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Risk Management Forum: Desperately Seeking Liquidity

Troubled markets drive defensive tactics.

Fortnightly Magazine - February 2009

20-year contracts with very good credits—namely BP, Shell and Eni—and hedged our positions in these large infrastructure facilities to make sure we get paid over time. We guaranteed our returns, not unlike what we’d get in the regulated utility business.

When you’re dealing in long-term assets, you have to think about how those assets will survive in various economic cycles. There will be times when they’ll be very much in demand and will do very well, and other times they won’t get used as much. We don’t like to take that risk. We like to lay it off on other counterparties or at least share the risk. About 75 percent of our LNG capacity is hedged for about 20 years. That puts us in a very good position to participate in upside if it happens to be there.

We issued debt offerings in November for Southern California Gas and at the parent company level. [ Editor’s Note:  In mid-November 2008, SoCal Gas issued $250 million in 5-year notes with a 5.5 percent coupon rate. At the same time, the Sempra Energy holding company issued $750 million in 5- and 10-year notes with 8.9 percent and 9.8 percent coupon rates, respectively.] We didn’t have to do it when we did, but my theory is that in a choppy market, you take what you can get, when you can get it.

On the regulated utility side, the good news is that if there’s a segment that’s been able to issue bonds at reasonable prices it’s been the A-rated utilities. SoCal Gas issued bonds at terms that weren’t terribly different from what we did a year or year and a half ago. So from a utility development standpoint, the access to capital and ability to execute on the building plan won’t be terribly affected by the credit crunch.

On the non-utility side, obviously capital costs are higher and the ability to borrow is more limited. That will affect plans for many companies. Most of what we’re doing we financed a good while back, and fortunately we’re in a very liquid position. We won’t have to access capital through 2009 and most of 2010. As a company we continue to make investments. We have adequate funding for our ongoing capital program, which totals about $2 billion a year. Our timing has been fortuitous. We’ll finish up our current capital program over the next two years, and the next round won’t start until 2011. By then I’d assume the capital markets will be operating on a more normal basis.

 

Fortnightly: What does the economic downturn mean for Sempra’s trading and hedging positions? To what degree will falling demand affect your resource requirements?

Snell: On the non-regulated side, we are a marketer of products. We’re in the oil, gas and metals businesses. We don’t have production, and our income isn’t dependent on the price of oil. We’re not so enamored with high commodity prices, but rather just continuing to move volume. So we continue to do pretty well. In fact, where there are some worries in the

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