DBA Sempra

Good day and welcome to SEMPRA's 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.

Good morning, everyone.

Welcome to SEMPRA's third quarter 2022 earnings call. A live webcast of this teleconference and slide presentation are available on our website under the investor section. Here in San Diego, we have several members of our management team with us today, including Jeff Martin, Chairman and Chief Executive Officer, Trevor Mihalik, Executive Vice President and Chief Financial Officer, Kevin Segar, Executive Vice President and Group President, Justin Bird, Chief Executive Officer of Sempra Infrastructure, Alan Nine, Chief Executive of Encore, Peter Wall, Senior Vice President, Controller, and Chief Accounting Officer, and other members of our senior management team. Before starting, I'd like to remind everyone that we'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 statement we make today. The factors that could cause our actual results to differ materially are discussed in the company's most recent 10-K and 10-Q filed with the SEC. Earnings per share amounts in our presentation are shown on a diluted basis and we'll 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 September 30th, 2022. I'd also like to mention that the forward-looking statements contained in this presentation speak only of today, November 3rd, 2022. 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, Glenn, and thank you all for joining us today. At Semper, we're on a mission to build one of the largest and most resilient energy networks in North America. Today, think about our company's role in the energy markets, particularly against the backdrop of what the International Energy Agency has called the world's first global energy crisis. Overseas, the supply-demand balance for oil and natural gas continues to be disrupted. War in Ukraine, supply chain challenges, and reduced investments in traditional forms of energy resources as compared to prior periods are contributing to the global challenge. Without adequate security of supplies, coal is unfortunately playing a much larger role in the global energy mix today. In fact, the combustion of coal is expected to match a record high reached nearly a decade ago and will likely move higher and set a new record next year. Here in North America, energy markets are continuing to expand and become increasingly integrated. That is why investing in a modern energy network to support cleaner forms of energy and future economic growth is central to our efforts here at SEMPRA. We're also developing new, large-scale export facilities so that European and Asian buyers of natural gas can diversify and improve the security of their energy supplies while backing coal out of their supply chain in the production of electricity. We're focused on expanding and modernizing North America's energy grids. Semper's three growth platforms, Semper California, Semper Texas, and Semper Infrastructure, are strategically positioned to help serve the growing needs of consumers in North America and around the world while staying at the forefront of innovation and integrating cleaner forms of energy. Semper's value proposition comes to life through its commitment to growing a stronger and more valuable business, one that serves the long-term interests of our customers and owners. Trevor will take us through each segment in detail, but first I'd like to highlight the strategic focus at each of our growth platforms. At Sempra California, we're continuing to innovate and invest in new technologies that are aligned with the state's clean energy goals and focus on safety, innovation, and grid resiliency. At Sempra Texas, Encore is advanced in its base rate review, which supports the continued expansion and modernization of its grid in Texas with a focus on load growth, grid reliability, and the integration of renewables. We expect these developments will lead to substantially higher capital spending in future periods. And at SIPRA Infrastructure, we're making significant progress aimed at providing cleaner and more secure energy to our customers. Specifically, we're excited to announce that we're expecting to take a final investment decision on Port Arthur LNG Phase 1 in the first quarter of next year. Shifting to the results for the quarter, earlier this morning we reported third quarter 2022 adjusted earnings per share of $1.97, and year-to-date 2022 adjusted earnings per share of $6.87. Based on the strength of these results, we are raising our full year 2022 adjusted EPS guidance range to $8.70 to $9 per share. We're also affirming our existing full-year 2023 EPS guidance range. Please turn to the next slide. In August, Congress passed the Inflation Reduction Act. This is largely viewed as one of the most significant clean energy bills in U.S. history and incentivizes substantial investments in key areas that are expected to reduce carbon in society. This legislation also builds on the Infrastructure Investment and Jobs Act, that passed last summer with a focus on modernizing infrastructure across the country. While some of the details in the IRA are still being finalized, we believe that our growth platforms are well positioned to benefit from the positive tailwinds created by this legislation. For example, a common component of these bills is the focus on electrification, and our California and Texas platforms are located in high-growth markets where the integration of renewables and the electrification of transportation continue to be major drivers of transmission and distribution infrastructure needs. Additionally, SoCalGas continues to advance its position as a leader in the clean fuel space. The federal bills I mentioned outline key spending priorities such as carbon capture, hydrogen, and biogas. This is important as you consider the different innovative pilots SoCalGas has underway that are focused on the commercialization of new and cleaner fuels. Further, SoCalGas is integrating renewable natural gas, or RNG, across its pipeline system today. As a reminder, earlier this year, the CPUC issued a decision establishing a statewide RNG procurement standard, which together with the federal bills, supports investment and continued decarbonization of SoCalGas' T&D system. And finally, at Semper Infrastructure, we have identified opportunities for further innovation in carbon capture and sequestration, such as the Hackberry project, and other investments to further decarbonize our facilities and support our goal of delivering cleaner energy to our customers. In summary, we believe our platforms are well positioned to advance the critical priorities detailed in the legislation. Please turn to the next slide, where I'll turn the call over to Trevor to provide several business updates for the quarter.

Thanks, Jeff. Beginning with temperate California, For SDG&E's 2022 cost of capital, a proposed decision and an alternative proposed decision were issued on September 30th, and the CPUC is expected to vote out a decision today. We are pleased that both proposed decisions confirm that extraordinary circumstances were present, and the cost of capital mechanism for 2022 should be suspended. If the proposed decision is approved, a second phase to determine SDG&E's rate of return for 2022 will be held. If the alternative proposed decision is approved, the 2022 cost of capital rates of return will be preserved and the proceeding will be closed. Next, I'd like to remind everyone that both SDG&E and SoCalGas filed their cost of capital applications with the CPUC in the spring to update their respective authorized rates of return for 2023 through 2025. As part of this, both utilities updated their respective cost of debt requests as recently as September. We continue to expect a final decision on these filings by year end. Also, both SDG&E and SoCalGas jointly filed a CPUC application with Southwest Gas to conduct hydrogen blending demonstration projects designed to further enhance grid resiliency and help California reach its goal of carbon neutrality by 2045. Each project builds upon years of research to identify ways to scale hydrogen blending to help drive decarbonization across multiple industries. These innovative projects are examples of our strong alignment with policymakers at both the state and federal level and are expected to provide incremental opportunities to invest in new sustainable forms of energy. Separately, SoCalGas recently made significant progress to substantially resolve the remaining legal and regulatory matters related to the 2015 Aliso Canyon Natural Gas Storage Facility leak. In October, we announced that we settled with the fifth and final property developer, and executed a settlement agreement with the CPUC Safety and Enforcement Division and Public Advocates Office to resolve all aspects of the LECA OII. The settlement with regulators is pending CPUC approval. Finalizing these settlements is a critical step in this matter's resolution, and we recorded $101 million after tax charge in the third quarter. Please refer to our SEC filings for additional details and descriptions of the remaining open issues. Shifting to Semper Texas, Encore continues to experience tremendous growth. During the third quarter of 2022, Encore added another 14,000 new premises to its system and continues to anticipate maintaining approximately 2% average annual long-term premise growth, which is significantly above the national average. Also during the third quarter, Encore added approximately 65 new transmission interconnection requests to its queue, which at this pace would set a company record for new annual interconnection requests. This highlights the continued growing demand and penetration of renewables in its service territory. Last month, Encore management reviewed with its board the need to grow and expand its transmission and distribution system with the expectation of substantially higher levels of capital spending. We expect to provide you with a more fulsome update on the five-year capital plan in the first quarter. Additionally, Encore expects a final order regarding its pending rate case by the end of the first quarter of 2023, with new rates going into effect thereafter. At Sempra Infrastructure, We've made substantial progress moving Port Arthur LNG Phase 1 closer to FID, and Justin will speak to those details in just a moment. At both SEMPRA and SEMPRA Infrastructure, we've stated the importance of advancing projects with a robust risk-adjusted return, as well as maintaining a strong balance sheet and investment-grade credit ratings. To that end, we've been working diligently on an optimal financing and capital structure plan for Port Arthur to align with those principles that would allow us to enhance our risk-adjusted returns, all while maintaining or exceeding our credit metrics. We're currently advancing two efforts to raise capital to fund the construction of the first phase of Port Arthur LNG, all with a view towards securing lower cost of capital for the project. The first work stream targets issuing debt at the project level, and we expect to kick this off in the coming weeks. In addition, we've already launched the second work stream, which aims to raise capital by selling project-level equity to one or more investors. These work streams are expected to pull forward a portion of the project's NPV to reduce our capital contribution, maintain SEMPRA and SEMPRA infrastructure's strong credit profile, while also highlighting notable value to our owners. Next, I'll turn the call over to Justin to discuss additional updates at Sempra Infrastructure.

Thanks, Trevor. Let me start at Cameron LNG, where operations for Phase 1 are going very well, with production levels exceeding expectations. In addition, both the proposed Phase 2 expansion project and related to bottlenecking activities of the existing three trains are moving along as planned. At Train 4, PHMSA, The U.S. Pipeline Regulator recently voiced support for our pending FERC permit. We continue to work through the competitive feed process, which we anticipate will be completed in the summer of 2023 and expect to take FID shortly thereafter. Also, we expect the full debottlenecking efforts to be complete before commercial operations commence at Train 4. Next, I want to provide you an update on progress at our ECHA LNG Phase 1 project. where we recently began erecting the first structural steel on site. Overall construction is slightly behind our original plan, but the project is on budget and we continue to expect to commence commercial operations in the middle of 2025. At our energy networks business, we're pleased to announce that our Pueblo Fuels terminal outside of Mexico City has started commercial operations. This terminal is integrated with our Veracruz port and Valle de Mexico terminals. and combined creates our refined fuels terminal network that we collectively refer to as Golfo Centro. This network provides for the end-to-end transportation of fuel by ship to the port of Veracruz and then into the Mexico City market by both rail and truck. The facilities are supported by a 20-year contract with Valero for the entire offtake. Finally, at our clean power business, we signed a 20-year power purchase agreement for Cimarron, a 300-megawatt wind development project with Silicon Valley Power, a AA-rated entity, to deliver electricity into the California power market. The site is adjacent to our inner Hiesa Juarez Phase 1 and 2 wind facilities and directly ties into our power transmission lines at the California-Mexico border. We plan to proceed to FID pending receipt of final permits and completion of the engineering and design work. With that, let's move on to the Port Arthur LNG Phase 1 update. Please turn to the next slide. As Trevor mentioned, we've had an exciting quarter. Port Arthur LNG continues to draw strong market demand, and its advanced permitting and development status makes it an increasingly attractive project. As I have mentioned, there are three key work streams associated with reaching FID. and we are optimistic that we can achieve each of these by the first quarter of next year. First, we completed the EPC refresh and signed a $10.5 billion contract that is dependent on reaching FID. This fixed-price turnkey contract creates critical momentum for the project. Efforts to date for the project include preparing the site for an efficient construction process, moving a major state highway, building dock capacity for the construction materials, and conducting robust soil tests across the entire site. Second, as Trevor detailed above, the financing work streams are underway. Finally, on the marketing front, things continue to progress at a rapid pace, and we are in advanced discussions with several potential customers for long-term off-date contracts and are confident in our ability to convert existing HOAs into SBAs. Based on these discussions, we have more than enough interest to be in a position to take FID in the first quarter of 2023. Please turn to the next slide. The interest in Port Arthur LNG exceeds the volumes of Phase 1, and we are actively marketing an expansion that could include a combination of Trains 3 and or 4. The takeaway here is that there are scenarios in which we are oversubscribed for the Port Arthur LNG Phase 1 development project and look forward to advancing ongoing offtake discussions for a potential expansion phase. We will provide a further update on Port Arthur on our fourth quarter earnings call. Please turn to the next slide where Trevor will review SEMPRA's financial results for the quarter.

Thanks, Justin. Turning to SEMPRA's financial results, Earlier this morning, we reported third quarter 2022 gap earnings of $485 million or $1.53 per share. This compares to third quarter 2021 gap losses of $648 million or $2.03 per share. On an adjusted basis, third quarter 2022 earnings were $622 million or $1.97 per share. This compares to our third quarter 2021 adjusted earnings of $545 million, or $1.70 per share. On a year-to-date basis, 2022 GAAP earnings were $1,656 million, or $5.23 per share. This compares to year-to-date 2021 GAAP earnings of $650 million, or $2.09 per share. Adjusted year-to-date 2022 earnings were $2,172,000,000, or $6.87 per share, which compares to our year-to-date 2021 adjusted earnings of $1,949,000,000, or $6.27 per share. As a reminder, this is the first quarter where we will reflect the full impact of the minority interest sales in SEMPRA infrastructure partners which closed with KKR in October of 2021 and Adia in June of 2022. In addition to improving our year-over-year results, we raised over $5 billion of capital through our minority interest sales, a portion of which was used to lower parent debt and reduce our interest rate exposure outside of our utilities. Taken together, our strong financial results and growing adjusted earnings demonstrate the strength of our underlying business, Please turn to the next slide. The variance in the third quarter 2022 adjusted earnings compared to the same period last year can be summarized by the following. $79 million of higher earnings at Semper California from income tax benefits from flow-through items and CPUC base operating margin net of operating expenses at SDG&E and SoCalGas. $50 million of higher equity earnings at Semper Texas Utilities primarily due to higher consumption and customer growth, and rate updates to reflect increases in invested capital. $74 million of lower earnings at SEMPRA infrastructure attributable to higher non-controlling interest, net of operating earnings, and $22 million of lower losses at parents and other. Please turn to the next slide. We are pleased with our performance this quarter. which has generated a lot of momentum across our platforms for the remainder of the year. We look forward to progressing the cost of capital and general rate case proceedings at Sempra California and the resolution of the base rate case at Encore while continuing development progress at Sempra Infrastructure. We view these work streams as opportunities to continue to drive significant growth in shareholder value into 2023 and beyond. And with that, This concludes our prepared remarks, and I will now stop and we can open the line up to take some of 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 11 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause for just a moment to allow everyone to signal for questions. And we'll take our first question from Shar Perez from Guggenheim Partners. Your line is open. Hey, Jeff and Trevor.

Hey, Shar. Morning.

Morning. So, Jeff, good news on Port Arthur I for sure. Just on Port Arthur II, as your slide noted, you guys have some offtake already locked in, and media, I think, has reported on more agreements with Williams. Are those sort of in advanced stages as well? And in terms of FID formation, just given Bechtel has been on site for Port Arthur, is there an advanced understanding of the EPC process and available EPC capacity to do the work on phase two in sequential order?

Yeah, look, it's a great set of questions you have there. I would refer, again, the audience to slide eight of our presentations, and it kind of reflects what you were just describing, which is, as you look forward to phase two, which is the opportunity to deliver both train three and train four, it reflects the fact that we've got volumes currently committed at Cameron. that could be moved over to support phase two, and it also reflects roughly three million tons per annum of capacity that's in advanced negotiations currently. But this goes back, Char, to something we've talked about a lot in the past, which is we really think there's a strategic advantage at Port Arthur. So remember, we've got 3,000 acres of frontage on the waterway there, roughly three miles of access to water. Also what's very attractive to customers is the potential scale of the development opportunity. You'll recall that this has the opportunity to be up to eight trains, and if you ever got that far, and obviously that's well into the future, it would be the largest export project in the Western Hemisphere. So it really has the ability to scale quite nicely, and to your point, Bechtel probably has the best reputation for delivering projects on time and on budget. They've got great craft in the Gulf Coast region. They have spent a significant amount of time on this site and that's been a real big linchpin in getting us confident in our FID opportunity for phase one, which we'll talk about hopefully in Q1, but it also is a real competitive advantage for phase two. When you think about the considerations I just outlined, there's no question that we're receiving a lot of strong inbound interest on Phase 2. And I will tell you something else. As we make progress, Char, toward getting to an FI decision on Phase 1, it actually increases the interest and likelihood that Phase 2 will go forward. So we said this in our prepared remarks, but by the time we get to our February call, we're hopeful to provide a lot more detail on our progress on Phase 2.

Perfect. And Jeff, Bechtel has the EPC capacity to continue on phase two.

Look, I will tell you that they're one of our finalists on the Cameron expansion project. Obviously, they've got opportunities to work on a variety of projects around the world, but from our perspective, we're really pleased to have them part of Phase 1, and there's no question that the most ideal situation for our company is to not allow your EPC contractor to demobilize. The ability to go from one project to the next could be a real competitive advantage for Port Arthur.

Okay, great. And then, Jeff, just moving on to the guidance assumptions, I guess, what are some of the inputs that you're thinking about as you're reaffirming 23, especially as we're thinking about bridging from 22? There's clearly a strong base in 22. But can we get your thoughts on some of the contingency that is building for 23 and maybe how you're seeing some of the offsets like O&M and interest rates get incorporated into the 23 assumptions? Thank you.

Yeah, let me give you my perspective on this. And I will tell you, this goes back to something that we as a management team have discussed, which is we're really, really happy with the progress we're making across all three of our growth platforms. I think the true competitive advantage for any company always comes down to the depth of your talent and leadership and how crisp your strategy is. And I think you're seeing both of those factors show up in our results. Let me give you a little bit of perspective before I turn to 2023. When you think back to where we were in 2021, we launched 2021 with an estimated guidance range of $7.50 to $8.10. And Char, you may recall that we actually delivered $8.43 last year. And we did not change our 2022 guidance. We kept our 2022 guidance. at $8.10 to $8.70. And now we're in a great situation where we're updating that guidance to $8.70 to $9.00, or a midpoint of roughly $8.85. So now as you look forward into 2023, our guidance, which we published in February, is unchanged at $8.60. to $9.20, or roughly a midpoint of $8.90. So very similar circumstance that we're walking into next year in terms of how we found ourself earlier this year. But I think the key for us is We are very excited about the strength of all three growth platforms. Certainly the progress we're making on Port Arthur Phase 1, and particularly Cameron expansion, causes us to have a pretty bullish view of the future. And in our prepared remarks, we reaffirmed our guidance for next year. And once full visibility to our 2022 financial results, we'll be excited to take this up again on our February call. Got it. Terrific execution, guys. See you in about a week. Thanks a lot, Char.

Thank you. One moment for our next question, please. And our next question will come from Ross Fowler with UBS. Your line is open.

Good morning, Ross.

Hey, Jeff.

Hey, Trevor. Morning. So maybe following up on Shara's question a little bit here, you know, there's certainly some headwinds I can think about into 23 from 22. One, you've had, you know, good weather in Texas this year. You know, there's some excess marketing revenue on Cameron. from some excess volumes in the second quarter. And then obviously there'll be a full year at the minority stake. So are those some of the drivers that are sort of, you know, as you contextualize 23 against your six to 8% sort of long-term growth guides that you've given previously that you're thinking about. And then as you think about 23, once you get to 22, I think you said in your answer, Jeff, you're going to work into that 23 number and you provide a little bit of an update on in February in the call.

Yeah, what might be helpful, Ross, is let me just comment, you know, potentially in terms of how I think about the long-term growth opportunity at Semper, and I'm going to pass it to Trevor, and maybe, Trevor, you can walk through some of the drivers for the quarter because I think that informs, you know, our continued bullish view for next year. But I was thinking about this, Ross, that earlier this year, We began executing on our $36 billion five-year capital program, and I think as you've seen us update across the year, we've been making great progress. We're still very comfortable with our 6% to 8% long-term EPS growth rate, and I think as you've heard us describe a new set of opportunities that are in front of us, I think we're going to be working really hard to see if we can't beat those numbers in the future. And I look back at our growth rate on an earnings per share basis now at the new midpoint of 885. And since the end of the year in 2017, that would allow us to grow our earnings per share at 11% CAGR. So I think we've got the right mix. We've got the right strategy. We have really sharp execution occurring across the business. And that's showing up in the quarter. And maybe, Trevor, you can talk about some of the puts and takes in the quarter and how that makes you think about 2023. Yeah, sure. Thanks, Jeff.

Yeah, Ross, you know, as Jeff said, there were some puts or takes in the quarter, but underlying that, I think, you know, we really did have a strong operational performance across all three platforms. And so what I want to do is just maybe give you a little more color and clarity around what we presented on page 10. You know, first at the Cal utilities, there was $36 million of higher CPUC-based operating margin, and that was roughly split evenly between the utilities. And then in separate Texas, Encore had significantly higher consumption, as you mentioned, this quarter, as well as rate updates from the increase in capital deployed year over year. And that really was about $58 million of higher earnings. And then third, and this is a big point that we kind of brought out in the prepared remarks, At SI, the big driver here relates to the minority interest sale, and this really reduced the period-over-period earnings of about $83 million, but these were partially offset by higher earnings in the business, driven by higher gas prices and the outperformance in the power business, as well as assets placed into service. So what I'm really pleased about is that we had a 9.5% year-over-year growth for adjusted EPS over the nine months ended this September 30th. And as Jeff said, you know, all in all, this really speaks to the strength and diversity of the T&D platform. And so we're pretty pleased about, you know, where we are in raising our guidance.

That's great, Trevor. Thank you for that. And then just one more from me. You talked about sort of running through the, or starting the capital raise project and the financing work streams for Port Arthur. You know, the HOA, I think, can you remind us that contemplated a 30% equity stake from ConocoPhillips, did it not?

It sure did.

Okay. And then one last one, maybe just an update on the Angeles Lake project. That's a pretty big and exciting potential growth area for you with hydrogen. You know, what steps, you know, from here are in the near term as we try to continue to move that to realizations?

Thanks for asking about that, Ross. I'll make a couple comments, and I'll pass the mic to Kevin to fill us in on some of the details. It's really interesting. As we think about California and SoCalGas in particular, one of the things we talk a lot about internally as a management team is the importance to winning the business of today. Quite clearly, our customers are asking us to decarbonize the system and make sure it's safe. And that's one of the reasons we talked about this in our prepared remarks. We've set a self-imposed goal of delivering 20% of renewable natural gas to our core customers by 2030. We're very pleased to see the state step forward and mandate that all load-serving entities should be delivering at least 12% for that period of time. So we're going to make sure the system's safe today. We're going to continue to decarbonize it. But there's no question that hydrogen is the future, particularly for hard-to-decarbonize areas around heavy-duty trucking, some industrial applications, and hopefully for power generation. The United States is behind in the hydrogen race. Europe is making great progress. Many of our customers on the LNG side, particularly in Japan, are much further ahead. And there's a clarion call across the policymakers in California that they want to see companies step up in innovation and new applications around hydrogens. That's one of the reasons we're really excited about the leadership that SoCalGas is showing. And, Kevin, maybe you can provide a little bit of visibility into next steps on Angela's link.

Yeah, thanks for that. Just kind of echo Jeff a little bit here, but Southern California is one of the nation's largest manufacturing areas and has a very significant industrial base, along with the nation's largest ports. So opportunities to back off diesel and other fossil fuels and even natural gas to help accelerate California's and the region's clean air goals is really important. And we've gotten a lot of good early feedback from stakeholders around this project, including city and state officials, labor and environmental groups, All of it's been really positive. Even the governor, Governor Newsom, and Energy Secretary Granholm have had some positive statements. So far, so good on that project. And I guess in terms of next steps, we filed for a memo account at the CPUC to start capturing costs. related to developing a large project like this. I think the memo account asked for something just short of $30 million, and we expect that that memo account would get approved before year end. So, you know, it's early, but we're really bullish on this. Thanks, Kevin. Thanks, everybody. See you in a couple weeks.

Thanks a lot, Ross.

Thank you. One moment for our next question, please. Our next question will come from Nicholas Campanella from Credit Suisse. Your line is open.

Hey, good morning, everyone. Thanks for getting me in here. Morning.

Hi, Nick. Morning.

Just a couple questions on just the financing comments on Port Arthur. Can you just maybe expand on where you have flexibility in those two efforts to raise capital? I recall you have some amortizing debt at Cameron 1 through 3. So is there additional kind of debt capacity at the SIP level already? And then just with the ownership structure around Port Arthur, is there kind of like a targeted pro forma ownership we should be thinking about for phase one? And is the goal ultimately here to limit external common equity at the SEMPRA level? Thank you.

Yeah, there's no question it will be a goal to limit any external equity at the central level. And you raised some great points. And let me kind of cap off. There's two work streams underway here. One is the equity process that's referenced in our slides. And after I cover that, I'll pass it to Faisal to talk about the debt amortization and his approach to the financing, which they're looking to launch near term. As we've disclosed in the past, Nick, we've been taking a tremendous amount of inbound interest regarding participation in the capital structure at Port Arthur over the last 12 to 18 months. So we see this as an opportunity to really kick off a sales process to sell a non-controlling stake that could result in separate infrastructures' ownership settling to a level similar to ConocoPhillips, whether a little bit more or less. The key for us is we're really focused on three goals on the equity side. Number one, making sure that we highlight value for our owners, that we use this as an opportunity to pull forward the project's NPV to reduce our capital contribution. One of the things we talk about a lot inside the company is really replicating what we did at Cameron, which effectively allows us to take a carried interest, and also make sure that as part of this process, it allows us to maintain Sempra and Sempra Infrastructure's strong credit profile. So in general, this is a way for us to effectively take a carried interest in the project, create a really strong return on invested capital, and deliver a great outcome for our shareholders. And I would say just as importantly, and you'll hear us talk about this a lot more, what's most important about phase one is also making sure it sets us up well for Phase 2 and 3. So this is the type of project, given its scale, you know, getting Phase 1 done really makes future phases a lot more exciting and a lot more probable. But maybe, Faisal, I can stop there, and maybe you can turn to the debt side and what the plans are for the financing.

Yeah, sure. So first of all, Nick, you're right. We do have amortizing debt across all of Semper Infrastructure. It's not just at Cameron, but it's also within some of our joint ventures in the pipeline side. And so that does give us sort of more debt capacity at the Semper Infrastructure level. And actually our credit metrics have improved from where we were earlier in the year to where we are right now. So we are building sort of debt capacity as we sort of get closer to FID. And as we think about sort of the layers of financing for Port Arthur, we've been very consistent about this over the last several quarters. First, we're going to start with sort of non-recourse project financing underpinned by credit-worthy counterparties. So it's non-recourse. It's investment-grade pricing. We've got strong interest from the banks to finance this project. Secondly, as we've done in the past, It's project-level equity for off-takers. So you've seen ConocoPhillips, a world-class sort of partner, step into this project with us on the HOA side, and so that's for a 30% equity interest. And then, as Jeff alluded to, we've got the potential to sell down additional equity at the project level and highlight value. So that's kind of where we're at. We feel like we're in a good spot, and we've been working on this for a very long period of time.

Really helpful. Thanks a lot. And just shifting to Texas and Encore, just you know, line of sight to getting this case done here? I know we're kind of coming towards the end of the process, but is a settlement still in the cards, if at all? And are you willing to just kind of take it to the full distance on the final order at this point? Thank you.

Sure, I would just start by saying we're pleased to have the Encore team in the room with us today. So we've got Alan with us, and I'll let Alan jump in here in a second. But, you know, Trevor and I just got back from a board meeting in the last couple weeks in Dallas. Actually, we were in Fort Worth. You know, we continue to be really impressed with the team, the quality of the relationships there. There's obviously a stunning amount of growth taking place across the state. So I think the rate case is really important. And I really think that we're going to get a great outcome, independent of whether it's a settlement or a commission decision. But, Alan, perhaps we could just talk about procedurally where we're at in the rate case and how you think about next steps.

Yeah, you bet. Thanks, Jeff. Just generally where we are, as you said, we did have our hearing on the merits, September 26th through October 4th. Since then, all the parties have filed two rounds of post-hearing briefs, and we're anticipating a proposal for decision at the end of December. With the Commission likely to take up a final order in a couple of open meetings at least, first quarter of next year, but final order before the end of the first quarter. Just a little color on the hearing. We believe it went very well. Our witnesses performed very well. Many of them were not even cross-examined. From a settlement perspective, you know, we have had extensive discussions. We will continue to have discussions. Thus far, they have not reached something that we believe is beneficial to the company, the stakeholders, and especially the ratepayers. So while those conversations will continue, we are very confident in our case. We think we've put on a very strong case, and should we need to go to the commission, we're comfortable and confident in doing so. Thanks. Thanks, Alex.

Thanks a lot. We'll see you in a few weeks here.

Appreciate it.

Thank you. One moment for our next question, please. Our next question will come from Michael Lapides from Goldman Sachs. Your line is open. Hey, Michael.

Good morning. Good morning, Jeff. Thanks for taking my questions. One is probably a follow-up for Alan, which is starting to see housing prices dip a bit in Texas. It's happening in a lot of places, but some of the dips in not only in and around the edges of your service territory, but also kind of south of you are starting to get pretty meaningful. Just curious how that impacts, if anything at all, or how a slowdown in residential construction impacts kind of your views of what kind of resi-load growth would be and what the need for new infrastructure. I know you're talking a lot about potentially raising your capital spend budget. My guess is a lot of that has to do with a lot of the new renewable and storage that's coming online. But can you kind of talk high level about those items?

And, Michael, I'll just jump in real quickly to say that, you know, I think we're really seeing great growth on the residential, customer, and industrial side. And, Alan, what might be particularly helpful to be responsible to Michael is some of the news you've got in terms of reaching the highest permitted housing starts and what some of the issues are in terms of letting that show up on the system.

Sure, sure. Thanks, Jeff. Yeah, Michael, I agree. We're seeing, as I think was in some of the remarks earlier, we added 14,000 new premises this quarter. And while we're a little below probably in the 1.7 range, whereas we've been 2% over the last few years, we're still anticipating and seeing long-term projections still in the 2% range. To Jeff's point, and I may have mentioned this before, we saw in June our largest request for new subdivisions ever in our company's history. So while there's a little dip in premise growth so far this year, and I'll tell you a little color on that, is what we're hearing is that as primarily supply chain and labor issues associated with the builders in our areas. But the demand for lots, the demand for new subdivisions, we're still seeing long-term around 2%. And just, you know, overall on our system, I know you didn't ask about it, but it's been discussed a little bit previously. Yeah, to your point, transmission points of interconnection, especially on the renewable side, are extremely high. Like Jeff said earlier, we're headed toward a historic year, and that's accurate. We're at 565 active requests right now versus 370 the same time last year. And West Texas just continues to grow at record pace. We're seeing 29% annual load growth on the Culberson Loop, a new peak of 1,000 megawatts versus 900 megawatts last year. New peaks in the far west Texas weather zone of 54.86 versus 51.63 last year. Stanton Loop growing at 16% annual load growth. And similar back to your residential, just another data point for you there. It's not just the DFW area. We're seeing, for example, Waco, load growth in Waco at three times the ERCOT average. So we're continuing to see really strong growth across our system, regardless of a little dip this year in premise growth, which we think is related to issues on the builder side, and we think it will bounce back, and we're continuing to see projected long-term growth at 2% on the premise side on our system.

And, Michael, I'll make one other comment maybe to wrap it up with Alan, which is Trevor and I will be back at the Encore board early next year. to review their final CALPHA program. You may recall that about this time last year we had approved their prompt year CALPHA program and reviewed their five-year plan, and it wasn't until like February or March, I believe, Alan, that we already had updated it by about $200 million. So this will give us a chance to pick up on some of these new opportunities. And the confidence level, at least from SEMPR's perspective, and I think Alan's, We're going to have the opportunity to put a lot more capital to work in the future than is in the current plan. So stay tuned, and we'll look forward to updating everybody on next year's call about that.

Got it. Thanks, Jeff. Hey, I had one follow-up, and it's probably a Justin one. Coastal Zoo, I think you made the comment that Coastal Zoo may be a little bit behind schedule, but the cost hadn't really moved, and it's a matter of months. It's not years, but fine. If I remember correctly, y'all have contracts already on one of the big pipelines that goes out of the Permian west towards the California border, and then it would connect and head south to Costa Azul. Spreads between Oaxaca, West Texas, and California are really wide. I mean, Oaxaca gas went negative recently. Does that imply that in the short run, long term, that gas is going to be used to supply Costa Azul small scale? But short run, are you guys benefiting from that? And has that gotten more material and potentially a tailwind? I know you've talked a lot about some of the headwinds for next year.

Yeah, Michael, I think, you know, as we move forward toward FID on ECHA Phase 1, one of the things our Board of Directors and we wanted to make sure is that we thought we had adequate transportation capacity through the areas you described. And until we actually utilize that capacity for ECHA, it really gives us a chance to optimize, and you've been seeing us do that. So, yes.

It's a tailwind. It's a tailwind. Got it. Meaning that the fact that Waha is pricing well below a buck and SoCal gas quarter is above Henry Hub, until Costa small scale comes online, you're actually capturing that spread.

Correct.

Got it. Thanks, Justin. Much appreciated. Thanks, Michael.

Thank you. One moment for our next question, please. Our next question will come from Julian DeMoulin Smith from Bank of America. Your line is open.

Hi, Julian.

Hey, Jeff. Good morning, team. Thank you, guys. So I just wanted to refresh here back to where we started the conversation on Port Arthur, PA1, and more importantly, PA2 here. Can you give us a little bit more of a sense? You alluded to it in the prepared remarks as to the ability to pivot readily into PA2 here. And can you speak more directly to the permitting context here, how that might impact the EPC timeline and also the ability to readily translate that HOA interest?

Well, let me do this. Let me speak real briefly to Phase 2 and recap some of our prior comments. Then maybe, Justin, I think there might be value to go from the Bechtel contract plus some of the things you're working on to make Q1FID happen. But I would just go back, just take you back, Julie, if you allow me, to this macro view. You've got a big scalable project, right, which is unique relative to a lot of our competitors. It's well situated on the ship channel there with over 3,000 acres. And we've had Bechtel on site for a very, very long period of time. So that enabling EPC contract that helps us launch phase one is critical as we continue to build out and refine our price estimates for phase two. In our prepared slides on slide eight, you can see we've got pretty advanced interest, at least for train three thus far, and we've got conversations well beyond that. Our goal really is we make and crystallize the opportunity for phase one. There's no question that the market interest in phase two will be increased, and we're hopeful to be back in front of our investors on our end of year call, Q4 call in February, with a more detailed view about the Phase II opportunity. But there may be some benefit, Justin, just to walk through in a little bit more granular level what we're trying to accomplish over the next 90 days.

Yeah. Thank you, John. Julian, I think as we look at Port Arthur Phase I, I think the completion of the EPC contract is really the linchpin that's really going to unlock us to have the ability to convert those HOAs into definitive SBAs and really to capture the remaining interest in that project and, frankly, additional trains at that project. That work stream is ongoing, very dynamic, moving quickly. On the finance side, I think Jeff and Trevor and Faisal all covered that. And then finally, you know, we're working through the required governance process with our boards of directors and management to really get to a point where we can take final investment decision in the first quarter of next year. As Jeff mentioned, as you move toward that date, you know, the ability to commercially contract on phase two and subsequent phases increases. As you know, the market tends to coalesce around projects that have a high probability of launching. And I think, you know, the market's starting to see that momentum at Port Arthur.

I just mentioned one other contextual comment for you, Julian, that you might find interesting. As you may recall, over the last 12 months, you've seen various parties announcing SPAs, and you've seen us take a lot of questions about HOAs. But what this really reflects is The key linchpin is getting that EPC contract done and not committing to the pricing of the offtake until you have that in hand. And now Justin's team is running quickly to go back and document those definitive SPAs on the basis of those economics, which is really positive. And finally, on our Q2 call, we got pressed a lot about the future opportunity for Port Arthur. And I actually said there are scenarios where it could occur after the the FID for Cameron, and there were some scenarios where it could occur in the first half. So it's a real credit to Justin's team and really a validation of the level of interest in Port Arthur that we've been able to accelerate it to a projected FID decision in Q1.

Right. Got it. But from a permitting perspective, any specific updated timeline there just on PA2? Just when can we get to that FID for the second round here? Just to reconcile that.

Yeah. Yeah, so as you look at Port Arthur Phase 2, I think, again, three work streams that you should watch. One is commercial interest, and we've talked a lot about that today. The second would be really the construction contract. And, again, as Jeff mentioned earlier, the important thing there is the quality of Bechtel and really the ability to not force a demobilization and remobilization puts us at a competitive advantage. And then finally here, you know, we're waiting for our FERC order. Well, we have applied. That has been before FERC. And, you know, we're continuing to move that forward. So we do need a FERC order for subsequent phases at Port Arthur. But, again, we think that process has been commenced a long time ago, and we're optimistic.

Okay. So it's a little bit unclear on timing. Okay. But just pulling it all together, Jeff, if I can, when can you be in a position to provide sort of this longer-term view with an EPS CAGR that includes presumably at least PA1, right? I know you talked about the CAGR a moment ago with Ross, but can you speak to this about when we get that fully inclusive one?

Yeah, we have a convention, as you know, of doing a roll-forward of our five-year plan. That process is underway by Peter Wall and Trevor currently. And I think we'll be in a position on our February call to do a couple things. We'll go back and re-look at our 2023 guidance. We will expect to announce our 2024 guidance. And we hoped at that time have a definitive view on the role forward of our capital program. You know, sometimes in the past, Julie, you may recall, we've saved that for an analyst conference later in the spring. We have not made a definitive decision with the IR team as to whether there will be an analyst conference. And my personal orientation is to come back on that February call and make sure it's fulsome and be in a position to talk about the role forward of our five-year capital program, which, to your point, should reflect the opportunities that we're discussing this morning.

Excellent. I look forward to it.

Good luck, guys. Thank you. Thank you, Julian.

Thank you. One moment for our next question, please. And our next question will come from David Arcaro from Morgan Stanley. Your line is open.

Oh, hi. Thanks for taking my question. Good morning. I'm wondering if you might be able to talk to just the hydrogen opportunities a bit more, the recent MOU with Avangrid, and then thoughts on the blue hydrogen potential opportunity down in the Gulf Coast. Just when might we see, in terms of timing, some potential concrete project opportunities arise?

Yeah, sure. We're very bullish on hydrogen. I made some comments about this earlier. One of the benefits we've had is really twofold. One is S&P came out with a study or an article in the last six months that talked about the 25 leading pilot programs for hydrogen in the United States. And over half of them, David, are in the Semper family of companies. So we've made this a strategic priority. I've made this comment before. We need to win in the business of today while we're building a competitive position in the business of the future. And there's no question that across our three growth platforms, hydrogen will play a larger role. So most of what's taking place in California today is folks are evaluating opportunities to either blend hydrogen into the existing pipeline system. There's been some work done at SoCal Gas about creating hydrogen-fueled homes on the residential side. Fuel cells are a big opportunity for our core customers, but I think broadly speaking, this is a strategic commitment. I think one thing that I would follow is one of the things that Kevin talked about earlier, is this memo account process that we expect to have resolved by the end of the year. That will be a very, very strong signal from the policymakers in the state of California about their commitment to make sure that we fully optimize the hydrogen future. But maybe, Justin, since we have an LNG and net zero P&L in Justin's portfolio, you could talk about how we're having conversations with some of our LNG buyers. And I've said this very recently in a speech. that the United States has a unique opportunity to not only improve the energy security of many of our allies, I think we're in a position to produce the cleanest value chain from the wellhead to the liquefaction facility of any country in the world. And I think innovation is going to be a key part of that. But, Justin, maybe you could talk about some of the projects you all have underway to help introduce hydrogen.

Yeah. David, great question. Look, we at Semper Infrastructure are very excited. As Jeff referenced earlier, we talk about succeeding in the business of today and really looking forward to being able to be successful in the future. In the middle of last month, you noted we signed our agreement with Avangrid, and that really is about working together to identify, appraise, and potentially develop large-scale green hydrogen projects to meet the needs of energy and decarbonization in both the U.S. and abroad. The LNG business, as Jeff mentioned, provides a strong foundation for our ability to work with all of those partners as they look to decarbonize and look toward future energy, whether it's green hydrogen, blue hydrogen, or blue ammonia. So we're excited about the opportunities in front of us. I think the other thing you saw recently, the Inflation Reduction Act, really provides a springboard for not only the hydrogen industry, but also for carbon sequestration. We're excited to continue developing Hackberry with our partners. We think it's a wonderful opportunity to really decarbonize our LNG facilities and really look at as a means to capture carbon in local industrial facilities as well. So we're very excited about the opportunities in the net zero side of our business.

Okay, great. Appreciate all the comments. I'll leave it there. Thanks so much. Thank you, David.

Thank you.

One moment for our next question.

Our next question will come from Durgesh Chopra from Evercore ISI. Your line is open.

Hey, guys. Thank you for giving me time. I know we're close to the hour here. Hey, Durgesh. Hey, Jeff. Thanks again. Hey, maybe just, you know, given your sort of historical timeline precedence and considering shortages, supply chain issues, et cetera, et cetera. How should we think about assuming a phase one, you know, FID green light here in the first quarter? How should we think about, can you give us a timeline on the COD of that project?

Well, you know, first off, that will certainly be tied to the date and time and when we take FID. These projects typically get built between 50 and 60 months. But if you look at Q1 and assume that there's an FID in that time frame, I'd look out in that 50 to 55-month time frame, and you can back into a reasonable estimate.

Got it. Perfect. Thank you. Just one quick follow-up. As we think about financing the project, are we going to – basically, the question is, are we going to be – are you going to be fully financed, you know, the $10.5 billion by first quarter next year, or is that expected in chunks?

Yeah. You know, Justin did a great job of kind of outlining some of the key milestones we're tracking to get to FID, but our assumption and goal, Girgash, would be that when we get to an FID decision with our board, we go through a very fulsome process of evaluating all aspects of the transaction, and we will not take FID without having lined up both the financing and the equity.

Got it. Perfect, guys. Thanks so much. Excellent quarter here. Thank you again.

Thank you for joining our call.

Thank you. One moment for our next question, please. Our next question will come from Steve Fleischman from Wolf Research. Your line is open.

Hey, Steve. Hi, Jeff. Sorry to make the call go the full distance here. But just one strategic question. So obviously, you're having a lot of success with growth projects in all your businesses. And we're now seeing, I think, a lot better public market values of midstream companies, and particularly companies that are successfully growing LNG. So just when you're looking at that big picture decision on the structure of the company and the like, just maybe it would be helpful to get some thoughts on how you're kind of thinking about that in terms of does it make sense to keep all this together or to review other options. Thank you.

Yes. Sure, no problem. I'll tell you, it's a great question. And one of the things that we spend the most time on with our board of directors is strategy. So when you think back to the 2017 timeframe, Steve, assuming we hit the midpoint of the new guidance range we put out today, we've been successful in growing the EPS of this business at 11% CAGR. So I think we've got a really high-quality leadership team, and I don't mean just the folks in this room, but across our top 25 or 40 leadership group, We've got a really good high-performing culture, and I think we've got a razor-sharp strategy. One of the things that you're really seeing come together in the first three quarters of this year is our ability to produce improved financial results. And all three of our growth platforms, and we try to integrate those activities from the central level, I would say are doing extremely well. And you're absolutely right. We've got growth in California. We've got growth in Texas. We continue to have a lot of growth opportunities in Mexico, and certainly Justin's business really has a unique opportunity set. So I would say we're currently happy with the overall organization of our three platforms, and particularly Semper Infrastructure. Remember, too, Steve, that Semper Infrastructure has been very critical in providing additional cash flows to support growth in our utilities. And I think going forward, part of what we need to do to be successful is to continue sourcing the lowest cost of capital to help SI grow. You've seen us be fairly creative through the KKR process and ADI and now the process that Faisal described earlier today. So we've demonstrated a willingness to transact at the SEMPRA infrastructure level. and at the project level, and we'll continue to forecast, and we continue to forecast a portfolio of new opportunities to grow that business. So I think the most important takeaway relative to your question is our sole focus is on driving value to separate shareholders. And I think you've seen this, but we're willing to look at new and better ways to do that And part of that is continue to optimize all three growth platforms. So there's a fair amount of excitement inside of our company about the increased earning power of all three platforms, and we're looking forward to executing into 2023. Great. Thank you very much. Thanks for joining our call, Steve.

Thank you. One moment for our next question. And we'll take our last question from Anthony Crodell from Azuho. Your line is open.

Jeff, Trevor, how are you doing? Good afternoon. Just hopefully quickly, two quick questions. One on Cameron. Is there ability to also go forward with construction of Cameron at the same time if you go forward with Port Arthur? Is there enough craft labor and everything to do those coincide? And the second follow-up is on Port Arthur, too. Is there a – you talk about maybe selling down some of the equity ownership to finance it. Is there a desired level of ownership? And I'll leave it there.

Yeah, I appreciate the question. I would tell you that, you know, we're now forecasting an opportunity to take FID on Port Arthur Phase I in the first quarter. Hopefully we'll have a fulsome update on that on our February call. And you'll recall that we've also forecasted taking FID on Cameron Expansion in in the middle of the summer or in the Q3 once we go through the competitive seed process that we have ongoing. So there's no question that we're in a position in terms of tradecraft and our expectation from our EPC contractors that we can deliver both projects at the same time. And then going back to phase two of Port Arthur, we've talked about this a little bit. I think the most important thing here for us is stay focused on phase one. The closer we get to taking FID on phase one, we're going to see the permitting process come together. We're going to crystallize some of the contract opportunities around phase two. And remember, the real strategic opportunity at Port Arthur is the ability to continue to scale it. So multiple phases become more probable once you get phase one done. So I really appreciate the question.

And just on Port Arthur, is there a desired level of ownership there?

Look, I think you're going to see us take different approaches at different times. I think the best example we can give, and we really appreciated being able to contribute the REGAS facility into the capital structure at Cameron and take effectively a carried interest. You're going to see us do that on Phase 1. Our job is to find the most efficient sources of capital and produce the highest returns on invested capital. And I think we've got a really good plan in place that we're executing on Phase 1. We don't have a target ownership level for Phase 2 at this point, but that answer will be determined by how we can deliver the highest returns from the project.

Great. Thanks so much, and congratulations on a great quarter.

Hey, thanks for joining the call.

Thanks, Anthony.

Thank you. And that concludes today's question and answer session. At this time, I'd like to turn the conference back to Jeff Martin for any additional closing remarks.

Sure, I'd just like to take a moment and thank everyone for joining our call today. I know there were some competing calls at the same time. Per custom, if there are any follow-up items, please reach out to our IR team with any additional information. I'd also mention for the balance of the year, we look forward to meeting with many of you in Florida at the EEI conference on the 13th and 14th, and we'll also be attending the Wells Fargo conference in New York on December 7th and 8th. This concludes our call.

Thank you for your participation. You may now disconnect.

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