Sempra (SRE) — Q4 2020 Earnings Call Transcript

Good morning, everyone, and welcome to our fourth quarter 2020 earnings call for Sempra Energy. A live webcast of this teleconference and the slide presentation is available on our website under the Investor section. With us today on the line, we have several members of our management team, including Jeff Martin, Chairman and Chief Executive Officer; Trevor Mihalik, Executive Vice President and Chief Financial Officer; Justin Bird, Chief Executive Officer of Sempra LNG; Kevin Sagara, Group President; Don Clevenger, Chief Financial Officer of Oncor; 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 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. 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 reconciliation to GAAP measures. I'd also like to mention that the forward-looking statements contained in this presentation speak only as of today, February 25, 2021, and the company does not assume any obligation to update or revise any of these forward-looking statements in the future. Lastly, as you know, due to our filings in the US and Mexico, we're limited in what we can say about the proposed IEnova's exchange offer and we'll be unable to respond to questions about this transaction. With that please turn to Slide Four, and let me hand the call over to Jeff.

Thanks a lot, Nelly, and thank you all for joining us today. To start, I'd like to take a moment to thank all of our employees and partners for their dedication and professionalism throughout 2020 in continuing to serve over 36 million consumers. I'd also like to briefly touch upon the extreme weather events that transpired last week. Our thoughts are with all those who have been impacted and the Oncor employees who are tirelessly working to maintain the integrity of the grid in Texas. We've often discussed our investment strategy and how it's focused on building 21st century energy networks or transmission and distribution investments that are essential to modern life, and the past year really highlights the importance of those essential services and why new investments will be needed to keep the grid growing and improving its resiliency. I'm pleased to report that in 2020, we also delivered strong financial and operating performance, creating positive momentum heading into 2021, as we build on our mission to be North America's premier energy infrastructure company. Turning to the financial results. Earlier this morning, we reported full-year 2020 adjusted earnings of $8.03 per share, the highest in our company's history. We also exceeded our previously increased 2020 adjusted EPS guidance range, which reflects our firm resolve to always try to meet or exceed our commitments. In line with this positive momentum, we're reaffirming our 2021 EPS guidance range. I'd also like to mention that this guidance range excludes the impacts of the proposed IEnova exchange offer and the sale of a non-controlling interest in Sempra Infrastructure Partners. Additionally, for the 11th consecutive year, we're raising our dividend. Our Board of Directors approved an increase to our annualized dividend to $4.40 per share, from $4.18 per share. While future dividends are at the discretion of the Board, we plan to target a 50% to 60% dividend payout ratio. This demonstrates our commitment to generating value for our shareholders by continuing to grow the dividend, while also reinvesting in the future growth of the business. Now please turn to the next slide, where I'll highlight some of our more notable accomplishments for the year. Our strong performance is attributable to our strategic focus on value creation, a track record of disciplined execution and operational excellence. We're proud of our many accomplishments in 2020. We continued to advance our capital plan with approximately $7 billion spent in 2020, which continues to be anchored around safety and reliability investments at our US utilities. We also completed the sale of our South American businesses in June, amidst the backdrop of a global pandemic and international travel restrictions. This was a terrific accomplishment and a credit to our talented team, and marks the full completion of our multi-year strategic capital rotation program, which has allowed us to successfully reposition our business in what we believe to be the most attractive markets in North America. In line with our consistent focus on creating value for our shareholders, in December we announced a series of integrated transactions intended to simplify our energy infrastructure businesses under one growth platform. This platform is also intended to create scale and strategic alignment, while unlocking value by selling a non-controlling interest to a strategic partner. Trevor will provide an update on the progress later on in the presentation. Financially, we've achieved strong results raising our 2020 adjusted EPS guidance range last June and today, significantly exceeding that increased range. Additionally, we made great progress on our five-year capital plan, while also executing a $500 million share buyback program. Fundamentally, across our US utilities and infrastructure platforms, we remain focused on investing and growing our businesses. And to a point that I've made previously, we're allocating capital into a lower-risk portion of the energy value chain in what we believe are the most attractive markets in North America. That really is the centerpiece of our strategy and is reflected in the strength of today's results. Please turn to the next slide. Our 2020 accomplishments are a testament to the remarkable growth we're continuing to see at our utilities. Our 2020 financial results were underpinned by strong performance grounded in safety and reliability. We also ended the period with approximately $37 billion of total combined rate base, of which nearly 74% is from electric T&D investments. So the key takeaway here is our two-year capital rotation program was specifically designed to build out this position as a leader in our North American energy networks in order to improve the strength and consistency of our financial results, which has clearly been demonstrated over the last several years. Looking to the future, we believe our Utilities platform will benefit from growth opportunities associated with serving the largest consumer base in the United States and operating in markets with the highest concentration of manufacturing and industrial production that in combination, make up nearly a quarter of the total GDP of the United States. In addition to growth, I also want to mention several other competitive advantages that allow our utilities to be successful in a variety of market conditions, such as decoupled revenues in California, constructive authorized ROEs averaging just over 10%, and constructive regulatory environments that support serving growth and investing to meet bold sustainability goals that further our efforts to decarbonize energy and also improve the safety and reliability of our system. As an example, our California Utilities have over 10 hydrogen research and development projects. We expect to showcase as well as other innovations that we have underway at our Investor Day later this spring. Now please turn to the next slide, where I'll turn the call over to Trevor to provide both business and financial updates.

Thanks, Jeff. We've made substantial progress on the announced Sempra Infrastructure Partners integrated transactions since our last business update call in December. As these transactions continue to advance, we wanted to re-emphasize our key objectives and expectations. By simplifying the ownership structure of Sempra LNG and IEnova under Sempra Infrastructure Partners, we believe this new streamlined platform will offer scale benefits and portfolio synergies as we continue to grow the business by advancing investments in cross-border renewable opportunities, large-scale integrated LNG projects and other investments in energy networks. Overall, it's our expectation that these integrated transactions will simplify our business model, strengthen our balance sheet and highlight significant value in the underlying businesses. Please turn to the next slide and I'll review the expected timing of this process. We continue to make good progress, and I'd like to highlight that we plan to complete the exchange offer and announce the sale of the non-controlling interest by the end of the second quarter. While timing is important, getting to the right partner and the right value is what is driving this great initiative. Additionally, I want to emphasize that while these two integrated timelines are part of our overall execution plan, the exchange offer and the sale of the non-controlling interests are advancing independently and are not contingent upon the other's timing. Please turn to the next slide. We've had several positive developments this past quarter at our US utilities and infrastructure businesses. At our US utilities, we executed record capital investments in 2020 of nearly $6 billion, continuing our focus on grid modernization. At SoCalGas, we're proud that we achieved approximately 20% methane reductions below 2015 levels, which is five years earlier than mandated. Moving to Oncor, we continued to see strong growth throughout the service territory. In the fourth quarter alone, Oncor connected approximately 18,000 new premises, which brought the full-year total to approximately 77,000. This is a 20% increase compared to 2019 connections, which is an amazing figure and reflects the best organic growth rate Oncor has ever experienced. This is particularly noteworthy, considering the backdrop of the global pandemic. On the transmission side, Oncor set a record for interconnection requests in 2020, driven by continued strong development activity in utility-scale generation with a focus on the renewable and battery storage markets in their service territory. Also, Oncor completed six major transmission projects in West Texas, totaling approximately 260 circuit miles and approximately $300 million of investment. Shifting to our infrastructure businesses. At ECA LNG Phase 1 reached final investment decision this past November, and we subsequently provided TechnipFMC with full notice to proceed under the EPC contract. The total expected capital investment is approximately $2 billion, which includes an equity contribution of approximately $250 million each from Sempra LNG and IEnova. And in December, an affiliate of Total took a 16.6% equity stake in the project. Shifting to Mexico, we continued to advance our pipeline of construction projects focused on improving the country's energy security. The Don Diego Solar project reached commercial operations and recently, IEnova announced an agreement to acquire the remaining interest in ESJ. Additionally, last week IEnova CEO, Tania Ortiz, and Energy Minister, Rocio Nahle, commissioned the Veracruz refined product storage terminal. As a reminder, the Veracruz marine terminal is situated in the largest Mexican port on the Gulf Coast and is expected to be one of the largest fuel terminals in the country with the capacity to serve 2.1 million barrels of refined product. Please turn to the next slide, where I will review our financial results. Earlier this morning, we reported fourth quarter 2020 GAAP earnings of $414 million or $1.43 per share. This compares to fourth quarter 2019 GAAP earnings of $447 million or $1.55 per share. On an adjusted basis, fourth quarter 2020 earnings were $553 million or $1.90 per share. This compares to our fourth quarter 2019 earnings of $447 million or $1.55 per share. Full-year 2020 GAAP earnings were $3.764 billion or $12.88 per share. This compares to 2019 GAAP earnings of $2.55 billion or $7.29 per share. On an adjusted basis, full-year 2020 earnings were $2.350 billion or $8.03 per share. This compares favorably to our previous full-year 2019 adjusted earnings of $1.911 billion or $6.78 per share. Please turn to the next slide. The variance in the full-year 2020 adjusted earnings compared to last year was affected by the following key items: $146 million of lower earnings due to the sale of our Peruvian and Chilean businesses in April and June of 2020 respectively. This was offset by $284 million of higher equity earnings from Cameron LNG JV, primarily due to Phase 1 commencing full commercial operations. $81 million of higher earnings at the California Utilities from higher FERC and CPUC base operating margins, $63 million of lower losses at Parent and Other due to lower net interest expense, and higher income tax benefits. $57 million of higher earnings at the California Utilities from the release of a regulatory liability in 2020 associated with an income tax expense memorandum account that tracked differences between actual and forecasted estimates from 2016 to 2018, partially offset by income tax benefits in 2019 from the release of our regulatory liability established in connection with 2017 tax reform for the excess deferred income tax balances that the CPUC directed to be allocated to shareholders in a January 2019 decision. $51 million of higher equity earnings at Sempra Texas Utilities, primarily due to increased revenues from rate updates to reflect invested capital and Oncor's acquisition of InfraREIT in May 2019. And $41 million of higher earnings from Sempra LNG's marketing operations, primarily driven by changes in natural gas prices. Lastly, I'd like to highlight that we're making a few changes regarding our financial guidance going forward in 2021 and beyond. We're continuing to work on ways to provide you a cleaner and clearer view of our operational performance and financial results. And after various discussions with a number of our investors and sell-side analysts, starting in the first quarter of 2021, we will be adjusting out foreign currency and inflation effects, as well as unrealized mark-to-market gains and losses. This change is incorporated into our reaffirmed 2021 guidance range. Reporting our earnings with these items adjusted out allows for a greater focus on earnings from ongoing business activities, and we appreciate all the input we received on this change of convention. Please turn to the next slide. Over the last three years, we've successfully narrowed our investment focus to T&D investments in what we believe are the most attractive markets in North America. And those of you who have followed us over the last three years have seen the difference this has made. Since 2017, we've transacted on approximately $27 billion in enterprise value, while still growing our adjusted EPS annually by approximately 14%. Not only has our adjusted EPS growth been exceptional, but the overall adjusted earnings quality has substantially increased providing greater visibility into future cash flows. We're proud of where our business stands today and believe we're well-positioned to continue providing strong financial results. With that please turn to the next slide, where I will review our new five-year capital plan. Last year, we laid out our record five-year capital plan of $32 billion. And when rolling our plan for this year, we continued to see robust opportunities to invest in our US utilities and infrastructure businesses. In 2021 to 2025, the capital plan is anchored by $29 billion of US utility investments, which represents over 90% of our total capital plan and is the largest utility program in the company's history. For SDG&E and SoCalGas, safety and reliability continue to be at the forefront of our capital plan. We're making investments at both utilities to enhance our pipeline infrastructure through our risk assessment mitigation phase and risk spending accountability reporting. At SDG&E, we continued to advance our industry-leading Wildfire Mitigation Program by investing in innovative and cutting-edge technologies to keep our communities safe. And at SoCalGas, we're making strides toward achieving our greenhouse gas emissions reductions and executing on a strategy to achieve at least 40% reduction in methane emissions by 2030. Additionally in Oncor, the capital plan is attributable to tremendous organic growth that we're seeing. On the distribution side, Dallas-Fort Worth is the fastest growing metropolitan area in the fastest growing state in the country. This is coupled with continued investments on the transmission side, resulting from the increase in wind and solar generation as well as battery storage being interconnected into the ERCOT system. When compared to Sempra's capital plan we've shared with you last spring, we've identified an increase of roughly $1.1 billion of incremental utility CapEx in 2021 and 2022 combined. Lastly, we plan to fund our robust capital plan with cash flows from operations, as well as using some of the cash proceeds received from the proposed sale of a non-controlling interest in Sempra Infrastructure Partners, and other available sources. As we've historically done, we'll continue to be disciplined and evaluate all available financing sources based on the timing of our investments and what we believe is the most efficient for our shareholders. Please turn to the next slide, where I will review rate base projections. Our continued investment in safety and reliability provides strong projected rate base growth of approximately 9% annually from 2020 to 2025. By 2025, our combined total rate base is projected to be approximately $56 billion. Notably over that period, our rate base mix does not change materially with approximately 70% of total rate base from electric infrastructure, which reflects how well-positioned we are to continue supporting strong trends in electrification. Please turn to the next slide, where I will hand the call back over to Jeff to review our priorities for 2021.

Thanks a lot, Trevor. As we turn our attention to the rest of 2021, we plan to continue our positive momentum. We've identified several priorities to capitalize on the critical role that energy infrastructure is providing in support of the energy transition. Our priorities include among others, executing health and safety programs to help mitigate COVID-19 risk for our employees, maintaining a focus on safety and operational excellence across all of our companies, continuing to execute on a utility-centered capital plan, delivering strong financial results, and completing the Sempra Infrastructure Partners integrated set of transactions. I look forward to sharing more about how we're delivering on a sustainable future for all of our stakeholders at our Investor Day later this year. Please turn to the next slide. And finally, let me summarize for you our investment proposition, which we believe is differential to others in our industry and offers compelling value both in the near and long term. We're building a top-tier T&D infrastructure platform that's well-positioned to succeed in attractive markets, continuing to execute a robust capital plan with significant expected growth in rate base, growing our EPS and improving our earnings visibility, maintaining attractive and growing dividends, and remaining committed to innovation, sustainability, and leadership. Please turn to the final slide. In summary, 2020 was a record year for our company. Against the challenging economic and operating backdrop, we deployed a record amount of capital and produced the best financial results in our company's history, topping the prior year's record of adjusted earnings results by over $400 million. We look forward to continuing to execute on our value proposition in 2021 and remain committed to creating long-term shareholder value. And with that, this concludes our prepared remarks and we'll stop to take your questions. Before opening the call to questions, however, I'd like to remind you that we will not be discussing the exchange offer.

Hey. Good morning, guys.

Morning, Shar.

So as we're sort of thinking about the pending SIP so, Jeff, I know proceeds could be somewhat substantial, just given sort of the prior comments around the potential transaction multiple. In terms of use of proceeds, you obviously have an opportunity to reinvest for the buyback and de-lever. Any sort of priorities here and how much do you sort of envision could be recycled at the utilities just from an equity standpoint? And how should we sort of be thinking about potential limits with efficient redeployment of the proceeds in the near term?

Appreciate the question, Shar. And I think the way we think about it is, we've gone through in our prepared remarks kind of what we think the critical success factors are for the transaction, and obviously one of the things we've identified in that order of criteria is to predict accretive transaction. So when you think about the use of proceeds, what I try to describe to people is it's essentially dependent upon three factors. Number one, how well you successfully execute the general offer. Number two, how well you execute the sell-down process, and that includes both the overall quantity of equity sold and the implied valuation. And to the point that you're getting to, the third part of that is the use of proceeds. And one of the things we noted on the call is that you've seen not only the same $32 billion capital program roll-forward, but you're also seeing a higher portion of capital in the five-year plan allocated toward the utilities. So last year's plan was roughly 85% to 86% utility spending over the five years. This year's plans closer to 90%. And we did highlight for you that we think there's at least $1.1 billion of incremental CapEx just in our California Utilities in the next two years, and you've seen us raise the CapEx for Oncor by another $300 million over the five-year timeframe. So, we're going to look at both debt reduction, we're going to look at opportunities to fund additional utility CapEx. We will always test that against share repurchases. And there are scenarios where you could see us take in-kind investments from investors, although it's probably a lower likelihood. So, what we're going to try to do is manage all three of those things; the tender process, the equity sell-down, and then the efficient use of proceeds in a way that delivers all the critical success factors that we identified in our prepared remarks.

Got it. And then just the amount of the sale kind of obviously remains unknown and we'll find out pretty sure where that stands, but should we be assuming sort of cash or a combo of cash and maybe an asset swap that could be like EBITDA-neutral or accretive, so swapping EBITDA for EBITDA, so how do we sort of just think about that?

We have stated publicly that we plan to sell a non-controlling interest, ensuring that we will maintain control of the entity moving forward. We have a strong vision for this platform and the value it can generate over time. Our primary focus will be on executing these transactions as efficiently as possible, likely emphasizing cash transactions. However, we are open to the possibility of asset swaps or allowing someone to contribute an asset as part of the overall value.

Got it. Just one last housekeeping item before I pass it off is that you reiterated the '21 guidance, which may have had some upside based on prior comments. Is that simply a function of waiting for the pending SIP deal and the Analyst Day? How should we think about that?

I think you probably summarized it better than I could. I think both of those points are accurate. And I think, Shar, you have followed our company for quite a while, and I would tell you that we went through a relatively thoughtful process with our Board in 2018 to make sure we had the right strategy. And we really wanted to focus on North American sell non-core assets, make sure we're in the right markets. I will tell you, if anything about last week in Texas and some of the challenges you're seeing in your industry, if it points to anything it's really the value of investing in the grid. And as you recall from some of our prior conversations, we have specifically avoided the generation marketplace, we've avoided being exposed to commodities, and that's why being in a decouple marketplace like California is so important. So, you've seen over the last three years us be able to grow our EPS at about a 14% CAGR. And as we think about 2021, I would probably go back and just mention to you that think about how we did our guidance last year. I think it was on this call that we talked about our guidance last year, and some people were a little bit disappointed in the Q4 call of the 2020 guidance. And you recall, Shar, it was on the Q1 call that we guided to the high end of the range. And later in Q2, we went ahead and revised our guidance upward of $7.20 to $7.80. In the Q3 call last year in November, we guided at the high end of the range and think about what we've done, right? During the pandemic, probably the worst economic downturn in the history of our country, Sempra Energy has produced record EPS, we've produced record earnings and all five business units for the first time in the history of this company, each one of them produced record earnings results. So as we go into 2021, you should expect us to basically continue to look at getting the SIP transaction done, get further along in the execution of our capital program, specifically in our utilities, and come back to you with a view toward trying to always under-promise and over-deliver.

Terrific. Thank you, Jeff. Thank you, Trevor. I'll jump back in the queue.

Thanks a lot, Shar.

Thanks, Shar.

Hi, Steve.

Thank you, Jeff and Trevor. I have a couple of questions. First, I need clarification. Trevor, you mentioned that the SIP sell-down would be announced by Q2, but the slide on the timeline indicates the announcement is expected by the end of Q1. So, is it true that the announcement will be made by the end of Q1 and then close in Q2, or will it be announced in Q2?

I think, the game plan is the slide is correct. We're going to look to announce the transaction and the sell-down next month. We hope to also launch our tender process next month but both transactions, Steve, are geared to close in Q2.

Okay, great. And then just one other clarification in terms of the transaction being accretive. Would that also be ultimately to earnings per share accretive, not necessarily during '21 but just beyond most likely?

I'm sorry, Steve, I'm not sure I understood the question. We definitely believe that the transaction will be EPS accretive, if that's the nature of your question.

Great. I just wanted to clarify that. Jeff, could you discuss how you're viewing the situation in Texas and what it might mean for Oncor and its investment requirements? I've heard discussions about utilities possibly investing in batteries or other solutions. Do you see any political risks for Oncor in this context, even though it wasn't directly a distribution event? Thank you.

Yeah. Well, look, I would start, Steve, by saying I think the events of last week, which were in the Midwest, obviously in Texas and obviously Northern Mexico as well, they also impacted California, which we're also comfortable talking about if you'd like to go into that, but it was the most important event in the energy markets globally last week. And we've always started by thanking our employees for their hard work in the Dallas community and across North Texas and certainly, there's been a lot of people have been hurt by this and our hearts go out to all those folks. But as for Oncor, you recall that their job is really as a grid operator is to execute the commands of ERCOT in terms of load shedding just to make sure there wasn't a complete failure of the grid. I think one of the things is taking place in Austin today is we're going through legislative hearings. Our CEO, Allen Nye, is going to also testify at those hearings. But I think the most important thing is Oncor stood tall during last week's event. I think they are one of the more positive participants in the overall marketplace. That's also a view shared by the Governor, by the way. And I think what's important as we think about future reforms is I just want to be a little bit cautious, Steve, that we don't front-run the activities that are underway today at the state. There's going to be a full-scale investigation. The Railroad Commission will be involved, the PUCT, the Governor's Office, and the PUCT obviously, but all the interveners in the marketplace. So, I think what will happen from this is you'll probably find opportunities for the state to improve its resiliency. There is also a lot of generation as we've talked about on prior calls, it's in the interconnection queue, and we certainly expect that that will lead to additional investments in the T&D space. But look, I don't want to start talking about capital at this point. I just think that as you think about building that marketplace, which has the strongest economy, at least the growth economy in the country, we don't think that we're going to be spending less capital. We think that spending more capital will certainly be part of the solution.

That's great. And just since you mentioned before, just I am curious kind of because I think gas got very expensive in Southern California too, and I don't know if there's any issue in Mexico, but just could you talk about the impacts of that from last week?

Yeah. You'll recall that Texas took up most of the news cycle, but they had a DC time, the Midwest that went down, obviously there were impacts all across into Louisiana, which had some temporary disruptions to our Cameron facility. Cameron is fine and still online and operating well. You'll also recall at one point in time, the Governor issued an order that natural gas in Texas had to stay in Texas to meet electric generation needs first before being exported. That obviously has impacts to Mexico. Mexico had rolling blackouts in four or five of its Northern states. So, we're working very closely with Tania, and you'll recall that we've got seven pipelines where we've moved gas across the US-Mexico exchange. And she was being quite helpful to Texas to make sure that people were not unnecessarily scheduling gas across that interchange, but she was also working very closely with CFE. So, you think about our LNG facility in Baja, which is a giant storage facility, it was critical in that process of serving the needs of Northern Mexico and Southern California. And again, the State of California called on our storage network at SoCalGas, which is a very critical piece of infrastructure here in the state. And what people sometimes forget, Steve, is that California sits at the western end of the pipeline system. We don't have much, if any, indigenous production of natural gas in the state, so we're very reliant on events outside the state, like you saw last summer, for us to import power from neighboring states but also to import gas, particularly here in the wintertime. So it was a system-wide event in the Western United States, and I think what we feel great about is we really have been hitting this pretty hard with our investment community, Steve, is we are the picks and shovels to the Gold Rush, right? We're the company that's investing in grids, we're investing in storage and we're a big part of the solution today. And I think if you look at where the market is going, I think we've got the wind behind ourselves in terms of our investment thesis and we should expect to see continued strong capital spending across our enterprise.

Okay, thank you.

Thanks, Steve.

Thanks, Steve.

Thanks for taking my question. Good morning, Jeff. Two questions on regulatory or policy themes. First of all, can you talk about when you look at the rate base growth changes, meaning the old forecast and the new forecast, one of the things that stands out is the Oncor and the SDG&E kind of capital spend trajectory have pretty big step-ups relative to the one you gave last spring. Can you talk about the opportunity set at SoCalGas, and especially given some of the legislative and policy pushes to limit the growth of the natural gas usage in the State of California?

Yeah. Thanks, Michael for the question. I will tell you that we certainly think that the theme of electrification is a hard secular trend. And I think if you think back to the Oncor acquisition in March of 2018, it was really premised that on that expectation that that trend would continue. So as you see us lay out today, we've currently got 74% of our US utility rate base is exposed to that dominant trend. But I would go back to a point I was making with Steve Fleishman too, which is there is really an untold story of the criticality of natural gas to support the energy transition. So, Michael, 80% of the world's energy emissions today related to carbon come from oil and coal. And by the middle of next decade, the most dominant fuel in the world will be natural gas. In fact, Royal Dutch Shell came out just yesterday and forecasted that the LNG trade would double by 2040. So there is a strong recognition that the one country in the world has got it right and has reduced emissions the most has been the United States. So for the last two decades, we've led the world in emissions reductions. Number one, by committing to renewable capacity; and number two, making sure we fuel switch from coal to natural gas. So when you come back to California, clearly, Michael, we had blackouts last summer, and that was because we were over-reliant on imports. I think there is a recognition that natural gas is the natural partner to renewables, so I think we're going to have headwinds. We've got to tell a better story. The most important thing we can do, and Trevor talked about this, is we have to make sure that natural gas plays the appropriate role, but it's incumbent upon us as a company to limit fugitive emissions around methane. And that is very critical all across this country that we're on top of that. I expect to see the Biden administration likewise continue to regulate that area. But longer-term, natural gas, which we think over time will be replaced by hydrogen and green molecules, will be the best way to get after heavy-duty transportation and the industrial side of the equation. So electrification can take you so far, but it will be moving from natural gas to hydrogen, we believe, and the green molecules that will support what we need to do to reduce emissions both in industry and transportation. So, I think you're going to continue to see the type of rate-based growth that you see in front of our utilities. And I'll remind you that when we got our rate case at SoCalGas, it basically approved a record capital expenditures because as you go forward in time, Michael, you've got to make sure that you maintain the reliability of that system but also that it maintains it in a safe way. So, we're going to definitely grow our electric side of our portfolio and as you can see by the middle of this decade, we expect to have $55 billion in rate base across those three utilities. We're very excited about.

Got it. Thank you, Jeff. One other question. Mexico, there is some interesting legislation that's been battered around there regarding reforms to the power sector. It seems like that would present some challenges to all privately held or non-government owned power generation renewable conventional, etc. Can you just talk about that or can your team about that whether they think that legislation actually happens and gets done, and what the ramification would be for IEnova?

Sure, I think the administration is proposing a series of reforms for the power industry. These reforms include a complex set of changes, but the most publicized aspect is the effort to alter the dispatch curves. Typically in the United States, power generation dispatch is based on cost, with the lowest-cost sources, including zero-fuel-cost options like nuclear and renewables, being deployed first. With the global economic downturn, it's worth noting that Mexico is part of OPEC Plus and is involved in the oil market. They have higher sulfur content in their fuel oil, presenting an opportunity to leverage more of their natural resources for power generation. They aim to prioritize CFE's oil-fired plants in the dispatch order, which could impact independent power producers using oil or natural gas competitively. We are not part of that sector; the only electric generation facility we operate is attached to California and supports Southern California outside the CFE grid. This could affect our renewable portfolio, but since they are net short on electricity, renewables will still be dispatched. Our renewable business constitutes about 10% to 15% of IEnova's EBITDA, and IEnova itself accounts for roughly 10% of Sempra's overall earnings. We believe this situation is manageable. If the law passes through the Senate in the next few weeks, it has several significant issues. Firstly, under the Mexican constitution, there is a principle of fair dealings and open competition, which will lead to constitutional challenges against the law. Secondly, the USMCA agreement requires that government entities do not receive advantages over state-owned entities. Lastly, we also have grounds to argue that you can’t retroactively enforce regulations without bilateral agreement. We have tried to stay out of this conflict and instead focus on assisting President Lopez Obrador and his administration to succeed. It was significant that Trevor mentioned in his remarks that Rocio Nahle from the Ministry of SENER was with us at the Veracruz terminal last week, and senior officials have attended other development projects. Our aim is to support Mexico's success, particularly since they need more foreign direct investment and face infrastructure deficits. This administration has been committed to fiscal discipline, so our role is to collaborate with the government to help achieve their objectives. It will be interesting to see how the referenced legislation unfolds.

Got it. Thank you, Jeff. Much appreciated.

Thank you, Michael, for joining us.

Hey, good morning, team. Hey, thanks for the time.

Good morning.

Good morning. I would like to clarify something from the call. When you mention that the timing is separate and parallel for your desired transaction, it seems you're indicating that you can close on them at the same time but may announce them separately, rather than closing one and then separating the other. This also seems to include the Mexican tender, correct? I just want to make sure that's clear.

Sure, I'll take both questions. The first is what we're trying to convey is that one transaction does not have to happen sequentially before the other, right? So these can be pursued in tandem but not chronologically committed to one methodology. We certainly are intent on closing both of them expeditiously, and I would also convey that they're going forward in the ordinary course. We've had no disruption to our expectation. It's probably taken a little bit longer than we might have forecasted before. And I was joking with some people on the team, rarely are we criticized for being overly optimistic when you think about our guidance. But in this case, and I personally take responsibility for it, we thought we could get it done in Q1, but I think we have a high confidence level it will happen in Q2.

And then separately, did I hear right that you sort of deemphasized taking assets in-kind or some other kind of asset swap earlier?

No, what I'm trying to communicate is that we've engaged with a wide range of investors. We've discussed before the importance of targeting traditional infrastructure investors, as well as those who might be characterized as strategic infrastructure investors. Our goal is to connect with individuals who share an interest in collaborating with Sempra to develop a successful business. We believe this platform has significant growth potential and can expand aggressively. We're particularly interested in identifying investors who recognize the franchise value of Mexico and the value of LNG. We're open to whatever proposals they may present, but it's most likely to be a cash transaction. I've never indicated that an in-kind transaction was the most probable outcome, although there could be possibilities for investors to contribute both cash and in-kind investments. I don't see that as very likely, but we remain open to the idea.

Got it, excellent. Lastly, I would like to clarify the question regarding the use of proceeds. You've increased your capital expenditures, which is impressive. When considering other uses, should we anticipate another increase in capital expenditures? For instance, could we see something related to the annual Texas rehash this fall, or should we focus on the remaining cash proceeds after this $1 billion, which is primarily going to be used for debt buyback, dividends, and other purposes?

I believe your question relates to why we've previously raised in-kind assets. When considering the use of proceeds, we focus on the amount of equity we sell and the implied valuation, which establishes a pool of capital. This capital can be entirely in cash or a combination of cash and in-kind assets. As we consider how to utilize this capital, we've explored various scenarios, such as a 50/50 split between incremental capital expenditures and debt reductions, among others. We're pleased to announce that we've identified an additional $1.1 billion in incremental capital expenditures at SDG&E and SoCalGas for this year and next. In the past, I've mentioned that Oncor has increased its capital program from $11.9 billion to $12.2 billion. We continuously evaluate these options, so there's a possibility we could identify further capital expenditures as the year progresses.

Great. Excellent, guys. Thank you very much. Best of luck.

Thank you for joining us, Julien.

Hi, good morning. With regards to SIP, is your goal to self-fund CapEx through SIP contemplate kind of like the full scope of potential LNG development opportunities there? Are there any other considerations here? And just lastly, just wanted to clarify when you talked about the sell-down being accretive, if that was specific to 2021. Just want to clarify if that was your thought there.

So what I would say is in terms of accretion, we've always said the transaction is accretive. We haven't talked about years, but I would just say generally speaking, the transaction is accretive out of the box. And again, this turns on use of proceeds and the things that I've outlined previously. And I'm sorry, the first part of your question was?

Just as far as if this joint venture could self-fund all of it.

Thank you for that. It is certainly one of our objectives. They have over $1 billion in annual cash flows. The main goal of this transaction is to alleviate Sempra's balance sheet while aggressively expanding our regulated utility platform, and at the same time, allow Sempra Infrastructure Partners to fund its own growth. As we've discussed, we are collaborating with credit rating agencies to ensure that post-transaction, Sempra Infrastructure Partners will maintain an investment-grade balance sheet that can support its anticipated capital needs independently. The only potential exception might be Port Arthur, depending on how we decide to handle our obligations there, and we are open to involving equity partners at the project level if necessary.

Got it. That's very helpful. Thanks. And just a last one if I could. When you read from the 2021 guide there and you talked about switching out the FX and commodity mark-to-markets there, did that have any impact on 2021 at all? Just wanted to be clear on that.

Well, I would say when you think about year-over-year, obviously in 2020 there were some earnings such as our discontinued operations. I think it was close to $93 million of contributions from our South American businesses before we sold those. Generally, there are positive contributions from the items you just mentioned because they're one-time and they tend to inject a small amount of entropy into our earnings, I think in the conversations we've had with various owners, we think that it's not material. And I think anything we can do to keep doing what we've done over the last three years to improve our earnings quality is really important to our owners and that's why we took that slight change.

Appreciate that and welcome the change as well. I was just curious when you reaffirm 2021, did that change impact your view on 2021 at all?

No, it did not impact it.

Hi, everybody. Is there a way to quantify or frame the cash flow implications to the Texas freeze events on Oncor and to the extent that there is any at Cameron?

I'm sorry, would you mind saying that one more time, please?

Is there a way to quantify or frame any of the working capital fluctuations or cash flow implications at Oncor from the events of the last two weeks?

I want to emphasize that Oncor is not involved in the commodity marketplace. Unlike others who need to procure gas or generate electricity, we do not engage in that business, so we don’t have direct costs to customers. Instead, we typically bill the retail energy providers. Oncor ended the year with approximately $2 billion in liquidity, and we don’t foresee any significant liquidity issues within the Sempra companies. This reinforces a point I’ve made before: we are an infrastructure provider. We do not want to own generation, avoid exposure to commodities, and only engage in markets where we are separate from customer consumption volumes.

Okay. In Texas, it appears that you have raised your CapEx guidance for 2022. What prompted an increase of $100 million to $150 million?

Yeah. So one of the things we talked about in our prepared remarks was that we see incremental CapEx in California of $1.1 billion. We've also seen, and you may recall this from our Q3 call, we raised our overall CapEx plan in Don's organization over five years by about $300 million. So, they went, Ryan, from $11.9 billion to $12.2 billion. But in terms of maybe providing a little bit more color, Don, about where you're seeing some of those increases in Texas, could you please supplement the response here, please?

Yeah, sure, Jeff. Yeah, when we raised that by $300 million, the main things we were looking at is continued growth in Texas that just continues to exceed what we project out in each five-year plan, and then an increased emphasis on maintenance as well. Not only traditional maintenance, but system hardening and resilience, and we're always looking at what we need to do in that regard, and cyber because cyber is where we also continue to make a very hard to look at.

Okay, and then last question from me. Do the events of the last couple of weeks change the conversation around ECA in terms of its use as an import facility or any of the contracts there?

Now, it's interesting. You recall that we built that facility last decade as a re-gas facility, and it's fully contracted for 20 years, and those contracts are in place. It will continue to serve its current role through 2028. And so I think this was just making sure that that facility was available to support both markets in Mexico and the United States, and they have ongoing obligations and contracts with CFE down there. But it does highlight something that's important, Ryan, which is the value of storage. So, there's been a lot of, obviously, discussions around the value of electric storage, which I think has a great future, but the value of storage in California and I think the increasing importance of storage in Texas has really been highlighted in the last couple of weeks.

Okay, great. Thank you.

Thank you, Ryan.

Good morning, Jeff and Trevor. I have two quick questions. Let’s start with California. I see that there has been significant CapEx growth, supported by the gas rate plan decision from either 2019 or 2020 that bolstered the gas infrastructure. However, has there been any resistance concerning customer bills in California? Considering the expenditures related to wildfires and your efforts with policy initiatives, have any policymakers or other parties expressed concerns regarding customer bills?

Yeah. It's interesting. Kevin Sagara is with us on the call as well, but when I was at SDG&E I remember looking at some of the old strategy books from 1987 and 1990, and there was an embodying focus on making sure that bills did not get too high. This is something that we've been very focused on over multiple decades to make sure that the value of what we're providing is consistent with the value of what they're receiving. And I will tell you, we have relatively high rates in California. We expect those rates to go higher because of the needed capital spending, but what's most important and people miss this sometimes is our bills are well below the national average. And that's largely because we have very moderate weather here. And so many parts of the year and many parts of San Diego don't even have air conditioning. So because of the moderate weather, because of the commitment to energy efficiency across the state, you're incentivizing customers to use less. And as you do that, the per unit cost of electricity goes up, right? So rates probably continue to go up. We try to do everything possible to make sure that we meet those needs with energy efficiency and come up with programs to help people save on their bills. But right now, the annual bill is below average for the United States.

Great. And I guess more of a high level, just it seems that the Sempra model capital recycling maybe showing non-controlling interest is maybe getting replicated in the utility space. But I guess I think of the utility space, Sempra may be one of the last one or one of the few non-pure play utilities left. If I could just get your thoughts on being one of the last ones of not being a pure play, just thoughts on that business mix?

I believe that for quite some time, we've emphasized the importance of having the right strategy and making investments aligned with areas that can deliver the best financial returns at the lowest risk for our utility investors. We concentrate on businesses that share similar costs of capital and models that yield comparable risk-adjusted cash flows. Our efforts have been successful, and if you've followed the industry over the past few decades, you've likely noticed that some companies have moved away from unregulated businesses. A common reason for this shift may include growth challenges in those areas or issues with maintaining a similar cost of capital. Our position is clear: we aim to be a leading owner of energy networks, particularly utility networks in the country. We're positioning ourselves to capitalize on important trends related to electrification. With Sempra Infrastructure Partners, we've ensured that we have access to the lowest cost of capital, allowing that business to self-fund. This self-funding approach enables us to enhance Sempra's balance sheet and continue investing in our core priority of expanding our network platform in California and Texas. While some may label their inability to grow outside of utilities as simplification, it's essential to evaluate whether such strategic changes have been beneficial or not for investors. While I respect how other companies operate, we will always seek opportunities to add value for our investors. Over the past year, our stock traded around $160 in February, and if we assess whether we've added value to our overall franchise—considering our diverse investments—we have achieved significant milestones. We've successfully brought two trains at Cameron online, transforming our LNG business and driving record earnings last year. We sold our utilities in South America, which helped de-risk our business and resulted in $5.8 billion of pre-tax proceeds. We've improved our credit metrics and strengthened our balance sheet, ending the year above our target with a FFO-to-debt ratio of 17% and a debt-to-cap ratio below 50%. We made record capital investments of $7 billion across both utility and non-utility sectors. We raised and exceeded our guidance, secured a 10.6% ROE at FERC for SDG&E's transmission assets, bought back $500 million in stock, took the only final investment decision in LNG last year, and announced a two-part SIP transaction. Moving forward, we will remain proactive in de-risking our model, continually evaluating the fit of our unregulated businesses within our portfolio. This approach supports our transaction by involving a co-investor with a shared vision for the business while enhancing Sempra's balance sheet and ensuring we can fund all development initiatives with an investment-grade balance sheet.

Great. That was very helpful, Jeff. Thanks so much, and hope everyone stays healthy.

Thanks a lot. I appreciate you joining us.

Hi, good afternoon. Thank you for taking my questions. Most of the topics have been discussed. I just had maybe a housekeeping question here. Could you remind us on the status of the San Diego franchise negotiations, please?

Yeah. I've got our Group President of California with us, Kevin Sagara. And Kevin, perhaps you could update our audience on where we're at with the franchise.

Thanks, Jeff, and thanks for the question, Sophie. So as you'll recall, last year the city ran a process that culminated in a bid from SDG&E. And in that process, there were no other bidders. Since then, we've got a new Mayor, we've got a new City Council and in the spirit of cooperation with that new government, we agreed to extend our franchise out June 1 of this year. We believe the city is getting ready to issue a new ITB. We expect that to come out in the next month, hopefully. And they're tracking currently to the schedule that the Mayor put out when he took office in January, so we feel constructive about the process. As Jeff has said many times before, we're going to put our best foot forward. We lead in all the areas the city wants us to be good in, which is safety, reliability, clean energy, and we firmly believe we're the right partner for the city. So we're just looking forward to the issuance of this next ITB and putting our best foot forward.

Thank you so much. That's all from me for today.

Thank you, Sophie.

Good morning, gentlemen. Thank you for taking my call.

Hi.

A quick one on the CapEx that you're showing for Infrastructure, the $3.1 billion green wedge. Does that assume your current ownership and proportionate or is there some kind of an assumption around the two transactions embedded there?

Yeah. Jonathan, that's completely external of the sub-transactions. And nothing has been put into this plan with regards to Infrastructure Partners, and so this really just represents the investments made at LNG and Mexico.

Okay. If that's the case, could you explain the difference between the 2020 to '24 plan, which was $4.4 billion across the two segments, and now standing at $3.1 billion? I'm curious if this indicates a larger 2025 compared to 2020 or if it's related to timing.

Yeah. So the difference there from last year to this year is we did put in place the Mexican terminals. So those projects have gone into operations and so that's not reflected in this prospective plan. And then ECA is also now kind of layered in. And while we did have it in last year's plan, we've solidified with the EPC contractor and that's layered in here as well. But predominantly, it's just those projects in Mexico that came online.

Okay, and on the current basis. That's great. Thank you.

Thanks so much, Jonathan.

Now, let me just conclude by saying we appreciate everyone attending our call. I'd like to acknowledge the challenges of the last 12 months and the significant impacts that everyone has had. We sincerely hope you all are staying safe and appreciate you taking the time to join us today. Per our convention, please feel free to reach out to our IR team with any additional questions. This concludes today's call. Thank you.