San Diego-based Sempra Energy held debt-equity initial public offerings (IPO) in Mexico during the first quarter, raising nearly $1 billion for its expanding operations south of the border, and in the process creating what CEO Debra Reed said is Mexico's second largest energy company, IEnova.

During an earnings conference call Thursday, however, Reed reported that earnings fell below expectations in 1Q2013, mainly due to a series of one-time charges and a continuing delay in a rate case decision in California for Sempra's two major utilities, San Diego Gas and Electric Co. and Southern California Gas Co.

Sempra reported 1Q2013 earnings of $178 million (72 cents/share) compared with $236 million (97 cents/share) for the same period last year, driven by one-time charges and utility profits that were off quarter-over-quarter by $34 million.

Reed was very bullish about the Mexican developments, calling the IPO "extremely successful" and noting that since the launch IEnova's share's have increased in value by 22% as the first energy company on Mexico's stock exchange. The March stock IPO, in which Sempra sold 19% of its interest, was preceded by two debt sales in February that garnered $400 million.

"This is consistent with our strategy to create capital structures in our international businesses that allow them to grow with local debt and equity," said Reed. The project in Mexico is similar to one Sempra did earlier in Peru. "The success of our Mexican transactions recognizes the value we are creating in our Mexican business."

IEnova attracted a broad group of international investors, with the majority of the investment coming from Mexico, according to Reed. "The market has shown continuing enthusiasm for IEnova," she said, noting that when launched the implied valuation of the company was around $3 billion, and that it is now $4 billion.

"Our 81% holding in IEnova is worth nearly double today what our book value in those assets was at the end of 2012," Reed said.

Last October, Mexican state-owned electric utility Comision Federal de Electricidad chose a unit of Sempra International to construct, own and operate a 500-mile, $1 billion pipeline network to deliver gas to power plants in the northwestern Mexico states of Sonora and Sinaloa (see Daily GPI, Oct. 24, 2012). Sempra also has a major wind project and other upcoming gas infrastructure projects south of the border.

In response to questions from analysts, both Reed and Sempra President Mark Snell emphasized that they intend to maintain the roughly 80% holding in the Mexican company as they are doing in Peru. "We really like this business, and the reason we wanted to do the IPO was to grow the business," Reed said.

"We have a lot of great projects on the horizon for IEnova, and the good news is we have quite a bit of debt capacity," Snell said. "We would expect that our earnings share from IEnova over the years will grow, no matter what our ownership percentage is."

Growth in Mexico will be through gas infrastructure extensions to supply a growing switch from oil to more gas-fired electric generation and expected new chemical plants. There also will be an uptick in renewable development.

"I think in the next five years we are going to see a lot of development in Mexico," Snell said.

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