桑普拉能源 (SRE) 2013 Q1 法說會逐字稿

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

At this time, I am pleased to turn the conference over to Mr. Rick Vaccari. Please go ahead, sir.

Good morning. 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 2013 financial results. A live webcast of this teleconference and slide presentation is available on our website under in the Investor section.

With us today in San Diego are several members of our Management team. Debbie Reed, Chairman and Chief Executive Officer; Mark Snell, President; Joe Householder, Executive Vice President and CFO; and Trevor Mihalik, Controller and Chief Accounting Officer.

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 reports filed with the SEC.

It is important to note that all of the earnings per share amounts in our presentation are shown on a diluted basis. I would also like to note that the forward-looking statements contained in this presentation speak only as of today, May 2, 2013, 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 it over to slide 3, and let me hand it over to Debbie.

Thanks, Rick, and thanks to all of you for joining us today. During the first quarter, we completed two significant transactions that further our strategy.

First, we closed the sale of one block of the Mesquite Power plant for about $600 per kilowatt, which further reduces our exposure to merchant generation, consistent with our plan. Second, we completed an extremely successful initial public offering of equity in our Mexican subsidiary, which was preceded by an issuance of about $400 million of local debt. This is consistent with our strategy to create capital structures in our international businesses that allow them to grow with local debt and equity.

The success of our Mexican transactions recognizes the value that we are creating in our Mexican business. In fact, the increase in the IEnova stock price places our 81% stake at roughly equal to the total equity market cap based on the IPO price. The stock performance since the offering clearly demonstrates the high value that investors place on this business, and allows our investors to use this as a reference to determine what our Mexican segment is worth.

This quarter, we also received the long-awaited proposed decision in the general rate case at our California utilities, and a final decision on this case should be voted out soon. And finally, we continued to make progress during the quarter on our key projects, including Cameron Liquefaction, where we received a definitive schedule from FERC on their approval process.

We will now go through each of these items in more detail after we discuss the financials. But before doing so, I would like to turn to Slide 4.

There was a lot going on in our reported earnings this quarter, and I want to share with you some of the issues that are included in earnings that caused us not -- to not meet your quarterly expectations. Slide 4 lists a number of items from the first quarter, all of which are either one-time in nature or will turn around before year end. This list includes the gain on the sale of one block of the Mesquite Power plant; a deferred tax charge related to the IEnova IPO, and impairment on our holdings in Argentina in anticipation of a sale by year-end; a reduction in our renewable grant receivable due to the federal budget sequestration; marked-to-market losses due to higher gas prices, which should reverse by the end of the year; an adjustment to our consolidated tax expense, which is expected to reverse by year-end; and natural gas transmission integrity costs in excess of amounts currently recovered in rates that will be balanced under the proposed decision in RGRC.

Of course, one of the most significant issues impacting our performance is the continued delay and a final decision in our 2012 general rate case at SDG&E and SoCalGas. And as I mentioned, we will discuss this in more detail a little later. We hope this table helps you reconcile our reported earnings to your projections.

Now, let me hand things over to Joe to further discuss our financial performance during the first quarter, beginning with slide 5.

Thanks, Debbie. Earlier this morning, we reported first quarter earnings of $178 million, or $0.72 per share. This compares to earnings of $236 million, or $0.97 per share, in the same quarter last year.

As Debbie just mentioned, this quarter's earnings were impacted by a number of issues, including the continued delay in the final decision of our general rate case. And a one-time $63 million deferred tax charge incurred as part of our initial public offering of our Mexican operations. As a result of recording the tax related to the IEnova IPO in the first quarter, we will be able to now quickly distribute to the US parent about $200 million due to the taxable income associated with the IEnova transaction. Since we can bring this cash back earlier than originally forecasted in this year, we have decided to defer any further repatriation until 2014, when we will continue with our planned repatriation of approximately $300 million per year.

While we did receive a proposed decision in our utility general rate case in the first quarter, we will not update our guidance for 2013 until we receive a final decision. The draft decision is on the CPUC's agenda for May 9, and assuming it is voted out on that day, we intend to provide an update to our guidance at our analyst conference on May 23. We would expect to see some changes in the PD based upon the process Commissioner Ferron has put into place, and Debbie will discuss the key issues a little later on the call. However, if the current PD is adopted as written, we would expect to be at the low end of our 2013 guidance range of $4.30 to $4.80 per share.

Now let's go through the results for each of our segments in detail, beginning with our two California utilities on slide 6. At San Diego Gas & Electric, earnings for the first quarter of 2013 were $91 million, down from earnings of $105 million in the first quarter of 2012. Southern California Gas first-quarter 2013 earnings were $46 million, compared to earnings of $66 million last year.

Earnings were lower at both California utilities, primarily due to higher operating expenses, including depreciation, with no increase in authorized revenue due to the delay in our 2012 GRC decision. We have now operated since 2011 with no increase in our revenue requirement, as we await the final decision in the GRC.

The first quarter results at SoCalGas were adversely impacted by $4 million related to the after-tax effect of natural gas transmission pipeline system integrity program costs, which exceed the amount currently being recovered in rates. Once the GRC decision is final, the excess costs for this program incurred since the beginning of 2012 will be balanced, and all costs will be recovered in rates.

Additionally, as a result of the cost of capital decision, our revenue is reduced to reflect our actual embedded costs of long-term debt, which is lower than what was previously being recovered in rates. This true-up negatively impacted earnings by approximately $5 million at SDG&E and $3 million at SoCalGas in the first quarter of 2013, and we expect a similar impact throughout the remainder of the year.

Finally, SDG&E's first quarter earnings were positively impacted by higher transmission earnings, while SoCalGas earnings in the first quarter of last year included $4 million related to incentive awards associated with the Gas Cost Incentive Mechanism. We anticipate a similar GCIM award to be recorded by SoCalGas later this year, once it is approved by the CPUC.

I am cautiously optimistic that this is the last quarter I have to say this, but please keep in mind that until we receive a final decision on our general rate case, we continue to record revenues based upon 2011 authorized levels, plus an adjustment for recovery of incremental wild fire insurance premiums at SDG&E based on recent CPUC decisions for recovery of prior-year's increased premiums. In the quarter the general rate case is decided, which we now expect will be the second quarter of this year, we will record the cumulative impact of the decision from January 1, 2012.

Now, please move to slide 7. At our South American utilities, earnings were $37 million in the first quarter of 2013, compared to earnings of $40 million in the same period of 2012. We recorded higher earnings from operations at our businesses in Chile and Peru, but this was more than offset by a $7 million impairment charge related to our investment in two Argentine natural gas utility holding companies. We continue to actively pursue the sale of these investments, and we expect to dispose of them by the end of the year.

First quarter 2013 earnings for the Sempra Mexico segment were $31 million, versus earnings of $33 million in the first quarter of last year. The small decrease is due primarily to the minority interest from the IEnova IPO.

Now please turn to slide 8. Moving on to Sempra US Gas & Power, the natural gas segment earned $53 million in the first quarter of 2013 compared to $1 million in the year-ago period. This quarter's earnings include the $44 million gain, net of related expenses, from the sale of one of the two blocks of our Mesquite Power plant.

The increase in earnings for the quarter was also due to $9 million of higher earnings from our US LNG business, due to the timing of cargo marketing operations. These increases were offset by $10 million of higher marked-to-market losses related to movements in gas prices. In the first quarter of 2013, marked-to-market losses were $12 million, which we expect to reverse by the end of the year.

The Renewables segment generated earnings of $4 million in the first quarter of 2013, down from earnings of $10 million in the first quarter of 2012. The decrease is primarily driven by two factors. First, due to the federal government sequestration, there has been a reduction of 8.7% in the amount of cash grant awards to be paid by the US Treasury. This resulted in a $23 million decrease in our cash grant receivable, and a reduction in earnings of $5 million this quarter.

Second, there were tax benefits related to the completion of solar assets placed in service in 2012. The decrease in earnings was partially offset by higher levels of production tax credits from our wind assets, many of which were placed into service in late 2012.

Now let me hand the call back to Debbie.

Thanks, Joe. We have talked about our intent to optimize our capital structure and our international business unit. And I am pleased that we took a big step in that direction last quarter through extremely successful debt and equity offerings at our Mexican subsidiary. That subsidiary, previously called Sempra Mexico, now IEnova, raised nearly $1 billion of external capital during the first quarter.

In February, we had two successful debt issuances at IEnova that raised a total of about $400 million, at very attractive terms. In addition to raising capital, the debt offering helped educate investors about our Mexican operation, and the strength of the balance sheet at IEnova allows for further leverage as we continue to grow.

Then in March, IEnova sold almost 19% of its equity, at a value of around 10 to 11 times 2013 expected EBITDA under IFRS. The demand for this offering was tremendous. IEnova is the second largest energy company in Mexico, and the first energy company to be listed on the Mexican stock exchange. The strong demand allowed us to create a shareholder base which is comprised of a broad group of Mexican and international investors, with the majority coming from Mexico, further bolstering IEnova's position in that market.

Please turn to slide 10. Even with pricing at the top of the published valuation range for the offering, the market has shown continued enthusiasm for IEnova, as the stock is up 22% since the IPO. When we launched the IPO, the implied valuation for IEnova was around $3 billion, and today that is about $4 billion.

As you can see from the chart on the left, our 81% holding in IEnova is worth nearly double today what our book value in those assets was at the end of 2012. This is great for Sempra shareholders, as it provides transparency into the value the market ascribes to our Mexican subsidiary, and allows IEnova to continue growing without the need for additional Sempra capital. Both the debt and equity transaction in Mexico represent an important step in optimizing our international capital structure. And since all three of our international businesses have substantial ability to increase leverage to fund growth projects, we will continue to look for future opportunities.

Let's go on to slide 11. In March, we received a proposed decision in the general rate case for our two California utilities. The proposed decision authorizes a revenue requirement for 2012 of $1.749 billion and $1.952 billion for SDG&E and SoCalGas, respectively. This represents respective growth of 8% and 6% over currently-authorized levels. The decision also establishes a four-year GRC period through 2015, subsequent escalation of the adopted revenue requirements for 2013 through 2015, using the Consumer Price Index, and the continuation of the Z-factor mechanism for qualifying cost recovery.

While there were some positives in the proposed decision, such as the capital requirement levels that are generally in line with our requests, we filed comments on the proposed decision last month requesting a few significant changes. First, these changes aim to address certain inconsistencies between our PD and prior CPUC general rate case rate case decisions. We strongly believe that all California utilities should be treated equally from a policy perspective on routine issues, such as attrition mechanism and employee compensation.

The most significant inconsistency between the Edison decision that was voted out unanimously just four months ago, and our proposed decision, relates to the attrition mechanism, which calls for the use of the CPI urban index. This index does not reflect the true escalation in costs that a California utility phazes, and based on historical trends, would provide SG&E and SoCalGas annual revenue increases that are about 1% lower than what the Commission adopted in all recent rate case decisions.

Another major inconsistency relates to the proposed amount of rate payer funding of our employee compensation plan. RPD calls for rate payer funding of only 50% of our performance-based compensation, while there have been recent CPUC decisions approving 90% of the same. Given that the CPUC's own employee compensation study affirmed that our total compensation, which includes performance-based compensation, is at market levels, we don't believe it makes sense for our rate payer funding to be reduced, as the record in the rate case clearly supports full funding. We also recommended changes that helped to ensure both SoCalGas and SDG&E have sufficient funds to maintain safe and reliable operations, and continue providing the level of service our customers expect and deserve.

The need for changes in the PD is most acute at SoCalGas, where the proposed decision reduced funding for critical operations that are required for that company to do basic work, such as leak detection, and locate and mark services. We think it is highly unusual, given its focus on safety, that the Commission would choose to reduce funding in these core services. We have made our concerns known, and we expect that with a better understanding of the facts, most, if not all, of this funding will be reinstated in the final decision.

Commissioner Ferron has acknowledged that some errors were made in the PD. He has put in place a transparent process to allow parties to address their concerns with the proposed decision, and we have made our case for improvements. We expect him to do the right thing, and make the appropriate changes. We anticipate that a final decision will be reached on the GRC in the second quarter. And as Joe noted earlier, we hope to be able to provide an update to our financial guidance that reflects the outcome at our analyst conference on May 23rd.

Let's now go on to slide 12. Turning to our efforts to develop liquefaction at our Cameron facility, last month FERC issued a notice of its schedule for the environmental review of the project. Cameron is the first and only proposed LNG export application currently pending before FERC to have reached this milestone in the permitting process. Based on the published schedule, the final environmental impact statement will be released in November 2013, and the final application should be approved by early 2014.

The DOE non-FTA permit is of course the other major outstanding permit we require, and we continue to expect to receive it in 2013. FERC's decision to release the schedule shows the relative strength of our project, and we continue to believe that Cameron is well positioned to be among the first applications that DOE reviews and approves. With the timing of these regulatory approvals in mind, the project remains on schedule to start construction next year and begin operations in the second half of 2017. On the commercial front, we are nearing completion of the tolling and JV agreements with Mitsubishi, Mitsui and GDF SUEZ. We expect that those agreements will be signed later this month, and I expect we will have much more to say on this at our analyst conference.

Now, please turn to slide 13. In summary, we took a number of key steps forward during the first quarter in achieving our long-term goals. We look forward to seeing many of you at our analyst conference on May 23 in New York, where we will discuss our goals and overall strategy in significantly more detail. With that, I'll stop and open up the call to take any of your questions.

(Operator Instructions)

Faisel Khan, Citi.

On the -- IEnova, just wondering if you could elaborate a little bit more on what your plans are going forward for your participation in the entity? Meaning that you have roughly 80% right now, and if the Company raises more equity in the future to grow the business, will you maintain your 80% stake or will you let that flow down?

I would say first off, we really like this business. The reason that we wanted to do the IPO was so that we could grow the business. So I think at this point, we like what we have in both Mexico now and Peru, with the 80% ownership, that we feel that's a good share balance, with having local ownership and local debt, plus our 80% ownership, and we haven't really thought of anything beyond keeping that structure. I'm going to ask Mark and Joe, because they were part of the road tour on this, to add any comments.

Yes, Faisel, hi, this is Mark. We don't have any current plans to reduce our ownership below where it currently -- where it is. I think if you look at what we've done in Peru over the years, it mimics the ownership structure that we have down there, and I think we're pretty satisfied where it is. We have a lot of great projects on the horizon for IEnova, but the good news is we still have quite a bit of debt capacity. So it is -- into the foreseeable future, we don't really see it changing.

Okay. This is Joe. I'll add on to that. I know there are probably people on the call that participate in the road show, and I know many of the names I saw. What I said when I was asked this question many times is, just as Debbie and Mark said, but we don't have any plans to sell down. We probably would never sell any of our shares. And as Mark said, we have plenty of debt capacity. But the growth there is tremendous, and if they continue to grow at this pace and they need to raise more equity, I think we would let them do that. We would have to determine at that time whether we wanted to participate or allow ourselves to be diluted a little bit. But as Debbie said, we really like the business and want to stay in it.

On the other hand, we've always said we like the size of our international business around 30%, one-third of Sempra's overall structure, so as we continue to grow our US business, we get Cameron in, we can have more international earnings. But if IEnova can grow -- somebody asked me on the road show, can IEnova be bigger than Sempra? I said I hope so (laughter). So, we'll see.

Okay.

I would say this. I don't think that we would see -- we would expect that our earnings share from IEnova over the years will grow.

Right, exactly.

No matter what our percentage is, our share earnings will grow.

Absolutely.

Okay. Thanks, makes sense. Then can you give us an update on the ROE case filed for the power gen -- electric transmission assets?

Sure. We made our filing at FERC, and we used the FERC-prescribed methodology, contrary to some of the other cases that have been in the news. We used the FERC-prescribed methodology, which takes the median of your peer group of electric utilities, and we did that under four different methodologies that we filed at FERC. That came out with a 10.3% as kind of your base ROE. Then we added to that the allowance of 50 basis points for being part of an ISO and 50 basis points for our utility-specific risks. And as you know, in California, we have things like the debt equivalency for the power contract, and things like that, that FERC has looked at as being kind of utility-specific risk to consider. So we made a filing of 11.3%. The rates should go into effect on September 1 and, you know, we'll wait and see what -- the outcome. But we do feel we followed their methodology.

When do you expect an outcome from the FERC?

September 1.

September 1, okay. Got you. Last question for me. Where are you right now on the feed for the Cameron facility?

Well, we have the engineering work under way. We actually are in the process of selecting between -- there's two -- two parties, two contracting groups that are bidding for the ETC, and that -- we have a pretty well developed feed that they can bid on. Then we'll do all the detailed engineering after that. We would expect to select our contractor by the end of this year. And then, again, expect to begin construction next year. Mark, do you want to --

No, I think you hit all the points. We have a very well developed feed and it will get enhanced, but it's out for bid now, so we'll have EPC contracts at the end of the year.

Okay. Great. Thanks for the time. I really appreciate it.

Steven Fleishman, Wolf Research.

Hi, Steven.

Hi. Had a couple questions. Just on that transmission issue, I thought FERC regionally or at least [staff] has been pushing single utilities to use a midpoint, not a median, and then if you're in an ISO or RTO, you can get a median?

No.

Is that --?

Well, we are in an ISO, and the FERC rules for an ISO is you use the median. And where there have been some issues is when utilities have not followed what the rules are for, you know, what -- their structure. We're an ISO. We're supposed to use the median of the peer group. Then we do four different studies, using different economic modeling mechanisms of what the ROE comes up under those studies, and that's what we submitted to FERC.

Okay. Switching gears to the -- just a clarification, the tax expense on the IEnova transaction, you're keeping that -- that's part of your ongoing guidance for this year, the $0.25?

Yes.

But then you're not going to be repatriating the other -- the annual money that was typically about a $0.30 hit every year? Okay.

Well, we will repatriate starting next year. But because we had the already paid taxes on this, and we can bring the $200 million back in the very near future, then we didn't see a need to bring back -- if you look at our cash balances, our cash flow statement is very, very strong, and so it just didn't seem to make a lot of sense for us to do additional repatriation this year.

And I would just add on to that, Stephen, she said we already paid tax. Actually, we're not going to pay the taxes for four or five years because of the NOL, but we incurred the expense on the books.

Okay, and then just at the year end, when you reported you had that slide with the kind of growth rates off the base, et cetera, I mean, is all of that -- that slide all still relevant? In terms of the different growth rates?

Yes, I mean, there's nothing in terms of our projects, and the fact that we have all of these projects that we have underway, that the majority of them are already contracted or part of the utility, that would change in that slide. What we will do is if we can get a final decision in the rate case, and enough time to analyze before the analyst meeting, then we will give you an update to that at that time, and we'll give you new guidance numbers and new ranges. Without having a final rate case decision -- we sure wish we were not in this situation, either. It's gone on a long time, and we would like to be able to give you more than that. But hopefully by the time of the analyst meeting, as I said, that this is on the agenda for a vote of our final rate case on May 9, and so if it comes out then, we should be able to give you all of that at the analyst meeting in a few weeks.

Okay. And just -- but in theory, to some degree, the GRC also just sets the base, and then the growth rate --?

And the growth rate that we showed you -- I don't see anything substantively different in the growth rates that we showed you, but we want to give you better guidance on the range for this year that begins the growth rate, and then, you know, what that ends up being at the end of the period of time, and we're just not able to do that absent a rate case. I wouldn't ignore at all what we gave you before. I just think we would like to further refine that for you at the analyst meeting.

Okay, and one more question, different topic. The DOE non-FTA approvals, what's your sense on the order -- essentially the order of the queue at this point, and when do you think they will rule on you -- on Cameron?

Well, a couple things. I'm not so sure that there's going to be a queue, where one project is going to come right after another. It may be very well that the decision is to take a group of projects that have -- are under the level that was in the study that inter -- that was done last year, and that study, I think, went up to 10 Bcf of export. And so we think that we are in good place in the queue, we're the only facility that is in the FERC process, and that usually tends to be that tends to be -- the critical path is getting that FERC approval. So we have some dates certain as to when that would come forward, but I don't know that the queue is going to come out one by one. If you did that, I think we're number four or number five in that queue, but we also think there is a possibility they may approve a number of projects all at one time.

And do you have a sense on either -- I'm sorry. Go ahead, Mark.

I was just going on to say, I think when we talk about the queuing order, let's remind ourselves that's the queuing order in which the applications were filed. And while they have indicated that will pace -- or play some bearing on it, it isn't necessarily so that's going to be the order. We don't know that. But I do think that all of the feedback that we're getting out of Washington, all of the things that we're hearing, that we believe our project and the other brownfield projects are likely to be approved.

This year.

This year, and we -- you know, we continue to believe that. We haven't heard anything contrary to that. And I will say that there is nothing on the record at the DOE that would indicate that they shouldn't approve these projects. I think that's an important point to remember. There is -- there's been no real record made of any reason not to approve them. So I suspect that they will get approved, and we're confident that it's going to happen.

I would add to what Mark just said, too, Moniz, who is in the confirmation to head up the agency, made very clear that as the Natural Gas Policy Act stands today, you really have to make a case as to why they shouldn't be approved. The burden of proof is on the other party. So the relevance of what Mark is saying is someone has to come in and make a case as to why these projects are not in the public good. Everything that's come out has shown that these public projects are in the public good, and Moniz commented on that during his confirmation hearing.

Great. Thanks so much.

Stephen Byrd, Morgan Stanley.

Hi, Stephen.

Hi, good morning. I just thought I would check in on the overall commercial arrangements. You mentioned fairly soon you'll have tolling and JV agreements in place on Cameron, and I just wanted to check to see if there was any evolution of your thinking on the commercial terms, or the nature of the partnership that you're seeking in terms of capital commitment, in terms of degree of risk you're willing to bear, just in general without going into too much specifics?

I would say what we've told you is the way that it's absolutely heading, which is that we would be committing our existing facility as our equity contribution, and that ourselves and our partners would then form a joint venture, and that the joint venture would finance about 70% of the projects, and each of the partners would then put in additional equity. And then depending on what the project costs, there may be some additional requirements for equity, but we would anticipate that to be funded largely by the income from the trains as they each come on. So that's the structure. There's nothing that we're seeing that would change in that structure. Mark, do you wan to --?

Yes, the only thing I would say is sort of the broad parameters that we laid out last year at our analyst conference, those are all still, you know, roughly the same, and we've marched along to that. There isn't anything -- there isn't anything that's coming up in the JV structure or the tolling structure that's significantly different than what we anticipated. And then we'll give you an update at the analyst conference, but I don't expect that anybody will be surprised by anything.

Okay. That's helpful. And so it sounds like there's nothing in relation to that, that would prohibit you from, for example, pursuing an MLP structure down the road if that was something you wanted to do with this business?

No, no, that's a great question. I'm glad you brought it up. We -- you know, we specifically designed the JV agreements and the tolling arrangements to allow for an MLP structure, if that's the best available capital at any given point in time. So that's -- you know, it's definitely still in our plans.

Great. Thanks so much. Just a very quick, small question on the Argentina businesses. Should we be thinking of that in terms of any material proceeds or, you know, further accounting adjustments there going forward?

Joe? I'm going to have Joe discuss that.

Stephen, the value of the assets, and it's been reported in our previous SEC reports, it was written down to $30 million this previous to this quarter. So there's no specific proceeds there, but what's important is, because of the impairment that we took many years ago, we still have a large tax basis. So we're expecting, as soon as the sale takes place, to file a quick carry back claim and get about $80 million of tax back on this.

Okay. And that tax benefit, help me understand how that -- I sometimes get confused as to how that translates back up to the mothership, as it were?

Yes, we'll get the cash here. It's US tax. It will come to us, and there won't be an earnings effect of it. The earnings effect was booked long ago, but we'll actually get the proceeds from the sale, plus this $80 million of cash.

Okay. Beautiful. Thank you.

Thanks.

Thank you.

Greg Gordon, ISI Group.

Hi, Greg.

Thanks. Hi, guys. Most of my questions have been answered. I think you've pretty much answered the one remaining in your script, but I just want to be clear. Did you say that if the attrition mechanism was not put in consistent with precedent, that was worth about 1% to revenue annually? Is that right?

What I said is if you look at the difference between what was granted in our proposed decision, which we would hope to get changed, and the utility-specific index, which has been used in virtually all general rate cases of recent, that is about a 1% difference on an annual basis in the attrition.

Right, and so -- you know, I'm with you. It sounds like they ought to be consistent in its application. But if they decided to change that and stick with the proposed decision, it would be sort of 1% less revenue in each of the years of the rate period?

That would be the case, but if that were the case, we would obviously have to manage our business to that. And, you know, that's what we made clear, is that with the focus that is on the Commission right now, with their own consultant raising concerns about the order of priority that they place on safety in the -- in terms of things, we would find it odd that they would look at doing this type of thing now for our companies, when our performance has been so stellar over several years. And so, you know, we think that this is something that should be adjusted in the final decision. We have made our case very clear that the basket of bananas and eggs, and things like that, is not reflective of the cost of utility operations. So we gave them some pretty specific information on this. There is a lot of support on the record in the case that would justify that this should be changed.

Okay. Thank you.

Neel Mitra, Tudor Pickering.

Good afternoon.

Hello. How are you, Neel?

Good. Question on Chile. Now that you've sold down about 20% in Peru and Mexico, you know, on the last call you said you would consider selling down some of the interest there. What are your thoughts on that? Has anything changed in your thinking?

Yes, I mean, we're looking at it. The issue at Chile is that there is an incremental tax that occurs in Chile that we would have to pay for repatriated dollars. And so the benefit of that there and doing the equity issuance is there, and then looking at that as any kind of repatriation source doesn't -- is not as attractive to us as Peru and Mexico. The other thing with Chile is that we have a lot of cash there for investments. We have the ability to leverage. We're underleveraged there. And so we're looking at all of that in the context of what we want to do.

We like the model of the 80% ownership, but we're only going to do that if it really makes sense, and we would do it at a time when it would make sense. We're trying to -- we have the transmission projects we're doing in Chile right now. We're bidding on some additional transmission projects there. If we start looking at having all of this growth that we hope to see there over the next few years, that would probably be a better time for us to look at doing it.

Got it. Then second question, now that we're seeing some liquefaction projects, whether yours or others, coming online in the Gulf Coast, how is that affecting the value of your storage assets, and maybe some of the actions you're taking with the midstream network, like reversing the Cameron pipeline? Are you taking any incremental action, now that we're getting a little bit closer with the midstream assets?

Absolutely, and this is something we're very excited about, when we look at how the value -- what we think the value of the storage assets will be as that -- as all of those LNG facilities start coming on. And you look at where they are, and other than -- all the brownfield other than Dominion are located in that whole Gulf area. So let me have Mark talk about some of the things we've been working on.

Yes, I think that it actually is pretty exciting. We are -- you know, we've done our engineering on turning the flow around at Cameron. We're looking at other -- we're looking at other pipeline developments in the region, to allow us to more freely move gas around. And our Louisiana storage, which is the closest developable storage to our facility, and to the Cheniere and Freeport facilities, that story will become increasingly more important as these plants start operating. So we're actually pretty excited about some of the opportunities down there, and the ability for us to really become sort of gas managers, or being able to help people facilitate the operation of these facilities to make sure that they can run most efficiently, which is continuously all the time, and without interruption until -- so having readily available gas storage is going to be a real plus, and we're very, we're very well positioned to do that.

Great. Thank you.

Leslie Rich, JPMorgan.

Hi, Leslie.

Hi. Just had a question on the solar grant, and the delay due to budget sequestration. Is that the kind of thing that you would expect to happen every quarter, or I guess it depends on, you know, if Congress can --?

Yes -- no, we would not expect that. The $5 million that we had for this quarter, we would expect that would be it. And then that there will be a little bit more on depreciation expense down the line, but it's insignificant in future years, very insignificant. So this really takes care of the sequestration issue.

So if sequestration ends and, you know, the [things] are as usual, would that reverse (laughter)?

If we don't -- it's an interesting issue, because if sequestration ends, and then we haven't gotten the grant, then the grant will not be sequestered. So it's a funny thing, but so the -- I'll ask Joe to -- or Trevor to talk about the accounting of it. Because right now, we don't know when we get our money back, and that will -- that will depend on what -- what happens will depend on what -- the timing of the money coming back.

Yes, Leslie, when we finished those projects at the end of last year, we booked the receivable for the grants that we were going to get, and these are the only grants we can get the grant programs over, really. So we booked those grants, and then Treasury came out and said these are going to be sequestered, and if you -- if you get cash back from the government between March and the end of September, you're going to have this cutback. So we had to book the cutback, and that's why we took the $5 million of earnings hit. But as Debbie said, if we actually don't get the money until October, we'll get more money. We think we will get it between this time, but who knows. We filed for the grants.

Okay.

I think the important thing is we've booked (multiple speakers) --

It's done.

Yes.

It's a one-time deal. We booked the negative effect.

It's done.

There are some of us sitting around this table wondering how this can be -- how you can do this.

Right.

Why this is legal. But at the end of the day, we may end up getting it back someday, but at the end -- right now, the negative effects are all taken care of.

Okay. That's what I wanted to hear. Thank you.

Thank you.

Michael Lapides, Goldman Sachs.

Hi, Michael.

Hi, guys. Congrats on the progress you made in Mexico. That's very exciting. I want to turn to US business, the utilities. Can you just refresh us a little bit? What was the rate base, I guess the last known or last known authorized rate base going all the way back to 2011? What is your recommended rate base for '12 versus kind of where the ALJ proposed decision came in?

Yes, I don't -- I have what our actual rate base is, but I don't have the answer to your question for back to 2011. What I can say is what we requested and what the decision granted, and what we requested was about $4.3 billion at SDG&E, and the proposed decision granted $4.1 billion. The key area of difference there is for some smart grid investment. And what the proposed decision did is that it disallowed that in this case, but set another case down the line where you could try to recover it. You know, I think that there are a lot of parties that would like to have us go ahead and move forward with some level of expenditure on smart grid, so it's very possible that something can be reinstated there now. And then on the SoCalGas side, we requested $3.6 billion and received $3.5 billion. Much of the reduction there was in gas operations. And as I already said in my comments, I think that the focus on gas operations, I would expect us to get reinstatement of a lot of the O&M and the capital, because these are basically core business functions.

Got it. And if the proposed decision is largely upheld, maybe not entirely, but some of the key components of it are upheld, could this put your utilities in a very unusual situation, one they probably haven't faced in 15 or 20 years, which is being -- struggling to actually earn their authorized rate of return?

Well, you know, we've managed to -- every kind of outcome we've gotten in rate cases. And, first of all, I would say I would not expect this to be the final decision. I do believe that we will see changes made. We've had all-party meetings -- I would give Commissioner Ferron credit. He had an open process to listen to comments on that. There was an all-party meeting where we discussed our issues. I think that the people that were at that all-party meeting felt that we had pretty compelling reasons to see changes in here.

So we would expect to see some changes. But we also, I think -- you know, we're going to live with what we get. And I don't think that's a good solution for our customers, nor a good solution for our state. After the clear focus that the CPUC needs to be placing on safety now, to look at some of the kinds of reductions that have been here, are really penny-wise and pound-foolish in our minds, and so I think that we will see some changes.

Got it. Thanks. Last question, cash balances at the end of the quarter, large, large number, $1.4 billion, $1.5 billion. Can you talk to me about the thoughts around the allocation of that capital?

Yes, I'm going to have Joe talk about that.

Yes, that really comes from a couple things, which was we had the proceeds from the IPO coming in right before the end of the quarter of close to $600 million, and we also did the bond offering in Mexico in February and a lot of that -- a lot of those funds actually repaid inter-company debt back up into one of the Sempra International Holding Companies. We also received the proceeds from the sale of Mesquite, and with that we mostly paid off commercial paper. But now we have these funds, close to $1 billion of that is from Mexico, and a substantial part of the Mexican IPO funding will be used this year to fund the Sonora Pipeline project, and then the remainder of those funds used next year, together with probably additional borrowings down there. But that's what this is about, the big increase was mostly things that happened right toward the end of the quarter.

Got it. In other words, a large chunk of that cash, almost $1 billion of that cash is not sitting at the holding company. It's actually sitting at -- you know, down at the Mexico sub?

That's absolutely right.

Okay. Thanks, guys.

Thank you.

Paul Patterson, Glenrock Associates.

Hi, Paul.

Hi, how are you?

Great.

I don't want to, like, keep going over this, but I want to make sure I understand it. This attrition mechanism and the compensation issue, you had mentioned in your press release that you would be at the bottom end of guidance if this were to -- if the proposed decision wasn't changed. And I guess what I'm wondering is, I think if the attrition thing as being more of a -- I guess compensation, certainly -- the attrition thing particularly as being more of a long-range kind of EPS impact. And I'm just wondering if this were to change, would that -- you say that you would work within the -- with what you get, but would that not mean that there would be an impact on long-term growth rate?

Well, I don't tie this to growth rate. First of all, we'll manage with what we get, but the attrition mechanism would affect 2013 because, as you know, it's taken us 1.5 years to get a rate case decision, so we are basically operating on 2011 revenue requirement. We didn't get an increase in 2012, and then we should have gotten an attrition increase to the 2012 level for 2013. So we're basically two years behind, in terms of having revenues to operate our Company. You know, that -- we don't think that what is in the proposed decision is what should be voted out by the Commission. We made the case on that. We made a very strong case on this attrition, because it's not consistent with prior regulatory decisions.

They just voted out four months ago the Edison decision, and gave them what is an appropriate utility index attrition mechanism. And so we do expect to get it changed. If it is not changed, the mechanism here has historically been about 1% a year less in attrition increase than what the -- utility specific. But if that's what we get, we'll have to find a way to manage to it, but it's not to the benefit of our customers to have that.

I know you guys aren't going to give guidance until we get -- until we get the final decision, but should we be thinking about any potential change in the long-term growth rate?

No.

Okay.

No. I mean, I think I -- at least I tried to articulate that the long-term growth rate would be consistent with what we had showed you before in February, but that what we will do is that if we get a decision, we will give you more definitive information on that, and the numbers for 2013, and narrow the range as we talked to you that we would do, and then give you more detail on that growth rate.

Okay.

And Paul, this is Joe. When I showed you guys that chart, it's been our stated objective to be at 6% to 8%. But as I said, we're working on a lot of new areas of development and new projects, which is going to drive it above that. So our expectation right now is that these growth rates will be the same, and we'll talk more about it when we get to the conference, assuming we get the PD, or finalized it.

That's excellent. I think that's great. I guess what I wanted to finally touch base with you on, there was this IRS ruling that came out, or letter or what have you, on April 15 regarding the construction date for, like ITC, PTC. I was wondering, you guys have probably had a chance to look at this and what have you. Do you think that provides some additional opportunity for some renewable stuff for you guys, or I mean, is that sort of -- any thoughts you guys have on what they came up with, you know, the sort of language they used in terms of the construction date and stuff?

Well, we think it's constructive, and we are pursuing some additional opportunities to see if we can get under construction by next year, as required under those guidelines. So we're moving forward to seek some additional opportunities in the wind space.

Okay, great. Appreciate it.

Maura Shaughnessy, MFS Investment Management.

Hi, good morning. Most of my questions have been answered, but two quick ones. First, have you actually announced the sale of Argentina, or are you just hoping that it's done by the end of the year? And the second point, on the attrition issue and the compensation issue, were these kind of totally out of the blue? I can't recall these mechanisms ever coming up in California before, the CPI linkage and sort of random employee compensation? Well, I don't know why I would say that, but at any rate, those two questions, please?

Yes, I'll have Mark hit the Argentina sale, and where we are on that.

Hi, Maura.

Hey.

With respect to Argentina, no, we do expect to close by year-end. We're in active negotiations to sell our interests, and we have been for sometime, and we're working out the details. But we're not -- it's not like we're just starting the marketing now.

Okay, great.

And then in terms of your other question on the mechanism, you know, let me just say that we have a brand-new Commissioner. This is his first rate case that he's dealing with, and that the -- you haven't heard about attrition mechanisms or compensation generally because usually in every rate case, the utility-specific attrition mechanism's been adopted, and the incentive comp, if it's found be at market by the Commission's own compensation study, is put in rate. I mean, that is really the requirement to allow the utility to recover reasonable costs, and if your compensation is reasonable, you should be able to get that. And if the attrition is based on the utility-specific -- so you should be able to get that. This is a new Commissioner with the first rate case decision that he is writing, and I give him credit. He's listening to some of the other Commissioners. He had an all-party meeting, where parties could make their thoughts known, and I'm hoping that what we will see as -- changes in this, based upon him listening to some of the experienced Commissions that have dealt with this issue historically.

Okay, great. Thanks. Good luck.

Thank you, Maura.

Santiago Perez-Teuffer, Credit Suisse.

Hi.

Hello, Santiago.

Thank you for taking my question. Thank you, and congratulations on your results. I just wondered, coming from you, there is a lot of expectation on how is the Mexican energy industry shaping up and in your -- [I feel] it's a clear example of the expectations the markets have, and the value that it's writing on it. I wanted to ask if you could please share your expectations in Mexico going forward, and the unique time expectations you have in new bidding processes?

I'm going to turn it to Mark.

Santiago, we had a little bit of trouble hearing you, but we think -- if your question is, what is our expectations in Mexico and the growth going forward, is that your question?

Yes, exactly. I mean, do you have any time expectations in new bidding processes?

Yes, good. We're really excited about what -- our opportunities in Mexico. The ones -- the projects that we mentioned on the road show, you know, the pipeline projects and also the wind project that we have, ESJ, both of those are slated to go here in the near-term. Long-term prospects, obviously the Mexican infrastructure needs, and Mexico's desire to wean itself, at least for electrical production, off of oil and on to natural gas, is going to allow for a lot of infrastructure development projects, you know, in central Mexico and throughout those regions, and so we're pretty excited about it. We've got the right vehicle in place to assist Mexico in making those infrastructure developments and, you know, that's why we're so excited about this Company and why we think its growth prospects are so good.

Thanks so much, Mark. And do you have any time frames like when will new bids come up, in your perspective? I mean, about probably the second phase of Los Ramones or any other project you believe is interesting?

We don't have any specific timing, but recognizing that some of these projects -- the ultimate plants and things, and chemical treatment facilities that are going to use the natural gas that's being transported, or their products that were being transported back to market, obviously as those plants -- the other phases of these projects all have to come in, in fairly swift order. Otherwise, they are kind of pipelines to nowhere, and all of that's happening. So I think -- I don't think any of this is super long-term. I mean, we're -- probably in the next five years, we're going to see a lot of development in Mexico.

Great. Thanks so much for taking my question.

Thank you.

Michael Goldenberg, Luminus Management.

Good morning.

Hi, Michael.

I wanted to understand something that Paul Patterson, I think, asked about the growth rate, and I want to get a better understanding. So the guidance for 2013 changed a little, based on some items. Does that mean we should be taking the same growth rate off of a new number, or should we be adjusting the growth rate for future numbers, whatever we were extrapolating earlier?

Well, I'm not going to tell you how to do the calculation, but I will tell you that what we've said with our growth rate is what Joe showed in February, is you take the 2013 earnings and then you subtract from that the retroactive piece of the rate case, and then from that is where you would grow, and that we were looking at a 6% to 8% growth rate, and we're looking at that same range.

Okay. So it hasn't changed, even though -- so even though the base number may have changed, the growth is staying the same?

The growth range is still the same, yes.

Got it. Thank you very much.

Vanessa Quiroga, Credit Suisse.

Thank you. Thank you for taking my question. It's actually regarding IEnova again, and specifically about your leverage in that entity. Right now it's very low, but we would assume that with more growth, more new projects, you would be willing to increase your leverage. But what is the maximum level that you would be comfortable with at the IEnova level?

Yes, I'm going to -- I will just say that this is exactly why we did this, is -- in response to your question, is so that we can lever up and we can grow that business, because we think it's a terrific business. So I'll have Joe talk about how much leverage we could put on that business.

Hi, Vanessa. Yes, on the road show what we talked about is the fact we would issue some more debt likely next year, as we use the IPO proceeds for the construction of the Sonora Pipelines, and that when we got the AAA credit rating there, we talked to the rating agencies, and they said they would be comfortable with that credit rating as long as we stayed below 3 times debt-to-EBITDA. What I spoke about was at the Sempra level, we have roughly a 50/50 debt/equity ratio, and I need to manage that across the whole portfolio. So as we start to reach those levels, then we'll have to consider where we are, but no more than 3 times debt-to-EBITDA or 50/50. But as they continue to grow their EBITDA, there's going to be a lot of capacity there.

Okay. Yes, I agree. I mean, this 3 times debt-to-EBITDA, when you talk about the EBITDA, you don't mean pro forma for -- or assuming when the new projects start generating EBITDA already, right? You would be talking about the current year debt-to-EBITDA?

I think if you focus sort of at the 50/50 debt/equity ratio, the -- hold on one second. I think at that rate, and we're probably looking at the current run rate EBITDA. But as I said, it's growing fast because these projects are coming on quickly.

Yes, okay. No, that sounds excellent. Thank you.

Thank you.

Ashar Kahn, Visium.

I guess good morning; good afternoon from our side.

Good afternoon.

Debbie, I don't want to go too deep in it. So how should we follow the proceeding next week, if they do adhere to the schedule and -- on the rate case, and they do come out with a decision? Will they discuss this in their meeting, or will we have to wait for a final order to find out whether they made the changes to what we like or didn't make the changes? Can you just tell us how we can monitor it on our end?

Yes, the typical way this would go is that changes would be published before the meeting, and then the Commission would vote on the decision with those changes at the meeting. So it's on the agenda for next week. What would typically happen is those changes would come out later this week or early next week, and then the -- all of the Commission offices would have the opportunity to review those changes, and then the Commissioners would then vote on it. If a Commissioner had a concern about what was in there after those changes were made, the Commissioner could hold it at that meeting, and could make an election to write an alternate decision or go back to the assigned Commissioner to suggest further changes. So that's kind of how the process unfolds.

Okay. So that would show up. So any changes would show up in the docket of the case, right? That's where I should be looking at?

Yes, that's what should happen. And then of course, you know, we will provide as much information as we can once we get the final decisions out. It does take a while to analyze these decisions, and one of the reasons that we want to be sure when we give you new guidance, is that we've had the full-time to analyze the decision. Because, just looking at the revenue requirement does not necessarily yield what the outcome is going to be, so it will take us a little while to analyze.

Okay, and the second question is, I don't know, it's a new company and all that, and I apologize, there were too many earnings today. Is IEnova going to have an earnings call? Or can you give us any sense of what their earnings were exactly year-over-year?

Yes, we're not going to do -- we're not going to do sub-segment information in our call, but the plan is in the future, IEnova will have its own earnings calls, and we'll provide that information to its investors. And, I don't know, Mark or Joe, do you want to add anything to that?

I think that's right. They are going to do their own. We will only comment on them to the extent that it affects Sempra, and we'll give you that data on our call.

Yes.

As -- in fact, the one thing to remember is in Mexico they are reporting under IFRS, so the numbers are going to be slightly different. And we don't give -- as Debbie said, we don't give sub-segment information, so we give you guidance at the Sempra International level, but I think you all could listen into their calls, and I think starting next quarter probably is when they will get set up to start doing that.

And I just was reminded that their release is on our website, too. So you can go to our website and see their release. But I do believe next quarter they will start the calls.

Okay, so they do have their own release, which is on your website?

Yes.

Okay. I didn't know that. I really appreciate it. Thank you so much.

Steven Fleishman, Wolfe Research.

Hi, Stephen.

Yes, hi. One just follow-up question. I'm sure you heard the commentary from Edison the other day on San Onofre. Could you just -- any color to add there, and just in the event the plant does need to be shut down, what are your recourse actions to take?

The thing I would say is that -- I read the Edison transcript, and what they say about kind of their decision point. You know, we are not -- we're a minority owner. We own 20% of the plant. We've never operated the plant. We didn't decide on what kind steam generators went in, we didn't do any of that. And so we have to kind of look at our own position in this case, and that we are waiting for the NRC to act, and we're going to see what they do. And we're hopeful that we will get something out by early summer from the NRC, and then we're going to make our decisions on our options based on what's best for our customers, and that's what we'll be looking at. And we may not be on the same timeline as Edison is precisely, but we will look at our options as what's best for our customers, as a minority owner of that plant. And I can't really add anything. Edison went through on their call all of the details about the two applications, the license amendment and the confirmatory action letter, and they are better to handle those kinds of questions because they are the ones that are dealing with the agencies and operating the facility.

Okay. Thank you.

Vedula Murti, CDP Capital.

Good afternoon.

Good afternoon.

Couple of things, one, in your earlier remarks you answered questions, when the question of incremental renewables came up, I think you indicated you were focusing -- you would be focusing in the wind arena, and I think that was all based on, you know, the production tax credit. Do you have a point of view as to, one, some prospects for the -- renewable, and multi-legislation that's pending? And based on your analysis, I'm wondering whether -- if that were to occur, whether that's basically something for things prospectively or given stimulation of, you know, tax credits having been utilized and whatever in the past that, you know, historic existing assets would be unlikely to bid into such a structure? And I have a separate question after that.

Okay. Well, let me just say that the focus on my answer on wind was specific to that extension in the legislation, but we are developing solar projects, and we have a 250-megawatt project that's going into construction. We have, you know, projects that we're working on to be in the queue on the solar side. So I don't want to give any impression that our focus is just on wind, because we are very actively pursuing other projects. But we love your question about the MLP, and actually, when I had my meeting with the President earlier this year, that was one of the things we talked about would be very beneficial to the industry, is to have some type of a REIT or MLP structure for renewables. But Mark was just involved in this about a week ago, so let me turn it to Mark.

Yes, look, I think we are kind of excited about the prospect for renewables to be put in the MLPs, and be given parity with other energy projects in the country, so we think that's -- we think it's a good development. I will tell you it's one of the very few things that seems to have relatively broad bipartisan support. I think the thing that's holding it up from being approved is that it's -- while it has sort of bipartisan support, it's not a really big deal to the people on the Hill, and so at the end, it will probably be attached to some other larger tax bill or something that goes through. There is -- we have questions about how it's going to work for existing projects, and I don't think that's been fully fleshed out. There has to be some other -- besides making it MLP-able, because the MLPs have these tax credits, how that will do, or if that will be a replacement for the tax credits. No one really knows how those things will come to be.

But we do think it's exciting. It's something that makes a lot of sense. And, you know, we would be well positioned to put some of our assets and add it to our midstream MLP, or create a separate one on its own, whichever kind of investors sort of look to want to do. We think both of those things, we think they are exciting, and it is something that does look like it has good support right now.

Okay, and secondarily, Debbie, you mentioned your meeting with the president. I was going to ask you, based on all of your commentary around, you know, the positive view from the new Head of DOE in terms of met gas exports, and all the various export facilities, did that come up in your conversation? And do you feel like that's the view, that view there is similar as to the view at DOE?

Yes. I mean, I was asked specifically not to share what occurred in the meetings, but I would say that the attendees at the meeting universally were quite favorable to the ability to export gas if there were appropriate provisions put in place to deal with all -- the environmental issues associated with fracking. And so, you know, I think that's the direction it's heading. I didn't sense anything at all that would run counter to that direction in the discussions I had.

The one last thing, in terms of the [trade] status of free trade versus non-free trade export, my recollection was that earlier this year there was talk about, you know, trying to perhaps give an exemption, or something like that, to Japan and maybe Western Europe, since they are kind of allies, or whatever. Is there anything going on, on that front at all?

It seems like that has kind of died down a bit, and I think where the focus is now -- I mean, we really do hear a number of things that at least, you know, and you never -- you never get definitive answers of when something is going to be approved. But we have heard a number of comments that would lead us to believe that the approvals are forthcoming, and the approvals are forthcoming sometime in the near future, and that it's not going to be that type of a structure with a limited approval. So -- and you start hearing more, too, I think with the situation in North Korea, that you start hearing more of the concerns about, you know, what do we do to help support generally our allies? What do we do to have the US be a contributor into the energy marketplace that would help deal with some of these political issues? And so, you know, it seems like at least the dialogue has gone more in that direction recently, which would say you're probably not just going to just get a Japanese exemption or a Europe exemption.

Okay. Thank you very much.

Thank you. Okay --

I'm sorry, I was just going to turn it back over to Ms. Debbie Reed for closing remarks.

Okay, I was just going to take it (laughter). Thank you all very much for joining us. As always, we have Rick and Victor, and Diane, there to answer any of your follow-up questions from the call. And we look forward to seeing you in New York on May 23. Thank you very much.

Thank you. That does conclude our conference call for today. We do thank you all for your participation.