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Sempra’s Cameron LNG Said on Track; Management Eyeing Texas, Mexico Assets to Boost Earnings

Sempra Energy is looking to its newly expanded footprints in Texas and across the border in Mexico to drive much-needed future growth, as the California-based company saw some of its utilities struggle in the first quarter of 2018, CEO Jeff Martin said Monday.

Since Sempra’s early March close of its acquisition of Energy Future Holdings Corp. (EFH), the indirect owner of 80% of Texas-based Oncor Electric Delivery Co. LLC, the company has accumulated $15 million in earnings attributed to equity earnings from the investment. For the full year, Sempra expects its Oncor business to drive in between $320 million and $360 million.

After two earlier bids by other suitors failed, Berkshire Hathaway appeared to be set to make the acquisition of EFH, only to be blocked by investor Elliott Management Corp. in bankruptcy court. Sempra purchased the struggling holding company for $9.45 billion in cash.

Oncor's strong pure-play electric transmission and distribution business “solidifies our footprint in the Gulf region and just as importantly, improves the scale and diversity of our domestic utility earnings,” Martin said on a call to discuss quarterly earnings.

In California, Martin said the company is moving forward with its regulatory priorities in the state, including updated rate case testimony submitted in April that includes projected impacts from tax reform.

With regard to protections for wildfire risk in the state, Sempra along with other stakeholders continue to execute a three-part strategy to help protect its customers and help ensure the long-term health of its California utilities, San Diego Gas and Electric Co. (SDG&E) and Southern California Gas Co. (SoCalGas).

Martin noted that Sempra has helped lead an education campaign with the California governor's office, legislature and the California Public Utilities Commission (CPUC), and two pieces of legislation have recently been introduced, “the first of which was the need to adopt standards across the state to reduce wildfire risk; and second, the need to establish objective and measurable criteria that can form a part of a new prudent manager standard for utilities going forward.”

On the infrastructure side, construction of the liquefied natural gas (LNG) export terminal, Cameron LNG, in Hackberry, LA, remains on track, and the company continues to expect all three trains to be producing in 2019. At the end of last year, Sempra settled with the contractors at the Cameron export facility to resolve "known and unknown claims to date," including those related to Hurricane Harvey's aftermath.

Even before Harvey forced Sempra to shut down the site last summer, Sempra and its partners were questioning Chicago Bridge & Iron Co. NV, the engineering, procurement and construction (EPC) contractor, regarding the project timetable. The contract with the EPC was signed in 2014. Total cost of Cameron is estimated at $10 billion.

“We continue to believe this agreement puts both the contractor and Sempra in a stronger position to meet the current schedule,” said Martin.

Sempra reported 1Q2018 earnings of $347 million ($1.33/share), compared with $441 million ($1.75) in 1Q2017. The $94 million loss included $58 million higher net interest expense and preferred dividends.

SoCalGas reported 1Q2018 earnings of $225 million, up from $203 million during 1Q2017. The gains made at SoCalGas were attributed to a $31 million higher CPUC base margin because of the effect of a lower tax rate in 2018 on the higher margin of the first quarters. The gains at SoCalGas were partially offset by $7 million unfavorable impact from the lower cost of capital in 2018.

A higher CPUC base margin also contributed to gains at SDG&E, which reported 1Q2018 earnings of $170 million versus $155 million in 1Q2017.

Sempra LNG & Midstream reported a $16 million loss in 1Q2018 versus $1 million in earnings in 1Q2017. Most of this was attributable to impacts from the Tax Cuts and Jobs Act of 2017, but also because of $11 million lower earnings from midstream activities.

The company reaffirmed its 2018 adjusted earnings-per-share guidance of $5.30-5.80/share, but Martin said it is tracking two noncash items that could impact this guidance range later in the year: the movement of the Mexican peso and the impacts of tax reform.

Across the southern border, Sempra’s Mexican utility Infraestructura Energetica Nova (IEnova) in April announced a $130 million project to develop, construct and operate a marine terminal to receive, store and deliver hydrocarbons, primarily gasoline and diesel, within the La Jovita Energy Center, which is 23 kilometers (14 miles) north of Ensenada, Baja California, Mexico. It would be IEnova’s fourth refined product terminal in Mexico.

The Baja Refinados project has 15-year U.S. dollar-denominated contracts for 100% of its capacity. It also capitalizes on the continued build-out of infrastructure related to Mexico's energy reform by increasing fuel supply capacity in Mexico. “In turn, this further helps Mexico's energy mix become more reliable and gets consumers more fuel choices,” Martin said.

IEnova has signed a long-term contract with Chevron Combustibles de México S de RL de CV to store and deliver the fuel. The agreement would allow the Chevron Corp. subsidiary to utilize about 50% of the terminal’s storage capacity.

Additionally, another subsidiary of Chevron would have the right to acquire 20% of the equity of the terminal after commercial operations begin. Chevron, headquartered in San Ramon, CA, is one of the largest refiners on the West Coast.

When asked last month if the ongoing Mexican presidential elections had affected IEnova’s ability to close new deals in the liquids segment, IEnova CEO Carlos Ruiz Sacristan noted that business continued unabated.

“I think that what’s happening is exactly the opposite,” he said. “All of the large refiners that want to participate in the country are really moving in and trying to close deals with us and others, in order to build the infrastructure that is needed.”

Earnings from Sempra Mexico were $20 million in 1Q2018, compared with $48 million in the first quarter of 2017. The loss was largely attributed to lower earnings from the the recognition of allowance for funds used during construction equity in 1Q2017, of which $12 million is related to a cumulative amount recognized when regulatory recovery became probable for the Ojinaga-El Encino and San Isidro-Samalayuca pipeline projects.

Sempra’s primary foreign exchange related exposures in Mexico are related to the taxes on its U.S. dollar denominated debt and deferred tax balances. “Consistent with prior years, we continue to hedge the monetary positions. So our upsides and downsides are limited with respect to large currency movements,” CFO Trevor Mihalik said.

Meanwhile, Sempra is continuing to evaluate tax reform and its impact. While the territorial tax system, which taxes businesses on only income earned within a country's borders, increased the value of its international businesses, a component of it, the global intangible low tax income, is impacting the company as “an unintended consequence of tax reform,” Mihalik said.

The law was intended to prevent transfers of intangible assets to a lower tax jurisdiction, “which clearly is not our case,” Mihalik said. This quarter, the tax was an $8 million expense with an estimated full-year impact of about $24 million.

“It could also reduce our earnings in future years by similar amounts but declining over time. We're hopeful that this issue will be fixed with updated regulations or legislation before the end of the year. But until this happens, we're recording the tax as part of our earnings,” Mihalik said.

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