Sempra Energy plans to ride the growing U.S. bandwagon for exporting plentiful domestic supplies of liquefied natural gas (LNG) through a $7 billion joint venture (JV) and midstream master limited partnership (MLP) centered on its under-used Cameron LNG receiving facility in Louisiana, said CEO Debra Reed, who spoke to analysts Thursday in San Diego.
Reed and Sempra President Mark Snell outlined a five-year strategy that calls for $14 billion in capital expenditures, $11 billion of which would be in the two California utilities, San Diego Gas and Electric Co. (SDG&E) and Southern California Gas Co. (SoCalGas), along with an LNG export JV at Cameron operating by 2016. Sempra's management team also plans to push for more investments in renewable energy and limit its gas-fired merchant generation to existing facilities.
Sempra is looking to expand its utility footprint in the U.S. and abroad that would provide both "synergy and growth," said Reed. The company recently completed a full review of all of its assets, which are heavily concentrated in natural gas infrastructure, to identify what over the next five years it will keep and what it might eventually sell.
"Several trends came out of that assessment and one was that there is going to have to be a lot of capital invested in utility infrastructure," she said. "That's why we are looking to spend $11 billion in capital in our two California utilities over the next five years. The creation of Sempra [in 1996-98] is an example of this. We merged the two utilities not only for synergistic reasons, but also for the growth opportunities that would create in other businesses. If a small utility in the Southeast had midstream assets that were compatible with our midstream assets, then we would be interested in an acquisition perhaps."
Sempra has concluded that an MLP financial structure would be the best way to "integrate and grow" its midstream business that produces $200-300 million of net income annually. "We see an MLP as a vehicle to grow our midstream businesses," Snell said.
One of the biggest "shareholder value creation opportunities" for Sempra is found in the potential LNG export business, said Reed. With the import facility, including the multi-ship marine terminal already in place, adding export capability offers "pure upside potential."
Unlike the company's Baja California LNG import facility in Mexico, which is fully contracted and making a profit, the Cameron facility is only about 40% contracted and is "breaking even" at best on a net income basis, Snell acknowledged.
However, LNG exports offer "a fantastic opportunity, an opportunity to build an operation the size of SoCalGas almost overnight," said Snell. They would be centered on "reversing the flow" of supplies through what Sempra hopes to develop as a tolling facility for sending LNG to Japan and other global markets.
"With the shutting down of some nuclear capability, Japan's total need for LNG has increased by about 20 metric tons per year," said Snell. "They really are looking for a new source of supply, and are going to be turning ever more to the United States for this gas."
Sempra's plans call for two or three trains of liquefaction capability at Cameron, each train about 4 million metric tons/year. Snell emphasized that the ultimate size of the facility would be driven by customer demand, and those customers would also be part of a 50-50 JV partnership. The technology expected to be used would be a "proven one" that is used in most (80%) of the liquefaction facilities worldwide and most recently installed in Peru, he said.
Current plans envision commercial development agreements with customer/partners by the end of June that would commit to the Cameron facility and not negotiate with other terminals. The customers also would fund pre-filing costs on an equal basis with Sempra, and eventually sign 20-year tolling agreements with the facility.
"Our intent is to sell tolling capacity contracts, unlike other players in the market," Snell said. "We're not planning right now to sell the commodity. We have a lot of [potential customer] interest in that, so we don't have to take that commodity risk." Cameron has the advantage of being close to several major shale gas plays and to a lot of pipeline infrastructure, a lot of which Sempra already controls, he added.
Sempra plans on making its existing $1 billion facilities its major contribution to an eventual JV project. The remaining estimated $6 billion would come from the partners, Snell said. The projected annual net income from a three-train facility is estimated at slightly more than $300 million.
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