Sempra (NYSE:SRE) Q3 2023 Earnings Call Transcript

Sempra (NYSE:SRE) Q3 2023 Earnings Call Transcript November 3, 2023

Sempra beats earnings expectations. Reported EPS is $1.08, expectations were $1.01.

Operator: Good day, and welcome to Sempra’s Third Quarter Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn it over to Glen Donovan. Please go ahead.

Glen Donovan: Good morning, and welcome to Sempra’s third quarter 2023 earnings call. A live webcast of this teleconference and slide presentation are available on our website under our Events and Presentations section. We have several members of our management team with us today, including Jeff Martin, Chairman and Chief Executive Officer; Trevor Mihalik, Executive Vice President and Chief Financial Officer; Kevin Sagara, Executive Vice President and Group President; Justin Bird, Chief Executive Officer of Sempra Infrastructure; Allen Nye, Chief Executive Officer of Oncor; Peter Wall, Senior Vice President, Controller and Chief Accounting Officer; and other members of our senior management team. Before starting, I’d like to remind everyone that we’ll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those projected in any forward-looking statements we make today. The factors that could cause our actual results to differ materially are discussed in the company’s most recent 10-K and 10-Q filed with the SEC. Earnings per share amounts in our presentation are shown on a diluted basis, and we’ll be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. We also encourage you to review our 10-Q for the quarter ended September 30, 2023. Please note that all share per share amounts reflect the 2-for-1 split of our common stock in the form of 100% stock dividend that we announced on the second quarter call and distributed in August.

I’d also like to mention that the forward-looking statements contained in this presentation speak only of today, November 3, 2023, and it’s important to note that the company does not assume any obligation to update or revise any of these forward-looking statements in the future. With that, please turn to Slide 4, and let me hand the call over to Jeff.

Jeff Martin: Thank you all for joining us today. We’re pleased with the strength of our third quarter results, which sets the stage for our Company’s continued growth. Given current geopolitical tensions, countries around the world are looking to ensure they are not dependent on supply chains that are subject to disruption and uncertainty. Increasingly, they want to source essential goods, whether food, liquefied natural gas, or microchips closer to home or from dependable allies. With this trend toward deglobalization, we see North America as one of the principal beneficiaries. We also believe these trends support important new growth in Mexico, where in the first half of 2023, foreign direct investment has risen sharply by approximately 40% over the prior year comparable period.

Just this year, Mexico has also surpassed China as America’s largest trading partner. As these trends continue, new higher levels of investment in North America’s energy grid will be critical to supporting continued economic expansion. That’s why at Sempra, we’re really excited about our mission to build this continent’s premier energy infrastructure company. As part of that mission, we focus significant time and effort on building a high-performing culture where we invest for the long-term in our business and our employees. And in combination, this has helped us achieve strong financial and operating results. Our strategy focuses on what we believe are the most attractive markets in North America with strong economic growth and constructive regulation.

Combined with capital discipline, this positions Sempra to deliver competitive long-term returns for our owners. Also, our business is expected to benefit from secular tailwinds that support our five-year capital plan of approximately $40 billion. You will recall I’ve spoken before about the opportunities that lie ahead for Oncor and the possibility of doubling their rate base over the next five to six years. While we’re still early in our fall planning process, we expect to increase our $40 billion capital plan by 10% to 20% when we update our five-year plan on our fourth quarter call. This increase is expected to be anchored by regulated utility investments and primarily driven by Oncor. Overall, we continue to see significant growth in multiple areas of Oncor service territory.

And with Allen here today, he will speak to some of those opportunities later on today’s call. Turning to the quarter, we believe our results demonstrate the strength of our business and our ability to continue producing strong earnings growth. Earlier today, we reported third quarter 2023 adjusted earnings per share of $1.08 and year-to-date 2023 adjusted earnings per share of $3.48. Given our year-to-date success, we’re expecting to be at or above the high end of our 2023 adjusted EPS guidance range and we’re affirming our 2024 EPS guidance range and projected long-term EPS growth rate of 6% to 8%. Finally, let me take a moment to speak about Kevin Sagara, who will be retiring next month after nearly 30 years of service at Sempra and its predecessor companies.

Kevin was instrumental in the 1998 transaction that originally formed Sempra when the parent companies of SDG&E and SoCalGas merged. He has held many leadership positions across our companies, including CEO of Sempra Renewables, CEO of San Diego Gas & Electric, as well as his recent role as Group President over our California Utilities. He’s had a really amazing career here and made significant contributions to our success and will be greatly missed. Now let me turn the call over to Allen Nye, who will take us through business developments in Texas.

Allen Nye: Thank you, Jeff. Today I would like to highlight our strong operational performance this quarter and speak to the recent legislation that we believe will improve our ability to provide high quality service to customers and deliver improved financial performance. I’ll then finish by highlighting some of the underlying growth drivers at Oncor. Despite record heat throughout the third quarter, the Oncor team performed exceptionally well, and I would like to thank them for working safely in extremely difficult conditions. As a result of our team’s efforts, reliability continued to be strong, with average outage duration improving by 9% over the last 12 months. Turning to the continuation of the Texas Miracle, Oncor is one of the nation’s largest pure play T&D utilities, operating in one of the fastest growing states.

With over 30 million people, Texas’ GDP is approximately $2 trillion, which makes it the eighth largest economy in the world. Texas annual GDP grew at 3.4% last year, well above the U.S. average of 2.1%. Our pro-business climate is well documented and has driven diversified job creation across many sectors of the economy. Oncor serves four of the top 15 fastest growing cities in America, with premise growth of approximately 2% annually expected in our service territory. The population of the Dallas-Fort Worth metroplex is larger than most states, and in each of the last two years added more people than any other U.S. metropolitan area. This growth has certainly impacted the demand for electricity. This past summer, ten peak demand records were set in the ERCOT region, culminating in an 85 gigawatt peak, which is 16% higher than the peak just five years ago.

This growth also continues to fuel significant expansion of our system. In the third quarter, Oncor connected around 20,000 additional premises, built, rebuilt or upgraded approximately 630 miles of T&D lines, and managed 755 active transmission interconnection requests, a 34% increase over last year. Specifically, retail interconnection requests have increased about 90% since the end of Q3 last year, which will be a major driver in our capital budget. Turning to the recently completed Texas legislative session, several bills were passed that give utilities better tools to support the growth of the state and improve resiliency of the grid. As we discussed on the second quarter call, HB 2555 provides a new opportunity for Oncor to develop a forward-looking plan to invest in the resiliency of our system.

The PUCT rulemaking associated with this legislation is currently underway, and we expect it to be finalized in the fourth quarter of this year. We are targeting the first quarter of 2024 to file our first system resiliency plan, or SRP, with the Public Utility Commission. HB 2555 provides for a six-month timeline for review and approval of the SRP. While much work remains to implement this legislation, we are optimistic that it will provide needed hardening, modernization and risk mitigation to our T&D grid for the benefit of our customers, while improving the earnings and cash flow needed to support these investments in the future. Additionally, you’ll remember Oncor is now also able to file two distribution cost trackers each year, as opposed to just one.

Thanks to SB 1015. In September, Oncor submitted its second DCRF tracker for investments made in the first half of the year. SB 1015 accelerated DCRF approval timelines to 60 to 75 days, matching the efficient interim TCOS process that has worked well for two decades. As we said last quarter, we expect the addition of the second DCRF filing to improve Oncor’s earnings by approximately $70 million to $90 million annually. Oncor is actively evaluating our five-year capital plan to reflect the continued growth across Oncor service territory and the impacts of new legislation. After reviewing with our board, we expect to announce an update as part of Sempra’s fourth quarter earnings call. Please turn to the next slide. This slide demonstrates the diversity of our service territory, both geographically and by customer type, which propels Oncor’s expected higher capital plan.

As you can see, growth is driven by a broad group of industries, including manufacturing, oil and gas, professional services and large data centers arising not only in the Dallas-Fort Worth metroplex but in North, Central and West Texas. Notably, the Permian Basin continues to be one of the premier energy producing regions in the world and is undergoing a major electrification effort. The load demand in this region is projected to increase from 4.2 gigawatts to roughly 17.2 gigawatts over the next decade. Please turn to the next slide, while I will hand the call to Trevor to review business updates at Sempra California and Sempra Infrastructure as well as Sempra’s detailed financial results.

Trevor Mihalik: Thanks, Allen. Starting in California, it’s worth reminding everyone that during the third quarter, Southern California experienced a rare tropical storm and I’m 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, TURN and UCAN. 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, and 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 non-controlling interest in the project 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-FDA application. Marketing of Phase 2’s off-take 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 non-controlling interest sales to KKR in 2021 and ADIA in 2022 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 will 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.

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Q&A Session

Operator: Thank you. This concludes the prepared remarks. We will now open the line to take your questions. We have time today to take several of your questions. [Operator Instructions] And our first question will come from Shar Pourreza from Guggenheim Partners. Your line is open.

Shar Pourreza: Hey guys.

Jeff Martin: Hey, Shar.

Shar Pourreza: Good morning, Jeff. I know Trevor just kind of answered the question a little bit here. But on the 10% to 20% CapEx, I mean, that’s obviously significant financing needs that will come with that. And you guys have different levers, right? You’ve been able to kind of minimize that external equity. You’ve recapitalized at SIP. You’ve had obviously some unlocking of debt capacity. I guess, I’m just kind of curious on, can you just elaborate on just Trevor’s comments a little bit around the source of funding this 10% to 20%? Does it need to come from straight equity or can you utilize what you’ve utilized in the past? Thanks.

Jeff Martin: Yes. Thank you for the question, Shar. And look, I think we would look to all those levers, but Trevor, since you spoke about this in the prepared remarks, why don’t you provide some additional color please?

Trevor Mihalik: Yes. Sure, Shar. Again – how you doing, Shar? We’re pretty excited about the investment opportunities and that’s really kind of what we had mentioned on this call. And that’s really kind of coming from the regulated utilities and that’s really around continuing to deliver safe and reliable service to our customers. So that 10% to 20% increase over the five year capital plan, we will discuss in more detail on the year end call. But we do understand just how important the financing is on this. So we’re continuing to analyze the expected capital needs and we are currently looking at efficient ways to finance this growth. And as we always have, as Jeff said, we will look at all of the options, but we will include common equity as part of that consideration.

Shar Pourreza: Got it. Thanks for that, Trevor. And obviously depreciate sort of that early update around the CapEx plan. Obviously, you’re highlighting that 10% to 20% is purely on the regulated side, which is good. It is a bit of a wide range. So I guess, what could dictate 10% versus 20% since it’s already kind of skewed what you already know, which is Texas and California. And the CapEx update would predate the California GRC final order. So is that also a potential tailwind or is that captured on that 10% to 20%? Thanks, guys.

Jeff Martin: Thank you, Shar. The way I would think about it is, we just had – Trevor and I just had our Oncor Board meeting just two weeks ago. They’re going through their planning process. And what’s different this year relative to prior years is we’ve aligned our financial planning process here at Sempra with the work that Allen and Don do in Dallas. And as we’ve been going through that process, we’ll make some final decisions with the Oncor Board later this year and look to kind of report kind of a comprehensive view on our capital in February. The good news is we’ve seen enough direction about where the capital plan is going to provide that 10% to 20% guidance. So, look, I was thinking about this before. If you go all the way back to the early 2018 time frame, we had roughly a $14 billion five year capital plan.

And right now we’re executing on one that’s close to $40 billion. And we’re expecting that to go up quite significantly between now and February. So we’ve been on a pretty big growth campaign over the last three to five years, and we’re pleased that it’s continued. What we can guide you to is it will be anchored to utility investments and specifically led by Texas.

Shar Pourreza: Just lastly for me, Jeff. Appreciate it. I have to ask this IP question.

Jeff Martin: Sure.

Shar Pourreza: Just, I guess, can you just talk about the impacts of that development pipeline? The fuel terminal moved from 4Q to the first half of 2024, Port Arthur, pipes and storage expansion are moving into the construction phase. ECA Regas contract is expiring, which would allow for ECA 2 in the mix. Are these developments, just so we understand, are they net accretive to that 6% to 8% growth rate you talk about? Thanks.

Jeff Martin: Yes. I’ll make a couple of comments and I’ll pass it to Justin. I would start by saying that we’re at this point in the planning process where we’re not going to go into details about what’s in the plan or outside the plan. What’s more important to us is our LNG strategy, which you’re referring to is moving forward briskly, primarily because as compared to our peers, we have the opportunity to both dispatch LNG directly into the Pacific and out of the Gulf. I would update you, Shar, that Cameron Phase 1 is producing in excess of 100% of its expected volumes. Both ECA Phase 1 and Port Arthur Phase 1 are in construction and moving forward on schedule with a great safety record. And I think what might be helpful to your question is for Justin.

Maybe do two things, Justin, if you would, talk about the development status of Cameron LNG Phase 2, Port Arthur Phase 2, and then speak directly, if you don’t mind, both to the Louisiana connector as well as the storage facility.

Justin Bird: Great. Thanks, Jeff. Hi, Shar. We’re excited about the progress we’re seeing at SI across our development projects. As Jeff mentioned at Port Arthur Phase 2, we recently received our FERC approval we think this is a major milestone that adds to the commercial momentum that we’re seeing. We’re continuing to advance commercial discussions with potential customers, again many of whom are also interested in project equity. And at the same time, we’re advancing engineering and construction, regulatory and financing. At Cameron Phase 2, we’re working with Bechtel on value engineering. And similar to what we did at Port Arthur, we and our partners are continuing to conduct that exercise and expect that work to go through the end of the year.