With litigation from California’s energy crisis a decade ago now settled and an exit from commodity trading imminent, Sempra Energy’s remaining nonutility businesses face a mixture of challenges and opportunities as outlined by Sempra senior executives Tuesday during a conference call with financial analysts. During the call the company reported greatly decreased first quarter earnings compared to the same period last year (see Daily GPI, May 5).
Nearly half of the quarter-over-quarter earnings drop was due to a one-time, $96 million charge tied to the litigation settlement and even with continued robust earnings in its two California utilities, Sempra officials expressed some frustration that a major $1 billion-plus transmission project, Sunrise Powerlink, is still awaiting a final federal approval from the U.S. Forest Service, even though San Diego Gas and Electric Co. (SDG&E) had expected to have construction started by the end of the first quarter.
CEO Donald Felsinger said he was optimistic that the fact that the federal agency is taking more time on the final permit should be a good thing in the long run in making the approval “more litigation-proof.” He said the forest service is “making sure it has a complete record before issuing a decision, so the fact that they may take extra weeks or months may cause me frustration, but in the end when we get that decision it will be a better one. We don’t expect any other holdups, and we are sure we are going to get it.”
Among Sempra’s independent power generation, liquefied natural gas (LNG) and gas pipeline/storage businesses there were setbacks mixed with some success stories from the first quarter, but Felsinger made it clear there were some remaining hurdles to overcome. For example, since the Easter Day (April 4) 7.2-magnitude earthquake in North Baja California, Sempra Generation’s natural gas-fired Mexicali power plant has been offline awaiting the fabrication of ceramic insulators damaged in the quake. In the immediate aftermath, Sempra had said that its utility and nonutility facilities on both sides of the international border had not been hurt by the quake.
“There was some relatively inexpensive, but critical equipment [at the Mexicali plant] that was damaged in the quake,” said Felsinger, adding that he expected the plant to be back in service later in May (ironically, the plant had just finished a 40- to 50-day planned maintenance outage a day before the quake). Unrelated, Sempra’s generation business showed a $53 million loss for the first quarter, compared to a $43 million first quarter profit in 2009, due to a $84 million after-tax charge tied to the California crisis litigation settlement.
Felsinger indicated that Sempra is looking to expand on added land it owns surrounding existing gas-fired power plants in Nevada, Arizona and North Baja California in Mexico, noting it is already developing about 100 MW of solar around its El Dorado gas-fired plant in Nevada and another 600 MW of solar photovoltaic is being considered around the Mesquite gas-fired plant in Arizona. He did not rule out more nonutility gas-fired generation on adjacent lands, although under a current arrangement the El Dorado plant eventually is to be owned and operated as a utility plant by Sempra’s SDG&E.
Felsinger said Sempra now has about 11.5 Bcf of underground storage in operation that has been fully contracted and by the end of this year, it will have another 12.5 Bcf, “and we have already sold forward about 50% of that.” He said Sempra’s near-term opportunities would be to sell the added storage capacity going forward.
“And at some point in time if we find there are real opportunities in transacting around storage, we will also look at that business.”
Felsinger acknowledged that the forward storage market, and the natural gas market in general is “fairly weak” currently. “Prices are pretty low and volatility is flat. But as we continue to talk to customers, the long-term desirability of being able to store natural gas is something that customers are willing to contract for. We’re not seeing the prices [for storage] we were two or three years ago, but they are high enough to give us comfort that we can go ahead and develop other storage.”
Similar to storage, Felsinger responded to a question about Sempra’s latest deal with Gazprom and the Sempra Cameron, LA, LNG receiving facility by saying his LNG unit has been talking to various parties about doing something with unsold capacity at the Gulf of Mexico receiving facility that opened last year (see Daily GPI, April 23). The first deal was with the Qatar LNG producer for a series of shipments from the mid-part of last year through 2010.
The Gazprom deal allows the Russian-based LNG supplier to pay Sempra for the ability to be able to use the Cameron facility to bring in spot cargoes from time to time over the next few years. Felsinger said he could not give more commercial details on the agreement, but he thinks the deal “bodes well from a couple of standpoints — one being there is a lot of unsold LNG capacity in the Gulf [of Mexico] and the fact that we have two major players that want to transact with us I think says something about Sempra and the location of our facilities. These are all positive developments, but I can’t give more details on the financial arrangements.
“Basically, we will be getting fees over time to allow them to use our terminal and the opportunity when cargoes actually come in to make more money,” he said.
Regarding Sempra’s purchase of El Paso Corp.’s Mexican assets, including its joint venture with the government oil company, PEMEX, that closed last Monday, Felsinger said that the Mexican government has indicated it wants to dispose of its interest, and Sempra now has the right-of-first-refusal to buy the government’s share. If that comes up by the end of this year, Felsinger said Sempra would “take a hard look” at purchasing the added interest in two natural gas pipelines and a propane pipeline in northern Mexico.
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