce when it comes. As soon as the world economy regains strength, he said, pent-up demand will drive up prices rather quickly. Felsinger said he thinks price volatility will continue to be a factor and when prices begin to rebound, too. "The current low natural gas prices are nothing but a precursor for higher prices in the future."

The current electric generation fuel mix that California is working toward, lowering coal's portion and greatly raising renewable and natural gas-fired supplies, will eventually become a model for the rest of the nation, Felsinger said. That also will have an influence on future gas supplies and prices, he indicated.

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