Sempra Energy Earnings Call Nuggets: Ownership Aspects and Accounting Details

Sempra Energy (NYSE:SRE) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Ownership Aspects

Faisel Khan – Citi: On the IEnova just wondering if you could elaborate a little bit more on what your plans are kind of going forward before your participation in the (India) – and the entity meaning that you have roughly 80% right now and if the company raises more equity in the future to grow the business, will you maintain your 80% stake or will let that kind of flow down?

Debra L. Reed – Chairman and CEO: I would say, first off, we really like this business and the reason that we wanted to do the IPO was so that we could grow the business. I think at this point, we’re very – we like what we have in both Mexico now and Peru with a 80% ownership, that we feel that that’s a good share balance with it is having local ownership and local debt with our 80% ownership and we haven’t really thought of anything beyond keeping that kind of structure. I’m going to ask Mark and Joe because they were part of the road tour on that to add any comment.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Mark A. Snell – President: Faisel, this is Mark. We don’t have any current plans to reduce our ownership to below where it is. I think if you look at what we’ve done and proved over the years, it may mix the ownership structure that we have down there and I think we’re pretty satisfied where it is. We have a lot of great projects on the horizon for IEnova, but the good news is that we still have quite a bit of debt capacity, so it is — into the foreseeable future we don’t really see it changing.

Joseph A. Householder – EVP and CFO: I’ll just add on to that and I know there are probably people on the call that participated in the road show and I know many of the names I saw. What I said when I was asked this question many times is just as Debbie and Mark said, but we don’t have any plans to sell down, we probably would never sell any of our shares. As Mark said we have plenty of debt capacity, but the growth there is tremendous and if they continue to grow at this pace and they need to raise more equity I think we would let them do that, we would have to determine at that time whether we wanted to participate or allow ourselves to be diluted a little bit. But as Debbie said we really like the business and want to stay in it. On the other hand, we’ve always said we like the size of our international business around 30%, a third of Sempra’s overall structure. So, as we continue to grow our U.S. business, we get Cameron in, we can have more international earnings, but if IEnova can grow – somebody asked me on the road show, can IEnova be bigger than Sempra, I said I hope so. We’ll see…

Mark A. Snell – President: I would say this, I don’t think that we would see – we would expect that our earnings share from IEnova over the years will grow, no matter what our ownership percentage is, our share of earnings will grow.

Faisel Khan – Citi: Can you give us an update on the ROE case filed for the power gen electric transmission assets?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Debra L. Reed – Chairman and CEO: Sure. We made our filing at FERC and we’ve used the FERC prescribed methodology contrary to some of the other cases that have been in the news. We use the FERC prescribed methodology which takes the median of your peer group of electric utilities and we did that under four different methodologies that we filed with FERC that came out with a 10.3% as kind of your base ROE and then we added to that the allowance – the 50 basis points for being part of an ISO and 50 basis points for our utility specific risk. And as you know in California we have things like the debt equivalency for the power contracts and things like that that FERC has looked at as being how utility specific risk to consider. So, we made our filing of 11.3, the rates should go into effect on September 1 and we will wait and see what the outcome but we do follow their methodology.

Faisel Khan – Citi: When do you expect an outcome from the FERC?

Debra L. Reed – Chairman and CEO: September 1.

Faisel Khan – Citi: Last question from me. Where are you right now on the feed for the Cameron facility?

Debra L. Reed – Chairman and CEO: We have the engineering work underway. We actually are in the process of selecting between there is two parties – two contracting groups that are bidding for the EPC and we have a pretty well developed feed that they can bid on and then we will do all the detailed engineering after that. We would expect to select our contractor by the end of this year and then we again expect to begin construction next year. Mark, you want to…?

Mark A. Snell – President: No, I think you hit all the points. We have a very well-developed FEED and it will get in half, but ii’s out for bid now. So, we’ll have EPC contracts at the end of the year.

Accounting Details

Steve Fleishman – Wolfe Trahan: I had a couple of questions just on that transmission issue, I thought FERC recently, or the staff has been pushing single utilities to use the midpoint not a median and then if you are in ISO or (RPO), you can get a median?

Debra L. Reed – Chairman and CEO: No, well, we are an ISO and the FERC rule for an ISO is you use the median. And where there have been some issues is when utilities have not followed what the rules are for, what their structure. We are an ISO. We are supposed to use the median as a peer group and then we do four different studies using different economic modeling mechanisms of what the ROE comes up under those studies and that’s what we submitted to FERC.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Steve Fleishman – Wolfe Trahan: Switching gears to the just a clarification. The tax expense on the IEnova transaction, you’re keeping that in part of your ongoing guidance for this year for $0.25?

Debra L. Reed – Chairman and CEO: Yes.

Steve Fleishman – Wolfe Trahan: But then you’re not going to be a repatriating the annual money that was typically about a $0.30 hit every year, okay?

Debra L. Reed – Chairman and CEO: We will repatriate starting next year, but because we had already paid taxes on this and we can bring the $200 million back in the very near future then we didn’t see a need to bring back. If you look at our cash balances, our cash flow statement is very, very strong and so it just didn’t seem to make a lot of sense for us to do additional repatriation this year.

Joseph A. Householder – EVP and CFO: I’d just add on to that of, Steven. As you said we already paid tax. Actually we’re not going to pay the tax for four for five years because of the NOL, but we include the expense on the books…

Steve Fleishman – Wolfe Trahan: Then just at the year-end when you reported, you had that slide with the kind of growth rates off the base et cetera, is that slide still relevant in terms of different growth rates?

Debra L. Reed – Chairman and CEO: There is nothing in terms of our projects and the fact that we have all these projects that we have underway, the majority of them are already contracted or part of the utility that would change in that slide. What we will do is we can get a final decision in the rate case and enough time to analyze before the Analyst meeting, then we will give you an update to that at that time. And we will give you new guidance numbers and new ranges, without having a final rate case decision — we sure wish we were not in this situation either, it’s gone on a long time. And we would like to be able to give you more than that. But hopefully by the time of the Analyst meeting as I said that this is on the agenda for a vote of our final rate case on May 9. So, if it comes out then we should be able to give you all of that at the Analyst meeting in a few weeks.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Steve Fleishman – Wolfe Trahan: But in theory, to some degree the GRC just offer – just sets the base and then the growth rate…

Debra L. Reed – Chairman and CEO: That’s what, the growth that we showed – I don’t see anything (substantively) different in the growth rates that we showed you, but we want to give you better guidance on the range for this year that begins the growth rate and then what that ends up being at the end of the period of time. We’re just not able to do that absent the rate case, I wouldn’t ignore at all what we gave you before, I just think we would like to further refine that for you at the Analyst meeting.

Steve Fleishman – Wolfe Trahan: And one more question, different topic. DOE non-FDA approvals what’s your sense on the order – essentially the order of the queue at this point and when you think they will rule on Cameron?

Debra L. Reed – Chairman and CEO: Couple of things, I am not so sure that there is going to be queue where one project is going to come right after another, it may be very well that the decision is to take a group of projects that have – are under the level that was in the study that was done last year and that study, I think, went up to 10 Bcf of export. So, we think that we are in good place in the queue, we are the only facility that is the FERC process and that usually tend to be – that tends to be their critical path is getting that FERC approval and so we have some date (indiscernible) that when that would come forward, but I don’t know that the queue is going to come out one by one. If you did that I think we are number 4, number 5 in that queue but we also think that there is a possibility that they may approve a number of projects all at one time.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Mark A. Snell – President: I was just going to say I think when we talk about queuing order what just remind ourselves that that’s the queuing order in which the applications were filed and while they have indicated that that will play some bearing on it, it isn’t necessarily so that that’s going to be the order. We don’t know that. But I do think that all of the feedback that we are getting out of Washington, all of the things that we are hearing that we believe our project and the other brownfield projects are likely to be approved this year and we continue to believe that. We haven’t heard anything contrary to that. And I will say that there is nothing on the record at the DOE that would indicate that they shouldn’t improve these projects. So, I think that’s an important point to remember. There has been no real record made of any reason not to improve them. So, I suspect that they will get approved and we are confident that it’s going to happen.

Debra L. Reed – Chairman and CEO: Yeah. I would add to what Mark just said to and Moniz, who is in the confirmation to head up the agency made very clear that as the natural gas policy act stands today, you really have to make a case as to why they shouldn’t be approved and the burden of proof is on the other party. So, the relevance of what Mark is saying is that someone has to come in and make a case as why these projects are not in public good. Everything that’s come out has shown that these projects are in the public good and Moniz has commented on that during his confirmation.