Sempra Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 14 speakers on the call.

Operator

Good day, and welcome to Sempra's Second Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn it over to Glenn Donovan. Please go ahead.

Speaker 1

Good morning and welcome to Sempra's 2nd quarter 2023 earnings to the call. A live webcast of this teleconference and slide presentation are available on our website under our Events and Presentations section. We have several members of our management team with us today, including Jeff Martin, Chairman and Chief Executive Officer Trevor Mychajluk, to Executive Vice President and Chief Financial Officer Kevin Segarra, Executive Vice President and Group President to Justin Bird, Chief Executive Officer of Sempra Infrastructure Alan Nye, Chief Executive Officer of Encore to Peter Wall, Senior Vice President, Controller and Chief Accounting Officer and other members of our senior management team. 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 projected in any forward looking statements we make today.

Speaker 1

The factors that could cause our actual results to differ materially are discussed in the company's most recent 10 ks and 10 Q filed with the SEC. Earnings per share amounts in our presentation are shown on a diluted basis, and we'll be discussing certain non GAAP financial measures. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. We also encourage you to review our to 10 Q for the quarter ended June 30, 2023. Please note that these earnings per share amounts do not reflect to the 2 for 1 stock split in the form of a 100% stock dividend that we announced earlier this morning.

Speaker 1

These amounts will be updated when we announce our Q3 and full year 2023 financial results. I'd also like to mention that the forward looking statements contained in this presentation speak only of today, August 3, 2023, And it's important to note that 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.

Speaker 2

Thank you all for joining today. Earlier this summer, Sempra celebrated its 25th anniversary. While the company was founded in 1998, our operational roots at San Diego Gas SoCalGas date back to the late 1800s. Over that time, we've embraced a strong commitment to serving others, to Delivering Energy with Purpose and Bettering Our Communities. Today, we have 3 premium growth platforms located in what we believe are the most attractive markets in North America.

Speaker 2

And looking forward to the next 25 years, we're really excited about the opportunities in front of us to modernize and expand our energy network so that we can deliver increasingly clean, affordable and reliable energy to our customers. This year, we also published to our 15th corporate sustainability report emphasizing how our sustainable business practices help mitigate risk and unlock new opportunities as we continue executing on our record $40,000,000,000 5 year capital plan, Which you'll recall only includes Sempra's proportionate share of the capital. Today, Sempra has multiple tailwinds supporting our growth and income equity story, and we're confident in our ability to continue delivering high quality earnings and dividend growth to our shareholders. That brings me back to the quarter. Earlier this morning, we reported Q2 2023 adjusted earnings per share of $1.88 and year to date 2023 adjusted earnings per share of $4.80 As you will recall, we discussed the company's 2023 and to our Q1 call in May and based on the strength of our results across the first half of the year, We're pleased to affirm both our 2023 2024 guidance ranges and our projected long term EPS growth rate of 6% to 8%.

Speaker 2

Also just yesterday Sempra's Board approved a 2 for 1 stock split with the distribution date on August 21st. The split does not impact our reported results for the Q2, but it's important to note that in the Q3, our historical and Financial results will reflect the post split share count. For the last several years, we've had one of the highest stock prices in the S and P 500 Utility Index. So with the plan split, we believe it will increase our trading volume and provide more accessibility for a broader group of investors to join us on our mission to be North America's premier energy infrastructure company. Please turn to the next slide.

Speaker 2

When Sempra began its journey in 1998, we had a relatively modest rate base of roughly $5,000,000,000 and across the last two and a half decades, We've been successful in transforming the size and scale of Sempra's overall portfolio, while also simplifying our business model. Today, we own $45,000,000,000 of rate base and over $80,000,000,000 of assets with an investment focus on what we believe to the higher value, lower risk portion of the energy value chain or transmission and distribution assets. I'd also note that Sempra's businesses are located in contiguous markets in the Southwestern Tier of North America and really benefit from strong economic growth across the region. Our strategy focuses on investing in regulated utilities that are decoupled from direct commodity exposure to Ann, Long Term Contracted Energy Infrastructure, while avoiding the volatility associated with commodities and to the uncertainties facing legacy generation facilities. In other words, our core value proposition focuses on investing in the transmission and distribution backbone to North America in helping to efficiently move energy from producers to customers.

Speaker 2

Finally, our T and D utility investments to the operator to benefit from constructive regulatory mechanisms with competitive returns on equity and the timely return of capital. Sempra Infrastructure's business is underpinned by long term contracts with world class counterparties that are expected to provide steady recurring cash flows. Taken together, our 3 platforms provide great visibility to high quality, long term earnings growth, Which is aligned with our overall mission to continue building out the premier energy infrastructure company in North America. Please turn to the next slide where Trevor will walk you through both our business and financial results.

Speaker 3

Thanks, Jeff. As we close the first half of the year, we're pleased with our financial results, which highlight the strength of our business model. For background, Sempra was formed via the merger of the parent companies of SDG and E and SoCalGas, and it's exciting to see how that foundation has allowed us to build a much larger and more successful company over time. Today, we have a leading position with $24,000,000,000 of rate base within our Sempra California platform and serve nearly 26,000,000 consumers. As electrification continues to increase, we're seeing significant load growth.

Speaker 3

Since 2022, SDG and E has Experienced load growth of approximately 3%. This is the result of economic expansion and the trend of more business and consumer activity switching to electricity. For example, the Port of San Diego recently unveiled the arrival of 2 all electric cranes, Which are the first of their kind to be unveiled in North America. The port also approved an electrification project enabling cruise ships to plug into the grid while at birth as opposed to running their diesel engines, thereby significantly reducing emissions. To the Port of San Diego is also expecting to receive the 1st all electric tugboat to support further emission reductions across their operations.

Speaker 3

As these trends continue, we see opportunities for increased investment in infrastructure to support continued decarbonization in the region. Another great example is the ongoing electrification of transportation. California is leading the nation in electric vehicles And SDG and E now has over 110,000 EVs in its service territory as of the Q1, to an increase of almost 35% compared to last year. At Sempra, our employees have also been leaders in promoting electrification. To Back in 2015, we set an internal goal to have 500 employees using electric vehicles as a primary means of transportation.

Speaker 3

We're pleased to report that we have recently exceeded the 1,000 employee mark, making us one of the first companies in Southern California to reach this milestone. And as electrification and customer adoption increases, we expect this to drive increased load growth in our service territory. Further, with an increasingly complex grid, significant modernization is required to maintain safety and reliability. To. SDG and E's recent commissioning of 171 Megawatts of Utility Owned Energy Storage Assets Is another great example of utilizing technology to store and dispatch clean energy while reducing reliance on conventional gas fired power to clients.

Speaker 3

To help ensure California can meet its reliability and clean energy goals, CAISO approved the 2022 to 2023 transmission plan in May, awarding SDG and E an estimated $500,000,000 of new development projects. Also in June, CAISO initiated a comprehensive bidding process with over $2,000,000,000 of additional projects located within SDG and E service territory. At Sempra, we're one of the largest owners and operators of transmission assets in North America, and we believe SDG and E is well positioned to compete favorably. The company has a long track record of operating success here in Southern California, And we certainly believe our leadership and credibility in wildfire mitigation will also inform the quality and competitive nature of our bid. Also in June, SDG and E announced that 80% of San Diego County customers are now receiving their electricity supplies from 3rd party providers.

Speaker 3

This is consistent with SDG and E strategy of focusing more narrowly on modernizing the grid to efficiently move cleaner sources of energy to customers or what we refer to as an energy delivery model

Speaker 4

to much like Encore

Speaker 3

in Texas. Turning to SoCalGas, the company released an expanded clean fuels analysis indicating the need to plan and account for increased levels of clean, firm dispatchable generation. Results highlight the potential reliability benefits of electric resource diversity and the value of hydrogen generation. The report also contemplates how cleaner fuels can be delivered safely and affordably to SoCalGas' existing and potentially new energy networks to help support electrification and decarbonization. In connection with California's new renewable gas procurement standard known as SB 1440, SoCalGas recently issued a new request for proposal for biomethane supply in the form of RNG Andor BioSynthetic Natural Gas.

Speaker 3

At the end of 2022, RNG represented 5% of core gas deliveries at SoCalGas And the mandated procurement through SB1440 is expected to support the adoption of RNG in the state and in turn help SoCalGas meet its goal of 20% RNG in core customer deliveries by 2,030. This is a prime example of how SoCalGas is using its existing energy network to help the state decarbonize in a safe and affordable manner. Finally, our California GRCs are well underway. Our application in those cases are centered around delivering cleaner energy safely and reliably and in alignment with California's decarbonization goals. Recently SDG and E and SoCalGas participated in evidentiary hearings with interveners and submitted updated testimony and the regulatory process continues to advance We continue to expect a proposed decision in the Q2 of 2024 with rates retroactive to the beginning of that year.

Speaker 3

Please turn to the next slide. Turning to Texas. I first want to acknowledge the excessive heat that customers are currently enduring across the state, While also recognizing the strong performance of the grid under some of the challenging conditions. To Oncor's innovative and dedicated employees are the driving force maintaining reliable electric service to despite challenging external factors and they go to work each day with this commitment to excellence. When we acquired just over 80% to our commitment to support a minimum $7,400,000,000 5 year capital plan.

Speaker 3

That same capital Spend grew to be nearly $12,000,000,000 over that same period and Encore has nearly doubled its rate base to $21,000,000,000 as of the end of 2022. Over the past 5 years, Oncor system has grown substantially, Having added approximately 7,000 miles of transmission and distribution lines, earlier this year, Encore increased its 2023 to 2027 to our capital plan to $19,000,000,000 With continued strong economic growth and the recent positive legislation, We now certainly anticipate upside when we roll forward the new 5 year capital plan. We have long talked about the incredible macroeconomic growth in Texas and how it continues to drive additional capital investments. To put OnCore's customer base into perspective, the Dallas Fort Worth Metroplex alone has a larger population than 38 states. To since June of this year, ERCOT set 6 new records for peak demand and it's also noteworthy that over the past 7 years, There has been a 17% increase in ERCOT's peak demand.

Speaker 3

Specifically for Encore, both C and I and residential customer demand Continues to grow. A great example of this incremental C and I demand is the roughly $60,000,000,000 of These large manufacturing sites are expected to drive demand and require the build out of significant new electrical infrastructure in the surrounding communities. Finally, we also want to provide an update on a series of positive to our next question comes from the line of John. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Good morning, everyone. Please turn to the next slide.

Speaker 3

Several bills were recently enacted in Texas that are designed to provide enhanced recovery mechanisms for utilities and reduce regulatory lag. Together, these bills are expected to improve realized ROE and facilitate additional investment to support Texas' growth. We believe that the improved regulatory legislation coupled with an incredible economic growth story positions Encore as one of the to Premier Regulated T and D Utilities in the country. Starting with SB1015, Encore is now able to File a distribution capital tracker twice a year as opposed to only once. Similar to the existing regulatory mechanism for transmission investments, This should reduce regulatory lag and reflect Oncor's distribution investments in a more timely manner.

Speaker 3

This should improve both earnings and cash flows and is critical in markets like Texas, which is experiencing increased demand to Requiring Rapid Capital Deployment. Moving to HB 2,555. This bill is designed to allow utilities to file a plan to harden and make its transmission and distribution systems more resilient to potential disruptions. Of note, the bill provides a separate regulatory mechanism for recovery of commission approved resiliency investments. The PUCT is currently drafting new rules to specify actual implementation, which we expect to be completed by the end of the year.

Speaker 3

To the rulemaking will lay out the procedural steps and timelines between future filings and the actual rate implementation. SB 1076, the permitting efficiency bill, helps address the transmission grid's expansion needs by shortening the time to approve CCN applications from 12 months to 6 months. Finally, HB 5,06 to directs ERCOT and the PUCT to develop plans for transmission projects to serve high growth areas of Texas, to including the electrification efforts in the Permian Basin and could provide incremental investment opportunities for Encore. Together, these constructive legislative outcomes enhance Oncor's ability to better serve customers and support system growth. Please turn to the next slide where I will turn the call over to Justin to provide an update on Sempra Infrastructure and Port Arthur.

Speaker 5

Thank you, Trevor. Sempra Infrastructure was formed 2 years ago to streamline our business and bring together decades of energy infrastructure development to operating expertise under a single platform. Our increased scale positions us to capture new opportunities, create portfolio synergies and support the growth of North American Energy Markets. There are 3 key trends that support these opportunities, to decarbonization, energy security and restoring of manufacturing to North America, all of which give us confidence in the long term growth profile to our business. Trade between the U.

Speaker 5

S. And Mexico continues to grow as a result of a strong reshoring trend. For example, a recent Reuters article identified more than $9,000,000,000 of capital that has flowed into Mexico from overseas manufacturers in the last 9 months. And recently, Mexico surpassed Canada to become the largest trading partner of the U. S.

Speaker 5

Given our position as a leading player in North American energy infrastructure, we are well positioned to support growing cross border trade with Mexico. More recently, we received several positive regulatory approvals across a number of our assets in Mexico, including in our Energy Networks and Clean Power segments. Moving to projects under construction, our teams have been busy with over 10,000,000 accumulated hours worked without a lost time incident. We expect these projects will come online over time with GRO expansion and ECA targeting COD in the second half of twenty twenty four and the summer of 2025 respectively. And finally, Port Arthur Phase 1 is also advancing as expected and continues to target commercial operations of Train 1 and Train 2 in 20 7 and 20 28 respectively.

Speaker 5

Turning to LNG development at Cameron Phase 2, we're at a stage in the competitive feed process where we have selected Bechtel to move forward to complete the remaining work. We are aligned with our partners to invest additional time upfront to reduce construction risks and project costs. We expect this process to continue through the fall, position us to take FID next year after The selection of Bechtel is a significant milestone and we're implementing a strategy similar to what we did at Port Arthur to reduce overall cost and risk to deliver another world class LNG project. Also, we are pleased with the marketing development at Port Arthur LNG Phase 2 and are particularly encouraged by recent comments made by the FERC Chairman in support of energy infrastructure projects needed for reliability. Looking ahead, we're also expecting that Sempra Infrastructure Partners will finalize its project level ownership stake in Port Arthur LNG Phase 1 at 28%.

Speaker 5

This is within the previously shared target range of to 20% to 30%, and we expect the transaction with KKR to close in the Q3. Based on this updated ownership forecast for the project, Sempra Infrastructure Partners' equity requirement is anticipated to be approximately $1,740,000,000 And its proportionate share of EBITDA is estimated to be $460,000,000 which excludes certain upside economics Such as Sempra Infrastructure's right to common facility payments from future phases. Please turn to the next slide. At Port Arthur, we're developing a flagship energy hub that showcases the value of Sempra Infrastructure's world class integrated capabilities. Sempra Infrastructure can leverage development and operational expertise across its portfolio to enhance the total value of Port Arthur.

Speaker 5

With 13,000,000 tons per annum already under construction, Phase 2 is expected to double that capacity. Further, we're leveraging the integrated capabilities of our business segments by developing the proposed Louisiana Connector Pipeline, to gas storage facilities, Titan Carbon Sequestration Facility and an early stage hydrogen project in the Port Arthur region. To This comprehensive development approach supports the sustained growth of our energy infrastructure portfolio and is expected to help us to capture a larger piece of the economics from the Port Arthur footprint. At Port Arthur Phase 1, construction is well underway with more than 2,700,000 hours worked without a lost time incident. Many of you are likely aware that our recent FERC request, Which would enable Bechtel to expand staffing and work schedules to include 24 hour shifts.

Speaker 5

This provides for better optimization of construction activities, to focusing on safety and allows for certain tasks to be completed at night, such as material deliveries and next day site preparation. We also believe it will improve workflows and streamline schedules, so it's a mutually beneficial situation from our perspective. To Steve. With that, please turn to the next slide where Trevor will discuss Sempra's financial results.

Speaker 6

Thanks, Justin.

Speaker 3

Turning to Sempra's financial results. Earlier this morning, we reported Q2 2023 GAAP earnings of $603,000,000 to $1,000,000 or $1.77 per share. On an adjusted basis, Q2 2023 earnings to for $594,000,000 or $1.88 per share. This compares to our Q2 2022 earnings to $626,000,000 or $1.98 per share. Please turn to the next slide.

Speaker 3

The variance in the Q2 2023 adjusted earnings compared to the same period last year can be summarized by the following. At Sempra California, dollars 32,000,000 of higher CPUC based operating margin at SDG and E And higher amounts earned under certain CPUC regulatory incentive mechanisms and $14,000,000 of higher CPUC net to the financial results. Thank you, sir. Our first question comes from the line of Chris Partially offset by net higher interest expense. At Sempra Texas, dollars 26,000,000 of lower equity earnings from higher expenses and lower weather driven consumption, offset by new base rates and customer growth.

Speaker 3

At Sempra Infrastructure, dollars 40,000,000 of higher earnings attributable to NCI, including the 10% sale of a minority interest in Sempra Infrastructure Partners to Adia and higher development expense. This was partially offset by $33,000,000 of higher equity earnings, primarily from transportation tariffs, Partially offset by lower asset optimization revenues, primarily from lower LNG diversion fees And lower generation at TDM from a scheduled major maintenance. At Sempra Parent and Other, to There were $45,000,000 of higher costs, primarily driven by lower tax benefits and increased net interest expense, Partially offset by net investment gains. Please turn to the next slide. Over the past 25 years, Sempra has transformed from a regional Southern California utility to a leading North American energy infrastructure company and is positioned at the intersection of multiple macroeconomic growth trends.

Speaker 3

Along each step of the way, we've exhibited strong financial stewardship, to oversee meaningful earnings growth and return significant capital to owners in the form of dividends and share repurchases. Looking ahead, we're focused on reaching a constructive outcome on our California rate cases, executing our record capital plan, Demonstrating financial discipline and materially advancing critical infrastructure projects across our growth platforms. We've had a great start to the year that highlights our compelling growth story. And with that, this concludes our prepared remarks

Operator

Thank you. This concludes the prepared remarks. We will now open the line to take your questions. For just a moment to allow everyone to signal for questions. And our first question will come from Shar Pourreza with Guggenheim Partners.

Operator

Your line is open.

Speaker 7

Hey, guys. Good morning.

Speaker 2

Good morning, Shar.

Speaker 8

Good morning, Jeff. Starting off On your commentary for Encore, and I know you obviously you've had some assumptions in plan, but the Texas legislation is clearly a material support. For Encore, we just saw a peer of yours raise CapEx while also kind of highlighting additional opportunities. Can you just help us quantify how and when to. Incremental benefits start getting embedded in plan, when we could start seeing some more of that CapEx benefits reflected, especially if you now have the ability to achieve allowed returns.

Speaker 8

So like could we further see updates as we approach your normal guidance, update cycle later this year around Texas. Thanks.

Speaker 2

Yes. Thank you for the question. I certainly agree with you. This has been a very constructive legislative cycle in Texas. And I would to start at the very beginning by really expressing our appreciation to Alan and his team.

Speaker 2

They deserve a lot of credit and they're doing an exceptional job on the ground there. They're clearly seeing a lot more growth on the system, Shar, and I'll have Alan speak to some of that growth in a second. But we would look forward to refreshing the ENCORE plan this fall in providing future updates from Sempra's perspective in February. I do think you may find it helpful though and I want to mention as a rule of thumb, The DCRF legislation is expected to improve Encore earnings in our estimation around $70,000,000 to $90,000,000 on a full year basis, Which falls within our current guidance, but as I mentioned, we'll be updating for 2025 on our February call. Also, it may be helpful that as a ballpark reference, every incremental $100,000,000,000 of capital added to the plan in Texas It's expected to add approximately $0.01 of accretion to Sempra on a pre split basis.

Speaker 2

But Alan, it might be helpful to Shar if you just provide a little bit of visibility into the growth that you're seeing on the system and your future expectations.

Speaker 9

Yes, sure, Jeff. Good morning. Growth continues to be just very, very strong, frankly at record levels throughout our system and on all the metrics that we track. Just real quickly, premise growth is up about 10.5% quarter over quarter. We connected 21,000 approximately new premise in Q2 versus 19,000 same Q last year.

Speaker 9

Transmission points of interconnection or POIs are incredibly strong. We added 92 new requests in Q2 for a total amount now in our Q of $720,000,000 which is a 37% increase over the same quarter last year. Broken down by retail and generation, retail requests for transmission points are up around 22% based on versus the same quarter last year. Generation incredibly strong, Up 50% over the last 12 months and the total number of generation requests Has actually doubled since 2020. So really strong growth on our transmission system.

Speaker 9

West Texas remains very strong. The Far West Texas weather zone peak increased by about 11.5% over the 22p. To peak on our Culberson transmission loop system out there, 21% year over year growth. And then just a couple more stats on things that aren't presently in the numbers, but our economic development team activities, new project requests are up 36 And request for information are up 32%. All those things, some of those things ultimately will work their way into the other numbers.

Speaker 9

So we're very pleased with the continued economic expansion in Texas. We're very pleased with the continued very strong growth we're seeing on our system. If you look back, as Trevor said, we had $11,500,000,000 $11,700,000,000 in 2017 when the Sempra Transaction with Encore was announced by the end of 'twenty two. We had about $20,800,000,000 We've already said we're doing about 3 point $6,000,000,000 in CapEx this year. Looking forward, we still have a $19,000,000,000 CapEx plan for the next 5, we added $200,000,000 in July.

Speaker 9

We got our board to approve that. That is new capital that is not pulled forward. And then going into our October and Q1 Board meetings, we'll obviously do another CapEx plan refresh. As Trevor said, we think there's Likely to be upside there if we continue to see the growth that we're seeing now, as well as the addition of a resiliency plan under HB to 2,555. There's presently a PUC rulemaking right now.

Speaker 9

So as Trevor said, we effectively doubled rate base from the time The Sempra transaction was announced already. Looking forward, we think it's possible we'll see a path to potentially to doubling our rate base again in the next 5 to 6 years in a manner that really benefits our customers, results in a more resilient to grid and benefits to the ERCOT market. All those things are obviously subject to the resiliency rulemaking, to continuing to see strong growth and all the necessary Board actions. But Texas has a great story and we're very pleased to be a part of it and I appreciate

Speaker 2

So Shar, I'll just make the kind of concluding comment here that we've guided to $70,000,000 to $90,000,000 of incremental earnings associated with the DCF legislation. We talked about the accretion associated with the We talked about the accretion associated with the $100,000,000 of capital in Texas. And to highlight, I think, a couple of key things from to Alan's comments. We've effectively doubled rate base from 2017 to 2022. And I think Alan highlighted this, but there's more work to be done this with our planning team, but we have a real opportunity to more than double their rate base the second time in the next 5 to 6 years.

Speaker 2

So we've got some more planning work to be done, We look forward to working with the Encore Board and finalizing his roll forward 5 year capital plan and certainly coming back and updating how we think about That from Sempra's perspective in February.

Speaker 8

Got it. Perfect. And lastly, Jeff, for me is, obviously, appreciate the stock split strategy to create some more liquidity. Obviously, the hope there is that it could eventually improve the valuation of the stock further. Are there sort of any other thoughts So on strategy and optimization, I mean, Mexico has shown some desire to renationalize some energy industries.

Speaker 8

So has there been any interest on the legacy assets, Especially as fuel storage and terminals were considered kind of a security need or does the SiP ownership structure kind of prohibit for any capital rotation decisions. Thank you, guys.

Speaker 2

Yes. Thank you, Shahriar. I'll kind of address both of those questions. I think the thought process behind the stock split We currently have the highest stock price in the S and P 500 Utility Index. As we celebrate our 25th anniversary, this is the first time that we've announced to a stock split for the company.

Speaker 2

We certainly, to your point, think it will improve trading volumes and make the stock more accessible to a broader group of investors. So we view it just generally as a positive, and I think it really reflects management's bullish view on our future business prospects. Turning to your issue of strategy, and I'll come back to Mexico. Our Board reviews our strategy at every Board meeting. It's been a top focus of our management team for the last 5 years.

Speaker 2

And it's allowed us to simplify our business model, improve our visibility to future growth. When you think about the to updates that Alan just provided and some of the things from our prepared remarks. We feel great about our growth and income story, and we have more work to do, as I indicated with Alan's team, to continue to think about the growth prospects in his business. Turning to Mexico, this kind of goes to the issue of what our prioritization is. And Justin mentioned this in his prepared remarks, but by combining Mexico with LNG, we created a business of larger scale with what are effectively midstream assets with approximately 17 to 18 years tenure in that overall contract portfolio.

Speaker 2

So it's a really high quality portfolio of cash flows. But as we look to finance our future, there's no question that we're going to continue to prioritize the growth in our utilities. We've demonstrated a willingness to sell down the capital structure to SI. I think we've done that quite efficiently in the past 2 years. And opportunities like you identified to continue to capital recycle, that's right in our wheelhouse.

Speaker 2

So we'll continue to look for assets There are less core to our future strategy and that will always be something that we'll take a hard look at with Trevor and his team. So We feel good about our strategy going forward and we appreciate the question.

Speaker 8

Much appreciated guys. Have a great morning. Thank you so much.

Speaker 2

Thank you, Shahriar.

Operator

Thank you. Our next question comes from Durgesh Chopra from Evercore ISI. Your line is now open.

Speaker 2

Good morning, Durgesh.

Speaker 6

Hey, good morning. Good morning, Jeff. Just maybe just looking at your year to date performance, Just wanted to get your thoughts of how that's tracking versus your expectations. I mean, the EPS guidance range is still pretty wide, But clearly, you've exceeded my expectations and I believe Street estimates. So just how is the year shaping up versus your guidance range?

Speaker 2

Sure. Appreciate the question. You recall that in 2022, we really had a banner year. We reported around 9.21 Sledd:] Adjusted EPS reporting $4.80 for this year, we think is a very strong number. So we think we've had a strong first half, a good first quarter.

Speaker 2

We feel great about our guidance. Obviously, one of the things that we're focused on as a management team and Kevin's business is making sure that we execute very well around our rate cases here in the state of California. And we mentioned on the call that we expect to finalize that in the middle of next summer With rates retroactive to January 1. So I think we feel very good about where we're at this year. I think it also signals strength to our guidance for next year.

Speaker 6

Got it. Very strongly positioned, sounds like. Okay. Then maybe just Turning to California and you mentioned the rate cases, but the CAISO opportunity $500,000,000 is that incremental Or is that embedded in the current CapEx plan? And then you also highlighted $2,000,000,000 worth of projects, which are going to be competitively bid on.

Speaker 6

Maybe just talk to us as to how we see that embedded into your CapEx plans, just the timeline and next steps there. Thank you.

Speaker 2

Sure. I appreciate that question. We actually think very similar to Texas, there's a very strong underlying growth story In California, we highlighted in our prepared remarks that SDG and E has seen year over year demand growth of about 3%. I've been at the company since 2004. We've never seen that type of growth, and it really is a reflection of the electrification that's taking place in the state.

Speaker 2

On your issue of whether the $500,000,000 of Ekamil transmission projects are in our 5 year plan, just remember our current plan goes through 2027. We're going to roll that plan forward next February. This is really the Cal ISO's efforts to lock in the needed transmission, the need for the next 10 years. So most of these projects will be outside of our current 5 year plan and be picked up in future periods. But I thought, Kevin, it might be helpful to give your perspective on the to.

Speaker 2

Transmission opportunities here in the state and specifically the larger numbers that Durgesh just spoke to.

Speaker 10

Yes. Thanks, Durgesh. Stepping back for a second, I was just talking about it. It's clear that grids all across the country need significant upgrades as we move toward more electrification. In California, we've estimated that electric demand will more than double by 2,045 with commensurate investments in grids.

Speaker 10

And as he mentioned, we're seeing that kind of load growth in San Diego already with a lot of adoption around electric vehicles. So we're really excited about this recent announcement for the CAL ISO to to add $7,000,000,000 This is just like an incremental $7,000,000,000 of transmission opportunities. And as Trevor mentioned, to $500,000,000 has already been directly awarded to SDG and E, and we're going to bid on those $2,000,000,000 to $3,000,000,000 of other projects. And I'd note that across the Sempra family of companies, we're one of the largest owners and operators of high voltage electric transmission in the country I'm really well positioned to be successful here in California as California continues this path of aggressive investments to enhance and facilitate electrification.

Speaker 6

Got it. Thanks guys. Just a quick follow-up, is there a timeline On that the $2,000,000,000 worth of projects that you mentioned over what time frame is that going to be awarded?

Speaker 10

Well, it's going to be I think there's going to be a shortlist come close to winner in December and then with something awarded early next year. So I think more to follow here, but there's a process that Cal ISO is going to follow. And like I said, I'm pretty optimistic and we're going to be very competitive.

Speaker 6

Awesome. Thank you, Kevin.

Speaker 2

Thank you.

Operator

Thank you. Our next question will come from Julien Dumoulin Smith from Bank of America. Your line is now open.

Speaker 2

Good morning, Julien.

Speaker 7

Hey, good morning, team. Thanks for the time. Appreciate it. All right. If I can focus first on the LNG side, if you don't mind.

Speaker 7

I just wanted to understand a little bit of the push out in the timeline on the Cameron side. Clearly, this had been, in some senses, articulated previously. But as you think about getting clarity on timeline today on when to move forward, are you Kind of waiting for inflation to moderate. Are you waiting for certain milestones to be achieved here with your new partner with Bechtel Or are there other considerations? Just to kind of understand the shift to 24 now, but also the input parameters to narrow that in a little bit more precisely.

Speaker 2

Sure. I'll make a few comments. I'll pass it to Justin, maybe provide a larger overview of his LNG development program. But I would just start by saying, Julian, the best way to think about it is, we were on a call very similar to this in August of last year, to where we were talking about the potential for Port Arthur Phase 1 to leapfrog Cameron. And we were not at that time prepared to make an FID estimate for Port Arthur, but we felt good about the progress.

Speaker 2

We're probably in a similar position today. We've got more work to be done on both of our brown to projects Cameron expansion as well as Port Arthur too, but we're making significant progress. We're very excited to have selected Bechtel. Bechtel is doing a wonderful job and has been on-site at Port Arthur for probably close to 5 years at this point. So I think that's a big step forward for us to have Bechtel in house working with us on finalizing cost and design work.

Speaker 2

And Justin, maybe you could do 2 things, update us on the overall LNG portfolio for Jillian's And maybe provide additional details about how you're thinking about timing.

Speaker 5

Great. Well, thank you, Julian. Let me take a step back. As Jeff mentioned, Again, our core strategy is to build an LNG infrastructure business, and that would be a business that offers customers LNG volumes from both the Pacific and Gulf Coast. And as you think about where we are to date, Cameron Phase 1 is producing in excess of 100 to schedule.

Speaker 5

And as you look at our LNG development projects, look, we're very excited about the opportunity set in front of us. To Cameron Phase 2, as Jeff mentioned, the selection of Bechtel is a major milestone. And what we're doing with Factola is similar to what we did at Port Arthur. We and our Cameron partners will continue to conduct value engineering work through the fall as we finalize the EPC arrangements. And again, you have to remember that the goal is to optimize the design so we can to optimize the overall cost structure and timing of COD.

Speaker 5

These efforts should position us for an FID next year, Subject to definitive commercial arrangements and any needed regulatory extensions. So as you think about that timing, we're going to press forward on the EPC to management. And I guess I would echo what Jeff said. We were in this position last year on Port Arthur I and we'll try to do the same thing. Looking at Port Arthur Phase 2, very optimistic.

Speaker 5

We continue to advance commercial discussions with potential customers. To Importantly, many of whom are also interested in project equity. And at the same time, we're advancing engineering construction with Bechtel, to regulatory and financing. Julian, as I kind of think about the business and where we are today, I think the key takeaway is We have made significant progress on our LNG strategy and are very bullish on both Port Arthur Phase 2 and Cameron Phase 2 moving forward next year.

Speaker 2

And then I would just conclude, Jillian, by saying that we're going to finalize costs around Cameron expansion. We're going to complete the commercial arrangements and continue to progress our permits and look to take FID next year on Cameron. The most important thing I'd always remind folks is it's never really a race. It's about putting all the risk in a box and optimizing the project to produce the best returns for our investors. And we've demonstrated the ability to do that and we've got a great team on it.

Speaker 2

So we feel good about our progress on both Port Arthur Phase 2 and Cameron expansion.

Speaker 7

Got it. And just in light of those last comments, if you don't mind elaborating, Jeff, you used the term leapfrogging. I heard you the last time talking about it. I'm hearing you this time talking about it. So you feel pretty good about getting just Thanks, it's Esther when you

Speaker 8

say things.

Speaker 7

Just the timeline here, closer than not on announcing incremental commercial terms here, if you will, Just on PA2 and then also the inflationary dynamics, you feel confident about the terms there to de risk that project, the second phase as well?

Speaker 2

No. I would just clarify that I was reminding ourselves that when we had this call last year, there was still a fair amount of uncertainty around both projects. And we indicated there might be an opportunity for Port Archer Phase 1 to leapfrog forward. What I'm really referring to is Even though there seems like there's a little bit uncertainty around both of these brownfield projects, I can assure you that both of them are progressing in advance of what we've said publicly. So we feel very good about both of them going forward just like we were able to mature Port Arthur Phase 1.

Speaker 2

We're going to work diligently on Cameron expansion and Port Arthur Phase 2 with a hope of doing the same thing on both of those projects.

Speaker 7

Right. And you said still anticipate to sell down the equity potentially in future expansion. Just Considering the backdrop of LNG transactions of late, I figured you'd just clarify that last comment too.

Speaker 2

No. I mean, This goes back to kind of how we tend to finance things. And obviously, as we've talked about before several times, Julian, we're going to maximize our operating cash flows. We've got a lot of flexibility in our overall capital structure to finance things, but you see us at a 50% ownership level in Cameron today. You've seen us now at a 28% ownership position for Sempra Infrastructure Partners in Port Arthur Phase 1.

Speaker 2

One of the unique things is we have the opportunity to optimize the capital structure so that we really improve the returns for our shareholders. So Certainly, I think that's a pattern in practice you would expect us to continue.

Speaker 7

Yes. Thank you, guys.

Speaker 2

Thank

Operator

you. Thank you. Our next question comes from Jeremy Tonet from JPMorgan Securities. Your line is now open.

Speaker 4

Hi, good morning.

Speaker 2

Good morning, Jeremy.

Speaker 4

Just want to pick up after what Julian was putting down there with regards to Port Arthur too, more Specifically, on the FERC and the lack of the vote there for the expansion. Any current sense on timing on year end? And do you See this kind of impacting commercial discussion?

Speaker 2

No, we don't. We do think it's important for that FERC certificate to be issued. We certainly think that will be issued in the next month or 2. So we remain optimistic about that.

Speaker 4

Got it. That's helpful there. And then maybe drawing a bit more of a fine point, as a follow-up. We've seen Cove Point transacted at a much lower multiple than it did in 2019. And just wondering if this is a sign of value of the LNG space changing or just any thoughts on the value of that transaction?

Speaker 2

Look, I think at Cove Point, what you saw take place was a transaction from minority interest. It was not a transaction related to a controlling interest. I think the thing I would fall back on Jeremy is when you look at what's taking place in the LNG marketplace today, the world Has a global capacity of just below 400,000,000 tons per annum. That marketplace will grow by more than 50% by the end of the decade And likely double by the middle of the century. So the way we think about it is, there is a need today for more LNG.

Speaker 2

That need will grow as countries around the world look for natural gas to balance out their commitment to cleaner fuels like renewables. We think the United States continues to have a competitive advantage and will take market share. We are the world leader today in 2023. And when you think about to the competitive price of natural gas in the United States. You think about the depth of our capital markets and the constructive regulation, This is less about Cove Point or NextDecade or Sempra.

Speaker 2

This is about the United States taking a leadership position in the world. We think this business will continue to get much bigger. It's grown at about an 8% CAGR from 2017 to 2021, and we continue to expect to see to strong growth in LNG marketplace and I think Sempra's is well positioned as any company in North America to be a big part of it.

Speaker 4

Got it. That's very helpful there. And wondering if there's any more commentary you're able to provide as far as commercial discussions are concerned between to Asian versus European buyers or portfolio buyers, otherwise, just trying to get a flavor for kind of how that is progressing at this point.

Speaker 2

We're having commercial negotiations on Port Arthur Phase 2 as well as on some of the offtake arrangements around Cameron expansion. To many of the same type of customers you would expect in Europe and in Asia are part of those conversations. It is a very vibrant market today and there's lots of conversations taking placed by our marketing team, so we remain optimistic about future announcements in that area.

Speaker 4

Got it. Real quick last one, if I could. I was just wondering If you could provide more details on this latest Port Arthur CCS announcement, is this project just CCS for Port Arthur in Sempra or I guess how what's the addressable market that you're targeting there?

Speaker 2

Yes. I would say that we've named this project Titan. It's some recent pore space that we've been able to acquire. It is a very competitive process in Louisiana and Texas to have these types of facilities. And Titan has been dedicated to serve the needs of Port Arthur Phase 1 and future phases at Port Arthur.

Speaker 2

We also expect that it will Serve other third party interests in the region.

Speaker 4

Got it. That's helpful. I'll leave it there. Thanks.

Speaker 2

Thank you. Appreciate you joining the call.

Operator

Thank you. Our next question comes from Carly Davenport from Goldman Sachs. Your line is open.

Speaker 2

Good morning, Carla.

Speaker 11

Hey, Jeff. How are you? Thanks for taking the question. Just wanted to go back to Texas very quickly. You had mentioned the resiliency bill.

Speaker 11

Could you just give us some details from a timing perspective in terms of when you're able to file for that and kind of how long the approval process is

Speaker 2

Sure. It's a really good question and I will tell you it is a to very, very important development in Texas. We think it will be something that we will participate in once the rulemaking is set. But Alan, Perhaps you could talk about the bill itself, when you think the rulemaking will be over and when you expect you'll put your first 3 year filing in front of the commission.

Speaker 9

Yes, you bet, Jeff. Let me I'll just run you through kind of the timeline that we're seeing for HB 2,555, the resiliency bill. The bill became effective June 13th this year. It required a rulemaking to be completed within 180 days. So the statutory deadline for the rule is December 10th this year, subject to whatever comes out of that rule making presumably utilities Like us, we'd be free to file thereafter.

Speaker 9

The plans that are filed with the commission by law are required to be approved, modified or rejected within to So with respect to us, we're hoping to file a plan in Q1 of 2024 and seek to have that plan approved in the second half of twenty twenty four. That's what we know for now.

Speaker 11

Great. That's really helpful. Thank you for that. And then just to think about the maybe shifting to California, You mentioned the general rate cases kind of going on there. Can you just talk about kind of how that process has to if there's anything that surprised you so far.

Speaker 2

Sure. I'll make a couple of comments and I'll pass it to Kevin if he wants to add anything. But The GRC hearing is concluded in July and opening briefs will be filed in the middle of this month with the proposed decisions I indicated in the second Quarter of 2024. I think the most important thing, Carly, is the state is very focused on safety, reliability and decarbonization. And that's exactly how we lined up our rate cases.

Speaker 2

So remember, we had the 1st ramp rate case back in 2019. This is also a ramp format that we're following, and it's really closely aligned with what we think are the public policy positions of the state. So I think we're in good shape. Kevin, would you like to add anything else about how this unfolds?

Speaker 10

I mean, just process wise, Carly, I just would mention that We also just updated our filings for inputs from inflation factors, labor rates, medical insurance costs And the like. So we just updated them. We're going to have a refile this fall and look forward for a PD in the first part of mid next year, 1st part of the year.

Speaker 11

Great. Appreciate the color. Thank you.

Speaker 2

Thank you, Carly.

Operator

Thank you. Our next question will come from Nicholas Campanella from Barclays. Your line is now open.

Speaker 12

Hey, everyone. Thanks for taking the questions.

Speaker 2

Hi, Dave.

Speaker 12

I'll keep it short. So I guess, Port Arthur, good to see you finalized 28% here. Just what's causing you to fall higher in the range that you kind of to Gabe to us. And then when we think about the puts and takes around the funding plan and what was outlined in the Q1 call, now that you've kind of solidified this 28%, Should we still think about no kind of external equity financing at the Holdco? Thank you.

Speaker 2

Sure. I would just say that we had originally targeted between 20% 30% ownership. Obviously, our goal is to own as much of the project as we can. So we are very pleased to guide up to the 28% range. Previously on calls, we had talked about notionally just giving out information at the 25% level, But our goal all along was to make sure that we could land as high in the range as possible.

Speaker 2

I think we're well set on financing. I'll pass it over to Faiza Khan, who's the CFO Of Cipro Infrastructure. And maybe you can just update us on how you expect the Denali capital process to go forward and your funding for Port Arthur Phase 1.

Speaker 10

Yes. Thanks, Jeff. So as always talked about, we have this sort of flexible capital structure. So first with our project financing at Port Arthur, sort of well underway. That's roughly $7,000,000,000 in capital for the project.

Speaker 10

Then of course, we have our partners, ConocoPhillips and now KKR as Equity Partners as well. And then we also have moving up the capital structure, you get into Sempra Infrastructure Partners where you have to Adia and KKR as well. So again, plenty of capital to be drawn on from all of our partners, sort of having that capital flexible capital structure in place It enables us to sort of maximize returns on the project up to Sempra.

Speaker 12

Got it. Thanks. And then, I know everyone's very focused on Train 4 for Cameron, but

Speaker 2

can you just give us

Speaker 12

a sense of how debottlenecking for 1 through 3 is progressing and whether you remain on track to increase that capacity before Train 4?

Speaker 2

Sure, Justin. You can take it.

Speaker 5

Yes, Nick. We're still doing some of that engineering work. I'd say it's very to And just as you recall, the debottlenecking won't be binary. So what we'll likely do as we continue to take Trains down for routine maintenance. We will do the debottlenecking activities during those trains, and we'll expect to see additional volumes.

Speaker 5

So Again, the bottleneck is moving forward very positively. Thanks. Have a great day.

Speaker 2

Thank you, Dick.

Operator

Thank you. And our next question will come from Steve Fleishman from Wolfe. Your line is open.

Speaker 13

Hello, Steve. Hey, Jeff. Just under the wire. Just wanted to circle back to the back to Encore and some of the things you mentioned, the $70,000,000 $90,000,000 on DCRF and to the kind of sensitivity on investment. So when would you see this benefit of DCRF?

Speaker 13

Would that be pretty much in place for 2024, or yes.

Speaker 2

Yes, it's a good question. We expect to make our 2nd DCRF filing for this year in September and the pickup for DCRF which might be a little bit this year Will primarily be in 2024. So it will be a full run rate benefit in 2024, Steve.

Speaker 13

Okay. But you said it falls within your guidance because your guidance range is pretty wide, I guess.

Speaker 2

That's correct. To Karen. We also review that with our Board in the ordinary course as part of our fall financing exercise. And you'll recall, We'll also be updating and issuing our 2025 guidance on the February call.

Speaker 13

Okay. And tied in with that, just on Capital at Encore, which you said you'll update in the fall. The I mean, Will that include are you going to just update kind of normal course there? Or will that include to this reliability aspect as well, which won't have been fully finalized by them or would that maybe come later on?

Speaker 2

Yes. I think this goes back to Carly's question. We're going to do our normal roll forward 5 year planning process led by Don Clevenger at Encore. The Encore Board will be deeply involved with that as well the ownership both of TTi and Sempra. We obviously have seen the capital plan grow from $15,000,000,000 to $19,000,000,000 just year over year.

Speaker 2

And we certainly think it's going to obviously grow again as we've already indicated. The key issue for you on this new rulemaking, which Alan indicated, the rulemaking, Steve, will not be finalized until at the earliest December 10 this year. And Al will be coming back to the Board with an add on related to resiliency. So the work that we're doing that will be finalized in the fall It's a normal roll forward 5 year capital plan. But once we have the rulemaking in place, Alan and his team will hustle to put together the appropriate analysis for the Encore Board and that will lead to the filing that we made with the commission.

Speaker 2

And I think as Alan indicated, We expect to have feedback from the commission in the second half of the year. Alan, you'll add to that?

Speaker 9

No, Jeff. I think that's exactly right. Okay.

Speaker 13

Great. Thank you. Appreciate it.

Speaker 2

Hey, good to talk to you, Steve.

Operator

That concludes today's question and answer session. At this time, I'd like to turn the conference back to Jeff Martin for any additional closing remarks.

Speaker 2

Look, as we close out today's call, I wanted to note that we're pleased with our financial to results both for the quarter and for the first half of the year. I certainly believe we continue to make great progress on our LNG story. We're making progress at Phase 2 At both Cameron and Port Arthur and are also pleased to guide the higher ownership percentage of 28% at Port Arthur Phase 1. And as you can tell from today's call, Texas continues to be one of the leading growth stories in the country and the improved regulatory compact there It's a very strong signal, in my opinion, for continued investment. And finally, as we celebrate our 25th anniversary, we're pleased to announce our 2 for 1 stock split.

Speaker 2

We appreciate everyone making time to join us this morning. We have several IR events this month in Wisconsin and Las Vegas and hope to see many of you there. This concludes our call and feel free to follow-up with our IR team. Thank you.

Operator

Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Sempra Q2 2023
00:00 / 00:00