桑普拉能源 (SRE) 2018 Q4 法說會逐字稿

Good morning, and welcome to Sempra Energy's Fourth 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 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 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, February 26, 2019, 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 a lot, Faisel, and thank you all for joining us today. 2018 was an exceptional year for Sempra both operationally and financially. It was also a transformative year, marking our company's 20th anniversary and the continuation of our strategic mission to become North America's premier energy infrastructure company.

As I mentioned at our Analyst Day last June, since our formation, we proactively managed our business portfolio. Over the years, this has greatly improved our earnings and cash flow visibility while bolstering a lower risk profile. Importantly, our recent accomplishments have laid a solid foundation for us to build on and include: completing the Oncor transaction; closing the sale of our U.S. solar business; closing the sale of our natural gas storage assets; announcing the sale of our U.S. wind business; announcing Oncor's InfraREIT acquisition; announcing the sale of the South American businesses; and making very important progress on our LNG projects, among other successes.

Over the last 12 months, we've accomplished a tremendous amount. The amount of activity we've had is uncommon and even more uncommon are the results. I could not be more proud of our team and what we've done to improve our portfolio. Notably, we expect our renewables and midstream divestitures to yield approximately $2.5 billion of proceeds. This is an excellent result and provides a valuable opportunity to pay down debt and redeploy capital to support our growth.

I also want to highlight that this past year, SDG&E received the prestigious Edison Award from EEI for its efforts to enhance wildfire preparedness and grid resiliency. This award is presented to only one U.S. investor-owned utility each year. At Cameron LNG, we've entered the critical commissioning phase of construction and also have an excellent safety record with over 67 million hours worked without a lost time incident. Additionally, we were recently added to the Dow Jones Utility Index, a strong testament to the continued focus on execution and commitment to delivering shareholder value.

Now turning to our financial results. Earlier this morning, we reported full year 2018 adjusted earnings of $5.57 per share, one of the strongest years in our company's history. This puts us above the midpoint of our full year 2018 adjusted earnings guidance.

In addition, our board approved a dividend increase of 8% for 2019. This marks the ninth consecutive year we've raised our dividend and represents 47% growth over the last 5 years. This is important for a number of reasons because it clearly demonstrates our commitment to a healthy dividend policy. I'm also pleased to say that we're affirming our full year 2019 adjusted earnings guidance of $5.70 to $6.30 per share. Trevor will review the key drivers influencing guidance later on the call.

I'd also like to spend a few minutes on California. Earlier this month, we filed our wildfire mitigation plan related to Senate Bill 901. This filing is a continuation of our ongoing focus on safety, reliability and wildfire prevention that we've been implementing for over a decade, and during this time, we've invested about $1.5 billion in these efforts.

Regarding the state's efforts to reduce wildfire threats and their potential impacts, we are very encouraged by recent statements by the governor as well as the formation of the blue-ribbon commission and the governor's strike team. There is widespread recognition among the governor, legislature, utility commission that the current liability rules for California utilities need to be fixed to support a long-term solution for the state and to allow it to meet the state's energy policy goals.

To be clear, these goals cannot be met without strong financially healthy utilities that support the infrastructure investments needed to deliver cleaner and lower-cost energy solutions. We anticipate solutions being brought forward will fall into 3 key categories: first, help reduce the threat of wildfires across our state; second, protect the interest of our state's rate payers; and third, provide a clear legislative pathway for a timely and adequate cost recovery for prudent system operators. These potential outcomes will help create a longer-term sustainable framework for the state and its energy future.

Finally, I'd be remiss if I didn't take a moment to recognize Martha Wyrsch. Martha will be retiring at the beginning of March. On behalf of everyone here at Sempra, I wanted to thank Martha for her tremendous contributions to the company. We wish Martha and her family all the best in retirement. Now please turn to Slide 5 and I'll hand it over to Trevor.

Thanks, Jeff. As Jeff mentioned, we accomplished a lot in 2018, making great progress to refocus our efforts on the strategic mission to become North America's premier energy infrastructure company. Additionally, with 2 months of 2019 behind us, we've already announced the completion of the evaluation of the South American businesses. Bank of America and Lazard will act as our financial advisers and we'll begin the sales process in March. We've also started implementing the next round of continuous cost improvement initiatives, which I'll touch on in a few minutes. All of these developments demonstrate this management's team to focus on execution and commitment to creating shareholder value. Please turn to the next slide.

The decision to sell the South American businesses was not something we nor our board took lightly. The 6-month evaluation process was comprehensive. The primary criteria we looked at are laid out in this slide. Both businesses screened well in many areas but we concluded that they no longer remain a strategic fit for us. As part of this evaluation, we assessed the benefits and rationale for holding and growing or partnering and growing. However, we determined the sale of these businesses and redeployment of the proceeds into North American infrastructure should maximize value for our shareholders while giving us the opportunity to strengthen our balance sheet while paying down parent debt.

There's no doubt that the South American businesses are considered some of the most desirable companies in the region with strong company-specific and macro fundamentals. We certainly have received robust inquiry from global financial and strategic buyers ahead of our formal sales process commencing. Although we expect this transaction to be EPS dilutive, it could be value accretive as we deploy the proceeds into North American T&D infrastructure and strengthen our balance sheet.

Portfolio optimization is not something new to our company, and we've talked about this many times over the years. We have a long and successful track record of actively managing our portfolio, including exiting businesses that are either no longer consistent with our strategy or provide greater long-term value through selling rather than holding. A great example of this is the sale of our U.S. solar assets late last year. The decision to sell the South American businesses is a continuation of this philosophy and demonstrates our commitment to maximizing value for our shareholders. We're targeting a transaction announcement in mid-2019 and closing this transaction by the end of this year.

Please turn to Slide 7 where I'll review our efforts around cost improvement initiatives. At our Analyst Day in June last year, you'll recall that Jeff walked through the evolution of our business portfolio, illustrating how our management team is continuously reassessing our strategy and business platforms and how they fit with changing market environments. In direct alignment with this portfolio review process, we're always refining and reevaluating our cost structure in order to optimize the organization to effectively accomplish our strategic goals.

Sempra has a history of being a prudent cost manager. We make thoughtful and deliberate efforts to reduce costs in ways that make our organization efficient but also very effective. Our continuous cost improvement process is designed to yield long-term savings and instill a cost-conscious culture across the organization. A great example of this is the $65 million of annual savings identified a few years ago at our California utilities that was incorporated into the 2019 GRC filings. These savings should benefit our customers by allowing us to allocate these dollars to continued infrastructure investments in safety and reliability.

Recently, we've initiated further efforts around continuous cost improvements designed to rightsize our organization with our evolving business portfolio. The announced sale of our assets and other efficiencies will allow us to reduce our corporate costs. We expect these cost savings to ramp up to approximately $50 million annually on a pretax basis over the next few years. Our management team is committed to reviewing our costs on a regular basis to ensure we run an organization as effectively and as efficiently as possible.

Now please turn to Slide 8 where I'll hand the call off to Joe.

Thanks, Trevor. First, I'd like to briefly touch on IEnova and Mexico. Mexico is the world's 15th largest economy at over $1 trillion in GDP with nearly 130 million people. The infrastructure needs of the country are expected to remain significant. For example, only 7% of the households have access to natural gas, and residential electricity demand is expected to double by 2040.

For more than 2 decades, IEnova has remained focused on developing energy infrastructure that promotes economic development in a sustainable and socially responsible way. IEnova is working with the private sector on additional opportunities that should benefit the country such as: refined product terminals that should enhance Mexico's energy security and the reliability of transportation fuel supplies; renewable projects that should increase Mexico's clean energy supply and be a source of efficient, low-cost electricity; and the conversion of the Energia Costa Azul project to an LNG export project that should bring additional regional investment, economic development and jobs.

As IEnova mentioned on their call late last week, they have proactively engaged in discussions with the current administration related to natural gas transportation contracts that were awarded through public and international tender processes. IEnova has always had a very constructive relationship with the Mexican government and its institutions. As a company that is committed to being a responsible partner, IEnova looks forward to working collaboratively to advance the country's energy goals and build out the infrastructure needed to provide clean, safe, reliable and low-cost energy.

Please turn to the next slide. Moving on to Cameron. The onsite teams are relentlessly focused on moving through commissioning towards completion of Train 1. The contractor has made significant progress recently with the completion of the gas turbine testing, commissioning of the boil-off gas compressors, introduction of fuel gas into the system and completion of all 3 flares ignition testing. In the near term, the contractor expects to introduce FEED gas sometime this quarter, and it also expects to produce LNG, stabilize production and complete performance testing in the second quarter. With that said, we expect to start receiving earnings by mid-2019.

This first phase of construction, which includes Train 1 and the associated support systems as well as the common infrastructure that will be used by all 3 trains, represents approximately 60% of the entire project. After many years of development and construction, all of the employees involved as well as the community are excited that the facility will soon be up and running, further boosting the local economy while also helping to meet global energy demand.

As you may have heard on McDermott's call yesterday, the same teams are working hard towards completion of Trains 2 and 3. McDermott reported that Train 2 is targeted to be completed by the end of Q4, and Train 3 is targeted to be completed by the end of Q1 2020. This schedule is consistent with what was disclosed on their Q3 2018 call.

Please turn to the next slide where Trevor will review our financial results.

Thanks, Joe. Earlier this morning, we reported fourth quarter GAAP earnings of $864 million or $3.03 per share. On an adjusted basis, fourth quarter earnings were $431 million or $1.56 per share. Full year 2018 GAAP earnings were $924 million or $3.42 per share. This compares to 2017 GAAP earnings of $256 million or $1.01 per share. On an adjusted basis, full year 2018 earnings were $1,503,000,000 or $5.57 per share. This compares favorably to our 2017 adjusted earnings of $1,368,000,000 or $5.42 per share.

Please turn to Slide 11 where I'll discuss the key drivers impacting our full year 2018 results. The year-over-year increase in full year adjusted earnings was driven primarily by higher operational earnings in 2018, including: $371 million of earnings at the Sempra Texas utility segment, resulting from the acquisition of our interest in Oncor in March of 2018; $65 million of higher earnings at SDG&E, primarily due to Electric Transmission operations; $25 million of higher earnings at Sempra Mexico, mainly driven by higher pipeline operational earnings; and $16 million of higher earnings at SoCalGas due to higher PSEP earnings. This was partially offset by $310 million of higher costs related to increased interest expense and preferred stock dividends at the parent, which includes the impact of our Oncor acquisition financing and $21 million unfavorable impact from the foreign currency and inflation effects, net of foreign currency hedges, in Mexico.

Please turn to the next slide. With several significant business developments since our last analyst conference, we thought it would be helpful to provide a brief walk-through of the key items related to our affirmation of our 2019 adjusted EPS guidance.

First, we removed the earnings associated with the U.S. renewables and nonutility natural gas storage assets subsequent to their respective sale close dates; second, we added partial year earnings from Oncor's planned acquisition of InfraREIT and our planned acquisition of a 50% equity interest in Sharyland; and third, we added the positive impacts from using the expected $2.5 billion of proceeds from the sale of solar, wind and natural gas storage. When taking these items into account, we are affirming our 2019 adjusted EPS guidance range of $5.70 to $6.30 that was presented at the analyst conference last year. This is a strong outcome, given the significant activity within our business portfolio.

Please turn to Slide 13. As we turn our attention to the rest of 2019, we'll continue to focus on the positive momentum we've developed over the past year. We've identified several goals to progress on our strategic mission to become North America's premier energy infrastructure company. They include, among others: continuing to focus every day on public and employee safety as a cultural imperative; optimizing and completing the remaining asset divestitures; optimizing cost structures; improving the franchise value of our LNG business by progressing on our 5 development projects; completing Oncor's InfraREIT acquisition and executing on their growth initiatives in Texas; and advancing our 2019 General Rate Case and cost of capital filings at the California utilities, among others.

Please turn to the next slide. As I stated at the beginning of my comments, we're very proud of the great strides we've made and the many accomplishments in 2018. We delivered strong financial results and our company is aligned for the future. We look forward to continuing this progress and feel prepared to meet the challenges and capture strategic opportunities that lie ahead.

Looking to next month, we're excited to host many of you in San Diego for our analyst conference. We'll cover several topics, including: detailed segment guidance for 2019 and 2020; the 5-year capital plan and rate base growth for our 3 U.S. utilities; our growth outlook in Mexico; and an update on the progress of our approximately 45 mtpa of LNG development opportunities.

We'll also be hosting a tour of our industry-leading weather center at SDG&E and highlighting some of the innovative technologies around safety, reliability and resiliency that we've deployed on our systems. With that, we'll conclude the prepared comments and stop to take your questions.

(Operator Instructions) We will now take our next question from Greg Gordon.

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

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

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

Great. And I know there's been -- there has been and will probably continue to be a lot of volatility around the peso. And I think the assumption you're using is your baseline is a bit higher than where the peso is today. So how should we think about that sort of friction inside the guidance range?

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

Okay. So I mean, just to keep it high level, if I start at the midpoint, I should -- and then flex from there, I'd be, as we go through the year, looking at a reasonable approximation of how the peso is affecting your outcomes?

I would just say I think that's the right approach. But I think as we've seen in the past, Greg, the peso will continue to demonstrate some volatility. I think our goal is to make sure that when we put earnings out there and guidance that we can deliver that. I think the point Trevor was making is we've got enough levers at our portfolio that we will adequately follow the peso, but I think that we feel good -- very good about our 2019 range.

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

Greg, I think it's a great question. I can assure you that we remain concerned. I think it's how you manage good projects is be on top of these types of things. I would comment that Joe has done a remarkable job with his team. He worked with our partners on the Cameron build-out. I also think if you listened to McDermott's call yesterday, they've been quite clear about what they believe they can deliver. And we will remain active with our partners and manage that relationship against the commissioning time line. But Joe, do you want to provide some additional color on your conversations with David and how you're approaching it?

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

We will now take your next question from Steve Fleishman of Wolfe.

So just a, Jeff, question on California. So obviously, you've done a good job making -- avoiding fires and investing a lot for your system. But there's still, I think, a lot of outside concern of just, has California done enough to limit risk for the companies, credit agencies putting pressure on you, too. So I'm just kind of curious what you -- from your standpoint as someone who's not had a fire recently, just what you really want the state to do to help address this concern. What are you advocating for?

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

Okay, that's very helpful. One other question just on Mexico. The news from 2 weeks ago on the -- what the government might want to do with the force majeure situations. Was there any better clarity just on that specific issue? Or is it still at more of a high level right now?

Yes, let me make a couple of comments here. I'll pass it to Joe for some details around the actions relative to that pipeline. I think it might be helpful, too, for Dennis to talk about what the United States government is doing to support the key nature of Mexico as a partner, particularly around natural gas. But what I try to do, Steve, is remind people that we've been investing in Mexico for over 20 years. We're not a company that began investing in projects a year ago or 2 years ago. We have the leading Mexican energy company in the country. We're ranked in the top 50 on the Bolsa. Obviously, as you know, it's headquartered in Mexico. We've got independent Mexican directors and it's self-funded from local markets. And one of the things that we're trying to do is we have a long-term view about the opportunity around infrastructure in that country. And we believe that the infrastructure opportunity remains quite large, Steve. And as the government continues to focus on expanding services to all the people of Mexico, their reliance on foreign direct investment will go up, it will not go down. And I think our value proposition, every time we're in front of stakeholders in Mexico, is to really emphasize our role in bringing new and cleaner sources of energy to the country to help support the economy and give choice and lower-cost energy to Mexican families. But on the specific issue of the pipeline, Joe, and kind of steps that Carlos and Tania are taking, do you want to provide additional color?

Thanks, Jeff. Steve, yes, look, you mentioned a lot of the things that I wanted to mention that we are very focused on providing low-cost energy into Mexico. And one of the things that you know, Steve, is really helpful is the feedstock of natural gas into the electricity market. And so all these pipeline infrastructure was being built around that. The situation with the 7 pipelines that they referred to the other day was they were, as you mentioned, in force majeure for various reasons. We're involved in 2 of those. In the Sonora pipeline, as you'll recall, we have that pipeline in operation. It was already earning revenues. So it's a little bit unlike all the other 6, which are pipelines that haven't gone into service. In this case, it was in service and then there was sabotage. And it was damaged and we had to take it out of service and we've been working with CFE. The administration is very focused on making sure that it's getting good value for the money it's spending. And so it's actually an opportune time, and Carlos and Tania have been in meeting with CFE. So a little bit unlike some other things that have been out in the press, we have been a first mover here to go in and meet with various members of various parts of the administration, have meetings with CFE, and Tania's now -- she's the CEO. She is in charge of meeting with CFE to move this along. I think it gives us a great opportunity actually to get this pipeline fixed. If they could work with us, if the government can work with us to work with the local people that were involved in this, I think within weeks, you could have that pipeline fixed and bringing cheap low-cost gas into Mexico and I think that resolves that problem. The other one that we're involved in is the Marine pipeline that TransCanada and we are building. And that one's ready to go into service soon. We're just working on tieing in the -- the thing is substantially done but the offshore pipeline needs to get tied into the onshore pipeline, and they're working on that now. There are some weather challenges, which means [wave action] is keeping them from having the vessels tie up these things. But we're working on that and it should be done pretty soon. So that will also solve that second one.

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

We will now take our next question from Stephen Byrd of Morgan Stanley.

I wonder if you could just talk a little bit more about your dialogue with the rating agencies with respect to risk mitigation in California. As Steve Fleishman mentioned, I mean, you have a very strong operational track record. You're a clear leader in fire risk mitigation. A lot more of your system is underground than other utilities. Is that being recognized? Are there real tangible steps in progress that you need to make to avoid ratings downgrades? Can you just give a little more color on that dialogue, please?

Appreciate the question, Steve, and I think the answer in a short form is yes. I think as you think about all the strategic initiatives we, as a company, have undertaken in the last 2 years, we have had very, very close contact with the rating agencies because we've made it a priority to make sure we maintain an investment grade-plus balance sheet. And your point on differentiation is important and it does resonate with all 3 agencies. We have the best safety program. And I mean #1 in the country and it deserves a higher, not a lower, credit rating and we make that point consistently. We have been aggressive about derisking our service territory and derisking our overall business model at Sempra. And that's one of the reasons you've seen the agencies move down their target FFO to debt metrics based upon our continued focus on T&D type of investments. Second, I think there is momentum, Steven, in the state to correct the market. I made this comment earlier in my remarks and ensure ratepayers are protected. And if there are costs to be absorbed, that there's timely recovery for those folks like SDG&E, that are prudently managing their system. So I think the agencies are in a tough spot, right? I think this has largely been a re-rating of the state more so than individual companies. But it's our job to be in front of them, making sure that they understand that there is true differentiation. And separate apart from how the rules change or how the laws change, the #1 thing to do is to be a leader around how you run your system when you cut your system off, how predictive you are about weathers that impact your system. And our goal, and I think you can see this in our wildfire mitigation plan, is to take the current leadership we have and extend it based on the investments we're making. But I would say with respect to SDG&E, independent of what actions the agency is taking, I think we're going to be quite aggressive in terms of defending our franchise. We have also taken steps to make sure we have ample liquidity at SDG&E.

That's super helpful color, that actually -- that last part, Jeff, does touch on a question we get often from investors. Just in the event that, for any number of reasons, the rating agencies do choose to downgrade not just you but potentially other utilities in the state further, obviously, that's not -- it's not good for customers in the sense that the cost of capital obviously goes up, the cost of financing in the long run. But in the short run, I guess, the perspective is you do have quite a bit of liquidity. You are not facing fire liabilities. You haven't had a fire in 12 years. But could you maybe give a little more color just on sort of the short-term protections you have, liquidity, et cetera, you have just as sort of allay those near-term concerns?

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

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

We will now take our next question from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

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

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

No, I think you hit on all the points, Jeff. The only thing I'd mention is recall that the strike team that the governor has set up has various representatives, whether it's his Chief of Staff, people from the finance industry, the legal industry, folks from insurance. So I think it's multifaceted. There are a lot of perspectives that are going to be presented in the road map and the recommendations to the blue-ribbon commission. And then their job is going to be really to refine the plan to look at the recommendations, the pros and cons of risk and how you can make sure that you can navigate through this process and make those recommendations to the governor until the legislature by the end of June.

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

Let me take a stab at that and if we see it needs more detail, I'll have Trevor jump on it. But I think, we've circled the $50 million opportunity around our corporate center, and we know that those -- we know exactly were those dollars are coming from, we expect to have full run rate of that $50 million, Julien, by the end of the year. This isn't a onetime event. I think you've heard us talk about this before. Good companies are always pursuing these type of cost savings. And that's why going back to some of Trevor's prepared remarks, we ran a program like this at our operating companies that engender just over $65 million of savings at SDG&E and SoCalGas, and those dollars are currently in the rate case. And this $50 million is incremental to that. But from time to time, we'll take questions on our Form 1s and so forth and I was looking at some data recently where, as an example, Julien, since 2013, just over 5 years ago, SDG's electric O&M per customer has decreased by 40%. So we've been able to reduce cost on a per customer basis by a 12% CAGR for 5 straight years. And that includes dropping 500 positions in terms of headcount. So we probably, in terms of the total O&M at SDG&E, there's probably about 20% that can be directly impacted outside of other required spending. They've done a remarkable job today, and that's the type of cost efficiency that was put into our rate case. The second thing I'll say is what we've tried to do at the parent company is as we sell our solar business and our wind business and our natural gas storage business, a lot of these cost savings are because we can realign more efficiently, increasing span of control of officers and leaders so that we can have a lower-cost platform at the parent company as we sell and become more focused in our strategy. And then as to your issues around the 2019 guidance, I'll always remind you that we basically took $100 million out of earnings, right? So at the analyst conference, we forecast that 2019 without any -- without taking out solar and renewables out of that forecast. So in July of last year, we forecasted 570 to 630 -- $5.70 to $6.30 of EPS. And today, that's our exact same guidance after taking $100 million of earnings out of it for our renewable portfolio. And the way you do that is you use the proceeds to pay down parent debt, you reinvest in capital programs. You go do the investment in Texas with InfraREIT and you continue to find savings. And I will tell you, I expect the $50 million number to go up by the end of the year because we're going to keep going in terms of making our parent company more efficient.

And GRC assumptions, nothing to say, right? Nothing to add right now?

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

We'll now take our next question from Shar Pourreza of Guggenheim Partners.

It's actually Konstantin here for Shar. A lot of great questions were answered and congrats on a strong quarter and a great year. One kind of a short little follow-up. On the cost of capital filings, so any thoughts around kind of how you're thinking about it at this point? There's been some kind of early remarks by kind of the FERC ROEs done and all that, but in light of kind of some of the more recent events, kind of what are your thoughts around cost of capital in California?

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

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

And I will add that Bruce Folkmann is our CFO at both of our utilities. He is a very talented person, and he really led the last cost of capital discussion, I think, on behalf of all 3 utilities. He has a team in place with outside consultants, and they'll be putting together a very thoughtful plan about how they approach this and I think that you're raising a great point and this is something that we're very focused on, we're going to try to basically improve the regulatory model this year. We're going to get a great rate case, and we're going to get a cost of capital that's appropriately sized for the type of risk that we expect to manage in the state.

Perfect. And one kind of just detailed question, housekeeping on the cost savings program that's being implemented. You kind of called out the $50 million in the run rate in the next -- in the following few years. Is there any detail of how to think about the overall kind of costs at the parent and kind of where that $50 million is coming from and where kind of any incremental opportunities lie?

Yes, I would just say that the best way to think about this is it's probably in the most common misunderstanding, Konstantin, is. We have an ongoing cost management program every year in the history of the company. So SDG&E will have stretch goals, and one of the ways they reach their stretch goals like you saw the great performance last year, and Trevor talked about it, is continuing to have best practices around technology and innovation and cost efficiency. So every single operating company at Sempra is very, very focused on leveraging technology and innovation to lower their per unit cost per customers. What was unique about what the exercise we went through under Martha Wyrsch and Dennis's leadership in the last 6 months was we really revisited opportunities at the parent company because as you sell and dispose of some assets and turn your portfolio over, it gave us the opportunity to challenge what is the proper role of external affairs and Investor Relations and financial reporting. And you have people at corporate that were directly servicing the solar business or the wind business or natural gas storage. So most of the cost opportunity has been around looking at costs associated with the businesses that we're selling. And now, as you know, last month, we took the decision to sell our South American utilities. That represents another opportunity for us to become more cost efficient at the parent. So the long-term goal is you got to remember, we're going to grow this business at a rate faster than our peers. And as we grow this business, one of the things we're going to try to do is keep the cost at parent the ones that we control. I'm not talking about interest expense in preferred dividends, and so forth. I'm talking about the things that we can normally control. Our job is to keep it flat to declining at the same time that we're scaling the corporate center against a growing set of operating companies.

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

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

We will now take our next question from Michael Lapides of Goldman Sachs.

Two questions kind of unrelated to each other. First of all, the California cost of capital docket. Given what's happened to your neighbor to the north and just how the California utilities have traded, it seems a little bit unusual to me to even have this docket. I mean, how do you calculate the cost of equity for 1 of the 3 companies in the state? Just curious if there's potential to kind of push those out to come back and revisit this at another year at another time or whether the commissioners in the state as a whole is kind of driving to make sure this happens in 2019.

Well, it's actually a very insightful question. If you think back to the California utilities' track record around cost of capital, you have seen the cost of capital extended for 1 or 2 or 3 years at a time, and you've seen the utilities get engaged from time to time when you see large changes in the marketplace. What intrigues me a little bit, Michael, is that there's been a strong voice coming from the credit rating agencies about re-rating the state, right? There's obviously been the very unfortunate bankruptcy and the casualties to the north. Obviously, this has implications to Edison as it does to SoCalGas and SDG&E. And part of the process I think that's going on is you have a change in the governor. You've got a change in a lot of the members of his administration. Even some of the energy principles are changing off of Governor Brown's staff. So they basically have a new guard in Sacramento to have some strong voices coming from the credit markets and have the chance to come back in a timely basis and really lay down some numbers that really point to the cost of not properly managing risk. These costs inadvertently get passed on to ratepayers. So there is really a hue and cry to fix the market. And I actually think this cost of capital process may be additive to that voice and constructive and long term toward getting action.

Got it. And then unrelated question. Just curious. There've been a number of LNG projects in the U.S. in the North America, including Canada. Get their environmental impact statements or FERC certificates. And just curious how the LNG contracting environment has changed over the last 6 to 12 months and how the economics for new LNG, for projects like Port Arthur even ones like Costa Azul or the Cameron expansion look now relative to how they may have looked a year or 2 years ago.

Great question. I think you'll recall that where we assembled our new management team last summer, we took the time, Michael, to do a bottoms-up view of what we thought was taking place in the global marketplace. And after we had a better feel for that, we looked at our own team, our own capabilities. You saw us raise our expectations for what we can accomplish, Michael as well as make some change in terms of how we were leading that organization. I would tell you today that I'm probably more bullish than I was 3 or 4 months ago. I mean, I think Joe and I are on the road starting this weekend, going overseas to meet with potential offtakers. But to your point, you'll recall that Cameron was originally constructed really as a tolling agreement, no different that you would think about as a power plant, right? Your short gas on one side of the plant and your long LNG on the other, and we structure that really as a tolling situation where Sempra was not really involved in the downstream risk or the upstream risk related to that facility. One of the things that's taking place in the marketplace is the number and type of counterparties has expanded to folks like the oil and gas company in Poland as they now expect someone at the terminal to go upstream and source the gas. And frankly, as long as we can do some form of index where we're not taking the commodity risk, we're certainly a business that's quite comfortable with transportation. So you've seen the model changing a little bit where you're moving probably from a pure toll model toward being able to provide the service of bringing the gas to one side, whereas they take all responsibility for the gas and another. And look, a competitive market always puts pressure on the cost side of it, but one of the things I think that I would mention to you is we have a competitive advantage. And our competitive advantage is that 2 of our 3 sites are brownfield sites, number one; and number two, the fact that we have one on the West Coast of North America is a huge advantage. And you should be expecting us to push that aggressively in all of our marketing meetings. But I'll just stop there, Joe, and see if you'll add anything to the contracting environment.

The only thing I would say in addition, one thing I want to start with is we're going to spend a bunch of time on this at our analyst conference, which is coming up in a few weeks so I won't go into too much detail. But we are very focused. The world has changed a little bit and you're right, we are starting to see a lot of action at FERC and our project at Port Arthur is moving through that queue, it's very close in the queue now. So it's moving right ahead. And so the contracting is indeed important. And we have seen a change. There was a lull for a while. Now we're starting to see that really come together. We just said we got airline tickets, we're heading out. And so that shows a good sign. We'll talk more about this at the conference. But you're absolutely right, we're starting to see quite a change and we're going to see more and more projects go to FID.

We'll now take our next question from Paul Patterson of Glenrock Associates.

Just want to touch base with you on the wildfire, the prudency standard that you guys are looking for at the CPUC. And I was wondering, in light of sort of the recent activity, obviously, the bankruptcy at PG&E and stuff, are you sensing more traction with respect to having the prudency standard be substantially compliant with the wildfire plan? Or how are you looking at that? It sounds like you and Edison sort of have been proposing that in this OIR.

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

I think that sounds great. And it would seem to me that regardless of what happens with strict liability or what-have-you, if that standard is adopted, I mean, obviously, there's a lot more that you want to accomplish for a lot of reasons, ratepayer cost to -- not the least of which. But that would be -- I mean, this one issue, if you could get that resolved, it would seem to me that, that would go a long way. Do you follow what I'm saying? And that might be one way of sort of -- I know it's not a silver bullet but it would be something that would seem to go a long way in solving a lot of this without necessarily relying on the holistic thing to be completely sewn up. Do you follow what I'm saying?

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

Okay. And then just finally, the McDermott call, the discussion of Chiyoda came up. And I'm just wondering [they couldn't really] -- obviously, I'm not asking you to comment on the Chiyoda situation, but they themselves, as you know, have said -- have raised ongoing -- has an ongoing concerning questions. Could you just remind us what kind of contingencies we have if, in fact, Chiyoda isn't able to meet its obligation?

Well, I will start, and I'll see if Joe will add some color. But I think in our remarks, what you've heard is that the partnership has been very engaged with the EPC contractors. And particularly, McDermott has been very clear about what their expectations are for delivering the project. And obviously, those 2 parties are jointly and certainly reliable for their obligations under that contract and has the full EPC wrap contract, right? So those obligations reside with the EPC. But I got to tell you, we have had great conversations with David Dickson. I think he has looked at this with clear eyes. He understands the challenges, and we have confidence in their ability to deliver. But Joe, if you want to comment further on some of the details around those 2 parties.

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

We'll now take our last question from Winfried Fruehauf of Winfried Fruehauf Consulting.

I have a question about PG&E and it's a 2-part question. One is what lessons have Sempra learned from the bankruptcy filing? Or -- yes, that's the first question. The second question is, are there any opportunities for asset purchases from PG&E by Sempra?

Well, thank you for that question. I'll start with the second part of the question first, and I'll circle back to lessons learned. I think you'll recall because you followed us for a long time, Winfried, that we don't typically comment on any type of M&A activity. As we've had discussions on our management team, our slate of organic spending in our core businesses here in North America over the next 2 years is quite significant. One of the things you should expect from our management team is to have our head down and make sure that we execute well our financial plan for 2019 and 2020. On the larger issue of lessons learned, it's quite interesting. We learned a lot, Winfried, from our 2007 wildfire and viewed it like an existential threat 10 years ago. And it really has informed our view that we have to get better and we have to provide leadership. And we have to innovate. And everything we do is open source. I mean, all the progress we've made, we're more than willing to share with others. But I will give you one discrete thing from the bankruptcy that we [find interesting is], you'll see a lot of numbers out there about the potential costs that our contingent liabilities related to the renewable contracting. And you'll hear numbers above $30 billion being forecast in large portions of that being out of market costs. It goes back to over the last 4, 5 years, the deep strategic process that our board has led. We made the decision, number one, that we wanted to exit fossil fire generation. We made the decision to exit renewable generation. We did not get involved in lifting natural gas or oil or field processing, so we've moved further and further away from generation and commodity and procurement. And as early as 2014, myself and Stephen Davis at SDG&E decided to stop all of our renewable purchases at SDG&E because we were well ahead of the game at that time. So I think the lesson that points to here is it's very important to make sure we're doing all the right things to advance the Clean Energy Transition. But it's is also important that we're doing that in a way, which is thoughtful around price, diversity of supply and a balanced energy program. And I think that what you see at PG&E continues to confirm Sempra's business model, number one, of focusing on T&D and the prudency, I think, that we've shown around a balanced energy approach to the commodity side of the business. We hope we see you at the analyst conference.

I'm not so sure because I'm physically not in a position to do much traveling.

Okay. Well, we wish you the best and look forward to staying in touch with you.

As there are no further questions, we hand the call back to Jeff Martin for closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.