Sempra Energy (SRE)

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Sempra Energy (SRE)

Q3 2012 Earnings Call

November 06, 2012 1:00 pm ET

Executives

Richard A. Vaccari - Vice President of Investor Relations and Treasurer

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

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

Mark A. Snell - President

Trevor I. Mihalik - Chief Accounting Officer and Controller

Analysts

Faisel Khan - Citigroup Inc, Research Division

Greg Gordon - ISI Group Inc., Research Division

Naaz Khumawala - BofA Merrill Lynch, Research Division

Kit Konolige

Rajeev Lalwani - Morgan Stanley, Research Division

Paul Patterson - Glenrock Associates LLC

Ashar Khan

Mark Barnett - Morningstar Inc., Research Division

Winfried Fruehauf

Presentation

Operator

Good day, and welcome to the Sempra Energy Third Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rick Vaccari. Please go ahead, sir.

Richard A. Vaccari

Good morning, and thank you for joining us. I'm Rick Vaccari, Vice President of Investor Relations. This morning, we'll be discussing Sempra Energy's third quarter 2012 financial results. A live webcast of this teleconference and slide presentation is available on our website under the Investors section.

With us today in San Diego are several members of our management team: Debbie Reed, Chief Executive Officer; Mark Snell, President; Joe Householder, Executive Vice President and CFO; and Trevor Mihalik, Controller and Chief Accounting Officer.

Before starting, I'd like to remind everyone that we will be discussing forward-looking statements on this call 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 reports 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 will be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call and to Table A in our third quarter 2012 earnings release for a reconciliation to GAAP measures.

I'd also like to note that the forward-looking statements contained in this presentation speak only as of today, November 6, 2012, and the company does not assume any obligation to update or revise any of these forward-looking statements in the future.

With that, I will turn it over to Debbie.

Debra L. Reed

Thanks, Rick, and thanks to all of you for joining us today. I know many of you on the East Coast are recovering from the effects of Hurricane Sandy and we appreciate you taking the time to be on this call. SDG&E has sent more than 40 employees and 20 pieces of heavy equipment to help Con Edison repair overhead power lines damaged by the storm, and we will continue to do whatever we can to provide assistance.

Moving to our call, today we'll review our third quarter financial results and provide updates on operational matters at all of our businesses, on regulatory matters at our California utilities and on our outlook for the remainder of the year. Let's begin with our financial results.

Earlier this morning, we reported third quarter earnings of $268 million or $1.09 per share. Excluding a $60 million after-tax non-cash charge related to our investment in the Rockies Express Pipeline, or REX, adjusted earnings for the third quarter of 2012 were $328 million or $1.33 per share. In the third quarter of 2011, we reported earnings of $289 million or $1.20 per share. This quarter, we were able to grow our adjusted earnings despite the loss of the CDWR contract, which you'll remember expired in September of 2011. And I remain very pleased with our operating performance.

We continue to execute on our strategy through the sale of 50% of our Mesquite power plant, our plans to build a new pipeline in Mexico and our continued progress on the liquefaction project at Cameron.

Now let me pass things over to Joe to take you through the details of the financial results, beginning with Slide 4.

Joseph A. Householder

Thank you, Debbie. At San Diego Gas & Electric, earnings for the third quarter were $174 million, up from $113 million in the year-ago quarter. The primary driver of the increase was a $38 million reduction in tax expense due to a change in IRS tax law regarding how repairs on electric transmission and distribution assets are treated. $22 million of the benefit recorded in 2012 is related to the 2011 tax year, while the remaining $16 million relates to the year-to-date tax benefit for the 2012 tax year.

Also benefiting the quarter were $12 million of increased transmission earnings, including the impact of Sunrise Powerlink, which is now in rate base.

I want take a moment and discuss recent developments in our Wildfire Expense Balancing Account or WEBA proceeding. Last month, the CPUC issued a proposed draft decision denying SDG&E's request for approval to establish a mechanism to record claims paid out in excess of our insurance. They instead suggested we use an alternative mechanism, the Z-factor, for recovery, which is the same mechanism we use for excess wildfire insurance recovery. The assigned commissioner in this case issued an alternative draft decision approving a rate recovery mechanism for fires occurring after July 2010. Similar to the proposed decision, this alternate decision indicated that SDG&E can seek recovery for 2007 wildfire costs through the same Z-factor mechanism.

After reviewing these documents, considering the statutory and regulatory precedents and communicating our concerns to the assigned commissioner through an ex parte meeting, we continue to believe that it is probable that SDG&E will be permitted to recover substantially all costs related to resolving wildfire claims in excess of our insurance through customer rates customer and from amounts recovered from other responsible parties.

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