Priding itself on “delivering results, not promises,” San Diego-based Sempra Energy laid out a bullish outlook for both its cash-cow utility and merchant sectors, confident for the most part that it has the flexibility and financial strength to maintain a successful mix of utility, merchant energy, trading, international and energy services businesses, along with becoming a gatekeeper of liquefied natural gas (LNG) imports in North America.
“In the five years of Sempra’s existence, we have achieved performance that few in our industry have,” said Sempra CEO Stephen Baum, citing 2003 earnings that showed strong growth, particularly at the two major utilities, San Diego Gas and Electric Co. and Southern California Gas Co.
In response to questions about future financing needs, Sempra CFO Neal Schmale said the company is “really in good shape” because of its major business units generating steady cash streams, giving the company “a lot of financial flexibility.” It does not anticipate having to raise large amounts of new equity or debt unless one of the prospective acquisitions it reviews on an ongoing basis is large enough to require that, both Baum and Schmale said in response to questions.
Baum reiterated that Sempra’s previously announced interest in some of the assets involved in the AEP auction would be done with a private investment equity partner.
Baum was particularly bullish about LNG’s expected returns on equity (12% to 13%) and the prospects for lining up suppliers because many are anxious to talk and to become equity partners in the receiving terminals if they can, although Sempra does not feel the need to give up any of its equity. “We think these are pretty good investments,” Baum added.
However, Baum also reiterated that the company will not go forward with either its North Baja (joint venture with Shell) or Cameron, LA, LNG projects without “an assurance of at least a return of our investment through our contracting strategy, and we would fully expect to be there on our construction schedule,” which calls for a start of construction on one or both of the terminals later this year.
“We’re looking at other assets in the country that fit with our LNG strategy,” Baum said. “So we do have a fair confidence level in our projected capital investment levels up to the $1.1 billion level. Beyond that level we are not specifically identifying any projects.” (An estimate of $170 million for LNG from that $1.1 billion of capital costs for the year is based on starting construction at both sites this year, according to Donald Felsinger, Sempra’s president of global businesses.)
A lot of Sempra’s nonutility capital for the year is still “unallocated,” Felsinger said. “We have several opportunities that we are pursuing, but at this time we have made no commitments.” In response to a specific question from an analyst, Felsinger indicated that any acquisitions most likely would be investments in existing assets — not greenfield projects.
Sam Brothwell, in a Merrill Lynch report on Sempra noted it was remaining neutral in terms of buy/sell recommendations, but it believes “there is upside potential to the shares,” despite the fact that Sempra has some issues to address, “and despite a steady track record, has difficulty getting credit for its nonutility earnings.” Nevertheless, it was Brothwell’s conclusion that “over a longer time horizon, (Sempra) presents an attractive profile, albeit with some near-term earnings hurdles.”
In discussing the relative development of the Baja California and Louisiana LNG terminals, both of which have the needed construction permits, but now need long-term supply contracts, Baum gave some insights into how deals might be structured in the preliminary discussion with BP and Indonesia on supplies for the proposed Baja terminal.
The talks are for the equivalent of 500 MMcf/d of throughput, with a split discount, including both a fixed portion and a variable portion. “So in effect, we are allocating the risk/opportunity with BP and Indonesia on price movements,” Baum said. “Those fixed and variable discounts will lead to a defined California indexed price.” (The fixed part will be the number of cents discounted to the index, and variable will be a percentage discount to the index, so the risk and opportunity is allocated between the terminal operators and the shippers.)
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