Sempra Energy Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 6.12 | About: Sempra Energy (SRE)

Sempra Energy (NYSE: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

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.

As of September 30, 2012, we have recorded regulatory assets arising from wildfire litigation costs pending regulatory approval of $326 million. Of this amount, $292 million is related to CPUC operations, while the remainder is related to FERC operations. In February of this year, FERC approved a settlement allowing for the recovery of wildfire-related costs extended through March of 2011. Each quarter, we must determine the extent to which it is probable that we will recover costs and be able to reasonably estimate the recovery. As we have disclosed previously, any negative assessment of the probability of recovery would likely have a material adverse effect on SDG&E's cash flows and results of operations.

If the commission fails to act, or it acts in a manner which results in a negative assessment of the probability of recovery or in a manner that affects our ability to reasonably estimate the amount of the recovery, we will record a charge against earnings at the time such conclusion is reached. As of September 30, this would have resulted in an after-tax charge to earnings of approximately $175 million. But to be very clear, we will continue to pursue recovery of substantially all of these costs and given statutory and regulatory precedent, believe it is probable we will be successful in those efforts.

Now moving on to Southern California Gas. Third quarter 2012 earnings were $71 million compared to $81 million in the third quarter of 2011. The decrease was primarily attributable to higher depreciation expense, with no increase in authorized revenue due to the delay in our GRC decision. Keep in mind that until we receive final decisions in the SDG&E and SoCalGas general rate cases, we will be recording revenues based upon 2011 authorized levels, plus an adjustment for recovery of incremental wildfire insurance premiums at SDG&E based on recent CPUC decisions for recovery of prior year's increased premiums.

Once the general rate cases are decided, we'll record the cumulative impact of the decision from January 1, 2012. In the event that a final decision is not reached until next year, the cumulative impact from the decision will be recorded in 2013 earnings, not 2012.

Now please go to Slide 5. At our South American Utilities, earnings were $40 million in the third quarter of 2012 compared to $50 million in the year-ago period. Last year's results included a $19 million nonoperating foreign currency gain related to cash held in Chile at that time. Third quarter 2012 earnings for the Sempra Mexico segment were $54 million compared with $47 million in the same period last year. The increase was primarily due to improved operating results across our businesses in Mexico.

Now, please turn to Slide 6. Moving on to Sempra U.S. Gas & Power, the natural gas segment lost $68 million in the third quarter of 2012. Excluding the $60 million charge related to REX, the segment lost $8 million. The loss in the quarter was driven primarily by lower natural gas prices affecting our U.S. LNG business. The decrease from the third quarter of 2011 was mainly attributable to lower natural gas and power prices, including the impact of the exploration of the CDWR contract which, as Debbie mentioned, expired on September 30 of the last year.

As you may recall, Kinder Morgan, a 50% owner of Rex, has agreed to sell its interest in the pipeline to Tallgrass Energy Partners. In the third quarter, as part of this sales process, additional market information became available that required us to reconsider the current value of our investment and as a result, we recorded a $60 million after-tax noncash charge. As I mentioned last quarter, we continue to expect to effectively recover our original investment in REX on a cash basis through a combination of distributions and tax benefits prior to the end of the existing contract period.

When the sale closes, which is expected to happen later this month, we will receive a $41 million cash payment from Kinder Morgan related to a tax make-whole provision in the LLC agreement. This will partially offset the impact of the charge on full year 2012 results by $25 million after-tax, which we expect to be reflected in fourth quarter results, assuming the deal closes.

The Renewables segment generated earnings of $13 million in the third quarter of 2012, up from $1 million in the same period last year. The increase was driven by the addition of solar and wind assets.

I am also pleased to announce that we are finalizing agreements with the Salt River Project, a utility in Arizona, to sell a 625 megawatt block of our 1,250 megawatt Mesquite natural gas fired power plant. We expect to receive a price of approximately $600 per kilowatt, which is in excess of our book value. The transaction is contingent on executing definitive agreements and receiving necessary regulatory approvals, and the deal should close by the first quarter of next year.

And with that, please turn to Slide 7 and I will hand the call back to Debbie.

Debra L. Reed

Thanks, Joe. Last month, Sempra Mexico announced plans to build a 510-mile pipeline project that will transport natural gas from the US-Mexico border south of Tucson, Arizona, to the Mexican state of Sonora to the northern part of the Mexican state of Sinaloa. This project, which should cost roughly $1 billion, will support Mexico's initiative to convert more of its electric generating capacity to natural gas. We expect to fund this project entirely through Sempra International's operating cash flows and Sempra Mexico’s ability to access external capital. The pipeline will be supported by a 25-year take-or-pay contract with the Mexican state-owned electric utility CFE, which will be denominated in U.S. dollars.

We expect the project to come online in 2 phases. The first phase should start operations in the second half of 2014, and we expect the second phase to be online in the second half of 2016. This project represents a great growth opportunity for Sempra International, and will add another asset with attractive returns to our portfolio of operations in Mexico.

Now let me provide you with an update on what we've been doing to move forward on our plans to develop a liquefaction facility at Cameron LNG. Work on the front-end engineering and design of the project is ongoing and should be done by early December. With that process complete, we will be able to file our formal FERC application later that same month. As you'll recall, we made our pre-filing with FERC in April. And that document, which was well over 1,000 pages long and contained detailed project and environmental information, paved the way for our formal FERC application. We've always planned to complete a full environmental impact study or EIS as part of our application to ensure that FERC has comprehensive information upon which to approve our project.

The completion of the engineering work will also allow us to go out for EPC bids in early next year, as planned, and we expect to get the bids back in the second half of 2013.

In September of this year, the Department of Energy announced that it was delaying the release of its study on U.S. natural gas export until the end of 2012. We continue to expect to receive a DOE non-FTA permit late this year or early next year, and we don't anticipate that the delay in the report will have a material impact on the overall time line of the project.

We expect to finalize negotiations on both our tolling agreement and our JV participation agreement by mid-2013, and continue to believe that we will have received all necessary regulatory approvals by the end of next year, at which point, we will begin construction on the facility.

Now let's go to Slide 8. I'd like to update you on some of the key regulatory proceedings at the California Utilities. As we mentioned earlier, we continue to await a final decision on our general rate cases and the current CPC calendar calls for a decision by year-end. However, as Joe mentioned, if a decision is not received by year-end, the retroactive impact of the decision back to January 1, 2012 will be recorded in 2013.

Turning to our cost of capital filings at SDG&E and SoCalGas, evidentiary hearings concluded last month and all briefs have been filed. A draft ALJ decision is expected by November 20, in time for us to receive a final decision as scheduled on December 20. The new rates set in this proceeding will be effective January 1, 2013.

As a reminder, for SDG&E, this cost of capital filing only covers CPUC jurisdictional assets. SDG&E's electric transmission assets are regulated by the FERC, which currently has an authorized return on equity of 11.35%. The currently authorized FERC return on equity is effective until September 2013. Our pipeline safety enhancement plan is proceeding on schedule. We continue to expect the decision on our PSEP in the first half of next year and continue to receive public comments from commissioners that our filing and past performance are viewed positively.

Finally, as Joe mentioned earlier, we did receive both the proposed and alternate decision on our WEBA request and we continue to expect that we will be permitted to recover substantially all these costs either through rate settlements with third parties.

Let's move on to Slide 9. At this point in the year, we would typically have good visibility on our full year results, but due to the delay in our general rate case proceedings at SDG&E and SoCalGas, we are not currently in that position. However, due to the strong performance across our businesses, we currently believe that assuming we receive a final rate case decision in 2012, our full-year earnings will be at or slightly above the high end of our prior guidance range of $4 to $4.30 per share. In the event that a decision on the GRC is delayed into 2013, we believe that full year 2012 earnings will be around the low end of that range. This full year guidance excludes the $239 million year-to-date charges related to REX and a $47 million year-to-date tax benefit related to company-owned life insurance policies, which we discussed on the second quarter call.

Now let's go to the final slide. We are on track to execute on our strategy and meet the goals we laid out for you in March. Through our sale of 1/2 of Mesquite, we will further reduce our exposure to merchant generation and we will redeploy that capital to areas of the business that fits better with our long-term strategy. Our operational results were solid again this quarter, and our ability to more than offset the loss of the CDWR contract shows the strength of our businesses. We are excited about our future prospects, and I'm pleased that we continue to find excellent growth opportunities as we've done with our new Mexican pipeline project.

With that, I'll stop and open up the call to take any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll now take our first question from Faisel Khan with Citi.

Faisel Khan - Citigroup Inc, Research Division

Just I had a couple of questions, one on LNG and then one on the Mexico pipeline. On the LNG liquefaction proposal, there was recently some statements made by a DOE official stating that he didn't think that the DOE would be granting non-FTA export license until 2014. And then he went on to say that there's really only 2 projects in the queue that are on track to meet all these requirements to get that approval by 2014. Can you just -- can you talk about a little bit like how this differs from -- why this differs from kind of what you're saying and that you expect the DOE will be both be looking at your filing in 2013 and maybe even later this year? Then I have a follow-up on the Mexican pipeline.

Debra L. Reed

Okay, sure. Well, let me address your first question and then we'll go to your second. In terms of some of the comments that have made on non-FTA permit and timing of that, there've been a lot of comments that have made in different presentations that have been made from members of DOE. I would say that one of the comments that was made was an error and actually there was withdrawal of that comment and I think it was related to the comment that you're referring to. What we're hearing is that the report will be out later this year. And that after the report is out, that there would be a comment period of about 60 days. And then after that comment period, the decision would be made regarding non-FTA. So we feel that we will be seeing that sometime in early 2013. Mark, I would ask if you have any additional comments you want to make on that.

Mark A. Snell

Yes, Faisel, it was unfortunate, but the comment that was attributed to a member of the DOE staff was actually not made by a DOE person. And it was made by an outside consultant that was speaking at the same event. And it wasn't really intended to be -- it was more of a reflection on market conditions, not on regulatory permit restrictions. And we really think it really has almost no bearing on our permit or any of the others that are being processed now through the DOE and the FERC. We expect to go forward. Yes, as you know that there has been a delay in the issuance of the DOE report. We don't expect that to affect our project. We're moving forward. We should have our full engineering study done by the end of the year and we expect to file our FERC permit sometime in late December, so with the full engineering study. So we're moving forward on this, and we really haven't -- we really don't expect this to be a big deal.

Faisel Khan - Citigroup Inc, Research Division

Okay, great. That makes it clear. My second question is on the pipeline development in Mexico. In the past, you've talked about dividend-ing out cash flows from your South American operations and taking a tax hit up here in the U.S. through repatriation of that capital. With the development of this pipeline, does that change how you're allocating your cash flow from these international assets into this project, or potentially the dividends you're receiving back from those assets in the U.S.?

Debra L. Reed

Well, as you will recall that we were planning, as you mentioned, to repatriate dollars back over the 5-year plan period beginning in late 2013. We're still planning to do that, and the amounts that we were looking at over the 5-year period we believe are going to be consistent with what we showed you in the 5-year plan. So we don't see any real change in that as a result of this pipeline.

Operator

And we'll now go to our next question from Greg Gordon with ISI Group.

Greg Gordon - ISI Group Inc., Research Division

So I just wanted to be clear on the earnings guidance. So presuming you get a decision from the GRC this year, which hopefully you will, your guidance at or above the high end of the range excludes REX, excludes the parent life insurance, but includes the tax benefit that you spoke in the third quarter at the utility operating companies, correct?

Debra L. Reed

That is correct.

Greg Gordon - ISI Group Inc., Research Division

Okay, I just wanted to make sure.

Operator

And we'll take our next question from Naaz Khumawala with Bank of America.

Naaz Khumawala - BofA Merrill Lynch, Research Division

I have a 5-part question on the wildfire case. Sorry, Steve made me say that. So actually, real questions that I have. One is on the REX write-down. Philips also took a write-down this quarter I know you guys know that. Their write-down, I think, was a little bit bigger than yours was. I don't quite understand how these determinations are made and if it’s the same pipe, is it just based on your forward projections on how this is done? And what more could kind of trigger a write-down past this point?

Debra L. Reed

Sure. Let me address it at a high level, and then we'll have Trevor or Joe kind of fill in more detail. What I would say is in going through the process of assessing this, is our best estimate and we consider all factors involved. There is a ROFR and at this quarter, we had information on the ROFR. We also had the opportunity to have discussions with Tallgrass and understand their kind of strategy long-term for the development of the pipeline and what they might do to change the operations, the flows on that pipeline. We did market modeling and had various models that we consider. And we did a full assessment of all of the data that was available to us, and put a significant amount of weight on the ROFR and made our determination of what we felt the value of the line was. In terms of in the future that we have to assess as information becomes available to us if that changes any of our modeling, if it changes our assumptions, if there was a sale by one of the parties, and we had information on the prices that pipeline share would sold at, whether it's a fourth sale, or if it's a really full open market sale. All those are things that are considered in terms of the valuation. And that's the process we went through and concluded that the level of $369 million for the value of the line was an appropriate level.

Trevor I. Mihalik

Naaz, this is Trevor. And just to kind of reiterate a little bit of what Debbie said here, again, we got the ROFR in the third quarter and so that was another market level input that we needed to consider in determining the equity value from an accounting perspective. We weighted that, that input, at about 2/3 of the value and then we utilized the other inputs that we used in the second quarter as about 1/3 of the value and that's because the ROFR was more of a level 2 input from an accounting perspective and the other unobservable inputs were level 3. And so in determining that, we came out with a fair value of approximately $369 million for the quarter. And so we disclosed that also fairly significantly in our Q.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Okay, great. And then on the Mexico pipeline, just had a couple of quick questions. One is how much Bcf a day of capacity will flow on that? And then when we think about kind of returns on the pipe, should we weight them more toward international returns or more toward the utility-like returns, if you can give firm perspective on that?

Debra L. Reed

Yes, let me just kind of go through the high-level of the pipeline and the returns. In terms of the pipeline, as I mentioned, it was going to cost about $1 billion. And it's a little over [ph] 500 miles. We are expecting returns on that pipeline that are slightly higher than what the ROEs are that we have authorized by our California utility. So that's the kind of returns that we would expect for this pipeline assets that are contracted with CFE for 25 years. And in terms of the Bcf a day, I'll have Mark talk about that.

Mark A. Snell

The pipeline is in 2 phases. The first phase is a little under 800 Bcf a day, and the second phase is a little over 500 Bcf a day.

Naaz Khumawala - BofA Merrill Lynch, Research Division

Okay, so 1.3 Bcf in total?

Mark A. Snell

Well, no. I wouldn't add it together. It's a little under 800 Bcf coming down to a certain point and then it gets sold [indiscernible].

Naaz Khumawala - BofA Merrill Lynch, Research Division

Okay, I see what you're saying.

Operator

And we'll take our next question from Kit Konolige with BGC.

Kit Konolige

So just to follow again on the Mexican pipeline, can you give us an idea then. Sounds like you will finance it at the project level. And so what -- how should we view how much equity you would have in that business, either parent level cash and net investment or even parent of level equity that would be attributable to that? And then if you could discuss a little bit what under the contract do you get dollars that can be repatriated immediately? Or is this generating more cash that's held overseas?

Debra L. Reed

Kit, Let me just try to give you a very high level and then I'm going to have Joe go into our thinking on the financing. At first, I would say, as you know, that we have a lot of debt capacity still in Mexico. And we've talked about that in prior meetings. And so that we have -- are looking at all the options for the financing of this and what ends up being the best for us in terms of the goals that we have and lower rates and security and all. So let me turn it to Joe and he will go through kind of where we are. Let me just also say that we haven't made a decision. I mean, we just really got the notification that we received these and so we're going to look at all of our options there. So Joe?

Joseph A. Householder

We're very excited to have this new project be part of our growth profile and the sources of the capital that we're going to use to fund it will depend on minimizing our cost, maintaining the strong credit quality we have and enhancing our financial flexibility, and part of that will be looking at the dividend as you mentioned. And as we begin to incur significant expenditures as we start to develop this project, we'll work on finalizing that approach and let you know as we know more about how we're going to do that. But it will produce dollars, but those dollars will be part of the retained earnings and then depending on how we finance it, we'll have to look at what we do to bring that money out. It doesn't immediately just come out. It obviously will be part of our whole Mexico franchise and we'll have to evaluate those dividends. But as Debbie mentioned earlier to Faisel's question, we will be continuing with the program of about $300 million a year into the near-term as we see that go on, unless something happens here in the election and we see a different tax regime.

Kit Konolige

Okay. And on a separate topic then, your guidance for 2012 now, assuming that you did get a decision in the GRC by the end of the year and, therefore, you’d then, I gather, be indicating you’d be at or slightly above the high end of the current range. But that's with what I calculate as something like $0.15 of the tax special item or kind of onetime sort of item. A, is that an accurate way to look at it? B, compared to at the Analyst Day earlier in the year, which segments are stronger and which are weaker than you had thought at that time?

Debra L. Reed

Yes, first, let me say that the special tax item that I think you're referring to, we had the -- we're taking out the COLI, which was not a tax item. We're taking out the REX, and that's what our guidance includes. And then we had the tax item at SDG&E this quarter, which is really not a special tax item. It's an ongoing change in how taxes are calculated for SDG&E. And so we should see that impact continuing into next year, some of it. Part of it, about $0.09 a share this year was retroactive to 2011, and the remainder of it was for 2012 and would continue, subject to no other changes, into 2013. So I just want to clarify that it wasn't a onetime item or the majority of it was not a onetime item.

Kit Konolige

Very good. Okay. And so then segments compared to the Analyst Day, which are doing better than you'd thought and which not as well?

Debra L. Reed

Yes, if you've kind of looked at our segments, SDG&E has had a very, very strong year. And that -- when we get a rate case decision, SoCalGas will have had a very strong year. I mean, we are booking based upon 2011 revenues with no attrition at those 2 utilities. And so -- and we are booking based upon the depreciation and the interest expense and all that we had in 2011, and that, that is much higher this year than it was actually in 2011, but we don't have any additional revenues we're booking for that until we get a rate case decision. So those 2 segments are doing extremely well. Our International segment is doing extremely well, and our gas and power segment is pretty much on track with what we expected.

Operator

And we'll take our next question from Rajeev Lalwani with Morgan Stanley.

Rajeev Lalwani - Morgan Stanley, Research Division

Just another question on Cameron. Assuming you don't get non-FTA approval, what then happens? Do you only do a train or do you do -- you just cancel a project? And then I have a follow-up.

Debra L. Reed

Yes, let me have Mark talk about that. I don't think there's much of a change in our view from what we've talked about before but...

Mark A. Snell

No, I think what we've said publicly is that the projects would be smaller, and that means this probably goes from 3 trains to 1 or 2 trains and we'd have to evaluate that at the time. But let me stress that none of the feedback we've gotten from the FERC or the DOE and none of the -- and the way are rules are written and what we expect to go forward and the rumblings we've heard about the report at DOE, we fully expect to get this thing permitted and moving it forward. So we don't think that that's going to be a -- that we're going to have to deal with that. But if we do, we do think that there's enough of a market with our partners in the FDA-approved countries already that we would just -- we would continue to do a project, but it would be smaller.

Rajeev Lalwani - Morgan Stanley, Research Division

Okay. And then in terms of the remaining merchant power assets, are you comfortable with the amount you have there now? Or are you still looking to monetize the remaining megawatts?

Debra L. Reed

Yes, thanks for that question. Just to clarify, our desire is to exit the merchant power business. We don't see that as part of our long-term strategy, and we've been doing that, and we've sold El Dorado. It's a utility we sold half of the plant we co-loaned with Occidental earlier. Now we've sold half of Mesquite to Salt River project and we have about 250 megawatts sold of the remaining block at Mesquite. So we are on the path to exit the merchant generation business. But as you can see from this transaction, that we were able to transact at about $600 per kW. So we're not in a big rush to sell, that we will find buyers that we can work with effectively to get good value for our shareholders from the assets.

Rajeev Lalwani - Morgan Stanley, Research Division

Great. And can I ask one more?

Debra L. Reed

Yes.

Rajeev Lalwani - Morgan Stanley, Research Division

In terms of the tax item at SDG&E going forward, is it just going to be a modestly lower tax rate than we've historically seen?

Debra L. Reed

Joe, do you want to comment on that?

Joseph A. Householder

Yes, sure. Essentially, this change in the rule will allow us to continue this going forward, but we'll have to actually do the calculations after we spend the funds and see what the repairs were. And so it's a little bit harder to predict what it will be going forward, but it will continue forward and if we continue to operate in the way we are, you might consider it to be a similar kind of an amount.

Operator

And we'll take our next question from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Just on the tax thing again, what would be the regulatory -- first of all, what was it exactly that happened? I guess, if you could just flesh it out a little bit more in terms of what the IRS has now determined? And I mean, was that unique to you? And also, just what will be the regulatory treatment with respect to your current regulatory proceedings? I mean, will this just be -- so that would go into -- somewhat would be incorporated into rates or how should we think of that?

Debra L. Reed

I'll have Joe respond.

Joseph A. Householder

Hey, Paul. So this has been an issue that's been going on for a long period of time. I mean when I arrived here at the company in 2001, people were looking at this issue and the IRS was auditing a lot of companies, the Big 4 were looking at a bunch of companies, trying to do this thing, and there was no guidance really. And there was a big question about whether certain repairs that were made should be deducted or whether they actually should be capitalized for tax purposes. And so some companies have early adopted this rule, if you will, without any guidance, and they're under audit. So each company will be a little bit different here. They didn't all take exactly the same treatment at the same time. We're following the Safe Harbor guidance that the IRS published late in 2011. We had to do a lot of work to study because we had to go back to the sort of beginning of time of all of these assets and these repairs and roll forward the study. And then we had to also make sure we have the systems to implement that and carry it forward. And the -- when you change tax bases like this, not through depreciation, it is normally a flow-through item for rate-making purposes. And that's why it's flowing to the bottom line here. And so that's how it's treated for rate-making purposes. And those kind of flow-through items we always have to forecast into future rate cases.

Paul Patterson - Glenrock Associates LLC

Okay. So would it be captured in these rate cases that you're currently dealing with?

Joseph A. Householder

No.

Paul Patterson - Glenrock Associates LLC

Okay. And then just a few quick housekeeping items. There's a U.S. Treasury grant receivable of about $181 million I see. And I was wondering, does that impact earnings? And when would we see it impact earnings?

Debra L. Reed

Joe?

Joseph A. Householder

Yes, that receivable, it doesn't impact earnings. It is a reduction of the basis of the assets. So when we get the receivable, it just reduces the basis of the assets that you're putting into service. And we're using that grant rather than the ITC. It's more efficient for us. And we expect to get that in the early part of the year. So the solar -- I'm sorry, some of the solar assets.

Paul Patterson - Glenrock Associates LLC

Okay, I got you. And then with the sundry assets, I've noticed that they've been increasing over -- really actually since the beginning -- since the end of 2010 and I just was wondering, the latest it seems to be $55 million. How should we think about that in terms of does it have an earnings impact and just sort of what's driving that?

Joseph A. Householder

Sundry assets, the increase from the end of the year until now is a couple of different things but one of the things is we have a portfolio of assets that are used to cover our various executive plans and other things that's in a rabbi trust. And those went up in value. So those actually do go to earnings. Some of the other changes where unamortized debt issuance cost and things like that but mostly the change was the rabbi trust going up in value.

Paul Patterson - Glenrock Associates LLC

Is that excluded -- is that part of the COLI thing or -- I mean, was that in earnings [indiscernible].

Joseph A. Householder

Yes, it actually -- some of those assets are in the COLI, some of them aren't, but it's to support our various deferred comp and other benefits.

Paul Patterson - Glenrock Associates LLC

So there's like a $55 million benefit in that, is that how to think about it in this quarter?

Joseph A. Householder

That one was not much. I'll see if Trevor has the actual number for the rabbi trust. In the quarter, again, there was about $15 million.

Trevor I. Mihalik

$17 million.

Joseph A. Householder

$17 million.

Paul Patterson - Glenrock Associates LLC

Okay, and then just finally, we have -- it's election day today, and I was wondering -- a real question here, perhaps not, but any thoughts about how either whoever wins the presidential election might impact you guys at all, if at all?

Debra L. Reed

I would just say that our history has been able to be able to work under any administration, and that I don't think either administration -- or either candidate has been very, very clear on their energy policies as part of the debate. So whoever gets elected that's one thing we'll work on with them from the very beginning of them taking office or continuing. But I think it's really not that big of an issue for us that both are very favorable on natural gas infrastructure and have made public comments to that degree. And so I think that we feel that we can work under any administration and look forward to doing that.

Operator

And we'll take our next question from Ashar Khan with Visium.

Ashar Khan

Sorry I joined late. Debbie, any -- I mean, anyway where you can handicap, I guess, you got another 2 weeks whether we get the rate cases here or no? Any kind of feedback or anything?

Debra L. Reed

It's very difficult for us to determine what's going to happen in the next. Actually we could theoretically get it through the end of November a proposed decision and they could call a special meeting in December and vote it out. They haven't typically done that, so we're looking at November 20th as kind of being the date. And if we don't see a proposed decision by November 20th, we would anticipate it to be next year. And it's unfortunate that the commission has just had a lot of issues on their plate, a lot driven by San Bruno, which has kind of caused their normal schedule to lapse a bit. And it's really hard for us to predict what is going to be the outcome. That's why we wanted to give you a heads up and let you know how it would be accounted for accounting purposes. We would get our dollars retroactively, but in one case it would come into 2012 earnings and in another case it will come into 2013 earnings, which theoretically shouldn't really make much difference, but...

Ashar Khan

Okay. So just to kind of like...

Debra L. Reed

And I would just add that just to be clear, we did not have those earnings in our 2013 guidance so...

Ashar Khan

Yes, that's what I was going to say is that if the case goes into 2013, right, then the 2013, the variance on the guidance is about $0.30. So that would mean 2013 earnings would be higher by $0.13 -- $0.30 from what you had projected at the Analyst Meeting, am I thinking through that correctly?

Debra L. Reed

I would say we're not going to give any information on guidance. I just wanted you to understand that we had assumed we will get the rate case in 2012 when we gave our guidance. And I'm not going to tell you what's going to happen in 2013. We will do that at the Analyst Meeting as we always do and typically we also on our fourth quarter call give you some indication. So we'll do that at that time and then we'll have a better picture on what the actual rate case outcome is at that time.

Operator

And we'll take our next question from Mark Barnett with Morningstar.

Mark Barnett - Morningstar Inc., Research Division

I guess just a quick question on the pipeline projects in Mexico. You've obviously hit a lot of the details on the current project that you've announced, but you said it's more of kind of a $2 billion total opportunity and that there might be some more beyond the announced project. And I was wondering, are all bids in for that remaining? And kind of how do you feel about your prospects for the remaining maybe $1 billion or so of investment?

Debra L. Reed

Yes. We've looked thoroughly. There were different segments that were biddable, 4 segments that were biddable and we elected to only bid on 2 of those and we got the 2 that we bid on. So as far as we're concerned for this, the full length of the pipeline, we got the 2 segments that we had bid on. We received the go ahead on those.

Unknown Executive

And that's $1 billion. Just $1 billion.

Debra L. Reed

And that's $1 billion, yes.

Mark Barnett - Morningstar Inc., Research Division

So there are no other projects that could be announced later on from this?

Debra L. Reed

Not from this solicitation, but obviously Mexico is doing so much to change from an oil-based economy to a natural gas-based economy, so it's a great growth area for us. But in this solicitation, again, there will be no more.

Mark Barnett - Morningstar Inc., Research Division

Okay. And one just minor thing. I missed your comment on the mitigation payment from Kinder and maybe around some of the timing and maybe an earnings impact from that?

Debra L. Reed

As Joe mentioned, that there was a $41 million payment that we would receive in fourth quarter most likely assuming that the deal closes. And that would have an earnings impact that when we took out the REX amount and kind of looking at our guidance, we take out both the impact of that and we take out the write-off for that. So as we're giving you guidance of the $4 to $4.30 range and where we would be depending on the GRC, we've taken into account the potential of that payment. And not including it in the guidance estimates.

Operator

And we'll take our next question from Winfried Fruehauf with Winfried Fruehauf Consulting Ltd.

Winfried Fruehauf

I have a question on the accounting treatment of repairs on the IFRS. Does it make a difference if the repair not only restores the asset to the pre-repair value, but results in a betterment; either in terms of life extension or higher quality, higher capacity or not?

Debra L. Reed

I'm not sure that I understood your question clearly. It was a little muddled here. But I think it had to do with the IFRS and...

Unknown Executive

The IRS treatment of this. And really under the Safe Harbor, it just really gives guidance as to what amount of the line can actually be subject to capitalization or what amount of the line is subject to really expense based on the repair. And so that's what really the IRS is giving guidance on is even though that the repairs may not add longevity to the line or increase the capacity of the line, you're still allowed to capitalize a certain amount of the repairs and that's what this Safe Harbor ruling does, it allows you to capitalize some of the amount that we historically would have expensed.

Joseph A. Householder

Winfried, this is Joe. I understand what you're saying and those betterments and all those rules are kind of the old way that the IRS looked at these sort of things. What they've done with these rules is they've tried to define what a unit of property is, so they're looking at a certain number of feet or miles of pipe or in this case, a transmission line or distribution line. And if you only repaired a certain amount of that, and it's less than the whole unit, then you get to expense that as a repair rather than capitalize it. And so that's what this has to do with and it's kind of getting away from a little bit betterment language that you're referring to.

Winfried Fruehauf

Okay, that's helpful. The other question I have is on the largess at natural gas resulting from lower natural gas prices which impacts your LNG business, is there a metric that would allow one to determine the impact for, say, a $0.10 up or down change in natural gas prices, the impact on LNG?

Debra L. Reed

Yes, we generally use for the LNG business a rule of thumb of $13 million per dollar change in gas prices, is what we traditionally use as a rule of thumb for that. And that applies to the LNG business. There's also some variability in some of other businesses, but those businesses depend on what our hedge positions are. I know they are not so easily done by a rule of thumb, but for LNG about $13 million per dollar change.

Mark A. Snell

And SoCal board of price was down $0.66 from what it was at the end of last year and that's what's causing this $8 billion or $9 million effect.

Debra L. Reed

I'll remind you though that for our utility businesses, we are not at risk for any of the commodity changes so gas price impacts are really in our U.S. gas business and our International for the LNG so.

Winfried Fruehauf

And this $13 million, is it pretax or after-tax?

Debra L. Reed

Pre-tax.

Unknown Executive

After-tax.

Debra L. Reed

After-tax.

Operator

[Operator Instructions] And we'll go now to our next question from Vedula Marti with CDP Capital.

[Technical Difficulty]

Operator

And it appears there are no further questions at this time. Ms. Reed, I'd like to turn the conference back to you for any additional or closing remarks.

Debra L. Reed

Well, I again want to thank you all for joining us this morning. And if you have any further questions, please feel free to contact Rick or Victor and have a great day. Thank you very much.

Operator

And ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

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