Q1 2021 Sempra Energy Earnings Call
[music].
Please standby were about to begin.
Good day and welcome to the Sempra Energy first quarter earnings call Today's conference is being recorded.
At this time I'd like to turn the conference over to MS. Nelly Molina.
Please go ahead.
Good morning, everyone and welcome to our first quarter 2021 earnings call for Sempra energy.
The live webcast of this teleconference of the slide presentation is available on our website under the investors section.
On the line with US today, we have several members of our management team, including Jeff Martin Chairman and Chief Executive Officer, Trevor Mihalik, Executive Vice President and Chief Financial Officer, Justin Bird, Chief Executive Officer of Sempra, LNG Allen Nye, Chief Executive Officer of Encore, Kevin Fogarty.
The group President Lisa Larocque, Alexander Senior Vice President and Chief Sustainability Officer, and Peter <unk>, Senior Vice President Controller, and Chief Accounting Officer.
Before starting I would like to remind everyone. The we'll be discussing forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Results may differ materially from those projected in any forward looking statements we make today the.
The factors that could cause our actual results to differ materially all of this.
Cause in the company's most recent 10-K and thank you filed with the SEC.
All of the earnings per share amounts in our presentation of showing them the dilutive basis, and we will be discussing certain non-GAAP financial measures.
Please refer to the presentation slides that accompany this call for that be consolation to GAAP measures.
I'd also like to mention that the forward looking statements containing the presentation speak only as of today may five 2021, and the company does not assume any obligation to update or revise any of these forward looking statements in the future.
Lastly, because the offer of period for our you know the exchange over is the open with limited what we can say about the exchange offer and we will be unable to respond to questions about this transaction.
With that please turn to slide four and let me hand, the call over to Jeff.
Thank you Nelly I am pleased with our first quarter results I think it sets us up well for the balance of 2021.
Youll recall, we shifted our market focus back to North America, several years ago and have been consistently investing new capital.
Utility platforms in California, and Texas. This strategic focus together with strong operational execution are continuing to drive improvements in our financial performance.
The second part of our strategy is focused on consolidating our unregulated investments under separate infrastructure, and we're making great progress there as well.
Just last month, we announced our agreement to sell of 20% equity interest in that business. The KKR and that's an important step for two reasons first bringing in a new strategic partner allows separate infrastructure to strengthen its own balance sheet. While also positioning the business to self fund its future growth.
Second this transaction since a clear market signal about the value and expected growth of our infrastructure platform.
Turning now to the company's financial results earlier. This morning, we reported first quarter 2021 adjusted earnings per share of $2 95 says we're also affirming our 2021 adjusted EPS guidance range the.
Now please turn to the next slide where I'll turn the call over to Trevor to provide both business and financial update.
Thanks, Jeff.
We've had several positive developments at our operating companies of this past quarter at.
At our California utilities, we received a proposed decision for 2022, and 2023 attrition rates, which if approved will provide greater support for safety and reliability initiatives as well as improved visibility into the future earnings.
Moving to Texas and.
In 2020 encore experienced its highest organic premise growth ever and we're excited to see the growth continue this year.
In the first quarter alone oncor connected approximately 19000 new premises.
Later than the connections in the first quarter of 2020 again, validating the underlying strength of economic and demographic growth in the region.
Now shifting to our infrastructure business.
The Sempra LNG, we have begun engineering construction of <unk> phase, one and continued to progress our LNG development projects.
At Cameron Phase two we continue to work with our Cameron partners on the technical design of the project and to advance commercial discussions.
At Port Arthur LNG, we continue to work with partners and customers to focus on options to reduce the project's greenhouse gas profile and continue improving its competitive position in the global energy transition.
At this time given this work and the continued impacts of the pandemic on the global energy markets. It is more likely the final investment decision at Port Arthur will move to next year, we will keep you updated as things progress.
Moving to our Mexican business, we continue to advance our pipeline of development projects focused on diversifying its energy supplies and improving the country's energy security.
In March we expanded the renewable energy platform by finalizing the acquisition of the remaining 50% equity interest in ESG and placing the border solar project into operation.
Also as Jeff mentioned earlier, we're making great progress on Sempra infrastructure and the associated series of transactions.
Just last week, we received the necessary regulatory approvals to launch the exchange offer.
As that process moves forward, it's important to note that it does not have the minimum requirement to close.
With that please turn to the next slide for a short update on additional details of the pending sale of announcements and Sempra infrastructure.
With the announced sale of of 20% equity interest in Sempra infrastructure to KKR with gains of strategic partner to help fund future growth. The three $3 7 billion in proceeds is expected to be used to fund growth at our U S utilities and to strengthen our balance sheet.
And also establishes an implied enterprise value of approximately $25 2 billion equal.
Equally important we're pleased to be partnering with an investment firm that has a shared vision for growth in North America.
Lastly, we expect to close the transaction in the middle of this year subject to customary closing conditions and certain approvals from third parties and regulatory agencies.
Please turn to the next slide where I will review the financial results.
Yes.
Earlier. This morning, we reported first quarter 2021, GAAP earnings of $874 million or $2 87 per share.
This compares to first quarter 2020, GAAP earnings of $760 million or $2 53 per share.
On an adjusted basis first quarter 2021 earnings were $900 million.
Or $2 95 per share.
This compares to our first quarter 2020, adjusted earnings of $741 million or $2 47 per share.
Please turn to the next slide.
The variance in the first quarter 2021, adjusted earnings compared to the same period last year was affected by the following key items.
$73 million of lower losses at parent and other primarily due to net investment gains lower net interest expense lower retained operating costs and lower preferred dividends.
The $62 million of higher equity earnings from Cameron LNG JV, primarily due to phase one commencing full commercial operations in August of 2020.
The $35 million of higher CPUC base operating margin of Socal gas net of operating expenses.
And $30 million of higher equity earnings at Sempra, Texas utilities, primarily due to increased revenues from rate updates to reflect invested capital and customer growth and higher consumption due to weather.
This was partially offset by $56 million of lower earnings due to the sales of our Peruvian and Chilean businesses in April and June of 2020, respectively.
Please turn to the next slide.
Yes.
We're pleased to report of successful quarter, both operationally and financially and we are affirming our full year 2021, adjusted EPS guidance range and with that this concludes our prepared remarks, however, before moving to the Q&A I'd like to remind you that we will not be discussing the exchange offer we will stop now and take your questions.
Yes.
Thank you if you'd like to ask a question of please signal by pressing star one on the telephone keypad. If you are using the speaker phone. Please make sure. Your mute function is turned off to lighter signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll go first to sharp Raza with Guggenheim partners.
Hey, Jeff Thanks Trevor.
Good morning Shar.
Just a couple of quick ones here, Jeff now that the.
S T.
It's fully announced the transaction can you maybe talk a little bit about proceed expectation.
<unk> three 4 billion is a big number of Securitas.
Maybe get a sense for the regions and the businesses for reinvestment I mean, obviously, Texas is the logical option with the economic growth do you have a plan for our regulated versus LNG. The delevering buybacks. So I'm curious there.
Well sure I appreciate the question Richard.
The conversation that we've had a lot over the last 90, plus days and I would tell you that.
As you think back over the last two or three years.
You've seen us really focus on funding our utilities right. So we've got of 32 billion five year capital program. That's the very large capital project.
Close to $29 billion of that is dedicated to our utilities. So as we think about how.
How we would use those proceeds certainly we want to make sure that we're funding growth in our utilities and there'll be opportunities for us to look at paying down parent debt and continued strength of our balance sheet. We've made great progress also over the <unk>.
Last three years of of.
The improving our equity layer so.
What I would say is when we get toward the analyst conference. So right now we're targeting June 29th we'll look forward to reviewing our 2021 guidance of that Tom and just see if there's any adjustments that are needed. We will also for the first time share issue our 2022 guidance.
And in terms of our use of proceeds and the expected average accretion of over three or four years, we will announce that related to the separate infrastructure and that number will be included in the guidance that we provided at that time.
Okay perfect you actually just answered two of my questions in one side of it.
Sure.
One last one.
Just on the.
Of the stake of Oncor, the 20% of roughly the minority position you guys don't own with GTI any sense, if acquiring the remaining stake or kind of ever be of near term driver of are there any discussions happening in all of their just kind of think about that.
It's interesting.
We do a very periodic strategic review of our board and I think you've heard US talk a lot about this long term secular trend toward electrification and how we can change the to reorient our portfolio toward transmission and distribution. So as you think about the outages in California last summer in some of the things that Texas has gone through.
We really think the best risk adjusted returns near term and long term per our investors is the continuing to take a leadership position in owning more energy grids. So as you think about renewables over the next 20 of 30 years potentially doubling of across the country. We really think thats grid positions can be very important so.
The right in your assessment, we find oncor to be of very attractive investment. It has the waterfall management team. We think it has a really important leadership position in the Texas market. We have good relationships with <unk> as you know as a matter of convention, we tend not to talk about M&A type of opportunities, but I will I do feel golf will confer.
Firming debt.
Our T&D thesis has been validated several times over the last couple of years and that will be of continuing priority for our management team.
Got it and then let me just just a follow up just.
There could be opportunities in Texas to look at other systems that may be coming of that as a result of it.
Other utilities looking to delever or simplify the story of whatever day.
You. If you were to look at inorganic opportunities do you need a closure of on core to grow Inorganically in Texas or should we assume these are mutually exclusive events, if an opportunity does come about.
Yes, I would go back and say that.
One of the things that Trevor and I will talk about a lot shar is really the importance of really thoughtful execution around our current capital program.
Thank over long periods of time, we were a review of our total shareholder return over the last two decades with just over 1000%. If all goes back to be in a really prudent thoughtful allocator of capital. So we're very much focused on the.
The sheer volume of opportunities, we're seeing organically, we do always look at a wide a range of things.
From an acquisition standpoint, particularly projects more so the large companies. So we don't rule of those types of things out, but our focus is on delivering a very very big capital program, that's right in front of us.
Terrific. Thank you, Jeff Thats, a pretty consistent appreciate it.
Thank you so I appreciate it.
We will go next to Steve Fleishman with Wolfe Research.
Good morning, Steve.
Hey.
Good morning.
So just.
Maybe first on Texas.
Maybe this question is for Alan.
Just curious thoughts on.
Just now that we're a few months further from the urea of that.
What does that all mean for your business in terms of.
The future.
Changes or.
Investment opportunities that may come up and anything that we should be watching from the legislative session that could impact.
Your wires business.
Thanks, Steve It out just for the benefit of the larger audience, Alan the CEO of volume quarters on the phone with us and I would just make a quick contextual comments, Steve before pass of Ala, which is really proud of of how our team responded during the crisis in February I mentioned this in the comment to share, but I think the importance of <unk>.
Texas is the state thinks about adding new generation as it thinks about meeting its growth prospects I think will become increase the important when the observation I'll note before I hand, it off to us.
Theres a lot of conversations around the PUC reform or market reform or increased capital spending around Weatherization I think one of the takeaways. Steve is this was a really remarkable weather event really really highly uncommon and it's very much focused on the supply side and making sure that weatherization is a real prior.
From the generation asset, Steve all the way up the value chain going toward the wellhead. So I think this is probably in the long run going to be more about how we prepare the supply side, including the fuel side more so than expected market reforms, but I think we talked with Alan and we think we're probably not going to try to front run.
The state in terms of what the expected outcomes are but we have a lot of confidence that we'll get to a good outcome from the legislature, but Alan.
Perhaps you could comment more on the different buckets that you expect conversations to occur in the legislature Ed at the PUC if you could.
Yes, sure Jeff and thanks for the question Steve Obviously.
We had a very traumatic event here in the state.
And I think it's getting an appropriate and a corresponding response from both the legislature and the regulators.
We're obviously in the middle of assertion getting towards the end the.
As of now we have over 180 bills dealing with issues associated with the winter event.
To Jeff's point, we're not seeing things that are likely to have.
<unk> market redesign.
Type of implementation.
But generally we see the current legislative session kind of falling into the six categories market governance and oversight of <unk>.
Mineralization communications, both with the within the market into customers, obviously gas and electric coordination customer and market protection and securitization.
And while we don't see overall market redesign occurring we think theres significant momentum of that behind any number of those issues and we're likely to see could see.
Distillation pass addressing each of those concerns or issues rather.
Frankly, it's too early to tell we got session going through May 31 of the possibility of additional special sessions. Similarly of the PUC has addressed the eight areas of inquiry. They basically overlap of many of the categories coming out of the legislature.
Those areas of inquiry could obviously change as we get new commissioners appointed to the commission.
So overall, probably not wholesale market change.
The action on each of those topics that I addressed.
Many of them some of them could impact us some of them could require additional investment on our system.
As I said when I testified before the legislature I believe and I think it shows the evidence shows that our system performed very well.
We did what we had to do but obviously.
There are things, we can improve on and the things that we intend to improve on and depending on what comes out of the legislative session.
We will make the necessary investment to the.
To achieve those.
Yes.
And just one I guess one follow up on that is just the.
The renewables build out of the state or are you seeing any either delay or or acceleration in renewables and batteries.
Coming out of this event.
You bet yeah. Thanks.
On the generation side.
We've seen an uptick in request in Q1 over Q1 of last year last year, where we.
We were end of year, we're around 180 overall generation interconnection requests.
As of Q1 2021 were at $1 94.
So we've seen that uptick I can't tell you, what it's related to or what its not I know theres a lot of the legislative action SB three in particular.
Around the could have potential implications too.
Renewables.
But so far those of the numbers that we have on generation for first quarter of this year and obviously much as you would expect when you look at the Q.
Much of those are renewable solar and wind.
Okay, and then one question Jeff on an LNG, just seems like market conditions remain pretty robust.
Obviously more at least spot market conditions.
How is that impacting your discussions on.
New contracts and moving forward with your growth projects and just how are you feeling overall there.
Thank you.
We continue to be very optimistic about the development portfolio of Steve you recall on our Q4 call. We commented on some of the spot prices I think which set records actually at JK Yan Li.
The debt marker in January.
You were talking about looking back at LNG trade last year for the first part of this year. It has been one of the bright spots in the overall global energy markets I think in part is attributable to this robust demand response, we're seeing in Asia and low inventories in Europe.
The consultants, we work with bank debt by.
2030, you could see the market climbed to about 550 million tonnes per annum and today, it's right around 365, So we're pretty optimistic about where we're at in terms of our development portfolio, and particularly being able to access Asia, we talked about at least Trevor did in his prepared remarks port Arthur.
Obviously this is a really large project.
All of the states and obviously part of company.
We expect that we will probably move the Saudi decision in the next year, but one of the things. That's interesting is we're trying to improve our portfolio.
Things like carbon capture and move into electric drive supported by renewables.
The greening up of the value chain here in North America is something that the sales side and the buy side should fall, but does that expect it will make america increasingly competitive over time.
I would mentioned that things that each of the phase one are going very well in fact.
The EPC contract or actually mobilize last month to the again some of the site preparation work and that's one that we will look to make updates on going forward of then of Cameron phase two probably has had the most activity.
We're working with our camera partners through the funding of the pre feed work.
This will also help us advance and optimize the overall technical design of that project of which.
We remain quite bullish on after pre feeds the next steps will be the engineering work for feed and moving forward with the EPC contract and we're also making great progress on the commercial conversations with both the Mitsui Mitsubishi and hotel. So that's advancing quite nicely. So I think as we look at it we think.
That's the thesis that we've laid out to wall Street about the supply demand gap in the middle of the decade continues to be validated in the we've talked about this now for three or four years. So I think our portfolio will be well positioned going forward and I think as you see the higher coal use right now in Asia, particularly this year as compared to prior years.
I think the importance of LNG as part of the clean energy transition is increasing in importance.
Great. Thank you.
Okay.
Well then thank you guys.
Oprah with Evercore ISI.
Hey, good morning.
Good morning for you guys. Thank you for taking my question.
Jeff just big picture wanted to get your thoughts on sort of how you're thinking about a couple of years out sampras profile of regulated versus nonregulated, and specifically given sort of the valuation marker on the private side for the gas assets is there opportunity for you to kind of wind down or liquidate.
The larger portion of SUV moving forward.
Yes.
As we've thought about it we look back over the last three years I think we've shown a real willingness as a management team with our board to make changes to the portfolio all through the lens of try it and see if we can improve our financial performance right.
And we've found opportunities where.
We're a seller when other people value of assets at a level higher than we value of them and you have likewise seen us be a buyer, particularly around our T&D thesis when we feel like that we can pick something up at a fair price of the market's it's strategic to us and if you as you think about those activities and being thoughtful about our capital allocation.
We've been able to grow our adjusted earnings per share of about a 14% CAGR. So we feel very good about the portfolio of in fact, we did the look back.
<unk> to our portfolio over the last two decades, and we've been able to grow our total shareholder return of just over 1000 per cent versus the S&P 500 is right around the 400% total shareholder return and the S&P utilities at right around 314%. So we've been able to over two decades outperform our sector by <unk>.
<unk> type of performance I think it's just.
The idea that you can put together a portfolio of and if you really thoughtful and disciplined about capital allocation, you're always taking what the market gives you and right now we think we want to focus on growing our utility platform both of the Texas and California. We think we have a leadership position in both markets. So I think in the near term our focus will be on.
On growing our utilities and tried to meet and find the most capital efficient way that $32 billion capital program at the end of the day, we're very excited about our partnership with KKR, but this was also an opportunity for us the source the lowest cost of capital to fund our capital program. So we're actually quite bullish on both of these.
At Forum and look forward to growing them into the future.
Much appreciate it. Thank you maybe can I just.
Maybe you can I just quickly.
I ask you for an update on the San Diego franchise agreement, where does that strength.
Sure.
This is something that is obviously, a big priority to us the city issued a new invitation to bid back in March and Kevin. If you have other comments feel free to supplement my comments.
San Diego gas electric responded providing a proposal on April 16th again, they were the only bidder in the process and they are currently in bilateral negotiations with the city of its probably not appropriate given the state of the snug negotiations to characterize where we're at in that process I would go back, though I mentioned a couple of things.
Things that Kevin and I have mentioned on prior calls, which is we continue to believe there is a very strong alignment of interest between what the city is trying to accomplish for its citizens and what we're trying to accomplish for our customers. We feel very constructive about the process and we certainly look forward to continuing to engage with the new mayor Todd Gloria and the City Council.
Kevin just like to make any additional comment.
Covered it Jeff.
Yes.
Alright, thanks, so much guys much appreciate the time.
Thank you and have a nice day.
We will go next to Julien Dumoulin Smith with Bank of America.
Hey, good morning team. Thanks, Good morning Julien.
Good morning.
So if I can go back to perhaps where we started at the at the top of the Q&A here.
Can you elaborate a little bit on the comments on balance sheet strength.
How are you thinking about debt pay down is this just relative to the loss of cash flow from the sale are you thinking about proportionately deleveraging from where you are today I just wanted to clarify the comments that you made in the prepared remarks.
As well as any tax leakage you might be willing to share.
Yeah, I think that on prior calls you may you may recall that we mentioned that we did not expect to have any cash tax consequences associated with the transaction because of the buildup of Nols we have the.
And of the 2024 of 2025 time frame.
I think the most important takeaways from my earlier remarks is that we're going to be in a position at our analyst conference Julien to provide our 2022 guidance. So I think that's the appropriate thing to focus on the use of proceeds for this transaction will be imported I've talked about the importance of making sure that we can find of our capital program. There is nothing unique or nuanced about.
The balance sheet issue I think you've seen us go from.
A an equity layer that was closer to 40 41, 42% in Q2 of 2018 and we finished this year last year on December 31, with the balance sheet that had an equity layer at about 51%. So we really have improved our balance sheet and second of our equity layer.
But as we look at paying down debt, we'll look at our various maturities. We will look at our make whole payments will get to the right economic decision. It will balance that with other offensive opportunities to fund our capital program. So we feel good about the Sempra infrastructure transaction. It was premised on sourcing the lowest cost of capital right.
Finding a partner that has a shared vision for growth and it's going to be accretive.
Right actually Jeff if I can follow up on that last comment here I think I heard you say three to four years of share.
Incremental accretion.
Is the expectation for disclosure of our U.
Thinking about providing something on a consolidated EPS CAGR like some of the extent of the prior analyst day here or is it just going to be very narrow in terms of what the incremental accretion from the <unk>.
Yes, I would just go back and say that if so while one of the thing.
One of the things we're excited about is going to the analyst Conference to review number one 2021 and the published for the first time 2022, and if you harken back to the Oncor transaction, what we tend to do is make sure of it number one that any accretion associated with this transaction is included in the guidance that we expect to present.
That has not been the case the date right in terms of the guidance, we put out for 2021, and we tend to look at the overall impact of the accretion over multiple years of taking the oncor case, we provided three to four year average accretion that would be our expectation would be the adhere to that convention in June where we're all together.
Yeah.
Right, absolutely and and perhaps provide updates on organic capital spending at the utilities as well.
Exactly that's exactly right okay.
That's exactly right.
Perfect I'll leave it there all of the Beth.
I appreciate it Julian thank you.
We'll go next to Jeremy Tonet with J P. Morgan.
Hi, good morning.
Hi, Jeremy.
When you were talking about the LNG I think you mentioned carbon capture there and just wanted to follow up on that a bit.
Just wanted to see if you thought the current 45 Qs is the written right now.
Are sufficient to provide economics to.
Gulfport with those type of projects right now or more support as needed.
And also.
The shell collaborate with their LNG provider to deliver of carbon neutral LNG into Europe and I'm just wondering.
If you see this is like a bigger trend in the in the industry and I guess, how sempra thinks about that in general.
Yeah, well look I'll start by saying that we've long talked about the competitive advantages of North America relative to other places like Australia, or Canada, or our Iran, or Russia, and I think when you think about the.
The fact that we have ample resources for natural gas in the United States low price volatility you've got certainty of construction here relative to other jurisdictions and you have got deep capital markets. We have always said and I think most forecasters agree the United States, who will lead the world in LNG exports in the next two or three years as you think of.
The other competitive advantages I mentioned this at Port Arthur but also of Cameron cameras, specifically, we're looking at opportunities to make sure that we can greening up the value chain. So we have the most competitive form of LNG possible.
I think what you talked about its shell that will become increasingly common but I think the United States in particular will take us the existing advantages and will become more advantaged relative to our competitors because of the very things you referenced in the perhaps Justin who is our CEO of our LNG business can talk a little bit about how you're thinking about the.
The role of both renewables and carbon sequestration and your LNG program adjusted yes.
Yes, Thanks, Jeff Yeah, Jeremy I think under 45 Q question, Yes, we do think that will will play an important part as we look at carbon capture around of our LNG and I guess broader within the company.
And in terms of what we're doing at our LNG projects, we are always looking for ways to reduce our emissions.
Both onsite and then.
From from the gas coming in as well as the power of Thats coming into the project So as Jeff mentioned earlier.
As we look to potential of electric drives.
Trying to increase the percentage of renewable power that would drive those as well as other ways to capture and reduce methane on our site.
I think those are important drivers as we look to keep.
Keep.
Greening, our facilities and frankly, the the supply of that comes into them in terms of.
You made reference to the Cheniere shell deal I think you will start to see more of that in the LNG marketplace. We are working with our customers and potential customers as to how we will track the emissions associated with that LNG and then as to ways that the emissions.
That LNG can be offset so I do think you will see that play an important role as the market continues to grow but as Jeff mentioned in his earlier remarks, I think what excites us most about LNG is the continued growth you see in the LNG around the world frankly, as the rest of the world and does move toward energy transfer.
<unk> and cleaner energy natural gas is clean affordable, we're seeing it supplement domestic gas resources around the world. We're seeing it provides support for renewables and supporting electrification. So we think our LNG will play a critical role and particularly the American LNG in.
The global energy transition.
Great. That's very helpful. Thanks for that.
Maybe pivoting a bit here talking about LNG I think you say, 20% of R&D by 2030 here.
For your your assets and I was just wondering what line of sight that you might have to that number and other supporting policies of regulatory incentives.
Our debt would need to be put in place to hit this or just kind of any of the thoughts on the trajectory of the past there would be helpful.
Sure I'll make some comments and then ask if if Kevin cigar can supplement my views, but we've made some pretty bold commitments around go into scope, one two and three emissions at net zero by 2045, and our gas utility of many of you know we own the largest gas utilities here in North America.
I think we've taken a leadership position in our commitments there and to your point, we have made a commitment to be at 20% renewable natural gas by 2030, I think we're at about the 5% level today and what's interesting is you get carbon offset credits. If you can use renewable natural gas.
For marine purposes, as well as for transportation purposes, and I think theres an opportunity to extend those type of all sets to pipeline utilization. We also think there's an opportunity here in California to see us move towards something that looks a lot more of like the renewable portfolio standard that was used in 2007 to launch a.
<unk> investments across the state, but we do think capturing biogas from landfills from dairies is a has a huge impact on taken unconverted methane out of the environment. So we're gonna be try to we're actually going to try to be a leader in that area and this is something that we'd be even take the inquiries from from some of our European partners about the progress.
And leadership the Socal gas has shown the Kevin Youll comment on any of the regulatory issues or other issues around renewable natural gas.
Thanks for that Jeff just as Jeff mentioned, we have of can then they had the gas company to be.
Have 5% of our core of load share by RMG by next year, and we're well on our way of meeting that I think we're almost there right now and then the larger commitment of 20% by 2030.
For that one we need we need some more regulatory instead of something like Jeff mentioned around an Rps standard would be very helpful. Ultimately, but this is this is an issue that we're going to have to tackle that in the state right methane is about 80 times or you've seen many more times worse more times of net worth for the.
Atmosphere and for the the climate than <unk> and so.
There's going to there's going to be need to be of regulatory construct in the anti drive kind of the knitters of this of methane to capture that and use that our burn it or put it back into the ground.
Going to see more of that but like you mentioned I think in Rps standard with the very helpful in helping us reach our goal.
Yes, that's very helpful. Maybe just if I could squeeze the squeeze the last one in.
The Biden playing out there early days, but just anything you see I guess in.
That could help you on the transmission side or maybe aim of any of your kind of growth in Texas or any thoughts there that you could share.
No I would just probably say that we're committed to work with this administration, obviously theres a little bit of of bid ask spread between both parties about the size of the infrastructure plan, but the area that there does seem to be of consensus beyond the normal bridges roads and airports is around issues like telecom and number two an expansion of the transmission system. So.
These are very very hard to site and bill of these are long lead time projects that can take up to a decades of complete and it's one of the reasons I think that we feel so constructive.
The transmission and distribution positions, we have in Texas, and California, because we think the lion's share of these upgrades that will be extended will come from the existing owners of the existing rights of way and existing <unk>.
Land positions in infrastructure. So we are we've had a team on the ground in Washington led by Trevor and lease Alexander in the last two weeks meeting with policymakers on this point and I do think we will we expect to see some support in the infrastructure Bill for transmission.
Got it that's great I'll leave it there thank you.
Thank you appreciate it.
We will go next to Stephen Byrd with Morgan Stanley.
Hey, good morning.
As Steven.
A lot's been covered but I wanted to maybe go back to your Investor event in June and just make sure I'm thinking about all the the key focus topics I heard a couple of through Q&A like 'twenty, two guidance and a discussion of capex opportunities, but other sort of other focus topics or sort of key messages you wanted to reinforce it.
The big event.
No I think we've had a fair amount of optimization of the portfolio over the last three years I think what we're going to try to accomplish at the at the Analyst Conference is make sure that we present, a very clean clear runway of growth you recall one of the things Thats new this year as we've continued to make strides of reporting higher quality.
The earnings so we've backed out FX and mark to market and inflation from our results you saw that in our recast comparison for last year, Secondly, you're going to hear us talk about the growth that we expect an or of California and utility platforms in Texas.
And how we expect to fund that going forward there'll be a lot of focus and Trevor presentation in June around our approach to funding our capital program.
And I would also mentioned, we expect Steve to have spotlights on technology and innovation in all of our business unit presentation. So it was very interesting we had a conversation with 40 Burrell from the IEA not too long ago, who met with our board and he made the point to us that for the world of reached net zero by 2050, it's the view of the.
International Energy agency debt, 50% of the required technology and that includes new fuels do not exist today.
So we think that industry controls the tools of de carbonization, and the research and development and innovation that's needed needs to come from industry. So youll expect to here is not just talk about sustainability, but our role in taking the leadership position in our industry about what we're going to do in each business unit to improve sustainability.
And focus on innovation.
That's really helpful. Jeff and maybe just on an innovation and following up on the questions around California, and natural gas I mean, you all of Ben <unk>.
Leaders in innovation in terms of thinking about renewable natural gas how to pivot your business model to achieve a variety of goals I was just curious, though as you talk with the CPUC in talk with California legislators on the more negative end of the spectrum in terms of just any any new developments that you see in terms of.
Wanting from a variety of folks to move away from conventional methane more quickly or changes pushes towards electrification anything else that you're sort of seeing in terms of your dialogue with policymakers.
Yeah, I might ask Kevin to supplement these comments, but I would tell you that.
I think we benefited from positive and progressive regulation of the state for a long period of time and there's no question debt.
Electrification will be a dominant near term and long term secular trend, but what's interesting to me is there is this growing convergence of.
Around the role of not just electric infrastructure, but natural gas infrastructure, because natural gas is what's allowing us to find that efficient frontier of hosted the guests in our center of excellence here yesterday, and we were looking at a real time aboard and I think we were at right around 82% renewable penetration on <unk>.
<unk> system at a point in time yesterday afternoon, and that's the only possible because you've made those investments in a resilient grid backed up by batteries and you've got all of the peaking and necessary load support from your natural gas side. So this was one of the lessons learned from our blackouts in California.
Summer. So I think there is this kind of convergence that over a long periods of time to continue to push.
Leaner forms of energy natural gas has a role in where we're still use of a lot of natural gas obviously in power production.
There will always be points of differences there'll be robust dialogues there'll be conflict of discussions around energy policy, but over long periods of time I think the state has done a great job and you recall in the most recent G. R. C. The PUC approved the largest capital spending program in the history of Socal gas.
And it's really of flexion of their commitment to safety and reliability and I think the long term importance of that system and Kevin would you like to make any more comments about natural gas generally in the state I'll just echo what you said about it's really clean electrons in clean molecules working in tandem I think thats, becoming clearer as we progress on this continue in light of the of the energy.
<unk> energy.
The energy transition Steven it's not really binary of thought electrification and then forget about natural gas or forget about hydro right I forget about other clean forms of molecules. It's really some combination of both because you can't really decarbonize the industrial sectors day.
Heavy duty transportation sectors without the clean molecules and really what you need to make the clean molecules is more of renewable energy you need more of a clean electron which means more investment in the transmission grids and so it's really these two systems working together, which is going to resolve and achieving this net zero emissions emissions by 2040.
Five got at both the state has but both of our utilities of announced they are in alignment with as well so just.
That's the key takeaway I think thanks.
Thanks, Kevin really really thoughtful response, thank you.
Thank you.
We'll go next to Michael Lapides with Goldman Sachs.
Hey, Kathy Thank you for taking my question.
You brought up the very long term kind of share price and total return outperformance of Sempra over the last 20 years.
And it's interesting just curious if I can just located at our more recent.
Even though.
Over the last year, maybe even last two years relative to the main sector index.
The shares of actually underperformed.
And I'm.
Just curious because you've made lots of great transactions to simplify the business and the monetize some of the valuable asset Joan.
Do you worry there is a need to diversify further away from California, meaning do you worry and does the board have of concern that California utilities, whether it's to the wildfire risk whether it's due to the move away from natural gas, whether it's earnings range due to the cost of capital mechanism kicking in.
And low interest rates do you kind of worried that relative to the rest of the sector of that California utilities are kind of of.
I guess you used the term discount stocks.
Right, well I would start by saying that and you've followed us for a long time, Michael that we tend to take a long term view around how we try to create value and we don't have knee jerk reactions to the short term changes in the marketplace and I know thats not what youre, implying but we are always tied ourself to that long term.
And you'll recall I went.
Back and looked at the end of 2017 88 per cent of our earnings were in North America, and 12% were in South America, and we had roughly 70% of our earnings composition came from California and today, that's just less than 50%. So there has been a trend in terms of how we've man.
Simpler infrastructure partners and how we've managed our growth in Texas, namely through the acquisition of an 80% interest in oncor and as you recall, we also ball in per week, which was a public company.
And then you've seen at Allen's capital program went from what was about $7 4 billion dollar commitment.
His November of 2017 for our five year capital program to today is closer to $12 2 billion. So we're now forecasting $55 billion of utility rate base by the end of 2025 and at least based upon current returns is selling on a weighted Roe basis of about $10.
But I think you're one of the good point look we're going to continue to manage this portfolio and we're going to continue to grow at number one weighted toward utilities and number two if there's opportunities to expand we have a huge leadership presence in California, we like the state. We think we have the chance to take some of the economies of learning here around sustainability and.
That influence is why we're a better stakeholder in the investor in other parts of our business, but yes, we'll continue to look for opportunities to expand the outside of California, and frankly, Mike when you look back on the last three years, you've seen us execute that way.
Got it. Thank you and then one follow up.
Kind of a more detailed the one on on the LNG expansion and growth projects.
Just curious you've got if I remember correctly, almost 7 million tons per year, largely contracted of port Arthur right. The 5 million tonnes with a range of auto and $2 million how much more do you think you need to take the project like.
Like do you need the full 10 to take it up I E would.
Would you need something a little bit less than that to make it economic to do so.
And do you think the <unk>.
The kind of of the contracting market. This year isn't robust enough just to get another million of 2 million tons contracted.
Right well look I think what we tried to do in our unregulated business is make sure that we exercise our capital allocation strategy to produce.
Cash flows have substantially similar risk reward to our utilities right. So.
Port Arthur as an opportunity of where you've got seven today I don't see any scenario that we would probably take F D without having it fully contracted that we'd mentioned one of the things that was attractive Michael about the simple infrastructure partners portfolio as you're hard pressed to find someone that owns the business like that has average contract tenor across.
<unk> LNG in our contracts in Mexico at 21 years. So all of the lessons from last decade in the decade before about merchant positions and commodity exposure and exposure to generation.
We paid our tuition and back in those decades, and I think what we're focused on right now is aggressively growing our California, and Texas utility platform and inside of simple infrastructure partners Theres. No question, we have an industry leading development platform, but we think that we have competitive positions that will allow us the fully contract those those businesses before that.
Go forward and I'll make one last point you may remember that we announced early on the Emma use Michael for Eco phase one and that was fully fully tied up by Emma use before we progressed the S. P. As we're in that exact same position today with Cameron expansion. So even though we're bullish long term about port Arthur that can be a real.
Mark couple of project, we're even more bullish about Cameron expansion. So that's one that adjusted and the team will be speaking more about at our analyst Congress.
Got it thank you Jeff much appreciate it alright.
Alright, Thank you Michael.
We'll go next to Ryan Levine with Citi.
Good morning, Brian Hey, everybody.
Hi.
Couple of questions one of in terms of the SAP.
P entity on a go forward basis, given your assets in the Louisiana curious if theres any efforts to develop hydrogen related infrastructure, specifically around your L. A storage in hackberry.
Yes, well. Thank you for that question I think we've talked about on prior calls.
<unk> is the very important development all across the Sempra family of companies when we get to the Analyst Conference. Ryan We will definitely have some spotlight discussions around our progress both in our utilities and outside of our utilities on hydrogen, but perhaps I could turn it over to Justin to talk about as you think about creating more competitive project.
How are you thinking about hydrogen the either at port Arthur or Cameron Yeah Ryan.
Yeah, I think we are looking at hydrogen opportunities at all of our LNG facilities, particularly those in the Gulf Coast I think the other thing and you mentioned hackberry storage. The other thing that's interesting Ryan is we're also looking at carbon sequestration. So how can we not only take the carbon from our own liquefaction facilities, but.
Is there a way to develop the facility that can take carbon from some of the adjacent industries in that area of whether they'd be LNG or other things.
To help reduce reduce.
C O two there. So I think we are very excited about these opportunities. We are thinking along the same lines as you Ryan and I think as.
As Jeff mentioned, when we talked about innovation at the analyst day.
This is one of the areas that I think you'll see us focus on.
Appreciate the color maybe switching gears as COVID-19 related restrictions continue to ease how are you expecting O&M costs to trend in the back half of the year and are there any meaningful opportunities you have to redo some of your your overall costs across the businesses.
Yes. Thank you it's interesting.
Because of our geographic exposure to Mexico, Obviously, Texas here in California, and Louisiana, you can imagine Ryan that each jurisdiction has been a little bit impacted differently, we've been a little bit further behind in California. For example, we have not even begun to have or authorized discretionary business travel.
We also have not really had a return to the office program across simple yet so we're still working more in a virtual mode.
Per our central work force, which is in the field, but things that we're looking at you may recall over the last three years. We've had these programs we call. The Janus program, where we try to take costs, particularly out of the parent company. We've had a consistent process in 18, 19, and 20 of reducing costs at the parent company at our California.
<unk>, they're also being thought but one area that we're going to track well into the future Ryan is our real estate needs. We have a lot of office space.
Storage facilities, all across southern California, I know Alan So could this in Texas and once we get back to a more normalized return to work profile I think this will be an opportunity to look at our fleet vehicle program. We will look at our real estate costs. All of these also impact of our ongoing O&M.
Entertainment and travel costs as well and Trevor would you like to add anything to that in terms of of how youre thinking about it yes. Thanks, Jeff you know Ryan I would just point you to the appendix, where we kind of lay out where we had lower parent costs and that was really $15 million of lower operating costs at the parent. So you can can see where we're looking to try to find efficiencies of.
Across the board and hope to continue to do so.
Great and the last question for me in terms of the federal legislation, that's being discussed in Washington.
The additional investment opportunity around transmission curious your view around the necessary permits day to be able to execute on some of those opportunities and if theres any.
Assistance or policy that may be of supportive of <unk>.
Militating that further of transmission investment.
Yeah, It's a great question and I think it's one of the things that has kind of plagued kind of the policy environment about how you you address issues like this you've obviously seen it in the pipeline industry as well, but particularly because transmission of pipelines and Bob Interstate Commerce. That's one of the reasons that the federal government has such an important role here in terms of policymaking.
But a lot of those land in those rights issues fault of the state so.
This is something they're going to continue to grapple with we found no silver bullet in the last couple of decades in this area. What I would say is the ability to develop whether it's generation Spurs 230 kv lines 500 kv lines.
Little bit different by jurisdiction of whether Youre in Louisiana, or you're in Texas of Mexico relative to California, you May remember the largest of the last large scale transmission line. We built here, what's the Sunrise power line.
And it took up almost $1.9 billion to build 90 miles right. So it is a very costly challenging permitting project, particularly in California, and that's one of the reasons Ryan that we have a thesis that when you talk about transmission and distribution and the importance of grids towards accepting more renewables it will fall.
All of largely to upgrading existing facilities and making sure that more renewable clusters can access the existing infrastructure.
I appreciate it thank you.
Thank you Ryan.
We will go next to Anthony Carano with Mizuho.
Hey, good morning, Jeff Thanks for taking my question.
Hi, Anthony.
If I could follow up on Michael's question earlier, I mean, the company makes a compelling argument for the growth of the Sempra LNG platform and also that the.
Vacation of utility earnings from California, recently have seen really high multiples on LDC transactions similar to what Centerpoint has just announced and also maybe a transaction like Duke selling a slice of the Indiana utility.
Is that simple is that something sempra would consider selling a portion of its regulated utilities as the low source of capital cost of capital to either fund LNG expansion or organic or inorganic utility expansion.
Yeah, well look I appreciate the question of it we spend a lot of time thinking of opportunities to continue to improve our portfolio. We certainly wouldn't take any options off the table, but I would call. Your attention of the fact that if we're trading at 16 or 17 times now, we just announced the transaction a couple of weeks ago at of 21 P effectively right.
So raising 337.
The $1 billion at something close to.
You know of 13 to 13 four times EBITDA in 'twenty. One P. E that was the cheapest source of capital for US to fund our $32 billion capital program. So I can guarantee that we will be thoughtful in this area, but right now we have a tremendous amount of growth in front of our utility platform in California, and in Texas and right now.
Our focus is on making sure we can meet our organic capital program with the lowest lowest cost forms of capital.
And we'll provide updates as we go forward.
Great and then just lastly to that to that.
I mean, what limits the growth it seems that as you highlighted the company has done a great job of sourcing capital finding projects what limits that growth is at the tail impact at finding more projects just because it looks like the company is hitting on all cylinders, whether it's sourcing capital you talked about how Alan.
The Capex is just really hockey Sticked up since 2017, just one of the limitations there.
Well look I think the most important thing is that you align your capital programs with the regulatory priorities of your local commission right. So here in California, There was a big emphasis around safety and resiliency and reliability in Texas Allen's challenges of little bit more differently. He's got really a new.
Warmus growth challenges in terms of making infrastructure investments to accommodate growth all participated in the board call with Alan and Trevor recently at Encore and in the far rest of West region. They saw something close to five to five 3% quarter over quarter electricity growth. So.
I think the challenge will be different by jurisdiction I would say that's one thing that intrigued US is we've spent a lot of time not just investing in a high performing culture of building a.
The business system that allows us to effectively manage our businesses manage risk effectively invest in our culture and be good allocators of capital and I think we of the real opportunity to build a bigger platform of scale and I think it was one of the outcomes from the pandemic last year was this belief.
That it's important to be larger and a market leader in every market. So when you think about our position in California, you think about our position with the Allen's business in Texas and you think about simple infrastructure partner, we've added scale at all three of those growth platforms and what we want to do is continue to assert those advantages in those mark.
That's the meet the needs of our regulators of our customers I think we'll find opportunities around that along the way, but we feel very good about how our business and our portfolio is set up we believe to provide differential growth around the dividend and earnings going forward.
Yeah.
Great. Thanks for taking my questions and stay healthy.
Yes, I appreciate it same to you.
We'll go next to Jonathan <unk> with.
For beer.
Hi.
Good afternoon guys.
Good morning, Jonathan.
Couple of quick ones.
And I apologize if I missed this earlier, but do you anticipate starting to report.
As an entity anytime soon.
The EBITDA.
Reporting that or do we stay sort of within the current reporting segments.
Earnings focuses the main currency.
Well I would tell you that we've spent the time talking about this you've heard us on this call to talk about our three growth platforms and perhaps Trevor you could talk about the process. We've put in place going forward as we think about our segments and also our focus on the EBITDA or adjusted EBITDA going forward. Yeah. Thanks, Jeff So Jonathan you know as as you've seen.
We do have this platform that is the combination of two businesses.
At some point I think we would like to get to a sempra infrastructure partners as a segment that probably would not happen on an interim basis during the quarters, but we would do it on an annual basis, when we get to an end of the year period.
Right now I think its really there is on the overlap between <unk>.
Mexico, given the LNG assets that they have in Mexico, and the LNG business.
As we're putting this together and working through the structure of both internally here and as with KKR, we will be making that determination as to what the reportable segments would be on a prospective basis and I would also follow on of that Jonathan to say that we will be expecting to report adjusted EBITDA for Sempra infrastructure.
Okay.
All of that but the the segments may come later.
That's right I think you can see at least.
Until we get the transaction closed them through a period, we will still be reporting on the Mexican business and the LNG business, but then as we put the management team in place and as we manage that business prospectively. It will be managed as a single unit then at some point in the future.
Okay.
The one other thing when you announced the.
S IP stake sale in the 8-K, you talked about these the priority distribution rights. The KKR was getting based on deviations on project cash flows and I think there was something in the two about.
The priority distributions.
So it did not take.
The seven projects by a certain time, just any incremental insight you can give us.
Materiality of what the sort of Timeframes of the project would be.
Yes, what I would say is that we want to make sure that we're transparent in all of those 8-K filings.
We obviously have done a great amount of work about how we structure of these partnerships and it's not uncommon to have different distributions around different issues within our business remember loans I would tell you from our perspective, we do not view these as rising to the level of materiality in terms of the overall business.
So I would say I would characterize them as ordinary course and adequately describe disclose based on how we think about it.
Okay. Thank you.
Thank you.
Yes.
At this time there are no further questions I will turn the call back to Jeff Martin for additional or closing remarks.
Yes, I just wanted to close by thanking everyone for attending I know there was a lot of other calls today. So we appreciate you spending time with the separate team. We also look forward to providing you with further updates that are upcoming virtual 2021, Investor day, which we expect to be held on June 29th. So please take a moment at the end of today's call just the Mark that date on your cash.
Olander, it's something we always look forward to thank you again for joining us and feel free to reach out of our IR team with any additional questions per our custom this concludes today's call.
The.
This does concludes today's conference. Thank you for your participation you may now disconnect.
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