Sempra Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 14 speakers on the call.

Operator

Good day, and welcome to the Sempra Second Quarter Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Neli Malana. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to our On the line with us today, we have several members of our management team, including Jeff Martin, Chairman and Chief Trevor Mihalik, Executive Vice President and Chief Financial Officer Justin Bird, Chief Executive Officer of Sempra LNG Alan Nye, Chief Chief Executive Officer of Encore Kevin Sagara, Group President and Peter Wall, Senior Vice President, Controller and Chief Accounting Officer. Before starting, I'd like to remind everyone that we'll be discussing forward looking statements within the meaning of Vivat Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward looking statement we make today, 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 all of the earnings per share amounts in our presentation are shown on a diluted basis and will be discussed in certain non GAAP financial please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. I'd also like to mention that forward looking statements contained in this presentation speak only as of today, August 5, 2021, and the company does not assume any obligation to update or revise any of these forward looking With that, please turn to slide 4, and let me hand the call over to Jeff.

Speaker 2

Thank you, Nelly. I want to start today by thanking those that attended our Virtual Investor Day this past June and also mention that the team and I really enjoyed getting back on the road this past to attractive markets and improved capital discipline, all with the goal of offering a competitive value proposition, including Consistent and attractive returns, strong earnings visibility and EPS growth and a sustainable and growing dividend. Additionally, at the Investor Day, Al and I highlighted the robust growth that Encore continues to see all across its service territory. And as a result, Encore is increasing its capital plan, which Trevor describes in further detail later in today's presentation. Shifting now to the quarter, I'm pleased with our financial results and I think it's a testament to the affirmative steps we've taken to simplify our business model And focus our capital investments on top tier infrastructure growth platforms.

Speaker 2

We're reporting strong earnings I'm excited about the progress we've made so far this year and I'm proud of the broad support we're seeing all across our operating businesses. Now please turn to the next slide where I'll turn the call over to Trevor to provide both business and financial updates.

Speaker 3

Thanks, Jeff. To begin, we We have had several positive developments at our operating companies this past quarter. At SDG and E in July, we received CPUC approval for our 2021 wildfire mitigation plan update, building on the utility's long standing commitment to advance fire hardening and public safety. SoCalGas began flowing renewable natural gas at 2 additional biomethane Projects in support of their goal to provide 20% RNG to core customers by 2,030 to help the state reach its de In Texas, Encore has provided visibility to their 2022 to 2026 projected Total plan, which has increased to approximately $14,000,000,000 over the 5 year period. Additionally, Encore did receive PUCT CT approval to extend its rate case filing deadline to June 1, 2022.

Speaker 3

At Sempra Infrastructure, we completed the exchange offer for Enova shares, resulting in a 96.4 percent ownership interest, and we plan to launch a cash tender offer for the remaining 3.6 percent interest. We're also advancing the sale of the non controlling interest in Sempra Infrastructure partners to KKR. And while I may have been a bit optimistic at Investor Day, we now expect to close the transaction around the end of the third quarter, Subject to the Mexican Competition Commission completing its economic and market analysis and issuing the regulatory approval. With that, please we will now begin with strong macro fundamentals. As a result, Encore is announcing its 2022 to 2026 projected capital plan of approximately $14,000,000,000 nearly a $2,000,000,000 increase over the 2021 to 2025 capital plan.

Speaker 3

Furthermore, Encore Consistent with what Alan outlined at the Investor Day and is largely incorporated in the new $14,000,000,000 5 year capital Oncor's robust capital plan supports the economic development seen throughout its service territory, increases Interconnection requests, strong premise growth and investments in grid resiliency. A good example of this robust growth can be seen In new relocations, expansions and electric service to Encore system, which are on pace to exceed 2020 values by 70% And to exceed 2019 values by 170%. Please turn to the next slide where I will review the financial Earlier this morning, we reported Q2 2021 GAAP earnings of $424,000,000 or $1.37 per share. This compares to Q2 2020 GAAP earnings of 2.239 $1,000,000 or $7.61 per share. On an adjusted basis, Q2 2021 earnings were 5 $4,000,000 or $1.63 per share.

Speaker 3

This compares to our Q2 2020 adjusted earnings of $501,000,000 or $1.71 per share. On a year to date basis, 20 21 GAAP earnings were $1,298,000,000 or $4.24 per share. This compares to year to date 2020 GAAP earnings of $2,999,000,000 or $9.91 Adjusted year to date 2021 earnings were $1,404,000,000 or $4.58 This compares to our year to date 2020 adjusted earnings of $1,242,000,000 or 4 point Earnings compared to the same period last year was affected by the following key items. Dollars 126,000,000 from a CPUC decision that resulted in the release of a regulatory liability at the California utilities in 2020 related to prior year's forecasting differences that are not subject to tracking in income tax expense memorandum account And $22,000,000 of lower earnings due to the sale of our Peruvian and Chilean businesses in April June of 2020 respectively. This was more than offset by $38,000,000 higher equity earnings from the Cameron LNG JV, primarily due to Phase 1 achieving Full commercial operations in August of 2020, dollars 35,000,000 of lower losses at parent and other, primarily due to lower preferred dividends And lower net interest expense, dollars 34,000,000 of higher income tax benefits from forecasted flow through items at SDG and E and SoCalGas and $22,000,000 income tax benefit in 2021 from the remeasurement of certain deferred income taxes at Sempra LNG.

Speaker 3

Please turn to the next slide. We're pleased with our strong operational and financial performance this quarter and are focused on continuing to execute throughout the remainder of the year. And with that, this concludes our prepared remarks. So I now will stop and we can take your questions.

Operator

Thank Thank you. We'll now take the first question from Shah Pourreza at Guggenheim Partners. Please go ahead.

Speaker 4

Hey, everyone.

Speaker 5

Good morning, Shahriar.

Operator

Jeff, can

Speaker 6

we maybe just talk a little bit about The visibility into 2022, I mean, obviously, you and Trevor reiterated guidance. There is more CapEx coming into Texas, Which includes some contemporary industry recovery. Can you maybe talk about the other moving pieces or changes in assumptions for 2022, I. E, Maybe cost of capital, anything else that can move you in the range or actually incremental to the range?

Speaker 5

Right. I would start, Shar, by indicating that we're very pleased with our first half results to be able to produce $4.58 of adjusted EPS in the first half, I think, is an extraordinary outcome. And that does cause us to be fairly bullish Against our increased guidance for 2021, we certainly think there'll be some pull through of that strength into 2022. And I think it's a function of The growth that we're seeing in front of all three platforms, I think there's a portfolio of opportunities here in California and in Texas and the Sempra infrastructure, which really highlights while we need to perform and execute well, I could not be more pleased. We obviously did this transaction back in March 2018 with Encore, we forecasted internally with our Board that there would be increased capital opportunities.

Speaker 5

We were pleased at the time They had a $7,400,000,000 commitment to their regulator about their capital program. In November of 2017, they launched a great CIS What we were not prepared for was the quality of that management team. So Alan Nye is on the call with us today, Don Clevenger, who's the CFO, Matt Henry, the General Counsel and Jim Greer, the COO, they are knocking the socks off of it, prioritizing what we think is most important at Sempra, Which is strength of operations and safety. More to your point on what we can expect next year, you did raise cost of capital. We talked a little bit about that at the analyst conference.

Speaker 5

And in our assumptions for 2022, we indicated that we did not expect in those assumptions To include any type of triggering at SDG and E or SoCalGas. So we did mention, Shar, that if there is a trigger to occur, which Looks more likely now, it would probably be limited only to SDG and E and within the confines of that business, Kevin Sigard and his team thinks that they can limit the impact That forward guidance to roughly $0.05 to $0.10 So I would just summarize by saying the first half of this year causes great optimism For our performance, even against the increased guidance we provided for this year, I will be disappointed if we're not back in front of our investors, taking an increased view of what our performance might be in 2021, we do expect some of that pull through to continue into 2022. We're obviously not prepared to revise the guidance for 2022 yet, largely because this cost of capital mechanism is still out there. We think at least at SDG and E, it's well managed to something around $0.05 to $0.10 of impact.

Speaker 6

Perfect. I think that message is pretty clear. Thank you for that, Jeff. And then, Just on I mean, you said a clean path on LNG at the Analyst Day. And since then, some contracts have been moved over from Port Arthur.

Speaker 6

Do you anticipate Cameron Train 4 is now close to being fully subscribed between existing MOUs and the Polish oil? And as kind of a follow-up, can you characterize if the economics of Cameron IV are better than Port Arthur? And is there a way to make Port Arthur more competitive to potentially get the offtake interest back to that site. Thank you.

Speaker 5

Sure. Let me kind of take a step back and take a little broader view and I'll come right back to your We talked a little bit at Investor Day about our focus right now is on making sure that ECA Phase 1 is Delivered on time and on budget. We have that coming into our planning period in the second half of twenty twenty four and that's proceeding quite well. We've been managing the COVID environment down there and the work environment, and we remain optimistic about continuing to meet that deadline. Secondly, I think we have been consistent really over the last 18 months about continuing to have a more bullish view on Cameron expansion.

Speaker 5

We're working closely with Mitsui, Mitsubishi and Total. We'll be continuing to have those conversations throughout the fall. We do think that project will have superior returns, which is one of the questions you're indicating. And that's largely McCall's at a high level, you can always expect the economics of brownfield projects to be generally superior to greenfield projects. And the key for greenfield projects like Port Arthur It is much more advantageous to do that project at multiple phases at scale, which makes it increasingly more economic.

Speaker 5

But right now, Bringing online Train 4 at Cameron is a top priority for Justin and Faizel on the team. And being able to do that, Sure. At the same time that you debottleneck trains 1, 23 really adds to its cost advantage. And you mentioned Port Arthur That continues to be a remarkably well situated site. The team is going to ground right now to make it more competitive and we've outlined some of the steps we're taking to reduce the emissions profile.

Speaker 5

And I think the recent announcement regarding the Polish oil and gas company really is a reflection of the strength, number 1, of that customer relationship And their confidence in our ability to deliver them into a project that meets their long term needs. So I think that relationship is in good stead. I certainly think ECO. 1 is going well. We continue to be quite bullish on Cameron expansion.

Speaker 5

In Port Arthur is probably a longer term opportunity, but we have more work to be done there.

Speaker 4

Perfect. That's very clear. Thanks so much, Jeff. Congrats.

Speaker 5

Thanks, Shahriar.

Operator

We'll now take the next question from Jeremy Tonet at JPMorgan. Please go ahead.

Speaker 5

Good morning, Jeremy.

Speaker 7

Hi, good morning. Thanks for having me here. Just want to start off, if you might be able to talk a bit about timing considerations that went into the choice to raising Encore CapEx now versus at the Analyst Day or waiting until 3Q? And then could you help us think through some of the limitations might be to add even more capital just given all the opportunities down there in Texas?

Speaker 5

Well, I think it's a series of questions there and let me try to take them seriatim and then Alan, I'll pass it to you to provide some more color. But Let me just start with a couple of highlight points. Number 1, Jeremy, the growth that we're talking about and the adjustments to the CALFA program Are really around number 1, strong premise growth number 2, active transmission interconnection requests primarily focused on renewables and some baseload generation And UT and D Investments. In terms of the timing around revising our plan, we had a Board meeting at Encore last week. Alan is very good about bringing back to the Board not only the approval of next year's plan for 2022, but taking the opportunity to review longer term What the opportunity really was to meet some of the growth needs in Texas.

Speaker 5

So we feel quite bullish about that opportunity. I would add one final comment. We've seen some questions earlier this morning, but the raised expectation that Alan's team has put forward and they've also got a press release out that provides more detail, does not impact the continued expectation of incremental capital in the $775,000,000 range to $1,270,000,000 So we've had the opportunity to reevaluate the needs of that business and the needs of our customers Over the next 5 years, we'll go into the fall planning cycle with a view toward updating our Board in October November. I thought the opportunity here was really one of providing our latest view as transparently as possible to the Street. Alan, I know I covered a number of these points, but I think if you don't mind, talk a little bit more detail about the growth that you're seeing across your system and maybe kind of your approach to governance with your Board last week.

Speaker 8

Yes. Thanks, Jeff, and thanks, Jeremy. I think Jeff covered it to a large degree, but let me just give you a little bit of color. With regards to why now, it's exactly what Jeff said, I mentioned at the Investor Day that we had a need to go to our Board in July to increase our expectations for 2022 in order to get ahead of the game to Make sure we have the resources and the equipment to actually execute next year. And so as Jeff said, we did that.

Speaker 8

We raised 22 from What we previously said was 2.4 to 2.5 up to 2.8. We also took this opportunity to let you all know that We're seeing some opportunities this year, and so we've upped our 2021 from 2.4, which is what we previously had told you all to 2.5. And then just given the fact that we're going to go ahead and talking about increasing 2021 2022, we had the opportunity to discuss with our Board. Thanks. We're seeing some of this growth that Jeff is talking about.

Speaker 8

And so we've been spending a lot of time on CapEx here at Encore because of what we're seeing. And What we're seeing is, to Jeff's point, Trevor talked about it earlier, premise growth last year, we had the largest organic growth rate ever in our company's history. And we're on pace this year through 2 quarters. Both quarters this year were higher than the corresponding quarters last year. Transmission points of interconnection on both the retail and the generation side are above the levels end of year last year and above the Similar quarters of last year.

Speaker 8

Economic development, which I think is in Trevor's earlier remarks, economic development is another thing we look at. Request for information, which are basically project location specific discussions we're having with potential builders, Are up 72% approximately year over year. And then I always talk about West Texas when we're talking about growth. The West Texas story continues to be really strong. The latest trend is electrification of fields, people considering ESG ramifications, emissions.

Speaker 8

So we're getting some uptick there, but we have another peak on our cobblestone loop transmission system In July, hit 760 megawatts versus 6 78 megawatts last year. That's an all time high. Another peak in the Far West Texas weather zone in June, so we're seeing growth all over our system, really strong, which leads to these CapEx discussions we're having. And since I told you all at the investor call, our investor meeting that we are going to address 2022 with our Board in July and since we've adjusted 21 up, We thought now was a good opportunity to just provide you all with our expectations as a management team of what we're seeing with regards to those outer years. And those outer years, as you can Our documents are we're looking at 2.7 to 3.0 for the 4 years of the outer years of the plan.

Speaker 8

And that's our expectation right now. But as Jeff said, we're going to go into October like we always do and have our meeting on our 5 year plan With our shareholders, with our independent directors and with our Board, and we're going to review the information available to us at that time. And we'll have a number then. It may be 14, it may be something else. We feel very good about 14 right now.

Speaker 8

And we'll see where we are when we get to October, and we'll have Something to announce after that. To Jeff's point as well, we added about 1.8 $1,000,000,000 to our 5 year expectation right now. The incremental capital that we have talked about in previous meetings and investor calls In the range of $775,000,000 to $12.75,000, which I think was on Page 45 of the investor deck last time we talked. That remains available. We have sometimes we move projects from that incremental kind of bucket into our CapEx plan.

Speaker 8

Sometimes we have CapEx that comes from outside that incremental bucket and it goes into our plan. But notwithstanding the fact that we've raised to right now our Expectation to around $14,000,000,000 over $5,000,000,000 There are significant there remain significant opportunities to invest on our system and those additional opportunities are in part reflected in that incremental CapEx bucket that we've discussed before. I'll be glad to answer any of the questions, but thanks a lot.

Speaker 5

I would just mention, I appreciate that color, Alan, and for your benefit, Jeremy, remember, we as a management team and our Board of Directors underwrote a transaction in the fall of 2017, and we closed at March of 2018 based on the belief that they had made a regulatory commitment to spend roughly 7 point $4,000,000,000 over 5 years or roughly $1,480,000,000 a year on average. And now we're Outline something that looks like on the back end of the plan, it could be looking more like $3,000,000,000 a year. So that's an almost doubling of the average put in terms of CapEx at that company. So we're very pleased with the growth in the state. And I think Alan and his team have a great plan to meet that growth in a way which is the most cost effective for ratepayers.

Speaker 7

Got it. That was very helpful. Thank you for the thorough answer there. Maybe if I could just Pivot to RNG here, if that's okay. Just want to see if you could provide some color on how California customer demand for RNG has been kind of trending over time.

Speaker 7

And do you see any kind of policy or regulatory items that you're watching that could support the 20% goal for 2030 and then maybe even though RNG has negative carbon attributes, how do you see, I guess, competing for customers versus electrification? Do you see

Speaker 5

Look, I think if we're going to meet our long term climate goals as a nation, we need an all the above strategy, right? So Technification is going to be a long term secular trend. We certainly have the opportunity to play that in a big way just as Alan described in Texas. We expect to be a leader in that market in connecting renewable grid solutions to load centers. Here in California, we did something that no one else has done across We made a commitment that we would deliver roughly 20% of all of the natural gas delivered on the SoCal Gas system, not 2,030 using renewable natural gas.

Speaker 5

You may have seen the press release in the last week or so. We just connected 2 new biomethane plants To our system, so whether it's a transportation opportunity, where it's a maritime opportunity or an opportunity to basically deliver renewable natural gas Across our network, it's a priority. We have set a goal of being at the 5% level next year. We remain on track to hit that goal. Scott, Drew and his team are doing a hell of a job at SoCalGas to transform that business.

Speaker 5

And by doing so, as you know, exogenous methane in the environment has An 80 times higher detriment than gas, which is combusted in the ordinary course. And there has been some exciting developments, I think in terms of how the commission and other stakeholders in state view RNG, I thought maybe Kevin Segar, our Group President for California, Could you talk about the recent report that came out of the PUC regarding this?

Speaker 9

Yes, I think thank you, Jeremy, for that question. And yes, As you might expect, we've had a great run so far with the low carbon fuel standard in this state creating a good amount of demand for RNG. But I think To go to the next level and help meet the state's very ambitious climate goals, we saw that The legislature passed SB 1440 and then recently the PUC staff this PUC Energy Division issued a staff report recommending essentially an RPS for RNG for the California utilities. And really the levels are based on The California statutory obligation to divert organic waste from landfills. So when you look out to 2025, they're supposed to Procure the utilities are supposed to procure biomethane from organic waste equal to about 75% of the state's obligation To divert this waste from landfills, which is about 5.5 percent of core load.

Speaker 9

And by 2030, that goes up to about 12.3% of core load. You asked about creating more demand. That would be a good opportunity. That staff report hasn't yet been active upon, but we Hopefully, it does shortly.

Speaker 5

That's why I think we're glad you asked the question because it really is a priority to our company. And I think as Scott, Drew and the team continue to innovate at So We have the opportunity to be a leader in RNG. We've also made some commitments, as you've seen, Jeremy, to be a leader in hydrogen.

Speaker 7

Got it. Super helpful. If I could slip in one last quick one here. Just given some of the resource adequacy concerns that have come up this summer in California, what's your latest thinking on some of the capital opportunities that might present themselves here?

Speaker 5

Yes. Well, look, this is a great opportunity to go back Talk about our base business model, right? We're a T and D company, right? So one of the things that has privileged our commitment to California and our commitment to Texas is we've moved away from being an owner and operator of electric generation, either fossil or renewable with exception of Mexico. And likewise, we don't have a lot of exposure because we're decoupled on whether consumers consume more or less.

Speaker 5

So we very much like that sweet spot Building that kind of long term growing bond portfolio and not being exposed to those issues. In terms of capital opportunities, there has been a new announcement in the state where they're looking for 11.5 gigawatts of new capacity additions in terms of generation, energy efficiency and long duration storage. We certainly think long duration storage in particular is a unique opportunity where we've developed a capability there at San Diego Gas and Electric And that will be a continued opportunity. But in the near term, the state is really being aggressive about making sure we find More needs, more ways of supporting our resource adequacy. And I think one of the great challenges, Jeremy, is traditionally during some of the highest demand times of the year, we're importing About 25% of the state's power needs from outside of California and always makes us subject to what's taking place in those other And what their demand needs are.

Speaker 5

So over a long period of time, California has got to take steps and it's going to take 5 to 7 years To get ahead of these demand needs through new capacity additions.

Speaker 7

Got it. Makes sense. I'll leave it there. Thank you very much.

Speaker 5

Appreciate you joining the call.

Operator

We'll now take the next question from Durgesh Chopra at Evercore ISI. Please go ahead.

Speaker 4

Good morning. Hey, good morning, Jeff. Thank you for taking my question. I have a clarification and then a follow-up question. Just I know we've talked about Encore tons, but just so The $21,000,000 to $25,000,000 CapEx as it sits now, is it closer to $12,600,000,000 12.7 $1,000,000,000 with the $400,000,000 incremental, is that the right way to think about it?

Speaker 4

Or is it still at 12.2?

Speaker 5

Yes, that's the right way to think about it.

Speaker 4

Got it. Okay. Perfect. And then just on SIP getting to the close here.

Speaker 10

You have the cash tender offer for

Speaker 4

the balance of like 4% that you currently don't own for Mexico. Do you have to get the 100% to close SiP? I'm just thinking about what sort of the is it more sort of procedural delay in the SiP? Or does the Mexico Like owning 100 percent of the Mexico needs to get you need to check that box before completing that transaction with KKR?

Speaker 5

Yes, I would think about it as Two different disjunctive ideas here. Number 1, our long term goal is to take the EONOVA business platform private. As you've indicated, there is still about 3.6%, which is floated to public investors. And the process that we're following Is to set up a cash tender process, which will happen over the next week or 2 with a view toward taking out that additional private public float And delisting that business, if there's any remaining shares, we'll look to clean that up by a separate mechanism. In terms of closing, that's not really the pace and item for closing.

Speaker 5

Pacing item for closing is, there's a small number of CPs related to regulatory approvals. And right now, we think the pacing item Is the competition commission in Mexico. And once they finish their analysis, we think that we'll be in a position to close the transaction, which we're forecasting Is around the end of Q3. Got it. That's super helpful.

Speaker 5

Thank you, guys. Thanks a lot for joining us.

Operator

We'll now take the next question from Michael Lapides at Goldman Sachs. Please go ahead.

Speaker 11

Hey guys, thank you for taking my question. Just Curious. Hi, Michael. Hey, Jeff. Commodity inputs are up a ton.

Speaker 11

How are you thinking about what this means For the construction cost per ton of any new LNG trains, whether it's Cameron IV or somewhere else, That haven't already gone FID and don't have lump sum contracts. And therefore, what that means Really for kind of the economics of North American LNG versus LNG coming from other sources around the world.

Speaker 5

Right. So look, I think you're asking a great question. I think input cost to all infrastructure businesses are being impacted. You're also seeing it in other commodity costs as well. We probably have a multipronged strategy here.

Speaker 5

I would tell you at ECA Phase 1, Obviously, we've got an EPC wrap contract. We feel good about the contract at ECA, but that would be a near term focus for us. In terms of input costs for future projects, that goes through our whole feed and pre feed process to make sure we get to the right number. But I think it does go back to this issue, Michael, that greenfield projects, which tend to have a little bit of a higher per unit cost than brownfield projects, This will continue to put pressure on that dichotomy. But keep in mind that all the other projects in the world are subject to those same cost pressures, right?

Speaker 5

So At the same time that you're seeing cost pressures around construction, you're still seeing a lot higher LNG spot prices around the world. And most people who are observing this industry think it will be the most dominant fuel used in the world by the early part of next decade. And the only way that's going to occur is, is you're going to see a massive build out of continued LNG development and the United States should expect to take its fair share.

Speaker 11

Got it. Thank you, Jeff. Much appreciated. Hey, one for Alan. Just curious, what's the latest on being able to push out the rate case?

Speaker 11

And I guess a follow on with the higher CapEx budget, how do you think about what that means for regulatory lag?

Speaker 8

Yes, you bet, Michael. The answer is, yes. We received approval, on July 29th By the Public Utilities Commission to move our rate case filing deadline to June 1, 2022 next year. So we're off the calendar for this year and we're on the clock for June 1, 2022. Second question with regard to lag, was lag associated with this additional investment?

Speaker 8

Is that right?

Speaker 5

Yes.

Speaker 11

Yes. Just if you raise CapEx, do you does that also like I know the trackers for distribution and Transmission could capture much of that, but just curious about the forward versus historical looking nature of Those trackers as well as what happens to other parts of the income statement that could drive regulatory lag.

Speaker 8

Got you. Got you. Let me answer it this way. Approximately 97% of everything in this plan that we have now, the 5 year plan is tracker eligible. And those trackers, as we talked The trackers decrease the lag.

Speaker 8

On the transmission side, the interim key cost tracker decreases lag to about 5 months approximately, While the distribution cost tracker, while it's good, it's not quite as efficient and the lag on the distribution side, is about 15 months. So about 97% Of everything we've talked about this morning that's in that $14,000,000,000 over $5,000,000,000 the lag associated with that investment would generally be consistent with these two Periods of time that I've just described.

Speaker 11

Got it. Thank you, Alan. Much appreciated.

Speaker 12

Yes, sir.

Speaker 8

Thank you.

Speaker 5

Yes. And I would just mention as a follow on for the audience is that volume growth, which they're experiencing in Texas, can also offset some of that Lag in the regulatory model.

Operator

We'll now take the next question from Sophie Karp at KeyBanc Capital Markets. Please go ahead.

Speaker 13

Hi, thanks for taking my question. It's Acharya Sangeetha for Silcy.

Speaker 5

What's the question?

Speaker 13

I have a couple of follow ups on the Texas CapEx. Should we think of inflation as being Any factor in the increase in the front end of the CapEx? And then as a follow-up, my question is, does the recent Texas legislation build into your CapEx at any point or do you see upside from that?

Speaker 5

So what I would try to do is I'll answer the first part of the question and pass it on to you, Alan, for the legislative question. But the way to think about it, Sophie, is that Alan and his team, particularly Jim Greer deserve a lot of credit because as they've been looking at meeting the needs for 2021 and planning to meet both the hard cost and soft cost needs for 2022. This is one of the reasons that the timing of these conversations with the Board was moved forward. In other words, there are some inflationary and competitive pressures to access the equipment and materials they need to meet their growth needs in the state. They deserve a lot of credit for being proactive to go ahead and secure and lap those resources well in advance.

Speaker 5

But I don't think beyond that it's had any influence in terms of how we're thinking about They're recast over 5 years. But Alan, maybe you could talk about the various bills that are continuing to are pending in the legislature And how you might think about forward CapEx related to those bills.

Speaker 8

Yes. Thanks, Jeff. Yes, I agree with that, the answer on the inflation. And with regards There's kind of 2 things to think about here. There's what was passed and has been signed by the governor, in the regular session, which is now to a large degree been Shifted over to the PUC and ERCOT, there's over 30 rule makings presently going on at the Public Utility Commission.

Speaker 8

That's basically going to set out how this legislation is going to be implemented. And then there are a number of bills that have been filed right now in special Session. So I'll address it this way. Special session, the governor did not include electric issues in the charge and in the call rather. And the call is what limits The topics that can be addressed by the legislature.

Speaker 8

So we're monitoring what's going on with the legislature with these bills that relate to the Industry, but we don't believe they're going anywhere without the charge or the call being changed, which we don't anticipate happening. So our focus really is more on The activities at the PUC where the rulemakings are going on, I talked about this, I think, during the investor call. There are Quite a few bills, a bunch of rule makings. A lot of them have to do with PUC ERCOT There's some coordination between agencies and industry participants and then there's some general calls for weatherization and things like that. So we'll have to see.

Speaker 8

It's too early to predict what's going to come out of those rule makings. They're just at the beginning. But to the extent anything comes out of that, that would be incremental What we have in our CapEx plan right now. The other thing that I mentioned in the investor call, there was another bill That was not related to Winter Storm Yuri, but it added an economic benefit test to the transmission approval process at ERCOT. And we think that has the potential to potentially allow us to get more projects, economic projects through ERCOT.

Speaker 8

But again, we'll have to wait and see How that all shakes out, we'll know for sure. And so that's my answer. Thanks.

Speaker 5

And Sangeetha, I just want to make sure we answer both of your questions. Did that answer it for

Speaker 4

you? Yes, yes.

Speaker 13

If I can just add a follow-up, actually a different question. Now that we know that the Texas GRC is pushed 2022 and otherwise your regulatory calendar kind of looks like through the end of the year. How would you characterize the puts and takes that could lead you to the high end of your 2021 guidance versus the low end?

Speaker 5

Well, I would just make a couple of comments. One was the movement of the Rex's rate case was assumed in our planning numbers we provided at the Investor Day. I made some comments earlier on this call that I could not be more pleased with the strength of our financial performance in the 1st 6 months to be able to post $4.58 of adjusted EPS. I think that really bodes well for the second half of this year. And I do expect Sanditas and pull through into 2022.

Speaker 5

And I mentioned one of the offsetting considerations was the cost Capital we talked about earlier.

Speaker 13

Right. Okay. That answers my question. Thanks so much.

Speaker 5

Wonderful. Thank you for joining us.

Operator

We'll now take the next James Stallica at BMO Capital Markets. Please go ahead.

Speaker 4

Good morning.

Speaker 5

James, you may be on mute.

Speaker 12

Good morning, guys. Thank you for taking the call.

Speaker 4

Good morning.

Speaker 8

This might be a question for Alan, and not putting

Speaker 12

the cart before the horse, but Traditionally, T and D companies in Texas have been viewed as lower risk and the capital structures have reflected this. Over the last couple of years, Yes, we've obviously seen with the impact of Yuri and increased hurricane risk and now we've got a new PUCT coming in. Has there been any discussion potentially about Taking the equity layer is one way to sort of beef up the credit in anticipation of maybe more widespread system hardening.

Speaker 5

And Alan, I'll make a quick comment and turn it over to you. And I appreciate that question. I would just make one comment, which is, we as a management team have spent a time in the last 3 years, really trying to distinguish what we think is the unique benefit of T and D investments relative to other businesses that are either weather exposed Consumer volume exposed or exposed to stranded cost risk with generation. So as you think about in California, The blackouts that happened last summer, you think about how we operated through the pandemic here in California and in Texas, and you think about Storm Yuri, which you referenced, All we've really done is raise our guidance and exceed our guidance, right. So this is the strength of having a T and D model That we think gives us unique visibility to consistent financial performance.

Speaker 5

So I just want to make that point because We talk very consistently about the value of the model that we're pursuing and why we think it deserves a higher valuation. And I think it really is Very much true of the T and D business in Texas. So Alan, feel free to go ahead and add some additional color around how you think about your equity layer.

Speaker 8

Yes, sure. Thanks, Jeff. Yes, I agree. Look, I think our equity layer is lower than maybe the national average things that are going on in other parts of the country. It's something we always look at when we're putting together a rate case.

Speaker 8

We're probably about even with CenterPoint AT right now. But now we've got a little time going into June of next year, it's something we'll spend a lot of time on and figure out what we can accomplish. We have a long, long history, as I've Many times on these calls of working with all the constituents in our cases, and that was demonstrated again by the support we got for Pushing this rate case off and we'll see what we can accomplish. Yes, Yuri, things like that certainly impact our thoughts and our analysis. And But yes, maybe cart before the horse a little bit right now, seeing as we won't go until June of next year.

Speaker 8

Thanks.

Speaker 12

Okay, great. Thanks guys. Appreciate the thoughts.

Speaker 5

Thanks, James.

Operator

We will now take the next question from Paul Zimbardo at Bank of America. Please go ahead.

Speaker 10

Hi, good morning. Thanks for taking the time.

Speaker 4

Good morning.

Speaker 10

I want to follow-up after the significant Encore CapEx increase that you talked all about. How should we think about the potential for Share repurchases and just overall thoughts on the balance sheet targets you previously articulated?

Speaker 5

Yes. I'll start with share repurchases. And you recall, Paul, that last summer, we did an accelerated share repurchase program where we put to work about $500,000,000 I think the weighted average cost of that program was right around $123 plus or minus. The Board also supported a new authorization of $2,000,000,000 And the way we long time thought about this is, we're really stewards of capital For you, our owners, and whatever creates a bad pass for owners, that's what we're going to do. So we have a current outstanding authorization, as I mentioned.

Speaker 5

We actively review this as an opportunity from time to time and we expect to be opportunistic in our approach. So it's something that we continue to evaluate and it's something that we will use as we have in the past opportunistically. In terms of the balance sheet, Trevor, you'll make some comments in terms of how you think about we ended last Sure. In terms of FFO to debt and how you've grown the equity layer?

Speaker 3

Yes, sure. Thanks, Jeff. So Paul, as you know, last year we ended right around 70% on the FFO to debt and we're Still kind of tracking around that plus or minus 1% and feel good about where we are on the metrics. We also talked about our debt to equity layer and we're also at the end of the second quarter at sub-fifty percent right now. And again, we have the proceeds that will be coming in from the Sempra Infrastructure Partners transaction That we'll be utilizing to continue to shore up the balance sheet.

Speaker 3

And as Jeff says, looking at opportunities to deploy that in the most effective way For our shareholders and we couldn't be more pleased about the opportunities around organic growth, share repurchases or other opportunities to create shareholder value.

Speaker 10

Okay, great. And just to follow-up on Jeremy's question about some of the resource adequacy Concerns we've seen in the West. Are you seeing any opportunity to potentially increase or accelerate within the plan? Some of those, I believe it's $2,000,000,000 of clean power investments you detailed at the Analyst Day.

Speaker 5

Yes. We talked about a couple of things. On Jeremy's question, I was speaking more to what the investor owned utility opportunity was. So obviously, there are There are around energy efficiency, primarily at SDG and E, the big focus on long duration battery storage, which is desperately needed in the state. And the state has circled About 11.5 gigawatt opportunity for new resources.

Speaker 5

What you're referring to is on the unregulated cyber business and Sempra Infrastructure. You'll recall that Justin Bird is leading 3 separate P and Ls with Tanya and the team, one of which is clean power. So we do have about 3 gigawatts Development opportunities on the border. And we did preview a very interesting project by the way at the Investor Day, which is our battery storage projects. You may recall, we Have a combined cycle plant on the border.

Speaker 5

We've got 2 underutilized transmission systems that dispatch directly into the California independent system operator. And that thermal plant also has a second plant that was targeted 15 years ago for construction. We've got all the transmission in place and that's been redesignated as a 500 Megawatt opportunity for battery storage. So our goal is to be able to dispatch out of Northern Mexico With both wind and solar resources backed up and supported with its own resource adequacy from its battery production. So You're making a great point.

Speaker 5

That is an opportunity. We're going to be active to pursue it.

Speaker 10

Okay. Thank you again for the time.

Speaker 5

Thank you very much.

Operator

It appears there are no further questions at this time. Mr. Jeff Martin, I'd like to turn the conference back to you for any additional or closing remarks.

Speaker 5

Yes, just a quick Couple of comments here. As I know it's a busy time of the year as people head into kind of the summer vacation period, particularly on Wall Street, but we look forward to seeing some of you in person at the Wolf Conference in September. Steve always runs a great conference, and we're looking forward to being back on the road. Additionally, I would mention that we're going to do some virtual conferences with Goldman and Citi As well as some NDRs this summer in Asia. I hope everyone has a great rest of your summer and thank you again for joining us and feel free per custom to reach out to our IR team with additional questions.

Speaker 5

This concludes today's call.

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Sempra Q2 2021
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