Sempra Energy is banking on a belief in the traditionalregulated pipes and wires business but with a couple of new twists.The holding company for San Diego Gas & Electric and SouthernCalifornia Gas is literally breaking new ground in North America,while buying into established utilities as far south as theSouthern Cone of South America.
Among the top two dozen energy firms around the nation, Semprademonstrated again this past month it is unique in itsaggressivenessin acquiring and developing small- to medium-sizenatural gas distribution companies far from its Southern Californiaroots. With its latest Chilean purchase of gas and electricdistribution assets for more than $800million, it now hasinterests in nine gas distribution systems and investments of morethan $1 billion outside of its two large California utilityoperations
In announcing the Chilquinta Energia acquisition of gas andelectric distribution assets, along with an interest in a largeChilean power generator, Sempra’s President Stephen Baum called theacquisition “strategic” and one that is profitable now with goodprospects for future earnings growth. “[It’s] a solid platform forgrowth in the rapidly expanding Latin American energy market, morethan doubling our investment in the region and adding substantialelectric utility assets to our already sizable portfolio of gasdistribution properties.”
Internationally, the company is looking for greater growth andleverage between gas and electric operations than are possible inmost areas of the U.S., said Sempra spokesman Michael Clark, addingthat his firm is focusing on two geographical areas: northernMexico and the “Southern Cone” of South America, including Chile,Argentina and Uruguay. “Generally, abroad we’re looking at areasthat offer higher growth rates than the U.S. and, in turn, offerhigher risk-adjusted rates of return. Obviously, the northeasternpart of the U.S. is an area of growth, too.”
In the energy industry none of the other large national andinternational companies have focused on this niche, according toindustry observers who are having a little trouble adjusting to thestrategy. “I thought the whole reason that Sempra was formed was toget out of too much reliance on that kind of business,” said RobertMichaels, an energy consultant and economics professor specializingin utilities at California State University, Fullerton. “I can’tthink of anyone else doing this. The distribution pipes are justgoing to be one of the last regulated pieces of capital around, andI don’t think with open access it necessarily provides anadvantage. I don’t really know what’s up their sleeves. I don’t seethe logic.”
Regulated or unregulated, Sempra obviously sees some growthpotential in digging into the basic business of buildingdistribution systems. In the U.S., Sempra now is buildingtransmission and distribution pipeline systems in parts of Maineand North Carolina that will be receiving natural gas for the firsttime. In total, there is more than a $100 million investment overfive years contemplated to offer service to a population of 120,000in 12 Maine communities as Bangor Gas, and a population of 150,000in seven counties of northwest North Carolina.
In Maine, Sempra is building the distribution system and signingcustomers in anticipation of gas flowing from the Sable Islandsupplies offshore as early as this fall or some time in 2000.Sable gas is also the source of another Sempra project across theCanadian border in Nova Scotia where it has committed to spendingup to C$1 billion over seven years to sign up about 75% of thepotential load in the province which includes a population of910,000.
Sempra proposes to build nearly 5,000 miles of plastic and steeldistribution pipelines to serve the province if it wins provincialapprovals. Hearings for competing gas proposals began April 12 andare expected to continue through mid-July. Both the Maine and NovaScotia projects are capitalizing on the fact that for the firsttime these areas will be next-door to supplies rather than at thewrong end of very long pipelines.
Between hearings last week, Andrew Rea, president of SempraAtlantic Gas, a joint venture competing to bring gas to NovaScotia, emphasized that he and his fellow executives at Sempra aresatisfied their offbeat niche strategy seems to be working. “Weare pleased our strategy finds us out front,” Rea said. “It issimilar to the one we are using internationally. We know it is aniche and eventually we expect others to follow.”
Internationally, in addition to the recent Chilean purchase thatincludes assets in Argentina and Peru as well, Sempra has two gasdistribution systems it is developing and operating in Mexico(Mexicali and Chihuahua), which eventually will total 994 miles ofpipeline serving 77,000 customers for about $64 million, along witha 10-year agreement to supply natural gas to the Presidente Juarezpower plant in Rosarito Beach, across the border in BajaCalifornia. It includes the construction of a $28 million, 22-mile,large-diameter pipeline from the border and a deal which over thelife of the contract could amount to a $1 billion in gas sales.
Sempra’s Michael Clark said his company’s strategy in northernMexico is to look for market opportunities on both sides of theborder, adding that the first two distribution projects in Mexicaliand Chihuahua are already profitable. In Argentina, Sempra owns a21.5% interest in two gas utility distribution operations servinga combined total of 1.2 million customers with a combined averagedaily sendout of 650 MMcf/d. And in Uruguay, Sempra has won the bidto spend between $150 and $200 million over five years to build anatural gas and propane distribution system throughout most of thecountry, except for the population center of Montevideo.
Most recently Sempra announced it is competing for a third gasproject to build a distribution infrastructure in Mexico to serveup to 50,000 customers through the La Laguna-Durango system.Mexico’s equivalent of FERC, the Energy Regulatory Commission(CRE), will announce the winning bid May 20. Richard Nemec,Los Angeles
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