Q3 2023 Sempra Earnings Call
Good day and welcome to <unk> third 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.
Yeah.
Good morning, and welcome to <unk> third quarter 2023 earnings call.
The webcast of this teleconference.
Yeah.
On our website.
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 <unk> Executive Vice President and group President.
Justin Bird Chief Executive Officer of Sempra infrastructure.
Allen Nye, Chief Executive Officer of Encore.
Peter Wong Senior Vice President controller, and Chief Accounting Officer.
And the other members of our senior management team.
Before starting I would 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 reconciliations.
Okay.
Okay.
Okay.
Please note that all share and per share amounts reflect the two for one split of our common stock in the form of a 100% stock dividend.
On the second quarter call and distributed in August.
I'd also like to mention that the forward looking statements contained in this presentation.
We have today November 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, we're pleased with the strength of our third quarter results, which sets the stage for our company's continued growth.
Given current geopolitical tensions countries around the world are looking to ensure they are not dependent on.
On supply chains that are subject to disruption and uncertainty.
Increasingly they want to source of essential goods, whether food liquefied natural gas or micro chips closer to home or from dependable allies.
With this trend towards globalization, we see North America as one of the principal beneficiaries.
We also believe these trends support important new growth in Mexico or in the first half of 2023 foreign direct investment has risen sharply by approximate 40% over the prior year comparable period.
Just this year in Mexico has also surpassed China as America's largest trading partner.
As these trends continue new higher levels of investment in North America's energy grid will be critical to supporting continued economic expansion.
That's why it's separate we're really excited about our mission to build this confidence Premier energy infrastructure company as part of that mission, we focused significant time and effort on building a high performing culture or we invest for the long term in our business and our employees and in combination. This has helped us achieve strong financial and all.
Operating results.
Our strategy focuses on what we believe are the most attractive markets in North America with strong economic growth and constructive regulation.
Combined with capital discipline dispositions separate to deliver competitive long term returns for our owners.
Also our business is expected to benefit from secular tailwind that support our five year capital plan of approximately $40 billion. You were recall I've spoken before about the opportunities that lie ahead for encore and the possibility of doubling their rate base over the next five to six years.
While we're still early in our fall planning process, we expect to increase our $40 billion capital plan.
About 10% to 20% when we update our five year plan on our fourth quarter call.
This increase is expected to be anchored by a regulated utility investments and primarily driven by encore.
Overall, we continue to see significant growth in multiple areas of Oncor service territory and with Alan here today, He will speak to some of those opportunities later on today's call.
Turning to the quarter, we believe our results demonstrate the strength of our business and our ability to continue producing strong earnings growth earlier.
Earlier today, we reported third quarter 2023, adjusted earnings per share of $1.08.
And year to date 2023 adjusted earnings per share of $3 48.
Given our year to date success, we're expecting to be at or above the high end of our 2023, adjusted EPS guidance range and we're affirming our 2024 EPS guidance range and projected long term EPS growth rate of 6% to 8%.
Finally, let me take a moment to speak about cabin cigar who will be retiring next month. After nearly 30 years of service at Sempra and its predecessor companies.
He was instrumental in the 1998 transaction that originally formed separate when the parent companies of <unk> and Socal gas merged he has held many leadership positions across our companies.
Including CEO of separate renewables.
San Diego gas and electric as well as recent role as group President over our California utilities, He's had a really amazing career here and made significant contributions to our success.
Will be greatly missed.
Now, let me turn the call over to Allen Nye, who will take us through business development in Texas.
Thank you Jeff today, I'd like to highlight our strong operational performance this quarter and speak to the recent legislation that we believe will improve our ability to provide high quality service to customers and deliver improved financial performance. I'll, then finish by highlighting some of the underlying growth drivers at encore despite record.
Throughout the third quarter, the encore team performed exceptionally well and I would like to thank them for working safely and extremely difficult conditions. As a result of our team's efforts reliability continues to be strong with average outage duration improving by 9% over the last 12 months.
Turning to the continuation of the Texas Miracle Encore is one of the nation's largest pure play T&D utilities operating in one of the fastest growing states with over 30 million people, Texas GDP is approximately two trillion dollars.
Which makes it the eighth largest economy in the World, Texas annual GDP grew at three 4% last year well above the U S average of two 1% our pro business climate is well documented and has driven diversified job creation across many sectors of the economy.
Encore serves four of the top 15 fastest growing cities in America with premise growth of approximately 2% annually expected in our service territory. The population of the Dallas Fort Worth Metroplex is larger than most states and in each of the last two years added more people than any other U S metropolitan area.
This growth has certainly impacted the demand for electricity. This past summer 10 peak demand records were set in the ERCOT region, culminating in an 85 gigawatt, Pete which is 16% higher than the peak just five years ago.
This growth also continues to fuel significant expansion of our system.
In the third quarter encore connected around 20000 additional premises built rebuilt or upgraded approximately 630 miles of T&D lines and managed 755 active transmission interconnection requests at 34% increase over last year specifically.
Retail interconnection requests have increased about 90% since the end of Q3 last year, which will be a major driver in our capital budget.
Turning to the recently completed Texas Legislative session.
Several bills were passed that give utilities better tools to support the growth of the state and improve resiliency of the grid.
As we discussed on the second quarter call HB $25 55 provides a new opportunity for oncor to develop a forward looking plan to invest in the resiliency of our system.
The PCT rulemaking associated with this legislation is currently underway and we expect it to be finalized in the fourth quarter of this year. We are targeting the first quarter of 2024 to file our first system resiliency plan or SRP with the public utility Commission HB $25 55 provide.
It's for a six month timeline for review and approval of the SRP, while much work remains to implement this legislation. We are optimistic that it will provide needed hardening modernization and risk mitigation to our T&D grid for the benefit of our customers, while improving the earnings and cash flow needed to support these investments in the future.
Additionally, Youll remember Oncor is now also able to file two distribution cost trackers each year as opposed to just one.
Thanks to SB $10 15.
In September Oncor submitted its second DC RF tracker for investments made in the first half of the year SP $10 15 accelerated D. CRF approval timelines to 60% to 75 days matching the efficient interim T cost process that has worked well for two decades, as we said last quarter.
We expect the addition of the second DC RF filing to improve encores earnings by approximately $70 million to $90 million annually Oncor is actively evaluating our five year capital plan to reflect the continued growth across our core service territory and the impacts of new legislation after reviewing with our board we.
Check to announce an update as part of <unk> fourth quarter earnings call. Please turn to the next slide this slide demonstrates the diversity of our service territory, both geographically and by customer type, which propels oncor as expected higher capital plan. As you can see growth is driven by a broad group of industries.
Including manufacturing oil and gas professional services and large data centers are rising not only in the Dallas Fort worth metroplex, but in north central and West Texas.
Notably the Permian Basin continues to be one of the premier energy producing regions in the world and is undergoing a major electrification effort. The low demand in this region is projected to increase from four two gigawatts to roughly $17 two gigawatts over the next decade. Please turn to the next slide we will I will.
The call to Trevor to review business updates at Sempra, California, and simpler infrastructure as well as <unk> detailed financial results.
Thanks Alan.
Starting in California, it's worth reminding everyone that during the third quarter, Southern California experienced a rare tropical storm and.
And I am pleased to say that both <unk> and Socal gas systems remained resilient and operational.
We believe delivering energy under these circumstances validates the important work our teams have accomplished and continuing to improve system safety and reliability.
Over the past several decades Pega consulting has published reliability rankings for American utilities, and <unk> was recently awarded the number one ranking of best in the west for the 18th year in a row.
They also received the national grid Sustainability Award.
This award is presented to a leading American utility demonstrating excellent and reliable service to its customers, including the application of clean energy technology and investment in the grid.
In combination. These awards are a great credit to Caroline Winn and the entire <unk> team.
One key consideration in supporting the energy transition is the ability to store and discharge excess power.
With more renewable energy storage and dispatch able resources are critical for maintaining the stability of the grid, even during extreme weather events.
That's why in the third quarter STG any requested approval for another 160 megawatts of utility owned energy storage assets.
This is in addition to the 171 megawatts of our recently commissioned assets that we discussed on our second quarter call.
If approved this would bring <unk> energy storage portfolio to over 500 megawatts in support of their ability to deliver safer cleaner and more reliable energy to its customers.
Importantly, as SD Genie integrates innovative technologies, such as utility owned stories to help meet its grid reliability and clean energy goals. We're also pursuing federal investment tax credits, which could result in an estimated $215 million in savings the.
The potential savings would be passed onto customers and included in the calculation to establish rates beginning in January 2025, as part of the company's continued efforts to drive a series of cost savings initiatives to improve the affordability of it services.
Last quarter, we updated you on the approval of Cal ISO is transmission plan.
And the recent assignment to us our $500 million of new projects in our service territory.
Also <unk> submitted bid materials for Cal ISO spark 1000 solicitation.
We expect to be quite competitive as part of that process.
As you know transmission assets deliver benefits integrating increasing amounts of clean energy to the broader state of California, and as such these costs are spread across the state.
Recently, the CPUC approved an increase in the authorized working gas storage capacity at Aliso Canyon.
The CPUC recognize the importance of the facility to help improve grid reliability and customer affordability.
The additional gas storage capacity is also expected to help mitigate potential price volatility.
Additionally, in the third quarter Governor Newsome directed the formation of California's hydrogen market development strategy.
Which will employ in all of government approach to lay out pathways for building a robust hydrogen market in the state.
We're excited to see the innovative ways that hydrogen may be used to help decarbonize California's economy.
On the federal side, the U S Department of energy awarded up to $1 $2 billion of funding for our regional clean hydrogen hub in California.
Socal gas is proud to be a partner and arches the statewide public private partnerships sponsoring this application.
The Doe award demonstrate support for the valuable role hydrogen could play and de carbonization, while striving to ensure safety affordability and resiliency.
California recently passed into law SB 410, supporting investments for further decarbonization and electrification of the energy system.
As electrification continues to become a larger part of the state strategy to achieve its climate goals demand on electric grid will also increase meaning utilities will need to proactively plan and build distribution grid upgrades to meet customer needs.
Similar to some of the Texas Legislative updates that Alan described.
Before 10, as California's recognition of the need to utilize existing regulatory mechanisms such as balancing accounts to support customer needs in between <unk> cycles and help California's utility make critical new investments to keep pace with the states expanding economy and de carbonization goals.
I'd like to provide a brief update on the <unk> process.
Our applications are centered around safety reliability and the delivery of increasingly clean forms of energy.
We recently filed a few settlement agreements with various intervenors, including Cal advocates small business utility advocates turn and you can.
While there remains input from other intervenors and ultimately approval by the CPUC as part of the final decision in the DRC. We believe this is a constructive step in the process.
We continue to expect a proposed decision in the second quarter of 2024.
With rates retroactive to the beginning of that year.
As a final note most of you already are aware that the cost of capital mechanism triggered and both <unk> and Socal gas filed advice letters, which are pending commission approval.
These applications are expected to increase <unk> by approximately 70 basis points beginning January one 2024.
We believe this adjustment should be approved by the commission as part of the established mechanism and.
And as one of the key components that supports California's constructive regulatory environment.
We believe California's regulatory framework is quite constructive relative to other jurisdictions, given it's forward looking rates attractive Roes.
Cost of capital adjustment mechanism.
In advanced framework for handling climate related event risks.
With California's continued economic growth and constructive regulatory framework, we believe our utilities are well positioned to continue improving their service to customers, while supporting overall system growth and resiliency.
Please turn to the next slide.
Turning to Sempra infrastructure, we've reached several key milestones in the quarter.
At Port Arthur LNG Phase one we completed the previously announced sale of a 42% indirect noncontrolling interest in the project to KKR.
And recently Port Arthur LNG Phase III received a permit from FERC a critical milestone in the project development now.
Now that <unk> has issued its approval.
<unk> is able to consider the environmental review associated with our non FTA application.
Marketing a phase twos offtake continues to build momentum as we see volumes coalesce in the market around projects that have the highest potential of commercial development.
Phase II is also expected to add two additional liquefaction trains capable of producing an incremental 13, MTBE, which would effectively double the total capacity of port Arthur.
And its entirety, the port Arthur energy hub showcases the expertise and value that sempra infrastructures integrated capabilities bring to project development.
Earlier, this year and March Cameron LNG phase III received approval for its FERC order.
<unk> infrastructure and its partners at Cameron LNG continue to develop a fourth liquefaction train.
We have now begun working with bechtel to perform value engineering to reduce construction risks and project costs we.
We expect this process will continue through the end of the year.
Separate infrastructures mission is to provide energy for a better world through its high growth low.
Carbon platform.
We're excited about collaborating with Mitsubishi Corporation, and a consortium of Japanese natural gas utility companies to explore the development in export of natural gas, which is synthesized from captured cotwo by combining it with green hydrogen.
Together, the stakeholders intend to evaluate a Gulf coast project with a view towards producing approximately 130000 tons of E. Natural gas annually that would be liquefied and exported from the Cameron LNG terminal.
Wrapping up on central infrastructure, the overall scale of our portfolio positions us to capture additional growth opportunities.
Create new synergies and support the growth of top tier projects as demonstrated by the Port Arthur Energy hub currently under construction and development.
As Jeff mentioned earlier, we believe North America's energy markets will continue to be driven by the trends of Decarbonization energy security and re shoring of manufacturing back to North America.
Infrastructure remains well positioned to contribute to and capitalize on such opportunities.
Please turn to the next slide.
Turning to our financial results earlier. This morning, we reported third quarter 2023, GAAP earnings of $721 million or $1 14 per share.
This compares to third quarter 2020 to GAAP earnings of $485 million or <unk> 77 per share.
On an adjusted basis third quarter, 2023 earnings were $685 million or $1 <unk> per share.
This compares to our third quarter 2022 earnings of $622 million or <unk> 98 per share.
Please turn to the next slide.
The variance in the third quarter 2023, adjusted earnings compared to the same period last year can be summarized by the following.
At Sempra, California, $27 million of lower income tax benefits and higher net interest expense offset by $27 million of higher electric transmission and CPUC base operating margin at SD G&A net of lower authorized cost of capital and higher regulatory interest.
Income at STG any in Socal gas.
At Sempra, Texas $49 million of higher equity earnings from weather, driven consumption, new base rates and customer growth.
At Sempra infrastructure $21 million of lower net interest expense due to higher capitalization of interest on projects under construction.
$16 million, primarily driven from higher transportation tariffs.
At Sempra parent that were $23 million of higher costs, primarily driven by increased interest expense, partially offset by a net income tax benefit given.
Given the geographic and regulatory overlays between the two companies. We are currently considering re segmentation and which are <unk> and socal gas segments would be combined into one reportable segment Central California.
We intend to complete our analysis in the fourth quarter of 2023, and assuming a positive determination is made we would implement the re segmentation in our annual 10-K.
For the period ending December 31, 2023, please turn to the next slide.
We are pleased with the strength of our third quarter results and the positive message it conveys about sampras business quality and the robust growth we are seeing across all three platforms.
Before I close let me briefly touch base on the balance sheet.
That is a core component of our capital structure and over the past three years, we've taken important steps to transition to lower rate longer duration fixed rate debt.
We've been prudent with our balance sheet management by using proceeds from the Noncontrolling interest sales to KKR in 2021, and <unk> in 2022 to repay short term debt and limit near term parent debt maturities.
In fact at the parent level, if interest rates increase by another 50 basis points, we would project a negligible impact to EPS between now and 2027.
Please refer to slide 14 in the appendix for additional information.
Looking forward, we remain focused on identifying and executing on sound capital investment opportunities.
We are continuing to optimize our financing plan to support the growth we highlighted today and we will evaluate all of our financing options, including the use of common equity to support accretive growth.
Throughout our history Sempra has demonstrated operational excellence strong financial stewardship.
Meaningful earnings growth.
And our commitment to return capital to our shareholders.
We would now like to open the lineup and take some of your questions.
Thank you.
This concludes the prepared remarks, we will now open the line to take your questions. We have time today to take several of your questions. 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 sharper razor from Guggenheim Partners. Your line is open.
Hey, guys.
Hey, good.
Morning, Jeff.
Trevor just kind of answered the question a little bit here, but on the 10% to 20% Capex I mean, that's obviously.
Difficult financing needs that have come with that and you guys have different levers right <unk> been able to kind of minimize that external equity you've recapitalized.
Yeah.
You've had obviously some unlocking of debt capacity.
I guess I'm just kind of curious on can you just elaborate on just covers comments a little bit around the source of funding this 10% to 20% does it need to come from straight equity or can you utilize what you have utilized in the past. Thanks.
Yes. Thank you for the question Shar and look I think we were.
Look to all of those levers, but Trevor since you spoke about this in the prepared remarks, well, let you provide some additional color. Please yeah sure sure.
Again.
How're you doing.
We're pretty excited about the investment opportunities.
That's really kind of what we had mentioned on this call and that's really kind of coming from the regulated utilities and thats really around continuing to deliver safe and reliable service to our customers.
That 10% to 20% increase over the five year capital plan, we will discuss in more detail on the on the year end call, but we do understand just how important the financing is on this so we're continuing to analyze the expected capital needs and we are.
Currently looking at efficient ways to finance this growth and as we always have as Jeff said, we will look at all of the options, but we will include.
Common equity as part of that consideration.
Got it thanks for that Jonathan obviously, depreciate sort of that early update around the Capex plan.
Obviously, you highlighted the 20% is this purely on the regulated side, which is good it is a bit of a wide range. So I guess, what could dictate 10% versus 20% since its already kind of skewed.
You already know, which is Texas and California.
And the Capex update would predate the California Trc final order. So is that also a potential tailwind or is that captured on a 10% to 20%. Thanks guys.
Thank you Sir the way I would think about it is we just had that Trevor and I just had our Oncor Board meeting just two weeks ago.
Theyre going through their planning process. So what's different this year relative to prior years as we've aligned our financial planning process here at <unk> with the work that Alan and Dan do.
And Dallas.
And as we've been going through that process, we will make some final decisions with the Oncor Board later this year and look to kind of report kind of a comprehensive view of our capital in February. The good news is we've seen enough direction about where the capital plans going to provide that 10% to 20% guidance. So look.
I was thinking about this before if you go all the way back to the early 2018 timeframe, we had roughly a $14 billion five year capital plan and right now we're executing on one that is close to $40 billion and we're expecting that to go up quite significantly between now and February. So we've been on a pretty big growth campaign over the last three years to five years and we're pleased that it's <unk>.
What we can guide you to is it will be anchored to utility investments and specifically led by Texas.
And just lastly for me Jeff I appreciate it that you have to ask sure IP question. Just I guess can you just talk about the impacts of that development pipeline fueled terminal move from <unk> to the first half of 'twenty for Port Arthur pipes and storage expansion are moving into the construction phase eco re gas contract is.
Is expiring, which would allow for <unk> in the mix or these developments just so we understand I think net accretive to that 6% to 8% growth rate you talk about thanks.
I'll make a couple comments then I'll pass it suggested that I would start by saying that we are at this point in the planning process, where we're not going to go into details about what's in the plan or outside the plan, what's more important to us is.
Our LNG strategy, which you are referring to is moving forward briskly, primarily because as compared to our peers. We have the opportunity to both dispatch LNG directly into the Pacific and the golf.
That you saw that Cameron phase one is producing in excess of 100% of its expected volumes. Both eco phase one in port Arthur Phase one are in construction and moving forward on schedule with a great safety record and I think what might be helpful. To your question is for Justin maybe two things, Jeff If you would.
Talk about the development status of Cameron LNG Phase III Port Arthur Phase two and then speak directly if you don't mind both to the.
Louisiana conductor as well as the storage facility great. Thanks, Jeff.
Hi, Chuck.
We're excited about the progress we're seeing at ESI across our development projects.
As Jeff mentioned at Port Arthur Phase two we recently received our FERC approval we.
We think this is a major milestone that adds to the commercial momentum that we're seeing.
We're continuing to advance commercial discussions with potential customers again, many of whom are also interested in project equity and at the same time, we are advancing engineering and construction regulatory and financing.
At Cameron Phase two we're working with bechtel on value engineering and similar to what we did at Port Arthur We and our partners are continuing to conduct that exercise and expect that work to go through the end of the year. The goal is to optimize the design and reduce the construction cost and project risk.
As we've previously mentioned these efforts should position us well to make a final investment decision in 2024 subject to definitive commercial arrangements.
Financing and any needed regulatory.
Extensions.
On the.
Pipeline and the la storage that you talked about.
Look you recall on the last call, we talked about the value of the Port Arthur Energy hub.
Port Arthur pipeline and La storage are key components of that facility and really support the operations at Port Arthur LNG Phase one.
Port Arthur pipeline I, sometimes call it the Louisiana connector has access to the liquid supply hub.
And has the capacity to deliver slightly over two Bcf a day of gas to port Arthur Phase one.
La storage is $12 five bcf.
I turn salt dome storage facility and it also supports the gas supply strategy for Port Arthur Phase, one and importantly future phases.
Both port Arthur pipeline, and LNG storage have begun the procurement and engineering process and importantly, we anticipate both to be online in advance of Port Arthur Phase one.
I think the key takeaway is that we continue to make significant progress on our LNG strategy.
And the associated development and we're bullish on both brownfield projects progressing in the next year.
So an exciting time to be in the LNG space and we think our projects are well positioned to support our customers.
Thank you Justin.
Thank you Chuck a couple of days.
Thank you maam.
Our next question please.
Our next question will come from Carly Davenport from Goldman Sachs. Your line is open.
Hey, good morning, Thanks for taking the questions.
Maybe to start just as you think about the drivers for potential Capex upside you mentioned I think at encore, our new retail connections being a key driver. There are there any other factors that you'd point to as big contributors to that potential upside on the capital spend.
No I think one of the most important things were tracking right. Now currently is making sure that we have a successful execution of our general rate case here in California that continues to go well, we've got a track record of working well with all stakeholders should get to good outcomes for our rate ratepayers. So that's one that we're following we've obviously got several things that Justin just.
Went over in terms of development opportunities related to Port Arthur Phase II and Cameron phase two both of those are significant opportunities for our company and I think just and his team have a fair amount of momentum on both of those projects and what might be helpful to you is.
Just to give a little bit color about some of the drivers specifically in Texas I haven't spent more time out there is really quite remarkable I've been in the business for almost three decades, and it's quite remarkable the type of growth and how diversified the growth is in Texas and maybe if we could Alan if you could provide a little bit more color about where some of the growth.
It is coming from and why it's impacting your capital plan. So strongly yes, you bet, Jeff. Thank you and thanks for the question garlic.
As Jeff said our growth in Oncor continues to be just very very strong across the board.
I've mentioned some of this in my opening remarks as well as in our press release, but just for example.
Premise growth for this quarter versus last quarter versus same quarter last year up 43%.
Total transmission points of interconnection.
Our.
34% versus the same quarter last year.
New requests for transmission points of interconnection or up 34%.
Retail points of interconnection.
Totals are up 28%.
Generation points of interconnection up 38%, so really strong premise growth really strong growth on our transmission system for transmission.
Yes.
And then as I alluded to earlier in my remarks, West, Texas continues to perform very very well.
Our west, Texas, whether zone peak.
Increase of 16, 6% over the 'twenty to peak.
And then really strong growth on both our Culberson loop in our Stanton loop with Culberson up 16, 5% and stand up over 23 about 23, 5%.
Really strong developments in our economic development area for new projects up 21% RFID is up 21%.
So really just strong growth everywhere across our system as I think as shown on slide six of the deck.
The diversity of our growth not only from an industry perspective, but from a geographic expansion perspective as well.
And that growth is what has been a consistent driver for our Capex plan ever since we announced the.
The $7 5 billion over five year regulatory commitment when we announced December transaction, all the way through until where we are now at.
$19 to over five.
We expect that trend to continue as we work with our board we met in October.
Again discussing with our board our Capex plan, a five year plan and what we need for next year.
As Jeff said, we're going to announce that.
On the fourth quarter call with the other separate companies but.
But we expect that it will be a significant increase if we continue to see what we're seeing right now on our system and we also expect there'll be some additional opportunities related to house Bill 2585, the resiliency Bill.
So we feel very good about where we are with our Capex plan right now going into these additional meetings with our board.
And we will be announcing later lastly, I'd, just say and I know I've said it earlier, but we're really pleased that we've been able to navigate.
This really.
Exceptional period of growth.
Maintaining our operational excellence and I think the example of that is the fact that our customers are seeing seven fewer minutes of outages than they did in the prior year.
An improvement of about 9% and also our employees have been doing an excellent job of staying safe. So all credit to them, Jeff Thats kind of where we are in those issues. Thank you Allen.
Great. Thanks, Alan and thanks, Jeff for that color great to hear and then the follow up is just around the.
CCM trigger could you just remind us kind of the next steps in that process and then as you think about your earnings expectations for next year do you embed the 70 basis point improvement in ROE or could there be potential upside there.
Thank you for the question currently I know that <unk> spoke to this on their call.
Last week in Edison spoke to it earlier this week and the way we think about it is the key.
Cost of capital mechanism was put in place for situations in our view.
When the capital markets move outside the dead band than with the rise in rates that we've all seen.
That's what that's what we've seen over the last year based on the methodology that you used in California, and the cost of capital mechanism has triggered and accordingly currently we have filed our advice letters last month with the resulting change to rig rates you.
You may have seen yesterday intervenors filed their joint filing and we will make a required next week, but from our perspective at the end of the day, we fully anticipate the commercial support the existing just adjustment mechanism thats in place and in terms of 2024 guidance. We reaffirm that today. We've taken this question before and we said that whether it goes forward. It does.
Go forward, it's within the range that we published.
Great I appreciate that color. Thank you.
Thank you Carla.
Thank you.
Our next question will come from Steve Fleishman from Wolfe Your line is open.
Hi, Steve.
Hey, good.
Afternoon, and good morning, So first Kevin Congrats.
Also congrats to Alan on the Texas Rangers Wow.
Okay.
Thank you.
Yes.
So just wanted to follow up on the comment about the segmenting in California.
Businesses is this.
Just a re segmenting for accounting purposes are you considering even some type of.
Structural merger also entities.
Okay.
Steve It's something we have under evaluation right now and as you know when you think about financial segments do you think about how Trevor and I view the business and from an accounting perspective. We think this is something that might make sense in terms of how we manage the business across three growth platforms, but Trevor perhaps you can provide some additional color from Steve or where youre at with your analysis, Yes, I think again it is.
Really kind of an accounting analysis and really is as Jeff said, Steve This is how.
We as the chief operating decision makers will be evaluating the business on a combined basis that being said, we will still be filing the accusing case for the individual businesses and our combined consolidated financial statements.
Youll still have access to that detailed information as well.
Okay.
Okay, Great. My other questions were answered so thank you.
For joining us.
Thank you.
Our next question will come from Julien Dumoulin Smith from Bank of America. Your line is open.
Hey, good morning, John and thank you guys for the time appreciate it Kevin I'm going to Echo the congrats again to you too Sir.
Thanks for all the help over the years.
Thank you.
You absolutely best of luck here.
Look I would just to come back a little bit in the same direction.
Some of the prior questions on equity.
How do you think about some of these more efficient alternatives here I mean, certainly maybe minority sell downs have been part of the MMO at various points here, but how do you think about the alternatives to common equity given the track record of pursuing these kinds of alternative avenues in recent years for LNG as you think about funding the.
Tilda growth.
Yes.
Thanks Jody.
Sure.
Or not sell down a portion of the utilities.
Most importantly, when you see this type of growth that's in front of our company. It goes back to kind of first principles at central which has been a disciplined allocator of capital.
It is important to match that discipline with efficiently sourcing capital and we've answered just a couple of different times whichever, but maybe just provide some color on how youre thinking about it yes.
Yes, again, I think we've looked at various ways over the last several years.
So look at how to how to source the.
Capital.
But at the end of the day I think from our perspective.
I think we're looking at ways that would be the most efficient.
And the most timely and right now we're.
Thinking that.
Any time you have this kind of growth we will look at all sources.
Capital needs.
Got it alright indeed.
Wish you the best of luck as you plan and I anticipate we'll hear on fourth quarter on that front.
Okay.
Maybe just to pivot in a slightly different direction as you think about the quantum of Capex and the potential step up here, how do you frame that against the regulatory lag expectations again I get that you haven't settled on 10 versus 20% et cetera, but how would you think about lag prospectively understanding some of the legislative.
Packs amongst others.
That could also play into the math about keeping up earned returns.
Yes. Thank you Julian for that question I will start by referring you to slide 13 in our slide deck and just historically it gives you a sense of how much growth we've seen in our capital plan from 2017 to 2023 and it gives you a sense of the question you just asked Trevor we've been pretty thoughtful about how we source capital.
And how we allocate capital to growth in terms of regulatory lag I think theres a couple of key takeaways here for the audience number one one of our Q2 call and again today, we've talked about the quality of the regulatory compact in Texas several different bills that Alan walk through specifically reduce regulatory lag which led to.
It is improvement in terms of expectations of $70 million to $90 million of additional earnings.
Likewise SB four tenants passed in California, very similar to some of the initiatives in Texas and this again allows for reduced lag between rate cases on some of these investments around electrification. So we.
We're going to be very thoughtful about making sure that when we grow our rate base, you're going to see earnings growth really track that rate base over time. So we take these things into consideration, we're midway through our financial planning process for the fall we feel great about the direction. Thanks for everyone for the company. We have a lot of growth ahead of us but any.
You see this level of growth what Trevor and I are focused on is making sure that we're driving discipline throughout the organization in terms of how we allocate capital and how we source capital.
Got it so more consistent level or actually could you see improvement on earned returns.
Thank you.
Our job is and we have multiple meetings about this we're trying to improve returns at all three of our growth businesses. All the time, that's clearly right in our wheelhouse of discussions of the management team.
Excellent. Thank you best of luck here.
Thank you Andrea.
It sounds good.
Thank you.
Time for one more question and our last question will come from Nicholas Campanella from Barclays. Your line is open.
Hey, Hi, Nick Thanks for squeezing me in.
Hey.
I just wanted to follow up on the segmentation for California, just what's the ultimate goal is it just to simplify the structure from a reporting standpoint or is there a benefit that can be realized for customers and.
And shareholders. If you were to kind of pursue something from a regulatory standpoint, I just acknowledged that <unk>.
<unk> and <unk> are pretty close on the filing path.
Just wanted to take your temperature there.
Sure. Yeah. Obviously this is something that we're still evaluating but remember over the last three or four years, one of my priorities with our board has been to simplify our business model and I've talked about it a fair amount Nick that anytime you can simplify your business take risk away from how you execute you can make your business more valuable so we boil this business down.
To having really three primary growth platforms.
But Texas Central, California, and separate infrastructure and all we're really evaluating at this point is would it make sense for US is key executive decision makers to make sure that our accounting reflects how we think about manage the business. This is something we're going to evaluate over the next several months and come back to you guys on Q4, it's no major legal reorganization.
Not that at all it's just a matter of does it not reflect a more simplified form of how we manage and operate the business.
Okay, Great and then maybe I could just kind of come back to some of the questions on the growth rate quickly.
I understand that cost of capital is.
Reflected in the range of outcomes here, but you have a lot of positives that you just talked about in Texas right. Obviously financing is a moving target, but should investors. They will just be expecting you to do the six to eight no matter, what the scenario or do you see upward pressure to the growth rate.
No I appreciate that question.
Always looking to put upward pressure on that growth rate, but the way we've always oriented as we don't think about a 6% to 8% growth rate as a year over year issue or necessarily even a five year planning issue over long periods of time.
One of the few companies in our sector that have been able to deliver those type of results over a 20 year period of time, we've grown our earnings per share at a 7% CAGR in the last 10 years, we've grown at an 8% CAGR in the last three or four years, we've grown at rates much higher than that so I think our orientation is youre talking about a sector that has.
Traditionally grown EPS at 3% to 4%, we're very comfortable that over long periods of time that we can deliver a 6% to 8% growth rate, but I think youre on the right track, we're certainly talking about a unique set of growth drivers in front of the business today. So we as a management team would always be looking to see if we cannot push and exceed those expectations.
Is it possible.
Hey, I appreciate it and happy Friday, Thank you.
Hey, I appreciate it Nick.
Yes.
Thanks, Jim 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.
Thank you before we close out the call I wanted to thank everyone, who took the time to join today I know, it's been a busy week with a lot of earnings calls here as a few key takeaways number one we had a strong quarter of financial results with year to date results trending ahead of the comparable period in 2022, which you'll recall was a record year for the company.
As a result, we are guiding our adjusted EPS to at or above the high end of our guidance range.
Two we're also seeing a portfolio of new opportunities, particularly in Texas to deploy higher levels of investment and are expecting to raise our five year capital plan by 10% to 20% I'd also want to mention that we'll be attending next weekend in Phoenix and very much look forward to spending time with each of you in person at that time.
Thank you again for joining this concludes our call.
Thank you for your participation you may now disconnect.
Okay.
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