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Sempra Ties Future More Closely to Natural Gas

Having exited the global trading space and facing merchant power markets that are problematic, San Diego-based Sempra Energy will be placing renewed emphasis on its varied natural gas investments along with its California and foreign utilities. That was the essence of presentations at the energy holding company's financial analysts' meeting Wednesday in New York City.

"In natural gas we are seeing a combination of low cost, abundant supplies in the United States from domestic shale production and increased demand for gas for power generation," said Sempra CEO Donald Felsinger. "This will provide a number of opportunities for Sempra's businesses. Lower gas prices reduce rate pressures on our utility customers and creates more opportunities to invest in natural gas infrastructure or peaking shale flows.

"Natural gas storage is economic at current market prices, and we plan to continue to invest in this sector," Felsinger said.

Sempra's new strategy as outlined by Felsinger and several other senior executives is "narrower," focusing on its utilities in California and South America and on "contracted energy infrastructure." The company assumes that there is going to be increased conversions from older, more polluting coal-fired generation plants to natural gas.

"If you look at the age of coal-fired plants in the United States, 45% are more than 45 years old, so you look at the economics of meeting all the environmental requirements [for various air pollutants and greenhouse gas] and what you're seeing is that a lot of the utilities with these coal plants are indicating they will retire a lot of them. So we are already starting to see increased use of gas to displace coal in some of these plants," said Executive Vice President Debra Reed.

Citing an increase in U.S. gas reserves of 70% over the past 10 years, Reed said even with the current low wholesale prices for gas, the drilling for shale gas continues unabated. "While a lot of that is focused on the wet gas plays, the drilling is still continuing," she said, adding that total U.S. gas production last year (58 Bcf/d) was at its highest level since 1973, with 25% coming from shale.

"What we can't say for sure in looking at this picture is what natural gas prices are going to do in the future," Reed said. "We don't know if the current spreads between the United States and other areas is going to change over time. That's why at Sempra for all of our gas plans we use the global forward curve for gas."

Over the next five years, these forward projections are seeing gas prices stay in the range of $4.20/Mcf to $5.20/Mcf, with relatively low volatility. "We're hoping this will give us some upside opportunities."

Southern California Gas Co. CEO Mike Allman indicated that the gas-only Sempra utility's retail gas prices are "among the lowest in the nation. Our storage and interstate pipeline assets, along with our progressive regulatory incentive mechanisms, help us keep prices very low for consumers."

In gas storage, Sempra has made what its leaders described as a lot of changes to reflect a combination of changes in the U.S. economy and what has been going on globally, according to George Liparidis, CEO at Sempra Pipeline & Storage Co. "We think we have a good position that we can improve upon based on what we have," said Liparidis, who disagrees with predictions that storage will be overbuilt and prices will be further depressed.

"We haven't seen that; in fact, it has been quite the opposite, we are seeing some consolidation in this space," he said. "Because of our position, we're here to stay, and we're going to be a survivor in this business. Not only are we in a position to stay, but we are in the position to be able to find low incremental costs for expansion [in storage]."

"Even though the value of the gas in storage has fallen, that has really not happened to the storage assets themselves, and this tells you a lot about the future of storage facilities." Liparidis doesn't see the current depressed storage prices as a permanent trend.

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