Richard A. Vaccari - Sempra Energy Debra L. Reed - Sempra Energy Jeffrey W. Martin - Sempra Energy Joseph A. Householder - Sempra Energy.

Greg Gordon - Evercore Group LLC Julien Dumoulin-Smith - Bank of America Merrill Lynch Christopher James Turnure - JPMorgan Securities LLC Michael Lapides - Goldman Sachs & Co. LLC Paul Patterson - Glenrock Associates LLC Faisel H. Khan - Citigroup Global Markets, Inc..

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

Good morning, and welcome to Sempra Energy's third quarter 2017 financial presentation. A live webcast of this teleconference and slide presentation is available on our website under the Investors section.

With me in San Diego are 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 and Controller.

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 in our presentation are shown on a diluted basis, and that we will be discussing certain non-GAAP financial measures.

Please refer to the presentation slides that accompany this call and to Table A in our third quarter 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, October 30, 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, Rick. This morning, we reported third quarter earnings per share of $0.22 or $1.04 on an adjusted basis. We reported year-to-date earnings per share of $2.99 or $3.87 on an adjusted basis. Based on these strong year-to-date results, we expect to be at the upper end of our 2017 adjusted earnings guidance range of $5 to $5.30 per share.

On a GAAP basis, our updated 2017 earnings guidance range is $4.13 to $4.43 per share. Excluded from adjusted earnings this quarter was the impairment of SDG&E's wildfire regulatory asset, which I will discuss later.

On this call, I want to update you on actions we have taken to implement our growth strategy, including plans to create value from the Oncor transaction. I will also review our General Rate Case filings at our California Utilities and the requested rate base to continue to run safe and reliable systems.

Before I review each of these, please turn to the next slide, where Jeff will walk you through our quarterly results.

Jeff?.

Thanks, Debbie. Earlier this morning, we reported third quarter earnings of $57 million, or $0.22 per share. This compares to third quarter 2016 earnings of $622 million, or $2.46 per share. On an adjusted basis, we reported earnings of $265 million, or $1.04 per share.

This is in line with third quarter adjusted earnings in 2016 of $259 million, or $1.02 per share. Please turn to the next slide. As Debbie mentioned, our year-to-date adjusted earnings have been strong and are 11% higher than last year. The quarterly variances are explained in the business unit summary section.

The key takeaway from our results is that we're on track to deliver strong full-year earnings. And with that, let's move to slide 7; and I'll turn it back over to Debbie..

expansion of the transmission grid and increasing the capacity of existing transmission facilities to accommodate low growth and reduce congestion; expansion into new growth regions in the Dallas-Fort Worth area; expedited deployment at smart grid and other technologies; and hardening of critical infrastructure to mitigate storm and other damage and the cost of restoration.

Please turn to the next slide. As we were contemplating this transaction, the market opportunities we saw led us to believe we can make both companies better in the future. As you can see on the slide, Texas is a leader in energy and holds the number one spot in many areas.

By expanding our business portfolio in the region with the Oncor transaction, we believe we are well-positioned to source additional opportunities in the Gulf Coast and Mexican energy market through the strong relationships, market intelligence and experience we have in one of the fastest-growing markets in North America.

Please turn to the next slide where I will discuss our California Utilities' recent rate case filings. I briefly mentioned some developments at our California Utilities earlier, and would like to take a minute to provide some additional details.

With regard to the 2019 General Rate Case filings, we requested a 19% and 11% revenue requirement increase over estimated authorized 2018 levels for SoCalGas and SDG&E, respectively; 6% to 7% average annual attrition mechanisms through 2022, which would result in a four-year rate case cycle; and projected investments related to our risk assessment and mitigation filings, which should help ensure continued safety and reliability of our gas and electric systems and increase our rate base over time.

We will work constructively to achieve a fair and timely decision to be implemented in 2019. Please turn to the next slide. I would like to discuss the impairment that we recorded this quarter related to the cost from the 2007 wildfires.

In August, two ALJs issued a proposed decision denying SDG&E's request to recover cost previously incurred related to these wildfires. We vehemently disagree with the PD. While this is not a final decision, under applicable accounting guidance, we concluded that the wildfire regulatory asset should be impaired.

However, based upon the evidence and law, we believe the Commission should rule in our favor.

Since this proposed decision, we have had properly noticed ex parte in all party meetings with the CPUC to reiterate our position that the wildfires fall under the construct of inverse condemnation; and that as such, this cost should be fully recovered through insurance and rate.

California courts have allowed plaintiffs to claim inverse condemnation against SDG&E for the 2007 wildfires. To date, courts have applied inverse condemnation to utilities, in part, on the notion that utilities can pass through the cost to ratepayers.

To further support our position, FERC previously approved, in full, SDG&E's wildfire recovery, considering the inverse condemnation precedent. We will vigorously pursue available avenues to favorably resolve the issue with the CPUC. And if needed, we'll exhaust all available administrative and court appeals.

Also, in light of the recent wildfires in Northern California, I want to highlight the proactive steps we've taken over the years to implement a comprehensive fire risk mitigation program to help protect our customers and stakeholders. I'll go through the few of many examples.

We installed 13,000 new steel distribution and transmission poles with higher-strength conductors and increased line spacing beyond the CPUC's requirement.

We developed the largest utility weather network in the nation, with 170 weather stations, each of which provides real-time weather data, delivering enhanced situational awareness to our utility operations and field personnel. We also provide this data to firefighting agencies.

We contracted for supplemental firefighting resources, including one of the largest helitankers in the world; and like our weather data, we make this resource available to our region. And we developed and implemented an aggressive vegetation management program, where we have a database of 460,000 trees that are in close proximity of our line.

We systematically assess, remove, and trim vegetation away from our lines and facilities to reduce fire risk. Now, please turn to the last slide. To recap, we've been working diligently to deliver on our value proposition.

First, we expect to be at the upper end of our 2017 adjusted EPS guidance range; second, we're leveraging our growth drivers to execute additional projects at both our utility and infrastructure businesses to add to future earnings growth; and third, we're advancing the Oncor transaction by making substantial regulatory progress, and we're looking forward to adding this strategic growth platform to our business.

With that, we'll conclude our prepared comments and start to take your questions..

Thank you. And we'll go first to Greg Gordon with Evercore..

Thanks. Good morning..

Good morning, Greg..

A couple of questions. I apologize if I'm a little fuzzy on it.

Can you take us through the initial Los Ramones Norte investment, and what the economics were that you articulated on that project? And what should we expect the incremental economics to be on this additional $520 million investment?.

Sure. We have been a part owner of this project. As you know, we own 25% of it. And what we did is we acquired Pemex's 25% share, bringing our total investment up to 50% of the project. I'll have Joe talk a little bit more about Ramones Norte. And we're hoping to close this in the end of this year 2017. Joe, you want to....

Sure. Thanks, Debbie. Hi, Greg. Hey, you might recall that when we – IEnova actually acquired our 50/50 Pemex's interest in our joint venture, we excluded this particular pipeline, because this pipeline was the one that was actually in construction at that time.

And as the parties negotiated for the acquisition of Pemex's interest in the joint venture, they were hopeful of getting a price that recognized that the pipe was fully operational, and all the construction risk, and everything was behind them, but that wasn't the case.

So, we actually pulled this piece of the operation out of that and continued the joint venture, while the pipeline was being built. And now that's fully operational, it's already in service and have much lower risk, we went back to them, and they were still interested in selling that interest.

And so, we struck a deal with them, which is a really good value, but probably closer to the lower end of our normal expectations of high single digit, low double-digit unlevered returns, and that's simply because it has lower risk.

It's completed, it's in service and operating, and it's a great pipeline and is one of the biggest pipelines taking gas to Mexico from the U.S..

Fantastic.

Joe, while I have you, can you give us an update on what the – now that we've hopefully gotten through hurricane season, whether you are still comfortable with the productivity level you're seeing at the Cameron site? And when it is that we'll get another big sort of update from you on how you're doing on milestones?.

Look, before Joe says anything, I just want to remind everyone that we believe, and we firmly believe, from everything that we see now that Cameron will be liquefying natural gas in all three trains come 2019. And they've made a lot of progress on construction, and things seem to be going well, and not too much impact, it appears, from the hurricane.

Joe, why don't you add a little color?.

Yeah. Sure. Thanks, Debbie. Greg, you pointed it out, and we're not completely through the labeled hurricane season, but I think we've made it through. And unfortunately, for all of you in the Northeast, it seems like the weather is moving that way.

But the good news is, and although we recognize that certainly a lot of people in the Gulf Coast and across Texas suffered as a result of the storm and we contributed money to the efforts there, the storm had relatively little impact on the actual Cameron LNG site.

And as far as the schedule goes, Debbie just mentioned, that we have no change in the schedule. We did get a claim from the contractor around Hurricane Harvey. It was a named storm, so they're allowed to make a claim, but it was rather immaterial, less than a couple of weeks delay.

So, that didn't really change the schedule and an immaterial amount of money related to it. They have told us they might have some additional claims, but we don't have information on that. But I think it's pretty well-recognized that there wasn't much damage. We're still on track. Things are going well.

They were back on the site working hard within a couple of weeks of the storm. And so, that's where we stand..

Right.

My last question may seem a little bit esoteric, but on the inverse condemnation case, first, is it on the docket? Is it on the calendar due for a vote at any point soon? And two, if this were to go against you, don't you think it would have tangible enough consequences to people's expectations of risk in California that you would want to reassess what you believe to be your true cost of capital in the next review? Because if they're not going to honor the law here, then the true cost of capital for a California utility in the normal course of business is, in my perspective, materially higher than what you settled on earlier this year..

Well, it's on the calendar for November 9, and it's been on the calendar three times, and then postponed. So, we don't know what's going to happen on November 9. Obviously, with the situation in Northern California and the Napa fires that this has to be a focus area of the Commission.

And the laws in California have been pretty clearly determined by the courts to apply to the investor-owned utilities. And these laws rely on the fact that these utilities that provide services for the public interest and have facilities in the public domain would have the ability to recover cost, and that therefore, they have strict liability.

And that it is something that we will put through the court system if the Commission does not rule in our favor. In terms of the cost of capital, I think that's speculative at this time as to how all of this comes out. We look at the risks that we can mitigate.

And as I've said earlier in my remarks, we have really focused on a lot of mitigation efforts to reduce our fire risk in Southern California and our service territory. Our insurers have told us that we have the absolute best fire mitigation plan that they've seen in the industry.

So, our focus is on doing what we can control, and that we're hopeful that the Commission decides like they did earlier when they granted us the funds for FEMA recovery, which was our cost of restoration from the fire, and that FERC granted us full recovery in this.

And that it would seem a little odd not to have the same type of recovery with the law in California. But at this point, we'll wait and see what happens when the Commission decides..

Much appreciated. Thank you..

And next, we'll go to Julien Dumoulin-Smith with Bank of America Merrill Lynch..

Good morning..

Good morning..

Good morning, Julien.

Hey. So, I wanted to follow up first on the Oncor side. Obviously, you've talked about some of the process here.

Can you give us a little bit of an update on settlement negotiations, I know, just to the extent which they continue to happen, and expectations on even getting to a timeline there, first and foremost?.

Sure. I would first say that we've been in settlement discussions for a few weeks, and that our modification through our financing actually came from hearing from the parties as to what their principal concerns were.

And when we heard those principal concerns, we decided to simplify the financing and make our regulatory filing consistent with the 65/35 equity to debt that we talked about. And that really came from a lot of our discussions with the parties.

Since that time that there have been some discussions with parties, but they're in the discovery process right now. And they, of course, have to do their diligence. And then, we would expect as soon as that discovery is complete, which should be very shortly, that we would enter into full settlement negotiations with the key parties in the case.

Speculating timing on when a settlement could be reached is difficult, of course. But I think, really, by addressing the financing concern, that addressed a lot of the issues that we had heard from the parties..

Got it. All right. Excellent. I'll leave that one be. And then moving back to Cameron real quickly, can you elaborate a little bit just in terms of you reaffirming the timeline.

Is it that the hurricanes this summer, did they ultimately just shift within the expected delivery time window, or is it sort of offset by productivity improvements at other points? And I just want to make sure we're sort of crystal clear about how – the reaffirmation for folks out there?.

Yeah. I mean, we told you when we gave you the schedule the last time, it was not just a schedule that we have looked at and had hired consultants to do assessment of the schedule.

And we've gotten third-party input when we looked at what we told you on the last call relative to the schedule, that what we saw was no change from those expectations coming through the hurricane season. There were some small delays, but we would not have any major impact of the hurricane.

Joe sits on the Management Committee and is very close to this, so I'm going to ask him to add anything he wants to that comment..

Thanks, Debbie. Hey, Julien. I think it's more like within the window. Yeah, they're making good progress at the site and they were there right after. And so, we just didn't lose that many days, and then the hurricane season kind of came to a bit of a halt at that point.

So the weather has been good, and they've been working hard at the site and making a lot of progress. So I think it's a combination of those things, but I'd say we're probably kind of within the window. But still the good thing is, we're still going to report earnings of $300 million to $350 million in 2020..

Got it. All right. Excellent. And then, lastly, just real quickly on....

From Cam..

From Cam. As Debbie said, from Cameron..

From Cameron, yeah..

Yes, of course..

I just want to clarify..

Of course..

Exactly. Absolutely, absolutely. It wasn't lost on me. Just very quickly on the CapEx side, wanted to make sure I'm hearing you guys right about obviously a lot of success year-to-date on adding things to the bucket.

Where do you stand about reevaluating the open season in Texas, and then just in general about accelerating CapEx focused on Texas, be it Oncor or elsewhere?.

Well, at this point, the open season, we just got the results in and we're contacting the parties who have expressed interest. And we don't have anything to announce at this time, but that we have a lot going on in the Gulf Coast region.

People forget sometimes that we have the joint venture with TransCanada to build the Marine Pipeline across the Gulf region to Mexico. That's under construction right now. We have some storage development opportunities tied to the LNG facility. We have the pipelines tied to the LNG facility.

And then, we have the three trains at Cameron under construction in Louisiana, and then are looking at moving forward with Port Arthur. So we see a lot of opportunity, most of which has been on the gas side. And we think that Oncor also has, in talking to their leadership, opportunities.

They've been a little capital-constrained, as you might imagine, and have opportunity to invest for the benefit of their customers in areas like technology and in release of congestion that will actually reduce cost to customers, improve service.

And we've asked them to start looking at, if they were not in such a capital-constrained situation, what more would they be able to do in terms of investments over time. And I think that they're really excited about the opportunities to look at spending time focused on how they grow their business versus dealing with five years in a bankruptcy court.

So I think there's some great opportunities, Julien..

Excellent. I'll leave it there. Thank you all very much..

And next, we'll go to Christopher Turnure with JPMorgan..

Good morning. Going back to the wildfires, I had two questions on that front.

One was just kind of how you're perceiving, I guess, the exact legal definition of negligence there, and how that was interpreted in the proposed decision? And then, secondly, on that front, kind of knowing what you know today and, let's say, hypothetically the CPUC does come out and reject your request, would you have had the opportunity to act differently in the court process at all?.

Well, I'm not sure if I fully understand your question, but I'll try to answer as I interpret it. That negligence is not the standard for inverse condemnation. I mean the court, in looking at the fire claims never considered whether there was negligence or gross negligence; they only considered whether our facilities were involved in the fires.

And if that is shown to be the case that your facilities are involved in the fires, the standard in California is strict liability. And that standard of strict liability comes from the view that you can spread those costs across the ratepayers.

And it was a law that was really started from municipalities, largely, so they have facilities in the public good. And then if something flooded, or there was an issue that they could recover those costs across all of the customers in the municipality. The courts in California did interpret it to apply to the investor-owned utilities as well.

So you don't ever get into a negligence standard through the court system on this. And that's the concern that we have with what's the proposed decision. It doesn't rely on how the courts determine how inverse condemnation is applied. It sets a different standard that is not the standard that's used by the court to assess whether you have a liability.

So, that's where we will be fighting that. And we do not believe that – clearly, FERC saw that, and FERC looked at the same set of facts and believed that we were a reasonable utility operator; the very same set of facts, and that we were a reasonable utility operator.

And so, these ALJ proposed decision, and I will stress, these are not Commission decisions at this point. They are ALJ proposed decision, we just see as inconsistent with the law and inconsistent with how the other regulatory agencies looked at the same set of facts..

Okay. Got you.

But then, let's say, hypothetically, you could rewind the clock almost 10 years now and going into the original court processes, know that you would not ultimately get recovery from ratepayers, would that have changed your legal options at all, I guess, negligence or no negligence?.

No, because that's not the standard. We would have had no option on that. The courts determined that the 2007 fires fell under inverse condemnation, that our facilities were involved, and the fact that our facilities – there's no negligence whatsoever that's a consideration on those cases.

And if we had tried to fight that, that's not the standard that's applied with inverse condemnation. So, it wouldn't have changed anything. And that's the thing that why we will go back to the court system if it's not ruled in our favor..

Okay....

The other thing I'll mention to your point, this is Jeff Martin, is the most important thing is we were prudent operators back in 2007, just like we are today. So, it doesn't really change, as Debbie's really going to the fact that the law at that time relied on inverse condemnation, and that's the basis of why we think we should have recovery..

And I would say FERC determined we were prudent operators in their decision. So, it's just – yeah..

Yeah. I know you guys have been pretty clear, I think, on your position here and what your options were, so thank you for that clarification. My follow-up is just on Oncor. Maybe not necessarily your financings, but in regards to the memo that came from one Commissioner last week on the process.

Does that kind of fall outside your expectations as it relates to the ultimate outcome of the case or your options here? Does it surprise you maybe given your discussions with interveners up into this point at all?.

No, not at all. I mean, this is the discovery process that occurs. And if you look at the other cases that have been before the Commission, that this Commissioner has asked similar kinds of question, it's part of their diligence. And I would expect the Commission and interveners to due diligence.

In the next 10 days, we will be submitting supplemental testimony to address all these issues. We look forward to addressing those issues.

We have nothing of concern and nothing to hide that we have great financial strength as a business, and we look forward of explaining all of that, explaining the kinds of contracts we have on LNG, where we have really mitigated the risk in our types of contracts.

So, that we will submit our responses to the PUC of Texas, and we would expect them to consider all of that as part of the fact base in the case..

Okay, understood. Thank you, Debbie..

Thank you. Operator. And next, we'll go to Michael Lapides with Goldman Sachs..

Hey, guys. Couple of easy questions for you. One on Southern California Gas. And there's something I'm not entirely sure I understand. Maybe I'm misstating how much growth is there.

At the Analyst Day back in the spring, you all highlighted that you thought – I think it was in Steve Davis' slides that Southern California Gas' rate base could get to about, I don't know, around $7.6 billion in 2021. And yet in today's slide deck, you're showing it at $9.7 billion in 2022.

That's a pretty big change, right? I'm looking at slide 13 from today. And I want to make sure I'm following that just because I know you've announced a bunch of projects, but I didn't realize looking at that chart on page 13, you announced something that could take SoCalGas' rate base all the way up close to $10 billion..

Let me take you back to the Analyst Conference and explain or remind you how we did the forecasting for the utilities at the Analyst Conference.

And what we told you at that time, when we looked at the out-years of the plan, and 2021 is the one that you're providing, all we did is we took the approved rate base that we had, and then we applied the attrition factor that had been approved for the utility over the life of the plan, so that's all we did.

And that it did not reflect our regulatory filings; it did not reflect this new process, this risk adjustment mechanism, the ramps that we had to look at risk, and then how do we mitigate those over time with a systematic replacement of key components of the system.

And so, what you're seeing now is what we filed for in the rate case, that would be our 2022 with the amount of rate base we requested and the attrition mechanisms we requested in the rate case. That is not to say that we're going to get all of that, but that is what we've requested.

And in that rate case now, we have specific projects and specific activities to consume that capital. When we did it before, all we used is what had been approved with an attrition factor on it. So, this gives you greater visibility to what we're looking at in terms of CapEx requirement for the utility.

Again, it's our filing, we may not recover all of that, but we think we have great justification for it, because that all came out of the process that the Commission has asked us to use which is this risk-adjustment process..

Got it.

So, in other words, what you're saying today is that your expectation, both for capital spends and rate base growth at Southern California Gas is significantly higher than what you outlined back at the Analyst Day in the spring?.

Yeah. It's higher for both utilities; it's about $1 billion higher. The 2022 number is about $1 billion higher than the 2021 number we gave you.

And for SDG&E at about $2 billion higher for SoCalGas, which came out of our rate case filing, and going through detailing from this risk process that we were required to use, what are the expenditures that we need for our business, and then what is the normal replacement cycle for replacement capital.

So, that's what we have in our regulatory filings..

Great. And then one Texas question or an Oncor question.

The Oncor rate case, already been resolved, the new rates go into effect soon, are there any post-deal infusions you have to make into Oncor? I know they're getting a higher equity layer, or is that all just kind of factored in as part of the transaction?.

Yeah, the Oncor Board of Directors will determine how the – they changed their equity and the rate case; they thickened their equity. And the Oncor Board of Directors will determine how that equity gets put into the business. So, it was approved in the rate case..

But it's not incremental equity above the purchase price that Sempra has to put in..

Jeff, why don't you describe how that....

Thanks, Michael. The purchase price we've agreed to is $9.45 billion. As you've talked about, subsequent to our original purchase request, they have finalized the rate case and that they need to move the equity layer up from roughly 40% equity to 42.5% equity.

As you know, along the way, it depends on when our closing occurs and what time post-closing we actually have to fill up the rest of that equity infusion. But if there are additional equity requirements for Sempra, it's been fully factored into all of our financial analysis..

Got it. So it's factored into all of the $0.10 to $0.20 accretion dilution, all that....

Yes..

...kind of stuff that you put out in the public domain..

Yes, it is..

Yes, it is..

Great. Thank you, guys. Much appreciated..

And next, we'll hear from Paul Patterson with Glenrock Associates..

Good morning.

Can you hear me?.

Good morning. Yes, we can hear you. Hi, Paul..

Okay. Great. Okay. So just with the wildfire, just sort of a follow-up, I think, on the earlier question.

Just to make this crystal clear, this has nothing to do with negligence, nothing associated with the ALJ's ruling, et cetera, correct?.

The inverse condemnation law in the state has no negligence requirement, and that's the law that governs who has accountability for the claims under inverse condemnation.

The ALJ had indicated that there are things that they thought that we should have done differently in hindsight review, looking at things, but that there's no court that has come out with any finding of negligence in this case..

Okay.

And I guess the question that comes up, of course, is that since we've had wildfires in other parts of the state, if there was to be found, hypothetically speaking, negligence associated with the utility, would a finding in your favor have any ramifications with respect to a situation in which negligence was the reason associated with liability, if you follow me?.

Yeah. I don't know how I can explain. Negligence is irrelevant. That if you have a fire that your facilities were involved in, the law of the State of California, if it shows that your facilities were involved in that fire, you have strict liability. You don't go to court. No one claims negligence in court. They claim inverse condemnation.

And if it's shown that your facilities were involved, there's a strict liability standard. All the claims that we paid out on our fire had to do with strict liability and inverse condemnation. And that law is created because you were supposed to be able to collect from your customers, or if you're a municipality, those in the municipality.

So negligence is not an issue. No one claims in these cases negligence. They come in and they claim its inverse condemnation, and that you have strict liability for it.

So all the claim – I'm sorry?.

So I appreciate that, and I thank you for the clarification.

I'm just wondering though, in terms of the issue of recovery from ratepayers – I guess, I should have articulated this more clearly – in terms of recovery from ratepayers, would the issue of negligence be an issue that might come up? Do you follow what I'm saying? Because it sounds like you guys are saying that there were some things in the ALJ where they said that you might have done some things better, et cetera, et cetera, et cetera.

But I guess what I'm wondering is, and I guess the reason why the question is being asked I think to a certain degree because of the recent wildfires is, if it was found that a utility had been negligent in terms of how it was – I'm not suggesting you guys were involved in that, I'm just suggesting – I'm just questioning, if that was the case, would that have any impact, in your opinion, on the ability to recover from ratepayers?.

It should not. It should have no basis. If you just look at why you buy insurance, and we get rates funded to buy insurance. Insurance, it doesn't matter, you pay out a claim, an insurance claim, and it doesn't matter whether there's negligence or not in an insurance claim. Insurance is to protect you.

And this law basically is like a replacement of insurance. And so, it should have no basis. It should have no basis..

Okay. Great. I appreciate that. The second question I'd like to ask you is with respect to Oncor.

And just, in general, I mean are you guys willing to keep the ring-fencing in other provisions long-term? Should we think about that as sort of long-term setup, or how should we think of those?.

Well, when we look at Oncor and the ring-fencing and we look at the independent Board of Directors, at some point it would be nice for us to have built the confidence of the regulators in the State of Texas by how we act as an owner, that they would see that we should be treated like any other utility in the State of Texas.

And other utilities don't have that kind of structure. But I think it's something that we have to earn over time, with the way that we capitalize that business and ensure that we honor the provisions and that they see that Oncor management really makes the decisions for the best interest of Texas and its customers.

And I hope we are able to earn that confidence from the regulators over time. When we look at the ring-fence and those provisions, we felt it was not significantly different than what we have or how we've operated with our California Utilities under a first priority condition, where we have to put capital into those utilities to meet their needs.

And so, is it livable? Yes. Would we want to change it over time with us proving that we were strong owners and the Commission feeling that we should have the same kind of regulatory structure that the other Texas utilities do. When we get to that point, we would look at maybe a way to transition..

Okay. Great. And then, sorry, just back to the wildfire and the write-off charge. What I'm a little bit unclear about is, you just got an ALJ recommendation, and just based on that, it seems that you guys are taking the write-off, even though we don't have a final decision.

And I'm just wondering, I guess, there must have been some sort of threshold question about whether or not you thought it was likely or not.

And I just wonder if you could address specifically what led to the write-off and hypothetically, if you did get a ruling in your favor, we just see that reverse, is that correct or is there anything else we should think about?.

Yeah. Let me just comment that the standard is very high; it's an 80% probability standard. And what we looked at is all of the facts. We looked at – that we had an ALJ proposed decision; we don't have an alternate decision at this point; and that we have to meet this 80% probability standard.

And under the accounting rules, we felt that the interpretation of the accounting rules would cause us to feel, at this point, that we would have to take this impairment. If the Commission rules in our favor, then obviously, that whatever the ruling would grant us, then that would come back.

And I would stress that is a non-cash impairment, but it was our interpretation of the accounting rules is applied to all of the information that we had..

Awesome. Thank you..

And next we'll go to Faisel Khan with Citi..

Hi, Faisel.

Faisel?.

Yeah. I'm here. Sorry, guys.

Can you hear me?.

Yes..

Okay. Thanks, Debbie. I just had one follow-up question. Actually not a follow-up question, a separate question.

Just in terms of the Aliso Canyon investigation, is there any update on the timing of the study that's being done by Blade?.

No. They're in the process right now of removing the casing on site, but there's been no indication of when they're going to complete their work. So, as soon as we hear anything, of course, we would report that. But at this point, they're just in the process of removing the casing from the well..

Okay. So, they're still on site, I guess....

Yes..

...doing more of the physical work. They're not even ready to put a report together, it sounds like..

No. They're not at all ready to put a report together. They haven't even completed the casing removal, so..

Okay. Okay. Great. Thanks..

Thank you..

And that will conclude today's question-and-answer session. At this time, I'll turn things back over to Debbie Reed for any additional or closing remarks..

Well, thanks again for all of you joining us today. And we hope to see many of you next week at EEI. If you have any follow-up questions, our IR team will be available, and have a great week. Thanks..

That will conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect..