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Sempra On Verge of Cap-Ex Push on Gas Projects

Coming off record 2005 profits approaching a billion dollars, San Diego-based Sempra Energy is looking to solidify more of its high-profile natural gas projects in the weeks and months ahead with cash from some of its ongoing merchant electricity sector sales, according to CEO Donald Felsinger.

Speaking last Wednesday to financial analysts on a year-end earnings report conference call, Felsinger said Sempra is targeting $2.3 billion in capital expenditures this year, split evenly between its California utilities and its various merchant trading, generation, liquefied natural gas (LNG) and pipeline/storage businesses.

Felsinger said Sempra expects to make a key announcement on its Rockies Express Pipeline joint venture with Kinder Morgan "within the next week" and expects an update on its sales of remaining power plant properties in Texas in "the very near future." In the meantime, the already announced $480 million sale of the company's Twin Oaks power plant in Texas will close in the second quarter with an after-tax gain of $215 million, Felsinger said.

Felsinger said the company is working to finalize binding commitments from shippers for more than 1 Bcf/d of firm capacity on the proposed 1,300-mile Rockies Express project. "The total cost of the project, including the cost of [a related pipeline link] and capitalized interest during construction, is expected to be in the $4.0-4.4 billion range," said Felsinger.

He said construction is on schedule at both the Energia Costa Azul LNG project on the Pacific Coast of North Baja California and the Cameron, LA, LNG facilities. In addition, Sempra expects final Federal Energy Regulatory Commission approval for a third LNG receiving terminal at Port Arthur, TX, by the middle of this year.

Compared to $1.5 billion in capital investments last year, Sempra expects to increase its investment in new projects by $800 million, with half going to its California utilities, where Felsinger said the investments "will help grow our rate base and strengthen our generation, distribution and transmission systems. We plan to use the proceeds from our asset sales to help fund our expanded capital programs and we'll continue to effectively manage our balance sheets."

Drawing on robust results in its energy trading and utility businesses, Sempra reported record net income for all of 2005, totaling $920 million, or $3.65/diluted share, compared with $895 million, or $3.83/diluted share in 2004. For the fourth quarter last year, net income was $255 million, or $1.38/diluted share, compared with $346 million, or $1.46/diluted share, for the same period of the previous year.

Despite the record overall results, Sempra said the fourth quarter results last year were adversely affected by a $116 million after-tax charge for energy crisis-related litigation, primarily its class action lawsuit settlement announced last month. Before the charge, net income was $436 million, a 36% increase over the same period the previous year.

As a result of its '05 results, Sempra increased its earnings outlook for 2006 to a range of $3.40-3.60/share, from the previous range of $3.20-3.40/share.

"We continue to execute our strategy, expanding our competitive businesses in liquefied natural gas (LNG) and natural gas pipelines and storage, while building upon a solid foundation with our utilities, generation and commodities units," said Felsinger, who was bullish in particular about the company's energy trading, noting that continued global market volatility adds to the value of the commodities business.

Breaking down its major business units, Sempra Commodities recorded 2005 net income of $460 million, a 44% increase over 2004's $320 million in net profits; the utilities collectively earned $473 million ($262 million for San Diego Gas and Electric Co. and $211 million for Southern California Gas Co.), compared with $440 million collectively last year; and Sempra Generation recorded net income for 2005 of $164 million, compared with $137 million the previous year.

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