Coming off a remarkable year with solid liquidity, an in-the-black balance sheet and a growing energy trading business, Sempra Energy has begun shopping for assets. Year-end results last week boasted of a 14% earnings increase, and the company used its financial muscle to acquire Dynegy Inc.’s proposed liquefied natural gas (LNG) terminal project in Louisiana for only $20 million down.

What is giving rise to Sempra’s financial stability is in part due to its merchant unit, Sempra Energy Trading, which pushed the San Diego-based utility’s earnings into double digits last year. Strong trading gains were made in natural gas, metals and oil, the company said.

Sempra Energy Trading reported fourth quarter net income of $53 million, up from $10 million in 4Q01. A huge increase in trading activity toward the final half of the year, especially for natural gas, boosted the unit’s report, despite volatile market conditions. The results for the unit included a $14 million gain (8 cents a share for the year) after it acquired a metals trading business last year.

For the entire company, Sempra reported ’02 earnings of $591 million ($2.87 per diluted share), compared with $518 million ($2.52) for 2001.

“We finished 2002 with a healthy balance sheet, liquidity and cash flow to meet our planned operating needs,” said CEO Stephen L. Baum. “We have maintained solid, investment-grade credit ratings and access to capital markets, which enable us to grow our businesses and to take advantage of opportunities in the marketplace.” Baum noted that Sempra was “one of the few credit-worthy players in the industry with demonstrated capability in both physical and financial trading. Customers have recognized this. We are building market share and extending our reach globally.”

Baum said the company is confident that growth will continue this year. Sempra Energy is forecasting a 2003 earnings range of between $2.60 to $2.80. The company also announced a capital budget of $1.3 billion this year.

For the fourth quarter 2002, Sempra reported overall earnings of $148 million (72 cents), compared with $107 million (52 cents) for 4Q01. Excluding gains from the trading business, 4Q02 earnings increased about 25% from 4Q01. Corporate wide, 2002 revenues dropped more than $1 billion from a year earlier, to $6 billion from $7.7 billion in 2001, because of lower commodity prices reflected in subsidiary Sempra Energy Utilities. However, for the fourth quarter, revenues rose to $1.7 billion from $1.3 billion in the same period in 2001, as commodity prices rose and the company improved its wholesale trading sales.

Sempra Energy Utilities earned $415 million in 2002, up from $384 million in 2001. Both Southern California Gas Co. (SoCalGas) and San Diego Gas & Electric (SDG&E) finished the year with strong financial positions and exceeded their authorized returns on equity. Net income for SoCalGas last year increased to $212 million from $207 million in 2001 on lower interest expense. For the fourth quarter 2002, SoCalGas recorded net income of $45 million, compared with $51 million in the same time period in 2001.

Net income for SDG&E for 2002 increased to $203 million, compared with $177 million in 2001. Results in 2002 benefited from a $25 million tax benefit in the second quarter, coming from the resolution of a prior-year tax issue. For the fourth quarter, SDG&E reported net income of $53 million, versus $45 million for the same time period in 2001.

SDG&E’s regulatory balancing account linked to California state law AB 265 was reduced to $215 million as of Dec. 31, 2002. The account, which peaked at $750 million in 2001, represents uncollected wholesale power costs from California’s 2000-2001 energy crisis that SDG&E said it is entitled to recover from customers. The company projects that the entire under-collection will be repaid by 2005.

Sempra Energy Resources, the wholesale power generation subsidiary of Sempra Energy, reported net income of $60 million in 2002, compared with a loss of $27 million in 2001. For the fourth quarter 2002, Sempra Energy Resources reported break-even earnings, compared with a net loss of $13 million for 4Q01. Sales of power under the 10-year supply contract with the California Department of Water Resources (DWR) comprised most of ’02’s earnings.

In 2001, the company incurred a loss under the contract from selling power to the DWR at a discount to market prices. However, through 2005, about 85% of the peak-generating capability from Sempra Energy Resources’ facilities is sold forward.

Sempra Energy International, which develops and operates utilities in international markets, reported net income of $26 million in 2002, compared with $25 million in 2001. For the fourth quarter, the international unit posted a $4 million loss, compared with $14 million in earnings in 4Q01, mostly because of higher income taxes associated with foreign operations.

Sempra Energy Solutions, which offers an integrated mix of energy outsourcing and commodity services to large commercial, industrial and institutional customers, recorded net income of $21 million in 2002, up dramatically from net income of $1 million in 2001. Earnings were positively impacted by increased electric commodity sales nationwide. In the fourth quarter, Sempra Energy Solutions earned $10 million, versus earnings of $5 million in the same time period in 2001.

Meanwhile, newly formed Sempra LNG Corp. said it would acquire Dynegy’s proposed Hackberry LNG project for an initial payment of $20 million and additional contingent payments based on development milestones and performance. Pending approvals, commercial operation of the planned 1.5 Bcf/d facility is scheduled for early 2007.

The facility, which is expected to cost about $700 million to develop, will be sited along the Gulf of Mexico, with two docks and storage capability of 10.4 Bcfe. It already has received preliminary approval from the Federal Energy Regulatory Commission, with a final decision anticipated this year (see NGI, Dec. 23, 2002).

The Louisiana acquisition dovetails with Sempra’s planned North Baja LNG receiving terminal, for which the company expects a decision from Mexico’s federal energy regulators in July, according to a Sempra spokesperson. Hackberry has no designated source of gas, but Sempra at this point is not considering Bolivian supplies — its proposed source at North Baja — as viable for the Gulf Coast plant. The two projects are, however, on the same timeline for development with Baja projected to start in late 2006-early 2007. Together, Sempra expects to invest more than $1.3 billion for the two LNG projects.

A plant in Louisiana, however, will have no impact on the pending Mexican regulatory decision, the Sempra spokesperson said. “They are two separate projects,” with two separate Sempra subsidiaries — Sempra LNG Corp. and Sempra Energy International for Baja. “However, they’ll come on line pretty close to one another.”

Under FERC’s preliminary approval, Hackberry would operate under market-based rates and have the capacity to receive and vaporize 750 MMcf/d initially and be expanded to 1.5 Bcf/d later. Dynegy first announced plans to build the LNG terminal in July 2001 at its existing liquefied petroleum gas terminal located in Hackberry.

“As domestic supplies of natural gas fail to keep pace with energy demand in North America, LNG is going to become an increasingly important part of the energy supply mix for North America over the next decade,” said Donald E. Felsinger, group president of Sempra Energy Global Enterprises. “This strategic acquisition of the Hackberry project will provide us a solid foothold in this critical market.”

Darcel L. Hulse, president of Sempra LNG, said that the “biggest single challenge in meeting North America’s natural gas demand will be the siting and permitting of new LNG receipt facilities.” The Hackberry project “enjoys a good location, is well advanced in the permitting process and has received a precedent-setting preliminary approval from the FERC that provides much-needed flexibility for the development of LNG infrastructure.” Hulse added that the acquisition will “greatly accelerate” Sempra’s LNG plans in North America.

Sempra Energy International also has proposed building the Costa Azul LNG project in Baja California, Mexico, at a site about 14 miles north of Ensenada (see NGI, Sept. 16, 2002). The Costa Azul project is currently under review by Mexico’s national energy and environmental regulatory bodies. A ruling by Mexican authorities is expected by mid-year, according to Felsinger.

Together, Sempra’s Hackberry and Costa Azul LNG projects would process a combined total of 2.5 Bcf/d once they are operational. The closing of the Hackberry transaction will depend upon customary federal waiting periods, according to Sempra.

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