As part of an internal reorganization, effective Jan. 1, 2005 Sempra Energy will consolidate its liquefied natural gas (LNG) projects into one business unit and merge its international businesses with a newly designated “pipeline/storage” business unit. Meanwhile, Sempra is pushing ahead with construction of its most advanced LNG project at Costa Azul in North Baja, Mexico.

With 100% of its projected 1 Bcf/d capacity fully contracted under two separate 20-year deals, Sempra’s North Baja LNG receiving terminal project, including a breakwater and large-diameter pipeline, is undergoing initial construction work prior to a deal being signed with a major engineering contractor. Construction agreements will be in place by the end of the year, according to Sempra CEO Steve Baum, speaking Thursday at a third-quarter results conference call with financial analysts.

The overall project costs for the terminal, pipelines and breakwater will be $900 million to $1 billion, said Baum, noting that eventually Sempra will use project financing. CFO Neal Schmale reiterated that Sempra intends at first to self-finance the Mexican-based LNG facilities.

Baum also said that there are active discussions with potential customers about expanding the proposed size of the facility, which involves sufficient extra land and the pipeline to be increased to 1.5 Bcf/d of capacity. “The incremental 500 MMcf/d capacity will cost significantly less than would a new LNG receipt facility, so we have taken this expansion potential into consideration in the design and engineering of the take-away pipelines,” he said.

“As we have put these (LNG) contracts together, we have always contemplated that we would like to have the option to do project financing,” said Sempra President Don Felsinger, who noted the company “later on” will decide when and whether to do project financing.

While the capital costs to Sempra have now doubled due to its development partner, Shell, dropping out of the terminal ownership and going to a 20-year contract for half of the terminal’s capacity, Baum said the risks going forward are principally construction and/or supply related. “We would certainly think that this project is project finance-able,” Baum said. “Particularly given the returns we expect to earn from it.”

CFO Schmale said the rating agencies have been fully briefed on the project, and they agree it can be project financed if the company decides to take that route. “They understand what we are doing, and we still have the ability to finance these projects with internal cash flow.”

With construction now getting underway at the Baja site, Sempra executives said they think lingering opposition from surrounding property owners will begin to die down and eventually wither away. The farther along the project gets, the higher the amount of bonds the groups and individuals seeking injunctions must pay.

“The cost of poker goes up over time,” Baum said. He called “frivolous” all of the attempts so far to legally stop the project. “None of these challenges have had any merit to them. They have been brought by people who wanted to sell us land or were unhappy with what we had paid them and wanted more.”

Felsinger said that Sempra’s earlier natural gas pipeline and power plant projects in Mexico drew similar opposition that went away after construction began. “This is not unexpected,” he said.

For Sempra’s two U.S.-based LNG receiving terminal projects, Felsinger would not specify when supply contracts would be announced for the Cameron, LA, project. The Port Arthur, TX, facility is still in the permitting stage. “We’re still in commercial discussions with numerous parties for Cameron,” he said. “There is nothing we can talk about now.”

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