Sempra
Q2 2008 Earnings Call Transcript

Published: 8 Aug 2008

[Operator:]

Good day and welcome to the Sempra Energy's Second Quarter 2008 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Martin. Please go ahead, sir.

[Jeff Martin:]

Good afternoon, I'm Jeff Martin. We know how busy everyone is with earnings season, so we appreciate the fact you've taken the fact to join us today. This afternoon we will be discussing Sempra Energy's second quarter 2008 financial results. A live webcast of this teleconference and slide presentation is available on our website under the investors section. With us today in San Diego are several members of our management team including Don Felsinger, Chairman and Chief Executive Officer; Neal Schmale, President and Chief Operating Officer; Mark Snell, Executive Vice President and Chief Financial Officer; Debbie Reed, President and CEO of Sempra Utilities and Joe Householder, Senior Vice President and Controller. You will note that slide 2 contains our Safe Harbor statement. Please remember that this call contains forward-looking statements that are not historical facts and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve risk, uncertainties and assumptions that future results may differ materially from those expressed on our call. These risks and uncertainties and assumptions are described at the bottom of today's press release and are further discussed in the company's reports filed with the Securities and Exchange Commission. It's important also to note that all of the earnings per share amount in our presentation today are shown on a diluted basis. And with that, I'd now like to turn it over to Don, who'll begin with slide 3.

[Donald E. Felsinger:]

Well, good morning. Thanks Jeff, and thanks to each of you for joining us. Here is a format for today's call. First, Mark Snell and I will start with the financial results. And I will update you on the status of our key business activities. And then, as we usually do, we will close with any questions that you may have. Now to the financial results; earlier this morning, we reported second quarter net income of $244 million or $0.98 per share compared with second quarter 2007 net income or $277 million or $1.05 per share. We are pleased with our performance for the first half of 2008 with strong results from our California utilities and a great start for our new joint venture, RBS Sempra Commodities. Based on the strength of our first half performance combined with an improved outlook for the reminder of the year, we are increasing our guidance to a new range of $3.80 to $4 per share, a $0.15 increase over our previous guidance. Now I'd like to hand it over to Mark, who will take you through the business unit results beginning with slide 4.

[Mark A. Snell:]

Thanks, Don. Well, Sempra Utilities second quarter 2008 net income increased 11% to $117 million from a $105 million in the year ago period. San Diego Gas & Electric net income for the second quarter improved to $61 million compared with $51 million in the year ago-quarter, primarily due to the performance incentives recognized during the quarter and the impact of a lower effective tax rate. At Southern California Gas, second quarter 2008 net income was $56 million, up from $54 million in the second quarter of 2007. For the first six months of 2008, Sempra Utilities net was $248 million, up from $222 million in 2007. It's important to note that earnings from our utilities for the first six months of 2008 do not include any revenue increase from the rate case decision we received last week. As a result of the revenue increase now being retroactive to January 1st of this year, earnings for this first six months of 2008 would have been approximately $42 million higher. That increase will be recognized into the third quarter. Now let's go to slide 5. Sempra commodities reported second quarter net income of $130 million in 2008 compared with $155 million in the prior year's quarter. This is the first reporting period under our new joint venture with RBS and reflects our reduced ownership in the business. All prior periods represents Sempra's ownership at the 100% level. Second quarter 2008 net income included $93 million in equity earnings from the joint venture and a $67 million gain on the transaction with RBS, offset by $30 million in charges primarily related to litigation and tax issues. The excellent results from the joint venture in the quarter were driven primarily by the strong contributions we had from our natural gas and power segment. Now let's move to slide 6. What I'd like to do here is to go into a little more detail on the earnings allocation from our new joint venture. The JV had an extremely strong quarter with $646 million of margin on a mark-to-market basis. After operating expenses, the JV had $334 million in pre-tax distributable income or about $220 million on the standalone after-tax basis, well above the year-ago quarter. Now let's review how the partnership income is distributed. First, Sempra gets the 15% return on its $1.6 billion of invested capital, which for the quarter equaled $60 million. After RBS received its return on capital, then Sempra gets 70% of the next $500 million in annual earnings, which for the quarter was $87 million. Finally, Sempra gets 30% of all remaining earnings or in this case $18 million for the quarter. For the total distributable earnings to Sempra for the quarter were $165 million. After adjusting the U.S. GAAP and for the impact of U.S.... for the impact of taxes, Sempra share of the joint venture equity earnings was $93 million. One quick note

[Donald E. Felsinger:]

Thanks, Mark. Let me begin with an operational update starting with our utilities. Last week, we received a final decision on our general rate cases for SDG&E and SoCalGas. This decision together with our updated capital results in a $209 million revenue increase this year retroactive to January 1st with fixed revenue escalations in the following year averaging $95 million or over just... just over 3% year per year. As a result of the decision, we are not affected by changes in our customer base or productivity targets and there is no earnings sharing, both of which are important protections for shareholders and more broadly demonstrate the constructive nature of the California's regulation, particularly given the down term in the economy. Regarding the Sunrise Transmission project, we still expect a final decision by year-end, which would result in the line being placed into service in 2011. Last month, we also filed a request to develop a series of solar projects at SDG&E. This program would have an initial target of developing 70 to 80 megawatts of solar electricity about two-thirds of which would be utility owned with the reminder owned by third parties. Pending commission approval SDG&E expects to add up to an additional $250 million of rate base to develop these projects over the next five years. The first installations are targeted to be operational as early as next year. And finally, we recently began installing smart meters in SDG&E's territory and also announced Itron as our meter vendor. Full deployment will begin in 2009 with completion targeted in 2011. Before, I move on to our recent EnergySouth announcement, I'd like to briefly touch on what's driving the early success that we are seeing out of our commodities joint venture with RBS. As mark mentioned, the strong results we saw this quarter were driven primarily by natural gas and power. Another key development that we are seeing is increased deal flow, this coming from both new customers and of new areas of business. At the moment, we have a pipeline of about 50 large deals pending, many of which combined customer needs for financing with their need to hedge some form of commodity related exposure. As you'll recall, these are exactly the types of transactions we were targeting by partnering with RBS. Now let's move to slide 12. Last week, we announced our plans to acquire Mobile based Alabama EnergySouth for $510 million in cash. EnergySouth consist of two business lines

[Operator:]

[Operator Instructions]. And we'll take our first question from Lasan Johong from RBC Capital Markets.

[Lasan Johong:]

Good morning. Don, the EnergySouth transaction looks very compelling, but I'm kind of wondering what you're going to do with 93,000 customers.

[Donald E. Felsinger:]

Of course, I mentioned, Lasan, the distribution utility came with a transaction. It's a good utility with good regulation. And for the current time, we plan to keep it.

[Lasan Johong:]

Any opportunities to do some bolt-on type acquisitions around that small utility?

[Donald E. Felsinger:]

As I mentioned that that's a growing area of the U.S. from an economic standpoint. And we look at it something that we would plan to look and make it even a better utility.

[Lasan Johong:]

So, you're going to operate it first, try to improve it and then maybe kind of abate [ph] to launch more potentially more acquisition.

[Donald E. Felsinger:]

I think you should a look at everything that are doing in the Gulf is a way to enlarge out footprints. We think this is a key area for growth and for natural gas infrastructure, having storage pipelines, LNG receipt terminals and a distribution utility there give us the foundation to kind of build from.

[Lasan Johong:]

I think that's the great idea. This is probably a question you're going to laugh at and probably say you can't answer, but I'm going to ask it anyway. What would have Sempra been able to do with the commodities business having not have the joint venture?

[Donald E. Felsinger:]

I think we'd be struggling in today's credit markets.

[Lasan Johong:]

So, you may not have gone to your $93 million?

[Donald E. Felsinger:]

It's hard to get into hypotheticals of what we could have done or not done. We know that this is a very difficult market from a credit standpoint. Having the strength of RBS behind this transaction, looking of where commodity prices are and the positions we would have been able to hold, I think all bodes well for this. Note the fact that I mentioned, Lasan, just the deal flow that we are now getting with RBS that we didn't have access to before, makes us a really great outcome.

[Lasan Johong:]

Understood, and I can't disagree with that. What's the progress on getting additional contacts at Cameron and ECA?

[Donald E. Felsinger:]

Let me, I will go and just start here that and I will let Neal talk about where we are contracting, but I think it comes back again to how we thought about this business. And remember we said this before that when we launched it, we launched in a way that we were able to get a return of and on our invested capital. The fact we have done that puts us in a much different position to other people that are in the space today. Because we have... there is no urgency for us to go out and do something, but we give away capacity. So, we are sitting here with full contracts at Cameron. And in total, we are getting about a 9% on lever return on that investment. We are now looking at what's happening upstream with new LNG supplies and we see them coming on stream, but let me have Neal talk about exactly what we are doing.

[Neal E. Schmale:]

Well, I don't know what else has to be commented [ph]. Just to say that we are actively talking to a lot of people in the industry about how capacities will be at the Cameron. And I think, the key point is that our fundamental view of the LNG markets really hasn't changed that much. It's absolutely true that there has been a little bit of slowdown, because these plants have taken longer to come of stream, but over the lifetime of this facilities, we think the economics are going to do as basically as we they were original.

[Lasan Johong:]

Very nice.

[Donald E. Felsinger:]

I think the thing that we see Lasan is that gives us encouragement is that the liquefaction coming on stream that is currently either finishing up construction are going to start up testing right now is going to increase the world's LNG supply by about 50% towards the end of next year. This bodes well, because a lot of this gas will be looking for a home.

[Lasan Johong:]

Right.

[Donald E. Felsinger:]

And so we believe that we have... our terminal in Cameron and we look at as location, access to pipeline, access to storage. We think it's probably one of the better terminals in that region.

[Lasan Johong:]

I agree. One last question if I may. What's the status of progress of Rockies Express Northeast?

[Donald E. Felsinger:]

Remember, when we launched Rockies, it was driven by producers. Any expansion off of Rockies going into the further east is going to going to be driven by the marketplace. And we have a very cost effective pipe solution. Our competitors have a smaller pipe, and I think it's going to depend on what the market wants. If they want a bigger pipe solution, there is no doubt that we with the pipe that we have and the partner that we have can come with that solution. But we are still waiting for the market to decide what it wants.

[Lasan Johong:]

Understood. Thank you.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We'll take our next question from Michael Goldenberg with Luminous Management.

[Michael Goldenberg:]

Good afternoon, gentlemen.

[Unidentified Company Representative:]

Hi, Michael.

[Michael Goldenberg:]

Excellent results, I wanted to ask to questions; first of all, just one of the gain, a better understanding for the increase some guidance; Is it any specific unit that is performing stronger than expected or is it just overall?

[Donald E. Felsinger:]

Well,I'm going to have... I'll have Mark Snell give you some more detail. But we sat down, Michael, a week or two ago and just kind of took a look at all of our businesses. And when we look at the fact, when we started this year, we had a lot of uncertainty. We didn't have the RBS transaction done. We didn't have our LNG terminal in operation, Rockies West wasn't flowing gas, our utilities were waiting on the outcome of the rate case. We now have got closure on almost all of those items. So when you look across the board, we see improved financial results, so we see uncertainties being eliminated and pipelines in our LNG business and our utility business and our commodities business. And it was the combination of all those things that caused us to take a look at our ongoing outlook for these businesses and increased guidance.

[Michael Goldenberg:]

If I look at March 27 presentation from this year, and you had the detailed break down of 2008 outlook. Any specific numbers you can assign that have been moved up and by how much?

[Donald E. Felsinger:]

This is Mark Snell.

[Mark A. Snell:]

Yes, Michael, I would say just generally speaking the commodity, the utilities are operating at more towards the high end of their original guidance.

[Michael Goldenberg:]

Okay.

[Mark A. Snell:]

We took that into consideration. The JV is performing better than we expected early out of the box. And so we took that into consideration. And most all of our other business units are you know kind of right where we thought they would be. Actually generations is moving a little bit ahead of where we thought they would be. So, just it seems like everything was firing on all cylinders and it may tends to go ahead and make some adjustments.

[Michael Goldenberg:]

And specifically on utilities and generation, would you feel comfortable saying that the strength you are seeing in 2008 should carry over into 2009 and beyond?

[Mark A. Snell:]

Well, certainly in the utilities because the strength that we are seeing doesn't reflect yet the new revenues that we are going to get from the rate case. So we definitely think that, that business is going to continue on with strong performance. The generation business, some of that is a little more specific to commodity pricing and things of the particular time. But we think certainly the bulk of our income there comes from the DWR contract. And so we'll have that next year into '09 and '010.

[Michael Goldenberg:]

Got you. Excellent. And just one more follow-up, specifically on the power and gas units of the trading business that have performed particularly well. I understand you are... you have your hands tied a little less to what you can say. But was it kind of directional bets, was it increased customer flow, was it long, short position? Can you provide more color as to what specifically on gas and power made you so much money this quarter?

[Donald E. Felsinger:]

Generallyspeaking, it's all of those and none of those. I mean we had definitely more deal flow from the bank which is what we expected. We had... because we had a rapid increase in commodity prices in the first quarter and with volatility kind of staying at historical percentage averages but those percentages translated into bigger dollars. Because of that volatility we were able to take advantage of that. And so generally speaking, we had a very good quarter.

[Michael Goldenberg:]

Okay. This may be a little premature but we all know that in Q3 some of the commodities have retreated. Just wonder, would you be able to make us feel comfortable that Q3 is still kind of... nothing has happened to make you worry about Q3 or Q4?

[Donald E. Felsinger:]

I would say this, I would say that we had a really good second quarter in commodities. We did not anticipate that continuing through the end of the year, at that same pace. And so we took that as a consideration when we raised guidance.

[Michael Goldenberg:]

Understandable. Excellent, thank you very much. Congratulations again.

[Donald E. Felsinger:]

Thank you.

[Operator:]

Our next question comes from Faisel Khan with Citi.

[Donald E. Felsinger:]

Hi Faisel.

[Faisel Khan:]

Hi. On the commodity deals that you guys were talking about that you couldn't do last year but now you can do. Would the deals that you are now able to do, are those deals that would extend the maturity of the trade book that you guys have with RBS?

[Donald E. Felsinger:]

Let me have Mark Snell addressed that.

[Mark A. Snell:]

Faisel, some of them are longer term that, what we would have dealt with in the past. And one of the primary reasons that we liked this transaction was that the bank afforded us the liquidity to be able to enter into some longer term transactions. Most of them are probably in the neighborhood of four years and five year kind of deals because that's typically how long the banks... they're lending money to a company on let's say 5-year maturity for a bank lending operation and we're hedging against that.

[Faisel Khan:]

Okay. Got you.

[Donald E. Felsinger:]

Neal,Mark and I attended the first Board meeting of this joint venture a couple of months ago. And I was laughing at David Messer who runs the business now, because he said that RBS had been dragging around the world on an airplane, introducing to us all their customers. And so when we talked about the fact that we've got 50 large deals in the pipeline, these are really deals that RBS is introducing Sempra Commodities too as a new arrow in their quiver they didn't have before. So they are out there making sure that their customers are aware that they now have this commodity hedging opportunity.

[Faisel Khan:]

Got you.Okay. If I am looking at the way you get down to the equity earnings from that business, the U.S. GAAP conversion impact, the distributable income that's an IFRS basis, is that kind of similar to what you guys reported previously on kind of the real earnings?

[Donald E. Felsinger:]

It's essentially a mark-to-market number. The IFRS number doesn't have the EITF adjustments. The bottom line is under IFRS we are allowed to mark our inventories that we use in hedging transactions. And, we are allowed to mark our pipeline of storage capacity to market. And that's really the big differences.

[Faisel Khan:]

Got you. That makes sense. On the RECs, previously Sempra Commodities had contracted for capacity on RECs, where does that capacity sit within the firm?

[Donald E. Felsinger:]

It actually... it's reported the results of it we report in the commodities business.

[Faisel Khan:]

Okay.

[Donald E. Felsinger:]

Inthe commodities segment we've actually managed here in San Diego.

[Faisel Khan:]

Okay. Got you. And the full economic benefit though is still split between you and RBS?

[Donald E. Felsinger:]

No, it's not. It accrues the full economic benefit of that capacity, accrues 100% to Sempra. But we thought that because it is closest related in... its source is closest related to trading type of activity that we reported with commodities but we actually manage it here and it's not shared.

[Faisel Khan:]

If the differential between the Rockies and say the Ohio region is much wider than your tariff, that in theory that would be an economic benefit --

[Donald E. Felsinger:]

That's absolutely right.

[Faisel Khan:]

Okay. Got you. Then on the EnergySouth deal, was that a competitive transaction or was that something you guys think that --

[Donald E. Felsinger:]

That was competitive.

[Faisel Khan:]

Okay. And on the Sunrise transmission line, you are saying now you are looking at approval for the entire line by year end Or when is the environment approval slated to be completed by?

[Donald E. Felsinger:]

Let me ask Debra Reed just to give everybody an update and I know it's on a lot of your minds.

[Debra L. Reed:]

The Sunrise Power Link, we are looking at approval in the fourth quarter of this year. And that it would be in service in 2011 if we received approval then. As you recall, we have had numerous hearings on this line. And we are in the process now of getting the final EIR/EIS to come out and that's supposed to be scheduled on October 13. Then the ALJ proposed decision is supposed to come out about a week later. And the first opportunity for the commission to vote is about November 21st, that's what we will be looking at.

[Faisel Khan:]

And what's the estimate of the project cost on that line?

[Debra L. Reed:]

Well, the estimated cost is about $1.5 billion without mitigation. And so whatever the CPC might order in mitigation may change that costs, that are estimated about $1.5 billion.

[Faisel Khan:]

Have you guys made any preparations for major component costs in that line?

[Debra L. Reed:]

We have had discussions with contractors, but until we get the line approved, we aren't going to be doing any hedging. So we are looking at... we did redo our estimate most recently and filed that. We filed an update but these costs are updated costs based upon those estimates.

[Faisel Khan:]

Okay. Understood. Thanks for the time guys.

[Donald E. Felsinger:]

Thanks Faisel.

[Operator:]

We'll take our net question from Paul Patterson with Glenrock Associates.

[Paul Patterson:]

Good morning guys.

[Donald E. Felsinger:]

Hi Paul.

[Paul Patterson:]

How you doing?

[Donald E. Felsinger:]

Good. Thanks.

[Paul Patterson:]

I am ifI missed this but it looks like the data you used to provide on the commodities business regarding the realization of the mark-to-market and al that stuff. I can't find it, is it somewhere in the appendix or something or --

[Donald E. Felsinger:]

Are you talking about tenure of the contracts?

[Paul Patterson:]

Yes, the time that they become realize and turn into cash, it looks like this... at least I was unable to find it on this... evenly find it on the news release?

[Donald E. Felsinger:]

Because it's not there.

[Paul Patterson:]

Okay. Are you guys as... now as a result of the joint venture, not going to be providing this information?

[Donald E. Felsinger:]

That's correct.

[Paul Patterson:]

Okay. And that because I guess, RBS is the one of provider or...

[Donald E. Felsinger:]

We are providing everything that RBS is providing.

[Paul Patterson:]

Okay. As far as the distributable cash, was it distributed to you guys or it is still at the...

[Donald E. Felsinger:]

I'll ask Mark Snell on that.

[Mark A. Snell:]

The distributable cash represents the amount of cash that will be distributed at the end of the year. We... during the year the that we get distributions for... what our tax obligations are related to those... related to the earnings. And then at the end of the year, we distribute the rest of the cash to us.

[Paul Patterson:]

Okay. Just back to the disclosure, will the 10-Q have this? Or is this something that you guys aren't going to be... because of the deal you're not going to provide any more?

[Mark A. Snell:]

Because this is now an equity investment we are still talking with RBS about what kind of disclosures we are going to make. This is our first attempt here to give people what we think they need to sort of model the business adequately. And so we have a fairly good breakdown of how the JV income is allocated between the partners. And we also have provided some... the information on geographic and product sales. But we aren't going to give the tenure of the book or the bars any longer.

[Paul Patterson:]

Okay. Well I thought you guys did a great job with that. And I will miss it. I guess I understand you guys have a JV now and it's a little different.

[Donald E. Felsinger:]

What we are trying to do provide the information that we think will help you guys have insight into our business and to be able to model it. We think we are giving you that information. And if we hear a lot otherwise, we will address it in the future. But, I mean, we have to be cognizant of the fact, we have a majority partner who doesn't give out that kind of detailed information even on the bank. And so we have to appreciate that.

[Paul Patterson:]

I appreciate it. Thanks guys.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We will take our next question from Michael Lapides, Goldman Sachs.

[Michael Lapides:]

Hi, guys. Can you summarize the changes in your long-term capital spending plan that have occurred since your Analyst Day Meeting? Meaning the solar is the good example, obviously EnergySouth is a good example. I don't know if I'm missing anything else.

[Donald E. Felsinger:]

Yes, as I look at our capital spending we gave you guidance that we're going to spend about $2.1 billion this year. And then over the remaining for years I think we are averaging about $2.3 billion or $2.4 billion a year. We are not changing that. This transaction we did for EnergySouth will in essence still avoid that we have because we are not doing Contextion [ph]. And when we look at the solar program being done by our utility, we have some other unidentified projects where we had placed all the dollars for. I think in general, we are comfortable with the numbers that we gave you several months ago. And when we take a look at the end of this year and provide guidance for next year and beyond, we will update that as we've progressed on those smartmeters of SoCalGas and any other thing that we see that it's going to come to fruition.

[Mark A. Snell:]

Michael, it's Mark Snell. Let me just make one other comment too. One thing that might be throwing your numbers off a little bit in that spending is, we redeemed $400 million of industrial development bond during that sort of auction rate note debacle that all of the companies were going through. So, we redeemed those bonds and we are reissuing some more types of bonds later on this year. So that will be kind of in and out but it may be throwing your number off because it's $400 million.

[Michael Lapides:]

Gotit. One other question, I think little bit unrelated but thinking about it Sempra Generation opportunities for solar development. Can you talk a little bit about kind of what you think is possible in terms of megawatts over the next four or five years? And second, what types of contracts would you be seeking?

[Donald E. Felsinger:]

Neal, do you want to talk about this?

[Neal E. Schmale:]

Sempra Generation is actively involved in developing solar projects next to their facilities in Nevada and in Arizona. They have announced that they're going to have a 10 megawatts facility online later this year in Nevada. We have acquired land and we should have the capacity ability from the land standpoint to add several hundred megawatts of solar capacity around the Nevada facility and in Arizona over time. And in terms of contracting, the intent is to fit into the various RFPs that the utilities have, all the utilities in the region have.

[Michael Lapides:]

Okay but you are making this decision on the first 10 megawatts to build without having actually having a contract on the other side. Is this just kind of like a test run?

[Donald E. Felsinger:]

That's correct. We just decided to build that facility and go ahead with it. We are confident that we will be able to sell the output.

[Neal E. Schmale:]

I think the way to look at this is we have a technology that we are looking at that we think longer term is going to be the technology from a solar perspective that is going to be the generation of choice. We want to go ahead and get some experience on what it costs to build these. How they operate and so this $40 million, 10 megawatt announcement we have, based on how the construction goes, how they actually operate will set the stage on what we do next year and beyond in terms of looking at bidding this stuff on a larger scale into the Southwest region.

[Michael Lapides:]

Got it, thank you guys, congrats on the good quarter.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We'll take our next question from Samuel Brothwell with Wachovia.

[Samuel Brothwell:]

Hi, Couple of quick ones. Just to be clear on the guidance as you updated '08 with respect to commodities. Did that include the gain on the transactional gain net of the losses?

[Donald E. Felsinger:]

Sam, it did. Let me have Mark give some more color?

[Mark A. Snell:]

Yes Sam, it's Mark. It did. I would think about it this way. As our operational earnings for the quarter were kind of right at our results of the $0.98 the gain on the commodities sale was offset by some litigation reserves and taxes that we took with respect to commodities and also the Mexican tax piece that hit our pipeline business and LNG business. And those are kind of one-time unusual things. But if you take those out of it, operationally we were right at about where we were for the quarter. And given that plus the improvement at the utilities, the retroactive adjustment of the rate case and how we were performing at commodities and the other business units, we made a judgment of where we thought we would end up at the end of the year. So, that's why we increased the guidance.

[Samuel Brothwell:]

Got You. I forgot my other question. I will jump back in the queue. Sorry.

[Mark A. Snell:]

Okay.

[Operator:]

We will take our next question from Becca Followill with Tudor Pickering Holt.

[Rebecca Followill:]

Hello folks. First question on EnergySouth, the range that you have is basically breakeven on in 2009 and up $0.30 what determines that... was it return [ph] how that would play out? I know it's a time in the development of storage but, how much more just kind of what progression you guys are looking at?

[Donald E. Felsinger:]

Beccafor 2009 remember, we don't close this transaction until November maybe December. So, there is not a whole lot that's in here for the rest of this year. When we look at what this business will generate over time it really gets down to what the value of storage is. And we've made some assumptions that when you look at storage costs that are in the range of $0.30 to $0.40 that we think this business can generate, about on the high end, about $0.30 of net income in 2012.

[Rebecca Followill:]

So that by 2012 how much storage would have to be developed to get to that?

[Donald E. Felsinger:]

That's building out essentially all the storage we have that is identified. I don't know if it's in your chart or not.

[Rebecca Followill:]

It's got 27Bs by 2011 for Bay Gas, but Mississippi Hub is upto 30 by 2015, so how much of the Mississippi Hub would be developed?

[Donald E. Felsinger:]

Ofthe 57 we are acquiring about 40 of it, or about 40 Bcf of new storage in operation in 2012.

[Rebecca Followill:]

And what determines whether or not you develop a just demand?

[Donald E. Felsinger:]

Well, I mean it's like everything else we do. We will lay out a plan for that area, we will go out and talk to customers. And if we can enough contracts signed up for the right price to launch we will, and so this would be no different. We are seeing very strong interest right now. As you notice that we already have about 20Bs contracted. So we are seeing strong interest in the marketplace to develop more. We will actually get contracts in place for the majority of that before we launch the next increment.

[Rebecca Followill:]

Great, thank you. And then on the commodities business, you said that you have 50 large deals pending, from your reference, what was this like a year ago at this time? How many large deals did you have pending and --?

[Donald E. Felsinger:]

The types of deals that we are talking about here are really deals where RBS is providing financing, and the customer is looking for some way to hedge the output of that... the solar that's being financed, we really weren't doing any of these deals.

[Rebecca Followill:]

Okay. So all this is incremental. And then for going forward you guys have three months under your belt with the JV. What you guys have seen so far in July... it's tremendous performance for just three months under a JV. Are you seeing continued momentum going into July and August?

[Donald E. Felsinger:]

One month or three months don't make a business. Markets are fairly volatile. And we do have confidence looking through the rest of this year that, to give us enough comfort to make a change to our guidance that coupled with other businesses, I just wouldn't forecast what we plan to see in terms of what the commodity markets will give us.

[Rebecca Followill:]

Okay. Thank you.

[Donald E. Felsinger:]

Thanks, Becca.

[Operator:]

We'll take our next question from Asher Khan [ph] with SAC Capital.

[Unidentified Analyst:]

Good afternoon, congrats. I had a question on the rate case, if you can. You mentioned on the slide that $42 million earnings benefit related to the first half of 2008. Can we multiply that number by two and say the benefit for the year would be 84?

[Donald E. Felsinger:]

Could but you would be wrong.

[Unidentified Analyst:]

Could you tell us what's happening in the second half?

[Donald E. Felsinger:]

Asher, let me have Debbie just kind of walk you through how to think about that.

[Unidentified Analyst:]

And Debbie, if you could also, because now it's a final decision, could you hope you can elaborate what the rate case means additional earnings for the next three years also based on the decision?

[Debra L. Reed:]

Well, Asher, let me try to address your first question which was the 42. The 42 reflects the adjustment for the first half of the year. We will have additional revenues of $209 million split between the two utilities. But of course, we do have additional costs, and we have been operating under our 2007 authorized margin is what we were recording for the first half of the year. That we would... we have looked, as Mark has said, at what we would expect for the remainder of the year. We had a very strong first half and we do believe that we would be at the high end of our range, as a result of the rate case decision and how we are managing the business. We don't forecast now for the next two to three years. We will be... when we do the analyst meeting next year we will be revising all of our forecasts at that time.

[Unidentified Analyst:]

You would have some sense, I guess, to additional earnings the next one, two, three years under the rate case. So you are saying the utility... you will go through the process of revision by spring of next year, though the numbers are going to be higher. Is that a fair conclusion?

[Debra L. Reed:]

Yes. We have laid out... we laid out for you our plan in the analyst meeting and showed that plan reflected the settlement in the rate case and what we would anticipate that. That we will look at that again as we do every year and make any revisions that are necessary but that plan as we showed you back in the spring reflected the settlement in our rate case.

[Unidentified Analyst:]

Okay. Thank you very much

[Donald E. Felsinger:]

Thanks Asher.

[Operator:]

We have a follow up question from Lasan Johong with RBC Capital Markets.

[Lasan Johong:]

Thank you. Don, it strikes me as being self evident that the best use of your new storage assets from EnergySouth will come through the Sempra Commodities business. But since that is now a majority owned by somebody else, how do you structure the integration and the benefits from the two coming together?

[Donald E. Felsinger:]

Well, obviously Sempra Commodities... Sempra-RBS Commodities will have access to the storage like any other third party would. And the --

[Lasan Johong:]

Do youcharge the JV a fixed fee for utilizing the space like you and any other third party --

[Donald E. Felsinger:]

Remember we have partners in these projects. So we can't do anything that is favorable to our own affiliate.

[Lasan Johong:]

Okay I understand that. Don, it seems to me also that given the current credit situation that having done a lot of transactions in the private equity for generation that there might be some potentially opportunistic acquisition scenarios developing, would that be a fair statement?

[Donald E. Felsinger:]

I think it's a standard answer. I always give you Lasan that we are always looking at opportunities where we think we can either do something at attractive price or will bring some strategic value to something that we look at buying or building.

[Lasan Johong:]

But has the environment changed to favor with that kind of analysis?

[Donald E. Felsinger:]

I would say so. I mean we've... you look at there are fewer people in the marketplace today, there are fewer people they can do deals and so being financially strong as we are I think that if we saw deal that we wanted to do that I'd have more confidence we can get it done.

[Lasan Johong:]

Got it. And lastly, conservation; are you seeing any evidence of that in your utilities?

[Donald E. Felsinger:]

Yes, Debbie would address that.

[Debra L. Reed:]

And actually on the electric side, we are continuing to see peak low growth of about 1.5% to 2% per year and sales growth of about 1.5% through year on an 12 months running average. So, we are not seeing much in that regard at all.

[Lasan Johong:]

What about the gas side, the gas and electric?

[Debra L. Reed:]

On theSoCalGas side, we are seeing about 0.8% growth and customers about 45,000 meters, and our consumption is level there, and it's pretty level there for several years.

[Lasan Johong:]

Interesting, thank you.

[Donald E. Felsinger:]

Thanks, Lasan.

[Operator:]

We will take our next question from Annie Tsao with AllianceBernstein.

[Annie Tsao:]

Good afternoon. Just wondering in terms in your commodity sector, power and gas, can you give a little bit of color in this quarter? Do you see the liquidity come down because of the financial player being pulled down, because we heard from a lot of other sources?

[Donald E. Felsinger:]

Your question is, was there less liquidity in the market, because there is fewer players in gas and power sector?

[Annie Tsao:]

Yes.

[Donald E. Felsinger:]

I don't believe we have seen that. Mark, do you have any?

[Mark A. Snell:]

No, I think... generally speaking through the second quarter, I think the amount of liquidity and activity was pretty good. We had a fairly rapidly rising commodity market, and I think there was... again, we tend to deal more in physical and the physical side of the business, and that hasn't been affected as much by some of the financial players dropping out. But how that continues on, we will wait and see.

[Annie Tsao:]

And on the share repurchase program, should we assume this about $200 million left for the rest of the year?

[Mark A. Snell:]

How many millions left?

[Annie Tsao:]

About $200 million.

[Mark A. Snell:]

No, I don't...

[Annie Tsao:]

Is it from your $1 billion to $1 billion?

[Mark A. Snell:]

What we did? We did an accelerated share repurchase program as you remember, and we committed to buy $1 billion dollars worth of stock back this year. We have been delivered about 15 million shares so far. That was early on and now we are just... they're wrapping that program up. And it will wrap up in the fourth quarter. We will bring in a $1 billion worth this year.

[Annie Tsao:]

Okay. And lastly does this Sempra Utility, you have about $4 million benefit from the San Diego Gas & Electric from lower tax rate? What kind of tax rate we should assume going forward?

[Donald E. Felsinger:]

Joe Householder, would you take that?

[Joseph A. Householder:]

Sure. Going forward for the year for SDG&E, the tax rate for 2008 about 36%.

[Annie Tsao:]

Okay, all right. Last... I do have one more question. CapEx; do you have any changes since the last time?

[Donald E. Felsinger:]

I think I said that earlier; if you missed it, that we expect of CapEx to kind of be what we have forecasted for the year.

[Annie Tsao:]

Okay. Thank you.

[Operator:]

We'll take our next question from Faisel Khan with Citi.

[Faisel Khan:]

Just curious, the Supreme Court came back on the western contracts issue, and looks like the remanded some issues back to the FERC and upto Mobile-Sierra, is there is sort of impact to you guys over the next 6 to 12 months in terms of...

[Donald E. Felsinger:]

Faisel,I don't. We actually thought that decision was right in line with what we thought that the Supreme Court would do. It's been remanded back to the FERC and it's going to take its time work through that process, but don't expect any change this year.

[Faisel Khan:]

Okay. Thanks, guys.

[Operator:]

We will take our next question from Michael Worms with BMO Capital.

[Michael Worms:]

Thank you very much. Can you just go over for me what the tax change was at the utility company in the quarter?

[Donald E. Felsinger:]

Michael, you are fading out. Could you...

[Michael Worms:]

Sorry, can you hear me for now?

[Unidentified Company Representative:]

Yes.

[Donald E. Felsinger:]

Yes.

[Michael Worms:]

Just wondering what the lower tax rate was at the utility company what drilled that and what drilled the tax rate be going forward to rest of the year.

[Donald E. Felsinger:]

What drilled the lower tax rate at the utility?

[Michael Worms:]

Yes.

[Donald E. Felsinger:]

Joe Householder, again.

[Joseph A. Householder:]

Hi, what was really driving it in the quarter is we have additional software expense, which flows right through to the rates. We get immediately deducted in that actually flows rate through the rate in the rate making.

[Michael Worms:]

Okay. So we will... it will just continue throughout rest of the year?

[Joseph A. Householder:]

Yes, that's the projection for the year, and it's actually driving effective rate down for the year it's blended in.

[Donald E. Felsinger:]

So, the 36% is for the entire year.

[Michael Worms:]

Okay,fair enough. And then on the at the commodities level, can you just go over that second bullet on slide 5, the $67 million gain? What was driving that or what drove that? And then what was offset was on the litigation impact matters?

[Donald E. Felsinger:]

I'vegrabbed the slide here, so slide five commodities?

[Michael Worms:]

Yes.

[Donald E. Felsinger:]

Yes, Mark Snell.

[Mark A. Snell:]

Maybe there is some surprise, because we have basically signaled that we sold the business or half of the business to RBS at book. And so maybe the fact that we are having a gain surprises some people. But I think generally speaking we did sell it at book and for the most part since we mark-to-market all of the assets on a daily basis or most of the assets, you would expect there to be fairly little gain. But there were some assets that under U.S. GAAP we couldn't mark-to-market and the purchase agreement allowed us to mark those assets to market, especially under IFRS. That was primarily transportation, inventories, and storage that we owned. And so we did mark that to market and we were able to realize the benefit for that. Now the full benefit, the full gain on those types of things we only recognized half of it, because we continued to own half of the business. So that we didn't really recognize the full gain on that, but we recognized half of it. And then there was some other items too that things like they are building in some other assets that we mark-to-market. So, that was really the differences. It didn't amount to that much, but it was significant.

[Michael Worms:]

Okay. And can you talk a little bit about the litigation and tax matters, what was that?

[Mark A. Snell:]

Well, litigation was just additional reserve that we took on litigation that we indemnified identified our RBS for and those related to things around the California energy crisis that involved trading. We had some reserves on the books already. And we just pumped those up as part of the close. And then the other things were the tax matters was... it was a UK expense, we lost the case in the UK equivalent of the tax course, and so we made an accrual for that.

[Michael Worms:]

And one final question, thank you. The U.S. GAAP conversion impact, you said, will go away over time. Can you kind of quantify time?

[Donald E. Felsinger:]

We are hoping that by the end of this year we'll have no weighted all of the significant agreements over to the bank. And it's a little complex, but let me just take a stab at simplifying it. As we move all of these contracts to the bank, the bank will pay us the fee for managing exactly equal to the IFRS or the international accounting standards profit on those contracts and that will eliminate the GAAP adjustments.

[Michael Worms:]

Thank you.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We will take our next question from Elvira Scotto with Banc of America Securities.

[Elvira Scotto:]

Just one quick follow up on the Rockies Express; just on the cost side. The $5.6 billion the total costs; is that... you think that's a good number now or is there still potential for that to move higher? Is there anything kind of outstanding and how should we think about that?

[Donald E. Felsinger:]

The project team, led by Kinder, went through this about a month or a month and a half ago, revised all the numbers up. There is always the uncertainty. We had quite a few conditions from the FERC that we are going to meet. And as we look at those environmental conditions and the routing decisions, there is always the chance that the cost could change. But we think the $5.6 billion with what we know today is a good number.

[Elvira Scotto:]

Okay, great. Everything else I had has been answered. Thank you.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We'll take our next question from Manuel Garcia with Banc of America Securities. Yes, we'll go back to Sam Brothwell with Wachovia.

[Samuel Brothwell:]

Yes, I'm sorry. You had mentioned some charges in the LNG segment that appeared close to the formation of the JV. What... can you elaborate on that how we should think about it?

[Donald E. Felsinger:]

Sam,I'm sorry, I couldn't hear you very well; you have faded out. Could you just... if you're little closer to the phone and speak.

[Samuel Brothwell:]

I'm sorry; you mentioned some charges in the LNG segment that seem to crop up post formation of the commodities JV. Could you elaborate on that and how we should think about it?

[Mark A. Snell:]

Well, I'm not sure exact... maybe there is a little bit of misunderstanding. We had some charges on the LNG segment related to the Mexican taxes and what those are we have U.S. dollar denominated that in Mexico. And under the Mexican tax law, if the Peso appreciates, the amount of Pesos required to pay down that debt is reduced, and therefore we have a gain and we pay tax on gain. So as the peso strengthens against the dollar, we have a tax expense based on the fact that it takes less pesos to pay the debt. It has nothing to do with the JV.

[Samuel Brothwell:]

I thought I heard you say something about the JV, my apologies.

[Joseph A. Householder:]

This is Joe Householder. Sam, I think what you are talking about is also in the LNG business, there was a loss, $12 million due to the contracts that LNG has with RBS Sempra Commodities. It's a mark-to-market contract on the sale of the natural gas. And so that's in there every quarter. There is a mark-to-market, and gas prices went up, there is a loss.

[Samuel Brothwell:]

And that's just something in the prior structure that would have just netted out.

[Joseph A. Householder:]

This would have eliminated; company wise, it doesn't eliminate now. But it's been there every quarter. That one we don't really consider or not... that's going to be there as gas price goes up and down, it will be a gain sometimes and a loss sometimes. It's non-cash, and it will all turnaround as we start to sell the product. It's just basically represents a part of the marketing fee.

[Samuel Brothwell:]

Got it. I appreciate your patience.

[Joseph A. Householder:]

Okay.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We have no additional questions at this time, and I'd like to turn the call back to Don Felsinger for any additional or closing comments.

[Donald E. Felsinger:]

Well, once again thanks to all of you for joining us for the second quarter 2008 call. If you have any follow-up questions, you know how to get a hold of Jeff, Glen, or Scott. Thanks, have a great day.

[Operator:]

This concludes today's conference. We thank everyone for your participation. You may now disconnect your lines.