Sempra Energy - Shareholder/Analyst Call

Sempra Energy (SRE)

March 29, 2012 12:30 pm ET


Steven D. Davis - Vice President of Investor Relations

Donald E. Felsinger - Executive Chairman

Debra L. Reed - Chief Executive Officer, Director and Chairman of Executive Committee

Michael W. Allman - Chief Executive Officer of Southern California Gas Company and President of Southern California Gas Company

Jessie J. Knight - Chief Executive Officer of San Diego Gas & Electric

Mark A. Snell - President

Unknown Executive -

Jeffrey W. Martin - Chief Executive Officer of Sempra Generation and President of Sempra Generation

George S. Liparidis - Chief Executive Officer of Sempra Pipelines & Storage and President of Sempra Pipelines & Storage

Eduardo Pawluszek - Former Chief Financial Officer

Mile Cacic - Chief Executive Officer

Joseph A. Householder - Chief Financial Officer, Chief Accounting Officer and Executive Vice President


Unknown Analyst

Michael Goldenberg - Luminus Management, LLC

Faisel Khan - Citigroup Inc, Research Division

Greg Reiss

Winfried Fruehauf

Chris Shelton

Greg Gordon - ISI Group Inc., Research Division

Leslie Rich - J.P. Morgan Asset Management, Inc.

Raymond M. Leung - Goldman Sachs Group Inc., Research Division


Steven D. Davis

Good morning, and welcome to Sempra Energy's 2012 Analyst Conference. I'm Steve Davis, Vice President of Investor Relations and Corporate Communications. I'd like to thank those in attendance with us here in San Diego, as well as those of you who are joining us by webcast. We want this to be an interactive conference, so our webcast audience will also have the ability to ask questions via the link located at the bottom of the webcast screen.

Before getting started, I'd like to remind everybody that presentations we'll be discussing today contain forward-looking statements within the meaning of the Private Securities 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 described on this slide and are further discussed in the company's reports filed with the Securities and Exchange Commission. I'd also like to note that the forward-looking statement contained in these presentations speak only as of today, March 29, 2012, and the company doesn't assume any obligation to update any forward-looking statement in the future. In addition, some of the financial information we'll be discussing contains non-GAAP financial measures. In accordance with Regulation G, you'll note that we reconcile these financial measures to the most directly comparable GAAP figures and you'll find that information in the appendices of the financial and U.S. Gas and Power presentation. We've got a lot of information to cover today, so let me begin by introducing Sempra Energy's Executive Chairman, Don Felsinger.

Donald E. Felsinger

Let me also add my welcome to those on the webcast. And for those of you here in the audience, thanks for making the trip to San Diego. Your time is valuable and we appreciate the effort that each of you have made to be with us today. Those of you that attended last year's conference may recall that I told you that our board was engaged in a succession process in light of several planned executive departures. And that was Neal Smalley, who was our President and COO, was leaving at the end of last year, and Darcel Hulse, who was the CEO of our LNG business is retiring next month, and then my retirement coming up the end of this year. And today, I'm pleased to be able to report to you that we've completed a very seamless leadership succession process for all these positions. And to me, that just exemplifies the quality and the depth and the breath of Sempra's management pool. As a management, we take our responsibility of providing our employees an opportunity to learn, to grow, to be challenged, exposing them to different parts of the business. And we do this to ensure that we have a depth of leadership succession for management. And the Board of Directors has a similar oversight. But with respect to the CEO position, and they want to, see that have management talent that's developed, that they want to be able to assess the progress of that management development and look at what there is available for CEO succession that's within the organization. And Sempra's board, unlike any other board that I've been exposed to, takes this process very, very seriously. And I can speak firsthand about this, because I went through a very rigorous process in 2005 when I became the CEO.

Starting about 2 years ago, our board decided to initiate a very structured process to review the list of internal CEO candidates. And the first thing we did was we quickly determined that given the depth and breadth of the management team within Sempra, that my replacement would come from within. Next, our board then took several steps to better familiarize themself with all the candidates, and this process included a lot of board interaction with each of the candidates. We had each of the candidates confidentially reviewed by their peers, their co-workers, subordinates. The board engaged an external consultant that specializes in CEO succession. And finally, we had each of the candidates go through a very structured process with the board where they made presentations and then engaged in Q&A. I have to tell you that having gone through this process in 2005 as a candidate, and then having led our board through this, this past year, it was a lot more fun being on the other side of the table directing the process and being a participant. Or as many of you know, this process culminated in June of last year in the selection of Debbie Reed to succeed me. And we had a discussion at the time about the process of succession, and we decided that it would be healthier for the organization and for the outside people that we do business with to have this become a blip in the transition versus a drama that played on for months, and we decided to make Debbie the CEO immediately and have her pick her team immediately and get on with business and get this behind us, which we did.

Some of you know something about Debbie and her previous Sempra roles, and a lot of you have learned more about her since she has become CEO. Let me share you with you who I know her to be. After graduating summa cum laude from the University of Southern California, Debbie started working for SoCalGas as an engineer. She had a long and successful career at our utilities, culminating in becoming the CEO at SoCalGas and SDG&E. Debbie also gained valuable experience on what it is to be responsible for shareholders in her service on outside boards. She currently serves on the board of Halliburton, and she previously serves on the boards of Genentech, Dominguez Services and Avery Dennison. And locally, she chairs a Board of Directors of the Regional Economic Development Corporation. I had the chance to meet Debbie for the first time in 1996 when we were forming Sempra, and I followed her career for the past 15 years. A few years ago, when Debbie was the CEO of SDG&E and SoCalGas, I offered her the opportunity to come to work for me in a corporate position. And the reason for that is because of the strong affiliate rules in California. Debbie had never had the chance to be exposed to the businesses that are outside our regulated California utilities. Debbie took on that assignment, and for the last 2 years, had been a study on the other side of the Sempra fence with the unregulated affiliates. Debbie not only took on this role with enthusiasm for both learning about these other businesses but she was a very quick study. She was thoughtful, she was inquisitive, and I can see that today in the way that she performs as CEO. She's also a team player, as evidenced by our more recent leadership announcements, where she's put strong capable people like Mark Snell and Joe Householder around her. I'm going to leave Sempra later this year as probably one of its largest individual shareholders. And I do so knowing the company is in great hands with Debbie and the rest of the management team, and that my investment's going to be well taken care of. On a personal note, let me thank all of you for your continued interest and support of Sempra. I have enjoyed and benefited from the interaction we've had over the years. And Debbie, why don't you now come up and take these people through our strategies and priorities for the next 5 years.

Debra L. Reed

Thank you, Don. And I would be remiss if I didn't comment on what Don has brought to our company. Don talked about when we first met during the time that we were forming Sempra. And it was his vision and his view of Sempra being more than just 2 utilities that really got us to where we are today. He was very focused on growing our business and doing that in a way that we managed risk effectively. And I think if you look at our history of TSR performance, he can take great pride in the leadership that he provided to all of us in his tenure as CEO, and before that, of leading our global businesses. On a personal note, and sometimes people say it's very difficult to have the person who was your predecessor stay on, I would say that in Don's case, he has been an incredible mentor to me, and I greatly appreciate that. And we all are going to wish him well later this year in his retirement where he can go and enjoy himself. So thank you very much, Don.

Now I'd like to begin our presentations for today and start with an overview of the areas that we're going to be covering. And I'll start with a high level presentation on our strategies and our key focus areas and priorities. And then, we will have the California utilities come up and do a Q&A session. After that, the international utilities come up with Mark Snell talking about LNG, about our energy infrastructure business and the opportunities for MLPs and do a Q&A. And U.S. gas and power led by Jeff Martin doing that. On the whole opportunities with our North American renewable business and our Gas business. And then George and Eduardo are going to do a deep dive into our international businesses. You've had a lot of questions about that, and we want you to understand how regulation works in Chile and Peru and how good these businesses are and how they set in the portfolio. And then finally, Joe is going to come up to do a financial recap, and then Mark and I are going to join Joe at the end to answer all of your questions remaining for the day. So you'll have plenty of opportunities through the course of the day to ask your questions and get them answered. You will also have a great opportunity to meet our senior leadership team. And I encourage you to do that, because I think this is a fantastic team that has great diversity of background and experience that comes together in a synergistic manner for us to make really good business decisions. You have people like Mark Snell, who's been very much involved in project development, has worked largely on the unregulated side, have strong financial background, coupled with people like myself and Jessie, who have a lot more experience on the regulated side of the business. And we have a really, really solid team. I am so pleased with having now Mark Snell as my President and overseeing our unregulated businesses, and then Joe Householder, who moves up from our SVP and Controller as CFO. We just have a real solid team. So please take some time to meet everyone today, get to know them. They're the same faces in a lot of new jobs, including Jeff Martin. He's has taken on a bigger role. And in spite of his activities with the President, he's taken on a bigger role and now is responsible for all of Sempra's North American operations.

I'd like to start with our 2011 accomplishments because, quite frankly, these lay the foundation for our future, and we just had a very, very strong year in 2011. As Don mentioned, often times when you go through a transition, things are up in the air and performance drops. That was not at all the case in Sempra. We had 14% increase year-over-year in adjusted earnings per share. And that came from not just one of our businesses hitting a home run, but from all of our businesses performing well and exceeding their goals. The other thing that we accomplished in 2011 is our earnings now have grown to the point that we have replaced the earnings that we lost during the sale of our Commodities business. And we replaced those earnings with very stable types of predictable earnings in areas like renewables, our utility growth both in the U.S. and internationally and then our LNG business, and then we'll be talking about all of those in more detail today.

Another key accomplishment in 2011 was to move forward and get construction on Sunrise so far and so effectively. We are on track to deliver this nearly $2 billion project on time and on budget. It's probably the most difficult state to build infrastructure because of all of the environmental concerns and regulation. I was out visiting the Sunrise Powerlink construction with Mike Niggli the other day, and it is really an engineering feat and a construction feat because most of the towers have had to be set by helicopter. We have 150 environmental engineers every day watching our performance on this. And in spite of all of these challenges, this project is coming in on time and on budget, which shows we can build major infrastructure projects in Sempra. We also closed the transaction for the 2 South American utilities to take controlling interest in the utility in Peru and the utility in Chile. And these have been integrated during the course of the year very, very well into our business. As you might recall when we made this announcement last year, we were looking at $0.15 accretion in 2011 and $0.22 accretion in 2012. And we do expect to see that. We've also, in the renewable space, Jeff Martin stood up here last year and told you he had this really big goal of 1,000 megawatts in renewables to be in service by 2015. And Jeff Martin's going to stand up here today and tell you that he has substantially increased that goal. The renewables business is a case of us being really a leader in solar technology in the West, and we think that, that is where the growth is going to occur in this space

And then finally, the dividend. When I meet with all of you, the one thing I usually hear is what are we going to do about the dividend? Can we build a stronger way to bring capital back to shareholders? And 2 years in a row, in 2011, we increased the dividend by 23%, and in 2012, we had another 25% increase in the dividend. And you'll hear more about the strength of that dividend based upon the strong cash flows from our businesses as we go through the day.

So let's move on to the next slide, which is focused on how we approached our strategic review of our business. And before I became CEO, we had already been in the process of kind of doing a strategic review of Sempra, largely because we had exited the trading business and we were looking at where we wanted to grow in the future, and we continued that process over the last few months. Some of the things that we did is to really look at all of our assets and to look at the markets where those assets sit and how markets may evolve over time. We did an assessment of every one of our assets and whether it would be better to maintain that asset or to look at exiting and selling the asset, and we looked at what kind of performance we could expect to get from all of our assets. And the key things that came out and trends that kind of drove our decision making are on this slide. And I'm not going to go through them in a lot of detail because you're certainly familiar with these trends, but one thing that's very clear is that there is going to have to be a lot of capital put into utilities across the U.S. over the next few years to provide the supportive infrastructure. And in our own 2 California utilities, we're looking at spending $11 billion out of over $14 billion of capital over the next 5 years in those 2 California utilities. And we expect to see some trends that we are seeing on the West Coast move to the East Coast. Certainly, pipeline safety and the focus on how do we run safe gas systems is something that we see here very much as the focus in California that we also see going through the rest of the U.S. The other thing is certainly coal-to-gas conversion, and you saw that EPA came out with some was yesterday for knowing who to call for electric generation. But we see that the coal-to-gas conversion is going to be driven not only by environmental reg, but by the next trend in that shale gas. Because shale gas has really changed, and we believe will continue to change the economies of gas for generation. We also believe it will change the economy for gas for other uses. You're hearing now companies looking at coming back into the United States to actually manufacture here or develop plastics or fertilizers. You also hear increased focus on liquefied natural gas or fuels -- for vehicle fuel. And so we see that this is something that's here to stay and it is also the thing that we think will make LNG export a reality. Now the other trend that we believe influences our business and is here to stay for some time is renewables. And we think that this is driven largely by the renewable portfolio standards that 36 out of the 50 states have adopted. And we also believe that Sempra is well positioned in this because if the PTC doesn't get renewed, as looks like may be the case now, then solar is going to be the future for the next several years. And you couldn't have a much better position than we have in terms of solar development. And we also have a terrific wind project that we'll be building in Mexico that is not reliant on the PTCs. In terms of emerging markets, this is the type of growth that we believe is a value in the Sempra portfolio that we get from our Chile, Peru and Mexican investment. In there, we're looking at 3% to 4% customer growth each year, and 5% to 6% load growth where, if you look at U.S. utilities, that's expected to be relatively flat. And then the final trend that influenced our thinking and certainly influenced our view on repatriation is what's going to happen in the way of tax. And our answer there is we really don't know what's going to happen in the world of tax. What we do know is that we want to try to use all of the tax credits and any net operating losses as quickly as we possibly can, and that is the reason we made the decision to repatriate dollars.

Next slide. So when we started on this process and we looked at these trends driving our business, we really had 3 strategic imperatives for Sempra, what we wanted to accomplish from this review. We wanted to look at how we could streamline our business and integrate aspects in a way that when they operated together, you could get more value. We wanted to focus then our capital allocation on where we thought the greatest growth greatest value creation would occur and then limit capital allocation in other areas, and then we wanted to really focus on some of the prior investments where we had already spent quite a bit of capital and we felt that we could get greater performance out of those assets. And that was a huge priority because there's not much you can do better than to create shareholder value than to get some value out of those assets that we'd already invested in. So out of this, we created the 3 growth platform that Sempra will be focused on in our future. Our U.S. utilities where we're expecting 5% to 6% growth between our 2 California utilities, and a lot of that now moves to SoCalGas about -- SoCalGas is looking at about 8% growth over the next 5 years. Our South American utilities and Mexican midstream where we are looking at 8% to 9% earnings CAGR over the 5-year period, and we have a great foundation there to support Mexico and its oil to natural gas conversion. Both have been one of the key energy partners in Mexico now, having been there 20 years, and then having a strong partnership with PEMEX to help make that happen. We also have very strong organic growth in these 2 utilities. And then finally, our U.S. gas midstream and renewables business. And this is where we can focus on our utility and municipal customers. Those are the customers for both our gas storage business and for our renewables business. And we understand what their needs are because we run large utilities ourselves. And so we believe that these businesses can grow, and they can grow on the foundation of an LNG export and the infrastructure that's going to be needed to support this changing gas environment. Also the coal to gas conversion, and we can help some of these companies as they make the coal to gas conversion, because with SoCalGas, we run a very large storage facility. We have experience serving electric customers and we run electric utilities that have to think about reliability and gas-based fuel. Our goal with all of this is to deliver superior shareholder return. And that comes from both very high growth compared to our peers, 6% to 8%, plus a strong dividend that's supported by predictable strong cash flows from our businesses. And we've aligned our organization based upon these 3 growth platforms so that we can look at the integration of assets of our international assets in Mexico, how those can be integrated in a way that we can get more value out of them. And then in our U.S. assets between our North American gas assets, our renewables business, how can we integrate to better serve the needs of the customers.

So, when we think about the future, and in 20 minutes being able to try to picture for you, draw a picture for you of where we believe Sempra is heading over the next 5 years. That's the best way to do that quickly is to tell you we believe where we are today, what our key goals and initiatives are and where we see our company in 2016. So let me start with that with the U.S. utility. I would say that our headline for our U.S. utilities is to stay the course. We have great organic growth in those utilities, and the 2 CEOs will be talking about why we believe we can pursue that growth without having tremendous impact on rates. Because our focus is really on looking at capital investments that benefit the customer, either in providing rate reductions to customers over time, or reducing future rate increases over time. They're also focused on doing the things the regulators have asked us to do, whether its pipeline safety and integrity, or it's really implementing the state, goals on clean energy and renewables. And we think by making these investments that we will be able to provide good value to our shareholders. Now we also believe that when we look at our scale, having built a major transmission line overhead, 500 kv; built a major transmission line underground, 230 kv; implemented full rollout of smart meters throughout our service territory with little of any reaction -- negative reaction from our customers, now doing that at SoCalGas, being a leader in pipeline safety, we believe that all of these skills that we have are very transferable to other utilities and in the U.S, and that we will be looking at ways that we can enlarge the Sempra footprint and create more value. I would say that we're particularly interested in utilities that are adjacent to our current service territories or adjacent to our midstream businesses, and that also have maybe 2 potential growth platforms: The utility business and the midstream business.

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