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Sempra CEO 'Fairly Confident' Internal Growth, Asset Sales Will Fund Businesses to 2010

April 3, 2006
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Sempra Energy CEO Donald Felsinger said the company will invest $10 billion over the next five years in its utilities and natural gas infrastructure businesses and is "fairly confident" the company can fund the program internally and by selling nonstrategic assets.

Speaking from Sempra's headquarters in San Diego at a day-long conference Wednesday with Wall Street analysts, Felsinger and his management team laid out their strategic vision for the company through 2010. Strong internal growth and asset sales will help the company avoid issuing new stock to fund its capital expenditures for the next few years, the CEO said.

"This capital expenditure program is very big, the largest in Sempra history," Felsinger told analysts in his opening remarks. Sempra plans to spend about $2 billion total every year on its capital program, upping the amount slightly in 2010.

Investments in its core utility operations will make up the bulk of Sempra's investments, with about $6 billion over the next few years infused into its regulated utilities: San Diego Gas & Electric Co. (SDG&E) and Southern California Gas Co. Another $2 billion will go toward building liquefied natural gas (LNG) terminals and infrastructure, and $2 billion more will be put into natural gas pipelines and storage projects.

Sempra and Shell are building a 1,000 MMcf/d Energia Costa Azul LNG terminal in Baja California Norte, Mexico. It is scheduled to be operational in early 2008. In March, Sempra announced an open season for nonbinding bids for capacity in what could be up to a 1.5 Bcf/d expansion of the receiving terminal (see NGI, March 20). Sempra also is close to selling out the initial capacity of its Cameron, LA LNG import terminal, which is scheduled to begin construction in 2007 (see NGI, March 13). The Cameron terminal would have 1,500 MMcf/d of capacity.

"The LNG contributions will begin to show up in the next few years," Felsinger said. The site work and permitting process has taken a lot of investment, but he noted that Sempra is committed to securing long-term contracts and "has held off on construction until we had long-term suppliers." Both the Baja California and Cameron LNG projects are being launched with "turnkey contracts to mitigate the risks," he said.

Sempra's partnership with Kinder Morgan Energy Partners to build the 1,323-mile, $4 billion Rockies Express gas pipeline also is no fluke, Felsinger said. With the LNG projects under way, he said, Sempra's internal research indicated that new gas infrastructure would be a necessity. The proposed pipe would bring Rocky Mountain gas east to markets in the Midwest and Northeast, with final completion anticipated by June 2009 (see NGI, March 6).

"We see natural gas continuing to be our infrastructure focus," Felsinger said. "We will act decisively when we see an opportunity."

Felsinger said he is encouraged by the regulatory environment in California, which he believes has improved in the past couple of years.

"There are great opportunities in California," Felsinger said. "We are continuing to see attractive growth and demand in California, and all of this is supported by a very favorable regulatory environment..." He said Sempra's visions are aligned with the California Public Utility Commission's, and the company is gearing new utility investments to lower customer costs.

"California is back on track to deal with its own destiny," Felsinger said of the regulatory environment. "It has some of the most aggressive growth plans...in the nation. California has put its history behind it and become very attractive."

However, Sempra has no plans to build new generation in the state in the next few years. Its generation subsidiary recently completed construction of the 550 MW gas-fired Palomar plant in California, and ownership of the plant is being transferred to SDG&E, as planned.

"At the right price," Felsinger also did not rule out asset sales, but there are few buyers in the market. He also said the company would admit when it was time to sell off assets that did not work, such as its energy services group, which it sold last week to Honeywell Building Solutions for an undisclosed amount. Felsinger said Sempra had "worked hard" to make its retail unit work, but he said there were better opportunities for ahead.

"This sale completes two objectives for Sempra Generation," said Michael Niggli, Sempra Generation's president. "It puts our energy-services business under the auspices of a well respected, international company that specializes in performance contracting, and allows [us] to concentrate on the efficient operation of existing power plant assets."

Sempra is "going to focus on regulatory utilities and natural gas infrastructure" going forward, Felsinger said. "It's attractive for contracted cash flows and earnings certainty." More nonstrategic assets will be sold for the right price, but the CEO did not elaborate. "Expect us to do in the future much of what we've done in the past," he said.

"The electricity business we have today...it would be difficult for us to sell in California, and I'm not sure I'd want to go through the process today. If that climate changes in California, and we see offers down the road, it will be something to think about. But today, there are no offers."

In February, Sempra increased its 2006 earnings to a range of $3.40-3.60/share. On Wednesday, Sempra forecast 2007 earnings to range between $3.50 and $3.70, and by 2010, earnings are forecast to range between $4.20 and $4.75.

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