Sempra (NYSE:SRE) Q4 2022 Earnings Call Transcript

Sempra (NYSE:SRE) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good day and welcome to Sempra’s Fourth 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, everyone. Welcome to Sempra’s fourth quarter 2022 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 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 will 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 statement we make today. The factors that could cause our actual results to differ materially are discussed in the company’s most recent 10-K filed with the SEC. Earnings per share amounts in our presentation are shown on a diluted basis and we will 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 annual report on Form 10-K for the year ended December 31, 2022. I’d also like to mention that the forward-looking statements contained in this presentation speak only of today, February 28, 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, Glen and thank you all for joining us today. We are pleased with our accomplishments in 2022 and in large measure it gives us added confidence in our future performance. In 2023, we will be celebrating our 25th anniversary and across our management team, we are pursuing future opportunities with a lot of optimism. For purposes of today’s call, I will provide summary comments on our performance recap our business strategy and frame our success in terms of our accomplishments over the last half decade. Then Trevor and Justin will review our business and financial accomplishments in greater detail and we will reserve time for your questions. Let me start with Sempra Infrastructure. In 2022, the United States reached an important milestone as an energy exporter.

It was the first year that our country became the top exporter of liquefied natural gas, or LNG, while also leading the LNG industry and new offtake contracts that support future development. This supports our view that U.S. LNG exports will more than double by the end of the decade. At Sempra Infrastructure, we built an exciting backlog of LNG development projects that are expected to support that forecasted growth. As one example, Sempra Infrastructure signed more long-term SPAs and HOAs for LNG offtake in the fourth quarter of 2022 than any other market participant. In part, this has allowed us to stay on track in meeting our goal of taking a final investment decision on Port Arthur LNG Phase 1 before the end of the quarter. Outside of our LNG business, we see the continued need to expand and modernize North America’s energy networks, particularly in California and Texas.

There is a common opportunity set in front of each of our business platforms focused on investments in modern energy infrastructure that accelerate electrification and the transition to cleaner fuels. We expect significant opportunities for investment across all three growth platforms and are affirming our full year 2023 and EPS guidance range of $8.60 to $9.20. Additionally, on the basis of this future opportunity set, we are reiterating our long-term forecast of a 6% to 8% compounded annual EPS growth rate. Consistent with our past practice, our long-term forecast uses the midpoint of current year guidance and is anchored by strong projected rate base growth at our California and Texas utilities. Given Encore’s ongoing rate case, I also want to note that we plan to share an updated 5-year capital plan as well as our EPS guidance range for 2024 on our first quarter earnings call.

Please turn to the next slide. At Sempra, our high-performance culture, one that is centered around safety and operational excellence, is the foundation for delivering on our mission to build a premier North American energy infrastructure company. Our corporate strategy guides our business activities and continues to be validated by the strength of our overall financial performance. In recent years, we have grown the business, strengthened the balance sheet, delivered an attractive dividend and meaningfully increased our rate base, which continues to be a principal driver in our future growth. Looking ahead, our team is excited about the future in part is because we expect our culture and commitment to excellence will continue creating value through the end of the decade as we extend our position as a leader in the markets we serve and continue to invest in our employees.

Please turn to the next slide. Since 2017, we’ve executed on our strategy to simplify our business model, build our leadership position in some of the largest economic markets in North America and improve our financial performance. We’ve streamlined our portfolio, exited non-core businesses and extended our regulated utility footprint into Texas by acquiring an ownership stake in Oncor and InfraREIT. Through this strategic repositioning, we’ve been successful in creating greater scale across our franchise and new growth opportunities. To add context around our financial accomplishments since 2017, we have doubled our adjusted earnings, significantly exceeded a compound annual EPS growth rate of 6% to 8%, increased our combined utility rate base in California and Texas by 300%, all while supporting our balance sheet and maintaining a balanced 50-50 capital structure.

It’s also important to note that our commitment to this more simplified business strategy has resulted in a strengthened market position, improved business mix, enhanced quality of cash flows and perhaps, most importantly, improved visibility to future growth. Today, in many ways, it is pride in our past that gives us confidence in our future is from Sempra’s rich tradition of serving others that we understand our role in society and how we can best meet the expectations of a growing list of stakeholders. While much has changed over the last quarter century, our vision delivering energy with purpose has remained constant as we embrace each new challenge as an opportunity to create innovative forward-looking solutions. To be clear, this is an important time for our company.

At Sempra, we understand that modern energy infrastructure is a great enabler of prosperity, health and well-being for billions of people around the world. That is why Sempra is pursuing the dual opportunities of advancing decarbonization and helping to deliver energy security globally, all while improving the resiliency of how we deliver energy in our core markets. With that, I will turn the call over to Trevor to discuss business and financial updates.

Trevor Mihalik: Thanks, Jeff. What we would like to do is update you on three things. First, I will provide business updates on Sempra California and Sempra Texas then Justin will discuss Sempra Infrastructure, including notable progress on our LNG export projects, and then I’ll wrap up with a review of our financial results. Let me start with Sempra California. Community safety is a core tenet of our culture, and I’m proud to highlight that in 2022, SDG&E completed the hardening of 100% of its Tier 3 high-fire threat district transmission infrastructure. This has been long journey that reflects the dedicated efforts of our employees, extending across more than a decade and have significantly improved community safety. In November, SDG&E received a final decision from the CPUC maintaining its 2022 cost of capital rates of return.

In December, SDG&E and SoCalGas received a final decision authorizing the 2023 cost of capital, which preserved both companies’ equity layers at 52% and updated SDG&E’s and SoCalGas’ ROE to 9.95% and 9.8%, respectively, through 2025. Last year, we announced the Angeles Link hydrogen proposal. In December, SoCalGas received CPUC approval to establish a memorandum account that allows the company to track the costs of performing Phase 1 feasibility studies. This is an important milestone in evaluating new opportunities to advance California’s decarbonization goals. Moreover, the CPUC directed SoCalGas to include this as part of California’s application to the U.S. Department of Energy for Hydrogen Hub federal funding. SoCalGas believes Angeles Link has the potential to serve a significant strategic role in supporting the build-out of a full scale Hydrogen Hub and the transition to a green hydrogen economy in Southern California.

As proposed, this would be one of the largest hydrogen infrastructure hubs in the U.S. and would support the decarbonization of hard to electrify sectors in the Greater Los Angeles region, which is one of the largest manufacturing areas in the country. Also, SDG&E and SoCalGas are working closely with their customers and regulators to help mitigate the impacts of unusually high winter prices for natural gas, which has been a challenge all across the western region of the country. From the state of Washington to Wyoming and Nevada, Arizona, New Mexico and California, the Western region experienced a difficult price environment. Fortunately, natural gas prices across the country have dropped more than 65% since December. And here in Southern California, our utilities have also seen price declines in recent weeks and expect that trend to continue, some materials from a recent CPUC on bank as well as a summary of the programs that SDG&E and SoCalGas have in place to support their customers, are included in the appendix of today’s presentation.

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Finally, the ongoing general rate cases at SDG&E and SoCalGas established the foundation for meeting the future needs of our customers. It is also important to note that our filings are well aligned with the state’s clean energy, safety and reliability goals, and we expect a proposed decision in the second quarter of 2024 with retroactive treatment to the beginning of the year. Moving to Sempra Texas, I am happy to report that Oncor achieved strong employee safety results in 2022, which is a testament to the high-performing culture and operational excellence at our Texas platform. In fact, in a year marked by extreme weather, Oncor had a nearly 5% improvement in its SAIDI reliability score. On the transmission side, Oncor set another company record with 280 new annual interconnection requests in 2022, which is a 30% increase compared to 2021.

To put this into context, 2021 was also a record year for the company, which as you think about it, further underscores the scale of growth that continues to come on Oncor system. In 2022, Oncor built or hardened nearly 2,000 miles of T&D lines across its service territory and connected over 2,000 megawatts of wind and solar generation to the grid. By the end of 2022, cumulative connections to Oncor system totaled over 18,000 megawatts of wind and solar generation, representing nearly 40% of ERCOT’s total wind and solar resources. The momentum of transmission and distribution growth this year was driven by continued high demand for renewables and strong demographic and premise growth across Encore service territory. Oncor’s rate case is on the PUCT open meeting agenda for March 9, and we expect a final order to be voted out in the next 4 to 6 weeks.

Oncor has a track record of working constructively with the regulators for the benefit of its customers and to advance the key public policy priorities of the state. In part, these considerations support our view that Oncor will receive a constructive rate case outcome. Since the public proceedings are ongoing, Oncor has not unveiled their new capital plan. In conjunction with its final rate case, Oncor expects to review an updated capital plan with its Board. Afterwards, as Jeff mentioned earlier, we expect to publish our updated 5-year capital plan, which will most likely occur on our first quarter earnings call. I will turn it over to Justin to provide updates for Sempra Infrastructure and progress on development at Port Arthur Phase 1 and Cameron LNG Phase 2.

Justin Bird: Thanks, Trevor. I’m excited about Sempra Infrastructure’s recent accomplishments and want to highlight some of our key achievements. Sempra Infrastructure has seen a solid year of commercial activity with robust LNG, cross-border renewables and pipeline infrastructure demand, creating a foundation for future growth. During the year, Sempra Infrastructure brought assets online within its Clean Power and Energy Networks businesses, while operations at its Cameron LNG Phase 1 terminal exceeded production targets. On the Pacific Coast, we continue to expect ECA LNG Phase 1 commercial operations to commence in the summer of 2025. Also, both ECA LNG Phase 2 and Vista Pacifico LNG received DOE approvals to re-export U.S.-sourced natural gas from Mexico in the form of LNG to non-free trade agreement countries.

Please turn to the next slide. As you all know, we continue to advance our strategy of building out a dual market platform that allows us to efficiently deliver LNG to customers in the Atlantic and Pacific regions. To that end, I am excited to say we have completed the marketing phase for Port Arthur LNG Phase 1. We have carefully structured this development project to reduce risk by fully contracting the long-term offtake securing a fixed price EPC and identifying world-class development partners. In November 2022, we announced the execution of definitive agreements with ConocoPhillips, pursuant to which they would acquire a 30% ownership interest in Port Arthur LNG Phase 1 and take 5 MTPA of offtake from the project. In January, we announced that Port Arthur LNG Phase 1 was fully subscribed at 10.5 Mtpa of definitive long-term take-or-pay contracts with world-class counterparties.

We also have a fixed price turnkey EPC contract with arguably the most experienced LNG EPC provider in the U.S., Bechtel. With the completion of marketing and execution of the EPC contract, we’re now focused on finalizing the project level debt and equity financing. On the basis of the current financing efforts that are underway, we aim to efficiently raise lower-cost capital and protect Sempra Infrastructure’s investment-grade balance sheet. We are targeting Sempra Infrastructure Partners’ ownership in the project of between 20% and 30% with ConocoPhillips owning 30% and the balance being sold in the form of a non-controlling interest to one or more investors. This is an exciting project. In this initial phase, we’re aiming to generate equity returns in the mid-teens while preserving Sempra Infrastructure’s investment grade rating and reducing our equity contributions to the project.

As we approach FID, we continue to focus on striking the right balance of efficient financing, risk mitigation and retention of upside from future project cash flows and earnings. Over the past decade, we’ve successfully built LNG export and other large infrastructure facilities, demonstrating our deep development expertise and capabilities to build world-class infrastructure. I believe this experience serves us well as we aim to bring Port Arthur LNG Phase 1 to FID through construction and ultimately to commercial operations as we execute on our goal of delivering cleaner, more secure U.S. natural gas to global markets. Please turn to the next slide. Turning to Cameron LNG Phase 2. As a reminder, this project is also competitively positioned on the Gulf Coast to export LNG to Europe and Asia.

And given that as a brownfield facility, it has a distinct advantage to produce competitively priced LNG. The expansion project remains on track as we advance our key work streams. We outlined last year that our activities are focused primarily on completing the FERC amendment, advancing marketing efforts with the goal of securing long-term offtake agreements and completing the competitive feed process. On the regulatory front, the FERC commitment process that supports the transition from gas turbines to electric drives is progressing well. We received the environmental assessment from FERC citing no adverse impact, which is a positive step toward securing the final authorizations. Turning to marketing. 100% of the expected offtake is subscribed under HOAs our existing partners will take their 50% of production and SI’s 50% of volumes is already subscribed under existing HOAs on a back-to-back basis.

Next, on engineering, as we have talked about in the past, we’re running a competitive feed process between Bechtel and a JGC Zahra joint venture. This process is on track to be completed in the summer of this year, and we would expect to make a final investment decision shortly thereafter. Please turn to the next slide, where I’ll turn it back over to Trevor to discuss Sempra’s financial results.

Trevor Mihalik: Thanks, Justin. Turning to Sempra’s financial results. Earlier this morning, we reported fourth quarter 2022 GAAP earnings of $438 million or $1.39 per share. This compares to fourth quarter 2021 GAAP earnings of $604 million or $1.90 per share. On an adjusted basis, fourth quarter 2022 earnings were $743 million or $2.35 per share. This compares to our fourth quarter 2021 earnings of $688 million or $2.16 per share. Full year 2022 GAAP earnings were $2.94 billion or $6.62 per share. This compares to 2021 GAAP earnings of $1.254 billion or $4.01 per share. On an adjusted basis, full year 2022 earnings were $2.915 billion or $9.21 per share. This compares favorably to our previous full year 2021 adjusted earnings of $2.637 billion or $8.43 per share.

As a reminder, 2022 includes the minority interest sale of Sempra Infrastructure to ADIA that closed in June of 2022. Even after considering this minority interest sale, our strong performance and growing adjusted earnings demonstrate our ability to generate value for our shareholders while providing safe and reliable service to our customers. Please turn to the next slide. The variance in full year 2022 adjusted earnings compared to the same period last year can be summarized by the following: at Sempra California, $161 million of higher earnings from higher CPUC base operating margin, net of higher operating expenses at SDG&E and SoCalGas and $46 million of higher flow-through items related to repairs deduction allowances and self-developed software and other items recorded as a reduction to income tax at SDG&E, partially offset by $52 million of higher net interest expense primarily due to higher debt balances at SDG&E and SoCalGas.

At Sempra Texas Utilities, $120 million of higher equity earnings primarily due to rate updates at Oncor to reflect increases in invested capital, higher consumption and customer growth. And at Sempra Infrastructure, $160 million of higher earnings driven by excess production at Cameron LNG Phase 1 and strong production from existing energy networks and clean power assets as well as new assets placed into service and $110 million of higher income tax benefits, partially offset by $250 million of lower earnings driven by the sale of our minority interest in Sempra Infrastructure. Please turn to the next slide. As we near the end of our prepared remarks today, I’d like to take this opportunity to bring this all together and highlight Sempra’s investment proposition.

We’ve built a high-performing energy infrastructure company that is well positioned in some of North America’s most attractive markets. We’re focused on strategically deploying capital in what we believe is within the higher-value, lower-risk portion of the energy value chain and provides significant visibility to growth and shareholder value. At our utilities, this year, we will continue to be focused on advancing our rate cases, which center around making the needed investments to further safety, reliability and decarbonization to serve customers. For Sempra Infrastructure, we’re nearing FID for a large-scale LNG project in Texas, dedicated to helping provide energy security to our country’s allies and directly supporting the energy transition.

With that said, at Sempra, there are a number of open items to be completed this spring, including finalizing the Oncor base rate case and taking FID on Port Arthur Phase 1. That is why, as mentioned earlier, we plan to update our 5-year capital plan on our first quarter earnings call in May and also expect to issue our EPS guidance for 2024 at that time. Our work today gives us confidence in our ability to continue the build-out of one of the largest and most competitive energy networks in North America. By advancing our position as a leader in technology and innovation, we are better positioned to serve customers and create value for our shareholders. That’s why today, we’re announcing the approval by our Board of Directors of a quarterly dividend of $1.19 per common share, a projected annualized dividend of $4.76.

We look forward to continuing our commitment to creating and returning value to our owners by building the energy networks of the future. And with that, this concludes our prepared remarks, and we will now stop and open the line to take your questions.

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Q&A Session

Operator: Thank you. And our first question will come from Shar Pourreza from Guggenheim. Your line is open.

Shar Pourreza: Hey, guys.

Jeff Martin: Hi, good morning, Shar.

Shar Pourreza: Good morning, Jeff. Just maybe just more broadly on the 6% to 8% growth CAGR from the €˜23 midpoint based. I mean I guess the question is the cadence of growth that is embedded in that long-term CAGR. And the reason why I ask is the €˜22 to €˜23 original midpoints reflect 6% growth in €˜23. And obviously, we don’t have €˜24 guidance today. So do you anticipate some step-up in growth with maybe regulatory outcomes, SIP projects reaching commercial operations and getting some clarity on the upwards cost of capital revision in California as we move further in plan?

Jeff Martin: Sure. Let me provide some context here. You did mention the step up from €˜22 to €˜23, which was about 9.25% growth. I’ll give you a couple of things that I think will help you on this. One is when you look back over the last 1, 5, 10, 20-year periods of financial performance, we’ve delivered EPS growth in the range of 6% to 8% or higher. In fact, over the last 5-year, Shar, we’ve delivered a compound annual growth rate of right at around 11%. So I would also note, over those same periods of time, we’ve outperformed our sector in total shareholder returns. Second, harking back to 2022, as you alluded to, our 5-year capital plan we launched last year was our largest ever at $36 billion. And you’ll recall that over 90% of those dollars were allocated toward meeting our expected rate base growth.

And we certainly €“ we think that will continue to be a big driver across the balance of the decade. But one of the reasons we have so much confidence in our long-term growth rate is because now we really have improved visibility to a portfolio of growth opportunities at Sempra Infrastructure over the same period. So we feel very good about our 6% to 8% growth rate. I think that we’ve demonstrated over a long period of time we have the ability inside this organization to grow at a rate faster than that. And we’ve certainly done that in the last 12 months than we’ve done it over the last 5 years.

Shar Pourreza: Got it. And Jeff, just €“ I was actually referring to the original midpoint on €˜22 from €˜23. But I appreciate, thank you for that clarity. Just on the €˜23 guide, I just want to make sure, is there €“ is it inclusive of sort of the headwinds around O&M, interest rates, cost of capital that we just saw in California. Just trying to get a sense a better idea of what’s in and what’s upside to €˜23 and whether there is any tail risks out there that we should be concerned about? Or is it just the fact that you want these events to close?

Jeff Martin: Yes. I think it’s a combination of both. You’ll recall that when we set our 2023 guidance last February. We’ve come back 12 months later, we’ve affirmed that guidance. When you look at the 2022 results, obviously, it was record adjusted EPS for our company, really had strong safety results, strong operational results, executed a $7.8 billion capital plan, which we’re really very pleased with. But I would note to your point, as we look to 2023, we are going to manage some headwinds, right? Number one, you referenced one of them which is the ROEs and our California utilities were adjusted down by 25 basis points. We are operating in a higher interest rate environment. Number three, and Trevor mentioned this one, non-controlling interest at Sempra Infrastructure today is 10% higher than it was at this time last year.