Sempra Energy Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.27.14 | About: Sempra Energy (SRE)

Sempra Energy (NYSE:SRE)

Q4 2013 Earnings Call

February 27, 2014 1:00 pm ET

Executives

Richard A. Vaccari - Vice President of Investor Relations

Debra L. Reed - Chairman, Chief Executive Officer 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, Senior Vice President and Controller

Analysts

Greg Gordon - ISI Group Inc., Research Division

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Rajeev Lalwani - Morgan Stanley, Research Division

Paul Patterson - Glenrock Associates LLC

Kit Konolige - BGC Partners, Inc., Research Division

Mark Barnett - Morningstar Inc., Research Division

Andrew Levi

Joshua Golden

Winfried Fruehauf

Operator

Good day, and welcome to the Sempra Energy Fourth Quarter Earnings Results Conference 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. This morning, we'll be discussing Sempra Energy's fourth quarter and full year 2013 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, Chairman and Chief Executive Officer; Mark Snell, President; Joe Householder, Executive Vice President and Chief Financial Officer; Martha Wyrsch, Executive Vice President and General Counsel; and Trevor Mihalik, Senior Vice President, Controller and Chief Accounting Officer.

Before starting, I would 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 most recent 10-K 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 will be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call and to Table A in our fourth quarter and full year 2013 earnings press 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, February 27, 2014, 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 3 and I let me hand the call over to Debbie.

Debra L. Reed

Thanks, Rick, and thanks to all of you for joining us today. 2013 was another great year for our company, and one filled with many accomplishments on our infrastructure projects, partnership initiatives and regulatory effort. We are extremely happy that our Cameron Liquefaction project received the Department of Energy's conditional permit to export to non-Free-Trade-Agreement countries on February 11. And with a noteworthy progress, we are making and securing our FERC permit. We expect construction on this project to begin this year. We will provide further details later on the call.

Turning to our financial results. I continue to be pleased with our performance of sustained delivery of top tier shareholder return. With the DOE non-FTA permit for Cameron now in hand, we have given greater confidence in the earnings contribution Cameron will provide starting in 2018. This puts us well on our way to meeting our goal of 9% to 11% compound annual earnings growth through 2019. Additionally, I'm confident that we will execute on some of the growth opportunities we've identified which are not yet in our plan. This would allow us to get to the higher end of that range, and I look forward to discussing these opportunities with you at our analyst conference next month.

Now let me hand things over to Joe to discuss the 2013 results in more detail, starting with Slide 4. Joe?

Joseph A. Householder

Thanks, Debbie, and good afternoon or good morning to everybody. Our results for the fourth quarter exceeded the expectations we've provided on our third quarter call and resulted in a strong finish to 2013. This morning, we reported fourth quarter earnings of $282 million or $1.13 per share. This compares to adjusted earnings of $268 million or $1.08 per share in the same quarter last year. Including both the impact of the $77 million 2012 retroactive benefit from our General Rate Case in California and the $119 million loss on the closure of SONGS, we reported 2013 GAAP earnings of $1,001,000,000 or $4.01 per share. For guidance purposes, we reported 2013 earnings per share of $4.49, above the midpoint of our guidance range of $4.30 to $4.60 per share. These earnings per share exclude the loss on SONGS, but they include the retroactive GRC benefits.

Full year 2013 adjusted earnings, which exclude both the SONGS loss and the retroactive GRC benefit totaled $1,043,000,000 or $4.18 per share. There were 2 major factors to 2013 adjusted earnings that arose from our previously announced repatriation strategy and the IEnova IPO. Both of these strategic decisions were designed to create and have in fact, increased total shareholder value.

Just to recap those in more detail. 2013 was the first year of our plan to repatriate cash from international operations back to the United States. While we pay little in cash taxes on this repatriation, we do have to book an income tax expense when we bring the funds back to the U.S. For 2013, this tax expense was $63 million or $0.25 per share. The cash flow to the U.S. from this plan supports our strategy to continue growing our dividend.

Second, in March, we completed the IPO of IEnova in Mexico which has been tremendously successful, creating significant value for Sempra shareholders. Since the IPO, IEnova's stock is up over 70% and the value of Sampra's investment has increased by more than $1.5 billion. This increased value has more than compensated our shareholders for the $26 million or $0.10 per share dilution we reported in 2013. In addition to those factors, as discussed on our third quarter call, the Mexican government enacted tax reform that keeps the Mexican corporate tax rate at 30% after 2013, as opposed to a scheduled reduction to 28% under prior law. This change will have only a minimal impact to ongoing earnings, but did negatively affect 2013 results by $13 million due to the required adjustment to our deferred tax liabilities.

When taking these items into consideration, I can see that the health of our underlying business remains strong and in line with our long-term growth aspirations.

Now let's go through the segment results in more detail, beginning with SDG&E on Slide 5. At San Diego Gas & Electric, earnings for the fourth quarter of 2013 were $119 million compared to earnings of $110 million in the fourth quarter last year. Fourth quarter earnings were higher primarily due to $28 million of higher CPUC base margin, net of expenses, partially offset by a $10 million impact of lower authorized CPUC and FERC returns, and $4 million of lost SONGS earnings due to the plant closure. For the year, SDG&E reported adjusted earnings of $471 million as compared to $484 million in 2012. Earnings in 2012 included a $22 million higher income tax benefit resulting from the change in the treatment of repair expenditures that relates to the year 2011. In 2013, we also partially offset impacts from the lower authorized rates of return and loss of SONGS earnings with higher CPUC base margin, net of expenses, as SDG&E identified operating efficiencies to improve their performance.

Now please turn to Slide 6. Fourth quarter 2013 earnings at Southern California Gas were consistent with the last year at $98 million. This quarter's results were impacted by $30 million of lower tax benefits as earnings for the fourth quarter of last year included the full year's impact of the change in tax treatment for repair expenditures. This tax impact was offset in the fourth quarter of 2013 by $19 million of higher CPUC base margin, net of expenses, and $12 million of reduced tax expense related to prior year's income tax issues.

SoCalGas increased annual adjusted earnings by $50 million to $339 million in 2013. This increase largely reflects $36 million of higher CPUC base margin, net of expenses, in part due to operating efficiencies that SoCalGas identified to improve performance. Higher 2013 earnings also includes $15 million in pipeline integrity expenses that are now being fully recovered in rates.

Now let's move to Sempra International on Slide 7. At our South American Utilities, fourth quarter 2013 earnings were $43 million compared to $46 million in the fourth quarter of last year. Full year 2013 earnings were $153 million. Excluding the $11 million loss on the sale of our Argentine investments, this segment was in line with our expectations.

Fourth quarter 2013 earnings for Sempra Mexico segment were $26 million versus earnings of $35 million in the fourth quarter of last year. Fourth quarter earnings reflect a $13 million increase in deferred income tax expense due to the change in tax law I discussed earlier and an $8 million decrease resulting from our noncontrolling interest at IEnova. These effects were partially offset by $9 million of higher net earnings as a result of recording AFUDC earnings for pipeline construction. For the full year 2013, Sempra Mexico's earnings were $122 million compared with $157 million in 2012. Similar to the quarter, the decrease in earnings resulted from the end of year change in Mexican tax law and a $26 million dilutive effect from the IEnova IPO.

Now please turn to Slide 8. Moving to Sempra U.S. Gas & Power, the Natural Gas segment earned $9 million in the fourth quarter of 2013 compared to a loss of $6 million in the year-ago period after excluding the $25 million payment received from Kinder Morgan for tax impacts related to the sale of their interest in REX. Higher fourth quarter earnings were due primarily to a lower of cost or market adjustment that occurred in 2012 related to the purchase of an LNG cargo in the fourth quarter of 2012, and the change in intercompany marketing agreements that reduced cost in 2013. For the full year, Sempra Natural Gas reported 2013 earnings of $64 million. Included in this amount is a $44 million gain on the sale of one block at the Mesquite Power Plant.

Fourth quarter 2013 earnings for the renewable segment was $6 million compared with earnings of $14 million in the fourth quarter of 2012. Higher earnings in 2012 reflect $12 million of higher deferred income tax benefits as a result of assets placed into service in 2012. For 2013, annual earnings of $62 million include $24 million of gains associated with our new solar joint ventures.

Let's please turn to Slide 9. Turning now to our guidance for 2014. We are reaffirming expected consolidated earnings for the year to fall within the range of $4.25 to $4.55 per share. Overall, our near-term and long-term prospects remain very strong and we are looking forward to giving you more detail on our outlook at next month's analyst conference. In addition, the Board voted in February to increase our annualized dividend by approximately 5% to $2.64 per share. We recognize that returning capital to shareholders is important and we remain committed to providing a strong and growing dividend to the owners of Sempra. Once Cameron is in construction, we intend to recommend a higher dividend growth as an alternative to a larger one-time increase after Cameron is operational.

Now let me hand the call back to Debbie to discuss Slide 10.

Debra L. Reed

Thanks, Joe. As I mentioned at the outset of this call, we were pleased to receive our permit to export to non-FTA countries from the Department of Energy on February 11. We are also the first on the list of proposed LNG projects to have received our Draft Environmental Impact Statement from FERC. FERC schedule calls for issuance of the final EIS on or before April 30, 2014. This is the last major step in securing our FERC order authorizing the construction and operation of the project. And we expect to receive that order this summer.

In addition to progress on permitting, we are finalizing terms on the lump sum construction contract with our preferred EPC contractor. The cost estimates for the project remains in line with the $6 billion to $7 billion of construction cost, and $9 billion to $10 billion of total cost that we have consistently projected. We have also made substantial progress in securing financing. We are working with the Japanese export credit agencies to finalize their loan commitment. And earlier this month, we signed a commitment letter with commercial banks worldwide as part of our very successful commercial bank syndication. Given this development, we continue to have confidence we will be able to close long tenure borrowing at very attractive rates.

Subject to FERC's final approval, the project remains on track to start construction in 2014, and we still expect all 3 trains to come online throughout 2018, with the first full year of 3-train production in 2019.

Concerning the progress of our Cameron LNG facility, we want to take this opportunity to update you on our thinking around the potential MLP strategy. We have a great asset in Cameron. And we know that it could serve as a very strong and anchor for an MLP, as it will provide natural drop-down given its significant cash flow underpinned by 20-year contract. Since those cash flows don't start for several years, we continue to explore ways to jumpstart an MLP using our own storage of pipeline assets or by developing or buying other assets. After much analysis, we've determined that, currently, our existing assets don't provide the certainty of cash flows to support the formation of an MLP that will generate the premium valuation our shareholders deserve.

We will continue to assess this. In fact, the assets, like rocks [ph], are well positioned to secure contracts for transport of that out of the Marcellus and Utica, and could help jumpstart an MLP. As you saw with our IEnova IPO, we are focused on structures that increase value for Sempra shareholders both today and into the future, and we will time a possible MLP accordingly.

Using Cameron as a strong foundation for future MLP is bolstered by the many exciting prospects we have to grow in and around the LNG and gas infrastructure businesses. Mark will provide you with more information on these emerging opportunities at next month's analyst conference. At that time, Joe will also go into more detail about our MLP thought process.

Let's now turn to Slide 11 for an update on regulatory proceedings for our California utility. In January 2014, SDG&E filed an uncontested multiparty settlement agreement with FERC on our Electric Transmission formula that establish an authorized return on equity of 10.05%. The FERC order approving the settlement should be issued by the end of the third quarter in 2014. But will be retroactive to September of last year, and this settlement will be in effect through December 2018. The settlement specifically allows SDG&E the right to apply for incentive adders on future projects and determines the equity ratio based upon actual equity recorded on December 31 of each year. Terms of the settlement are reflected in our fourth quarter 2013 earnings and in our 2014 guidance.

Second, on SONGS. The CPUC's proceedings remain ongoing and while the commission is encouraging parties to engage in settlement discussions, we expect the final resolution of all proceedings to take some time. We continue to believe that the amount of our remaining regulatory asset is reasonable and will be recovered.

Now please turn to Slide 12. In Peru, our Santa Teresa Hydro project remains on schedule and should be completed later this year. The 100-megawatt project is our first generation project in Peru, and I'm confident it will be the first of many additional projects we will execute there. In fact, Mark, Joe and I recently visited South America and are enthusiastic about prospects for growth in Chile and Peru. We will discuss more specifics at the conference next month, but there are a number of possible projects in South America that fits very well with our strategy, including gas pipelines and electric generation and transmission opportunity.

In Mexico, we also continue to move ahead on our many infrastructure projects. Construction of the first phase of our Sonora Pipeline project is on schedule and on budget, and this 300-mile segment is expected to be completed in the second half of 2014. The second segment of the pipeline is projected to start operations in the second half of 2016.

In January, construction began on the Los Ramones I project as part of our joint venture with PEMEX. And that pipeline is also expected to be completed in the second half of 2014. We continue to work on finalizing the contract for our participation in the Northern Phase of Los Ramones II and I anticipate these negotiations will conclude very soon. As you'll recall, we expect to have a 25% share of this segment of the pipeline.

Finally, in Mexico. Last quarter, we've started construction on the 156-megawatt ESJ Wind project, which is supported by a 20-year contract with SDG&E. As we discussed last quarter, formation of a 50-50 joint venture for this project was delayed due to our original prospective partner's decision to exit the wind development business. However, negotiations are progressing well with other interested parties and I'm confident we will finalize the JV very soon.

Finally, in the first quarter of 2014, we made the decision to hold for sale the second block of the Mesquite Power Plant in Arizona. It continues to be our goal to complete our exit of the merchant generation business, and we are making good progress on the sale of this asset. However, since we do not yet have a contract for sale, we are not including the transaction in the guidance that we reaffirmed today.

Now let's finish by turning to Slide 13. In summary, 2013 was another very good year for our company. Demonstrating how well our business strategy performs in our changing market and regulatory condition. We have already made significant progress on planned infrastructure projects, and with over $2 billion of projects scheduled to come online before next year, I'm equally optimistic about future earnings. Sempra's diversified portfolio and focused strategy on long-term contracted cash flow positions us well for growth in the years ahead.

And with that, let me stop and take any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Greg Gordon of ISI Group.

Greg Gordon - ISI Group Inc., Research Division

Can we take the commentary around the time horizon for the sort of ability for you guys to flow the -- an MLP, part and parcel with your willingness to be more aggressive on the dividend in the intermediate term, and sort of the financial sort of balancing act you're making in order to try to drive the best shareholder value for your investors until the point where you get to a viable portfolio of MLP-eligible assets?

Debra L. Reed

Well, as I said -- I mean, I think, just the Cameron asset alone, has great potential for an MLP with the ability to drop down that in pieces over time and have clear visibility to that. And I thought, as the debt is paid off, the earnings increase and that there's some good upside from that asset. Right now, as we look at the other assets we have, we don't feel that it would be in our shareholder's interest to do a bridge strategy without those assets. But I will say, we're constantly looking at other assets that we could potentially acquire. And if we found some good assets that would create a good bridge strategy, we're not opposed to do that. On the dividend issue, we have a great deal of confidence now about Cameron coming online. After getting the non-FTA permit and being where we are in the FERC process, we're feeling very confident about this project going online with all 3 trains coming on in 2018. And then full 3-year operations -- 3-train operations in 2019. And so, as we look at our dividend, we've had a policy of 45% to 50% payout ratio. We see the earnings coming in 2018 and 2019, and we really think that we can do that dividend and it not be inconsistent with any MLP strategy. Joe?

Joseph A. Householder

Yes. Greg, I'm just making another point. I don't see them as a very linked at all. I think that we have really strong earnings and growth in our other businesses besides just Cameron. And so this dividend is in response to our continually growing earnings from that. And as we look forward and study the MLP, we'll have enough cash flow from LP and GP units to keep our dividend even post an MLP. So I don't see that as any kind of a bridge, it's from the strong earnings that we have.

Greg Gordon - ISI Group Inc., Research Division

A follow-up question. Have you considered -- given so successful in the IEnova transaction, have you considered as a -- instead of an IPO of your MLP-eligible assets, doing a strategic transaction with another entity with an existing GP, where you contributed your assets for a GP stake and, thus, helped to drive further growth for that other entity and, therefore, added value to the GP shares that you would be acquiring?

Debra L. Reed

I would say, we look at all of those things, Greg. That -- the thing that we have got to be sure is that, with the Cameron asset, we want to be sure that our shareholders get the right kinds of splits, have the right kind of long-term structure for our assets that we're going to put in. And if we found something that would work with that, we would definitely be open to considering that. But we're not going to rush to get something out that devalues our assets in the long-term.

Operator

And we'll go next to Neel Mitra with Tudor, Pickering.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I just had a follow-up on the MLP question. So you're not willing to use a bridge strategy with REX right now, but with where mid-stream assets are going for in terms of valuation, how do you expect to compete without having an MLP in place to buy some of these assets?

Debra L. Reed

Well, what I said was that if we look at our existing assets right now, putting them in MLP to do a bridge strategy, we don't think that was the best thing. What I also said, though, is that, some things are changing with those -- the value of those assets that we might see in the future. And as you know that after we basically have REX flow, bidirectionally, are moving forward and that, that could offer some opportunities if we can have contracts that extend beyond the expiration of the existing contracts. So -- and we just did a nonbinding open season and that had some -- it gave us some promise that there's some real upside with that asset, potentially. So we will continue to look at that. And if we had to make an acquisition for a bridge strategy that made economic sense in the long term, we would look at doing what made economic sense in the long term.

Neel Mitra - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Okay, got it. And secondly, on the 9% to 11% growth rate. Kind of bridge that with the previous 6% to 8% growth rate before -- I guess, you guys included Cameron for 2018 and 2019. So does the 9% to 11% include projects that are not in the development plan or not in the earnings plan right now? Do that exceed 11% or is it kind of -- you'd be the closer to 9% without those projects and towards the higher end of the range if you executed on some of the growth projects?

Debra L. Reed

Yes. We'll go through this in detail at the analyst meeting. But when we look at that range of 9% to 11%, the 9% basically includes what we have in our base plan without incremental growth and Cameron at full operation in 2019. We will go through the upsides that we have in our -- that are not in our plan but are upsides to that plan at the analyst meeting. But there are a lot of things happening in that regard and a number of bids are coming out in 2014 even that could add to that and get us towards the high end of that range. And that's what I commented on, as if we pick up some of those projects, we could definitely be towards the high end of that range by 2019.

Operator

And we'll go next to Matt Tucker with KeyBanc Capital Markets.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Apologies, I just want to beat up once more on the MLP topic. Assuming you don't make any major acquisitions and your existing assets don't change in such a way that you'll be even [ph] more MLP-able between now and when Cameron does start operating, should we assume that it is your plan to form an MLP with Cameron as the anchor in 2018 or 2019? Or are you still not sure that you'd go that route when you get to that point?

Debra L. Reed

Well, I mean, these are discussions that obviously we will have our Board of Directors as we get closer. But if everything stays as it does today and if there's opportunities to grow at that midstream business with cheaper equity and do that, then that would be our intent. But that's a while off, so things could change, tax laws could change, interest rates could change. But as we look at it today, that's the direction we would be headed.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

And just to clarify on your comments around the dividend growth, you're planning to propose accelerated dividend growth starting, I guess, next year, assuming that Cameron enters construction as opposed to staying on the same trajectory you've been on recently and waiting all the way until 2018 for more of a step change. Is that correct?

Debra L. Reed

That's generally correct. Let me just have Joe talk about kind of how we're thinking about the dividend.

Joseph A. Householder

Yes. As we said, we right now today have a dividend payout ratio that is higher than the 45% to 50% that we've set with the board long term because of the repatriation plan. And we just recommended and they approved an increase of almost 5% now for this year. And what we said is once Cameron is in construction later this year, then we go to next year's dividend, we think we will suggest a slightly faster pace that will allow us to get to the 45% to 50% in 2019. So you can kind of assume that we'll be suggesting something more of a straight line from 2015 to 2019 that you gets to that 45%, 50%.

Matthew P. Tucker - KeyBanc Capital Markets Inc., Research Division

Got it. And then just on the Cameron financing, is that pretty much just waiting for FERC approval before that gets secured? Or are there other issues that you're still working through?

Debra L. Reed

Mark, why don't you talk a little bit about where we stand on Cameron, in general, including the financing?

Mark A. Snell

Well, I think, in general, we're in very good shape. And I would point out that just to comment on, in line with the dividend question, just to remind you all that this whole project, we're committing existing assets and we fully expect to finance and use the contributions from our partners to finance construction. So that's not a drain on our cash, so we certainly are able to raise the dividend without -- that there's no concerns there. As far as financing goes, and Joe can comment on this as well, but we have a very, very robust response to our financing efforts. And we are highly confident of being able to completely finance this project without any problems.

Debra L. Reed

Another comment on where we are with the EPC, too.

Mark A. Snell

We're in the final kind of final weeks of negotiating the EPC contract. And what I will say is that we will have -- we will come out of with this with a contract that is a lump sum turnkey project contract that shifts the construction risk to the EPC contractor. And I think there was always some concern whether that would happen, but the market has been good around that and we have a very nice contract that we're very happy with, with a very experienced builder.

Operator

And we'll go next to Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

I want to ask about the underlying assets within the U.S. Natural Gas business. Can you talk a little bit about what you're seeing with gas storage economics, given the volatility we've just seen over the last couple of months and whether a change in the economics have started to appear in gas storage or whether the gas storage market appears somewhat depressed still?

Debra L. Reed

Sure, Michael. Let me just start generally, and then I'm going to turn it over to Mark to add a few more detail. We did talk about REX and what we see happening there. And many of you have written about what's happening in Marcellus and Utica. And you've talked about a lot of the pipelines reversing flow going into the Gulf area. And what we see in the Gulf area is we see colder gas conversion and in the Southeast in that region. And we also see all the LNG export occurring. And that -- we think that is going to change some of the dynamics relative to storage certainly. And what we're starting to see is an interest in contracting on longer-term basis for some of the storage assets because I think others are seeing the same thing and think that it will be good to get some long-term contracts. Mark, do you want to add a little bit to that?

Mark A. Snell

Yes. A couple of things I would just say is that -- and I know you can appreciate the technical nature of some of my comments here. But what we've seen in the past is we've had a very depressed storage market with really the only value being recognized is the summer, winter spread that frankly has been relatively small and weak over the last few years. We're certainly seeing that change now, we're seeing a higher value for that. But then I think even more importantly for the first time in probably 4 years or so, we're seeing a real return to some extrinsic value. So valuing that volatility around the gas market, we're seeing a value put on that, and we're getting that in our storage rates currently. So I think that part of the business seems to be coming back a bit. And in fact, I think for the first time we've actually sold some storage to marketers, which we haven't done in a long time. So there is something going on there. I'm a little bit reluctant to say that it's back to where it was 7 or 8 years ago. But it's certainly a better market today than it was 6 months ago.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. And when thinking about REX and kind of the reversal of REX back to or at least a part of REX back to Midwest, how long do you and your partners think you could -- how long do you think it likely will take before you sign up a lot greater percentage or a greater portion of REX to move gas from either the Marcellus or Utica into the Midwest?

Debra L. Reed

Well, we would hope to do that very soon. That, as I said, we had a nonbinding open season. And there seemed to be a lot of interest in that, and so we would like to pursue that. And then you've also seen all the announcements through the pipeline, some of which actually connected to REX, the reverse flows going from north to south. And so we think this is going to happen relatively soon with the need for takeaway capacity out of the Marcellus and the Utica. We also are working on the lateral that we talked to you about previously, and that will be in service very shortly in 2014, probably by April. So the whole dynamics of that are changing that area is going to change rapidly and we need to be able to respond rapidly, and we will.

Operator

We'll go next to Rajeev Lalwani with Morgan Stanley.

Rajeev Lalwani - Morgan Stanley, Research Division

I have 2 questions. One, can you just talk about what you're seeing as it relates to the market for buying existing midstream assets as it relates to pricing, things like that? And second question, specifically on Cameron, with more clarity on financing costs, et cetera, do you still feel good about the numbers you laid out before in terms of the EPS contribution, et cetera?

Debra L. Reed

Yes. Let me start with the last question on Cameron. And yes, we feel very good about the numbers that we've talked about at Cameron. With everything we've seen with the EPC contract, the financing and all, as I reaffirmed today, those numbers look good. I'll talk a little bit about at a high level, the midstream. And I don't want to go into details on assets. But what I think you're starting to see now is a cycle that's kind of been interesting and it's repeated itself multiple times in the E&P business, where you're starting to see more of the E&P companies look at selling off some of their midstream assets so that they can invest that stream. So I think what we saw a few years ago is starting to change a little bit. And so we will continue to look at opportunities as these changes occur. Chevron has looked at some asset sales. Chesapeake is looking at some asset sales. And it's very typical when E&P companies decide that they need to invest more upstream for them to look at the selling off some of those assets, and so we'll be exploring that. And in terms of asset pricing. Obviously, you're competing with MLPs and that are interested in getting those assets. And so we will continue to look at every opportunity that is out there and whether it fits for us. The good thing is that we have some opportunities in the LNG space that Mark will talk about more at the conference. But I'll let him just maybe give a little bit on that right now.

Mark A. Snell

Well, I would say that if you think of LNG as being sort of a midstream asset that's certainly MLP-able, we are starting to see opportunities in the LNG space. And I'm going into some detail on some specifics at the conference. But I think we are kind of starting construction on Cameron with a mindset that this isn't just a single-asset business. It is a business that we believe we can grow, and we can continue to add to it. And we're very excited about the opportunity to really have an LNG business and not just an LNG asset. So I think that's what's very exciting. And I will say on the other midstream stuff, it's a very competitive market. And the stuff that we've seen that's been priced reasonably is stuff that we typically don't want. And the stuff that we've looked at that we want is either not for sale or very, very expensive. And so we certainly are taking that into consideration. And I think most of you have enough confidence in us that this is a management team that's pretty thoughtful about how we make investments in these kinds of things. And we're looking to do -- we are certainly anxious to do something that builds shareholder value. But we're also very willing to be patient.

Joseph A. Householder

I'd just add to that one thing, too, is we're a very strong company with a very strong balance sheet. And where the 10-year debt is, is very low. And our after-tax cost of capital for borrowing money to buy something is pretty low. But as Mark said, we're going to be very disciplined about looking at things and make sure they were the right thing to do.

Rajeev Lalwani - Morgan Stanley, Research Division

Great. And just a quick follow-up. So you talked about the asset side. What about actually buying an existing company or sort of that idea?

Debra L. Reed

I'll ask Mark to add because I've already given some kind of my view. So I'll ask Mark to add...

Mark A. Snell

When you say buying an existing company, you mean as far as -- in which state.

Debra L. Reed

With a general partner or...

Rajeev Lalwani - Morgan Stanley, Research Division

Yes. Or rather than buying -- doing a piecemeal and buying assets to put into an MLP, maybe buy an actual company that has existing assets, kind of existing MLP or something else?

Mark A. Snell

Well, I get it. Look, I think exactly the same comment applies, which is, I mean, the valuation metrics around assets and existing MLPs is pretty much the same, which is the ones you really want are very, very expensive and the ones that look like they're reasonably priced, there's usually something wrong and something we don't want. So I think the same -- all the same caveats apply. But as Joe said, we're more than willing to move on something if we find the right thing. We just haven't found it yet.

Operator

And we'll go next to Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

I'm not going to ask you any more about the MLP. But just -- since a lot of my questions have been asked, just a few quick ones. Is there any interest -- you guys have previously been in merchant power, you guys have really walked away from that, et cetera. Given where prices are and things coming up for sale, do you guys have any interest at all in that? Or is that pretty much still off the table?

Debra L. Reed

No. I mean, really our model now and our strategy, I think that works very well for us and that we have plenty of growth opportunities within this model is to do long-term contract and infrastructure. And so merchant business and the volatility of the merchant business doesn't really work well with our other assets. And so if we could do a long -- a 20-year contract or something and build a plant, but I don't consider it merchant, yes, we would do something like that. But to be in the market, like what happened when our DWR contract expired, is not where we want to be.

Paul Patterson - Glenrock Associates LLC

Okay, makes sense. Just some real quick cleanup things. The Mexican taxing, did I understand it correctly that's mostly nonrecurring, that there really shouldn't be any impact going forward?

Joseph A. Householder

This is Joe. Going forward, it's $3 million to $4 million a year. It's 2% change in the tax rate on our pretax income, if not greater.

Paul Patterson - Glenrock Associates LLC

And then sundry items, the asset balance sort of increased again. Was there any impact on earnings for the quarter?

Trevor I. Mihalik

Yes. This is Trevor, Paul. Very limited there. On the sundry items, the increases there were primarily associated with the PBOP assets and the greenhouse gas allowances that increased there. So the PBOP assets and the pension assets increased by about $95 million and the greenhouse gas allowances were about $60 million and then we also had some workers' comp insurance increases there for about $40 million. Then included in there is also the Rabbi Trust. But year-over-year, that was about the same. So that was really the driver in the increase of the $263 million on sundry.

Paul Patterson - Glenrock Associates LLC

Okay. But I mean, for the quarter, was there an EPS impact?

Trevor I. Mihalik

No, there was very minimal impact really associated with it.

Paul Patterson - Glenrock Associates LLC

And then just finally, your stock has moved up a lot. Any thoughts of the stock split? I know it's kind of a cosmetic question, but just since I got you on the phone.

Debra L. Reed

I mean, people always ask us that question. I think when Berkshire Hathaway trades as it does, you kind of feel that most of the buyers can afford the stock as it is. And so unless there's some other compelling reason, it's not something that we spend a lot of time on most likely.

Operator

And we'll go next to Kit Konolige with BGC.

Kit Konolige - BGC Partners, Inc., Research Division

A couple of kind of cleaning-up questions. So on the dividend growth going forward. The comment was that we would potentially see a slightly faster rate of growth. Did I write that down correctly?

Debra L. Reed

Well, we had said before a 4% to 5% growth. And if you look at a 4% to 5% growth and you look at what happens when Cameron comes online with the earnings, you don't quite get to a 45% to 50% payout ratio. So we're looking at rather than wait and doing a 4% to 5%, and then waiting to have a step function increase when Cameron comes online, to smooth that a bit. So that should yield the dividend growth rate, that would be slightly higher than we would have done otherwise.

Kit Konolige - BGC Partners, Inc., Research Division

All right. Okay, fair enough. Okay. And your discussion of SONGS, it sounds as though your expectations are pretty low for any settlement. Is that a fair assessment?

Debra L. Reed

No. I wouldn't assess it that way. But I really can't talk about any settlement discussions. So I wouldn't conclude that it's not possible or that it is possible, I just really can't talk about any kind of confidential settlement discussions.

Kit Konolige - BGC Partners, Inc., Research Division

Right. How about in the absence of a settlement discussion, how long -- can you be any more specific about how long it might take until we get a fully litigated result?

Debra L. Reed

Well, I can tell you what the phases are. And there's 4 phases in the case. And we have a schedule for the first 2 phases, and we just heard that the first phase is already being delayed. It was supposed to come out in February. It will be delayed now until the end of March. And so we're thinking this will certainly take through this year and probably into next year if you just look at their schedule.

Kit Konolige - BGC Partners, Inc., Research Division

Okay. More CPUC delays, right? They never announce that it's coming sooner. And then one other area that I just jotted down. So on the impact of tax expense on the repatriation, is that going to be a steady impact in years going forward now? In other words, year-over-year, will there be any change in that?

Debra L. Reed

Let me ask Joe to handle that. The thing that I just would remind you all is this year, we did the IPO, so it was a little different this year and we repatriated about $200 million associated with that. Our plan called for us to repatriate about $300 million a year, henceforth. Joe, why don't you talk about the tax on that?

Joseph A. Householder

Yes. So I think what we said a year or more ago when we announced this plan was that it would go on for about 5 or 6 years and that we would have with earnings impact, which would be roughly $0.25 or up to $0.30 a share. It might move around a little bit, just depending on some issues around the tax rules, the way they work and with our other income. But it should be in that neighborhood for about 5 or 6 years, so pretty [indiscernible].

Kit Konolige - BGC Partners, Inc., Research Division

Very good. Okay. And one final area, just to get my thinking straight on this. The growth rate of 9% to 11%. Can you give us a sense of kind of what are the building blocks there? In other words, is that simply the kind of prior growth rate plus a CAGR that would get us to the addition of Cameron when it comes online? Or are there other things going on there?

Debra L. Reed

Yes. Basically we'll go through this as an update at the analyst meeting. But we showed you those charts last year that had kind of our growth rate through 2018, 2017. And then it showed, if you added Cameron to that, the 9% to 11%. That's basically what we're talking about. We basically take what our 2018 earnings would be on our base business, you added a full year of Cameron and thats what gives you kind of the 9% range. And then there's upside, as we showed you last year, in terms of additional opportunities that could get you towards that 11% range. And we'll go through those in detail at our analyst meeting.

Operator

And we'll go next to Mark Barnett with Morningstar.

Mark Barnett - Morningstar Inc., Research Division

I learned a new term today, MLP-able. Outside of the U.S., you've been doing obviously some really good building business down obviously in Central America, focused on Mexico. But I guess, maybe with that growing base of assets and maybe with a growing relationship, particularly with a partner like GDF SUEZ, do you see maybe some of these partnerships as a beginning of a larger platform for Latin America? And I guess, second part of that question would be I know your positions are already fairly strong. But is there any benefit to maybe a more formal agreement pursuing projects? Or is an ad hoc approach better suited?

Debra L. Reed

Yes. I mean, I will say that we're looking at some bids that will be coming up, and we're looking at partners that would be good partners for us for those kinds of bids. And that we -- as you can see with our Cameron facility and what we've done with our Renewables business, we are not at all opposed to partnering. And especially if you can create a bigger pie by partnering, we really like that. So I think there's every opportunity that we would look at partners in Mexico, especially if we want to get into, as we would like to, some of the gathering and processing and areas like that in Mexico, it would be ideal to have a partner to work with there. And then the same thing, South America, and I would say the same thing in the United States.

Mark Barnett - Morningstar Inc., Research Division

Okay. And maybe a further question on Mexico, in particular. I know it's still in progress and you mentioned the gathering and processing, and obviously gas infrastructure is kind of appealing. But do you think that there -- given some pretty, I guess, impressive growth fundamentals and investment needs, does electric distribution have any interest in the longer term for Sempra?

Debra L. Reed

This is something that I would just say we are watching, and that the thing that we're really watching is what happens with rate structures that really allows you to be competitive. And we think the electric businesses is a good business. They have a lot of capital requirements in that business in the long term. We have aging infrastructure throughout the U.S., so there's a lot of opportunity to invest in transmission as well. So there are parts of that business that we like a lot. And so I wouldn't rule it out. We happen to own the largest gas distribution company and we love the gas business. So with that, a lot of our growth is really focused on the gas side, as you see. But that doesn't mean that electric is not of interest to us.

Mark Barnett - Morningstar Inc., Research Division

Okay. And I guess, in particular, for Mexico, there's still, I guess, a lot of rate formalities as it were that have yet to be ironed out around electric distribution is my understanding?

Joseph A. Householder

Yes.

Debra L. Reed

That's correct.

Operator

And we'll go next to Joe Zhou [ph] with Avon Capital Advisors.

Andrew Levi

Actually, it's Andy Levi. And I apologize if the question was kind of asked because I see the headlines, but I was at a different meeting, so I kind of just got back. But just on the MLP front, would you guys consider purchasing? I know since you're on the headlines on Bloomberg that you'd purchase assets to create an MLP. But would you actually consider buying a small MLP to kind of jumpstart that process?

Debra L. Reed

Yes. We would consider that. What our focus will be on though is creating the greatest long-term value. And if we saw something like that, that was reasonably priced, we thought we could grow it with some other assets we have. And we would be particularly interested in something where if you combine the assets that they have with the assets that we had, 1 plus 1 would equal more than 2. And if we could find something like that, then yes, we would be open to that. Mark stated earlier that what's been shopped, usually if it's priced reasonably, it's not something we would have much interest in. And that a lot of the other things just seem already having every potential growth priced in. And so if it looks like it would be good for our long-term shareholder interest, we are absolutely willing to consider that as an option.

Andrew Levi

And I assume you have obviously the currency to do that, so...

Debra L. Reed

Yes.

Andrew Levi

Yes. I guess, that gives you some options, a better way to put it.

Operator

And we'll go next to Josh Golden with JPMorgan.

Joshua Golden

I'm so sorry for asking the question upfront. This probably isn't the best place to ask you. But can you talk a little bit more about the LNG, Cameron LNG terminal? So from the producer side, where exactly is this gas going to be coming from? Is this more Marcellus-Utica gas? Or is it more Eastern Texas-type of gas? And I guess, I'm just sort of thinking in combination, many years ago, you guys made the acquisition of EnergySouth and the storage assets down there. So I'm just trying to think about how all this works together. And really curious, where do you see the gas coming from for this terminal?

Debra L. Reed

Yes, let me ask Mark to answer that. But I just want to be clear on one thing. We don't buy the gas through the terminal. Our customers will be buying the gas through the terminal. Basically, our contract to the terminal is almost like a take-or-pay contract with the pipeline, where when the facility goes in service, whether they use it or not, we get paid and that they buy the gas and they sell the gas. So I just want to be sure that you understand kind of the structure before Mark answers your specific question. Mark?

Joshua Golden

Yes, I sure do.

Mark A. Snell

Okay, yes. Look, I think, well, this answer is going to sound a little bit like the current administration. It's kind of an all-of-the-above strategy. Our customers are going to acquire gas both -- there will be Marcellus gas that we expect to flow south into the facility and we'll also -- obviously the Texas production will flow there as well. And there could even be Midcon and other production basins that will flow into this facility. And if you think about our facility and the other LNG facilities that are in that region, even with and coupled out with the petrochemical businesses and the proposed petrochemical plants all in that Gulf region, this is going to be a very, very large area of consumption for natural gas, and so supplies will come from all over. All of the producing regions will end up supplying this region. And we're seeing that now. And it's actually -- that's what one of the things that's creating value for not only our storage assets, as you mentioned, but also some of our pipeline assets that you might not even think about. REX is looking like becoming more of a header system for the whole north part of the country. And that header system is going to feed both going north and south. So we do think there'll be some interplay with our other assets.

Joshua Golden

So that's interesting. Now just one follow-up. So if you look at the basis spread differential, it's really collapsed year-over-year and hence, all the feedback storage, et cetera. What do you think will happen to basis spread differential between north, south, et cetera? I mean, do you see those increasing again? Or how do you see that shaking out?

Mark A. Snell

I think because we have found gas in so many places across the country, and some of those places are so close to the consuming regions, basis spread has collapsed around the country. And I think what you're going to really see is -- and like all infrastructure, we do have a lot of pipeline infrastructure, it's just some of it is not going in the right direction. So as we make the incremental investments to be able to move gas in the direction that we need it to go, you're going to see the basis kind of reduced down to the tariff on those lines.

Operator

And we will take a follow-up question from Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Real quick. I'd like to turn back to the original -- one of the original businesses, the utilities in California. Can you just talk a little bit about how the agreement with the FERC on FERC transmission impacts revenues for 2014?

Debra L. Reed

Sure. Let me go through exactly what the settlement is, and then talk about the impact. So it's a multiparty settlement. It's uncontested. It sets an ROE at 10.05%. And it's based upon the actual equity as recorded on 12/31 of each year. It will go from September 1, 2013, to December 31, 2018. So that's gives you kind of the duration of this. And if you look at where we were at 11.3% ROE to a 10.05% ROE, that's something like $20 million to $30 million a year of impact in that production of ROE based upon the FERC assets, the FERC rate base that we have. And that has been included in our guidance. So the numbers that we gave you, we started having this effect in 2013. Once we knew a settlement was pending, we were booking to the settlement amount. And it's reflected in our 2014 guidance.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

So when you say it was in the 2013 numbers, meaning that full amount was, so there's no incremental year-over-year delta? Or was part of that '13 and part '14?

Debra L. Reed

Yes. Well, the only incremental would be as the rate base increases. But it was in '13 for the fourth quarter from September 1 forward when the prior rate expires.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. And on the O&M side at both utilities, I mean, you guys over the years have been one of the best, if not the best, operator at the utility level. Just curious what some of the operating efficiencies you've been able to find and how we should think about kind of directional trends from 2012 onwards for the next few years in terms of utility O&M.

Debra L. Reed

Well, I mean, I would say that we're always -- this is a constant improvement effort at our utilities, as you well know. And so last year, some of the efficiencies of operations were able to offset some of these [indiscernible] reductions in ROE and SONGS, to some extent. And we would see us continuing to work at that level of efficiency and looking for other opportunities to improve. What I will say is safety is our first priority, and we will not do anything that would reduce the safety of our service. And so that is the key focus for our people. But new technologies come in all the time. We have opportunities to change the way we dispatch workers, change the way we time appointments, change the way we use technology to answer customer calls, route customer calls. Those are the kinds of things we really focus on that can improve customer service, improve safety and reduce cost.

Operator

And we'll go next to Winfried Fruehauf with W. Fruehauf Consulting Ltd.

Winfried Fruehauf

Regarding Energía Costa Azul, what was the net income contribution in 2012 and '13 and also the fourth quarters of each year?

Debra L. Reed

Yes. We don't break it down. We share data at segment levels, Winfried, so we would not break it down to that kind of a level. You can kind of look at the Mexico segment and see.

Joseph A. Householder

We've decided it's relatively stable because it's under a long-term contract, so there's very little difference between '12 and '13. So it's the same, but we don't give that kind of detail.

Winfried Fruehauf

Okay. And another question, if I may. What was the total foreign exchange impact in 2012 and '13 and also the fourth quarters of each year?

Trevor I. Mihalik

Across all businesses, it was fairly small. I don't have the number right off the top of my head. But in the fourth quarters, it was approximately $5 million to $6 million in the fourth quarter of '14. But I need to pull the number to get that specifically for you and not much different from that for the full year.

Winfried Fruehauf

Okay. And that was negative?

Trevor I. Mihalik

That's right.

Joseph A. Householder

The dollar would strengthen.

Winfried Fruehauf

Yes, okay. Well, if you could maybe get back to me please with the numbers, that would be appreciated.

Operator

And we'll take a follow-up question from Kit Konolige with BGC.

Kit Konolige - BGC Partners, Inc., Research Division

Just a couple of items. On the 9% to 11% growth rate, to get back to that, what's the base EPS that you're using there? Is it the 2013 actual now?

Debra L. Reed

No. We'll go through that at the analyst meeting. I don't have all of that in front of me right now. We'll update all of that for 2014 through 2018, and then the show you 2019 at the analyst meeting. And I'd rather do it that way versus giving you pieces of information because I don't want to create confusion around that. And we'll have slides on all of that at the meeting.

Kit Konolige - BGC Partners, Inc., Research Division

Sure, okay. One other item, I noted that the Energen, according to reports, is selling Alagasco. You guys have been in that part of the world for a while. Do you have any interest in gas distribution in Alabama?

Debra L. Reed

We can't really comment on any kind of transactions like that.

Operator

That concludes today's question-and-answer session. Ms. Reed, at this time, I will turn the conference back over to you for any additional or closing remarks.

Debra L. Reed

Well, thank you, all for joining us today, and thank you for all of your questions. We look forward to answering more questions at our analyst meeting coming up at the end of March and going through a lot more detail with you at that time. In the meantime, if you have any questions that you need follow-up on, please contact Rick Vaccari or any of the people in our Investor Relations group to help you in the meantime. And we will see you at the end of March. Thanks.

Operator

Thank you. That does conclude our conference. You may now disconnect.

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