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Sempra Energy

Michael Vellucci

14 February 2005

McIntire Investment Institute

Some Background Info

� Utilities company in southern California and parts of central California

� Based in San Diego, Sempra employs � Based in San Diego, Sempra employs 13,000 and has a 10 million+ customer base

� Utilities and Natural Gas Utilities Sector

Company Breakdown

Brief Financials

� Total Assets @ $22 billion

� Operating revenues @ $7.9 billion

� NI @ $649 million

� NI has steadily risen since 1999 from $394 � $591 � $649 million

Thesis Points

� I) SoCalGas

� II) San Diego Gas and Electric

� III) Sempra Energy LNG (SELNG)

SoCalGas, Thesis I

� It is one of the largest energy distribution companies

� Its size and position allow it to maneuver the southern California maneuver the southern California market with ease

� Its economy of scale provides a nice stability in an ever changing market with degrees of instability.

SoCalGas (cont’d)

� Contracts are long-term (20+ yrs) and reflect stability

� Extreme precision and efficiency; management operates with a management operates with a outstanding historical trend of ROE: 15%-16%

� 51% of Sempra’s TR and 35% of its NI is from SoCalGas

SDG&E, Thesis II

� The cash cow

� Provides electricity and gas to individuals throughout the greater San Diego metropolitan areaSan Diego metropolitan area

� Highest customer satisfaction in eight years

� Population demo: inflow of residents in Southern California and little outflow for the next decade

SDG&E – October 2003

� Cedar Wildfire — Killed 20 people, burned 700,000 acres, and destroyed 3,600 homes

� The areas affected by the fires included nearly 25% of service territorynearly 25% of service territory

� Crisis management techniques; 3,500 transmission and distribution poles and more than 400 miles of electric wiring

� Built onto an already outstanding customer service reputation

Sempra LNG, Thesis III

� This sector promises to expand rapidly throughout the late 2000s and into the next decade

� Sempra’s LNG subsidiary will be the � Sempra’s LNG subsidiary will be the driving force of the business well into the 2010s, the 2020s and the 2030s

� So what is LNG?

LNG – What exactly is it?

� LNG is short for liquefied natural gas which is super cooled (-260° F) so that its volume condenses

� Takes up 600x less the volume of � Takes up 600x less the volume of natural gas

� If shipping and storage costs can be reduced by liquefying gas, ALL costs will be reduced

SELNG

� Projected facilities: � Cameron LNG (Louisiana)

� Port Arthur LNG (Texas)

� Energía Costa Azul (Baja Calfornia), � Energía Costa Azul (Baja Calfornia),

� Translates into up to 5.5 billion ft3 per day of new gas supply capable of serving the North American market

SELNG – Costs

� Price Tags:� Energía Costa Azul @ $600 million; construction

2004, operation in 2008

� Port Arthur LNG @ $600 million; construction beginning in early 2006 and operation in 2009beginning in early 2006 and operation in 2009

� Cameron LNG at $700 million with construction beginning in 2004 and operations starting in 2008.

� However, added pipelines and other costs closer to $1 billion (MHeim)

Risks

� Sempra Energy Trading

� Regulation

� Sempra Energy LNG Ships� Ships

� Lack of buyers

� Lawsuits

Sempra Energy Trading, Risk I

� Point: Noted as biggest source of risk roughly 25% of SRE equity is tied here

� Counterpoint: 10% ROE for the past several years; some favor this branch because its unique structure can clutch Sempra out of a rut

Regulation, Risk II

� Point: SoCalGas, one of their two subsidiaries is limited in growth and production by regulated market

� Counterpoint: this subsidiary has returned on average more than 15%. ROE good indicator that Sempra is not severely constrained by California’s current energy situation.

Ship Construction, Risk IIIa

� Point: Limited by the availability of ships. there are a limited number of ships capable of transporting LNG

� Counterpoint A: contracting to start construction , the time required to build these ships is much less than the production plants which allows Sempra to have considerable time to maneuver and negotiate contracts.

Lack of Buyers, Risk IIIb

� Point B: Sempra’s prescribed facilities can be considered mammoths by their size and potential output, but what happens when they can not find buyers?what happens when they can not find buyers?

� Counterpoint B: in the process of signing sales-and-purchase agreements for all three terminals.

Lawsuits, Risk IIIc

� Point C: resistance in courts, lawsuits will have considerable drain on Sempra’s LNG resources

� Counterpoint C: Sempra works closely with the EPA and Mexico’s Comision Reguladora de Energía (CRE); they have already obtained all the necessary permits to begin construction on their facilities

Value Added Research

� SDG&E Customers � Edward Allison, Director of Business Development @ cBiz: Medical Management Professionals, IncManagement Professionals, Inc

� Analysts� Mike Heim, VP of AG Edwards and Sons

LNG Terminals

LNG Terminals

Questions / Comments

� Full analyst report online @

� http://orgs.comm.virginia.edu/mii/research/sre.pdf

� Questions and comments?