Sempra (SRE) — Q1 2018 Earnings Call Transcript

Thank you. Good morning, and welcome to Sempra Energy’s first quarter 2018 financial presentation. A live webcast of 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 including Jeff Martin, Chief Executive Officer; Joe Householder, President and Chief Operating Officer; Trevor Mihalik, Chief Financial Officer; Dennis Arriola, Chief Strategy Officer and Executive Vice President of External Affairs and South America; Martha Wyrsch, General Counsel; Peter Wall, Chief Accounting Officer and Controller; Allen Nye, Chief Executive Officer of Oncor. Before starting, I’d 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 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’ll be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call and the Table A in our first quarter 2018 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, May 7, 2018, 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 four, and let me hand the call over to Jeff Martin.

Thanks, Faisel and welcome to the team. As much as we enjoyed addressing your questions in the past, it’s nice to have you on this side of the call today. I’ll start by thanking Debbie Reed and acknowledging the pivotal role she’s played in Sempra’s growth and success. This company clearly would not be in the position it’s in today without her leadership and vision. Our succession plan was designed to ensure continuity of leadership, and the recent executive appointments demonstrate our commitment to continue our focus on delivering long-term value creation for our shareholders. I’d also like to welcome everyone into their new roles as well as the Oncor team and to thank Allen Nye for joining us today. We were just in Dallas a few weeks ago meeting with our top 200 leaders and could not be more excited about the opportunities that lie ahead. Oncor’s strong, pure-play electric T&D business solidifies our footprint in the Gulf region and, just as importantly, improves the scale and diversity of our domestic utility earnings. We remain committed to maximizing shareholder returns through strategic, disciplined investments and growing dividends. Lastly, we’re reaffirming our 2018 adjusted EPS guidance of $5.30 to $5.80 per share. In doing so, it’s also important to point out that we’re tracking two non-cash items that could impact this guidance range later in the year. Trevor will cover those later in the call. As we highlighted on the fourth quarter call, we have four near-term priorities: delivering on our growth strategy; executing on our California regulatory goals; ensuring that all three trains at Cameron produce LNG in 2019; and analyzing opportunities to strengthen our balance sheet to support future growth, which we’ll address in greater detail at our upcoming analyst conference. Let me start first with growth. We have improved visibility into our long-term growth strategy with the closing of Oncor, almost one month earlier than planned. We’re expecting our portion of Oncor earnings for the partial year of 2018 to be in the range of $320 million to $360 million. Additionally, it’s worth noting that over 80% of our equity offerings were allocated to existing shareholders. We’re moving forward with our California regulatory priorities. In April, our California utilities submitted updated rate case testimony that includes projected impacts from tax reform. We’re pleased to say that this will benefit our customers through lower projected bills at SoCalGas and increased wildfire mitigation investments at SDG&E with no expected impacts to bills. This is an important process for us as we seek to improve our services to the communities we serve. Regarding protections for wildfire risk, we, along with other stakeholders, continue to execute a three-part strategy to help protect our customers and ensure the long-term health of our California utilities. In fact, we’ve seen good progress over the last several months with the issuance of statements recognizing the need to address the increased threat from natural disasters and climate change. We continue to believe this partnership will enable us to offer safer and more reliable utilities to our customers. We are making great progress with Cameron trains one through three. This is one of our top priorities. We continue to expect all three trains to be producing LNG in 2019. We reached a settlement agreement with our contractor to resolve all claims, putting both the contractor and Sempra in a stronger position to meet the current schedule. We are pleased with the recent shareholder approval to combine McDermott and CB&I, which we believe improves our contractor’s overall delivery capabilities and financial strength.

Thanks, Jeff. Earlier this morning, we reported first quarter earnings of $347 million or $1.33 per share. This compares to first quarter 2017 earnings of $441 million or $1.75 per share. On an adjusted basis, we reported earnings of $372 million or $1.43 per share. This compares to first quarter 2017 adjusted earnings of $438 million or $1.74 per share. Our operational performance included $22 million of higher earnings at SoCalGas, $15 million of equity earnings from our investment in Oncor, beginning March 9th, and $8 million of higher pipeline earnings, primarily attributable to assets placed in service in the second quarter of ‘17 in Mexico. However, our adjusted quarter results were also impacted by $94 million of higher losses at the parent level, which include higher net interest expense and preferred dividends. This was partially offset by $14 million of higher earnings due to the application of revised seasonality in 2018 at SDG&E. We are continuing to evaluate tax reform and its impact. While the territorial tax system increased the value of our international businesses, we believe the component of it, the global intangible low tax income, is impacting us due to unintended consequences of tax reform. This quarter, the tax was an $8 million expense with an estimated full-year impact of approximately $24 million. It could also reduce our earnings in future years by similar amounts but declining over time. We’re hopeful that this issue will be fixed with updated regulations or legislation before the end of the year. But until this happens, we’re recording the tax as part of our earnings. Now, please turn to the next slide while I hand it back over to Jeff.

Thanks, Trevor. We’re excited to be hosting our analyst conference next month in New York where we’ll be providing important updates regarding our future business plans. Our goal this year’s conference is to provide a detailed view of how we plan to create shareholder value well into the future. We hope you will be able to join us in New York. The date of our conference is June 28. And with that, we’ll conclude our prepared comments and stop to take your questions.

Hi. Good morning. Congratulations. So, a couple of quick questions here. Can you elaborate a little bit further on the pace of sensitivity and just how you think about your set of hedges to the extent to which they might not necessarily be linear with the previous disclosures?

You’ll recall that we tend to focus on two different baskets, Julien, when we talk about FX. For the quarter, we had FX and inflation impacts of roughly negative $30 million. The two key takeaways I’d give you is you have to remember that IEnova and all those projects are U.S. dollar denominated and that impacts how we account for those cash flows. It’s a non-cash impact. So, we use some form of costless collar to hedge our current monetary liabilities each year.

Just to confirm what you said earlier, these currency impacts are non-cash. Therefore, the ongoing effect on the underlying economic value of the business is not material.

That’s correct.

What form might be needed to look forward? Could the treasury address this through rulemaking, or would a formal legislative change be necessary? Can you clarify the potential pathways for addressing this issue?

Yes, we are looking at trying to see if treasury would be willing to work with the companies to get a technical correction on this. Right now, treasury is working through it.

Yes. I was just at the site two weeks ago and I can tell you it was impressive. There was substantial progress compared with the last time I visited. CB&I and Chiyoda maintain that they are on the path to get us LNG from all three trains in 2019. It’s looking very good. I was very impressed with the productivity I saw.

Is there any reason for us to assess the ability of the JV to complete the Freeport project on the current schedule?

Thanks. Look, I’m not going to talk about the Freeport project, but I don’t think there is any read through there. Their reported delays were somewhat surprising, but I believe it’s more due to the floods in Houston which impacted them more than us.

The recent movement in Permian gas differentials and recent competitor pipeline announcement push out the timeline to develop P2K, or is everything moving unchanged?

Thanks for that question, Ryan. That’s an important project for us. We are monitoring that situation. At this point, we don’t have an update on P2K other than what we’ve said publicly in the past.

And then, could you frame the incremental investment opportunity regarding SDG&E’s wildfire mitigation program?

One of the interesting things about that program is we started back in 2007. Our experience formed our approach to hardening the system, improving our standard operating procedures around wildfire and climate change risk. The biggest capital program we have going forward right now is the Cleveland National Forest project, which is between $600 million and $700 million.

I’m looking at the slide and would like a reminder of the weighted average rate base for an apples-to-apples comparison, excluding FERC assets for San Diego Gas and Electric. What was that in 2017?

The rate base for SDG&E at the end of the year for CPUC was about 5.4 billion and for SoCal it was about 5.9 billion. And roughly that’s pretty close to where it is today.

Got it. In the ORA testimony, there appear to be several positive aspects. I’m curious about your thoughts on the potential for settling a rate case.

Well, I would start by saying it’s early in the process and too early to read too much into the ORA filing. We’re optimistic about some aspects of their recognition of the need for a four-year rate case cycle.

We’ve always worked to settle our cases. We think that the other interveners are filing testimony next week.

Do you have intangibles overseas? And is there transfer pricing or transactions occurring?

We don’t really have any intangibles overseas. This tax was designed to target companies that were moving intangible earnings to lower tax jurisdictions. We are not involved in anything like that.

Any surprises, good or bad, or any changes, CapEx changing at Oncor?

We’re pleased to have Allen Nye, their CEO join us today. We’ve gone out there and met with their top 200 leadership group. The culture and fit is going very well. We’re glad to see good growth for Oncor. We have a robust $8.4 billion capital plan over the next five years. Going forward, we’re focused on infrastructure, considering trends around batteries, renewable energy, electrification, and transmission and distribution.