Q2 2023 Sempra Earnings Call
Good day and welcome to Suntrust second quarter earnings call. Today's conference is being recorded at this time I'd like to turn it over to Glenn Donovan. Please go ahead.
Good morning, and welcome to separate second quarter 2023 earnings call.
Live webcast of this teleconference and slide presentation are available on our website under events and presentations section.
We have several members of our management team with us today, including Jeff Martin Chairman and Chief Executive Officer, Trevor Mihalik, Executive Vice President and Chief Financial Officer, Kevin Cigar Executive Vice President and group President.
Justin Bird Chief Executive Officer of Sempra infrastructure.
Allen Nye, Chief Executive Officer of Encore.
Peter Walsh, Senior Vice President Controller, and Chief Accounting Officer, and other members of our senior management team.
Before starting I'd like to remind everyone that we'll be discussing forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected in any forward looking statements we make today.
The factors that could cause our actual results to differ materially are discussed in the company's most recent 10-K and 10-Q filed with the SEC.
Earnings per share amounts in our presentation are shown on a diluted basis and will be discussing certain non-GAAP financial measures.
Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures.
We also encourage you to review our 10-Q for the quarter ended June 32023.
Please note that these earnings per share amounts do not reflect the two for one stock split in the form of a 100% stock dividend that we announced earlier this morning.
These amounts will be updated when we announce our third quarter and full year 2023 financial results.
I'd also like to mention that the forward looking statements contained in this presentation speak only as of today August three 2023, and it's important to note that the company does not assume any obligation to update or revise any of these forward looking statements in the future.
With that please turn to slide four and let me hand, the call over to Jeff.
Thank you all for joining us today earlier this summer separate celebrated its 25th anniversary.
The company was founded in 1998, our operational rates at San Diego gas and electric in Socal gas date back to the late 18 hundreds.
Over that time, we've embraced a strong commitment to serving others delivering energy with purpose and bettering our communities today, we have three premium growth platforms located in what we believe are the most attractive markets in North America and looking forward to the next 25 years, we're really excited about the opportunities in front of us to modernize and expand.
Our energy network, so that we can deliver increasingly clean affordable and reliable energy to our customers.
This year, we also published our 15th corporate sustainability report emphasizing how our sustainable business practices helped mitigate risk and unlock new opportunities as we continue executing on our record 40 billion five year capital plan, which you'll recall only includes <unk> proportionate share of the capital.
Today's sempra has multiple tailwind supporting our growth and income equity story, and we're confident in our ability to continue delivering high quality earnings and dividend growth to our shareholders.
That brings me back to the quarter.
Earlier. This morning, we reported second quarter 2023, adjusted earnings per share of $1.88 and year to date 2023 of adjusted earnings per share of $4 80.
As Youll recall, we discuss the company's 2023 and 2020 for guidance on our first quarter call in May and based on the strength of our results across the first half of the year. We're pleased to affirm both our 2023 and 2024 guidance ranges and our projected long term EPS growth rate of <unk>.
6% to 8%.
Also just yesterday <unk> board approved a two for one stock split with the distribution date on August 21.
The split does not impact our reported results for the second quarter, but it is important to note that in the third quarter, our historical and future financial results will reflect the post split share count.
For the last several years, we've had one of the highest stock prices in the S&P 500 utility index. So with the plans that we believe it will increase our trading volume and provide more accessibility for a broader group of investors to join us on our mission to be North America's Premier Energy infrastructure company.
Please turn to the next slide.
When separate began its journey in 1998, we had a relatively modest rate base of roughly $5 billion across the last two and a half decades, we've been successful in transforming the size and scale of <unk> overall portfolio. While also simplifying our business model today, we own 45 billion.
Of rate base in over $80 billion of assets with an investment focus on what we believe is the higher value lower risk portion of the energy value chain or transmission and distribution assets.
I'd also note that separate businesses are located in contiguous markets in the southwestern tier of North America, and really benefit from strong economic growth across the region. Our strategy focuses on investing in our regulated utilities that are decoupled from direct commodity exposure and long term contracted energy.
<unk>, while avoiding the volatility associated with commodities and the uncertainties facing legacy generation facilities in other words, our core value proposition focuses on investing in the transmission and distribution backbone of North America, and helping to efficiently move energy from producers to customers.
<unk>.
Finally, our T&D utility investments benefit from constructive regulatory mechanisms with competitive returns on equity and the timely return of capital.
Our infrastructure business is underpinned by long term contracts with World class Counterparties that are expected to provide steady recurring cash flows taken.
Taken together, our three platforms provide great visibility to high quality long term earnings growth, which is aligned with our overall mission to continue building out the Premier energy infrastructure company in North America. Please turn to the next slide where Trevor will walk you through both of our business and financial results.
Thanks, Jeff.
As we closed the first half of the year, we're pleased with our financial results, which highlight the strength of our business model.
For background Sempra was formed via the merger of the parent companies of <unk> and Socal gas and it's exciting to see how that foundation has allowed us to build a much larger and more successful company over time.
Today, we have a leading position with $24 billion of rate base within our Sanford, California platform and serves nearly 26 million consumers.
As electrification continues to increase.
Seeing significant load growth since 2022, <unk> has experienced load growth of approximately 3%.
This is the result of economic expansion and the trend of more business and consumer activity switching to electricity.
For example, the port of San Diego recently unveiled the arrival of two all electric cranes.
The first of their kind to be unveiled in North America.
The Port also approved an electrification project, enabling cruise ships to plug into the grid, while at birth as opposed to running their diesel aliens.
Thereby significantly reducing emissions.
The port of San Diego is also expecting to receive the first all electric tugboats to support further emission reductions across their operations.
As these trends continue we see opportunities for increased investment in infrastructure to support continued de carbonization in the region.
Another Great example is the ongoing electrification of transportation.
California is leading the nation in electric vehicles and <unk> now has over 110000 Evs in its service territory as of the first quarter, an increase of almost 35% compared to last year.
At Sempra, our employees have also been leaders in promoting electrification.
Back in 2015, we set an internal goal to have 500 employees using electric vehicles as a primary means of transportation.
We're pleased to report that we've recently exceeded the 1000 employee Mark making US one of the first companies in southern California to reach this milestone.
And as electrification and customer adoption increases we expect this to drive increased load growth in our service territory.
Further with an increasingly complex grid significant modernization is required to maintain safety and reliability.
<unk> recent commissioning of 171 megawatts of utility owned energy storage assets is another great example of utilizing technology to store and dispatch clean energy, while reducing reliance on conventional gas fired power plants.
To help ensure California can meet its reliability and clean energy goals.
<unk> approved the 2022 to 2023 transmission plan in May.
Awarding <unk>, an estimated $500 million of new development projects.
Also in June <unk> initiated a comprehensive bidding process with over $2 billion of additional projects located within <unk> service territory.
At Sempra, where one of the largest owners and operators of transmission assets in North America, and we believe <unk> is well positioned to compete favorably.
The company has a long track record of operating success here in Southern California and.
And we certainly believe our leadership and credibility in wildfire mitigation will also inform the quality and competitive nature of our bid.
Also in June <unk> announced at 80% of San Diego County customers are now receiving their electricity supplies from third party providers.
This is consistent with <unk> strategy of focusing more narrowly on modernizing the grid to efficiently move cleaner sources of energy to customers.
Or what we refer to as an energy delivery model much like oncor in Texas.
Turning to Socal gas.
The company released and expanded clean fuels analysis, indicating the need to plan and account for increased levels of clean firm dispatch of generation.
Results highlight the potential reliability benefits of electric resource diversity and the value of hydrogen generation.
The report also contemplate how cleaner fuels can be delivered safely and affordably through socal gas is existing and potentially new energy networks to help support electrification and decarbonization.
In connection with California's new renewable gas procurement standard known as SP $14 40, So co gas recently issued a new request for proposal for Biomethane supply in the form of RMG <unk> biosynthetic natural gas.
At the end of 2022, R&D represented 5% of core gas deliveries and Socal gas.
And the mandated procurement through SP <unk> 40 is expected to support the adoption of RMG in the state and in turn help Socal gas meet its goal of 20% R&D and core customer deliveries by 2030.
This is a prime example of how socal gas is using its existing energy network to help the state decarbonize in a safe and affordable manner.
Finally, our California, <unk> are well underway.
Our application in those cases are centered around delivering cleaner energy safely and reliably.
And in alignment with California's de carbonization goals.
Recently, <unk> and Socal gas participated in evidentiary hearings with intervenors and submitted updated testimony.
And the regulatory process continues to advance in a constructive manner.
The next key milestone is opening briefs, which are scheduled to be filed in mid August .
We continue to expect a proposed decision in the second quarter of 2024 with rates retroactive to the beginning of that year.
Please turn to the next slide.
Turning to Texas.
I first want to acknowledge the excessive heat that customers are currently enduring across the state.
While also recognizing the strong performance of the grid under some of the challenging conditions.
<unk> innovative and dedicated employees are the driving force maintaining reliable electric service despite challenging external factors and they go to work each day with this commitment to excellence.
When we acquired just over 80% in oncor five years ago.
It had $11 billion of rate base, and <unk> made a regulatory commitment to support a minimum seven 4 billion five year capital plan.
That same capital spend grew to be nearly $12 billion over that same period and encore has nearly doubled its rate base to $21 billion as of the end of 2022.
Over the past five years Encore system has grown substantially having added approximately 7000 miles of transmission and distribution lines.
Earlier this year encore increased its 2023 to 2027 capital plan to $19 billion with continued strong economic growth and the recent positive legislation. We now certainly anticipate upside when we roll forward the new five year capital plan.
We have long talked about the incredible macroeconomic growth in Texas and how it continues to drive additional capital investments.
To put encores customer base into perspective, the Dallas Fort worth Metroplex alone has a larger population in 38 states.
Since June of this year.
<unk> six new records for peak demand and it's also noteworthy that over the past seven years, there has been a 17% increase in ERCOT peak demand.
Specifically for encore, both C&I and residential customer demand continues to grow.
A great example of this incremental C&I demand is the roughly $60 billion of <unk>.
Chip manufacturing facilities that have begun construction in the cities of Sherman and Taylor over the past 18 months.
These large manufacturing sites are expected to drive demand and required the build out of significant new electrical infrastructure in the surrounding communities.
Finally, we also want to provide an update on a series of positive legislative outcomes that could add significant long term value for oncor and its customers by attracting additional capital to meet the state's growth and resiliency needs.
Please turn to the next slide.
Several bills were recently enacted in Texas that are designed to provide enhanced recovery mechanisms for utilities and reduce regulatory lag.
Together. These bills are expected to improve our realized ROE and facilitate additional investment to support Texas's growth.
We believe that the improved regulatory legislation.
With an incredible economic growth story positions oncor as one of the premier regulated T&D utilities in the country.
Starting with SB $10 15.
<unk> is now able to file a distribution capital tracker twice a year as opposed to only once.
Similar to the existing regulatory mechanism for transmission investments.
This should reduce regulatory lag and reflect on course distribution investments in a more timely manner.
It should improve both earnings and cash flows and is critical in markets like Texas, which is experiencing increased demand requiring rapid capital deployment.
Moving to HB $25 55.
This bill is designed to allow utilities to file a plan to harden and make its transmission and distribution systems more resilient to potential disruptions.
Of note. The Bill provides a separate regulatory mechanism for recovery of commission approved resiliency investments.
The PUC is currently drafting new rules to specify actual implementation, which we expect to be completed by the end of the year.
Rulemaking will lay out the procedural steps and timelines between future filings and the actual rate implementation.
SB 10, 76, the permitting efficiency Bill helps address the transmission grid expansion needs by shortening the time to approve CCN applications from 12 months to six months.
Finally, HB 50, 66, direct ERCOT and the PUC T to develop plans for transmission projects to serve high growth areas of Texas, including the electrification efforts in the Permian basin and could provide incremental investment opportunities for encore.
Together these constructive legislative outcomes enhance encores ability to better serve customers and support system growth.
Please turn to the next slide where I will turn the call over to Justin to provide an update on center infrastructure and Port Arthur.
Thank you Trevor simpler infrastructure was formed two years ago to streamline our business and bring together decades of energy infrastructure development and operating expertise under a single platform.
Our increased scale positions us to capture new opportunities create portfolio synergies and support the growth of North American energy markets.
There are three key trends that support these opportunities de carbonization energy security and re shoring of manufacturing to North America, all of which give us confidence in the long term growth profile of our business.
Trade between the U S and Mexico continues to grow as a result of a strong re shoring trend for example, a recent Reuters article identified more than $9 billion of capital that has flowed into Mexico from overseas manufacturers in the last nine months.
And recently, Mexico surpassed candidate to become the largest trading partner of the U S.
Given our position as a leading player in North American energy infrastructure, we are well positioned to support growing cross border trade with Mexico.
More recently, we received several positive regulatory approvals across a number of our assets in Mexico, including in our energy networks and clean power segments.
Moving to projects under construction our teams have been busy with over 10 million accumulated hours work without a lost time incident we.
We expect these projects will come online over time with <unk> expansion and <unk> targeting <unk> in the second half of 2024 and the summer of 2025, respectively.
And finally port Arthur Phase one is also advancing as expected and continues to target commercial operations of train one and train two and 27 and 28, respectively.
Turning to LNG development at Cameron Phase two we're at a stage in the competitive feed process, where we have selected <unk> to move forward to complete the remaining work we are aligned with our partners to invest additional time upfront to reduce construction risks and project costs. We expect this process to continue through the <unk>.
Fall <unk>.
<unk> to take FID next year after satisfactorily finalizing additional feed work securing project financing and any required regulatory approvals.
The selection of backfill is a significant milestone and we're implementing a strategy similar to what we did at port Arthur to reduce overall cost.
And risk to deliver another world class LNG project.
Also we are pleased with the marketing and the development at Port Arthur LNG Phase III and are particularly encouraged by recent comments made by the FERC chairman in support of energy infrastructure projects needed for reliability.
Looking ahead, we're also expecting that simpler infrastructure partners will finalize its project level ownership stake in Port Arthur LNG phase one at 28%.
This is within the previously shared target range of 20% to 30% and we expect the transaction with KKR to close in the third quarter.
Based on this updated ownership forecast for the project simpler infrastructure partners equity requirement is anticipated to be approximately $1 74 billion.
And its proportionate share of EBITDA is estimated to be $460 million, which excludes certain upside economics, such as separate infrastructures right to common facility payments from future phases.
Please turn to the next slide.
At Port Arthur we are developing a flagship energy hub that showcases the value of <unk> Infrastructure's World class integrated capabilities.
Infrastructure can leverage development and operational expertise across its portfolio to enhance the total value of port Arthur.
With 13 million tonnes per annum already under construction phase II is expected to double that capacity.
Further we're leveraging the integrated capabilities of our business segments by developing the proposed Louisiana connector pipeline gas storage facilities tightened carbon sequestration facility and in early stage hydrogen project in the Port Arthur region.
This comprehensive development approach supports the sustained growth of our energy infrastructure portfolio and is expected to help us capture a larger piece of the economics from the Port Arthur footprint.
At Port Arthur Phase, one construction is well underway with more than $2 7 million hours worked without a lost time incident.
Many of you are likely aware that our recent FERC request, which would enable <unk> to expand staffing and work schedules to include 24 hour shifts.
This provides for better optimization of construction activities focusing on safety and allows for certain tasks to be completed at night, such as material deliveries and next day site preparation. We also believe it will improve workflows and streamline schedules. So it's a mutually beneficial situation from our perspective.
With that please turn to the next slide where Trevor will discuss <unk> financial results.
Thanks, Justin.
Turning to <unk> financial results earlier. This morning, we reported second quarter 2023, GAAP earnings of $603 million or $1 91 per share.
This compares to the second quarter of 2020 to GAAP earnings of $559 million or $1 77 per share.
On an adjusted basis second quarter, 2023 earnings were $594 million or $1 88 per share.
This compares to our second quarter 2022 earnings of $626 million or $1 98 per share.
Please turn to the next slide.
The variance in the second quarter 2023, adjusted earnings compared to the same period last year can be summarized by the following.
At Sempra, California, $32 million of higher CPUC base operating margin at <unk> and higher amounts earned under certain CPUC regulatory incentive mechanisms.
And $14 million of higher CPUC net interest income earned on regulatory balances and higher tax benefits on flow through items at Socal gas.
Partially offset by net higher interest expense.
At Sempra, Texas $26 million of lower equity earnings from higher expenses, and lower weather driven consumption offset by new base rates and customer growth.
At Sempra infrastructure.
$40 million of higher earnings attributable to NCI, including the 10% sale of a minority interest in San for infrastructure partners to audio and higher development expense.
This was partially offset by $33 million of higher equity earnings primarily from transportation tariffs.
Partially offset by lower asset optimization revenues.
Merrily from lower LNG diversion fees and lower generation at Tdm from a scheduled major maintenance.
At Sempra parent and other there were $45 million of higher costs, primarily driven by lower tax benefits and increased net interest expense, partially offset by net investment gains. Please turn to the next slide.
Over the past 25 years Sempra has transformed from a regional southern California utility to a leading north American energy infrastructure company and is positioned at the intersection of multiple macroeconomic growth trends.
Along each step of the way we've exhibited strong financial stewardship overseen meaningful earnings growth and return significant capital to owners in the form of dividends and share repurchases.
Looking ahead, we're focused on reaching a constructive outcome on our California rate cases, executing a record capital plan.
Demonstrating financial discipline and materially advancing critical infrastructure projects across our growth platforms.
We've had a great start to the year that highlights our compelling growth story.
And with that this concludes our prepared remarks, and we will now stop open the line and take your questions.
Thank you.
This concludes the prepared remarks, we will now open the line to take your questions. If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Please make sure your mute function is turned off.
We will pause for just a moment to allow everyone to signal for questions.
And our first question will come from Shar <unk> with Guggenheim Partners. Your line is open.
Hey, guys good morning.
Sure.
Good morning, Jeff.
Just starting off on your commentary on Corning I know you, obviously, you've had some assumptions and planned but the Texas legislation Thats clearly a material support for Oncor would just saw peer of yours raised capex. While also kind of highlighting additional opportunities can you just help us quantify how and win incremental benefits start.
Embedded in plan.
We could start seeing some more of that capex benefits reflected especially.
You now have the ability to achieve the allowed returns so.
Could we further updates as we approach our normal guidance update cycle later this year around Texas.
Yes. Thank you for the question and I certainly agree with you. This has been a very constructive legislative cycle in Texas and I would.
Start at the very beginning by really expressing our appreciation to Alan and his team they deserve a lot of credit and been doing an exceptional job on the ground. There. They are clearly seeing a lot more growth on the system short I'll have Alan speak to some of that growth in a second but we will look forward to refreshing. The oncor plan this fall and providing future updates from <unk> perspective in February .
Larry.
I do think you may find it helpful. Though I don't want to mention as a rule of thumb. The DCF legislation is expected to improve on core earnings in our estimation around $70 million to $90 million on a full year basis, which falls within our current guidance, but as I mentioned, we'll be updating for 2025 on our February .
Also it may be helpful, but as a ballpark reference every incremental $100 billion of capital added to the plan in Texas is expected to add approximately one set of accretion to sempra on a pre split basis.
It might be helpful to Shar can you just provide a little bit of visibility into the growth that youre seeing on the system and your future expectations, Yes sure Jeff.
Good morning growth continues to be just very very strong frankly, a record levels throughout our system and on all the metrics that we track.
Just.
Real quickly premise growth is up 10, 5% quarter over quarter, we connected 21000 approximately.
New premise in Q2 versus 19, Saint <unk> last year.
Transmission points of interconnection or.
Yes.
Our incredibly strong we added 92, new requests in Q2.
For a total amount now in our Q 720.
As a 37% increase over the same.
Quarter last year broken down by retail and generation.
Retail request for transmission points of interconnection are up around 22%.
Versus the same quarter last year generation incredibly strong.
Up 50% over the last 12 months and the total number of generation requests.
Has actually doubled since 2020, so really strong growth on our transmission system.
West, Texas remains very strong.
The far West, Texas, whether zone peak increased by about 11, 5% over the 22 peak peak.
Peak on our Culberson transmission loop system out there.
91% year over year growth.
Then just a couple more stats on things that are presently in the numbers, but our economic development team activities New project requests are up 36%.
And request for information or up 32%.
Are those things some of those things ultimately will work their way into the other numbers.
So we're very pleased.
With the continued economic expansion in Texas.
Very pleased with the continued very strong growth, we're seeing on our system.
You look back as Trevor said, we had 11 $511 $7 billion in 2017 when December transaction with Encore was announced by the end of 'twenty two.
We had about 28 billion. We've already said, we're doing about $3 6 billion in Capex this year.
Looking forward, we still have a $19 billion Capex plan for the next five we added $200 million in July our board to approve that.
That is new capital that has not pulled forward.
And then going into our October and first quarter Board meetings, we'll obviously do another capex plan refresh as Trevor said, we think there's likely to be upside there. If we continue to see the growth that we're seeing now.
As well as the addition of the resiliency plan under HB $25 55. This presently a PUC rulemaking right now.
So as Trevor said, we effectively double the rate base from the time December transaction was announced already looking forward. We think it's possible we'll see.
Two potentially doubling our rate base again in the next five years to six years in a manner that really benefits our customers results in a more resilient grid and benefits the ERCOT market all of those things are obviously subject to the resiliency rulemaking.
Turning to see strong growth in all of the necessary board actions, but.
Texas is a great story and were very pleased to be a part of it and I. Appreciate the question. So sure I'll just kind.
Concluding comment here that we've got it to $70 million to $90 million of incremental earnings associated with the DCF legislation, we talked about the accretion associated with the $100 million of capital in Texas and to highlight I think a couple of key things from Alan's comments, we've effectively doubled right.
Base from 2017 to 2022, and I think Alan highlighted this but theres more work to be done this fall with our planning team, but we have a real opportunity to more than double the rate basis second time in the next five to six years. So we've got some more planning work to be done, but we look forward to working with the Oncor board and finalizing his role.
Our five year capital plan, and certainly coming back and updating how we think about that from <unk> perspective in February .
Got it perfect and lastly, Geoff for me is obviously appreciate the stock split strategy to create some more liquidity obviously the hope there is that it could eventually improve.
<unk> stock further are there sort of any other thoughts on strategy and optimization I mean, Mexico has shown some desire to renationalize. Some some energy industries. So has there been any interest on the legacy assets, especially as fuel storage terminals were considered kind of a security need or does the ownership structure.
We're kind of prohibit for any capital rotation decisions. Thank you guys.
Yes. Thank you sorry, I'll kind of address both of those questions I think the thought process behind the stock split is that we currently have the highest stock price in the S&P 500 utility index as we celebrate our 20 <unk> anniversary. This is the first time that we've announced a stock split for the company. We certainly to your point. Thank you will improve.
Trading volumes and make the stock more accessible to a broader group of investors. So we view it just generally it's a positive and I think it really reflects management's bullish view on our future business prospects.
Turning to issue a strategy and I'll come back to Mexico, Our board reviews, our strategy at every board meeting it's been a top focus of our management team for the last five years.
It's allowed us to simplify our business model improve our visibility to future growth. When you think about the updates that Alan just provided some of things from our prepared remarks, we feel great about our growth and income story and we have more work to do as I indicated with Alan's team.
To continue to think about the growth prospects in his business turning to Mexico. This kind of goes to the issue of what our prioritization is and just had mentioned this in his prepared remarks, but by combining Mexico with LNG, we created a business of larger scale with water effectively midstream assets with approximately 70.
To 18 years tenure in that overall contract portfolio. So it's a really high quality portfolio of cash flows, but as we look to finance our future. There's no question that we're going to continue to prioritize the growth in our utilities, we've demonstrated a willingness to sell down the capital structure to ESI I think we've done that quite efficiently in the past two years.
And opportunities like you identified or continue to capital recycle that's right in our wheelhouse. So we will continue to look for assets that are less core to our future strategy and that will always be something that will take a hard look at with Trevor and his team. So we feel good about our strategy going forward and we appreciate the question.
Much appreciate it guys have a great morning. Thank you so much.
Thank you Chuck.
Thank you.
Our next question comes from their guests Chopra from Evercore ISI. Your line is now open.
Good morning.
Hey, good morning, good morning, Jeff.
Maybe just just looking at.
Year to date performance.
Just wanted to get your thoughts on how that's tracking versus your expectations.
EPS guidance range is still pretty wide.
But clearly you have exceeded my expectations and I believe street estimates. So just how is that you're shaping up.
Is your guidance range.
Sure I. Appreciate the question you recall that in 2022, we really had a banner year, we reported around $9 21 of adjusted EPS.
Reporting $4 80 for this year, we think is a very strong number. So we think we've had a strong first half a good first quarter, we feel great about our guidance, let's say one of the things that we're focused on as a management team and Kevin's business is making sure that we execute very well around our rate cases here in the state of California, and we mentioned.
On the call that we expect to finalize that.
In the middle of next summer with rates retroactive to January one so I think we feel very good about where we're at this year I think it also signaled stretch so our guidance for next year.
Got it very strongly position it sounds like Okay, then maybe just.
Turning to California and.
You mentioned the rate cases, but the queso opportunity $500 million is that incremental or is that embedded in the current Capex plan and then you also highlighted $2 billion worth of projects, which are going to be competitively bid on maybe just talk to us as to how we see that embedded into your capex plans just to.
Timeline of next steps there. Thank you.
Sure I appreciate that question, we actually think very similar to Texas has a very strong underlying growth story in California, we highlighted in our prepared remarks, but as <unk> has seen year over year demand growth of about 3% I've been at the company. Since 2004, we've never seen that type of growth and it really is a reflection.
The electrification that's taken place in the state.
Issue of whether the $500 million of Victorville transmission projects are in our five year plan just to remember our current plan goes through 2027, we're gonna roll that plan forward next February this is really the Cal ISO efforts to lock in the needed transmission the need for the next 10 years. So most of these projects will be outside.
Out of our current five year plan and be picked up in future periods.
Kevin It might be helpful to give you a perspective on the transmission opportunities here in the states and specifically the larger numbers that our guests just spoke to.
Yes, thanks to our guests.
Stepping back for a second just talking about it's clear the grids all across the country need significant upgrades as we move toward more electrification in California, we have estimated that electric demand will more than double by 2045 with commensurate investments in grid.
You mentioned, we're seeing that kind of load growth in <unk>.
San Diego already with.
A lot of adoption around electric vehicles. So we're really excited about this recent announcement for the Cal ISO to add 7 billion. This is just like an incremental $7 million of transmission opportunities and as Trevor mentioned $5 billion has already been directly awarded <unk> and we're going to bid on those $2 billion to $3 billion of other project.
And I would note that across the Sempra family of companies, where one of the largest owners and operators of high voltage electric transmission in the country and we're really well positioned to be successful here in California, and California continue this path of aggressive aggressive investments to enhance and facilitate electrification.
Got it thanks, guys. Just a quick follow up is there a timeline on that the $2 billion worth of project that you mentioned over what timeframe is that going to be awarded.
Well, it's going to be I think theres going to be a short list.
Yes close to winter in December and then with something awarded early early next year. So I think more to follow here, but there is a process to Kelly. So it's going to follow in and like I said I'm pretty optimistic we're going to be very competitive.
Awesome. Thank you Kevin.
Thank you.
Yes.
Thank you our.
Our next question will come from Julien Dumoulin Smith from Bank of America. Your line is now open.
Hey, Julien.
Hey, good morning team. Thanks for the time appreciate it alright, if I can.
Focus first on the LNG side, if you don't mind.
I just wanted to understand a little bit of a push out in the.
On the camera side.
Clearly this had been in some sense is articulated previously but.
As you think about getting clarity on timeline today on when to move forward or you're kind of waiting for inflation to moderate waiting for certain milestones to be achieved here with your new partner with bechtel or are there other considerations just kind of understand that.
The shift to 'twenty four now, but also the input parameters.
So narrow that down a little bit more precisely.
Sure I'll make a few comments I'll pass it suggests that maybe provide a larger overview of his LNG LNG development program, but I would just start with say enjoying the best way to think about it is so we are on the call very similar to this in August of last year, where we were talking about the potential for port Arthur Phase one.
To leapfrog Cameron and we were not at that time prepared to make it.
For Port Arthur but we felt good about the progress we're probably in a similar position today. We've got more work can be done on both of our brownfield projects Cameron expansion as well as port Arthur too, but were making significant progress. We're very excited to have selected bectal backfill is doing a wonderful job and its been onsite at port Arthur.
Close to five years at this point, so I think thats, a big step forward for us to have backfill in house working with us on finalizing cost and design work and just that maybe you could do two things update us on the overall LNG portfolio for Julians benefit and maybe fried or additional details about how youre thinking about time.
Great.
Thank you Julien let.
Let me take a step back as Jeff mentioned again, our core strategy is to build an LNG infrastructure business.
And that would be a business that offers customers LNG volumes from both the Pacific and Gulf Coast and as you think about where we are to date Cameron.
Cameron phase one is producing in excess of 100% of its expected volumes.
Phase, one and Port Arthur Phase one are under construction and both are proceeding safely and on schedule and as you look at our LNG development projects look we're very excited about the opportunity set in front of us.
At Cameron Phase two as Jeff mentioned.
The selection of backfill is a major milestone and what we're doing with Bechtel is similar to what we did at Port Arthur.
And our Cameron partners will continue to conduct value engineering work through the fall as we finalize EPC arrangements and again you have to remember that the goal is to optimize the design. So we can optimize the overall cost structure and timing of COPD.
These efforts should position us for RFID next year subject to definitive commercial arrangements and any needed regulatory extensions. So as you think about that timing.
We're going to press forward on the EPC arrangement.
And.
I guess I would echo what Jeff said, we were in this position last year on Port Arthur One and we will try to do the same thing.
Looking at Port Arthur Phase II.
Very optimistic we continue to advance commercial discussions with potential customers importantly, many of whom are also interested in project equity.
And at the same time, we are advancing engineering construction with Bectal regulatory and financing.
Julian as I kind of think about the business and where we are today I think the key takeaway is we have made significant progress on our LNG strategy and are very bullish on both port Arthur Phase II and Cameron Phase III moving forward next year, and then I would just conclude Julian, but saying that we're going to finalize costs around <unk>.
<unk> expansion, we're going to complete the commercial arrangements and continuing to progress our permits.
Look to take data next year on Cameron the most important thing I would always remind folks is it's never really a race, it's about putting all the risks in a box and optimizing the project to produce the best returns for our investors and we've demonstrated the ability to do that and we've got a great team on it. So we feel good about our progress on both port Arthur Phase II and Cameron expansion.
Sure.
Got it and just in light of those last comments, if you don't mind elaborating Jeff.
You used the term leapfrogging I heard you the last time talking about it I'm hearing this time talking about it.
You feel pretty good about getting.
So when you say thanks.
The timeline here.
Closer than not on announcing incremental commercial terms here if you will.
And then also the inflationary dynamics you feel confident about the terms there.
De risked that project the second phase as well.
Yes, I would just clarify that.
Reminding ourselves that when we had this call last year, there is still a fair amount of uncertainty around both projects.
And we indicated there might be an opportunity for port Arthur Phase one to leapfrog forward, what I'm really referring to is even though there seems like there's a little bit of uncertainty around both of these brownfield projects I can assure you that both of them are progressing.
Most of what we've said publicly so we feel very good about both of them going forward just like we were able to to mature port Arthur Phase one we're going to work diligently on Cameron expansion and Port Arthur Phase two with the Pope and doing the same thing on both of those projects.
Right and you said you still anticipate to sell down the equity potentially in <unk>.
Future expansion.
Just considering the backdrop of LNG transactions of late I figured I'll, just clarify that last comment too.
No.
This goes back to kind of how we tend to finance things, obviously as we've talked about before several times Julien we're going to maximize our operating cash flows. So we've got a lot of flexibility and overall capital structure to financings, but you see us at a 50% ownership level and Cameron today, you've seen us now at a 28% ownership position.
A separate infrastructure partners in Port Arthur Phase, one, but one of the unique things as we have the opportunity to optimize the capital structure. So that we really improve the returns for our shareholders. So certainly I think thats a parent in practice you would expect us to continue.
Yes, Thank you guys.
Thank you.
Thank you.
Our next question comes from Jeremy Tonet from Jpmorgan Securities. Your line is now open.
Hi, good morning.
Good morning, Jeremy.
Just wanted to pick up after what Julian was putting down there with regards to port Arthur to more specifically on the FERC and the lack of the boat there for further expansion.
Any sense on timing on your end and do you see this kind of impacting commercial discussion.
No no. We don't we do think it's important for that FERC certificate to be issued.
Certainly thanks that will be issued in the next month or two so.
So we remain optimistic about that.
Got it.
Helpful. There and then maybe drawing a bit more of a.
A final point.
As a follow up we've seen Cove point transacted at a much lower multiple than it did in 2019 and just wondering if this is a sign of value of the LNG space changing or just any any thoughts on the value of that transaction.
Look I think at Cove point, what you saw take place with a transaction from minority interest. It was not a transaction related to a controlling interest I think that I think I would fall back on Jeremy is when you look at what's taken place in the LNG marketplace today. The world has a global capacity of just below $400 million.
Tons per annum that marketplace will grow by more than 50% by the end of the decade and likely double by the middle of the century.
So the way we think about it is there is a need today for more LNG that need will grow as countries around the world look for natural gas to balance out their commitment to cleaner fuels like renewables, we think the United States continues to have a competitive advantage and we will take market share. We are the world leader today in 2023, and when you say.
About the competitive price of natural gas in the United States, you'd think about the depth of our capital markets and the constructive regulation. This is less about Cove point. Our next decade are separate this is about the United States, taking a leadership position in the World. We think this business will continue to get much bigger it's grown at about an eight.
<unk> CAGR from 17 to 2021, and we continue to expect to see strong growth in LNG marketplace.
<unk> is well positioned as any company in North America would be a big part of it.
Got it.
Helpful. There and wondering if theres any more commentary you're able to provide as far as commercial discussions that concern between <unk>.
Asia versus European buyers or portfolio buyers, otherwise just trying to get a flavor for kind of how that is progressing at this point.
We're having commercial negotiations on port Arthur Phase III.
As well as on some of the off take arrangements around Cameron expansion. Many of the same type of customers you would expect in Europe and in Asia are part of those conversations. It is a very vibrant market today and there is lots of conversations taking place by our marketing team. So we remain optimistic about future announcements in that area.
Got it real quick last one if I could I was just wondering if you could provide more details on this latest port Arthur Tcs announcement.
As this project just Tcs for Port Arthur and Sempra or I guess how.
What's the addressable market that you are targeting there.
Yes, I would say that we've named this project Titan.
Some recent poor space that we've been able to acquire it as a very competitive process in Louisiana and Texas to have these types of facilities and Titan has been dedicated to serve the needs of port Arthur Phase, one and future phases at Port Arthur We also expect that it will serve other third party interest in the region.
Got it that's helpful I'll leave it there thanks.
Thank you I appreciate you joining the call.
Thank you.
Our next question comes from Carly Davenport from Goldman Sachs. Your line is open.
Good morning Carl.
Hey, Jeff how are you thanks for taking the question.
Just wanted to go back to Texas very quickly you had mentioned the resiliency Bill could you just give us some details from a timing perspective in terms of one year able to file for that and kind of how long. The approval process is expected to take until you can begin to recover investments under it.
Sure. It's really good question and I will tell you. It is a very very important development in Texas. We think it will be something that we will participate in what's the rulemaking, but Alan perhaps you could talk about the bill itself. When you think the rulemaking will be over and when you expect Youll put your first three year filing in front of the commission.
Jeff Let me just run you through kind of the timeline that we're seeing for HB 25, 55, the resiliency Bill.
The Bill became effective June 13th of this year it required a rulemaking to be completed within 180 days.
So the statutory deadline for the rule is December 10th of this year.
Subject to whatever comes out of that rule, making presumably utilities like us would be free to file thereafter.
The plans that are filed with the commission by law are required to be approved modified are rejected within 180 days.
So with respect to us we're hoping to file a plan in Q1 of 2024.
And seek to have that plan approved in the second half of 'twenty four.
That's what we know for now.
Great. That's really helpful. Thank you for that.
Just think about the maybe shifting to California, you mentioned that the general rate cases going on the air can you just talk about kind of how that process.
Slide six.
Is there anything that surprised you so far.
Sure I'll make a couple comments then I'll pass it to Kevin if he wants to add anything but that.
The <unk> hearings concluded in July and opening briefs will be filed in the middle of this month with a proposed decision as I indicated in the second quarter of 2024, I think the most important thing currently as the state is very focused on safety reliability and de carbonization and Thats exactly how we lined up our rate cases so.
<unk>, we had the first ramp rate case back in 2019. This is also ramp format that we're following and it's really closely aligned with what we think are the public policy positions of the state. So I think we're in good shape, Kevin would you like to add anything else about how this unfolds I mean, just process wise correlates would mentioned that.
We also just updated our filings for inputs from inflation factors labor rates medical insurance costs and the like.
We just updated on we're going to have a brief filed this fall and look forward for a PD in the first part.
Mid next year first part of the year.
Great I appreciate the color. Thank you.
Thank you Carla.
Thank you.
Our next question will come from Nicholas Campanella from Barclays. Your line is now open.
Hey, everyone. Thanks for taking the question.
Yes.
I'll keep it short so I guess.
Port Arthur or good to see you finalized 28% here.
Just what's causing you to fall higher than the range that you kind of gave to US and then when we think about the puts and takes around the funding plan and what was outlined in the first quarter call now that you've kind of solidified the 28% should we still think about no kind of external equity financing.
At the Holdco. Thank you.
Sure I would just say.
That we had originally targeted between 20 and 30% ownership obviously our goal is to own as much of the project as we can so we're very pleased to guide up to the 28% range. Previously on calls we had talked about notionally, just given that information up to 25% level, but our goal all along was to make sure that we can land as high in the range of.
It's possible I think we're well set on financing I'll pass it over to <unk> who's the CFO of simpler infrastructure, maybe you can just update us on how you expect the Denali capital process to go forward and Youre funding for Port Arthur face what yes. Thanks, Jeff.
<unk> always talked about we have this sort of flexible capital structure. So first with our project financing at Port Arthur sort of well underway, that's roughly $7 billion in capital for the project. Then of course, we have our partners Conocophillips and now KKR as equity partners as well and then we also have moving up the capital structure you get into.
San for infrastructure partners, where you have <unk> and KKR as well, so again plenty of capital to be drawn on.
All of our partners sort of having that capital flexible capital structure in place enables us to sort of maximize returns on the project up to Sandra.
Got it thanks, and then I know everyone's very focused on train four for Cameron, but can you just give us a sense of how debottlenecking for 123 is progressing and whether you remain on track to increase that capacity before train four.
Sure Jeff So you can take yes, yes, Nick.
Still doing some of that engineering work I would say, it's very positive.
And is there just as you recall.
Bottlenecking won't be binary so what we'll likely do as we continue to take trains down for routine maintenance, we will do the debottlenecking activities. During those trains and we'll expect to see additional volume. So again debottlenecking is moving forward very positively.
Thanks have a great day.
Thank you Nick.
Thank you.
And our next question will come from Steve Fleishman from Wolfe Your line is open.
Hello, Steve.
Hey, Jeff just under the wire.
I just wanted to circle circle back to the.
Back to encore and some of the things you mentioned.
The 70 to 90 million on DC RF in the.
The kind of sensitivity on investment so.
When would you see this benefit FTC RF would that be pretty much in place for 2024.
Or yes.
Yes.
Yes, it's a good question, we expect to make our second <unk> filing for this year in September and they pick up for D C area, which might be a little bit. This year will primarily be in 2024. So it will be a full run rate benefit in 2020 for Steve.
Okay, but you said it falls within your guidance because of your guidance range is pretty wide I guess.
Correct.
But we will also we also we also review that with our board in the ordinary course as part of our fall financing exercise and Youll recall, we will also be updating in issuing our 2025 guidance on the February call.
Okay and tied in with that just on the capital at Encore, which you said your update in the fall.
The.
I mean, we will.
Will that include.
Are you going to just update kind of normal course, there or that include the <unk>.
This reliability aspect.
As well, which have been fully finalized by them.
Or would that maybe come later on.
Yes, I think this goes back to <unk> question, we're going to do our normal roll forward five year planning process led by Don Clevenger at Encore.
Core board will be deeply involved with that as well the ownership both at <unk> and Sempra. We obviously you have seen the capital plan grow from 15 billion to $19 billion just year over year, and we certainly think it's going to obviously grow again as we've already indicated the key issue for you on this new rulemaking, which Alan indicated the rulemaking Steve will.
Not be finalized until at the earliest.
December 10th of this year and al will be coming back to the board with an add on related to resiliency. So the work that we're doing that will be finalized in the fall. It's a normal roll forward five year capital plan.
Once we have the rulemaking in place Alan and his team will hustle to put together the appropriate analysis for the Oncor board and that will lead to the filing that we made with the commission and I think as Alan indicated we expect to have feedback from the commission in the second half of the year, Alan you'll add to that.
No, Jeff I think thats exactly right okay.
Great. Thank you I appreciate it.
Hey, good to talk to you Steve.
That concludes today's question and answer session. At this time I would like to turn the conference back to Jeff Martin for any additional closing remarks.
Okay as we close out today's call I wanted to note that we're pleased with our financial results both for the quarter and for the first half of the year certainly believe we continue to make great progress on our LNG story, and we're making progress at phase II at both Cameron and Port Arthur and are also pleased the guide to the higher ownership percentage of 28%.
At Port Arthur Phase, one and as you can tell from today's call, Texas continues to be one of the leading growth stories in the country and the improved regulatory compact there is a very strong signal in my opinion for continued investment.
And finally as we celebrate our 20 <unk> anniversary, we're pleased to announce our two for one stock split we appreciate everyone, making time to join US. This morning, and we have several IR events. This month in Wisconsin, and Las Vegas, and hope to see many of you. There. This concludes our call and feel free to follow up with IR team. Thank you.
Thank you for your participation you may now disconnect.
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