Richard A. Vaccari - Sempra Energy Debra L. Reed - Sempra Energy Jeffrey Walker Martin - Sempra Energy Steven D. Davis - Sempra Energy Joseph A. Householder - Sempra Energy.

Steve Fleishman - Wolfe Research LLC Julien Dumoulin-Smith - UBS Securities LLC Michael Lapides - Goldman Sachs & Co. Paul Patterson - Glenrock Associates LLC.

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

Debbie Reed, Chairman, President and CEO; Jeff Martin, Chief Financial Officer; Steve Davis, Corporate Group President of Utilities; Joe Householder, Corporate Group President of Infrastructure; Dennis Arriola, Executive Vice President; Martha Wyrsch, General Counsel; and Trevor Mihalik, Chief Accounting Officer.

Before starting, I would like to remind everyone that we will be discussing forward-looking statements on this call within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today.

The factors that could cause our actual results to differ materially are discussed in the company's most recent 10-K and 10-Q. It's important to note that all of the earnings per share amounts are shown on a diluted basis and we'll be discussing certain non-GAAP financial measures.

Please refer to the presentation slides that accompany this call and to Table A in our first quarter 2017 earnings press release 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 9, 2017, 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 Debbie..

Thanks for joining us this morning. And I first want to start by saying that I am going to be talking about Sempra, and not whoever that other company was that that operator put on. Thanks, Rick, and thanks to all of you who joined us in San Diego or via the webcast for our analyst conference a few weeks ago.

I appreciate the useful feedback we received. For those of you who were unable to attend, you can find all of the conference materials on our website. I'd like to start off by reiterating Sempra's long-term value drivers.

First, we expect to grow our EPS 10% to 11% from 2017 through 2021 by successfully executing on project already under contract, and our Infrastructure businesses and our expected utility performance.

Second, we plan to grow our dividend from 2017 by 8% to 9% annually, then reassess that for additional increases after Cameron's three trains come online. And third, our increased cash flow should provide $2.5 billion to $4.5 billion in additional debt capacity in 2021. This offers us the flexibility to further enhance long-term shareholder value.

And four, we expect to capture opportunities over the next five years to add to or extend our earnings growth. Before I turn it over to Jeff, please turn to slide five. One of the ways we measure our success is delivering on our EPS guidance.

Jeff will review a few of our recent operational successes and our first quarter results, which keep us on track to meet our 2017 earnings guidance of $4.85 to $5.25 per share.

Jeff?.

Thanks a lot, Debbie. First, regarding the cost of capital, we remain constructive on the settlement and believe it's in the best interest of all parties. We continue to expect that the settlement or something in a substantially similar form will be approved.

Second, we're focused on executing the capital plan that we laid out at our conference by advancing major projects, in particular Cameron's Trains 1 through 3 in the marine pipeline. We've also made near-term progress on several other projects.

At SDG&E, we signed five new contracts for battery storage facilities totaling 83.5 megawatt, 70 megawatt of which will be directly owned by SDG&E. SDG&E also placed one of the largest lithium-ion battery systems in the world into service in the first quarter.

Many of you had the opportunity to visit SDG&E during the conference to hear about this and how it supports California's electrification efforts, as well as furthering the state's policy goal by reducing carbon emission. IEnova expects to complete three natural gas pipelines by the end of the second quarter.

This also represents a combined investment of close to $900 million. Each project you recall is backed by 25-year U.S. dollar denominated contract with CFE. Third, we're also looking at new investment opportunities. Let me list a few examples.

IEnova recently agreed to construct a solar facility with a 20-year PPA for 110 megawatts with an industrial steel company. This is the first bilateral agreement in Mexico under the new market for renewables where the off-taker is a private company. We anticipate there'll more opportunities like this.

The Pima Solar facility is expected to cost roughly $115 million and be operational by the end of 2018. This project is also a great example of how we at Sempra leverage our experience across different growth platforms. The success we've demonstrated in the U.S.

renewable business allows us to compete more effectively for projects just like this in Mexico. We also made CPUC filings for additional projects representing the potential for almost $500 million of new capital. To be clear, these projects were not included in the capital plan we outlined at the analyst conference.

These projects include an expansion of SoCalGas' Master Meter program for Mobile Home Parks and SDG&E's proposal to replace its Customer Information System. Now, please turn to the next slide. Our first quarter financial results was the strongest first quarter performance Sempra has experienced since it was formed.

Earlier this morning, we reported first quarter earnings of $441 million or $1.75 per share. This compares favorably to first quarter 2016 earnings of $353 million or $1.40 per share. On an adjusted basis, we reported earnings of $438 million or $1.74 per share.

Again, this compares to first quarter 2016 adjusted earnings of $404 million or $1.60 per share. You'll also recall that we adopted the new accounting standard on stock-based compensation in the third quarter of last year. This was applied retroactively to the first quarter of 2016, and accordingly increased earnings by $34 million in that period.

Now, let's turn to slide 7 to discuss the key factors impacting our result.

Our higher quarter-over-quarter adjusted earnings were driven by strong operating results, including $18 million of higher operating earnings from SDG&E in South America; $21 million of higher earnings at our California Utilities, this is largely as a result of the delay of the 2016 GRC file decision, these earnings were recorded in the second quarter of 2016; plus $29 million of higher earnings at Sempra Mexico related to the GdC and Ventika acquisitions, and higher AFUDC earnings.

Also improving earnings this year were $14 million of higher tax benefit and lower interest cost at Parent. These items were partially offset by $34 million of tax benefits in 2016 compared to $3 million of tax expense in 2017 associated with share-based compensation.

And at Sempra Mexico, $25 million of lower earnings from foreign currency and inflation effects, primarily from current quarter losses. If you will, I'd like to spend a moment on foreign currency. You'll recall that our current hedging strategy limits our FX-related exposure on U.S. dollar debt in Mexico.

While we expect some inter-quarter volatility from time to time, our hedging strategy over the full year is designed to reduce or eliminate expenses related to this exposure. You'll also recall that there are other FX exposures that impact earnings, but not cash flow. These occur in Mexico and South America and we do not hedge these additional costs.

These exposures have historically largely offset over a full year when the currency's movement (08:50). You'll find additional details on FX in the appendix. And with that, we'll conclude with our prepared comment and start to take any additional questions that you might have..

Our first question comes from Steve Fleishman of Wolfe Research. Your line is open..

Yeah. Hi..

Hey, Steve..

Hi. Couple of questions.

So first on the cost of capital settlement, could you maybe just let us know if there's any additional color you have on why the delay in approving it, and if you don't have any additional color, when do you expect to get some color?.

I'm going to have Steve Davis talk a little bit about that. But just to remind everyone, this is an all-party settlement. There were no comments filed against the settlement during the proceeding. The settlement included both ORA and a major consumer group in the state, TURN, as well as the three utilities as part of that.

And we have been having meetings, ex parte meetings with Commissioner with all of those five parties present in those meetings to reinforce the settlement. And so, we had a meeting last night. We have more scheduled today, and I will turn it over to Steve to add any more color..

Yeah. Thanks, Debbie. I would just add that we continue to believe the settlement or something substantially similar will be approved by the Commission in a timely basis. And we will continue to have further discussions with parties this week and we're hopeful of having a timely decision..

Okay.

Did they give any indication on why this delay occurred?.

There has been no real indication, but what I will say from my 30 – almost 40 years of experience is that when you have new Commissioners coming in for a major decision for the first time on that, oftentimes they want to take a little bit more time until they understand the issues.

And that it's usually the assigned Commissioner would allow for that to happen. So, we're not reading anything more into it that there's like any major concern. And we're not getting indications of major concerns in the meetings that we had so far..

Okay. That's helpful.

Secondly, just – sorry, I have to ask this every call, but just is the Cameron project still on the same timeline as you said at the Analyst Day?.

Yeah. I mean, ourselves and our partners and our contractors are committed to that timeline. I mean, I asked Joe to talk about some of the processes that we have in place to monitor the project and try to stay on top of it with our partners and our contractors because Joe has been personally involved with those.

He also talked to the CEO of CB&I earlier this week.

So, Joe?.

Thanks, Debbie. Hi, Steve. Yeah. Debbie mentioned, I did speak with Phil Asherman over the weekend in preparation for this call, as I normally do now. And there is no change in the dates that they gave us and we gave you last fall.

And I think it's important to emphasize what Debbie did, the commitment of each of our partners, and as you know, our customers, to get the project finished and into operation is completely there. We have joint venture board meetings regularly. We're all going to go out and see the sites next month when we have our meeting.

And everybody is engaged in getting this important project done..

Okay.

And just any other update on the partner issue?.

Go ahead, Joe..

Yeah. Thanks, Debbie. There's really no update from what I gave at the Analyst Day. I continue to believe and I'm confident that we'll find a common path here to a solution, but as I mentioned, it's complex, and we have to negotiate all these things, and it requires unanimous consent as I mentioned.

So, I don't have a particular date of when we're going to get it done, but it's clearly one of my priorities, and I'm focused on it, and I'm actively working on it with my team and with the partners..

Okay. Thank you..

Thanks, Steve..

We will take our next question from Julien Dumoulin of UBS. Your line is open..

Hey. Good morning. Good afternoon..

Hi, Julien..

Hey..

Hi..

So, quick first question here, more focused on the quarter than anything else. Can you elaborate a little bit more on – I think the gas marketing was the – what you guys talked about in the deck.

What was the source of that $26 million higher earnings a little bit, and how should we think about that on a go-forward basis?.

I mean, that – we always have given you indications of kind of information on how gas prices affect our business and we have that information in the appendix.

Part of what you're looking at is the change of gas prices year-over-year, quarter-over-quarter, but I'll have Jeff take you through that, and in particular to have you understand kind of what we think is going to happen for the remainder of the year.

So, Jeff?.

Good afternoon, Julien. On the $26 million improvement, roughly $15 million of that is from mark-to-market losses in the quarter last year. And as Debbie indicated, obviously, the natural gas prices have improved just over $1. I would also mention that at the end of this year you'll think about the ENI contract will be rolling off.

And I think if I was to guide you in terms of how we think about the year, this segment we showed you at the analyst conference would report roughly $40 million to $50 million of negative results for the year, and we still think that's the best way to think about it..

Got it. Excellent.

Can you elaborate any further successes? I know we're just a few weeks out in terms of the Peruvian bid or anything like that, and also in terms of Mexico on the marketing effort, those – both seems somewhat tangible (15:35)?.

Yeah. As you say, it's only been 30 days out, Julien, but in that 30 days, we did announce a new solar project in Mexico. And we – if we think to answer the Mexico question first, is there's some wonderful opportunities in terms of renewables there.

A lot of bids will be going out for additional renewable resources to meet the standards that have been set by Mexico. And then, what's significant about the Pima project is it's one of the very first projects to be assigned with an industrial customer.

And we think that that's a really interesting market to have some opportunities to directly sign up with some of the commercial and industrial customers to provide them renewable resources. Also on Mexico, we're still expecting bids coming out on the electric transmission side.

And as we told you at the conference, we think there's some great opportunities to continue our efforts in the liquids side of the business, and don't have anything specific to announce in that area. But we see a lot of interest in finding a partner like IEnova to build the infrastructure on the liquid side of the business.

And as you know, we already have an ethane pipeline and a terminal and so we've been in that business and we think it has some great opportunities for us.

On the Peruvian pipeline, I will ask Steve Davis to add any color to that, but what I will tell you is that it looks like that that project will go out for bid and that it's likely to go out for bid later this year or the beginning of next year.

And our focus has been on ensuring that the bid turns will allow for a truly competitive bid process with participants that are concerned about not taking on any Foreign Corrupt Practice Act responsibilities. And as you know, we backed away from that when we felt that we could not get the kind of a clean deal that we felt that we could execute on.

And so, we have had some meetings with the government officials, encouraging them to create a bid that ensures that the project is going to be financeable, and that there will be adequate opportunities to bid in the way that the bid is structured.

Steve, I don't know if you want to add anything more to that?.

Yeah. The only thing I would add, Julien, as you know, we talked a little bit about this at the analyst conference, and we obviously know a lot about the project. And as Debbie had mentioned, we are having discussions with the government.

And to the extent that it fits our risk profile, we'll take another look at it and we expect something to happen either later this year or the first part of next year..

Got it. Excellent.

Sorry, going back to the first question real quickly, Jeff, did I hear you right saying something about a contract rolling off? How does that impact the sensitivity, just really quickly to clarify?.

I think that you'll recall that the – ENI was one of the original contracting parties at Cameron, and that contract is rolling off within the year. And what we're really basically saying is, next year, you will not have the benefit of that contract..

And, Julien, that's the regas contract..

Right..

Yeah. I mean, this has been part of what we've told you all along that we want to remind you that that – because we start – I mean, it's a good thing – because we start the testing of the first train in the beginning of next year, we cannot have export going on at the same time as import.

And so, that contract has to stop so that we can begin the testing of the trains for the export. And that impacts us financially later this year, and the beginning of next year, always have been incorporated into our base plans..

Got it.

But that reduces the sensitivity, just to be clear, the gas sensitivity?.

Not really. It's – I mean, it's probably about a $5 million benefit this year and zero next year..

Yeah..

Got it. All right. Sorry to belabor it. Thank you, all..

Yeah. It's a – if your question is, does that reduces sensitivity to gas prices, no, because it's really not dependent upon gas prices. The gas price sensitivity is really tied to the ECA plant and attained good (19:55) contract at the ECA plant, plus any gas in storage and have volatility during the course of the year..

Okay, great. That's what I thought. Thank you..

Okay..

We will take our next question from Michael Lapides of Goldman Sachs. Your line is open..

Hey, guys. Thanks for taking my questions. One quick one just on the utilities, the Mobile Home Meter and the CIS projects.

Those were not included in your base CapEx, but they were included in I think your upside scenarios, what's – can you kind of just walk us through what's changed in the last four or five weeks?.

Sure. We've actually made our filing on the CIS project for SDG&E and about $250 million project. So, now we're beginning the regulatory process on that and that happened since the analyst conference.

And then, do you want to talk a bit about the Master Meter, because there are some differences between the two utilities and how that moves forward?.

Sure, Debbie. Hi, Michael. As I had mentioned at the analyst conference and that looking at some of the incremental capital opportunities, they were both highlighted and we talked about quarter two filings of which we made a filing on the 28th and then one just on Friday for the Master Meter project. So, both are in alignment with what our plan is.

The CapEx associated with the SDG&E Customer Information System is about $250 million and that the gas company for the Mobile Home Park, it's about a $270 million capital project. So, both are solid projects and we look forward to timely approval of those going forward..

When do you think spend – how long do you think the regulatory approval process will likely be, and when do you think the capital – and what's the timeline for the capital to actually occur or actually be spend?.

Well, the good news is we've had two very successful pilot projects at both SDG&E and the gas company. So, the Commission is very well aware of our track record, and so we think we will get a timely decision likely in into 2018 and we would begin immediately after the approval..

Okay. And, Joe, I want to come back a little bit to the Cameron project.

And I know you talked with Phil from CBI, but also note that in their earnings call yesterday, one of Phil's colleagues, Patrick Mullen, used the comment when asked about Cameron LNG and the start-up, and I'll quote, "We expect the phased start-up of these three trains starting in the latter half of next year".

That may have just been kind of bundling of Train 1 and Train 2 with one supposed to be mid-year and one supposed to be at the end of the year, or you could interpret that as, hey, everything is moving a little bit more again. Would love your thoughts if any..

Joe, why don't you go ahead and....

Okay. Yeah. Thanks, Michael. I obviously read that as well and I think you can read it a number of different ways. I think what he was saying wasn't different from what my discussion with Phil was because I've been in a number of conversations with Pat and I think they believe that they are in the schedule that they gave us.

So, I think he was just commenting altogether, he basically said all the trains are moving toward getting into operation in the second part of the year, which is very consistent with what we said..

Got it. Thank you, Joe. Much appreciated..

Sure..

We will take our next question from Paul Patterson of Glenrock Associates. Your line is open..

Good morning..

Good morning, Paul..

Hi. How are you doing? So, a lot of my questions have been answered, but just a few quick ones. So, I was wondering how the Australian LNG curtailment potential might impact you guys. What kind of opportunities you guys might see or just in general what it means for the market? So, that was my first question..

Yeah. I'm going to have Joe go through it in more details, but what I will say is that we've been saying all along that we saw a market opportunity in the 2021 to 2023 period. And I think now the kind of the herd mentality is where we've been all along. And that's why we've moved forward.

We're trying to get Port Arthur in the marketing stage where we are right now. And while we're trying to get the issues with Cameron Train 4 resolved so that we can get into the market for that.

And I think what you're seeing is what we have been predicting all along as if there was going to be a demand need in the market come that kind of timeframe, and that's why we've continued to work on development of our projects.

Joe, do you want to talk about the Australian curtailments?.

Sure. Hi, Paul. I guess I would say it this way, I think that the long-term users of LNG both in Asia and Europe are looking for long-term solutions and reliability. And so they want to make sure that they're going to a source where they can see that over a long term.

And I can say that the meetings that we had together with Woodside where we were jointly marketing the Port Arthur facility went very well and there's quite a lot of interest in that facility.

And I think that what's going on in Australia it just shows that not necessarily getting these things done means that always that that's going to be available or available for a longer period of time.

So, I'm not sure it's going to have an immediate effect, but it starts to show that the end users are seriously starting to contemplate the need to go FID pretty soon, if not this year, next year or into the next year so that they can make sure that they meet the needs that they have, and don't get in trouble if something like that were to become more serious.

And so, I think that having Woodside along with us has been very good for the project and for us. So, we look forward to trying to get these things signed up..

Okay.

So, it's been positive for the most part, and – but you don't actually see any sort of near-term potential opportunities that are going to be developed (26:42) if I'm understanding what you guys are saying, is that right?.

I would like to make sure I understand your question.

You're talking about near-term development projects in Australia or here?.

No. No. I mean, with you guys.

I mean, if you're having curtailments, that would suggest that people might have concerns about – first of all, what does it mean for just LNG sales in the near term in the market, what does it mean in terms of tightening up the market perhaps in Asia? And then secondly, does it make – and it sounds like you were saying that it does, does it make people more interested in something like Port Arthur or are there opportunities that you guys are exploring in terms of getting supply that may not be as – I'm sorry, that may not have as much risk perhaps associated with it as something like we're seeing in Australia?.

I mean, we have talked to you all about what we saw as the advantages of the U.S. project, over these projects with dedicated supply sources because of the supply it dries up or that there's a problem of getting that supply to market. And in the U.S. market, you don't have one dedicated supply source for the gas.

And you also have the ability to sell off the gas at liquid points in the U.S. if you don't want to take the gas. I actually think that what's happening in Australia and in some of these other locations where the supply source starts to get more constrained makes it way better for the U.S. in terms of marketing our projects.

And so that's the opportunity that we see right now. And I think Woodside's seen the similar view, they've been very excited about our Port Arthur project from the beginning. And I think, being an Australian company, they see the benefit of that as well..

Okay, great. And then the second question I have is that we're seeing – there was an announcement last – yesterday on some immigration enforcement by the DOJ with respect to another LNG facility. And we've also been hearing in other industries potential issues with immigration raising construction prices, delaying in-service dates and stuff.

And I was just wondering – or at least the risk that's being perceived to that, I'm just wondering if that – is it all an issue that you guys are thinking about in terms of just as a cost and scheduling with LNG..

I'm going to have Joe – because we just read the news report and we checked into it. It's not our project and we have controls in our project that should allow us not to have this kind of a situation occur. Joe, do you have any....

Yeah. Thanks, Debbie. So, I think as she just said, we saw this article this morning and didn't – we haven't heard that, so that didn't sound like it was us. I checked. It wasn't us, it wasn't CC JV, and it wasn't their contractors, and we have controls in place around that.

Also, you heard on the call yesterday, Phil mentioned that they were employing a great number of people, and they have a huge roster of people that they go to to bring people onsite. And they haven't really had problems bringing people onto the site. So, I think their controls are very sound, and we haven't seen this problem.

Obviously, one of the reasons that we hired this consortium of contractors to work on this project was they have a large resource of people to go to, to bring to the site, and very much though in Louisiana..

I didn't mean to suggest it was your facility. I guess what I....

There was a comment that if a news article that it was..

Yeah..

Oh there was? Okay, I'm sorry..

Yeah, there was. Yeah. That's why we had it checked right before the call. So....

Yeah, I checked as well.

But just an – and FYI, though, I guess, just a – sort of a derivative to that is – and I don't mean to belabor this, but are you seeing any issue with any of your projects, LNG or otherwise with respect to this issue of – we're hearing this from the building sector, et cetera, that like they're having significant concerns about access to labor due in part to limitations on immigration and more immigration enforcement.

Have you heard of anything? Was that – is that something that's coming up in terms of costs or anything that you're hearing about in general in the market?.

We have not, actually, Paul, and we do talk about this when we meet with the contractors. And they seem to have ready access to labor and have not brought this up as an issue..

Okay. Thanks so much..

Thank you..

Thank you..

That concludes the time that we have for questions at this point. I would now turn the call over to Ms. Debbie Reed for closing remarks..

Well, thanks again, for joining us today. And if you have any follow-up questions, please feel free to contact our IR team. Have a great day..

That concludes today's conference. Thank you for your participation. You may now disconnect..