Sempra (SRE) — Q3 2015 Earnings Call Transcript

Welcome to Sempra Energy's third quarter 2015 financial presentation. A webcast to this teleconference and slide presentation is available on our website under the Investors 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 Southern California Gas; and Jeff Martin, Chief Executive Officer of San Diego Gas & Electric. Before starting, I would like to remind everyone that we'll be discussing forward-looking statements on this call within the meaning of the Private Securities Litigation Reform Act. 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. 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 third quarter 2015 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, November 3, and the company does not assume any obligation to update or revise any of these forward-looking statements in the future. Please turn to slide 4, and I'll hand the call over to Debbie.

Thanks, Rick. During the third quarter, our solid operating and financial performance across the company continued. With strong year-to-date results, we are now raising our 2015 adjusted earnings guidance range to $4.95 per share to $5.15 per share. In addition, we continue to execute on our five-year base plan and are on track to meet or exceed our approximate 11% adjusted base plan EPS CAGR for 2015 to 2019. Since providing those projections at our March Analyst Conference, we have announced more than $2 billion of investment opportunities that are incremental to our base plan. We have also filed for commission approval of our GRC settlement agreement for SDG&E and SoCalGas. I am very pleased with our progress this year and I'm optimistic as we move into 2016. Let's begin with an operational update and then Joe will provide more detail on our financial results. Please turn to slide 5. With regard to our base plan, I would like to first revisit the visibility of our 11% adjusted EPS CAGR. On this slide, we provide key base plan assumptions. I will mention just a few points. First, the almost $20 billion of investments included in our five-year base plan reflect projects that were essentially approved, contracted, or under construction as of March 2015. For earnings associated with these projects, we have risk mitigation strategies in place that limit our exposure to changes in interest rates, foreign currency rates, or commodity prices. We provide additional information in the appendix to this presentation. Second, our base plan projections do not include impacts from the proposed GRC settlement, the $2 billion of new projects or acquisitions announced since March 2015 or any earnings from our three potential LNG development projects. Third, we do not need to issue Sempra equity nor any potential MLP equity in order to finance the base plan. In light of the planned IEnova equity offering we discussed last quarter, we do not need to issue Sempra equity to finance the PEMEX acquisition or any of the announced renewable projects that are incremental to our base plan. Further, we did not include any earnings impacts from a potential MLP in our base plan. Altogether our five-year plan was built on conservative assumptions, and we are on track to meet or exceed our base plan earnings projections. Now, let's go to slide 6 for an update on our growth and development opportunities.

Thanks, Debbie. Earlier this morning, we reported third quarter earnings of $248 million or $0.99 per share. On an adjusted basis, we reported third quarter earnings of $250 million or $1 per share. Third quarter earnings in 2014 were $348 million or $1.39 per share. Adjusted earnings this quarter exclude expenses related to the development of our three proposed LNG liquefaction projects. Similar to last quarter, we only recorded $2 million of after-tax expense. This number reflects the fact that a substantial portion of the costs are either being capitalized or shared with our Cameron joint venture partners and PEMEX. Earnings this quarter include reduced tax expense associated with repatriation. As I mentioned on last quarter's call, we intend to participate in the planned IEnova equity offering, and now expect to use about two years' worth of dividends from Mexico that we had originally planned to repatriate. As a result, we expect an approximate $0.10 per share benefit in both 2015 and 2016 from lower than expected tax expense. Our current plan is to resume repatriation from Mexico in 2017 and 2018. I also want to reiterate that third quarter earnings continue to reflect the impact of seasonality in SoCalGas's revenues. This impact resulted in $113 million of lower earnings this quarter and $48 million of lower earnings year-to-date. Applying seasonality will have no impact on full year earnings. We will see a $48 million after-tax benefit in the fourth quarter due to seasonality. You can refer to the appendix for additional detail where we illustrate 2014 SoCalGas earnings had seasonality in revenues being applied. Excluding the impact of seasonality in SoCalGas revenues, Sempra's third quarter adjusted earnings increased by $15 million compared to the same period last year. Looking forward, we are now raising our 2015 adjusted earnings guidance range to $4.95 per share to $5.15 per share. With regards to 2016 earnings and dividends, we anticipate updating our guidance in February on our fourth quarter call. Our new five-year EPS and dividend projections will be updated at our 2016 Analyst Conference. I will note two additional matters. As a result of IEnova's anticipated purchase of PEMEX's interest in their shared joint venture, we expect to record a non-cash gain in the fourth quarter from the step-up of our own investment to fair value. This gain is not included in our 2015 adjusted earnings guidance.

Thanks, Joe. With regard to investment opportunities post 2019 that are beyond our base plan period, we continue to make good progress. For Cameron expansion, we filed our FERC application in September and expect to receive FERC approval mid-2016. We received EPC pricing for Train 4 with per train costs that are lower than Trains 1-3. We believe Train 4 could be one of the lowest cost LNG development projects worldwide and competitive in the marketplace. Now that we have firm EPC pricing, we can conduct focused discussions with customers, and we continue to target announcing customer agreements prior to the end of the first quarter of next year. For our Port Arthur project, we have received our DOE FTA authorization and are continuing our project assessment. We are targeting the first half of next year to execute a joint development agreement with Woodside. For our ECA liquefaction project, we continue to work on the regulatory and other project development issues with PEMEX. We view both the Port Arthur and ECA liquefaction projects as potentially providing LNG post-2020. With that, let's turn to slide 8 for a discussion of the quarterly earnings.

Hey, good afternoon.

Hi, Neel.

How are you?

Great.

First question was on the pipeline award expected this week. There have been some articles with some bids submitted or published. And it looks like you guys are a close second. Are those apples-to-apples comparisons and does that reflect how the ultimate auction will come out or is that – or is the CFE still ruling on it?

Well, first, let me say that they just changed the date when we will be notified on the bid to November 10, which is next Tuesday. And if you've looked at any of these bids before, the capital costs are not really reflective of who wins the bid, it's one component of the total bid. The real bid decision is based upon the tariff amount that you are agreeing to provide over the 20 years or 25 years of the contract in all of these pipeline bids, and that's what will be analyzed and looked at next week and announced. Capital is a component, your return is a component, what your gas costs for operating the facilities is a component, what you think in terms of additional capacity sales that you might get off of the pipeline, those all factor into the creation of a tariff rate and that's what they will be announcing next week. So, we feel good that we're in a close second, only $4 million behind the low capital, but there are a lot of other factors that will come into the final decision.

Okay, great. And second question on Cameron Train 4. Has the timeline been pushed out as far as negotiating customer contracts or MoUs, because I think previously you guys mentioned end of the year and I think in your prepared remarks, you said you'd have something maybe by Q1 2016. Can you just remind us of the timeline going forward and the market conditions for additional LNG?

Sure. I'll start and then I'll have maybe Mark add some additional color to it. But I've been saying in meetings with the investors for some time that we were looking at the end of the first quarter of next year. And that was because we really could not even begin negotiating MoUs until we have the EPC contract and we just got that this month. And so now we have the information that we can get a firm price. And we're very pleased that knowing that and getting a firm price, we think Cameron will be one of the, if not the lowest cost facility in the United States for LNG export. And so that allows us to really negotiate a firm MoU. And we followed the same process when we did Trains 1-3. We really needed to know what the cost was going to be in order to have a firm MoU negotiated. Mark, do you want to add anything?

Yeah. I would just say that we've been having substantive discussions with a lot of potential customers and now we've been able to give them some hard data to work with, and we do expect to show some results. They won't all come at once, and we expect to have some towards the end of the year and in the first part of next year. But our firm decision to move forward on this would be late in the first quarter.

You might also comment, Mark, on what we see in the contracting area there because I know that there has been a lot of articles and all, and what we've seen is that there are still a lot of parties out there contracting.

Yeah. I think there's always speculation in the press and rightfully so, picking up that LNG is oversupplied up through 2018, but when you start looking at the needs beyond that, when you get into 2020 and 2021, there's definitely a need for additional capacity and we're seeing that. And just to remind the audience, just in 2015 alone, we had 27 contracts signed. And 17 of those were 20-year contracts, four were 10-year and the rest were shorter-term contracts. So there is plenty of activity going on, and we are certainly seeing that and we remain very confident that we'll move forward on Train 4.

And, Mark, just to quickly follow up on the comment that off takers will need LNG in 2021. How late can they wait before they sign contracts in order to procure that supply? Do they have another year or is it necessary to make that decision in 2016?

I think they really got to start making those decisions in 2016, especially for new projects because otherwise they just won't be online in time. We are probably the – as far as a new train goes, Train 4 can probably come online as probably as quickly or quicker than any other train in the market that's starting anew, and you've got to really kind of make that decision in 2016.

Thank you.

Hi. Good afternoon. Can you hear me?

Yes.

Yes, Julien. We can hear you.

Excellent.

Good afternoon.

Yes. Indeed. So, perhaps firstly on Mexico, can you elaborate a little bit on opportunities down there, and I suppose principally focusing on non-oil and gas, but obviously this transmission, there's talk of electric capacity market like procurements, et cetera. What are you guys planning to do down there at present?

Yeah. I mean, that's a great thing about Mexico. I think, it's one of our wonderful growth platforms where we see layers of opportunities for our company there. And certainly, there are more bids coming out on pipeline, we'll see $6 billion worth of pipeline bids occur over the next several months and we will be actively involved in that. Following that, they are finalizing the market rules for electric transmission and in our slides we showed you some of the projects that would be up for competition and probably within the first half of next year. And we're very interested in participating in that market. Further, now some of the oil properties are beginning to be taken over as it is and we see some great opportunities to the liquids pipelines that will take how – take away capacity from some of those PEMEX properties that are now being developed. And also, potentially gathering and processing in those areas. And then the generation market will be opening and we have, as you know, the ESJ lands, property that we could – we could add about another 1,000 megawatts or more to that area to do wind production. And so we see some great opportunities there. We also see some opportunities to really get some greater value add of our TDM plant. So, I think that and I would also add, I should say, that looking at our existing assets and a great pipeline backbone that we have, we can also add capacity with industrial customers to that and we're working on that right now. So we just see a great worth of opportunities, wealth of opportunities in Mexico and are very excited about it.