Sempra (SRE) — Q2 2018 Earnings Call Transcript

Thanks. Good morning, and welcome to Sempra Energy’s second quarter 2018 earnings call. A live webcast of this teleconference and slide presentation is available on our website under the Investors Relation 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, South America; Martha Wyrsch, General Counsel; Scott Drury, President San Diego Gas & Electric; and Peter Wall, Chief Accounting Officer and Controller. Before starting, I’d like to remind everyone, we’ll be discussing forward-looking statements 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 second quarter 2018 earnings press release for reconciliation to GAAP measures. I’d also like to mention that the forward-looking statements contained in this presentation speak only as of today, August 6, 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 a lot, Faisel. Before we get started, I’d also like to thank everyone who joined us at our analyst conference in New York. We enjoyed the opportunity to talk about our strategic goals, planned asset sales, financial projections, and long-term vision. Since the analyst conference, we've had the opportunity to continue this dialogue and I've met with over 100 investors. We appreciate the positive feedback we continue to receive on our plan and are committed to delivering long-term value to all of our shareholders. Our management team continues to focus on three things; first, advancing our strategic vision to become the premier North American energy infrastructure company with leadership positions in the most attractive market; second, strengthening our balance sheet to support our strategic initiatives; and third, making progress on our existing and new projects that fit our transmission and distribution and long-term contracted business model. As we discussed in New York, our focus is on delivering shareholder value through superior earnings per share and dividend per share growth. On today's call, I'll provide an update on some of the topics covered at our Analyst Day, new project announcements, and the progress we're seeing in our LNG business. Afterwards, Trevor will review our second quarter financials, the key drivers influencing our results, and our guidance. I'd like to highlight that we’re reaffirming our full year 2018 adjusted earnings guidance of $5.30 to $5.80 per share. Please turn to the next slide. In late June, we communicated our strategic vision. It's focused on high grading our portfolio with transmission and distribution investments and long-term contracted assets in tier 1 markets, all with a focus on becoming America’s premier energy infrastructure company. In conjunction with this effort, we announced the planned sales of our U.S. wind, U.S. solar, and certain U.S. midstream assets. Since then, we've launched the sales process and hired advisors, and we continue to be very encouraged by the substantial market interest we’ve received. Also, you recall at the Analyst Day, we discussed the need for an additional $1.6 billion of equity in order to reach our targeted capital structure for the Oncor transaction of approximately 65% equity to total capital. Related to this, in mid-July, we executed the issuance of $1.1 billion of common equity forwards and $500 million of mandatory convertible preferred shares. We're pleased to say that both offerings were very well received by the market. In fact, both offerings experienced robust demand and were 3 times oversubscribed. Additionally, the green shoots on each of the securities were fully exercised by the underwriters, bringing the total expected gross proceeds to $1.85 billion. As I mentioned earlier, the funds raised will be used to complete our targeted financing structure that we provided both to the market and the Public Utilities Commission of Texas for the Oncor transaction, and will help ensure that our company is positioned for success going forward. Also, as we laid out at our analyst conference, our long-term vision includes providing industry leading earnings per share and dividend per share growth, while maintaining an investment grade plus credit rating over the long-term. Notably, our initiatives to high-grade our portfolio and reduce our risk profile have allowed Moody’s to consider revising our FFO to debt threshold down to between 16% and 17%. We believe this is an appropriate and achievable range, and should allow us to effectively execute our capital plans. Moving on to the wildfire issue. We, along with other stakeholders, continue to execute our three-pronged strategy designed to help mitigate the risk to our customers and help ensure the long-term health of California Utilities. Given the recent progress from the formation of the special legislative committee, bills in the legislature, and Governor Brown's proposal to specifically address inverse condemnation, we’re optimistic that appropriate legislation could be put in place to address this issue by the end of this month. Also, I’d like to briefly touch on our recent conversations with Elliott Bluescape partnership. We’re highly engaged in constructive dialogue at the highest levels of each organization and have had multiple face-to-face meetings. Most recently, three of our Board members met with members of the Elliott Bluescape partnership at their offices in New York. In our view, all parties had a strong interest in maximizing shareholder value and constructive conversations are continuing. At the end of the day, our management team believes our disciplined North American focused strategy should create significant long-term shareholder value, and we’re extremely focused on executing the strategic vision. Now please turn to the next slide. We continue to make great progress on our existing and new projects. Let me start by discussing our LNG projects where we believe we’re well positioned to help meet the world's growing natural gas demand with Cameron and three other LNG development opportunities. First, the construction of Cameron trains one through three continues to progress. The facility remains on track for all three trains to produce LNG in 2019, which McDermott recently affirmed on their earnings call. In addition, in mid-July, Total completed its acquisition of Engie’s LNG assets. We’re actually quite excited to have Total as the new partner. It is a well-led company and has a growing leadership position in the space and we look forward to working with them on this project and potential expansion opportunities at the facility. Shifting to our other LNG opportunities as highlighted at the recent analyst conference. We’re highly encouraged by our progress. We recently selected an EPC contractor for ECA and continue to receive significant market interest given the project’s West Coast location. We also selected an EPC contractor for Port Arthur and announced the heads of agreement with the Polish Oil and Gas company, outlining terms for a 20-year proposed agreement to supply two Mtpa of LNG, which is in addition to the memorandum of understanding signed with KOGAS just last year. Please turn to the next slide where I’ll review new projects and our other businesses. Starting with IEnova, we continue to establish a dominant market position in the liquid storage business and we were recently awarded the Topolobampo Marine terminal project. Additionally, we announced an expansion of the Veracruz terminal and redistribution of capacity at the Mexico City and Pueblo terminals. Related to these updates, the total investment for the terminals at Veracruz, Mexico City, and Pueblo is now expected to be $315 million, which is a $40 million increase. In Chile, Chiquita recently announced the acquisition of two operating transmission lines for $220 million, subject to customary regulatory approvals. A good portion of these operating assets are within Chiquita's service territory and are already integrated with their existing distribution infrastructure. The transaction is likely to close in the second half of 2018 as expected to be funded with cash on hand in Chile. The projects in Mexico and Chile support the strategy we developed along with our board, which seeks to high-grade our portfolio through transmission and distribution and long-term contracted assets. Just as importantly, they’ll help improve energy accessibility and resiliency in both countries. Turning now to California. We recently submitted an application for a natural gas leak abatement program per Senate Bill 1371. We requested a CapEx amount of approximately $115 million, which would be deployed over a three-year period. This program will help ensure the delivery of safe, reliable natural gas and further the state’s goal of reducing GHG emissions. An additional cost to development was the CPUC's mitigation report released at the beginning of July, which directed us to increase the storage volume of Aliso Canyon from approximately 24.6 bcf to roughly 34 bcf. This further supports our stance that Aliso and natural gas are an integral component of energy reliability and affordability in Southern California. More than 90% of Southern California residents depend on natural gas for their daily needs. By some estimates, converting to all electric appliances could cost the average household over $7,000 upfront and up to $1,000 per year and increase appliance and energy costs. That’s why from a customer perspective, we certainly support trends toward electrification while also supporting the ongoing role of natural gas. With that, let me hand it over to Trevor who will review our financial results.

Thanks Jeff. Earlier this morning, we reported a second quarter loss of $561 million or $2.11 per share. These results include the impairment charges, primarily related to our U.S. natural gas storage business, which we discussed at our Analyst Day. This compares to the second quarter 2017 earnings of $259 million or $1.03 per share. On an adjusted basis, we reported earnings of $361 million or $1.35 per share. This compares to the second quarter 2017 adjusted earnings of $276 million or $1.10 per share. Let’s turn to the next slide where I’ll discuss the key drivers impacting our quarterly results. Our adjusted quarterly results were primarily driven by the following; $114 million of earnings at the Sempra Texas Utility segment due to the acquisition of our interest in Oncor in March of 2018; and $46 million of higher earnings at the Sempra Mexico segment, primarily due to favorable foreign currency and inflation-related impacts net of hedges. This is partially offset by $81 million, primarily related to higher interest expense and preferred dividends at the parent, which includes the impact of the Oncor acquisition financing. With these results, we are reaffirming our 2018 adjusted earnings guidance of $5.30 to $5.80 per share and GAAP guidance of $1.78 to $2.28 per share, but we continue to monitor the peso movements relative to our guidance assumptions. Please turn to the next slide and I’ll hand it back over to Jeff.

Thanks a lot, Trevor. I want to emphasize that execution of our strategic plan to create long-term shareholder value remains top of mind. In the near term, our management team is focused on the following items: resolving our general rate cases, executing the sale of our U.S. wind, U.S. solar, and certain U.S. midstream assets, progressing the construction of Cameron, and advancing our California wildfire risk mitigation strategy. Also, I’d like to take the opportunity to again thank everyone who participated in recent equity offerings; the shareholder support we receive is important to us in terms of delivering our long-term vision of delivering quality growth and value creation. With that, we’ll conclude our prepared remarks and start to take your questions.

Jeff, you mentioned at the beginning of your discussion a targeted FFO to debt level. And I was just thinking through Sempra has a number of upside growth potential areas of spending. And as you look at it now when you look at your projected financials, your projected FFO to debt level, if you were successful in some of those incremental growth opportunities, what does that debt target level tell us? Does that imply you have some degree of dry powder with respect to leverage? Or does it mean we should assume a more traditional need for incremental equity if you have incremental applied CapEx?

I’ll give you a few comments and then pass it to Trevor. But in general, we’ve been impressed from time to time about what is your specific FFO to debt target. And as you know, we spent a lot of time choreographing our strategic plan with all three credit rating agencies. I think what we’ve tried to do really is make sure that we are very, very clear that we expect to maintain an investment grade plus credit rating. I think the second thing we tried to do is spend a lot of time explaining where we were a decade ago, where we had exposure to IPP businesses, where we had exposure to commodity businesses, and how we had a concerted effort of trying to high-grade the portfolio where we can have a lot more transparency about our future cash flows. We really found that to be around the transmission distribution type of assets. So what we've done in Texas, we announced that we recently had in Chile this is really the ongoing focus. And what that's really resulted in is the type of dialogue and conversations you see come out of Moody’s where they are open-minded about reducing our overall risk profile. So our goal is to make sure that we’re really doing everything as a business in terms of cash flows, repatriation and divestitures to support the type of growth initiatives you’re referring to. I’ll stop there and see if Trevor wants to add any comments to that.

Stephen, the only other thing I’d add really is one of the things once Cameron comes online that is a significant change in the cash flows for the organization, which will certainly support the FFO to debt metrics. And so depending on what we monetize the wind and the solar assets for could significantly help with the growth prospects. And again, what we laid out at the analyst conference with regards to the $15 billion capital plan and the incremental equity offering that we just completed, we believe over the period of time, we will be in a position to support our investment grade plus credit rating.

And then shifting gears to California. So I think the very large recent wildfires highlight the seriousness of the issue and we certainly hear regularly from investors the urgent need to have legislation. I was curious in your dialogue you mentioned you were I think optimistic or hopeful that we’d see legislation in the session. Can you talk a little bit about the dialogue you’ve had, what gives you some optimism in terms of ensuring that we get legislation that the investment community very much wants to see?

Well, I’m glad you asked that question and obviously this is top of mind to a lot of investors. I’ll provide a couple of comments and then ask Joe to provide some comments as well. I think the way I thought about Stephen is last fall it was really a process of problem identification. Obviously, the CPUC ruled on our WEMS decision, which put a lot of this in play in terms of how people thought about the problem. In the first quarter of 2018, there was a large education process. I think part of that was really aimed at making sure that people understood that this was not a problem, it was unique to the California investor-owned utilities; the impacted municipals affected the residential communities’ ability to procure insurance, it had a broad impact on the state. And I think one of the things we could be more pleased about now is to see the type of leadership coming out of both houses of the legislature and the governor has really stepped forward. And I think the conversation today is less about one particular bill number or one particular assembly bill number, and really about the value of what’s taking place in the conference committee. So there's a committee meeting tomorrow on safe and reliable energy grid and there's a committee meeting on Thursday on inverse condemnation and electric utilities. I think the dialogue has progressed to the point that is right where it should be. We’ve got the right people focused on the right issues; it’s being redefined more broadly as a statewide issue and not just an investor and utility issue and I think that's part of my calls for optimism. Now I’ll see if Joe would like to supplement that.

I would just add a couple of things. I think that the governor wants healthy utilities; he wants to further his energy policies and his agenda and the IOUs play a large role in that. So I think as Jeff mentioned, two weeks ago, the conference committee had their first meeting. We have the opportunity to participate in that meeting. We were the only investor-owned utility that was at that meeting. But our director of the fireside employment adoption was there at that meeting and now tomorrow they’re having this meeting. And it’s not only members from each of the California investor-owned utilities but also people who are representing the municipals. So this is a statewide issue; it’s not just investor-owned. So we’re encouraged that they’re having that meeting tomorrow followed by another meeting on Thursday. The agenda for that meeting isn’t out yet. You can see these other agendas on their website. But we are encouraged about this. We’re working with the various stakeholders in this and we see the opportunity for some movement this month while the legislature finishes its work this year.

Maybe is it possible you give a little more color on maybe where there are areas of agreement or disagreement?

As I mentioned in my prepared remarks and obviously we took a team back to New York. Jesse Cohen is the Head of the National Practice and that’s who I’ve been dealing with directly. I think all of the conversations you expect us to be having they’re being had, the conversations are quite constructive. And I think that the most important thing is the issues that we’re all focused on are the right issues. It’s really around making sure that we’re continuing to try to find a way to not only have an identity venture with Elliott Bluescape but also ensuring we’re thinking of the interests of all of our shareholders. So I am actually quite optimistic that the tone of the conversations are good, all the right people are engaged, and I remain very optimistic about it.

You mentioned Moody’s in the 16% to 17% range. I assume you’re indicating that this aligns with where your plan is expected to take you.

I appreciate that question, because we spent a little bit of time at the analyst conference talking about how much time we’ve been spending with the credit rating agencies. A lot of that, as you know, was as we approached the Oncor transaction last summer we had laid out our long-term plans with a view of making sure that we can accommodate that type of transaction. So we've always been fairly high touch with respect to the credit rating agencies. But over the last nine months, in particular, it's been a very engaged process. So when we got to analysts conferences, it’s really about laying out the fact that, yes, we're doing all the right things to make sure that we're managing our cash flows and supporting our balance sheet, and I've talked about some of those. But it was also about making sure that we got the message across about what impact our focus on the portfolio should have on our risk profile. And I think that's reflected in what Moody's said. So it's probably less about whether we've created a cushion or not created a cushion. We need to make sure that we're executing the way that we've laid it out, because we do think there's a lot of opportunities in front of us and making sure we're very closely aligned with agencies is important to us.

And do you have an idea of when they're going to resolve their review, or outlook?

I'll pass it to Trevor.

They have recently published information about us. As Jeff mentioned, due to the Oncor acquisition and the related financing, we have a set timeframe to achieve the optimal equity structure of 65% to 35%. Although we have completed some equity offerings, many of these are backed by forward contracts, meaning the expected funds will be received gradually. The agencies have allowed us about 18 months to finalize the Oncor financing. Additionally, as we noted earlier, the proceeds from the anticipated sale will also play a significant role.

And what I would add to that, Steve, too is I think part of the value here, just like as management communicates with the market, part of it is making sure that when you sit down to credit rating agencies, you deliver what you tell them you're going to deliver. So just last year we actually exceeded our FFO to debt metrics, which was one of our goals. We set out some goals about the targeted capital structure; not only do we deliver, we delivered it early and that's one of the things we're trying to ensure is that we follow through on these types of things. I think the wildcard continues to be the issues that Stephen raised which is what takes place with the California regulatory environment. So I would expect that the agencies will be very much geared to seeing what takes place in the legislative environment. And that really was one of the wildcards that was not factored in last fall when we were talking about the Oncor transaction. So part of this is to stay closely aligned and deliver what we think is some improvements from the legislation going forward. And I think there will be some alignment in the state to do that.

Joe, I wanted to follow-up on the two town developments, obviously, well anticipated. But how does that change the marketing efforts on the Cameron expansion? And then secondly I suppose in tandem hard to ignore the developments in China around their tariff. How does that impact thus far your efforts across the portfolio of projects you’re pursuing?

I will begin and then hand it over to Joe. I previously mentioned at the conference that during the World Gas Conference, Octavio, Joe, and I had dinner with Patrick Pouyanne from Total. I am genuinely impressed with their organization. I noted in my prepared remarks that they are exceptionally well-managed and have set ambitious goals for an integrated natural gas strategy. They aim to achieve about 40 million tons per year in their portfolio by 2020, with roughly half of that being equity-owned gas. This is a discussion we will continue, and we are pleased to have them as a partner at Cameron. They have publicly expressed strong interest in participating in the expansion there. Regarding marketing activities, I see Cameron as focused on relationship management and ensuring the interests of our current customers at that facility. Concerning the broader issue of China and tariff challenges, it’s difficult to predict the impacts at this stage. However, I am reasonably confident that LNG will play a crucial role in China's future, helping to reduce coal usage on their grid. The United States is positioned as one of the lowest-cost suppliers, which is promising for the future. Now, I'll turn it over to Joe to provide further insights about the marketing effects.

I think you pretty much summed it up, but I will say in a number of conversations that I had with as they were working with us to request all the approvals needed to make that acquisition, they emphasized a number of times that they really only did this because they wanted to have access to the expansion. And so they’re very open about that and want to engage in that topic. And I had some conversations with some other partners and I think we’re all starting to see that, especially as we see one, two, and three coming toward it. And so our focus is staying on one, two, three but I think we have to start engaging in discussions around that. And I think that Total will bring a lot to that discussion. And I don’t have anything else to add on the tariffs evolving.

And then maybe can I just bring it back to another issue to get a little bit more clarity on the credit side? Obviously, the 16% to 17% thresholds mentioned a couple of times here. But it’s predicated in part on the business mix change I presume. What’s the timeframe on the sales, and is that what’s linked here to get the affirmation of the outlook, I suppose separately and distinctly from California resolution? And maybe to tackle on the second piece, to that end in terms of business mix, obviously, you’re making pretty explicit efforts on several of your assets. Should we read by the acquisition of the Chilean assets of late that perhaps that’s firmly off the table?

I think there are about three questions in there, Julien. So let me make a rundown. I think that I would probably decouple this first issue of whether this 16% to 17% is tied to the divestitures. The 16% to 17% is a reformed view by Moody’s about the measures we’ve taken over the last three to five years to reposition the portfolio. So it’s based upon their view of the existing portfolio and really the Capstone investment in that trend line around Oncor. Secondly, I do want to emphasize that how we handle the divestiture is really important to us. There are a fairly wide range of outcomes that could occur there. Our Chief Strategy Officer, Dennis Arriola, is leading that divestiture campaign and we’ve been very aggressive to shoot to get that moving, so that’s something we look forward to making comments on in the future. And then to your third question about Chile, it’s definitely not off the table. I think what we’ve tried to say is we’ve laid out a very disciplined phased approach to our strategy about what we’re going to basically articulate, both with our Board and the market in Q1 of next year and then in the following Q1 of 2020. And what we’re trying to do is to say that acquisition is reflective of how you run the business, whether you’re a buyer or seller you’re looking to partner. So we’re going to look at our international business with fresh eyes; I mean the legal term is de novo. We’re going to start from the bottom up and we’re going to try to get to the best possible answer near term and long term for our investors. So there is absolutely nothing off the table that was an ordinary course bolt-on to the existing franchise, which we quite frankly think makes it more valuable.

One thing I’d say is that that transaction we discussed at our analyst meeting too, so that was in Dennis's slide deck as well.

So you just actually did touch on my Chilean question that Julien just asked. But I’m curious whatever decision you guys choose with South America. Is there an opportunity to reach a conclusion and a decision before you built Cameron, or should we think about any strategic decision you think about with South America would have to be as you get closer to Cameron?

We’ve talked about the fact that we're trying to improve our balance sheet, and part of what we tried to explain at the analyst conference was the choreography that there’s a timeline that allows you to look more aggressively at the portfolio and that timeline was choreographed against how we repatriate cash today and improve our balance sheet on a near-term basis. Obviously, to your point, Shahriar, it’s really an inflection point in 2020 and we expect to have obviously all three trains fully up and running. That gives us a lot more flexibility with respect to our balance sheet. But prior to that time, you can sell assets like wind or solar once which are not, quote-unquote credit dilutive. But as you look at transactions which could be credit dilutive, there are scenarios where those can also be advantageous to our shareholders; we just have to choreograph those. And that’s why we laid it out in a three-phase approach. The ones which can be beneficial to our balance sheet today, at least in the near term we've articulated is phase one. And we will look at the South American and international businesses between now and Q1 of next year, because we're getting closer to obviously having each of the trains producing LNG. So there is a certain timeline to that. But certainly, we can make a decision on South America prior to the full commission of every train at Cameron.

And just let me ask you one last one, because sometimes it’s a source of confusion. I mean clearly from your slide decks and your prepared remarks, I mean, you echo becoming a premier North American infrastructure company. So that inherently assumes LNG and IEnova remain very strategic to us for Sempra.

Well, I think this goes back to the timeline question as well, which is what we tried to say is that phase one is the opportunity to transact on assets today in North America where we think we can redeploy the capital more effectively. Phase two is going to be a bottoms-up review of our international businesses with a focus on South America. Obviously, that's choreographed against the strength of our balance sheet. You’ll recall that I described the fact that each of the credit rating agencies have assigned more value to Peru and Chile from a credit standpoint, because of the regulatory diversity and they have very, very high FFO to debt ratios. So as we go forward and continue to improve our balance sheet, it gives us more flexibility there. With respect to LNG, I think we talked about this. We were very intent on trying to highlight value with our LNG business as part of our TRV vehicle, much like an MLP. As that market went away, we’re going to continue to develop that business; and it’s really, Shahriar about looking for that efficient frontier, as we develop that business and build scale and greater visibility to cash flows, we certainly would welcome the opportunity to that to market to create value for our shareholders. Joe, would you like to add anything to that?

These two businesses are important parts of our growth. And since 2012, they created $40 a share value in our stock price and we think that that can be significantly higher. So we think both of those are great infrastructure growth areas. I think there is a lot of complementary parts to them and so I think those are keen focus for us. What we do with them over time, we’ll see but I think that for us right now they are a priority.

Of the three LNG projects in the growth pipeline, which do you think is further along in the process compared to the others, and why?

Well, I’ll take a shot at this Joe and you can chip in with me. But I think what’s interesting about your question is each of them have their own unique attributes from a marketing standpoint. I described in an earlier question that the Cameron expansion feels more like a relationship management issue. Obviously, we’re focused on getting trains one through three done; that’s the laser focus of our entire LNG business obviously. But having Total in the mix now, I think makes it more important that we’re building great relationships with those three customers, and being able to build trains four and five will be a huge opportunity for us. On the West Coast, clearly, as you see more and more natural gas coming out of the Gulf. It’s pretty intriguing if you can actually develop a project where you can access San Juan or Permian gas and take it off the West Coast of North America. So as you can imagine, those people that want destination flexibility want to have a shorter time to the Asian markets without going through the Panama Canal and the issues there. That certainly is drawing a tremendous amount of interest. And frankly, Port Arthur is very well situated geographically. There are a lot of folks who understand the value of the Port Arthur, particularly as you saw some affirmation of that Michael with the recent HoA we signed with Poland, which by the way, most people were surprised to see that that was a 20-year agreement. So I think each of these three facilities provide some unique marketing advantages. One of the things that’s intriguing before I pass it to Joe is much like back in the IPP days, Mike, when you used to talk about system sales that was how the California Department of Water Resources contract was structured, there's a lot of interest in some of the conversations with Octavio’s team is having around participating in more than one project, which I think is also interesting. And Joe, perhaps you can add some color to the question.

Michael, I think I’ve said this before. We don’t particularly prioritize them that way, because each of them has a little bit different situation and each of them has a lot of interest, as Jeff was saying. And so when we were at the World Gas Conference, Jeff and myself with Octavio and some of his team, we talked to a number of different important buyers who each have different interest in them. So clearly, there are some at Cameron; we have permits. At ECA we have permits. We’re working on and hope to finalize our permit at Port Arthur this year. We’re working with EPC contractors now at both the other facilities. And so each of them is a little bit different; we like them all and don't prioritize one over the other in like we want that one first and put all the team on that one. At this point, we're looking at all of them because they all have good opportunity.

And can I ask just a question about ICA, regarding the energy meaning the pipeline infrastructure in Mexico needed to get Permian, let's say, Permian gas over to ICA. Just curious how difficult, how easy or hard would it be to actually permit those? Do you have some of the same issues that some of the other developers, folks like TransCanada, have seen getting pipelines built in Mexico? Just curious in terms of how realistic this is.

We discussed the mid-scale project, which has a capacity of 2.5 Mtpa. We anticipate using the existing American pipeline system to transport it to this region. For the larger scale project, at 11 Mtpa, we likely expect to build a new pipeline. We haven't yet decided whether it's more efficient to route it through Northern Mexico or partially across the United States. However, a critical factor is gaining access to the Permian Basin. If we can achieve this in a cost-effective manner and successfully launch LNG from the West Coast, there is significant interest from the market. Joe, would you like to add anything about the pipeline?

I would only add on to that. We've built or partnered with 11 of the 14 pipelines built in Mexico, so we have not had a problem getting them permitted.

What's the impact of the recently announced and potential future Chile investments on the expectation for cash repatriation from South America? And what's the return profile for the recently announced projects?

I'll pass it to Trevor. Go ahead, Trevor.

Right now the repatriation that we announced was $1.6 billion over five years with, call it roughly $400 to $500 coming in 2018, none of that cash is coming from Mexico, that's all cash coming from Chile or none of its coming from Chile; it's coming from Peru and Mexico. So the cash and we're going to be using for the investment in those transmission lines is just cash that is the cash in Chile.

The second part of his question was the return expectations; it's immediately accretive, and Dennis you want to add anything to those investments?

We believe this investment is strategic because the operating assets are already part of our system. Most of the transmission assets there are linked to ours, creating synergies. From a return perspective, we are being prudent. We aim for double-digit leveraged returns and high single-digit unlevered returns. Additionally, we will use existing cash from our business for this investment. It represents a solid opportunity, whether we continue to operate in the country and expand or choose to monetize it in the future, as it will enhance the overall value.

The only thing I would also add to that is that these assets are in into service territory as well, so it's a natural follow-on.

Are there any additional opportunities in Chile?

We're looking at it. Obviously, given where we're located outside of Santiago, there are some additional add-ons. We're continuing to look at some of the zonal transmission bids and the national ones. But again, we're only going to do this if it makes sense or if it’s complimentary to our existing system. We’re not just going to go chase an investment because it’s in the country of Chile.

And could you comment on the current appetite for additional U.S. acquisitions?

We don’t comment on M&A generally. I think that what we’ve laid out right now is we’ve got a fairly aggressive capital program going forward. We’ll continue to look at things if we think it’s strategic to us. I think we’ve been very clear about the types of things we’re interested in, particularly in transmission and distribution, so that’s an area we’ll continue to follow. But I think we’re really focused Ryan on executing our plan and we’ll stay close to the markets which are most important to us, which are California, Texas, and Mexico.

And then regarding the ICA mid-scale project, what’s the current outlook for permitting for that project? And are there any developments on that front?

We basically have the full permit for the larger scale project and we’re working with the government agency to modify that to accommodate this and hope to do that over the next couple of months.

So I want to just follow up on the asset sale. The $1.87 billion approximately assets held for sale, the vast majority of that I assume is the wind and midstream and what have you. How much should we think is the tax basis for that?

How much do you think the tax basis is for what we’re selling?

Well again I would just say on the $1.87 billion, the impairment was roughly $1.5 billion associated with that and then $900 million after-tax. On the tax basis for those assets, you can assume that the tax basis is actually fairly low in those assets, mostly from bonus depreciation and then also on the wind side associated with a lot of those, and we’ve sold down half of the interest on the wind side through the tax partnership structures.

And Paul, you know we have large NOLs so it will not be a big cash impact with the tax effect.

And then just could you remind us what the earnings associated with those assets are?

You can see that we’ve shared this information during the analyst conference call, showing the asset guidance ranges for 2018, 2019, and 2020 at the segment level. The wind and solar assets are projected to generate revenue between $80 million and $100 million per year, while the midstream assets we are selling are currently at a loss.

I just want to check if there have been any updates regarding that. Also, I’m curious about the discussions we’ve been having with the California PUC. Do you know what that is about?

As you read any ex parte notification it talks about the overall scope of the ex parte conversations and afterwards they make a filing relative to that. And I’ll refer you to the public record on that, Paul.

I saw the record on it and I'm wondering if that's a normal occurrence. I understand and appreciate your comments. Thank you very much.

I’ll just ask two questions. First of all, what's your California risk appetite? And what I mean by that is if you had opportunities to make additional acquisitions or as a muni call for IOU. Is that something that would be interesting? And a follow-up to Ryan’s question, and the reason I ask is obviously PG&E announced that they may be splitting up the company. My second question is with regard to President Trump's comments to Angela Merkel about importing Russian gas in light of that comment; has Sempra seen an uptick in interest from either Eastern Europe or Europe in general for U.S. LNG? And is this something that is real or is it just political?

With respect to the M&A question, obviously broadly speaking, we don’t typically comment on M&A. But I’d probably answer it this way that last summer before we have these wildfire issues here in California, we have made the decision that we thought Texas was a great market from a regulatory standpoint that they had good demographic growth, constructive regulation, and it was something that was a target of interest for us because of the T&D focus. But I think that gave us a great opportunity, number one, it gets more regulatory diversity. And given where we're at in our discussions with the credit rating agencies that guides you to thinking about where you’d be more focused at this point in time. And then on your second question, we certainly have followed both pipelines in Germany, both Nord Stream 1 as well as Nord Stream 2, and I think the President has been spot on. I think you go back to the 2014 EU charter and there has been an emphasis for the entire EU community to diversify their fuel supply for their energy markets. So I think this is really an opportunity, that’s why we talked about a little bit earlier about the importance of Port Arthur and the ability of some of these facilities that we have in the Gulf to access the Western European marketplace. We continue to think that the drivers there are more around energy security and energy independence, which was somewhat different from the drivers that we discussed at the analyst conference for Asia. So we certainly think it’s a political statement that the president has made, and the work he has done with the EU is actually quite constructive for the entire LNG industry here in the U.S.

Well, look we’re very appreciative of everyone joining our call today. Per custom, if you have any follow-up questions feel free to contact the IR team and have a great day.