Sempra (SRE) Earnings Call Transcript & Summary

All right. So good morning. I'm Dan Aldridge, Managing Partner for Asbury Coyne and both SHARE and as she alluded, I have the pleasure of interviewing Jenell McKay, who is the Head of IR at Sempra, a fascinating energy company. I'm going to let her tee it up and talk all about it. But I think you'll find the conversation very interesting.

Thank you all for allowing me to be in your presence today. Thank you for joining us, coming all the way to the stock exchange for this. Thank you to Dan and the SHARE Series for hosting me. Pleasure to be here. And I'm actually going to start it off with a fun little video, live things up a little bit today. [Presentation]

Excellent. So great video.

Why don't you tell us a little bit about who Sempra is? Obviously, there's a lot of different types of energy companies. And so where do you fit in that spectrum?

Sure. So Sempra is located in San Diego, California, and we are made up of a number of businesses, as you saw a little bit in that video. We are an energy infrastructure company. We build the pipes and wires that connect people to everyday clean, safe and reliable energy. So that's kind of our main focus. We are considered one of the largest infrastructure companies in North America. We have nearly 300,000 miles of pipes and wires across California, Texas, Louisiana and into Mexico as well, serving nearly 40 million customers. And as you think about that customer base, we really are powering people's everyday lives. So that's kind of our core business focus, and we believe the combination of our businesses really does give us kind of a unique differentiated perspective for our investor base.

So actually [ ERG ] market for anybody who's following it, I guess had a lot of growth on the success over the last several years. Can you talk about where Sempra fits in with that? What should investors be looking at to track your progress?

Sure. So yes, there's a lot of different energy companies out there, and there's a lot of secular trends going on right now in the industry. You might have oil and gas exploration and production or E&P companies. You're going to have your retail end-use providers. You're going to have renewable generating companies. We think we fit squarely in between all of that. We consider ourselves kind of the bridge or connection between the producers of energy and the consumers of energy. So we are, for the most part, somewhat agnostic to whether it's a clean electron or a clean molecule transferring through our infrastructure. And we believe fitting ourselves within that space is really giving us the lower risk, higher value perspective of the energy value chain. It's all backed by regulated returns or long-term contracted cash flow. So we really have strong earnings visibility going into the future. And as you look at some of our secular trends, we're kind of seeing, we're seeing some big ones around electrification, energy transition, energy security globally. So those are kind of the -- some of the high points that are really driving a lot of the change in the industry today.

Yes. You mentioned electrification, right, we're in the move to EV batteries and everything else, and it's a huge trend, but thereabout the audience, right, has seen it, not experienced for themselves. And so can you talk about any specific opportunities that opens up for Sempra and how you take advantage of that?

Sure. One of the ways we're seeing electrification in a big way is actually one of our combined gas and electric utilities in San Diego, San Diego Gas & Electric. And what we've seen there is in 2022, we actually had a 3% increase in our consumption due to electric vehicles. We have about 123,000 electric vehicles in our service territory. We are one of the smallest utilities SDG&E is in the state of California. So as you think about that number of electric vehicles in your service territory and you think about the energy use that's occurring at the time from all those vehicles, you have significant increase, which means that you're now going to need to invest more in your infrastructure to increase the capacity and also modernize that infrastructure, so that it can integrate these newer technologies. One of the other ways, we're seeing electrification is actually in Texas, where some of the oil and gas producing companies in the West Texas or the Permian Basin area, are looking to electrify their businesses. So they're wanting to get interconnected to the grid instead of using their own backup generation that would be defiler fuel oil, which is much higher emission intensity than connecting to the [indiscernible] grid. So what that means is we can then interconnect them. So we're building additional transmission capacity so that they can get connected to the grid, so they can get the power that they want at the end of the day to meet their business needs. So those are some of the key ones that electrification is showing up for our businesses.

And so you obviously have one of the largest natural gas distribution facilities, right, in the country. So can you talk about that? How many people does it serve? What are the strategic implications of that for the company?

Sure. So one of our other operating companies, the Southern California Gas Company is based in Central California, mostly the Los Angeles region, but we do have a pretty broad service territory for that utility. And they are one of the largest gas LDCs or local distribution companies. And they serve over 20 million consumers in their service territory. And as you look at kind of where we're going in this decarbonization space, particularly in California is one of the leaders from state policy on a decarbonization effort is how do we integrate those cleaner molecules into our infrastructure system, what does that look like, right? So we're looking at renewable natural gas, hydrogen gas from biofuels that would be landfill or dairy gas. And there's a significant amount of supply in that, whether that comes from within California or we're importing it from Canada to meet these needs. We have a very ambitious renewable natural gas target of 20% blended into our delivery system by 2030. And that's much faster than the State of California school, which is only 12% by 2030. So we're really leaning into how do we support what consumers want at the end of the day because we're going to provide what our consumers want. It's them to tell us, do they want to get on this journey with us. And then we're also looking at hydrogen. We have the most number of hydrogen pilot projects of any utility company in the United States. We have over 20. And they're looking at all of the varieties of the energy value chain, everything from blending the natural gas into our parks and wires. What does that look like for power generation, right, instead of using natural gas. Can we use hydrogen, even all the way down to putting it into your homes than in every day base, right? If you have a gas stove in your house and you go to turn it on, what's the difference between natural gas and hydrogen, right? You're going to have a lower overall emissions intensity using hydrogen than you would natural gas. And SoCalGas actually has a really cool demonstration project that we've built. We call it the hydrogen innovation experience. And what it is, is it shows you how do you produce hydrogen all the way to using it in a home. So we have solar panels. We have a hydrogen fuel cell for storage and it gets blended into pipes all the way into a prefabricated home that uses appliances from your local hardware store like Home Depot or Lowe's, and it's blending up to 20% hydrogen into this home with natural gas to show that we can use it every day also. The chocolate chip cookies, they bake in the oven fueled with hydrogen, taste fantastic, by the way. You wouldn't even know.

So let's talk about hydro a little bit, right, because I think there's a lot of confusion out there. People hear about buzzwords and the next big thing is going to save the planet, right? So how feasible, right, is hydrogen, right? In your opinion, right, in the companies and what are really the opportunities?

Sure. Hydrogen is a new hot topic these days. There's a lot of federal support for it, and there's a significant amount of state support in California for it. particularly Governor Newsom actually put out for the office of the governor to create a hydrogen market strategy team. And what that means is they're looking at how do we create a hydrogen market within California. Los Angeles is the largest manufacturing hub in the United States. So as you think about that, how do you help these industries that cannot electrify decarbonize. One of those ways is helping them with cleaner molecules and hydrogen is one of those solutions. So the governor in his office is all in. We have been authorized to spend some research and demonstration money on some hydrogen projects, one of which is called Angeles Link, and it's proposed to be a dedicated green hydrogen pipeline from Central California all the way into the Los Angeles Basin. And what that means is there's a significant amount of renewables in the Central Valley of California. So let's create green hydrogen out in that area, whoever it might be, that we'll make it, put it in this pipeline, bring it all the way into Los Angeles, and we can have that then filter out through all of the industries that are in the L.A. region. So that's one of the ways. And then on the federal side, the Department of Energy just a couple of months ago, awarded about $7 billion in federal funding for hydrogen hubs throughout the United States. Two of those hubs Sempra's partner -- Sempra's companies are actually part of the SoCalGas and their Angeles Link project is part of one of the hubs in California. And the other one, Sempra Infrastructure is part of the HyVelocity hub in the Texas area. So we're bullish on it. We think it's going to be one of the solutions. It's not going to solve all the problems. But that's one of the things that you see in the energy space that is becoming more and more common these days is the diversity of your resources, diversity of who they come from, the diversity of the fuel source or electron stores. Not any one technology is going to solve all of these problems and we need them all to work together to be able to meet our growing energy needs.

So we're going to shift gears a little bit, because, unfortunately, we'll have 25 minutes, and we can probably get for hours. But when you think about climate change, obviously huge impact on the industry. You guys are obviously from the topics we've already talked about right at the forefront, right, of some of those solutions. But talk bigger picture, right, about Sempra, how does your strategy or how has it evolved from a sustainability perspective being directly in these business?

Sure. So we have actually been fortunate not to be considered one of the top ESG companies listed on the Dow Jones Sustainability Indices. Also, last year in 2022, we were recognized by investor business daily as the top ESG company as well. We've been putting out a corporate sustainability report for 15 years now, and we're very proud of that. Sustainable business practices is a core tenet of our business. We don't believe that just words are going to do it. Yes, we have a net-zero goal out there. However, we think our actions speak louder than whatever targets and goals we can put out there. So we're very committed to those sustainable business practices. And we believe that putting those actions in place in our everyday business operations is going to help be a model for the other companies that we work with, that we partner with, who are our customers, who might we get energy from, right, whereas our source coming from. So we're really committed to working with the full stream of energy providers to decarbonize the entire energy chain. So starting all the way from who's producing the energy, how it gets delivered through us and then at the end consumer market. So some of the ways that looks like is we are using drone technology to detect methane leaks on our gas system. And what that means is we can now reduce fugitive methane emissions, a significant percentage. We actually, in 2021 SoCalGas reduced 37%, compared to their 2015 baseline. So as you look at those reductions and integrating new technology, that's really where your sustainability comes into play is let's innovate, let's utilize this newer technology to see how can we make things more efficient and more available for everyone. And then the other way of some of those R&D projects that I talked about earlier is really understanding the technology and how can we use it, because the initial use case may be great, but maybe while we're studying that we find 3 other ways we can use it and make that technology even more cost effective, so it can get to the market faster.

So I'm going to pause and see if anybody has questions in the audience. Okay. I'll go back to mine, because I could have several. All right. So let's talk about a couple of different things within the business. And so obviously, extreme weather plays a piece of it, you guys do some work around wildlife fire management. And so can you talk a little bit about what you do there and how that impacts the overall environment?

Sure. So anyone who's either been to California or knows about California knows that wildfire risk is probably one of our top extreme weather events that we experienced, right? In the Southeast, you have hurricanes, even on the East Coast, you have hurricanes. You have to worry about in the Midwest, you might have tornadoes or significant snow storms, right? Well, in California, our biggest weather event is a wildfire risk. And wildfires can occur from a number of reasons. And SDG&E, our local gas and electric utility has been on a mission for the last 15 years. to invest in hardening our system against wildfire risk. And this comes up in a number of different ways. SDG&E has actually undergrounded more than 60% of their distribution lines by burying their lines. And what that does is it reduces the risk of a wildfire being caused from those lines being overhead. If a tree were to make contact during an event or if a wire were to snap from really high wind events that occur. So bearing those lines reduces that risk significantly. Some of the other ways we look at doing this is our vegetation management program. Let's really understand the vegetation in our area. What's it made up of? What's our weather like? What's our rainfall going to be like this year? And we take all of this information between historic weather data, the fuel moisture of our vegetation, right, how much rain have we gotten? Are the leaves dark green or are they're light green? Are they starting to get a little brittle? We incorporate that into artificial intelligence, predictive behavior modeling, and we can actually simulate wildfire events. And what this does is it helps us have a better understanding of if a wildfire occurs in this particular area and the wind is going in this direction at this speed, where is that fire going to burn to and let's preemptively put response out there. Let's work with our California Fire Department of Forestry, let's work with local fire departments as well. And let's preplan out where resources need to be, so we can reduce our response time, and we can reduce the impact if an event were to occur regardless of what caused it. And some of the other things we do from our community service space is in the event that customers do lose their power, we set up what we call community resource centers and they have power available there with backup generation, there's water, there's snacks, there's shelter for them to be at in case of their power is out for a few hours. And one of the new things we've added recently is actually EV charging. So if you have an EV, but your power happens to be out of your home due to an elevated wildfire risk event, then you can come to this community resource center charge up your car because it's very different than we're able to go to a gas station, right? So we want to make sure that people are not feeling completely stranded in events like that and really providing those community resources. And it's a joint effort. We're open source with our wild farm mitigation. We work with a lot of a number of other utilities to share what we've learned. We've been talking with utilities in Australia and in Canada and other states in the United States, so that we can share what we've learned, and we can learn from that, too, because that's where it comes down to is we all got to be in this together. And at the end of the day, it's for the customers.

So let's talk about competitive differentiation all the way. And so you obviously very unique and a very interesting company. I don't know if there's probably a like-for-like comp?

Probably not.

But how would you give for the audience, describe what your competitive set looks like and how you're different? And quite frankly, why investors should invest in you because of that?

Sure. So we do view we are a very differentiated business. We're a little bit unique in the utility sector. Most utility holding companies are solely for utilities, whether it's an electric utility, a gas utility or maybe combined, there's very few in our sector that are considered a multiline, is kind of what they call us. Another peer would be someone like an NextEra. They have a combination of regulated utilities, and then you have another business that's not considered a regulated utility that kind of differentiates us a little bit more. And so for us, that is temporary infrastructure. And in the video a little bit -- we said a little bit about that. It's a combination of assets in Mexico and our liquefied natural gas or LNG business. And we view that really sets us apart and add significant value for our investor base, because they view their whole business on long-term contracted cash flows, U.S. dollar denominated. So we have reduced foreign currency inflation risk. And when I say long-term contracted cash flows, we have an average tenor about 19 years for our contracts, which goes back to the earnings visibility comment. We know what we're going to get from these businesses. We have very few opportunities where there's going to be adjustments to any of that. We have a lot of protections in those contracts against inflation, rising interest rates. And then there is a little bit of upside benefit that can occur, particularly in the LNG business for anyone that's been watching as LNG gas prices have some differentiation across the global markets, while we do not take that commodity risk. Anytime we're able to have excess production, we can sell that into the market and take those profits as part of it. So we get our guaranteed cash flows that are going to bring our returns through our contracts. And then on top of that, we have the ability if we have a year of excess production that we can make a little bit more. So we think that gives us a nice real strong base and then a little kicker on top.

So let's talk about your track record a little bit, history. So you guys have been on the stock exchange, I think for about 25 years. How long is the company itself has been around, right? And what should investors look to give them confidence that it's going to be around another 50, 100 years.

Sure. So you're right, we did celebrate our 25th anniversary this year. Sempra was formed in 1998, actually by the prior parent companies of San Diego Gas & Electric and Southern California Gas Company. And so they merged together to great Sempra. But what we think gives us a lot of confidence is Southern California Gas Company and San Diego Gas & Electric have been around for almost 150 years. So as you look at that history and their understanding and their experience and those companies being around and having been around through a number of evolutions of the energy space, it gives us a lot of excitement about where we've been but also where we're going. A lot has changed in the last 25 years, Sempra has been around. We know a lot is going to continue to change in the next 25 years. And we're really looking forward to leaning into that. And we hope we're not just going to be a part of it, but that we're going to help lead this energy transition going forward in the future.

Yes. It's definitely fastening to watch right over the next couple of years. I completely agree with you. I mean, there's not one several bullet, right, that's going to take all these different people. And so we're almost at the bottom of the hour. And so what I would love to end it with is for the people watching online, people in the room, if they take away nothing else, what are the 3 things that they should remember about Sempra?

Sure. So a couple of things. I hope you all take away from this conversation is, one, that Sempra creates access to safe, reliable and cleaner energy powering our everyday lives. Sempra's businesses are also working towards being leaders in some of the fastest-growing markets. And third is, we touched on it a couple of times out today is it's going to take all of us. It's going to take a diverse set of solutions, a diverse set of suppliers. And I think in this day and age, incorporating diversity into our energy mix is going to be just as critical as incorporating diversity into other aspects of our lives, and Sempra is here for it.

Well, thank you very much for the time. I think...

Yes. Thank you, Dan. I appreciate it all. Thanks.