桑普拉能源 (SRE) 2014 Q1 法說會逐字稿

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

At this time, I'd like to turn the conference over to Rick Vaccari. Please go ahead, sir.

Good morning and thank you for joining us. Today we'll be discussing Sempra Energy's first-quarter 2014 financial results. A live webcast of this teleconference and slide presentation is available on our website under the Investors 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, Senior Vice President, 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 most recent 10-K and 10-Q filed with the SEC.

It's 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 first-quarter 2014 earnings press release for a reconciliation to GAAP measures.

I'd also like to note that the forward-looking statements contained in this presentation speak only as of today, May 2, 2014, 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. Before we get started, I'd also like to thank those of you who attended our March Analyst Conference in San Diego and those of you who also participated in the webcast. It was a great opportunity for us to discuss our strategy for achieving a 9% to 11% growth rate and the numerous additional projects in development that could provide upside to our plan.

On today's call we will discuss our first-quarter financial results and provide you with several operational and regulatory updates. Earlier this morning, we reported first-quarter adjusted earnings of $256 million, or $1.03 per share. Our first-quarter earnings were in line with our growth expectations and consistent with our full year of 2014 guidance.

On our Cameron liquefaction project, we are happy to announce that FERC completed this environmental review process and published the final environmental impact statement on April 30. We are now awaiting the final FERC permit, which we should receive this summer. This is an important milestone and we expect to be the second US LNG export project to begin construction.

Consistent with our 50/50 partnership model for renewables, we successfully completed the sale of a 50% interest in our Copper Mountain Solar 3 facility during the quarter. Additionally, on April 21, we announced a partnership agreement for our ESJ wind-generation project in Mexico.

On the California regulatory front, SDG&E and Southern California Edison reached an important settlement agreement with key parties, that, if approved by the CPUC, resolves all outstanding cost issues on the SONGS plant closure. We have also reached the proposed decision on our pipeline safety enhancement program. We will provide further details on all of these developments later in the call.

Now let me hand things to Joe to discuss the first quarter results in more detail, starting with slide 4. Joe?

Thank you, Debbie.

As you mentioned, the first-quarter financial performance was strong and in line with our growth expectations. We reported first-quarter consolidated earnings of $247 million or $0.99 per share. Excluding a $9 million revision to the loss on the SONGS plant closure, we reported adjusted earnings of $256 million, or $1.03 per share. This compares to earnings of $178 million, or $0.72 per share in the same quarter last year.

In comparing first-quarter performance year over year, remember that first-quarter earnings in 2013 did not include $29 million of earnings from our California Utilities as a result of their general rate case delay. Instead, these earnings were recorded in the second quarter of 2013 after SDG&E and SoCalGas received their rate case decisions.

2013 first-quarter earnings were also impacted by several other items, including a $44 million gain on the sale of a portion of the Mesquite Power Plant. In addition we recorded a $63 million deferred tax expense in the first quarter last year related to the IEnova IPO restructuring.

In the first quarter of 2014, we recorded $12 million of estimated deferred tax expense to reflect only a portion of the planned repatriation for the year. However, our estimated annual tax rate includes an expectation that we will record additional deferred tax throughout the year to reflect our planned repatriation for 2014.

Now let me turn to our earnings guidance. First, I would note that the impact of the SONGS settlement was not in our original guidance. Still, we are reaffirming our 2014 guidance per share at $4.25 to $4.55 including the $9 million or $0.04 per share SONGS impact. Also, last month the President of Chile presented a tax reform proposal to the Congress that would increase the corporate tax rate from 20% to 25% and apply a 10% additional shareholder tax when profits are earned rather than distributed. The higher proposed taxes are likely to be enacted this year although the final rules have not yet been determined.

We expect the proposal would phase in the higher corporate tax rate over a four-year period beginning in 2014 and change the shareholder level tax starting in 2017. In the quarter that any tax change is enacted we will record changes to deferred tax liabilities impacted by the change. None of these potential impacts of the proposed Chilean tax reform is in our guidance, as additional details are pending and the timing of enactment is uncertain.

Now please turn to slide 5 for details on SDG&E. First-quarter adjusted earnings for SDG&E were equal to $108 million and excludes the $9 million revision to the loss on the SONGS plant closure that resulted from the settlement agreement. In a year-over-year comparison, first-quarter 2013 earnings were $17 million lower due to the general rate case delay. In the first quarter of 2014, $4 million in higher CPUC base margin and improved operational performance largely offset $6 million of lower earnings from both the reduced FERC authorized return on equity and the loss of SONGS rate base earnings.

Now please move to SoCalGas on slide 6. For SoCalGas, first-quarter earnings were equal to $78 million. As with SDG&E, first-quarter 2013 earnings for SoCalGas were $12 million lower due to the rate case delay. First-quarter earnings last year were also reduced by $3 million of gas pipeline integrity expenses that were not recovered in rates in the first quarter. Instead, those expenses were recovered in the second quarter of 2013 under the rate case decision, and all ongoing costs are now fully balanced. In the first quarter of 2014 SoCalGas had an $11 million in higher CPUC-based margin and improved operational results.

Now let's move to Sempra International on slide 7. At our South American Utilities, first-quarter earnings were $35 million. In 2013, first-quarter earnings were $37 million and included a $7 million impairment charge on our Argentine investments. South America's first-quarter earnings are lower this year primarily due to $5 million of foreign exchange impacts resulting from the movement of currencies quarter over quarter. In addition, Chile incurred $2 million of higher interest expense this quarter due to an inflationary impact on the local bond interest rate. As we discussed at our analyst conference, tariffs for our South American Utilities do adjust for foreign currency and inflation.

Moving to Sempra Mexico. First-quarter earnings were $42 million versus earnings of $31 million in the first quarter last year. Sempra Mexico's first-quarter earnings increased by $11 million due to a $10 million reduction in income tax expense including effects from foreign currency in 2013. First-quarter earnings this year also include $9 million of AFUDC equity earnings from construction of the Sonora Gas pipeline, offset by $9 million of higher dilution resulting from the reduced ownership following the IEnova IPO that occur in late March of last year.

Looking forward to the second half of 2014, Sempra International expects to have several large projects coming online that will bolster earnings. These projects include the Sonora and Los Ramones pipelines in Mexico and the Santa Teresa Hydro project in Peru.

Now please turn to slide 8. Moving on to Sempra US Gas and Power. The natural gas segment earned $9 million in the first quarter of 2014 compared with $53 million in the same period last year. The difference in earnings is primarily due to a $44 million gain after tax on the sale of a portion of our Mesquite Power Plant in the first quarter of 2013. First-quarter earnings for the renewables segment were $28 million and include a $16 million gain associated with the sale of 50% of our Copper Mountain Solar 3 facility to our joint venture partner, ConEd. First-quarter earnings also include higher deferred income tax benefits, primarily due to a $5 million reduction in tax grant benefits in the same period last year as a result of the federal budget sequestration.

With that, let me hand the call back to Debbie to discuss slide 9.

Thanks, Joe.

Now we will provide you with an update on some of our major projects. As I mentioned at the outset of this call, on April 30 of this year, we received the final FERC environmental impact statement on our Cameron LNG project. This is an important milestone and the FERC final order is expected this summer. In March of this year we also signed a lump sum turnkey construction contract. Along with the progress we are making on financing, we are on track to begin construction later this year.

Turning to Sempra Mexico. This week the Mexican government released its five-year national infrastructure plan. The plan calls for investments totaling an estimated $13 billion in natural gas pipelines, $7 billion in power transmission projects, and $14 billion in power generation projects, including renewables. In the near term, Pemex plans to develop three pipelines to transport liquids from the Gulf of Mexico to the Pacific ocean. Pemex estimate that the total for these pipelines and needed storage and port infrastructure at over $2 billion. Bidding guidelines should be published in the second quarter of this year.

At our recent Analyst Conference, we also discussed a number of natural gas pipelines to be awarded in the near term by Mexico's Electricity Commission. On April 21, the Commission announced five pipelines for which bid offers will be reviewed this summer. The total estimated investment is over $2 billion. And three of these pipelines are in or have segments within US territory. Each of the pipelines is expected to be contracted by the Mexican Government under a take-or-pay long-term structure. We will watch for further details on the bid process, but the segments in Mexico will likely be attractive opportunities for IEnova.

We also view the US segments to be attractive opportunities for our US Gas and Power business, particularly as they would be long-term contracted assets that could blend well with Cameron in an MLP.

IEnova also announced on April 21 an agreement to sell InterGen 50% of our 155 megawatt ESJ wind-generation project. InterGen is a global power generation firm with 11 power plants in operation in Europe, Mexico, and Australia. The transaction is subject to regulatory approval and is consistent with our renewable strategy to deconsolidate debt and reinvest proceeds in near-term growth opportunity.

For US Gas and Power, we recently completed the sale of 50% of our Copper Mountain Solar 3 facility to ConEd, recording a $16 million after-tax gain. The 250 megawatt facility is currently under construction and half of the facility expected to be completed by the end of this year and the remainder expected to become completed by 2015. Additionally, US Gas and Power agreed to invest in a 50% ownership of ConEd's California solar portfolio. This 110 megawatt portfolio is comprised of four operating projects that provide power under long-term contracts.

Finally, we have some really good news with regard to our REX pipeline. This week REX launched a binding open season for 1.2 Bcf per day of east to west capacity. REX has already secured binding financial commitments for this capacity at rates of $0.50 per decatherm for 20 years. If REX receives higher bids in the open season, the shippers who have already provided commitments will have the opportunity to match the higher bid. Also during the first quarter, REX concluded a successful binding open season on the Seneca lateral, and we have filed with FERC to expand the associated capacity from 200,000 decatherms per day to 600,000 decatherms per day. The first portion of this capacity is expected to be in service in the second quarter of this year.

Let's now turn to the slide 10 for an update on the regulatory proceedings at our California utilities. On the regulatory front, our California utilities have seen important progress on two major issues. First, we announced at our Analyst Conference in March at that SDG&E and Southern California Edison had reached a settlement agreement with key parties on the SONGS plant closure. The settlement agreement is subject to CPUC approval and was filed with its commission on April 3. If approved, the agreement resolves all outstanding cost issues on the plant closure and allows for recovery of replacement power cost, operating and maintenance expenses, and our non-steam generator investments among other things.

The resulting financial impact for SDG&E is not materially different from the impairment we recorded in 2013. And we recorded an incremental $9 million after-tax loss in the first quarter of this year. Additionally, the agreement outlines the sharing mechanism between rate payers and shareholders for any third-party recovery.

On April 15, we also received a proposed decision for our natural gas pipeline safety enhancement program, or PSEP. The proposed decision finds that SoCalGas and SDG&E presented a reasonable conceptual plan to enhance safety and adopt the basic structure of the plan. In its current form, the proposed decision approves a process for cost recovery and balance in account treatment subject to a reasonableness review. The proposed decision also includes criteria for determining recovery of costs associated with records review and testing of pipelines installed after 1955. Our California utilities are seeking additional clarification on a number of key areas within the proposed decision and plan to file comments with the CPUC by the deadline of May 5.

Now let's finish by turning to slide 11. In summary, I am very pleased with our first-quarter results. We are on pace to meet our 2014 earnings guidance and we have several large projects in Mexico and Peru coming online in the second half of the year in addition to the numerous growth opportunities. At our California utilities, we are making headway on significant regulatory matters like SONGS and PSEP. Our Cameron liquefaction project remains on track to begin construction this year. And our US Gas and Power business has made important progress on both the REX pipeline and renewables project.

So with that, let me stop and take any questions you may have.

(Operator Instructions)

Matt Tucker, KeyBanc Capital Markets.

Hi, good morning, and congrats on a nice quarter.

Thanks, Matt.

First question on Cameron, now that you've got the FERC final EIS out there, any sense as to whether they'll take the full -- I think it's a 90-day window to issue a decision or are you thinking that it could come sooner than that? And is there any role for you all to play at this point in the FERC process or is it really in their hands now?

Well, I'll give you a high-level view, but then I'm going to have Mark go -- walk you through the schedule as we see it. But the next step as you mentioned is not a prescribed period of time and generally to get to the next step where FERC issues the order is a 30- to 90-day period. Obviously with all of the issues with the Ukraine and all of the attention on this, we would certainly hope that FERC would look at keeping that period as short as possible. And we thought it was a really good sign that there were no delays whatsoever in their issuing the final environmental impact statement. So that was a positive sign.

I would also say that the Secretary Moniz has commented that once FERC acts on these then DOE intends to act very quickly in giving their final approvals for the export as well. So I think with all the attention on this, we're hopeful that we'll be starting to see where there's not a required standard that we'll see some shorter time periods. But I'll have Mark walk you through what we see as the way that it would unfold.

Yes, I think Debbie pretty much highlighted exactly how it's going to work. But we do -- as you said, we have the final EIS and they could take up to 90 days. They're usually a little shorter than that, but it could be that long. We'll get a FERC order and then that has a mandatory 30-day comment period before it really becomes final. But during that period they could issue our initial authorization to construct which would allow us to do some work and get moving on the project.

But I think as it stands right now and as we've looked at other -- the other project that has received the FERC permit, the Sabine project, we still expect that we'd begin construction later this year. And that will time well with our financing and also meet the expectations that we laid out to you at the Analyst Conference.

Thanks a lot, that's helpful. And then on that PSEP program, you mentioned that the commission endorsed your model or structure for the program. Has the -- has your estimate for the amounts of spending changed at all or is that part of the Commission's proposed decision?

No, that's not really part of the Commissions proposed decision. We're going through and we're looking now. What's happened in their proposed decision is that they actually laid out the approval for all phases of PSEP not just the first phase of PSEP. So what that means in terms of how we do the work and how much work occurs over the 5-, 10-, 15-year period of time, we're going through and assessing that right now. What I would say as we look at the plan that we showed you in March for SoCalGas, we feel that we can certainly be consistent with a plan that we showed you in March of this year.

Great. And then one last one for Joe. I'm sorry, I missed when you were discussing what was in the original guidance versus what's in guidance now. If you could go back over those items that you called out, please.

Sure. What I said was that the SONGS settlement -- the revision of $9 million because of the SONGS settlement, that was not in our original guidance. We are reaffirming guidance at the numbers we had and now includes that. So that's a difference. And then we also said that in guidance is nothing for the Chilean tax reform which has been recently proposed.

Thanks a lot.

Steve Fleishman, Wolfe Research.

So to first on the REX news, could you maybe -- I think, if I recall, this project was not in your plan. Could you give us some sense on maybe how meaningful it would be to the plan if -- even if we stayed at the $0.50 and -- but also did the Seneca expansion as well?

Yes, let me clarify what is in the plan and what would be upside potentially to the plan. So the -- there's really three pieces of REX that we're talking about. We're talking about the first phase of the Seneca lateral which is about 200 a day and then we're talking about the second phase of the Seneca lateral which is an additional 400 a day and then we are talking about the east-to-west flows and those east-to-west flows have been contracted at for 1.2 Bcf a day at the $0.50 per decatherm rate for 20 years. And then that's part of the open season, the binding open season if other parties wanted to pay more than that and/or look at different volumes, then that's the purpose of the open season. But we really have firm contracts for the 1.2 Bs a day at the $0.50 a decatherm.

We can't go through what the investment levels are in each of these phases but I would say that they're not substantial. And so what I would -- you could -- and we cannot disclose what the rates are on the Seneca lateral pieces of that. But first phase of the Seneca lateral was in our plan, the 200 a day. The second incremental of 4 -- an additional 400 was not in our plan nor was the REX east-to-west flow. So you can do your best to calculate the numbers with what I've given you there and assume not huge levels of capital.

And when would you think you'll get a rough timeline for an answer on the binding open season?

I think it's May that we're supposed to get that completed. Initial day was May 7, I think, and then they said something about then they have to make some extension. But sometime in May we would expect.

Okay, great. And then on the Chilean tax issue, Joe, could you explain what the process is and whether this is actually going to happen? And is it more -- would it be meaningful more from a, excuse me, impacting your deferred tax balance or more from an ongoing tax or I guess both?

Yes. Thanks, Steve. That'll be helpful, I can elaborate on that. So as I mentioned in the prepared remarks, the President presented the tax reform proposal to Congress. She mentioned that she would be looking at doing something like this when she was running and so we expected it -- probably this or some form of this will get enacted. But she wants to raise the current rate from 20% to 25% and we believe that'll occur over a four-year period, so 1% or 2% a year for a few years.

This would increase our tax in Chile a few million a year in the early years, not so much because it's not a big change. But the other change that she wants to make has to do with the way that taxes under current law would be paid in addition. So there's a distribution tax or a withholding tax, if you will, a second-level tax that brings the rate up to 35% under current law. She wants to maintain the 35% rate but she wants those taxes paid currently even though the funds aren't distributed out of the country. And she wants that beginning around 2017.

We haven't tried to estimate what the impact on deferred taxes are yet because it's a little bit unclear on the second part exactly how it's going to work and when it might be enacted. But we'll tell you on a future call when we know more information about that. But to be clear, she's keeping the total rate at 35%, she's just changing the structure. So it will have some impact on current taxes in the next couple of years and then it could have a little bit higher impact if this 10% additional tax gets imposed currently.

Okay. And then last question is on the Mexico bids, when are those expected to be decided?

Sure. I'm glad you asked that because there's a lot of really exciting things happening in Mexico and the Mexican government actually put out their five-year plan that outlines hundreds of billions of dollars of projects that they plan -- several hundreds of billions of dollars just in the energy sector alone. And this year they have identified a number of projects.

I think there's about 10 or so pipelines that would be bid out this year. What we've seen already is the announcement from CFE of the five projects that I mentioned and that we expect those to be -- the big packages to be out within the next couple of months on those. Three of those projects are in the US, two of them are in Mexico, and then we've also seen an announcement of bid packages coming out for three projects from Pemex over the next few -- next couple of months. And one of those projects is a gas pipeline, one's a naphtha pipeline and one is a liquids pipeline or a propane pipeline.

And so we're seeing a lot of momentum right now in terms of these bids coming out and they've identified more bids, another five or so projects later this year, that on their schedule that they've identified as being bid out this year. So we think there's some great opportunities. We're analyzing those right now, looking at what is available on the projects. As I said, they don't have the bid packages out so it's very difficult for us to assess which ones we would bid on and all. We're certainly interested in both of those in Mexico and the US projects.

Great. Thank you very much.

Julien Dumoulin-Smith, UBS.

So first a big picture strategic question, as you think about the various modernizations that you've talked about in the past, can you talk about where you are in the gas side of the world? You've obviously got a couple merchant plants out there. And then also on the renewable side, how do you think about the future of that business given the YieldCo phenomenon out there, et cetera, and how that's (inaudible)?

Yes, in terms of the power business, and I think your question seems to be about the power part of our business which has the renewables and the generation. And on the generation side, in the US, we don't see that as a business that we want to be in and that we're exiting that business. We have Mesquite held for sale.

We have already sold our other power plants in the US. And that's largely because that doesn't fit our business model because that business when it was long-term contracted as it was when we had the DWR contracts, then that made a lot of sense. But for those assets today, you're not going to get 10-, 20-year contracts most likely. And that we -- although we do have on a block of Mesquite a long-term contract; but it's very, very competitive. It's not a focused area for us. So you're going to see as trying to exit that business this year in the US.

I would say in Mexico, we still own the TDM plant and as I mentioned there's billions of dollars that are planned in Mexico for electric generation. So we see an opportunity for that plant to meet some of those needs in Mexico and we'll hold that plant to enable that either on a long-term contracted arrangement or selling the plant down the line.

In terms of the renewable business, that -- we think it's a great business. The issue that we certainly always look at is the deferral of our ability to use the tax benefits from that business. And it may be a great business, our question is is it a great business for us to continue to deploy capital in? We certainly are very focused on building out our solar facility. And if we see good projects on the wind side, we're doing those but if it -- we're really focused largely on continuing to develop our solar side of the business until the issue on the taxes and what's going to happen with tax incentives gets a little firmer. I don't know, Mark do you want to -- ?

The only thing I would add to that is that, again, those renewable projects do fit our contraction -- are contracting mode though which is the long-term 20 year contracts are all -- they're all contracted for long periods of time. On the wind side, we're -- the whole industry is a little bit up in the air. We don't know where we're going to be with PTC extensions or not. I think from our perspective since we're not using all the tax credits, some phaseout of PTCs or something would probably be helpful for us.

But I think what we will be doing is deploying capital primarily in our solar projects that are adjacent to some of our existing facilities. We have a fairly competitive pricing point there because we have a lot of infrastructure in place and I think we can win bids and be successful and get the kind of returns that we expect. So I think we're going to stay in that business, but again it's going to be the long-term contracted kind of profile that you've come to expect from us.

I would also add, when we went to the Analyst meeting, we talked about our capital allocation. And the thing that's been great for Sempra is we have a lot of growth areas. We have a lot of places we can deploy our capital and so we always look at these businesses in terms of the risk-adjusted return and how it fits for us in comparison to the other alternatives we have. And we'll continue to do that.

I would also just add Debbie, we've talked about this on a few other calls but we're always interested in ways to increase the value and we try to look at whether the stock's being priced fairly. And one of the things we've talked about is our contracted energy infrastructure business is effectively a YieldCo. I was talking to myself this morning on the way over here thinking maybe we should change the name to Sempra YieldCo. We have a YieldCo.

Absolutely. Well, perhaps a second strategic question and maybe this is a change in tack from your prior statements, but how are you thinking about the complementary assets here to back up Cameron? You alluded to it a little bit earlier. What exactly could those include guiding from your comments in the remarks earlier as well as how you are thinking about timeline to get something off the ground today?

Well, there's a lot of assets that are adjacent to Cameron that we own. Like the LA storage that's 19 Bs, that is something that we're looking at now. The potential of development of that. We have the Cameron pipeline. There are going to be -- we have our other storage facilities that we think with all of the change that we're starting to see and we're seeing now the picking up the pace of hold the gas conversions occurring and then we're starting to see the LNG facilities coming online over the next few years. So we think all of those assets integrate well.

We think other pipeline assets integrate well and that we think other LNG facilities -- we have the Port Arthur property that we think is a very viable facility to develop. And then we have trains 4 and 5 at Cameron that we think are also very viable to develop. So our focus is around that cluster of assets that really support each other and support the change in what's happening in the gas market.

So to follow up to be specific, is REX now eligible to be included now that you have some of the contracts comfort? And then secondarily, if it is to be included, do you still think you need other assets to look outside the complement starting or kick-starting an MLP?

Yes, we've been spending a lot of time on this question. So I'll let Mark and Joe answer this and then I might summarize at the end.

Well, let me I'll kick off. Clearly we're pleased with the upside potential at REX that we just six months to a year ago we didn't know whether -- where we were going to be with that asset. So obviously given the interest on the east-to-west shipping and some of the lateral opportunities, there clearly is a strong asset there now that looks like it's going to have good cash flows for a long time to come.

I think, and Joe can comment on this, but unfortunately we only own 25% of it and therefore there's some regulatory reasons why it is a standalone asset, can't be in that MLP but it can be in an MLP with other kinds of assets that we own and we certainly have plenty to do that. I do think we are continuing to look at MLP-able assets that make sense. And one of the most exciting things is these pipeline announcements that came out of Mexico, there's several of those pipelines, three of them that are going to be in the US and their sizable investments. And if we win one or two or so of those, they would also be very good assets for an MLP.

So we see some real opportunities where we actually have some, I think, advantages because of our history with the Mexican government and our ability and the fact that we've been doing business in Mexico for a long time. I think we would be looked at as somebody that would have not only the wherewithal to do that but also the experience, and I think somebody that would be a trusted partner for Pemex and for the CFE on those pipelines.

I would add that in terms of the timing of when the government is expecting, in this case CFE, expecting those pipelines to go into service, one of them is expected to go into service in 2016, the other is in 2017. So they have nice timing relative to our Cameron asset.

Right.

Excellent. Thank you for all of the detail.

(Operator Instructions)

Gabe Moreen, Bank of America Merrill Lynch.

Not to stick with everyone's favorite acronym, but related to the answer around the IEnova projects in the US portion of those projects, two fold. One is, is it possible to handicap how much of that $2 billion is actually pipe within the US? And then the second part of that is, in terms of structuring it is that something that CapEx would be undertaken at IEnova even for the US portions and then an MLP would acquire it later or does US Gas and Power just build that section and it eventually goes to an MLP?

Yes, let me tell you about the three US pieces of the project, and then I'll have Mark or Joe talk about some of the options for structuring with IEnova. The three pieces, the government has estimated as part of the $2 billion that those three pieces end up being it looks like about $1.2 billion of the total. So they're quite large.

There's one that's $250 million and then the largest of the three is $550 million in the government's estimate. Now the governments' estimates seem low to us from what was published, but those are the Mexican government's estimates for those pipelines. So you can see that they're sizable pipelines. And then Joe, do want to talk about the MLP?

Sure, yes, Gabe. And so then we wouldn't have IEnova build the US side of the lines, we would actually do that in US Gas and Power. As Mark mentioned a little bit earlier when he was talking to Julien, because we only own 25% of REX, to form an MLP we would need some other assets that are slightly larger than the value of REX because of this 40 act investment company rule. And so we need some other assets.

But I'm very excited about REX. I said that at the conference and this new announcement is great because it really enables us to look hard at that. And I mentioned that we had some other assets related to our LNG plant in Mexico that creates some US income. Looking at that and then looking at the ability to put these pipelines from the CFE bids that are in the US. And whether we fund it from US Gas and Power or whether we use an MLP IPO to fund it, we can look into that further. But first we have to win those bids. But this is a very exciting momentum for us with REX.

Great, thanks. And then sticking on the topic of REX, a two-part question, one clarifying. Which is to say the matching ability on bids, does that mean that a $0.50 goes higher for all shippers if indeed incremental shippers come in at higher than $0.50 or does that mean existing shippers have the chance to match on capacity? And then second, on the Analyst Day I think there was implied that there was a descent amount of hydraulic flexibility around the size of a REX reversal. So I'm curious around the 1.2 given other producer and midstream commentary on the need to get gas out of the Utica and the Marcellus, I think implying that the REX reversal may not even be enough of the flexibility to go to an even higher capacity if you get more interest.

Yes, we had talked about, I'm going to have Mark go through the details of how the open season works. But what we had talked about at the Analyst Conference is that there have been like 5.5 Bs of interest in the REX reversal, and so there is a high level of interest. What we have in place is 1.2 Bs of signed contracts at the $0.50 that becomes the base point for the open season. Mark?

Yes, to answer your question specifically, we went out and obviously canvassed potential parties and got commitments for 1.2 Bs at $0.50. If somebody comes in and wants additional capacity, then the existing holders have the right to match that price. So the $0.50 effectively becomes a floor. But at the end of the day, we expect that to be the price. So there could be a little bit of an uptick, but I think for our modeling and stuff we're using $0.50.

And then to your other question, yes, we can expand the east-west capacity of REX beyond the 1.2. The question is that as you start to expand it further, you get into certainly additional compression but also you get pretty quickly to where you have to start doing some looping which gets very expensive. And so the question is are we still the most cost-effective solution. And we're looking at it and everyone will certainly study it. But I would expect -- we're not putting anything in our plans right now for that and we're just really focused on getting this 1.2 signed up and moving forward on that. And then we'll look to see if we're cost-effective for the shippers on doing any further expansion. Could be that we are but we're just starting to study that now.

Great. Thanks very much.

Michael Lapides, Golden Sachs.

Hey, guys, congrats on a good quarter.

Thank you, Michael.

I wanted to ask, I went through the filing, the proposed decision in California and there was some language in there -- honestly I almost felt like I was reading another utilities language in some of the other PSEP related proceedings going on. Because there was language about potential cost that will be borne by the shareholder, not the rate payer, and pipe records that haven't been kept and pipelines that it can't really prove they've been inspected or not. And to be honest I'm not sure I understood a whole lot of it when it came to the Sempra side of it. So could you walk us through your interpretation of what some of those components of the PD means and what the cost implications and the rate payer versus shareholder implications are?

Sure, I'll try to do the best I can on that. If you've read the decision, then you'll also see that it's very hard to interpret and that there's some contradictory elements. As I said, we're going to be filing comments on May 5 and trying to get some of that cleaned up.

What the decision basically does is it goes back to 1956 and it says that any pipeline that they feel that should have been tested from 1956 and beyond where you haven't tested or you don't have complete records of testing, the shareholders should be responsible for the test and the test component of that. And we think we have some really good evidence that that was even inconsistent with the CPUC policy at the time. In fact, we have CPUC policy statements on the record dating back to 1960 where they said that utilities were not required to meet voluntary standards and that they were not going to be funded. So these are things that I think are in contention right now in the decision.

If we look at the decision in entirety and you look at the fact that we can expedite some of the other phases, that even if we look at the decision as it stands today, we think we can be consistent with a plan that we showed you in March. But we do feel like we have a really strong case for getting some of these things modified.

And you will see that, I hope you read our comments on May 5 when we file them and you'd see that the case that we have that shows that really that the first time there were standards put in place was in 1961. And SoCalGas and SDG&E had very, very few miles of pipe that were installed post-1961 that we don't have complete records on. So -- I think that's -- hopefully that's where we end up on this. But you'll see some very strong comments from us.

Great, thank you on that. One real quick, Joe, on Chile and the tax implications. Curious if all of it got implemented tomorrow morning, I know it's not, I know it's going to be a long-term multi-year process, but how would you think about what the either net income or EPS impact would be if all components of the tax change happened in a 2014 timeframe? I'm trying to quantify what the net income or EPS at risk is here.

Yes, we haven't tried to quantify it because there were so many unknowns about how that tax is going to work and what we might be able to do structurally around it. And so we've just focused on the next year or two is going to have a 1% or 2% increase for the next few years and that's only a few million. If it's additional tax does get enacted. We just need to know more about the rule really to try to figure that out. You can make some assumptions with math, but we haven't tried to do that for you.

Okay. And then finally the REX reversal contract, when would that actually go into place?

It would go -- well, it would become effective -- the contracts are effective, but the actual line would go into place in June of 2015 is the timeframe.

Meaning the reversal and therefore the revenue flow back to REX is -- ?

Exactly, yes.

Got it. Thank you, Debbie. Much appreciated.

Faisel Khan, Citi.

On REX, wondering would the binding open season you guys -- so the binding open season you guys had, was there -- do you have to solicit any turn back capacity so did -- were shippers -- were the existing shippers allowed to turn back their capacity in order to make room for the reversal or did those contracts still stick until they run out at the end of the decade?

Yes, I'm going to turn it to Mark.

Yes, we had a FERC hearing on those issues and we were successful and FERC agreed that in that zone, the shippers don't have any right to those revenues or the ability to do that.

Okay, got it. And then on guidance, was the Copper Mountain gain on sale, was that included in your guidance before? And is the sale of the wind assets in Mexico, the 50% interest is that also -- is that gain also going to be baked into your guidance?

Yes. When any of the gains or costs that we would incur in entering into these partnerships on renewables are in our guidance today, extent that we can expect them. And as you remember last December, we talked to you about ESJ that we thought we would be towards the low end of our ranges at that time because ESJ was delayed because it was in our plan for last year. And so ESJ and Copper Mountain 3 were both in our plans for this year. It's part of our business model where we sell 50% down. A lot of that is recouping the development costs that we've already expensed during the course of the time for these projects. So it's always in our guidance if we know that we're intending to sell an asset like that.

Okay, got it.

And I would say in the renewable space. Like Mesquite, is not in our guidance because that is not something that's a typical business model for us. But the turn of these renewable projects and selling off 50%, we always put that in our guidance.

Okay, got it, understood. And then on SoCalGas, the transportation volumes seem to be down pretty -- in a very large amount away over last year, is there anything associated with that except for just weather or -- ?

I' say it's probably the weather. We have had an endless summer in California, it's like 90 degrees here today. And so there's nothing fundamentally different in the business as we see it. It's -- I think it's mainly weather.

Yes, residential volumes were down and so Edison's electric volumes were probably down and the power plants were not used as much.

Yes. I don't think anyone's had their heater on in California or at least in Southern California this entire season. It's been so warm.

The air-conditioner.

Yes.

Fair enough. On Mexico, on the Los Ramones and the Sonora pipelines, as those ramp up at the end of this year, what's going to be the -- how are they going to ramp up? What's the -- how much gas are they going to pull from the US as those facilities ramp up? Is it they're going to hit capacity right away or is it going to be this slow movement in volumes as they get connected to some of these power plants?

Well, I think that the actual volume of gas flowing probably will ramp up because not all of the infrastructure is in place. But we'll get paid -- we've got a firm capacity arrangement essentially, so we'll get paid as if it was running full.

Sure. No, I understand. I was just trying to figure out the magnitude of the flow across the border.

Yes, it'll be slower at first. I don't -- I can probably get you those numbers if you're interested and get back to you on it but I don't know off the top of my head exactly what the ramp-up will be.

Okay, yes, that 'd be great if we get a chance to do that. And then on -- in Mexico too on the ethane pipeline and the LPG terminal in Guadalajara, what's the plan for that? Is there opportunity to expand that pipeline? And is that part of the whole infrastructure debottlenecking expansion plans for Mexico?

Yes, it's not listed as an expansion project in the list that we've gotten but there's obviously -- if we get more petrochemical plants down there and things that there is an opportunity there. But I think right now it's -- we're not counting on it.

Okay, got it. All right, appreciate. Thanks for the time, guys.

Kit Konolige, BGC Financial.

Very brief question, on SONGS, what are you guys anticipating as far as timing on hearing from NEIL and on the arbitration with MHI and what would the economics and the accounting look like if there's some recovery from one or both of those?

Okay. Well the timing on -- we're supposed to hear something back at least what NEIL has indicated this summer about their response to the claims that have been made. And then the MHI arbitration is likely to take a couple of years. We won't even probably be appearing before the arbitrator for a year or something. So that will take some period of time.

Under this settlement provision, there's a sharing mechanism for third-party recoveries where, based upon the amount recovered, that the rate payers get a certain amount and the shareholders get a certain amount. And none of that has been recorded at all, anything that we would get on that would be upside. We don't have anything in our plan about any recoveries of that, that would be all upside.

Yes. The first thing that happens is we recover legal fees that we paid out, so that would go right to earnings because we're already recording those expenses. And then as Debbie said, it would be upside, it would go to reduce the losses that we took earlier. So we'd just have income for the amount that came to us.

Okay, that's great. And to clarify in a few sentences maybe to go back through how we should view the potential for an MLP? If I can characterize it, obviously Cameron would be I guess the key asset. It sounds as though -- well, let me ask it this way, if you were to win one or more of the US pipes in the Mexican bidding, would you be able to put the potential asset, if you will, into an MLP and start an MLP, say, in 2015 if that -- along with REX say if that were to be when the bids were held?

Well, there's a lot of what ifs there.

Right.

But I think REX is a great asset. As we said, that is not an asset that could stand alone in an MLP. That the pipelines would go into service in 2016 or 2017 according to this schedule that's been published by the government. And so when those started -- if we were to get one or more of those and they were cash flowing in that period of time, then that that would be something we would definitely look at as a potential bridge strategy, consistent with what we told you at the analyst meeting.

Because those assets have the same type of characteristics as Cameron. They would be long-term contracted. And one of the things we don't want to do is to form an MLP with assets that don't have the same kind of value enhancing characteristics like Cameron that would trade at low yields. So if all of those things happen, we would certainly look at it and we would time it based upon how to create the greatest long-term value for our shareholders.

So is it fair to say that the Mexican bidding would be key to forming an MLP? Or could there be a bridge strategy only the Mexico LNG and REX?

We'll look -- I would not say Mexico -- the Mexican pipelines in the US are one way to form a bridge strategy. There are other ways to form bridge strategies and we have a team looking at all MLP-able assets and what it does to the long-term value if we were to acquire, build or buy any of these assets or companies. What it would do in terms of creating long-term value in comparison to a standalone MLP with Cameron. And that's the way we'll look at it. And we'll figure out the combination and the timing that gives us the greatest long-term value.

Yes. We usually do see the economics are better when we build greenfield things than buy something. But I think what Debbie just said, all of the above -- we're looking at all of the about.

Okay. Good luck with it. Thank you.

Mark Barnett, Morningstar Equity Research.

You talked a lot about what's going on this year in Mexico and I know a lot of it is very exciting. One more quick question following up on all of that discussion. Outside of the bidding rules for the next slate of projects this year, you'd mentioned in some past calls that there's some outstanding uncertainties around maybe rule-making or some additional reforms that you're still looking forward to. Could you maybe highlight what some of those might be?

Sure. One of the -- I mentioned earlier that we don't have anything in our plans in Mexico to do additional electric generation or transmission right now. Those are areas that are opening up and the government has published the list of potential projects to bid on. Those are right in our sweet spot, absolutely. Those are areas of interest to us that we have not put in to any of our plans today. And those are projects that we're interested in that are on that list that the government has published as well to be bid out.

The other area I would say, and we're doing some work on it now, is in the gathering and processing. We have done different types of pipelines in Mexico. We built an ethane pipeline as an example and so we think that this is a great opportunity area for us is to get into the gathering and processing area in Mexico. And so we're exploring those opportunities.

All of the markets are opening up in those areas, so it's not just gas pipelines for us, it's electric transmission, electric generation, gathering and processing, all of those are great opportunity areas. And I think in the energy sector that there was something like $600 billion of projects identified over the next five years in Mexico. I would see us going after a very large share of that and aggressively going after a very large share of that.

All right. Thanks for that.

(Operator Instructions)

Vedula Murti, CDP Capital.

To follow up a little bit on the conversation with Kit Konolige or whatever, what's your -- how do you evaluate it when you look at everything, all different permutations and everything like that? What's your opinion about how CenterPoint and OGE put their structure together? What Devon did with Crosstex in terms of trying to accelerate things and that type of thing, is that something that, based on what you've seen and how the value realization has read through so far, something that you view positively or do you feel like it's something that control is paramount? Or how should we think about -- how are you thinking about those types of things?

Well, I will tell you how we're thinking generally and I'm not going to comment on any other companies or their transactions. But the way that we think about it is we have an exceptional asset with Cameron when that goes online. It has natural drop-downs. We think will trade at a very low yield and would be an amazing MLP.

That if we do a bridge strategy, we would not want it to diminish the value of that long-term asset for an MLP. But there's a possibility that how something might be structured could increase the value in a bridge strategy. And if we found assets that we thought would trade at comparable yields and that they would allow us to have higher splits by doing it earlier, we are absolutely not adverse to doing that. But we're not going to just go out and buy something that is going to trade very differently than Cameron would likely trade and diminish the value of a high-value asset in the long term. And that's the way we would generally look at it.

Okay. And to follow up then on that, which I completely agree with, given you're probably reasonably well along in the evaluation, can you characterize how you think the probability is that a bridge strategy that meets your criterion can materialize? Or do you feel like your -- there's something that you see that has a chance to actually meet these criterion, which I completely agree with and wouldn't want to dilute anything. So I'm -- are you optimistic about that or how are you thinking about that?

I'm always optimistic and I think that there's a lot of infrastructure that's needed in the US and so there are opportunities for us to look at. But I wouldn't want to handicap it. And the good thing is we have an incredible fall-back position with Cameron and the assets around Cameron and so I wouldn't want to handicap it. But I think there's a lot of opportunities happening in the United States right now in terms of infrastructure.

Okay. Thank you very much.

Thank you. And it appears there are no further questions at this time. Ms. Reed, I'd like to turn the conference back to you for any additional or closing remarks.

Well, thank you all for joining us today on the call as always. Our incredible investor relations staff will be there to answer any of the follow-up calls that you have after, so call Rick or Kendall or Amanda with any follow-up questions and have a wonderful day. Thank you.

That concludes today's conference. Thank you for your participation.