Before its interim period before long-term contracts kick in, Sempra Energy is looking for spot market liquefied natural gas (LNG) shipments to line up following the completion of some test shipments that are due in the second quarter on the West Coast, Sempra CEO Donald Felsinger told financial analysts on an earnings call last week.

Sempra announced a slight profit increase from continuing operations ($1.13 billion, or $4.26/diluted share, for 2007, compared with $1.09 billion, or $4.17/diluted share, for the previous year). Its California utilities and global trading operations accounted for the bulk of the profits, nearly $500 million each for the year.

Executives with San Diego-based Sempra seemed unconcerned about cost increases and delays in some of the company's key projects.

While still considered relatively short, delays nevertheless have cropped up for the start of commercial operations at Sempra's Costa Azul liquefied natural gas (LNG) receiving terminal along the Pacific Coast of North Baja California in Mexico. There are also delays in the close of its joint venture trading operation with the Royal Bank of Scotland (RBS) and its higher buy-in capital cost, the continued delay of its San Diego Gas and Electric Co. (SDG&E) proposed Sunrise PowerLink 500-kV electric transmission line from the Imperial Valley, and a longer than planned outage spanning three months at its merchant El Dorado generation plant in southern Nevada in the fourth quarter.

Although the Costa Azul start-up is running two months behind previous schedules, the impact on estimated net income for the year is "negligible," and the company expects to be in an enviable competitive position longer term with the first West Coast LNG facility and a second one along the Gulf of Mexico at Cameron, LA, Felsinger said.

Responding to a question about the time gap between when Costa Azul is commercially ready late in the second quarter and when long-term contracts kick in, Felsinger said Sempra executives in late February held a conference call with potential LNG cargo shippers that represented supplies from all over the world. "They're out selling capacity and looking for spot cargoes," he said.

"As our facility goes operational and there is the ability to bring gas into it before the BP contracts [from Indonesia] start, we will be out there trying to convince people to bring [their supplies] to Costa Azul."

In response to another question, Felsinger refused to say what Sempra is paying for its test shipments, other than to classify the amount as "market prices." He said as his people have analyzed the situation, "we realized we can't start getting revenues from our customers until we can demonstrate the facility is commercial, and to do that we have to run test cargoes through it."

Sempra CFO Mark Snell reiterated that the test cargoes are part of the start-up costs for the LNG facility and are capitalized.

Regarding questions on the outlook for more global liquefaction capacity being added, Sempra COO Neal Schmale said he and others in the industry think there will be "a lot of liquefaction capacity going to be coming on" in the next few years, and "it will have an impact on the market." Generally, Schmale said Sempra views the global market as positive and he thinks it will continue to be that way in the years ahead.

In response to another question about recent LNG announcements by Cheniere Energy Inc., Schmale said its LNG operations reflect favorably on the value of Sempra's assets in the growing U.S. LNG sector even though the ultimate volumes that will come regularly to America are hotly debated (see related story).

Felsinger said Sempra has expansion approvals in the works for both its LNG terminals now completing construction (Costa Azul and Cameron) "so we now have the ability without launching [a third terminal at] Port Arthur, TX, to increase the Mexican facility up to about 2.5 Bcf/d and Cameron to 2.6 Bcf/d.

"What we have done is left ourselves some wiggle room to see how the upstream market develops. We can then determine if it makes more sense to expand one of our existing facilities or to launch a whole new facility [at Port Arthur]. We're fairly well positioned to expand at either or both of the existing terminals or move forward with Port Arthur.

"[What we do] will be a function of how quickly the liquefaction capacity expands and how robust the market is [domestically] for gas to support new LNG supplies. We have as much flexibility as anybody out there to take advantage of what does happen, or what doesn't happen."

He called the time period of 2011 and later the "watershed" years for future liquefaction development coming on-line.

Felsinger quoted Federal Energy Regulatory Commission Chairman Joseph Kelliher's recent prediction that the United States would become the world's largest LNG importer by 2011, and he said the opening of the West Coast terminal by Sempra makes it the only nation with Atlantic and Pacific Ocean-based receipt capability.

Even though delayed, Felsinger assured questioning financial analysts that all of the expected major milestones are going to be accomplished this year, headed by the LNG terminal opening and the closing of the RBS trading joint venture.

While finishing the RBS trading deal "has taken a little longer than anticipated, I don't think anyone anticipated the type of financial turmoil that has resulted from the subprime mortgage situation," Snell said. This has made it "understandably difficult" for federal regulators to give the Sempra-RBS transaction the attention it needed. "We're getting there, and we expect to get the Federal Reserve final buy off soon and close shortly thereafter -- perhaps before April 1," he said.

"RBS is meeting with us daily, they are ready to integrate the two businesses [into RBS Sempra Commodities] and from the get-go we'll be ready to move forward."

In response to other questions about merchant generation projects and possible asset acquisitions, both Snell and Felsinger indicated that once the RBS trading transformation is done, Sempra will be in a stronger position to take on new ventures. Market considerations, however, are still holding up the development of a 500-600 MW gas-fired combined-cycle generation plant in Maryland. New, higher PJM Interconnection pricing is one of the incentives to build there, the Sempra officials said, but they have to wait for the market to be just right.

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