Sempra Energy Earnings Call INSIGHTS: Mexico Tax Gain, Renewable Projects Update

On Thursday, Sempra Energy (NYSE:SRE) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Mexico Tax Gain

Naaz Khumawala – Bank of America Merrill Lynch: Just a couple of quick questions. Joe, do you mind letting me know how much was the Mexico tax gain in the quarter?

Joseph A. Householder – EVP and CFO: It was about $8 million and prior quarter was $7 million, so it’s virtually – it’s less than a half a million year-to-date.

A Closer Look: Sempra Energy Earnings Cheat Sheet>>

Naaz Khumawala – Bank of America Merrill Lynch: Can you guys talk about, I know you impaired REX based on projected cash flow going forward. Once the contract expire what do you expect to do with REX and kind of how do you see the pipe progression as their backhaul opportunity and what can you do?

Debra L. Reed – CEO: Let me make a couple of comments, then I’ll turn it over to Mark to go through some of our thinking on this because we have done a great deal of modeling looking at what we think may happen to gas market post 2019 when the contracts expire, and to look at how we felt about REX, the one thing that I want to make clear is because Kinder is in the process of the sale, the way that you value REX for the purpose of assessing whether it’s an impaired asset. It’s different because they are in the process of the sale. And it’s not the net present value of the future cash flows – you use net present value of the future cash flows versus actual future cash flows. So, a lot of what we were looking at is what is the timing of some of the changes that will occur in REX and we do believe that there will be change flows on that pipeline over time with the development of Marcellus and Utica, it’s just a matter of when those occur and what it does to that asset over time. So, Mark do you want to talk about that.

Mark A. Snell – President: Yeah, a couple of things. Look, this is still an important asset and it’s a good system to bring gas now to the Rockies East, but of course with the development of the Marcellus in particular as Debbie mentioned, we do think over time after our contracts expire that flow could reverse and gas will flow from both directions, then go up to Chicago and into the Midwest. But a couple of things just keep in mind, one as Joe said in his notes and I think it’s important is that we’re going to – before the end of the contract period, we will have recouped all of our investment in either cash distributions or tax benefits, and from an accounting perspective we’ll still have basis left, but economically we’ll have gotten our money back and I think that’s an important thing to remember. Two, I don’t think anybody can – we don’t know with the 100% certainty exactly where – what the revenues will be beyond the contract period, but we know that there is interest in going from both directions, and we know that we’ll have significant revenues. Now, they may not be as good as we’re now and that’s what we’ve indicated by our write-down, but I think – we do think this will be a significant asset going forward.

Naaz Khumawala – Bank of America Merrill Lynch: And then just, once Kinder does if they decide to and then once they complete the sale, is there – would you guys reassess the value based on market conditions or this is my accounting failing me?

Debra L. Reed – CEO: Yeah, let me ask Joe to talk about how we looked at that.

Joseph A. Householder – EVP and CFO: The Kinder sales process, as Debbie and Mark said, let us to evaluate the REX investment, but our analysis is based on several scenarios that resulted in the fair value assessment that we put on REX, that we would not expect that the eventual sale will really reveal any information that would cause us to change any of our assumptions within these scenarios. So we would not expect any change in our assessment. Of course, over time, new information could come to light. We just don’t expect that to occur in the next several years.

Renewable Projects Update

Michael Lapides – Goldman Sachs: Can you just give a little bit of an update on renewable projects put in place during the course of 2012, and also what you’re seeing in terms of output or capacity factor levels for some of your gas power plants in the U.S., meaning your non-regulated gas plants?

Debra L. Reed – CEO: Sure. Michael, I’ll mention some of the renewables and kind of go through what we have in operation and then what we have under development right now. Right now in operation, we have Fowler Ridge which is 100 megawatt our share. We have Copper Mountain Solar 1 and El Dorado Solar 58 megawatts, and then we have 125 megawatts at Cedar Creek II Wind which is our share of that. We own 50% of that. Right now under development, that contracts (that are) under construction, we have the Flat Ridge Wind project, which our share is 235 megawatt and that is to be put in service this year. We have the Mehoopany Wind project, which was just dedicated this week and our share of that is 71 megawatts and that’s to be completed this year. We’re in the process right now on Mesquite Solar of building that out to a total of 150 megawatts and we have 98 megawatts energized thus far, and that will be finally complete in 2013. Then we have Auwahi Wind, which is under construction right now, and that is a 11 megawatt wind project, which will be done this year. Then we have also under contract that we are working on construction, the Copper Mountain Solar project and that will be 92 megawatts. Then the ESJ project which will begin later this year, which will be our share of 78 megawatts. So, bottom line we have a lot of construction going on. I mean massive amount of construction going on, on these projects. All the wind projects are scheduled to be done in 2012 before any issues of PTC go away. So they’re all scheduled to be done in 2012 with the exception of ESJ, which is not depended upon PTC, because, as you know, it’s being constructed at Mexico, and we just get an accelerated depreciation on that. Then, I’ll have Mark talk about kind of the capacity factors and maybe a little bit of information on what’s happening on the generation front.

Mark A. Snell – President: Yeah, on the gas-fired generation front here in Southern California and the West where our plants are located, I think through the quarter we saw continued sort of weak gas prices and weak power prices. Unlike the rest of the country, we still have had fairly mild temperatures here in Southern California. So, we really haven’t seen much of an uptick or pressure on prices. We are expecting in August and September for that to change, we are seeing an uptick in both spark spreads – higher heat rates and better pricing. It’s not significantly better, but it is better than it’s been, we would expect to be a little bit stronger in the next quarter.

Michael Lapides – Goldman Sachs: Finally, I know you gave a little bit of an update of this at the Analyst Day, but any further thoughts natural gas storage development or any changes since the Analyst Day?

Mark A. Snell – President: No, real changes since the Analyst Day, I think the prospects for additional development on the storage side really is going to come in relation to the LNG projects that are in the Gulf and we are uniquely situated with one of our projects, the Louisiana storage facility, which would be ideal to serve both our facility there and also the (indiscernible) facility, so we think that eventually that will get developed and will be a good asset.

Debra L. Reed – CEO: That facility would be about 19 bcf when fully developed. Also, as Mark mentioned in that area we have the Cameron pipeline that serves that LNG facility and we would anticipate the development of both the storage and that pipeline to serve our facility engineers.