San Diego Aug 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Sempra Energy earnings conference call or presentation Tuesday, August 4, 2015 at 5:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Rick Vaccari Sempra Energy - VP, IR * Mark Snell Sempra Energy - President * Joe Householder Sempra Energy - EVP & CFO * Octavio Simoes Sempra Energy - President, Sempra LNG * Dennis Arriola Sempra Energy - CEO, SoCalGas * Steve Davis Sempra Energy - President, SDG&E ================================================================================ Conference Call Participants ================================================================================ * Julien Dumoulin-Smith UBS - Analyst * Neel Mitra Tudor, Pickering, Holt & Co. - Analyst * Steve Fleishman Wolfe Research - Analyst * Greg Gordon Evercore ISI - Analyst * Michael Dandurand Goldman Sachs - Analyst * Matt Tucker KeyBanc Capital Markets - Analyst * Faisel Khan Citigroup - Analyst * Mark Barnett Morningstar - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Sempra Energy second-quarter earnings results conference call. As a reminder, today's conference is being recorded. At this time I would like to turn the conference over to Rick Vaccari. Please go ahead. -------------------------------------------------------------------------------- Rick Vaccari, Sempra Energy - VP, IR [2] -------------------------------------------------------------------------------- Good morning and welcome to Sempra Energy's second-quarter 2015 financial presentation. A live webcast of this teleconference and slide presentation is available on our website under the investors section. With us today are several members of our management team. Mark Snell, President; Joe Householder, Chief Financial Officer; Martha Wyrsch, General Counsel; Trevor Mihalik, Chief Accounting Officer; Dennis Arriola, Chief Executive Officer of SoCalGas; Steve Davis, President of SDG&E; and Octavio Simoes, President of Sempra LNG. Before starting, I would like to remind everyone that we will be discussing forward-looking statements on this call within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. The factors that could cause our actual results to differ materially are discussed in the Company's most recent 10-K and 10-Q. It is important to note that all of the earnings per share amounts in our presentation are shown on a diluted basis and we will be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call and to Table A in our second-quarter 2015 earnings press release for a reconciliation to GAAP measures. I would also like to note that the forward-looking statements contained in this presentation speak only as of today, August 4, 2015, and the Company does not assume any obligation to update or revise any of these forward-looking statements in the future. With that, please turn to slide 4 and let me hand the call over to Mark. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [3] -------------------------------------------------------------------------------- Thanks, Rick. To start off I want to mention that Debbie is not joining us today. She had a medical issue with her left eye that required attention and treatment this morning. She apologizes for not being able to make the call, but we all realize health issues come first. I will be filling in for her today and so now we will get on with the call. Our financial performance for the second quarter was very strong. Earlier this morning, we reported second-quarter adjusted earnings of $260 million or $1.03 per share. As you may recall, these figures include the impact from applying seasonality to the SoCalGas revenues in 2015. While this change does not affect full-year earnings for SoCalGas, it results in almost all of their earnings being reported in the first and fourth quarter of the year. Specifically, the impact from seasonality was $48 million of lower earnings this quarter and $65 million of higher earnings year-to-date. Given our solid financial results in both the first and second quarters, we are on track to achieve our 2015 adjusted earnings guidance. Today I would also like to emphasize that just six months into the first year of our current five-year plan we have already secured five new projects that are additional to the base plan we presented at the March analyst conference. At US Gas & Power we have added two new solar projects at our Mesquite facility in Arizona. This adds to the Black Oak Getty Wind project we announced last quarter. In Mexico, IEnova was awarded another CFE pipeline project in July and last week IEnova agreed to purchase Pemex's 50% equity interest in IEnova Pemex joint venture. In addition, we are working on the steps needed to advance our potential LNG projects, which could extend growth beyond 2019, and our California utilities have made headway on the GRC and rate reform initiatives. We are all really pleased with our progress and will discuss our development projects in more detail as we proceed. First, let me begin with a regulatory and operational update, including a discussion of our progress in achieving our base plan. Please turn to slide 5. Our California utilities are making steady progress on their general rate case applications. Since our last call, we have completed evidentiary hearings and are well situated to receive a timely decision. Briefs are due in August and September, with the draft decision scheduled for year-end. After participating in the hearing process, we believe our recommendations make a compelling case in support of the state's priorities around safety and reliability. Please turn to slide 6. Turning to one of SDG&E's highest priorities, the CPUC approved a final decision on rate reform in July. The decision implements electric rates that are more fair and sustainable. We provide a summary in the appendix, but key outcomes of the decision include a reduction in the number of tiers from four down to two, an annual reduction in rate differentials between the lowest and highest tiers, minimum monthly bills, and a process to study and implement time-of-use rates. The decision directs all the state's electric utilities to implement initial changes no later than November 1, 2015. Yesterday, net energy metering tariff proposals were also filed by all parties. Once approved, the tariffs will determine how customers with new distributed energy resources will pay for utility services they received. SDG&E's suggested tariffs would apply to all new net energy metering customers by 2017. Though we expect a final decision by year-end, it could extend into the next year. Let's now go to slide 7 for an update on base plan projects and our other businesses. We are really executing well on our five-year plan. Since our last earnings call, two more projects are in service. In Mexico, the 155 megawatt ESJ wind project reached commercial operations in June and in the US 1.2 BCF per day of East-to-West capacity on the REX Pipeline was placed into service over this last weekend. In addition, we closed the sale of the remaining block of the Mesquite power plant in the second quarter. We received $347 million in net cash proceeds and recorded a $36 million after-tax gain on the sale. As discussed last quarter, this gain is not included in our 2015 adjusted earnings guidance. Please turn to slide 8 for an update on our development opportunities. We are pleased to announce that we have secured several development opportunities this quarter that are additional to our base plan. In Mexico, IEnova was awarded a new CFE pipeline project in July. The project represents an investment of about $110 million and is expected to be in operations in the first half of 2017. CFE has announced that two more pipelines will be awarded in August and September, one of which interconnects with the pipeline we just won. Five more pipelines are scheduled to be awarded later this year. You can refer to the table in the appendix for details. In addition, on Friday we announced that IEnova has agreed to purchase Pemex's 50% equity interest in their shared joint venture. The transaction is expected to close later this year. As noted in our recent press release, IEnova agreed to purchase the business for approximately $1.3 billion subject to certain terms and conditions. IEnova and Pemex will also maintain a 50/50 JV for the continued joint development of the Los Ramones Norte pipeline and other future infrastructure projects. As a result of the transaction, IEnova will own 100% of six purchased assets, five of which are currently in operation. The assets are covered by long-term dollar-based contracts. The acquisition is expected to be about $0.05 accretive to Sempra Energy's earnings in 2016, growing to about $0.10 per share by 2019. IEnova expects to finance the purchase with a combination of equity and debt. The acquisition provides several important benefits: an ongoing relationship with Pemex for future development projects, opportunities for asset optimization and expansion into areas such as the transportation and storage of refined products, and a larger platform and presence in Mexico to participate in energy sector reform. Moving to US Gas & Power, we are pleased to announce contracts on two new renewable projects at our Mesquite solar facility in Arizona. Mesquite Solar 2 will be 100 megawatt project secured by a 20-year PPA. Mesquite Solar 3 will be a 150 megawatt project secured by a 25-year PPA. Both PPAs are with creditworthy counterparties and we expect the projects to be in service by the end of 2016. And, finally, I will note that we are working diligently to prepare our S-1 filing for Sempra Partners. Securities laws, however, prohibit us from discussing the matter further. Let's now go to slide 9 for a discussion of our LNG development process. LNG development continues to be a terrific long-term growth opportunity with very large potential for upside for Sempra. While the development process takes time and can vary between projects, we are making solid progress on all three of our liquefaction initiatives. Since LNG development continues to be a hot topic for investors, we've provided this slide to illustrate the process needed to advance a project to FID, or final investment decision. Cameron Expansion is the project that is furthest along, so we use that project as an example. But before walking you through the slide I want to reiterate a couple key themes. First, while projections for global LNG demand are lower than a few years ago, industry forecasts continue to show large, uncontracted demand post 2019. These forecasts already include competing sources of supply such as the restart of some of Japan's nuclear fleet, more coal and renewable development in Asia, growing pipeline imports into customer markets, and indigenous shale gas sales. Second, US Gulf LNG projects are regarded as the most competitive source of global supply, both in cost and in flexibility. And, third, we are receiving strong interest in our projects from large buyers of LNG for delivery in the 2019 and beyond timeframe. Now moving to the graphic on this slide, we have illustrated key work streams related to project costs and design: permitting, marketing, and financing. You will notice that each category is interrelated. EPC project cost estimates and lenders consents are needed in order to finalize customer contracts. Agreements with customers on tariffs, in-service dates, and quantities are needed to finalize financing commitments; and financing terms and regulatory approvals are needed to make the final investment decision. Completion of each of these work streams is what enables us to take a project to achieve FID. For Cameron Expansion, we are targeting FID in late 2016. Our Cameron joint venture is currently permitting trains four and five, but the project could begin with one or two trains depending on total market interest. Cameron Expansion is well-positioned as one of the lowest-cost sources of global LNG supply. This is due to the economies of scale and adding more trains to an existing facility, the opportunity to benefit from continuous construction at the site, a simpler permitting process, an access to low cost of capital, and of course, inexpensive North American gas. Moving to other LNG development projects, we've continued to actively develop the Port Arthur project and have submitted the initial filings at both DOE and FERC. Market interest in this project remains strong as it offers different offtake and ownership opportunities than those available at Cameron. In June, we also announced an MOU with Woodside Petroleum to work on the feasibility of developing the project together. For ECA, we are working with the Mexican government in the development of all the regulations and conditions needed to support liquefaction and exports of LNG from Mexico. We have completed a number of studies on technical feasibility and market interest for this whole West Coast brownfield site. Together with Pemex, we continue to advance the development work and are now sharing costs. Now with that let's turn to slide 10 for a discussion of the quarterly earnings. Joe? -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [4] -------------------------------------------------------------------------------- Thank you, Mark. Earlier this morning we reported second-quarter earnings of $295 million or $1.17 per share. On an adjusted basis, we reported second-quarter earnings of $260 million or $1.03 per share. Second-quarter earnings in 2014 were $269 million or $1.08 per share. Adjusted earnings this quarter exclude two items. First, we recorded a $36 million after-tax gain on the sale of the remaining block of the Mesquite power plant. Second, as I noted last quarter, we are adjusting earnings for expenses relating to the development of our three proposed LNG liquefaction projects. While our cash expenditures have been consistent with costs for the LNG development activities we have undertaken thus far, we have recorded $1 million of after-tax expense in the second quarter of 2015. This number reflects the fact that certain costs are being capitalized and certain other costs are being shared with our Cameron joint venture partners and Pemex. I also want to note that compared with the same period last year, second-quarter earnings now reflect the impact of seasonality in SoCalGas revenues. As Mark mentioned earlier, this impact resulted in $48 million of lower earnings this quarter and $65 million of higher earnings year-to-date. Looking to the third quarter please be aware that we could report a loss for SoCalGas due to seasonality. You can refer to the appendix for additional detail, where we illustrate 2014 SoCalGas earnings had seasonality in revenues been applied. As the appendix shows, third-quarter 2014 earnings would have reflected a loss in the third quarter, though there was no impact on a full-year basis. Overall, we are on track to achieving our 2015 adjusted earnings guidance, given the strong financial performance we have had year-to-date. Finally, before proceeding I want to mention that we expect to report a one-time, non-cash gain next quarter that will step up our investment to fair value related to IEnova's purchase of Pemex's interest in their joint venture. The size of the gain has not yet been determined and is not included in our 2015 adjusted earnings guidance. Please turn to slide 11. Individual financial results for each of our businesses can be found in this section of our presentation entitled business unit earnings. I will address here the key drivers for our consolidated earnings this quarter. Sempra International recorded $19 million of higher earnings, primarily from the Los Ramones I pipeline and a section of the Sonora pipeline in Mexico that are now in service. SoCalGas recorded a $13 million retroactive benefit for 2012 to the first quarter of 2015 from higher rate base. Approval of this benefit by the PUC was contingent upon receiving a favorable private letter ruling from the IRS, which we received in April. SoCalGas also had $10 million of higher operational earnings from higher CPUC margin, net of operating expenses, and higher AFUDC equity earnings. Offsetting these positive factors were two items: the $48 million seasonality impact that lowered SoCalGas's 2015 earnings and $11 million of lower net investment earnings at the parent on assets in support of our retirement obligations. Now let's conclude with slide 12. Overall, our financial and operating results for the second quarter continued to be very strong and consistent with our 2015 adjusted earnings guidance of $4.60 per share to $5 per share. Excluding the impact of seasonality in SoCalGas's revenues, our second-quarter adjusted earnings increased significantly compared to the same period last year, driven largely by increased operating results at both Sempra International and SoCalGas. Across the Company we have made excellent progress on our base plan and continue to capture additional development opportunities. As we look forward to the remainder of the year, we are working diligently to capture more development opportunities that can provide upside to our base plan in the near term. In addition we will continue to work toward advancing our LNG projects that could extend this growth beyond 2019. With that, we will conclude our prepared comments and stop to take any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Michael Weinstein, UBS. -------------------------------------------------------------------------------- Julien Dumoulin-Smith, UBS - Analyst [2] -------------------------------------------------------------------------------- Good afternoon. It's Julien here. I suppose first question here out of the gates, obviously the IEnova is a pleasant development. But curious; you are providing the bridge loan, but ultimately how are you thinking about your ownership stake in IEnova pro forma for the latest deal? But probably more strategically, how are you thinking about that down the line as you think about the 80-ish-percent you own today? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [3] -------------------------------------------------------------------------------- I'm going to let Joe handle that question in detail, but let me just say off the bat that we are expecting to finance this at the IEnova level. And even if we don't participate in the thing, and I'll let Joe explain what we're thinking there, but even if we didn't it would still be accretive to us. But Joe why don't you give some more details on that. -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [4] -------------------------------------------------------------------------------- Thanks, Mark, and hi, Julien. This is very important and we are studying the issue. We really like this deal and so we would like to participate in the deal. We are looking at what the market is going to be like over the next couple months. We've gotten a lot of confidence from the banks we've work with on this transaction, and I think our current view is we will participate in the equity offering. We know that a number of our IEnova investors want to have more liquidity, so we have said all along that if we have a large project, this would enable us to go back out to the equity markets. And so we're going to have an equity offering. I believe we will participate. What I'm currently thinking is we have a dividend coming later this week from IEnova. It will come to our Mexican holding company and I think we will use that cash, plus some other cash, to participate in the offering. We haven't decided the firm amount yet. We want to see how the shares are doing and how the market is, but we definitely will participate. And as Mark said, this is going to be accretive either way. -------------------------------------------------------------------------------- Julien Dumoulin-Smith, UBS - Analyst [5] -------------------------------------------------------------------------------- Great, excellent. Turning to the LNG story. Curious, you mention on the slides here, for instance, one or two trains at Cameron. I suppose, as it relates to the project, what is your confidence level as it relates to the one or two trains? Then, secondly, in terms of conversation, are you still expecting that you tacitly acknowledge to the Street one way or another, perhaps by 4Q or 1Q next year, a decision? I know you indicate FID by second half of 2016, but just want to be very clear about your communication intentions. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [6] -------------------------------------------------------------------------------- Well, with respect to trains four and five, we have this partnership that owns the facility. We own 50% and our partners own the other 50%. Currently, through trains one through three, our partners have all of the capacity. With respect to trains four and five, we have a right -- Sempra has a right to 50% of the capacity. We are highly confident that we are going to be able to market that capacity and we are actively doing that now, and therefore, we know that at least one of the trains will go. Whether our partners decide to market that extra capacity or not is entirely up to them and we don't control that, but Octavio, if you would like to comment on any of that, maybe fill in. -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [7] -------------------------------------------------------------------------------- Sure. I think Mark covered the big topics and that is that the ownership has decided to go forward with the expansion. We have 50% of that expansion capacity, roughly 4 million tons. The partners, the remaining partners have 4 million tons as well. What they are doing with their capacity depends whether they want to put it in the market, if it fits in their portfolio or not. We are actively pursuing it. We're encouraged by all the things we're finding in our current negotiations. And so at the end of the day, I think the slide reflects that we will go back and say, okay, Sempra is taking on the 4 million tons that we are allotted to. If our partners say no, that means that probably then just one train will be built since there is agreement by everybody. If they market their capacity, then we would have the two trains. We are permitting both trains from both FERC and DOE. -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [8] -------------------------------------------------------------------------------- I would add on, Mark, just to be clear so everybody is clear on the call, the fourth train would be owned by the joint venture. So it would be 50/50 ownership, but Octavio is right, we would have the capacity. -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [9] -------------------------------------------------------------------------------- That's right, Joe. -------------------------------------------------------------------------------- Julien Dumoulin-Smith, UBS - Analyst [10] -------------------------------------------------------------------------------- Just to be extra clear about this -- apologize, so this would be --? You would obviously still need to go and remarket your respective ownership, but I suppose at this point in time you are indicating that you intend to at least move forward on train four? Is that an incremental? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [11] -------------------------------------------------------------------------------- Obviously we would not move forward if we haven't sold the capacity forward, but we are in the process of that marketing effort right now and we're pretty confident that we will get that done. -------------------------------------------------------------------------------- Julien Dumoulin-Smith, UBS - Analyst [12] -------------------------------------------------------------------------------- Okay, thank you. I will let it be. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Neel Mitra, Tudor, Pickering. -------------------------------------------------------------------------------- Neel Mitra, Tudor, Pickering, Holt & Co. - Analyst [14] -------------------------------------------------------------------------------- Good afternoon. A question on the Pemex acquisition. Now that you have a larger stake in Mexico, especially with the pipes, are you seeing additional synergies or lateral opportunities from owning a larger stake in Mexico? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [15] -------------------------------------------------------------------------------- Yes, in fact, we're seeing two things. One, on the cost side, with us acquiring 100% of the pipes that were in the JV, we believe we can integrate those with the other pipes that we own and we will definitely get some synergies out of that. That would be in addition to the earnings accretion that we have so far forecasted. So we think that there is additional upside just in the operational synergies that we can achieve. But then secondly, all of the pipeline infrastructure that we are building now, we have to this point only marketed it to the original customer that asked for it to be built, mainly CFE or Pemex. But these are open access pipes and we are now starting to market extra capacity to other users. We have just actually started working on that and we are seeing some success in getting that. So we do think there's additional upside to come from marketing additional capacity, either that exists currently or that we can create through compression. And we are pretty excited about that. We think that there is a growth opportunity there. -------------------------------------------------------------------------------- Neel Mitra, Tudor, Pickering, Holt & Co. - Analyst [16] -------------------------------------------------------------------------------- What would be the timeline for recognizing some of the possible lateral projects? When can we first hear about it? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [17] -------------------------------------------------------------------------------- I guess you will first hear about it when they are announced, but for the most part I think we are working on some of these right now. Some will be probably completed before year-end. -------------------------------------------------------------------------------- Neel Mitra, Tudor, Pickering, Holt & Co. - Analyst [18] -------------------------------------------------------------------------------- Okay, great. Joe, you have had two good quarters. Can you say where you are within the guidance range at this point? Are you at the high end? Are you in the middle? Can you comment on that? -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [19] -------------------------------------------------------------------------------- We're not going to narrow the range or talk about where we are in the guidance. You can see the year-to-date results are really strong. You can't double those because SoCalGas is $65 million ahead on the seasonality, so that will come back, and then we have a few items that are in the earnings year-to-date that won't repeat. So we feel really good about where we are, but we're not going to narrow it at this point. -------------------------------------------------------------------------------- Neel Mitra, Tudor, Pickering, Holt & Co. - Analyst [20] -------------------------------------------------------------------------------- Okay, great. Thank you. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [22] -------------------------------------------------------------------------------- I've got a few questions. First, on the two new solar projects, can you give us any sense of the earnings benefit to those? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [23] -------------------------------------------------------------------------------- We are not disclosing the benefits precisely, but they are 100 megawatts and 150 megawatt projects and they are consistent returns with what we've had in the past. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [24] -------------------------------------------------------------------------------- Okay. Then secondly, just on the MLP, which I know you can't talk about, can you just remind when we did the -- when you did your base plan my recollection is that you did not assume the MLP in your financing plan at your analyst day? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [25] -------------------------------------------------------------------------------- That is correct. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [26] -------------------------------------------------------------------------------- Is that correct? Okay. And just is there any way to give any color on kind of how to think about that strategy, just given current market conditions? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [27] -------------------------------------------------------------------------------- The thing is we just cannot comment on the MLP at all. I apologize, but that is just the way the rules are and so we really can't talk about it. We will talk about that when we do the marketing for the MLP. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [28] -------------------------------------------------------------------------------- Okay, I get that. Then finally, just back at IEnova, the $0.05 to $0.10 of accretion on the different years, that is whether you take stock or not related to this deal, that range is still pretty good either way in terms of the accretion? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [29] -------------------------------------------------------------------------------- Yes, I will let Joe tell you. -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [30] -------------------------------------------------------------------------------- It's pretty close. We have evaluated this as we have been working on this deal for a few months. And actually, whether we borrow money or whether we issue equity, it hardly has any impact and so the only thing that moves it slightly is whether we participate. But, again, it's going to be accretive either way. But I think we will -- you will see us participate to some degree. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [31] -------------------------------------------------------------------------------- Okay. And then one question on Cameron 4 and 5. You are in control of the 4 million tons of one train. You are only going to go forward with yours if you sign long-term contracts, I assume. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [32] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [33] -------------------------------------------------------------------------------- Okay. The partners have this other 4 million tons. Is there any way that if you see the market that you could kind of take that over as well if you wanted to, or is it really in their hands what to do with that? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [34] -------------------------------------------------------------------------------- It's really in their hands. I suppose something could be worked out, but we have other projects too that we are developing and part of our portfolio, so we would have to evaluate it in relation to those just as they will. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [35] -------------------------------------------------------------------------------- Okay. But it sounds like your conviction on moving forward with what you control seems quite high. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [36] -------------------------------------------------------------------------------- I think you could say that is very high, yes. -------------------------------------------------------------------------------- Steve Fleishman, Wolfe Research - Analyst [37] -------------------------------------------------------------------------------- Okay, thank you. Thank you. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Greg Gordon, Evercore ISI. -------------------------------------------------------------------------------- Greg Gordon, Evercore ISI - Analyst [39] -------------------------------------------------------------------------------- Steve just asked my question, so I'm good. Thanks. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Michael Dandurand, Goldman Sachs. -------------------------------------------------------------------------------- Michael Dandurand, Goldman Sachs - Analyst [41] -------------------------------------------------------------------------------- Good afternoon. Just two -- first of all, I appreciate the additional color on LNG, in particular to Cameron. I just have a follow-up there as it relates to Port Arthur. Can you just talk a little bit about what we should be looking for there and how things are going with Woodside now involved? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [42] -------------------------------------------------------------------------------- I will start and then I'll let Octavio comment on this as well. We have an MOU with Woodside to look at the feasibility of the project. We are progressing on it. We have had lots of meetings. We are starting some of the technical analysis and starting some of the marketing of the trains. It is an excellent site. It looks like it's very promising as moving forward and I would say their commitment to it is very strong. Octavio, do you want to give any other color on that? -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [43] -------------------------------------------------------------------------------- I think you've covered the process. I would just add that part of the attractiveness of Port Arthur is that it appeals to customers that may want to have equity as part of their supply strategy. It allows us and Woodside to look at options to really make Port Arthur a very low-cost supplier in the LNG market, which for us is key for the success of any project out of the US exports of LNG. So the process is going extremely well. There is a lot of similar objectives between us and Woodside, and you're likely to see some announcements as that relationship grows and as the project continues to go forward. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [44] -------------------------------------------------------------------------------- I would just add to that I think it's important just to keep in mind that our projects, both in the Gulf and ECA as well, we're positioning them as at the very low end of the cost curve for LNG worldwide and so we think they will be very competitive. Now that doesn't -- we have other Gulf Coast facilities that obviously compete with that, but in general our facilities and the others in the Gulf region in particular are some of the lowest-cost providers of LNG out there and, therefore, they are very likely to get lifted over time. -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [45] -------------------------------------------------------------------------------- Mark, if I may just add, one of the key elements for any buyer of LNG in the world is the reliability and the credibility of the developer. And so we think Sempra is very well positioned with our track record. Clearly, Woodside is very well-positioned given their track record and so that in itself is an advantage because we will be offering technology that is conventional, that the buyers are used to, that is reliable, and with all kinds of the guarantees that they expect from a project this size. -------------------------------------------------------------------------------- Michael Dandurand, Goldman Sachs - Analyst [46] -------------------------------------------------------------------------------- Got it, it's very helpful. So less of emphasis on the spot market, if I'm hearing that correctly? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [47] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Michael Dandurand, Goldman Sachs - Analyst [48] -------------------------------------------------------------------------------- Got it. And then just as far as -- we have seen a bit of a deterioration in the midstream arena and I appreciate that you can't discuss the MLP directly, but just as far as the broader landscape for midstream assets out there, are you seeing anything more attractive just from an M&A standpoint? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [49] -------------------------------------------------------------------------------- Obviously, we do see some attractive M&A opportunities. We just executed on one last week. So we think that we did a very good deal last week, and we are really happy with it. So, obviously, with the way the landscape has been, it could be the M&A opportunities become more viable, but it's still -- there's still a pretty good cost advantage to developing your own projects as opposed to trying to buy them in the marketplace. We see that both in the midstream area and also in the renewables area as well. To the extent that we continue to develop our own backlog of projects, that's a much more profitable avenue for us, and we're fortunate to have a pretty good backlog of projects to work on. So I think we are very well-positioned for growth, and growth at the lower end of the cost curve as opposed to somebody that's trying to do it through acquisition. -------------------------------------------------------------------------------- Michael Dandurand, Goldman Sachs - Analyst [50] -------------------------------------------------------------------------------- Got it, very helpful. The only other one I have is just on Mexico with the recent project win there, does that help your upcoming bid with the project in August here with -- I'm going to butcher this name -- but Samalayuca? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [51] -------------------------------------------------------------------------------- It does. We believe that the project that we just won is kind of a large header system, which will benefit us in being able to control the costs on the next project bid that is coming up. So I don't want to go into all the details of why that is, but we do think it gives us a little bit of an advantage and we're hoping to see some success there. -------------------------------------------------------------------------------- Michael Dandurand, Goldman Sachs - Analyst [52] -------------------------------------------------------------------------------- Okay, got it. Thanks for the time, appreciate it. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Matt Tucker, KeyBanc Capital Markets. -------------------------------------------------------------------------------- Matt Tucker, KeyBanc Capital Markets - Analyst [54] -------------------------------------------------------------------------------- Congrats on a nice quarter and on the IEnova transaction. I just wanted to ask about that. Pemex and IEnova highlighted the remaining JV as a platform for future product development. Can you just talk about a little bit the opportunities you see going forward with Pemex? And also is this model, if you can call it that, something you could see Pemex wanting to repeat, i.e., develop and construct a project and a JV and then sell their interest? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [55] -------------------------------------------------------------------------------- Yes. Look, I think it's a healthy development for us in the sense that Pemex is recognizing this transaction. They repeatedly referred to it as a monetization as opposed to a sale, because they see this opportunity to build these projects that they need to have done. And then once they are built, they can monetize them through a sale to us and then start on the next project. And we see that -- obviously, we think that's a very exciting opportunity for us. And we were very happy that they wanted to stay into this partnership arrangement with the pipeline that is currently under construction and then to consider new projects in that. So we do think -- we are looking at this as a source of future projects. We think it's a good model for us. It has worked well in the past. I think the thing that Pemex appreciates is that they have now worked with us on these projects over the years. They've had good results. We've built good projects. They've come in pretty much on time and on budget. And I think they see us as a really good partner that they can count on to deliver for them. So that's something that obviously we pride ourselves on, and we think it's going to lead to more projects in the future. -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [56] -------------------------------------------------------------------------------- Mark, I would just add onto that. Matt, I think the thing -- you don't always see this, but Mark and I sit on the IEnova Board. And so we were just down there last week and we were with Debbie and we went and met with Pemex and other government agencies. It's really important; we have a very interactive, ongoing relationship with IEnova and I just want to make sure you guys all understand that. -------------------------------------------------------------------------------- Matt Tucker, KeyBanc Capital Markets - Analyst [57] -------------------------------------------------------------------------------- Okay, great. Just on the California utilities, the GRCs, mentioned they are going well. Could you just update us on any kind of key or contentious issues that are emerging as the process goes on? I believe at the analyst day when you came out with your longer-term guidance you had assumed no rate increase coming from GRCs. Any update on how you are thinking about that assumption? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [58] -------------------------------------------------------------------------------- I'm going to turn this over to Dennis to give you the details, but let me just make one quick point, which is at the analyst conference and in the plan what we assumed with respect to the GRC was just normal attrition. But I think that was just a conservative assumption for planning purposes, but I think Dennis can give you some more detail on that. -------------------------------------------------------------------------------- Dennis Arriola, Sempra Energy - CEO, SoCalGas [59] -------------------------------------------------------------------------------- Thanks, Mark. As Mark said in his opening comments, things are going well. We finished our evidentiary hearings two days ahead of schedule and we are happy with the overall pace of the filings. And our witnesses from both SoCalGas and STGD did a great job of explaining the overall merits and details of both of our filings. We're really optimistic that we are going to receive constructive decisions for both companies. We can't obviously disclose anything related to any settlement discussions if we're in them, but what we can tell you is, given the strong showing that we had in our evidentiary hearings and the fact that our filings are consistent with the priorities of the PUC, which are around safety, reliability, and customer service, we feel really good about potential constructive discussions with intervening parties. As it pertains to the plan that Mark talked about, you're right. What we just assumed was that our existing attrition rates of 2.75% for both SoCalGas and SDG&E would continue from a planning perspective, but obviously we've asked for more that supports our filings. And so far the ORA in their reply have come back and said that they would be looking for 3.5% attrition increases in 2017 and 2018 for both SoCalGas and SDG&E. So having said all that, we feel really good about where we are at at this point. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [60] -------------------------------------------------------------------------------- Steve, do you have any comment on that? -------------------------------------------------------------------------------- Steve Davis, Sempra Energy - President, SDG&E [61] -------------------------------------------------------------------------------- No, I really have nothing more to add. But, again, as Dennis pointed out, we concluded our regulatory hearings and we feel very confident in the outcome of those hearings. We look forward to constructive dialogue with the parties going forward. -------------------------------------------------------------------------------- Matt Tucker, KeyBanc Capital Markets - Analyst [62] -------------------------------------------------------------------------------- All right, thanks. Then just one on the LNG side. I thought it was great that you kind of have the visibility to target the FID on the Cameron expansion. Any sense you can give us for do you have targets yet for FIDs on ECA or Port Arthur, or can you give us a sense for maybe how far behind they are right now? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [63] -------------------------------------------------------------------------------- I will let Octavio address that. -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [64] -------------------------------------------------------------------------------- Sure. Port Arthur we are probably looking at something in the late 2017, late 2018 timeframe for FID. It does take -- it does require a different permitting process. It is an environmental impact statement as opposed to environmental assessment, which takes longer. And obviously we don't have the benefit or the luxury of just a continuation of the existing EPC contract and contractor at Cameron. So that whole process with an invitation to bid and whatnot will take longer, so late 2017/2018 timeframe is what we are thinking about Port Arthur. For Costa Azul, as we are putting all the key elements in place from a regulatory standpoint and from a commercial standpoint, that might be a little later than that or at the same timeframe, frankly, on that one. I am not confident enough at this point to make a prognostic as to the FID timeframe. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [65] -------------------------------------------------------------------------------- One of the things with respect to ECA is a lot of the regulations are still being developed, so we're not really sure exactly how to go about that process. We have been working with the Mexican government on developing the regulations for LNG export, so we are still -- so to give you a firm date would be quite difficult, but it is probably more in the Port Arthur timeframe than it is in the trains four and five timeframe. -------------------------------------------------------------------------------- Matt Tucker, KeyBanc Capital Markets - Analyst [66] -------------------------------------------------------------------------------- Okay, that's really helpful. Thanks again. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Faisel Khan, Citigroup. -------------------------------------------------------------------------------- Faisel Khan, Citigroup - Analyst [68] -------------------------------------------------------------------------------- Good afternoon. On the Pemex, the accretion you guys discussed in your slides, bump from $0.05 to $0.10. I guess all I've got so far in that JV is -- in terms of projects that you are working on or expanding with that JV is the ethane pipeline. So what else is going to sort of drive that joint venture from $0.05 to $0.10? I'm assuming Los Ramones that's still in the JV in the same ownership percentage, so that doesn't change anything that is going on there. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [69] -------------------------------------------------------------------------------- I will let Joe address the EPS numbers. -------------------------------------------------------------------------------- Joe Householder, Sempra Energy - EVP & CFO [70] -------------------------------------------------------------------------------- Most of it is the ethane project coming online, but then in addition to that Mark talked a little bit about some of the synergies that we see. And in addition all the cash flow from the business would be accumulating and paying down debt or being available to provide some earnings. And that is what is really driving the few cents additional as we go through the time period. But the bulk of it is ethane. -------------------------------------------------------------------------------- Faisel Khan, Citigroup - Analyst [71] -------------------------------------------------------------------------------- Okay. That's a pretty big uptick in earnings just from the ethane project. What is the status of these lines in the JV? Are they running at full capacity or is there room to grow without having to spend much capital? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [72] -------------------------------------------------------------------------------- Actually, as I mentioned earlier, there's two things that we really didn't put into the EPS guidance. One was the efficiencies that we think we can get from running a whole system together as one. And then two, there is either additional capacity in the lines or capacity that could be added relatively inexpensively with compression, and we're in the process of marketing some of that capacity to other users. So other LDCs, power plants, and those kinds of things. And so we do think that there is upside there. We haven't put that -- we haven't calculated that into our EPS estimates of accretion, but there's certainly there then things that we think we can get. -------------------------------------------------------------------------------- Faisel Khan, Citigroup - Analyst [73] -------------------------------------------------------------------------------- Okay, got it. Makes sense. And then just on Port Arthur, so the sort of relationship you are talking about with Woodside Petroleum, I guess what is the timeline in terms of when you guys decide whether you are going to go forward with a joint venture and I guess, therefore, market that together? What are you guys thinking about right now? Where is the process? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [74] -------------------------------------------------------------------------------- We are actually starting -- we are marketing the asset right now, but I will let Octavio give you a little more detail. -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [75] -------------------------------------------------------------------------------- Let me be clear, on the marketing side of the asset, clearly, we would not have engaged in pursuit if we didn't find the interest, so it's exploratory interest. As we look through what the project will be structured then, if it is with Woodside, which obviously we hope and are confident it will be, then we together will have to develop the marketing strategy for the asset. So that is on the marketing side. As far as what we expect to see going forward, it's really going to be a continuation of the same process. We're looking at the feasibility. We're looking at the economics. There are hurdles that we will have to go through to make sure we go to the next stage. Are we confident we can put together a project that is low cost as it has to be? Are we confident that we can do all of the regulatory permits and all of the local issues we have to deal with? Those things will be hurdles that we will be overcoming. We're confident we can, but it's tough to give you a timeframe at this point that is very specific. I think you will see some developments between now and the end of the year, but I wouldn't want to commit at this point as to what those developments are. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [76] -------------------------------------------------------------------------------- Faisel, you may have missed it on the question before but we did discuss that we were talking about FID with that project, with Port Arthur sort of late 2017 all the way into late 2018. Probably in the 2018 timeframe. -------------------------------------------------------------------------------- Faisel Khan, Citigroup - Analyst [77] -------------------------------------------------------------------------------- Okay, understood. Just on the Cameron Expansion, just in terms of lowering the cost of the -- providing a sort of lower cost on the expansion from the economies of scale, where do you guys think that is right now, especially since we have seen steel costs come down and we've seen --? On a percentage basis versus what you guys have outlined for this one versus what you are thinking about on the expansion. Is there any color you can provide around that? Thanks. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [78] -------------------------------------------------------------------------------- There's some color I could, but won't. Right now we think we have a very competitive project. We think our costs are some of the lowest in the region. We are marketing that to our advantage and I really don't want to give any more detail than that. -------------------------------------------------------------------------------- Faisel Khan, Citigroup - Analyst [79] -------------------------------------------------------------------------------- Okay, got it. Fair enough. Thanks for the time, appreciate it. -------------------------------------------------------------------------------- Operator [80] -------------------------------------------------------------------------------- Mark Barnett, Morningstar Financial Research. -------------------------------------------------------------------------------- Mark Barnett, Morningstar - Analyst [81] -------------------------------------------------------------------------------- Good morning/good afternoon, everyone. You have talked a lot about the Pemex assets and the Pemex deal in some of your pipeline projects and upside today. I'm just wondering, given what has taken place over the past few months, six months and whatnot, how are you looking at the attractiveness of the generation sector in Mexico? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [82] -------------------------------------------------------------------------------- Well, generation clearly has been under stress in the US. Prices have been relatively low, but in Mexico there are going to be generation opportunities. On the renewable side I think they will be quite good and obviously we are well-positioned to do that and ESJ can be expanded pretty easily. But on the gas-fired generation side, and especially with respect to combined cycle plants, there will be opportunities to build those under contracts with CFE, but they haven't really been left out that much in any kind of volume. I think there has only been one. And what we are -- we are going to have to kind of wait and see to see how that market develops. I think what they're doing in Mexico is actually really pretty smart, which is they are building out the gas network first. They are developing a very active gas market, one that both CFE and the private sector will participate in to a great degree. And once they have a robust gas market and a good supply network, then I think you will start to see them let out the opportunities to build more power plants. But I think they definitely are staging it a little bit and I think rightly so. -------------------------------------------------------------------------------- Mark Barnett, Morningstar - Analyst [83] -------------------------------------------------------------------------------- Yes, it's definitely been a slow process. I just wonder, given that you are positioned already to be a fairly large operator of the gas infrastructure, does that give you some kind of a look into where your competitive position would be when those kind of bids do start to show up? -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [84] -------------------------------------------------------------------------------- Absolutely. I think we're going to be very well positioned to take advantage of those and I think -- we have every intention of doing that. It's just that they have to meet our criteria for having long-term contracts and being solid investments, which we expect them to be. But given our infrastructure and our knowledge of the gas pipeline network in Mexico, I think that we will be well positioned to take advantage of those offerings. -------------------------------------------------------------------------------- Mark Barnett, Morningstar - Analyst [85] -------------------------------------------------------------------------------- Okay, thanks. -------------------------------------------------------------------------------- Octavio Simoes, Sempra Energy - President, Sempra LNG [86] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I will turn the call back to Mark Snell for closing remarks. -------------------------------------------------------------------------------- Mark Snell, Sempra Energy - President [87] -------------------------------------------------------------------------------- Thanks again for joining us today. If you have any follow-up questions, please feel free to contact the IR team and have a great day.
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