Sempra (SRE) — Q4 2018 Earnings Call Transcript

Thanks a lot, Faisel. And thank you all for joining us today. 2018 was an exceptional year for Sempra both operationally and financially. It was also a transformative year marking our company's 20th anniversary and the continuation of our strategic mission to become North America's premier energy infrastructure company. As I mentioned at our Analyst Day last June, since our formation, we’ve proactively managed our business portfolio. Over the years this has greatly improved our earnings and cash flow visibility while bolstering a lower risk profile. Importantly, our recent accomplishments have laid a solid foundation for us to build on and include completing the Oncor transaction, closing the sale of our US solar business, closing the sale of our natural gas storage assets, announcing the sale of our US wind business, announcing Oncor’s InfraREIT acquisition, announcing the sale of the South American businesses and making very important progress on our LNG projects, among other successes. Over the last 12 months, we've accomplished a tremendous amount. The amounts of activity we've had are uncommon and even more uncommon are the results. I cannot be more proud of our team and what we've done to improve our portfolio. Notably, we expect our renewables and midstream divestitures to yield approximately $2.5 billion in proceeds. This is an excellent result and provides a valuable opportunity to pay down debt and redeploy capital to support our growth. I also want to highlight that this past year SDG&E received the prestigious Edison award from EEI for its efforts to enhance wildfire preparedness and grid resiliency. This award is presented to only one US investor-owned utility each year. At Cameron LNG we have entered the critical commissioning phase of construction and also have an excellent safety record with over 67 million hours worked without a lost time incident. Additionally, we were recently added to the Dow Jones Utility Index, a strong testament to the continued focus on execution and commitment to delivering shareholder value. Now, turning to our financial results, earlier this morning we reported full year 2018 adjusted earnings of $5.57 per share, one of the strongest years in our company's history. This puts us above the midpoint of our full year 2018 adjusted earnings guidance. In addition, our Board approved a dividend increase of 8% for 2019. This marks the ninth consecutive year we've raised our dividend and represents 47% growth over the last five years. This is important for a number of reasons because it clearly demonstrates our commitment to a healthy dividend policy. I'm also pleased to say that we’re affirming our full year 2019 adjusted earnings guidance of $5.70 to $6.30 per share. Trevor will review the key drivers influencing guidance later on the call. I’d also like to spend a few minutes on California. Earlier this month, we filed our Wildfire Mitigation Plan related to Senate Bill 901. This file is a continuation of our ongoing focus on safety, reliability and wildfire prevention that we’ve been implementing for over a decade. And during this time, we've invested about $1.5 billion in these efforts. Regarding the State's efforts to reduce wildfire threats and their potential impacts, we are very encouraged by recent statements by the governor and as well as the formation of the Blue Ribbon Commission and the Governor Strike Team. There is widespread recognition among the Governor, Legislature, Utility Commission that the current liability rules for California utilities need to be fixed to support a long-term solution for the state and to allow it to meet the State’s energy policy goals. To be clear, these goals cannot be achieved without strong financially healthy utilities that support the infrastructure investments needed to deliver cleaner and lower-cost energy solutions. We anticipate solutions being brought forward will fall into three key categories. First, help reduce the threat of wildfires across our State. Second, protect the interests of our State’s rate payers. And third, provide a clear legislative pathway for timely and adequate cost recovery for prudent system operators. These potential outcomes will help create a longer-term sustainable framework for the State and its energy future. Finally, I would be remiss if I didn’t take a moment to recognize Martha Wyrsch. Martha will be retiring at the beginning of March. On behalf of everyone here at Sempra I wanted to thank Martha for her tremendous contributions to the company. We wish Martha and her family all the best in retirement. Now, please turn to Slide 5, and I'll hand it over to Trevor.

Thanks, Jeff. As Jeff mentioned, we accomplished a lot in 2018 making great progress to refocus our efforts on the strategic mission to become North America's premier energy infrastructure company. Additionally, with two months of 2019 behind us, we’ve already announced the completion of the evaluation of the South American businesses. Bank of America and Lazard will act as our financial advisors and will begin the sales process in March. We’ve also started implementing the next round of continuous cost improvement initiatives, which I'll touch on in a few minutes. All of these developments demonstrate this management's theme to focus on execution and commitment to creating shareholder value. The decision to sell the South American businesses was not something we, nor our Board, took lightly. The six-month evaluation process was comprehensive. The primary criteria we looked at are laid out in the slide. Both businesses screened well in many areas but we concluded that they no longer remain a strategic fit for us. As part of this evaluation we assessed the benefits and rationale for holding and growing or partnering and growing. However, we determined the sale of these businesses and redeployment of the proceeds into North American infrastructure should maximize value for our shareholders while giving us the opportunity to strengthen our balance sheet while paying down parent debt. There is no doubt that the South American businesses are considered some of the most desirable companies in the region with strong company-specific and macro fundamentals. We certainly have received robust inquiry from global financial and strategic buyers ahead of our formal sales process commencing. Although we expect this transaction to be EPS dilutive, it could be value accretive, as we deploy the proceeds into North American T&D infrastructure and strengthen our balance sheet. Portfolio optimization is not something new to our company, and we've talked about this many times over the years. We have a long and successful track record of actively managing our portfolio, including exiting businesses that are either no longer consistent with our strategy or provide greater long-term value through selling rather than holding. A great example of this is the sale of our US solar assets late last year. The decision to sell the South American businesses is a continuation of this philosophy and demonstrates our commitment to maximizing value for our shareholders. We're targeting a transaction announcement in mid-2019 and closing the transaction by the end of this year. Please turn to Slide 7, where I'll review our efforts around cost improvement initiatives. At our Analyst Day in June last year, you'll recall that Jeff walked through the evolution of our business portfolio, illustrating how our management team is continuously reassessing our strategy and business platforms, and how they fit with changing market environments. In direct alignment with this portfolio review process, we're always refining and reevaluating our cost structure in order to optimize the organization to effectively accomplish our strategic goals. Sempra has a history of being a prudent cost manager. We make thoughtful and deliberate efforts to reduce costs in ways that make our organization efficient, but also very effective. Our continuous cost improvement process is designed to yield long-term savings and instill a cost-conscious culture across the organization. A great example of this is the $65 million of annual savings identified a few years ago at our California utilities that was incorporated into the 2019 GRC filings. These savings should benefit our customers, by allowing us to allocate these dollars to continued infrastructure investments in safety and reliability. Recently, we've initiated further efforts around continuous cost improvements, designed to right-size our organization with our evolving business portfolio. The announced sale of our assets and other efficiencies will allow us to reduce our corporate costs. We expect these cost savings to ramp up to approximately $15 million annually on a pre-tax basis, over the next few years. Our management team is committed to reviewing our costs on a regular basis to ensure we run an organization as effectively and efficiently as possible. Now please turn to Slide 8, where I'll hand the call off to Joe.

Thanks, Trevor. First, I'd like to briefly touch on the IEnova in Mexico. Mexico is the world's 15th largest economy at over $1 trillion in GDP, with nearly 130 million people. The infrastructure needs of the country are expected to remain significant. For example, only 7% of the households have access to natural gas. And residential electricity demand is expected to double by 2040. For more than two decades IEnova has remained focused on developing energy infrastructure that promotes economic development in a sustainable and socially responsible way. IEnova is working with the private sector on additional opportunities that should benefit the country, such as refined product terminals that should enhance Mexico's energy security and the reliability of transportation fuel supplies; renewable projects that should increase Mexico's clean energy supply and be a source of efficient, low-cost electricity, and the conversion of the Energia Costa Azul project to an LNG export project that should bring additional regional investment, economic development, and jobs. As IEnova mentioned on their call late last week, they’re proactively engaged in discussions with the current administration related to natural gas transportation contracts that were awarded through public and international tender processes. IEnova has always had a very constructive relationship with the Mexican Government and its institutions. The company is committed to being a responsible partner; IEnova looks forward to working collaboratively to advance the country's energy goals and build out the infrastructure needed to provide clean, safe, reliable, and low-cost energy. Please turn to the next slide. Moving onto Cameron. The onsite teams are relentlessly focused on moving through commissioning towards completion of Train 1. The contractor has made significant progress recently with the completion of the gas turbine testing, commissioning of the boil-off gas compressors, introduction of fuel gas into the system, and completion of all three flares ignition testing. In the near term, the contractor expects to introduce speed gas sometime this quarter and it also expects to produce LNG stabilized production and complete performance testing in the second quarter. With that said, we expect to start receiving earnings by mid-2019. This first phase of construction, which includes Train 1 and the associated support systems, as well as the common infrastructure that will be used by all three Trains represents approximately 60% of the entire project. After many years of development and construction, all the employees involved, as well as the community are excited that the facility will soon be up and running, further boosting the local economy, while also helping to meet global energy demand. As you may have heard on McDermott's call yesterday, the same teams are working hard toward completion of Trains 2 and 3. McDermott reported that Train 2 is targeted to be completed by the end of Q4 and Train 3 is targeted to be completed by the end of Q1 2020. This schedule is consistent with what was disclosed on their Q3 2018 call.

Thanks, Joe. Earlier this morning we reported fourth quarter GAAP earnings of $864 million or $3.03 per share. On an adjusted basis, fourth quarter earnings were $431 million or $1.56 per share. Full year 2018 GAAP earnings were $924 million or $3.42 per share. This compares to 2017 GAAP earnings of $256 million or $1.01 per share. On an adjusted basis, full year 2018 earnings were $1,503 million or $5.57 per share. This compares favorably to our 2017 adjusted earnings of $1,368 million or $5.42 per share. Please turn to Slide 11, where I'll discuss the key drivers impacting our full year 2018 results. The year-over-year increase in full year adjusted earnings was driven primarily by higher operational earnings in 2018, including $371 million of earnings at the Sempra Texas Utility segment, resulting from the acquisition of our interest in Oncor in March of 2018. $65 million of higher earnings at SDG&E, primarily due to electric transmission operations, $25 million of higher earnings at Sempra Mexico, mainly driven by higher pipeline operational earnings, and $16 million of higher earnings at SoCalGas, due to higher PSEP earnings. This was partially offset by $310 million of higher costs related to increased interest expense and preferred stock dividends at the parent, which includes the impact of our Oncor acquisition financing. And $21 million unfavorable impact from the foreign currency and inflation effects, net of foreign currency hedges in Mexico. Please turn to the next slide. Several significant business developments since our last Analyst conference, we thought it would be helpful to provide a brief walk through of the key items related to our affirmation of our 2019 adjusted EPS guidance. First, we removed the earnings associated with the US renewables and nonutility natural gas storage assets, subsequent to their respective sale closure dates. Second, we added partial year earnings from Oncor's planned acquisition of InfraREIT and our planned acquisition of a 50% equity interest in Sharyland. And third, we added the positive impacts from using the expected $2.5 billion of proceeds from the sale of solar, wind, and natural gas storage. When taking these items into account, we are affirming our 2019 adjusted EPS guidance range of $5.70 to $6.30 that was presented at the Analyst Conference last year. This is a strong outcome, given the significant activity within our business portfolio. Please turn to Slide 13. As we turn our attention to the rest of 2019, we'll continue to focus on the positive momentum we've developed over the past year. We've identified several goals to progress on our strategic mission to become North America's premier energy infrastructure company. They include among others, continuing to focus every day on public and employee safety as a cultural imperative, optimizing and completing the remaining asset divestitures, optimizing cost structures, improving the franchise value of our LNG business by progressing on our five development projects, completing Oncor's InfraREIT acquisition and executing on their growth initiatives in Texas, and advancing our 2019 General Rate Case and cost of capital filings at the California utilities among others. Please turn to the next slide. As I stated at the beginning of my comments, we are very proud of the great strides we've made in the many accomplishments in 2018. We delivered strong financial results and our company is aligned for the future. We look forward to continuing this progress and feel prepared to meet the challenges and capture strategic opportunities that lie ahead. Looking to next month, we are excited to host many of you in San Diego for our analyst conference. We will cover several topics including detailed segment guidance for 2019 and 2020, the five-year capital plan and rate base growth for our three US utilities, our growth outlook in Mexico and an update on the progress of our approximately 45 Mtpa of LNG development opportunities. We'll also be hosting a tour of our industry-leading weather center at SDG&E and highlighting some of the innovative technologies around safety, reliability, and resiliency that we've deployed on our systems. With that, we'll conclude the prepared comments and start to take your questions.

A couple of questions. Great year. I'm just wondering if you can go into a little bit more detail on how you were able to exceed the high end of the guidance range of the utilities for fiscal year '18? And how do we think about how that sets the stage for going forward?

Greg. Thank you for the question and thanks for joining the call. I think for those of you who have followed our company for a long period of time, certainly SoCalGas and the SDG&E are kind of the clear drivers underpinning our financial performance. I think you can see that year-over-year there was a lot of growth, particularly at SDG&E, and one of the slides kind of points out some of that oversized growth particularly around the FERC business, which is really a function of increased capital investments in and around our high voltage system and our substations, as well as a periodic for true-up which occurs, which was also helped to last year's results. I'd just like to ask, Trevor, if you'd like to add any other content around SoCalGas or SDG&E?

Yes. No, thanks, Jeff. I think also one of the things that the utilities are focused on are cost savings and certainly driving cost efficiencies in their businesses. But again, I think it's really just great operational results that have driven these earnings.

Great. I know there has been and will likely continue to be a lot of volatility around the peso, and I think your baseline assumption is a bit higher than where the peso is today. How should we consider that friction within the guidance range?

Yes. I think what I would do is refer you to the rule of thumb that we have in the appendix of the deck, and it shows kind of where we are assuming the peso will go by the end of the year and then it has that plus or minus 5%. I think if you look at that, given where the peso was last year and how we absorbed the peso strengthening in our earnings and we're still well within our guidance, I would just kind of direct you to that and I think there's enough other things that we're working on that could offset a strengthening peso.

To summarize, if I begin at the midpoint and adjust from there, I would be assessing a reasonable estimate of how the peso influences your results as we move through the year.

I believe that's the right approach. However, as we've experienced before, the peso will likely remain somewhat volatile. Our objective is to ensure that when we provide earnings and guidance, we can meet those expectations. Trevor's point was that we have sufficient flexibility in our portfolio to adapt to this situation. We feel very confident about our range for 2019.

Okay. Final question from me. Despite the progress that you've demonstrated at Cameron, there is still this lingering fear out there in the ether that that somehow this project is either still going to come on late, even though we're toward the back-end of the construction process, or that there is some way that there is incremental financial remuneration that you may have to give to the joint venture constructing the project to get this thing done. When do we pass the point of no return where those lingering fears that sort of definitively behind us from your perspective?

Greg, I think it's a great question. I can assure you that we remain concerned. I think that's how you manage because projects have to be on top of these types of things. I would comment that Joe has done a remarkable job with his team and worked with our partners on the Cameron build-out. Also, I think if you listen to McDermott's call yesterday, they have been quite clear. But what they believe they can deliver and we will remain active with our partners and managing that relationship against the commissioning timeline. Joe could you provide some additional color on your conversations with David and how you're approaching it?

Thanks, Jeff. I think you'd handled that well. But Greg, look together at Sempra and our partners and our customers we're very excited about the impending start-up at Cameron. And we're all focused on finishing the commissioning of Train 1 and continuing to work on Train 2 and 3. And I talked to David quite often and Jeff just mentioned, he was very strong about his desire to complete this world-class facility and their stocks doing very well today. And we're working hard toward continuing to push forward.

Great. So Jeff, regarding California, you've clearly made significant efforts to prevent fires and invested heavily in your system. However, there is still considerable concern about whether California has done enough to reduce risks, especially with pressure from credit agencies. I'm curious, from your perspective as someone who hasn't faced recent fire challenges, what do you think the state should do to alleviate these concerns? What are you advocating for?

Okay. Well, I appreciate you making the comment that we haven't had a fire for a while; it's been since 2007, and I think if there has been anything that's allowed us to create kind of a competitive advantage to protect our ratepayers it's experience we went through in 2007, and how hard we've worked to basically build a system. I think that provides a lot of leadership on behalf of our customers, but I talked about this a little bit Steve in my prepared remarks. But here some additional color. I think that we've been in close contact, as you would expect with all the key stakeholders. In fact, we are hosting a lot of key stakeholders from across the state, including members of the Governor staff, here in our building tomorrow, to continue to advance what we think the appropriate actions are. And I would also compliment the Governor; I think he's walked into a tough situation with strikes in the LA Unified School District and obviously a lot of the legacy issues in and around the fire areas. And he has pushed forward the Blue Ribbon panel. He's pushed forward to strike force, there's a lot of conversation from the Governor’s Office about trying to deliver results from both of those organizations, earlier in the legislative process rather than later. On the specifics of what needs to happen, I'm going to be very clear from Sempra's perspective, we do not think a strict liability standard is the appropriate standard for investor-owned utilities. But probably what's most important in our advocacy is to make sure that we always frame our discussions around what's best for ratepayers. I mean, that really is the fundamental issue in our service model and secondly that whatever the outcomes are, either from a regulatory path or a legislative path, there is a very clear and defined pathway for timely and adequate cost recovery for utilities that operate our system prudently. We filed our wildfire mitigation plan earlier this year. It is really kind of a 4 point plan that focuses, number one, on fire hardening. Number two on vegetation management. I think we have a world-class vegetation management program and our filing attempts to double the frequency of our inspections in our service territory. We're going to add to our aerial assets I think we've led the nation in terms of the type of helicopter support we've had on station and if someone used to fly helicopters, the Utopian goal is to have a 24-hour capability and part of our filing gives us the ability to operate at nighttime, which will be another competitive advantage as you try to fight fires when they start. And then lastly, the fourth part of that plan is we are going to double down our weather stations. I think we unified over 60 different weather stations that we're trying to enhance, so that not only can we accurately predict whether our assets should be shut down in a timely manner. But I believe, bottom line is, I think there's a lot of different ways to come at this. I'm pleased with the leadership being shown from the Governor’s Office. And I think that the whole goal here is to create a more sustainable and a more fair framework for everyone that's involved in the system.

Okay. That's very helpful. One other question, just on the Mexico. The news from two weeks ago on what the government might want to do with the force majeure situation. Was there any better clarity just on that specific issue or is it still added more of a high-level right now?

Yes, let me make a couple of comments here. I'll pass it to Joe for some details around the actions relative to that pipeline. I think it might be helpful too for Dennis to talk about what the United States government is doing to support the key nature of Mexico as a partner, particularly around natural gas. But what I'll try to do, Steve, is remind people that we've been invested in Mexico for over 20 years. We're not a company that began investing in projects a year ago or two years ago. We have the leading Mexican energy company in the country. We're ranked in the top 50 on the Bolsa, obviously as you know it's headquartered in Mexico, we've got independent Mexican directors and it's self-funded from local markets. And one of the things that we're trying to do is we have a long-term view about the opportunity around infrastructure in that country, and we believe that the infrastructure opportunity remains quite large Steve, and as the government continues to focus on expanding services to all the people of Mexico, their reliance on foreign direct investment will go up, it will not go down. And I think our value proposition, every time we are in front of stakeholders in Mexico is to really emphasize our role in bringing new and cleaner sources of energy to the country to help support the economy and give choice and lower-cost energy to Mexican families. But on the specific issue of the pipeline, Joe in kind of steps that Carlos and Tania are taking. Do you want to provide additional color?

Thank you, Jeff. Hi, Steve. You covered many points I wanted to address, particularly our commitment to providing low-cost energy to Mexico. One key factor is the supply of natural gas into the electricity market, with infrastructure being developed around that. Regarding the seven pipelines mentioned recently, as you noted, they are currently under force majeure for various reasons, and we are involved in two of them. The Sonora pipeline was operational and generating revenue before it was taken out of service due to sabotage and damage. We have been coordinating with CFE on this. The administration is keen on ensuring good value for their spending, making this a timely opportunity. Carlos and Tania have been actively meeting with CFE. Unlike other situations reported in the media, we have been proactive and have engaged with various administration members to discuss this matter. Tania, as the CEO, is leading these discussions to expedite the pipeline repairs. If the government collaborates with us and local stakeholders, we could have the pipeline operational again in a matter of weeks, supplying low-cost gas to Mexico. Additionally, we are also working on the marine pipeline that TransCanada and we are building, which is nearly ready to go into service. We're currently connecting the offshore pipeline to the onshore pipeline, which is substantially complete. Some weather-related challenges are delaying the final connections, but we expect to complete this soon, which will address that second issue as well.

Steve, this is Dennis. The other thing I'd add to Jeff and Steve's comments. First on the Sonora pipeline, I think it's important to remember that the auction process there was a competitive process that was run by CFE. The terms and conditions were dictated by CFE. And I think that was one of the things that our team in Mexico may refer to reiterate to the new CFE Director and to the President's administration that this was basically a very transparent and fair process. The other thing that I had mentioned to you is what we're doing in order to collaborate and support our people in Mexico. We've obviously continued to maintain close contact with the State Department, the Department of Energy, the Embassy folks in Mexico City to remind them not only of Sempra's investment in IEnova, but the importance of what this means to the United States. Remember that Mexico is the largest natural gas trading partner for the United States, and we have a trade surplus from an energy standpoint with Mexico. So making sure that we maintain fair and transparent rules in Mexico for the investments that we have there, which are badly needed in the future, not only is good for Mexico, but it serves the interest of the United States and I can tell you that folks in Washington DC are supporting this by watching this closely.

I wondered if you could just talk a little bit more about your dialog with the rating agencies with respect to risk mitigation in California, as Steve actually mentioned, I mean you have a very strong operational track record, you're a clearly leader in fire risk mitigation. A lot more of your system is underground than other utilities. Is that being recognized, are there real tangible steps in progress that you need to make to avoid ratings downgrades? Could you just give a little more color on that dialog? Please.

I appreciate the question, and the short answer is yes. Over the past two years, we have prioritized close communication with the rating agencies to maintain an investment-grade plus balance sheet. Your point about differentiation is significant and resonates with all three agencies. We have the leading safety program in the country, which justifies a higher credit rating. We consistently emphasize this point. We have been proactive in de-risking our service territory and overall business model at Sempra, which has influenced the agencies to adjust their target FFO to debt metrics due to our ongoing focus on transmission and distribution investments. Additionally, there is momentum in the state to address market issues and protect ratepayers, ensuring timely recovery of costs. SDG&E is prudently managing its system, placing the agencies in a challenging position. The recent changes seem to reflect a state-wide re-rating rather than a focus on individual companies. However, it's our responsibility to communicate clearly how we stand out, especially regarding operational leadership, system management, and predictive measures. Our goal, evident in our wildfire mitigation plans, is to leverage our current leadership and make necessary investments. Regardless of the agencies' actions, we will vigorously defend our franchise and have taken measures to ensure SDG&E maintains ample liquidity.

That's very informative. The last point Jeff mentioned brings up a question we often receive from investors: if, for various reasons, the rating agencies decide to downgrade not only you but potentially other utilities in the state, that would have negative implications for customers, particularly as it would increase the cost of capital and financing in the long term. However, in the short term, it seems you have substantial liquidity and have not faced fire liabilities, with no fires in 12 years. Could you elaborate on the short-term protections you have in place, such as your liquidity, to address these near-term concerns?

Yes, I'll have Trevor go ahead and talk through where we're at with our credit lines with SoCalGas and SDG&E and our ability to flex those lines.

Yes, Steve. So we have a fairly large credit line at both utilities that we can draw down, and those are largely undrawn at the current time. And then we also have the ability to continue to issue secured bonds if needed, albeit at higher rates. But again, I think, our view on this is, we're continuing to defend the fact that we are differentiated in California. We had the rating agencies out, to come take a look at our fire mitigation plans and they recognize that we are differentiated. But again, from our perspective, the credit lines are $750 million at each of the utilities.

Good. Thank you very much. So I want to pick up where a couple of last questions are left off. First going back to the California policies, more broadly, I'd be curious if you could expand a little bit on the current state of legislative affairs and specifically comment a little bit around the funding or the prefunding potential here for the various IOUs. How do you guys think about that versus other solutions on the table. I know it's early days, we've got some draft legislation out there, but it seems to be going in a certain direction. I'm curious if you think that's really where it's going or if there's any other twist that we should be looking at more conceptually, not in terms of hard details here?

I'll make some comments Julien and then I'll pass it to Dennis to fill in a couple more details. But now I think at a high level what I'm impressed by is that SB-901 calls for this Blue Ribbon panel to be seeded. I think they've got a diverse group of folks that have their head down working away on that initiative; that report out to the legislature is required by July 1, is my expectation based upon feedback that we've received. That they should be able to finish that work earlier, which I think would be helpful from the legislative process. The strike team that the Governor's put together was intentionally designed to bring in independent financial advisors, law firms, and people that specialize in issues around credit. So one of the things that we want to be very proactive about is that people really understand the power of the fixed income markets and the importance of the credit ratings across this industry. The bottom line is, we believe, and I think the Governor shares our view based on conversations I've had, that the utilities in this state deserve and need to have an A-rated balance sheet. And that is the goal of the process that we're undertaking. So, there's a lot more work to be done. We're going to have a seat at the table. I think we're going to have an aggressive outreach. I've been personally involved to make sure that Sempra has a seat at the table to improve the overall risk-reward profile of both SoCalGas and SDG&E. So the process that the state is undergoing should be an opportunity for Sempra to have a seat at the table and by the end of the year have improved the franchise value of both of our utilities. I'll stop and see if Dennis wants to add any color.

No, I think you hit on all the points, Jeff. The only thing I'd mention is recall that the strike team that the governor setup has various representatives whether it's chief or staff, people from the finance industry, the legal industry, folks from insurance. So I think it's multifaceted there are a lot of perspectives that are going to be presented in the roadmap and the recommendations to the Blue Ribbon commission, and then their job is going to be really to refine the plan to look at the recommendations of pros and cons of risks and how you can make sure that you can navigate through this process and make those recommendations to the governor and to the legislature by the end of June.

Got it. Excellent. Then just quickly following up on some of the questions on '19 guidance specifically. First off, I know you guys talked about the $50 million pre-tax cost savings effort. Didn't see that specifically called out here. So just wanted to make sure, just from a timing perspective, how you see that ramping up, as you say over the next few years, but more specifically here? And then also with respect to the California GRC here, you mentioned the assumptions on attrition, certainly, there are some early data points, shall we say; how does that figure into the plus-minus math that you show here on the right-hand side of slide 12?

Let me address that and if we need more detail, I’ll have Trevor provide further insights. We’ve identified a $50 million opportunity related to our corporate center, and we know precisely where that funding is coming from. We anticipate achieving the full run rate of that $50 million by the end of the year. This is not a one-off situation. As we’ve mentioned before, strong companies consistently seek these kinds of cost reductions, and referring back to Trevor's earlier comments, we implemented a similar program that generated just over $65 million in savings at SDG&E and SoCalGas, and those funds are currently included in the rate case. The $50 million is in addition to that. Periodically, we’ll address questions regarding our previous efforts, and I recently reviewed some data indicating that since 2013, SDG&E’s electric operational and maintenance costs per customer have decreased by 40%. We’ve managed to lower costs per customer by an annual average of 12% over five consecutive years, which includes a reduction of 500 positions. There is likely about 20% of the total operational and maintenance costs at SDG&E that can be directly influenced beyond other necessary expenses. The team has performed exceptionally well, and this cost efficiency has been incorporated into our rate case. Additionally, at the parent company level, as we divest from our solar, wind, and natural gas storage businesses, we are able to realign these savings more effectively, increasing the span of control among officers and leaders to create a more cost-efficient structure. Regarding your questions about the 2019 guidance, just a reminder that we effectively removed $100 million from earnings. At the Analyst Conference, we projected 2019 without including solar and renewable earnings, anticipating $5.70 to $6.30 in earnings per share. Our guidance remains the same even after accounting for the $100 million reduction related to our renewable portfolio. We will utilize the proceeds to reduce parent debt, reinvest in capital projects, invest in Texas through InfraREIT, and continue identifying cost savings. I expect the $50 million figure to increase by year-end as we strive to enhance our parent company’s efficiency.

And regarding GRC assumptions, I have nothing to add at this moment.

Yes. I would just say on the GRC assumptions, our convention over the last decade has been to always forecast the existing attrition of 3.5%. We've done that at both of our utilities and I think the filings that you can see from ORA and others, you can kind of draw your conclusions in many cases, they are actually higher than that. But we're not going to guide or change that until we get to this rate case. We are focused on making sure we have a good cost of capital filing by April 1st, and we're pushing very aggressively to make sure that we can improve the timings of our rate case decision.

Hey. It's actually Constantine here for Shahriar. A lot of great questions were answered. And congrats on a strong quarter and a great year. One, kind of short little follow-up on the cost of capital filing. So, any thoughts around, kind of how you're thinking about it, at this point. There has been some kind of early remarks with kind of the FERC ROE is done and all that, but in light of kind of some of the more recent events, kind of, what are your thoughts around cost of capital in California?

I'll give you some thoughts and pass it to Trevor. But I would just say this, as you know, at a high level, the cost of capital is always intended to be a proxy of the risk associated with our environment right in our regulatory environment. So, there is no question, given the recent developments, particularly in the northern part of the state that you should expect to see PG&E and Edison and SDG&E and SoCalGas revisit how that happens. Right? So you're right, there are some numbers out there for the first standpoint, but we're going to make sure that we're very thoughtful of bringing some independent resources and we're going to put forward something that we think is better reflective of the risk in the marketplace. And if some of that risk is resolved that likewise would impact how we would file this. But Trevor, would you add any color?

No, I think, Jeff, you really covered it. Again, as Jeff said it's supposed to be a proxy on risk and I think we feel pretty good about where we landed on FERC, but we certainly anticipate that cost capital filing should reflect the risk that we're seeing in the state.

And I would add that Bruce Folkmann is our CFO at both of our utilities. He is a very talented person and he really led the last cost of capital discussion, I think on behalf of all three utilities. He has a team in place with outside consultants and they'll be putting together a very thoughtful plan about how they approach this. And I think that you're raising a great point. And this is something that we're very focused on. We're going to try to basically improve the regulatory model this year. We're going to get a great rate case and we are going to get a cost of capital that's appropriately sized for the type of risk that we expect to manage in the state.

Thank you. I have a specific question regarding the cost savings program that is being implemented. You've mentioned a $50 million run rate over the next few years. Can you provide more details on the overall costs at the parent level, how that $50 million was determined, and potential incremental opportunities?

Yes. I would just say that the best way to think about this is probably the most common misunderstanding Constantine. We have an ongoing cost management program every year in the history of the company. So SDG&E will have stretch goals, and one of the ways they reach their stretch goals like you saw the great performance last year and Trevor talked about is continuing to have best practices around technology and innovation and cost efficiency. So every single operating company at Sempra is very, very focused on leveraging technology and innovation to lower their per unit cost for customers. What was unique about what the exercise we went through under Martha Wyrsch and Dennis' leadership in the last six months was, we really revisited opportunities at the parent company, because as you sell and dispose of some assets and turn your portfolio over, it gave us the opportunity to challenge what is the proper role of External Affairs, Investor Relations, and Financial Reporting. And you have people at corporate that were directly servicing the solar business or the wind business or natural gas storage. So most of the cost opportunity has been around looking at costs associated with the businesses that we're selling and now as you know, last month we took the decision to sell our South American utilities. That represents another opportunity for us to become more cost-efficient at the parent. So the long-term goal is you got to remember, we're going to grow this business at a rate faster than our peers. And as we grow this business, one of the things we're going to try to do is keep the cost at parent, the ones that we control. I'm not talking about interest expense and preferred dividends and so forth. I'm talking about the things that we can normally control. Our job is to keep it flat to declining at the same time that we're scaling the corporate center against a growing set of operating companies.

Okay. So it's fair to kind of assume that as these transactions close, and as you go through the transformation process, and the savings programs are going to continue further into more than just the 2019 here?

That's well said, and part of that is because, we will have ongoing service obligations for short periods of time on the assets that we sold, and part of what you're looking at is those service obligations rolling off throughout the year.

Good morning, Jeff. I have two questions that are somewhat unrelated. First, regarding the California cost of capital docket, considering the situation with your neighboring company and the trading of California utilities, it seems unusual for the stock to reach even half of its value. How do you determine the cost of equity for one of the three companies in the state? I'm also curious if there's a possibility to delay this and revisit it in another year, or if the commissioners and the state are committed to ensuring this occurs in 2019.

Well, it's actually a very insightful question. If you think back to the California utilities track record around cost of capital, you have seen the cost of capital extended for one or two or three years at a time, and you've seen the utilities get engaged from time to time when you see large changes in the marketplace. What intrigues me a little bit Michael is that there has been a strong voice coming from the credit rating agencies about re-rating the state. Right? There's obviously been a very unfortunate bankruptcy in the casualties to the north, obviously this has implications for Edison as it does to SoCalGas and SDG&E. And part of the process, I think is going on, as you have a change in the governor, you got a change in a lot of the members of his administration, even some of the energy principles or change in off of Governor Brown's staff. So basically have a new guard in Sacramento to have some strong voices coming from the credit markets and have the chance to come back in on a timely basis and really lay down some numbers that really point to the cost of not properly managing risk. These costs inadvertently get passed on to ratepayers. So there is really a hue and cry to fix the market, and I actually think this cost of capital process may be additive to that voice and constructive in the long-term toward getting the action.

Got it. And then unrelated question. Just curious, there have been a number of LNG projects in the US and in North America, including Canada. If their environmental impact statements are FERC certificates and just curious how the LNG contracting environment has changed over the last 6 to 12 months and how the economics for new LNG projects like Port Arthur even ones like Costa Azul or the Cameron expansion look now relative to how they may have looked a year or two years ago?

Great question. I think you recall that we were similar to our new management team last summer. We took the time Michael to do a bottoms-up view of what we thought was taking place in the global marketplace, and that we had a better feel for that. We looked at our own team, our own capabilities and you saw us raise our expectations for what we could accomplish, Michael, as well as make some changes in terms of how we were leading that organization. I would tell you today that I'm probably more bullish than I was three or four months ago. I mean I think Joe and I are on the road starting this weekend, going overseas to meet with potential offtakers. But to your point, you recall that Cameron was originally constructed really as a tolling agreement, no different you think about as a power plant. You're short gas on one side of the plant and you're long LNG on the other, and we structured that really as a tolling situation where Sempra was not really involved in the downstream risk or the upstream risk related to that facility. One of the things is taking place in the marketplace is the number and type of counterparties has expanded to folks like the oil and gas company in Poland, as they now expect somewhat at the terminal to go upstream and source the gas, and frankly, as long as we can do that some form of index, where we're not taking the commodity risk. We're certainly a business that's quite comfortable with transportation. So you've seen the model change a little bit where you're moving probably from a pure Toll model towards being able to provide the service of bringing the gas to one side, whereas they take all responsibility for the gas on the other. And look, a competitive market always puts pressure on the cost side of it, but one of the things I think that I would mention to you is, we have a competitive advantage, and our competitive advantage is, that two of our three sites are brownfield sites, number one. And number two, the fact that we have one on the West Coast of North America is a huge advantage. And you should be expecting us to push that aggressively in all of our marketing meetings, but I'll just stop there, Joe, and see if you want to add anything to the contract environment.

I want to start by mentioning that we will spend significant time discussing this at our upcoming analyst conference in a few weeks, so I will keep my comments brief. We are very focused on the changes happening in the industry. There has been increased activity at FERC, and our Port Arthur project is progressing through that queue, moving up quickly. Contracting has become increasingly important, and we are beginning to see positive developments after a period of stagnation. As Jeff mentioned, we are making travel arrangements, which indicates a good sign. We will provide more details at the conference, but we recognize that we are witnessing significant changes, and we expect to see more projects reaching FID soon.

I want to ask about the wildfire prudency standard that you are pursuing at the CPUC. Given the recent events, particularly PG&E's bankruptcy, are you experiencing increased support for the prudency standard to align more closely with the wildfire plan? How are you approaching this, considering that it seems you and Edison have been advocating for it in this ongoing inquiry?

What I would say, Paul, is that one of the things that makes the overall conversation quite complex is that there is a basket of legacy fires, some of which were in '17 pre-legislation and some of which were in '18 during a gap, because the legislation was effective until the first of the year. From a big-picture standpoint I think Sempra has been very much in the position that PG&E has been in for a long period of time, which we don't think a strict liability standard is the appropriate standard for investor-owned utilities. Right? It was intended for a different set of circumstances. I think it's very unfortunate that we moved on the decisions we got at the PUC. I think that really has been the catalyst for the possibility of there being uncovered or stranded costs actually borne by shareholders. And that's led to the situation we're in now. So, I think the challenge you have Paul is that the legislators put a lot of time in SB 901 last year, and they thought that they had put the appropriate band-aid on the issue, and like what we're really asking for is, I think the whole process as we looked at de novo with a fresh view. I'm really encouraged. I think the strike force specifically and the Blue Ribbon panel is not just taking the facts as they are today, Paul. I'm really looking at this thing holistically, around all the things that Dennis talked about, the insurance industry, what does this mean to tort claims. What does this mean to the legal industry and the impacts on the utility. So, I don't want to make this sound like this is a small change to legislation. We have a goal of making sure that we have the chance to operate our system prudently. Make prudent capital investments, and as fires occur from time to time, we are in substantial compliance with the program as they approved by the commission, there should be automatic pass-through of costs. It's not a discretionary standard.

Yes, I think that sounds great. It seems to me that no matter what happens with strict liability, if that standard is adopted, there’s a lot more to accomplish for various reasons, including repair costs. If we could resolve that one issue, it would make a significant difference. I hope you're following what I'm saying. While it might not be a complete solution, it would certainly help address many issues without relying on everything to be fully in place. Are you following what I'm saying?

I do Paul and I think you're spot on. But the only caveat I'd offer to you is, where you start your focus has a direct impact of what you end up resolving. And I think that we need to be very clear that's a strict liability standard is the wrong standard. At the end of the day you may have the practical solution, it may be less relevant is where that standard goes away, or whether that standard is interpreted by rule-making that allows for the automatic pass-through for people that operate your system prudently. So I think you're onto something. What I am encouraged by is the leadership the Governor is showing, the way that he has staffed in saying and asked them to move more quickly and he's asked for them to look at it holistically, with a fresh view de novo. Right. So again I can't forecast the future, except to say that I think a lot of the right activities are underway and we are optimistic.

Okay. As for the McDermott call, the topic of Chiyoda was mentioned, and I'm curious about the ongoing concern they raised. Could you remind us about the contingencies we have in place if Chiyoda is unable to fulfill its obligations?

I will start and I'll see if Joe wants to add some color, but I think in our remarks, what you've heard is that the partnership has been very engaged with the EPC contractors, and particularly McDermott has been very clear about what their expectations are for delivering the project. And obviously, those two parties are jointly and separately liable for their obligations under that contract, and it's a full EPC wrap contract, right. So those obligations reside with the EPC. But I got to tell you we have had great conversations with David Dixon. I think he has looked at this with clear eyes. He understands the challenges, and we have confidence in the ability to deliver it. But, Joe could you provide some additional color on some of the details around those two parties?

Thanks, Jeff. I think you really hit the main points. Great EPC contract, joint and separate liability, also, as we said a few times in the past, we do have letters of credit backstopping this, in typical amounts that you would see in a contract of this nature. And so those are the kinds of things. We always have to plan for any risk and so we have a lot of work around all of this with our partners, but we feel really confident David's very confident that is going to focus and get this project done. And I believe he is focused on it.

I have a question about PG&E, and this is a two-part question. One is, what lessons has Sempra learned from the bankruptcy filing, or yes, that's the first question. The second question is, are there any opportunities for asset purchases from PG&E by Sempra?

Thank you for your question. I'll address the second part first and then return to the lessons we've learned. As you know, we typically refrain from commenting on any M&A activities. Our management team has significant plans for organic investment in our core businesses in North America over the next two years. You can expect us to focus on executing our financial plans for 2019 and 2020. Regarding the lessons learned, we gained valuable insights from the 2007 wildfire, which we saw as a significant threat at that time. This experience taught us the need to improve, lead, be innovative, and operate in an open-source manner. We are willing to share the progress we've made. One interesting takeaway from the bankruptcy relates to the contingent liabilities from renewable contracting, with some estimates forecasting costs above $30 billion, much of which could be classified as out-of-market expenses. This connects to the strategic decisions made over the past four to five years by our Board, particularly our decision to exit fossil-fired generation and renewable generation. We have stepped away from engaging in natural gas or oil operations. Since 2014, when Steve, Davis, and I at SDG&E decided to halt all renewable purchases, we've been proactive in our approach. The key lesson is ensuring that we advance the clean energy transition thoughtfully, maintaining a focus on pricing, supply diversity, and balanced energy programs. The developments at PG&E continue to support Sempra's business model, emphasizing our commitment to transmission and distribution while prudently managing our energy supply strategy.

That's very helpful. Thanks very much, Jeffrey.

I appreciate it, Winfried. We hope we see you at the Analyst Conference.

Look, I just like to thank everyone for joining us today. I'll conclude by saying that I'm very pleased with our team, and I think we're excited about the progress we've made on our strategy. And we look forward to seeing all of you at our upcoming Analyst Conference here in San Diego later in March. If you have any follow-up questions, always feel free to contact the IR team. And have a great day.