桑普拉能源 (SRE) 2009 Q1 法說會逐字稿

Good day everyone and welcome to the Sempra Energy first quarter 2009 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.

Thank you and good morning. I know there are many of you who are traveling or attending the AGA Conference. I want to thank each of you for joining us, particularly if you're setting aside time to step out of your meeting schedule. This morning we'll be discussing Sempra Energy's first quarter 2009 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, our 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 that this call contains forward-looking statements that are not historical facts and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance, as you know. They involve risk, uncertainties and assumptions so future results may differ materially from those expressed on our call today. 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 also important to note that all of the earnings per share amounts in our presentation this morning 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, thank you all for joining us. We met with many of you in March at our analyst conference in New York where we laid out a plan to continue growing our Company. It's a testament to our business model where we are able to grow our profits under a variety of different market conditions, especially in a tough operating environment like we're currently in. And, as today's financial results show, we're off to a great start, putting us in a position to meet our financial goals for the year. 2009 is important. As many of you know we've invested heavily in our infrastructure businesses over the last several years. And now, several major projects including our Cameron LNG receipt terminal and the Rockies Express East Pipeline are nearing completion. We're also continuing to ramp up investments in our utility businesses where we benefit from constructive regulation and earn on those investments during construction.

Now to the financial results. Earlier this morning we reported first quarter earnings of $316 million or $1.29 per share, up from first quarter 2008 earnings of $242 million or $0.92 per share, a 40% increase in quarterly earnings per share.

Now let me hand it over to Mark Snell. He'll take you through some of the details of the financial results, beginning with slide four.

Thanks, Don. Before I get into the results of each of our business units, I wanted to quickly point out an accounting change that occurred this quarter. You may have noticed that Don referred to earnings on the previous slide and not net income like we have in the past. That's because of a new accounting rule, FAS 160, which changes where we report minority interest. With this change, the minority interest adjustment, now called earnings attributable to non-controlling interest, is moved below the net income line. So our bottom line results will now be referred to as earnings. The key take-away here is that there's no impact on our reported results.

Now let's go to slide five. At both of our utilities, we saw improved earnings primarily due to the positive impact of our general rate case decisions that were approved in the third quarter of 2008. At San Diego Gas and Electric, earnings for the first quarter were $99 million, up from earnings of $74 million in the year ago quarter. First quarter 2009 results benefited from $24 million of higher operating margin, as a result of the rate case mentioned just a moment ago, and $5 million from the favorable resolution of a litigation matter. In addition, first quarter 2008 results did include a $9 million benefit from the favorable resolution of prior year's tax issues. At Southern California Gas, first quarter 2009 earnings were $59 million, compared with $57 million in the first quarter of '08.

I'd like to call your attention to two new line items on our balance sheet relating to the fire litigation at SDG&E. One's an insurance receivable and the other's a reserve for wildfire litigation, both for $900 million. We're in negotiations with substantially all of the homeowners' insurance carriers. While many details still need to be worked out, the advanced nature of our discussions led us to conclude that we could reasonably estimate the cost of this settlement and as a result, we recorded that estimate. The accounting rules require the estimated settlement be grossed up, recognizing both the liability and the asset. While we believe the homeowners' insurance carriers represent the lion's share of the property losses, there are, of course, a variety of other claims that may take several years to be fully resolved. At this time, SDG&E doesn't have sufficient information to reasonably estimate the amount of its exposure to the remaining claims. That's why we haven't booked any reserves for them.

However, I would note that if we are successful in this settlement, we still have $200 million of coverage for any remaining claims. In addition, we have significant claims against Cox Communications for damages caused by one of the fires and, of course, if our liability insurance and other recoveries should prove insufficient, we would ask our regulators for recovery of the excess cost.

On a related issue, I want to note that our insurance premiums for wildfire coverage will substantially increase in the second half of the year when our current policies expire. The amount of coverage that we can obtain will be substantially reduced, as well. This is a broader issue for the rest of the state as the other utilities are also seeing similar cost and coverage issues. We've been discussing this with CPUC representatives and SDG&E will file a request to have any higher premiums included in rates.

Now let's go to slide six. Sempra Commodities earnings in the first quarter of 2009 nearly doubled to $114 million from $59 million in the prior year's quarter. The joint venture saw improved results in natural gas and oil marketing, as well as good performance in metals and power. The first quarter 2008 results benefited from Sempra Energy's 100% ownership of the Commodities business, offset by the negative impact of a $17 million credit reserve.

Now let's move to slide seven. Here we show how income is allocated at the joint venture for the quarter. A couple of highlights. First, the joint venture had income of $154 million during the quarter. After applying the income allocation methodology, the distributable income to Sempra was $114 million. After adjusting to US GAAP and taking into account the impact of income taxes, Sempra's joint venture equity earnings for the quarter were $116 million. After some small holding company costs, earnings for this segment were $114 million.

Please move to slide eight. First quarter earnings for our Generation business were $43 million, compared with $45 million in the same quarter in 2008. First quarter 2009 earnings were impacted $9 million from higher scheduled maintenance and the associated down time. This was offset by $8 million of lower income tax expense related to planned solar investments and Mexican currency adjustments.

Now, please move to slide nine. Sempra Pipelines and Storage earnings in the first quarter of 2009 were $37 million, up over 40% from the $26 million recorded in the same period in 2008. Mexican pipeline operations saw $9 million in higher earnings, compared with the same quarter in 2008. The increase was primarily due to earnings from LNG related pipeline contracts. Mobile Gas, which was acquired late last year, contributed $6 million in incremental earnings. Due to their rate structure, the first quarter is typically the highest earning quarter for Mobile Gas, due to home heating demand. Pipelines and Storage results were negatively impacted $7 million in the quarter from foreign currency exchange rate effects, primarily on investments in Chile.

Now let's please turn to slide 10. This slide provides a summary of our business unit results. I'd like to highlight a couple of things here. Sempra LNG recorded a loss of $7 million in the first quarter of 2009. That compares with a loss of $9 million in the prior year. At Parent and Other, we recorded a loss of $29 million in the first quarter, compared with a loss of $10 million in the same quarter in 2008. The increase in loss was primarily due to $14 million in higher aftertax interest expense and $8 million in losses on assets in support of non-qualified retirement plans and deferred compensation programs.

Please turn to slide 11. We're really pleased with our financial results. Earnings per share for the first quarter of 2009 were up 40% over 2008 results. We have ample liquidity, enhanced by strong cash flows, which included receiving a $300 million distribution from RBS Sempra Commodities during the first quarter. In the first quarter we increased our dividend over 11% in accordance with our previously announced dividend policy.

And with that, I'd like to turn it back over to Don who will begin with slide 12.

Thanks, Mark. You now let me update you on some of our business activities, starting with our utilities. In the first quarter, we continued our preconstruction activities for the Sunrise Powerlink Transmission project. The $1.9 billion project, which was approved by the California Public Utilities Commission at the end of last year, is expected to be placed into service in the second half of 2012.

Turning to our smart meter program, at SDG&E we began our expanded roll-out in March. Our goal is to have 200,000 meters installed by the end of this year and have all installations completed by year end 2011.

It's been a while since I provided you with an update on the Generations side of our utility business. In the summer of 2007, you'll recall that we were worried about meeting our summer load so we added a peaking plant here in San Diego. In an effort to meet the load we expect this summer, we're now in the process of bringing a second peaking unit online at the same site. Also, the Otay Mesa Energy Center, a 570-megawatt power plant, should be online by the end of the year. You'll recall that the plant that's being built by Calpine has 100% of the output being sold under contract to SDG&E.

And finally, at the San Onofre nuclear plant, of which SDG&E owns 20%, the replacement of the first of two steam generators is scheduled to begin this fall with the installation expected to be complete in the first quarter of 2010. The second steam generator is scheduled for replacement to begin in 2010 with completion in 2011.

At SoCal Gas, we filed with the CPUC in April, requesting the suspension of the current cost of capital adjustment mechanism. As many of you know, SoCal Gas' cost of capital is automatically adjusted when 30 year Treasury bond yields deviate from certain benchmark. Because Treasury yields are artificially low due to an unprecedented intervention by the federal government, we feel a suspension of this mechanism is justified. We anticipate a decision on this request in the third quarter.

Now, please go to slide 13. Moving to some of the projects we have under development at our infrastructure businesses. At our Cameron LNG receipt terminal, construction is nearing completion and later this quarter we expect to receive our first startup cargo and will begin testing the facility. This should put us on track to commencing terminal operations in the third quarter of this year. The associated Cameron pipeline is complete and ready to transport gas from the terminal when it comes online.

Before I move on, I'd like to also give you an update on some of our pipeline and storage projects. Regarding our 25% interest in the Rockies Express Pipeline, we anticipate interim service on the east portion of the line later this month, with the line fully complete and in operation by year end.

Turning to our Liberty Gas Storage project, you'll recall that we updated you last quarter about the problems we're having with one of our caverns. To date, our remedial efforts haven't been successful and we're continuing to consider alternatives. As you'll recall, we have $65 million on an aftertax basis at risk, if we have to write off this asset.

Let's move to slide 14. At Sempra Generation, last month we announced a 48-megawatt solar expansion project that will be located adjacent to our existing El Dorado solar facility. The combined 58-megawatt installation would become the largest operational photovoltaic solar power facility in North America. Construction will commence after we've contracted to sell the facility's output. The project could be fully operational by late 2010.

Now let's move on to slide 15. Now for a quick update on our Commodities joint venture with the World Bank of Scotland. Earlier today, the RBS Sempra joint venture announced the appointment of Kaushik Amin as their new CEO. Kaushik was previously the global head of liquid markets including commodities trading for Lehman Brothers and built a great business there. We're excited to have him onboard. Among many successes, he's credited with building a commodities business from scratch in 2005 to one that was earning more than $500 million in 2008. This commodities derivatives business capitalized on the flow of activities from Lehman's other businesses. While RBS Sempra is only beginning to capitalize on the flow of business from the other parts of the bank, given RBS's larger platform, we anticipate substantial growth. Combining the physical trading strengths of Sempra with the derivatives and financial strengths of RBS should yield significant synergies which we expect to capture over the next one to two years.

Integration activities continue. In August, the joint venture will be moving to a new location in Stamford, Connecticut.

The joint venture will be located in a newly constructed RBS building and co-located with the bank's North American headquarters. This new building will combine the trading floors of the bank's other trading operations including foreign exchange, interest rates, bond and equities trading, as well as our Commodities groups. All with a view toward creating additional synergies between the various business groups. This will be one of the largest trading floors in North America, accommodating over 700 traders.

Now turn to slide 16. I'm very pleased with our first quarter results which put us on track to meet our financial goals for the year. Even in this very challenging economy we've been able to grow our business and continue growing our dividend at double-digit pace. The growth that we saw last year and expect to continue to see is a result of over $10 billion we've invested in the last four years. And those investments, together with new projects underway at our utilities should provide us with double digit near-term earnings growth.

And with that, let me now open up the call and take any questions that you may have.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll take our first question from Lasan Johong with RBC Capital Markets.

Yes, thank you. Good afternoon. Nice results. I don't think this is going to be an unexpected question but I'm a little bit more than surprised that the joint venture reached outside of the organization to the point where you actually went to a completely different organization to recruit a CEO. And I'm at a loss as to why that was even put on the table or even considered. Let alone actually pulling the trigger and hiring somebody.

Well, Lasan, thank you for your comments about the quarter. We're also very happy about it. I would say that when we were taking a look at new leadership for the joint venture, we looked both within the Commodities business and within the bank and although there were a lot of good candidates, I think, as I mentioned in our conference in New York, that I think one of the things that David Messner and Steve Prince did was hire a lot of capable talent. But at the end, as we and RBS talked about the type of leadership that we needed and somebody that had been working in a bank infrastructure business like Lehman, that to bring that skill set over and to be able to capitalize upon leveraging that opportunity, we felt that Kaushik was the person that would best do that and that's how we got to that decision.

Have any senior people or traders resigned since the announcement of the CEO?

No. As a matter of fact, he's been out meeting with them and I think the group is all at ease now, having this transition behind them and as you can have seen from the first quarter results, we basically hit the ball out of the ballpark.

Can't disagree there. Was the compensation schematic changed?

I'm sorry, Lasan, again?

Was the compensation schematic changed at the joint venture?

The compensation that we've had is basically the same compensation that we've had since the formation. There have been some structural changes in terms of how it's paid but it's still all cash. The only change has been is the timing of it.

Okay. Don, I know if I asked you this directly you'll probably give me a very precisely worded vague answer so I'm going to ask you in a slightly different way. On a scale of one to ten, if you looked out in the market for Generation acquisitions, would you say this was a ten or a one with ten being a very good time to buy, one being a very bad time to buy.

There's no doubt with low gas prices and the economy as it is, that Generation prices are depressed. That's not a line of business that we currently have an interest in. We're still looking at natural gas infrastructure as the long-term growth opportunity for this business but I would just say to answer your question that I think Generation prices are depressed right now.

One last question. It looks like the alliance Spectra and I forgot who the third partner is on this pipeline that's going to go from the Rockies, kind of paralleling the Rockies Express for a while and ending up in Chicago is going to go through. Any thoughts on the impact of how that's going to change your business profile on Rockies Express?

We look at these, Lasan and this is a -- building large haul pipelines as we've just been through this learning process with Rockies Express is a very challenging endeavor and so I wish them good fortune.

Okay. I look forward to the second quarter conference call and the increase in guidance. Thank you.

Thank you.

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

How are you?

Good, thank you.

Just a couple questions here. One is the tax rate. I know that you guys got a little bit of a benefit in Generation but there was also, I think the utility was pretty good the first quarter so just wondering if you could just give us a little bit of flavor, what's happening there?

Our tax rate for the year is going to end up in the low 30% but let me have Joe Householder walk you through how we get there.

Hey, Paul. There were quite a few different pieces so let me just go at it a little bit slowly. The major piece of the difference between the first quarter of '08 and the first quarter of '09 had to do with the Mexican tax benefit on inflation and FX. This year, we had about an $8 million benefit and last year in the same quarter we had about a $7 million detriment. So that was about a 4% swing in the rate. We also had more non-US income in Sempra Commodities so that's about 2% of the rate and the remainder as you mentioned was in Generation, about 1% for the solar and 1% in the utilities for higher software expenses. And we had a little bit extra benefits in the Commodities business as we settled some old tax cases from UK benefit plans but that's the basic difference between the two years' results, but as Don said it should be in the low 30s to 32% for the year.

And then the oil and gas at RBS, the RBS joint venture, what was so good there? Is there anything in particular that made that business do so well?

Well, Mark Snell has been living back there for about the last month so let me have Mark walk you through what happened.

I think we just have seen a lot of opportunities on the oil business. You know, we're in a fairly steep and tangled market so I think that's contributed to a cash and carry kind of business where we've been able to buy fuel, buy oil, put it in inventory and benefit from forward sales. So I think that's been the bulk of it. But it's a pretty straightforward physical trade.

On the O&M, just if you could remind me, and I'm sorry if I missed it, I got a little distracted during the call but seems like there's a big decrease there as well.

Joe Householder here.

Paul, the big decrease there is the lack of having the Commodities business in the consolidated results last year. About $214 million of that difference is just the fact that they're not in the results because of the equity method accounting now.

Okay. Fair enough. And then the book, the trading book back at RBS, I know you guys give less information out since the JV happened but has the realization of the trading book changed at all or do you see anything happen there?

Talking about the tenure of the book?

Yes.

No, nothing's changed.

Okay. Thanks a lot, twice.

Thank you.

And we'll take our next question from Leslie Rich with Columbia Management.

Hi, how are you?

Hi, Leslie, how are you?

Good. Could you talk about the distribution from RBS of $305 million, how does that work?

I'll have Mark take you through it but as you are aware, Leslie, we've been getting cash now for about the last year out of the business which is something unusual for us.

Well, Leslie, it's pretty straightforward, actually. During the year, we get distributions to pay our taxes every quarter, based on the profitability of the partnership, and then at the end of the year there's a catchup to pay out, to essentially pay out 100% of the prior year's earnings, and that was the $300 million that we got in the first quarter which caught us up to the prior year's earnings. And we'll get that -- we plan on getting that every year.

Okay. Thank you.

We'll go next to Faisel Khan with Citi.

Hi, good morning, guys. How you doing?

Good, thanks.

All right. Just a question, going back to I think Mark's prepared comments on the insurance premiums, what's the estimate in terms of how much that's going to cost you this year and going forward?

I'll have Mark go into some more detail but we're one of the first utilities in the state to renew. We renew the end of I think it's next month, June. So we will have better numbers but as we've been talking to our carriers, every indication we get is we're going to pay more, probably have a higher deductible and get less coverage. Mark, you want to expand on that?

All I can just say is while we don't have exact numbers yet because all we're getting is indications of interest from the carriers and a general thought, we have a couple quotes but we don't have all of the different layers priced out yet, but it looks to us is that our insurance premiums for this kind of thing in the past have run about $16 million to $18 million. They're going to be probably at best twice that and maybe even higher. But we had anticipated that. And we're also looking to talking with the PUC representatives of getting recovery for that in rates.

Got you. Because your rates are frozen now through 2011, right?

Actually, yes, but our rate structure actually contemplates an ability for extraordinary things like this to go in on an interim basis and get some rate relief, so it's a possibility. We're not banking on it but it's certainly a possibility.

Okay. And just curious on your, Don, your prepared remarks on stocks. The replacement of the steam generation facility. How has the cost of that project changed over time? Is it still roughly the same amount that you guys talked about over the last year or so?

Yes, our share is something under $200 million and I've received no indication from Debbie that we should exceed that. Is that correct, Debbie?

Yes. Our information coming from Edison who is handling the construction is that the project is on schedule, on budget and our share would be about $169 million including AFUDC.

Okay. Got you. And then just on the tax plan that's proposed by Obama on closing some of these foreign tax loopholes, is there any impact that you guys can see from your operations abroad that would affect your tax rate or cash tax payments?

I'll have Joe Householder expand on this, Faisel, but remember, this plan is not slated to start until 2011. The legislation has not worked itself to either side of Congress yet, so it will probably change. I think we'll probably have more information toward the end of this year as more of these details get worked out. It will obviously in its current form have an impact but I don't think the current form that is being talked about will be what's implemented. Joe, do you want to -- ?

Faisel, I think it's pretty early in the process, as Don said, to speculate about what might actually happen. You already heard some of the senior senators saying they're not really for this. We need to have good international tax policies that are competitive with the rest of the world so I think it's fair to say that this proposal would move us in the wrong direction and we're more supportive of policies that would help us invest in US infrastructure, particularly in energy and infrastructure investments like that. That's where our focus is. We've looked at some estimates but I don't think it would be prudent to talk about them because this is going to change a lot in the next year or so.

Okay, Joe. Appreciate it.

And we'll go next to with [Badilla Verdi] with CGP US.

Good afternoon. I'm wondering, can you talk a little bit about what you're seeing in terms of, what you're thinking about in terms of expected LNG flows into the US over the summer and into the fall and then how that translates into any view you have in terms of natural gas markets and pricing outlook.

Yes, I'm going to have Neal respond to you. But we are still very optimistic that with the amount of LNG that's coming online, and the need to have someplace to deliver it, that the US is the destination of probably choice, maybe last choice, but we're the largest market. It's going to come here if it comes. Neal?

Yes. We talked extensively about this at the analyst presentation a month ago. And for those of you who were there, you'll recall that the demand in the rest of world is going down with the economy, and the consequences of that are that LNG is probably going to come to the US and that will exert a downward pressure on US natural gas prices. What's interesting from Sempra's perspective, of course, is that our business model in the LNG business is not designed around gas prices. We've contracted long-term for the utilization of these facilities and it's consistent with our general approach to things where we tend to perform pretty well in all kinds of markets.

I think one of the things that we are seeing and I think you'll see more of this later is that almost everyone that's bringing a new liquefaction facility online is getting themselves lined up to deliver spot cargoes both to Europe and North America. And we have had conversations with a lot of people that have an interest in bringing spot cargoes. We will see what eventually evolves but I think there will be announcements in the industry sometime in the next short time period.

And generally in terms of visibility, in terms of what type of cargo flows you're going to have, is it a very short window in which you have visibility because it's pretty variable or can you talk about that a little bit?

I just think that with the amount of capacity that's coming online and the fact that there aren't very attractive markets from a price standpoint any place in the world, that what people are looking to do is at least for the short term, and I'm talking about a year to two years, just deal with spot cargoes and taking the spot cargoes wherever the market gives the best price. I think beyond that, as people see a firming up of gas prices either in Asia, Europe or North America, there will be more long-term contracts put in place.

Okay. Thank you very much.

And we'll go next to Michael Lapides with Goldman Sachs.

Hey, guys. Congrats on a really good quarter. Can you give an update a little bit on Mississippi Hub and Bay Gas in terms of both the construction outlook but also the contracting outlook and what you're seeing in the competitive landscape for either pipelines into Florida or other storage products down in that region?

You bet, Michael. I'll have Neal give you an update. Let me just paint the big picture for you. Between now and about 2015, we're going to spend $1 billion developing about 75 Es of storage and that's at three locations, Bay Gas, Mississippi Hub and Liberty. And Neal, you want to walk him through where we are contracting wise?

The material we presented, once again at the analyst conference, is good but in terms of Bay Gas, we have a little bit over 11 Bcf currently operating and it's fully contracted. There's five Bcf under construction, be in serviced late 2010. And then we plan to increase the total capacity at Bay Gas to 27 Bcf. At Mississippi Hub we have 15 Bcf under construction, 4 Bcf of that is contracted, and our plan there is to increase the total capacity to 30 Bcf. And then we expect to have another 17 Bcf in the Liberty expansion area.

Generally, once again, what we're looking at here is something that's consistent with the approach that we've taken on all of our investments. That is, we've signed up contracts to lock in returns for a substantial portion of the capacity before we build it. And we try and build in areas with respect to assets that are in a good position to capitalize on the flows that we're going to face. More particularly, if LNG comes in, our assets in the Gulf Coast are going to be well positioned to take advantage of those flows. If the shale gas production and so forth in that part of the country predominates, we'll be once again well situated to deal with that. So I come back to the theme that we develop assets that can function well over a wide variety of economic outcomes.

Got it. And what's the best way for investors to think about the economic? Are the economics of these types of projects for Sempra mostly similar to take or pay like agreements or is there a combination of some variable component to it? I'm just trying to think about the modeling aspect of this.

Well, I think once again, when we sell out to the capacity, you should think of that as fundamentally the equivalent, I guess the economic equivalent of take or pay. But there are additional revenues around the edges. But when you adopt the kind of business model that we've adopted, the fundamental economics for our LNG facilities or for pipelines or for that matter for the storage fields revolve around the contracts that we've entered into that provide these stable good returns, but in almost all cases we have the ability to enhance that and improve the returns around the edges, if you will.

Got it. Okay. Thanks, guys.

And we'll go next to Michael Goldenberg with Luminous Management.

Good afternoon. Actually, good morning for you. Just a couple of housekeeping questions. Just so I understand, the low tax rate has to do with the Mexican currency benefit at the corp, is that why the tax rate is so low?

That was one of them. Also, the other was the timing of when we take solar credits.

How many credits did you bring in this year at this quarter from solar?

Joe?

Michael, there's roughly a small -- about a 1% of that impact is from solar. We're estimating to have maybe $20 million of credits for the year, and so using the effective rate method, maybe about a quarter of those have come in in the first quarter. But we also had some other issues. We had lower tax rates because we had more non-US income and we had some higher software deductions at the utilities.

And the $20 million will come at the parent, not at Generation, you book it at the parent?

It will be in the Generation business unit.

At Generation. Okay. Okay. So how many megawatts of solar do you expect to install this year?

Solar, we're looking at adding -- it's 48 megawatts between now and next year, so it's 20 this year.

About 20 this year.

20 online this year.

20 megawatts and then 28. And then I can take the solar credits proportionately?

That's correct.

That's reasonable.

Okay. And then other income at SDG&E and, what was it, why was it so high?

Say that again.

Other income at SDG&E of $17 million.

I'm not sure. Let me ask Debbie to take a look at that.

Seems abnormal; right?

Joe Householder here.

Yes, about $8 million of it was AFUDC equity at SDG&E and SoCal, the utilities combined, SDG&E $6 million. And then $10 million of it was an Interest rate swap gain at the Calpine OMEC plant but because we consolidate that plant we bring their income in so it really was not ours it was Calpine's/.

Hold on. It was plus $10 million at SDG&E and minus $10 million at the parent?

No, it's $10 million in our consolidated results. It gets backed out down in the what used to be minority interest but now earnings attributable to non-consolidated entities. There's no effect on net income.

Understood. So the $7 million of minority interest can be just backed out against other income?

Yes.

And are we going to keep seeing minority interest going forward?

Yes.

Okay. Understood. To the tune of like $7 million per quarter?

It will change, obviously, because Calpine plant's going online in about the third quarter so it will get bigger.

Okay. Why is it minority interest, because you own majority and you consolidated it?

This is Debbie. Under the FIN 46 rules, since we have a contract with a put and a call, then we have to record it on our books. I would also stress, though, when a plant goes into service, we will start seeing earnings off of this because we are increasing our equity and have the CPUC approve an increase in equity to offset that on our balance sheet. So as the plant goes in service, we will start seeing earnings later this year.

Okay. Understood. Thank you very much.

Thanks, Michael.

We'll go next to Leon Dubov with Catapult Capital.

Hi, good morning. I just wanted to double check. Trading clearly had a really good quarter and you guys pointed to the gas and oil parts of it. I'm wondering how much of that dynamic you continue to see in the second quarter, what drove the big gains in Q1 and if we should be thinking about similar types of results going forward?

Mark, you want to address this?

Well, look, I think it's always dangerous to take any one quarter for Commodities and try to project that out over the whole year. But I would say if you were looking at the markets, most of the things that you saw in the first quarter and towards the end of the first quarter as far as the steep contango in the market, the relatively low volatility and the way the markets were behaving, that hasn't changed all that much yet as we go into the second quarter. As we sit here right now it looks very similar. We don't really give predictions on where we are in the current quarter but I think the markets look similar, so take that for what it's worth.

Okay. That's very helpful. Thank you.

(Operator Instructions). And we'll go next to Rebecca Followill with Tudor Pickering.

The higher insurance rates for the utilities, is that included in guidance?

Yes, it is. We anticipated that and we haven't adjusted our guidance for it. So it is included.

Next question. Similar to after any disaster, insurance rates go up across the board so are you guys seeing significantly higher rates for your LNG facilities?

We are not. The rates for our other property insurances, I mean, they've changed a little bit but not nearly as significantly as we've seen for our fire insurance coverage.

Thanks. And then the last question on the Commodities business, I may be doing the calculation wrong but it looks like the invested capital is down at RBS. Could you talk about that a little bit?

Yes. The invested capital is quite a bit lower and the regulatory capital is actually running quite a bit lower than it was last year and that's pretty easy to figure out because it is a function of two things, which have both come off dramatically. One is commodity prices, those have dropped dramatically over the peak of last year, and the volatility is much lower too, and also as a result of the lower prices, the price of that volatility is less, even with absolute reduction in volatility. So both of those things have much, much lower capital requirements. And that actually for us, as the JV partner, with a cap on our capital, that actually works to our advantage. So we're getting a larger percentage of the earnings early on this year, because of the lower capital than we would have gotten last year.

By my calculation, I still back into $1.6 billion capital that you guys have but about $500 million from RBS compared to about $2.4 billion.

Your math is good.

So that's not a function -- it's a function of volatility and prices as opposed to any desire on their part to put less cash forward.

Yes, just lower Commodity prices. The total amount of invested capital in the business is still pretty high but the regulatory capital which is a function of pricing and volatility is what you're focused on and how the returns are derived, and you're absolutely right, the regulatory capital is much less. The actual capital in the business, the actual cash investment in the business, it's lower than it was last year but it's still quite a bit higher than the regulatory capital and that extra capital is just at normal borrowing rates.

Okay. Thank you.

And we'll go next to (Ujo Ike] with Ike Trade International.

Good evening from Europe. I have a question about the Commodity business having heard you have 700 traders. My question is are you trading all Commodities? And beside also the currencies and your also business with third partners, for instance in precious metals, overnight positions and such things.

What I was saying was that we're about to move our energy commodity traders together with traders from RBS's North American headquarters and they'll be trading a variety of activities -- foreign exchange, interest rates, bonds and equities, as well as energy commodities. So the entire group is going to be around 700 people.

But our group, our joint venture, is limited to Commodities only. So we're trading --

Energy Commodities.

Yes, energy Commodities and metals are really our primary trading activities.

Thank you.

And we'll go next to Michael Lapides with Goldman Sachs.

Hey, guys. Had a follow-up. And this is more of a macro, thinking longer term kind of question. Now that we're well into what's been a financial crisis and maybe can even look out the other side to see the world improving over the next nine, 18 months, can you talk a little bit about lessons learned across the industry and how you think the competitive landscape likely will change over the next few years in the natural gas infrastructure business, whether it's pipelines, LNG, et cetera?

The key learning is to not get over leveraged. I think going into this crisis where we had a strong balance sheet, didn't have that much debt, boded well for this company. I think the other thing that, as I look at what made us stand above our peers, is the fact the way we approach projects where we do not build on spec. We build a project only when we have customers willing to sign up for use of that facility, whether it be 10, 15 or 20 years. I think that, coupled with our long-term view that we've had about natural gas being the fossil fuel of choice in the political and economic climate that we're entering, that also plays well into where we're going. But I think the key lesson for most companies is don't get yourself over leveraged because free money is not a thing that lasts forever.

Okay. In the competitive landscape, can you look out over the next year or so, or two or three years, how do you think that changes if it changes much at all?

Depending on how long this current downturn persists, there will be some companies that probably will end up getting consolidated with other companies just for survival because the market is still not open enough for those that want to lend that don't have a good credit rating. So I do think there will be some consolidations but I do think that going forward that you'll see companies not being quite so free to build a project hoping that people will come and use it later on, that you'll see more of the discipline that we've applied in the past ten years where we only will deploy our shareholders' equity when in fact we have people willing to step up and sign a contract.

Got it. Okay. Thank you.

And with no more questions in the queue I'd like to turn the conference back over to Mr. Don Felsinger for any additional and closing remarks.

As Jeff said, I know you guys are all busy at AGA and about to travel so I want to thank you for taking the time to join us. It's great for us to be able to take a few minutes and share with you our first quarter results but I think I'll just repeat what we've said at the analyst conference, that we're in a great position in terms of the investments we've made that are about to start paying dividends to us. And the fact that we're one of the few companies in our peer group that have a very attractive earnings and dividend growth rate over the next five years. So we're happy with the way we're currently positioned. Thanks again for taking the time to join us. If you have any follow-on questions, you know how to get a hold of Jeff, Glen or Scott. You guys all have a great day.

Again, that does conclude today's presentation. We thank you for your participation.