Q3 2021 Sempra Energy Earnings Call

November 5, 2021

Please standby were about to begin.

Good day and welcome to the Sempra third quarter earnings Conference call. Today's call is being recorded at this time I'd like to turn the call over to MS. Nelly Molina. Please go ahead.

Good morning, everyone and welcome to our third quarter 2021 earnings call for Sempra.

A live webcast of this teleconference and slide presentation is available on our website under the investors section.

We have several members of our management team with us today, including Jeff Martin Chairman and Chief Executive Officer, but I wouldn't be Halleck executive Vice President and Chief Financial Officer, Justin Bird, Chief Executive Officer of Central infrastructure, Faisal Khan, Chief Financial Officer of Sempra infrastructure.

Allen Nye, Chief Executive Officer of Goldcorp, Kevin's Agora group, President and Peter Walsh, Senior Vice President Controller, and Chief Accounting Officer.

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 these calls.

In the company's most recent 10-K and 10-Q filed with the SEC.

Although the 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 recalculation to GAAP measures. We also encourage you to review our quarterly report on Form 10-Q for the quarter ended September 30th 2021.

I would also like to mention that the forward looking statements containing these presentation speak only as of today November 5th 2021 and 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 four and let me hand, the call over to Jeff.

Thank you Nelly several years ago, we revised our business strategy to narrow the focus of the company to invest in energy infrastructure in markets, where we expect high growth today. There is a growing recognition about why these types of investments are increasingly important whether it's the current dislocation in European energy market.

That's where high prices for LNG in Asia, where even challenging weather events here at home the call for greater resiliency <unk>.

New investments in energy infrastructure are certainly needed.

Bipartisan support in Washington for the pending infrastructure Bill provides further validation of this trend.

In addition to help meet the needs of the market at Sempra, We certainly believe energy infrastructure right here in North America is a key driver of job creation and economic growth and competitiveness across the economy. Moreover, maintaining the modern flexible and secure network of electric transmission and distribution lines.

Natural gas pipelines and storage facilities.

As essential to delivering affordable and increasingly clean energy to U S businesses and consumers, while promoting growth across all sectors of our economy.

Against that backdrop will provide a business update today on the key activities in our California, and Texas Utilities also Justin Bird, our new CEO, a separate infrastructure will provide an update on how he's organize that business to capture exciting new growth opportunities.

This will be followed by a summary of our financial performance.

As you know we have a long track record of continuing to raise our guidance and then working hard to meet or exceed that guidance. This is a result of our high performing culture and continuous focus on improving the quality of our operations.

As a result of these efforts we expect to be at the upper end of our full year 2021, adjusted EPS guidance range and we're reaffirming our full year 2022 EPS guidance range.

Now please turn to the next slide where Justin will provide business updates.

Let me start with our California utilities and August <unk> filed an off cycle application with the CPUC to update its cost of capital effective January one 2022.

This application would increase <unk> equity ratio from 52% to 54%.

ROE from 10.2 to $10 five 5%, while also lowering cost of debt from 4.59% to 384%.

The application is accepted by the CPUC will supersede the automatic cost of capital adjustment mechanism.

In terms of timing <unk> has requested a decision in the first half of 2022.

Also at Socal gas, we recently announced agreements expected to resolve substantially all materials civil litigation against Socal gas and Sempra related to the 2015 Aliso Canyon natural gas storage facility leak with net after tax cash flows for socal gas expected to ultimately be up to.

$895 million after taking into consideration collection of existing insurance receivables and other adjustments. These agreements are important milestones that will help the community and our company work toward putting this difficult chapter behind us.

In addition, last month's Socal gas issued an important technical analysis underscoring the essential role of clean fuel networks that leverage existing gas infrastructure to help California achieve its net zero goals.

And more importantly to do so more affordably and more efficiently than other alternatives.

Moving now to Texas Oncor analysis updated 2022 to 2026 capital plan of approximately $15 billion.

It's important to note that this plan is a $2 8 billion increase over its 2021% to 2025 capital plan that was presented at the 2021 Investor Day in June.

At separate infrastructure, we recently finalized a series of transactions, including the sale of a noncontrolling interest to KKR.

Completing the exchange offer and subsequent cash tender offer to purchase the publicly owned <unk> shares.

Andy listing iron over shares from the Mexican stock exchange.

<unk> like to note related to the formation of separate infrastructure, we've updated our GAAP guidance range for 2021 to include items expected to be reflected in our fourth quarter results. You can find the GAAP reconciliation in the appendix to the slide deck.

Please turn to the next slide.

Before I hand, the call over to Justin I want to make one follow one point about encore, we've talked a lot in the past about being in the most attractive energy markets in North America, and Texas is certainly an example.

Oncor today operates in one of the fastest growing markets in the country with some forecast estimating that the Texas population will nearly double by 2050.

With strong macro fundamentals across its service territory.

<unk>, just announced a record high of five year capital plan of $15 billion.

This capital plan is primarily earmarked to meet load growth with two thirds of the plan dedicated to expansion of the company's transmission and distribution network.

Encores robust projected capital plan and rate base figures are expected to support economic development across its service territory.

Increases in generation interconnections strong premise growth and critical new investments in grid modernization and resiliency.

And finally encore now expects to grow its rate base to nearly $28 billion by 2026, which reflects a compound annual growth rate of about 8% over the five year period. The growth. The company is experiencing is just remarkable please turn to the next slide where I'll pass the call over to Justin <unk>.

The latest updates at separate infrastructure.

Thanks, Jeff I'm excited to present, the newly formed center infrastructure platform. We expect the formation of Sempra infrastructure, along with the financial strength of KKR to give us added scale to execute on a wide range of energy infrastructure opportunities across simpler infrastructure three business lines.

Since closing this transaction a month ago, we're already seeing the benefits of combining the two organizations through financial synergies and commercial optimization. For example, we've been able to restock our capital structure to create meaningful cost savings.

To capture new development opportunities, we've organized into three business lines, LNG and net zero solutions energy networks and clean power.

We expect this structure will enhance growth and quality execution. This also strategically positions us to benefit from North America's continued trend toward the clean energy transition by optimizing the natural partnership between natural gas and renewables to help meet de carbonization goals here in North America and abroad.

Energy infrastructure as Jeff described at the top of today's call is the focus of our development program.

Now please turn to the next slide where I'll briefly discuss how we're advancing growth in each of our business lines.

First at LNG and net zero solutions. The LNG market has recovered quite dramatically as evidenced by the spot market with record high prices being seen in Europe, and Asia and a recent uptick in long term contracting activity around the world.

With that constructive backdrop, our LNG development portfolio is expected to benefit from the strategic advantage of being situated on both the Pacific and Gulf Coast with direct access to both Asian and European markets.

As a reminder, LNG phase one was the only LNG export project in the world to take a final investment decision last year, which reinforces the competitive advantage of brownfield sites that can dispatch into the Atlantic and Pacific basins.

Now looking forward, we remain focused on the construction of ACA LNG phase one working with our partners to optimize Cameron Lng's current operations as well as the development of the Cameron LNG expansion and finally working on an exciting new Pacific opportunity in total La Bomba, Mexico called <unk>.

Pacific LNG.

LNG phase one engineering equipment fabrication and site preparation are well underway. The project is on time and on budget and we continue to expect first LNG production by the end of 2024.

At Cameron LNG. The current facility is running well and hit record production levels during the month of October.

Together with our partners, we are developing a projected 7 million tonnes per annum expansion project benefiting from 1 million tons per annum of Debottlenecking trains 123 with.

With innovations and train design, coupled with the high performance of trains one through three we expect this to be a very competitive capital efficient expansion.

In terms of next steps, we plan to move to feed early next year to file an amendment with FERC to build train four with electric drive in order to reduce scope, one emissions and to work closely with our partners as we advance toward.

Lastly, Vista Pacific LNG is a new development project located adjacent to our total Obama refined products terminal. This new project is expected to be a mid scale facility connected to two existing pipelines.

One of them being the high pressure pipeline system, we own in Sonora.

The project would source lower cost natural gas from the Permian basin for export to high demand Asian markets.

At our energy networks, and clean power businesses I'd like to highlight two important projects.

The expansion of the <unk> pipeline and the expansion of our <unk> wind farm.

The <unk> expansion is a pipeline project in development that is expected to increase gas delivery capacity to the Baja peninsula and play a critical role in supplying gas to the <unk> LNG phase one project.

We continued to advance a series of our cross border renewable projects that are expected to dispatch directly into California, specifically, the ESG expansion leverages the existing power transmission capacity that we own on the U S and Mexico border.

We're the only company that owns cross border transmission lines that can connect into the California electric grid and that allow us to have a competitive advantage in helping the state meet its growing need for new renewable energy resources.

I am excited about the team we've put together and about the business we're building at <unk>.

Unique opportunity, we're well situated to compete and we certainly expect to play a crucial role in investing in energy infrastructure right here in North America that supports the global energy transition.

Please turn to the next slide where I'll pass the call to Trevor to review our financial results.

Thanks, Justin.

Earlier. This morning, we reported third quarter 2021, GAAP losses of $648 million.

Or $2 <unk> per share.

This compares to third quarter, 2020, GAAP earnings of $351 million or $1 21 per share.

On an adjusted basis third quarter, 2021 earnings were $545 million or $1 70 per share.

This compares to our third quarter 2020, adjusted earnings of $432 million or $1 $40 49 per share.

Please turn to the next slide.

The variance in the third quarter 2021, adjusted earnings compared to the same period last year.

It was affected by the following key items.

$35 million of higher earnings at Sempra, Mexico, due to higher ownership of the Nova.

$35 million of higher CPUC base operating margin net of operating expenses at <unk> and Socal gas.

$29 million of lower losses at parent and other primarily due to lower preferred dividends and $29 million related to the energy efficiency program refund in the third quarter of 2020 at <unk> <unk>.

Please turn to the next slide.

We are pleased with our operational and financial performance this quarter and are focused on continuing to execute through the remainder of the year.

We also thank our strong year to date performance sets us up well to have a great year in 2022.

With that this concludes our prepared remarks, we'll now stop and take your questions.

Thank you if you would like to ask a question you may do so by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again star one for questions.

We'll take our first question from Jeremy Tonet with JP Morgan.

Hi, good morning.

Good morning, Jeremy.

Just wanted to touch on the LNG market a bit here interesting to hear about the new prospects in Mexico that youre talking about but just curious for your thoughts on the market right now we've seen some others kind of sign some contracts close to 20 years pretty recently here.

It seems like the market could be improving and I understand that there's two types of markets. The spa, obviously being very strong right now, but you guys are looking at the long term contracts and Theres. Some different dynamics that go on there just wondering if you could help us think through how the market looks at this point for the longer term contracts.

Yes, I appreciate having the opportunity to answer that question and I'll pass. It suggested here momentarily, but I would just start let's say than the LNG trade the spot market's roughly 30% of the overall market.

Thank the market backdrop is quite constructive we've been fairly bullish on LNG as many of you know for quite a long period of time and I would say that we're quite optimistic based upon the level and nature of our current conversations with Counterparties, but let me just pass. It suggests that maybe you can give an overview of what youre seeing in the market. Please Joseph Thanks, Jeff.

Hi, Jeremy.

Yes, I think we've seen a dramatic improvement in the market both on the spot market and I think importantly, youre starting to see some of these long term contracts come back.

Also importantly, we are seeing higher forward curves over the next few years for deliveries into Asia and Europe.

I'd say the final thing that we're seeing that I think is important as you have seen China's reintegrate into the long term market.

We are seeing.

A real uptick in our discussions.

<unk>.

In Asia, and Europe, and frankly, as well as South America.

Think we're going to see some exciting things coming out of our LNG portfolio and we should benefit from this constructive market backdrop.

Again, we think we have a competitive advantage the ability to dispatch directly into Europe and Asia.

Again over the long term.

It's nice to see that we.

We still see demand for LNG growing mid to high single digits, which supports our long term very bullish view on LNG development.

Got it that's very helpful. There. Thanks.

Maybe pivoting towards California here and thinking about the California investment opportunities in some of the reliability considerations that remain in focus.

Are there any near term opportunities you see for San Diego gas and electric.

At this stage and just you know you see some others in the state moving forward the different initiatives. What do you think our next steps for you guys there.

Yes, I'll give you a couple of thoughts were actually quite constructive on California.

Couple of things Ive mentioned as you may have seen the decision yesterday, where the PUC approved increase in the capacity utilization at Aliso Canyon.

Increased it from literally 34 Bcf to 41 Bcf and I would tell you. We are certainly committed to supporting a much cleaner economy in California, but the expectations today, Jeremy is that traditionally, California uses roughly 39% to 41% of natural gas for its electricity production in the wintertime.

Because of low hydro levels I think there is much more focused now on that being closer to 45%, we could see record utilization of <unk>.

Natural gas here in California in the winter and I think the PUC decision kind of reflects that more broadly I think both socal gas and <unk> have made a commitment to be a leader in the clean energy transition and this is going to inform not only our current investments, but how we're stacking capital investments going to the <unk> next year and Kevin maybe.

Talk about some of the things that youre seeing around battery storage and other things that could be near term opportunities for SG&A.

Thanks for that thanks for that Jeff.

Thanks, Jeremy Yes, we are seeing a lot of opportunities at both utilities, you know Jeff mentioned at the gas company, obviously, a lot of clean fuels opportunities around R&D and hydrogen, but you specifically asked about SD journey and so on.

At <unk>, we're seeing a big push in the state given what we've seen in the last couple of tight summers around more and more storage capacity.

Basking more generation capacity I think SD journey.

We'll have some.

Fillings in the next few weeks around more utility owned battery storage.

I think you'll also see.

A lot more activity in the coming months and years around electric vehicles to California's made a lot of bold commitments to move too much more strongly towards electric vehicles, and I think you'll see a lot of grid enhancements and grid modifications in that area, but I'd also remind you that climate resilience is a big thing here and so.

<unk> to be in a lot of wildfire mitigation opportunities to invest capital as well.

Got it that's helpful I'll leave it there thanks.

Thanks, Jeremy.

We'll take our next question from sharper Rosa with Guggenheim Partners.

Good morning Shar.

Hi, Good morning team, it's actually Constantine here for Shar. Thanks for taking my question.

Just following following up a bit on the LNG market question.

As you're putting out more discrete project pipeline are there the economics for the projects within that pipeline still kind of in the same low teens IRR range that you've targeted before for some of the discrete projects.

And how do those differ between the three categories that you outlined.

So I think youre talking about the return expectations across all three platforms.

Yes.

Yes, I would probably say is in.

In this midstream space, we target mid double digit Levered type of returns. We think those are consistent across all of those interestingly on the clean power side. You may recall that we have seen returns come in here in the United States is one of the reasons, we exited that business two years or three years ago in Mexico because.

Of our border position and the access we have to two very important transmission lines that bring power into the United States. We think we have a real competitive advantage in that region. So we expect relatively higher returns, which you might find in renewables here in the United States. So I would stick to say an overall adjustments portfolio is going to manage toward mid double digit.

Equity returns one other thing I'll mention too to the broader LNG story.

And I got back from our recent trip to Europe, where we visited Warsaw, and Dusseldorf and Berlin in Brussels and in other places there is a tremendous amount of recognition in Europe about the role for natural gas and specifically LNG and there is certainly a new risk premium being assigned to pipeline gas theres, even discussions at the high.

This level.

The EU about creating a strategic natural gas reserve, we've got a team on the ground next week in Asia. So I think going back to the original point with Jeremy There is a tremendous amount of conversations today and I think just continues to reinforce our bullish case for LNG.

Yeah.

Excellent that's great color and.

I guess also shifting to the updates and regulated capex.

We're obviously seeing a healthy oncor update and do you anticipate a similar kind of intra year cadence of an update for California, and maybe can be a little bit more specific.

As youre thinking about the opportunities that you outlined is there any anticipation that kind of realign the focus with policy both state and federal in the next iteration of the <unk>.

<unk> filings in <unk> I suppose.

Yes, let me start a little bit more broadly I think theres been a lot of interest as people have engaged with us over the last couple of months about having better visibility into separate as long term growth rate you've heard us talk about our track record in the past of growing this business, whether it's a 10 year period, a 20 year period at an EPS growth rate of around 7% or 8% and I must tell you.

We feel fairly confident in our ability to produce similar growth in the future of our seven to 10 year period of time and part of that is bolstered by this continued point that we make about the quality of the markets. We're participating in right. So you've got the number one market in America is California, and our number two market is Texas and I think Alan.

Has a remarkable story in Texas, which keeps getting better and to your point, we're going to have an opportunity to restock our capital program here in California as part of our <unk> filing next year.

You should expect to see us to make a filing.

Following requests around many of the things that Alan is doing which is around resiliency modernization of the grid and making sure. We're making those investments today that are ensure that our infrastructure is future ready for what we need to in the future such as hydrogen and other things on the system. So we have a fairly clear pathway to grow the business.

California, very similar to Texas, and I think one of the things Youre seeing on today's call is a pretty bullish case by just at about what we can do it in a separate infrastructure business as well.

I think thats, an abundance of clarity thanks, Jeff.

Thanks Constantine.

We will take our next question from sure Josh <unk> Chopra with Evercore ISI.

Good morning, Good morning, Hey, good morning. Thank you for taking my question just I wanted to go back to the analyst day.

And you had specifically disclosed roughly $2 billion to $3 billion in additional capex.

Right.

At the utilities, so with this update.

What portion of that Capex.

You've locked in or have included in the plan.

Yes. So I think there were a couple of things that I have to make sure I don't misunderstand. Your question. The difference between the five year strip from Encore that we presented in June which went through 2025 as compared to the new five year strip, which goes through 2026, it's a difference of $2 8 billion. We also.

Talked about the analyst day, the intra period change in 2021 and 2022 from the prior year's period. So I think that you've seen two things take place year over year, you've seen the 2021 and 2022 Capex for our utilities increase but since June of this year <unk> seen.

Alan's numbers increased by $2 8 billion. So hopefully that's helpful.

Yeah absolutely.

In terms of like the Oncor Capex itself I think the number out there was like $775 million to $1 3 billion.

Hum.

Let me address let me, let me address that and hopefully.

This will be helpful. So a couple of points the five year strip.

Going back to June.

<unk> has increased about two 8 billion per Alan's organization, and Alan had an incremental bucket separate from that of $775 million to $1. Two 7 billion and that incremental bucket has been unchanged and maybe Allen it would be helpful. If this is the right time.

Maybe do things for our two things for our lithium audience, Alan maybe talk a little bit about what's in your $15 billion Capex plan and separately, what's not in the plan related to future rule, making and related to your incremental bucket, which I think is the nature of the question.

Sure Jeff. Thanks, So I think you described it very well I mean, what we've done today has announced another $1 billion of oncor capex over five years or two eight since the Investor day like Jeff said.

That has really backed up by what Jeff mentioned in his opening remarks, just tremendous growth that we can talk about across our system in a minute.

But that 15 over five is our new plan to Jeff's point, a couple of years ago. We introduced this idea that we had this other bucket this incremental bucket of potential capex.

And to Jeff's point that incremental bucket, which we I think announced at 725 to 1.2 dollars 75.

It remains there and available and so how does that work well what we do every year when we sit down with our board and come up with what is now the $15 billion plan there'll be some projects that come out of that incremental bucket and go into that $15 billion plan. However at the same time. We're also looking out further on the horizon and saying things that we think can be included.

In that second bucket, which is the incremental bucket.

That is separate and apart as Jeff said, we have announced a five year $15 billion plan Thats, where we are today.

We in addition have another bucket, which remains around I mean these are estimates of 725 to 1.2 dollars 75 that is available and in that incremental bucket in case, we get to this in a minute.

Are also things another thing that we've added to that bucket as potential capex.

Related to legislative activities in Texas, and those fall in several categories.

One is this possibility that we can participate a little bit in the storage market in Texas is a 100 megawatts available for the entire state. So we think there is an opportunity there are about $20 million for Rps and we're hopeful that that will grow over time.

The second Bill SB, 12, 81, which related to Ccs.

An economic benefit test specifically related to the CCN.

We think there's about probably $50 million a year.

And those incremental transmission projects.

On the emergency generation side I know, there's been a lot of interest in that we're working through.

Wiring some capital leases on the emergency generation side right now we're planning on having about 10 megawatts under contract.

By January one the Capex impact of what we do on emergency Gen. Like several of these categories will depend on how much we ultimately end up leasing.

But right now we're seeing kind of five megawatt emergency Gen two to five megawatts around $2 million.

And bigger 30 megawatt kind of on the back of trailers around $10 million. So we'll make we'll make an appropriate and reasonable decision for our customers in the ERCOT market on how much of that will require we will acquire and that will determine the ultimate capex impacts of emergency Jen.

Then on similar to that same bill also provide us the opportunity to acquire long lead time equipment that we might need for service restoration, we think we're probably around what I would call it $10 million for general kind of plant for 2022.

With an additional potential 100 on top of that for the remainder of the five year plan $100 million worth of equipment, but again that ultimate number is going to 10 10.

$10 million on general equipment is one thing, but if we get into stack comps in sbcs and some of the larger equipment.

That equipment goes from it can be anywhere from $50 million to $70 million per site.

So we're still looking at all these legislative opportunities Thats kind of just a general.

Approach and what we're thinking right now on each of those and as I said. This these dollars associated with potential capex associated associated with the legislation coming out of a storm here are right now and our incremental bucket, but as we refine them.

They will ultimately be moved at some point could be moved at some point.

Our five year plan.

Jeff is that what you are asking for it is and I will tell you. The reason there is so much enthusiasm from our team as we've seen a $2 $8 billion restocking of that capital plan up to 15 billion since June.

Had no impact on the incremental bucket, which is still there as Alan described and it hasnt picked up yet some of the forward looking opportunities around we will make any legislation. So I think I'd say, it's a very important story in the last thing Alan you might speak to is the expected impact on rates.

You bet, Jeff So here's here's how the rate impact works of the the $15 billion over five that we're talking about today about two thirds of that is growth related so new customers more or less or expansion of customers.

Of the increase that we're talking about today, the $1 billion increase about 80% of that increase is directly related to growth and I should mention also 97% of that total amount of the 15 billion over five as tracker eligible.

So as we make these investments keep in mind that we are presently the low cost investor owned utility in the state we have the lowest rates of all the investor owned utilities, we believe that because of the substantial growth we're seeing on our system, even after 15 billion over five.

We will remain the low cost provider or at least close to the low cost provider on the right side of that chart.

The rates for the all the investor owned utilities.

Generally I think we're probably thinking rates could increase somewhat similar to inflation.

But again, we're the low cost provider now and we believe will be the low cost provider at the end of five years at <unk> 15 billion. Thanks, Thanks, a lot Alan.

Okay. Thank you both appreciate it.

Breaking that down for us thank you.

Thank you.

We will take our next question from Stephen Byrd with Morgan Stanley.

Hi, good morning, Hi.

Hi, good morning, Thanks, so much for taking my questions.

I wanted to talk about federal legislation and in particular green hydrogen, though there there are other elements here that could benefit San Brian you all have been innovators in a number of areas that could get support at the federal level and I was just curious at a high level I know.

The exact composition of the Bill could change and obviously, we're not even sure it's going to pass it all but to the extent that we did see kind of the framework. That's been laid out what are the areas that you're most excited about in terms of what that support might mean in terms of accelerating your plans or change in your plans.

Yes, I appreciate having the opportunity to answer that question I think back in 2018, you may remember Steven that there was a lot of discussion around being in regulated business is under unregulated businesses and I think we took the opportunity to kind of redefine an investment class that set.

At the end of the day. These are all energy infrastructure investments and how you make money may be different in the regulated framework versus outside of the regulated framework can we really went to ground. This idea of being ahead of others in defining the markets where energy infrastructure will grow the most and I think in my opening remarks today I tried to really emphasize the point that energy infra.

Structures quite hot in Europe, and Asia, and the United States. So I think there is really well positioned and the infrastructure bill that you're referring to is certainly strong confirmation bias of the importance of this to the United States and there is really a tailwind for sempra around this clean energy transition. So four topics I think come out today's bill.

Could pass as early as today out of the house, one of which is we're tracking the private activity bonds.

These are ones that allow you to finance carbon sequestration and carb carbon storage devices, we think thats important for the sector.

He says there will not be a net zero 2050 without carbon sequestration and Thats. One of the reason that just since business is focusing on this opportunity second to your very point Green hydrogen is a big part of our country's future. We've made a decision to participate in all of the appropriate trade associations, we've got simple.

10 to 12 different R&D projects and hydrogen today, but specifically in the legislation that bill contemplates for regional hydrogen hubs in the country. We think this will be important as you think about distribution centers and one thing that people, sometimes Miss Steven is the number one manufacturing facility in United States.

Wide margin is the La basin and the number one industrial segment for the United States as the Gulf region between Texas and Louisiana. So both of these are areas that geographically we have a vested interest in I think we've got a leadership interest and so I think hydrogen in both of those markets will be imported two other quick points from today's.

One is the focus on.

The wildfire management, we talk about to Stephen a lot in California, obviously, a western region issue is an issue today in Europe, and Australia, and Ukraine in different parts of the world, but to Bill does contemplate support for vegetation management, and improving resiliency, which is a very important topic here in California, and lastly, there's a lot of <unk>.

And that bill in electric vehicles.

Trevor not participated in the strategy session with.

Alan's Board last week in Texas, the electric vehicle market in Texas is enormous today, there's about 30000 vehicles on encore system.

In comparison.

<unk> 20th the size of Encore system here at <unk> and they've got 70000 vehicles on our system. So I think electric vehicles will be very very important and that the bill is very specific.

Funding opportunities all across the country to promote electric vehicles. So those are the four we're probably following most closely but we do share your optimism around green hydrogen.

Well, that's a really comprehensive answer. Thank you very much helpful to kind of understand the areas you're focused on and shifting gears just back to LNG you raised a lot of good points earlier about.

The strength of this market.

Excitement around this this market and you guys are well positioned.

Does that sort of level of excitement globally provides additional opportunities to either monetize some of your assets or two to find just very low cost ways low cost of capital ways to pursue additional growth like the additional opportunity in Mexico, you mentioned in other words.

Could this could this be both a way to monetize as well sort of.

Use other people's money to to help achieve better growth and better better returns overall.

Yes.

The things I would start with saying as the priority of our capital program as our U S utilities and what we wanted to do is be able to grow our utilities at a rate faster than our peers and do that without coming back to the capital markets to issue some equity and Thats one of the reasons that the KKR transaction was so important it gave us a chance to crystallize it.

Highlight value in that business and recycle capital back into reducing parent debt and meeting the capital needs like Alan described today, but I would tell you I don't think we're finished write that business now has been valued at roughly an enterprise value of 25 billion. So we think about going forward. We think there will be strategic opportunities to bring that business to the market with those.

Those are conversations we would obviously have with KKR and to your point, if we had the chance to further diversify the capital structure at higher valuations. That's something you should look for us to do and we will be looking.

Under Feisal and Justin's leadership at bringing in project equity on some of these projects to reduce the call of capital from separate infrastructure, but right now they are very very focused on growth and theres a lot of enthusiasm about what they think they can accomplish.

That's great. Thank you very much that's all I had thank you for being on the call.

We will take our next question from Michael Liberties with Goldman Sachs.

Good morning, guys. Thanks for taking good morning, Jeff. Thanks for taking my questions one for Tom one long term one.

The short term one is can you remind us whats in guidance, what's assumed in your 2020 guidance in your kind of growth trajectory for what happens in the California cost of capital docket and the mechanism. That's question a question will be longer term on potential new Mexico LNG project.

What kind of pipeline development is needed to get the gas from the Permian to the site. Thanks Scott.

Yes. Thank you I'll pass the pipeline question in a second suggested it's a really positive story, there actually but I had mentioned obviously many of you on the call I've been following the cost of capital developments, both for <unk> and Edison I'll remind you that the socal gas mechanism did not trigger we're going to follow this closely I think the key gating item that everyone in.

The state has fallen as the forthcoming <unk>.

Okay memo that we expect from the commission, but in terms of forward guidance.

What we've indicated in the past Michael was that whether we get the automatic triggering mechanism or whether our applications approved is contemplated within our guidance for next year and because of some other steps that the business has taken to mitigate and become more maybe mitigate costs and become more efficient it's probably in the range of five to 10 cents either.

Way, but well within our guidance range that we would not expect to update guidance independent of that outcome.

And then just and I think.

Other times, particularly in domestic LNG development, there's always issues related to pipeline development I think it would be helpful to help our listening audience better understand what's unique about the pipeline system that supports Vista Pacifica, yes. Thank you. Thanks for the question Michael.

Yes, the specific wood.

Effectively source gas from the Permian from the U S basin and deliberate.

And in the form of LNG to Asia, there are two existing pipelines.

Basically converge very close to the site. So there would be a very small spur type pipeline that we would build that we connect Vista Pacific go to existing pipelines, both of which are under utilized on a transmission capacity basis.

No.

Yes, I think very little pipeline construction associated with this this is part of the strategic location of the project is its proximity to pipelines and the fact that two of those pipelines are very underutilized.

Got it and just one quick follow up are you you will need LNG or potential LNG project competing as you realize those those pipes.

Yeah.

Sorry, Michael can you repeat that question. He is asking is Europe project. The only one that's competing relative to those pipelines.

There is another there is another existing development.

Development project that is north of that.

<unk> is trying to get some capacity from one of those pipelines, which will which we own we own the pipeline yes.

Got it thanks guys.

Thanks, Michael.

We'll take our next question from Ryan Levine with Citi.

Good morning.

Given that political answer hey, Jeff given the political uncertainty related to Cfe contracts in Mexico are there any proactive steps.

Our broader temporary organization is considering to mitigate the counterparty risk or are there broader opportunities.

To capitalize on the growth in Mexico, and then related.

Temporary have any differentiated impact relative to par.

Partners in.

In any policy change in Mexico in conjunction with the KKR agreement.

Yeah, I would start with your second question, which is you know KKR has their own infrastructure presence in Mexico, both on the refined product side of the value chain as well as with renewables.

They are certainly collaborating with us constructively with Cfe. So thats been helpful. I can't make a couple of comments to Ryan that because of our headquarters being here in San Diego, you'll recall that we've been investing pretty consistently down in Mexico for close to 25 years and what excites US back then still excites US today is <unk> got about 100 <unk>.

30 million consumers, it's one of the fastest growing consumer markets in the Western Hemisphere, and most importantly, it's the largest energy export partner for the United States at about 7% to eight Bcf per day, and I think even though we've got kind of leading scale and expertise at separate infrastructure were still very selective about the projects, we expect to invest.

And even the Vista Pacifica project that Justin was describing those capacity releases releases on some of those pipelines that would be needed would come from the government and this is really a government sponsored project and one that <unk> been quite public about supporting from a permit and pipeline capacity standpoint, but tier issue I think is quite tough.

Typical that there are reforms being proposed in electricity market.

Do you expect to see the lower house vote on that in the fourth quarter, but it was not clear the legislature until probably April of next year, when we handicap that as a low probability and what's interesting about this is those reforms largely targets. So the point you've made Ryan generation assets that are connected to the <unk> system.

And today, we have a relatively small footprint in generation across all of separate because we're a T&D business I think the electric investments in Mexico account for roughly 1% of our consolidated earnings and more importantly, the vast majority of all of those projects something like 80% are on the border with California are not connected.

The cfe and dispatch directly into the Cal ISO but I would leave you with one thought which is probably the most important.

We've made the decision several years ago that what we really want to do is help president Lopez obrador be successful. So the majority of our conversations are focused on ways that we can partner with his cabinet to make pemex be successful and make CFPB successful. So when you see us announce projects like this the pacifica is because those will be done largely.

In tandem with the objectives of the government and that's one of the reasons, we still feel good about those types of projects in Mexico.

I appreciate the color. Thank you.

Thank you Ryan.

We will take our next question from Paul Zimbardo with Bank of America.

Good morning, Paul Good morning team.

I just had a question if you could discuss at a high level just how you're seeing some of the latest cost estimates change for the brownfield and Greenfield development project. However, you want to frame it what that percentage changes.

Think about the latest commodity backdrop.

So I think there's two parts to that question number one is this issue of how much inflation are we seeing in terms of how we source our soft and hard cost at any of our projects included in our utilities and we've got obviously some built in mechanisms that help us with that on the utility side and Justin's business, you'll recall that we're very well.

On EPC contracts, so the procurement and exposure to cost we shift that risk to.

The construction contractor and Thats why its important to have strong credit counterparties, but in terms of brownfield versus Greenfield I think the way I would answer it at a very general level to say brownfield projects to always have a cost advantage and.

In Greenfield projects can be.

Also quite viable typically they indeed be need to be done at scale and port Arthur would be an example of that but coming back to our projects think about this.

For us to have the opportunity to turnkey six to seven Bcf six to seven MTA at Cameron expansion. Our view internally is it could be one of the lowest cost projects for new capacity in the world. So our likelihood of going forward there.

As being relatively high and that's why we've got a 100% of the Mou is in place to go to the next step and moved to heads agreements in the Sba's. There and then it does to Pacifica. This is the type of project very similar to <unk> phase one our expectation is it will be oversubscribed.

Is a greenfield project, but the geographic location to be able to have direct pipeline access from two different pipelines to law and to be able to dispatch directly into the Pacific will be a tremendous competitive advantage, where we market that project.

Okay now that's great.

Shifting back to encore. Thank you for that type of detailed breakdown.

Given the robust opportunity set should we think about October 2022 Board meeting is the next opportunity for a fresh or should we think more of the 2021 pattern, where theres update sprinkled throughout the year.

It's such a great question and I hate to foreshadow that we're going to be sprinkling things throughout the year, but I'll give alan great credit I mean, it wasn't that they had an ongoing process just to update their plan. They were looking at issues in the market around inflation and how they saw supply chain issues in advance so the real Genesis of al and updating.

Capex guidance was he came back to the board so that they can make forward purchases that allowed them to keep their 2021 and 2022 capital plans in place. So what they were doing as they were reaching forward to source what they needed to execute those capital plans. So I think you would expect his team to do something very similar is it a wash in the marketplace. If there's.

<unk> suggests that they will and I think he made a great case for we didnt cannibalize that incremental bucket list. That's been replenished as we look going forward I think that they will continue to look for opportunities to take price risk away from their capital program and ensure that they can deliver the plan they have on the street today.

Okay, great to hear thank you all thank you for joining us.

We will take our next question from Craig Shere with Tuohy brothers.

Hello, Craig.

Good morning your time.

So do you see potential for total will bump or jumping ahead of port Arthur and the New project Q and did I hear correctly that the focus will be unsecured equity from partners outside of us IP where needed.

External equity is required for construction of three simultaneous accretive LNG product projects.

Phase one kind of in phase two and of course something else.

Yes, a couple of things here.

Total the total of <unk> project will be very similar in scale to eco phase one kind of in that three to 4 million ton per annum size.

Definitely can jump ahead of port Arthur So that's the answer to your first question. We certainly are quite bullish both on Cameron expansion, which is 6% to 7% and tpa as well as the Vista Pacific project, which is closer to 4 million tonnes per annum in terms of.

We're very comfortable with the level, we're at today with KKR certainly if we saw opportunities to diversify the capital structure at separate infrastructure at points in the future at higher valuations, we would evaluate that against the opportunity to bring in equity down at the project level, but definitely there is an interest to attract equity.

The pace at the project level, given the size and scale of our expectations around LNG.

Great that's very helpful and my last question.

Maybe Justin.

You want to opine, but we've kind of noticed that equity cargo capacity that can be delivered years in advance of new train construction appears to be a major selling point for new long term contracting.

But like the latest venture global announcements included some short term supply off.

Their calcasieu pass.

How do you see this market dynamic playing out with respect to <unk>.

Ip's portfolio.

Yeah. So.

Eight point, Craig and I think you even saw <unk> deal today had kind of a lead into the bigger capacity coming at the long term. So I would say I wish I had capacity I could sell right now to bridge some of the construction on these other projects.

Because I do think it is a competitive advantage to the market is very hot right now and people are looking for volumes in the next few years I think for us.

It's a question of maintaining our financial discipline potentially.

Potentially looking for partners.

Where we can provide some bridge volumes into.

Volumes coming from our facilities.

And then looking for.

Potential excess volumes that could be available.

Via the partners out of Cameron or.

<unk> phase one comes online looking for some additional volumes as production actually starts and we see what production looks like so.

Yes, I think you raise a great point.

Having having volumes to bridge into these long term contracts I would say is a competitive advantage and that's something that we're focused on and looking for opportunities to define those types of bridging arrangements.

Alright, Thank you very much.

Thank you that will conclude our question and answer session. At this time I would like to turn the call back over to Jeff Martin for any additional or closing remarks.

I just wanted to thank everyone for joining our call. This morning, we're certainly pleased to join the <unk>.

<unk> conference virtually next week and we're looking forward to spending time with as many of you as possible. Thank you again for joining us feel free to reach out to our IR team per custom with any additional questions. This concludes today's call.

Thank you that will conclude today's conference. We appreciate your participation.

Yeah.

[music].

Please standby were about to begin.

Good day and welcome to the Sempra third quarter earnings Conference call. Today's call is being recorded at this time I'd like to turn the call over to MS. Nelly Molina. Please go ahead.

Good morning, everyone and welcome to our third quarter 2021 earnings call for Sempra.

A live webcast of this teleconference and slide presentation is available on our website under the investors section.

We have several members of our management team with us today, including Jeff Martin Chairman and Chief Executive Officer, but I wouldn't be Harlech executive Vice President and Chief Financial Officer, Justin Bird, Chief Executive Officer of Sempra infrastructure, Faisal Khan, Chief Financial Officer of Sempra infrastructure.

Allen Nye, Chief Executive Officer of Encore, Kevin's Ogara group, President and Peter Walsh, Senior Vice President Controller, and Chief Accounting Officer.

The company's most recent 10-K and 10-Q filed with the SEC.

Although the 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 these call put out we constellation to GAAP measures. We also encourage you to review our quarterly report on Form 10-Q for the quarter ended September 32021.

Whether it's the current dislocation in European energy markets, where high prices for LNG in Asia, where even challenging weather events here at home the call for greater resiliency.

New investments in energy infrastructure are certainly needed.

Bipartisan support in Washington for the pending infrastructure Bill provides further validation of this trend.

In addition to help meet the needs of the market at Sempra, We certainly believe energy infrastructure right here in North America is a key driver of job creation and economic growth and competitiveness across the economy. Moreover, maintaining a modern flexible and secure network of electric transmission and distribution lines.

Natural gas pipelines and storage facilities is essential to delivering affordable and increasingly clean energy to U S businesses and consumers, while promoting growth across all sectors of our economy.

Against that backdrop, we will provide a business update today on the key activities in our California, and Texas utilities.

Also Justin Bird, our new CEO, a separate infrastructure will provide an update on how he's organize that business to capture exciting new growth opportunities.

This will be followed by a summary of our financial performance.

As an overview for the quarter, our strategic focus on investing in energy infrastructure across each of our three growth platforms together with our commitment to operational excellence continue to drive strong financial performance. As you know we have a long track record of continuing to raise our guidance and then working hard to meet our.

Seed that guidance. This is a result of our high performing culture and continuous focus on improving the quality of our operations.

As a result of these efforts we expect to be at the upper end of our full year 2021, adjusted EPS guidance range and we're reaffirming our full year 2022, EPS guidance range now.

Now please turn to the next slide where adjusted will provide business updates.

Let me start with our California utilities and August <unk> filed an off cycle application with the CPUC to update its cost of capital effective January one 2022.

This application would increase <unk> equity ratio from 52% to 54%.

ROE from 10, two to $10 five 5%, while also lowering cost of debt from $4 five 9% to 384%.

The application is accepted by the CPUC with supersede the automatic cost of capital adjustment mechanism.

In terms of timing <unk> has requested a decision in the first half of 2022.

Also at Socal gas, we recently announced agreements expected to resolve substantially all material civil litigation against Socal gas and Sempra related to the 2015, Aliso Canyon natural gas storage facility leak.

With net after tax cash flows for socal gas expected to ultimately be up to $895 billion. After taking into consideration collection of an existing insurance receivables and other adjustments. These agreements are important milestones that will help the community and our company.

Work toward putting this difficult chapter behind us.

In addition, last month's Socal gas issued an important technical analysis underscoring the central role of clean fuel networks that leverage existing gas infrastructure to help California achieve its net zero goals and more importantly to do so more affordably and more efficiently than other alternatives.

Moving now to Texas Oncor analysis updated 2022 to 2026 capital plan of approximately $15 billion.

It's important to note that this plan is a $2 8 billion increase over its 2021% to 2025 capital plan that was presented at the 2021 Investor Day in June.

At separate infrastructure, we recently finalized a series of transactions, including the sale of a noncontrolling interest to KKR.

Completing the exchange offer and subsequent cash tender offer to purchase the publicly owned <unk> shares and de listing <unk> shares from the Mexican stock exchange.

Additionally, like to note related to the formation of set for infrastructure. We've updated our GAAP guidance range for 2021 to include items expected to be reflected in our fourth quarter results. You can find the GAAP reconciliation in the appendix to the slide decks.

Please turn to the next slide.

Before I hand, the call over to Jeff and I want to make one follow one point about encore, we've talked a lot in the past about being in the most attractive energy markets in North America, and Texas is certainly an example oncor.

Oncor today operates in one of the fastest growing markets in the country with some forecast estimating that the Texas population will nearly double by 2050.

With strong macro fundamentals across its service territory Encore, just announced a record high five year capital plan of $15 billion. This capital plan is primarily earmarked to meet load growth with two thirds of the plan dedicated to expansion of the company's transmission and distribution network.

Encores robust projected capital plan and rate base figures are expected to support economic development across its service territory.

Increases in generation interconnections.

Strong premise growth and critical new investments in grid modernization and resiliency.

And finally encore now expects to grow its rate base to nearly $28 billion by 2026, which reflects a compound annual growth rate of about 8% over the five year period.

The growth. The company is experiencing is just remarkable please turn to the next slide where I'll pass the call over to Justin to review the latest updates at Sempra infrastructure.

To capture new development opportunities, we've organized into three business lines, LNG and net zero solutions energy networks and clean power.

We expect this structure will enhance growth and quality execution.

This also strategically positions us to benefit from North America's continued trend toward the clean energy transition by optimizing the natural partnership between natural gas and renewables to help meet decarbonization goals here in North America and abroad.

Energy infrastructure as Jeff described at the top of today's call is the focus of our development program now.

Now please turn to the next slide where I'll briefly discuss how we're advancing growth in each of our business lines.

First at LNG and net <unk> solutions, the LNG market has recovered quite dramatically as evidenced by the spot market with record high prices being seen in Europe, and Asia and a recent uptick in long term contracting activity around the world.

Mr Pacific LNG.

LNG phase one engineering equipment fabrication and site preparations are well underway. The project is on time and on budget and we continue to expect first LNG production by the end of 2024.

At Cameron LNG. The current facility is running well and hit record production levels during the month of October.

Together with our partners, we're developing a projected 7 million tonnes per annum expansion project benefiting from 1 million tons per annum of Debottlenecking trains 123 with.

With innovations and train design, coupled with the high performance of trains one through three we expect this to be a very competitive capital efficient expansion.

Lastly, Vista Pacific LNG is a new development project located adjacent to our total of Bumbaugh refined products terminal. This new project is expected to be a mid scale facility connected to two existing pipelines one of them being the high pressure pipeline system, we own in Sonora.

The project with source lower cost natural gas from the Permian basin for export to high demand Asian markets.

At our energy networks, and clean power businesses I'd like to highlight two important projects.

The expansion of the <unk> pipeline and the expansion of our <unk> wind farm.

We continue to advance a series of our cross border renewable projects that are expected to dispatch directly into California, specifically, the ESG expansion leverages the existing power transmission capacity that we own on the U S and Mexico border.

We're the only company that owns cross border transmission lines that can connect into the California electric grid and that'll allow us to have a competitive advantage in helping the state meet its growing need for new renewable energy resources.

I am excited about the team we've put together and about the business we're building at.

That's a unique opportunity we're well situated to compete and we certainly expect to play a crucial role in investing in energy infrastructure right here in North America that supports the global energy transition.

Please turn to the next slide where I'll pass the call to Trevor to review our financial results.

Thanks, Justin.

Earlier. This morning, we reported third quarter, 2021, GAAP losses of $648 million or.

Or $2 <unk> per share.

This compares to third quarter, 2020, GAAP earnings of $351 million or $1 21 per share.

On an adjusted basis third quarter, 2021 earnings were $545 million or $1 70 per share.

This compares to our third quarter 2020, adjusted earnings of $432 million or $1 $40 49 per share.

Please turn to the next slide.

The variance in the third quarter 2021, adjusted earnings compared to the same period last year.

It was affected by the following key items.

$35 million of higher earnings at Sempra, Mexico, due to higher ownership of the Nova.

$35 million of higher CPUC base operating margin net of operating expenses at <unk> and Socal gas.

$29 million of lower losses at parent and other primarily due to lower preferred dividends and $29 million related to the energy efficiency program refund in the third quarter of 2020 at <unk> <unk>.

Please turn to the next slide.

We are pleased with our operational and financial performance this quarter and are focused on continuing to execute through the remainder of the year.

We also thank our strong year to date performance sets us up well to have a great year in 2022.

With that this concludes our prepared remarks, we'll now stop and take your questions.

Thank you if you would like to ask a question you may do so by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again star one for questions.

We will take our first question from Jeremy Tonet with J P. Morgan.

Hi, good morning.

Good morning, Jeremy.

Just want to touch on the LNG market a bit here interesting to hear about the new prospects in Mexico that youre talking about but just curious I guess for your thoughts on the market right now we've seen some others kind of signed some contracts close to 20 years pretty recently here and so it seems like the market could be.

Improving and I understand that there's two types of markets. The spa, obviously being very strong right now, but you guys are looking at the long term contracts and there's some different dynamics that go on there just wondering if you could help us think through how the market looks at this point for the longer term contracts.

Yes, I appreciate having the opportunity to answer that question and I'll pass. It suggested here momentarily, but I would just start by saying in the LNG trade the spot market's roughly 30% of the overall market. We think the market backdrop is quite constructive we've been fairly bullish on LNG as many of you know for quite a long period of time and I would say that we're quite optimistic based upon.

The level and nature of our current conversations with Counterparties, but let me just pass. It suggests that maybe you can give an overview of what youre seeing in the marketplace Justin Thanks, Jeff.

Hi, Jeremy.

I think we've seen a dramatic improvement in the market both on the spot market and I think importantly, youre starting to see some of these long term contracts come back.

Also importantly, we are seeing higher forward curves over the next few years for deliveries into Asia, and Europe, and I'd say the final thing that we're seeing that I think is important as youre seeing China's reintegrate into the long term market.

We are seeing.

A real uptick in our discussions.

Both in.

In Asia, and Europe, and frankly, as well as South America. So I think we're going to see some exciting things coming out of our LNG portfolio and we should benefit from this constructive market backdrop.

Again, we think we have a competitive advantage the ability to dispatch directly into Europe and Asia.

Again over the long term.

It's nice to see that we.

We still see demand for LNG growing mid to high single digits, which supports our long term very bullish view on LNG development.

Got it that's very helpful. There. Thanks.

Maybe pivoting towards California here and thinking about the California investment opportunities in some of the reliability considerations that remain in focus.

Are there any near term opportunities you see for San Diego gas and electric.

At this stage and just you know you see some others in the state moving forward in different initiatives. What do you think our next steps for you guys there.

Yes, I'll give you a couple of thoughts were actually quite constructive on California.

A couple of things Ive mentioned as you may have seen the decision yesterday, where the PUC approved increase in the capacity utilization at Aliso Canyon. Thanks to increase it from roughly 34 Bcf to 41 Bcf and I would tell you. We are certainly committed to supporting a much cleaner economy in California, but the expectations today.

Jeremy is that traditionally, California uses roughly 39% to 41% of natural gas for its electricity production in the winter time because of low hydro levels. I think there is much more focus now on that being closer to 45%, we could see record utilization of net of natural gas here in California in the winter.

The PUC decision kind of reflects that more broadly I think both the socal gas and <unk> have made a commitment to be a leader in the clean energy transition and this is going to inform not only our current investments, but how we're stacking capital investments going to the GIC next year and Kevin maybe you can talk about some of the things that youre seeing around battery.

Storage and other things that could be near term opportunities for <unk>.

Thanks for that thanks for that Jeff.

Thanks, Jeremy Yes, we are seeing a lot of opportunities at both utilities, Jeff mentioned at the gas company, obviously, a lot of clean fuels opportunities around R&D and hydrogen, but you specifically asked about SD <unk>. So at <unk>, we're seeing a big push in the state given what we've seen in the last couple of tight summers around more.

More storage capacity more generation capacity I think SD Gianni.

We will have some.

Filings in the next few weeks around more utility owned battery storage I.

I think you'll also see.

A lot more activity in the coming months and years around electric vehicles to California's made a lot of bold commitments to move to much more strongly towards electric vehicles, and I think youll see a lot of grid enhancements and grid modifications in that area, but I'd also remind you that climate resilience is a big thing here and so.

<unk> to be in a lot of wildfire mitigation opportunities to invest capital as well.

Got it that's helpful I'll leave it there thanks.

Thanks, Jeremy.

We will take our next question from sharper Rosa with Guggenheim Partners.

Good morning Shar.

Hi, Good morning team, it's actually Constantine here for Shar. Thanks for taking my question.

Just following following up a bit on the LNG market question.

As you are putting out more discrete project pipeline are there the economics for the projects within that pipeline. So kind of the same low teens IRR range that you've targeted before for some of the discrete projects.

And how do those differ between the three categories that you outlined.

So I think youre talking about the return expectations across all three platforms.

Yes.

Yeah, what I would probably say is.

Of our border position and the access we have to two very important transmission lines that bring power into the United States. We think we have a real competitive advantage in that region. So we expect relatively higher returns than what you might find in renewables here in the United States. So I would stick to say on overall justice portfolio is going to manage toward mid double digit.

Equity returns one other thing I'll mention to the broader LNG story.

On to pipeline gas theres, even discussions at the highest level.

Yeah.

Excellent that's great color and.

I guess also shifting to the updates and regulated capex.

We're obviously seeing a healthy oncor update.

I had a similar kind of intra year cadence of an update for California, and maybe you can give a little bit more specific.

As youre thinking about the opportunity that you outlined is there any anticipation that we're going to realign the focus with policy both state and federal in the next iteration of the.

Filings in <unk> I suppose.

Growing this business, whether it's a 10 year period, a 20 year period at an EPS growth rate of around 7% or 8% and I must tell you we feel fairly confident in our ability to produce similar growth in the future of our 7% to 10 year period of time and part of that is bolstered by this continued points that we make about the quality of the markets we're participating in right.

You've got the number one market in America is California, and our number two market is Texas and I think Alan just has a remarkable story in Texas, which keeps getting better and to your point, we're going to have an opportunity to restock our capital program here in California as part of our <unk> filing next year and I think you should expect to see us to.

Make filing.

Following requests around many of the things that Allen joined which is around resiliency modernization of the grid and making sure. We're making those investments today that are ensure that our infrastructure is future ready for what we need in the future such as hydrogen and other things on the system. So we have a fairly clear pathway to grow the business and.

California, very similar to Texas, and I think one of the things you are seeing on today's call is a pretty bullish case by just in about what we can do in the separate infrastructure business as well.

I think thats, an abundance of clarity thanks, Jeff.

Thanks Constantine.

We will take our next question from <unk> Chopra with Evercore ISI.

Good morning, Good morning, Hey, good morning. Thank you for taking my question I wanted to go back to the analyst day.

And you had specifically disclosed roughly $2 billion to $3 billion in additional capex.

Right and.

At the utilities, so with this update.

What portion of that Capex.

You've locked in or have included in the plan.

Yes. So I think there were a couple of things that have to make sure I don't misunderstand. Your question. The difference between the five year strip from Encore that we presented in June which went through 2025 as compared to the new five year strip, which goes through 2026, it's a difference of $2 8 billion. We also.

Alan's numbers increased by $2 8 billion. So hopefully that's helpful.

Yes, absolutely.

In terms of like the Oncor Capex itself I think the number out there was like $775 million to $1 3 billion.

Yes.

Let me address let me, let me address that and hopefully.

This will be helpful. So a couple of points the five year strip.

Going back to June.

As increased about $2 8 billion per Alan's organization, and Alan had an incremental bucket separate from that of $775 million to $1. Two 7 billion and that incremental bucket has been unchanged and maybe Allen it would be helpful. If this is the right time.

Maybe do things for up two things for our lithium the audience, Alan maybe talk a little bit about what's in your $15 billion Capex plan and separately, what's not in the plan related to future rulemaking and related to your incremental bucket, which I think is the nature of the question.

That has really backed up by what Jeff mentioned in his opening remarks, just tremendous growth that we can talk about across our system in a minute.

But that 15 over five is our new plan to Jeff's point, a couple of years ago. We introduced this idea that we had this other bucket this incremental bucket of potential capex.

And to Jeff's point that incremental bucket, which we I think announced 725 to $1 $2 75.

Remains there and available and so how does that work or what we do every year when we sit down with our board and come up with what is now the $15 billion plan there'll be some projects that come out of that incremental bucket and go into that $15 billion plan. However at the same time. We're also looking out further on the horizon and saying things that we think can be included.

And that second bucket, which is the incremental bucket. So that is separate and apart as Jeff said, we have announced a five year $15 billion plan, that's where we are today.

We in addition have another bucket, which remains around I mean these are estimates for 725 to 1.2 dollars 75 that is available and in that incremental bucket in case, we get to this in a minute.

There are also things another thing that we've added to that bucket as potential capex.

Related to legislative activities in Texas, and those fall in several categories.

One is this possibility that we can participate a little bit in the storage market in Texas. There is a 100 megawatts available for the entire state. So we think there is an opportunity there are about $20 million for Rps and we're hopeful that that will grow over time.

The second Bill SB, 12, 81, which related to <unk> and.

In an economic benefit test specifically related to the <unk>, we think there's about probably $50 million a year.

And those incremental transmission projects.

On the emergency generation side I know, there's been a lot of interest in that we're working through.

Wiring some capital leases on the emergency generation side right now we're planning on having about 10 megawatts under contract by January one.

Capex impact of what we do on emergency Gen. Like several of these categories will depend on how much we ultimately end up leasing.

But right now we're seeing kind of five megawatt emergency Gen two to five megawatts around $2 million.

And bigger 30 megawatt kind of on the back of trailers around $10 million. So we will make we will make an appropriate and reasonable decision for our customers in the ERCOT market on how much of that will require we will acquire and that will determine the ultimate capex impacts of emergency Jen.

Then on similar to that same bill also provided us the opportunity to acquire long lead time equipment that we might need for service restoration, we think we're probably around what I would call it $10 million for general kind of plant for 2022.

With an additional potential hundred on top of that for the remainder of the five year plan $100 million worth of equipment.

But again that ultimate number is going to depend.

$10 million on general equipment is one thing, but if we get into stack comps in sbcs and some of the larger equipment.

And that equipment goes from it can be anywhere from $50 million to $70 million per site.

So we're still looking at all these legislative opportunities Thats kind of just a general.

Approach and what we're thinking right now on each of those and as I said. This these dollars associated with potential capex of <unk> associated with the legislation coming out of a storm here are right now and our incremental bucket, but as we refine them.

They will ultimately be moved at some point could be moved at some point.

Our five year plan.

Jeff is that what you are asking for it is and I will tell you. The reason there is so much enthusiasm from our team as we've seen a two $2 $8 billion of restocking of that capital plan up to $15 billion since June <unk>.

No impact on the incremental bucket, which is still there as Alan described and it hasnt picked up yet some of the forward looking opportunities around we will make any legislation. So I think I'd say, it's a very important story in that the last thing Alan you might speak to is the expected impact on rates.

You bet, Jeff So here's here's how the rate impact works of the.

The $15 billion over five that we're talking about today about two thirds of that is growth related so new customers more or less or expansion of customers.

Of the increase that we're talking about today at $1 billion increase about 80% of that increase is directly related to growth and I should mention also 97% of that total amount of the 15 billion over five as tracker eligible.

We will remain the low cost provider or at least close to the low cost provider on the right side of that chart.

The rates for the all the investor owned utilities.

Generally I think we're probably thinking rates could increase somewhat similar to inflation.

But again, we're the low cost provider now and we believe will be the low cost provider at the end of five years and $15 billion. Thanks, Thanks, a lot Alan.

Okay. Thank you both appreciate it.

Breaking that down for us thank you.

Thank you.

We will take our next question from Stephen Byrd with Morgan Stanley.

Hi, good morning.

Hi, good morning, Thanks, so much for taking my questions.

I wanted to talk about federal legislation and in particular green hydrogen, though there are other elements here that could benefit you all have been innovators in a number of areas that could get support at the federal level and I was just curious at a high level I know the exact composition.

The Bill could change and obviously, we're not even sure it's going to pass it all but to the extent that we did see kind of the framework. That's been laid out what are the areas that you're most excited about in terms of what that support might mean in terms of accelerating your plans or change in your plans.

I appreciate having the opportunity to answer that question I think back in 2018, you may remember Steve in that there was a lot of discussion around <unk>.

And regulated business is under unregulated businesses and I think we took the opportunity to kind of redefine an investment class.

Restructures quite hot in Europe, and Asia, and the United States. So I think there is really well positioned and the infrastructure bill that you're referring to is certainly strong confirmation bias of the importance of this to the United States and there is really a tailwind for sempra around this clean energy transition. So four topics I think come out today's bill.

<unk>.

Past as early as today out of the house, one of which is we're tracking the private activity bonds. These.

These are ones that allow you to finance carbon sequestration and carb carbon storage devices, we think thats important for the sector.

He says there will not be a net zero 2050 without carbon sequestration and Thats. One of the reason that justin's business is focusing on this opportunity second to your very point Green hydrogen is a big part of our country's future. We've made a decision to participate in all of the appropriate trade associations, we've got simple.

10% to 12 different R&D projects and hydrogen today, but specifically in the legislation that bill contemplates for regional hydrogen hubs in the country. We think this will be important as you think about distribution centers and one thing that people, sometimes Miss Steven is the number one manufacturing facility in United States by a wide margin.

Is the La basin and the number one industrial segment for the United States as the Gulf region between Texas and Louisiana. So both of these areas geographically we have the best had interest in I think we've got a leadership interest and so I think hydrogen in both of those markets will be imported two other quick points from today's bill one is.

The focus on.

The wildfire management, we talk about Stephen a lot in California, obviously, a western region issue is an issue today in Europe, and Australia, and Ukraine in different parts of the world, but the Bill does contemplate support for vegetation management, and improving resiliency, which is a very important topic here in California, and lastly, there's a lot of <unk>.

And that bill in electric vehicles.

Trevor not participated in the strategy session with.

Alan's Board last week in Texas, the electric vehicle market in Texas is enormous today, there's about 30000 vehicles on encore system.

In comparison.

<unk> 20th the size of Encore system here at <unk> and they've got 70000 vehicles on our system. So I think electric vehicles will be very very important and the bill is very specific about funding opportunities all across the country to promote electric vehicles. So those are the four we're probably following most closely.

But we do share your optimism around green hydrogen.

Well, that's a really comprehensive answer. Thank you very much helpful to kind of understand the areas you're focused on.

And shifting gears just back to LNG you raised a lot of good points earlier about.

The strength of this market.

Excitement around this this market and you guys are well positioned does that sort of level of excitement globally provide additional opportunities to either monetize some of your assets or two to find just very low cost ways low cost of capital ways to pursue additional growth like the additional opportunity in <unk>.

You mentioned in other words.

Could this could this be both a way to monetize as well sort of.

Use other people's money to to help achieve better growth and better better returns overall.

Yes.

One of the things I would start with saying as the priority of our capital program as our U S utilities.

And what we want to do is be able to grow our utilities at a rate faster than our peers and do that without coming back to the capital markets to issue equity and Thats one of the reasons that the KKR transaction was so important it gave us a chance to crystallize and highlight value in that business and recycle capital back into reducing parent debt and meetings.

Capital needs like Alan described today, but I would tell you I don't think we're finished write that business now has been valued at roughly an enterprise value of $25 billion. So we think about going forward. We think there will be strategic opportunities to bring that business to the market, but those are those are conversations we would obviously have with KKR and to your point, if we had the chance to further de.

<unk> the capital structure at higher valuations, that's something you should look for us to do and we will be looking under Feisal and Justin's leadership at bringing in project equity on some of these projects to reduce the call of capital from separate infrastructure, but right now they are very very focused on growth and theres a lot of enthusiasm.

What they think they can accomplish.

That's great. Thank you very much that's all I had thank you for being on the call.

We'll take our next question from Michael <unk> with Goldman Sachs.

Good morning, guys. Thanks for taking my good morning, Jeff. Thanks for taking my questions. One short term one long term one.

One is can you remind us whats in guidance, what's assumed in your 2020 guidance in your kind of growth trajectory for what happens in the California cost to capital docket and the mechanism. That's question a question will be longer term on potential new Mexico LNG project.

Can you talk about what kind of pipeline development is needed to get the gas from the Permian to the site. Thanks Scott.

Yes. Thank you I'll pass the pipeline question in a second suggests and it's a really positive story, there actually but I had mentioned obviously many of you on the call I've been following the cost of capital development, both for <unk> and Edison I'll remind you that the socal gas mechanism did not trigger we're going to follow this closely I think the key gating item.

The state has fallen as the forthcoming scoping memo that we expect from the commission, but in terms of forward guidance. What we've indicated in the past Michael was that whether we get the automatic triggering mechanism or whether our applications approved is contemplated within our guidance for next year and because of some other steps that the.

Our business has taken to mitigate and become more maybe mitigate costs and become more efficient it's probably in the range of five to 10 cents either way, but well within our guidance range that we would not expect to update guidance independent of that outcome.

And then just and I think.

A lot of times, particularly in domestic LNG developments. There is always issues related to pipeline development I think it would be helpful to help our listening audience better understand what's unique about the pipeline system that supports Vista Pacifica, yes.

Thank you thanks for the question Michael.

This specific.

Effectively source gas from the Permian from the U S basin and deliberate.

And in the form of LNG to Asia. There are two existing pipelines that basically converge very close to the site. So there would be a very small spur type pipeline that we would build that we connect to Pacific <unk> to existing pipelines, both of which are underutilized on trans.

As mentioned capacity basis so.

Got it and just one quick follow up are you, you'll need LNG or potential LNG project competing as you realize those those pipes.

Sorry, Michael can you repeat that question. He is asking is Europe rod yeah. The only one that's competing relative to those pipelines.

I think there is another there is another existing <unk>.

Development project that is north that is trying to get some capacity from one of those pipelines, which we are which.

Which we own we own the pipeline yes.

Got it thanks guys.

Thanks, Michael.

We will take our next question from Ryan Levine with Citi.

Good morning.

Given the political answer Hey, Jeff given the political uncertainty related to Cfe contracts in Mexico are there any proactive steps.

Our broader temporary organization is considering to mitigate the counterparty risks or are there broader opportunities.

To capitalize on the growth in Mexico, and then related.

Temporary have any differentiated impact relative to par.

Partners in.

Any policy change in Mexico in conjunction with the KKR agreement.

Yes, I would start with your second question, which is you know KKR has their own infrastructure presence in Mexico, both on the refined product side of the value chain as well as with renewables.

And even the Vista Pacifica project that Justin was describing those capacity releases releases on some of those pipelines that would be needed would come from the government and this is really a government sponsored project and one that they've been quite public about supporting from a permit and pipeline capacity standpoint, but tier issue I think is quite <unk>.

Recall that there are reforms being proposed in electricity market.

I think you'll expect to see the lower house vote on that in the fourth quarter, but it would not clear the legislature until probably April of next year, and we handicap that as a low probability and what's interesting about this is those reforms largely targets. So the point you've made Ryan generation assets that are connected to the cfe system.

And today, we have a relatively small footprint in generation across all of simpler because we are a T&D business I think the electric investments in Mexico account for roughly 1% of our consolidated earnings and more importantly, the vast majority of all of those projects something like 80% are on the border with California are not connected.

The CSC and dispatched directly into the Cal ISO but I would leave you with one thought which is probably the most important.

In tandem with the objectives of the government. That's one of the reasons, we still feel good about those types of projects in Mexico.

I appreciate the color. Thank you.

Thank you Ryan.

We'll take our next question from Paul Zimbardo with Bank of America.

Good morning, Paul Good morning team.

I've got a question if you could discuss at a high level, just how you're seeing some of the latest cost estimates change for the brownfield and Greenfield development project. However, you want to frame it what that percentage changes, but just how to think about the latest commodity backdrop.

So I think there's two parts to that question number one is this issue of how much inflation are we seeing in terms of how we source our soft and hard cost at any of our projects included in our utilities and we've got obviously some built in mechanisms that help us with that on the utilities side and <unk> business, you'll recall that we're very well.

On EPC contracts, so the procurement and exposure to costs, we shift that risk.

The construction contractor and Thats why its important to Jay have strong credit counterparties, but in terms of brownfield versus Greenfield I think the way I would answer that a very general level to say brownfield projects to always have a cost advantage.

And greenfield projects can be.

Also quite viable typically they ended <unk> needs to be done at scale and port Arthur would be an example of that but coming back to our projects think about this.

For us to have the opportunity to turnkey six to seven Bcf 67, MTA at Cameron expansion. Our view internally is it could be one of the lowest cost projects for new capacity in the world. So our likelihood of going forward. There we account as being relatively high and that's why we've got a 100% of the Mou.

He is in place to go to the next step and moved to a heads of agreement. Some SBA is there and then at Vista Pacifica. This is the type of project very similar to <unk> phase one our expectation is it will be oversubscribed.

It is a greenfield project of the geographic location to be able to have direct pipeline access from two different pipelines to wahaha and to be able to dispatch directly into the Pacific will be a tremendous competitive advantage, where we market that project.

Okay now that's great.

Shifting back to encore. Thank you for that Super detailed breakdown.

Capex guidance was he came back to the board so that they can make forward purchases that allow them to keep their 2021 and 2022 capital plans in place. So what they were doing is they are reaching forward to source what they needed to execute those capital plans. So I think you would expect his team to do something very similar is there watching the marketplace. If there's.

Okay, great to hear thank you all thank you for joining us.

We'll take our next question from Craig Shere with Tuohy brothers.

Hello, Craig.

Good morning your time.

So do you see potential for total will bump jumping ahead of port Arthur and the New project Q and did I hear correctly that the focus will be on securing equity from partners outside of us IP where needed.

If external equity is required for construction of three simultaneous accretive LNG product projects Zika phase one Cameron phase two and of course something else.

Yes, a couple of things here.

The total of <unk> project will be very similar in scale to <unk> phase one kind of in that three to 4 million ton per annum size.

It definitely can jump ahead of port Arthur because thats the answer to your first question. We certainly are quite bullish both on Cameron expansion, which is six to seven MTP.

As well as the Vista Pacific project, which is closer to 4 million tonnes per annum in terms of equity.

Level, given the size and scale of our expectations around LNG.

Okay.

Great that's very helpful and the last question.

Maybe just.

If you want to opine, but we've kind of noticed that equity cargo capacity that can be delivered years in advance of new train construction appears to be a major selling point for new long term contracting.

But like the latest puncture global announcements included some short term supply off.

Their calcasieu pass.

How do you see this market dynamic playing out with respect to <unk> portfolio.

Yeah. So.

Great point, Craig and I think you have.

<unk> deal today had kind of a lead into the bigger capacity coming at the long term. So I would say I wish I had capacity I could sell right now to bridge some of the construction on these other projects.

Because I do think it is a competitive advantage. The market is very hot right now and people are looking for volumes in the next few years I think for us.

It's a question of maintaining our financial discipline.

Potentially looking for partners.

Where we can provide some bridge volumes into <unk>.

Volumes coming from our facilities.

And then looking for.

Potential excess volumes that could be available.

Via the partners out of Cameron or.

<unk> phase one comes online looking for some additional volumes as production actually starts and we see what production looks like so.

Yes, I think you raise a great point.

Alright, Thank you very much.

Thank you that will conclude our question and answer session. At this time I would like to turn the call back over to Jeff Martin for any additional or closing remarks.

I just wanted to thank everyone for joining our call. This morning, we're certainly pleased to join the <unk>.

E Conference virtually next week and we're looking forward to spending time with as many of you as possible. Thank you again for joining us feel free to reach out to our IR team per custom with any additional questions. This concludes today's call.

Thank you that will conclude today's conference. We appreciate your participation.

Q3 2021 Sempra Energy Earnings Call

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