Sempra (SRE) — Q3 2022 Earnings Call Transcript

Good morning, everyone. Welcome to Sempra's Third Quarter 2022 Earnings Call. A live webcast of this teleconference and slide presentation are available on our website under the Investors section. Here in San Diego, we have several members of our management team with us today, including: Jeff Martin, Chairman and Chief Executive Officer; Trevor Mihalik, Executive Vice President and Chief Financial Officer; Kevin Sagara, Executive Vice President and Group President; Justin Bird, Chief Executive Officer of Sempra Infrastructure; Allen Nye, Chief Executive 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 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 and 10-Q filed with the SEC. Earnings per share amounts in our presentation are shown on a diluted basis, and we'll be discussing certain non-GAAP financial measures. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. We also encourage you to review our 10-Q for the quarter ended September 30, 2022. I'd also like to mention that the forward-looking statements contained in this presentation speak only of today, November 3, 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 4, and let me hand the call over to Jeff.

Thank you, Glen, and thank you all for joining us today. At Sempra, we're on a mission to build one of the largest and most resilient energy networks in North America. Today, think about our company's role in the energy markets, particularly against the backdrop of what the International Energy Agency has called the world's first global energy crisis. Overseas, the supply-demand balance for oil and natural gas continues to be disrupted. The war in Ukraine, supply chain challenges, and reduced investments in traditional forms of energy resources as compared to prior periods are contributing to the global challenge. Without adequate security of supplies, coal is unfortunately playing a much larger role in the global energy mix today. In fact, the combustion of coal is expected to reach a record high, nearly matching levels seen a decade ago and will likely increase further next year. Here in North America, energy markets are continuing to expand and become increasingly integrated. That is why investing in a modern energy network to support cleaner forms of energy and future economic growth is central to our efforts at Sempra. We're also developing new large-scale export facilities so that European and Asian buyers of natural gas can diversify and improve the security of their energy supplies while phasing coal out of their supply chain and the electricity generation process. We're focused on expanding and modernizing North America's energy grids. Sempra's three growth platforms: Sempra California, Sempra Texas, and Sempra Infrastructure are strategically positioned to help serve the growing needs of consumers in North America and around the world while staying at the forefront of innovation and integrating cleaner forms of energy. Sempra's value proposition comes to life through its commitment to growing a stronger and more valuable business, one that serves the long-term interests of our customers and owners. Trevor will take us through each segment in detail, but first, I'd like to highlight some strategic focus at each of our growth platforms. At Sempra California, we're continuing to innovate and invest in new technologies that are aligned with the state's clean energy goals focusing on safety, innovation, and grid resiliency. At Sempra Texas, Oncor is advanced in its base rate review which supports the continued expansion and modernization of its grid in Texas with a focus on load growth, grid reliability, and integration of renewables. We expect these developments will lead to substantially higher capital spending in future periods. And at Sempra Infrastructure, we're making significant progress aimed at providing cleaner and more secure energy to our customers. Specifically, we're excited to announce that we're expecting to take a final investment decision on Port Arthur LNG Phase 1 in the first quarter of next year. Shifting to the results for the quarter. Earlier this morning, we reported third quarter 2022 adjusted earnings per share of $1.97 and year-to-date 2022 adjusted earnings per share of $6.87. Based on the strength of these results, we are raising our full year 2022 adjusted EPS guidance range to $8.70 to $9 per share. We're also affirming our existing full year 2023 EPS guidance range. Please turn to the next slide. In August, Congress passed the Inflation Reduction Act. This is largely viewed as one of the most significant clean energy bills in U.S. history and incentivizes substantial investments in key areas that are expected to reduce carbon in society. This legislation also builds on the Infrastructure Investment and Jobs Act that passed last summer with a focus on modernizing infrastructure across the country. While some of the details in the IRA are still being finalized, we believe that our growth platforms are well positioned to benefit from the positive tailwinds created by this legislation. For example, a common component of these bills is the focus on electrification. Our California and Texas platforms are located in high-growth markets where the integration of renewables and the electrification of transportation continue to be major drivers of transmission and distribution infrastructure needs. Additionally, SoCalGas continues to advance its position as a leader in the clean fuel space. The federal bills, I mentioned, outlined key spending priorities such as carbon capture, hydrogen, and biogas. This is important as you consider the different innovative pilots SoCalGas has underway that are focused on the commercialization of new and cleaner fuels. Further, SoCalGas is integrating renewable natural gas, or RNG, across its pipeline system today. As a reminder, earlier this year, the CPUC issued a decision establishing a statewide RNG procurement standard, which, together with the federal bills, supports investment and continued decarbonization of SoCalGas' T&D system. And finally, at Sempra Infrastructure, we have identified opportunities for further innovation in carbon capture and sequestration such as the Hackberry project and other investments to further decarbonize our facilities and support our goal of delivering cleaner energy to our customers. In summary, we believe our platforms are well positioned to advance the critical priorities detailed in the legislation. Please turn to the next slide where I'll turn the call over to Trevor to provide several business updates for the quarter.

Thanks, Jeff. Beginning with Sempra California. For SDG&E's 2022 cost of capital, a proposed decision and an alternative proposed decision were issued on September 30, and the CPUC is expected to vote out a decision today. We are pleased that both proposed decisions confirm that extraordinary circumstances were present and the cost of capital mechanism for 2022 should be suspended. If the proposed decision is approved, a second phase to determine SDG&E's rate of return for 2022 will be held. If the alternative proposed decision is approved, the 2022 cost of capital rates of return will be preserved and the proceeding will be closed. Next, I'd like to remind everyone that both SDG&E and SoCalGas filed their cost of capital applications with the CPUC in the spring to update their respective authorized rates of return for 2023 through 2025. As part of this, both utilities updated their respective cost of debt requests as recently as September. We continue to expect a final decision on these filings by year-end. Also, both SDG&E and SoCalGas jointly filed a CPUC application with Southwest Gas to conduct hydrogen blending demonstration projects designed to further enhance grid resiliency and help California reach its goal of carbon neutrality by 2045. Each project builds upon years of research to identify ways to scale hydrogen blending to help drive decarbonization across multiple industries. These innovative projects are examples of our strong alignment with policymakers at both the state and federal level and are expected to provide incremental opportunities to invest in new sustainable forms of energy. Separately, SoCalGas recently made significant progress to substantially resolve the remaining legal and regulatory matters related to the 2015 Aliso Canyon natural gas storage facility leak. In October, we announced that we settled with the fifth and final property developer and executed a settlement agreement with the CPUC Safety and Enforcement Division and Public Advocates Office to resolve all aspects of the leak. The settlement with regulators is pending CPUC approval. Finalizing these settlements is a critical step in this matter's resolution, and we recorded a $101 million after-tax charge in the third quarter. Please refer to our SEC filings for additional details and descriptions of the remaining open issues. Shifting to Sempra Texas. Oncor continues to experience tremendous growth. During the third quarter of 2022, Oncor added another 14,000 new premises to its system and continues to anticipate maintaining approximately 2% average annual long-term premise growth, which is significantly above the national average. Also during the third quarter, Oncor added approximately 65 new transmission interconnection requests to its queue, which at this pace would set a company record for new annual interconnection requests. This highlights the continued growing demand and penetration of renewables in its service territory. Last month, Oncor management reviewed with its Board the need to grow and expand its transmission and distribution system with the expectation of substantially higher levels of capital spending. We expect to provide you with a more detailed update on the five-year capital plan in the first quarter. Additionally, Oncor expects a final order regarding its pending rate case by the end of the first quarter of 2023 with new rates going into effect thereafter. At Sempra Infrastructure, we've made substantial progress moving Port Arthur LNG Phase 1 closer to FID, and Justin will speak to those details in just a moment. At both Sempra and Sempra Infrastructure, we've stated the importance of advancing projects with a robust risk-adjusted return as well as maintaining a strong balance sheet and investment-grade credit ratings. To that end, we've been working diligently on an optimal financing and capital structure plan for Port Arthur to align with those principles that would allow us to enhance our risk-adjusted returns while maintaining or exceeding our credit metrics. We're currently advancing two efforts to raise capital to fund the construction of the first phase of Port Arthur LNG, all with a view towards securing lower cost of capital for the project. The first work stream targets issuing debt at the project level, and we expect to kick this off in the coming weeks. In addition, we've already launched the second work stream, which aims to raise capital by selling project-level equity to one or more investors. These work streams are expected to pull forward a portion of the project's NPV to reduce our capital contribution, maintain Sempra and Sempra Infrastructure's strong credit profile while also highlighting notable value to our owners.

Thanks, Trevor. Let me start at Cameron LNG, where operations for Phase 1 are going very well, with production levels exceeding expectations. In addition, both the proposed Phase 2 expansion project and related debottlenecking activities of the existing three trains are moving along as planned. At Train 4, FEMSA, the U.S. pipeline regulator recently voiced support for our pending FERC permit. We continue to work through the competitive feed process, which we anticipate will be completed in the summer of 2023 and expect to take FID shortly thereafter. Also, we expect the full debottlenecking efforts to be complete before commercial operations commence at Train 4. Next, I want to provide you an update on progress at our ECA LNG Phase 1 project, where we recently began erecting the first structural steel on site. Overall, construction is slightly behind our original plan, but the project is on budget, and we continue to expect to commence commercial operations in the middle of 2025. At our Energy Networks business, we're pleased to announce that our Puebla fuels terminal outside of Mexico City has started commercial operations. This terminal is integrated with our Veracruz Port and ViadeMexico terminals and combined creates our refined fuels terminal network that we collectively refer to as Golfo Centro. This network provides for the end-to-end transportation of fuel by ship to the port of Veracruz and then into the Mexico City market by both rail and truck. The facilities are supported by a 20-year contract with Valero for the entire offtake. Finally, at our Clean Power business, we signed a 20-year power purchase agreement for Cimarron, a 300-megawatt wind development project with Silicon Valley Power, a AA-rated entity to deliver electricity into the California power market. The site is adjacent to our Inner ores Phase 1 and 2 wind facilities and directly ties into our power transmission lines at the California, Mexico border. We plan to proceed to FID pending receipt of final permits and completion of the engineering and design work. With that, let's move on to the Port Arthur LNG Phase 1 update.

As Trevor mentioned, we've had an exciting quarter. Port Arthur LNG continues to draw strong market demand and as advanced permitting and development status makes it an increasingly attractive project. As I have mentioned, there are three key work streams associated with reaching FID, and we are optimistic that we can achieve each of these by the first quarter of next year. First, we completed the EPC refresh and signed a $10.5 billion contract that is dependent on reaching FID. This fixed-price turnkey contract creates critical momentum for the project. Efforts to date for the project include preparing the site for an efficient construction process, moving a major state highway, building dock capacity for the construction materials and conducting robust soil tests across the entire site. Second, as Trevor detailed above, the financing work streams are underway. Finally, on the marketing front, things continue to progress at a rapid pace and we are in advanced discussions with several potential customers for long-term offtake contracts and are confident in our ability to convert existing HOAs into SBAs. Based on these discussions, we have more than enough interest to be in a position to take FID in the first quarter of 2023. Please turn to the next slide. The interest in Port Arthur LNG exceeds the volume of Phase 1, and we are actively marketing an expansion that could include a combination of Trains 3 and/or 4. The takeaway here is that there are scenarios in which we are oversubscribed for the Port Arthur LNG Phase 1 development project and look forward to advancing ongoing offtake discussions for a potential expansion phase. We will provide a further update on Port Arthur during our fourth quarter earnings call.

Thanks, Justin. Turning to Sempra's financial results. Earlier this morning, we reported third quarter 2022 GAAP earnings of $485 million or $1.53 per share. This compares to third quarter 2021 GAAP losses of $648 million or $2.03 per share. On an adjusted basis, third quarter 2022 earnings were $622 million or $1.97 per share. This compares to our third quarter 2021 adjusted earnings of $545 million or $1.70 per share. On a year-to-date basis, 2022 GAAP earnings were $1.656 billion or $5.23 per share. This compares to year-to-date 2021 GAAP earnings of $650 million or $2.09 per share. Adjusted year-to-date 2022 earnings were $2.172 billion or $6.87 per share, which compares to our year-to-date 2021 adjusted earnings of $1.949 billion or $6.27 per share. As a reminder, this is the first quarter where we will reflect the full impact of the minority interest sales in Sempra Infrastructure Partners, which closed with KKR in October of 2021, and ADIA in June of 2022. In addition to improving our year-over-year results, we raised over $5 billion of capital through our minority interest sales, a portion of which was used to lower parent debt and reduce our interest rate exposure outside of our utilities. Taken together, our strong financial results and growing adjusted earnings demonstrate the strength of our underlying business. Please turn to the next slide. The variance in the third quarter 2022 adjusted earnings compared to the same period last year can be summarized by the following: $79 million of higher earnings at Sempra California from income tax benefits from flow-through items and CPUC base operating margin, net of operating expenses at SDG&E and SoCalGas; $50 million of higher equity earnings at Sempra Texas Utilities, primarily due to higher consumption and customer growth and rate updates to reflect increases in invested capital; $74 million of lower earnings at Sempra Infrastructure attributable to higher noncontrolling interest, net of operating earnings; and $22 million of lower losses at parent and other. Please turn to the next slide. We are pleased with our performance this quarter, which has generated a lot of momentum across our platforms for the remainder of the year. We look forward to progressing the cost of capital and general rate case proceedings at Sempra California and the resolution of the base rate case at Oncor while continuing development progress at Sempra Infrastructure. We view these work streams as opportunities to continue to drive significant growth in shareholder value into 2023 and beyond. And with that, this concludes our prepared remarks. And I will now stop and we can open the line up to take some of your questions.

So Jeff, there's good news regarding Port Arthur 1. As your slide mentioned, you already have some agreements in place, and I've seen media reports about more agreements with Williams. Are those agreements in advanced stages as well? Regarding the formation of the Final Investment Decision, since Bechtel has been on site for Port Arthur, is there a clear understanding of the EPC process and the available EPC capacity to handle the work on Phase 2 in a sequential manner?

Yes. Look, it's a great set of questions you have there. I would refer, again, the audience to Slide 8 of our presentations, and it kind of reflects what you're just describing, which is as you look forward to Phase 2, which is the opportunity to deliver both Train 3 and Train 4. It reflects the fact that we've got volumes currently committed at Cameron that could be moved over to support Phase 2, and it also reflects roughly 3 million tonnes per annum of capacity that's in advanced negotiations currently. But this goes back to something we've talked about a lot in the past, which is we really think there's a strategic advantage at Port Arthur. So remember, we've got 3,000 acres of frontage on the waterway there, roughly 3 miles of access to water. Also, what's very attractive to customers is the potential scale of the development opportunity. You'll recall that this has the opportunity to be up to 8 trains. And if you ever got that far, and obviously, that's well into the future, it would be the largest export project in the Western Hemisphere. So it really has the ability to scale quite nicely. And to your point, Bechtel probably has the best reputation for delivering projects on time and on budget. They got great craft in the Gulf Coast region. They have spent a significant amount of time on this site, and that's been a real big linchpin and get us confident in our FID opportunity for Phase 1, which we'll talk about, hopefully, in Q1, but it also is a real competitive advantage for Phase 2. So when you think about the considerations I just outlined, there's no question that we're receiving a lot of strong inbound interest on Phase 2. And I’ll tell you something else as we make progress, Shar, toward getting to an SI decision on Phase I and it actually increases the interest and likelihood that Phase 2 will go forward. So we said this in our prepared remarks, but the time we get to our February call, we're hopeful to provide a lot more detail on our progress on Phase 2.

Perfect. And Jeff, the tactile has the EPC capacity to continue on Phase 2?

Look, I will tell you that they're one of our finalists on the Cameron expansion project. Obviously, they've got opportunities to work on a variety of projects around the world. But from our perspective, we're really pleased to have been part of Phase 1, and there's no question that the most ideal situation for our company is to not allow your EPC contractor to demobilize the ability to go from project to the next could be a real competitive advantage for Port Arthur.

Okay. Great. And then, Jeff, just moving on to the guidance assumptions. I guess, what are some of the inputs that you're thinking about as you're reaffirming '23, especially as we're thinking about bridging from '22. There's clearly a strong base in '22 but could we get your thoughts on some of the contingency that is building for '23? And maybe how you're seeing some of the offsets like O&M and interest rates get incorporated into the '23 assumptions?

Yes. Let me give you my perspective on this, and I would tell you this goes back to something that we as a management team have discussed, which is we're really, really happy with the progress we're making across all three of our growth platforms. I think the true competitive advantage for any company always comes down to the depth of your talent and leadership and how crisp your strategy is. And I think you're seeing both of those factors show up in our results. Let me give you a little bit of perspective before I turn to 2023. When you think back to where we were in 2021, we launched 2021 with an estimated guidance range of $7.50 to $8.10. And Shar, you may recall, that we actually delivered $8.43 last year, and we did not change our 2022 guidance. We kept our 2022 guidance at $8.10 to $8.70. And now we're in a great situation where we're updating that guidance to $8.70 to $9 or a midpoint of roughly $8.85. So now as you look forward into 2023, our guidance, which we published in February is unchanged at $8.60 to $8.90 or roughly a midpoint of $8.90. So a very similar circumstance that we're walking into next year in terms of how we found ourselves earlier this year. But I think the key for us is we are very excited about the strength of all three growth platforms. Certainly, the progress we're making on Port Arthur Phase 1 and particularly Cameron expansion causes us to have a pretty bullish view of the future. And in our prepared remarks, we reaffirmed our guidance for next year. And once it's full visibility to our 2022 financial results, we'll be excited to take this up again on our February call.

So maybe following up on Shar's question a little bit here. There's certainly some headwinds I can think about into '23 from '22. One, you've had good weather in Texas this year. There's some excess marketing revenue on Cameron from some excess volumes in the second quarter. And then obviously, there will be a full year at the minority stake. So are those some of the drivers that are sort of as you contextualize '23 against your 6 to 8 sort of long-term growth guidance that you've given previously that you're thinking about? And then as you think about '23, once you get to '22, I think you said in your answer, Jeff, you're going to work into that '23 number and you provide a little bit of an update on in February in the call.

Yes. What might be helpful, Ross, let me just comment potentially in terms of how I think about the long-term growth opportunity at Sempra. And I'm going to pass it to Trevor. And maybe, Trevor, you can walk through some of the drivers for the quarter because I think that informs our continued bullish view for next year. But I was thinking about this, Ross, earlier this year, we began to execute on our $36 billion five-year capital program. And I think as you've seen us update across the year, we've been making great progress. We're still very comfortable with our 6% to 8% long-term EPS growth rate. And I think as you've heard us describe a new set of opportunities that are in front of us, I think we're going to be working really hard to see if we can't beat those numbers in the future. And I look back at our growth rate on an earnings per share basis. Now it's a new midpoint of $8.85. And since the end of the year in 2017, that would allow us to grow our earnings per share at an 11% CAGR. And so I think we've got the right mix. We've got the right strategy. We have really sharp execution occurring across the business. And that's shown up in the quarter. And maybe, Trevor, you could talk about some of the puts and takes in the quarter and how that makes you think about 2023.

Yes, sure. Thanks, Jeff. Yes, Ross, as Jeff said, there were some puts or takes in the quarter. But underlying that, I think we really did have a strong operational performance across all three platforms. And so what I want to do is just maybe give you a little more color and clarity around what we presented on Page 10. First, at the California Utilities, there was a $36 million of higher CPUC base operating margin, and that was roughly split evenly between the utilities. And then in Sempra Texas, Oncor had significantly higher consumption, as you mentioned, this quarter as well as rate updates from the increase in capital deployed year-over-year, and that really was about $58 million of higher earnings. And then third, and this is a big point that we kind of brought out in the prepared remarks is at SI, the big driver here relates to the minority interest sale. And this really reduced the period-over-period earnings of about $83 million, but these were partially offset by higher earnings in the business driven by higher gas prices and the outperformance in the power business as well as assets placed into service. So what I'm really pleased about is that we had a 9.5% year-over-year growth for adjusted EPS over the nine months ended September 30. And as Jeff said, all in all, this really speaks to the strength and diversity of the T&D platform. And so we're pretty pleased about where we are in raising our guidance.

That's great, Dave. I have one more question. You mentioned the start of the capital raise project and the financing work streams for Port Arthur. I believe the AA considered a 30% equity stake from ConocoPhillips, correct?

It sure did.

Okay. And then one last one, maybe just an update on the Angeles Link project. That's a pretty big and exciting potential growth area for you with hydrogen. What steps from here are in the near term as we try to continue to move that to realization?

Thanks for your question, Ross. I’ll share a few thoughts before handing it over to Kevin for more details. When we consider California and SoCalGas specifically, our management team often discusses the importance of succeeding in today's business environment. Our customers are clearly requesting that we decarbonize the system while ensuring safety. This is why we mentioned it in our prepared remarks. We have set an ambitious goal to deliver 20% renewable natural gas to our core customers by 2030. We're pleased that the state has mandated that all load-serving entities should provide at least 12% of that by the same timeline. We are committed to ensuring the system's safety and continuing its decarbonization. There is no doubt that hydrogen represents the future, especially for challenging sectors like heavy-duty trucking, certain industrial uses, and possibly power generation. The U.S. is lagging in the hydrogen sector while Europe is making significant strides. Many of our LNG customers, especially in Japan, are ahead in this regard. California policymakers are clearly calling for companies to innovate and explore new hydrogen applications. This is why we are excited about the leadership that SoCalGas is showing. Kevin, could you share some insights on the next steps regarding the Angeles Link project?

Yes. Thanks for that. I'll just kind of echo off a little bit here, but Southern California is one of the nation's largest manufacturing areas and has a very significant industrial base, along with the nation's largest ports. So opportunities to back off diesel and other fossil fuels and even natural gas to help accelerate California's and the region's clean air goals is really important. And we've gotten a lot of good early feedback from stakeholders around this project, including city and state officials, labor and environmental groups. All of it's been really positive; even the governor, Governor Newsom, and Energy Secretary Grand Home have had some positive statements so far, so good on that project. And I guess in terms of next steps, we filed for a memo account at the CPUC to start capturing costs related to developing a large project like this. I think the memo account asked for something just short of $30 million, and we expect that memo account would get approved before year-end. So it's early, but we're really bullish on this.

Just a couple of questions on just the financing comments on Port Arthur. Can you just maybe expand on where you have flexibility in those two efforts to raise capital? I recall you have some amortizing debt at Cameron 1, 2, 3. So is there additional kind of debt capacity at the SIP level already? And then just with the ownership structure around Port Arthur, like is there a kind of like a targeted pro forma ownership we should be thinking about for Phase 1? And is the goal ultimately here to limit external common equity at the Sempra level?

Yes, there's no question it will be a goal to limit any external equity at the Sempra level, and you raised some great points. So let me kind of cap off. There's two work streams underway here. One is the equity process that's referenced in our slides. And after I've covered that, I'll pass it to Faisel to talk about the debt amortization and his approach to the financing, which they're looking to launch near term. As we've disclosed in the past, Nick, we've been taking a tremendous amount of inbound interest regarding participation in the capital structure at Port Arthur over the last 12 to 18 months. So we see this as an opportunity to really kick off a sales process to sell a non-controlling stake that could result in Sempra Infrastructure's ownership settling to a level similar to ConocoPhillips, whether a little bit more or less. The key for us is we're really focused on three goals on the equity side. Number one, making sure that we highlight value for our owners. If we use this as an opportunity to pull forward the project's NPV to reduce our capital contribution. One of the things we talk about a lot inside the company is really replicating what we did at Cameron, which effectively allows us to take a carried interest and also make sure that as part of this process, it allows us to maintain Sempra and Sempra Infrastructure strong credit profile. So in general, this is a way for us to effectively take a carried interest in the project, create a really strong return on invested capital and deliver a great outcome for our shareholders. And I would say, just as importantly, and you'll hear us talk about this a lot more. What's most important about Phase I is also making sure it sets us up well for Phase II and III. So this is the type of project, given its scale, getting Phase 1 done really makes future phases a lot more exciting and a lot more probable. But maybe Faisal can stop there and maybe you can turn to the debt side and what the plans are for the financing.

Yes, we have amortizing debt across all our infrastructure, not just at Cameron but also in some of our joint ventures in the pipeline sector. This increases our debt capacity at Sempra Infrastructure, and our credit metrics have improved since earlier this year. As we approach the Final Investment Decision, we are building our debt capacity. For financing Port Arthur, we plan to start with non-recourse project financing backed by creditworthy counterparties at investment-grade pricing. There is strong interest from banks to finance this project. Additionally, we will use project-level equity for off-takers, as seen with Conoco taking a 30% equity share in this project. We also have the opportunity to sell down more equity to the project level to enhance value. Overall, we believe we are in a solid position and have been actively working on this for an extended period.

Really helpful. And just shifting to Texas and Oncor, just line of sight to getting this case done here. I know we're kind of coming towards the end of the process, but is the settlement still in the cards, if at all? And are you willing to just kind of take the full distance on the final order at this point?

Sure. I would just start by saying we're pleased to have the Oncor team in the room with us today. So we've got Allen with us, and I'll let Allen jump in here in a second. But Trevor and I just got back from a Board meeting in the last couple of weeks in Dallas actually we were in Fort Worth. We continue to be really impressed with the team, the quality of the relationships there. There's obviously a stunning amount of growth taking place across the states. So I think the rate case is really important. And I really think that we're going to get a great outcome independent of whether it's a settlement or commission decision. But Allen, perhaps we could just talk about procedurally where we're at in the rate case and how you think about next steps.

Yes, you bet. Thanks, Jeff. Just generally, where we are, as you said, we did have our hearing on the merits September 26 through October 4. Since then, we hold the parties have filed two rounds of post-hearing briefs, and we're anticipating a proposal for decision at the end of December. With the commission likely to take up a proposed or final order rather in a couple of open meetings, at least first quarter of next year, but final order before the end of the first quarter. Just a little color on the hearing. We believe it went very well. Our witnesses performed very well. Many of them were not even cross-examined. From a settlement perspective, we have had extensive discussions. We will continue to have discussions. Thus far, they have not reached something that we believe is beneficial to the company or the stakeholders, especially the ratepayers. So while those conversations will continue, we are very confident in our case. We think we put on a very strong case. And should we need to go to the commission, we're comfortable and confident in doing so. Thanks.

One question for Allen is about the recent dip in housing prices in Texas. This trend is occurring in various locations, particularly near the edges of your service area and further south, where the decreases are becoming significant. I'm interested in understanding how this situation, or a slowdown in residential construction, might influence your predictions for residential load growth and the need for new infrastructure. I know you have mentioned potentially increasing your capital spending budget, which I assume relates to the new renewable and storage projects coming online. Could you provide a high-level overview of these aspects?

And Michael, I want to quickly mention that we are experiencing significant growth in both the residential and industrial sectors. Allen, it would be beneficial for you to share any updates regarding the recent peak in housing starts and the challenges that may prevent this growth from fully reflecting in the system.

Thanks, Jeff. Yes, Michael, I agree. We're seeing 14,000 new premises added this quarter. Although we're slightly below the 1.7 range compared to 2% growth over the past few years, we still expect long-term projections to remain around 2%. As Jeff mentioned, we received our largest request for new subdivisions in June in the company’s history. There is a small dip in premise growth this year, primarily due to supply chain and labor challenges impacting builders in our areas. However, the demand for lots and new subdivisions is still projected at around 2%. Additionally, while you didn’t specifically ask, transmission points of interconnection, particularly in the renewable sector, are at historical highs. Currently, we have 565 active requests compared to $370 million at the same time last year, and West Texas continues to experience rapid growth with 29% annual load growth on the Culberson Loop reaching a new peak of 1,000 megawatts, up from 900 megawatts last year. In the Far West Texas Weather Zone, we are also seeing new peaks at $54.86 compared to $51.63 last year, and the Stanton Loop is growing at 16% annual load growth. Furthermore, this strong growth isn't limited to the DFW area; for instance, Waco is experiencing load growth at three times the ERCOT average. Overall, we are observing significant growth across our system despite a slight dip in premise growth this year, which we believe is temporary and linked to builder-related issues, and we anticipate continued long-term growth of 2%.

And Michael, I'll make one other comment maybe to wrap it up with Allen, which is Trevor and I will be back at the Oncor Board early next year to review their final capital program. You may recall that about this time last year, we had approved their prompt our capital program and reviewed their five-year plan. And it wasn't until like February or March that we already updated by about $200 million. So this will give us a chance to pick up on some of these new opportunities. And the confidence level, at least from Sempra's perspective, and I think Allen's, we're going to have the opportunity to put a lot more capital to work in the future than it is in the current plan. So stay tuned, and we look forward to updating everybody on next year's call about that.

Got it. I had one follow-up, and it's probably a Justin one. Costa Azul, I think you made the comment that Costa Azul may be a little bit behind schedule, but the cost hasn't really moved, and it's a matter of months, it's not years, the fund. If I remember correctly, you all have contracts already on one of the big pipelines that goes out of the Permian West towards the California border and then it would connect and head south to Costa Azul. Spreads between Waha, West Texas and California are really wide? I mean Waha gas went negative recently. Does that imply that in the short run, long term, that gas is going to be used to supply Costa Azul small scale. But short run, are you guys benefiting from that? And has that gotten more material and potentially a tailwind? I know you've talked a lot about some of the headwinds for next year.

Yes, Michael. I think as we move forward toward FID on ECA Phase 1, one of the things our Board of Directors, and we wanted to make sure that we thought we had adequate transportation capacity through the areas you described. And until we actually utilize that capacity for ECA, it really gives us a chance to optimize and you've been seeing us do that. So yes. It's a tailwind.

I wanted to revisit our earlier discussion on Port Arthur, particularly regarding PA1 and, more significantly, PH2. Could you provide additional insight, as mentioned in the prepared remarks, about the ability to transition to PA2? Also, could you elaborate on the permitting situation and how it might affect the EPC timeline and our capability to leverage that HOA interest?

Let me briefly address Phase 2 and summarize some of our previous comments. Justin, I believe it could be beneficial to discuss the Bechtel contract along with your efforts to facilitate the Q1 FID. However, I want to take a step back, Julien, if you don’t mind, to present the broader perspective. We have a significant scalable project that stands out compared to many of our competitors. It's ideally located on the ship channel with over 3,000 acres, and we've had the Bechtel site for quite a long time. The enabling EPC contract is vital for us to kick off Phase I as we work on refining our cost estimates for Phase II. In our prepared slides on Slide 8, you can see that we’ve garnered substantial interest for Train 3 so far, and we’re having discussions that extend beyond that. As we finalize the opportunities for Phase 1, it's clear that interest in Phase 2 will grow, and we look forward to providing our investors with a more detailed update about the Phase II opportunity during our Q4 call in February. Justin, it might be worthwhile to delve into more specific details about what we aim to achieve in the next 90 days.

Thank you, Julien. As we consider Port Arthur Phase 1, the completion of the EPC contract is crucial for allowing us to finalize the SPAs and secure the remaining interest in the project, as well as additional trains. This work is actively progressing and advancing rapidly. On the finance side, Jeff, Trevor, and Faisel are managing that aspect. Additionally, we are navigating the necessary governance process with our Board of Directors and management to reach a final investment decision in the first quarter of next year. As Jeff noted, as we approach that timeframe, our ability to secure commercial contracts for Phase 2 and later phases will increase. The market tends to focus on projects with a strong likelihood of launching, and we are beginning to see this momentum at Port Arthur.

I just mentioned one other contextual comment for you, Julien, that you might find interesting. As you may recall, over the last 12 months, you've seen various parties announce an SPA. And you've seen us take a lot of questions about HOAs. But what this really reflects is the key linchpin is getting that EPC contract done and not committing to the pricing of the offtake until you have that in hand. And now Justin's team is running quickly to go back and document those definitive SPAs on the basis of those economics, which is really positive. And finally, on our Q2 call, we got pressed a lot about the future opportunity for Port Arthur and I actually said there are scenarios where it could occur after the FID for Cameron, and there were some scenarios where it could occur in the first half. So it's a real credit to Justin's team and really a validation of the level of interest in Port Arthur that we've been able to accelerate it to a projected FID decision in Q1.

Right. Got it. But from a permitting perspective, any specific updated timeline there just on PAT. Just when could we get to that FID for the second round here just to reconcile that.

Yes. So as you look at Port Arthur Phase 1, I think, again, three work streams that you should watch. One is commercial interest, and we've talked a lot about that today. The second would be really the construction contract. And again, as Jeff mentioned earlier, the important thing there is the quality of Bechtel and really the ability to not force a demobilization and remobilization puts us at a competitive advantage. And then finally, here, we're waiting for our FERC order, where we have applied that has been before FERC and we're continuing to move that forward. So we do need a FERC order for subsequent phases at Port Arthur. But again, we think that process has been commenced a long time ago, and we're optimistic.

Got it. Okay. So it's a little bit unclear on timing. But just pulling it all together, Jeff, when can you be in a position to provide this longer-term view with an EPS CAGR that presumably includes these PA1? I know you talked about the CAGR a moment ago with Ross, but can you address when we will receive that fully inclusive one?

Yes. We have a convention, as you know, of doing a roll forward of our five-year plan. That process is underway by Peter Wall and Trevor currently. I think we'll be in a position on our February call to do a couple of things. We'll go back and relook at our 2023 guidance. We will expect to announce our 2024 guidance. And we hope at that time, have a definitive view on the roll forward of our capital program. Sometimes in the past, Joe, you may recall, we've saved that for an analyst conference later in the spring. We have not made a definitive decision with the IR team. It's whether it will be an analyst conference and my personal orientation is to come back on that February call and make sure it's fulsome and be in a position to talk about the roll forward of our five-year capital program, which, to your point, should reflect the opportunities that we're discussing this morning.

Wondering if you might be able to talk to just the hydrogen opportunities a bit more, the recent MOU with AVANGRID and then thoughts on the blue hydrogen potential opportunity down in the Gulf Coast. Just when might we see in terms of timing, some potential concrete project opportunities arise?

Yes, sure. We're very bullish on hydrogen. I made some comments about this earlier. One of the benefits we've had is really twofold. One is S&P came out with a study or an article in the last six months, had talked about the 25 leading pilot programs for hydrogen in the United States. And over half of them, David, are in the Sempra family of companies. So we've made this a strategic priority. I've made this comment before. We need to win in the business of today while we're building a competitive position in the business of the future. And there's no question that across our three growth platforms, hydrogen will play a larger role. So most of what's taken place in California today is folks are evaluating opportunities to either blend hydrogen into the existing pipeline system. There's been some work done at SoCalGas about creating hydrogen fuel homes on the residential side. Fuel cells are a big opportunity for our core customers. But I think, broadly speaking, this is a strategic commitment. I think one thing that I would follow is one of the things that Kevin talked about earlier, this memo account process that we expect to have resolved by the end of the year. That will be a very, very strong signal from the policymakers in the State of California about their commitment to make sure that we fully optimize the hydrogen future. But maybe, Justin, since we have an LNG and Net Zero P&L in Justin's portfolio, you could talk about how we're having conversations with some of our LNG buyers. And I've said this very recently in a speech that the United States has a unique opportunity to not only improve the energy security of many of our allies, I think we're in a position to produce the cleanest value chain from the wellhead to the liquefaction facility of any country in the world. I think innovation is going to be a key part of that. But Justin, maybe you could talk about some of the projects you all have underway to help introduce hydrogen.

Yes, David, great question. Look, we at Sempra Infrastructure are very excited. As Jeff referenced earlier, we talked about succeeding in the business of today and really looking forward to being able to be successful in the future. In the middle of last month, you noted we signed our agreement with AVANGRID. And that really is about working together to identify, appraise, and potentially develop large-scale green hydrogen projects to meet the needs of energy and decarbonization in both the U.S. and abroad. The LNG business, as Jeff mentioned, provides a strong foundation for our ability to work with all of those partners as they look to decarbonize and look toward future energy, whether it's green hydrogen, blue hydrogen, or blue ammonia. So we're excited about the opportunities in front of us. I think the other thing you saw recently, the Inflation Reduction Act really provides a springboard for not only the hydrogen business but also for carbon sequestration. We're excited to continue developing Hackberry with our partners. We think it's a wonderful opportunity to really decarbonize our LNG facilities and really look at it as a means to capture carbon in local industrial facilities as well. So we're very excited about the opportunities in the Net Zero side of our business.

Given your historical timeline presence and considering shortages and supply chain issues, how should we consider a Phase 1 FID green light in the first quarter? Can you provide a timeline for the COD of that project?

Well, first off, that will certainly be tied to the date and time that we take FID. These projects typically get built between 50 and 60 months. But if you look at Q1 and assume that there's an FID in that timeframe, I'd look out in that 50 to 55 month time frame and you can back into a reasonable estimate.

Got it. Perfect. And just one quick follow-up. As we think about financing the project, is the $10.5 billion going to be fully financed by the first quarter next year, or will it be expected in chunks?

Yes. Justin did a great job of kind of outlining some of the key milestones we're tracking to get to FID. But our assumption and goal, Durgesh, would be that when we get to an FID decision with our Board, we go through a very thorough process of evaluating all aspects of the transaction. And we will not take FID without having lined up both the financing and the equity.

Jeff, sorry. To make the call go the full distance here. But just one strategic question. So obviously, you're having a lot of success with growth projects in all your businesses. And we're now seeing, I think, a lot better public market values of midstream companies and particularly companies that are successfully growing LNG. So Justin, when you're looking at that big picture decision on the structure of the company and the like, just maybe it would be helpful to get some thoughts on how you're kind of thinking about that in terms of does it make sense to keep all this together or to review other options?

Yes, that's a great question. Our Board of Directors spends a significant amount of time on strategy. Reflecting on our progress since 2017, if we achieve the midpoint of the new guidance range we shared today, we will have grown the EPS of our business at an 11% compound annual growth rate. We have a strong leadership team that extends beyond just the individuals in this room to our broader leadership group, creating a high-performing culture and a clear strategy. In the first three quarters of this year, we’ve successfully produced improved financial results across all three of our growth platforms. Our efforts at the Sempra level are performing very well, and we’re seeing growth in California, Texas, and many opportunities in Mexico. Justin's business also presents unique opportunities. Overall, we are pleased with how our three platforms, especially Sempra Infrastructure, are organized. Additionally, Sempra Infrastructure is crucial in generating cash flow to support growth in our utilities. Moving forward, it is essential for us to secure the lowest cost of capital to facilitate the growth of Sempra Infrastructure. We have shown creativity in our financing processes, and we plan to keep forecasting new opportunities for that business. The main takeaway regarding your question is that our focus is on delivering value to Sempra shareholders, and we are open to exploring new and improved strategies to achieve that. There is considerable excitement within our company about the enhanced earning potential of all three platforms, and we are eager to execute our plans into 2023.

I have two quick questions. First, regarding Cameron, can we proceed with its construction concurrently with Port Arthur? Is there sufficient craft labor to manage both projects at the same time? Second, about Port Arthur 2, you mentioned the possibility of reducing some equity ownership for financing. What is the target level of ownership you are aiming for? That's all from me.

Yes, I appreciate the question. I would tell you that we're now forecasting an opportunity to take FID on Port Arthur Phase 1 in the first quarter. Hopefully, we'll have a fulsome update on that on our February call. And you'll recall that we've also forecasted taken FID on Cameron expansion in the middle of the summer or in the Q3. Once we go through the competitive feed process that we have ongoing. So there's no question that we're in a position in terms of trade craft and our expectation from our EPC contractors that we can deliver both projects at the same time. And then going back to Phase 2 of Port Arthur, we've talked about this a little bit. I think the most important thing here for us is to stay focused on Phase 1. The closer we get to taking FID on Phase 1, we're going to see the permitting process come together. We're going to crystallize some of the contract opportunities around Phase 2. And remember, the real strategic opportunity at Port Arthur is the ability to continue to scale it. So multiple phases become more probable once you get Phase 1 done. So I really appreciate the question.

And just on Port Arthur, is there a desired level of ownership there?

Look, I think you’re going to see us take different approaches at different times. I think the best example we can give, and we really appreciated being able to contribute the regas facility into the capital structure at Cameron and take effectively a carried interest. You’re going to see us do that on Phase 1. Our job is to find the most efficient sources of capital and produce the highest returns on invested capital. And I think we’ve got a really good plan in place that we’re executing on Phase 1. We don’t have a target ownership level for Phase 2 at this point. But that answer will be determined by how we can deliver the highest returns from the project.

Sure. I'd just like to take a moment and thank everyone for joining our call today. I know there were some competing calls at the same time. Per custom, if there are any follow-up items, please reach out to our IR team with any additional information. I'd also mention for the balance of the year. We look forward to meeting with many of you in Florida at the EEI Conference on the 13th and 14th, and we'll also be attending the Wells Fargo Conference in New York on December 7th and 8th. This concludes our call.