Sempra (SRE) Earnings Call Transcript & Summary

Hi, everyone, and thank you so much for joining us. In the room, you have Bret Lane, the Chairman and CEO of SoCalGas; as well as Mia DeMontigny, the CFO of SoCalGas; as well as Adam Pierce and myself, Louise Bick from the Sempra IR team. With that, I'll kick it over to Bret to go over the presentation.

Hello, everyone, and thank you for taking the time today. I'm going to walk through very briefly the presentation that was sent out and hit a few highlights, but also really look forward to what questions that you might have. So in the presentation, I'm going to start with a high-level discussion around Sempra, who you're all familiar with, with our vision of being the leading infrastructure company within North America. And especially since Jeff has taken over and Trevor in his role as CFO over the last 2.5 years that I'd really highlight, I think, what you're seeing now is the product of the execution of the plans that have been laid out over that time frame, with really a focus within North America with the 2 utilities in California, Oncor in Texas, and we'll talk briefly on that as far as the Texas Miracle continues, the focus we have on LNG and then with IEnova in Mexico. We had our Analyst Day and then shortly after our Q1 call, and a few highlights off the call. One was just the strong earnings that we had of about $932 million. And one thing to think about that is the backdrop of -- we had very strong earnings in 2019 of about $1.9 billion. And you can see how we're performing so far through the quarter, even during some challenging times. That as a result of that, that our guidance is more to the higher end of the range. We're in a very strong point of liquidity right now. We're moving forward with executing our plans. We completed the sale of Peru. We're making great progress in completing the sale of Chile. I'll go into the utilities in a little bit more detail. And then LNG, yesterday, we announced the production starting on Train 3. And so we're making great progress there. And questions that you might have on LNG, Mexico, et cetera, we'll turn it to both Louise and Adam later on. Again, I've really hit on the Sempra overall. But the highlight for Slide 4 really is around our capital plan, $32 billion over the next 5 years. And the vast majority of that capital investment is within the 3 utilities. And again, for SoCal and SDG&E, our 5-year plan is $9 billion apiece. And Oncor is $12 billion. So you can see the investments really are back into the utilities of making those investments related to safety and reliability in serving our customers. A quick update on the next slide as far as our response overall on the pandemic. So this would be Slide 5. And the great thing with Sempra, the foundation of it out of the 2 utilities and now the acquisition of the third is, we've had a very long, strong culture of responding to incidents. And we quickly responded here with activation with our emergency management protocols, our crisis management system that we have in place. Through that, the utilities are deemed essential services. And especially for SoCal, SDG&E and Oncor, part of the critical infrastructure within the company. And so for us, we still have a large majority of our work -- or a large percentage of our workforce required to continue to work. At Sempra corporate and other elements, we're able to shift quickly and working from home. And I'll give an example; at least with SoCal, we have a population of employees of about 7,600, and half of those are working from home. The other half continue to provide that safe, reliable service, especially in today's environment with so many people working from home or at home that they're needed to provide that service, both on the gas side and for SDG&E and Oncor on the electric side. Now let's shift over to the SoCalGas, something I'm proud of. At last year's Analyst Day, we laid out our vision to be the cleanest gas utility in North America with really a focus on continuing to deliver affordable energy but increasingly, renewable energy. And I'll talk some more about the investments and the focus we have on technology and innovation related to not only reducing greenhouse gas, but also our further enhancements on the safety side, the work that we're doing related to renewable energy, in particular, the focus that we have on renewable natural gas and hydrogen, the regulatory environment. And I'll pause here for a second. As you know, both SoCalGas and SDG&E, we received our rate case decision last year. And as part of that, our Public Utilities Commission changed the rate case cycle from 3 to 4 years. And for them to shift the cycle, they actually granted us, both to us, the utilities, a fifth year. And so for SoCalGas and SDG&E, we, earlier this year, filed our attrition mechanisms for years 4 and 5. For both utilities on average, it's about a 4.5% attrition rate. And we do expect to receive those decisions or that decision by the end of the year. We also received our cost of capital decision for both utilities in a fairly quick manner, which I think is reflective of some of the changes that we're seeing in a very positive, constructive way on how they're managing the Public Utilities Commission. The other piece that we received was on our Pipeline Safety Plan -- Enhancement Plan, which I'll get into as far as our overall capital plan that I'll start with there. For both utilities, we have very robust 5-year capital plans of $9 billion each. For SDG&E, that yields about a 9% rate base CAGR. For SoCalGas, it's a 12% rate base CAGR. And for SDG&E, over 80% of that investment is related to safety and reliability. Over 90% for SoCal is safety and reliability. And as a reminder, we're the first 2 utilities within California that went through the commission's new process that's called RAMP or the risk mitigation phase. And it was a process where we went through diligently identifying risk and were granted pretty much all that we asked for within those processes. So for SoCal to focus there for just a minute. On our capital plan for the next 5 years, I mentioned our Pipeline Safety Enhancement Plan, which in the past had stood outside the rate case. On that, and we do highlight that we, in the past, how we would recover that is through -- we were able to recover 50% of it. And then the remaining 50% is subject to reasonableness reviews. We made great progress on 2 that -- we filed now all 3, but we've received great results out of the first 2 that we filed. And we're working on the third one, which is actually a very large recovery for us. But going forward, that process is now embedded in the rate case, and it's focused on our transmission pipelines, where we're testing or replacing certain segments. And this process will go on for many years to come. The largest investment is always in our distribution system. And I'll hit on that in one of our slides coming up. On our next slide, again, just a quick recap again on our '19 accomplishments that really do set us up for execution over the next, now with this rate case cycle, 4 years since '19 was the first year, a very constructive, positive decision there. As I mentioned, on the cost of capital, a great decision there for us of our ROE of 10.05%. For SDG&E, it was 10.2%. Again, I mentioned our Pipeline Safety Enhancement Plan and the settlement or the decisions that we received there. And then as a reminder, on our investments that we've made and continue to make on our transmission system, something we're proud of that we started many years ago, and that was the reconfiguration of our transmission system to make it piggable. It's not the only way to do the assessment. It's our, in general, favored way of how we assess the integrity of our pipeline. And so now we're up to 81%, 85% in what's called high consequence areas. And that's simply highly populated areas. So we continue to make progress there. On the macro environment that we're focused on, for us, always safety is foundational in what we do. And I'm proud of the progress that we're making there of a more in-depth, integrated view and migration to, I'd say, a very robust safety management system approach that looks at integrating more the safety aspects that you have combined with how you manage risk in the system. And this involves things like our integrity management programs, which includes transmission integrity, distribution integrity as well as storage. We continue our focus on helping the state achieve its very aggressive climate goals on decarbonizing. I do like to remind people that for natural gas use on the residential side, it only accounts for 7% of the GHG as compared to 40% on the transportation side. But we strongly feel that natural gas and then some evolution over time of the incorporation of renewable natural gas and hydrogen are going to be key aspects to help integrate, in particular with the nature of the use of renewables and the intermittency within our energy system. Last year's Analyst Day, we set a goal of achieving 20% of RNG in our system by 2030. And then continuing development of and ultimately integration of the use of hydrogen. And on the customer side, again, just to remind people on the amount of integration or the amount of usage that we have, especially on the residential side, we have 90% penetration in homes today with natural gas for heating, hot water heating, et cetera, in their homes. And especially with the trends today where some are focused on building electrification, one of the reasons of setting the target that we did on the renewable natural gas side that achieving that 20% RNG in our system by 2030 is the equivalent of 100% building electrification. At least studies that we've had done and other studies that have been done show that we think we can do it cheaper and in particular without the customers having to do anything. No costly retrofits of appliances in their homes nor potential retrofits they would need to do to their home wiring system. And then from a capital standpoint, this is the largest capital plan we've had in the company's history that, again, $9 billion. And like I said, SDG&E is similar. For SoCalGas, the largest investments are primarily transmission and distribution. I describe transmission on the distribution side, again, related to RAMP. What we're focused on there is some accelerated replacement of some of our older steel and vintage plastic pipes. As a reminder, we do not have any cast iron left in our system nor copper. We replaced that over 20 years ago. And so again, the focus here is just the further enhancement on safety, but it has that concomitant benefit though of also reducing, albeit very small, GHG emissions from small emissions that we might have on the current structure. And then as you can see, really a tremendous rate base growth of 12% over the next 5 years. The next slide, Slide 10, is actually my favorite slide of the deck. It's something I call our time continuum. And again, this is our view of how SoCalGas, and again, we're the largest gas -- local gas distribution utility in North America, one of the largest in the world with 100,000 miles of distribution pipeline. And we think we're well positioned to help or be one of the components of helping the state move forward in achieving its climate goals. We don't think there's one silver bullet of a magic solution to get there. We think it's going to take multiple fronts. And this lays out some of the things that we're thinking of to help advance those goals. Again, with natural gas, we think it's going to be around for decades. Just simply look at the rate case decision alone that the amount of capital investment we're making back into our system to enhance safety and reliability, those are long-term -- long-lived assets that will continue. We continue to do work on the tightening of our system. We've done studies there to show -- the good thing is relative to other parts of the country, it's a fairly new system, but we're tightening it even further and what we can do to eliminate fugitive emissions. Our focus on renewable natural gas, and again, this is one focused primarily on dairies and landfills, where we see the opportunities of bringing it in to our system. And the progress that we've made there so far, one from our public utility standpoint, we did receive a decision that allows us to purchase, I think we're up to, close to 100% RNG for our transportation customers that serve our RNG system. And I think that alone will get us pretty close to 2% of RNG in our system by the end of the year. We set an interim goal of 5% by the start of '23, leading to the 20%. Again, we're working with the commission on what we call a voluntary gas tariff that customers could sign up for us to purchase renewable natural gas for them as the next stepping stone. But ultimately, we've had, and I think, some good dialogue with members of the legislature on the creation of what we call a renewable gas standard, very similar to the RPS, because we know, ultimately, the market needs to see some signals and some incentive mechanisms to help bring this gas into the system to move it forward. And this is very similar to what was done with RPS many years ago that ultimately really drove the cost down, especially in California from the solar side. As we continue to look out, again, we've talked a lot about distributed energy in the past, but we see opportunities here, in particular, fuel cells where we're working on one particular application that we could see fuel cells serving in a microgrid sense to help those communities that may be most subject to the power shutoff plans. And fairly simple deployment of existing technology today that ultimately could shift over to the use of hydrogen as we move forward. And again, hydrogen is one that we're really excited about as far as the longer-term aspect. We see that hydrogen is a form of energy that it adds a component that batteries today simply don't. And that is simply capacity that -- we're very supportive of electrification where it makes sense, very proud of what SDG&E has done as far as the deployment of large-scale battery storage, but we all realize batteries have their limitations from an energy density standpoint as well as hourly or a time standpoint. And we see hydrogen playing a very complementary role there across multiple segments of our customer base, ranging from the potential it still has on transportation. There are certain auto manufacturers that remain very bullish on the use of hydrogen-powered fuel cells. There are certain industrial sectors where we see hydrogen playing a part that electrification simply will not work because -- I'll give you an example of a couple of industries, cement manufacturing, glass manufacturing, where today, electricity simply doesn't produce the heat that's needed for that process where hydrogen can. And then we're also doing work on the blending of hydrogen ultimately into our system. We continue to have discussions on deployment potentially of LNG, especially within the ports of Los Angeles, of how it might support certain industrial load as well as transportation in particular for heavy-duty type vehicles, where on the electric side, I think batteries still are shown to be a very challenging environment, especially for long haul. And then also the work that we're doing with others as far as the work on carbon capture in particular, utilization and storage, we see this as an opportunity. Again, it's out on the horizon. And so what we've tried to lay out here is our view for all of you. First, over the next 5 years that I think we have and hopefully, you now see very clear line of sight and visibility to the investments that we need to make. But then as we're looking out longer term, as we start transitioning to help the state on decarbonization efforts, the role that we can play with renewable natural gas and then ultimately, hydrogen in the future. And so I'll conclude, again, this is something that I know I and members of the senior management team are very proud as far as SoCalGas. We have, again, a $9 billion 5-year capital plan producing that 12% rate base CAGR. Our focus and commitment of driving to our 20% RNG goal. And then again, our foundational focus on safety with us moving forward with our safety management system programs and the investments that we're making on the capital side, really focused on enhancing the safety and reliability of our system. So with that, I will conclude and opening it up for questions across any of the Sempra company.

So again, as a reminder, if you have a question, please go ahead and enter it and I will ask it to Bret or Mia, who is also in the room. Bret, just kind of given the substantial growth in rate base, how should investors be thinking about the growth of rate base relative to the impact to earnings over time. You laid out a really, I would say, constructive decision from the rate case. And how should investors be thinking about this from the mid to kind of long-term 5-year time frame?

The short answer on this is that over time our earnings will catch up or the rate base growth that we're showing at 12%, it will eventually catch up with our earnings profile that I think we gave earnings for '20 and '21. But I'd also note, especially in the Analyst Day deck that you all have, that our rate base CAGR started in '19. And so really, what you ought to think about is '21 and beyond and how that will, again, start transitioning to match more of how we're growing from an earnings side. Some complication there is we do have some incentive mechanisms and then this early investment that we're making in this largest capital plan we have in our history. This earlier investment that we're making now, again, will eventually catch up as we transition over time. So I'd say the 2 things to look at is, one, we started with '19 with the rate base CAGR. So really take your focus on '21 and on out.

Great. So I'm not seeing any other questions. Just a reminder, if you do have a question, feel free to enter it. We'll give another minute or so and then we'll end it there. So without seeing any other questions, I just want to thank everyone who participated today for their time. Thank you, Bret and Mia, for your time as well. And if you have any other kind of follow-up questions, don't hesitate to reach out to the IR team. Thanks so much.

Thank you, everyone.