Earnings Call Transcript - SRE Q4 2021

Operator, Operator

Good morning everyone and welcome to Sempra's fourth quarter 2021 Earnings call. The live webcast of this teleconference and a slide presentation is available on our website under the Investors section. We have several members of our management team with us today, including Jeff Martin, Chairman and Chief Executive Officer. Trevor Mihalik, Executive Vice President and Chief Financial Officer. Lisa Lorac Alexander, Senior Vice President Corporate Affairs and Chief Sustainability Officer. Justin Bird, Chief Executive Officer of Sempra Infrastructure, Faisel Khan, Chief Financial Officer of Sempra Infrastructure, Allen Nye, Chief Executive Officer of Oncor, Kevin Sagara, Executive Vice President and Group President, and Peter Wall, Senior Vice President, Controller and Chief Accounting Officer. Before starting, I'd like to remind everyone that we'll be discussing forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements we make today. The factors that could cause our actual results to differ materially are discussed in the company's most recent 10-K filed with the SEC. All of the earnings-per-share amounts in our presentation are shown on a diluted basis and we'll be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. We also encourage you to review our Annual Report on Form 10-K for the year ended December 31st, 2021. I'd also like to mention that the forward-looking statements contained in this presentation speak only as of today, February 25th, 2022, and it's important to note that the company does not assume any obligation to update or revise any of these forward-looking statements in the future. With that, please turn to slide four and let me hand the call over to Jeff.

Jeff Martin, CEO

Thank you, Nelly. And thank you all for joining us today. In 2021, we delivered another year of strong performance. We'll discuss some of the operating highlights in a moment, but on the financial side, we invested over $7 billion in critical energy infrastructure, a record amount for our company. And we delivered full-year 2021 adjusted earnings per share of $8.43 well above our increased adjusted EPS guidance range of $7.75 to $8.35 per share. The strength of that performance, together with a portfolio of investment opportunities across all three of our growth platforms, gives us a lot of confidence in the future. Today we're announcing approval by our Board of Directors of an increased annualized dividend of $4.58 per share, consistent with our longstanding commitment to return value to our shareholders, record five-year capital plan of $36 billion with nearly 94% dedicated to our utilities, continued confidence in our full-year 2022 EPS guidance range, and the issuance of our full-year 2023 EPS guidance range. And finally, we're announcing a projected long-term EPS growth rate for the company of 6% to 8%. Please turn to the next slide. Next, I'd like to highlight a few of our accomplishments. From a strategic standpoint, we've made great progress over the last four years in updating our portfolio with three goals in mind. First, prioritizing markets with strong fundamentals and constructive regulation. Second, simplifying our business model to improve execution. And third, building scale, financial strength, and a high performing culture to deliver improved financial results. 2021 was another key milestone in that journey. We've completed a series of transactions to form Sempra Infrastructure, a simplified growth platform with scale and portfolio synergies, all while generating over $3 billion by selling a non-controlling interest to support growth and the return of capital to our owners. Furthermore, these transactions highlight the underlying market value of this business and demonstrate Sempra's continued ability to source lower cost of capital and recycle it into organic growth at our utilities. Moving on, we continue to advance our capital plan in 2021, deploying over $7 billion with a continued focus on supporting the strong growth at our utilities. From a safety standpoint, we had record employee safety results at Sempra, California and Sempra Infrastructure also had a great year. Advancing construction at ECA LNG Phase 1 on time and on budget with over 1 million hours of work without a lost-time injury. Taken together, these accomplishments and the quality of execution we're seeing across our businesses give us confidence in our ability to capitalize on future growth opportunities. Please turn to the next slide.

Lisa Alexander, Chief Sustainability Officer

Thanks, Jeff, for two decades, Sempra has been on a sustained path to decarbonize our business operations and the markets we serve. Innovation and new technologies are central to a clean energy future enabled by investments in three key capabilities: decarbonization, diversification, and digitalization. This past year we summarized our aspirations in each of these areas as part of Sempra's energy transition action plan, and I'm pleased to update you that we're making great progress. Here are a few examples. In California, SDG&E completed its inaugural issuance of $750 million in green bonds and secured regulatory approval for three new energy storage projects expected to total 161 megawatts. Additionally, SoCalGas achieved over 4% renewable natural gas deliveries to core customers in 2021. Moving to Texas, Oncor is doing an excellent job connecting customers to cleaner renewable sources of energy by expanding and modernizing Texas's fast transmission and distribution network. In 2021, Oncor connected nearly 2,200 megawatts of wind and solar generation, bringing the total renewables connected to Oncor's system to approximately 15,500 megawatts. In addition to progress on its operations, Oncor has also entered into a new $2 billion revolving credit facility with sustainability linked to performance metrics. And lastly, at Sempra Infrastructure, the newly consolidated platform is advancing opportunities in renewables, hydrogen, ammonia, LNG, and carbon capture infrastructure. The company recently filed an amendment with FERC to incorporate electric drives into the proposed Cameron LNG Phase 2 project, which could help reduce facility emissions by up to 40% while continuing to help decarbonize global markets. Earlier this year, the company also announced an MOU with Entergy to develop options intended to accelerate deployment of renewable energy to power primarily LNG facilities. Across our industry, companies are adjusting their business models to meet customer demands for increasingly cleaner sources of energy. At Sempra, we think these trends play to the strength of our company and effectively create a tailwind for new and cleaner investments across our platforms. Please turn to the next slide where I'll hand the call over to Trevor to provide business and financial updates.

Trevor Mihalik, CFO

Thanks, Lisa. To begin, we've had several positive developments at our operating companies. In the third quarter, SDG&E filed an application with the CPUC to assess its cost of capital for 2022, as a result of the extraordinary events of the COVID-19 pandemic. In December, the CPUC issued a scoping memo with a final decision expected later this year. Also, the CPUC authorized a memorandum account effective January 1, 2022, to track any differences in revenue requirements resulting from the interim cost of capital decision expected later this year. Additionally, the CPUC is working through the implementation of our renewable natural gas procurement standard. We're excited about this development and view it as a significant step forward in advancing the future of cleaner fuels here in California. Lastly, SoCalGas recently announced a bold new vision to develop a proposed green hydrogen infrastructure system to serve the Los Angeles basin called Angeles Link. As contemplated, this project would be the nation's largest green hydrogen infrastructure system and will deliver green hydrogen to the country's largest manufacturing hub to help decarbonize electric generation, industrial processes, heavy-duty trucking, and other sectors that are challenging to fully electrify. Shifting to Texas, Oncor set a company record for the number of new and active requests received for transmission interconnections in 2021, demonstrating the rapid growth in Texas and continuing opportunities for Oncor to grow its system. Oncor's service territory continued to grow as well, with Oncor connecting approximately 70,000 additional premises in 2021. At Sempra Infrastructure, we signed two MOUs to advance our unique capability of delivering LNG into both the Atlantic and Pacific basins, the first with Entergy that Lisa discussed earlier and the second, an MOU with CFP to jointly develop Vista Pacifico LNG as well as a new regasification project in La Paz, Baja, California Sur. Additionally, Sempra Infrastructure established a new credit facility in the fourth quarter and issued its inaugural investment-grade bond last month, all with the intention of efficiently financing its growth along with internally generated cash flows. Please turn to the next slide where I'd like to go into additional detail.

Justin Bird, CEO of Sempra Infrastructure

Great. Thank you, Rich. And thank you, Jeff. So I think, as Jeff mentioned, given the robustness of the LNG market and what we view as our privileged platform in the Pacific and Gulf Coast locations, I think you're seeing two things. One, we're seeing a dramatic increase in the market interest for our facilities. And two, I think you're seeing heightened confidence in our ability to execute on our development projects. First, speaking of Cameron, we're making great progress on the expansion project at Cameron. Given the timing of the filing of the amendment to the FERC permit, we're now targeting FID in the first portion of 2023. We're also making great progress on Vista. We are actively marketing about 10 million tonnes per annum of offtake and we're seeing extremely high levels of interest. So make no mistake, we're working with our partners and customers to get them supply as soon as possible. I wish we could give them more now, but as many of you know, the projects take time to develop, permit, and build. Also, we've made great progress in the last 24 months on Cameron. We reached full COD in 2020, hit record production last quarter, and we're working with our customers and partners to accelerate the debottlenecking of Phase 1. We took FID on ECA in November of 2020, as Trevor mentioned, the project is on time, on budget, and being done safely. We expect first LNG there towards the end of 2024, and you should expect us to optimize volumes out of ECA once we reach full production. So to really sum it up, Rich, we're focused on delivering LNG to our customers under long-term 20-year contracts. LNG demand is growing about 5% to 10% per year, and you should expect us to grow with the market or better. Lastly, we think we can deliver superior risk-adjusted returns to our shareholders by making disciplined investments in our LNG infrastructure.

Jeff Martin, CEO

Yeah. One of the things that was exciting about today’s call was one of the slides that showed that at the end of 2017, our U.S. utility rate base was $14 billion. Today, it's $41 billion and by the end of the five-year period that you are addressing is going to be $62 billion. And we have a fair amount of confidence to be able to grow that size of rate base. That's a 4.4 times growth over that nine-year period of time. And I think what that really reflects is the benefit of over the last four years, our capital recycling program and our focus on these T&D marketplaces where if you're in the right markets with good regulation, you can continue to produce higher recurring cash flows and grow your business faster than your peers. We certainly think that one of the arguments that comes through in our materials is the important role that Sempra Infrastructure plays in supporting that growth. So if you go back to the December timeframe of 2020, the market was valuing the IEnova business and LNG business at about $9 billion. We have a slide here today that shows our ability to basically extract roughly $7 billion out of that business to support the type of growth you're seeing in our utilities. So I think my conclusion would be we have three very strong platforms that are very capable of growing. Each of them has scale and a leadership position in the markets they serve. I think we've got this thing teed up to deliver really good results in the years ahead.

Durgesh Chopra, Analyst

Hey. Good morning, team. Thank you for taking my question. Jeff, big picture, what do you see of the regulated versus non-regulated earnings mix evolving here from '22 to 2026 in the future? The majority of the increase in capex is dedicated towards utilities. How are you thinking about that? Any updated thoughts there? Or how should we think about that business evolving over time?

Jeff Martin, CEO

Steve Fleishman, Analyst

Hey, hi. I guess it's afternoon here. Just a follow-up on LNG and specifically Cameron. If you do get to FID in first half of '23, when would Cameron likely be online expansion?

Justin Bird, CEO of Sempra Infrastructure

So in terms of the additional train, it would roughly be four years. After that I think the other thing to remember about the Cameron project as a whole, as I mentioned, we're looking to accelerate the debottlenecking, which we think can produce an incremental 1 million tons per annum. And we would expect that to come online prior to the full second train. Sorry, the full additional train at Phase two.

Jeff Martin, CEO

So the way to think about it, Steve, would be fully online by 2027, which is about a 48-month period of time. Justin is making a great point; we're looking to have access to additional volumes from debottlenecking probably within our five-year plan period.

Nicholas Campanella, Analyst

Hey, team. Hey, long time no talks. I guess, just on the California utilities and in terms of what's assumed in the broader six to eight CAGR here. I know we talked about the GRC cycle coming up. You also have cost of capital coming. Are you just kind of assuming status quo through 25/26, or how should we think about that?

Trevor Mihalik, CFO

The earnings you see in our guidance range for '22 and '23 assumes the proportional amount of earnings, the non-controlling interests in there. For example, in '22, you're seeing roughly 25% interest to our non-controlling shareholders. And then in '23, you're seeing 30% non-controlling interest. That's why you see a little bit of a change there. But on a gross basis, the EBITDA is basically fairly straightforward.

Operator, Operator

Thank you for your participation. You may now disconnect.