桑普拉能源 (SRE) 2016 Q2 法說會逐字稿

Good day and welcome to the Sempra Energy second-quarter earning results conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Rick Vaccari. Please go ahead.

Good morning and welcome to Sempra Energy's second-quarter 2016 earnings call. A live webcast of this teleconference and slide presentation is available on our website under the Investor section. Here in San Diego are several members of our Management team: Debbie Reed, Chairman and Chief Executive Officer; Mark Snell, President; Joe Householder, Chief Financial Officer; Martha Wyrsch, General Counsel; Trevor Mihalik, Chief Accounting Officer; Dennis Arriola, Chief Executive Officer of SoCalGas; and Jeff Martin, Chief Executive Officer of San Diego Gas & Electric.

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 not recent 10-K and 10-Q.

It's important to note that all of the earnings-per-share amounts in our presentation are shown on a diluted basis. We'll be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call and to Table A in our second-quarter 2016 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, August 4, 2016, and the Company does not assume any obligation to update or revise any of these forward-looking statements in the future.

We will keep our prepared remarks shorter than usual today for the focus on the quarterly earnings, as we just held our analyst conference. With that please turn to slide 4. Let me hand the call over to Debbie.

Thanks, Rick. And thanks to all of you who were able to make it to our analyst conference a few weeks ago. We couldn't have asked for better attendance and enjoy being able to talk to you in person and listen to your feedback.

Based on our year-to-date results, I will start by reaffirming our 2016 adjusted EPS guidance range of $4.60 per share to $5 per share. Joe will review the details of this quarters results but first let me take some time to address the strategic goals we have for the natural gas business.

We previously disclosed the sale of our interest in Rex, which negatively impacted our quarterly results. We also expect losses in this segment in 2016 and 2017, which are incorporated into our adjusted guidance. Our decision to sell REX reflects an implementation of our strategy for the natural gas business to focus our investments around our anchor LNG assets where we have competitive advantages. Octavio discussed this at our analyst conference. We also decided to sell our southeast utilities and TdM and redeploy the capital on assets that better align with our strategy and provide stronger, long term growth.

I'd like to spend a minute reiterating the value proposition that we believe is top tier among our utility industry peers, and that is a result of Sempra's long term strategy. First, our strategy continues to provide the building blocks for high total shareholder return. Our base plan projections result in approximate 12% adjusted earnings per share compound growth rate through 2020.

Second, we plan to grow the dividend 8% to 9% annually. Third, we have a healthy balance sheet with significant projected credit capacity in the latter years of the plan, which gives us several options to return value to our shareholders. Fourth, our businesses have great development platforms with a long runway of opportunities. Finally, with those development opportunities, we are committed to our strategy of long-term contracted infrastructure and utility earnings, which moderates risk and provides less volatility in varying market environments.

Now, I will turn it over to Joe to review the quarterly financial results. Please turn to slide 5.

Thanks, Debbie. Earlier this morning, we reported second-quarter earnings of $16 million or $0.06 per share. We also reported second-quarter adjusted earnings of $200 million or $0.79 per share compared to second-quarter adjusted earnings in 2015 of $259 million or $1.03 per share.

Quarter over quarter, adjusted earnings were impacted by the following items: At US Gas & Power we had losses of $19 million in the second quarter of 2016 compared with gains of $5 million in the second quarter of 2015, both related to movements of natural gas prices on inventory that we sold forward. We expect the majority of this quarter's losses to reverse by year end, as we sell the natural gas held in inventory. Our goal is to operate this part of the business to lower our economic exposure to commodity price swings. Also at US Gas & Power, we had $8 million of lower equity earnings due to the sale of our interest in REX.

At SoCalGas, we had a $13 million impairment as a result of the CPUC decision related to the North/South pipeline. We are now working on ways to recover all or a portion of these expenses, and more importantly, develop alternative solutions for the reliability needs in Southern California that this pipeline was designed to address. Last year, SoCalGas had a $13 million retroactive earnings benefit from higher CPUC rate base approved in the second quarter of 2015. You can find the individual financial results for our businesses in the business unit earnings section.

Please turn to the next slide. As Debbie mentioned, we took actions in the first half of this year to continue to align our assets with our long-term strategy. And at our California utilities, we received the final General Rate Case decision. As a result, we made several after-tax adjustments to arrive at adjusted earnings this quarter.

The significant adjustments are: First, a loss of $123 million for the permanent releases of pipeline capacity that Sempra natural gas held with REX and others. Second, $80 million in charges as a result of the final GRC decision for the reallocation to rate payers of certain benefits from tax preparer's deductions. Third, also related to the GRC decision, earnings benefits of $21 million for the retroactive GRC effect related to the first quarter of 2016.

Additionally I want to remind you we expect to report significant gains that will be excluded from adjusted earnings for two transactions when they close, both of which may happen in the third quarter.

First, we expect the after-tax gain for the sale of our southeast utilities to be approximately $70 million. We also expect to record a significant after-tax gain from the remeasurement of IEnova's investment in the shared joint venture of PEMEX upon its acquisition of PEMEX's interest. Regarding this acquisition, we have made progress recently, and we expect to close this year subject to regulatory approvals. The transaction was restructured earlier in July and a new price for the seven assets was finalized at approximately $1.1 billion. The sale by PEMEX will be submitted to the regulators for final approval.

I'd also like to address Aliso Canyon. We have increased the cost estimate to $717 million. And we have begun collecting under the insurance policies, and to date have received approximately $34 million. On July 25, the individual and business plaintiffs filed an updated and consolidated complaint as required under the case management order.

In addition, the County of Los Angeles filed a separate complaint against SoCalGas, a primary component of which seeks new safety measures. Please see our Aliso Canyon status update slide in the appendix, which describes the costs included and excluded from our estimates. And please refer to our 2015 10-K and second-quarter 10-Q for more detail on these costs and our insurance coverage.

Finally, as Debbie mentioned, we are reaffirming our 2016 adjusted EPS guidance of $4.60 per share to $5 per share.

With that, we will conclude our prepared remarks and stop to take your questions.

Thank you.

(Operator Instructions)

Julien Dumoulin-Smith, UBS.

Hi good morning or good afternoon. So first question, a little bit more strategic again going a little bit back to the Analyst day commentary, but what's the latest thinking of perhaps if you could elaborate on IEnova, and the decision to participate or not to participate both in sort of an immediate sense and over time in the equity offerings and maintain your ownership level, just can you elaborate a little bit more on that?

Sure. Let me talk a little bit about first, the investment opportunities that are there and we have a lot of things that are coming together now. First, of which we won the marine pipeline bid in conjunction with TransCanada and our investment there is about $840 million for that project and then it appears that the transaction with Pemex is going to move forward as we indicated and hopefully closed by the end of the third quarter and that's about $1.1 billion and in addition to that, we're looking at some M & A activity.

There are some renewables, the second auction is coming up for bid and we have some projects that we're looking at bidding into that second auction and so if you have a look at all of those that we have several billion dollars worth of new projects that we're going to be working on over the next few years and we already secured and several other billion dollars worth of projects between the renewables and then the transmission bids that are going to be coming up that are additional opportunities for us and further than that we're starting to do some things with the assets we have, like we just built a lateral agreement to build a lateral. We have some others under negotiation off the existing pipeline, so we're looking at how we keep taking the assets that we have and growing those assets so it is a great opportunity. I was just with Joe and Mark in Mexico City last week. We spent time down there with the Secretary of Energy, the Secretary of Treasury, they had Pemex, the Head of CFE, Sino Gas and everyone is very enthusiastic about the Mexico infrastructure opportunities and I will tell you their view is they aren't slowing down because it's critical to what their goal is to have manufacturing in Mexico, so we're really, really excited about the IEnova opportunities.

Going specific to your question then what we're going to do, and I can't tell you what position we're going to take on the equity, but we're going to look at all of that and we're going to look at all of the capital needs. I think we have a couple hundred million of available in Mexico right now and so we're going to have to look at the total capital needs that we would expect over the next year or so and then look at what's the right position for us to be in relative to that. We've told you that we're not repatriating because we wanted to take a position in the equity offering assuming the equity offering occurs and we would expect it to occur so there's really not a definitive percentage ownership that we ascribe to. What we would love to do is have the pie keep getting bigger and that we don't have to keep our same position in the pie. We don't have to own 80% of the pie. We would like the pie to be bigger and own a significant position in that pie.

Got it, but is there kind of a point at which, let's say Cameron does not move forward that would potentially evolve as you think about capital allocation or do you think about it separately and distinctly as what is the return proposition in Mexico not necessarily what happens with the Cameron?

We aren't looking at because we think any of these, all these projects are really good and they're financialable so, I wouldn't say that's a consideration but we have some things going on in Peru right now that are very exciting. Potentially we have the projects in Mexico and then the Cameron 4 and so from a capital allocation standpoint, as we kind of looked at it, that we set up IEnova, so that we could issue equity through IEnova. We have the opportunity through our Peruvian Company to issue equity. It already has. It's in the market and we own like 83% of it so if we needed capital for that we could issue equity and lose Del Sur. And then for Cameron 4 we could issue equity at Sempra for that. So we have different ways that we can finance these things and honestly if we have great projects that earn significantly above the cost of capital we have not had an issue in being able to finance them. Further we showed you at the Analyst meeting, our balance sheet strengthens over a five year period of time so we put a plug in of $1.5 billion of cash or of stock buybacks. We would hope to invest that money in good projects and I think we're going to be able to do that.

Got it and one more clarification on the thought process for IEnova. Anything around the Sebra E structure in Mexico to think about that here? Obviously that's kind of maturing and what does it mean for you guys one way or another? From your tax position in the country probably doesn't mean much does it?

I'm going to have Joe answer that. We talked a lot about that when we were in Mexico City last week. A lot of the agencies or Pemex have been looking at Sebra East for some of their assets, and I think that it offers some opportunity for financing. Again, for us a lot of it is as it was with the MLP, what's the best cost of capital so Joe?

Sure, thanks, Debbie. Hi, Julian. We looked at this over a year ago when it first came out and there were some issues with it and we worked with regulators around those and so now I think that's sorted out but I think it goes back to what Debbie said. What's going to be the best source of capital for us to grow the business and as she said we were just down there and it makes us even more excited to own a large part of this business, so how we decide to fund it with debt and equity we will take that all into account because these are really great projects and we really like the growth opportunity there. As to the Sebra East specifically, we just look at that as one of the options we have to grow the business. Pemex would love to try to do something but they would like to see the market kind of open up and it just hasn't evolved yet but we stayed very close to it.

Great, thank you.

Thank you, Julien.

Greg Gordon, Evercore ISI.

Hi, Greg.

Hi how are you? So looking at where you are for the first half of the year, and then understanding that certain things are coming out of the numbers like we won't have Rex in the second half, we expect the gas costs to reverse and other puts and takes, given the line of sight you have right now do you feel like you're right at the mid point of the guidance range, a little bit behind, a little bit ahead can you give us a sense of how you think you're trending?

We aren't going to pinpoint within a guidance range. That's why we use a range. The things that I think that you mentioned are the things that will take effect over the rest of the year. A few things to consider easily SDG&E has its best quarter in Third Quarter but SoCalGas has its worst quarter because of the way that the revenues are and then has a good quarter in the Fourth Quarter, so the earnings are not even throughout the year for the utilities. The hedged inventory that we talked about should reverse in the second half of the year. We had a North/South impairment at SoCalGas in the quarter of $13 million that hit SoCalGas. That's not something that is repeated again throughout the course of the year. And then the income tax tracking at SoCalGas that was going retroactive to the beginning of the year, so that is not quarterly issue, that's like double what it would be. And then last year to this year, we were looking at putting renewables in service last year that where we had a higher ITC, and now the ITC levels that we're showing are more normalized. So I mean, we look at the earnings that we have are like half of the earnings that we have in our guidance range, and we would anticipate being in the range and I'm not going to tell you high or low where in the range, that there's a lot of moving parts, but we feel really good about our business and what we're in it for is truly the long term. And when we start looking at the great opportunities that we have for the growth, in addition to what we've laid out in our five year plan, we feel really good about our business and that's what we are really focused on delivering.

No that's fair. Can't harm me for trying. The second question is a little bit off the beaten path. As you are looking to work on the emissions offset and carbon reduction programs that you're putting in place both in the normal course of business and as a result of Aliso Canyon incident how significant are some of these programs for methane emission reductions? What are the big buckets of methane emission reductions that you're going after, and do any of them actually require capital investment where you might look to put those types of programs into the rate base?

Sure, and some of them certainly do, so let me, I'm going to refer this to Dennis because he can address both the Aliso, and more specifically the methane reductions. SoCalGas has been actively involved working with DOE on this whole methane emission issue, and I would say that the one thing that SoCalGas has very, very low relative emission levels to other kinds of pipeline systems or upstream systems, but it's something that we've looked at and we looked at what investment would be required to really get it down significantly so Dennis?

Good morning, Greg. Let me start with what we're doing regarding Aliso, because I touched on this at our Analyst conference. We've already signed some letters of intent with various dairy owners and our strategy here is it's consistent with what the air resources board is the plan they put out, but our strategy basically is to look at the destruction of methane and the biggest opportunities in California are in with dairies and/or landfills. So we're working with some of those owners we're actually in the process of due diligence on a handful of dairies to see how we can most cost effectively mitigate what resulted from Aliso.

From a system standpoint as Debbie said, and we've obviously worked with the American gas association and the other trade groups, SoCalGas' emissions from our system itself are some of the lowest in the country so we don't see a huge amount of opportunities to be able to make improvements in rate base, but we're looking at new technologies from a monitoring standpoint for example, that could be associated, that could help us those types of things could be added into a rate base in the future. I think that what we see is technology is continuing to evolve and we're on the leading edge of working with those technology manufactures and the gas industry, so we're going to look at what we can do to try to grow rate base in a smart way that helps improve our system.

Thanks, so you really are going after the methane emissions from animal waste, that's really the biggest potential offset? That's interesting.

The biggest potential directly on methane is on dairies, that's correct and we have quite a few dairies within our service territory, especially in the central valley and that's where we are starting to look.

Okay thank you.

I would say also a couple of things. We've put the estimate of that in the $717 million for all of the offset for the emissions from Aliso. The emissions have been measured now and so we're going after making our commitment, fulfilling our commitment, making those offsets and it's really quite cost effective, so that is our focus and we will fulfill that commitment.

Great, thank you guys.

Thank you.

Lasan Johong, Auvila Research Consulting.

Thank you. I too have kind of an off beat question. By 2020 the rate base of utilities looks like it's going to be about maybe $17 billion maybe $17.5 billion. Could you give me an estimate on what the non-utility investment total would look like in 2020?

Non-utility investment total?

So investment base. Like similar to the rate base.

Similar to rate base, okay. And I have the utility projected rate base, while Joe looks up the non-utility piece I have the utility piece and at SDG&E we're looking at about $10.4 billion of rate base in 2020 and that's about (inaudible) for and then SoCalGas the rate base we're looking at 2020 is about $7 billion and then about $5.1 billion of that is CPUC at about $1.9 billion of that is more special projects approved the CPUC, that's not part of the rate case.

This is Joe. I think you asked me a question about something that we typically don't give out but it's probably information that's here and we can catch up with you on the call after because you're asking about what's the total invested capital outside the utilities. You aren't asking what the investments for that year are, correct?

That is correct.

Well we can do it off line, but I don't have that information on my finger tips we don't usually talk about our total invested capital. You can see it on the balance sheet pretty easily but it's more complex than I think we would take time with everybody because--

Agreed okay.

The utility assets are much bigger than the rate base, there's a whole bunch of things in there, you've got nuclear decommissioning trusts and all sorts of things so we need to parse it out and it's in the segment table so the information is there but we can lead you to it.

Okay, and the other question is the non-utility businesses. So Natural Gas LNG pipelines, on a risk basis compared to utility let's say the risk and utility businesses is 100 units, what would you characterize as the risk for all of your other businesses combined?

Yes, I mean, it's a really difficult comparison but what I will tell you is that our strategy is based upon having a portfolio with similar risk profiles between our use tell it and non-utility business and we do that by doing long term contracts and if you look at our non-utility businesses, they are either our International businesses are foreign utilities that have been under a regulatory framework for 30 years or they are long term contracted assets like our pipelines and so we have 20-25 year contracts on those. Most of those assets honestly when you look at it once they go into service they are more like a bond because you have a steady stream of earnings coming from those and so the construction risk on those projects is not much different than the construction risk on building sunrise, so I would say they're very similar and that's our strategy is to not go into extremely high risk areas to create the growth but to have a risk profile be quite similar.

The other thing you could look at is if you look at the slides we did at the conference a few weeks ago and lock at Slide 7 in my deck it talks about the investment grade credit ratings and all of the subsidiaries and these are all highly rated mostly A rated including Cameron and while we don't have ratings on all of the project financing at the Renewables as Debbie said they're all contracted long term with utilities. Kate and I just spent a good deal of time last summer with all of the rating agencies explaining why our non-utility businesses were as strong or stronger than our utility businesses because we don't have three year rate cases or four year rate cases. We have long term contracts and so they like that very much and they understand our business very well. I think it's very strong.

Michael Lapides, Goldman Sachs.

Hi guys, just a little bit of question want to make sure I understand trajectory of earnings as within your 2016 guidance and even for 2017 just across the quarter. It strikes me that you talked about this a little bit that there's going to be some significant movement around kind of what to expect versus a typical or historical year at both of the utilities in third versus Fourth Quarters going forward?

Yes, what last year was the first year for SoCalGas we had the new way of accounting for revenue so that kind of gives you what percentage of the revenues come out each year and they are just allocated on that kind of a percentage basis and so that should follow suit. And then SDG&E has historically reported earnings based upon the same methodology and so you can kind of look at what percentage of earnings usually fall within a quarter so if you look at last year, those are pretty regular in terms of how the earnings get allocated by quarter and we can give you the precise percentages for SoCalGas if you want those. But this quarter, we obviously had a lot of unique things because we had direct transaction, we had the capacity release, we had the change in the rate case, the rate case decision coming out, the impact of the taxes from the rate case decision, so there were a lot of things that occurred this quarter.

Next quarter, we're going to have a lot of things occurring as well and we tried to foresee that and communicate that because we should have a close of mobile and well met happening, some time at least by the end of this year and then that we will have also by the end of this year most likely the Pemex transaction closed and so both of those will have gains that would be adjusted out of adjusted earnings. Hopefully once we get through some of that the other thing we have, we have TDM as an asset held for sale and depending on the sales process for that and earlier this year we took a $26 million hit in terms of deferred taxes for holding out for sale so we've had a lot of things because we're really trying to go through and take our asset portfolio and cleanse it of things that we don't think are going to add to our growth in the long term and then reinvest our capital. Hopefully you'll start seeing more normalized kinds of earnings going forward since we have now pretty much accomplished that plan with the exception of getting some of these things closed and I don't know if that helps at all.

No that helps a ton. As you think about strategic positioning of existing assets, where does your Gulf Coast related gas storage facilities fit into this?

As we look at those, Michael, one of the things that we really have already started seeing as some of the LNG facilities come on line is that those storage assets we think will have more value over time and that we think that really to run an LNG facility it makes sense to have storage. There was a situation that just happened last week where Shaneer was cut back on their pipeline capacity and that you cannot cut back an LNG facility like that, so what we're looking at we haven't put any money in terms of developing those yet. We think as the LNG facilities come on line in the Gulf that the need for storage adjacent will become a lot more apparent and that this is part of our strategies we're hoping to develop some of the storage facilities and some adjacent pipelines to serve Cameron, other LNG facilities in the area, manufacturing in the area, and then that Port Arthur when that gets developed so we think that there's really going to need there's going to be a need from our robust infrastructure in that Gulf region as the LNG comes on.

When do you expect economically to benefit from higher storage pricing?

Well, we actually when we did our work this year, we looked a lot at that and we used outside firms and we actually cut some of their forecasts when we did our own projections this year because they are projecting that as the LNG facilities come on line, that, and as you get more of the coal to gas conversion that you're going to start seeing some storage rate increases occurring but what we've seen in reality is its been slower than what their projections have been so we took a conservative view in our plan but we are starting to see year to year, we're starting to see some price movement upward from where we were last year. Not huge amounts but we are starting to see some upward movement in pricing, so I think as more load comes on that we'll start seeing better storage rates.

Got it, thank you Debbie, thank you, Joe.

Sure.

Steve Fleishman with Wolfe Research.

Yes, hi. Just a question on Aliso. Could you give us an update on your well testing and what your latest thought is on when maybe some of the first wells could start coming back in operation?

Sure, I'm going to have Dennis address that as he's right in the middle of that now so Dennis?

Hi, Steve. As of right now we've completed the first series of tests on all 114 wells, and as of this morning, the division of gas, geothermal resources and oil has approved and reviewed 96 of those wells so they've all gone through the process. Out of the 96 we've had an additional 17 wells that have gone through the next series of tests and they passed and they've been reviewed by Dogger. So out of the 114, 17 have been completely cleared by Dogger, so once Dogger, and the Public Utilities Commission confirm that the entire field has met the requirements of the new law SB380, we believe that probably some time in September we'll be ready to start injections subject to their approval of somewhere between 20 and 25 wells so that's our best estimate right now is in September, later maybe as early as perhaps later this month, we'll be going back to Dogger, asking for that approval but they have to go through a process with the public hearings so, September is our best estimate at this point in time.

Okay, thank you.

Paul Patterson, Glenrock Associates.

Good morning.

Hi, Paul.

Just really quickly on the permanent relief impairment, is there any longer term impact to earnings associated with that, any benefit from reduced cost or something like that?

Yes, let me ask Mark talk about the capacity, most of it was tied to the Rex transaction.

Right, Paul I think to understand your question, I don't think there's any significant reduction in expense going forward tied to that release. It's a pretty small team that was managing it, but and also with respect to the release there shouldn't be any or there won't be any ongoing P&L impact now that it's done. So I think the answer to your question is no there's no really ongoing effect.

Okay.

And I would just add to that the decision to do this was largely looking at what the value of that capacity was going to be over time and it was devaluing in comparison to what we assumed it was going to be valued at and we wanted to get that behind us. We had some credit issues on Rex that were there. There was some shaky credits in addition and that we just felt it was better to get when we sold Rex to get all of that behind us and not have a tail risk associated with that pipeline.

Then just to follow-up on Aliso, so you guys mentioned the $717 million update and the receivable what have you, but there was something that cost estimate excludes. Do we have any sense as to what the neighborhood of those cost estimates that may be excluded are and what the insurance coverage of that is? Do you follow me?

Well I'll just say that we've included everything that's estimatable and that's the $717 million includes all of the well costs, it includes all of the relocation costs, it includes the cost for the blade to do the investigation, all of those kinds of costs that are estimatable. What's not estimatable is what happens on litigation and we don't know what that would be.

I would say the good thing is that we've paid for relocation, we have offered people to be out of the area. We tried to do things to reduce damages and then further the Department of Health services has come out repeatedly and most recently after thorough investigation of the homes and testing and all and said there were no long term health effects from this so how that all plays out in litigation, we can't estimate that. But what we tried to do is to put this in a box to the extent possible and insure that we manage the risks effectively and so we'll go forward with the litigation but I think from the basis of the estimate, that we have over $1 billion of insurance and that we continue to believe that with what we see that the insurance coverage is adequate for the damages.

Great, thanks so much.

Since there are no further questions then, I thank you all for joining us and I thank you all for being at the Analyst conference. It was great seeing you in person and if you have any follow-up questions, please contact our IR team and have a really wonderful day. Thanks a lot.

That will conclude today's conference. Thank you all once again for your participation.