桑普拉能源 (SRE) 2011 Q1 法說會逐字稿

Good day, and welcome to the Sempra Energy first-quarter 2011 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Steve Davis. Please go ahead, sir.

Thank you, Rochelle. Good morning, and thank you for joining us. I'm Steve Davis, Vice President of Investor Relations. This morning, we'll be discussing Sempra Energy's first-quarter 2011 financial results. A live webcast of this teleconference and slide presentation is available on our website under the Investor section.

With us today in San Diego are several members of our management team, including Don Felsinger, Chairman and Chief Executive Officer; Neal Schmale, President and Chief Operating Officer; Mark Snell, Executive Vice President and Chief Financial Officer; Debbie Reed, Executive Vice President; and Joe Householder, Senior Vice President and Controller.

You will note that slide two contain our Safe Harbor statement. Please remember that this call contains forward-looking statements that are not historical fact, and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve risks, uncertainties, and assumptions, so future results may differ materially from those expressed on our call.

These risks, uncertainties and assumptions are described at the bottom of today's press release, and are further discussed in the Company's reports filed with the Securities and Exchange Commission. It's important to note that all of the earnings per share amounts in our presentation are shown on a diluted basis.

With that, I'll turn it over to Don, who will begin with slide three.

Thanks, Steve. And again, thank you all for joining us. On today's call, we'll start by reviewing our first-quarter financial results, and I'll then give you an operational update on our businesses.

Earlier this morning, we reported first-quarter earnings of $258 million or $1.07 per share, compared with $106 million or $0.42 per share in the same period last year. The first quarter of last year included a $96 million or $0.38 per share charge related to the settlement of Energy Crisis litigation. Excluding the impact of this charge in last year's first quarter, our quarterly earnings per share increased by 34%. All of our businesses are performing well, and each of our business units reported an increase in earnings in the first quarter over the year-ago period.

There are two things I'd like to highlight before Mark goes into the details of the financial results. As we discussed at the March analyst conference, with our exit from the commodities trading business, we have refocused our strategy on regulated utilities and contracted energy infrastructure. This quarter's strong results across all of our business segments demonstrates our execution on that strategy going forward.

And second, a key element of our renewable business strategy is in the contracting of our portfolio of projects at Sempra Generation. We recently received regulatory approval for the first 150-megawatt phase of the 700-megawatt of the Mesquite Solar project, and signed contracts for two wind projects totaling about 175 megawatts.

Now I'd like to hand it over to Mark, so he can take you through some of the details of the financial results, beginning with slide four.

Thanks, Don. At San Diego Gas and Electric, earnings for the first quarter of 2011 were $89 million, compared with earnings of $83 million in the year-ago quarter. The increase was primarily due to $7 million of higher authorized margins, offset by $5 million of higher wildfire insurance premiums this year. And, in last year's first quarter, we had a $3 million charge related to the passage of the Healthcare bill.

At Southern California Gas, first-quarter 2011 earnings were $68 million; that's up from $65 million in the first quarter of 2010. Last year's results included a $7 million regulatory award and a $13 million tax charge related to passage of the Healthcare bill.

Now let's go to slide five. Our Generation business recorded earnings of $44 million in the first quarter of 2011, compared with a loss of $51 million in the same quarter in 2010. The increase for the quarter is due to lower operating and maintenance costs, less scheduled plants maintenance, and a $84 million charge related to a litigation settlement last year.

Now please move to slide six. Sempra Pipelines & Storage recorded earnings of $54 million in the first quarter of 2011, up from earnings of $38 million in the same quarter of 2010. The quarter benefited from $8 million of higher earnings from pipeline assets in Mexico, which were acquired in the second quarter of 2010, and from $6 million of higher operating results in Chile and Peru.

I'd also like to mention that in the next quarter, we expect to report a one-time gain related to our increased ownership stake in Chile and Peru, due to a step-up of our prior investment to fair value. The size of the gain has not yet been determined, and it was not included in our earnings guidance that we previously provided for this year.

And now please go to slide seven. Sempra LNG had earnings of $33 million in the first quarter of 2011, compared with earnings of $32 million in the prior-year's period. Both quarters included $11 million of earnings from customer payments related to contracted cargoes that were not delivered.

And with that, I'd like to turn it back over to Don, who will begin with slide eight.

Thanks, Mark. Now let me update you on activities in our California Utilities.

Last month, Governor Brown signed into law California's renewable portfolio standard legislation, which calls for a 33% renewables mix by 2020 for all retail providers of electricity in the state. You may recall that SDG&E had previously made a voluntary commitment to reach 33% renewable. Since the beginning of this year, SDG&E has signed contracts for about 700 megawatts of renewable energy, and is well on its way to reaching a 33% threshold.

Now moving to Sunrise Powerlink, construction on the project is well underway. We're now installing towers and have more than 100 towers in various stages of construction. The project is proceeding according to plan, and we expect to complete this line in the second half of next year. And finally, at SDG&E and SoCalGas, we have filed our applications for both utilities 2012 general rate cases last December. The CPUC rate case plan calls for a decision in approximately March of next year, with rates retroactive to January 1 of next year.

Now let's go to slide nine. Earlier this year, the CPUC opened up proceedings to assess new safety and reliability regulations for natural gas pipelines following the tragedy in San Bruno. We fully support the Commission's efforts and are actively participating in this process. Last month, SoCalGas and SDG&E responded to the Commission's request for records supporting the maximum allowable operating pressures of their pipelines. This extensive review renewed our confidence that the maximum pressures on our systems have been appropriately set, and that we operate our systems safely.

Our utilities operate about 4,000 miles of transmission pipelines, and the records review covered about 1,600 miles of those pipelines in populated areas. Federal regulation issued in 1970 requires specific documentation of pressure testing for transmission pipelines built after the regulation went into place. Approximately 500 miles of the pipelines were installed after 1970, and our records and operating procedures give us a very high degree of confidence that all of this pipeline has been pressure-tested and is operating safely.

Of the remaining 1,100 miles installed before 1970, we have records indicating that nearly 700 miles of this pipeline was pressure tested. The remaining 400 miles of pipeline had operating pressures determined by using alternate procedures under state and federal regulations. Of these, 170 miles had been smart-pigged, meaning sophisticated devices were inserted into the pipeline and inspected to make sure they are safe. We also have extensive construction and/or operating records that support the maximum operating pressure on all of this pipeline.

We have also voluntarily taken a number of precautions to provide an added margin of safety, including further reducing operating pressures in certain pipeline segments; conducting tests to validate pipeline strength; assessing possible replacement of certain segments; and conducting bi-monthly patrols and leakage surveys. I want to stress that safety is our top priority. We have a strong pipeline integrity program in place, and our financial plan includes a significant amount of spending and investment in this area.

The costs we've incurred this year to gather records has been less than $2 million, and we don't expect our utility earnings plans to be impacted by these efforts. We don't know what the Commission will ultimately decide regarding new pipeline regulations, but should new requirements result in incremental costs, we would expect to recover those costs.

Now let's move to the next slide. At our analyst conference in March, we discussed plans to develop 1,000 megawatts of renewable capacity at Sempra Generation over the next five years. Just in the first four months of this year alone, we've made significant progress toward that goal. Last month, we received CPUC approval for a 20-year contract to sell PG&E the output of the first 150-megawatt phase of our Mesquite Solar project. Construction will begin next month, and we expect to complete this first phase of the project in early 2013. When fully developed, the Mesquite Solar complex has the potential to generate up to 700 megawatts of solar energy.

Two of Sempra Generation's wind development projects also reached important milestones with the signing of long-term power sales contracts. Energia Sierra Juarez is a wind project located about 70 miles east of San Diego and just south of the US/Mexico border. The first phase to be developed is a 156-megawatt project. Given our land position and the wind resource there, we have the opportunity to develop as much as 1,200 megawatts over time.

For the first 156-megawatt phase, SDG&E has signed a 20-year contract for the output from the facility. The contract is subject to approval by the CPUC and the FERC. Pending the receipt of these approvals, we expect to begin construction next year and to complete this phase of the project in 2013. We've also reached a preliminary agreement with BP Wind Energy to bring them into the project as an equal partner.

Sempra Generation also signed a 20-year power sales contract with Maiu Electric for the 21-megawatt Hawaii wind project on the island of Maui and Hawaii. The contract is subject to the approval of the Hawaiian Public Utilities Commission, and we expect the project will be operational late next year.

And finally, I'd like to mention that construction is almost complete at the 250-megawatt Cedar Creek II Wind Project in Colorado, and operations are expected to begin this quarter. This project is a 50/50 joint venture with BP Wind. Consistent with our long-term contracting strategy, there's a 25-year agreement in place for the sale of the project's power.

Now move to the next slide, if you would. Last month, Sempra Pipelines & Storage increased its ownership stake in two South American electric utilities. We now own 100% of Chilquinta Energia in Chile and 76% of Luz Del Sur in Peru. Luz Del Sur is a publicly traded company in Peru, and the remaining 24% of shares in Luz Del Sur are held by institutional investors and the general public.

Last week, the groundbreaking of Luz Del Sur's 98-megawatt Santa Theresa hydroelectric project was held in Peru. This $150 million run-of-the-river project marks Luz Del Sur's entrance into generation, and is expected to be complete in 2014. We're excited about the opportunities to grow the business in both Chile and Peru.

Now please go to the last slide. Let me conclude by saying that I'm very pleased with our strong financial results for the quarter. The refocusing of our strategy on regulated utilities and contracted energy infrastructure drove our strong results across all business segments. These results have us on track to meet our earnings guidance for the year. I'm also proud of our recent accomplishments which include contracting and development of renewable energy resources and closing the accretive South American acquisition.

With that, let me stop, and we'll take any questions that any of you may have.

(Operator Instructions). Leslie Rich, JPMorgan.

I just have a question on your renewable CapEx. Given the progress that you've made during the first quarter, and also, I think the new information, or at least I don't recall BP being an equal partner in that Sierra Juarez project, is your CapEx for renewables still slated to be in the range of about $600 million next year?

You mean next year or this year, Leslie?

Well, this year in your analyst presentation, you had about $200 million this year, about $600 million next year. So if these projects all do get regulatory approval and move forward, are those CapEx numbers still good? Or just because BP is involved now, the CapEx number come down?

I'll let Mark take this.

Yes, hi, Leslie. No, it is about $600 million. We actually anticipated BP or a partner in these wind projects. And so that was in our plan.

Okay. Great. Thanks.

Paul Patterson, Glenrock Associates.

Just a few quick things. The RBS investment, my understanding was that that was going to be sort of coming down throughout the year. And it seems like it's pretty much holding in there. Could you elaborate a little bit what's going on in that in the balance sheet?

I'll have Mark take you through this, but I think what we have stated is that, by the end of this year, we'll have recovered all of the investment out of the commodities joint venture.

Yes, Paul, that's correct. What we did have happen -- unfortunately, it happened about three days after the quarter ended -- we got about $330 million, so that reduced our investment. And you'll see that in the next quarter. And we're hoping to get kind of routable payments over the next three quarters, bringing it down to $0 at year-end.

Okay. Great. And then also, you mentioned something about the wildlife reserve premium impacting earnings. And I'm sorry, I just didn't get that. Could you just repeat that again?

Okay. Well, what we had was about $5 million of additional insurance expense related to the wildfire insurance premium. At the utilities, under our old -- or our current rate case, we incurred higher costs related to wildfires for insurance. And we did recover some of that in the Z factor last year. And we may recover some of this later on; but right now, we don't have a recovery mechanism in place and so it's being expensed.

Okay. I noticed that the liability actually went down -- I mean, the asset -- no, the liability, I think, went down about $150 million. I know there was a $300 million receivable that you guys had at the end of the year. Could you just describe this a little bit on the balance sheet, what's going on with that reserve thing? Is that --?

Sure. Yes, sure. Well, of course, that asset receivable -- it's separate and apart from the insurance premiums, but the liability going down is related to payments that we've made during the period. We paid about $100 million during the period. And we moved about $71 million to long-term, because it won't be paid out for a couple of years.

Okay. And then, just in terms of the pipeline, it sounds like you guys pretty much have all your records? And you're not finding any -- there doesn't seem to be any issue in terms of collecting all of that and what have you? And -- is that pretty much getting it right?

Paul, I had anticipated that there would be some interest in this, so we invited Mike Allman, who is the CEO of that business, to join us this morning. And Mike, would you like to respond?

Yes, that's right, Paul. We completed a substantial review of our records and we are really in pretty good shape at this point. So I'm happy with what we've found so far.

Okay. Have you guys asked for a memorandum account for this? Or do you think that's necessary?

We did ask last week, and our expenses have been relatively low so far. We've been able to complete this review by reassigning existing resources. But last week, we did file for a Memo Account to capture expenses going forward, in case we need that.

Okay, great. Thanks a lot.

Ashar Khan, Visium.

Just wanted to go over, Mark, can you just -- is there any update, you had -- I believe there was some portion of earnings from the Analyst Day, like 9% for this year and 15% for next year, which were to be end of the contract and development projects. Is that number a little bit changed? And as we stand right now, more firming of those things, or no?

Are you referring to -- do you mean uncontracted earnings, the ones that we don't have --?

That's correct.

Okay.

There was like, in your chart, like 9% for this year and like 15% for next year, there were to be contracted or development project earnings. I was wondering if there's any update on those numbers as we stand today?

They're still relatively close. We're a little bit ahead of schedule on some of the contracts for the renewable projects, but I wouldn't be changing those numbers at this time.

Okay. Thank you.

Yes. Oh, hey -- one other thing, too, is we also did -- some of that was anticipation close of Chile and Peru. And that has happened, so that does update it a little bit.

Yes, that I have. That I have. Appreciate it.

Thanks, Ashar.

Thank you.

(Operator Instructions). Debra Bromberg, Jefferies & Company.

Just a question on Peru. I was wondering if you could share your thoughts on the upcoming presidential runoff election and any implications of a possible win by Humala?

Well, I mean, it's -- the elections are about three weeks away. Neal and I went down to Peru last week for the groundbreaking of a hydro project and had a chance to meet with the current President. He's fairly optimistic that Fujimori is going to win.

Now, his insights are his insights, but I think as we look at it, I think both Humala and Fujimori both came out of the back of the race and are now in a run-off. Whatever happens here with either one of them, I don't see any real changes to the regulatory framework that we have in Peru. So I think we left there with a pretty high degree of comfort that the economy in Peru is going to continue to grow, and whichever one of these individuals ends up becoming President, will kind of maintain the status quo.

Okay. Thank you.

Mark Barnett, Morningstar.

Just a couple of real quick questions. The first, anything new on those remaining PEMEX assets? I know they delayed the decision or decided to wait for now, but have you been in negotiations? Have you been talking to anyone from PEMEX? I mean, what's --?

There's been no change. We had expected when we made those acquisitions that PEMEX was going to be required to exit. So far they haven't. The good news is, is having PEMEX in the partnership, we have a fairly robust portfolio of new projects that we're looking at. So I think we were kind of indifferent at the very beginning whether or not they stayed as a partner or exited. We're indifferent; we see the business still continuing to grow.

Okay. And just lastly about the potential for the buyback later this year. You obviously mentioned maybe a small one later on. I mean, any more, given maybe some new project opportunities, something like that? Is that any more or less likely, do you think at this point or --?

I don't think there's much update over what we said at the analyst conference last month; but if, Mark, you want to add some more color to it --?

No, I think that's right. I mean, at the analyst conference, we said that we would kind of address this later in the year, as we looked at wherever our capital spend was and where we were. I will point out that the share count that we gave at the analyst conference did not anticipate a buyback, and we're sticking with that number for the year. So it's something we'll look at later on in the year and decide if there's anything that makes sense.

Okay. Great. Thanks for the detail, gentlemen.

And there are no further questions. I will turn the call back over to Don Felsinger for any additional or closing remarks.

Wow, this is the shortest call we've ever had. (laughter) I guess the business is getting too simple for you guys.

Hey, once again, thanks for joining us on this first-quarter call. If you have any follow-up questions, please contact Steve, Scott, or Victor. Thanks for taking time with us. Have a great day.

And that will conclude today's call. We thank you for your participation.