Trevor Mihalik
Executive Vice President and Chief Financial Officer at Sempra
Thanks, Allen. Starting in California, it's worth reminding everyone that during the third quarter, Southern California experienced a rare tropical storm, and I am pleased to say that both SDG&E and SoCalGas Systems remained resilient and operational. We believe delivering energy under these circumstances validates the important work our teams have accomplished in continuing to improve system safety and reliability. Over the past several decades, PA Consulting has published reliability rankings for American Utilities, and SDG&E was recently awarded the number one ranking of best in the West for the 18th year in a row.
They also received the National Grid Sustainability Award. This award is presented to a leading American utility, demonstrating excellence and reliable service to its customers, including the application of clean energy technology and investment in the grid. In combination, these awards are a great credit to Caroline Winn and the entire SDG&E team.
One key consideration in supporting the energy transition is the ability to store and discharge excess power. With more renewable energy, storage and dispatchable resources are critical for maintaining the stability of the grid even during extreme weather events. That's why, in the third quarter, SDG&E requested approval for another 160 megawatts of utility-owned energy storage assets. This is in addition to the 171 megawatts of recently commissioned assets that we discussed on our second quarter call. If approved, this would bring SDG&E's energy storage portfolio to over 500 megawatts in support of their ability to deliver safer, cleaner and more reliable energy to its customers.
Importantly, as SDG&E integrates innovative technologies, such as utility-owned storage to help meet its good reliability and clean energy goals, we're also pursuing federal investment tax credits, which could result in an estimated $215 million in savings. The potential savings would be passed on to customers and included in the calculation to establish rates beginning in January 2025 as part of the company's continued efforts to drive a series of cost savings initiatives to improve the affordability of its services.
Last quarter, we updated you on the approval of Cal ISO's transmission plan and the recent assignment to us of $500 million of new projects in our service territory. Also, SDG&E submitted bid materials for Cal ISO's FERC 1000 solicitation, and we expect to be quite competitive as part of that process.
As you know, transmission assets deliver benefits integrating increasing amounts of clean energy to the broader state of California, and as such, these costs are spread across the state. Recently, the CPUC approved an increase in the authorized working gas storage capacity at Aliso Canyon. The
CPUC recognized the importance of the facility to help improve grid reliability and customer affordability. The additional gas storage capacity is also expected to help mitigate potential price volatility.
Additionally, in the third quarter, Governor Newsom directed the formation of California's hydrogen market development strategy, which will employ an all of government approach to lay out pathways for building a robust hydrogen market in the state. We're excited to see the innovative ways that hydrogen may be used to help decarbonize California's economy.
On the federal side, the U.S. Department of Energy awarded up to $1.2 billion of funding for our regional clean hydrogen hub in California. SoCalGas is proud to be a partner in Arches, the statewide public private partnership sponsoring this application. The DOE's award demonstrates support for the valuable role hydrogen could play in decarbonization while striving to ensure safety, affordability and resiliency. California recently passed into law SB 410, supporting investments for further decarbonization and electrification of the energy system.
As electrification continues to become a larger part of the state's strategy to achieve its climate goals, demand on the electric grid will also increase, meaning utilities will need to proactively plan and build distribution grid upgrades to meet customer needs.Similar to some of the Texas legislative updates that Allen described, SB 410 is California's recognition of the need to utilize existing regulatory mechanisms such as balancing accounts to support customer needs in between GRC cycles and help California's utility make critical new investments to keep pace with the state's expanding economy and decarbonization goals.
I'd like to provide a brief update on the GRC process. Our applications are centered around safety, reliability and the delivery of increasingly clean forms of energy. We recently filed a few settlement agreements with various interveners, including Cal advocates, small business utility advocates While there remains input from other interveners and ultimately approval by the CPUC as part of the final decision in the GRC, we believe this is a constructive step in the process. We continue to expect a proposed decision in the second quarter of 2024 with rates retroactive to the beginning of that year.
As a final note, most of you already are aware that the cost of capital mechanism triggered in both SDG&E and SoCalGas filed advice letters, which are pending commission approval. These applications are expected to increase ROEs by approximately 70 basis points beginning January 1, 2024. We believe this adjustment should be approved by the commission as part of the established mechanism and is one of the key components that supports California's constructive regulatory environment.
We believe California's regulatory framework is quite constructive relative to other jurisdictions, given its forward-looking rates, attractive ROEs, cost of capital adjustment mechanism and advanced framework for handling climate-related event risks. With California's continued economic growth and constructive regulatory framework, we believe our utilities are well positioned to continue improving their service to customers while supporting overall system growth and resiliency. Please turn to the next slide.
Turning to Sempra Infrastructure. We've reached several key milestones in the quarter. At Port Arthur LNG Phase 1, we completed the previously announced sale of a 42% indirect noncontrolling interest in the project to KKR. And recently, Port Arthur LNG Phase 2 received a permit from FERC, a critical milestone in the project's development. Now that FERC has issued its approval, the DOE is able to consider the environmental review associated with our non-FTA application.
Marketing our Phase 2's offtake continues to build momentum as we see volumes coalesce in the market around projects that have the highest potential of commercial development. Phase 2 is also expected to add two additional liquefaction trains, capable of producing an incremental 13 Mtpa, which would effectively double the total capacity of Port Arthur. In its entirety, the Port Arthur Energy Hub showcases the expertise and value that Sempra Infrastructure's integrated capabilities bring to project development.
Earlier this year in March, Cameron LNG Phase 2 received approval for its FERC order. Sempra Infrastructure and its partners at Cameron LNG continue to develop a fourth liquefaction train. We have now begun working with Bechtel to perform value engineering to reduce construction risks and project costs. We expect this process will continue through the end of the year. Sempra Infrastructure's mission is to provide energy for a better world through its high-growth, low-carbon platform. We're excited about collaborating with Mitsubishi Corporation and a consortium of Japanese natural gas utility companies to explore the development and export of e-natural gas, which is synthesized from captured CO2 by combining it with green hydrogen.
Together, the stakeholders intend to evaluate a Gulf Coast project with a view towards producing approximately 130,000 tons of e-natural gas annually that would be liquefied and exported from the Cameron LNG terminal.
Wrapping up on Sempra infrastructure, the overall scale of our portfolio positions us to capture additional growth opportunities, create new synergies and support the growth of top-tier projects, as demonstrated by the Port Arthur Energy Hub currently under construction and development.
As Jeff mentioned earlier, we believe North America's energy markets will continue to be driven by the trends of decarbonization, energy security and reshoring of manufacturing back to North America. Sempra Infrastructure remains well positioned to contribute to and capitalize on such opportunities. Please turn to the next slide. Turning to our financial results.
Earlier this morning, we reported third quarter 2023 GAAP earnings of $721 million or $1.14 per share. This compares to third quarter 2022 GAAP earnings of $485 million or $0.77 per share. On an adjusted basis, third quarter 2023 earnings were $685 million or $1.08 per share. This compares to our third quarter 2022 earnings of $622 million or $0.98 per share. Please turn to the next slide.
The variance in the third quarter 2023 adjusted earnings compared to the same period last year can be summarized by the following. At Sempra California, $27 million of lower income tax benefits and higher net interest expense, offset by $27 million of higher electric transmission and CPUC base operating margin at SDG&E, net of lower authorized cost of capital and higher regulatory interest income at SDG&E and SoCalGas.
At Sempra Texas, $49 million of higher equity earnings from weather-driven consumption, new base rates and customer growth. At Sempra Infrastructure, $21 million of lower net interest expense due to higher capitalization of interest on projects under construction. $16 million primarily driven from higher transportation tariffs. At Sempra Parent, there were $23 million of higher costs, primarily driven by increased interest expense, partially offset by a net income tax benefit.
Given the geographic and regulatory overlays between the two companies, we are currently considering resegmentation in which our SDG&E and SoCalGas segments would be combined into one reportable segment, Sempra California. We intend to complete our analysis in the fourth quarter of 2023 and assuming a positive determination is made, we would implement the resegmentation in our annual 10-K for the period ending December 31, 2023. Please turn to the next slide.
We are pleased with the strength of our third quarter results and the positive message it conveys about Sempra's business quality and the robust growth we are seeing across all three platforms. Before I close, let me briefly touch base on the balance sheet. Debt is a core component of our capital structure and over the past three years, we've taken important steps to transition to lower rate, longer duration fixed rate debt. We have been prudent with our balance sheet management by using proceeds from the noncontrolling interest sales to KKR in 2021 and ADIA in 2022 and to repay short-term debt and limit near-term parent debt maturities.
In fact, at the parent level, if interest rates increase by another 50 basis points, we would project a negligible impact to EPS between now and 2027. Please refer to Slide 14 in the appendix for additional information. Looking forward, we remain focused on identifying and executing on sound capital investment opportunities. We are continuing to optimize our financing plan to support the growth we highlighted today, and we'll evaluate all of our financing options, including the use of common equity to support accretive growth.
Throughout our history, Sempra has demonstrated operational excellence, strong financial stewardship, meaningful earnings growth and a commitment to return capital to our shareholders. We would now like to open the line up and take some of your questions.
[:qa:]
