Sempra
Q3 2008 Earnings Call Transcript

Published: 10 Nov 2008

[Operator:]

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

[Jeff Martin:]

Good morning. I am Jeff Martin and I want to thank you that you could joining us. I know it's a busy time that many of you are actually traveling or attending the EEI Conference in Phoenix. This morning we'll be discussing our third 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 our Utilities; and Joe Householder, Senior Vice President and Controller. You'll note that slide 2 contains our Safe Harbor statement. Please remember this call contains forward-looking statements that are not historical facts and constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve risks, uncertainties, and assumptions. But 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 is also important also to note that all of the earnings per share amounts in our presentation today are shown on a diluted basis. And with that I'd now like to turn it over to Don, who will begin with slide 3.

[Donald E. Felsinger:]

Thanks Jeff. And again thanks to each of you for joining us. Here is a format for today's call. Mark Snell and I will start with the financial results, then I will update you on the status of some of our key business activities. And then, finally we'll close with any questions you have. Now to the financial results; earlier this morning, we reported third quarter net income of $308 million or $1.24 per share, compared with third quarter 2007 net income of $305 million or $1.15 per share. 2008 results benefited from a reduced share account due to the completion of the share repurchase program that we initiated in April. We're pleased with our performance for the quarter and for the first nine months of 2008. We had very strong results from the San Diego Gas & Electric, and Southern California Gas, as well as our Generation, Pipelines and LNG business. Third quarter results were negatively impacted by our commodities segment. But when we look at the full year outlook for that business, we still expect earnings to be in the range of $250 million to $350 million. Now, let me hand it over to Mark. He'll take you through each of the business units financial results beginning with slide 4.

[Mark A. Snell:]

Thanks Don. At San Diego Gas & Electric, net income for the third quarter was the $123 million, which is the same as the year-ago quarter. But if you note the items listed on slide 4, you'll see that SDG&E benefited from $19 million on higher authorized margin in Q3 2008, a direct result of our California and FERC rate cases. Now please turn to slide 5. Southern California Gas' third quarter 2008 net income was $77 million, up from $63 million in the third quarter of 2007. About half of the increase was the benefit for retroactively applying higher revenues authorized in a recently filed rate case, with the other half coming from the resolution of a regulatory matter. Now let's go to slide 6; Sempra Commodities reported a net loss of $8 million in the third quarter of 2008 compared with $87 million of net income in the prior year's quarter. This is our second reporting period under our new joint venture with RBS and reflects our reduced ownership in the business. You'll recall that prior to the second quarter of this year, Sempra had 100% ownership of the Commodities business. The third quarter 2008 net loss included an after-tax loss of $3 million from our share of the equity earnings of RBS Sempra Commodities. The JV recorded only $60 million of trading margin for the quarter, which was impacted by a sharp decline in commodity prices and reduced liquidity at certain physical trading hub, as the number of companies pulled back and we adjusted to these new market conditions. Even though each of our product lines was adversely affected in the quarter, losses were limited to our power marketing book. Don will update you with some of the positive developments we're currently seeing in this business, but for now let's move to slide 7, where we will review how income from the joint venture with RBS is allocated. Here we show how income is allocated at the joint venture, both for the quarter and its first six months. A couple of highlights; first the joint venture posted a loss of $33 million during the quarter, after applying the income allocation methodology, the loss at Sempra was $29 million. Now Sempra's share of the loss was higher than you might expect due to the combination of the joint venture having such an outstanding second quarter, and the third quarter results coming in much lower than the prior period. More simply, we had to give back some of the allocations above of our preferred return for the year that were booked last quarter since we made these calculations on an annual basis. After adjusting to U.S. GAAP and for the impact of taxes, Sempra's share of the joint venture equity earnings for the quarter was a loss of $3 million. In the first six months since its formation, the joint-venture earned $706 million in margin on a mark-to-market basis, after operating expenses, the JV earned $301 million or a $195 million after tax. Sempra's after tax share of the earnings since April 1st is $90 million. Please move to slide 8. Third quarter net income for our Generation business increased significantly to $94 million compared with $58 million in the same quarter in 2007. The improvement in the third quarter of 2008 was due primarily to $25 million and higher mark-to-market earnings and $8 million and lower income tax expense as a result of Sempra Generation's recent solar investments. Please move to slide 9. Sempra Pipelines & Storage net income in the third quarter of 2008 doubled to $34 million compared with $17 million in the same period of 2007. Mexican pipeline operations contributed $12 million in the third quarter, compared with $4 million in the same quarter in 2007, the increase was primarily due to earnings from LNG related pipeline contracts. The Rockies Express West pipeline, which you'll recall went into service earlier this year, contributed $5 million of earnings in the quarter compared with a $2 million loss in the prior year. For the first nine months of 2008, net income increased to $84 million up from $50million in the same period in 2007. Year-to-date 2008 includes $17 million of earnings from Rockies Express compared with a loss of $4 million in 2007. Please turn to slide 10. This slide provides a summary of our business unit results. One point of interest here is that Sempra LNG recorded net income of $4 million in the third quarter of 2008 compared with the net loss of $4 million in the prior year. The increase in net income was primarily due to a mark-to-market gain on a natural gas marketing agreement with RBS Sempra Commodities. Now please turn to slide 11. Now I'd like to take some time to talk about our liquidity position and how the current economic environment could impact our business in 2009. First let's talk about our current liquidity. As of October 31st, we had $245 billion of cash and availability under our committed bank line. We have three committed credit facilities with total commitments of $4.3 billion from a group of 19 banks. These are multi-year credit lines that'll mature in August 2011, roughly $2 billion of those credit lines are being used today to support our commercial paper program and letters of credit. Now please turn to slide 12; what I'd like to do now is kind of walk through our funding needs through the end of 2009. This table reflects our current outlook for sources and uses of funds over the next 14 months. Total sources not including our bank lines are expected to be about $2.7 billion, while uses are projected to be about $3.7 billion. This does not include the $500 million share repurchase previously planned for next year. This result in a net funding requirement and a possible draw on our credit lines of $1 billion through the end of 2009. Keep in mind, this assumes that only debt issuances to occur during the period would be about $600 million in utility debt and the remarketing of $400 million of IDBs. Assuming the debt markets remained close for holding companies and non utilities through 2009, a highly likely outcome... highly unlikely outcome, excuse me, we could still expect to end 2009 with ample liquidity of $1.5 billion under this scenario. Now please turn to slide 13. In summary, we expect our current liquidity to cover our net funding needs through the end of 2009 by roughly 2.5 times. We also have the flexibility to defer some capital spending if necessary. Once again this outlook assumes we issued no debt outside of our utilities. This is highly unlikely. We are well positioned to make up through this tight spell in the debt markets with enough liquidity to support our operating businesses, complete construction of several major infrastructure projects, and lay the foundation for continued growth. Now please turn to slide 14. We are pleased with our financial results particularly in a difficult environment. Earnings per share for the third quarter of 2008, was up 8% over the same quarter last year. SDG&E, SoCalGas as well as our Generation, Pipelines, and L&G businesses all performed well. Results worked for at our commodities, but we don't expect to repeat performance in the fourth quarter and are actually pleased with the results so far through October. Last month we also completed a $1 billion share repurchase that began back in April. In total, 18.4 million shares were repurchased. In regards to the additional repurchases we have planned on starting early next year, we will continue to evaluate the debt markets, interest rates and other factors that may impact our business with the view towards making a decision on a follow-on share repurchase, when the debt market return to normal. Turning to the economy and its impact, Sempra, like all companies, is being affected by the current worldwide economic crises. The debt markets are expensive at best and closed entirely in some cases. Higher borrowing costs coupled with very low natural gas prices, which affect profitability of Sempra Generation and Sempra LNG could, if they remain unchanged, effect our profitability in 2009. Additionally, given the uncertainty at the commodity markets, and a lack of bank borrowings for energy infrastructure, which impact related hedging activity, growth at RBS's separate commodities could be dampened. At our Analyst Conference, we provided 2009 earnings guidance of $4.35 to $4.60 per share. We will update that guidance on our fourth quarter earnings call, which will be held in February of next year. In the interim, there are several factors in the current economic environment that could put pressure on our 2009 financial results and these include interest rates. If they remain at the 10% to 11% level for BBB borrowers and given our forecasted borrowings, it could impact our earnings by $0.10. Natural gas prices, if they continue in the $6 range that could impact us by $0.05. And if growth of our Commodities JV is not as we... robust as our original forecast, and we come in closer to the low end of the $300 million to $400 million earnings range we forecasted, it couldn't impact us by as much as $0.20. Since we are not quantifying any potential upsize, we are not changing our guidance at this time. We are just pointing out the limited range of downsize that could impact our earnings due to the extraordinary economic environment we are experiencing. And with that, I'd like to turn it back over to Don, who'll begin with slide 15.

[Donald E. Felsinger:]

Thanks. Mark just covered some of the considerations that could put pressure on our results in 2009. I also think it's important to talk about some of the positive considerations as well. First, we expect the business environment to improve in 2009 and a corresponding reduction in interest rates as lending activity returns to more normal levels. I am also very optimistic. I am also very optimistic about our commodity segment. It looks like this past October will be one of our best month ever with improved business activity and margins across business all lines. And longer term when you consider RBS is improving balance sheet and the potential to increase market share, we remain confident in the joint-venture's ability to produce strong risk adjusted returns overtime. Also our two utilities just posted their best quarter ever with $200 in income. So I think there is positive to build on for 2009. Now let me update you on some operational issues starting with our utilities. In the third quarter, we received a final decision on our general rate cases for SDG&E SoCalGas. The decision called for a revenue increase in 2008 that allowed us to book a $40 million retroactive benefit for the first six months of the year. More importantly, the decision also provides revenue certainties for 2011 with fixed revenue increases in each year. Turning to our smart meter programs, at SDG&E, we'll began our full scale installations early next year; and at SoCalGas, we filed for regulatory approval of a $1.1 billion program of which $900 million would be capital. We anticipate the program will be approved and installations to began in 2011. Also during the quarter we filed a request to develop a series of solar projects at SDG&E. This program would have initial target of 70 to 80 megawatts of solar electricity. Pending commission approval, SDG&E expects to add up to $250 million of rate base as these projects are developed over the next five years. The first installations are targeted to be operational as early as next year. As for the Sunrise Powerlink transmission project, a major milestone in the approval process was reached 10 days ago. On October 31st, the commission issued two draft decisions, one by the administration law judge and one by the assigned commissioner. Even though the proposed decision issued by the administrative law judge in the proceeding of recommended new generation for the San Diego region we believe that the commission will ultimately approve some variation of the recommendation made in the alternate decision by the assigned commissioner. A transmission line that takes a more southerly [ph] route and the one we originally proposed. We expect the commission to make a final decision in this proceeding by year end. Our preliminary estimated cost of the line is approximately $1.9 billion including estimates for the required litigation measures needed to reduce environmental impacts and provide rerouting in certain areas. Now please go to slide 16; what I'd like to do now is to take a moment to recap some of the projects we've recently completed or have under development, our LNG and pipelines and storage business. We completed the Energía Costa Azul LNG terminal early this year as well as the expansion of a Bajanorte Pipeline, which connects to the facility. We've also started construction on nitrogen facility at the terminal. We are in the midst of developing a significant amount of salt cavern storage in the Gulf Coast region. The first project that we began developing in the region Liberty Gas Storage has been a challenge. We've had some sub-surface issues that have delayed completion. We're now evaluating whether we'll be able to correct these issues. If not, we may be required to take an impairment charge of approximately $65 million after tax or our 75% share of the project. Alternatively, if our corrective actions are successful, which we expect to know by the end of the fourth quarter, would expect to place the facility in the service in the first half of next year. Since we can develop three other salt zones in the Gulf, if we can't place Liberty in the service other than the one time charge, our ongoing storage earnings would not be significantly impacted. On October, the 1st, we closed the EnergySouth transaction, which now gives us two more storage projects in the region. First, the Bay Gas Storage is currently operating with the fully contracted capacity of over 11 Bcf and additional 5 Bcf is under construction with a 2010 in-service date. There are also plans to increase the facility's total capacity to 27 Bcf by the end of 2011. Mississippi Hub gas storage is the other project under development. Currently the facility's first step in the half Bcf of storage capacity is under construction and commitments are in place for 4 Bcf. Operations are slated to commence in 2010. There are also plans to increase the total capacity of Mississippi Hub to 30 Bcf by year-end 2015. Sempra's ownership interest in the project is 60%. Sempra's share of the capital cost to build out the total storage of both Bay Gas and Mississippi Hub is expected to be about $500 million. And finally, regarding our 25% interest in Rockies Express Pipeline, we are experiencing higher costs than we'd originally forecast for the eastern leg of that pipeline, mostly around labor and some of the workaround issues that were required as part of the permitting process. As a result, the revised cost estimate for Rockies Express is approximately $6 billion. Our share of the equity to support the project is now estimated at $750 million, and we expect annual distributions from that investment of roughly $80 million to $90 million per year. Now for a quick summary, please go to the last slide. I'm extremely pleased with the strength of our financial results for the quarter and came down for the first nine months of the year. When you step back, I think our success is in large part a function of how we allocate capital and manage risk. First, we don't commit capital to projects until we have contracts. Secondly, our utility investments are in locations with positive regulations where we aren't exposed to commodity prices or sales volumes and we have high returns on invested capital. Furthermore, we have pension plans that don't expose our shareholders when we need to make contributions to increased funding. Outside our utilities, we have paid the long dated contracts like you see in our natural gas infrastructure businesses, since this provides our shareholders with certainty of cash flows. And lastly on the commodities front, we took a proactive approach that placed us in a unlimited partnership position, where our equity is capped and we bear no liquidity risk. These are the type of things that helped businesses like ours consistently perform well. Going forward, we'll continue to be execution-focused and look forward to updating our 2009 guidance when you join us on our fourth quarter call. And with that, let me open up the call and take any questions that you may have. Question And Answer

[Operator:]

Thank you. [Operator Instructions]. We'll go first to Lasan Johong with RBC Capital Markets.

[Lasan Johong:]

Yes. Good morning.

[Mark A. Snell:]

Good morning.

[Lasan Johong:]

Don, Mark, I'm a little confused about the Commodities business. I would expect that with competitors dropping off like flies and volatility increasing, that it wasn't the...

[Donald E. Felsinger:]

Lasan, let me interrupt you and ask you if you could maybe get closer to the phone, we can't hear you here.

[Lasan Johong:]

Okay. Is this better?

[Donald E. Felsinger:]

That's much better.

[Lasan Johong:]

Okay. With competitors dropping off like flies and volatility and gas prices, it seems like a minimum branch-to-branch. I mean how is it that the Commodities didn't do well in the third quarter? What's specifically the type of [Ph], how did the loss get created?

[Donald E. Felsinger:]

Allow me to say Lasan that in the third quarter, we saw a very unusual commodity activity with prices basically all going down across all commodity lines. And we found ourselves in a position in the Northwest, where we had very little liquidity. And in the process of rebalancing our position, we ended up taking a loss in the power book in that region.

[Lasan Johong:]

We categorize that as a very unusual situation, something that has been not likely to be occurring frequently?

[Donald E. Felsinger:]

I think it's a position that we won't find ourselves and again.

[Lasan Johong:]

Okay. And... but going forward then, can we make in conjunction [Ph] that even though volumes may stabilize or even come down, the margins are to increase straight across the...

[Donald E. Felsinger:]

Lasan, back to that point, I am just... I have never been as excited about the commodity businesses I am today. We saw a lot of people exit out of the space. We had a very unusual quarter with just loss of liquidity and prices declining, but I think going forward with the joint venture we have with RBS even though, we don't have as much liquidity in the market, because there are fewer players, it plays very well to our strength. As both the financial and physical player, this is the space we want to be in right now, we just had a great month in October.

[Lasan Johong:]

Excellent, excellent. Don, this is the kind of situation for internationally economic when, Sempra's thinks to be able to pull some interesting acquisition moves and take advantage of some of the system modulation in the marketplace. Kind of... give us a sense of what you're thinking about in terms of valuations and assets in the acquisition market if you would?

[Donald E. Felsinger:]

Well, I would just say from a growth perspective that as I just went through a one down, we have a lot of capital projects that we are either in the final throws of completing or about the launch, and so a lot of organic growth. From the standpoint of the marketplace, there is no doubt that as you look around at the landscape, there are a lot of companies that have depressed equity prices. And if you look at the type of things that we would have an interest and just go back and look at what we did with EnergySouth, and I think that would kind of project to you the type assets we're looking for, something in the natural gas space that plays to the line of infrastructure we want to be in. So I think we are well positioned with organic growth, acquisition opportunities. And as Mark mentioned we have... always as a back staff, have the ability to go back and buyback shares when the market looks favorable.

[Lasan Johong:]

Mark, can you give us update on what the mark-to-market non-cash mark-to-market does for the third quarter?

[Mark A. Snell:]

I am sorry, Lasan, I just didn't... I didn't get that, could you repeat it?

[Lasan Johong:]

I am sorry. Third quarter non-cash mark-to-market adjustments?

[Donald E. Felsinger:]

Third quarter non-cash mark-to-market adjustment.

[Mark A. Snell:]

In which business?

[Donald E. Felsinger:]

In Generation?

[Lasan Johong:]

Straight across the board for the Generation, for Commodities, for whatever, LNG?

[Mark A. Snell:]

Lasan, I think what we thought was sort of the inverse of the asset commodities business, both at Generation and LNG, we have some hedges emplaced, and those hedges came roughly into the money as commodity prices dropped and that's why we have some pick ups across the board there.

[Lasan Johong:]

Okay. Thank you very much.

[Donald E. Felsinger:]

Thanks Lasan.

[Operator:]

We'll go next to Michael Goldenberg of Luminous Management.

[Michael Goldenberg:]

Good morning.

[Mark A. Snell:]

Good morning.

[Michael Goldenberg:]

I guess we've been already has done accustomed to excellent operations from Sempra. So I guess it's a little surprising to hear about your difficulties with the storage. Can you expand a little as to what exactly this with, why... it was unforeseen and what there remains to be figured out as to whether going to be a write-off or what do you can actually put on service?

[Donald E. Felsinger:]

Well, let me start off and I'll ask Neal to follow on here. But in our Liberty Gas Storage development, we ended up buying two existing caverns that have been mined for other purposes. And so in the process of going through and doing the sub-service development, we've run across some issues that we think will cause those storage caverns to have some problems. Now we're currently working through some potential solutions, we haven't given up yet on those. But as we mentioned if in fact, we do have to walk away from these facilities, our share of any write-down would be around $60 million, $65 million. But that is dependent upon getting some more information. The positive thing here, Michael, is that we do not need the storage field to go forward with the acquisition we've made with Bay Gas and Mississippi Hub plus other projects we have in the Liberty region, we can go forward and build out this business with minimal impacts on earnings going forward. Neal, do you want to...?

[Neal E. Schmale:]

I would just underline what you just said about how good the future of this business looks with the opportunities we have at Liberty South and with the recent acquisition. But to get you a very... the question about the cavern and question, the fundamental issues there is, we have 13.3 inch [ph] in the casing through a whole we drilled into one of the caverns, and we've been unable to get the right kind of pressure test to assure that 13.3 inch casings, what we're looking at now is running another string of 10.75 inch casing into that, cementing the new string, 10.75 inch casing and try, and try and effect to see a lab way [ph]. But we don't have a lot of space in the well board to do that, and we also have to make adjustment around whether or not long term and the objections were on cycle. We think that will be a satisfactory solution and what we are doing now is engineering studies and studies of the caverns around those issues, and we should have those sorted out before the end of the fourth quarter.

[Donald E. Felsinger:]

But the lesson here is this

[Michael Goldenberg:]

Got it. And one more question, its about the REX pipeline. When you said the new cost is $6 billion, which leg... continue with just clarify, which leg the $6 billion is for whether its REX East or the additional light of REX for these?

[Donald E. Felsinger:]

Well, it's mainly for the eastern portion of the pipeline. The western portion is in service. The costs are basically recorded. As we got the final FERC decision and the environmental mitigation that we had to go through the additional routing that we had to take place, and some of the mitigation measures of what's driving this cost.

[Michael Goldenberg:]

But that's through Ohio, right? It has nothing to do with the proposed pipeline down the road [ph]

[Donald E. Felsinger:]

Right,this is an existing pipeline through Ohio.

[Michael Goldenberg:]

Got it. Okay, that's what I wanted to make sure. Thank you very much.

[Donald E. Felsinger:]

Thanks Michael.

[Operator:]

We'll go next to Faisel Khan with Citi.

[Faisel Khan:]

Good morning.

[Unidentified Company Representative:]

Hey Faisel.

[Faisel Khan:]

Hi. Just to clarity in the Liberty Gas storage, can you just, can you quantify the size of the cavern relative to the size of the entire Liberty Gas storage project?

[Donald E. Felsinger:]

The two caverns were 17 Bcf.

[Faisel Khan:]

And the cavern that is, could be impaired is how large?

[Donald E. Felsinger:]

11 Bcf, I believe.

[Faisel Khan:]

11 Bcf of the 17 Bcf could be impaired?

[Donald E. Felsinger:]

Potentially, the full 17 Bcf, that's what we are looking at right now. But I once again would reiterate that these particular caverns, we have other projects that would fully replace the capacity we're talking about here.

[Faisel Khan:]

Sure. And on the Powerlink project, the alternative route that's have been proposed by the commissioner, the science commissioner on this project, what the... how would change the timing of a potential on a completion and engineering and construction of the Powerlink versus what you guys had if they are planning for previously?

[Donald E. Felsinger:]

Well, Debbie and I were taking before the call and we are assuming that if we get a final commission decision, which would expect before the end of this year, that we'll have that line in operation in 2012.

[Faisel Khan:]

Okay, got you. Is it still follow the same sort of FERC transmission rules in terms of getting cash return on equipment, is that right?

[Donald E. Felsinger:]

That's correct.

[Faisel Khan:]

And so that the cost of project now would be roughly $1.9 billion, is that what you are estimating?

[Donald E. Felsinger:]

This route is a little more expense and so we're looking at another couple of $100 million.

[Faisel Khan:]

Okay, understood. And I wonder if you can give us a little bit of an update on the LNG market. I know the last year the number of cargos coming to the U.S. has been pretty slim, but given the economic situation around the world, I am wondering if you can update us on it? Is there any change in the projected amount of volumes that might be coming into the U.S. at some point in time?

[Donald E. Felsinger:]

Well, it is amazing how quickly the world market changes in a three months period. But we actually feel very optimistic about the ability now to get spot cargos into the Gulf with the worldwide economic issues. As we look at the traditional landing areas in Asia and Europe. Our sense is that we're going to end up with more cargos in the Gulf. We are starting to see some activity now. I can't give you, kind of a firm estimate of how many cargos will be coming to North America and what was otherwise thought [Ph]. But I think by the end of this year, I will have a better sense of that.

[Faisel Khan:]

Great. Thanks for the time, guys.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We'll go next to Paul Patterson, Glenrock Associates.

[Paul Patterson:]

Good morning, guys. Can you hear me?

[Donald E. Felsinger:]

Hey Paul, we hear you fine.

[Paul Patterson:]

I wanted to touch base with you on an article that came out in today's [ph] press indicating that you think government's potential ownership of RBS could impact the JV, could you just sort of tell us from your perspective what you see the potential impact?

[Donald E. Felsinger:]

Let me give you some color on that. And then I'll have Mark follow through on this. But every signal that we have seen from RBS is that this is the space they still want to be in. It's such a great compliment to their banking business with all the asset they finance. But if you are referring to the fact that we're planning go out and do on equity offering and they've gone through and done with this portfolio fleet disclosures, where they may have to access in joint ventures, I think that's just what it is, a standard boiler plate language. From the standpoint of our joint venture, we have a clause in there that neither party can sell until four years out from the formation of joint venture, but I think that's kind of wrong approach to look at this. This is a business, it's in a space they want to be in. It's had a great month here that all the bankers that are out loaning money love the fact that we have the ability to hedge some of these transactions that they are doing with commodities. And we feel very upbeat about where we are. Mark?

[Mark A. Snell:]

Yes, just direct to your point on the article that you saw the quotes were actually from outside analyst, not from the people inside the bank. But what they were referring to was some JV agreements that they have, and I haven't read them all, but I know ours, have changed the control provision at the bank. So the government were to take a such a large percentage of this offering that they are doing that it triggered to change a control provision, it could cause some issues with some of their joint ventures. With respect to our joint venture in particular, it really doesn't cause any issue. The change in control provisions within our joint venture are relatively benign. It has some language around convents not to compete stuff with us, but it's really almost kind of mood point, it doesn't really matter. And the more important thing in our join venture agreement as, Don mentioned, which was the both neither side to really contemplate selling for four years. So essentially we have to be involved in that kind of the decision.

[Paul Patterson:]

Okay. So they can't not just laterally get out of the UK government as some sort of perspective as in order of the bank, some change in direction, I mean realize that that may not be a likely outcome, but just trying to get a better picture on this.

[Mark A. Snell:]

Right, they don't have a contractual right to do that. And so, I think at the end of the day, there are lot other commitments.

[Paul Patterson:]

Okay. Then with respect to Sempra Generation, and I guess... I apologize I got a little bit distracted when Lasan asked the question about the total mark-to-market impact. Don said that Sempra generation, but it's higher company as a whole, what is the non-cash mark-to-market impact? I'm sorry I didn't get the answer.

[Donald E. Felsinger:]

Hang a just second while we look at up,

[Paul Patterson:]

Okay. Whenever you get them, I'm moving on that [ph]. The other question that I finally have is on the stock buyback, there was some expectation, I believe for some of the buyback in your 2009 outlook and now it sounds like that might be held up by your... while we see what happens in the markets in general. Just I mean, if you can elaborate a little bit further, I mean you mentioned that some other company's stock prices were down and that might be opportunities. But as a last resort, you might obviously look at buying back stock, I don't know if I am quoting for data, but that's why I thought your comments were. Your stock has come down as well, obviously and what's the thought process I guess in terms of what that looks like vis-à-vis other. And also in terms of dividend growth, has that outlook changed at all since you guys were sort of a little bit more, thinking a little bit more aggressively about that earlier in the year?

[Donald E. Felsinger:]

Well, let me talk about stock buyback. It's not our last resort, I think stock buyback is something we would line up along with everything else we are doing. We have organic growth with projects we've already identified and have spending plans lined out form. When we look opportunities in the marketplace, we are seeing everybody having declining equity prices and so we have to go through and look at any of those opportunities and whether they make sense in today's debt markets. And then thirdly, we have the option to have a stock buyback. So I would line all three of those up and we will do whatever makes the most sense for our shareholders. And regarding our dividend policy, our Board has done nothing to signal any change. And they act upon this once a year. We will have a robust discussion again. But I don't expect any change.

[Paul Patterson:]

Okay, great.

[Mark A. Snell:]

Paul, this is Mark. To answer your question, we have $41 million in mark-to-market gains, $28 million in Generation, $13 million at LNG. And then of course, those are offset by the... some of the losses we have in mark-to-market at the commodities business.

[Paul Patterson:]

When we look at the cash flow statement, where do the mark-to-market gains, the non-cash gains show up. Is there any line item or are they sort of... I am just looking in general, I am having little difficulty in terms of locating where they would show up. But is it... I don't know, where are they?

[Mark A. Snell:]

They would show up in changes in working capital.

[Paul Patterson:]

Okay. So, they are all within less than a year?

[Mark A. Snell:]

Absolutely.

[Paul Patterson:]

Okay, great. I really appreciate it guys. Thank you

[Donald E. Felsinger:]

Thank you.

[Operator:]

We'll going next to Chip Moore, Canaccord Adams.

[Chip Moore:]

Thanks. Quick question on you smart meter program. You indicated earlier that San Diego Gas & Electric would start to point early next year; just wondering if that's on track with the original February timeframe?

[Donald E. Felsinger:]

It is. And let me have Debbie talk about what our next tests are?

[Debra L. Reed:]

Yes, we have... this is Debbie. We have installed 5,000 meters already and we are testing them MCL [ph]. We will begin full deployment in February of 2009 for SDG&E. And then we'll also filed for SoCalGas smart meters and we're hoping to get a regulatory approval for that in the middle of 2009. And then, we'll begin the work on the SoCalGas side. That's about $900 million of capital on the SoCalGas side if we were to get that approved.

[Chip Moore:]

All right, thank you. Appreciate the color.

[Operator:]

We'll go next to David Tameron [ph] Wachovia Capital.

[Unidentified Analyst:]

Good morning guys, thanks for the time. Just following up on the question about the JV; so there is no way for RBS to curb funding of the JV or do anything to slow it down, they are committed on to this contract for four years to fund whatever is required and to grow the businesses as you and MC said?

[Donald E. Felsinger:]

Well, Dave, I mean nothing is a guarantee unlike, RBS will do what RBS wants to do. They have a contractual arrangement with us and every signal we have seen is very positive about this business to get something that will enhance their basic thinking business. And so it's our expectation and as the expectation of all the people at RBS we interface with that they want to capitalize on the opportunities in the marketplace right now to grow this business. And we are seeing nothing to the contrary.

[Unidentified Analyst:]

Okay. So you feel like you have a full strength of their balance sheet and....

[Donald E. Felsinger:]

Yes we do.

[Unidentified Analyst:]

Okay. And I know when there was some discussions, I thought a month or so would go that there were still from contracts that hadn't been shifted over to JV. Are and those all shifted over now. Is every thing in?

[Donald E. Felsinger:]

No we've got.... we have some counterparties that reside in the U.S. and reside in Canada, and RBS is still getting regulatory approval in Canada. As soon as they have that regulatory approval, we will shift those contracts over to RBS's balance sheet. That's expected to take place around May of next year.

[Unidentified Company Representative:]

Let me add to that, David, that all of those contracts, they are all in... all of our commitments are guarantees, are indemnified by RBS. And I think the concern early on I think when there were some concerns that RBS might not survive, I think most people now expect the vast majority would believe that that's not an issue any longer with the cash infusion that's been made by the British government, so we fully expect to know that they would honor their commitments, and so we're fully indemnified by the bank.

[Unidentified Analyst:]

But that's not really an issue any more. Okay.

[Unidentified Company Representative:]

Right.

[Unidentified Analyst:]

Okay. That's helpful. All right, thanks for the time.

[Donald E. Felsinger:]

Thank you.

[Operator:]

We'll got next question from Faisel Khan with Citi.

[Faisel Khan:]

Hi guys, just a follow-up. Mark, you said there were some mark-to-market losses at the JV. Maybe you can quantify that and look at the operating income, pretax distributable income of the JV, what would the non-cash impact?

[Mark A. Snell:]

Well, Faisel, I think it's clearly we have... obviously everything is the JV, is on a mark-to-market basis.

[Faisel Khan:]

Right.

[Mark A. Snell:]

It came up of the negative earnings for the year, we must have had mark-to-market losses. But it's... so if you actually look at the table that are attached to the press releases, you'll see on the margins, we did have a large negative margin in the power book business. But other than that, the rest of our businesses were profitable.

[Faisel Khan:]

Is it fair to say that some portion of that power loss could be non-cash?

[Mark A. Snell:]

Ultimately, all of these things kind of go into cash, but they're probably non-cash at the moment. But that doesn't mean that ultimately it won't turn around. And most of this book turns around as you know in a two year period at the moment. Now some of those power fields are a little bit longer. They may go out three years or four years. But the impact is... we don't try to quantify that so much any more, because of the liquidity issue with the bank providing the liquidity. But at the end of the day, those losses will manifest themselves in cash over the next two or three years.

[Donald E. Felsinger:]

And Faisel, as I mentioned earlier, we saw a turnaround in October and actually had just one of the best Octobers we've had in the 10 years we've had this business.

[Faisel Khan:]

Has the size of the book changed at all? I know you guys don't disclose that; is there anything?

[Mark A. Snell:]

It has changed, it's gotten a little bit bigger. We've... it's been expanded a little with some of the business that we are getting on the hedging activity. It's one of the things that we talked about. That's been a real high point. But the gas... but beyond that the it's roughly the same.

[Faisel Khan:]

On the cash flow statement, can you guys just comment on how the housing and the working capital and equity earnings have been... large changes in working capital and...

[Donald E. Felsinger:]

Faisel, I am going to ask you, we're having difficulty on this. I think it's our phone system here. But could you repeat that please?

[Faisel Khan:]

Yes, sure. On the cash flow statement, for the nine months you got equity earnings of negative $228 million and changes in working capital negative 408, can you comment a little bit on how those may be reverse or change overtime?

[Donald E. Felsinger:]

Let me ask Joe Householder, see if he can make his...

[Joseph A. Householder:]

Can you hear me okay?

[Faisel Khan:]

Yes, I can hear you fine.

[Joseph A. Householder:]

The equity earnings is $228 million; that's just reversing out the equity running. $145 million of that is from RGS, $30 million from Rockies, and rest from South America. So then when that turns into cash, it comes in below. So, you'll see now, we will do wind down just below the working capital distribution for RBS. So that was the first distribution we've got after the second quarter.

[Faisel Khan:]

Okay, understood.

[Joseph A. Householder:]

Cash flow coming in. The working capital, it's kind of split up among four business units, SDG&E was $66 million of it. It's balancing account changes; SoCal was $115 million, mostly in inventory changes. $56 million [ph] of over Sempra Commodities just going away to venture, and about $90 million of it was at LNG, mostly for inventory acquiring cargos.

[Faisel Khan:]

Okay, understood

[Donald E. Felsinger:]

And Faisel, this will get a little bit more clear next year when... because we have the transaction with RBS this year.

[Faisel Khan:]

Right.

[Donald E. Felsinger:]

That kind of marks it up on the first nine months, but after we get that, the effects of that out of the system, it will be a little simpler.

[Faisel Khan:]

And the cash could distribute a partnership that the end of the year, is that right?

[Joseph A. Householder:]

It comes clearly tax distributions and then the rest around February, end of February.

[Faisel Khan:]

Okay. Understood, thanks guys.

[Donald E. Felsinger:]

Thank you.

[Operator:]

This does conclude today's question-and-answer session. At this time, I would like to turn the conference over to Mr. Felsinger for any additional and closing remarks.

[Donald E. Felsinger:]

Well, thanks to all of you for taking time out of your schedule today to join us on this call. And let me just go back and reiterate that we are extremely pleased with where we are today. We started this year out with earnings guidance of $3.65 to $3.85. We raised that to $3.80 to $4. And as we look at the next year with $4.35 to $4.60 of earnings. We feel good about that, but we've given you what we think are some of the worst case scenarios that could impact that guidance for next year. We'll have a chance to refresh this with you at the end of the quarter in our February call. And thank you again for joining us. If you have any questions, need to follow up, get a hold to Jeff, Glen, and Scott. You guys all have a great day.

[Operator:]

This concludes today's conference. We appreciate your participation. You may now disconnect. .