桑普拉能源 (SRE) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sempra Energy third-quarter earnings results conference 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. Today, we will be discussing Sempra Energy's third-quarter 2013 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. Debbie Reed, Chairman and Chief Executive Officer; Mark Snell, President; Joe Householder, Executive Vice President and Chief Financial Officer; Martha Wyrsch, Executive Vice President and General Counsel; 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 10-K, and most recent 10-Q.

It is important to note that all of the earnings per share amounts in our presentation are shown on a diluted basis, and that we will be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call, and to Table A in our third-quarter 2013 earnings press release for a reconciliation to GAAP measures.

I would also like to note that the forward-looking statements contained in this presentation speak only as of today, November 5, 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 to slide 3, and let me hand the call over to Debbie.

Thanks, Rick, and thanks to all of you for joining us today. Let me begin with our 2013 earnings guidance. We currently expect full-year earnings to fall within our guidance range of $4.30 to $4.60 per share.

Last week, however, Mexican tax reform moved forward in Congress, and we expect it to be enacted this year. The deferred tax impact of this reform would negatively affect fourth quarter 2013 earnings by about $0.05 per share.

Prior to the reform, we expected earnings for the year to be near the midpoint of our guidance range. Joe will discuss this issue in more detail a little later on the call.

Moving to the quarter, I'm pleased with our performance, and most notably, progress continued on our many infrastructure projects. These projects, which I will update you on shortly, should drive our long-term growth outlook of 6% to 8%. Based on the projects we have under way, I am confident that our Company is well positioned for the strong growth profile we outlined in our analyst presentation.

Before moving on to our financial results, I want to make note of some key management changes that we announced during the quarter. In early September, Martha Wyrsch joined Sempra as Executive Vice President and General Counsel.

Many of you know Martha from her time at Duke Energy, Spectra Energy and Vestas. In addition to prior experience as General Counsel, she brings a wealth of industry knowledge and experience to our management team.

As you know, we take great pride in the strength of our team, and the depth of our leadership bench. We also move people within our organization, as part of our plans to develop future leaders.

In September, we announced several changes to the management team at our business units that will take effect next year. Most of these individuals you already know.

At SDG&E, Jeff Martin will become CEO, and Steve Davis will take over as President and Chief Operating Officer. Jeff will replace Jessie Knight, who will come back to Sempra as our Executive Vice President of External Affairs. Steve will take over for Mike Niggli, who is retiring after a 42-year career in the energy industry.

At SoCalGas, Dennis Arriola will become CEO, replacing Anne Smith, who will retire after more than three decades with the company. Brett Lane will replace Dennis as Chief Operating Officer at SoCalGas. And finally, Patty Wagner will replace Jeff as President and CEO of Sempra US Gas & Power.

This team brings the strong leadership, financial, operating, and technical skills necessary to deliver on our long-term growth plan. Now, let me hand things to Joe, to discuss the financial results in more detail, starting with slide 4. Joe?

Thank you, Debbie. Earlier this morning, we reported third-quarter earnings of $296 million, or $1.19 per share. This compares to earnings of $268 million or $1.09 per share in the same quarter last year, which included a $60 million impairment charge on our investment in the Rockies Express pipeline.

On an adjusted basis, earnings for the third quarter of 2012, after excluding the impairment charge, were $328 million. You can see from the statement of operations that tax expense was very low last year.

The third quarter of 2012 included a $33 million tax benefit at SDG&E, related to the prior-period effect of adopting a new method for deducting repairs. Excluding this from 2012 would essentially result in relatively flat adjusted earnings between the third quarters of 2012 and 2013.

It is also important to note that in 2013, we overcame the effect of the dilution from the Enova IPO, as well as the $63 million tax impact reported in the first quarter of this year, related to our cash repatriation plan. Excluding the impact of these two items, and the low tax expense in 2012 that I just mentioned, our core business has performed very well, year to date.

Now, let's go through the segment results in more detail, beginning with SDG&E on slide 5. At San Diego Gas and Electric, earnings for the third quarter of 2013 were $129 million. SDG&E's earnings were lower, due to a $46 million increase in income tax expense, compared to 2012.

This was primarily driven by the impact of the tax treatment change I just mentioned, and was also impacted by $7 million of higher tax expense from unfavorable adjustments for prior years' tax issues, and the remainder from a higher effective tax rate in 2013, as compared to 2012. This quarter, SDG&E earned $15 million from higher CPUC-based operating margin, and electric transmission margin, net of expenses. These earnings were essentially offset by a $6 million effect of a lower rate of return from our cost of capital decision, $5 million of lower earnings due to the loss of SONGS-based margin as a result of the plant closure, and $3 million related to the redemption of SDG&E's preferred stock.

Now, please turn to slide 6. Third-quarter 2013 earnings at Southern California Gas were $102 million, compared to earnings of $71 million last year. This quarter's increase is primarily the result of $12 million of higher CPUC-based operating margin, as a result of the final GRC decision, net of expenses, and $10 million benefit from the lower income tax rate, mainly due to a change in repair expenditure deductions natural gas pipelines that began in the fourth quarter of last year.

Now let's move to Sempra International on slide 7. At our South American utilities, earnings were $39 million in the third quarter of 2013, compared to earnings of $40 million in the same period of 2012. Excluding the impact of the loss on the sale of our Argentine investment, our business in South America is in line with expectations through the first nine months of the year.

The third quarter 2013 earnings for the Sempra Mexico segment were $39 million, versus earnings of $42 million in the third quarter of last year. The decrease is due to $9 million from non-controlling interests at Enova related to our reduced ownership, partially offset by a $7 million benefit, primarily due to negative foreign currency effects, which largely relate to the third quarter of 2012.

Please turn to slide 8. Moving to Sempra US Gas & Power, the natural gas segment lost $7 million in the third quarter of 2013, compared to a loss of $8 million in the year-ago period, after excluding last year's $60 million impairment charge on rent. The third quarter is typically a challenging one for the natural gas business, due to the seasonal nature of gas storage, and this quarter's performance is in line with our expectations.

Longer term, lower natural gas and power prices continue to affect this segment. But as you know, we have clear actions under way to improve our performance. These include selling and/or contracting the remainder of our generation plant in Arizona, and developing the Cameron LNG export terminal and related facilities.

The renewable segment recorded earnings of $37 million in the third quarter of 2013, up from earnings of $13 million in the third quarter of 2012. The increase was largely driven by $24 million in gains from the contribution of our assets to the newly formed 50/50 solar joint ventures with Con Ed.

Please turn to slide 9. Turning to our guidance for 2013, as Debbie mentioned at the outset, we still expect earnings for the full year to fall within our range. Based on events last week though, it now appears that changes to the Mexican tax law are likely to occur this year.

The proposed legislation would keep future Mexican corporate tax rates at 30%, as opposed to having them drop back to 28%, as is the current law. This legislation would negatively impact Sempra's fourth-quarter earnings by about $0.05 per share, as a result of adjusting the deferred tax balance to the higher rate. The ongoing impact of this legislation should not be significant to earnings.

Additionally, we are working to finalize the formation of a joint venture at our Energia Sierra Juarez project at Enova. We had planned to partner with BP Wind on ESJ, but their decision to exit the wind development business has caused us to find another partner, somewhat prolonging the process.

Our guidance includes earnings of about $0.05 per share related to the formation, which reflects an expected gain on the contribution of the assets to the JV, and some recovery of development costs we have already incurred. We are currently in advanced discussions with potential investors, but completion of the deal as planned may not occur this year, which would defer those earnings.

I would like to reiterate the fundamentals of our business remain very strong, and we continue to be very optimistic about our future growth prospects. We will talk further about those prospects when we update our 2014 guidance on our next quarterly call. Now, let me hand the call back to Debbie.

Thanks, Joe. Turning to our utilities in California, the SONGS dispute resolution dispute between Southern California Edison and Mitsubishi Heavy Industries has ended, and will now move to binding arbitration. Edison is seeking to hold MHI liable for damages, which are estimated to be in excess of $4 billion, due to the defective steam generators that were installed at the plant.

SDG&E has also filed a lawsuit against MHI to protect its legal rights in the matter. The CPUC regulatory proceedings on SONGS continue, and we expect to see a proposed decision on the first phase, which deals with defining the costs related to the outage, by the end of this year.

Subsequent phases of the investigation will likely be resolved over the next few years. Parties have been encouraged by the Commission to engage in settlement discussions, defined as mutually agreeable and comprehensive solutions.

Moving on to rate reform, last month, Governor Brown signed Assembly Bill 327 into law. This important piece of legislation will go into effect on January 1, 2014, and give the CPUC the flexibility to implement fair and reasonable reforms of the state's residential electric rate and net energy metering programs. Additionally, the law grants the CPUC the authority to implement a monthly fixed charge of up to $10 per residential customer, as of January 1, 2015.

It also allows the CPUC to establish default time of use residential rates, on or after January 1, 2018. Returning authority to the CPUC to address long-term rate structure issues in California is a very positive step to overall rate reform. The CPUC is expected to issue a ruling on next step as part of its residential rate reform OIR, but will likely address AB 327 implementation through various proceedings, many of which are currently under way.

With respect to SDG&E's FERC rate case, an administrative law judge was assigned and hearings have been set for May, 2014, with any rate adjustment retroactive to September 1 of this year. Even though we are on a hearing track, FERC encourages informal settlement discussions, and those discussions are currently taking place. Based on recent decisions and the fact that SDG&E does not currently have any incentive adders in relation to the existing project, the outcome of this proceeding may result in an ROE closer to 10%, which is slightly lower than our range our anticipated outcomes.

This quarter, we received Commission approval to construct SDG&E's new South Bay Substation. The project should cost between $145 million and $175 million, and should be in service in 2017. Last week, we received a proposed decision approving our $200 million Aliso Canyon Compressor Station at SoCalGas, and expect that project to come online in late 2016.

Both of these projects are part of our base growth plan, and are important infrastructure upgrade for our utility. We are still awaiting a proposed decision on our pipeline safety enhancement plan, or PSEP, and expect that decision to come out this quarter. As you know, we have received authorization to track costs in a memo account, and are currently spending capital and O&M in anticipation of a final decision.

Please turn to slide 11. Moving to our Cameron liquefaction project, we received EPC bids last quarter from two groups, and we expect to select our final contractor by the end of this year or early 2014. Based on the significant front-end engineering work we did, and our initial review of these bids, we remain very comfortable that we will sign a lump sum turnkey contract, and that total project cost for the liquefaction facility will remain in the estimated range of $9 billion to $10 billion.

We are also progressing in our efforts to secure financing for this project, and expect to receive credit-approved proposals from lenders by year end. There has been strong interest from both Japanese export credit agencies and commercial banks to participate in this financing, and we believe that will allow us to close long tenure borrowing at very attractive rates.

On the permitting front, we are currently second in the queue to receive our non-FTA permit from DOE, and we expect to receive that permit by year end. The trend for non-FTA permits continues to point in a positive direction, and we are pleased to see that prior to the government shutdown, DOE had quickened its pace between permit approvals.

The project remains on track to receive all other necessary regulatory approvals, sign an EPC contract, finalize financing commitments, and start construction by the first half of next year. This will allow us to begin operations from the first train in the second half of 2017, with subsequent trains expected to come online six months after each prior one.

Let's now go on to slide 12. In September, we acquired the rights to develop the Broken Bow 2 wind project in Nebraska. The project has a total capacity of 75-megawatts, and has a power purchase agreement with the Nebraska Public Power District.

We expect the project to come online late next year. Consistent with our strategy for our renewables portfolio, we anticipate project financing the facility, and should have a 50% partner before operations commence. Further exemplifying this strategy, last quarter we completed the formation of 50/50 joint ventures from the Mesquite Solar 1 and Copper Mountain Solar 2.

We received cash proceeds of $174 million for the two transactions, and as Joe mentioned, recorded a total after-tax gain of $24 million this quarter. We have also launched the partnership process for our 250-megawatt Copper Mountain Solar 3 project. That project will be fully operational in 2015, and has the 20-year agreement to sell the power to LADWP and the City of Burbank.

Let's now go on to slide 13. Last quarter, the President of Mexico presented to Congress a proposal to reform the energy sector that will allow for liberalization of the Mexican energy market.

The President appears to have broad support for the proposed reform, and his administration has indicated it would like to see a bill passed by the end of this year. Even without energy reform, Enova has very strong growth prospects, and additional opportunities presented by reform should be incremental to the projects we currently have in development.

Last month Pemex announced that it intends to work with our joint venture to develop a 275-mile north segment of the Los Ramones II pipeline, an important project for Mexico, that will ensure a reliable supply of natural gas to growing industrial centers. We are working with Pemex to define the terms of the project in the coming weeks, but we expect Enova's participation in the $1 billion project will be at least 25%.

Pemex will execute a long term take-or-pay contract for all of the pipeline capacity, and the project will earn a rate of return approved by the Mexican regulator. I am also pleased to report that we have begun construction on the first phase of the Sonora pipeline project, and this phase is on track to go into service in the second half of next year. We also started construction on the ESJ wind project last month, and that project should start delivering energy in 2015 to SDG&E under a 20-year agreement.

Two significant projects in our JV with Pemex, the ethane pipeline and the Los Ramones I pipeline are also expected to go into service in the latter half of next year. Construction on the ethane pipeline began last quarter, and construction on Los Ramones should begin late this year. Lastly, the joint venture's LPG terminal in Guadalajara is scheduled to begin operations this month.

In summary, we had another very solid quarter, and I am pleased that our focused strategy continues to deliver results. We are making progress as planned on our major infrastructure projects, and have approximately $2.5 billion of projects scheduled to come online next year.

Additionally, Sempra's future prospects are very strong, with significant incremental growth opportunities across the Company, and I remain positive that the Company is well positioned to continue to deliver exceptional performance. And with that, let me stop and take any questions you may have.

(Operator Instructions)

We will take our first question from Faisel Khan with Citi.

I was wondering if you could talk a little bit about the potential investments you may be looking at in California to relieve some of the congestion and retirement issues with SONGS coming out of service, and how large some of these investments could be? And I just have a follow-up on the LNG side.

Sure. I would be happy to tell you what we are looking at right now. In terms of quantification, we're still working on that, but I can go through what the needs are, Faisel.

In looking at SONGS replacements, I would say that there are two areas of focus. One is on the electric side, but the other is on the natural gas side. And both of those will require reinforcement.

On the electric side, we will be improving the electric transmission system to provide voltage support, and SDG&E will be doing the construction of that, that has already been allocated by the ISO, for SDG&E to give an estimate for doing that. We will also be looking at new electric transmission, and that electric transmission for the state is something that the ISO is working on now, and it is likely to be competitively bid. And so ourselves and others would have the opportunity to bid on that, and that is expected to be several billion dollars worth of work.

And then on the natural gas infrastructure side, we have been working with the ISO, because with the gas needs from both the SONGS retirement and ones through cooling, that goes into place, that there is going to be the need to reinforce the gas system, to provide for more gas-fired generation in basin. And so both SoCalGas and then SDG&E are also looking at that, and we would anticipate laying out a plan with the ISO to the CPUC within the next year on the gas system enhancements.

Okay. Fair enough. And just on the LNG project costs, the $2 billion of financing costs, can you just give us an idea what the underlying cost of capital is, in that $2 billion number? It seems a little bit high, but I'm just trying to figure out how it is being calculated.

You are taking $6 billion to $7 billion, and you are subtracting that from the $9 billion to $10 billion, is that where you're coming up with the $2 billion?

Yes, I think you guys talk about it in your slide, too, $2 billion in finance costs.

Let me have Joe go through first of all, where we are on financing, and then how that kind of plays out. And some of it is reserves that we have to do.

Hi, Faisel Khan. It is Joe.

Yes, what Debbie said is correct, that we have required reserves and costs around the financing program, but as she mentioned, it is going very well. We have the term sheet and Kate Collier, the Treasurer and others on the team and our partners have been going around to visit with the large financial institutions in Japan and New York, and are trying to get the rating agencies to rate the project, which should have a very strong credit rating. But this money all really relates to capitalized interest and the required reserves that the financing is going to require, so that they can make the debt service payment.

The required reserves, you say it is half that $2 billion?

I don't think we've said how much exactly it is.

Fair enough. Thanks for the time. I appreciate it.

We will take our next question from [Nas Kummwala] with Wolfe Research.

Just a couple of questions. One is on the FERC ROE, when you said it was around 10%, I think Debbie, you mentioned that there's no -- you currently have no incentives on there? Are you going to ask for incentives? Or should I just assume it is 10% on the FERC rate base?

I mean what we're looking at is, for new projects, that we would have the ability to ask for incentives for new projects that we would do, and we would look at requesting incentives for new projects. For the existing projects, when we put the formulaic rate in place that we have had for a number of years, the condition was that we would not ask for incentives for any of the projects that were under that formulaic rate. So that is how I think you might want to look at it, and how it feels with incentive requests for new projects, we can't forecast how that will come out.

So it is going to go from the 10.3% to the 10%, based on I guess what you're seeing right now?

Our current is 11.3%.

Oh, sorry. I thought it was 10.3% plus 100 but I guess I'm mistaken.

We're currently at 11.3%.

Okay, 11.3. Great. And then on, you know, like the Broken Bow project and Los Ramones II, when you at the analyst day when you gave your 6% to 8% growth rate and you talked about the potential other projects that would be in addition to the growth rate, are these types of -- the wind and the new pipe, is that in addition to, or is that inclusive in the 6% to 8%?

Well, let me kind of go through what are some of the projects that were not identified in the 6% to 8%, and as we said at the analyst conference, that there will be some of the projects in the 6% to 8%, they may be sized differently than they were, and they may have some time changes and all, so it is not clear as this is the 6% to 8%, and then here is that 9% to 11%.

But I would say we have made significant progress on new projects since we saw you at the analyst day, and let me just go through some of the things that we're looking at now. Los Ramones II, I talked about that, we're looking at a minimum of 25% of that project, so $250 million, $300 million of investment there, on the low side.

We have two Chilean transmission projects that we have agreements on, that came after the analyst day, and that we will own 50% of those projects and the total is the $80 million, so we will have 50% of that. And those are scheduled for completion in the 2017-2018 time frame.

We also had the Broken Bow project that we talked about. We had some SONGS replacement needs that Faisel just asked about in the last question, and we are going through the process of trying to quantify some of those right now. And then there's some other projects obviously we're working on, that we will announce when we can confirm that we have received those projects.

And then finally, the PUC came out with a ruling on battery storage, and that was incremental to any of the plans, but I believe that all of that is likely to be in the later years of the plan, based upon what we're looking at right now. And these projects will either -- PSEP as an example, that could vary from what we had in the plan that we filed two years ago, because we have identified some additional records that would reduce the mileage on that, but at the same time, the time frame to get the work done and the cost estimates for doing that have likely gone up. So we're likely to have to file an update on that.

And so these projects will either add to or supplement some of the 6% to 8% growth. What I would say bottom line, is with everything we have going on, I have great confidence that we can achieve that 6% to 8% growth and possibly more.

Okay, that's helpful. Thank you.

We will take our next question from Matt tucker with KeyBanc Capital Markets.

You pointed out that the pace of approvals by the DOE, the non-FTA approvals have been improving, I think it was down to a month since the last two approvals, but it's been almost two months now since the last one, and you pointed out that we had the government shutdown during that time, but is this latest delay causing any concern for you folks? And have you heard anything from your discussions with stakeholders or the decision makers over the last couple of months that makes you more or less optimistic about getting the license this year?

Well, I think everyone we're hearing is quite constructive, and if you look at how long it took them to approve the prior project, it was something like 35 days, and if you add the government shutdown time to the 35 days, then hopefully we will see something coming out within the next week or so on Freeport. And then if they keep to that pace, we do believe that we would be in the -- would be next up in the approval queue, we would be number one then, after Freeport expansion, and expect to get that by the end of this year, if they kept up that pipe and schedule.

I would say that Secretary Moniz just traveled to Japan, and I think the thing that is very clear, is that the Japanese have made a strong case for the need of getting these projects moved forward quickly. Because of their need to have deliveries in the 2017-2018 period, and that we had read, and it has been reported to us, that Moniz was quite constructive on keeping this kind of pace of one to two months approval on the project, when he was in Japan.

Thanks. That's helpful. Just kind of following up on the last question, when you think back to the analyst day, and you gave us the two long-term EPS growth scenarios, 6% to 8%, including projects in your base capital plan, and then 8% to 10% with some opportunities not in the plan. as you just pointed out, there have been at least a couple if not more of those other development opportunities that now seem to be getting pulled into the plan.

So I guess could you just help us put into the context of the two different growth rates that you described, and are we starting to get towards the upper end of the base range, or the lower end of the higher range, or crossing over? If you could just help us, put it in context a little bit more.

I would just repeat the statement, I think we have great confidence and visibility to the 6% to 8%, and that when we give you our outlook at our analyst conference next year, we will lay out for the five years again, but you can look at those charts we gave you and see that we have made progress. So we will go through all of that when we can update all of our numbers at our analyst conference.

Thanks. That's helpful. Can you just remind us, my last question, what the initial range of anticipated FERC rates you were thinking of was?

Well, we don't ever do a public forecast, but we kind of monitor and set our plans based upon of what is coming out from FERC, so as I have said, we're looking to be in the low end of the range that we had anticipated going in. So we don't give any kinds of ranges. They are factored in, though, when we give you the guidance range, and that's why we give you by business unit guidance ranges, so that there is some flexibility as to where some of these things may come out, that we don't know the outcome of.

Thank you.

We will take our next question from Rajeev Lalwani with Morgan Stanley.

The first question I had was just on where you stood on forming an MLP for Cameron, and whether or not you think you have enough assets that would get you started there, until Cameron comes online? And then a follow-up.

Somehow, we anticipated this question, so I am going to have Mark talk about that. Mark?

Hi, Rajeev. Obviously, as we get Cameron moving, we are looking at this MLP opportunity. We think it would be a great asset to anchor an MLP for us.

And I think really the question is, is as we look at it, when will it start cash flowing and when would be the most opportune time to do that. So I think as an anchor, as the anchor tenant of our MLP, I think we're looking probably around, as we approach the first cash flows from the business, which would probably be 2016 or 2017.

I would also -- I would just add on this, too, is that when we look at this, it is like what we did with Enova, when we look at forming an MLP, when we look at doing an IPO, we really feel that it is absolutely critical to have a growth strategy, and to have clarity of how do you grow beyond the initial drop-down of the asset. And I would hope that with our highly successful IPO of Enova that you see, we're not hesitant to consider these types of financial structures, but that we try to time them when they align with our business interests.

And with Enova, I think that was a great example. We knew the Mexican reform was coming.

We had some projects we thought we could show some clear growth on, we launched the IPO, and the stock is up something like 51%. So that's the type of transaction we like to do around here, so I would hope you would have some confidence that we will look at all of these kinds of structures in light of that.

Okay. And then just a follow-up, probably a question for Joe, in terms of your cash position at the end of the third quarter, you had about $1 billion or so. Can you just talk about the large number there and expectations of using it going forward?

Sure, absolutely. And I mentioned this a little bit on the last call. A lot of that actually is cash from the Enova IPO, there is about $500 million in Mexico that is being used as we talk, building the Sonora pipeline. We expect to use that over the course of the next several months, and then possibly go back in and raise some more debt to finish the pipeline off next year.

As we have mentioned before, we have about $350 million in Chile in the holding company above the Chilean utility, and we are looking, and have some active projects going on right now that we haven't talked about, and we will, once we have a chance to firm it up and be able to talk about that. So we're actively working to use that money.

And about $167 million of it was at SDG&E, because we did an offering, a bond offering at SDG&E, and part of that was used to redeem the preferred stock in October. So the cash is pretty well spoken for.

Great. Thank you.

We will go next to Neel Mitra with Tudor Pickering.

The first question is on Los Ramones II. Could you kind of explain the progression from not bidding in to eventually getting a 25% or more stake in the project, and what has changed and maybe how that affects your outlook for investment in Mexico going forward?

Sure. We would be happy to. I am going to ask Mark to comment on that.

Hi, Neel. Good question. Well, first on the reason that we didn't bid is, I think when the proposal was put out, we looked at it, and we really didn't feel like there was enough time being allowed for us to do an effective bid. And while we did lobby to try to get extensions, that didn't happen, and Pemex went forward with the bid. And so we decided because we didn't feel like we had enough time to do a fulsome bid and really have a number that we felt very comfortable with, we decided not to bid.

As a result, I think partly because of the timing and other issues, the bids that came in didn't meet their expectations, nor did they conform with the bid instructions, and so they were rejected. Or the one bid that they did get in was rejected. Then they went back and talked to the potential bidders and worked out a program to really get this pipeline done on time, and help meet their expectations.

And they came back to us, I think because we have, A, a long history with Pemex of doing projects with them, we have a joint venture in place that has been very, very successful, and I think they felt very comfortable in dealing with us and making sure that if we did commit to something, that we could make sure that it would happen on time and within the kind of monetary restrictions that they were looking for. And so as a result, we have been able to -- we're negotiating with them, to get this project done, we will have at least 25%, and we expect it to have a regulated rate of return.

Great. Thank you. And the second question, you mentioned once through cooling as a reason why transmission might need to be built. How committed to you think the state is with the existing schedules for shutdowns for gas plants that have that problem right now, and do you think maybe they push out that schedule in light of SONGS and some of the reliability issues that they didn't anticipate for that?

I will just tell you, on past history, when it comes to environmental issues in California, I have not seen them generally delay. So the ISO is very actively planning for the restrictions on once through cooling, and looking at the needs that come from SONGS, and from some potential load growth over time. So the way we look at it, is that is going to be happening, and if it is like everything else in California, on the environmental front, it doesn't appear too likely to be delayed.

Okay, great. Thank you.

We will take our next question from Mark Barnett With Morningstar Equity Research.

You answered a lot of specifics earlier, and I'm wondering, maybe on a more general level, when you look at the potential for a reform bill, based on what you have seen and what the government is really looking to incentivize, what do you think the most relevant items you expect to be addressed, the highest probability stuff that we would see?

Yes, I will take a first crack at that, and then I will ask Mark to add to it. We look at reform, and a lot of the reform deals with the oil side of the business, clearly. And we do have some interest at Sempra in possibly going into gathering and processing, and one of the things that they are looking at under the reform is trying to get more participants in offshore and in some of the leasehold areas, so that Pemex can have their investments go in, in more of the conventional plays and bringing some of the oil from the conventional plays to the marketplace.

I think there is good opportunities for us to expand out of natural gas. We're doing that right now with Pemex in the area of ethane, we're building an ethane pipeline. And so we see a lot of gas opportunities, obviously, with the reform.

They're trying to convert all of the power plants in the state from fuel oil to natural gas. And so we see continued construction of pipelines occurring, but I would not limit it to that, as how we look at the future for Sempra. Mark do you want to --?

I would say, too, that I think one important thing to note is, is that with or without reforms, we're very well positioned in Mexico to continue to build out energy infrastructure. And I think the reforms, to the extent that they come, will only enhance our ability to continue to do that, because they will bring on -- more fields will be brought on.

There will be more need for pipelines. There will be more need for treatment facilities. There will be more need for the kinds of things that are in our wheelhouse.

But as that is happening and as there is more and more emphasis in Mexico on the fact that they need to divert more moneys into E&P, there is going to be those opportunities for us to continue to fund their infrastructure needs. And so we -- no matter how this comes out, we think even without reform, we have a pretty bright future there, and with reform, it gets even better, because it will be just more activity. So we're pretty excited about it.

That's very interesting. And I guess one last question on Mexico. With the proposed tax reform that you have already addressed with the deferred tax issue, but is this fairly firm at this point? Are there any incremental changes that might actually -- you mentioned on a look forward basis it is not a serious issue, given the small size of the change, but is it anything that might be meaningful for energy assets in general?

I will have Joe address that. I think just last week, Congress moved this forward, and we think that this is going to pass this year, and that is why we wanted to give you the heads up on this call. We will have Joe address the future view.

Sure. When this, when the energy reform was proposed, and the economic and tax reform, part and parcel, they need to work together a little bit, because the energy reform affects Pemex cash flow, and then they needed tax reform to drive more revenue, so a lot of the tax reform was driven around individual tax reform, so they increased rates on the individual level. And for corporations, they just changed a few things, and we've taken a look at all of that.

The one thing they did is the current tax rate in Mexico was 30% on corporations. It was supposed to go down to 29% and then 28% and so our deferred taxes in the future were booked at that those rates, and we're just having to bring them back to the 30%. But it is a small effect on future earnings.

We don't see any other major effects on us. There were some other small wrinkles, but we do expect it to go forward. Congress has essentially approved it and we expect it to go forward by year end.

Great. Thanks a lot.

(Operator Instructions)

We will take our next question from Ashar Khan with Visium.

My questions have been answered, thank you.

And we will take our next question from Vidula Merke with [CGI Capital].

Let's see, just to follow up on the MLP question, I'm just curious, given the time line that you laid out for Cameron and everything like that, given your other assets, I'm curious how you view right now -- clearly that is a long time in terms of changing around in terms of cost of capital, how do you think about the differential cost of capital now, with the possibility of a transactional type of opportunity, like what you saw with CenterPoint deciding to try to accelerate their development of assets through a merger with OGE's Enogex, and what we all saw in the E&P space with Devon Energy, rather than doing an IPO of a fairly smallish MLP, to do a merger as well, or a transaction to accelerate growth and scale?

Let me just say that we are very seriously looking at the whole MLP issue, and what are the right options for structuring an MLP, that would provide the long-term that we want in our space. There is nothing that we would preclude doing. But we would also -- I mean, we feel really good about the value of the assets that we would have to go into an MLP.

And when you have something like Cameron that basically we take an existing plant and we put that in as our equity contribution, and then we earn $300 million to $350 million a year off of that, we want to be sure that anything that we do is in the long-term interest of our shareholders. And so I don't feel any desperation to try to move it up. If we found a good partner, where we thought we could create greater long-term value in an MLP, we would be very open to that.

Okay, thank you very much.

At this time, we have no further questions in the queue. I would like to turn the conference back to Ms. Debbie Reed for any additional or closing remarks.

Well, thank you all very much for joining us. And as always, if you have any follow-up questions, you can please contact our IR team, and they would be happy to answer them for you. And have a great day.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.