An internal analysis indicates that Sempra Energy’s California utility natural gas pipeline system is safe, and its strategic assessments indicate there is plenty of room for growth within utility operations, Sempra Energy’s new CEO told financial analysts on a conference call last Tuesday.

In response to state and federal regulatory mandates tied to the natural gas pipeline rupture last year in San Bruno, CA, Sempra’s California utilities have completed reviews and tests of their system in the southern half of the state, concluding that current operating pressures on pipes in highly populated areas are safe and appropriate, CEO Debra Reed said. The San Diego-based energy holding company will continue to look for other opportunities in “contracted energy infrastructure” investments, Reed said.

While reporting robust growth in second quarter earnings from a year earlier, mainly due to a one-time gain of $277 million, Reed noted that her first major focus is to complete an annual five-year strategic outlook, looking closely at all of Sempra’s assets: utility and nonutility, and gas and electric.

Earnings with the one-time 2Q2011 gain were $511 million ($2.12/share), compared with $222 million (89 cents) for the same period in 2010; without the added $277 million, earnings increased 9% (97 cents).

Reed said that so far the Sempra utilities have satisfied the California Public Utilities Commission’s (CPUC) mandate that all gas pipeline in heavily populated areas have the appropriateness of their maximum allowable operating pressures (MAOP) verified through extensive record searches and/or hydrostatic testing. This includes 1,600 miles of the 4,000 miles of transmission pipelines in the system owned and operated by Southern California Gas Co. (SoCalGas) and San Diego Gas and Electric Co. (SDG&E).

“We conducted an extensive review that renewed our confidence that the MAOP has been appropriately set according to current standards and regulations, and that we operate our system safely,” said Reed, noting that the Sempra utilities also on Aug. 26 will file with the CPUC implementation plans for the testing or replacement of all pipeline systems that have not been pressure tested.

Reed said one of the objectives of her five-year strategy review is to look for new opportunities that could come from the changing energy landscape. She said new opportunities for natural gas-fired electric generation are likely to come from the combination of the new federal environmental standards forcing closure of more U.S. coal-fired plants and the nuclear plant fallout from the Japanese earthquake-tsunami in March.

Reed did not discount more investment in Latin America where Sempra has been expanding its footprint in Mexico, Peru and Chile, nor is a liquefied natural gas (LNG) export project in the United States off the table. She indicated that Sempra is currently exploring possibilities in all of those areas.

In response to questions about the development of future partnerships to expand Sempra’s ongoing involvement in interstate gas pipelines, storage and LNG projects, Reed said these were exactly the types of issues Sempra’s senior management team is looking at as part of its five-year strategies. “We’re looking at every asset we have, and what is the best structure for that asset,” she said. “We’re looking at which assets we can add assets to and increase the value, and what is the best way to maximize the value of our existing investment.”

This prompted the obvious question about Sempra joining others in the industry in pursuing the development of LNG liquefaction facilities at its existing Cameron, LA, import terminal.

“That is a possibility,” said Reed, but only if it includes long-term contracts from a creditworthy counterparty. “Don [Felsinger, former CEO] has said we are not going to do this without long-term contracts, and I concur. But it is certainly something we are currently looking at with other parties.”

Regarding the post-San Bruno work, Reed said the utilities expect to recover all of their future added costs related to the gas pipeline system, and that potentially there are “several hundreds of millions of dollars annually” that may be spent on upgrading the gas infrastructure. “Ultimately, it will be up to the CPUC to set the appropriate levels of investment going forward,” she said.

In response to a specific question from an analyst related to whether Sempra’s utilities have any potential pipeline problems similar to what Pacific Gas and Electric Co. has encountered in its review, Reed was emphatic about there being no similar concerns in the southern part of the state’s major gas transmission pipeline systems. A CPUC audit of the Sempra system gave it a clean bill of health, she said.

“We’ve gone through a thorough review with the same [CPUC] reporting requirements [as PG&E], and we have not found anything that concerns us in terms of our past practices or how we operate our pipelines,” Reed said. “We operate our system very safely.

“We have looked at the ‘lessons learned’ from the San Bruno incident, and we are making modifications as we move forward in areas where we think we could improve our responsiveness if something like that occurred, but we have not found any big concerns at all regarding the way we operate our system. We just had a recent audit by the CPUC, and they didn’t find any concerns either.”

In it foreign ventures to the south, Reed said as an outgrowth of existing joint projects Sempra has with Mexico’s national oil company Petroleos Mexicanos (Pemex) the company is exploring some future growth projects. “There has been no additional movement in terms of them ending the partnership, and as long as we remain in the partnership, we believe there could be a number of projects that we could do jointly.”

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