Sempra: A Smart Move in Utilities

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The company has also signed an agreement to acquire a 25% stake in the Sunstone project, a proposed 585-mile 1.2-Bcfd pipeline to transport gas from Wyoming to Western markets through an interconnection with other pipelines in Oregon.

Future opportunities include a REX pipeline extension east of Ohio, a 770-mile pipeline to connect the REX pipeline to the Chicago markets, expansion of the Liberty Gas Storage system, and development of additional storage projects, possibly in the Northeast or Gulf regions.

Sempra recently entered the natural gas storage business with investments in the $250 million, 15-Bcf Liberty Gas Storage facility, which is expected to begin commercial operations shortly. The $250 million, 17-Bcf Liberty South Gas Storage project is projected to begin operations in mid-2010, pending regulatory approvals. With the commencement of operations at many projects, Sempra expects a segment net income CAGR of 18% through 2012.

Sempra LNG

Sempra LNG owns and develops North American LNG receipt terminals. Its first project, the Energia Costa Azul LNG terminal, has an initial capacity of 1 Bcfd and has received approvals to expand to 2.6 Bcfd. Located on Mexico's Pacific coastline, the terminal has contracted 100% of its existing volumes for 20 years. A second project, the Cameron LNG terminal in Louisiana, will have an initial capacity of 1.5 Bcfd and is expected to be completed in late 2008. The terminal can be expanded to 2.65 Bcfd under current regulatory approvals. Currently, Cameron's capacity is 40% contracted for 20 years, and Sempra is seeking to contract the remaining capacity; the company believes it should be able to contract the remaining capacity by 2012. Sempra expects segment net income to turn positive in 2009 and then to grow rapidly through 2012.

Sempra also has the regulatory approvals to build a 3-Bcfd LNG facility at Port Arthur, Tex., but has delayed development because of lack of contracts. In addition, it is exploring the possibility of developing an import and export facility for crude, petroleum products, and liquid petroleum gases next to the proposed LNG site. Sempra expects that any expansions of the LNG facilities would become operational after 2012.

Sempra Generation

Sempra Generation owns 2,630 megawatts (MW) of natural gas-fired generation that serves the Southwest and Southern California. The plants' on-peak output is 75% contracted and off-peak output is 79% contracted through the third quarter of 2011, mostly under a California Dept. of Water Resources (CDWR) contract. At the end of the CDWR contract period, SDG&E plans to purchase the 480-MW El Dorado plant in Nevada for book value. As a result, Sempra estimates the segment's net income will decline about 23% in 2012.

There are several growth opportunities for the segment, in our view. The company is developing a 640-MW natural gas-fired combined cycle plant in Catoctin, Md., that is expected to become operational in 2011. Sempra believes the market's constrained transmission and growing demand will support the plant. Separately, California's renewable energy standards mandate that 20% of power supplies must come from renewable sources. As a result, the company has signed a contract with Southern California Edison to supply 250 MW from its La Rumorosa wind power project in Baja California, Mexico. The initial 250-MW phase of La Rumorosa is expected to become operational in mid- to late-2010. The company also has plans to develop an additional 750 MW.

RBS Sempra Commodities

On Apr. 1, 2008, Sempra Energy formed a joint venture with the Royal Bank of Scotland (RBS) by contributing its commodities trading business in exchange for a 49% share of the joint venture named RBS Sempra Commodities, the return of $1.2 billion in cash collateral, and a preferred earnings sharing agreement. RBS will effectively manage the venture, while Sempra will have veto authority over substantial changes to the joint venture.