NGI The Weekly Gas Market Report
It’s the green thing, stupid! That was part of the underlying message at Sempra Energy’s annual analyst conference in San Diego Thursday. Senior executives indicated they see new investment in the push to slow down greenhouse gas (GHG) emissions. But they also are counting on substantial growth and profits in both their energy trading and California utility businesses, and acknowledged a slowing of proposed liquefied natural gas (LNG) receiving terminal expansion because of the global pause in added liquefaction capacity.
“It was clear to us that Sempra is already looking at the investments it will be making five to ten years from now,” said Michael Heim, an analyst with AG Edwards & Sons Inc., in his written summary of the all-day meeting. “Several presenters discussed GHG emission issues and we believe Sempra may become a major investor in renewable fuel production in the future.”
Sempra CEO Don Felsinger certainly underscored this in remarks at the end of the presentations, noting that with an $11 billion five-year capital budget focused on its utilities and independent energy infrastructure, his company is still going to be investing more in energy efficiency and renewable energy projects. Felsinger acknowledged he has changed his mind on green investments, but he has not budged on staying basically negative toward mergers and acquisition and/or taking on a partner for its burgeoning energy trading business.
Two years ago when he was first transitioning into the top job at Sempra Felsinger was outspoken in saying Sempra wasn’t interested in owning and operating renewable energy projects. Since then, Felsinger said he has had an epiphany. “I thought there were just too many complications with affiliate transactions between ourselves and what would be [expected] customers. I have changed my thinking on that because I see the difficulty today in the contracts we have signed in getting the developers to follow through.”
With what Heim called a $100 million “bump up” in annual earning expectations from trading, and some uncertainty on the short-term global energy landscape, Sempra COO Neal Schmale said the company is striving to maintain the right mix of trading, infrastructure development, operating and risk management skills to take advantage of whatever opportunities arise. At the outset of the analysts’ meeting, Sempra raised its 2007 earnings-per-share guidance to $3.75-3.95.
Although he openly refused to answer an analyst’s macro question about when LNG would become a global commodity and at what price range it would likely be traded, Schmale said that Sempra plans to do well regardless of what develops. For planning purposes, he said Sempra generally was assuming that LNG can be economically imported into North American in the $5-6/Mcf range.
Schmale acknowledged that there has been a lot of talk in the financial community about the current delays in building LNG liquefaction facilities around the world. “The key point is that the fundamentals of this business [global demand] have not changed,” he said, noting that there have been some “hiccups” in the development of liquefaction capacity.
“This has presented some challenges for us, but it also has created some opportunities,” Schmale said. “What we are dealing with now is a relatively fragile balance between supply and demand — particularly in North America — and in that fragile balance weather changes and impacts on storage and infrastructure are all sort of magnified. This in turn causes increased price volatility, increased storage opportunities and increased pipeline capacity needs that we have been able to capture.”
Sempra expects the current price/supply volatility to persist “for some time,” he said.
This view of volatility continuing is one of the reasons Sempra CFO Mark Snell talked so bullishly about the company’s trading (commodities) operation as part of its global businesses, although he and other Sempra senior executives are not sure they ever will need a partner in this business sector.
Characterizing the energy trading unit as having “tremendous liquidity and highly ample capital,” David Messer, the head of Sempra Commodities, said he sees the environment for trading remaining mostly unchanged through 2009 with annual profits in the $350-450 million range. While analysts and some of the other Sempra executives speaking at the conference pointed toward increased volatility — a good thing in the trading business — Messer was more cautious in his projections, noting that it is “very difficult to look into our crystal ball and tell what volatility is going to be.” An economic downturn in North America could dampen it significantly, Messer said.
As for carbon emissions credit trading, another Sempra trading executive said the company is among the major traders in the European market, and it would expect to be heavily involved in the market in the United States when it is developed.
Similar opportunities exist for Sempra’s utility operations in the increased global warming mitigation push and the generally stepped up attention given environmental issues. Schmale said Sempra is viewing these as “environmental opportunities” — because of its “clean generation base” and its large utility customer base between Southern California Gas Co. and San Diego Gas and Electric Co.
“In the hard asset business, we seem to think of environmental issues as cost, but the shift in the way we are thinking about these things now is to look at them as opportunities. The growth opportunities, the quality of these opportunities, and our ability to early identify these opportunities is what really sets this company apart,” Schmale said.
Both Sempra’s two major California utilities, along with the global business units, are going to be looking at renewable opportunities. So far, Sempra is seeing new goals for efficiency and renewable programs put before the utilities and outside developers are “just not moving fast enough,” Felsinger said.
Analysts questioned Sempra’s proposed size of investment in renewables and energy efficiency given the very large goals being established by regulators, such as $1 billion in efficiency programs over the next few years. Debra Reed, CEO of the two Sempra utilities, said that bidding processes in the past have always included requests for utility ownership opportunities, but that category hasn’t drawn any interest. She said the utilities plan to change the way they contract and approach renewable requests for offers (RFOs).
Felsinger said the state’s initial renewable portfolio standard (RPS) goal of 20% renewable resource-produced power by 2010 is going to be reached by the utility, which currently has 15% under contract and other negotiations ongoing.
“What we’re going to do is make sure those developer, in fact, follow through,” he said. “We’ll put money in these projects if financing becomes a hurdle for developers. And if the goal goes on to call for 30% RPS by 2020, you will see us at the corporation take a much more active role at that point in time. We’ll be looking closely at where SDG&E or one of the global companies can participate in that next round.”
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