Good day, and welcome to the Sempra Energy Second Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Faisal Khan. Please go ahead. Good morning, and welcome to Sempra Energy's Q2 2019 earnings call.
A live webcast of this teleconference and slide presentation available on our website under the Investors section. Here in San Diego are several members of our management team, including Jeff Martin, Chairman and Chief Executive Officer Joe Householder, President and Chief Operating Officer Trevor Mihalik, Executive Vice President and Chief Financial Officer Dennis Arriola, Executive Vice President and Group President George Balisic, Group President and Peter Wall, Vice President, Controller and Chief Accounting Officer. Before starting, I'd like to remind everyone that 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 ks 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 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, August 2, 2019, 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 4, and let me hand the call over to Jeff.
Thanks, Faisal, and thank you all for joining us today. We're really pleased with both the financial and operational progress we've made so far this year. You'll recall at our Investor Day this past March, I discussed our goals for 2019. Those goals serve as our roadmap as we progress our mission to be North America's premier energy infrastructure company. Here's a snapshot of our progress this quarter against those goals.
We completed the sale of our U. S. Wind assets, bringing the total proceeds from the sales of our U. S. Solar, wind and non utility natural gas storage assets to roughly $2,500,000,000 2nd, we recycled a portion of that capital into Encore's acquisition of InfraREIT and Sempra's acquisition of a 50 percentage of Centurion providing greater visibility into further growth in the Texas market.
3rd, we produced 1st LNG and expect commercial operations under the tolling agreements in mid August at Cameron LNG Train 1. 4th, we continue to advance our LNG development projects, including signing the heads of agreement with Aramco Services Company at Port Arthur LNG. And lastly, we advanced the planned sale of our South American businesses, which is an important transaction as we continue to recycle Together with leadership from the California legislature, Governor Newsom's Together with leadership from the California legislature, Governor Newsom's leadership was critical in passing new legislation that helps return California to a premier regulatory jurisdiction. It also enhances the operating environment and financial health of California's electric utilities, enabling them to advance the state's goals of providing clean, safe and reliable electricity to their customers. Looking forward, we're focused on executing our strategic plan and progressing in a number of key areas that are important to our stakeholders, such as resolving our ongoing discussions with CFE related to 2 of our pipelines in Mexico, receiving final GRC and cost of capital decisions here in California, executing on Encore's robust 5 year capital program of over $11,000,000,000 while integrating the InfraREIT assets and continuing our focus on completing Cameron LNG and reaching FID at ECA and Port Arthur LNG.
Also with our strong year to date adjusted earnings per share of $3.03 today, we are affirming our full year 2019 adjusted earnings per share guidance range of $5.70 to $6.30 would also remind you that we're still waiting our GRC proposed decisions for both California utilities, which we expect in the coming weeks. We will also continue to monitor the movements in the Mexican peso. Both of these items may impact our 2019 adjusted EPS guidance. And with that, please turn to the next slide where Joe will review some of our key operating updates.
Thanks, Jeff. And I'd like to echo your comments regarding the constructive wildfire legislation. We believe there are 5 key areas of the legislation that materially improve the operating environment for California's electric utilities. First, a wildfire fund. SDG and E will participate in the larger fund option, which is expected to be supported by a continuation of the Department of Water Resources surcharge as well as utility shareholder contributions, potentially providing for a total fund amount of $21,000,000,000 dollars Coupled with the insurance subrogation language in the law, this could translate to a fund estimated to cover roughly $40,000,000,000 to $50,000,000,000 of potential wildfire damage.
SDG and E's upfront contribution will be 4.3 percent or $323,000,000 and then $13,000,000 annually over a 10 year period. 2nd, an annual safety certification resulting in a presumption of prudency. SDG and E received this certification on July 26. 3rd, a new prudency standard of review, more comparable to the FERC standard. This is important as it clarifies that any utility conduct considered in the prudency review must have been related to the ignition of the wildfire.
This review must also take into account factors outside the utilities control like wind speed, humidity and temperature. 4th, a rolling 3 year shareholder liability cap for any potential future wildfire damages allocated to the utility under the prudency review. Currently, SDG and E's liability cap is approximately $825,000,000 based on its 2018 electric T and D rate base. And 5th, increased safety spending including $5,000,000,000 of required wildfire safety CapEx via the California IOU's wildfire mitigation plans. Consistent with the contribution to the wildfire fund, SDG and E share is 4.3% or $215,000,000 In terms of oversight, the legislation calls for the formation of a wildfire safety division, which will initially be within the CPUC and then transition to the newly created Office of Energy Infrastructure Safety in 2021.
This wildfire safety division will hold the utilities accountable for mitigating wildfire risk and we look forward to working with them. We believe that these new laws substantially improve the regulatory model in California and support SDG and E's goal of delivering safe and reliable energy to our customers and the communities we serve. But let me emphasize one thing, our goal of safely mitigating the risk of any wildfire across our service territory is a top priority as it has been for over a decade. Please turn to Slide 6, where I'll discuss some of the regulatory updates at our California utilities. Starting with the 2019 GRC, you'll recall that SDG and E and SoCalGas are the 1st California industrial and utilities to incorporate the risk assessment mitigation phase into our GRC filings.
This takes into account safety and reliability spending as directed by the CPUC. We anticipate a proposed decision will be issued in the coming weeks with a final decision expected by year end. As a reminder, our financial plan and associated earnings guidance assume a 3.5% attrition rate through 2020. However, until we receive a final decision, we continue to record revenues consistent with 2018 levels. Any true up related to adopted revenue requirements, as well as balancing accounts and other provisions would be recognized in the quarter we received final CPUC approval retroactive to the beginning of 2019.
Trevor will discuss the related impact on quarterly results in more detail a little later on. Regarding our FERC cost of capital filing for SDG and E, discussions continue with interveners even though the procedural case is now in the litigation phase. Unless discussions progress, an initial decision is expected in the second half of twenty twenty. Moving on to the CPUC cost of capital filings at SDG and E, we filed revised testimony requesting an ROE of 12.38%, including consideration of wildfire risk, which were lowered from our initial request. This ROE request takes into account our estimation of the risk associated with potential future unrecoverable wildfire liabilities, premiums demanded by insurers and premiums required by investors in our catastrophe bonds.
While the law helps to further mitigate any risk of future wildfire damages SDG and E could face, we believe this revised ROE request is reasonable and helps further our goal of delivering safe, reliable and affordable energy to our customers. We continue to expect a final decision by year end in line with the regulatory schedule issued by the CPUC. Please turn to Slide 7, where I'll talk about developments at our Texas utility. As Jeff mentioned earlier, we're pleased with closing the Infarit and Shireland acquisitions as they're both high quality assets that expand our T and D footprint in Texas. Importantly, these acquisitions were funded with a portion of the proceeds from our completed asset sales and are another example of this management team's ability to effectively and efficiently redeploy capital into investments with strong risk adjusted returns in premium markets.
Encore's robust 5 year capital plan of more than $11,000,000,000 and corresponding infrastructure build out will further support Texas' rapid growth. Encore's assets are strategically located to take advantage of potential renewable additions, load growth from oil and gas development in the Permian Basin and continued demographic growth in urban centers around the Dallas Fort Worth area. The Texas market continues to have a constructive regulatory environment with exceptional growth opportunities. Please turn to the next slide. We also continue to generate positive momentum at our LNG business.
Starting with Cameron LNG, we couldn't be more pleased that Train 1 is delivering low cost US natural gas to our customers. This is a wonderful milestone for this project. We expect commercial operations under the tolling agreements in mid August. Cameron LNG recently amended its EPC agreement to further align all parties to complete the project according to the EPC contractors project schedule, which remains unchanged from what was previously disclosed. The amendment provides the contractor with the potential to earn incentive payments if it meets certain scheduled milestones in a timely manner.
This agreement does not materially change our IRR from the project and maintains our expected full run rate earnings from Trains 1 through 3 of $400,000,000 to $450,000,000 annually. Now let me provide you some updates on our LNG development projects. We continue to be quite active. Notably, over the last 10 months, we've signed HOAs, MOUs and an SPA totaling 17.6 MTPA of potential offtake capacity with customers. At Port Arthur LNG, we announced an HOA with Aramco Services Company for 5 MTPA of offtake capacity and a 25% equity stake in the project.
This HOA combined with the Polish oil and gas company SPA represents nearly 65% of the project's total offtake capacity. At ECA, the Phase 1 development project continues to progress with a goal of reaching FID around the end of 2019. Aside from the activities at ECA this past quarter, Enova reached mechanical completion on the marine pipeline, continued diversifying its business through contracts with private corporations and most recently announced off take agreements with Marathon Petroleum and BP for capacity at the Manzanillo and Guadalajara and increased the capacity at the Manzanillo liquids terminal to approximately 2,200,000 barrels. With regard to Mexico in general, we are not pleased with the recent developments regarding 2 of Enova's pipelines and the Enova management team, along with deep engagement by the senior team here at Sempra, are actively focused on reaching a timely resolution. We continue to work with the CFE so that we can help deliver low cost natural gas that benefits the people of Mexico.
Regarding the development portfolio, Inova continues to expand its infrastructure with 9 projects under development or in construction. The off take agreements for these projects are each with private enterprises, primarily major global energy companies. These projects will help provide access to cheaper and cleaner energy across the country. Now let me turn the call over to Trevor, who will review our financial results, beginning with Slide 9.
Thanks, Joe. Earlier this morning, we reported Q2 2019 GAAP earnings of $354,000,000 or $1.26 per share. This compares favorably to Q2 2018 GAAP losses of $561,000,000 or $2.11 per share. On an adjusted basis, Q2 2019 earnings were $309,000,000 or $1.10 per share. This compares to our 2nd quarter 2018 adjusted earnings of $361,000,000 or $1.35 per share.
Please turn to Slide 10, where I'll discuss the key drivers of our quarterly results. The variance in Q2 2019 adjusted earnings when compared to last year was affected by the following key items. Dollars 40,000,000 variance at Sempra Sempra Mexico due to impacts from foreign currency and inflation effects, net of foreign currency hedges. This large delta year over year primarily driven by a $34,000,000 benefit in the Q2 of 2018 from a depreciation in the peso compared to a $6,000,000 expense in the Q2 of 2019 from a slight appreciation in the peso. $35,000,000 of lower earnings at Sempra Renewables related to assets sold in December of 2018 April of 2019.
$26,000,000 of lower earnings at the California utilities from lower CPUC base operating margin in 2019 due to the delay in the 2019 GRC decision while absorbing higher operating costs, including higher wildfire insurance premiums at SDG and E. As Joe mentioned earlier, any true up for the 2019 GRC related to adopted revenue requirements and attrition would be recognized in the quarter we received final CPUC approval retroactive to the beginning of 2019. And $1,000,000 of lower earnings at Sempra Texas Utilities. While this is a small variance, it was mainly due to Oncor's acquisition of InfraREIT net of transaction costs recorded during the quarter, which was offset by higher consumption in the Q2 of 2018, primarily driven by weather. These items were offset by $22,000,000 of higher earnings from our discontinued operations in South America, mainly from higher tariffs, lower costs of purchased power in Peru and including $10,000,000 of lower depreciation expense in both countries due to assets classified as held for sale.
$19,000,000 of higher earnings at Sempra LNG from our marketing operations, primarily driven by optimization of natural gas transport contracts related to our ongoing businesses and LNG development projects and $12,000,000 of higher earnings at SDG and E from increased investments in electric transmission operations. I'd now like to take a moment to discuss some potential financial impacts we expect as a result of the Wild wildfire legislation that Joe mentioned earlier. We plan to fund SDG and E's initial share of the wildfire fund with the contribution from Sempra Energy. Sempra Energy does not anticipate issuing any new equity to fund this. And given the size of the contribution, we expect minimal negative impacts to our credit metrics in exchange for a material improvement in the overall risk profile of SDG and E and Sempra Energy.
Additionally, we along with the other California IOUs are currently evaluating the accounting treatment of these contributions and we expect a resolution to this in the Q3. Please turn to Slide 11. Over the last year, we laid out a strategy to grow at scale. It was a 3 part plan that involved focusing on a smaller number of high growth, high impact markets, recycling capital from lower to higher return businesses and executing across all platforms with discipline and focus. We also continue to add to the strength and depth of our management team and will remain focused on delivering our financial commitments.
The reaffirmation of our adjusted EPS guidance range reflects all of this as well as our continued confidence in the strategic plan. With that, we'll conclude our prepared remarks and stop to take your questions.
Thank Our first question will come from Greg Gordon with Evercore ISI.
Thanks. Good afternoon.
Afternoon, Greg.
A couple of questions. First, there was some agita recently around the Cameron project because of the action in McDermott's share price after they reported their financial results. So I think you had the project is pretty much on the verge of being complete now and you've given them new incentive payments. But I also think you have some protections if for some reason even though we're in the end game here, they failed to commercially complete the project in terms of letters of credit and such. Can you talk about your comfort level with the ability to get the project completed on the current schedule and what the contingencies would be if even in this very late stage they failed to complete it?
Greg, thanks for that question. Obviously, we spent a little bit of time in our prepared remarks talking about the progress we're having right now on Train 1. There's a term of art in the contract referred to as substantial completion, which we're expecting for Train 1 in the next day or so. And that triggers really the commencement of revenues, which we referenced as commercial operations in the middle of the month. So you're raising a couple of good points.
As we get further along in the development of the project, the risk that you're talking about actually diminish in terms of time and exposure. And then to your point, there's been no change in terms of expected completion dates for Trains 23. The contract amendments that you referenced also provide the appropriate incentives, I think, that causes to have more certainty with respect to that schedule. But perhaps, Joe, you could provide some additional color relative to the contracting relationship.
Thanks Jeff. Hi Greg. Yes, look I feel very confident about this. You mentioned the amendment and I think that gives them a lot of incentive to earn these performance based payments by continuing. And they're making really great progress and the plants running really well.
So all that's good. There's very positive momentum at the site. Obviously, their stock price took a hit, but I think that's focused on other things and didn't really change the financial condition of the company itself. I think you mentioned a couple of things. We do have letters of credit that back up the contract and we feel comfortable with what those are.
And as you recall, we have joint several liability between the 2 contracting partners and Chiyoda just received a large influx of capital from Mitsubishi and MUFG. So I think I feel really good about it. Obviously, I don't like to see that happening to one of our working members, but it's been a little bit tough for them. But they continue to get great big contracts from very large multinational oil companies. So I think people have conviction that they'll make it.
Okay. Couple more questions. In terms of what's going on in Mexico, I know there's some opacity there. Is the government there concerned about the force majeure payments that have been made for pipelines that have not been delivering gas? Or are they also, in addition to being unhappy about the force majeure payments, asking for fundamental redesign of the underlying contract structure of those agreements between the pipelines and CFE?
Greg, thanks for the question. You recall there's about 7 pipelines down there that have pending disputes with CFE. 2 of those impact pipelines, 2 of the 14 that we own in Mexico. And the answer to your question is the former. The conversations have been focused specifically on the force majeure provisions.
And you recall that the Sonoran pipeline is currently not in operation due to the Yaqui tribe has interrupted our service. And although we've completed the Marine pipeline, it has not been placed in service yet as part of these discussions. But Joe, perhaps you can provide some additional color on the Mexico situation.
Sure. Thanks, Jeff. Yes, Greg, look, I want to start out by saying, your team here at Sempra is very engaged with our colleagues in Mexico City on these issues. George and I were actually just in Mexico last week and working with Carlos Antonio met with several parties to continue our advocacy for a resolution of these matters. It's really a commercial dispute around 2 of these pipelines, 2 of our 14 pipelines.
Each of those pipelines, as Jeff said, is complete. But these are fully legal contracts that were developed by the CFE in the auction. So we feel good about our ability to continue to work with them and we are on a pretty much a daily basis working with them to try to resolve what I view as a commercial difference of opinion. But they've approved these force majeure payments. And when we went to them with what the force majeure reason was, they approved that and approved the payments.
And now they're asking that to be reevaluated.
I'd also mention, Greg, I think that we're fairly optimistic that we think there's a timeline in front of us where we can move through this relatively quickly. And I think all the signals have been from the government that they share our interest in resolving this quickly.
So I
think there's an alignment of interest and we're hopeful that we can make some progress in the near term.
Great. My final question is on the accounting for the wildfire fund payments, the initial contribution and the ongoing contributions. You indicated you're working with the other utilities in the state to figure out the right account treatment. I mean are the 2 options that they're either considered you can charge off both the initial contribution and the future contributions? And or is there a potential for because of these being sort of payments that extend out for an extended for 9 more years on an annualized basis that that would be an item that would be considered a GAAP operating non recoverable expense?
Or to sum up the question, what are the different potential outcomes here and how should we think about that?
Right. And we feel a little bit apologetic. We wish we could give you a really clean answer as what the appropriate accounting treatment would be. You're absolutely right in your assessment that we're working collegially with our colleagues to the north and their respective audit firms to make sure that we get the right approach here. But Trevor, perhaps you could give Greg some color around the options that are being currently reviewed.
Sure, Jeff. Hey, Greg. Yes, so one of the things we're doing is, like Jeff said, we're working with the others just because you need to have consistency across all three entities because it's really the same transaction. And so what we're looking at is working through that with them and then ultimately getting it through the 2 different audit firms that D and T audits us, PG and E and then PwC on Edison. But what you're really asking is, could this be an expense or does this really meet a definition of an asset from a GAAP basis?
And if it meets the definition of an asset from a GAAP basis, then how does that get unwound off your balance sheet? And so we're working through all of that right now, but it really comes down to can you expense it immediately or do you have to hold it up on your balance sheet and unwind it either through some kind of an actuarial assumption or over some period of time that it would come off your balance sheet. And that's really just for the initial contribution.
And for the ongoing expense?
Same thing, sorry. Yes, the initial contribution on the ongoing expense and then you've got the other piece of the legislation, which is the contribution to the mitigation investments. So that's our $215,000,000 and that really then ultimately is really part of our ongoing wildfire expense that's capital, but you just don't get an equity return on the capital, but you do get a return of that as well as the associated financing costs. So really $322,000,000 and the $13,000,000 is do we expense that immediately on the $322,000,000 and expense the $13,000,000 each year Or do you capitalize and put it on your balance sheet as an asset, and then unwind that over some period of time? And all of that's being worked on, and we will come up with an answer before the Q3 because we're recording it in the Q3.
Gentlemen, thank you. Greg, this is Peter. Just to add on to what Trevor said, kind of the third alternative there is an event based treatment. So we would hang it up as an asset. And then should we or one of the other IOUs have an event and a determination was made by the CPUC in terms of recoverability whether or not that
that was expensed at that time.
I see. Okay. Thank you. Have a great day.
Thanks, Greg.
Next we will hear from Shahriar Pourreza with Guggenheim Partners.
Hi, good morning. It's actually Constantine here for Shahriar. Just kind of thinking about you didn't mention any updates on the South America sales. So I guess the first part is, is there any updates that we had there? Do you have any tentative kind of schedule in mind yet?
Or is process kind of still ongoing? And the follow-up within that is thinking about kind of the post South America sale kind of Sempra, are you planning to update kind of the dilution guidance numbers or kind of somewhere after the close or around the Q3? Or is that going to be reserved a little bit more for when a lot of these other items start coming to fruition like the GRC in California, all the regulatory proceedings, Texas updates, deleveraging, etcetera?
Yes. Thank you for that question. We've laid out strategy that Trevor described in his prepared remarks, where we're trying to refocus the business around higher growth markets where we think we can produce the biggest financial impact. At the same time that we're moving our investment strategy where we can from lower return to higher return investments and then trying to execute with more discipline. And with that context, the South American transaction is really important to us.
It gives us a chance to basically recycle capital out of South America directly into our North American strategy, strengthen our balance sheet and support our $25,000,000,000 capital program. What we traditionally do as a convention would be to update our 2020 guidance on our Q4 call in February, and you raised a number of really important points. And I think it does put some context to this quarter. We just produced 3.03 dollars of adjusted earnings in the first half of the year relative to the prior period in 2018 where it was closer to $2.78 So we've been able to produce roughly a 9% growth rate year over year. That does not include the benefits from the recently closed InfraRE transaction.
It doesn't include any potential uplift from the GRC or the cost of capital. And you will note that we have not been recording the any benefit from an attrition increase year over year as part of the GRC. And finally, we noted on the call that we expect Cameron to start producing revenues in the middle part of the month. So again, that's another portion of uplift that's not captured in the first half. So those are all some strong positives going into 2020.
And based upon the South American sale, when we have those definitive numbers, that will go into that overall assessment of how we think about 2020. But certainly, based upon the results in the first half of the year, we feel good about being at $3.03 and they'd be able to have closed the InfraRE transaction and have now visibility of the 1st train producing revenues in the middle of the month with the GRCs hopefully with the proposed decision in the coming weeks. We think we're very well set up to provide really good visibility going into 2020. But I'll stop there.
We have a new member of
our team that many on the call may recognize. George Balisic has spent the better part of 20 years as the Vice Chairman of Lazard handling mergers and acquisitions and engagements, supporting good governance at Boards. We're very pleased to have him part of our team. And he is actually leading and stepped into the South American transaction, with Dennis and Trevor on the team. And I thought, George, perhaps you could speak to the current state of that transaction on an ongoing forward basis.
Thanks, Jeff. What I'd say about the process is we're right in the middle of a very competitive sales process. We've received robust interest in these assets. They're obviously a very unique and rare collection of assets with a strong underlying investment thesis for potential new owners of the business. We're again in the middle of the process.
We would be anticipating announcing the winning bidder toward the end of Q3 of this year or early in Q4.
Perfect. Yes, that's a very thorough answer. Thank you for that. Just kind of following up on kind of the Cameron side and I've noted a couple of remarks that were from the McDermott call and that kind of the performance milestone bonuses are kind of forthcoming. So that kind of that seems to bode well for completion there.
But also thinking about the site and kind of you've talked about the expansion, the Trains 45, while Port Arthur and ICA kind of both have an FID timeline. How are you thinking about the development at the site for 4 or 5 kind of between kind of the existing partnership having interest and any kind of analysis and parallel path that can go on with development there?
Thank you for that question. And I think there's also an opportunity when I stop to let Joe kind of update on some of the expansion opportunities at Port Arthur, but we remain very excited about Cameron expansion. I think the relationship with Total as an anchor tenant has been really important to us. It's a relationship that we've invested in. I'm actually going on a marketing trip to Europe in the next couple of weeks.
I think Joe and his team with Carlos and others are expected to be going on another trip to Asia. So we feel good about the marketing work that's taking place. Joe cited in his prepared remarks the 17,000,000 tons per annum that we've signed up under some form of agreement in the last 10 to 12 months. The Cameron II is an interesting opportunity, right? Cameron was built as a brownfield site initially.
We think the expansion opportunity makes a lot of sense for our partners. It's certainly something that Total has been quite constructive on. And we're continuing to process now a study with our fellow partners about that expansion. I think it continues to look like something that is that we feel is we're optimistic about. Joe, perhaps she could provide some color on both including the developments at Port Arthur.
Sure. Thanks, Jeff. Yes, I think I've mentioned before on prior calls that the partners are working at looking very hard at the expansion project. Our focus is clearly on getting Cameron Trains 1 through 3 into operation and we're right at the date of getting Train 1 into operation and start earning. So Trains 23 are progressing well.
So it is time for us to be at this point where we're studying with our partners the ability to move that project forward and it has all the FERC approvals and everything. So as Jeff said, we're encouraged about that. On Port Arthur, we're really encouraged about having about 2 thirds of it either under contract with Poland or in the HOA with Aramco Services. And so that project has a really high focus in our team to fill out the necessary commercial agreements so that we can move that project forward. And we're getting a lot of positive interest and that in part caused us to go to the FERC and file for 2 additional trains that create the potential for 27 MTPA at Port Arthur and we requested authority of FERC to site and construct that by January 2021.
So that's all important. And I would say we're also really advancing our work with Bechtel on the engineering work at Port Arthur. So we're pretty excited about what's going on.
Wonderful. That's really helpful color. Thank you very much.
Thank you.
And our next question will come from Julien Dumoulin Smith with Bank of America Merrill Lynch.
[SPEAKER JULIEN DUMOULIN SMITH:]
Hey, good morning. Good afternoon.
Hey, Julien. How are you doing?
Great. Thank you. So perhaps just to kick it off, in the prepared commentary, you mentioned Mexico and the peso. Just to clarify here what you meant by that. If the peso remains at its current levels, do you feel comfortable with current guidance range?
I know you mentioned in the remarks that it could impact your 2019 guidance. Just want to clarify that at the outset here.
Yes. I don't think there's much to read through there. I think we affirmed our guidance for 2019 and what we called out was, we still have 2 rate cases to follow through on and 3 cost of capital, 2 here in the state and 1 at FERC. And obviously, as you can see just in the quarter over quarter results, FX does change from time to time. So we're just calling that out as another factor that will have some impact to the second half of
the year.
Okay. All right. Fair enough. And then separately, if I can go back to the cost of capital side of that equation since you just mentioned it, the move of the equity cap ratio upwards from 52% to 56% potentially. Can you elaborate a little bit on the process there and your confidence level of making that happen?
Obviously, one of your peers seems to have made moves around that already. But I was curious if you have any comments.
I appreciate the question. I think we noted in our remarks that the PUC laid out a scoping memo that puts us on a path to get to final cost of capital decisions by the end of the year, Julian. Our utilities actually updated yesterday, so filed comments on the cost capital were filed yesterday. SDG and E requested 12.38%. SoCalGas is Julian remained unchanged at 10.7%.
I think you'll find there's a fairly tight range of filings. I think PG and E is now at 12% and Edison is at 11.45%. So I think the 3 electric utilities are in the 40 to 90 bp range with each other. And we're already at the 56% level from the equity standpoint at SDG and E and we asked exactly what we filed for was 56%. But I would also mention the process we use, we've used the exact same industry experts that we've used on prior cost of capital filings.
We went through a process with them to develop rational economic models that form the basis of our initial filing, and that was before the AB1054 legislation. And after that legislation passed, we went back to the same folks, updated those models and consistent with the underlying assumptions that were published around AB1054 that really led to our revised comments yesterday where we adjusted our number to 12.38% as our request for SDG and A.
Got it. Last quick details. 2020 guidance affirming that here?
We as a convention Julian, it's a good question. We as a convention do not affirm forward guidance. We did on actually as aberration, we did that on our Q1 call largely because you recall that we had changed the schedule for Trains 23 and taken a lot of investor interest in that. So we reaffirmed that on the last call. There's no look through issue here.
Just as a matter of convention, we don't talk about our forward guidance on every call.
Thank you. Appreciate it. All the best.
Thanks a lot, Julien.
And our next question will come from Steve Fleishman with Wolfe Research.
Yes, hi. Thanks. Just on the first on the LNG growth projects, could you maybe just give a little more color on milestones that we should be watching to the end of the year to watch for? And then I guess also along with that, have you seen much of an impact from the lower commodity environment in terms of customer interest? Are they kind of looking through that?
Thanks for the question, Steve. I'll start with the second question first. Obviously, the spot market for LNG has been trending lower. There's a lot of discussion that in the marketplace and there are folks that are influenced by the shorter part of that curve. But most of the folks we're talking about, they understand that there needs to be additional capacity built.
They understand that the United States has not only the lowest price to access to natural gas, largely because so much of it is associated gas fees, we've got lower volatility in deep capital markets. So more capacity has to get built and that capacity will be built based on long term contracts. So we have not seen any material impact to the marketing discussions we're having just because the spot market really for LNG is low at this time. In terms of some milestones to think about, particularly as we focus on Eco 1, We're still targeting trying to get that completed by the end of the year in terms of final investment decision. There's 3 things we're focused on.
Number 1, taking our existing 3 counterparties from a heads of agreement to a definitive SPA. Number 2, filing for and getting our export permit to move gas off the West Coast of Mexico. And finally, we've got some more work to do to finalize our EPC contract. But that's really the focus as we think about now and year end.
Okay. And then just totally separate question back in California. Would be interested in your thoughts on the new President of the CPUC and just given the focus on PUC reform and Governor Newsom's focus there, just any sense on what you see maybe being done differently going forward?
Thank you. I would start by saying that I personally have not spent a lot of time with Governor Newsom prior to him stepping into his new role. I think members of our Board, members of our management team, myself included, we have been very impressed with the leadership he's shown in the last 6 months together with leadership from the legislature. So think about the fire experiences we had as a state, Steve, in 2017 2018. The big effort that we made last year to get to SB 901 and to have issues that have developed in the state since then and really to see a new governor step in and kind of galvanize the type of political support that was necessary to deliver this was really, really important.
I would also say he is very focused on ensuring that we have a good regulatory environment and that there are needed reforms at the commission. I think the naming of the new President has been important. We certainly enjoyed Michael Picker's reign over the last 6 plus years, but she has a noted reputation as a reformer. She's been very successful in the prior roles that she's had in the state and outside the state. I have not had the chance to meet with her, but folks who know her personally hold her in very high regard.
So we're quite optimistic. Not only that, this new legislation helps move us back toward a premium regulatory marketplace, But we're also very pleased with the new leadership that's taking place at the commission.
Thank you.
And next we will hear from Michael Lapides with Goldman Sachs.
Hey, guys. Question about Port Arthur. When you for it seems like you're getting closer to an FID decision on Port Arthur and it's exciting that you're going to potentially upsize this. When you first took Cameron 1, 2, 3 FID, you gave out disclosure and you've updated that over time about the EBITDA and earnings impact potentially for Cameron 1, 2, 3. I know it's still a little bit early, but you do have some of the contracts in hand.
How should we think about the economics of Port Arthur relative maybe on a dollar per train basis or a dollar per BCF day basis relative to the economics of Cameron now that we're 7 or 8 years down the road, the world's becoming more competitive with more LNG, more folks building liquefaction in the U. S. How should we think about the returns on that type of project, the earnings and EBITDA impact relative to the size and scale and compared to what you did with Cameron?
Michael, I think there's a lot of questions embedded in that. I probably cannot give you the definitive detail you're looking for. I can say that we're pleased at this point to have close to 70% of the contracts in hand. We have a lot more work to be done to finalize the additional customers that we need. Believe it or not, that site is expandable to 8 trains.
It could be upwards to 45,000,000 tons per annum and certainly that's not currently within the contemplation of our near term ambition. But it's a great site. I think having Saudi Aramco as an anchor tenant there was a huge development for our company. And obviously, they're also expected to be a 25% stakeholder. So having them involved will be a real resource to us, not just on the engineering side, but how we approach financing that project.
As we move through, what we have internally is a 10 point report card for FID, both at EcoOne and at Port Arthur. One of the things we're doing now is working through the issues you're describing in terms of making sure we're hitting the right hurdle rates and we have the right expectations relative to cash flows. But it's something as we move forward with that project that we commit to come back to you with, Michael, with more detail in the future.
Got it. And then my next question, I know, especially if you move forward with Port Arthur, you'll have a very capital intensive budget for the coming years on good growth projects. But Jeff, how are you generally thinking about M and A, whether it's U. S. Utilities or whether it's other?
And to be honest, how does the integration of Encore into the portfolio impact your view of future bolt on acquisitions?
Great question. I'll tell you, we have had a very active M and A team in our company for the better part of 15 years. And typically, Michael, it was focused really on project level acquisitions, which I think we developed quite a bit of expertise around. The Encore transaction was one that we probably had studied in terms of what we were seeing in California and the type of markets that we found most attractive. I think it's one of the reasons that we were able to kind of move relatively quickly when we had to make that transaction happen.
And by the way, we cannot be more pleased with it. I think you were able to attend our analyst conference this spring. Alan and I laid out one of the best high visibility growth projections for that business that I've seen since I've been at Seppra. And by the way, to be able to come behind that and extend that Texas platform with Emporate has been a real plus for us. So I'm really excited about the Texas market generally.
I'm excited about the backlog and the interconnection queue there in ERCOT and the need for more generation to be built given some of the relatively low reserve margins. So that platform is something that we have high optimism about. We typically don't talk about as a convention forward M and A, but clearly Texas continues to be a market of interest for us and we are very excited about the continued outperformance relative to what we thought Encore could do. And you've seen us raise that capital plan now 3 or 4 times, including now updating it for the InfraREIT transaction. So stay tuned.
We'll continue to focus on our $25,000,000,000 to $1,000,000,000 capital program. We have a lot in front of us, but we feel great about what's been taking place in Texas.
Got it. Thank you, Jeff. Much appreciated.
Thanks, Michael.
And our next question will come from Sophie Karp with KeyBanc.
Hi. Good morning, guys.
Hi, Sophie.
Hi. I wanted to just confirm something on the Mexico pipeline dispute, right? Could you confirm that this issue is contained to the force majeure payments? Or is that a broader scope there, maybe concerning the ongoing tariff?
Yes. There was a similar question earlier. I would say that a couple of things are important to confirm. One is we have 14 pipelines in Mexico. As you know, we've got regas facilities and LDCs.
We've got solar and wind facilities. We've got refined product storage. This is really contained to 2 contracts out of the 14 pipelines. And the focus of the conversations have been around the force majeure payments, largely because both of those pipelines have not been in operation. But keep in mind, these were contracts that were sourced as part of a competitive bid process.
These were contracts that were put forward by CFE for their bidders to sign. And based upon how those contracts are written relative to the force majeure provisions, CFE has been making payments against those force majeure requirements since the force majeure event occurred. So to answer your question specifically, yes, the focus of the conversations around reforming the force majeure provisions in both of those contracts.
Got it. And then also should we think about this issue as more or less intertwined with your process of obtaining an export permit for your terminal there?
No, I don't think there's any read through there. I mean, look, the new President down there has set a variety of goals about what he wants to do with that country. He wants it to be safer. He wants it to be more fair. He wants to raise the standard of living of all the Mexican people.
And you think about how we've actually positioned IEnova. We've been down there for over 2 decades now, really with a goal of making the critical infrastructure investments that allow energy to compete, it allows energy prices to be cheaper, it allows the energy sources to be more clean. So we think we have a big role to play in continuing to make progress that's good for the country.
Got it. And then one last one, if I may. I want to ask you if are you seeing any impact on any of your businesses from the ongoing trade war and trade disputes between the U. S. And China?
Maybe it's on the LNG side or in the kind of construction side? Like if there's any color on
that you could give us would be helpful.
Yes, I appreciate the question. We've looked at this from time to time. Obviously, we're in kind of the definitive phase of trying to wrap up our EPC contracts both for ECA and for Port Arthur. But we've really seen no impact yet on that type of issue. Formerly, when we owned our renewable business, it was a type of issue that could impact the sourcing of panels.
But today, across our businesses, we really have not felt any material impact relative to those trade issues.
Thank you. That's all I had.
Thanks a lot, Sophie.
And our final question will come from Suneel Sabal with Seaport Global Securities.
Yes. Hi, good morning guys and thanks for taking my question. Yes, I just wanted to drill a little bit into the contracting construct for the LNG projects. I understand that for the Cameron, all the contracts were on tolling basis. And I just wanted to know for this Port Arthur contracts, are you following the same approach?
Or there is kind of more flexibility in how you're contracting those that plant?
Joe, would you like to respond to that?
Sure. Hi. Yes, the tolling model was something that was prevalent in the first constructions with our project and a couple of others. But But it's no longer a model that most customers prefer for a variety of different reasons. And most of them now prefer to have a simple SPA model where they're buying LNG either delivered to them or at the birth of the LNG plant.
And whether or not that particular customer has gas in North America, they prefer to just separate that activity from the LNG plant. So it may be the customer and we have a few of these, the customer actually wants to bring gas and sell it to the plant. That's okay with us because our model has a determination of what the price is, the LNG price is based on the gas price. So we don't care. We know how to buy gas.
We bought gas for many of our businesses like when we own the generation plants and so forth. So it's fine with us. It's just a little bit different than tolling model, but effectively we're creating what would almost be like a synthetic toll.
Okay. Thanks for that. And does that kind of create a little bit more commodity exposure for you or maybe infrastructure exposure for you upstream? And is that kind of incorporated into your tolling model or your returns on the project?
Sunil, what we try to do is we sit down and looked at the entire value chain for LNG and thought about what parts of that value chain are consistent with what Sempra does every day. For example, like at SoCal Gas, where we buy gas and have it shipped to our city gate. And what we determined was that we could basically make a traditional infrastructure investment at the terminal, get long term contracts and have great visibility to certainty of cash flows. We could also, if needed by customers, contract for gas to be shipped on pipelines to our facility. But in all those cases, we would only do that if we were selling it at an index plus price.
So in other words, the price risk from the index selected by the customer is passed on directly to the customer and we don't participate in that type of commodity exposure in terms of the volatility that you're asking about.
No upstream investment.
Okay. Got it. And then just one more on the Cameron incentive payments that you agreed with McDermott. So obviously McDermott has revealed $110,000,000 of payments for Train 1 and maybe part of that applies to Train 2 and 3 also. So I just wanted to understand that how much more of those kind of incentive payments could be there?
Is there enough if you can't talk about that in more specified city, if there is an order of magnitude we should think about in terms of those payments?
Thank you. This is Joe. I'll just say this. We did not make the provisions of that amendment public. So McDermott did say that on their call relative to what they had collected and it's effectively mostly work milestone payments that they got from work on trains 23, not on train 1.
And we're not going to tell you the number, the total number, but I can tell you what's most important from a Sempra point of view. It doesn't materially impact our IRR from the project nor our earnings forecast that we've given you.
Okay, got it. Thanks a lot guys.
Appreciate it, Sunil.
And I will now turn the call back over to Jeff Martin for closing remarks.
I just want to close by expressing our appreciation for everyone who joined us this morning. If you have any follow-up questions per custom, please feel free to reach out to our IR team. We hope each of you have a great day.
And that does conclude our call for today. Thank you for your participation. You may now disconnect.