Sempra Energy (NYSE: SRE) is a gas utilities company with holdings including the Southern California Gas Company (SoCalGas), San Diego Gas & Electric (SDG&E), Sempra Commodities, and Sempra Generation.
SoCalGas and SDG&E are both utilities companies, part of Sempra Utilities, and are government regulated. Gas utilities often have virtual monopolies in the regions where they operate, thanks to the high cost of utilities infrastructure; this makes government regulation necessary to prevent unchecked pricing power for these firms. While set rates guarantee steady revenues, it is also difficult for gas utilities to pass costs on to consumers since regulators must approve every rate hike before it goes into effect. Sempra Generation operates natural gas and nuclear power plants, which it uses to supplement its electric utilities' power-purchase contracts. As California becomes more intent on going green, Sempra will need to start adopting renewable energy sources; already the state is requiring that 20% of its electricity come from green sources by 2010, a goal which the company is only a quarter of the way toward meeting.
Sempra Pipelines & Storage is the company's gateway into the emerging liquid natural gas business. Sempra has three major terminals in development, giving it the jump on other pipeline companies who are spending on infrastructure to move more gas from American wells to American consumers. Sempra is partnering with Kinder Morgan to build a pipeline from the large reserves in the Rocky Mountains to the high price gas markets on the East Coast; the project is sure to command a price premium as E&P companies bid to use the potentially lucrative pipeline. Sempra Commodities is one of the company's most profitable businesses, but could bankrupt the company, as its involvement in the California Energy Crisis of 2000-01 has led to a $24 billion class-action lawsuit against which all the company's dismissal motions have failed.
Sempra is an energy holding company that operates through five reporting segments - San Diego Gas & Electric Company (SDG&E), Southern California Gas Company (SoCalGas), Sempra Commodities, Sempra Generation and Sempra Pipelines & Storage.
Second Quarter 2010 Results
Sempra Energy reported second-quarter 2010 earnings of $222 million, or $0.89 per diluted share, up from earnings of $198 million, or $0.80 per diluted share, in 2009. Second-quarter 2009 earnings included a charge of $64 million, or $0.26 per diluted share, for an asset write-off at Sempra Pipelines & Storage.
SDG&E’s service area covers 4,100 square miles. During the year ended December 31, 2009, SDG&E had 1.4 million customer meters consisting of 1,225,500 residential, 146,700 commercial, 500 industrial, 2,000 street and highway lighting and 4,500 direct access. SDG&E buys natural gas for its Palomar and Miramar generating facilities and for the Cabrillo Power I, LLC and Otay Mesa Energy Center LLC tolling contracts. SDG&E's 500-kilovolt (kV) Southwest Powerlink transmission line, which is shared with Arizona Public Service Company and Imperial Irrigation District, extends from Palo Verde, Arizona to San Diego, California. Mexico's Baja California system is connected to SDG&E's system via two 230-kV interconnections with firm capability of 408 megawatt (MW) in the north to south direction and 800 MW in the south to north direction.
Sempra Commodities is primarily comprised of the Company’s investment in The Royal Bank of Scotland plc (RBS) Sempra Commodities, a joint venture. It is a subsidiary of Sempra Global. The Company formed a partnership with RBS to purchase and operate the commodities marketing businesses, which comprised the Sempra Commodities segment. This business unit also includes Sempra Rockies Marketing, which holds firm service capacity on the Rockies Express Pipeline.
SoCalGas is a subsidiary of Sempra Energy. SoCalGas has natural gas franchises with the 243 separate counties and cities in its service territory. These franchises allow SoCalGas to locate, operate and maintain facilities for the transmission and distribution of natural gas. SoCalGas and SDG&E sell, distribute, and transport natural gas. SoCalGas provides natural gas storage services for core, non-core and non-end-use customers. Non-core customers at SoCalGas consist primarily of electric generation, wholesale, large commercial, industrial, and oil recovery customers. During 2009, SoCalGas added 27,000 customer natural gas meters. SoCalGas purchases natural gas from Canada, the United States Rockies and the southwestern United States. It also purchases some California natural gas production and additional supplies delivered directly to California for its remaining requirements.
Utilities tend to be highly regulated in the U.S., with the national government setting transmissions rates and state governments setting electric and gas distribution rates. These rules are designed to ensure both profitability for the company and accessibility for the consumer - necessary since gas utilities are essentially natural monopolies because of the high cost of infrastructure installation, but problematic since they limit the profitability of the utilities sector. Sempra, which operates only in California, is especially vulnerable to regulators, who ensure that the company's energy trading business does not conflict with its electric utilities business. Though California is known to have a relatively flexible regulatory body, any rate hike request from Sempra is likely to be taken with a grain of salt, since Sempra's commodities business benefits when electricity costs more - and since the company was allegedly involved in the California Energy Crisis.
Regulations are also used to control monopolists in the energy industry from using price manipulations to exploit customers - a practice which Sempra was accused of during the California Energy Crisis during the first years of the decade. Sempra is being sued for its involvement, and a final attempt by the company to stop the $24 billion antitrust class action lawsuit from going to trial has failed. As a result, Sempra will now face a jury relating to charges of conspiracy and market manipulation that precipitated California’s 2000-01 energy crises, both of which probably resulted from the company's utilities business trying to feed its commodities business. The civil action seeks treble damages of approximately $24 billion - $10 billion more than the company is worth by market cap.
In the face of environmental criticism of coal as a form of energy, many electric utilities in the U.S. are adopting natural gas as the fuel for their large-scale generators The supply to match this growing demand cannot be met solely through natural gas production in the U.S.; importing natural gas, however, requires the use of new technologies that convert the fuel from its gas form to a more-easily-transportable liquid form - liquid natural gas(LNG). Once LNG is in the U.S., it will need infrastructure to transport it and convert it back to gas. Sempra has already begun developing and installing the necessary pipelines and terminals.
Sempra is developing LNG receiving terminals in Baja, California, Cameron, Louisiana, and Costa Azul, Mexico. Another LNG terminal with a daily processing capacity of 1.5 bcf of natural gas will be developed at Port Arthur, Texas. These terminals will allow the company to receive LNG from South America, where countries like Venezuela and Brazil have been making large gas reserve discoveries and natural gas production is predicted to surge. The company also intends to operate its Liberty Gas Storage LLC natural gas storage facility in the Gulf Coast region, allowing companies to inventory their natural gas to balance supply and demand and reduce some of the sector's price volatility. Furthermore, Sempra Global has signed a memorandum of understanding with Gazprom, the largest natural gas producing company in the world, to cooperate in the delivery and associated marketing of LNG in North America. With the infrastructure already in place to begin receiving large quantities of liquid natural gas and the partnerships to bring it in, Sempra is betting on natural gas to boom as the next big source of energy in the U.S.
Sempra Pipelines & Storage and Kinder Morgan, have proposed to build a new natural gas pipeline, linking the producing areas in the Rocky Mountain region to the upper Midwest and Eastern United States. These two regions are known for having particularly high gas prices; with colder, stormier winters than the rest of the country and no dry season, they have particularly high demand for gas utilities, and gas utilities in the region to have particularly high demand for natural gas. High demand means high prices, so natural gas production companies prefer selling in these two regions to any other region in the country; higher prices also mean that production companies will be willing to pay a premium to transport their product to the desired market. The Rocky Mountain Express Pipeline is planned to link some major Rocky Mountain gas reserves almost directly to the strongest markets in the country, making its operators potential benefactors of this delivery premium.
SDG&E has signed several major power-purchase contracts, including an agreement with enXco and Covanta. Sempra Generation also signed a 20-year agreement to provide Southern California Edison with up to 250 megawatts (MW) of wind power generated at the La Rumorosa Wind Power facility under development in Baja California, Mexico. Additionally, SDG&E reported that it has received nearly 5,000 megawatts (MW) of renewable-energy-supply proposals in response to the utility's most recent renewable Request for Offers (RFO) solicitation. Twenty-six states around the country have adopted Renewable Portfolio Standards in response to public outcry over rising energy prices and fears about climate change. California, where Sempra operates, passed a legislative mandate that 20% of the state's energy come from renewable sources by 2010. These standards most greatly impact electric utilities and energy producers, as these companies must spend millions on renewable power installations and contracts. Currently, Sempra has contracted 232 MW of renewable energy from sources like biomass and wind, making up about 5% of the company's total power portfolio; Sempra also generates 430 MW of power from its own nuclear power plant, though nuclear energy is not included in California's definition of "renewable energy" and so does not apply toward the Portfolio Standard. Currently, Sempra still has to shift 15% of its electricity production to renewables, and it has just two years to do so.
As a holding company, Sempra competes in a number of industries.
In the gas transportation industry, Sempra competes with Enbridge, Questar, Oneok, TC Pipelines, and Transcanada Pipelines. Currently, all these companies own and operate gas transport infrastructure in the Rockies, though Enbridge and Questar are vying to build the Rockies Alliance Pipeline, which would compete directly with the Rockies Express Pipeline, possibly lowering the premium that the latter would have otherwise commanded.
High infrastructure costs make Sempra a monopolist utility in the regions it services, though government regulation keeps the company from exploiting customers with high prices. The largest electric utilities in California include PG&E, Calpine Corporation, and Southern California Edison.
Major gas utilities include
|AGL Resources||Atmos Energy||Energen||Equitable Resources||National Fuel Gas Company||ONEOK||Sempra Energy||Southern Union Company||National Grid Transco|
|Total Revenue (Millions)||$2,494||$5,898||$1,435||$1,361||$2,039||$13,488||$11,438||$2,617||£8,778|
|Gas Delivered (Bcf)||319||297.3||82.7||49.5||38.98||176.55||N/A||56.2||N/A|
|Number of Utilities Customers (thousands)||2,271||3,187||451||274||725||2,050||N/A||552||11,571|