桑普拉能源 (SRE) 2012 Q1 法說會逐字稿

Good day. Welcome to the Sempra Energy first quarter earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr Rick Vaccari. Please go ahead, sir.

Good morning and thank you for joining us. I'm Rick Vaccari, Vice President of Investor Relations. This morning, we'll be discussing Sempra Energy's first quarter 2012 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, Debbie Reed, Chief Executive Officer; Mark Snell, President; Joe Householder, Executive Vice President and Chief Financial Officer; and Bruce Folkmann, Acting Controller. Before starting, I'd 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 reports filed with the SEC. I'd also like to note that the forward-looking statements contained in this presentation speak only as of today, May 3, 2012, and the Company does not assume any obligation to update or revise any of these forward-looking statements in the future. With that, I'll turn it over to Debbie.

Thanks, Rick, and thank all of you for joining us today. Before we get started, I wanted to note that Rick Vaccari is with us today in his new role as Vice President of Investor Relations, which he assumed following our Analyst conference. Rick takes over for Steve Davis who is now Senior Vice President of External Affairs. If you haven't had a chance to meet Rick, I trust you will very soon. I'd also like to thank those of you who joined us here in San Diego for our Analyst conference at the end of March and those of you who participated in the webcast. It was a great opportunity for us to meet many of you and to show you how we plan to produce above average long-term earnings growth and support a competitive and growing dividend going forward. Now on today's call, I'd like to accomplish two things. We will review our first quarter financial results and then we'll give you an operational update on our businesses.

Let's begin with our financial results. Earlier this morning, we reported first quarter earnings of $236 million or $0.97 per share compared with $254 million or $1.05 per share in the same period last year. All of our businesses performed well and we're on track to meet our earnings guidance for 2012 which is $4.00 to $4.30 per share. You'll note that this is the first quarter of reporting our financial results under our new operating unit structure. We now have six reporting segments which include our two California utilities, SDG&E and SoCalGas. We have two reportable segments within Sempra International, the South American Utilities and Mexico segment, and finally we have Sempra US Gas & Power which consists of the Renewables and Natural Gas segments. Now, let me hand it over to Joe so he can take you through some of the details of the financial results beginning with Slide 4.

Thanks, Debbie. At San Diego Gas & Electric earnings for the first quarter were $105 million up from $89 million in the year ago quarter. The increase in earnings was primarily due to higher equity AFUDC earnings compared to the year ago period driven by the construction of the Sunrise Power Link project that is very near completion. Moving on to Southern California Gas, first quarter 2012 earnings were $66 million compared to $68 million in the first quarter of 2011. I'd like to point out that until we receive final decisions in the SDG&E and SoCalGas general rate cases, we will be recording revenues based upon our 2011 authorized levels with no attrition plus an adjustment for the actual incremental costs of wildfire insurance premiums at SDG&E. Once those general rate cases are revolved, which we expect to occur in the second half of this year, we will record the cumulative impact of the decision from January 1 through the quarter in which the final decision is issued.

Now let's go to Slide 5. Within the Sempra International operating unit we have two reporting segments as Debbie just mentioned, at our South American Utilities which includes the electric distribution utilities in Chile and Peru earnings were $40 million in the first quarter of 2012, that's up from $22 million last year. The $18 million increase was due to higher earnings as a result of the acquisition of the controlling interest in our two South American Utilities in April 2011. Our Mexican operations include the Energia Costa Azul LNG terminal, natural gas pipelines, the joint venture we have with PEMEX, the Mexicali natural gas fueled generation plant as well as a small natural gas distribution business. For the first quarter of 2012, the Sempra Mexico segment produced earnings of $37 million compared with $39 million in the same period last year.

Now please turn to Slide 6. In the US Gas & Power business our two reporting segments are Renewables and Natural Gas. The Renewables segment represents our US based wind and solar business. The Renewables earnings were $10 million in the first quarter this year. That's up from $4 million in the same period of last year on a restated basis to reflect the change in accounting method for projects that we have with investment tax credits. The restatement reduced first quarter 2011 earnings by $4 million which is $0.02 of earnings per share. As we previously mentioned, beginning in the first quarter of 2012, we are using the deferral method of accounting for these credits. In the Natural Gas segment, which includes our storage and pipeline assets, the Cameron LNG terminal, the 1,250 megawatt Mesquite natural gas fueled generation plant and a small natural gas distribution business, earnings were $1 million in the first quarter of 2012. The decrease in earnings of $62 million compared to the prior year period was primarily due to the expiration of the CDWR contract. With that, I'll hand the call back to Debbie.

Thanks, Joe. Now I'd like to update you on some of the key activities within our businesses starting with our California utilities. Last month, we and the other major utilities in California filed our application in the cost of capital proceeding, seeking approval of a new proposed cost of capital to be effective in 2013. In this proceeding, the CPUC determines the appropriate and reasonable rate of return necessary to attract capital. This compensates the utilities for their business and financial risks and promotes continued, safe and reliable operations. Both SDG&E and SoCalGas requested adjustments to their capital structures and the authorized cost of debt, preferred stock and return on equity. SDG&E requested a decrease in the overall rate of return from 8.4% to 8.2% reflecting a lower cost of funds raised by the Company since its previous proceeding in 2007.

The proposal included a decrease in return on equity from 11.1% to 11% and an increase in the common equity component of its capital structure from 49% to 52%. SoCalGas requested a decrease in the overall rate of return from 8.68% to 8.42% also due to the lower cost of funds raised since its last adjustment in 2003. The proposal included a slight increase in the return on common equity from 10.82% to 10.9% and an increase in the common equity component of its capital structure from 48% to 52%. Both utilities also proposed to continue mechanisms that automatically adjust the cost of capital until the next proceeding proposed for 2016. The mechanisms would trigger adjustments in the event of market changes that exceed certain measurement levels. SDG&E currently has the same mechanism as Southern California Edison and Pacific Gas & Electric but proposed a safeguard provision to protect against extreme changes in interest rates.

SoCalGas currently has a different adjustment mechanism that is based on US Treasury. The other large California utilities used a mechanism based upon utility bonds and SoCalGas has also requested to use utility bond. SoCalGas also proposed the safeguard provision against extreme changes in interest rates. We expect a final decision in the cost of capital proceeding by the end of this year which will be effective in January 2013. I'd also like to remind you that for SDG&E this cost of capital filing only covers CPUC jurisdictional assets. SDG&E's Electric transmission asset also regulated by the FERC which currently has an authorized return on equity of 11.35% on actual equity. The currently authorized FERC return is effective until September 2013.

Please turn to the next slide. Now on to some of the other key regulatory proceedings. In San Diego Gas & Electric since Southern California Gas Company's general rate case proceedings, opening briefs were filed last month and replied briefs are due in May. We expect a decision in the second half of this year, which will be retroactive to January 1 of this year. Turning to our pipeline safety enhancement plan. Last month, the Commission approved memo accounts to track the project costs at SoCalGas and SDG&E and also transferred the proceeding into the Triennial Cost Allocation proceeding or TCAP which is a natural gas transmission and storage rate design proceeding. And finally, at San Diego Gas & Electric, construction of Sunrise Power Link is now nearly 90% compliment and we expect that it will go into operation this summer. When completed, Sunrise will add about $1.2 billion to SDG&E's FERC rate base which includes the impact of bonus depreciation. None of the project costs are currently in rate base but once the line is operational, we'll transfer the projects of work in progress to rate base.

Now I'd like you to go to Slide 9 for an update on our Cameron LNG export project. We've made excellent progress in moving our Cameron liquefaction project forward. Last month, we announced commercial development agreements with Mitsubishi and Mitsui. These agreements commit the parties to fund the engineering and permitting of the liquefaction project. In addition, the commercial development agreements are the precursor to the tolling agreements and equity agreements. The project we are developing is a three train, 12 million-ton per annum liquefaction facility. We have already agreed upon the key commercial terms of tolling agreements with Mitsubishi and Mitsui for a total of 8 million tons per annum from two liquefaction trains. This morning, we also announced that we have reached an agreement with GDF SUEZ for the remaining 4 million tons per annum of capacity. On the permitting and approval front, we initiated the FERC pre-filing process earlier this week and we expect that the FERC approval process will be complete in the second half of next year. Our application with the Department of Energy to export to non-free-trade countries is pending. We've previously received approval from the DOE to export to free-trade countries.

I'm very pleased with the early progress that we've seen with the Cameron export project and I look forward to updating you in the future as we take steps toward making this project a reality. Before we move on to the summary, I also wanted to mention that the CPUC approved SDG&E's power purchase agreement with 156 megawatt Energia Sierra Juarez wind project that we are developing within our Sempra Mexico business. We expect to develop this as a joint venture and to start construction this year following the receipt of the remaining authorization including those from FERC and DOE. Now let's go to the final slide. I'm very pleased with the results of all of our businesses for the quarter. We continued to execute on our strategy throughout the quarter and made significant progress on our key initiatives. We are on track to meet our guidance of $4.00 to $4.30 per share for 2012 and believe that we have a clear path to achieving 6% to 8% earnings growth over the long-term. Now with that, I'll stop and open up the call to take any questions.

(Operator Instructions) Stephen Byrd, Morgan Stanley.

I just wanted to talk about the Southwest merchant gas fired assets, given the SONGS outage and just with low natural gas, do you have any just updates or implications for the performance of those assets or just general interest in those assets?

Well, I would say that there has been a lot more interest generally in generation in the Southwest. There are a number of RFPs that are out right now or coming out in the very near future to look at long-term contracts for generation. Some of that is associated with the ones for cooling issues, some of it is associated with looking at possible coal retirement. I'll ask Mark to add a little bit of color on what's happening in the current marketplace.

Well, clearly with the outage at SONGS and some of the other maintenance issues with some of the other plants in the region, we've had a tighter market than we expect for this time of year. As we roll into summer, it looks like we're going to have -- I would say, as we look at it today it looks like we could have a slightly tighter market than what we've experienced in the past couple of summers. So that should have some upward pressure on pricing but we're not -- we really haven't made any change in our outlook for what we think that business will do for the year. We could be pleasantly surprised but I think at the end of the day we're sticking to the numbers that we gave you at the Analyst conference.

Great, that's helpful and then just on LNG export, actually this is on Costa Azul. Just curious are you having any discussions on possibly turning that into export or is that not really a focus area right now?

We certainly are taking a look at that. It's an interesting opportunity for us. It has some advantages as being closer to Asia and not having to go through the canal and all that, so we are definitely taking a look at it. We don't have as much land there as we do in Cameron but it is something we could handle maybe one, maybe two trains at the most there but it is something that we're exploring. But our top priority is to get Cameron online and to move that forward and obviously we took a big step in that today and we're really excited about it and we think that will add tremendous value.

Yes, I would just add that unlike Cameron, the facility in Baja is fully contracted for 20 plus years. So it's not -- for us, the priority is definitely on getting Cameron which is not fully contracted fully utilized and producing earnings.

Kit Konolige, Konolige Research.

A couple of questions kind of following on this. On Cameron, can you give us a perspective on I think Cheniere has gotten their equity infusion and is ready to roll. Can you update us on where they are and what if any implications that has for you guys on a competitive basis?

(technical difficulty) -- very well, the GDF announcement that we had today kind of completes the circle for us so we have all three trains now that we have customers for and we're just going to work forward on moving that. I think one of the things that -- where we are, what we feel very comfortable with is our partners in this project and our major customers are all experienced LNG players that have long customer relationships with Korea, with Japan, with Chile, with places that are some of the biggest users of LNG in the world. So we feel like we're in a very good position to move our project forward.

If I can just follow on that a little bit, can you then point out to us what you see as I think I know generally but what you see as kind of the next critical steps that we need to keep an eye on, obviously -- ultimately, we need Federal Government approval to go ahead and financing but if there's specific benchmarks?

Yes, look. I think the things that are the big milestones to come forward is -- first let me just remind everybody that we do have export capability to all the free-trade countries, and that includes Korea which is a very big user of LNG. The next step is to get the non-free-trade export permit and we expect to get that as we've said sort of later in the year, it could be the earlier part of next year but that's something that we've got to get done. We also would need a FERC permit to construct and we are working on that. Right now, we would expect to get that some time late in the year. We are working on the final design and engineering, those kinds of things need to be done to get the FERC permit, so we've got a ways to go. We are just off to a very good start.

Paul Patterson, Glenrock Associates.

I'm sorry if I missed this. You were talking about the MICAM filing that you guys are -- that you asked for a waiver on I think and what's the procedural schedule for that? When do you think the CPUC will act on that or whoever it is who acts on that to give you the waiver on it?

Well, we would anticipate that since we've made our filings for the cost of capital that would really take precedent, that we have made a prior filing a couple years ago at SoCalGas because of the impact of some of the government policy issues on using US Treasury and that was never envisioned when that mechanism was put in place. So when we made those filings, we had some discussions with the CPUC at the time about us filing for the cost of capital. So they were expecting us to be making this filing. So I think that we will be on the same schedule as all of the utilities and that would have us having a decision by the end of this year with a new cost of capital mechanism and cost of capital structures going into play on January 1, 2013.

Okay, but is there any idea when they will actually formerly say that you don't have to file this MICAM letter?

No, I don't know.

Okay, that's fine. Then the wildfire litigation liability seemed to go down. I was wondering what lead to that and what -- if there was an EPS impact. I noticed on the balance sheet just what was going on there?

I'm going to have Joe go through the numbers on the wildfire reserves litigation.

Hi, Paul. It was mostly payments that were made. We're resolving many, many -- remediating many of these cases like 60 a month and so mostly it was about $130 million of payments during the quarter.

Okay.

So it wasn't an adjustment to the reserve so much as it was payments down.

Okay, great.

There was no impact on the P&L as a result of that.

I got you. Then on the liquefaction, just on the DOE, the issue of export -- potential export restrictions with non-free-trade agreement countries, excuse me. Some companies have in their negotiations with shippers, put that risk on the shipper if you follow me. In other words, it's not one that the actual terminal owner will have, at least that's my understanding. I'm just wondering how you guys have approached that with your contracts for the shippers and stuff, if you could --

I'll have Mark go into a little bit of color on that.

Yes, it's a great question. In the commercial development agreements that we have signed with our three customers & partners, they've agreed to a long-term tolling arrangement which does not include an out for losing that license. So if we were to get the license and lose it or not get it, the long-term tolling arrangement doesn't have an out for that. But the long-term tolling arrangements haven't been signed yet. So there is some -- if we never got it between now and the time that we would sign those long-term tolling arrangements, it may change things. I think the way we stand now given the partners that we have, it probably has more to do with the sizing of the facility than whether it actually moves forward or not. We feel like there's enough of a market currently that there would be a market for the facility even if we didn't get it but at the end of the day, we expect to get it, it makes the most sense. Frankly, the long-term implications of that would rest with the shipper. Now that's one of the reasons too though, that we want them to be partners in the facility because if there was any kind of disruption like that it's nice to do this as everybody has an equity interest in the facility and we would work together to have the right outcomes.

Okay, that's excellent. I think that's great. Then just finally, any sense as to how much liquefaction the North American continent can actually handle. As you know, you're not the only ones who are announcing this stuff. Just any sense we should think about the natural sort of just economic constraints there are of just sort of the amount of stuff we're hearing in the announcement on.

Well, let me take that first because I think Debbie has a comment on it too. Look it's a great question because I think there is an awful lot of concern in the country about exporting a tremendous amount of gas. I think one thing we all have to remind ourselves is that the LNG market, while it is big, it is a fixed amount. We have lots of competition around the world to sell that gas to those countries that need it. So right now, we think that there's a potential kind of excess capacity in the near term or excess demand in the near term, primarily driven by Japan's desire to -- as they've shut down their nuclear fleet and their desire to wean themselves off nuclear and move to gas and then as the economies pick up, it's probably something like 20 million tons a year. I think what we're talking about is a facility that could be as much as 4 million. When we look at some of the other facilities, there's enough to sort of absorb what could come out of the US, but you aren't going to be in a situation where we're going to have 20, 30 Bcf a day being exported. It's probably not that big of a market right now.

Yes, I just want to clarify something Mark said. I think he was talking about in CFD versus metric tons, because when you look at the potential for export, it's higher than the 20 million number.

Oh, yes. Maybe I confused the numbers. But it is, the potential is -- just Japan alone is probably in excess of 10 million cubic feet a day -- 10 billion cubic feet a day or something like that. So there is some potential for export but it is in an unlimited market. So I don't think the US has to worry that we're going to have a large share of our gas supply go offshore. That's probably not the case.

What I was going to say is yesterday, I'm sure many of you saw that the Brookings Institution published a study and they looked at an export level of 9 Bcf a day out of that study and showing very minimal impact on gas prices coming from that. At least their approach was that it should be open to all parties who can participate in the market. I think that's the position we would really like to see adopted, is that this becomes market based. We think if this is market based we have a very competitive facility and that we will be with our counter parties that we've signed these CDA agreements in, we will be moving forward with construction and export if we can have a market based type of approach like Brookings suggested.

Greg Gordon, ISI Group.

I have a question on LNG. Good morning. Can we talk a little bit about the cost of capital filing? You specifically -- we know that you've asked for ROE at the level that you put in your presentation, but I think when we look at the trend for authorized ROEs nationally, our ROE of 10.9% or 11% is a bit above the national average. But more importantly, there's some cases pending in California, namely a water case or two where it looks like the ROEs could come in demonstrably lower than that. What gives you comfort that in your dialogue with the regulators, you're be able to articulate the sort of fact set that's supportive of ROEs closer to what you filed for?

First of all let's take the water case as a good benchmark example. If you look at historically, the differential between energy companies and water companies in ROEs authorized it's about 100 basis points so authorized ROE of water companies in the 10 range would definitely be equivalent for energy companies in the 11 range based upon historical precedent. The risks seen in those businesses are quite different so there's always a much higher ROE granted to the energy company. I would also say that California has seen the not to have ROEs that would allow us to attract the capital necessary to make the kinds of investments that the State is expecting, in terms of clean energy, Renewables, having the 33% Renewables contracted, having the balance sheets to support that, all of the infrastructure, the pipeline safety investments that we will be making and so I think that if you kind of look at those facts I think they do support an ROE that's in the 11 range.

Ashar Khan, Visium.

My question has been answered, thank you.

Mark Barnett, Morningstar.

A quick question on the GDF SUEZ agreement, too many earnings calls to see it, the announcement yet, but is that also going to include a future equity investment from GDF?

Yes, the way that all the parties we've worked with and signed agreements are, we're looking at making this a joint venture where we would have most likely 50% ownership than they would. The three parties have a sharing of 50% ownership and all of those parties have expressed an interest in taking equity. We haven't negotiated the final terms of that but that is what's envisioned.

Okay, and then I guess given the approval last month of the memo account, is any of your pipeline CapEx, has any of that timing shifted a little bit closer into 2012 or are you still comfortable with where you presented at the Analyst day?

Yes, we're still looking at 2012 being largely about doing the engineering studies and the planning for the construction and expecting that the expenditures would be somewhere in the $100 million range for 2012.

Michael Lapides, Goldman Sachs.

Two questions. One related to the utilities. Utilities posted great quarters, especially SDG&E and especially given the challenge of not having a rate order in hand. If we go back and look at PG&E's first quarter from last year or Southern Cal Edison from first quarter this year, both had pretty significant challenges in terms of year-over-year earnings at the utility. Can you talk a little bit about what the drivers were at SDG&E? Was it all just AFUDC? Was there a significant change in the O&M level? A significant change in the cost structure, et cetera?

Yes, the main driver at SDG&E, Michael, is definitely the AFUDC from Sunrise. That is the significant issue. What I would say though is that both utilities, we're trying to operate at the revenue requirement that we had last year because until you get a decision that's the prudent thing to do. So we've had a history of trying to operate our businesses until we get the CPUC decision at the level that has been previously authorized and raised.

Got it. The other thing on the renewable side here in the US, can you talk about where you see -- what RFPs are kind of out in the market and therefore publicly known for either solar or wind in the desert Southwest? I'm thinking some of the bigger ones.

Mark, do you want to?

Sorry what was it?

The renewable RFPs in desert Southwest and what are some of the bigger ones that are out right now?

Well, I guess we wouldn't really talk about the ones that we're currently bidding on, but there are still some several fairly large ones that are out there. There's some that have been in process for a while that people have had trouble now meeting some of the requirements and they're coming out for additional opportunities. But we don't -- probably the numbers that we presented at the Analyst conference for our fleet are likely to be what we have then for the rest of the year. We haven't seen, I don't think anything that would come up now would happen until at least the following year.

(Operator Instructions) There are no further questions in queue. At this time, I would like to turn the conference back over to Debbie Reed for any additional or closing remarks.

Well, thank you all for joining us this morning for our first quarter call. If there's any follow-up questions you have please contact Rick or Scott or Victor and have a really nice day.

That does conclude our conference. You may now disconnect.