San Diego-based Sempra Energy sees energy trading as an “integral part” of its overall business, providing a useful window on market imbalances that can lead to capital investment opportunities, according to CFO Mark Snell, who spoke Thursday at the Merrill Lynch Global Power and Gas Leaders Conference in New York City.

Such market intelligence through what Sempra designates as its “commodities unit” has led to its partnering with Kinder Morgan on the Rockies Express interstate natural gas pipeline and its purchase of coal-fired generation plant’s in Texas’ natural gas-dominated market that were subsequently sold at unexpectedly high net profits.

“We are always going to be in the commodities business,” said Snell, who reiterated Sempra’s current focus on natural gas — liquefied natural gas (LNG), pipelines/storage projects, and its two major California utilities. “We always have a need to sell gas/buy gas, sell power/buy power, so we’re committed to the business, and have grown it fairly substantially. With the increased volatility of the recent years, it has been a very healthy business for us.

“It also is our insight into this business. We rely on the commodity business to identify those imbalances in the market that we first exploit through the commodities business, and if they persist, then we fix them with infrastructure. This is how we first looked at the LNG business, it is certainly how we look at the pipeline business, and why we started talking to Kinder about that [Rockies Express] project.”

Snell said the company has developed a successful track record at understanding energy markets and capitalizing on opportunities, such as LNG, the Rockies pipeline and strategically positioned power generation facilities. Looking ahead five years, he said all of Sempra’s growth is tied to identified projects with identified contracts. Rockies Express is the largest natural gas pipeline project in 20 years and its is fully subscribed, all by producers, according to Snell.

So far, Sempra has financed its major capital expenditures with internal cash flows, without having to issue equity. The company has $7.5 billion in committed bank lines to strengthen its liquidity in the energy trading business, Snell said.

The purchase and subsequent sale of the two Texas coal-fired generation plants — 305 MW Twin Oaks and 632 MW Coleto Creek — is what Snell touted as an example of how Sempra has assessed markets, and based on those assessments, made decisions to play off the increasing need to diversify fuel supplies for power generation.

Sempra got into the coal business “for the exact same reason we got into the LNG business — to correct market imbalances,” Snell said. “Two-and-a-half years ago we did not think gas prices would stay in the $2.50 to $3.50 range,” he said. “We felt very strongly it was going to go higher and there was going to be declining production in the United States leading to higher gas prices, so LNG was a good fix and good investment.

“At the same time we looked for something else to invest in, and we decided coal in a gas market made a lot of sense.”

Sempra bought Twin Oaks for $125 million and Coleto Creek for $460 million, selling each for much higher profits than the company ever dreamed about getting — $480 million for Twin Oaks and $1.2 billion for Coleto, which was bought and sold as part of a 50-50 partnership.

“Two years later gas prices were at $12 and $13/MMBtu, and we didn’t think those prices were sustainable so we sold the two coal-fired power plants for much more than we anticipated,” said Snell, who added that the robust sales proceeds and profits from its underlying businesses should allow Sempra to avoid issuing any equity the next five years to pay for its $10 billion, five-year capital spending program.

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