DBA Sempra

Good day and welcome to SEMPRA's first quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Louise Fick. Please go ahead.

Good morning and welcome to SEMPRA's first quarter 2026 earnings call. A live webcast of this teleconference and slide presentation are available on our website under the events and presentation section. We have several members of our management team with us today, including Jeff Martin, Chairman and Chief Executive Officer. Karen Sedgwick, Executive Vice President and Chief Financial Officer. Justin Byrd, Executive Vice President of SEMPRA and Chief Executive Officer of SEMPRA Infrastructure. Caroline Nguyen, Executive Vice President of SEMPRA. Alan Nye, Chief Executive Officer of Encore. Diane Wold, 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-Q files with the SEC. Earnings per common 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 gap measures. We also encourage you to review our 10Q for the quarter ended March 31st, 2026. I'd also like to mention that forward-looking statements contained in this presentation speak only as of today, May 7th, 2026, and it's important to know 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 three and let me hand the call over to Jeff.

Thank you all for joining us today. We're pleased with our first quarter financial results and the progress we've made against our 2026 value creation initiatives. Let me start by walking through the key developments from the quarter. Recall our first initiative is to invest approximately $13 billion in T&D energy infrastructure while also emphasizing improved financial returns. 2026 has started on a positive note with SEMPRA deploying $3 billion of investment capital in the first quarter, which keeps us on track to meet our annual target. As for improving returns, Encore received approval from the PUCT for the settlement of its base rate review. This decision comes with higher authorized equi layer at 43.5%, higher return on equity at 9.75%, and higher cost of debt set at 4.94%. Additionally, ONCOR is permitted to surcharge the difference between the new billing rates and ONCOR's current rates for the period January 1 to June 1, 2026. Based on the final order received last month, the surcharge will be made through a separate filing with recovery expected over the remainder of the year. Ultimately, this outcome is expected to better align rates with Encore's current cost structure and support improved financial strength and credit metrics during a period of elevated capital investment that helps support Texas's growing energy needs. For more information on the improved decision, please refer to slide 11 in the appendix. I also want to note that Encore submitted its inaugural UTM filing last month to incorporate $4.4 billion of T&D assets that were placed into service since January 1, 2025 into rates. Importantly, the UTM helps meaningfully reduce regulatory lag by allowing recovery on these assets and going forward can be filed every 365 days. We anticipate a final order and updated rates in the second half of 2026. In combination, the rate case approval and periodic UTM filings put ENCOR in a better position to earn closer to its authorized ROE across the plan period. In California, SDG&E filed an uncontested offer of settlement in its TO6 proceeding with FERC, which establishes the authorized framework for SDG&E's cost to own, operate, and maintain high-voltage transmission infrastructure. Similar to improving financial returns at Encore, the offer of settlement is important because it would also increase SDG&E's authorized base return on equity to 10.28% with a hypothetical capital structure of 54% equity among other items. The terms of the settlement remain subject to FERC approval, which is expected to occur in the second half of this year. Importantly, if approved, the settlement terms would be retroactive to June 1 of 2025. Now turning to SIPR infrastructure, we declared COD at Cimarron Wind during the quarter. At ECA LNG phase one, we introduced feed gas from the GRO pipeline into the facility and began the startup process. We continue to expect to produce first LNG next month, and we're targeting substantial completion this summer. At that point, we'll begin recognizing LNG revenues with long-term contracted sales and full commercial operations commencing shortly thereafter. Port Arthur LNG Phase I and Phase II construction projects continue to progress on time and on budget. Another one of our top priorities for the year is to close the SI Partners transaction and use the associated proceeds to reinvest in our utility businesses. We're making progress toward completing the transaction and have recently received key approvals from FERC and antitrust regulators. We expect a close in transaction in the second or third quarter of 2026. We also remain focused on simplifying Sempra's business model to concentrate our future investments on our utilities, which we previously projected would grow rate-based at roughly 11% annually through 2030. That's why we're continuing to advance our capital recycling program. Consistent with this initiative, the previously announced Ecogas sale remains on track to also close in the second or third quarter of this year. As you know, we also have a relentless focus on modernizing operations to support improving our cost structure and building out our execution capabilities. In that regard, Encore continues to make strides diversifying its supply chain while reducing execution risk. Currently, they're growing their supply base across multiple sourcing categories, securing labor and materials, expanding logistics and warehousing capacity, and strengthening physical security. Lastly, we continue to prioritize community safety, affordability, and operational excellence across the enterprise. As an example, during January's winter storm fern, SoCalGas's natural gas storage facilities helped both SoCalGas and SDG&E customers avoid approximately $120 million in higher potential energy costs by withdrawing natural gas purchase months earlier. The effective use of these assets highlights the clear value of natural gas storage and how it can be used successfully to support customer affordability. Additionally, the California Earthquake Authority published its Natural Catastrophe Resiliency Study in April. It outlined several potential pathways to improve affordability in the state and improve community safety. We're encouraged by the report and will closely monitor developments informed by the study's findings as the year progresses. Now, please turn to the next slide where Karen will walk through our financial results.

Thank you, Jeff. Earlier today, SEMPA reported first quarter 2026 gap earnings of $1,037,000,000 or $1.58 per share. This compares to first quarter 2025 gap earnings of $906 million, or $1.39 per share. On an adjusted basis, first quarter earnings were $991 million, or $1.51 per share. This is an increase to our first quarter 2025 earnings of $942 million, or $1.44 per share. I'd also note that the positive financial impact for the first quarter of ONCOR's base rate review will be primarily recognized in the second quarter, given the PUCT order wasn't issued until April. We're pleased with our financial results for the quarter and look forward to building on them for the remainder of the year. Please turn to the next slide. Experiences in the first quarter of 2026 adjusted earnings compared to the same period last year can be summarized as follows. At Semper Texas, we had $25 million of higher equity earnings from the UTM, higher invested capital and customer growth partially offset by higher interest expense depreciation and O&M. Turning to Semper California, we had $44 million of increased earnings, primarily from higher CPUC base operating margin, net of operating expenses. Semper California also had $48 million of lower income tax benefits and higher net interest expense. At Semper Infrastructure, earnings increased by $34 million, primarily from lower depreciation, due to the classification as held for sale. partially offset by other items. At Semper Parent, we had $6 million of higher losses from higher net interest expense and net investment losses, partially offset by other items. Please turn to the next slide. With solid first quarter results and progress against our key initiatives, we're affirming our full year 2026 adjusted EPS guidance range of $4.80 to $5.30. and 2027 EPS guidance range of $5.10 to $5.70. We're also affirming our projected long-term EPS growth rate of 7% to 9%. We remain focused on achieving the key milestones we've laid out for the remainder of the year, including closing the SI Partners transaction and recycling that capital back into our utilities, continuing to simplify the business with the completion of the ECO gas sale, and strengthening the balance sheet post-close through parent debt pay down and the deconsolidation of SI partners, as well as working with the rating agencies as we continue to improve our credit profile. In addition, we're executing on a record $65 billion capital plan that supports strong projected rate-based growth across the plan period. Also, a central feature of our capital plan is that we're investing more in Texas. We expect to derive a majority of our rate base by the end of the decade. What's more, we have improving visibility into approximately $9 billion of incremental capital opportunities beyond the base plan, which is also primarily concentrated in Texas. In short, Semper is well-positioned to achieve our projected long-term EPS growth rate of 7 to 9 percent, which is one of the highest in the utility sector. We look forward to building on our early momentum and continuing to execute our corporate strategy, which aims to provide investors with a compelling mix of current yield durable earnings growth, and long-term capital appreciation. Now I'd like to open it up for your questions.

Thank you. This concludes the prepared remarks. We will now open the line to take your questions. Please limit your questions to one question and one follow-up. 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. We will pause for just a moment to allow everyone to signal for questions. And our first question will come from Char Perez from Wells Fargo. Your line is open.

Hi. Good morning, team. It's actually Constantine on for Char. Thanks for taking our questions.

Good morning, Constantine.

Good morning. Maybe starting off on the progress at Encore with the 127 gigawatts of qualifying load, Do you view the quality as comparable to the prior 39 kind of high confidence number? And do you envision any rule changes that could move that number lower? Just maybe talking about how you envision to have a timeline for converting that into CapEx? Is that within the five-year plan or mostly outside?

Yeah. Let me try to address this from a couple of different perspectives. I think that number is quite solid. You'll recall just over a quarter ago it was closer to 38 gigawatts. I think Alan and his team have made substantial progress in confirming and meeting the requirements for that to move into the RTP. Why don't I do this? I'll provide a little bit of high-level commentary and then I'll pass it to Alan to update us on where they're at in the batch zero process, as well as the regional transmission plan, and see if that will answer your question. My starting point here, Constantine, is I think the terminology I've heard a lot in our industry is the United States really is in the middle of an arms race. And it's a race to build the infrastructure that we're talking about. Artificial intelligence can continue to improve America's standing as a technology leader in the world. And when you think about it, and we study all the other states in the country, Texas truly is ground zero for this opportunity. And that's why I think there will be substantial opportunities to grow ENCOR's plan beyond the base plan, beyond the incremental $10 billion of CAPEX, you know, well into the middle part of the next decade. That's also why we and our Encore friends are following the ERCOT Batch Zero process so closely, as well as the Regional Transmission Plan. So, Alan, would you mind giving a little bit of a procedural update about where we're at with Batch Zero and your views on RTP?

Yes, sure, Jeff. So, I think as we all know, ERCOT's been developing the process for Batch Zero through the stakeholder workshops that recently concluded. Protocol revisions are now proceeding through ERCOT committees to get to Board approval, hopefully on June 1, followed by PUC approval. The timeline as we understand it right now is we'll finalize the inclusion criteria in July of 26, a batch study which will occur between July 26 through January 27, a load commitment period beginning probably for 30 days beginning in February of 2027, followed by a refinement study from March to May of 27, and then RPG submission in June of 27. That's what we know about the schedule right now. It's obviously subject to changes, as we've seen. We're obviously very involved and will continue to be throughout the process. And I think it's good, Jeff, that you kicked it to me for both these issues because they do overlap to a certain degree. In fact, there's some discussion as recently as about 30 minutes ago at the open meeting in Austin this morning about the RTP and the batch process. But with regards to the 2026 regional transmission plan, I said on previous calls that we had what I said was high confidence. You mentioned it. With regards to 38 gigawatts, and I also said that it would likely increase by our April 1 filing for the regional transmission plan. As you've seen, our total queue right now for large load is at 289 gigawatts, of which 271 gigawatts are data center related. For our OnCourse 2026 RTP filing, we did submit 122 gigawatts of load, and that's load 75 megawatts or higher. We also submitted 5.2 gigawatts of medium-sized load, which is load between greater than 25 megawatts but lower than 75 megawatts. Together, that constitutes what's known as substantiated load pursuant to the IRCOT compliance plan. To your question about the quality of the variance of the quality between the 38 and the 127, they're effectively the same in this regard. The 127 that we submitted as part of the RTP meets all the requirements of SB6 as they were at the time. So we feel very good about those numbers. How they can change, I mean, there's literally a discussion this morning about what the commission is going to do with regards to batch and RTP. So we'll have to see. But that's where we are right now on large load.

And, Alan, I would just follow up with Constantine and summarize a couple things I think are most important for investors. Recall that Encore is growing earnings at 30% annually through the midpoint of its 2027 guidance. Second, I would remind you that they've got a $47.5 billion capital plan that's solid. It doesn't turn on whether there's more or less large data center or large load customers coming onto the grid. Number three, as I indicated earlier, they've identified this $10 billion of incremental CapEx, and Alan and Don and the team have been working quite aggressively to try to firm that up, and I'm confident that we'll be able to give you an update on that incremental CapEx bucket later this year And finally, we keep using this term of 127 gigawatts of large load customers. The bottom line is it's going to lead to higher levels of capital spending in Texas. And interestingly, internally, Constantine, we refer to this as the incremental to the incremental. In other words, it's beyond our incremental capital program or what we refer to as I squared. And we expect the I squared will show up in continued levels of of record capital spending at Encore well through the middle part of the next decade.

Thanks for that. Really appreciate it. Really staggering numbers here. Thank you. Maybe in a little bit more detail, ERCOT's been moving forward with some of the local transmission upgrades supporting near-term. I think they've announced more than $2 billion of projects already awarded. And is that upside to the current plan? Is that a part of that $10 billion opportunity? And maybe more holistically, how are you tracking versus that $10 billion number? And maybe just the trigger for the next update.

Sure. So you're 100% correct. I think about two weeks ago, and I referenced this on a prior call, in addition to Batch and RTP, we have also been pursuing some projects that we had at ERCOT that were just going through the regular RPG process. And so we had four gigawatts that we referred to as South Dallas, four gigawatts, and we had about 10 gigawatts elsewhere throughout the system. And approximately two weeks ago, I don't remember if it was Thursday or Friday, ERCOT did release those four gigawatts of South Dallas projects. And they had an estimated cost around those around $2.9 billion. Given that those are, they're not all in South Dallas, there are some other projects that they released as well. But given that the majority of them are in South Dallas where we serve, the majority of those projects would be ours. Costs associated with those projects are presently in what is our incremental opportunities bucket.

I think this is an important point, Constantine, because one of the things I indicated in my first response is they're working aggressively right now to firm up that $10 billion bucket. This is a great example of progress they made just two weeks ago, and certainly I'd like to be in a position later this summer, perhaps on the Q2 call, to provide more visibility to how this is firming up. You've got to get CCNs. You've got to get rights away. There's things out there, but we have a process by which what we put into the base capital plan is firm and rock solid, and I think Alan's making a great point. We've made tremendous progress on the $10 billion of incremental capital just in the last 90 days. I think there's some more things we can do between now and our Q2 call in August, and we look forward to coming back to the street and updating you.

Really appreciate that. Very impressive. Thank you. Thank you.

Thank you. Our next question will come from Steve Fleischman from Wolf. Your line is open.

Good morning, Steve.

Hey, excuse me. Good morning. Sorry, a less exciting question. Just the SEMPRA infrastructure closing, what steps do you still have to achieve to close that?

Sure, we've said a few things in our prepared remarks in terms of some of the progress we've made. And maybe, Justin, why don't you recap the progress we've made since the announcement and what the remaining items are that we'll resolve here in short order.

Yeah, thank you, Jeff. And hello, Steve. So as Jeff said in the prepared remarks, we do remain on track for closing in the second or third quarter of this year. Thus far, we've gotten FERC approval, competition approval from Korea. We've reached the end of the HSR period. We've received antitrust approvals in Mexico, and we have received the majority of our third-party consents. We are currently working with the Cameron Partners and the Japanese export credit agencies who finance Cameron to get their consents. And, Steve, at the same time, our teams are working on finalizing the pre-transition and transition services with those closing activities remaining on track. So I'd say our relationship with KKR remains strong. We're working closely with them to close the transaction in Q2 or Q3. And I think we're in great shape, Steve.

Okay, good. And then just to follow up on that, when you – I think – Karen mentioned just the rating agencies and completing their review after SEMPRA infrastructure potentially. Is that the key milestone or are there other things that the rating agencies are looking at related to the negative outlook maybe going away?

Sure, Karen. Please go ahead.

Yeah, so Steve, that's the main catalyst for some changes in our thresholds from the rating agencies. So we've spoken with all of them and they've all talked about improving our thresholds once the deal is done. But I don't expect that to be immediate. So it's not just that. For example, Moody's also wants to see some further progress on our construction projects. So they're tracking pipe installation and those things. So I anticipate our thresholds improving post-close to the project but probably closer to the end of the year once we reach some of those construction milestones, so it's the end of the year or early 27th.

The way I think about it, Steve, is I'd probably think about closing plus six months, and that will give us time to pay down some parent debt. Obviously, a big part of it is deconsolidating separate infrastructure from our financials and obviously improving the overall credit profile of the company, and that will go into what Karen's referring to as an adjustment in terms of downgrade thresholds.

Okay, and then I guess just one last question on the you know I guess your confidence on in moving to California on getting changes to the wildfire liability law this session.

Yeah, you know, this is something, Steve, that I've been personally involved in with Caroline Wynn. You know, one of the things I've said on prior calls is the right people that are supposed to be addressing the issues are around the table. The right issues are being discussed. And I think one of the things, from my perspective, and I'll pass it to Caroline for some additional commentary, is I can see this legislative session kind of oriented around how we as a state improve the livability of the state for its citizens. I think obviously there's a continued prioritization from the governor's office in growing the economy. I think this session you'll see a big focus on the affordability of housing, the availability of insurance, reduction in sales taxes in some areas, and I certainly think what you're asking about SB 254 falls in that category as well. We were pleased, Steve, with the CEA in laying out different paths to reduce wildfire risk and set up improved recovery mechanisms But I have reasonable confidence that we're going to get something done. This legislative session, I don't think it's going to cost a couple years. I think there's a lot of momentum to get something done that will be helpful to our industry. And perhaps, Caroline, you could provide some commentary on what your priorities are this session.

Sure. Maybe I'll just highlight three areas of the report that I think were very helpful. One is that the wildfire risk is really framed appropriately as a whole-of-society problem, not just a utility problem. I think the second piece is that there's a clear acknowledgement that the current framework isn't durable nor adequate. And maybe three, that there is significant cost of inaction. So, you know, as Jeff mentioned, the report includes a menu of different options that provides, I think, a solid base of facts that will inform the legislature. And from our perspective, we're really focused on these three priorities. One, we need to put wildfire victims first. Two, we need to implement a more coordinated statewide approach to risk mitigation. And three, as Jeff mentioned, we need to make meaningful progress within this legislative session. And ultimately, this is about improving California's wildfire framework It's about keeping our communities that we serve safer. It's about making California more affordable to live in and ensuring that recovery is faster and fairer when wildfires do occur. And just as I end here, we are seeing that the governor and the legislative leadership are moving, and to that point, they'll start informational hearings next week. So I do think that there is a lot of activity and alignment on this issue.

The only other thing I would add, Steve, to Caroline's comment is, I think what's different is you don't want to go to the legislature and be talking about, you know, bespoke issues. I think what's really important right now is the state conversations around a dialogue of improving the livability of the state. And what you and I are talking about on this call with 254, it's just one element of that. So I think the focus is on the right issues, and I think that we've got a lot more people aligned around action, and I think the CEA report is certainly helpful in that regard.

Great. Thank you very much. Thank you, Steve.

Thank you. Our next question will come from David Arcaro from Morgan Stanley. Your line is open.

Hi, David.

Hey, thanks so much for taking my questions. No worries. Circling back to the Texas landscape, you know, we heard earlier today from an IPP in Texas anyway who was more cautious really on, I guess, the physical ability for all that data center capacity to So I guess I'm curious, um, Here's your confidence level, you know, what you're seeing on the ground, the physical progress, and any limiting factors that you see realistically for the low growth outlook.

Let me make a couple comments. I'll pass it to Alan. I think there's something, David, that's unique about Sempra and the Encore story. And you'll be reading and following different earnings calls where people are having challenges with the RTO or people are talking about leaving markets. I think what we're talking about is we've got a base capital plan that's largely indifferent to whether these things happen or don't happen. So we have an industry-leading story that is largely unrelated to the number of data centers that come online. The great news is Semper is an opportunity where you can have leading growth, and the data center story, as it matures, becomes significant upside beyond our capital plan. I just want to keep putting that out there. This is a plan based upon Texas's economic activity and the need to build this superhighway of high-voltage transmission. That informs roughly 70% of Encore's existing base plan. They have a solid plan in this area, and I do believe they have an improving view of how many data centers will come online, and you're making a great point. Having the right matching of generation capacity that will be choreographed with that growth will be important. And maybe, Alan, you can talk about what you're seeing on the ground and whether you see continued progress on the generation side.

Yeah, sure. Thanks, Jeff. Yeah, it's a very reasonable question. The numbers, especially ours alone, but when you look at ERCOT as an aggregate, are very, very large. And I think that's why it's important that ERCOT and the PUC are going through the exercises that they are right now with the batch process and how they're handling the 26 RTP. It's going to – we're going to need as a state to coordinate and phase this very well. And there's going to have to be a lot, to Jeff's point, more transmission built to serve any significant amount of this load. There's going to be – there is sufficient excess generation right now. There's 164 gigawatts installed, and I know that's nameplate. versus an 85.5 gigawatt peak. But we have, as a state, about, I think, 450 gigawatts or so of generation somewhere in the ERCOT queue right now. So I think we have at Encore, I think, over 164 gigawatts trying to connect to us in some manner right now. And I think, you know, as I've discussed things with people on the generation side, I think they're looking for price signals to put more steel in the ground And this could certainly cause that.

What's interesting, Alan, is the choreography between the RTP process, the batch process. You're really trying to make sure that you match up load with capital investment and transmission, and you start unlocking that 450 gigawatt queue of generation. So there's kind of a loading order here, David. And certainly, we continue to think that Encore's capital plan is really positioned on what we think is the anchor investment that unlocks this, which is high-voltage transmission.

Great. Yeah, thank you for that helpful color as we try to figure out what's going on on the ground in Texas. Then maybe shifting over to California, you know, we're close here heading into the GRC period, and I know your filing coming soon. But I was wondering, any preview of just your maybe priorities and how you're positioning the GRC filings, what we should expect to see there? Sure.

Yeah, Caroline and her team have been doing work on this for probably well over a year. We're expecting to make our filing later in Q2, and Caroline, it might be helpful to talk about kind of what your priorities are to David's question as we put the GRC together.

Sure. Yeah, just as a reminder, our last rate case was filed in 2022 and we received our final decision in December of 24, so As Jeff mentioned, we will be filing next month and we'll be taking into consideration really lessons learned from prior GRCs as well as others in the state. And you can expect our filing to focus on three key areas. One is continued necessary investments in safety and reliability. Also, technology innovation. And lastly, modernization of our services and our infrastructure to support customer needs. But maybe I'd also like to note that we've done some really great work on the affordability of our services recently with modernizing our organization structure and right-sizing our business. And we're really focused on efforts that will support our ability to make critical investments while also improving the affordability of our services.

Very helpful. Thanks so much. I appreciate it.

Thank you. Our next question will come from Aiden Kelly from J.P. Morgan. Your line is open.

Hi, Aiden. Hey, guys. Thanks for the time today. Just one question on my end. Now with the Texas-based rate case wrapped, would you just remind us of the expectations for ROA improving by year as far as what you contemplate in the plan? And then just, you know, high-level, how should we be thinking about the key components in your UTM filings?

Yeah, I'm sorry, Aiden, you came across just a little bit garbled. Would you mind repeating your question for us, please?

Yeah, sorry about that. Just wanted to ask on the ROE improvement by year in Texas as far as what you contemplate in the plan and then just the UTM filing, you know, thoughts there on the key components.

Yeah, so I would just start by saying that you'll recall that just over 18 months ago, we had been forecasting earned ROEs at Encore just below 8%. There was a lot of work done by Alan and his team to create the right legislative environment and the right stakeholders to support the UTM process, which was designed to reduce that regulatory lag, which was even more important in a period of much higher growth in capital deployment. And behind that, the base rate review obviously increased both the ROE, the equi-layer, and the expected cost of debt. And those two things in combination, what we've said publicly is it is expected to move their earned ROE on average much closer to their new authorized ROE of 9.75%. But other than that, would you like to make any other comments now in terms of the schedule for the UTM?

Yes, sure. I'm glad to address the UTM. It's going well. We made our filing on April 22nd. We got a revised procedural schedule actually yesterday, which would call for testimony of the parties, interviewer staff encore, to be filed in July with a potential hearing on August 20. We expect a final order and new rates to go into effect during the second half of 2026. And we have the opportunity to get interim rates on or about October 4th if we don't have an order before then. So we're constructive on the schedule and we'll look forward to and we'll work with the parties moving forward. And just as a reminder, we can file once every 365 days.

Aiden, the only thing I would add is these developments were very, very important to Semper, right? We knew there was going to be growth in the state. We knew that Encore had an increased opportunity to deploy a lot more capital. But as we started to see these developments take place, that's why under Justin's leadership and Karen's leadership, we took the opportunity to load the balance sheet. So the timing, I think Steve Fleischman referenced this, the timing of getting the KKRI transaction closed, the improvement in financial returns, which by the way was the number one priority for our value creation initiatives last year, and it's the number one priority this year. That progress and improved expectation of returns in Texas has really unlocked what I think is a significant leg of capital, and obviously you're seeing that show up in their earnings growth.

Great. Thanks for the insight. Always the best. Thank you for joining.

Thank you. Our next question comes from Julian DeMoulin-Smith from Jefferies. Your line is open.

Hi, Julian. Hi, this is actually Andrew on for Julian. Thank you for the time. Just two questions on my front. One, you know, Texas, on the execution piece, you know, I think the disclosure was very helpful that, you know, you guys have contracted slot for your base plans through 2028. Can you maybe kind of talk a bit more about, you know, the progress for securing that for the remainder of your base plan, as well as kind of more specifically for your upside plan? Are you looking to kind of secure those slots throughout the rest of the year, or are you kind of waiting for more visibility on those opportunities? So, thank you.

Well, Andrew, thank you for joining the call. And I would refer you and our listeners to slide 13. And I think what we wanted to do here is lay out something that Alan has been leading at Encore since the COVID days, which was they've got the opportunity in Texas to deploy economies of scale in terms of how they resource their business. I think slide 13 does a good job of showing their progress to date, but Alan, if you could, maybe talk about the work you've done to support the base plan and why you think we're in good shape with the board support for you to keep contracting forward.

Yeah, you bet. Thanks, Jeff. We're in excellent shape. As I've said on prior calls, we have what we need for the first three years of the base plan. The outer two years, we have line of sight, too. We effectively have understandings or agreements that are not conceptualized in paper yet or not executed yet. for those same suppliers to provide what we need in the outer years. And there's just some of our suppliers who will only execute three-year contracts with us. But we have what we need for the first three, and we believe we're in excellent shape for the outer two years for the base plan. To Jeff's point, we're constantly working on supply chain, diversifying, securing slots. And his point to what the board support that we've had is several years ago, probably five years ago, the board gave us authority to start looking at securing things outside of what we were planning for. And so we've been doing that for a number of years now. That's how we got in the good position we are right now with regards to the 765 equipment that we have ordered or acquired. So we are always looking beyond the five-year horizon, looking into our incremental buckets to see what we need, and the Board has given us the ability to go ahead and secure those slots or products that we need for those plants.

You know, Andrew, I would just add that over a long period of time there's been discussions in the industry about the value of scale. And I think in this case, Encore really is a case study in that. I think not only has it been proactive planning over the last five years, they're really in a position, I think, that has created a competitive advantage for them in the industry to be so far along in their supply chain management. But thank you for joining our call.

Yeah, no, thank you. That was very helpful. Maybe one quick one on LNG as well. Obviously, given the backdrop that we're in, Can you maybe talk a bit about how you're thinking about LNG as a long-term component of your business strategy versus historically more so of a source of capital? Has that changed over time, and how has the conversation been with potential off-takers for your backlogged projects?

Well, let me make a couple comments, if you would, Justin, kind of on the macro environment, and I can pass it to you to talk about conversations you're having with current bilateral customers as well as potentially where you're at in some of your project status. You may recall, Andrew, that it was back in 2018 that there were a lot of people that were challenging Sempera on its perspectives on LNG. And we came out front in the industry and said, look, we firmly believe there's going to be a second wave of LNG opportunity. And we really tried to build a business where we put the Mexican platform together with our LNG platform. And obviously, we've marked the value of that business multiple times now, including most recently in the KKR transaction. But I can tell you that the LNG trade today, which is about 60 million tons per annum, or about 60 BCF actually, annually, really isn't tempting to balance supply and demand both in Asia and Europe. And when you see the stress that the global energy markets are in today, it really points to markets that have a competitive advantage in fundamentals. And the fundamentals we're talking about is the United States, which has deep capital markets, ample natural gas reserves, probably most importantly, low price volatility and the rule of law. So it's times like this that America's competitive advantage shows up. We're very bullish on the LNG trade long term because over time, and this came out recently from comments from the IEA, Buyers will continue to pay a premium for taking risk off from their supply market. And I think the United States, this is being demonstrated with the issues that Qatar is facing, the United States will continue to not only be the largest exporter of LNG, I think they're going to take market share. And Justin, you might want to talk about how that's informing some of the conversations with buyers, and then maybe cap it off with just a quick recap of where you're at with your projects.

Sure. Thanks, Jeff. And hello, Andrew. So, as Jeff mentioned, you know, the fundamentals of the market really matter when there's stress, and we think this is a key reason why the U.S. and, frankly, our LNG portfolio, with access to both the Pacific and Atlantic coasts, continue to be well positioned from a supply perspective. In the short term, these items are translating into positive momentum around our additional volumes at Port Arthur LNG2. and additional LNG development opportunities around our expansion projects. We are actively engaged in discussions for the remaining offtake at PA LNG Phase 2 and are constructive on securing our remaining volumes under long-term contracts with prices that will bolster SI's economic return. We, and along with our SI partners and our Cameron partners, are very bullish on the prospects of LNG, U.S. LNG, our dual-coast LNG portfolio, and we really think there's an opportunity to supply the market with the demand that's going to be there. Following on, on kind of the project status, let me just give you an update on some of the SI projects. At ECHA, as Karen mentioned, we've achieved mechanical completion We're excited to have recently introduced First Gas into the system, which began the startup process and pre-commissioning activities. We continue to expect to produce LNG next month, which supports our target of achieving substantial completion this summer. Once we reach substantial completion, we'll begin recognizing revenues from LNG cargoes. Once the commissioning process is complete, long-term contracted sales and full commercial operations will begin. Overall, the project is moving along and we look forward to an upcoming project milestones.

The only other thing I would add, Andrew, is You know, we've revised our corporate strategy, right? We've made the decision this is going to be a pure play utility business. So to the heart of your question, we would expect to be reducing our capital allocation to the LNG space. As one example, in addition to our $65 billion capital plan, we've circled about $9 billion of upside. Almost all that's in Texas. About $1 billion of that could come from the LNG side. But I just want to be really clear. We think the opportunity for US LNG is expanding. We think the opportunity for SEMPRA infrastructure is also expanding. But SEMPRA's corporate strategy is going to a lower risk profile, focused on our US utilities, with a big emphasis on Texas. And by the end of this decade, we expect to have almost 60% of our rate base in the state of Texas.

Very clear. Thank you very much.

Thank you.

Thank you. And we have time for one last question today. And our last question will come from Carly Davenport from Goldman Sachs. Your line is open.

Hi, Carly. Hey, Jess. Thanks so much for taking my question. Just one from me, and it's a follow-up to an earlier question on, you know, we're hearing more about emerging labor constraints. And I know you guys laid out the supply chain diversification in Texas. But could you talk a little bit more about the labor side specifically beyond 2028? and then how you think about kind of labor availability as you contemplate upside opportunities to the capital plan.

Yeah. As you were framing that question, you know, you think about we have this high class problem where we have all this tremendous growth, which is fantastic, and you're really on point. Supply chain becomes more and more important as you try to de-risk your capital plan. And, Alan, perhaps you could talk about some of the great work that Jim Greer did and now Alan Buck, the work you're doing with contractors.

Yeah, excuse me, Carly. I think one of the really important features of our supply chain with regards to labor is this. We have so much to build, and we have so much in our pipeline. that it's very attractive to labor to come work for us and be able to know you're going to be working in one place for the next multiple years, as opposed to having to move your family or jump from region to region to do the work. Is it tight? Certainly it is. Have we had a tremendous response from our partners? We have, and we feel very good at where we are. We have increased the number of contract labor over the years significantly. We've almost tripled it. It's helped us in a number of ways, but one of the features I think is very important is our backlog or our future flow of work is very attractive to people in the field to come work for us for an extended period of time.

Okay, that's really helpful, Collar. Thank you so much.

Thank you, Carly.

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.

Well, as we close, I'd like to thank everyone for joining us today. We appreciate you making time to participate, and we're very excited to be getting on the road to meet with a lot of investors. We look forward to seeing many of you in Arizona at AGA. We also have investor trips planned to San Francisco, Los Angeles, and Boston over the next three or four weeks. If there are any follow-up items, please don't hesitate to reach out to our IR team with your questions. And this concludes our call.

Thank you for your participation. You may now disconnect.