Sempra (NYSE:SRE) Q1 2024 Earnings Call Transcript May 7, 2024
Sempra beats earnings expectations. Reported EPS is $1.34, expectations were $1.33. Sempra isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 it over to Glen Donovan. Please go ahead.
Glen Donovan: Good morning and welcome to Sempra’s first quarter 2024 earnings call. The live webcast of this teleconference and slide presentation are available on our website under our Events and Presentations 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; Trevor Mihalik, Executive Vice President and Group President, Sempra California; Justin Bird, Executive Vice President and Chief Executive Officer of Sempra Infrastructure; Allen Nye, Chief Executive Officer of Oncor; 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 and 10-Q filled 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 GAAP measures. We also encourage you to review our 10-Q for the quarter ended March 31, 2024.
I’d also like to mention that forward-looking statements contained in this presentation speak only of today May 7, 2024 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 4 and let me hand the call over to Jeff.
Jeff Martin: Thank you, Gle,n and thank you all for joining us today. We’re pleased to report our first quarter financial results. It’s a great start to the year and sets us up well to provide strong financial performance for 2024. In addition to the strength of our financial performance, the market backdrop for energy infrastructure continues to be very constructive. We’re seeing strong macroeconomic fundamentals supporting US energy demand with the economy continuing to grow at a steady pace with manufacturing production gains, easing of supply chain constraints and continued job creation. We previously discussed the view that our industry is experiencing a super cycle of growth and believe Sempra’s strategy and portfolio are well-positioned to benefit from current trends.
In addition to the long-term demand from reshoring and electrification of transportation, artificial intelligence and data centers are driving new growth in digital infrastructure with demand estimates tripling from 2.5% of total US electric consumption to 7.5% by 2030. Growth in Texas is also particularly remarkable with ERCOT recently raising its forecasted peak demand by the end of the decade to over 150 gigawatts. Of note, that’s 65 gigawatts higher than the all-time record in the state. Against the backdrop of strong industry fundamentals, Sempra offers several competitive advantages. First in California we’re at the forefront of the energy transition, serving 25 million consumers in the country’s largest economy and one of the largest manufacturing bases in the US.
And through our general rate cases, we’re expecting to make new investments that support electrification and decarbonization while also improving affordability, safety and reliability. Turning to Texas, we’re seeing diverse industrial, C&I and residential growth, which is creating jobs, increasing electricity demand and requiring significant investments to modernize and expand the electricity grid. With economic expansion, the safety and resilience of the grid becomes even more critical, and in part, that’s why Oncor’s recently filed system resiliency plan is both timely and important. Al will speak to this in greater detail later in today’s presentation. And finally, at Sempra Infrastructure, we’re supporting global demand for energy security are in the midst of a second wave of LNG developments expected to support over 700 million tonnes per annum of demand by 2050.
Our dual coast LNG strategy is contributing to this push with approximately 16 million tons per annum of new export capacity currently under construction, which would more than double our existing LNG operating footprint. The key takeaway is we’re excited about the opportunities ahead and Sempra Infrastructure looks to provide cleaner and more reliable sources of energy to its customers while charting a course for attractive built-in growth through the end of the decade. It’s also important to note that Sempra Infrastructure’s growth forecasts are based solely on projects that have reached FID and are under construction and doesn’t yet include expected upside from a series of other projects still in development. Turning now to our financial results.
We reported first quarter 2024 adjusted EPS of $1.34. In addition, we’re pleased to also affirm our full year 2024 adjusted EPS guidance range of $4.60 to $4.90 and 2025 EPS guidance of $4.90 to $5.25. As a reminder, when you look at our adjusted EPS guidance range from 2023 to 2025, it reflects approximately 7% annual growth, which is consistent with our long-term EPS growth expectations of 6% to 8%. Please turn to the next slide where I’ll turn the call over to Karen to provide several business updates.
Karen Sedgwick: Thank you, Jeff. We’ve previously said that 2024 will be an important year of execution at each of our growth platforms, and I’m excited to provide an update on our progress. At Sempra, California, we continue to see constructive regulatory outcomes. In March, the CPUC issued a proposed decision supporting the updated return on equity that was implemented this year as part of the CCM trigger. The commission agreed that current cost of capital mechanism operated as designed, and the recently established returns on equity at SDG&E of 10.65% and at SoCalGas of 10.5% should remain in place through 2025 unless market conditions result in a trigger. Importantly, this improves regulatory certainty by affirming the protection that the CCM provides to customers and shareholders.
And the key takeaway is that this is another constructive data point for California’s regulatory framework. Another example of this is rate reform. Improving affordability for all of our utility customers is a top priority and I’m pleased to share that a proposed decision was issued at the CPUC in March to implement a fixed charge for residential electric customers. As currently proposed, this will reduce volumetric rates, support a more fair rate structure, and help California meet its clean energy goals. A final decision is expected in the second quarter of 2024, and the fixed charge would then be expected to begin in the fourth quarter of 2025. During the quarter, we also made a joint filing with the other California utilities to develop projects that successfully demonstrate blending hydrogen into the natural gas system.
These projects will begin blending at up to 5% on isolated sections of the natural gas system and incrementally increase the hydrogen concentration based on safety and technical feasibility. Hydrogen blending has been demonstrated safely and reliably around the world for decades. And we look forward to working with our partners to support new and improved ways to expand decarbonization efforts here in the state. Turning to the GRC, we expect a proposed decision in the second quarter and a final decision this year. Once the final decision is obtained it will be retroactive to the beginning of the year. As a reminder, after we receive a final decision, we will have a clear regulatory pathway for execution on our utility-focused capital plan through 2027.
Lastly, Cal ISO updated SDG&E that it was not selected to move forward on the Imperial Valley transmission line and substation. It’s important to note that we were financially disciplined in how we developed our bid and we look forward to supporting the project’s successful development as well as building the other transmission projects that were directly awarded to SDG&E by Cal ISO. Turning to Texas, we continue to see significant growth across Oncor’s service territory. Just last month, ERCOT issued an updated transmission planning report, forecasting approximately 40% higher load in 2030 than in last year’s report. And yesterday, Oncor made its inaugural SRP filing, which includes approximately $3 billion of capital investments. In addition to SRP, the 2023 legislative session was particularly constructive for the state’s utilities.
We’re already seeing the positive impacts at Oncor in terms of the planning and execution that support the state’s priorities and improve the timing of the company’s returns on capital. Moving to Sempra Infrastructure. We’re very excited about the opportunity to help deliver cleaner energy to our customers and partners. Recently, we declared a positive FID at our Cimarron Wind Expansion project. This project demonstrates our ability to generate attractive returns while utilizing existing company-owned transmission capacity to serve the California market and targeting O&M efficiencies based on locational advantages. Additionally, we’re making great progress at ECA LNG Phase 1 and Port Arthur LNG Phase 1. ECA is roughly 80% complete and remains on target to start commercial operations in the summer of 2025.
Port Arthur also remains on schedule with significant ongoing construction activity including excellent progress around soil stabilization, new foundations, and the commencement of concrete pouring and structural steel work. Turning to our marketing efforts. The LNG market is long-term by nature and while the DOE pause has received a lot of press, we remain confident in our ability to deliver projects that offer long-term, secure, and cleaner energy to customers. Sempra Infrastructure benefits from experienced project development teams that continue to make progress on critical work streams including permitting, engineering, and commercial negotiations. Moreover, the referenced pause does not impact our confidence in the overall competitive positioning of our development projects and we’re strategically utilizing this time to steadily advance our opportunities.
Also of note, even if you only take into consideration projects that have reached FID, Sempra Infrastructure has incredible built-in growth. With 16 million tonnes per annum of LNG export facilities, associated infrastructure, and a new wind project under construction, we’re improving visibility to attractive earnings growth through the end of our planning period in 2028. And that’s all, before taking into account our development project pipeline, which Jeff referenced earlier and offers notable upside. We can now turn to the next slide, where Allen will discuss ERCOT’s new planning processes.
Allen Nye: Thank you, Karen. As we have been discussing for several quarters now, Texas continues to experience strong demand growth. Oncor now serves close to 13 million customers and has now surpassed over four million meters. ERCOT is adapting to this growth, with a recently announced new planning process, to account for higher expected electricity needs in the future. In April, ERCOT announced that peak load is expected to reach 152 gigawatts in 2030, nearly double the record set last year of 85 gigawatts. This load growth is coming from a wide range of industries across the state, including new and expanded C&I, electrification of oil and gas operations, data centers, manufacturing and residential. To put this growth in context, the change from 2023 to 2030 would be like adding load greater than the size of the entire California power market.
Currently, we anticipate that approximately 40% of the new load, will come from Oncor service territory. So from our perspective, as one of the premier builders of T&D infrastructure in America, we are excited about the opportunity to continue to scale our investments in electric infrastructure. Since 2018, Oncor has constructed approximately 13,000 miles of transmission and distribution lines, approximately six miles per day. We have an active planning process underway and are confident in our ability to secure the materials and labor, necessary to serve our customers in the ERCOT market. Please turn to the next slide. Given the growth in the state, resiliency is more critical than ever. In 2023, the Texas legislature passed House Bill 2555, which allows electric utilities to file system resiliency plans, proposing capital and operational expenditures to improve overall grid resiliency.
We made our first filing yesterday, for approximately $3 billion of new capital expenditures and just over $500 million of operating expenditures, to be made over a period of three years. This investment would address overhead and underground system resiliency and modernization, flexible and self-healing distribution system, vegetation management, wildfire mitigation and cyber and physical security. To provide some additional color, the majority of our proposed spend is in the modernization and hardening of the older parts of our distribution system, by adding lightning protection, stronger class poles and cross arms and addressing capacity constrained parts of the grid, during extreme temperatures. Furthermore, we are proposing significant technology and infrastructure investments that will help enable, the automated reconfiguration of our system when extreme storms hit, quickly restoring service to customers on undamaged segments by intelligently rerouting power.
I would also like to highlight, that we have invested in wildfire mitigation for many years including, effectively partnering with industry leaders like SDG&E and the Texas A&M Forest Service. Now, thanks to HB 2555, Oncor has an additional opportunity to further accelerate our wildfire mitigation strategies across our service territory. We estimate that approximately $900 million of the total proposed spend including both CapEx and OpEx will focus on expanding our wildfire mitigation tools and implementing our grid modernization and hardening measures in wildfire-prone areas. Procedurally, the SRP statute provides 180 days for the PUCT to review the filing, and we anticipate having a decision by the end of the year. The SRP program with approximately $3 billion of capital expenditures if approved would be incremental to Oncor’s $24.2 billion of planned CapEx announced earlier this year for the five year period 2024 to 2028.
We believe our proposed SRP creates an opportunity to fundamentally improve customer reliability and overall customer service during and after extreme weather events while also helping to mitigate other risks. I will now turn the call back to Karen to walk through Sempra’s financial update.
Karen Sedgwick: Thanks, Allen. Earlier today, Sempra reported first quarter 2024 GAAP earnings of $801 million or $1.26 per share. This compares to first quarter 2023 GAAP earnings of $969 million or $1.53 per share. On an adjusted basis, first quarter 2024 earnings were $854 million or $1.34 per share. This compares to our first quarter 2023 earnings of $922 million or $1.46 per share. Please turn to the next slide. Variances in the first quarter 2024 adjusted earnings compared to the same period last year can be summarized as follows at Sempra California, we had $24 million primarily from higher net interest expense and lower income tax benefits and $12 million of lower CPUC base operating margin, net of operating expenses, offset by higher authorized cost of capital.
As a reminder, because our GRC is still pending, our CPUC revenues in first quarter 2024 are still based on 2023 authorized levels. This is important because any true-up later this year will be retroactively applied to January 1 when the final decision is approved. Turning to Sempra Texas. We had $56 million of higher equity earnings attributable to rate updates, increased embedded capital, and consumption, partially offset by higher interest and operating expenses. At Sempra Infrastructure, we had $13 million of lower transportation revenues and higher O&M, partially offset by higher power results, and $27 million of lower asset and supply optimization, partially offset by lower net interest expense due to capitalized interest, lower taxes and other.
As a note, beginning this year, the waterfall numbers are presented after non-controlling interest to improve comparability. At Sempra Parent, the $48 million quarter-over-quarter change is primarily due to higher taxes from the interim period application of an annual forecasted consolidated effective tax rate, which is expected to turn around over the course of the year. Please turn to next slide. Before we close out our prepared remarks, I want to outline Sempra’s value proposition as we execute our corporate strategy. At Sempra, our management team is committed to challenging the status quo in all aspects of our business operations. We offer exposure to growth in some of North America’s largest economic markets. Our position as a leader in the infrastructure development in these markets translates into a record $48 billion capital campaign through 2028.
In addition, we make energy infrastructure investments that target attractive mid-teens returns on equity and we understand that disciplined capital allocation is central to our success. And we understand the importance of returning capital to our owners and expect to continue growing our dividend. Of note, we’ve successfully grown our dividend at a rate of roughly 7% annually over the last 10 years. This is particularly noteworthy given the expected strength of our future earnings growth. To conclude, the role of our industry is becoming increasingly important to society and at Sempra we’re excited about the prospects ahead of us. Sempra is competitively positioned to capitalize on opportunities and we’ll continue to invest in our people, prudently manage risks, efficiently finance our businesses and be good stewards of the capital entrusted to us.
We thank you for joining us and I’d now like to open the line for your questions.
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