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Shell Oil leasing half the Energia Costa Azul terminal in Baja, Mexico for 20 years…

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THE WALL STREET JOURNAL: Sempra’s Flow to Natural Gas Proves Timely

Investment in LNG
Comes as Utilities
Begin to Shun Coal
By REBECCA SMITH
April 7, 2008; Page B5

As utilities abandon plans to build coal-fired power plants, a big bet Sempra Energy has made on natural gas is turning out to be timely.
 
Sempra has been pouring money into natural-gas infrastructure. The big San Diego energy company is spending $2 billion on construction of the first liquefied-natural-gas receipt terminal on the West Coast and another in Louisiana. It has budgeted $1.2 billion for a 25% stake in a new gas pipeline — the Rockies Express — stretching from Colorado to Ohio, and $200 million for more gas storage in Louisiana.

“Sempra’s been investing in all the right areas,” says Faisal Khan, utilities analyst for Citigroup in New York.

It’s a far cry from 2005 and 2006, when coal was the hot energy source and power companies announced plans to build more than 24,000 megawatts of coal-fired power plants versus about 10,000 megawatts of gas generation, according to the Energy Information Administration, a part of the U.S. Department of Energy.

But rising worries about future restrictions on carbon-dioxide emissions and rising construction and fuel costs have turned the tables. Last year, utilities canceled plans for 13,880 megawatts of coal plants because of such concerns.

Meanwhile, gas demand by the U.S. power sector grew a hefty 10% last year, according to the Energy Information Administration.

Demand is expected to grow more slowly this year due to a softer economy and forecasts of a milder summer. Regardless, coal’s woes and the new popularity of gas have turned things in Sempra’s favor.

“We’ve been looking at the U.S. landscape and trying to anticipate the infrastructure needed,” said Don Felsinger, Sempra’s chairman and chief executive. Mr. Felsinger says he was surprised at how quickly opinion turned against coal plants. “We saw a more robust future for coal,” he says.

Gas-fired plants emit about half as much carbon dioxide as coal-fired ones and they can be approved and built more quickly and cheaply. High fuel costs, such as occurred in 2006 following the disruptions to gas production caused by hurricanes Rita and Katrina, still are major risk factors for gas generators. But some utilities feel they have little choice but to move forward with gas capacity to stay ahead of demand.

Liquefied natural gas, or LNG, is gas cooled until it becomes liquid and then shipped in tankers, opening the doors to a global gas market similar to the international flow of oil. Payback on the Sempra’s LNG investments begins this month when the new Energia Costa Azul terminal in Baja, Mexico, is expected to receive its first shipment of liquefied gas. Shell Oil Co., the U.S. arm of Royal Dutch Shell PLC, is leasing half the terminal for 20 years. Sempra is retaining control of the other half and is importing gas from Indonesia under an arrangement with BP PLC.

Next year, Sempra will receive its first LNG shipments at its Cameron terminal, under construction in Hackberry, La. Eni SpA, an Italian energy company, is taking 40% of the terminal in a 20-year contract and Merrill Lynch Commodities Inc. is taking up to 30%. The two terminals will boost North America’s LNG import capacity by 2.5 billion cubic feet a day, or about 40%.

It is unlikely either terminal will run at full capacity. Instead, the facilities will give gas importers the ability to arbitrage gas prices, unloading shipments where prices are highest. There are five LNG terminals operating in North America — four in the East and one in Alaska — and there are proposals for 40 more, including expansions of existing facilities and new ones. Many experts believe that a dozen, at best, will get built.

Sempra has structured its contracts to provide it with regular income. “They’ve done a lot to mitigate their risk but there’s still some exposure to LNG markets,” says Paul Patterson, analyst at Glenrock Associates LLC in New York.

LNG imports are expected to top 770 billion cubic feet this year, about the same as last year, led by gas from Trinidad and Tobago. New gas-liquefaction facilities in Qatar, Equatorial Guinea, Nigeria and Norway are expected to boost shipments next year by about 29% to about 995 billion cubic feet, according to the Energy Information Administration.

Sempra expects net income of $835 million to $1.07 billion in 2008 and $970 million to $1.12 billion in 2009. It expects to use $3.4 billion for share repurchases and dividends, including a 9% increase in its dividend, effective in July, to $1.40 a share annually.

Write to Rebecca Smith at [email protected]

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