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Sempra Expanding Distribution in Non-Traditional Areas

Sempra Expanding Distribution in Non-Traditional Areas

Sempra Energy is banking on a belief in the traditional regulated pipes and wires business, but with a couple new twists. The holding company for San Diego Gas & Electric and Southern California Gas is literally breaking new ground in North America, while buying into established utilities as far south as the Southern Cone of South America.

Among the top two dozen energy firms around the nation, Sempra demonstrated again this past month it is unique in its aggressiveness in acquiring and developing small- to medium-size natural gas distribution companies far from its Southern California roots. With its latest Chilean purchase of gas and electric distribution assets for more than $800 million, it now has interests in nine gas distribution systems and investments of more than $1 billion outside of its two large California utility operations

In announcing the Chilquinta Energia acquisition of gas and electric distribution assets, along with an interest in a large Chilean power generator, Sempra President Stephen Baum called the acquisition "strategic" and one that is profitable now with good prospects for future earnings growth. "(It's) a solid platform for growth in the rapidly expanding Latin American energy market, more than doubling our investment in the region and adding substantial electric utility assets to our already sizable portfolio of gas distribution properties."

Internationally, the company is looking for greater growth and leverage between gas and electric operations than are possible in most areas of the U.S., said a Sempra spokesperson, Michael Clark, who said his firm is focusing on two geographical areas: northern Mexico and the "Southern Cone" of South America, including Chile, Argentina and Uruguay. "Generally, abroad we're looking at areas that offer higher growth rates than the U.S. and, in turn, offer higher risk-adjusted rates of return. Obviously, the northeastern part of the U.S. is an area of growth, too."

In the energy industry none of the other large national and international companies have focused on this niche, according to industry observers who are having a little trouble adjusting to the strategy. "I thought the whole reason that Sempra was formed was to get out of too much reliance on that kind of business," said Robert Michaels, an energy consultant and economics professor specializing in utilities at California State University, Fullerton. "I can't think of anyone else doing this. The distribution pipes are just going to be one of the last regulated pieces of capital around, and I don't think with open access it necessarily provides an advantage. I don't really know what's up their sleeves. I don't see the logic."

Regulated or unregulated Sempra obviously sees some growth potential in digging into the basic business of building distribution systems. In the United States Sempra now is building transmission and distribution pipeline systems in parts of Maine and North Carolina that will be receiving natural gas for the first time. In total, there is more than a $100 million investment over five years contemplated to offer service to a population of 120,000 in 12 Maine communities as Bangor Gas, and a population of 150,000 in seven counties of northwest North Carolina.

In Maine, Sempra is building the distribution system and signing customers in anticipation of gas flowing from the Sable Island supplies offshore as early as this fall or some time in the year 2000. Sable gas is also the source of another Sempra project across the Canadian border in Nova Scotia where it has committed to spending up to C$1 billion over seven years to sign up about 75% of the potential load in the province which includes a population of 910,000.

Sempra proposes to build more than 8,000 kilometers of plastic and steel distribution pipelines to serve the province if it wins provincial approvals. Hearings for competing gas proposals began April 12 and are expected to continue through mid-July. Both the Maine and Nova Scotia projects are capitalizing on the fact that for the first time these areas will be next-door to supplies rather than at the wrong end of very long pipelines.

Between hearings last week, Andrew Rea, president of Sempra Atlantic Gas, a joint venture competing to bring gas to Nova Scotia, emphasized that he and his fellow executives at Sempra are satisfied their offbeat niche strategy seems to be working. "We are pleased our strategy finds us out front," Rea said. "It is similar to the one we are using internationally. We know it is a niche and eventually we expect others to follow."

Internationally, in addition to the recent Chilean purchase that includes assets in Argentina and Peru as well, Sempra has two gas distribution systems it is developing and operating in Mexico (Mexicali and Chihuahua), which eventually will total 994 miles of pipeline serving 77,000 customers for about $64 million, along with a 10-year agreement to supply natural gas to the Presidente Juarez power plant in Rosarito Beach, across the border in Baja California. It includes the construction of a $28 million 22-mile, large-diameter pipeline from the border and a deal which over the life of the contract could amount to a $1 billion in gas sales.

Sempra's Michael Clark said his company's strategy in northern Mexico is to look for market opportunities on both sides of the border, adding that the first two distribution projects in Mexicali and Chihuahua are already profitable. In Argentina, Sempra owns a 21.5% interest in two gas utility distribution operations serving a combined total of 1.2 million customers with a combined average daily sendout of 650 MMcf/d. And in Uruguay, Sempra has won the bid to spend between $150 and $200 million over five years to build a natural gas and propane distribution system throughout most of the country, except for the population center of Montevideo.

Most recently Sempra announced it is competing for a third gas project to build a distribution infrastructure in Mexico to serve up to 50,000 customers through the La Laguna-Durango system. Mexico's equivalent of FERC, the Energy Regulatory Commission (CRE), will announce the winning bid May 20.

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