桑普拉能源 (SRE) 2008 Q3 法說會逐字稿

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.

Good morning. I'm Jeff Martin. I want to thank each of you for joining us. I know it's a busy time that many of you are actually traveling or attending the [EEF] conference in Phoenix. This morning, we will be discussing our third quarter 2008 financial results. A live webcast with slide presentations is available at 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 our utilities, and Joe Householder, Senior Vice President and Controller.

You'll note that slide two 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 Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guaranteed the performance. As you know, they involve risks, uncertainties and assumptions, but future results may differ materially from those expressed on our calls. These risks, uncertainties and exceptions are described at the bottom of today's press release and are further discussed with the reports filed with the Securities and Exchange Commission. It's also important to note that all of the earnings per share amount in our presentation today are shown on a diluted basis. And with that, I'd now like to turn it over to Don who will begin with slide three.

Thanks, Jeff. And again, thanks to each of you for joining us. Here's the format for today's call. Mark Snell and I will start with the financial results. Then I'll 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 count 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 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 four.

Thanks, Don. At San Diego Gas and Electric, net income for the third quarter was $123 million, which is the same as the year ago quarter, but if you note the items listed on slide four, you'll see that SDG&E benefited from $19 million in higher authorized margin in Q3 2008, a direct result of our California and FERC rate cases. Now, please turn to slide five. At 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 a 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 six. 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 require 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 reported 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 hubs as a 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 seven where we'll 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 to 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 our preferred return for the year that were booked last quarter since we make these calculations on an annual basis. After adjusting to US 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 $195 million after tax. Sempra's after tax share of the earnings since April 1st is $90 million.

Please move to slide eight. 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 in higher mark to market earnings and $8 million in lower income tax expense as a result of Sempra Generation's recent solar investments. Please move to slide nine. Sempra pipelines and storage net income in the third quarter of 2008 doubled to $34 million, compared with $17 million in the same period in 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 $50 million 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 units' results. One point of interest here is that Sempra LNG reported net income of $4 million in the third quarter of 2008 compared with a net loss of $4 million in the prior year. The increase of 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 we'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 31, we had $2.5 billion of cash in availability under our committed bank lines. We have three committed credit facilities with total commitments of $4.3 million from a group of 19 banks. These are multi-year credit lines that 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 results in a net funding requirement and 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 remain closed for holding companies and nonutilities through 2009, a highly likely outcome -- highly unlikely outcome, excuse me, we would 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 issue no debt outside of our utilities. This is highly unlikely.

We are well positioned to make it 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're 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, SoCal Gas as well as our generation pipelines and LNG businesses all performed as well. Results were poor at commodities, but we don't expect a 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 regard 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 a view towards making a decision on a follow on share repurchase when the debt markets return to normal.

Turning to the economy and its impact. Sempra, like all companies, is being affected by the current worldwide economic crisis. The debt markets are expensive at best and closed entirely in some cases. Higher borrowing costs, coupled with very low natural gas price, which effect profitability of Sempra Generation and Sempra LNG, could, if they remain unchanged, affect our profitability in 2009. Additionally, given the uncertainty of commodity markets and the lack of bank borrowings for energy infrastructure which impact related hedging activity, growth at RBS Sempra Commodities could be dampened.

At our analyst conference, we provided 2009 earning 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 triple B 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 at our commodities JV is not as 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 could impact us by as much as $0.20. Since we're not quantifying any particular upsides, we're not changing our guidance at this time. We're just pointing out the limited range of down side that could impact our earnings due to the extraordinary economic environment we're experiencing. And with that, I'd like to turn it back over to Don who will begin with slide 15.

Thanks. Mark just covered some of the considerations that could put pressure on our results in 2009. But 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 of interest rates as lending activity returning to more normal levels. I'm also very optimistic about our commodities segment. It looks like this past October will be one of our best months ever with improved business activity and margins across all business lines. At a longer term, when you consider RBSs 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 over time. Also, our two utilities just posted their best quarter ever with $200 million in income, so I think there's positives 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 generate cases for SDG&E and SoCal Gas. 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 certainty through 2011 with fixed revenue increases in each year.

Turning to our smart meter programs, at SDG&E, we'll begin our full-scale installations early next year and at SoCal Gas we filed for a 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 begin 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 31, the commission issued two draft decisions, one by the administrative law judge and one by the assigned commissioner. Even though the proposed decision issued by the administrative law judge in the proceeding recommended new generation for the San Diego region, we believe that the commission will ultimately approve some variation of the recommendation made in the alternative decision by the assigned commissioner. A transmission line that takes a more southerly route than 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 mitigation 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 recently completed or have under development, our LNG and pipelines and storage businesses. We completed the Energia Costa Azul terminal earlier this year as well as the expansion of the Baja Norte pipeline which connects to the facility. We've also started construction on a nitrogen facility at the terminal. We're 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 subsurface issues that have delayed completion. We'll now evaluating whether we will be able to correct these issues. If not, we may be required to take an impairment charge of approximately $65 million after tax for 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 into service in the first half of next year. Since we can develop three other salt domes in the Gulf if we can't place Liberty into 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, Bay Gas storage is currently operating with a fully contracted capacity of over 11 BCF. An additional five 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 BCF storage capacity is under construction and commitments are under place for four BCF. Operations are slated to commence in 2010. There are also plans to increase the total capacity at Mississippi hub to 30 BCF by year end 2015. Sempra's ownership interest in the project is 60%. Sempra's share of the capital costs 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're experiencing higher costs than we'd originally forecast for the eastern leg of that pipeline, mostly around labor and some of the work around 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 where we are 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 regulation 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 favor long contracts like you see in our natural gas infrastructure businesses, since this provides our shareholders with certainties of cash flows. Lastly, on the commodities front, we took a proactive approach that placed us in a limited partnership position where our equity is capped and we bear no liquidity risk. These are the type of things that help 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.

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Lasan Johong with RBC Capital Markets.

Yes, good morning.

Good morning.

Don, Mark, I'm a little confused about the commodities business. I would suspect that with competitors dropping off like flies and volatility increasing that it ought to be performing --

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

Okay. Is this better?

That's much better.

Okay. With competitors dropping off like flies and the volatility of gas prices swinging like an ape from branch to branch, how is it that the commodities didn't do well in the third quarter? What could be the -- how did the loss get created?

Well, I would just 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 at northwest where we had very little liquidity and in the process of rebalancing our position, we ended up taking a loss in a power book in that region.

Could we categorize that as a very unusual situation, something that is not likely to reoccur very frequently?

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

Okay. But going forward, then, can we make a conjecture that even though volumes may stabilize or even come down, your margins are to increase straight across the --

Lasan, back to that point, I'm just -- I have never been as excited about the commodity business as time 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 a financial and a physical player, this is the space we want to be in right now. We just had a great month in October.

Excellent. Excellent. Don, this is the kind of situation with the national economy when Sempra seems to be able to pull some interesting acquisition moves and take advantage of some of the discombobulation in the marketplace. Kind of give a sense of what you're thinking about in terms of valuations and assets and the acquisition market, if you would.

Well, I would just say from a growth perspective that, as I just went through a rundown, we have a lot of capital projects that we're either in the final throws of completing or about to launch. And so a lot of organic growth. From the standpoint of the marketplace, there's 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 in, just go back and look at what we did with EnergySouth and I think that would kind of project to you the kind of assets we're looking for, something in the natural gas base that plays to the line of infrastructure we want to be in. So I think we're well positioned with organic growth, acquisition opportunities and, as Mark mentioned, we have always as a back stop have the ability to go back and buy back shares when the market looks favorable.

Mark, can you give us an update on what the mark to market -- noncash mark to market adjustments were for the third quarter?

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

I'm sorry, third quarter, noncash, mark to market adjustments?

Third quarter noncash mark to market adjustments.

In which business? In generation?

Straight across the board for the generation, for commodities, for whatever, LNG.

Lasan, what we saw was the inverse of that at the commodities business. Both at generation and LNG, we have some hedges in place and those hedges came vastly into the money as commodity prices dropped and that's why we had some pickups across the board there.

Okay. Thank you very much.

Thanks, Lasan.

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

Good morning.

Good morning.

I guess we've been over the years grown accustomed to excellent operations from Sempra. I guess it's a little surprising to hear about your difficulties with storage. Can you expand a little as to what exactly the issue is, why it was unforeseen and what there remains to be figured out, as to whether it's going to be a write off or whether you can actually put it in service?

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 had been mined for other purposes. So in the process of doing subsurface 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 potential solution, we haven't given up on those, but as we mentioned, if, in fact, we do have to walk away from these facility, our share of the writedown would be about $60 million, $65 million, but that is dependent upon getting some more information. The positive thing here, Michael, is that we do not need this 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 --

I would just underline what you just said about how good the future of this business looks with the opportunity we have at Liberty South and with the recent acquisition, but to get to your very -- the question about the caverns in question, the fundamental issue there is that we have 13 3/8-inch casing through a hole that we drilled in one of the caverns and have been unable to get the right pressure test at the shoe of the casing. What we're looking at now is running another casing through that, cementing the new 10 3/4-inch casing and try in effect to seal it that way. We don't have a lot of space in the well [boar] to do that and we also have to make a judgment around whether or not long term in the injection withdrawal cycle we think that will be a satisfactory solution, and what we're doing now is engineering studies and studies of the caverns around those issues and we should have it sorted out before the end of the fourth quarter.

But the lesson here is this, this is one of those facilities where we went in and tried to take a preexisting cavern and make it capable of holding high pressure natural gas. In the other projects we have in the region, we are going to go into a salt dome and mine our own caverns. And so we will have much more confidence in the integrity of the caverns. And the lesson here is, don't go buying a cavern that was used for something else and try and think you can store gas in it.

Got it. One more question is about the Rex pipeline. When you said the new cost of $6 billion, which leg -- can you just clarify which leg the $6 billion is for, whether it's Rex east or the additional leg of Rex further east?

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 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.

But that's through a higher, right, it has nothing do with the proposed pipeline --

Right. This is existing pipeline through Ohio.

Got it. Okay. That's what I wanted to make sure.

Thanks very much.

We'll go next to Faisel Khan with Citi.

Good morning.

Hey, Faisel

Hey. Just to clarify on the Liberty Gas storage, can you quantify the size of the cavern relative to the side of the liberty gas storage project?

The two caverns were 17 BCF.

And the cavern that could be impaired is how large?

11, I believe.

11 of the 17 BCFs could be impaired?

Potentially the full 17. That's what we're 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.

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

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

Okay. Got you. It would still follow the same -- the FERC transmission rules in terms of getting cash return on quick. Is that right?

That's correct.

Okay. And you said the -- sorry, the cost of the project now would be roughly $1.9 billion, is that what you're estimating?

This route is a little more expensive and so we're looking at another couple of hundred million dollars.

Okay. Understood. And I wonder if you could give us a little bit of an update on the LNG market. I know for the last year the number of cargos coming to the US is pretty slim. Given the economic condition around the world, I wonder if you can update us on if there's any change in the projected amount of volumes that might be coming into the US at any point in time?

It is amazing how quickly the world market changes in a three-month period. But we actually feel very optimistic about the ability now to get spot cargos into the Gulf with the worldwide economic issue. 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're 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 than what was otherwise thought, but I think by the end of this year, we'll have a better sense of that.

Great. Thanks for the time, guys.

Thank you.

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

Good morning, guys. Can you hear me?

Hey, Paul, we can hear you fine.

I want to touch base with you on an article that came out in the British press, indicating that the UK 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 being?

Well, let me give you some color, 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 that they still want to be in. It's such a great compliment to their banking business with all the assets they finance. But if you're referring to the fact that they're getting ready to go out and do an equity offering and they've gone through and done one of these boilerplate disclosures where they may have to exit some joint ventures, I think that's just what it is, it's standard boilerplate 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 the joint venture. But I think that's kind of the wrong approach to look at this. This is a business that it's in a space they want to be in, it's had a great month here. All the bankers that are out loaning money love the fact that we have the ability to hedge some of these transactions that they're doing with commodities and we feel very upbeat about where we are. Mark?

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

Okay. So they can't just unilaterally get out if the UK government has some sort of perspective as an owner of the bank, some change in direction or -- I mean I realize that that may not be a likely outcome, but just to try to get a better picture on this.

Right. They don't have a contractual right to do that. And so I think at the end of the day, they'll honor their commitments.

Okay. Then with respect to Sempra Generation, and I guess you -- I didn't -- I apologize, I got a little bit distracted when Lasan asked the question about the total mark to market impact. Not just the Sempra Generation, but the entire company as a whole, what is the noncash mark to market impact? I'm sorry, I didn't get the answer.

Let's see here.

Hang on just a second, we have to add them up.

Whenever you get a moment on that. The other question that I finally have is on the stock buy back, there was some expectation, I believe, for some of the buy back in your 2009 outlook and now it sounds like that might be held up while you're -- while we see what happens in the markets in general. Just, I mean if you could elaborate a little bit further. I mean you mentioned that some other company's stock prices were down and that might be some opportunities, but as a last resort, you might obviously look at buying back stock. I don't know if I'm quoting you verbatim, but that's what 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-a-vis others? 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?

Well, let me talk about stock buy back. It's not a last resort. I think stock buy back is something we would line up along with everything else we're doing. We have organic growth with projects we've already identified and have spending plans lined out for them. When we look at opportunities in the marketplace, we're 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 opportunity to have a stock buy back. 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.

Great.

Paul, this is Mark. The answer to your question, we had about $41 million in mark to market gains, $28 million in generation, $13 million at LNG, and then, of course, those are offset by some of the losses we had in mark to market at the commodities business.

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

They would show up in changes in working capital.

So they're all within less than a year?

Absolutely.

Okay. Great. I really appreciate it, guys, thank you.

Thank you.

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

Thanks. Quick question on your smart meter program. You indicated earlier that San Diego Gas & Electric would start to pull in early next year. I'm just wondering if that's still on track with the original February time frame.

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

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

All right. Thank you. I appreciate the color.

We'll go next to David Grumhaus, Copia Capital.

Good morning, guys, thanks for the time. Just following up on the question about the JV. So there's no way for RBS to curb funding of the JV or do anything to slow it down, they're committed under this contract for four years to fund whatever is required and to grow the business as you and them see fit?

Well, Dave, nothing is a guarantee in life. 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. It's something that will enhance their basic banking business, and so it's our expectation and it's 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're seeing nothing to the contrary.

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

Yes, we do.

Okay. And I know when there was some discussion I thought a month or so ago that there were still some contracts that hadn't been shifted over to the JV, are those all shifted over? Is everything in?

No. We've got some -- we had some counterparties that reside in the US 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.

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

So that is not really an issue anymore.

Right.

We'll go next to Faisel Khan with Citi.

Hi, guys, just a follow up. Mark, you said there were some mark to market losses at the JV. Is there any way you can quantify that? Look at the operating income pretox, pretax distributable income of the JV, what were -- was it a noncash impact?

Faisel, it's clear that everything at the JV is on a mark to market basis.

Right.

If we came up for a negative earning force the year, we must have had mark to market losses, but it's -- so if you actually look at the tables that are attached to the press releases, you'll see in 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.

So is it -- I mean is it fair to say that some portion of that power loss would be noncash?

Well, ultimately all of these things kind of go into cash, but they're probably noncash at the moment. But that doesn't mean that ultimately that they 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 deals are a little bit longer. They may go up three years or four years, but the impact is -- I don't -- we don't try to quantify that so much anymore 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.

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

Has the size of the book changed at all? I know you guys don't disclose that anymore, but are there any --

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

On the cash flow statement, can you guys just comment on how the timing of the working capital and equity earnings -- there appears to be large changes on the working capital --

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

Sure. On the cash flow statement for the nine months, you got equity earnings of negative [$228 million] and changes in working capital of negative [$408 million]. Can you comment a little bit on how those -- on how those maybe reverse or change over time?

Let me have Joe Householder see if he can make --

Can you hear me okay?

Yes. I can hear you fine.

The equity earnings of $228 million, that's just reversing out the equity earnings. $145 million of that is from RBS, $30 million from Rockies and the rest from South America. So then when that turns into cash, it comes in below. So you'll see now we have a new line down there just below the working capital, distribution from RBS. So that was the first distribution we got after the second quarter.

Okay. Understood.

That's where we'll have cash flow coming in. The working capital, it's kind of split up among four business units, SDG&E was $66 million of it, just balancing account changes, SoCal was under $115 million, mostly inventory changes, $66 million of it was Sempra commodities that is going away in the venture and about $90 million of it was at LNG, mostly for inventory and acquiring cargos.

Okay. Understood.

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

Right.

It kind of mucks 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.

And the cash gets distributed for the partnership at the end of the year. Is that right?

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

Okay. Understood. Thanks, guys.

Thank you.

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

Thanks to all of you for taking time out of your schedule today to join us on this call. Let me just go back and reiterate that we're extremely pleased with where we are today. We started this year out with earnings guidance of $3.65 to $3.85. We raised that $3.80 to $4. As we look next year with $4.35 to $4.60 of earnings, we feel good about that, but we have 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 follow-up, get a hold of Jeff, Glenn or Scott. You guys all have a great day.

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