Sempra Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to Sempra's First 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, everyone. Welcome to Sempra's Q1 2023 earnings call. A live webcast of this teleconference and slide presentation are available on our website under the Investors section. Here in San Diego, we have several members Our management team with us today, including Jeff Martin, Chairman and Chief Executive Officer Trevor Mychajluk, Executive Vice President and Chief Financial Officer Kevin Segarra, Executive Vice President and Group President Justin Berg, Chief Executive Officer of Sempra Infrastructure Alan Nye, Chief Executive Officer of Encore 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.

Speaker 1

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 in 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 10 Q for the quarter ended March 31, 2023.

Speaker 1

I'd also like to mention that the forward looking statements contained in this presentation speak only of today, May 4, for 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 us today. We're excited to report that through the 1st 4 months of this year, we've accomplished several significant objectives that advanced our business strategy and position the company for future success. We're off to a great start for this year. So what I'd like to do is provide you updates on several key business developments, Growth opportunities over the next half decade and our EPS guidance for 2023 2024. After that, Trevor and Justin will walk us through the business and financial achievements for our 3 growth platforms.

Speaker 2

And at the end of today's call, we'll reserve time for your questions. Turning now to business developments. Encore completed its base rate review last month with an updated ROE of 9.7% and a continuation of its existing equity layer of 42.5%. This constructive outcome provides strong support For Encore's credit ratings and the expanded capital spending that's needed to meet the strong growth that's continuing to occur across its service territory. Just last week, Encore's Board met and reviewed the company's updated 5 year capital plan, which increased from roughly $15,000,000,000 to $19,000,000,000 Encore continues to see strong demand growth on its system and the need to make additional capital investments in transmission, Distribution and new technology to continue improving safety and reliability.

Speaker 2

It's also important to note that we Back to Encore management, we'll again refresh their long term capital plan in the future with a view toward increasing it for the roll forward 5 year period ending in 2028. Next, I'd like to mention that I'm pleased with the recent positive final investment decision at Port Arthur LNG. It's an important milestone that highlights the growing franchise value of Sempra Infrastructure and how well positioned that platform is for continued growth through the end of the decade. We also have a lot of respect for ConocoPhillips and their management team, Their participation in the capital structure and offtake creates strong alignment with us for successful execution of the project. I would note as well that we're bullish about future LNG opportunities and expect the U.

Speaker 2

S. LNG capacity We'll grow annually at a double digit clip through the end of the decade and the Sempra infrastructure is well positioned to help the U. S. Extend its leadership position In this area. With these developments and newly updated view of our planned capital spending across all three growth platforms, We're announcing Sempra's new 2023 to 2027 capital plan of $40,000,000,000 Note too that this number only includes Sempra's proportion ownership share of the capital being allocated to Oncor and Sempra Infrastructure, including Port Arthur LNG.

Speaker 2

This year, we're celebrating Sempra's 25th anniversary. Our 20,000 employees are on a mission to build North America's leading energy infrastructure company and it's our commitment to innovation, Sustainability and leadership that guides our disciplined investment strategy. We aim to provide a growing and competitive dividend, While also increasing the company's earnings per share over the long term at rates of growth that continue to trend above the industry average. With that backdrop, we're affirming our full year 2023 adjusted EPS guidance range of $8.60 to $9.20 and issuing our full year 2024 EPS Guidance range of $9.10 to $9.80 Together, this updated guidance and our new capital plan provide a solid foundation for our long term projected 6% to 8% compounded annual EPS growth rate, which we're also affirming today. Now I'll turn the call over to Trevor to discuss our 5 year capital plan in more detail and provide a summary of our business and financial results.

Speaker 3

Thanks, Jeff. We continue to see robust opportunities to invest in our utilities and infrastructure businesses, Resulting in a $40,000,000,000 5 year capital plan, which as Jeff mentioned is approximately $5,000,000,000 higher than the previous plan. I'll briefly summarize the expected spending at each business. At Sempra California, Their 5 year $21,400,000,000 capital plan is aligned with the state's priorities, which include safety, reliability, Wildfire Mitigation and Sustainability with a focus on customer affordability. At Sempra Texas, The $15,300,000,000 capital plan includes our proportionate share of Oncor's $19,000,000,000 plan.

Speaker 3

Expected spending is in response to robust economic and demographic growth that is occurring across the state. As Jeff mentioned, We expect this capital plan will likely be revised upward in the future. At Sempra Infrastructure, Its new capital plan of $3,600,000,000 now includes Sempra's proportionate share of Port Arthur LNG Phase 1, assuming Sempra Infrastructure's targeted 25 percent ownership level. To fund this growth, Our customary approach is to start by reinvesting operating cash flows and raising debt financing at our regulated utilities In line with our authorized capital structures. We also evaluate other financing options Such as project level debt and equity and asset sales before issuing common equity at the parent, all with a goal of solving for the lowest cost of capital.

Speaker 3

This approach is consistent with our past convention, Where we've raised efficient financing through various asset and minority equity state sales and our financing of Port Arthur LNG Phase 1. Overall, this approach of sourcing the lowest cost of capital has allowed us to maintain a strong balance sheet And continue to return capital through our growing dividend, all while providing flexibility to support infrastructure investments and deliver strong financial performance. The key takeaways from me as the CFO Is that this is an exciting time for Sempra and we have improved visibility to a portfolio of opportunities to capture strong growth across this decade. Please turn to the next slide. Over the next 5 years, our rate base is expected to increase at an average annual growth rate of 9% With over 70% dedicated to electric infrastructure, this growth reflects the positive macroeconomic tailwinds in our core markets And attractive regulatory environments.

Speaker 3

Please turn to the next slide, where I'll speak to Sempra California and Sempra Texas' accomplishments this quarter and their updated capital plans. Beginning with SoCalGas, you'll recall that in late 2022, The CPUC issued its decision for the Angelus Link memorandum account, which also directed SoCalGas to work with the state In its application to the DOE for Hydrogen Hub federal funding. In doing so, SoCalGas is honored to be a partner with more than 100 other entities to support California's application. According to DOE, Clean hydrogen hubs are expected to create a network of producers, consumers and local connective infrastructure to accelerate its implementation as a scalable clean energy source. SoCalGas is excited to support the state's application And looks forward to advancing the development of critical new infrastructure to support cleaner fuels for the benefit of its customers.

Speaker 3

Further, customer affordability is a top priority. That's why SDG and E has been working closely with regulators to proactively develop solutions to reduce bills, while continuing to enhance customer safety and reliability. SDG and E is advancing several initiatives that we believe will improve the overall affordability of its services. First, I recently filed a joint proposal with the other 2 large investor owned utilities in the state to redesign electric rates to include a fixed charge, which is intended to make electricity more affordable and encourage broader support for the electrification across the state. A proposed decision is expected in early 2024.

Speaker 3

Also, SDG and E announced that it submitted an application to DOE seeking up to $100,000,000 in federal matching funds To support the strategic undergrounding and hardening of overhead power lines in and near federally recognized tribal nations land within a service territory. SDG and E would invest an additional $100,000,000 towards this effort, subject to approval from the CPUC. Exploring options to tap into federal funding For infrastructure hardening is a great example of how SDG and E is working to advance safety and reliability in a more cost efficient manner for our customers. Further, the California ISO recently issued a draft 20 year transmission outlook, which included several important projects in SCG and E service territory that would support further renewable integration And overall grid reliability. Within the draft plan, the projects identified meet both reliability and policy objectives.

Speaker 3

The estimated costs of these projects are approximately $500,000,000 based on reliability needs And an estimated $3,000,000,000 for projects consistent with state policy, which will be subject to a competitive bid process. The draft plan is anticipated to be reviewed by the CAISO Board later this month. We're encouraged to see their outlook is beginning to incorporate the higher expected electrification loads that will be needed to further decarbonize the state in accordance with state policies. Additionally, we expect the ongoing general rate cases at SDG and E and SoCalGas to establish the critical foundation for meeting the future needs of customers. Importantly, Our filings are centered around delivering cleaner energy, safely and reliability in alignment with California's sustainability goals.

Speaker 3

Based on the current schedule, we expect a proposed decision in the Q2 of 2024 with rates retroactive to the beginning of that year. In the meantime, SDG and E is continuing to execute a state of the art wildfire mitigation plan, Advancing the integration of utility storage and distributed resources and supporting electrification for the transportation sector. For SoCalGas, Scott and his team are focused on continuing to make improvements in the safety and integrity of the natural gas system, While preparing its infrastructure for the delivery of cleaner fuels. Please turn to the next slide. Moving to Tempur, Texas.

Speaker 3

I'm pleased to report that Encore is off to a strong start to the year. As Jeff mentioned, Encore received a constructive final order for its base rate review in April, which preserved Oncor's equity layer at 42.5% and updated its ROE to 9.7%. As part of its decision, the commission recognized Encore for its track record of excellent reliability of service, even with the extreme weather events that have occurred in its service territory. This regulatory outcome has bolstered our confidence in the regulatory construct in the state. Having received the final order, Encore updated its 5 year capital plan for 2023 through 2027 to $19,000,000,000 With a view toward making critical investments that support growth in the Texas economy and benefits customers through improved reliability of service.

Speaker 3

Also, as a reminder, as part of Sempra's agreement to acquire Encore in 2017, we committed to deploying $7,500,000,000 for the 5 year period from 2018 to 2022. At the end of 2022, Encore had invested nearly $12,000,000,000 over that same period or nearly 60% more than its 2017 regulatory commitment. And now, its 5 year plan anticipates $19,000,000,000 of investments, which is 2.5 times its original regulatory commitment at the time of Sempra's investment. Increases to Oncor's new capital plan are expected to support Growing generation interconnections, which are primarily related to renewables and clean power, strong premise growth, Grid Resilience and Reliability and Technology and Innovation advancements on the grid. You've heard us talk a lot about the attractiveness of this market in the past.

Speaker 3

In part, it's because Oncor benefits from the Efficient Capital Recovery Tracker mechanisms that are designed to limit lag associated with its investments. There is now pending legislation that we are following that could improve OnCourse capital efficiency even further. In particular, SB 1015, if passed, would provide for 2 DCRF filings per year instead of the one that Oncor currently operates under. Passage of the bill would reduce regulatory lag and further support Encore's efficient deployment of capital. From an operational perspective, Encore had another strong quarter with a 41% increase in active and retail transmission interconnection requests at the end of March compared to the same time last year.

Speaker 3

Also, premise growth continued to be robust in the Q1, where Encore connected 17,000 new premises. Please turn to the next slide, where I will turn the call over to Justin to provide an update on Sempra Infrastructure.

Speaker 4

Thanks, Trevor. Sempra Infrastructure had a strong Q1 of strategic accomplishments, Particularly across its LNG and net zero business lines, where continued demand for cleaner, more secure energy has strengthened the need for future development. On the Gulf Coast, we've had several positive developments I want to highlight. I'll speak to Port Arthur in a moment. But first, In March, FERC approved Cameron LNG Phase 2's amendment to transition from gas turbines to electric drives.

Speaker 4

The completion of this work stream is critical to the development of the project. Given its competitive position to deliver LNG to customers in Europe and Asia, We remain confident in the attractive upside opportunity offered by this proposed expansion. As a reminder, we expect that Cameron Partners will take their share of offtake and SI will sell its share of volumes under back to back contracts. We continue to advance the competitive FEED process. We've been targeting the completion of this process later this summer.

Speaker 4

Consistent with our disciplined approach to project development, we and the Cameron partners may extend this process beyond the targeted timeframe to reduce construction risk, project cost and optimize the construction schedule through COD. We would expect to take FID after completing the FEED process as well as the project financing. At Port Arthur LNG Phase 1, we reached A positive final investment decision in March. We closed on $6,800,000,000 of non recourse project debt and executed definitive equity financing agreements, which paved the way to advance the project. We continue to target closing our transaction with KKR this The momentum on Phase 1 sets us up well for a potential Phase 2 expansion at the facility, And it's important to note that SI has retained rights over the associated development and common facilities.

Speaker 4

We're continuing development work on the proposed expansion. And last month, we were pleased to receive the environmental assessment from FERC Citing no adverse impacts, another positive step in our development. Port Arthur LNG Phase 1 was a great example of our strategic approach of Collaborating with world class partners to identify and execute investments with long term contracted cash flows, All with a view of creating incremental value to our owners. We're continuing to execute this strategy, capturing new opportunities to support energy Security and the Global Energy Transition. In Sempra Infrastructure's new capital plan, we have included Sempra's targeted proportionate share Of the $13,000,000,000 projected capital expenditures at Port Arthur LNG Phase 1, Sempra Infrastructure Partners is targeting A 20% to 30% ownership interest in the project based on Sempra's 70% ownership of Sempra Infrastructure Partners And assuming its 25% target ownership in the project, we're including approximately $2,000,000,000 in our capital plan.

Speaker 4

As a reminder, our planning convention is to only include projects that have reached FID and therefore our plan does not currently include Cameron LNG Phase 2, Port Arthur LNG Phase 2 or other development opportunities where we haven't taken FID yet. As you look to the robust growth opportunities that we've outlined in the appendix, I also would highlight we're now including the Port Arthur, Louisiana Connector Pipeline. The pipeline would support 2 Bcf per day of feed gas supply for Port Arthur from the strategically located Gilles Hub. Please turn to the next slide. With FID at Port Arthur now behind us, I'm excited to provide you the first update on construction progress and how quickly teams led by Bechtel have mobilized to start construction.

Speaker 4

There are already approximately 450 people on-site, including both the Bechtel and SI teams. As a result, the site is changing daily. Clearing of the areas for the 2 LNG trains and 2 storage tanks is almost complete And we've already started soil stabilization. We're doing this all with a firm eye on maintaining both a strong safety culture and deep community support for the project. Please turn to the next slide, where I'll turn it back over to Trevor to discuss Sempra's financial results.

Speaker 3

Thanks, Justin. Turning to Sempra's financial results. Earlier this morning, we reported Q1 2023 GAAP earnings of $969,000,000 or $3.07 per share. This compares to Q1 2022 GAAP earnings of $612,000,000 or $1.93 per share. On an adjusted basis, 1st quarter 2023 earnings were $922,000,000 or $2.92 per share.

Speaker 3

This compares to our Q1 2022 earnings of $924,000,000 or $2.91 per share. Please turn to the next slide. The variance in the Q1 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 net interest expense at SoCalGas and SDG and E And lower income tax benefits at SoCalGas, primarily from flow through items, netted against lower income tax expense at SDG and E, primarily from flow through items, partially offset by $14,000,000 primarily from higher CPUC and FERC base operating margin at SDG and E and lower CPUC based operating margin at SoCalGas. At Sempra Texas, dollars 35,000,000 of lower equity earnings, primarily due to higher depreciation expense, Interest expense, O and M and lower revenue from decreased consumption, partially offset by higher revenues from rate updates and customer growth.

Speaker 3

At Sempra Infrastructure, dollars 56,000,000 of lower earnings Driven by the sale of a minority interest in Sempra Infrastructure, more than offset by $71,000,000 of higher earnings, Primarily from the transportation business in Mexico, asset optimization and higher LNG diversion fees, partially offset by higher net interest expense and lower income tax benefit and other items at Sempra Parent, which includes $36,000,000 of lower cost, primarily driven by return on investments supporting certain non qualified benefit plans And higher income tax benefits, partially offset by higher net interest expense. Please turn to the next slide. We have a clear strategy to build leading T and D infrastructure businesses in some of the most attractive markets in North America, And we have demonstrated a consistent ability to identify and deploy capital into attractive, regulated and long term contracted businesses. We have also taken concerted steps to simplify our business model into 3 growth platforms. And this has improved our capital discipline and allowed us to generate attractive risk adjusted returns for our shareholders over short and long term investment periods.

Speaker 3

Now with our updated capital plan And favorable macroeconomic tailwinds, paired with disciplined financial and operational execution, We believe we're well positioned to continue delivering an attractive dividend and compelling earnings per share growth. Please turn to the next slide. On our Q4 earnings call in February, we outlined our commitment to resolving some key outstanding items. And in just 2 months, we've delivered on those priorities, including Encore receiving a constructive base rate review, supporting our view that Texas continues to be a very strong regulatory environment. Taking FID and beginning construction at our LNG development project at Port Arthur, which sets the stage for additional growth at Sempra Infrastructure, announcing a record 5 year capital plan at Sempra $40,000,000,000 anchored by Encore's new $19,000,000,000 capital plan and issuing our 2024 EPS guidance range.

Speaker 3

As we look ahead, we continue to prioritize creating value for our shareholders, while supporting our customers. To deliver on this commitment, we're focused on the following: receiving a constructive outcome on our ongoing rate cases in California by the middle of next year, which will pave the way for the next 4 years of expanded investments in safety, Reliability and Sustainability. Executing on our strategy of building modern energy networks underpinned by our new Record 5 year capital plan and continuing to capture incremental capital opportunities at Sempra Infrastructure from our growing development pipeline of LNG and other large scale infrastructure projects. As I've talked about this before, Delivering in these areas provides enhanced visibility to future growth and coupled with our strong position in highly attractive markets Gives us confidence in our ability to create meaningful value for our shareholders through the end of this decade. With that, this concludes our prepared remarks and we will now stop and open the line to take your questions.

Operator

Thank you. This concludes the prepared remarks. We will now open the line to take your questions. Phone keypad. Please make sure your mute function is turned off.

Operator

We will pause for just a moment to allow everyone to signal for questions. And our first question will come from Shahriar Pourreza from Guggenheim. Your line is open.

Speaker 5

Hey, guys. Hey, Shar.

Speaker 6

Jeff, how are you doing? Just Couple of quick ones here. Just on are you including any outcomes in Texas legislation as we've Seeing Bill's advances, any of this in your 2023 or 2024 numbers? And I guess how quickly would you seek to adjust the plans and filings to reflect any changes from legislators, especially items that reduce ROE lag or implement a resiliency planning framework, etcetera. Thanks.

Speaker 2

Thank you, Shahriar. Our approach has been to basically put together a 2023 update as well as a 2024 plan It contemplates a number of outcomes. And I would say independent of those outcomes in Texas, we would stick to the same plan we have on The Street now.

Speaker 6

Got it. But so the Texas legislation is not in the numbers. I just wanted to confirm that.

Speaker 2

Our current expectation, and we're going to We want to front run the legislature is that we do get some constructive outcomes and we expect that the DCRF benefit if it were to pass is within the range and currently in the plan. Okay.

Speaker 6

Got it. And then just on the growth rate, as you guys start reaching COD on ECA and reaching full earnings run rates Over 25% and 26% and Port Arthur in 27%, 9% rate based growth in your 5 year plan And contributions from FID projects, cost of capital trips. I guess you seem to have a lot more tailwinds than tail risks in that 6% to 8%. I guess What are we missing? Are there other drags we should be thinking about?

Speaker 2

Yes, it's a great question. One of the things we've talked about internally is you would expect your earnings growth over time To pretty much track your capital growth over time. So that's one of the reasons we have a lot of confidence in that 6% to 8% range. But I would actually take the opportunity, Shar, to make 2 other comments here. First, one of the things we oftentimes tell our investors are that our past financial results Should be a good indicator of our future performance.

Speaker 2

I think you've not had this conversation before, but over the past 10 20 year periods, We've consistently been able to grow our earnings per share at rates and our rates of roughly 7% to 8%. And even more recently in the 5 year period, You recall that we've been able to grow our earnings per share at an annual growth rate of just over 10%. So to your point, when you start looking forward, We have reaffirmed our 6% to 8% EPS growth rate. And I've always wanted to be very clear, it's not a quarter by quarter or year over year Type of forecast. We're really truly focused, as you point out, on growing the business over the long term and particularly through the end of the decade.

Speaker 2

So From my perspective as the CEO, I think the takeaway from today's call is that our announcement of a $40,000,000,000 capital plan Makes us even more confident in our long term forecast. And I would tell you through the end of the decade, given all the opportunities that are in front of us and you outlined many of them, I would be disappointed if we didn't exceed the high end of that range.

Speaker 7

Perfect. That's what I

Speaker 6

was trying to get at, very clear cut and congrats on the execution seriously. Thanks.

Speaker 2

Thanks, Shar. We appreciate it.

Operator

Thank you. Our next question comes from Steve Fleishman from Wolfe Research. Your line is open.

Speaker 2

Hello, Steve.

Speaker 7

Yes. Hey, Jeff. Hi, everybody. Yes, a couple of questions. So just Could you talk to your funding plan for the higher CapEx?

Speaker 7

And I guess, Specifically, it looks like in the appendix that there's some additional shares in the 2024 guide. Could you just talk to what's driving that And the like. Thank you.

Speaker 2

Sure. I'd be glad to. We've got Trevor with us and maybe Trevor you could take a step back and give us an overview of the Financing plan.

Speaker 3

Yes, sure, Jeff. I'd be happy to. So Steve, if you take back and you look over the last 5 years, we really have taken steps to strengthen our balance sheet and our credit metrics. And we did include kind of a summary in the appendix of the slide deck of each of the businesses On their credit carrying stable outlook. But as part of that process, we've also developed an efficient loading order when you look At seeing how we source the lowest cost of capital to fund these businesses.

Speaker 3

So first, we've taken concrete steps to simplify the business and then to sell noncore assets and then we've recycled that into new investments. And that process really occurs on a routine basis. Secondly, we do evaluate debt and equity at the project level. And Steve, a good example of that would be what we recently did at Port Arthur with that announcement, where we just circled over about $10,000,000,000 of third party debt and equity. And then 3rd, we've also had success in efficiently raising capital at our operating companies.

Speaker 3

And there you saw us do that with KKR and Adia by bringing them into the capital structure of SI, which has allowed us to raise over $5,000,000,000 And then finally, we can always raise debt and equity at the parent level if we determine that's in the best interest of our shareholders. And so bottom line is we're always focused on financing growth that is most beneficial to our shareholders and we're pretty excited about the capital plan that's in front of us.

Speaker 7

Okay. No, that's very helpful. But just specifically to the 24, The share count goes off. Is that some kind of plan for just like an ATM or something or?

Speaker 3

No, I think that's just some of the shares that are we've got in the plan for employee benefit plans and other things like that.

Speaker 7

Okay. Got it. All right. That's very helpful. And then on the On Port Arthur, within the 2027, is it I mean, I know you're It's not like your stake is 25% of the life, but just is it is that first train in for the whole year?

Speaker 7

Or Is it not come until later in the year, so it's really not showing up in the last year of the plan yet?

Speaker 2

Yes. The way you thought about it, Steve, is Train 1 comes online in 2027 with Train 2 coming online in 2028, it would be it would not have any material impact on the 2027 number.

Speaker 7

Right. So we're still seeing this growth without really seeing the other quarter.

Speaker 2

That's correct. And the way to think about that would be you're absolutely correct. The way to think about that would be the full run rate for Phase 1 of Port Arthur would be in 2029.

Speaker 7

Got it. Okay. That's helpful. Thank you. Thank you.

Speaker 7

I think I'm good.

Speaker 2

All right. Thank you, Steve.

Operator

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

Speaker 8

Hey, good morning team.

Speaker 2

Good morning, Jeff. Hi, Julian. How are you doing?

Speaker 8

Great. Thank you so much. Hey, look, let me just pick up on this earnings growth outlook here. And obviously, you guys gave us a 2024 refresh here, nicely done. Should we expect growth in 25% to be maybe higher than the 6% to 8% range, given that as you say maybe 6% to 8% Was it less than 2024?

Speaker 8

How do you think about the perhaps potential lumpiness of certain growth years? Or should We expect improvement to be maybe later dated with LNG contributions. You can expand on that.

Speaker 2

Yes, I appreciate it. One of the comments I was making earlier was We don't think about it in terms of quarters or years necessarily. The big issue that's needed to respond to you in 2025 is 2 things. It will be largely driven About the outcome of our rate cases in California. And as you know, a lot of people don't put out guidance when they're middle of the rate case or have a rate case pending.

Speaker 2

We've included a reasonable set of expectations for 2024, but that outcome, Julian, will have a big impact on 2025. And the second thing I'd call your attention to is we're still forecasting kind of a half year convention for ECA Phase 1 with ECA expected to COD In December of that year. Right.

Speaker 8

Yes, a lot of different moving pieces in the plan. Actually, if you can elaborate a little bit, You commented a little cryptically on Cameron on perhaps reevaluating timeline a little bit. Can you talk a little bit about what you're seeing on the inflationary front, labor, etcetera, to be able to get some of these LNG projects done? Maybe a little bit of an updated timeline as you think to optimize that? And then related, I know there's been some challenges, with the DOE here on extending timelines.

Speaker 8

Perhaps not Harley related, but I'm curious if you have any opinions on that related to the camera.

Speaker 2

Sure. Let me start with the Policy shift, I think, that you're talking about. And I'll come back to the timing on some LNG projects and your inflationary question. So I'll take your second question first. You recall, Julian, that last year the United States made a series of announcements with the EU and the United Kingdom about Our country's support for their economic and energy security, we found that to be very constructive.

Speaker 2

And more recently, that was updated at the G7 meeting Where the U. S. Came forward and affirmed the importance of global LNG for energy security and climate goals. So I think the DOE What's constructive in putting out both of those statements on behalf of the United States, we're certainly continuing to track the statements they've made here more recently, But our initial assessment is it highlights the significant value of derisked projects that are under construction or actively moving forward like Eco Phase 1 in Port Arthur And it probably discourages projects that are not materially progressing. So based on our experience in the sector, the market and the regulators tend to coalesce around projects Have a higher likelihood of being successful and we continue to have confidence that our projects in particular are well positioned relative to that standard.

Speaker 2

On the issue of timelines, there's no question that interest expense and inflation and supply chain issues are impacting the whole industry. You would likewise expect that to be happening on the LNG side. But right now, we don't see any movement in terms of how we're thinking about future COD dates in some of our projects. I thought it might be helpful to Justin to do 2 things, maybe provide just a short update for Jillian's benefit on Cameron expansion, but also talk about the excitement you're seeing around interest in Port Arthur Phase 2.

Speaker 4

Yes. Well, thanks, Jeff. Let me start with Cameron Phase 2. So, Julian, I think, importantly, we and the partners continue to advance the project, and, there's a lot of excitement around this expansion at Cameron. As we noted, we received FERC's approval of our amendment and now have a fully permitted project.

Speaker 4

On the offtake side, we expect The Cameron Partners will take their share. And as we've said before, we will sell our share of volumes on a back to back basis. The competitive feed process does continue to advance. I think the way I would clarify is that if we and the partners See the opportunity to, most importantly, accelerate the expected start of commercial operations and thus the cash flows, While at the same time reducing project risk and cost, we're willing to spend a little bit more time upfront and we would be willing to extend the competitive feed process. I guess on an overall basis, my statement would be we continue to advance it.

Speaker 4

It's a priority project. And I'd say we and the partners are very committed to bring this forth. We think it's a great project. I would say in terms of Port Arthur Phase 2, we've already had a successful start. We talked about FID.

Speaker 4

And I would say building on that success, we're seeing strong interest in Phase 2 expansion, which will create significant scale in the Gulf Coast. So We're continuing to work on marketing. We're continuing to Work on permitting and construction. And then once those 3 are wrapped up and we have commercial arrangements, We'll move forward to the financing phase. But lots of excitement around Port Arthur Phase 2.

Speaker 4

And basically, I would say the business in general.

Speaker 2

Yes. I would add to it as well. I made this comment. We were talking about the policy issues from Washington. When you see projects like Phase 1 going forward, Julian, it's really been helpful to coalesce interest for Phase 2.

Speaker 2

So I think the thing that's really interesting is we're really drawing a lot of market interest Phase 2 at

Speaker 7

this time.

Speaker 8

Yes. Excellent, guys. Thank you.

Speaker 2

Thank you for joining.

Operator

Thank you. Our next question will come from Durgesh Chopra from Evercore ISI. Your line is open.

Speaker 2

Good morning, Durgesh.

Speaker 9

Hey, good morning, Jeff. Thanks for giving me time. Just I have one quick clarification hopefully. Trevor, just On the equity front, the plan to 2026, the formal plan, you are very clear that there's no equity through 2026. And I appreciate you went through the different sources of financing in responding to Steve's question.

Speaker 9

Is that still the case through 2027 that is no Equity or could we see equity at the Sempra consolidated level as you sort of advance through your capital plan? If you could just clarify that for us. Thank you.

Speaker 2

Yes. And Durgesh, I'll be glad to take that. I mean, Trevor spoke to this issue of kind of the loading order we use to source lowest cost best fit capital. And the way I think about Durgesh is In the equity markets, right, you have some companies that are really strong as income based equity stories, some are growth stories. I think what we've tried to do is Take out a position in the utility space is beating one of the leading growth and income stories.

Speaker 2

So you think about all the options today with Higher rates and the more competitive corporate yields. I think we're well positioned to continue to attract investor interest around our story today. We've just raised our capital plan $5,000,000,000 We've got a track record of being very, very efficient in our financing. You're referencing prior years when our plan was smaller and there was no scenario where we thought we're going to issue equity. And I think what we're telling you now is We've got a very robust plan and we're going to go to the same loading order that Trevor described and solve for what we might need in 2027 or 2025 Because it's dynamic, right?

Speaker 2

You've got issues changing in Texas and the legislation. You've got a dynamic situation now where Phase 2 of Port Arthur And Cameron expansion is not currently in the capital plan. But right now, as we see it, we've got a really good plan to execute on and we've got a track record of sourcing the lowest Cost of capital, and we're doing this through the lens of what drives the most values to our owners. I think that's the best way to respond to your question.

Speaker 9

That makes a ton of sense. Thank you. I appreciate that clarification.

Speaker 2

Thank you, Durgesh.

Operator

Thank you. And we have time for one more question. Our last question will come from Jeremy Tonet from JPMorgan Securities. Your line is now open.

Speaker 5

Good morning, Jeremy. Hi, good morning. Thanks for squeezing me in.

Speaker 2

No worries.

Speaker 5

Just wanted to kind of pivot towards the net zero solutions as you talked about before from SiP And wondering what updated thoughts you have on that side post passage of the IRA if Louisiana gets primacy and Class 6 Wells for CCS. Just wondering if you could update us there as far as potential customer interest in these services.

Speaker 2

Yes. Two things I'll mention and I'll pass it to Justin to provide some overview of some of the projects we're looking at relating to the Net Zero Solutions business. One is something that I think is oftentimes overlooked as one of the most important bills that Biden administration passed earlier Was the infrastructure bill, which really earmarks $8,000,000,000 or $9,000,000,000 for the formation of hydrogen hubs. And we've talked about that in Trevor's prepared remarks. That's something that's got a lot of excitement, both in Texas and also here in California.

Speaker 2

And our utilities are a big part of promoting, Particularly the LA Basin is an opportunity for hydrogen hubs. So I think that's something outside of the SI business where you're going to expect to see leadership from Sempra's Utilities. Relative to SI on the IRA bill, there are a number of things there that are helpful. Number 1, it's really going to incent Both solar and wind to come onto the system that calls for more expansion of what we talked about in growth at Encore as they look to basically meet the needs of Standing transmission and distribution, their service territory, but it also does a lot to help us in terms of our underground storage plans for carbon sequestration And also some of the hydrogen and green fuel opportunities that we're looking at in separate infrastructure. And maybe Justin, you could talk about some of the progress It's your making on the development side.

Speaker 4

Yes, will do. Hi, Jeremy. Let me start by talking a little bit about Hackberry Carbon Storage. So As Jeff mentioned, we are actively pursuing solutions to enable net 0 GHG emission goals, for energy and industrial facilities, Including our own LNG facilities. The foundational initiative really is Hackberry.

Speaker 4

This is located in Hackberry, Louisiana, and it's in the development. And it was intended to basically permanently sequester carbon dioxide from the Cameron LNG Joint Venture and potentially other industrial facilities in Southwest Louisiana and Southwest Texas. As you mentioned, we have filed an application with EPA for a Class 6. Louisiana is working with EPA about primacy. And we have announced a participation agreement with our Cameron LNG Partners.

Speaker 4

And look, IRA is important. The $50 per ton to $85 per ton will support this project. We're also looking at potentially developing carbon sequestration and capture around the Port Arthur facility. So we think there's opportunities to not just reduce carbon output of our own facilities, but potentially expand that to some of those other industrial Facilities in the region. On Hydrogen Hub, and I'll be brief.

Speaker 4

So we're looking at a lot of early stage efforts. We are participating in 3 separate hubs that have been encouraged and have filed applications with the DOE. One is around the Port of Corpus Christi, another in the Gulf and others in Texas and Louisiana. So we are looking for opportunities to support hydrogen as one of the many clean molecules that we think will fuel the future.

Speaker 5

Got it. That's very helpful. Thank you for that.

Speaker 2

Thank you. Go ahead.

Speaker 5

Unless you had anything else to add there, I was just going to pivot to another question?

Speaker 2

No, no. Please go ahead to the next question.

Speaker 5

I was just pivoting towards California here. How my efforts around income based electric charges influence your Affordability work in California. And is there anything unique about SDG and E service territory here that we should be thinking about relative to the other California

Speaker 2

I don't think so. I mean, obviously, we currently have the lowest bills in the state relative to the To investor owned utilities, part of that is we benefit from more moderate climate. But we've got kind of a 3 part program that we're currently pursuing. And I would just I'm going to pass it to Kevin to address this in a second. He's our Group President for California.

Speaker 2

But one thing I would tell you that I think is important to remember, We're most successful when our customers are succeeding. And I will tell you that affordability is top of mind for our management team. This has been a tough 2 or 3 year period where we've seen the cost of living increase. Inflation doesn't just impact businesses, it impacts consumers. So part of our social compact with our local community is we need to demonstrate every day how hard we're working to maintain low cost And that we're going to bat for them and looking for new and better ways to improve the affordability of our services.

Speaker 2

I think we're pretty excited about some of the programs we have underway. There's a lot more work to be done, but Kevin, perhaps you could summarize kind of the 3 pronged attack that we have on affordability.

Speaker 10

Yes. Thank you for that, Jess, And good morning, Jeremy. Yes, it's definitely a 3 pronged attack, really focused around cost control, obtaining funding From parties other than our customers and rate reform, you mentioned the fixed charge effort, Jeremy. On the O and M front, we need to continue to be laser focused on controlling costs and improving efficiency by streamlining and automating Various business processes to gain efficiencies, and this includes digitizing everything. A good example of how our culture Of embracing technology translates to savings for our customers would be in the wildfire mitigation area where our industry leading program directly translates to Significantly lower insurance premiums.

Speaker 10

A second focus would be around sourcing funds from outside our customers like programs under the infrastructure bill. Trevor mentioned some of this in his remarks. We can seek funds outside of our customers, like the infrastructure bill, investment tax credits And other sources of federal funding and advocating for use of securitization as a tool to spread the cost of certain programs over more years. And the 3rd area of focus would be pushing for meaningful rate reform to make our customer bills more predictable, affordable and equitable. Examples of this would be advocating for the fixed charge for which there is an open proceeding currently at the CPUC and removing the public purpose program charges from our bills and into State's General Fund.

Speaker 10

So we always need to be laser focused on affordability, and we have a number of work streams currently underway.

Speaker 2

The only thing I would add to Jeremy is I think this affordability issue, particularly around this fixed charge that you referenced, what the state really want to get to is a transition toward Higher levels of electrification, particularly in the transportation space. And by moving to a fixed charge, it has the benefit of lowering The rate for electricity and it makes it more competitive against fuels that you see in transportation. So I think you've got several things taking place here where we have A variety of programs which are intended to limit cost to consumers, but also make electricity more competitive and Sempra Here in California and in Texas is strongly supporting electrification.

Speaker 5

Got it. That's very helpful. Thank you.

Speaker 2

Thank you for joining us.

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

Sure. I'd just like to close by thanking everyone for joining today. I know we've got a lot of feedback that there were a lot of other competing calls this morning, so we appreciate everyone taking the time to join our call. Per custom, if there are any follow-up items, Please take the time to reach out to our Investor Relations team with any additional questions. This concludes our call.

Operator

Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Sempra Q1 2023
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