桑普拉能源 (SRE) 2008 Q2 法說會逐字稿

Good day. Welcome to the Sempra Energy 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.

Good afternoon. I'm Jeff Martin. We know how busy everyone is with earnings season, so we appreciate the fact you have taken the time 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 investor 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 and Joe Householder, Senior Vice President and Controller.

You will note that slide two contains our Safe Harbor Statement. Please remember that this call contains forward-looking statements that are not historical fact 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 risks, uncertainties and assumptions so future results may differ materially from those expresses on our call. These risks, 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 amounts in our presentation today are shown on a diluted basis. With that, I would now like to turn it over to Don who will begin with slide three.

Good morning. Thanks, Jeff. Thanks to each of you for joining us. Here is the format for today's call. First, Mark Snell and I will start with the financial results. And then I will update you on the status of our key business activities. 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 of $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 remainder of the year, we were increasing our guidance to a new range of $3.80 to $4 per share, a $0.15 increase over our previous guidance. Now I would like to hand it over to Mark who will take you through the business unit results beginning with slide four.

Thanks, Don. Sempra Utilities' second quarter 2008 net income increased 11% to $117 million from $105 million in the year-ago period. San Diego Gas and Electric net income for the second quarter improved to $61 million, compared with $51 million in the year ago quarter, primarily due to 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 1 of this year, earnings for the first six months of 2008 would have been approximately $42 million higher. That increase will be recognized in the third quarter.

Now let's go to slide five. 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 represent 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 segments.

Now let's move to slide six. What I 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 in 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 a stand-alone after-tax basis, well above the year ago quarter.

Now let's review how the partnership income was distributed. First, Sempra gets a 15% return on its $1.6 billion of invested capital which for the quarter equaled $60 million. After RBS receives 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. Total distributable earnings to Sempra for the quarter were $165 million.

After adjusting to U.S. GAAP and for the impact of U.S -- for the impact of taxes, Sempra's share of the joint venture equity earnings was $93 million. One quick note, over time, we expect the US GAAP adjustments to eventually go away as we complete the transition of moving certain contracts that are held at the joint venture level over to RBS.

Please move now to slide 7. Second quarter net income for our Generation business was $23 million, compared with $10 million in the same quarter in 2007. The improvement in the second quarter of 2008 was due primarily to $17 million in increased earnings from plant operations due to scheduled maintenance in associated downtime that impacted the operations in 2007.

Now please move to slide eight. In the second quarter 2008, Sempra Pipelines and Storage reported net income of $24 million, a 41% increase over the $17 million reported in 2007. The Rockies Express west pipeline which went into full service in May contributed $7 million of earnings in the quarter. Also for the first six months of 2008, net income increased to $50 million, up from $33 million for the same period of 2007. The improvement was primarily due to $12 million of earnings from Rockies Express.

Please turn to slide nine. This slide provides a summary of our business unit results. I will highlight a few points and starting with our LNG business. Sempra LNG reported a net loss of $28 million in the second quarter of 2008, compared with the net loss of $13 million in the prior period. The higher losses were primarily due to higher income tax expense related to Mexican taxes on the appreciation of the peso with respect to U.S. denominated debt. And we also had higher mark-to-market loss on our marketing agreement with RBS Sempra Commodities.

For the year, we expect this business unit to come in within our guidance of negative $40 million to negative $60 million. Under parent and other, we recorded a net loss of $22 million in the second quarter of 2008, compared with net income of $6 million in the prior year's period, primarily due to $18 million gain from an interest rate swap recorded in last year's quarter.

Please turn to slide ten. In summary, we had a strong quarter. And as Don indicated, our improved confidence for the remainder of the year allows us to increase guidance to a range $3.80 to $4 per share. Income from our California utilities increased 11% before the benefit of our general rate case decision. Our new commodities joint ventures off to a great start and we believe this demonstrates the potential for continued strong growth.

In April, we began repurchasing the first billion dollars of our common stock as part of our planned $1.5 billion repurchase program. We've had over 15 million shares delivered to us already and we expect to complete the first billion dollars in the program in the fourth quarter. Finally, we've increased our quarterly dividend 13% this year from $0.31 to $0.35 per share in accordance with our targeted 35% to 40% payout ratio. And with that, I will turn it back over to Don who will begin with slide 11.

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 cost-to-capital results in a $209 million revenue increase this year retroactive to January 1 with fixed revenue escalations in the following years averaging $95 million or just over 3% per year.

As a result of the decision, we are not affected by changes in our customer base or productivity targets and there's no earnings sharing. Both of which are important protections for shareholders and more broadly demonstrate the constructive nature of California's regulation, Particularly given the downturn in the economy. Regarding the Sunrise transmission project, we still expect the final decision by year end which will result in a 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 mega watts of solar electricity. About two-thirds of which will be utility owned with the remainder owned by third parties.

Pending commission approval, SDG&E expects to have 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 and SDG&E's territory and also announced I-Tron 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 would 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 new areas of business. At the moment, we have a pipeline of about 50 large deals pending. Many of which combine customer needs for financing with their need to hedge some form of commodity related exposure. As you will 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 consists of two business lines; a growing mid-stream business that is in the midst of a major build out of its natural gas storage facilities that should reach 57 billion cubic feet of capacity when completed and an Alabama natural gas distribution company that serves as southwest Alabama region.

This acquisition directly supports our broader natural gas strategy. Much like our role in bringing Rockies' gas to premium markets in the northeast with the Rockies Express pipeline, by expanding our gulf coast operation, this transaction allows us to better serve key markets in southeast for gas demand outpaces the national average. These new assets complement our existing operations in the region and position us for growth in the future. This transaction is expected to be slightly accretive to earnings in 2009. And depending on how natural gas markets develop, will contribute up to $0.30 per share in earnings in 2012.

Go to slide 13. This slide provides more detail of the businesses that comprise EnergySouth. EnergySouth Midstream owns 91% of Bay Gas Storage, a facility located 40 miles north of Mobile. What we fine most attractive about Bay Gas Storage is it's the eastern most storage facility on the Gulf Coast, and we believe it's the best positioned storage facility to directly serve the growing Florida market.

Currently, Bay Gas has more than 11 Bcf of working storage all of which is contracted and operational. And additional 5 Bcf is over 90% contracted and under construction with a scheduled 2010 in-service date. There are also plans to increase the facility's total capacity to 27 Bcf by the end of 2011.

Their Midstream business also owns 60% of Mississippi Hub Gas Storage. This facility has planned direct interconnections to the growing natural gas production areas in eastern Texas, Oklahoma and Arkansas. Currently the facility's first 6 Bcf of storage capacity is under construction and commitments are in place for 4 Bcf of this capacity. Operations are slated to commence in 2010. There are also plans to increase the total capacity to 30 Bcf by year-end 2015.

Sempra Energy's share of the capital cost to build out the total storage of both Bay Gas and Mississippi Hub will be between $475 million and $525 million. You will recall that we've talked about the growing importance of natural gas storage, given the combination of high prices and continued volatility in commodity markets. That's why we think this business will complement our existing Gulf portfolio.

On the utility side, Mobile Gas serves over 90,000 customers in southwest Alabama, a region that stands to benefit from strong economic development. Alabama has a constructive regulatory environment with authorized ROEs and the 13% range and mechanisms in place to minimize sales and volume risk. Overall, it's an attractive regulatory environment with a risk profile similar to what we have here in California. In short, these are great businesses that will be a nice addition to the Sempra family of companies.

Now let's move to slide 14. This slide shows EnergySouth's locations in the Gulf region. In the center, you will see EnergySouth's existing business, the Mobile Gas utility, Bay Gas Storage and Mississippi Hub Gas Storage. You can also see that they are uniquely located to capitalize on new shale producing regions in Texas, Oklahoma, and Arkansas as well as future LNG growth in the Gulf. Along with our current LNG pipeline and storage development in the region, we believe the EnergySouth acquisition helps lay the foundation for a highly profitable natural gas business in the Gulf.

Now let's move to slide 15. There has been a lot of progress in recent months on Rockies Express pipeline project. In May, we began full service on the Rockies Express west portion of the pipeline that runs from Colorado to Missouri. Approximately 1.5 Bcf per day of gas is now flowing.

We also began construction on Rockies Express east in July. We still target interim service by year-end with completion expected in the third quarter of 2009. As you may have seen, total project costs for the entire pipeline are now expected to be $5.6 billion with Sempra's share at $1.4 billion.

There had been a number of things that have gone well within this project, but the challenge of late has been around cost increases on the eastern most segment of the pipeline. These increasing cost pressurize primarily due to labor escalations and changes in our preferred route. Even with these cost increases, when Rockies express is operational, we will have around $650 million of equity invested and be receiving dividends each year of about $70 million to $80 million, an attractive return on our investment.

I think it also bears mentioning that today's high cost environment makes it more difficult for new pipeline projects to compete with Rockies Express. Early on, we were able to lock in certain costs such as steel and labor for the first half of the pipeline. That type of hedging is not available in today's cost environment. The key point is that Rockies Express or any similar pipeline couldn't be duplicated at the same price.

Moving to LNG, at our Energia Costa Azul terminal, we began commercial operations in May and started receiving revenue on half of the terminal. We also plan to start construction on $125 million nitrogen injection plant in the third quarter and expect completion by year-end 2009. In Louisiana, our Cameron receipt terminal remains on track to be completed by the end of the year.

Now let's move to slide 16. Let me close with a couple of summary comments. Very pleased with our strong financial results for the quarter and where we are for the first half of the year.

What's important to focus on is what's driving our financial performance. First, it's our California utilities, up 11% for the quarter and 12% in the first half of the year. And that excludes impact of increased revenues from the rate cases which will be retroactively applied to January 1. Secondly, it's from our pipelines and generation business. Pipelines is up over 50% in the first half with new contributions from Rockies Express. And our commodities business, producing solid growth with less risk to Sempra.

On the basis of those results and our improved outlook for the remainder of the year, we raised our 2008 earnings guidance to $3.80 to $4 per share. And with that, let me now open up the call and take any questions that any of you may have.

(OPERATOR INSTRUCTIONS.) We will take our first question with Lasan Johong with RBC Capital Markets.

Don, the EnergySouth transaction looks very compelling. I'm wondering what you will do with 93,000 customers?

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

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

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

You will operate it first, try to improve it and then maybe use that as a base to launch potentially more acquisitions?

I think you should look at everything that we are doing in the Gulf as a way to enlarge our footprint. 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 build from.

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

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

You may not have gotten to your $93 million?

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

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

I will go and start here that -- and I will let Neal talk about where we in contracting. 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 than 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.

We are setting here with full contracts at Echo, contracts at Cameron. And in total, we are getting about a 9% unlevered 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.

I don't have a lot to add to Don's comment, except to say that we are actively talking to a lot of people in the industry about capacity that we have at 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 is a little bit of a slowdown, because these plants that have taken longer to come on stream. But over the lifetime of these facilities, we think the economics are going to be basically as we thought they were originally.

Very nice.

I think the thing that we see, Lasan, that gives us encouragement is that the liquefaction coming on stream that's currently either finishing up construction or going through startup testing right now, is going to increase the world's LNG supply by about 50% toward the end of next year. This it bodes well, because a lot of this gas will be looking for a home. We believe that we have -- our terminal in Cameron when we look at its location, access to pipeline, access to storage. We think it's probably one of the better terminals in that region.

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

Remember, when we launched Rockies, it was driven by producers. Any expansion off of Rockies going into the further east will be driven by the marketplace. We have a very cost effective big pipe solution. Our competitors have a smaller pipe. I think it will 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 up with that solution. But we're still waiting for the market to decide what it wants.

Understood. Thank you.

Thank you.

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

Good afternoon.

Hi, Michael.

Excellent results. I wanted to ask two questions. First of all, wanted to gain a better understanding for the increase in guidance. Is it any specific unit is that performing stronger than expected? Or is it just overall?

I will have Mark Snell give you more detail. But we sat down a week or two ago and just took a look at all of our businesses. When we look at the fact that 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 a rate case.

We now have got closure on almost all of those items. When we look across the board, we see improved financial results or we see uncertainties being eliminated, and pipelines in our LNG business, in our utility business, and our commodities business. It was the combination of all those things that caused us to take a look at our ongoing outlook for these businesses and increase guidance.

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

This is Mark Snell. Michael, I would say that generally speaking the utilities are operating at more towards the high end of their original guidance. We took that into consideration.

The JV is performing better than we expected early out of the box. We took that into consideration. And most all of our other business units are right where we thought they would be. Actually Generation is moving a little bit ahead of where we thought they would be.

It seems like everything was firing on all cylinders and it made sense to go ahead and make some adjustments.

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

Certainly in the utilities, because the strength that we are seeing doesn't reflect yet the new revenues we will get from the rate case. 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 at a particular time. We think certainly the bulk of our income there comes from the DWR contract and so we will have that next year into '09 and '10.

Got you. Excellent. Just one more follow up. Specifically on the power and gas units of the trading business that have performed particularly well. I understand you have your hands tied a little as to what you can say. Was it directional best? Was is 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 more money this quarter?

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

And this may be a little premature, we all know that in Q3 some of the commodities have retreated. Would you be able to make us feel comfortable that Q3 is still -- nothing has happened to make you worry about Q3 or Q4?

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. We took that into consideration when we raised guidance.

Understandable. Excellent. Thank you very much. Congratulations again.

Thank you.

Our next question comes from Faisel Khan with Citi.

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

Let me have Mark Snell address that.

Some of them are longer term than 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 deals, because that's typically how long the banks -- they are lending money to a company on say a five-year maturity for a bank lending operation. We're hedging against that.

Got you.

Neal, Mark and I attended the first Board meeting of this venture a couple of months ago. I was laughing at David [Messer] who runs the business now, because he said that RBS had been dragging him around the world on an airplane, introducing him to all their customers. We are talking about we have 50 large deals in the pipeline, these are really deals that RBS is introducing Sempra commodities to as a new arrow in their quiver they didn't have before. They are out there making sure their customers are aware they now have this commodity hedging opportunity.

If I'm looking at the way you get down to the equity earnings from that business, the US GAAP conversion impact. Is the distributable income that's an IFRS basis, is that similar to what you guys used to report previously on the real earnings?

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 and storage capacity to market. That's really the big differences.

That makes sense. On the REX, previously Sempra commodities that contracted for capacity on REX, where does that capacity sit within the firm?

It actually -- it's reported the results of it we report in the commodities business. In the commodities segment. It's actually managed here in San Diego.

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

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 a trading type of activity that we report it with commodities, but we actually manage it here and it's not shared.

If the differential between the Rockies and say the Ohio region is much wider than your [tera] in theory that would be an economic benefit?

That's absolutely right.

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

That was competitive.

And on the Sunrise transmission line, you are saying now you are looking at approval for the entire line by year-end? When is the environmental approval slated to be completed by?

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

The Sunrise power link we're still looking at approval in the fourth quarter of this year. It would be in service in 2011 if we received approval then. As you recall, we have had numerous hearings on this line. We're 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. The first opportunity for the commission to vote is about November 21. That is what we will be looking at.

What's the estimate of the project cost now on that line?

The estimated cost is about $1.5 billion without mitigation. Whatever the CPC might order in mitigation may change that cost. But our estimates about $1.5 billion.

Have you got made any preparations for major component costs?

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

Okay. Understood. Thanks for the time.

Thanks.

We will take our next question from Paul Patterson from Glenrock Associates.

Good morning, guys.

Hi, Paul.

How are you doing?

Good, thanks.

I'm sorry if I 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 all that stuff. I can't find it. Is it somewhere in the appendix or something?

Are talking about the tenure of the contracts?

Yes. The time that they become realized and turned into cash. I wasn't able to find it on this -- easily find it on the news release.

Because it's not there.

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

That's correct.

Okay. That's because RBS doesn't want to provide it?

We are providing everything that RBS is providing.

Okay. As far as the distributable cash, was it distributed to you guys? Is it still at the -- ?

Here is Mark Snell on that.

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

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

Because this is now an equity investment, we are still talking with RBS about what kind of disclosures we are going to make. This was our first attempt here to give people what we think they need to model the business adequately. We have a fairly good breakdown of how the JV income is allocated between the partners. Then 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.

Okay. I thought you did a great job before with that and I will miss it. But I understand you have a JV now and it's a little different.

We are -- what we are trying to do is 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. We have to be cognizant of the fact here we have a majority partner who doesn't give out that detailed information even on the bank. We have to appreciate that.

I appreciate it. Thanks a lot, guys.

Thank you.

We will take our next question from Mike Lapides with Goldman Sachs.

I have a favor to ask. Can you summarize the changes in your long-term capital spending plan that have occurred since your analyst day meeting? Meaning the solar is a good example. Obviously, EnergySouth is a good sample. I don't know if I'm missing anything else.

If I look at our capital spending, we gave you guidance that we were going to spend about $2.1 billion this year. Then over the remaining four years, I think we are averaging about $2.3 billion or $2.4 billion a year. We aren't changing that.

This transaction, we did for EnergySouth, will in essence fill a void that we had because we aren't doing [cotocton]. When we look at the solar program being done by our utility, we had some other unidentified projects where we had place-holder dollars for. I think in general, we are comfortable with the numbers that we gave you several months ago.

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 have progress on the Smart Meters at SoCalGas and any other thing that we see that is going to come to fruition.

Michael, it's Mark Snell. Let me 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 bonds during that -- the auction rate note debacle that all of the companies were going through. We redeemed those bonds and are reissuing similar types of bonds later on this year. That will be an in-and-out, but may be throwing your number off because it's $400 million.

Got it. One other question and little unrelated, but thinking about it for Generation, opportunities for solar development. Can you talk a little bit about 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?

Neal, you want to talk about this?

Sempra Generation is actively involved in developing solar projects next to their facilities in Nevada and in Arizona. They have announced they will 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 stand-point to add several hundred megawatts of solar capacity around the Nevada facility and in Arizona over time. In terms of contracting, the intent is to fit into the various RFDs that all of the utilities in the region have.

You are making make this decision on the first 10 megawatts to build without having actually having the contract on the other side? Is this just a test run?

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

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 wanted to go ahead and get some experience on what it costs to build these. How they operate. This $40 million, 10-megawatt announcement that we have -- I think based upon 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.

Got it. Thank you, guys. Congrats on a good quarter.

We will take our next question from Sam Brothwell with Wachovia.

Couple 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?

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

It's Mark. It did. I would think about it this way. Our operational earnings for the quarter were 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 that Mexican tax piece that hit our pipeline business and LNG business. And those are one-time unusual things. If you take those out of it, operationally we were right at about where we were for the quarter. 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. That's why we increased the guidance.

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

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

Hello, folks. First question is on EnergySouth. The range that you have of basically breakeven on in 2009, and then up to $0.30. What determines how that would play out? I know it's the timing of the development of storage. How much more -- just what progression are you looking at?

For 2009, we -- remember, we don't close this transaction until November, maybe December. 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. 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 that income in 2012. By 2012, how much storage would have to be developed to get to that? That's building out essentially all the storage that we have that is identified. I don't know if it's in your chart or not.

It's got $0.27 Bs by 2011 for Bay Gas. But Mississippi Hub is up to $0.30 by 2015. How much is the Mississippi Hub would be developed?

Of the 57, we're acquiring about 40 of it. About 40 Bcf of new storage in operation in 2012.

And what determines whether or not you develop it? Just demand?

It's like everything else we do. We will lay out a plan for that area. We will go out and talk to customers. If we can get enough contracts signed up at the right place and right price to launch, we will. This will be no different.

Okay.

We are seeing really strong interest right now. As you noticed, we have about 20 Bs contracted. 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.

Thank you. On the commodities business, you said you had 50 large deals pending. For frame of reference, what was it like a year ago at this time? How many large deals did you have pending?

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

Okay. All this is incremental. For going forward, you have three months under your belt with the JV. What are you seeing so far in July is -- it's tremendous performance for just three months under a JV. Are you seeing continued momentum going into July and August?

One month or three months don't make a business. Markets are fairly volatile. We do have confidence looking to 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.

Okay. Thank you.

Thanks, Becca.

We will take our next question from Ashar Khan with SAC Capital.

I have 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 will be $84 million?

Could, about you would be wrong.

Could you tell us what is happening in the second half?

Let's me have Debbie just walk you through how to think about that.

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

Well, let me try to address your first question which was the $42 million. The $42 million reflects the adjustment for the first half of the year. We will have additional revenues of $209 million split between the two utilities. Of course, we do have additional costs. We have been operating under our 2007 authorized margin -- is what we were recording for the first half of the year.

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. 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.

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

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

Okay. Thank you very much.

Thanks.

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

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. Since that is now a majority owned by somebody else, how do you structure the integration and the benefit from the two coming together?

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

Do you charge the JV a fixed fee for utilizing the space like you would any other third parties?

We have partners in these projects. We can't do anything that's -- that is favorable to our own affiliate.

Sure. 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?

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

Has the environment changed to favor that analysis?

I would say so. You look at -- there are fewer people in the marketplace today. There are fewer people that can do deals. Being financially strong as we are, I think that if we saw a deal that we wanted to do -- that I would have more confidence we could get it done.

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

Yes. Let me ask Debbie to address that.

On the electric side, we are continuing to see peak load growth of about 1.5% to 2% per year and sales growth of about 1.5% per year on a 12-months running average. We were not seeing much in that regard at all.

Interesting. What about the gas side? SoCalGas and Electric?

On the SoCalGas side, we were 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.

Interesting. Thank you.

Thanks.

We will take our next question from Annie Stile with Alliance Bernstein.

Good afternoon. Just wondering in terms -- in your commodity sector. For 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.

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

Yes.

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

Generally speaking, through the second quarter -- for the amount of liquidity and activity was pretty good. We had a fairly rapidly rising commodity market. I think there was -- again, we tend to deal more in the physical side of the business. 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.

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

How many millions left?

About $200 million.

I don't --

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

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

Okay. And lastly, the Sempra utilities, you have about $4 million benefit from the San Diego Gas and Electric from lower tax rate. What tax rate should we assume going forward?

Joe Householder, will you take that?

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

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

No. I think I said earlier if you missed it that we expect our CapEx to be what we forecasted for the year.

Okay. Thank you.

We will take our next question from Faisel Khan with Citi.

Just curious, the supreme court came back on the western contracts issue. And looks like they [remanded] some issues back to the FERC -- upheld Mobile Sierra. Is there any impact to you guys over the next six to 12 months in terms -- ?

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

Okay. Thanks, guys.

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

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

You are fading out.

Can you hear me better now?

Yes.

Wondering what the tax -- lower tax rate was at the utility company. What drove that and what will the tax rate be going forward for the rest of the year?

What drove the lower tax rate at the utility?

Yes.

Joe Householder again.

What was really driving it in the quarter is we have additional software expense which flows right through to the rates. We get to immediately deduct that and that flows through the rate in the rate making.

Okay. Will this continue throughout the rest of the year?

Yes. That's the projection for the year. It's actually driving the effective rate down for the year. It's blended in.

The 36% is for the entire year.

Okay. Fair enough. And then on the -- at the commodities level, can you just go over that second fluid on slide five, the $67 million gain? What was driving that or what drove that? And then what the offset was on the litigation and tax matters?

Let's grab the slide here. Slide five commodities.

Yes.

You have that, Mark Snell?

Hold on. He's talking about the gain?

Yes.

Well, maybe there is some surprise, because we have basically signaled that we sold the business or half of the business to RBS at book. Maybe the fact that we are having a gain surprises some people. I think generally speaking, we did sell it at book. 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 US 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. We didn't really recognize the fill gain on that, but we recognized half of it.

And then there was some other items, too, that -- things like their building and other assets that we mark-to-market. That was really the differences. It didn't amount to that much, but it was significant.

Can you talk a little bit about the litigation and tax matters? What was that -- ?

Litigation was just an additional reserve that we took on litigation that we indemnified 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 bumped those up as part of the close.

The other things were the tax matters was -- it was a UK tax expense. We lost a case in the UK equivalent of tax court and so we made an accrual for that.

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

We are hoping that by the end of this year, we will have novated all of the significant agreements over to the bank. 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 a fee for managing them exactly equal to the IFRS or the international accounting standards profit on those contracts. And that will eliminate the GAAP adjustment.

Thank you.

Thank you.

We will take our next question from [Obirus Tophill] with Banc of America Securities.

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

The project team, led by Kinder, went through by 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. As we look at those environmental conditions and 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.

Okay. Great. Everything else I had has been answered.

Thank you.

We will take our next question from Manuel Garcia with Banc of America Securities.

Let's go to Sam.

We will go back to Sam Brothwell with Wachovia.

You had mentioned some charges in the LNG segment that appeared close to formation of the JV. Can you elaborate on that just a little bit and how we should think about it?

I'm sorry. I couldn't hear you very well. You were faded out. Could you get closer to the phone?

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

I'm not sure exactly. Maybe there is a little bit of a misunderstanding. We had some charges in the LNG segment that related to the Mexican taxes.

What those are -- we have US dollar denominated debt in Mexico. Under the Mexican tax law, if the peso appreciates, the amount of pesos required to pay down the debt is reduced. Therefore, we have a gain and we pax tax on that gain. 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.

I thought I heard you say something about the JV. My apologies.

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

That's just something in the prior structure that would have netted out?

It would have eliminated intercompany-wide. It doesn't eliminate now. It's been there every quarter. That one we don't really consider -- 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 turn around as we start to sell the product. It's basically represents a part of the marketing fee.

Appreciate your patience.

Thank you.

We have no additional questions. I would like to turn the call back Don Felsinger for any closing remarks.

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 ahold of Jeff, Glen or Scott. Thanks. Have a great day.

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