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

Greg Gordon - Evercore ISI Faisel H. Khan - Citigroup Global Markets, Inc. Steve Fleishman - Wolfe Research LLC Christopher James Turnure - JPMorgan Securities LLC Michael Lapides - Goldman Sachs & Co. Leslie Best Rich - JPMorgan Investment Management, Inc..

Good day, everyone, and welcome to the Sempra Energy Second Quarter Earnings Call. Please note that today's conference is being recorded. At this time, I'd like to turn the conference over to Rick Vaccari. Please go ahead, sir..

Debbie Reed, Chairman, President and Chief Executive Officer; 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'd like to remind everyone that we will be discussing forward-looking statements on this call within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today.

The factors that could cause our actual results to differ materially are discussed in the company's most recent 10-K and 10-Q. It's important to note that all of the earnings per share amounts in our presentation 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 second quarter 2017 earnings press release for a reconciliation to GAAP.

I'd also like to mention that the forward-looking statements contained in this presentation speak only as of today, August 4, 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. Let me hand the call over to Debbie..

we expect the protections we put in place to keep Cameron's long-term economics materially the same. We think it is important to share with you the progress that has been made on this project site. Please go to the next slide. This slide shows a photo of the Cameron site as of mid-July. As you can see, a lot of work is getting done.

That said, we will continue to monitor the progress against the schedule to help ensure that safety and long-term reliability of the project is not being compromised. Now, turn to the next slide. We have listed some of the most important and relevant accomplishments to date, which give a sense of how far construction has progressed. I'll mention a few.

100% of the engineering work has been completed, nearly 100% of the procurement is completed, and all three heat exchangers have been laid on their foundation. Finally, this project has our full attention, and I want to emphasize how important it is to us. I also know that it's important to all of you.

With that, I'll hand it off to Jeff who will walk you through our quarterly results.

Jeff?.

$23 million due to higher earnings from LNG marketing activities in 2017 and losses in the second quarter of 2016 that were related to gas price movement on inventories sold forward, $21 million of higher operational earnings, primarily from acquisitions and pipelines placed into service in Mexico, $16 million from higher CPUC base margin, net of operating expenses at SDG&E, and finally, $11 million from higher earnings due to U.S.

renewable assets that were placed into service in 2016, as well as increased production across the portfolio this year. The strong operational results that I discussed for Mexico were more than offset by $12 million of losses in the current quarter related to foreign currency and inflation effects. This compares to a $16 million benefit last year.

I'd also like to emphasize that assuming current rates, $30 million of additional hedge income is expected to be booked in the second half of the year and largely offset the year-to-date FX losses at Mexico. And with that, I'll hand it back to Debbie, who will go over our business updates..

the cost of capital extension; and reinstating injection at Aliso Canyon. And third, we raised 2017 adjusted EPS guidance and affirmed 2018 EPS guidance on a strong expected operational performance. With that, we'll conclude our prepared comments and stop to take any questions that you might have..

Thank you. And we'll go first to Greg Gordon from Evercore ISI. Your line is open, sir. Please go ahead..

Thanks and congratulations on a great quarter..

Thanks, Greg..

Several questions. Listen, I heard your script and I understand your reticence to get too granular on guidance in the context of the change in the Cameron service date being offset by improvements elsewhere.

But can you talk to, at a high level, how much of that improvement in 2018 that's offsetting the Cameron delay is coming from new projects versus just better expected returns in either the utilities businesses or the existing infrastructure businesses..

Sure. Let me kind of walk you through because I think it is important for you to understand that. Because the key thing is that these are improvements that we believe are sustainable going forward. And we've really been working throughout 2017 to put these kinds of things in place and then to build upon them in 2018 and 2019.

So, let me hit the highlights of the key areas. First, last year, we got about $1.4 billion of incremental capital approved in our utilities that was outside of a rate case capital. And so these are incremental projects.

And we've been really focused on how we can expedite getting those projects in service, beginning the collection of AFUDC and then putting into service in the rate base. And then we filed for another $500 million worth of projects that I mentioned in my talking points.

So, the utility performance has been very strong and it's really based upon the deployment of additional capital largely. And then we are building on another 200-megawatt solar project in California. And that will go into service throughout 2018. And so we will have that on an ongoing basis producing earnings.

In Mexico, we've had a lot of new projects that we've announced. We have a solar project with the Pima Solar. Now we have these liquids terminals that we'll be constructing throughout 2018 into 2019.

And then we've just had really strong performance from all of our businesses in terms of being very efficient in the operations, which is something we believe can continue. So everything we're looking at in 2018 is, in my mind, totally focused on better performance and performance that we can continue beyond 2018..

Fantastic. Thank you. My second question goes to what's happening at Cameron. And you gave a very detailed explanation, so thank you.

But given the track record CB&I has had with other projects with delays, how can you be confident that this is the sort of final straw and there aren't going to be further delays? And have you sort of built in some thinking around that in the new schedule you've given us, or is the new schedule you've given us sort of completely in sync with like specifically what they have told you is their current expectation?.

What they told us is only one piece of the thinking. And trust me, we've done a lot of thinking on this.

And then we brought in consultants from the outside who have been working with us to look at all of the scheduled documents, look at the onsite work that have been done, and then give us their independent assessment of the schedule and when we think that the trains can come into service.

So what we're giving you today is our best estimate based upon all of the work that's been done by the 70-plus people we have on site as part of the JV, the outside firms that we've been using to validate the information, and then looking at what we've gotten from our contractor, and then just looking at how things can affect projects.

And so it's our best estimate based upon all of those factors, not just what the contractor has given us..

Okay. And you commented on the fact that CB&I or this joint venture with – CB&I has with Chiyoda, has indicated that they'd like to be paid more money. It's not clear to you at this point that their claims are valid.

Is there any way for you at this point to sort of quantify the types of dollars we're talking about? And if you can or you can't, that being said, how is the contract structured so that you are protected if you have to deploy more capital?.

Yeah. I'm going to have Joe go through this because he has been on the ground working on these issues.

So, Joe?.

Yeah. Thanks, Debbie. Hi, Greg. So let me talk about that. I've spoken about this before. The thing that we looked at when we entered into this project was a very risk-mitigated approach. And so we did, with our partners at Cameron JV, sign a lump sum turnkey agreement, and we expect to hold the contractor joint venture to that agreement.

And like most construction projects, people will come along with claims and ask for different things, and that's the normal course. I'm not going to go into the specifics of the dollars because we do not have enough information to even review it, audit it, or anything else. And so I don't want to talk about dollars.

And one of the reasons is very important for you all to remember. This is really not a Sempra issue. We are protected throughout the agreements that we've signed on this issue, primarily through the EPC lump-sum turnkey agreement, and we expect them to perform under that contract. But also through our other contracts, we're protected.

Our economics are going to be protected. Of course, as Debbie said, we're disappointed in the earnings movement. But we're confident about getting the value out of this project. And I think that's what we should focus on when you're talking to us about Sempra's impact from these kinds of cost issues.

Does that help?.

That's the best you're going to tell me, then that helps. Thanks, guys. Take care..

All right. And we'll take our next question from Faisel Khan from Citibank. Please go ahead..

Yeah. Thanks. Good morning..

Hi, Faisel..

Hi, Debbie.

Did you guys issue any change orders to the contractor at all?.

No, we didn't issue change orders to the contractor..

Let me just – let me just – throughout the course of the contract, there's been one change order for $12 million. That's it..

That's it..

Okay. Okay, understood. That's the only question on Cameron.

And then just on the sort of CCA issue that sort of seems to be ongoing in the news, do you guys have any update on what's going on in your territory with some of these aggregation sort of topics?.

Yeah, that's a great question because from the Sempra standpoint, we really support the customers having choice and we like the ability of customers having the choice to go to a CCA because we basically earn our money based upon them using our transmission and distribution systems.

And so if they want go to another party for procurement, that's great. The problem that we have in California is ensuring that when those customers exit, they take all of the costs with them.

So, I'm going to have Steve talk about the work that we're doing at the Commission now to have them meet the state law in California, which requires customers exiting to take all of their costs..

Thanks, Debbie. Hi, Faisel. As Debbie mentioned, our focus really is on ensuring that the Commission complies with current law, which requires departing load to take their fair share of costs. And the three IOUs have put forward a solution to that at the Commission that we're hopeful will be voted on by the end of this year.

So to the extent that when there is departing load and they take their costs, that's fine and we just need to make sure that going forward, the Commission complies with that law and we have a solution to do that.

I would like to just say, though, keep in mind that in California, our rates are decoupled and our generation rate base investment is less than 10%. So, we're not long on generation obviously. In San Diego, we don't have any CCA providers. We do have some cities that are looking at it.

And one of the key issues in variables as they look at this issue is what the Commission is doing in compliance with state law on the departing load charges. So that's a key issue in variable which is causing the cities to take a second look at things..

Okay, got it. And actually I misspoke. There's one more question on Cameron just on – follow up to Greg's question on the schedule.

Does that include any sort of disruptions from weather at all in the hurricane season?.

Yeah. I'll let Joe come in, too..

Thanks, Debbie. Hey, Faisel. So let me tell you why I have confidence in what we're projecting for you. We have – and Debbie said, 70 people. We actually now – we keep increasing. We have about 120 people on the site, and the engineering capacity is looking at what's going on in the site. So we know what's going on in the site.

We also have multiple external consultants there reviewing the work and the process.

In reviewing the forecast forward, what do we see going forward? And as the work continues to progress, as you see in the photograph, there's lots of work to finish so that would naturally cause you to be a little bit more confident in it, yet we do have to take into account things like weather, so as our consultants and we look at it, we take into account the normal course of events in the Gulf Coast.

What I would say is not in there is unexpected events. If there was a major disruption from a major hurricane in 2017 or 2018, that would probably cause some change, but it's hard to say because it depends where the hurricane hits, how much time is away.

You know that recent storm, Cindy, that they had, they were away from the site like a day-and-a-half. So it kind of depends on the severity of it, but we do, in our own analysis, build in the normal kind of weather issues that confront contractors in the Gulf of Mexico..

Okay, great. Fair enough. Thanks for the time. Appreciate it..

Thanks, Faisel..

And we'll go next to Steve Fleishman from Wolfe Research. Please go ahead..

Yeah. Hi. Good morning, or afternoon. I guess, first, a couple of questions on Cameron. So the third point you made in terms of the delay that kind of you included the inherent risk in constructing and testing.

So that is it fair to say, there's some cushion that you've kind of put into this update? I mean, we'll hear from CB&I I guess on Monday when they report.

So, there could be some maybe difference potentially in the timelines there?.

We just used all the data that we had available and really looked at the work being done by our outside consultants against what the contractor had given us and gave our best estimate of when we think the trains will come on in 2019. So I mean, we looked at all the factors we had before us and it's our best estimate for that..

Okay.

And then also, any color that you could give on how the relationships are with the partners going through this process and the like? Any color there?.

Well, since Joe meets with them about every week, I'll have Joe talk about that..

Thanks, Debbie. Hi, Steve. We have a good relationship with our partners. I mean, remember, our partners are also our customers. And we had a pretty lengthy call with them yesterday. I met with them a couple of weeks ago in Houston. I'm in Houston quite a bit.

As we got these schedules, I was poring through the schedules with them and with our engineering teams. I think it's a very constructive relationship, and they have two roles to play there. They're both our partners on the equity side and they are our customers. And so we are working closely together.

We're all aligned even with the contractor consortium to try to get this done as soon as possible. But obviously, people have different views on things, but I think we have a good relationship with them..

Okay. And then last question just on the offsets, specifically on the utility side, I guess, Debbie, you mentioned like $1.4 billion of capital approved outside the rate case.

Could you just give a little better sense of are these other projects getting recovered through other mechanisms outside GRC, or it's kind of AFUDC type benefits they are – yeah..

Yeah. Most of the projects that are in the $1.4 billion are FERC projects. So you get AFUDC on the projects during construction and then as they are completed, they immediately go into rate base because we use like actual rate base for FERC.

So you don't have to go back to the CPUC and try to recover the rate base amount after, it just trues up on the actual rate base based upon what actual rate bases that you are in and so the majority of these are at SDG&E and the majority of them are FERC related.

And then on some of the other areas, there are regulatory mechanisms that are put in place outside of the rate case to recover costs that are CPUC related. So we don't have to wait for a rate case..

Okay. Great. Thank you..

Thank you..

And we'll go next to Chris Turnure from JPMorgan. Please go ahead..

Good morning, guys. I wanted to talk about new LNG in Port Arthur in particular or you had an announcement during the quarter there that you had I think signed a preliminary agreement with Korea.

Could you just maybe put that in context and specifically talk about the MOU that you had at Port Arthur already, how this would work and maybe how if at all this is differentiated from some of the other companies that made announcements at the same time in regards to agreements with Korea?.

Yeah. We had an agreement with KOGAS and we made an announcement about having a memorandum of understanding with them to hopefully come to some conclusion for them to become a buyer and potentially a foundation buyer which would allow them to take some equity in the Port Arthur facility.

And I think part of the differentiators that we found in the market is that there are some buyers who like to take some equity in the projects as well and as KOGAS has expressed an interest in that, we're hoping to get one to three foundation buyers that would take equity positions, and then sell the rest of the gas that's produced to other.

So, it was really great to have the biggest – I guess, the second largest LNG buyer in the world want to be in our project and want to have equity in our project. And so, we're in the process of marketing now. We'll also be continuing our discussions with KOGAS to finalize agreements. But we thought it was really positive news..

Okay. Great. And then, shifting gears back to Cameron. I know we've had a couple of questions on the topic already, of course, but you used the language that kind of indicated the project could spill into – start in 2019. So I think one of the earlier questions spoke to a range of potential outcomes.

What's the base case start-up for each train right now? And is your assessment here something that was kind of pushed to you by CB&I, and then you felt like you had to kind of give us this information, or conversely do you feel like you were kind of getting out ahead of what they're saying and this is a relatively I guess conservative view on what could happen?.

Yeah. Let me just kind of talk about what's happened and how we got to this point because I think it's important for you to understand the level of monitoring and meetings and questions and everything that we have with a contractor.

Once they gave us a detailed schedule back in October, then we've hired outside firms to work with us, and then we have all these people on site to monitor performance against the schedule.

And what we started to see is certain things on that schedule being done sooner than the schedule indicated, and other things being done on a schedule later than was indicated.

And what we wanted to understand is really kind of what the critical path was on the project and what does that mean to the end day on the project, because when you have a combination of things getting done faster and things getting done later, it's really hard to determine what the overall impact was. So we brought in outside consultants.

We spent time with the contractor that – they gave us some dates that they felt that they could meet. We had our consultants, and I'll review all of that type of information, and we came to some of our own conclusions.

And our conclusions are that, from our standpoint, we feel that we don't want to have any earnings in our financial plans for 2018 for Cameron. We don't want to assume that risk, and we want to give you guidance without any earnings from Cameron. If something wonderful happens and it comes in early, that's great.

But from our standpoint, from the information that we have, we just felt it was best to take all of the earnings out for Cameron in 2018, and then focus on what we could do as a management team to get to our guidance without having any of Cameron. And we have some great opportunities to offset Cameron.

And we just thought it was the right thing to do and that's the way we approached it..

Okay. That's very helpful context and color there. You mentioned that CB&I came to you with an updated version of the schedule when that was one piece of the equation in your overall analysis here.

If they had not done that, I guess I would ask, would you have kind of come to the same conclusion? Would you have given us this updated schedule as it exists right now?.

We would have....

And the work that you had done preceding that..

Yeah. I mean, we would have used all the information available to do our assessment of what's the right thing for our company and our guidance that we gave you. And that's exactly what we did in this case. And then the schedule that we have from CB&I doesn't have a lot of details and everything on it. So we still have to work through that.

But we have to tell you what we believe based upon all the data that we have, and we would have done that whether or not we had a schedule..

Okay. Got you. Thanks, Debbie..

All right. We'll take our next question from Michael Lapides from Goldman Sachs. Please go ahead..

Hey guys. A couple of different ones.

First of all, SoCalGas in the second half of 2017, is there anything unusual when we should think about the earnings bridge from the second half of 2016 and the second half of 2017 at either SoCalGas or SDG&E?.

No, not really from year-to-year at the two utilities. I mean, I think the big thing that happened at both utilities is we got our attrition allowance year-over-year. And then to the degree we manage costs within that attrition allowance, that gives us some upside.

But year-over-year, the companies have done pretty well, when you look at quarter-to-quarter. If you look at on an annualized basis, as you know, there's seasonality at SoCalGas, but there was seasonality at SoCalGas last year as well..

Got it. Okay. And one thing, can you talk a little bit about you've got the new renewables -.

One thing, Michael. I just want to remind you, and we had this and all the data last year and I was assuming you weren't talking about things like this, but we did have an impairment last year at SoCalGas within our South pipeline that we reported in the quarter last year. But that was in the information that we had disclosed (37:47).

But there was nothing else between the two companies that was really different year-to-year..

Got it.

And on Sempra Renewables, how are you looking at over the next couple of years, the potential to add to that backlog or add to that pipeline of potential solar plants? And can you remind us, what's the amount of – I don't know the right term for it, but literally the land or the sites that you currently control, what's kind of the amount of megawatts you could add over a very long period of time, if you were able to get the contracts?.

Yeah. I mean, there's several hundred megawatts capability at each of those locations. I think you're talking about our two solar locations. And there are several hundred megawatts of capability there.

We're focused on developing those and we have been bidding those into RFPs, and then looking at other ways that we might be able to add value on those sites with maybe adding some batteries and being able to do peak-shaving. So we have our existing sites that are expandable and then we're also developing new sites.

And a lot of our new sites are really developed in the Midwest area with customers we've already done business with and adding wind, which is very economical in a lot of those locations. And we have a lot of customers that we've already done business with that are interested in either expanding an existing site or adding a new site.

So we're doing a lot of work in that area. And then as I mentioned, we have contracts now to build a 200-megawatt solar project in California as well that we just talked about. So I mean it's a business that we think has growth potential.

There's a lot of states that are very interested with renewable portfolio standards and with the economics being there for wind and solar now. But it's one of our growth areas but I wouldn't say that we have changed significantly our capital plans in that area from what we showed you at the Analyst conference..

Got it. Thanks Debbie. Much appreciated..

All right. And we will take our last question from Leslie Rich from JPMorgan. Please go ahead..

Hi. Just following up on that question. The 200-megawatt solar contract that you just announced, that was not at your existing facilities.

This is a new project altogether to do – because it's coming online so soon, is it something that was already in development when you bought it?.

Yes. It was a project that was in early-stage development. We bought the project and are building it out..

And do you have a contract with I guess one of the IOUs in California?.

We have average 18 year contracts with a number of parties, some municipalities, a variety of parties where they offtake..

And in terms of the cost, you talked about having over $1 billion of new capital since the Analyst Day. But adding it all up, unless you got this solar project virtually for free, it must be more than $1 billion.

So just wondering if you could give any indication of the CapEx associated with that?.

No. We don't give the CapEx associated with individuals but it is over $1 billion. If you add everything up, it's over $1 billion, so..

Okay. And then, just on Cameron. I'm a little confused about the contract terms. You said today that it was a fixed price turnkey contract. And in the past, I thought you had said that to the extent that there were incremental costs associated with building Cameron, that the cost to build would go up, but that your ROE would stay the same.

And the way that would happen would be that the higher cost to build would be essentially passed through to customers.

So, where am I wrong?.

You're not wrong. That's the way that contract is written..

That is what I tried to say..

Yeah..

So....

I said it's not a Sempra issue, Leslie, we're protected. We have the contract protections with the contractor, that's the primary. But we also have other protections in our other contracts that keep us whole on a return basis and you have exactly right..

And so, how are you thinking about Train 4 at this point? Has your thinking shifted on that?.

I would say our focus is on Train 1 through 3 right now and getting those done. So we have been having meetings with the partners to look at development of further trains on the site. And Joe just was at a meeting a few weeks ago. I think we're making some progress but I don't expect anything to be resolved before the end of the year..

Okay. Great. Thank you..

And that concludes our question-and-answer session for today. I'd like to turn it back over to Debbie Reed for closing remarks..

Well, thank you all for joining us today. And if you have any follow-up questions, please feel free to contact the IR team. Have a great day. Thank you..

Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. You may now disconnect..