桑普拉能源 (SRE) 2016 Q4 法說會逐字稿

Good day and welcome to the Sempra Energy fourth quarter earnings results conference call. As a reminder today's conference is being recorded. At this time I'd like to turn the conference over to Rick Vaccari. Please go ahead.

Welcome to Sempra Energy's fourth quarter 2016 financial presentation. A live webcast of this teleconference and slide presentation is available on our website.

With me in San Diego are Debbie Reed, Chairman and Chief Executive Officer; Mark Snell, President; Jeff Martin, Chief Financial Officer; Steve Davis, Group President of Utilities; Joe Householder, Group President of Infrastructure; Martha Wyrsch, General Counsel; and Trevor Mihalik, 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.

It's important to note that all of the earnings per share amounts in our presentation are shown on a diluted basis and 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 fourth quarter 2016 earnings press release for a reconciliation to GAAP measures.

I'd also like to mention that the forward-looking statements contained in this presentation speak only as of today, February 28, 2017 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 4 and let me hand the call over to Debbie.

Thanks, Rick. On today's call, I will discuss several topics. Our 2016 achievements, an update on the key items our management team is focused on in 2017 and our 2017 earnings guidance and dividend.

This morning we reported full year 2016 earnings of $5.46 per share or $5.05 per share on an adjusted basis. Our 2016 adjusted earnings include a net $0.11 per share benefit related to several additional items.

The adoption of a new accounting standard for share based compensation and a change in our planned repatriation, both partially offset by a revaluation of deferred income taxes related to Peruvian tax reform, and the impairment of the North-South pipeline. This net benefit largely offsets the loss of earnings resulting from the sale of our interest in the Rockies Express Pipeline.

In 2016 we delivered on our financial targets and positioned ourselves for future success by resolving some key issues that I will discuss in a few minutes. We are pleased to announce we are raising our 2017 earnings guidance to a range of $4.85 to $5.25 per share, up from our previous guidance of $4.80 to $5.20 per share. Jeff will review the key drivers of our increased guidance.

At Sempra, we have a longstanding commitment of growing our dividend, consistent with this, our Board approved a 9% increase in the 2017 dividend to $3.29 per share last week. As you'll recall, we're targeting 8% to 9% annual dividend increases over the next several years.

The strength of our projected future cash flows gives us confidence we can grow our dividend at a higher rate than our utility peers. It also reinforces our commitment to maximizing total shareholder value through a combination of dividend and earnings growth. The next few slides will highlight our key areas of focus in 2017 beginning with our California utilities on slide 5.

Earlier this month, we reached an important proposed agreement on the cost of capital extension. The agreement sets SDG&E's and SoCalGas' authorized return on equity to 10.2% and 10.05% respectively through 2019.

In 2018 we will true-up long term debt costs to actual debt costs at both our California utilities. The debt true-up impacts earnings at the utilities by about $36 million per year, which we had already assumed in our financial plans.

This proposed agreement is an important step in gaining greater certainty to our planned utility earnings. Since we had already forecasted a debt true-up in 2018, the settlement has no material impact to the assumptions discussed at last year's analyst conference regarding utility capital structure and returns. CPUC approval is required, which is expected in the first half of this year.

Moving to Aliso Canyon. SoCalGas has resolved a number of key issues. We sealed the lake over a year ago. The Department of Public Health conducted indoor and outdoor testing, which facilitated residents returning to their homes last summer.

We've entered two settlement agreements with governmental agencies including the recent settlement with South Coast AQMD and at the facility, we strengthened the infrastructure and filed for approval to begin injections. Our focus going forward is to resolve the remaining issues as expeditiously and safely as possible, including resuming injections at the field, continuing to collect insurance proceeds, and resolving remaining legal claims.

Turning to SONGS. The final decision in the arbitration hearing against MHI is expected in the near future. The existing SONGS settlement agreement calls for an even split of the award between rate payers and shareholders, after reimbursement of attorneys fees.

As a reminder, at the end of last year, the CPUC directed the parties to revisit the 2014 SONGS settlement agreement. By April 28, all parties must come to an agreement where the CPUC will begin further proceedings.

Two all-party meetings have been held. We maintain that the existing settlement agreement is consistent with regulatory precedent and takes into consideration the best interests of the parties.

Please turn to slide 6 for an update on Cameron. I want to assure you that completing Cameron JV Trains 1 through 3 and putting them into service is a top priority for Sempra and the other owners. The JV continues to monitor the construction activities as well as the quality of the work and provides weekly progress reports to Sempra and other owners.

Since the owners received the updated working schedule in early November, executive management from Cameron JV has had multiple meetings with Cameron's contractor to discuss and review the schedule and path forward. Sempra management has also had discussions with the contractors.

Cameron JV continues to engage additional independent resources to provide further insight into the construction process and progress, and the contractor has implemented a number of additional measures which we think are important. The measures include improvement of drainage at the site to help mitigate effects of adverse weather conditions and resequencing the work to minimize risks and improve efficiency among other things.

Cameron's contractor believes the current schedule is achievable and calls for in-service timeframes of mid-2018 for Train 1, end of 2018 for Train 2, and mid-2019 for Train 3. When we provide our 2018 earnings projections at the analyst conference, our results will reflect these estimated dates. It is important to note that Cameron JV's exposure is safeguarded in two important ways.

First, the lump sum turnkey contract is generally designed to transfer certain cost overrun and schedule risk to Cameron's contractor. Second, Cameron JV's tariff adjustment mechanism is designed to materially preserve its IRR in connection with cost overruns and schedule changes.

Sempra's focus continues to be delivering the overall long term value of our interest in the Cameron JV to our shareholders while reducing risks. Before I hand the call over to Jeff, I'd like to take a moment to address the current political and business environment.

I will take a minute to address potential policy implications to Mexico and later Jeff will discuss potential tax reform. The current administration is focused on addressing the US trade imbalance.

The value of US energy exports to Mexico in 2016 was more than twice the value as US energy imports from Mexico, improving the US trade imbalance. [Innovis] business supports this by helping build the backbone of Mexico's energy infrastructure.

We continue to see great growth potential in Mexico and will highlight some of the opportunities we see at the upcoming analyst conference. With that, I will hand the call over to Jeff for his first earnings call as CFO. Please turn to slide 7.

Thanks, Debbie. I have the good fortune of starting my new role on a positive note. We've updated our plan and are increasing our 2017 EPS guidance range. Our new 2017 guidance is $4.85 to $5.25 per share. Our new range is up from the previous guidance of $4.80 to $5.20 provided at last year's analyst conference.

Next, I'll briefly discuss the key drivers of our updated guidance. First, both SDG&E and IEnova had strong performance in 2016 and we expect the improved performance to continue.

Given the strong international growth opportunities, we're no longer planning to repatriate cash from current earnings from Mexico or Peru. Our plan is to indefinitely reinvest the cash locally in capital projects.

Compared to previous guidance our tax expense is lower because of this change. These benefits were partially offset by higher insurance costs at SDG&E and SoCalGas that are not fully offset by cost savings included in our prior plan.

Let's turn to slide 8 to discuss our financial results. Earlier this morning, we reported fourth quarter earnings of $379 million or $1.51 per share. On an adjusted basis, we reported fourth quarter earnings of $383 million or $1.52 per share.

Full year 2016 earnings were $1.370 billion or $5.46 per share. This compares favorably to 2015 earnings of $1.349 billion or $5.37 per share. On an adjusted basis 2016 earnings were $5.05 per share.

This year, you'll also see the organizational changes we announced last fall. Our operations are now combined into two groups; Sempra Utilities and Sempra Infrastructure. Individual financial results for each of our businesses can be found in the appendix.

Next, I'll go through a comparison of 2016 to 2015. This slide highlights our recent results and that they were impacted by several items. Debbie addressed the first five items earlier in her remarks.

Please note that the change in our planned repatriation resulted in a reversal in 2016 of a $20 million tax charge taken in 2015. The other main drivers of the year-over-year comparison are as follows: $9 million of net higher earnings at the California utilities, offset by $14 million lower favorable impact from the resolution of prior years taxes at parent and $25 million lower favorable impact from foreign currency and inflation effects at Sempra Mexico and South American Utilities.

Next, let's please turn to slide 10. I'd like to end with a discussion on tax reform. There are a few proposals being circulated and we've evaluated several scenarios. At a high level we believe that most likely outcomes would not materially impact our projected earnings.

At our California utilities, which represent almost 80% of our 2016 adjusted earnings, we don't expect any significant impact. It's important to remember there's been a history of flow through treatment for major tax reform dating back to 1986 and we expect any differences to be recorded in the memo accounts established by our final 2016 GRC.

Under that decision you'll recall we're required to track the impacts of tax changes with amounts reviewed in the next rate case. There are also opportunities to offset any potential reduced rate base from 100% expensing with additional capital spending.

When you consider the potential impact to our EPS five years from now, we expect there's a potential range of a negative 5% to 6% to a positive 5% to 6%. The low end assumes 20% corporate tax rate, 100% expensing of capital, immediate non-deductibility of interest and a potential to use some foreign cash to reduce US debt.

In contrast, the high-end scenario has the same assumptions except Cameron qualifies for the border tax exemption and the non deductibility of interest is confined to new debt only. We've also looked at additional scenarios which we believe are more likely and involve some form of mitigation resulting in the range of negative 1% to 3%.

To be clear, we find this to be the most likely outcome. It's uncertain if there will be any material change to our current tax laws, but if there are, the impacts to our earnings profile could be materially different than what is shown here.

In the interim we'll be working with key trade associations and independently to ensure that the unique aspects of our industry and our Company are fully understood and fairly represented. Next, please turn to slide 11 for a few closing remarks from Debbie.

Thanks, Jeff. In summary, we were able to meet our 2016 adjusted earnings guidance while positioning ourselves for long term success.

We executed our operational plan and continue to resolve key challenges including: finalizing the GRC at our California utilities, and most recently, reaching a proposed settlement on the cost of capital extension; closing the PEMEX JV acquisition; winning the Marine Pipeline, bid jointly with TransCanada; and executing the successful IEnova equity follow-on offerings in Mexico; selling REX and our Southeast utilities to more closely align our assets with our long term growth strategy; and making significant progress related to Aliso Canyon.

These are just some of the accomplishments that have established our foundation for future success and give us confidence in our 2017 dividend growth and earnings guidance discussed today. We look forward to seeing many of you at our upcoming analyst conference here in San Diego on April 4 and 5, and talking more then about our future.

Finally, I'd like to take a minute to acknowledge Mark Snell for his extraordinary contributions to the success of Sempra. It has been a pleasure to work with him over the last 15 years and we wish him well as he moves into the next chapter of his life. With that, we'll conclude our prepared comments and stop to take any questions you have.

Thank you.

(Operator Instructions)

We'll take our first question from Greg Gordon with Evercore ISI.

Thanks, good morning.

Hi, Greg.

I just wanted to be -- a couple questions. First is, I just wanted to make sure it's clear that you're going to assume Train 1 mid-2018, Train 2 end of 2018, Train 3 in mid-2019, when you give us the guidance in April. But you have not formerly agreed to a change in the contract in terms of the delivery dates, is that right?

Let me hit the high level and then I'll have Joe talk a little bit about where we are on that. As we look at the schedule in the Trains, the schedule that you laid out is the schedule that has been confirmed by the contractors, the schedule that they believe that they can deliver the Trains on.

And we've been doing a lot of due diligence work, both with the Cameron JV and then some follow-up meetings that the Sempra team has had with a contractor. And so when we give our guidance, assuming nothing changes between now and the time we give our future guidance, we will be using that estimate that the contractor has affirmed to us as their current estimate.

In terms of contractually, we're still working through all of those issues but we basically been using that as the schedule for the Trains. Joe, do you want to add?

Thanks, Debbie. Hi, Greg. The concise answer to your question is no, we did not change the contract but the contract still has earlier dates in it. This is their working schedule that they are working with and the one they think is achievable.

Okay so that's important for our understanding of safeguards, right? That you aren't conceding that they won't owe you liquidated damages if they are late?

We have not. That's correct. We have not and as you might remember, our IRR, pretty much stays intact whether there's a change in cost or a change in schedule. The most important thing is our earnings are protected it's just a question really of what happens to the tariff with respect to the issue that you just rose.

Okay, and then Jeff I had a question for you. You commented on a decision to not undertake tax repatriation from South America because of the better growth prospects there. So, not to jump the gun on the Analyst day presentation but is it safe to assume that we're going to see higher regulated Capital Expenditures in Chile and at Peru versus the prior plan as a result of that reassessment?

Greg, thanks a lot for your question. One of the things I'd say in response is we had our largest ever capital campaign last year of $5.3 billion. That was driven largely by our California utilities with [$2.7 billion] but we are seeing a lot more deal flow outside of our regulated utilities.

A lot of that showed up last year in Mexico and I think from a repatriation standpoint we're really looking at whether we can put those earnings to work in a more efficient way there locally. And that currently is our assumption going into our planning period so this is something we probably, as you indicated, will give you a lot more visibility on in April.

Okay, great and then can I ask, I know -- this is the last question for me. The list of changes on page 9 from 2015 to 2016 as I think about what the old guidance was and how you did significantly better than old guidance on what you delivered in 2016, I thank you for that.

So what were the key changes that happened as you got into the fourth quarter that moved you from the middle of the old guidance range to where you actually delivered? I would assume they were some of the tax changes in the repatriation and some of the other tax things?

Yes, I mean those were the major things that occurred. We tried to delineate pretty much everything that was happening for the quarter and for the year so you could get a good picture of it and I think that the major issues were some of the castings and then there was a change in the accounting methodology for stock based compensation and that also had an effect for last years results.

Okay thank you.

We'll go next to Steve Fleishman with Wolfe Research.

Good morning, Steve.

Hi, good morning. One other clarification on Cameron. When you last talked about this, the contractors never had told you why there was a delay? So, have they clarified to you why the delay in the schedule?

Yes, what they've claimed is that much of the delay was due to weather conditions and as we've all known that there has been a lot of rain that's occurred. What I'd like to do though is, Joe actually met with the principals of the CB&I yesterday with the lead Director on our Board for our -- actually the Chair of our LNG construction committee and he is the prior CEO of [Flora]. So, they both went and met with the principals of CB&I yesterday and I think it might be helpful to add a little bit more color of what came from that meeting. Joe?

Thanks, Debbie. Hi, Steve. These are complex projects. There's thousands, there's over 20,000 line items and things that they're working on, so there's lots of things that go on in the project.

Certainly, weather it is a factor among other things. One of the things that we spoke about yesterday when we talked about their confidence in meeting the working schedule is, they're making sure that logistically they are doing things in the best way possible. So for example, they were talking about how they are going to move pieces of equipment directly to locations, reducing the use of cranes.

There's so many different things, it's hard to characterize and pin anything on one particular item because there are so many. But we had a good meeting with them yesterday and spoke about a number of issues.

Again, remember that the Cameron joint venture is the one in charge of the contract with them and working with them with a daily basis and our Director and I were there to basically do due diligence for Sempra to understand where they were and their confidence level in moving along and keeping to the working schedule and keeping that on track.

Okay, maybe just a little bit of a logistical question for the analyst day. Is your intention to still do the same kind of year ahead outlook, and then five year outlook as you've always done?

Our intention is to give the 2018 numbers and then to give a growth rate through 2021, consistent with our past practice.

Okay and just at a high level and again I'm not sure this is fully possible right now, but just you mentioned like the repatriation changes, you have the updated schedule for Cameron but is there any things that we should just be noting that have changed a lot versus the long term outlook given then?

I think those are -- the things you named are the most significant things and we'll give you the details of that when we get to the analyst conference with laying out our 2018 numbers and then what has changed from when we last forecast 2018 which was several years ago. So, one thing as an example when we last forecast 2018, we still were forecasting REX in it.

So I think most of those things you know about and I don't think that there's anything that I'm aware of that you probably don't already know about. But how it all comes together, we'll share with you when we get to the analyst meeting.

Great, and last question is just on Mexico, you talked very briefly on it but just maybe a little bit more color on how you're looking at the political economic implications of the new administration and the like. And just maybe a little more color on is it impacting future bids or strategy around IEnova?

We really haven't seen anything impacting our business in Mexico. We see amazing growth opportunities in Mexico and what we see there happening is that the Markets that are opening are creating additional opportunities for us. We see some Electric transmission bids coming, renewables is a big focus -- they've set a renewable portfolio standard, those bids we see going forward and then we're really interested some opportunities we see with liquids pipelines and receiving terminals.

And so we see that business continuing to move forward and in discussions that we've had with the officials in Mexico and then with some of the administration, that when we look at energy imports/exports, the US exports twice as much in the energy space to Mexico as we receive from Mexico. So, it really meets what the focus is to correct any trade imbalances.

So we see that opportunity for us to continue to grow in the energy space in Mexico remaining under the administration and so we're going forward. We will be talking about a lot of opportunities that Carlos and his team have on the drawing board right now when we get to our Analyst meeting and we're very excited about it.

Great, thank you.

Thank you.

We'll go to Michael Lapides with Goldman Sachs.

Yes, hi, one housekeeping question and then one, maybe more structural question. On the housekeeping side can you just talk about the impact of bonus depreciation over the next couple of years? And also your position under current tax law in terms of cash tax payments levels over the next couple years?

I'm going to have Jeff and Trevor talk about that. As Jeff mentioned, when we looked at the provisions of tax reform going forward and the impact of bonus depreciation, beyond the time that we had envisioned in our plan. Because when we gave you our plans we always looked at the bonus depreciation effect in the plans as far as it had been continued. Now, if that continues beyond the time frames Jeff indicated to you that we thought it would be it's about --10% more capital or about $100 million of each utility that would need to be spent to offset that. And we feel that, that is very achievable with the kinds of long term projects we have like PSEP under way, but I'll have Jeff specifically talk on the cash tax impact.

Good morning, Michael. I would just start by saying that when you go back to what the policy makers priorities are in California you think about safety and reliability and grid modernization. These are right in the wheel house of what we think is important to our customers.

So if you go back to the original conversation on bonus depreciation several years ago, I think what you've really seen is the Company spending more capital to meet the policy makers requirements and no real change in terms of the impact to our rate base. And I think to Debbie's point, the bonus depreciation rules which are in place today were really reflected in the guidance we laid out last summer.

And then on a going forward basis if you did move under tax reform to 100% expensing, I think what we've laid out is -- to Debbie's point again, it would require us about another $100 million in incremental capital in each of our utility to not have any erosion to our rate base. So I think one of the things that emboldened by is we invested about $2.7 billion in 2016, which is one of our highest years ever in terms of capital deployment at SoCalGas and SDG&E and we have lots of opportunity going forward.

So I think there's a fair amount of enthusiasm of getting to the analyst day and laying out that larger capital plan. And then with respect to cash taxes, currently, we had a effective tax rate last year of 21%. We think that probably goes up slightly going into 2017 but currently we aren't in a cash tax paying situation.

We aren't in a cash tax paying situation throughout the period of the plan that we will be presenting.

Got it, and then Debbie, thinking a little more structural. You made the organizational shift creating a utilities group and an infrastructure group. Are you rethinking the broader structure?

Meaning are you and the Board rethinking the broader structure of Sempra at all, about what pieces fit well together and have natural synergies with each other across the multiple different businesses and multiple different geographies you serve? And whether there's a greater opportunity to create value if maybe some of the pieces aren't part of the same corporate puzzle?

Michael, we always look at that -- we always assess the structure of our Company. We look at the assets that we have and which assets we want to keep and which we want to dispose of. You've seen us do that clearly in the last year we sold REX and we sold the Mobile Gas and Wilmette Gas so we always look at those things.

There is nothing in the near term [offing] for that but as those businesses continue to grow we've tried to preserve optionality. That was one reason we did the IPO in Mexico.

We have ownership in Peru that is outside of our ownership and we try to structure these things in a way that would give us flexibility. The businesses no longer fit together in a portfolio that we would have the option of changing the way the businesses are structured. But there's nothing that we have that -- you should not read this as a sign that anything is planned now.

Got it thank you, Debbie much appreciated.

Thank you.

We'll go next to Paul Patterson with Glenrock Associates.

Good morning.

Hi, Paul.

So on Cameron, in terms of if I heard your comments, it sounds like you guys were a little bit more oriented towards reducing risk and I didn't hear as much about expansion or potential expansion. Has there been a change or are there any thoughts? Is this just basically how you guys always have thought about it, or is there any reassessment or any change in how you look at the risk or opportunity at Cameron?

What Joe was going through is when we structured Cameron we were very clear on the risk that Sempra was willing to keep and the risk that we wanted to layout to other parties. And for Trains 1 through 3 it was very clear to us that we did not want to take the construction risk associated with either pricing or timing of construction.

Because we were not doing the construction and we were not, you have a joint venture overseeing the construction, it wasn't Sempra alone overseeing construction. So we fashioned this in a way that we protected our shareholder interest and, keeping the economics of the project solid, regardless of what happened with the timing or the cost of construction, we laid those risks off intentionally.

That's not to say that we aren't looking at expansion and when we did that contract, we also looked at the expandability of the facility and we had terms in the agreement that went through how we would expand to a 5-Train facility. We've commented before that one of our partners has not been willing to provide the equity for the expansion and that we are working to resolve those issues with that partner so that we can expand to a Train 4.

That -- we've had meetings with that partner and the principals of that partner and are in discussions with them to see if we can reach a resolution on that and then once we get that resolved we are very interested in continuing forward with Cameron Train 4 because we think it's going to be one of the lowest cost options in the marketplace, and it's a really good option.

And so nothing has changed in that but as we've told you before we've got to resolve this partner issue in order for us to move forward with expansion and we're diligently working on that now.

Okay, great and then I apologize if I missed this but the border tax adjustment, it just isn't intuitive to me why that would apply. How does that work I guess? Why would --?

Go ahead with your question. I'm sorry.

I'm just wondering, just simply why would it apply to Cameron in the first place?

Okay, I'm going to have Jeff go through that for Cameron and as we indicated, we think that it's not a highly likely scenario but there are, depending on how this is drafted in terms of the final tax provisions, and we all know that's a moving target now. So that there are some ways where it could apply and be a benefit. Jeff?

Good afternoon, Paul. Just as you think about it, under a border adjustment, the taxes will apply to whether goods are consumed rather than produced and the thing that hits us most directly, as you'll recall, we have two facilities that actually we import power into the United States from.

The first one is our Mexicali Power Plant referred to as TdM. That one is held for sale so we expect that will resolve itself by the middle of the summer. Then secondly IEnova has the ESJ wind farm that dispatches into the California grid.

We've done some assessment around that and the applicable taxes if border adjustment did go forward and we think that's a non material issue to our Company but what's a little bit interesting is if you think about the Cameron facility, it's probably unlikely, Paul, that it would apply to us.

But there have been scenarios in different [back] countries where the export exemption has applied upstream so think about that as a tolling facility no different than the power plant, right? Our customers bring gas to the facility and they are ultimately the ultimate exporter from the facility.

It's just something we want to track closely because if you did see a decline in the corporate tax rate from 35% to 20%, if the border adjustment did apply, it would be reducing and the tax on Cameron an incremental 20% to zero. So again, to Debbie's point, it's probably speculative at this point, it will really depend on how the legislation is written, but it's something that we'll be actively following.

Okay, great and then I guess the Sundry item on the balance sheet went up about $100 million from Q3 to Q4. Was there any earnings impact associated with that?

Paul, it's Trevor. No, there's no earnings impact with that. Primarily what the increase there is it's the greenhouse gas allowances and then also the assets associated with the pension benefits. So those are really the drivers on the increase but no P&L impacts on those items.

We used to combine the Rabbi Trust in there and then that any movement in the Rabbi Trust would have a small P&L impact but there we've broken it out a couple lines above.

Okay, great. Thanks so much.

Thanks.

We'll go next to Faisel Khan with Citigroup.

Good afternoon, Faisel from Citigroup. Have you guys looked at this smaller scale LNG or modular scale LNG concept that we've seen both Cheniere, talk about and this new start up Tellurian had talk about. Have you guys looked at that as a competing technology to expansions at Cameron?

We have looked at that technology. We specifically looked at it for ECA, and whether or not something like that would be better than trying to convert the facility at Costa Azul. Joe do you want to comment on that?

Faisel, as Debbie said, we continue to look at many of these things. We look at a lot of these projects we're very mostly focused on the three projects -- the Cameron expansion, the Port Arthur, and the ECA facility and building the larger scale Trains, we think those will have the best economics and in terms of getting to the large scale customers. I think a lot of these smaller scale ones work well in the emerging markets things than some of the other ones, but that's not where our current focus is.

Okay yes, because some of these facilities are modular design but they are still large facilities like 15 million ton, 20 million ton facilities. What these new company's are advertising, our new technologies are advertising, is that they can get the cost structure down below certain number to make them competitive. But it sounds like you guys have looked at this technology and it's not -- you don't think it's cost competitive with the bigger scale Trains?

Yes, what I would say is that we looked at this several times and that it depends on the market that you want to serve and when we looked at it as we were looking at potentially serving the Hawaiian market out of Costa Azul, and something like that for a smaller market may make sense.

Most of what we are looking at is the focus on the lowest cost for the volume of the facility. And we don't see that technology as being the best technology when you have the kind of facilities that we have that have great shipping lanes and docking potential and all of that.

If you had to serve islands in the Caribbean or Hawaii -- it's by application and by the market you're going after, and that we tend to go after the larger markets with long term contracts and that's our business plan.

These might eventually turn out okay but when you're dealing with a big utilities you're looking for something that has sustained reliability over long periods of time and they want to make sure that when they sign up for something that you're going to be able to deliver operating results over long periods of time.

Okay understood, thank you.

It appears there are no further questions at this time. I would now turn the conference back to Debbie Reed for any additional or closing remarks.

Well thanks for joining us this morning. We really appreciated the questions and we hope to see all of you at our analyst conference on April 4 and 5 in San Diego. And if you have any follow-up questions, our IR team will be available to respond to them later today. Thank you very much.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation.