With litigation from California's energy crisis a decade ago now settled and an exit from commodity trading imminent, Sempra Energy's remaining businesses face a mixture of challenges and opportunities as outlined by Sempra senior executives last Tuesday during a conference call with financial analysts.

Sempra reported first quarter profits of $106 million, or 42 cents/share, compared to $316 million, or $1.29/share, in the first quarter last year. The hit to profits came from a $96 million one-time charge related to a $410 million litigation settlement announced at the end of April stemming from California's 2000-2001 energy crisis, which impacted both Sempra's independent generation and joint venture trading units (see NGI, May 3).

Both Sempra Generation and the joint venture trading unit RBS Sempra reported losses in the first quarter -- $53 million, compared to $43 million of profits in the first quarter of 2009 for the generation business, and a loss of $5 million, compared to $114 million in net profits from the commodities business in the first quarter of 2009.

Nearly half of the year/year earnings drop for the parent corporation was due to a one-time, $96 million charge tied to the litigation settlement and even with continued robust earnings in its two California utilities, Sempra officials expressed some frustration that a major $1 billion-plus transmission project, Sunrise Powerlink, is still awaiting a final federal approval from the U.S. Forest Service. San Diego Gas and Electric Co. (SDG&E) had expected to have construction started by the end of March.

A day before the earnings report, Sempra also announced it had closed a previously announced purchase of El Paso Corp.'s natural gas pipeline and related infrastructure in Mexico, including half interests in several projects with the Mexican government's energy agency (see related story).

Among Sempra's independent power generation, liquefied natural gas (LNG) and gas pipeline/storage businesses there were setbacks mixed with some success stories from the first quarter, but Felsinger made it clear there were some remaining hurdles to overcome. For example, since the Easter Day (April 4) 7.2-magnitude earthquake in North Baja California, Sempra Generation's natural gas-fired Mexicali power plant has been offline awaiting the fabrication of ceramic insulators damaged in the quake. In the immediate aftermath, Sempra had said that its utility and nonutility facilities on both sides of the international border had not been hurt by the quake.

"There was some relatively inexpensive, but critical equipment [at the Mexicali plant] that was damaged in the quake," said Felsinger, adding that he expected the plant to be back in service later in May (ironically, the plant had just finished a 40- to 50-day planned maintenance outage a day before the quake). Unrelated, Sempra's generation business showed a $53 million loss for the first quarter, compared to a $43 million first quarter profit in 2009, due to a $84 million after-tax charge tied to the California crisis litigation settlement.

Felsinger indicated that Sempra is looking to expand on added land it owns surrounding existing gas-fired power plants in Nevada, Arizona and North Baja California in Mexico, noting it is already developing about 100 MW of solar around its El Dorado gas-fired plant in Nevada and another 600 MW of solar photovoltaic is being considered around the Mesquite gas-fired plant in Arizona. He did not rule out more nonutility gas-fired generation on adjacent lands, although under a current arrangement the El Dorado plant eventually is to be owned and operated as a utility plant by Sempra's SDG&E.

Felsinger said Sempra now has about 11.5 Bcf of underground storage in operation that has been fully contracted and by the end of this year, it will have another 12.5 Bcf, "and we have already sold forward about 50% of that." He said Sempra's near-term opportunities would be to sell the added storage capacity going forward.

"And at some point in time if we find there are real opportunities in transacting around storage, we will also look at that business."

Felsinger acknowledged that the forward storage market, and the natural gas market in general is "fairly weak" currently. "Prices are pretty low and volatility is flat. But as we continue to talk to customers, the long-term desirability of being able to store natural gas is something that customers are willing to contract for. We're not seeing the prices [for storage] we were two or three years ago, but they are high enough to give us comfort that we can go ahead and develop other storage."

Regarding Sempra's purchase of El Paso's Mexican assets, Felsinger said that the Mexican government has indicated it wants to dispose of its interest, and Sempra now has the right-of-first-refusal to buy the government's share. If that comes up by the end of this year, Sempra would "take a hard look" at purchasing the added interest in two natural gas pipelines and a propane pipeline in northern Mexico.

Similar to storage, Felsinger was asked about Sempra's latest deal with Gazprom and the Sempra Cameron, LA, LNG receiving facility (see NGI, April 26).

Felsinger said the LNG unit had been talking to various parties about the unsold capacity at the Gulf of Mexico receiving facility, which opened last year. The first deal was with the Qatar LNG producer for a series of shipments from the mid-part of last year through 2010 (see NGI, Jan. 11).

The Gazprom deal allows the Russian-based LNG supplier to pay Sempra for the ability to be able to use the Cameron facility to bring in spot cargoes from time to time over the next few years. Felsinger said he could not give more commercial details on the agreement, but he thinks the deal "bodes well from a couple of standpoints -- one being there is a lot of unsold LNG capacity in the Gulf [of Mexico] and the fact that we have two major players that want to transact with us I think says something about Sempra and the location of our facilities. These are all positive developments, but I can't give more details on the financial arrangements.

"Basically, we will be getting fees over time to allow them to use our terminal and the opportunity when cargoes actually come in to make more money," he said.

Sempra Energy's once-lucrative joint venture commodities business RBS Sempra Commodities should be dissolved by the end of August, Felsinger said. Sempra's initial projection that it would remain in the joint venture trading business through the end of this year has now been accelerated forward based on what he called "progress" made with the international sale of the trading arm to J.P. Morgan and in selling the second half of the business -- the North American natural gas and electricity trading book, for which a buyer is still being sought.

"We're fairly comfortable now with our ability to control the timing so we will be out of this business early in the second half of this year," said Felsinger, noting that his expectation is "to be out of the business by July or August." He said Sempra is working as hard as it can in this regard, so by the time it has its second quarter earnings conference call "we will either be out or close to being out."

CFO Mark Snell said Sempra's projected share of the overall two-part sale of the joint venture trading business is around $2 billion.

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