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Sempra Energy (NYSE:SRE)
Q1 2019 Earnings Call
May. 7, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. We are about to begin. Good day and welcome to the Sempra Energy First Quarter 2019 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Faisel Khan. Please go ahead.

Faisel H. Khan -- VP of IR

Good morning, and welcome to Sempra Energy's First Quarter 2019 Earnings Call. A live webcast of this teleconference and slide presentation is available on our website under the Investors Section.

Here in San Diego are several members of our management team, including Jeff Martin, Chairman and Chief Executive Officer; Joe Householder, President and Chief Operating Officer; Trevor Mihalik, Executive Vice President and Chief Financial Officer; and Peter Wall, Chief Accounting Officer and Controller.

Before starting, I'd like to remind everyone that we'll be discussing forward-looking statements 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'll be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures.

I'd also like to mention that the forward-looking statements contained in this presentation speak only as of today, May 7, 2019, 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 4, and let me hand the call over to Jeff.

Jeffrey Walker Martin -- Chairman & CEO

Thanks a lot, Faisel. I'd like to thank everyone who attended our Investor Day here in San Diego. We appreciated having the opportunity to provide a comprehensive update on our strategy and capital plans, and enjoy taking many of you to visit our LNG facility in Baja, California, as well as SDG&E, where we highlighted our wildfire mitigation program and showcased tour (ph) of the California utility assets. We hope you came away from our conference with the following. First, we have a sharper strategic focus; second, we've improved our capital discipline; and third, we are investing in a high performance culture. Since our Investor Day, we held our internal Top 300 leadership meeting, leaders across our company came together here in San Diego to discuss steps we're taking to better align our 20,000 employees to directly support our strategic mission of becoming North America's premier energy infrastructure company. There was a great sense of energy among the team as we set our course for the next year and beyond.

From an execution standpoint, we continue to make progress on our goals. Just last month, we completed the sale of our wind assets, which brings the total cash proceeds from our renewables to midstream divestitures to approximately $2.5 billion, well above market expectations. Next, our focus is on successfully completing the planned sale of our South American businesses, which we're targeting to close around the end of this year.

Proceeds from our asset sales will be used to advance our strategic mission by funding growth, while also strengthening our balance sheet by paying down parent debt. Now looking forward, Sempra is well-positioned, our businesses at the intersection of two key trends that are transforming the energy markets, the transition toward cleaner energy which is happening market-by-market and the U.S. is growing dominance in the global energy markets.

We expect our assets to play a key role in further in both of these trends, which in turn should create jobs, both in the United States and Mexico, bolster the economies of both countries, and drive future value creation for our shareholders.

Before handing it off the call to Joe, I'd also like to highlight that we are affirming our 2019 adjusted EPS guidance range, as well as our 2020 EPS guidance range.

Please turn to the next slide where Joe will discuss how we are executing on our operational goals.

Joseph Allan Householder -- President & COO

Thanks, Jeff. Before touching on some of the legislative discussions happening in California on wildfire risk, I would like to mention that last week the CPUC issued a favorable proposed decision on SDG&E's wildfire mitigation plan, enabling us to continue to improve our industry-leading program.

Now on the legislative front, we're pleased with Governor Newsom, and the strike force's leadership and their proposals. The most important aspects are mitigating the threat of wildfires through measures such as increase vegetation management, advancing emergency response to minimize damage if an event occurs, and defining proposals that can help ensure healthy utilities to achieve California's greenhouse gas reduction goals.

We believe the strike force's recent recommendations of liquidity fund, a wildfire fund, and changes to inverse condemnation, help narrow the focus of the Blue Ribbon Commission. We are actively engaged to help ensure that our customers and our shareholders' interests are addressed, and that our existing wildfire mitigation efforts are recognized. We're optimistic that effective legislative solutions could be introduced and approved this summer.

Although positive headway is being made, the current regulatory environment and threat of wildfires in this State are factors we must take into account in our regulatory filings, including the cost of capital proceeding.

Please turn to Slide 6. This CPUC cost of capital proceeding is very important to our two utilities, because our currently authorized return on equity numbers were last updated in July of 2017, and where were the result of a two-year extension from our last cost of capital proceeding approved in 2013. A lot has happened since 2017, and even more so since 2013.

Over this time period in California, customer needs, state mandates, energy goals, the environment, the regulatory construct, have all can change considerably. They've had a corresponding and material impact on the risk profile of California industrial and utilities.

Our cost of capital applications reflect this shift in risk and the higher ROEs are designed to help ensure access to the capital markets, specifically our request for focused on, returns that are commensurate with the increased risk of operating in California, investment grade credit ratings to preserve reasonable rates for customers, and maintain access to capital to continue investing in safety and reliability, and financial stability.

With this in mind, we requested first; an increase to our authorized ROEs, at SDG&E, we requested a base ROE of 10.9%, plus a 3.4% adder, for a total of 14.3%, an increase from our currently authorized ROE of 10.2%. We arrived at the wildfire adder by estimating risk associated with potential unrecoverable wildfire liability, premiums required by insurers and premiums required by investors in our catastrophe bonds. At SoCalGas, we requested an ROE of 10.7% compared to its currently authorized ROE of 10.05%.

And second, an increase in our authorized capital structure to 56% equity for both utilities, which has been our average actual capital structure over the past five years, and puts us within the range of debt ratios for Moody's A rated regulated electric and gas utility companies.

We believe our ROE applications are appropriate based on our financial modeling, input from external consulting experts, and taking into account the current capital markets and regulatory environment. We also believe the applications will help to ensure the credit worthiness and financial integrity of our California utilities.

For additional perspective, our base ROE request are similar to our authorized ROEs prior to 2012, which were around 11%. We submitted our FERC cost of capital filing for SDG&E in October of last year, which included a proposed ROE of 11.2% compared to our current ROE of 10.05%.

In terms of timing, settlement discussions have started and are expected to go through the second half of the year. Our requested FERC ROE increases clearly lower than our proposed CPUC ROE increase. This is primarily due to the fact that when these applications were filed, events that have occurred since that time and most importantly differences in the probability of cost recovery between the two regulatory jurisdictions.

Regarding our 2019 GRC filings, based on the activity we've seen, we continue to believe we'll receive a proposed decision from the CPUC in mid-2019, with an effective date of January 1, 2019. Southern California Edison recently received their proposed decision, but from a timing perspective, each rate case is assessed on an individual basis, and has led by different commissioners and administrative law judges. We continue to believe our proposals are in the best interest of all stakeholders involved, with a focus on safety and reliability for our customers.

Please turn to the next slide. Shifting to our Texas Utility business. We're happy to report the settlement has been reached with key stakeholders in Oncor's proposed acquisition of InfraREIT and Sempra's proposed acquisition of a 50% interest in Sharyland, the last regulatory steps in the transaction, our approval and a final order from the PUCT. This is consistent with our previous timeline, and we would expect to close the transaction in mid-2019.

Now please turn to Slide 8. I'd now like to spend a few minutes discussing our infrastructure businesses. Let me start with Cameron. As you'll recall at our Investor Day, we were able to raise Sempra's projected annual run rate earnings guidance range for Cameron LNG Phase 1 to $400 million to $450 million. Train 1 continues to achieve key milestones to support its timeline and most recently, we introduced feed gas in mid-April.

We expect to begin producing LNG from this Train shortly and began recognizing earnings in mid-2019. Based on updated disclosures, the EPC contractor now expects Train 2 to produce LNG in Q1, 2020, and Train 3 to produce LNG in Q2 of 2020 due to a longer construction and commissioning schedule.

Moving on to our development projects both ECA and Port Arthur recently received non-FTA approval to export LNG. Additionally, Port Arthur received FERC authorization to site construct and operate the LNG facility. These approvals bring us one step closer to reaching FID for these important projects. Related to IEnova, we're still targeting commercial delivery of natural gas at the marine pipeline in the second quarter of this year.

The terminal businesses, IEnova announced two new capacity contracts with a global integrated oil company. This included an additional contract for 740,000 barrels of storage at the previously announced Manzanillo marine terminal development project, as well as 290,000 barrels of capacity at a new storage terminal project in Guadalajara. This new Guadalajara terminal is their seventh terminal project, and one of 12 projects currently in development or under construction.

Please turn to the next slide, where Trevor will review our financial results.

Trevor I. Mihalik -- EVP & CFO

Thanks, Joe. Earlier this morning, we reported first quarter GAAP earnings of $441 million or $1.59 per share. This compares favorably to first quarter 2018 earnings of $347 million or $1.33 per share. On an adjusted basis, first quarter earnings were $534 million or $1.92 per share, this compares favorably to our first quarter 2018 adjusted earnings of $372 million or $1.43 per share.

Please turn to Slide 10, where I'll discuss the key drivers of our quarterly results. The variance in our first quarter 2019 adjusted earnings when compared to last year was affected by the following items; $79 million of higher equity earnings at the Sempra Texas Utility segment, resulting from the acquisition of our interest in Oncor in March of 2018; $35 million and $31 million at SoCalGas and SDG&E, respectively related to the January 2019 CPUC decision, allocating certain deferred income tax balances to shareholders. This benefit was included in our 2019 adjusted guidance; $23 million of higher earnings from South American operation, including $15 million at Peru due to an increase in rates and lower cost of purchased power and $7 million of higher earnings combined from both utilities, as a result of lower depreciation due to the assets classified as held for sale; $21 million in lower expense related to foreign currency and inflation effects, net of foreign currency hedges in Mexico, and $15 million of higher earnings at Sempra LNG from our marketing operations, primarily driven by changes in natural gas prices, which was offset by $18 million of lower operational earnings at SDG&E comprised of $27 million of lower CPUC based operating margin in 2019, due to the delay in the 2019 GRC decision, while absorbing higher operating costs, offset by $9 million of higher earnings from electric transmission operations; and $25 million of higher costs related to increased net interest expense and mandatory convertible preferred stock dividends at the parent, driven by the Oncore acquisition.

Please turn to Slide 11. To recap, we continue to execute on our path to premier. Looking forward, our key priorities are; executing on our $25 billion five-year base capital plan; optimizing our capital allocation with a focus on strengthening the balance sheet; advancing our LNG development opportunities and engaging with stakeholders in key regulatory and legislative proceedings at our U.S. utilities. We believe our strategic mission and disciplined capital allocation plan should help us reach our operational and financial goals, well into the future.

With that, we'll conclude the prepared remarks, and start to take your questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question will come from Greg Gordon with Evercore ISI.

Greg Gordon -- Evercore ISI Institutional Equities, Research Division -- Analyst

Hi, guys, how are you doing?

Jeffrey Walker Martin -- Chairman & CEO

Good morning, Greg.

Greg Gordon -- Evercore ISI Institutional Equities, Research Division -- Analyst

A couple of questions. I think, obviously the quarterly earnings were significantly better than consensus, and I think that you -- utility analysts, no matter how long they've been doing this. And I've been doing quite a while often at time, hard time with the quarterly -- just given how the regulatory model in California causes things to be extremely lumpy sometimes in this case it was the the utility income tax benefit that was $66 million positive on the quarter. I know that you put that -- that was also you footnoted that was also in your full-year guidance range that you gave at Analyst Day. But can you just, it's probably not a recurring item, even though it's considered an ongoing item. So how do we bridge to 2020 to the growth guidance that you gave for SDG&E and SoCalGas? What are the sort of, not in specific mathematical terms, but in general terms that sort of replace that and offset it, so that you can show growth despite that item being sort of a one-time thing?

Jeffrey Walker Martin -- Chairman & CEO

Well, thanks for that question, Greg. And obviously, I think there's a number of big levers in front of us for 2019. And you can probably list a lot of these, but obviously, we're quite focused on getting our GRC approved for both SoCalGas and SDG&E. You recall that the year one step-up in our filed request for SoCalGas was close to a 20% step-up in a 10% step-up in the attrition for SDG&E. And then in the outer years, SDG&E is roughly 5% to 6% and SoCalGas is 6% to 7%. So the outcome of the GRC is important both for 2019 and 2020, and I will remind you that in the reported results for Q1 we held, there are no additional attrition revenues above what we got in 2018. So that should lead to some form of understatement for Q1. Secondly, you recall that we've got our FERC ROE pending, I think we requested 11.2%, it's over 100 basis points above where we're currently at, the expected effective date for that FERC decision independent of -- when this can be rolled upon is the 1st June in 2019. And then, obviously, the cost of capital proceeding at the PUC is really, really foundational to what we're trying to accomplish and in our base plan, we've requested a 10.9% number for SDG&E, you followed us long enough, you recall in the 2008 to 2012 timeframe, it was slightly higher than that. I think it was around 11.1%. So we think that's adequate and you did note that we have a 3.4% at or relative to whether the reforms that we're expecting this summer adequately put in place, the same number for SoCalGas is at 10.7% ROE. So in general, that there is going to be some moving pieces in '19, but our ability to execute well around those regulatory initiatives will have a big impact on 2020.

Greg Gordon -- Evercore ISI Institutional Equities, Research Division -- Analyst

Thanks. My second question, bit more general, the Governor's framework is released by his -- I think you called the strike team or strike force contemplates several ideas to solve the wildfire, the structural wildfire problem, and one of them is the idea of this catastrophic wildfire fund, and the understanding is that multiple constituencies would be asked to potentially contribute to capitalize that including the state, but also including the utilities and that would create a buffer between utility balance sheets and potential future wildfire claims, such that inverse condemnation would essentially in many ways be immunized. And then if you see deal with fault later, I mean, how do you contemplate that -- is that a viable outcome for you because in some ways, I think investors look at it, and say well that's a little bit frustrating from a Sempra specific perspective, since you have best-in-class wildfire safety provisions, you haven't had a fire in 10 years and yet you might ask to be contribute some amount of this fund. In the long run, it might be in the best interest of your shareholders to contemplate that, and then on the other hand, you have the best-in-class safety record. So can you talk about how you're thinking about the evolution of this negotiation and what that might look like?

Jeffrey Walker Martin -- Chairman & CEO

Yes, it's a very thoughtful question. Let me try to do this, I'm going to give you a couple contextual comments first, and then I'll talk about some of the levers that could be put in play that would bridge that buffer that you referred to. First off, we probably will stop short of forecast and an outcome. And I can say across our management team, we have growing optimism that we'll get some things done this summer, there will be adequate. First off, I commented on this, on the Q4 call, the Governor Newsom has really shown some strong leadership, and I think one of the things I'll try to focus on, Greg is, up and down the state, all the right people that you'd expect to be at the table are highly engaged, which I think is promising. Secondly, you referenced the strike force report, but it does lay out a roadmap for preventing future wildfires in the future, and this is a point you made a comment on SDG&E, we've been a leader in this regard, we've been recognized nationally. So I think that, it gives us some credibility to be at the table. And then thirdly, the commission that was established under SB 901, as this report due to the legislature on July 1, I think that will be an important thing for all the investor-owned utilities and its investors to track, but there are three key working groups out of that commission now focused on utility costs recovery standards, wildfire funding mechanisms, and insurance affordability and the heart of your question, goes to this issue of wildfire funding mechanisms. And I would say this, independent, first off, we think it's a good idea to have this type of fund in place, I think it provides confidence to the market, it protects the utility balance sheet, and just as importantly, it gives people who have incurred damages Greg, access to liquidity, which I think inspire some confidence in the marketplace. But the mechanism by which that funding level is met and the funding levels determined continues to be in play. I don't want to speculate too much except to say that, I know that the reduction of the subrogation rights of insurers that provide wildfire insurance to consumers is actively under consideration also know that there is a variety of things in the existing rate making formula in California, such as the Department of Water Resources bonds, which are rolling off here in the short-term. So there's going be some headroom in existing rates relative to how we might raise those dollars, and like you, we've also heard some of the discussions around potential equity contributions, it's probably quite frankly too early to speculate on that, except to say that we are certainly significantly small fraction of the state in terms of exposure. We have invested $1.5 billion to-date in hardening our back country, in our vegetation management programs, we spent another $300 million. So around fire science, our risk fuel content in the back country, it's something like that came to the fore, we certainly think that any contributions from us should recognize the point that you made, which we're in a materially different situation.

Greg Gordon -- Evercore ISI Institutional Equities, Research Division -- Analyst

Thank you, very clear. Have a good morning.

Jeffrey Walker Martin -- Chairman & CEO

Thank you, Greg.

Operator

Our next question will come from Steve Fleishman with Analysts and Wolfe Research.

Steven Isaac Fleishman -- Wolfe Research, LLC -- Analyst

Hi, thank you. Excuse me. Turning to -- good morning -- to Cameron. Could you just, first of all, clarify the dates are -- first LNG dates. So in terms of actually turning it into earnings producing asset is that like three months after six months after, what is a rough timeline for turning it commercial?

Jeffrey Walker Martin -- Chairman & CEO

Yes. What we usually look for is, it's usually four to six weeks after you get first LNG to get to substantial completion, as well as earnings.

Steven Isaac Fleishman -- Wolfe Research, LLC -- Analyst

Okay. And then, I know this isn't an issue by 2021. But just for 2020, how should we think about the delay in terms of your guidance range?

Joseph Allan Householder -- President & COO

Well, I think in your -- my prepared remarks, we talked about the fact that there's really no change, I mean frankly you go back to the analyst conference and we were looking at different contingencies for the year. We build in the expectations of a potential delay like this, the 2021, I think to your point, Steve is still when we expect full run rate earnings and you recall that at our Investor Day, we raised our expectations around that to $400 million to $450 million.

Steven Isaac Fleishman -- Wolfe Research, LLC -- Analyst

Okay. And then maybe, just switching gears on to California wildfire fixes. So all the right people together, et cetera, just do you think it's feasible to get done by this July timeframe? Are you more focused on just by the end of the session? And what will kind of -- what are you keyed off of to kind of say that this will get done?

Jeffrey Walker Martin -- Chairman & CEO

So we're -- actually entertaining some of the key stakeholders in Sacramento here in San Diego later this week, actually have a group of senior folks in administration touring our Wildfire Science Center here at SDG&E, which we think is positive. All the right conversations being held, we certainly think Toni Akins, who's from San Diego has a very important role to play in the Senate, the Governor's got the right folks on it Guggenheim is an independent financial advisor, they've been meeting with all the credit rating agencies, in fact some of the agencies has actually been out to Sacramento. So we think to your original point, all the right folks are at the table. I continue to be very key to offer this July 1st date, which is a date that the Blue Ribbon panelists to make their reports to the legislature, which I think is important. And then obviously, there has been a commitment to try to get a bill, that is comprehensive to the legislature, the middle of July, which I think is the second data point to follow. But look, I go back to the point, Steve, but this is the fifth largest economy in the world. We have had a premium regulatory climate here for several decades. I think there is a growing recognition in all my conversations that they understand the value of having A rated balance sheets from the investor-owned utilities. I think that we remain optimistic that we'll get something done.

Steven Isaac Fleishman -- Wolfe Research, LLC -- Analyst

One last quick question, just on the GRC. So we did finally getting Edison GRC, and I guess some of the issues there were mixed. But I know you filed your GRC, I think was the first one done under the ramp filing mechanisms. So I guess the question really is, how should we view the Edison proposed decision, as a barometer at all for yours?

Jeffrey Walker Martin -- Chairman & CEO

I'll make a couple comments and see if Joe wants to add some. But internally, Steve, the way we've talked about it is apples and oranges, right? So this risk assessment program that we use for our rate case really went into all the fundamentals of how you rank a hierarchy of risk operationally in your service territory. And then you guys have that to expected capital spending, right? To make sure that you end up with a different risk mitigated set of outcomes. If you look at the backdrop, that the commission's reviewing our ramp-based GRC that backdrop is around how we take risk out of system and move toward more constructive regulation. So I'm not sure how much press (technical difficulty) assigned to the Edison case but Joe do you want to add anything about how you're thinking about our rate case?

Joseph Allan Householder -- President & COO

Sure. Thanks, Jeff. Hi, Steve. I think you have to consider a few things, when you think about it. First, each rate case filing is very different, they have different assigned commissioners, different staffs, different ALJ,s. We've already talked about the ramp, I don't need to repeat that, but our filing incorporate safety and reliability spending as directed by the PUC, a large component of the filing for SDG&E was including additional wildfire mitigation efforts that include accelerating the hardening increased, vegetation management, above and beyond what we have to do additional fire prevention technology. And if you look at the wildfire mitigation plan that we have, that was just approved there's little additional capital, because most of its already incorporated in this GRC ramp request. And if so, kind of the same thing., it's a continuation of integrity management for transmission, distribution and storage. So we think we have a very thoughtful filing around safety, reliability and most of all importantly affordability for our customers. So we think as Jeff said, there are apples and oranges.

Steven Isaac Fleishman -- Wolfe Research, LLC -- Analyst

Thank you.

Jeffrey Walker Martin -- Chairman & CEO

Thanks, Steve.

Operator

Next we'll go to Julien Dumoulin-Smith from Bank of America.

Julien Patrick Dumoulin-Smith -- BofA Merrill Lynch -- Analyst

HI. Good morning. Can you hear me?

Jeffrey Walker Martin -- Chairman & CEO

Good morning, Julien. You're loud and clear.

Julien Patrick Dumoulin-Smith -- BofA Merrill Lynch -- Analyst

Excellent. So perhaps just to clarify a couple of things that have already been followed up on here. How do you think about the wildfire mitigation plans and some of the responses in the proposed decisions that came back of late -- on the ALJ side. First, how do you think about translating a wildfire mitigation plan into some form of prudency, and now given the way the things have been developing, how do you think about clarifying that from a legislative perspective, obviously, this is one nexus, I'd be curious on your perspectives?

Jeffrey Walker Martin -- Chairman & CEO

Yeah. I'll make two comments in that regard, and Joe you feel free to come in behind me. But you recall that our wildfire mitigation plan was focused on fire hardening, vegetation management, increase in our aerial support, so we have the 24 hour capability with night time flying helicopter. And then you may recall, Julien, we've got 177 weather stations in the back country, six of those will be retrofitted as part of our plan, and we've asked for an incremental $100 million to $200 million associated with our mitigation plan for 2019 and that augments what Joe covered because there's a fair amount of capital just in our ramp-based GRC filing. So as you think about that contextually then you move over to how you might think about assign liability. What we're trying to do is move away from some type of discretionary standard, right? So if the goal is to make sure that you're substantially compliant, the whole goal of having this liquidity fund set up is to meet the needs of those people who have incurred losses. Separate and apart from that, you recall Julien, that the commission always retains discretion regarding penalties, if they think that there should have been a different standard applied. So what we want to move away from is this idea of a discretionary standard where someone's interpolating how well you have complied with your established wildfire mitigation plan.

Joseph Allan Householder -- President & COO

Yes, let me just add on to that. H, Julien. Look, I think that, I'm going to go back up to a different level. We really applaud the work of the governor in his leadership and trying to address this. He clearly recognizes that healthy utility companies are a key component of us providing clean, safe and reliable energy. And in order to have healthy utility companies, we have to have certainty of recovery, right we have to, and that includes cost in operating our business and those incurred as a result of the application of inverse, if we are operating in the normal course. So his strike force has laid out a path, where The Blue Ribbon Commission and the California legislature to achieve that, we think that's the way, and as Jeff said we need the certainty, and if you were to look at our U.S. Supreme Court filing, it goes through all of this. Right? We have to have certainty of recovery and you can have a taken. So I think this is the point we need to make.

Julien Patrick Dumoulin-Smith -- BofA Merrill Lynch -- Analyst

And then just turning back very quickly to the McDermott side of the equation. Just curious, are there ongoing negotiations are just to clarify, after some of the commentary last week here about the status of the project and not necessarily related to the timeline, but just cost and even in that there. Obviously there's a lot of activity on their side of the equation. How do you think about your leverage in the situation to ensure not just timely completion, but also completion on budget, as it stands today?

Jeffrey Walker Martin -- Chairman & CEO

Let me take that, Julien. I think look for all of you, the most important thing to recognize is that this project is days away from beginning to produce LNG and start delivering it to our customers, and Cameron LNG and the EPC contractor have common goals and getting this world-class project completed safely and reliable. And I want to kind of remind you all that Sempra risk manages project and the imminent start up is very exciting for a few reasons. One, we have a very low cost, world-class LNG project that has created substantial value for the shareholders; two, the high return asset that we have is a very high return asset, it's going to begin producing earnings very soon. Cameron LNG, the business is very strong, we have strong partners, we have strong contracts and that supports our long-term cash flows from this business. So remember we put in our old project, we're going to get like $12 billion of cash flows out of this thing, and there have been ongoing discussions with the contractor over the last year or so, They continue to move things a little to the right, you can see in McDermott's materials that they just have, they're going to spend between the two of them, about $1 billion to finish this thing. And so they like to get some help, but we would like to make sure we get the project done. We want to make it get it done, we want to get it done as soon as possible. Everybody is focused on it. What we're really excited about is, we're starting up right now, and that's about all I can say right now.

Julien Patrick Dumoulin-Smith -- BofA Merrill Lynch -- Analyst

Fair enough. Thank you.

Jeffrey Walker Martin -- Chairman & CEO

Thank you, Julien.

Operator

And Christopher Turnure from JPMorgan has our next question.

Christopher Turnure -- JP Morgan Chase & Co, Research Division -- Analyst

Good afternoon, guys. Just a follow-up on the last question, Joe, is there a way that we can think about kind of your own internal processes for evaluating Cameron timing, and cost and construction versus what the contractors are doing there, because I think you're being very deliberate in your message that that is what they're forecasting that's what their latest update points to certainly that was your message at the Analyst Day too, and that was pretty recently that we had a affirmation of the old schedule versus now?

Joseph Allan Householder -- President & COO

Look, I think that we -- when I say we, let me talk about Cameron LNG, Cameron LNG is a company, it's owned 50% by Sempra, and 16.6% by the other three equity owners who are our customers. Cameron LNG has people on the ground at the site every day as they have since the start of the construction, and they oversee what's going on. They're a big engineering team, looking at the forecast of the schedule. I can tell you that McDermott has -- since last year when they took over CB&I, put a lot of focus and effort on this project, and have gotten more deeply into the schedule and the costs over time as you've seen in their announcements. I think that David Dickson, is very intent on getting this project done, he talks to all the partners, as well as to Cameron LNG management. We have assessed it, we've had partners, engineers assess it, we've had our owner's engineer assess it. We think the schedule is one that, it seems very reasonable, but it's in the hands of the contractor, which is Chiyoda and McDermott. So it's up to them to predict the schedule and the costs. We think that what's laid out there. We took that into account, when we did our earnings guidance, and that's about I'd say.

Christopher Turnure -- JP Morgan Chase & Co, Research Division -- Analyst

Okay, that's helpful color. And then, could you just give us a little bit more detail on the LatAm sale process and kind of how that's progressing next milestones to look for? And I guess, versus a base case what might move that schedule forward or backward?

Jeffrey Walker Martin -- Chairman & CEO

Thank you. The current sales process is being handled by Trevor is our CFO, and I'll let Trevor address the next milestones.

Trevor I. Mihalik -- EVP & CFO

Thanks, Jeff. Yes. We're progressing well on schedule, we've seen robust interest across the board for these businesses and these are great businesses. Interest has been wide range from financial investors to sovereign and pension funds. So, we are targeting first round bids, by the end of the second quarter, and then go into the second round. And then, we're still targeting close sometime around the end of the year.

Christopher Turnure -- JP Morgan Chase & Co, Research Division -- Analyst

Okay. And nothing that could move that forward or backward, based on what you're seeing right now?

Trevor I. Mihalik -- EVP & CFO

No, I think we've got a pretty formalized process that we're working through and we're still adhering to the schedule that we laid out.

Christopher Turnure -- JP Morgan Chase & Co, Research Division -- Analyst

Okay, great. Thanks, Trevor.

Trevor I. Mihalik -- EVP & CFO

Yeah.

Operator

Our next question will come from Michael Lapides with Goldman Sachs.

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

Hi, Jeff. Hi, Joe. Thank you for taking my question. Real quick, if you had to peg which moves forward first. Is it the Cameron expansion so four and five. Is it the first trains at Port Arthur or is that the small train at Costa Azul (ph) and if so, what are the next key milestones we've got to watch for?

Jeffrey Walker Martin -- Chairman & CEO

Thank you for that question, Michael. And I'll give some color commentary, maybe Joe can add into it. But I think that, the one that has the lead advantage currently, as we currently have three heads of agreement at ECA Phase 1, already fully contracted in all three of those are moving toward having SPAs in place. So just in terms of documentation that when its further along in terms of being 100% contracted and moving toward more definitive agreements. I would also say that Cameron expansion is something we remain optimistic about, you will recall that when Total stepped into LNGs position they made it very clear to their shareholders that one of the attractive aspects of being in the original Cameron partnership was, they were committed and interested in seeing the expansion go forward, which you may recall was something we were trying to do several years earlier. So I think you've got a lot of sight to the three participants in the expansion, and we continue to have a lot of positive work being done there to make sure that the underlying economic support that. And then obviously at Port Arthur, we've got 2 million tons per annum accounted for -- with our partner from Poland, we're continuing to have a lot of very positive conversations around Port Arthur. And we think that is a remarkable site for a number of reasons. So I think in general, one of the things you recall that we did was, we did a bottoms-up strategic review of our LNG business over the last 12 months, and came away with you, Michael, that not only is it a core business to Sempra, and Sempra can continue to add value in terms of balance sheet and expertise, We really raised our ambitions about what we thought we could accomplish. So we're actually feeling quite constructive on all three of those projects.

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

Got it. And then a question on the settlement in Texas. Any impact, meaning the settlement regarding InfraREIT and Sharyland. Any impact of that settlement on the potential accretion, dilution that you discussed when first announced?

Joseph Allan Householder -- President & COO

I would say that we've gone back and revisited our underlying economics and we feel equally good about how we underwrote that transaction before, maybe 30 or 40 days of slippage in and out of when we expect to close, but we feel great about the transaction. Frankly, the type of growth that we outlined at the Investor Conference monthly, you recall, really had a lot to do with that Central and West Texas opportunity and the InfraREIT transaction actually lays into that growth probably even better than we originally thought when we underwrote the deal.

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

Got it. Thank you, Jeff. Much appreciated.

Jeffrey Walker Martin -- Chairman & CEO

Thank you, Michael.

Operator

Next we'll go to Ryan Levine from Citi.

Ryan Levine -- Citigroup Inc, Research Division -- Analyst

Hi, given the recent weakness in global LNG, do you anticipate any customers so (inaudible) if not nominator with LNG in Cameron one after the commissioning phase is complete. Can you comment on the nomination process. Now that you're nearing first half (ph) ?

Jeffrey Walker Martin -- Chairman & CEO

I don't know if we'll go into kind of how we think about nominations, Ryan. But I think that we do take questions from time-to-time about whether we see overall contracting model change and based upon our current conversations in the marketplace. Joe's been on the road, I'm on the road, Carlos Ruiz (ph) we've got our entire management team been over to make sure we were talking to the right folks. We still see this as a long-term contracting business and our goal as a first step as we move toward FID is making sure that we have high quality customers contracted for 20 years with very strong balance sheet. And remember, we're really on the infrastructure side of business right. So, we want to play in the exact same role or very similar to what we are doing at Cameron, which is a totally model.

Ryan Levine -- Citigroup Inc, Research Division -- Analyst

Okay. And then on ECA with the non-FTA approval received, are there any remaining permits that the company is still looking to procure?

Jeffrey Walker Martin -- Chairman & CEO

Yeah, you raise a great point. We've got the non-FTA approval to export from the United States to Mexico and then to also export from Mexico abroad as issued by the Department of Energy. We also, in this year got our Port Arthur approval from FERC. I'll let Joe comment on what other permits we have in Mexico and whether there's any that we're still pursuing.

Joseph Allan Householder -- President & COO

Thanks, Jeff. Hey, Ryan. Yeah, really the major permit we got earlier about both the large-scale and the mid-scale site. And then as Jeff just mentioned, the non-FTA, what we still need to get and we have applied for and we've done this before, is we need our Mexican export permit. So that's under way. The other things are just small local permits around building the site, but those come later in the process, but the only one that's more significant is this export from Mexico. We expect, no problems with that.

Ryan Levine -- Citigroup Inc, Research Division -- Analyst

Thank you.

Jeffrey Walker Martin -- Chairman & CEO

Thanks, Ryan.

Operator

Our next question will come from Shahriar Pourreza with Guggenheim Partners.

Jeffrey Walker Martin -- Chairman & CEO

Hi, Shahriar.

Constantine Lednev -- Guggenheim Partners

Hi. Good morning. It's actually Constantine here for Shahriar. A lot of the questions have been answered, just a couple of kind of housekeeping items. On the LNG development projects, now that kind of permitting has been progressing. Can you talk about how you see kind of the ownership structure is going to be similar to Cameron where somebody offtakers might take an equity interest or just how to think about on that going forward?

Jeffrey Walker Martin -- Chairman & CEO

Yeah, thank you for that question. I think as we went through our strategic review of our LNG business over the last six to eight months, we've also been looking as we move toward an FID decision, that ECA Phase 1 later this year and hopefully an FID decision around Port Arthur in Q1 of next year. One of the things we're looking at is, how we finance these projects and the potential impacts to our balance sheet, but you're on great point, as you saw in the Cameron facility Phase 1, Joe articulated this earlier, our three partners are each and for just over 16% participation.

We think it's a great model to align the interests of partners around these large capital projects and to your point, we expect that will be a model, you'll continue to see us replicate going forward, I would say if you went up to one million feet and looked across the portfolio of our LNG projects, we like to be in that 60% to 70% range of equity ownership in our projects.

Constantine Lednev -- Guggenheim Partners

Okay. So kind of thinking about it the same way as it's been. Another just kind of small housekeeping item, you mentioned the cost of capital application equity ratio is going to kind of shore up the credit ratings, but both from your perspective. And I guess what you can reflect on the CPUC, some of the downgrades have come not on the heels of just formulaic metrics, but also some of the regulatory and kind of legislated kind of structures around there. So, how are you thinking about that kind of going toward credit metrics?

Jeffrey Walker Martin -- Chairman & CEO

Well, I mean we have spent a lot of time with our credit rating agencies, and obviously, they're very focused on the process we've described on this call around making sure that the legislative and regulatory model moves back to standard utility practice and procedure rates, you always expect to have your reasonable costs returned, plus an additional return on what's on your investments, and I think that's what brokers you recall with the -- this application of the inverse condemnation model is, there has been a leakage of utilities ability to recover all the cost that they have incurred.

So, I think it's really a multipart effort. You've got to get back to the right regulatory regime, that allows for the type of funding mechanisms to meet the liquidity requirements, you've got to get a improvement to the regulatory model and you've got to make sure that your return on equity reflects the risk in the marketplace and I've oftentimes said, that your return on equities tend to be a proxy for the regulatory financial and operating risk that you see in the marketplace and that's why we filed our updated ROE request as we have.

Constantine Lednev -- Guggenheim Partners

Okay. I guess it's fair to say that kind of progress on all fronts as what you're targeting?

Jeffrey Walker Martin -- Chairman & CEO

Yeah, that's well said. That's right.

Constantine Lednev -- Guggenheim Partners

Okay. Yeah. That answers everything to me. Thanks.

Jeffrey Walker Martin -- Chairman & CEO

Thank you.

Operator

And that does conclude our question and answer session today. I'd like to turn the call over to Jeff Martin for closing remarks.

Jeffrey Walker Martin -- Chairman & CEO

Look, I want to thank everyone for taking the time to join us on the call today. I would say as we've had conversations with our management team we actually have a lot of exciting things that we're working on right now and look forward to seeing many of you on the road in the next couple of months and per custom, if you have any follow-up questions, feel free to contact Faisel, In the IR team. Have a great day.

Operator

That does conclude our conference for today. Thank you for your participation.

Duration: 48 minutes

Call participants:

Faisel H. Khan -- VP of IR

Jeffrey Walker Martin -- Chairman & CEO

Joseph Allan Householder -- President & COO

Trevor I. Mihalik -- EVP & CFO

Greg Gordon -- Evercore ISI Institutional Equities, Research Division -- Analyst

Steven Isaac Fleishman -- Wolfe Research, LLC -- Analyst

Julien Patrick Dumoulin-Smith -- BofA Merrill Lynch -- Analyst

Christopher Turnure -- JP Morgan Chase & Co, Research Division -- Analyst

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

Ryan Levine -- Citigroup Inc, Research Division -- Analyst

Constantine Lednev -- Guggenheim Partners

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