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Sempra chases LNG cargoes as demand for long-term capacity ebbs

Sempra Energy, the utility owner that built gas-import terminals in Mexico and Louisiana, said it's seeking spot deliveries at its U.S. plant after a collapse in demand made it impossible to get long-term contracts.

“I don't think in this environment that anyone in their right mind would enter into a 10- or 20-year contract to use a terminal,” Chief Executive Officer Donald Felsinger said Thursday in an interview at Sempra’s headquarters in San Diego. “When there is enough terminal capacity available, you just contract for it and get the best price you can on a spot basis.”

Sempra (NYSE: SRE), which invested in liquefied-natural-gas and pipeline projects to spur growth outside its utility business, opened its $900 million Cameron LNG terminal near Lake Charles, La., in July. A 20-year agreement with Italy's Eni SpA to use 40 percent of the terminal’s capacity covers Sempra’s investment and provides a “small return,” Felsinger said.

Sempra's $1.1 billion Energia Costa Azul LNG plant in Baja California, Mexico, which began commercial operations in May 2008, has contracts for all of its capacity for 20 years.

“We think their decision to go into the LNG business was the right one,” said Lasan Johong, an analyst with RBC Capital Markets in New York who rates Sempra shares a “top pick.” “Given their contracted position in their LNG business, we believe the company will achieve project returns in the high single digits with upside potential to low double digits.”

Sempra rose 35 cents Friday to close at $49.43, leaving it up 15 percent this year. It's the No. 3 performer in the 15-member Standard & Poor’s 500 Multi-Utilities Index and is beating the 3.1 percent and 1.9 percent year-to-date gains by California utility owners PG&E Corp. (NYSE: PCG) and Edison International (NYSE: EIX), respectively.

LNG is natural gas chilled to minus 260 degrees Fahrenheit, putting it in a liquid state so it can be shipped by tanker from remote producing fields to consuming markets. The liquefied gas is than processed back into a gaseous state at terminals like Sempra's so it can be sent by pipeline to users.

There are nine U.S. LNG terminals open and five new plants or expansion projects under construction, according to the Federal Energy Regulatory Commission. Terminals were built when domestic gas production was failing to keep pace with growth in U.S. demand and officials such as Federal Reserve Chairman Alan Greenspan were saying more import capacity was needed.

U.S. LNG imports have failed to meet expectations, averaging less than the capacity of just one terminal.

New York natural-gas futures, which traded as high as $15.78 per million British thermal units in 2005, tumbled as the recession eroded demand and development of shale formations spurred a jump in U.S. production. The futures fell to a seven-year low of $2.409 Friday.

Sempra is among companies that have shelved terminal projects. Its planned plant in Port Arthur, Texas, was put on hold in 2007. According to FERC, the U.S. has 14 approved terminal projects that aren't under construction.

At the Cameron LNG plant, Sempra expects to sign more short-term agreements like one it recently inked with an affiliate of Ras Laffan Liquefied Natural Gas Co. to deliver as many as 50 cargos by the end of next year, Felsinger said.

U.S. imports of LNG may increase 42 percent this year to 500 billion cubic feet, as global gas production rises, the Energy Department predicted in an Aug. 11 report.

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