Faisel H. Khan - Sempra Energy Jeffrey Walker Martin - Sempra Energy Joseph A. Householder - Sempra Energy Trevor Ian Mihalik - Sempra Energy.

Christopher Turnure - JPMorgan Securities LLC Steve Fleishman - Wolfe Research LLC Greg Gordon - Evercore ISI Julien Dumoulin-Smith - Bank of America Merrill Lynch Michael Lapides - Goldman Sachs & Co. LLC Paul Patterson - Glenrock Associates LLC.

Good day and welcome to the Third Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the program over to Mr. Faisel Khan. Please go ahead, sir..

Good morning and welcome to Sempra Energy's third quarter 2018 earnings call. A live webcast of this teleconference and slide presentation is available on our website under the Investors section.

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

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

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

Please refer to the presentation slides that accompany this call and to Table A in our third quarter 2018 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, November 7, 2018, and the company does not assume any obligation to update or revise any of these forward-looking statements in the future. With that, please turn to slide 4 and let me hand the call over to Jeff..

Thanks, Faisel, and thank you all for joining us today. The third quarter was quite busy for us here at Sempra. We recently held a strategic update call where we discussed the announced InfraREIT and Sharyland transactions, and our renewable sales agreement with ConEd. This quarter's strong financial results add to this positive momentum.

And together with this week's LNG announcements, further advances our strategic vision to become North America's premier energy infrastructure company. Today, we'll be providing more color on the progress we're making related to our disciplined phased approach to our strategic vision. Specifically, we'll be discussing how we're progressing.

Cameron Phase 1, advancing our LNG development opportunities through this week's announced Heads of Agreements and memorandum of understanding, high-grading our portfolio and strengthening our balance sheet. But to be clear, we're committed to maximizing shareholder value through all these activities.

We believe this can be achieved through our superior, projected earnings per share and dividend per share growth, coupled with our T&D risk profile. We'll continue to make disciplined investments tied directly to this strategy. I'd like to briefly discuss this construction progress at Cameron.

The successful completion of this project remains a top priority. As we have stated all along, we continue to believe all three train will be producing LNG in 2019. We also remain confident in McDermott and Chiyoda's ability to deliver a state-of-the-art facility.

Later in this presentation, Joe will provide some additional details regarding the commissioning of train 1 and other construction activities. In addition, we're working hard to make real progress on our LNG opportunities. Joe just spent two weeks in Asia and Carlos and I were in Europe meeting with our partners and potential customers.

We received significant interest and hope to continue building our relationships in those two regions. Our recently-announced MOU and HOAs are a direct results of those marketing efforts. Please turn to the next slide. I'm pleased to say we continue to make great strides with our vision to become North America's premier energy infrastructure company.

An integral component of that vision is our commitment to continue to improve the visibility of our T&D earnings mix, which we are able to do through our recently-announced Texas acquisitions. These transactions require no incremental equity and we expect to fund them with a portion of the proceeds from our announced U.S. solar portfolio sale.

Furthermore, we're continuing to make progress on the sale of our U.S. wind and certain U.S. midstream assets as originally announced in June. We're currently engaged in an active sales process with very strong initial market interest. Lastly, we're continuing to strengthen our balance sheet.

We plan to pay down parent debt with the portion of the proceeds from the announced asset sales and the settlements of our common equity forwards. And with that, I'll hand it off to Joe..

Thanks, Jeff. I'd like to highlight some of the recent projects we've captured that are incremental to our plan. I am particularly pleased with this week's announcements of the MOU with Total and the three HOA agreements for the ECA Phase 1 project. I'll discuss these in more detail in just a moment.

Oncor is now projecting CapEx of approximately $10.5 billion over five years compared to the $8.4 billion over five years that we discussed at our analyst conference. The portion of this growth can be attributed to, number one, interconnecting the Rayburn County Electric Cooperative into ERCOT.

Two, building approximately 30 130-kV transmission projects in 2019 and 2020, largely comprised of greenfield and brownfield lines. And third, adding two 345-kV projects in West Texas. They're part of a new transmission loop to support increased load growth in the Permian Basin. IEnova continues to expand its strong position in Mexico.

Most recently, it announced the acquisition of a 51% equity interest in the Manzanillo marine terminal project. IEnova will build the terminal, which has a total estimated cost of approximately $200 million. The facility is expected to go into service in late 2020. IEnova is making great progress in this new terminal business.

And also recently announced a capacity agreement with BP for 50% of the Baja Refinados liquids terminal, and capacity agreements with Chevron and Marathon, each for 50% at the Topolobampo liquids terminal. Each of these terminals are now 100% contracted. IEnova continues to make great progress in diversifying its portfolio and its customer base.

I would also like to briefly mention that IEnova's management team has been engaging in collaborative discussions with the incoming administration. We look forward to furthering the goal of developing critical and essential energy infrastructure designed to provide safe, reliable, and lower cost energy for the people of Mexico.

Please turn to the next slide. On top of capturing incremental opportunities, there have been several positive developments at our California utilities. Specifically, we received a very constructive decision relating to the Power Charge Indifference Adjustment or PCIA reform.

Announced our commitment to helping the City of San Diego's formation of Community Choice Aggregation or CCA, which we're financially neutral too as were decoupled from commodity sales. View the recently-enacted wildfire legislation as a constructive move in the right direction.

Submitted a project alternative for the San Diego Pipeline Safety & Reliability Project or PSRP with total CapEx estimates that are similar to the PSRP project, and finally, filed for an increase of our FERC return on equity to 11.2%, an increase of approximately 100 basis points over the current 10.05%.

Please turn to the next slide where I'll discuss our LNG business. As we discussed at our analyst conference, we look to create leadership positions in fast-growing addressable markets. Our LNG business fits that profile.

There continues to be significant worldwide demand growth for LNG and we're well positioned with five strategically-located opportunities in North America, comprising over 45 million tonnes per annum of long-term projected capacity.

Sempra is committed to growing its LNG business into a world-class organization, and over the past few months, we've made significant progress in realizing this goal, including restructuring our organization to form the North American Infrastructure group to better align our resources and enhance our visibility to execution, making great progress at Cameron, and advancing the four LNG development projects in our queue, and launching a comprehensive global marketing outreach program to further discussions with our potential customers.

These efforts have proven to be effective as illustrated by our execution of the Memorandum of Understanding with Total and execution of the Heads of Agreement with Mistui, Tokyo Gas and Total for ECA Phase 1. These accomplishments speak volumes about our commitment to our LNG business. Please turn to the next slide.

Our MOU with Total is a significant milestone for our LNG business and outlines the potential for Total to contract up to 9 million tonnes per annum of offtake across Cameron LNG Phase 2 and ECA Phases 1 and 2. Please turn to the next slide.

The signing of the three detailed HOA agreements with Mistui, Tokyo Gas and Total for the expected LNG offtake at ECA Phase 1 represents a significant step toward negotiating and executing definitive agreements with these quality counterparties. Importantly, ECA is the only brownfield LNG opportunity on the West Coast.

We believe that ECA provides a great opportunity for our customers to source low-cost U.S. shale gas and provide it to the growing markets in Asia. Please turn to the next slide and I'll discuss Cameron Phase 1 in greater detail. As Jeff already mentioned, we continue to believe that all three trains at Cameron will be producing LNG in 2019.

We also have confidence in McDermott and Chiyoda in meeting the current project schedule. In fact, for train 1, all major construction activities have been completed to begin the commissioning and start-up process. Importantly, we've commenced the start-up of support systems for the three trains and commenced the refrigerant gas turbine test.

This progress keeps the project on track and the remaining milestones are lined up in fairly rapid succession, namely the initial start-up of train 1 including the introduction of fuel gas into the system as well as commissioning of all three flares, and the production of first LNG from the project in the first quarter of 2019.

Regarding our EPC contract and McDermott's recent announcements, I'd like to remind you that one, the EPC contract is a lump-sum turnkey fixed price agreement with established milestone payments.

Two, we reached the settlement agreement with our EPC contractor, which includes Chiyoda and McDermott in December of 2017, which resolved all known and unknown issues through that date.

And all Cameron joint venture partners as well as our EPC contractor, McDermott and Chiyoda, are in alignment with our expectations that all three trains are producing LNG in 2019. Now please turn to slide 11, where I'll turn the call over to Trevor who will review with you the third quarter results..

Thanks, Joe. Earlier this morning, we reported third quarter GAAP earnings of $274 million or $0.99 per share. This compares to third quarter 2017 GAAP earnings of $57 million or $0.22 per share. On an adjusted basis, we reported earnings of $339 million or $1.23 per share.

This compares favorably to third quarter 2017 adjusted earnings of $265 million or $1.04 per share. So let's turn to slide 12, where I'll discuss the key drivers impacting our quarterly results.

Our adjusted earnings results were primarily driven by the following; $154 million of earnings at the Sempra Texas Utility segment due to the acquisition of our interest in Oncor in March 2018, and $39 million of higher earnings at SDG&E, primarily due to electric transmission operations.

This is partially offset by $86 million of higher costs, primarily related to increased interest expense and preferred stock dividends at parent, which includes the impact of the Oncor acquisition financing, and $38 million primarily related to unfavorable impacts from foreign currency and inflation effects, net of foreign currency derivative effects at Sempra Mexico.

In addition, I'd like to point out that this quarter we recorded a one-time non-cash charge of $65 million in equity earnings, reflecting the full impairment of our remaining equity method investment in RBS Sempra Commodities as a result of previously-disclosed ongoing litigation in the UK.

Another adverse item impacting this quarter's results is the movement in the Mexican peso. Specifically, during the quarter, we saw the peso strengthen relative to the dollar, which drove the large non-cash FX loss in Mexico. However, subsequent to the end of the quarter, we've seen the peso weaken, which has largely reversed these non-cash losses.

We continue to monitor the movements in the peso relative to our guidance assumptions of a year-end rate of approximately 21 pesos to $1 and its associated impact to our full-year 2018 earnings projections.

Based on strong year-to-date operating results, plus our expectations for the remainder of the year, we're reaffirming our full-year 2018 adjusted earnings per share guidance range of $5.30 to $5.80 per share or $2.83 to $3.44 per share on a GAAP basis. Please turn to the next slide and I'll hand it back over to Jeff..

Thanks, Trevor. We're pleased with this quarter's financial results and the progress of our plan to-date. However, I'd like to stress that our management team will continue to be focused on delivering our disciplined phased strategy of becoming North America's premier energy infrastructure company.

We actually believe this strategy will be strengthened by the work we're undertaking with our full board. Working with the newly-created Business Development Committee, your management team will be focused on five key areas.

Number one, conducting a bottoms-up strategic review of each of our businesses; number two, restructuring our corporate center activities to better support each of our businesses; number three, performing a strategic review of our businesses in South America and determining whether it's better to hold and grow partner or divest these assets; number four, completing the renewables and midstream divestitures that we've previously announced; and finally, number five, updating our financial plan to reflect these updates.

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

And we'll take our first question from Christopher Turnure with JPMorgan. Please go ahead. Your line is open..

Good morning, everyone.

Just on that last set of priorities you mentioned Jeff, could you elaborate on the, I guess, it was the corporate center review in a little bit more detail and kind of what you're thinking there?.

Good morning, Chris. Thank you for joining our call. Sure.

As you think about the divestitures we announced back in June, where we're selling our domestic solar business, domestic wind business and our non-utility natural gas storage businesses, our parent cost – our parent activities are really intended to reflect how we support all the different businesses that we own.

So as you reduce your overall asset base, we need to make sure that we're reducing our parent cost at the same time. So we'll be looking at how we can better leverage technology for repeatable processes. We'll look at resizing our head count, we'll also look at whether some functions that we do at corporate could be better done in the business unit.

So, we're realigning our parent cost to make sure that we're better serving our businesses and we're also lowering our cost structure..

Over the past several years you've had some movements in asset sales and divestitures as well.

To what degree before this time have you focused on cost cuts at the corporate level?.

Thank you. Remember, going back in the 2015 to 2016 timeframe, we had an enterprise-wide initiative to create more value around our business model and I think across all of our utilities, across our non-utility businesses and parent, we took significant cost out of our business.

Some of those initiatives are still ongoing at our utilities in 2018 and 2019, we called it our Fueling our Future initiative. You've heard us talk about in the past.

What we're doing at corporate really is a phase two of that work and this is really intended to make sure that we right-size our cost as we reduce our asset base and our revenues related to the three divestitures that I cited..

Okay, that's helpful context. And then my second question is on the LNG announcements from today and I think two days ago.

Could you give us a little bit more color on the competitive environment maybe what has changed if anything there over the past three to six months and give us a little bit color too on your decision to articulate a goal of 45 million tonnes per annum?.

Sure. I actually appreciate that question a lot.

I think as the new leadership team got together in May and June and we prepared for the analyst conference, we took the time we went to the World Gas Conference, I was joined by Joe Householder, and Joe, I'd like you to make some comments when I finish too, if you want to add some color and we took the opportunity to say where are we in terms of our competitive advantages geographically with respect to all five of the projects that we're pursuing, we took time to meet with a lot of different customers starting in Washington, D.C.

I think we made the decision, Chris that we need to be a little bit more ambitious about what we think we can accomplish. And that was really driven by the customer interest we saw in our projects.

So, I think one of the things that today's announcement from my standpoint, but I think the key takeaways are is that there's a lot of validation in the marketplace that we are very well competitively situated with our terminal down at ECA, as well as the two terminals we have in the Gulf Coast.

So we've raised our ambitions and that's why as you think about our strategic goal of being North America's premier energy infrastructure company, we also want to be North America's premier infrastructure company in the LNG space.

And that 45 million ton per annum figure was intended to reflect what we think that we can accomplish, and I'll give you a little bit more color in terms of why the Total MOU is so important. We took the time starting at the World Gas Conference to meet with Patrick Pouyanné, Joe and I did.

And I think when you look at the integrated natural gas space and all the competitors in the marketplace, they are currently the number two publicly-traded LNG player.

But I think their ambition from equity gas in the ground through service to customers, and they've circled the goal of having 40 million tonnes per annum in their LNG portfolio by 2020, and then growing that portfolio at a 5% rate well into the future.

What we felt like was that we matched their ambition in a small part of that value chain and namely that was making sure that we could turnkey some infrastructure here in the United States to support exports abroad.

And that's why we were so interested in trying to match their ambition across the value chain really in an area where we thought that we had some unique expertise and really well-positioned geographic sites for liquefaction terminals. But, Joe, I appreciate if you will make some comments as well..

Sure. Thanks, Jeff, and hi, Chris. We've been engaged with Total since they made the announcement of buying the LNG business from Engie and I have been talking to them, and then we had the good fortune to meet with them at the World Gas Conference.

And then Jeff and I met with them a number of times since, and he mentioned I was just in Asia with some of our LNG team and Faisel was along with us as well. But Jeff was busy with Carlos and others in Paris working on this. So we had a quite busy couple of weeks and a very busy weekend getting these things done.

But I wanted to go to your point about competition. We have great partners and customers at Cameron and Total is now one of them, but also Mitsubishi and Mistui, and we're very pleased that Mistui is able to join us in the ECA project. I want to tell you there was a considerable competition for that project.

We had a lot of people that wanted it and it was a little bit hard to explain to a couple of them that they were not going to be offtakers. We sold the thing out in these HOAs and having Mistui and Tokyo Gas and Total is very exciting for us.

But I want you to know the competition was really high there and will continue to be high for the large scale project..

Okay. That's really helpful. So it sounds like you guys are taking a step forward on the level of competition on the supply side here, but that also the demand remains pretty robust in terms of interest from prospective clients..

I think that's accurate..

Chris, let me just add on to that because I mentioned and Jeff mentioned, I was in Asia for almost two weeks. The interest for our Port Arthur facility also is very robust. So we met with people in three countries and from the customers to the ministers and we have a lot of interest in all of our projects.

And I think it speaks volume to our ability to execute across this frame and we've been talking about it for a while, but now we are in execution mode..

All right. Appreciate that Joe. Thanks Jeff..

Thanks, Chris..

We'll take our next question from Steve Fleishman with Wolfe. Please go ahead. Your line is open..

Yes, hi. Thanks. A couple of questions. So first just, Jeff maybe in your strategic initiatives that you mentioned one of the things that I keep having people seem to get confused of is this board committee is called the LNG and Business Development Committee. But then none of these initiatives specifically talk about LNG.

So could you just kind of clarify that issue since it seems like really on LNG you're mainly focused on just getting these growth projects done?.

Yeah, Steve, I appreciate the question and we certainly appreciate you taking the time to come visit us here recently in San Diego. The way I would describe it is, we had an ad hoc committee of the board.

Over the last several years it was really focused on meeting and making sure that we were galvanizing particularly the construction leadership from our board around making sure that the Cameron construction process went forward in a very healthy way.

And as we went through resolving our thoughts and discussions with Elliott and folks, what we decided to do was rename that committee really around the business development review process.

So that committee really has nothing to do "with LNG", it has everything to do with making sure that we take a comprehensive bottoms-up review of our entire business. There are no sacred cows. You've heard me say that before.

If there are opportunities to drive more value to our customers and to our shareholders, that's exactly what you should expect us to do. So, the LNG portion of that title and I think you correctly point this out, is a little bit of a misnomer. It's really a legacy issue for the name of that original ad hoc committee.

But this is intended to be a committee of the board that's focused exclusively on working with the management to make sure we look across the entire enterprise at ways that we can unlock value and strategy, will always be owned by our full board.

But this is the committee that will iterate the process through February, where we've been making board decisions related to our strategy. And you should expect us to provide a fulsome update in the last week of March of all the five work streams I discussed at our analyst conference..

Okay. Great.

And then, just on the HOA and MOU and the like, just from a standpoint of pricing and returns, I know you don't have official contracts yet, but just, should we read these as you're seeing sufficient pricing to get the returns you need on these projects? How can we think about that?.

Steve, it's a great question. Obviously, the MOU – and we've taken some questions on this before – is intended to be a statement of aspiration about how we plan to collaborate with Total. That's a company that we hold in high regard.

And there's more work to be done there as Joe indicated in his prepared remarks, about how we plan to maximize their participation not only in ECA 1 and 2, but also in Cameron Phase 2. We typically target low-double-digit unlevered returns on all of our LNG projects.

I think Joe and I and others have talked about trying to guide across this portfolio where we're targeting roughly between 60% and 70% equity ownership. So, I think, the most important takeaway as you think about potential returns is the comment that Joe made particularly around ECA 1, Steve. The level of interest in the project was extremely high.

We think that bodes well for ECA 2 but that also speaks directly to the point you're asking about is the pricing power and the expectation of how that might impact returns.

But, Joe, if you want to add any other color to Steve's question?.

I think you answered it, Jeff. I think that getting these HOAs was a significant milestone for us. But there was a lot of competition..

Right..

Steve, so I think that answers your question..

Okay. And then one last question just on Cameron 1-3, you mentioned you feel confident in the construction and schedule.

Can you just maybe talk to maybe the other concern that that's out there is just the financial health of your E&C companies and just your protections from that?.

Yeah, I'll make a couple comments, Steve, and pass it to Joe. But I think that we were thoughtful in the very beginning in terms of how we structure the contract. Joe talked about the lump sum nature of the EPC contract in his prepared remarks. Obviously, Chiyoda and now McDermott are jointly and severally liable to deliver that.

We will not speak obviously to the financial health of those businesses directly, except to say we have a lot of confidence in both companies. Joe in particular has spent a lot of time with David Dickson, who is someone we enjoy spending time with. He certainly has a firm handle on that project.

And I think the most important takeaway from our perspective is we continue to think that the project is on track with respect to what we've said in terms of having all three trains producing LNG next year and we don't really have any fundamental change in terms of how we think it's executed.

But Joe, if you want to add some color, it would be helpful..

Yeah, thanks, Jeff. Hi, Steve. I think that the big takeaway is, look, they just confirmed their plan to have all three trains producing LNG next year. And I have confidence in their ability to execute on that schedule. And I think that McDermott has made a number of positive changes in the oversight and management of the job site and at corporate.

And we all, including the Cameron LNG team, the partners, we've all spent time with David Dickson and several of his team members over the past several months, the past six months I'd say since they had the merger completed with CBI (sic) [CB&I] (29:38).

And they have a very high level of engagement and analysis about what it takes to finish this job. And I've personally met with David a number of times, he's very engaged and he's committed, he's focused. He knows he has a tough job ahead of them and they've accepted that in their merger.

But you can see from his comments that he's focused on getting it done. And the contractual payment terms are drawn around ways for them to get cash flow as they hit milestones. So they're encouraged to keep pushing ahead. And the sooner they finish their work the sooner they get paid and the sooner they cut out their indirect and overhead costs.

And I think if you looked at McDermott's announcements recently, they've talked about raising the funds they needed and have liquidity to finish the job on their side. So I feel good about their ability to do it..

All right. Thank you..

And we'll take our next question from Greg Gordon with Evercore. Please go ahead. Your line is open..

Hey, good afternoon..

Hi, Greg..

Great list of accomplishments this quarter..

Thank you..

I think you may have just answered the question but I just wanted to be clear on follow up with regard to ECA Phase 1.

You obviously own a majority stake in the IEnova, IEnova owns ECA, is it IEnova's intention to retain 100% equity stake in this project or would Mistui, Tokyo Gas, Total all be taking equity stakes in the project itself as well?.

It's a great question, Greg. You recall that using Cameron as a model, we have roughly a 51% ownership stake in Cameron. And Joe talked about this earlier as well, where we're targeting across this portfolio of 45 million tonnes per annum, owning between a 60% and 70% stake on average across the portfolio.

Our approach to Cameron 1 will be targeting probably something that looks very close to a 50-50 equity ownership, for ECA 1 I mean, between IEnova and Sempra. And we're still having ongoing discussions about the level of participation that may or may not occur between the offtakers..

Okay.

So IEnova – if I assume IEnova owns 50%, Sempra Corporation owns 50% because you functionally own a majority of IEnova, you own a proportionately higher direct and indirect stake in the project then, correct?.

That's correct..

Okay. I just wanted to be clear on that. Thank you..

Thank you..

My second question is with regard to the CapEx increase at TXU and I know in March you'll give a full five-year update on your financing plan.

But is it your expectation that sort of the overall corporate balance sheet has the capacity to fund the equity investment needed to grow at that rate at TXU without additional equity issuance at the parent?.

Greg, I really appreciate that question. I think that I'll start by just telling you how darn excited we are about the Oncor investment, right.

You recall about this time last year they were heading into finalizing their rate case and had committed to a minimum capital expenditures over five years of $7.5 billion, and by the time we got to closing earlier this year in March we were able to adjust that CapEx forecast to $8.4 billion.

So we're very pleased now to be able to put a firm number around their five year revised forecast of $10.5 billion. And that obviously does not include the expected CapEx that would come from purchase in InfraREIT as well to extend that franchise.

So I think that the growth that we're seeing is both on the population side and on economic expansion and I certainly believe that we can meet the requirements of this over the next five years without equity issuances..

Fantastic. Take care, guys. See you soon..

Thank you, Greg..

We'll take our next question from Julien Dumoulin-Smith with Bank of America. Please go ahead, Julien..

Hi, Julien..

Hey, Jeff. Congratulations to the whole team on these LNG developments..

Thank you very much..

Absolutely. Just following up on some of the last questions – particularly Steve's, how do you think about the mix with respect to Total's commitment here and just the timeline as well, right? So ECA, and especially the ECA expansion, certainly that had some other considerations on timeline given the import contract.

How do you think about juggling these various considerations, especially given the 9 Mtpa committed. I mean, maybe said differently and more directly, you've got Total involved in the first phase of ECA.

How imminent are we looking at an ECA expansion decision here, given what seemed like pretty material volumes, both with respect to the ECA expansion and Cameron 4, 5?.

Well, as you ask that question, Julien, you can tell it's kind of a high-class problem, right? And we've got a lot of activity going on. I think it's particularly not only in our divestitures, but the acquisition in Texas.

It's very important, and one of the things we spend a lot of time on is making sure that we have a very disciplined approach to execution.

So, right out of the box, the most important thing is the careful disciplined delivery of Cameron Phase 1, right? So, all hands on deck to make sure we stick to the timeline of ensuring that we get LNG produced at all three trains in 2019.

Next steps in terms of ECA 1 is to move from these HOAs, which, by the way, have relatively definitive terms that we expect to crystallize into sales and purchase agreements early in the spring, and that will be a critical step, as you look to try to reach FID at the end of2019 on ECA 1.

And I think one of the things that Joe and Carlos and the overall marketing team are looking at now is we have a variety of campaigns around not only ECA Phase 2 and the marketing program there but also Port Arthur.

So those conversations are underway and that's something that we'll be looking to update you on as we have more details in the coming month..

Maybe to clarify this.

How much flexibility does Total have in the initial rate in that you all have committed with them on basically balancing ECA Phase 2 versus, say, Cameron 4, 5?.

The way I would describe it is if you just look at kind of what Total's announcements have come out, in 2017 they finished the year with roughly 60 million tonnes per annum in their overall LNG portfolio and they've targeted 40 million tonnes per annum publicly by 2020, right? So they have a pretty ambitious program underway.

And I think they have long been focused on Cameron expansion even when they did the Engie acquisition they were quite public about their commitment not only to be in that project but also to sponsor the Phase 2 of Cameron.

So I think what you've seen is you've seen them take down 0.8 Mtpa today in the HOA announcement at ECA Phase 1 and you've seen that they've circled an aspiration around a total of nine and it's reasonable to believe that that could be up to 4 million tonnes per annum at Cameron Phase 2 and up to potentially 4 million tonnes per annum at ECA Phase 2.

So there's a lot more work to be done there but I think most importantly we share their ambition, Julien. I think we have a great working relationship at the senior level of both companies. I think the working engagement today around Cameron has been extremely healthy and that's one of the reasons we've got a lot of aspiration for the relationship..

A quick clarification, if I can, on the Cameron Phase 2, is this to be assumed to be the leading project in the U.S.

now relative to Port Arthur and that marketing efforts are going to be focused on this then, just given the greater involvement of Total now?.

What I'll do is I'll make a comment and I'll pass it to Joe, but I will tell you that it probably remains to be seen. I mean, there are people in the marketplace, Julien, that really want to privilege the competitive advantage of brownfield sites like we have at ECA, and like we have at Cameron.

But one of the benefits we have at Port Arthur is we've done a lot of design engineering work going back to over the last several years. We think we have a very low cost project there. It's in a unique location in Beaumont. And I think that we've got an opportunity to do all of these.

That's one of the reasons we've really changed our vision, our ambition of what we want to accomplish. So I don't want to make it sound like that we're going to prioritize Cameron Phase 2 over Port Arthur. There is a lot of interest as Joe indicated in both of these projects. And I'll pass it to Joe, if he'll make some comments on that..

Please. Thank you, Jeff. Hey, Julien. Look, they are different customers. So we don't have to prioritize one over the other. Total is very seriously interested in Cameron as are we. And we're working with our other partners evaluating what exactly is the best thing to do there.

But that project is really a project where existing equity owners and customers are going to take the offtake from that facility. And now we're approaching a phase in the original construction that we can see. We can see to the end now and we can see when we could start doing something about expansion.

But that one is focused on the existing customer base there.

Port Arthur, I can tell you, I've just mentioned this earlier, I think to Chris is, the people that I spoke to in Asia, people that Jeff spoke to in Europe, others in Europe, they're very interested in Port Arthur because Port Arthur can equally go to both Europe and Asia And so, that one is something that I think will attract a lot of attention because of what Jeff talked about in terms of the cost.

It's going to be very cost competitive. Cameron's a different situation. And so I wouldn't link those two together in terms of competition.

And one comment about Phase 2 of the ECA project, I think we could probably try to move that forward very fast but we have something which I've talked to you about before which is we have an existing project there that's making $150 million a year. And we don't want to give away that. So we have to balance that.

But depending on how fast the offtakers want to take it and what size can be, we'll have to look at that but I would say all three are moving ahead in a very nice way..

Congratulations again. Talk to you soon..

Thanks..

Thank you, Julien..

We'll take our next question from Michael Lapides with Goldman Sachs. Please go ahead. Your line is open..

Hey, guys, congrats on a good earnings season. One question....

Thank you, Michael..

...you made the comments about kind of the broader strategic review and then you touched on the Latin American businesses. Can you talk just a little bit more, clarify kind of how you're going through the process of looking at those businesses? How you think about what's core versus maybe non-core to Sempra.

And then and this may be a Trevor question kind of with all the asset sales and some of the other moving parts, what's your tax position? Meaning if you were to sell these at a sizable gain and you've owned them for a long time, how should we think about what it means from a cash tax perspective?.

So, Michael, I appreciate the question. I think I would harken back to the June analyst conference where we laid out that one slide that talked about how we thought about capital rotation and strategy and it was a very clear three-phase process.

So, this year, we made a decision about how we could high grade the U.S.-based portfolio and focus more on T&D businesses both in utilities and outside the utilities. We talked about Phase 2 would be a deep dive on South America. Phase 2 is a Q1 2019 report.

And then we talked about the reasoning why we would revisit IEnova and LNG in Q1 of 2020 because we want to make sure that, number one, Cameron is fully online and we're balancing, making sure that as we go through this capital rotation process we're doing it through the lens of making sure we maintain a strong credit position.

So we have a very disciplined phased approach. This year it's divestitures. Next year, it's the Latin American review or, frankly, it's the South American review not Latin America. And then in 2020, we're going to update you on the IEnova, LNG story.

And as you've seen in today's call, IEnova and LNG are greatly intertwined on ECA Phase 1 and ECA Phase 2 and that's why it's a second order analysis. Now, let me drop down to your specific question on South America. The lens we'll be looking through is just as we described it last June.

If there's an opportunity to do something different with those businesses that have traceable benefits to our shareholders, you should expect us to follow that path. Now, this is something we've looked at multiple times historically and particularly the tax lens has been the greatest challenge.

Now, as you know over the last nine months, you've seen a dramatic change in terms of how we reform U.S. taxes. But when we talk about was the change in control of tax provisions both in Peru and Chile that have tend to create a significant amount of leakage in excess of a $1 billion if you do transact down there.

So the lens that Dennis Arriola, who's leading that effort, is reviewing what this is, number one, we're going to put it through the lens of earnings impact and accretion. Taxes will be a consideration as well as credit. And we always try to look at it, Michael, from the lens of, are these businesses more valuable to somebody else.

So one of the inherent questions is what might be different this time when you look at it? Well, asset values in South America have certainly traded up, the interest rate environment is a consideration, the change in taxes here in the United States and our NOL position is a consideration.

So what our commitment is, is to go back and look at it de novo with a fresh review bottoms-up and if we can create more value in some type of rotational opportunity, we will. We're going to go through exactly what I said in our prepared remarks.

Does it make the most sense to hold and grow those businesses, partner either in South America or at the holding company in the Netherlands or to sell those businesses? So that's the thought process. And then I'll turn to Trevor to see if he'll add anything from an overall tax standpoint..

No, Jeff, I think you covered it pretty well. There is – even though we have an NOL position in the U.S., as Jeff said, there's local taxes that need to be taken into consideration and the indirect sales rules that also need to be contemplated if there were to be a sale down there.

And so, you need to take a look at all of that across the board to determine what the cash tax payment implications are and that's why we try to disclose that at the analyst conference..

Got it guys. Thanks much appreciated, Jeff, Trevor..

Thank you, Michael..

And we'll take our next question from Paul Patterson with Glenrock Associates. Please go ahead. Your line is open..

Hi, Paul..

Hey.

How you doing?.

Great.

How you doing, Paul?.

All right. So I think I've been LNG'd-out here.

So just back on Oncor, are all these – are these projects subject to, I mean they sound perfectly legitimate and everything, but just in general, is there any regulatory approval process for them or is it sort of formula driven? Or how do we think about that and how is the cost allocation?.

Yeah. Thank you for asking that question. You'll recall that in Texas they have a T-cost mechanism which is the mechanism by which you look at use and useful type of projects that you identify. They'll make investments in distribution and transmission. And all of those are reviewed in hindsight at the next rate case.

But these are all driven by demand that they are seeing on their system, and I think one of the things that Allen (45:42) and the team are quite proud about is they've never had $1 of disallowance in the history of that company. So they're quite prudent in terms of how they allocate capital.

And I think one of the things you're seeing here is they've got a real focus on not only being the lowest cost provider in the state of Texas today, but they're also making sure that all the capital that they allocate, Paul, is prudently used knowing that at some point in the future, it'll be reviewed as part of a rate case..

Okay. Great. And then, there were some rate design concerns that sort of had shown up this summer at San Diego that had caused some concern. And I know you guys were looking to address them and what have you, and I just wondering if you could update us in terms of how you think that's looking in terms of getting that sort of corrected.

And then just also, in terms of the wildfires, one of your utilities is voicing concern – or one of your neighboring utilities, I'm sorry, is voicing concern about higher risks associated with wildfire and, therefore, planning on asking for a higher return in terms of cost of capital.

And I'm just wondering if you guys were thinking of doing the same thing with the upcoming cost of capital proceeding..

Hey. Sure I'd be glad to try to address both of those questions. The first of which is on rate design; the second is on the potential impact of cost of capital. I'll see if Joe wants to kind of come behind me with any other comments. But let's start and talk about rate design.

You remember that over the last three to five years, we've had a number of different rate initiatives around rooftop solar and the redesign of the rates around, not just a three-tiered rate schedule, Paul, which is volumetric, but also a super user rate. And the design of this is that your fixed costs are collected volumetrically.

And essentially, as you use more electricity in the San Diego system, much like the rest of the state – the other utilities have a similar mechanism – you actually cover a larger portion of the fixed cost for the utility.

I think one of the things we've long advocated for is that whether you're a rooftop solar user, whether you're completely off the grid with some sporadic or intermittent use of the utility, there is a design model where costs are best spread evenly across customers and then a lot of dialogue around a fixed charge. We have a fixed charge at SoCalGas.

I think there's a fixed charge at over 60 different utilities across the state of California. So both SCG&E (48:17), PG&E and San Diego Gas & Electric have long thought that a portion of their fixed costs should be collected that way.

But the current rate design has a three-phase approach with the super-user rate and that's something that will continue to be part of the design discussion at the Commission.

Secondly, on cost of capital, I think you've hit a really, really important point which is, it's intended to be a proxy of what we in the market believe is the appropriate return for all stakeholders. So as you look at both the interest rate environment, you look at inherent operating risk in your service territory.

As we go into that cost of capital review, we will be approaching that in an April filing which is intended to reflect what we think the appropriate return is for the unique operating characteristics of our own service territories.

Joe, do you want to add any comments to either of those?.

No. I think you addressed it. Let's see if there's another question..

Well, just I mean, just as a sort of a follow-up there.

So should we expect – I mean, how are you guys thinking about the risk profile? I mean, I know that you guys were relatively unscathed compared to others in the most recent fire seasons, but just in general, we should expect you guys going in and probably expecting a higher? I mean, how should we think about it in terms of your current cost of capital that you guys settled on recently?.

Yeah. Sure. Paul, this is Joe. I'll just add on to it. I mean, we got asked the question a little bit earlier about the FERC ROEs and we certainly asked for 100 basis points additional there which takes into account existing situation with wildfires of course. And the FERC rate base is about $4 billion, a significant part of our rate base.

So we will be looking to do the same with the CPUC ROE, taking into account many factors. Interest rates going up, the wildfire exposure. Of course, in our situation, we have spent a significant amount of money over the past 10 years really mitigating a lot of that risk and continue to do that every day.

Our goal is to reduce that risk to the most minimal amount we can. But we have to take into account all those risk premiums. So I think we will be looking forward to making a filing with a higher ROE..

Okay.

And then, just finally with the – back to the rate design, should we think that next summer, when it comes around the situation, that developed this summer is unlikely to happen again? I mean, with your discussions with the Commission and what have you, that they're sort of open to the idea of changing this, that they're also finding this to be sort of an issue?.

I'll make a couple of comments. One is, I think there are many stakeholders in the process, Paul, that believe that, from a environmental standpoint, the people that use the most should be burdened the most. And the rate design is intended to make sure that the more electricity you use, the higher amount of fixed cost that you bear.

I think what happens in the summer time is it becomes more extreme. So what people are looking at is ways that you can make sure that you can have a rational rate design where people are paying their fair share for system cost as well as their fair share of electricity cost. And this is not a recent phenomenon.

This is an ongoing debate over the last decade. And I think what you should count on is there are many people in the process now that believe that we can move to a more modern design where folks that are incentivized to use rooftop solar are rewarded for that.

But at the same time, there's a more common fee associated with people that are connected to the grid. So I can't promise you that it'll be resolved by next summer. I can say there are a lot of people very engaged in this process. And over the next several years, my instinct is, you'll see an evolution in rate design..

Awesome. Thanks so much, guys..

Thank you, Paul..

And at this time, I will turn the program to Jeff Martin for any closing or further comments..

So let me close by saying that we very much appreciate everyone's participation on today's call. We're very pleased with the strong operating results we posted for the quarter and the great progress we've seen from our LNG team. Thank you, again, for joining us.

If you have any follow up questions, feel free to contact the IR team and have a great day..

This does conclude today's program. Thank you for your participation and you may disconnect at any time..