As others pull back from market, Sempra Energy bucks trend, sets sights on AEP capacity in Texas

Platts T&D - 03/10/2004

Sempra Energy, the San Diego-based integrated firm that is on many analysts’ short-list of potential buyers of generating capacity, said last week it is interested in buying as much as 4,200 MW of generation assets from American Electric Power in Texas.

Sempra, in fact, seems to be on something of a roll, in contrast to a host of other firms who have sharply curtailed wholesale trading operations and are attempting to shed merchant units.

In an analyst call last week, Sempra Energy Chairman, President and CEO Stephen Baum boasted that the firm has seen its earnings per share grow by an average of nearly 20% annually since it was formed in 1998. “We achieved record financial results in 2003 and enhanced our already strong balance sheet,” he said.

In December 2002, Sempra bought the natural gas trading book of CMS, while Constellation two months later bought CMS’s book of power trades.

Last week in its earnings report, the company reported that its full-year 2003 trading margin in four products in North America, Europe and Asia was $538-million, compared to $476-million in 2002. The company did twice as much business in North America than elsewhere, and it did twice as much natural gas business than power.

Sempra has been building out its strategy of being a big supplier in the Southwest. It brought on-line new plants in Bakersfield, Calif., Mexicali, Mexico, and Phoenix, Ariz., with a total of capacity of 2,125-MW in 2003, bringing its total merchant capacity to just under 6,000-MW.

According to a recent report by ABN AMRO, there is currently some 56,600-MW of power capacity for sale in the U.S., with 21,500-MW of that up for grabs in Texas.

In that report, the ABN analysts argued that the management of many companies are “still too focused on deleveraging and rebuilding balance sheets to divert their energies elsewhere,” even though stockholders are “beginning to clamor for earnings growth again.”

The analysts said that there are seven companies that are currently “exceptions to the rule,” whose strong credit ratings and excess cash flow give them room to maneuver. Those seven are Sempra, Constellation, Dominion, Entergy, Exelon, FPL and Southern.

AEP’s Texas Central unit announced its asset auction in December 2002, and last month sold its 7.8% share of the 692-MW coal-fired Oklaunion Power Station to Golden Spread Electric Cooperative for $42.75-million. The remaining assets, however, include a 623-MW coal-fired plant, a 25.2% share of the South Texas Project nuclear facility, a small hydro facility and eight gas-fired plants ranging in size from 178 MW to 697 MW.

Under terms established when AEP completed its acquisition of utility Central and South West in 2000, AEP is to make its stranded cost true-up filing in September, 2004. The company hopes to recognize a significant stranded cost recovery. According to the ABN AMRO analyst report, “The book value of generating and associated regulatory assets is over $2-billion (about twice common equity) which makes stranded cost recovery a key issue. This will be a long process with an eventual sale of securitization bonds not expected to occur until April 2006 at the earliest.”

An AEP spokeswoman said the company was reviewing final bids and hoped to conclude the sales by year end. A Sempra spokeswoman would not comment further on what assets the company made bids on.

Earlier the previous week, Sempra Energy Resources said it was proposing to build an unregulated 1,450-MW, coal-fired plant near Gerlach, Nev.

The Washoe County Planning Commission considered a permit for Sempra’s project March 2. The project would be located near a major transmission line that runs from Oregon to California. A Sempra spokesman said earlier this month that the project was in the early stages and subject to change, and that the company has not yet bought land to build the plant, he said.

Also, Sempra has the permits needed to build a 500- MW gas-fired plant near Boulder City, Nev., according to the PUC. If built, the $400-million project would target customers in Nevada and other parts of the southwest.