This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk10: Good day, and welcome to SEMPRA's fourth quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn it over to Glenn Donovan.
spk09: Please go ahead.
spk16: Good morning, everyone. Welcome to SEMPRA's fourth 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 Zagara, Executive Vice President and Group President, Justin Bird, Chief Executive Officer of Sempra Infrastructure, Alan Nye, Chief Executive Officer 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 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 reconciliation to GAAP measures. We also encourage you to review our annual report on Form 10-K for the year ended December 31st, 2022. I'd also like to mention that the forward-looking statements contained in this presentation speak only of today, February 28th, 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.
spk18: Thank you, Glenn, and thank you all for joining us today. We're pleased with our accomplishments in 2022, and in large measure, it gives us added confidence in our future performance. In 2023, we'll be celebrating our 25th anniversary, and across our management team, we're pursuing future opportunities with a lot of optimism. For purposes of today's call, I'll provide summary comments on our performance, recap our business strategy, and frame our success in terms of our accomplishments over the last half decade. Then Trevor and Justin will review our business and financial accomplishments in greater detail, and we'll reserve time for your questions. Let me start with Semper Infrastructure. In 2022, the United States reached an important milestone as an energy exporter. It was the first year that our country became the top exporter of liquefied natural gas, or LNG, while also leading the LNG industry in new offtake contracts that support future development. This supports our view that U.S. LNG exports will more than double by the end of the decade. At Semper Infrastructure, we've built an exciting backlog of LNG development projects that are expected to support that forecasted growth. As one example, Semper Infrastructure signed more long-term SPAs and HOAs for LNG offtake in the fourth quarter of 2022 than any other market participant. In part, this has allowed us to stay on track in meeting our goal of taking a final investment decision on Port Arthur LNG Phase 1 before the end of the quarter. Outside of our LNG business, we see the continued need to expand and modernize North America's energy network particularly in California and Texas. There is a common opportunity set in front of each of our business platforms focused on investments in modern energy infrastructure that accelerate electrification and the transition to cleaner fuels. We expect significant opportunities for investment across all three growth platforms and are affirming our full year 2023 EPS guidance range of $8.60 to $9.20. Additionally, on the basis of this future opportunity set, we're reiterating our long-term forecast of a 6% to 8% compounded annual EPS growth rate. Consistent with our past practice, our long-term forecast uses the midpoint of current year guidance and is anchored by strong projected rate-based growth at our California and Texas utilities. Given Encore's ongoing rate case, I also want to note that we plan to share an updated five-year capital plan as well as our EPS guidance range for 2024 on our first quarter earnings call. Please turn to the next slide. At Sempra, our high-performance culture, one that is centered around safety and operational excellence, is the foundation for delivering on our mission to build the premier North American energy infrastructure company. Our corporate strategy guides our business activities and continues to be validated, by the strength of our overall financial performance. In recent years, we've grown the business, strengthened the balance sheet, delivered an attractive dividend, and meaningfully increased our rate base, which continues to be a principal driver in our future growth. Looking ahead, our team is excited about the future. In part, it's because we expect our culture and commitment to excellence will continue creating value through the end of the decade as we extend our position as a leader in the markets we serve and continue investing in our employees. Please turn to the next slide. Since 2017, we've executed on our strategy to simplify our business model, build our leadership position in some of the largest economic markets in North America, and improve our financial performance. We've streamlined our portfolio, exited non-core businesses, and extended our regulated utility footprint into Texas by acquiring an ownership stake in Encore and InfraReit. Through this strategic repositioning, we've been successful in creating greater scale across our franchise and new growth opportunities. To add context around our financial accomplishments since 2017, we have doubled our adjusted earnings, significantly exceeded a compound annual EPS growth rate of 6% to 8%, increased our combined utility rate base in California and Texas by 300%, all while supporting our balance sheet and maintaining a balanced 50-50 capital structure. It's also important to note that our commitment to this more simplified business strategy has resulted in a strengthened market position, improved business mix, enhanced quality of cash flows, and perhaps most importantly, improved visibility to future growth. Today, in many ways, it is pride in our past that gives us confidence in our future. It's from SEMPRA's rich tradition of serving others that we understand our role in society and how we can best meet the expectations of a growing list of stakeholders. While much has changed over the last quarter century, our vision, delivering energy with purpose, has remained constant as we embrace each new challenge as an opportunity to create innovative, forward-looking solutions. To be clear, this is an important time for our company. At Semper, we understand that modern energy infrastructure is a great enabler of prosperity, health, and well-being for billions of people around the world. That is why Semper is pursuing the dual opportunities of advancing decarbonization and helping to deliver energy security globally, all while improving the resiliency of how we deliver energy in our core markets. With that, I'll turn the call over to Trevor to discuss business and financial updates.
spk14: Thanks, Jeff. What we would like to do is update you on three things. First, I'll provide business updates on Semper California and Semper Texas. Then Justin will discuss Semper infrastructure, including notable progress on our LNG export projects. And then I'll wrap up with a review of our financial results. Let me start with Semper California. Community safety is a core tenant of our culture, and I'm proud to highlight that in 2022, SDG&E completed the hardening of 100% of its Tier 3 high-fire threat district transmission infrastructure. This has been a long journey that reflects the dedicated efforts of our employees, extending across more than a decade and has significantly improved community safety. In November, SDG&E received a final decision from the CPUC maintaining its 2022 cost of capital rates of return. In December, SDG&E and SoCalGas received a final decision authorizing their 2023 cost of capital, which preserved both companies' equity layers at 52% and updated SDG&E's and SoCalGas's ROE to 9.95% and 9.8% respectively through 2025. Last year, we announced the Angelus Link hydrogen proposal. In December, SoCalGas received CPUC approval to establish a memorandum account that allows the company to track the costs of performing phase one feasibility studies. This is an important milestone in evaluating new opportunities to advance California's decarbonization goals. Moreover, the CPUC directed SoCalGas to include this as part of California's application to the U.S. Department of Energy for hydrogen hub federal funding. SoCalGas believes Angelus Link has the potential to serve a significant strategic role in supporting the buildout of a full-scale hydrogen hub and the transition to a green hydrogen economy in Southern California. As proposed, this would be one of the largest hydrogen infrastructure hubs in the U.S. and would support the decarbonization of hard-to-electrify sectors in the greater Los Angeles region which is one of the largest manufacturing areas in the country. Also, SDG&E and SoCalGas are working closely with their customers and regulators to help mitigate the impacts of unusually high winter prices for natural gas, which has been a challenge all across the western region of the country. From the state of Washington to Wyoming and Nevada, Arizona, New Mexico, and California, the western region experienced a difficult price environment. Fortunately, natural gas prices across the country have dropped more than 65% since December, and here in Southern California, our utilities have also seen price declines in recent weeks and expect that trend to continue. Some materials from a recent CPUC en banc, as well as a summary of the programs that SDG&E and SoCalGas have in place to support their customers, are included in the appendix of today's presentation. Finally, the ongoing general rate cases at SDG&E and SoCalGas established the foundation for meeting the future needs of our customers. It is also important to note that our filings are well aligned with the state's clean energy safety and reliability goals, and we expect a proposed decision in the second quarter of 2024 with retroactive treatment to the beginning of the year. Moving to Sempra, Texas. I'm happy to report that Encore achieved strong employee safety results in 2022, which is a testament to the high performing culture and operational excellence at our Texas platform. In fact, in a year marked by extreme weather, Encore had a nearly 5% improvement in its SADIE reliability score. On the transmission side, Encore set another company record with 280 new annual interconnection requests in 2022, which is a 30% increase compared to 2021. To put this into context, 2021 was also a record year for the company, which, as you think about it, further underscores the scale of growth that continues to come on Encore's system. In 2022, Encore built or hardened nearly 2,000 miles of T&D lines across its service territory and connected over 2,000 megawatts of wind and solar generation to the grid. By the end of 2022, cumulative connections to Encore's system totaled over 18,000 megawatts of wind and solar generation, representing nearly 40% of ERCOT's total wind and solar resources. The momentum of transmission and distribution growth this year was driven by continued high demand for renewables and strong demographic and premise growth across Encore service territory. Encore's rate case is on the PUCT open meeting agenda for March 9th, and we expect a final order to be voted out in the next four to six weeks. Encore has a track record of working constructively with the regulators for the benefit of its customers and to advance the key public policy priorities of the state. In part, these considerations support our view that Encore will receive a constructive rate case outcome. Since the public proceedings are ongoing, Encore has not unveiled their new capital plan. In conjunction with its final rate case, Encore expects to review an updated capital plan with its board. Afterwards, as Jeff mentioned earlier, we expect to publish our updated five-year capital plan, which will most likely occur on our first quarter earnings call. I'll turn it over to Justin to provide updates for SEMPRA infrastructure and progress on development at Port Arthur Phase 1 and Cameron LNG Phase 2.
spk05: Thanks, Trevor. I'm excited about Sempra Infrastructure's recent accomplishments and want to highlight some of our key achievements. Sempra Infrastructure has seen a solid year of commercial activity with robust LNG, cross-border renewables, and pipeline infrastructure demand, creating a foundation for future growth. During the year, Sempra Infrastructure brought assets online within its Clean Power and Energy Networks businesses while operations at its Cameron LNG Phase I terminal exceeded production targets. On the Pacific Coast, we continue to expect ECHA LNG Phase I commercial operations to commence in the summer of 2025. Also, both ECHA LNG Phase II and Vista Pacifico LNG received DOE approvals to re-export U.S.-sourced natural gas from Mexico in the form of LNG to non-free trade agreement countries. Please turn to the next slide. As you all know, we continue to advance our strategy of building out a dual market platform that allows us to efficiently deliver LNG to customers in the Atlantic and Pacific regions. To that end, I'm excited to say we've completed the marketing phase for Port Arthur LNG phase one. We have carefully structured this development project to reduce risk by fully contracting the long-term offtake, securing a fixed price EPC, and identifying world-class development partners. In November 2022, we announced the execution of definitive agreements with ConocoPhillips, pursuant to which they would acquire a 30% ownership interest in Port Arthur LNG Phase 1 and take five MTPA of offtake from the project. In January, we announced that Port Arthur LNG Phase 1 was fully subscribed at 10.5 MTPA of definitive long-term take-or-pay contracts with world-class counterparties. We also have a fixed-price turnkey EPC contract with arguably the most experienced LNG EPC provider in the U.S., Bechtel. With the completion of marketing and execution of the EPC contract, we're now focused on finalizing the project-level debt and equity financing. On the basis of the current financing efforts that are underway, We aim to efficiently raise lower-cost capital and protect Sempra Infrastructure's investment-grade balance sheet. We are targeting Sempra Infrastructure Partners' ownership in the project of between 20 and 30 percent, with ConocoPhillips owning 30 percent and the balance being sold in the form of a non-controlling interest to one or more investors. This is an exciting project. In this initial phase, we're aiming to generate equity returns in the mid-teens while preserving Semper Infrastructure's investment grade rating and reducing our equity contributions to the project. As we approach FID, we continue to focus on striking the right balance of efficient financing, risk mitigation, and retention of upside from future project cash flows and earnings. Over the past decade, we've successfully built LNG export and other large infrastructure facilities demonstrating our deep development expertise and capabilities to build world-class infrastructure. I believe this experience serves us well as we aim to bring Port Arthur LNG Phase I to FID through construction and ultimately to commercial operations as we execute on our goal of delivering cleaner, more secure U.S. natural gas to global markets. Please turn to the next slide. Turning to Cameron LNG Phase 2, as a reminder, this project is also competitively positioned on the Gulf Coast to export LNG to Europe and Asia. And given that it's a brownfield facility, it has a distinct advantage to produce competitively priced LNG. The expansion project remains on track as we advance our key work streams. We outlined last year that our activities are focused primarily on completing the FERC advancing marketing efforts with the goal of securing long-term offtake agreements, and completing the competitive feed process. On the regulatory front, the FERC amendment process that supports the transition from gas turbines to electric drives is progressing well. We received the environmental assessment from FERC citing no adverse impacts, which is a positive step toward securing the final authorizations. Turning to marketing, 100% of the expected offtake is subscribed under HOAs. Our existing partners will take their 50% of production, and SI's 50% of volumes is already subscribed under existing HOAs on a back-to-back basis. Next, on engineering, as we have talked about in the past, we're running a competitive feed process between Bechtel and a JGC Zachary joint venture. This process is on track to be completed in the summer of this year, and we would expect to make a final investment decision shortly thereafter. Please turn to the next slide, where I'll turn it back over to Trevor to discuss SEMPRA's financial results.
spk14: Thanks, Justin. Turning to SEMPRA's financial results. Earlier this morning, we reported fourth quarter 2022 GAAP earnings of $438 million, or $1.39 per share. This compares to fourth quarter 2021 GAAP earnings of $604 million, or $1.90 per share. On an adjusted basis, fourth quarter 2022 earnings were $743 million, or $2.35 per share. This compares to our fourth quarter 2021 earnings of $688 million, or $2.16 per share. Full-year 2022 GAAP earnings were $2,094,000, or $6.62 per share. This compares to 2021 GAAP earnings of $1,254,000, or $4.01 per share. On an adjusted basis, full-year 2022 earnings were $2,915,000, or $9.21 per share. This compares favorably to our previous full-year 2021 adjusted earnings of $2,637,000,000, or $8.43 per share. As a reminder, 2022 includes the minority interest sale of Sempra Infrastructure to Audia that closed in June of 2022. Even after considering this minority interest sale, our strong performance and growing adjusted earnings demonstrate our ability to generate value for our shareholders while providing safe and reliable service to our customers. Please turn to the next slide. The variance in full year 2022 adjusted earnings compared to the same period last year can be summarized by the following. At Sempra California, $161 million of higher earnings from higher CPUC base operating margin net of higher operating expenses at SDG&E and SoCalGas, and $46 million of higher flow-through items related to repairs deduction allowances and self-developed software and other items recorded as a reduction to income tax at SDG&E, partially offset by $52 million of higher net interest expense, primarily due to higher debt balances at SDG&E and SoCalGas. At Semper Texas Utilities, $120 million of higher equity earnings primarily due to rate updates at Encore to reflect increases in invested capital, higher consumption, and customer growth. And at Semper Infrastructure, $160 million of higher earnings driven by excess production at Cameron LNG Phase 1 and strong production from existing energy networks and clean power assets, as well as new assets placed into service. and $110 million of higher income tax benefits, partially offset by $250 million of lower earnings driven by the sale of our minority interest in SEMPRA infrastructure. Please turn to the next slide. As we near the end of our prepared remarks today, I'd like to take this opportunity to bring this all together and highlight SEMPRA's investment proposition. We've built a high performing, energy infrastructure company that is well positioned in some of North America's most attractive markets. We're focused on strategically deploying capital in what we believe is within the higher value, lower risk portion of the energy value chain and provides significant visibility to growth and shareholder value. At our utilities, this year we will continue to be focused on advancing our rate cases, which center around making the needed investments to further safety, reliability, and decarbonization to serve customers. For SEMPRA infrastructure, we're nearing FID for a large-scale LNG project in Texas, dedicated to helping provide energy security to our country's allies and directly supporting the energy transition. With that said, at SEMPRA, there are a number of open items to be completed this spring, including finalizing the Encore base rate case and taking FID on Port Arthur phase one. That is why, as mentioned earlier, we plan to update our five-year capital plan on our first quarter earnings call in May, and also expect to issue our EPS guidance for 2024 at that time. Our work today gives us confidence in our ability to continue the build out of one of the largest and most competitive energy networks in North America. By advancing our position as a leader in technology and innovation, we're better positioned to serve customers and create value for our shareholders. That's why today we're announcing the approval by our board of directors of a quarterly dividend of $1.19 per common share, a projected annualized dividend of $4.76. We look forward to continuing our commitment to creating and returning value to our owners by building the energy networks of the future. And with that, this concludes our prepared remarks, and we will now stop and open the line to take your questions.
spk10: Thank you. This concludes the prepared remarks. We will now open the line to take your questions. We have between 20 and 30 minutes for questions today. If you would like to ask a question, please signal by pressing star 1 1 on your telephone keypad. Please make sure your mute function is turned off.
spk09: We will pause for just a moment to allow everyone to signal for questions. And our first question will come from Char Perez from Guggenheim.
spk10: Your line is open. Hey, guys.
spk19: Hey, good morning, Char.
spk08: Good morning, Jeff. Um, just let me just more broadly on the six to 8% growth CAGR from the 23 midpoint based. I mean, if the question is the cadence of growth that is embedded in that long-term CAGR. And the reason why I ask is the, you know, the 22 to 23 original midpoints reflect 6% growth in 23. And obviously we don't have 24 guidance today. So do you anticipate some step up in growth with maybe regulatory outcomes, SIP projects reaching. commercial operations and getting some clarity on the upwards cost of capital revision in California as we move further in plan?
spk18: Sure. Let me provide some context here. You did mention the step up from 22 to 23, which was about a 9.25% growth. But I'll give you a couple of things that I think will help you on this. One is when you look back over the last 1, 5, 10, 20-year periods of financial performance, we've delivered EPS growth in the range of 6% to 8% or higher. In fact, over the last five years, Char, we've delivered a compound annual growth rate of right at around 11%. So I would also note over those same periods of time, we've outperformed our sector in total shareholder returns. Second, harking back to 2022, as you alluded to, our five-year capital plan we launched last year was our largest ever at $36 billion. And you'll recall that over 90% of those dollars were allocated toward meeting our expected rate-based growth. And we certainly, we think that will continue to be a big driver across the balance of the decade. But one of the reasons we have so much confidence in our long-term growth rate is because now We really have improved visibility to a portfolio of growth opportunities at Semper Infrastructure over the same period. So we feel very good about our 68% growth rate. I think that we've demonstrated over a long period of time we have the ability inside this organization to grow at a rate faster than that, and we've certainly done that in the last 12 months than we've done it over the last five years.
spk08: Got it. And Jeff, just to, and I was actually referring to the original midpoints on 22 from 23, but I appreciate, thank you for that clarity. Just on the 23 guide, I just want to make sure, is there, is it inclusive of sort of the headwinds around O&M, interest rates, cost of capital that we just saw in California? Just trying to get a sense, a better idea of what's in and what's upside to 23, whether there's any tail risks out there that we should be concerned about, or is it just the fact that you want these events to close?
spk18: I think it's a combination of both. You recall that when we set our 2023 guidance last February, we've come back 12 months later, we've affirmed that guidance. When you look at the 2022 results, obviously it was record adjusted EPS for our company, really had strong safety results, strong operational results, executed a $7.8 billion capital plan, which we're really very pleased with. But I would note, to your point, as we look to 2023, we are going to manage some headwinds, right? Number one, you referenced one of them, which is the ROEs in our California utilities were adjusted down by 25 basis points. We are operating in a higher interest rate environment. Number three, and Trevor mentioned this one, non-controlling interest at Semper Infrastructure today is 10% higher than it was at this time last year, and we're managing some different potential outcomes associated with the Encore base review. That said, the reason we're confident about our 2023 numbers and we're going to work hard to beat them is we have a great plan of execution. It causes us to have a lot of confidence in our guidance. And I would also mention to your earlier question, we have a visibility to one of our largest portfolios of opportunities in the future, and that's why we feel very good about the 6% to 8% growth rate.
spk08: Perfect. And just lastly on the LNG side, Jeff, as you're getting closer to ECOSCOD, can you just maybe talk about how the economics of that project kind of stack up in the context of SIP, similar returns and earnings contribution pro rata versus Cammon, or they're sort of some headwinds, you know, from the inflationary pressures, interest rates, et cetera, more broadly. So how would the economics, is that in line with other projects, especially Port Arthur as the next step is, you know, that's the next big one, so.
spk18: Well, thank you. We're certainly excited about Port Arthur. I noted in Justin's prepared remarks, I think he used the word exciting four or five times. I think that really reflects our excitement inside the company. At Semper Infrastructure, you've followed us for a long time, Char. We tend to be very disciplined in how we allocate capital between shareholder distributions and new projects like Port Arthur. SEPRA infrastructure typically targets high single-digit to low double-digit unlevered returns. And we mentioned in our prepared remarks that we do this with the goal of maintaining portfolio equity returns in the mid-teens. We're very excited. I think one of the things Justin talked about is, you know, we think we can deliver this project on time and on budget. But given the positive interest in the marketplace for the project, I would tell you the returns that I decided we think are very reasonable. But one thing that's worth our audience tracking, which is we also expect to retain certain preferences in economics and the sell-down of our equity and asset optimization initiatives like you've seen us do around de-bottlenecking, expansion projects, and gas supply that could give us returns at levels well higher than our normal target. Perfect. Thank you guys so much. Appreciate it. I'll see you soon. Thanks for joining the call.
spk10: Thank you. And our next question will come from Nicholas Campanella from Credit Suisse. Your line is open.
spk17: Hey, everyone. Thanks for taking my question.
spk02: Good morning.
spk17: Good morning. So, hey, I just wanted to round out the conversation on just how to think about growth past 23. When we think about the EPS CAGR off the 23 midpoint. Does that already incorporate the five-year CapEx view you'll give us on the first quarter? Does it assume anything for LNG development on top of ECA, such as funding for Port Arthur and Cameron II? Can you just give us a sense of how the next update can affect growth considerations? Thank you.
spk18: yeah i appreciate the question i would remind folks that we uh brought back our five-year forecast back in 2021 the convention we've adopted over the last several years has been to work off the midpoint of our current year guidance which we announced today we feel very solid about our 68 growth rate and really that's looking at the roll forward capital plan from last year of about 36 billion i think what's exciting for us is we have the opportunity to improve that forecast Certainly phase one of Port Arthur's important, and Al and his team are doing a really good job of managing our rate case outcomes in Texas. So I would just say that that six to eight percent growth rate is something that looks conservative relative to our past performance. And I'll tell you that one of the things, we talked a little bit in my prepared remarks about how we've repositioned the business over the last five years. What's unique today is our visibility into future growth is better than it has been in the past. So we want to get through a couple big events here in the spring and come back with a more robust capital plan by our May call, and we look forward to having that conversation in greater detail.
spk17: Okay, thanks a lot for that. And then I just wanted to ask just a capital allocation question. The dividend increase is 3.9%. We just noticed that's maybe a little light compared to what you kind of executed on historically. Can you just give us a sense of what's driving that, how you're thinking about capital allocation regarding the dividend, and then also the buyback that you outlined last year, just given you have all these new growth opportunities in front of you, that'd be helpful. Thank you.
spk18: Yeah, that's a great question. I'll tell you, it's one of the things that really differentiates good companies from average companies is how disciplined you are in capital allocation. And I'll tell you, we certainly understand the importance of dividend to our investors, and that's why we've consistently grown it over the last 12 years. Our board has established a projected payout ratio for us between 50% and 60%. What we announced today falls in the 53% range. And I would make a comment that over the last 10 years, we've averaged roughly a 7% increase to our dividend, which we feel great about. But remember, too, that we're investing in our businesses to support organic growth, and that is our most important initiative. And over our history... I think most people would say our focus has been on investing in opportunities to grow our business while balancing that with returning capital to shareholders, just like you talked about. So you have seen us return capital in the form of share repurchases, and we've also been fairly aggressive about returning capital in the form of a dividend. So I guess my concluding point would be, in combination, that dividend growth and the planned growth we have in front of the company, we think this strategy has resulted in the relative outperformance of Semper Stock over the last 1, 5, 10, and 20-year period relative to our index. We are committed to disciplined capital allocation in a strategic manner that results in an increase in shareholder value. It is certainly a priority to our management team.
spk17: Okay, and then if I could just sneak one last one in, just the NCI sale around Port Arthur. Can you just kind of give us a sense of how we should think about that timeline? Do you have to take FID first and then pursue it? Just how should investors think about that?
spk18: Yeah, I would say we've focused on really the last two remaining items that we're working on right now is focusing on lining up our non-recourse debt and also the sell-down of equity, right? And I think if you think about historically what we've communicated about how we finance projects, we do step one, we look at project-level debt that's non-recourse to our owners. Two, we leverage the benefit of partners at the project level. We're very pleased to have ConocoPhillips playing that role in Port Arthur. Third, we use capital calls from our partners at Semper Infrastructure Partners. You know, we've got Adia and KKR in the capital structure, and they're going to have an important role in helping us move this project forward. And then finally, as we're doing now, we look to bring in new sources of private equity capital to sell down our interest. For us, it's all about striking the right numbers to take FID, and you should expect us to execute in a way that economizes calls on our equity while striking the right balance of efficient financing, risk mitigation, and retention of upside from future project cash flows.
spk17: Thanks for all the color. Really appreciate it. Appreciate it.
spk04: Thank you.
spk10: Thank you. And our next question will come from Anthony Prodel from Mizuho. Your line is open.
spk00: Hi, Anthony. Good afternoon, Jeff. Good afternoon, Trevor.
spk01: How are you doing?
spk06: Good. Hopefully two easy ones, and I guess, I don't know if you mentioned it in Char's question, but slide 14, you guys talk about maybe the basis differential in the Western gas market. Is that an investment opportunity for either the regulated utilities or SIPP?
spk18: I would go back to a couple of first principles here, which is we're very focused on building an infrastructure company. It's one of the reasons that we talked about the reposition of this business back in 2018, really about being an infrastructure business and really removing non-core assets and commodities from our business model. So in the western region right now, we're focused on working through this western region gas event, and certainly we're trying to do that from a customer perspective. We've been relatively aggressive about trying to ensure we're making the appropriate announcements to our customers and putting some good programs in place. But no, we're not pursuing a basis differential opportunity. But I would think it might be helpful, Justin, to talk about how we think about your asset position, particularly in Texas, Louisiana, and Mexico.
spk05: Yeah, sure. Thanks, Jeff. I think, and I'll harken to something that you said earlier, Jeff, that as a starting point, SI is really focused on long-term contracted cash flows from our infrastructure projects in Louisiana, Texas, and Mexico. And I think there's two important points to remember there. One, we don't own infrastructure in the western U.S., and two, we work to avoid commodity exposure. As you think about ECHA LNG in Baja, as you recall, when we took FID decision in 2020, we essentially leased transportation capacity that would allow natural gas to be delivered from the producing basins, both in Texas and New Mexico, to the project when it comes online in 2025. And in the interim, we looked to offset those costs by utilizing that capacity to deliver gas to customers. But given our infrastructure focus, we do this by conservatively hedging our position well in advance, which reduces our market exposure. And you'll notice as you look in the 22 earnings on a gap basis, as a result of those hedges, we have unrealized mark-to-market losses of over $300 million. which represent the difference between our conservative hedges and the market price. So, again, as an infrastructure company, we prefer to optimize recurring infrastructure cash flows and minimize our exposure to changes in commodity prices, essentially exchanging price volatility to get recurring cash flows. And I think you'll see that trend continue. We're focused on long-term recurring cash flows from credit-worthy off-takers, and that will be our focus at SI.
spk06: Great. And then if I could just follow up probably also to you, Justin, on the port author phase one, you know, the enter the EPC contract, $10.5 billion fixed price. If you could just give us some more color maybe on the contract, is there, you know, a cost plus agreement or any commodity exposure that maybe SIP or SEMPRA has with Bechtel on that? And I'll leave it there.
spk05: Yeah, thanks, Anthony. So yeah, as we've said, that contract is for $10.5 billion. It is a fixed price. There is some escalation components in that as we move toward issuing a final notice to proceed. I think importantly, let me emphasize again, we're very proud of our selection of Bechtel. They have a history of building projects, LNG projects in the Gulf that have all been on time, on budget, and have importantly provided production numbers in excess of what was guaranteed. As we look at our specific EPC contract, there are some very small pieces of that that would float. But again, we have a contingency in place, as does Bechtel, to handle those adjustments. So I think, again, looking to Bechtel's history, they delivered on time, on budget, under fixed price EPC contract. So we're very comfortable with the contract. And again, I'll use my word again. I can't tell you how excited we are as we move toward FID prior to the end of this quarter.
spk06: Great. Thanks so much. Congratulations on a great quarter.
spk18: Thanks, Anthony.
spk10: Thank you. And our next question comes from Jeremy Toney from J.P. Morgan. Your line is open.
spk13: Hi, good morning. It's actually Rich Sunderland on for Jeremy. Thank you for the time today.
spk04: Hey, Rich.
spk13: Sticking with some of the LNG questions here, I know in the past on the growth rate you've had LNG in the plan, and obviously the business has changed a lot since then. I believe Port Arthur was upside to the growth rate last year. Just curious if that's still the case this year, or is Port Arthur now baked in as you approach FID?
spk18: Yeah, it's a great question. We're going to update our roll-forward five-year capital plan later this spring. Currently, we're working off of the plan we rolled out last year. We don't typically put projects in our plan unless they've reached FID, so I would view Port Arthur as an upside to our long-term opportunities.
spk13: Got it. Very clear. Thank you. And then looking across the range of future LNG projects, Are you seeing more interest from Asian buyers versus European buyers for incremental offtake? Curious where interest stands.
spk18: Yeah, I would tell you the answer is both, right? So you've gone through a really unique situation in Europe. Most of the contracts for phase one are being launched off the basis of Europe. But I would also note in the Washington Post a few days ago, they talk about the highest ever approval rate for coal plants in China, where they're launching 106 gigawatts of new coal plants. That's 82 new plants going into service. And between China and India, they burn about 70% of all the coal in the world. So there is a big opportunity for energy insecurity in Asia. The long-term market opportunity remains an Asian opportunity. And the great news is we've got a platform that allows us to dispatch efficiently into the Atlantic and the Pacific. And I think that's one of the things that all takers are excited about doing business with Semper because of that.
spk12: Great. Thank you for the time today.
spk10: Thank you. Thank you. And our last question will come from Craig Scheer from TUI Brothers. Your line is open.
spk03: Hi, Craig. Hi. Thanks for taking the questions. So, and I'm often accused of getting over my skis, especially on LNG, but looking past PA1 and Cameron 2, First, could you discuss the logical pecking order at this time between Port Arthur II, Vista Pacifico, and ECA II?
spk18: Sure, Craig. I'll pass that to Justin. Maybe you can provide some view in terms of how you're thinking about the loading order for development.
spk05: Yeah, thanks, Jeff. And, Craig, I'm never going to assume you don't have a lot of LNG experience, so thanks for your question. I think as you look at the pecking order, again, it can always change. As you will note, about this time last year, the war in Ukraine changed what we thought was our pecking order at that time. But as I think about our opportunities going forward, let me start with Port Arthur Phase 2. I think there's a lot of excitement around a second phase at Port Arthur. It would be brownfield. It would clearly benefit from sharing of common facilities. And as I think about that development, you know, there's a few key work streams, which, again, is consistent with, Craig, how we've always discussed about how we move forward our LNG projects. First, permitting. Port Arthur LNG Phase 2 has an application into FERC and the FERC order is pending. Second is commercial. We have MOUs for volumes out of Phase 2 and are in discussions with many parties to fill any outstanding volumes. Engineering and construction, we're in discussions with Bechtel about continuous construction and optimizing that process. And as we always do, we are engaged with the credit rating agencies to make sure, as we think about financing these opportunities, we find the most efficient way to finance, taking into account credit and returns. So that's kind of Port Arthur. If you ask me the pecking order, I think the second phase at Port Arthur would be next. As we think about Vista Pacifico, I think you're seeing some exciting developments there as we continue to work with the Mexican government and with CFE about really optimizing supply there. There's a lot of interest, as you might expect, given it's out of the Pacific coast, and And as we think about ECHA LNG Phase II, I think you've seen some also exciting developments. If you recall, we recently got our non-FTA permits for both VISTA and ECHA. The other thing that you may have noticed is we had an MOU that we announced with CFE and CARSO. which would be an opportunity to bring additional gas volumes to the Baja area, which could expedite the development of LNG Phase II. So, again, I hate to be the – being accused of saying excited too much, but I think there are exciting opportunities in the rest of our LNG portfolio.
spk03: Great. And that kind of tees up a little bit my second question here. i i guess on a macro basis in the united states i'm wondering uh justin if you have some some feel for uh after the remarkable prior 12 months of contracting uh what we might see in terms of a slowdown the next year or two and and what i'm what i'm kind of referring to is that uh if if some partially contracted projects were to cross the finish line some peers we could see 80-plus MTPA of FIDs within 18 months. And we're just wondering if that's just more than the market needs just past mid-decade.
spk18: Well, this is Jeff speaking. I would provide a couple of comments, and Justin, feel free to weigh in. We think our view across the decade is very similar with what's been put out by the EIA, which is forecasting 130 percent growth for U.S. LNG across the decade. The 80 million tons per annum that you referenced sounds about right, actually. I think actually the DOE might be forecasting slightly more than that. But remember, it's not just American LNG. We're competing against other markets, whether it's Australia or Qatar. There's certainly opportunities potentially at Mozambique. And you remember, there's still volumes coming out of Russia, particularly on the north coast as well as from Sakhalin. So I think that one of the things we've noticed is there is a tremendous demand for energy security and affordable sources of energy. And natural gas has a very big runway there. internationally. We may see it decline here in the United States in different regions of the country, but it is a really big opportunity. I think the United States is viewed as a market that has security of supply, and we've got good counterparties, and we've got good credit, and we've got deep capital markets. So we're going to see the lion's share of LNG across the globe will be coming from the United States across this decade.
spk03: Thank you.
spk18: Thank you for joining us.
spk10: Thank you. 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.
spk18: Sure. Just by way of brief closing, we know there were several investor conferences underway today, so we very much appreciate everyone making time to join us. If there are any follow-up questions per custom, always reach out to our IR team with any additional questions. This concludes our call.
spk10: Thank you for your participation. You may now disconnect.
spk02: The conference will begin shortly.
spk08: To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. Thank you
spk11: Thank you.
spk09: Good day and welcome to SEMPRA's fourth quarter earnings call.
spk10: Today's conference is being recorded. At this time, I'd like to turn it over to Glenn Donovan.
spk09: Please go ahead.
spk16: Good morning, everyone. Welcome to SEMPRA's fourth 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 Zagara, Executive Vice President and Group President, Justin Bird, Chief Executive Officer of Sempra Infrastructure, Alan Nye, Chief Executive Officer 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 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 reconciliation to GAAP measures. We also encourage you to review our annual report on Form 10-K for the year ended December 31st, 2022. I'd also like to mention that the forward-looking statements contained in this presentation speak only of today, February 28th, 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.
spk18: Thank you, Glenn, and thank you all for joining us today. We're pleased with our accomplishments in 2022, and in large measure, it gives us added confidence in our future performance. In 2023, we'll be celebrating our 25th anniversary, and across our management team, we're pursuing future opportunities with a lot of optimism. For purposes of today's call, I'll provide summary comments on our performance, recap our business strategy, and frame our success in terms of our accomplishments over the last half decade. Then Trevor and Justin will review our business and financial accomplishments in greater detail, and we'll reserve time for your questions. Let me start with Semper Infrastructure. In 2022, the United States reached an important milestone as an energy exporter. It was the first year that our country became the top exporter of liquefied natural gas, or LNG, while also leading the LNG industry in new offtake contracts that support future development. This supports our view that U.S. LNG exports will more than double by the end of the decade. At Semper Infrastructure, we've built an exciting backlog of LNG development projects that are expected to support that forecasted growth. As one example, Semper Infrastructure signed more long-term SPAs and HOAs for LNG offtake in the fourth quarter of 2022 than any other market participant. In part, this has allowed us to stay on track in meeting our goal of taking a final investment decision on Port Arthur LNG Phase 1 before the end of the quarter. Outside of our LNG business, we see the continued need to expand and modernize North America's energy networks particularly in California and Texas. There is a common opportunity set in front of each of our business platforms focused on investments in modern energy infrastructure that accelerate electrification and the transition to cleaner fuels. We expect significant opportunities for investment across all three growth platforms and are affirming our full year 2023 EPS guidance range of $8.60 to $9.20. Additionally, on the basis of this future opportunity set, we're reiterating our long-term forecast of a 6% to 8% compounded annual EPS growth rate. Consistent with our past practice, our long-term forecast uses the midpoint of current year guidance and is anchored by strong projected rate-based growth at our California and Texas utilities. Given Encore's ongoing rate case, I also want to note that we plan to share an updated five-year capital plan, as well as our EPS guidance range for 2024 on our first quarter earnings call. Please turn to the next slide. At Sempra, our high-performance culture, one that is centered around safety and operational excellence, is the foundation for delivering on our mission to build the premier North American energy infrastructure company. Our corporate strategy guides our business activities and continues to be validated, by the strength of our overall financial performance. In recent years, we've grown the business, strengthened the balance sheet, delivered an attractive dividend, and meaningfully increased our rate base, which continues to be a principal driver in our future growth. Looking ahead, our team is excited about the future. In part, it's because we expect our culture and commitment to excellence will continue creating value through the end of the decade as we extend our position as a leader in the markets we serve and continue investing in our employees. Please turn to the next slide. Since 2017, we've executed on our strategy to simplify our business model, build our leadership position in some of the largest economic markets in North America, and improve our financial performance. We've streamlined our portfolio, exited non-core businesses, and extended our regulated utility footprint into Texas by acquiring an ownership stake in Encore and InfraReit. Through this strategic repositioning, we've been successful in creating greater scale across our franchise and new growth opportunities. To add context around our financial accomplishments since 2017, we have doubled our adjusted earnings, significantly exceeded a compound annual EPS growth rate of 6% to 8%, increased our combined utility rate base in California and Texas by 300%, all while supporting our balance sheet and maintaining a balanced 50-50 capital structure. It's also important to note that our commitment to this more simplified business strategy has resulted in a strengthened market position, improved business mix, enhanced quality of cash flows, and perhaps most importantly, improved visibility to future growth. Today, in many ways, it is pride in our past that gives us confidence in our future. It's from SEMPRA's rich tradition of serving others that we understand our role in society and how we can best meet the expectations of a growing list of stakeholders. While much has changed over the last quarter century, our vision, delivering energy with purpose, has remained constant as we embrace each new challenge as an opportunity to create innovative, forward-looking solutions. To be clear, this is an important time for our company. At Semper, we understand that modern energy infrastructure is a great enabler of prosperity, health, and well-being for billions of people around the world. That is why Semper is pursuing the dual opportunities of advancing decarbonization and helping to deliver energy security globally, all while improving the resiliency of how we deliver energy in our core markets. With that, I'll turn the call over to Trevor to discuss business and financial updates.
spk14: Thanks, Jeff. What we would like to do is update you on three things. First, I'll provide business updates on SEMPRA California and SEMPRA Texas. Then Justin will discuss SEMPRA infrastructure, including notable progress on our LNG export projects. And then I'll wrap up with a review of our financial results. Let me start with SEMPRA California. Community safety is a core tenant of our culture and I'm proud to highlight that in 2022, SDG&E completed the hardening of 100% of its Tier 3 high-fire threat district transmission infrastructure. This has been a long journey that reflects the dedicated efforts of our employees, extending across more than a decade and has significantly improved community safety. In November, SDG&E received a final decision from the CPUC maintaining its 2022 cost of capital rates of return. SDG&E and SoCalGas received a final decision authorizing their 2023 cost of capital, which preserved both companies' equity layers at 52% and updated SDG&E's and SoCalGas's ROE to 9.95% and 9.8% respectively through 2025. Last year, we announced the Angelus Link hydrogen proposal. In December, SoCalGas received CPUC approval to establish a memorandum account that allows the company to track the costs of performing phase one feasibility studies. This is an important milestone in evaluating new opportunities to advance California's decarbonization goals. Moreover, the CPUC directed SoCalGas to include this as part of California's application to the U.S. Department of Energy for hydrogen hub federal funding. SoCalGas believes Angelus Link has the potential to serve a significant strategic role in supporting the buildout of a full-scale hydrogen hub and the transition to a green hydrogen economy in Southern California. As proposed, this would be one of the largest hydrogen infrastructure hubs in the U.S. and would support the decarbonization of hard-to-electrify sectors in the greater Los Angeles region which is one of the largest manufacturing areas in the country. Also, SDG&E and SoCalGas are working closely with their customers and regulators to help mitigate the impacts of unusually high winter prices for natural gas, which has been a challenge all across the western region of the country. From the state of Washington to Wyoming and Nevada, Arizona, New Mexico, and California, the western region experienced a difficult price environment. Fortunately, natural gas prices across the country have dropped more than 65% since December, and here in Southern California, our utilities have also seen price declines in recent weeks and expect that trend to continue. Some materials from a recent CPUC en banc, as well as a summary of the programs that SDG&E and SoCalGas have in place to support their customers, are included in the appendix of today's presentation. Finally, the ongoing general rate cases at SDG&E and SoCalGas established the foundation for meeting the future needs of our customers. It is also important to note that our filings are well aligned with the state's clean energy safety and reliability goals, and we expect a proposed decision in the second quarter of 2024 with retroactive treatment to the beginning of the year. Moving to Sempra, Texas. I'm happy to report that Encore achieved strong employee safety results in 2022, which is a testament to the high-performing culture and operational excellence at our Texas platform. In fact, in a year marked by extreme weather, Encore had a nearly 5% improvement in its SADIE reliability score. On the transmission side, Encore set another company record with 280 new annual interconnection requests in 2022, which is a 30% increase compared to 2021. To put this into context, 2021 was also a record year for the company, which, as you think about it, further underscores the scale of growth that continues to come on Encore's system. In 2022, Encore built or hardened nearly 2,000 miles of T&D lines across its service territory and connected over 2,000 megawatts of wind and solar generation to the grid. By the end of 2022, cumulative connections to Encore's system totaled over 18,000 megawatts of wind and solar generation, representing nearly 40% of ERCOT's total wind and solar resources. The momentum of transmission and distribution growth this year was driven by continued high demand for renewables and strong demographic and premise growth across Encore service territory. Encore's rate case is on the PUCT open meeting agenda for March 9th, and we expect a final order to be voted out in the next four to six weeks. Encore has a track record of working constructively with the regulators for the benefit of its customers and to advance the key public policy priorities of the state. In part, these considerations support our view that Encore will receive a constructive rate case outcome. Since the public proceedings are ongoing, Encore has not unveiled their new capital plan. In conjunction with its final rate case, Encore expects to review an updated capital plan with its board. Afterwards, as Jeff mentioned earlier, we expect to publish our updated five-year capital plan, which will most likely occur on our first quarter earnings call. I'll turn it over to Justin to provide updates for SEMPRA infrastructure and progress on development at Port Arthur Phase 1 and Cameron LNG Phase 2.
spk05: Thanks, Trevor. I'm excited about Sempra Infrastructure's recent accomplishments and want to highlight some of our key achievements. Sempra Infrastructure has seen a solid year of commercial activity with robust LNG, cross-border renewables, and pipeline infrastructure demand, creating a foundation for future growth. During the year, Sempra Infrastructure brought assets online within its Clean Power and Energy Networks businesses while operations at its Cameron LNG Phase I terminal exceeded production targets. On the Pacific Coast, we continue to expect ECHA LNG Phase I commercial operations to commence in the summer of 2025. Also, both ECHA LNG Phase II and Vista Pacifico LNG received DOE approvals to re-export U.S.-sourced natural gas from Mexico in the form of LNG to non-free trade agreement countries. Please turn to the next slide. As you all know, we continue to advance our strategy of building out a dual market platform that allows us to efficiently deliver LNG to customers in the Atlantic and Pacific regions. To that end, I'm excited to say we've completed the marketing phase for Port Arthur LNG phase one. We have carefully structured this development project to reduce risk by fully contracting the long-term offtake, securing a fixed price EPC, and identifying world-class development partners. In November 2022, we announced the execution of definitive agreements with ConocoPhillips, pursuant to which they would acquire a 30% ownership interest in Port Arthur LNG Phase 1 and take five MTPA of offtake from the project. In January, we announced that Port Arthur LNG Phase 1 was fully subscribed at 10.5 MTPA of definitive long-term take-or-pay contracts with world-class counterparties. We also have a fixed-price, turnkey EPC contract with arguably the most experienced LNG EPC provider in the U.S., Bechtel. With the completion of marketing and execution of the EPC contract, we're now focused on finalizing the project-level debt and equity financing. On the basis of the current financing efforts that are underway, We aim to efficiently raise lower-cost capital and protect Sempra Infrastructure's investment-grade balance sheet. We are targeting Sempra Infrastructure partners' ownership in the project of between 20 and 30 percent, with ConocoPhillips owning 30 percent and the balance being sold in the form of a non-controlling interest to one or more investors. This is an exciting project. In this initial phase, we're aiming to generate equity returns in the mid-teens while preserving Semper Infrastructure's investment grade rating and reducing our equity contributions to the project. As we approach FID, we continue to focus on striking the right balance of efficient financing, risk mitigation, and retention of upside from future project cash flows and earnings. Over the past decade, we've successfully built LNG export and other large infrastructure facilities demonstrating our deep development expertise and capabilities to build world-class infrastructure. I believe this experience serves us well as we aim to bring Port Arthur LNG Phase I to FID through construction and ultimately to commercial operations as we execute on our goal of delivering cleaner, more secure U.S. natural gas to global markets. Please turn to the next slide. Turning to Cameron LNG Phase 2, as a reminder, this project is also competitively positioned on the Gulf Coast to export LNG to Europe and Asia. And given that it's a brownfield facility, it has a distinct advantage to produce competitively priced LNG. The expansion project remains on track as we advance our key work streams. We outlined last year that our activities are focused primarily on completing the FERC advancing marketing efforts with the goal of securing long-term offtake agreements, and completing the competitive feed process. On the regulatory front, the FERC amendment process that supports the transition from gas turbines to electric drives is progressing well. We received the environmental assessment from FERC citing no adverse impacts, which is a positive step toward securing the final authorizations. Turning to marketing, 100% of the expected offtake is subscribed under HOAs. Our existing partners will take their 50% of production, and SI's 50% of volumes is already subscribed under existing HOAs on a back-to-back basis. Next, on engineering, as we have talked about in the past, we're running a competitive feed process between Bechtel and a JGC Zachary joint venture. This process is on track to be completed in the summer of this year, and we would expect to make a final investment decision shortly thereafter. Please turn to the next slide, where I'll turn it back over to Trevor to discuss SEMPRA's financial results.
spk14: Thanks, Justin. Turning to SEMPRA's financial results, earlier this morning, we reported fourth quarter 2022 GAAP earnings of $438 million, or $1.39 per share. This compares to fourth quarter 2021 gap earnings of $604 million, or $1.90 per share. On an adjusted basis, fourth quarter 2022 earnings were $743 million, or $2.35 per share. This compares to our fourth quarter 2021 earnings of $688 million, or $2.16 per share. Full-year 2022 GAAP earnings were $2,094,000, or $6.62 per share. This compares to 2021 GAAP earnings of $1,254,000, or $4.01 per share. On an adjusted basis, full-year 2022 earnings were $2,915,000, or $9.21 per share. This compares favorably to our previous full year 2021 adjusted earnings of $2,637,000,000, or $8.43 per share. As a reminder, 2022 includes the minority interest sale of Sempra Infrastructure to Audia that closed in June of 2022. Even after considering this minority interest sale, our strong performance and growing adjusted earnings demonstrate our ability to generate value for our shareholders while providing safe and reliable service to our customers. Please turn to the next slide. The variance in full year 2022 adjusted earnings compared to the same period last year can be summarized by the following. At Sempra California, $161 million of higher earnings from higher CPUC base operating margin net of higher operating expenses at SDG&E and SoCalGas, and $46 million of higher flow-through items related to repairs deduction allowances and self-developed software, and other items recorded as a reduction to income tax at SDG&E, partially offset by $52 million of higher net interest expense, primarily due to higher debt balances at SDG&E and SoCalGas. At Semper Texas Utilities, $120 million of higher equity earnings primarily due to rate updates at Encore to reflect increases in invested capital, higher consumption, and customer growth. And at Semper Infrastructure, $160 million of higher earnings driven by excess production at Cameron LNG Phase 1 and strong production from existing energy networks and clean power assets, as well as new assets placed into service. and $110 million of higher income tax benefits, partially offset by $250 million of lower earnings driven by the sale of our minority interest in SEMPRA infrastructure. Please turn to the next slide. As we near the end of our prepared remarks today, I'd like to take this opportunity to bring this all together and highlight SEMPRA's investment proposition. We've built a high performing, energy infrastructure company that is well positioned in some of North America's most attractive markets. We're focused on strategically deploying capital in what we believe is within the higher value, lower risk portion of the energy value chain and provides significant visibility to growth and shareholder value. At our utilities, this year we will continue to be focused on advancing our rate cases, which center around making the needed investments to further safety, reliability, and decarbonization to serve customers. For SEMPRA infrastructure, we're nearing FID for a large-scale LNG project in Texas, dedicated to helping provide energy security to our country's allies and directly supporting the energy transition. With that said, at SEMPRA, there are a number of open items to be completed this spring, including finalizing the Encore base rate case and taking FID on Port Arthur phase one. That is why, as mentioned earlier, we plan to update our five-year capital plan on our first quarter earnings call in May, and also expect to issue our EPS guidance for 2024 at that time. Our work today gives us confidence in our ability to continue the build out of one of the largest and most competitive energy networks in North America. By advancing our position as a leader in technology and innovation, we're better positioned to serve customers and create value for our shareholders. That's why today we're announcing the approval by our board of directors of a quarterly dividend of $1.19 per common share, a projected annualized dividend of $4.76. We look forward to continuing our commitment to creating and returning value to our owners by building the energy networks of the future. And with that, this concludes our prepared remarks, and we will now stop and open the line to take your questions.
spk10: Thank you. This concludes the prepared remarks. We will now open the line to take your questions. We have between 20 and 30 minutes for questions today. If you would like to ask a question, please signal by pressing star 1 1 on your telephone keypad. Please make sure your mute function is turned off.
spk09: We will pause for just a moment to allow everyone to signal for questions. And our first question will come from Char Perez from Guggenheim.
spk10: Your line is open. Hey, guys.
spk19: Hey, good morning, Char.
spk08: Good morning, Char. Um, just let me just more broadly on the six to 8% growth CAGR from the 23 midpoint base. I mean, if the question is the cadence of growth that is embedded in that long-term CAGR. And the reason why I ask is the, you know, the 22 to 23 original midpoints reflect 6% growth in 23. And obviously we don't have 24 guidance today. So do you anticipate some step up in growth with maybe regulatory outcomes, SIP projects reaching. commercial operations and getting some clarity on the upwards cost of capital revision in California as we move further in plan?
spk18: Sure. Let me provide some context here. You did mention the step up from 22 to 23, which was about a 9.25% growth. But I'll give you a couple of things that I think will help you on this. One is when you look back over the last 1, 5, 10, 20-year periods of financial performance, we've delivered EPS growth in the range of 6% to 8% or higher. In fact, over the last five years, Char, we've delivered a compound annual growth rate of right at around 11%. So I would also note over those same periods of time, we've outperformed our sector in total shareholder returns. Second, harking back to 2022, as you alluded to, our five-year capital plan we launched last year was our largest ever at $36 billion. And you'll recall that over 90% of those dollars were allocated toward meeting our expected rate-based growth. And we certainly, we think that will continue to be a big driver across the balance of the decade. But one of the reasons we have so much confidence in our long-term growth rate is because now We really have improved visibility to a portfolio of growth opportunities at Semper Infrastructure over the same period. So we feel very good about our 68% growth rate. I think that we've demonstrated over a long period of time we have the ability inside this organization to grow at a rate faster than that, and we've certainly done that in the last 12 months than we've done it over the last five years.
spk08: Got it. And Jeff, just to – and I was actually referring to the original midpoints on 22 from 23, but I appreciate – thank you for that clarity. Just on the 23 guide, I just want to make sure, is there – is it inclusive of sort of the headwinds around O&M, interest rates, cost of capital that we just saw in California? Just trying to get a sense, a better idea of what's in and what's upside to 23 and whether there's any tail risks out there that we should be concerned about, or is it just the fact that you want these events to close?
spk18: I think it's a combination of both. You recall that when we set our 2023 guidance last February, we've come back 12 months later, we've affirmed that guidance. When you look at the 2022 results, obviously it was record-adjusted EPS for our company, really had strong safety results, strong operational results, executed a $7.8 billion capital plan, which we're really very pleased with. But I would note, to your point, as we look to 2023, we are going to manage some headwinds, right? Number one, you referenced one of them, which is the ROEs in our California utilities were adjusted down by 25 basis points. We are operating in a higher interest rate environment. Number three, and Trevor mentioned this one, non-controlling interest at Semper Infrastructure today is 10% higher than it was at this time last year, and we're managing some different potential outcomes associated with the Encore base review. That said, the reason we're confident about our 2023 numbers and we're going to work hard to beat them is we have a great plan of execution. It causes us to have a lot of confidence in our guidance. And I would also mention to your earlier question, we have a visibility to one of our largest portfolios of opportunities in the future, and that's why we feel very good about the 6% to 8% growth rate.
spk08: Perfect. And just lastly on the LNG side, Jeff, as you're getting closer to ECOSCOD, can you just maybe talk about how the economics of that project kind of stack up in the context of SIP, similar returns and earnings contribution, ProRata versus Camden, or they're sort of some headwinds you know, from the inflationary pressures, interest rates, et cetera, more broadly. So how would the economics, is that in line with other projects, especially Port Arthur as the next step? You know, that's the next big one.
spk18: Well, thank you. We're certainly excited about Port Arthur. I noted in Justin's prepared remark, I think he used the word exciting four or five times. I think that really reflects. It reflects our excitement inside the company. At Semper Infrastructure, you've followed us for a long time, Char. We tend to be very disciplined in how we allocate capital between shareholder distributions and new projects like Port Arthur. SEPRA infrastructure typically targets high single-digit to low double-digit unlevered returns. And we mentioned in our prepared remarks that we do this with the goal of maintaining portfolio equity returns in the mid-teens. We're very excited. I think one of the things Justin talked about is, you know, we think we can deliver this project on time and on budget. But given the positive interest in the marketplace for the project, I would tell you the returns that I decided we think are very reasonable. But one thing that's worth our audience tracking, which is we also expect to retain certain preferences in economics and the sell-down of our equity and asset optimization initiatives like you've seen us do around demodellnecking, expansion projects, and gas supply that could give us returns at levels well higher than our normal target. Perfect. Thank you guys so much. Appreciate it. I'll see you soon. Yes. Thanks for joining the call.
spk10: Thank you. And our next question will come from Nicholas Campanella from Credit Suisse. Your line is open.
spk17: Hey, everyone. Thanks for taking my question.
spk02: Good morning.
spk17: Good morning. So, hey, I just wanted to round out the conversation on just how to think about growth past 23. When we think about the EPS CAGR off the 23 midpoint. Does that already incorporate the five-year CapEx view you'll give us on the first quarter? Does it assume anything for LNG development on top of ECA, such as funding for Port Arthur and Cameron II? Can you just give us a sense of how the next update can affect growth considerations? Thank you.
spk18: Yeah, I appreciate the question. I would remind folks that we brought back our five-year forecast back in 2021. The convention we've adopted over the last several years has been to work off the midpoint of our current year guidance, which we announced today. We feel very solid about our 68% growth rate, and really that's looking at the roll-forward capital plan from last year of about $36 billion. I think what's exciting for us is we have the opportunity to improve that forecast, Certainly phase one of Port Arthur is important, and Al and his team are doing a really good job of managing our rate case outcomes in Texas. So I would just say that that six to eight percent growth rate is something that looks conservative relative to our past performance. And I'll tell you that one of the things, we talked a little bit in my prepared remarks about how we've repositioned the business over the last five years. What's unique today is our visibility into future growth is better than it has been in the past. So we want to get through a couple big events here in the spring and come back with a more robust capital plan by our May call, and we look forward to having that conversation in greater detail.
spk17: Okay, thanks a lot for that. And then I just wanted to ask just a capital allocation question. You know, the dividend increased 3.9%. We just noticed that maybe a little light compared to what you kind of executed on historically. Can you just give us a sense of what's driving that, how you're thinking about capital allocation regarding the dividend, and then also the buyback that you outlined last year, just given you have all these new growth opportunities in front of you, that'd be helpful. Thank you.
spk18: Yeah, that's a great question. I'll tell you, it's one of the things that really differentiates good companies from average companies is how disciplined you are in capital allocation. I'll tell you, we certainly understand the importance of dividend to our investors, and that's why we've consistently grown it over the last 12 years. Our board has established a projected payout ratio for us between 50% and 60%. What we announced today falls in the 53% range. And I would make a comment that over the last 10 years, we've averaged roughly a 7% increase to our dividend, which we feel great about. But remember, too, that we're investing in our businesses to support organic growth, and that is our most important initiative. And over our history... I think most people would say our focus has been on investing in opportunities to grow our business while balancing that with returning capital to shareholders, just like you talked about. So you have seen us return capital in the form of share repurchases, and we've also been fairly aggressive about returning capital in the form of a dividend. So I guess my concluding point would be, in combination, that dividend growth and the planned growth we have in front of the company, we think this strategy has resulted in the relative outperformance of Semper Stock over the last 1, 5, 10, and 20-year period relative to our index. We are committed to disciplined capital allocation in a strategic manner that results in increase in shareholder value. It is certainly a priority to our management team.
spk17: Okay, and then if I could just sneak one last one in, just the NCI sale around Port Arthur. Can you just kind of give us a sense of how we should think about that timeline? Do you have to take FID first and then pursue it? Just how should investors think about that?
spk18: Yeah, I would say we've focused on really the last two remaining items that we're working on right now is focusing on lining up our non-recourse debt and also the sell-down of equity, right? And I think if you think about historically what we've communicated about how we finance projects, we do step one, we look at project-level debt that's non-recourse to our owners and Two, we leverage the benefit of partners at the project level. We're very pleased to have ConocoPhillips playing that role in Port Arthur. Third, we use capital calls from our partners at Semper Infrastructure Partners. You know, we've got Adia and KKR in the capital structure, and they're going to have an important role in helping us move this project forward. And then finally, as we're doing now, we look to bring in new sources of private equity capital to sell down our interest. For us, it's all about striking the right numbers to take FID, and you should expect us to execute in a way that economizes calls on our equity while striking the right balance of efficient financing, risk mitigation, and retention of upside from future project cash flows.
spk17: Thanks for all the color. Really appreciate it. Appreciate it. Thank you.
spk10: Thank you. And our next question will come from Anthony Prodel from Mizuho. Your line is open.
spk00: Hi, Anthony. Good afternoon, Jeff. Good afternoon, Trevor.
spk01: How are you doing?
spk06: Good. Hopefully two easy ones, and I guess, I don't know if you mentioned it in Char's question, but slide 14, you guys talk about maybe the basis differential in the Western gas market. Is that an investment opportunity for either the regulated utilities or SIPP?
spk18: I would go back to a couple of first principles here, which is we're very focused on building an infrastructure company. It's one of the reasons that we talked about the reposition of this business back in 2018, really around being an infrastructure business and really removing non-core assets and commodities from our business model. So in the western region right now, we're focused on working through this western region gas event, and certainly we're trying to do that from a customer perspective. We've been relatively aggressive about trying to ensure we're making the appropriate announcements to our customers and putting some good programs in place. But, no, we're not pursuing a basis differential opportunity. But I would think it might be helpful, Justin, to talk about how we think about your asset position, particularly in Texas, Louisiana, and Mexico.
spk05: Yeah, sure. Thanks, Jeff. I think, and I'll harken to something that you said earlier, Jeff, that as a starting point, SI is really focused on long-term contracted cash flows from our infrastructure projects in Louisiana, Texas, and Mexico. And I think there's two important points to remember there. One, we don't own infrastructure in the western U.S., and two, we work to avoid commodity exposure. As you think about ECHA LNG in Baja, as you recall, when we took FID decision in 2020, we essentially leased transportation capacity that would allow natural gas to be delivered from the producing basins, both in Texas and New Mexico, to the project when it comes online in 2025. And in the interim, we looked to offset those costs by utilizing that capacity to deliver gas to customers. But given our infrastructure focus, we do this by conservatively hedging our position well in advance, which reduces our market exposure. And you'll notice as you look in the 22 earnings on a gap basis, as a result of those hedges, we have unrealized mark-to-market losses of over $300 million. which represent the difference between our conservative hedges and the market price. So, again, as an infrastructure company, we prefer to optimize recurring infrastructure cash flows and minimize our exposure to changes in commodity prices, essentially exchanging price volatility to get recurring cash flows. And I think you'll see that trend continue. We're focused on long-term recurring cash flows from credit-worthy off-takers, and that will be our focus at SI. Thank you.
spk06: Great. And then if I could just follow up probably also to you, Justin, on the port author phase one, you know, the enter the EPC contract, $10.5 billion fixed price. If you could just give us some more color maybe on the contract, is there, you know, a cost plus agreement or any commodity exposure that maybe SIP or SEMPRA has with Bechtel on that? And I'll leave it there.
spk05: Yeah, thanks, Anthony. So, yeah, as we've said, that contract is for $10.5 billion. It is a fixed price. There is some escalation components in that as we move toward issuing a final notice to proceed. I think, importantly, let me emphasize again, we're very proud of our selection of Bechtel. They have a history of building projects, LNG projects in the Gulf that have all been on time, on budget, and have importantly provided production numbers in excess of what was guaranteed. As we look at our specific EPC contract, there are some very small pieces of that that would float. But again, we have a contingency in place, as does Bechtel, to handle those adjustments. So I think, again, looking to Bechtel's history, they delivered on time, on budget, under fixed price EPC contract. So we're very comfortable with the contract. And again, I'll use my word again. I can't tell you how excited we are as we move toward FID prior to the end of this quarter.
spk06: Great. Thanks so much. Congratulations on a great quarter.
spk18: Thanks, Anthony.
spk10: Thank you. And our next question comes from Jeremy Toney from J.P. Morgan. Your line is open.
spk13: Hi, good morning. It's actually Rich Sunderland on for Jeremy. Thank you for the time today.
spk04: Hey, Rich.
spk13: Sticking with some of the LNG questions here, I know in the past on the growth rate you've had LNG in the plan, and obviously the business has changed a lot since then. I believe Port Arthur was upside to the growth rate last year. Just curious if that's still the case this year, or is Port Arthur now baked in as you approach FID?
spk18: Yeah, it's a great question. We're going to update our roll-forward five-year capital plan later this spring. Currently, we're working off of the plan we rolled out last year. We don't typically put projects in our plan unless they've reached FID, so I would view Port Arthur as an upside to our long-term opportunities.
spk13: Got it. Very clear. Thank you. And then looking across the range of future LNG projects, Are you seeing more interest from Asian buyers versus European buyers for incremental offtake? Curious where interest stands.
spk18: Yeah, I would tell you the answer is both, right? So you've gone through a really unique situation in Europe. Most of the contracts for phase one are being launched off the basis of Europe. But I would also note in the Washington Post a few days ago, they talked about the highest ever approval rate for coal plants in China, where they're launching 106 gigawatts of new coal plants. That's 82 new plants going into service. And between China and India, they burn about 70% of all the coal in the world. So there is a big opportunity for energy insecurity in Asia. The long-term market opportunity remains an Asian opportunity. And the great news is we've got a platform that allows us to dispatch efficiently into the Atlantic and the Pacific. And I think that's one of the things that all takers are excited about doing business with Semper because of that.
spk12: Great. Thank you for the time today.
spk18: Thank you.
spk10: Thank you. And our last question will come from Craig Shear from Tui Brothers. Your line is open.
spk03: Hi, Craig. Hi. Thanks for taking the questions. So, and I'm often accused of getting over my skis, especially on LNG, but looking past PA1 and Cameron 2, First, could you discuss the logical pecking order at this time between Port Arthur II, Vista Pacifico, and ECA II?
spk18: Sure, Craig. I'll pass that to Justin. Maybe you can provide some view in terms of how you're thinking about the loading order for development.
spk05: Yeah, thanks, Jeff. And, Craig, I'm never going to assume you don't have a lot of LNG experience, so thanks for your question. I think as you look at the pecking order, again, it can always change. As you will note, about this time last year, the war in Ukraine changed what we thought was our pecking order at that time. But as I think about our opportunities going forward, let me start with Port Arthur Phase 2. I think there's a lot of excitement around a second phase at Port Arthur. It would be brownfield. It would clearly benefit from sharing of common facilities. And as I think about that development, you know, there's a few key work streams, which, again, is consistent with, Craig, how we've always discussed about how we move forward our LNG projects. First, permitting. Port Arthur LNG Phase 2 has an application into FERC, and the FERC order is pending. Second is commercial. We have MOUs for volumes out of Phase 2 and are in discussions with many parties to fill any outstanding volumes. Engineering and construction, we're in discussions with Bechtel about continuous construction and optimizing that process. And as we always do, we are engaged with the credit rating agencies to make sure, as we think about financing these opportunities, we find the most efficient way to finance, taking into account credit and returns. So that's kind of Port Arthur. If you ask me the pecking order, I think the second phase at Port Arthur would be next. As we think about Vista Pacifico, I think you're seeing some exciting developments there as we continue to work with the Mexican government and with CFE about really optimizing supply there. There's a lot of interest, as you might expect, given it's out of the Pacific coast. And as we think about ECHA LNG Phase II, I think you've seen some also exciting developments. If you recall, we recently got our non-FTA permits for both VISTA and ECHA. The other thing that you may have noticed is we had an MOU that we announced with CFE and CARSO. which would be an opportunity to bring additional gas volumes to the Baja area, which could expedite the development of LNG Phase II. So, again, I hate to be the – being accused of saying excited too much, but I think there are exciting opportunities in the rest of our LNG portfolio.
spk03: Great. And that kind of tees up a little bit my second question here. i i guess on a macro basis in the united states i'm wondering uh justin if you have some some feel for uh after the remarkable prior 12 months of contracting uh what we might see in terms of a slowdown the next year or two and and what i'm what i'm kind of referring to is that uh if if some partially contracted projects were to cross the finish line some peers we could see 80-plus MTPA of FIDs within 18 months. And we're just wondering if that's just more than the market needs just past mid-decade.
spk18: Well, this is Jeff speaking. I'll provide a couple of comments, and Justin, feel free to weigh in. We think our view across the decade is very similar with what's been put out by the EIA, which is forecasting 130 percent growth for US LNG across the decade. The 80 million tons per annum that you referenced sounds about right, actually. I think actually the DOE might be forecasting slightly more than that. But remember, it's not just American LNG. We're competing against other markets, whether it's Australia or Qatar. There's certainly opportunities potentially at Mozambique. And you remember, there's still volumes coming out of Russia, particularly on the north coast as well as from Sakhalin. So I think that one of the things we've noticed is there is a tremendous demand for energy security and affordable sources of energy. And natural gas has a very big runway there. internationally. We may see it decline here in the United States in different regions of the country, but it is a really big opportunity. I think the United States is viewed as a market that has security of supply, and we've got good counterparties, and we've got good credit, and we've got deep capital markets. So we're going to see the lion's share of LNG across the globe will be coming from the United States across this decade. Thank you. Thank you for joining us.
spk10: Thank you. 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.
spk18: Sure. Just by way of brief closing, we know there were several investor conferences underway today, so we very much appreciate everyone making time to join us. If there are any follow-up questions per custom, always reach out to our IR team with any additional questions. This concludes our call.
spk10: Thank you for your participation. You may now disconnect.
Disclaimer