桑普拉能源 (SRE) 2009 Q3 法說會逐字稿

Good day, and welcome to the Sempra Energy third 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.

Good morning. I want to thank each of you for joining us. I trust many of you are probably catching up in the office after returning from EEI. We appreciate you taking the time for our call. This morning, we'll be discussing Sempra Energy's third quarter 2009 financial results. A live Web cast of this teleconference and slide presentation is available on our Web site 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, Neil 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 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 risk, uncertainties and assumptions, so future results may differ materially from those expressed 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 to also note that all of the earnings per share amounts in our presentation today are shown on a diluted basis. Like the format of of our prior calls, we'll first take you through our financial results, followed by an operating update, and then conclude with any questions you might have. And with that, I'd like to now turn it over to Don who will begin with Slide Three.

Thanks, Jeff. And again, thank you all for joining us. Before I discuss the quarter, I want to briefly update you on recent developments with the Royal Bank of Scotland. As many of you are aware, RBS has announced a second restructuring plan that includes the sale our their ownership stake in our commodities joint venture. There are several points worth noting. First, remember that this is a core business of Sempra. It operates in markets that we know and understand. It's highly profitable. And more importantly, we're committed to being in this business for the long-term. Second, as RBS goes about divesting its share, they are committed to providing all required capital and credit support. And third, the process will be orderly and significantly influenced by our participation. Our existing agreement doesn't allow for a sale prior to April of 2012. A quicker sale, which could be advantageous, would require mutual consent. As a final point, I'm certain we'll manage through this transition in a way that not only preserves but creates value for our shareholders and does so in a way that gives confidence to both our employees and customers. And based on our conversations with RBS's management, I can tell you that our interests are aligned in that regard. Now, on to the financial results.

Earlier this morning, we reported third quarter earnings of $317 million, or $1.27 per share, an increase from $308 million, or $1.24 per share, in the same period last year. It's important to note that results for the third quarter of last year included a $40 million retroactive benefit from the resolution of general rate cases at our California utilities. For the first nine months of 2009, earnings increased to $831 million, or $3.37 per share, up from $794 million, or $3.13 per share. You'll recall that in the second quarter of this year, we recorded a $64 million or $0.26 per share writeoff related to the Liberty Gas storage project. Earnings per share for the first nine months of 2009 without the impact of the one-time writeoff of Liberty, improved 16% over last year. Now, the reason I wanted to make this point is because it highlights the strength of our underlying businesses. These strong results keep us on track to meet our 2009 financial goals. Now, let me hand it over to Mark so he can take you through some of the details of the financial results, beginning with Slide Four.

Thanks, Don. At San Diego Gas and Electric, earnings for the third quarter were $108 million, compared with earnings of $123 million in the year-ago quarter. Third quarter 2009 results include a $9 million benefit from the resolution of regulatory matters. Third quarter 2008 results include a $33 million retroactive benefit from the resolution of the general rate case and a $12 million benefit from the resolution of tax issues which were partially offset by $17 million of litigation expense. At Southern California Gas, third quarter 2009 earnings were $74 million. That compares with $77 million in the third quarter of 2008. The current quarter's earnings benefited from strong operating performance. The quarter-over-quarter comparison was due to benefits recorded in the third quarter of 2008 which included a $7 million retroactive benefit from the resolution of the general rate case, and a $7 million benefit from the resolution of some regulatory matters. Now, let's go to Slide Five.

Sempra Commodities earnings in the third quarter of 2009 were $75 million, a significant improvement over last year's results. Performance in the quarter was led by the natural gas and metals businesses. Many of you will recall that last year's third quarter was negatively impacted by losses in power marketing, driven by the steep decline in commodity prices during the quarter. For the first nine months of the year, commodities earnings have increased to $274 million, up from $181 million in the first nine months of 2008, an increase of more than 50%. It's also important to note that the first nine months of 2008 included $37 million in net benefits from one-time items related to the formation of the joint venture with RBS in the second quarter, as well as Sempra Energy's 100% ownership of the commodities business in the first quarter. Now let's move to slide Six.

Here we show how income is allocated at the joint venture for the quarter and the first nine months of the year. A couple of highlights. First, the joint venture had income of $83 million during the quarter. After applying the income allocation methodology, the distributable income to Sempra was $60 million. After adjusting to US GAAP and for the impact of taxes, Sempra's joint venture equity earnings for the quarter were $75 million, up from a loss of $3 million in the same quarter in 2008. For the first nine months of 2009, the joint venture had income of $379 million, and Sempra's equity earnings were $278 million. Now let's move to Slide Seven.

Third quarter earnings for our Generation business were $43 million, compared with $94 million in the same quarter in 2008. Third quarter 2009 results reflect $12 million of lower earnings from operations due to less favorable market pricing compared to the same quarter last year. In addition, the third quarter of 2008 included a $28 million mark-to-market gain on forward contracts, and $8 million in tax benefits from the El Dorado solar project. Please move to Slide Eight.

Sempra Pipelines and Storage recorded earnings of $54 million in the third quarter of 2009, up from earnings of $34 million in the same quarter last year. Third quarter 2009 results benefited $15 million from the favorable resolution of tax issues, as well as $6 million of increased earnings from Rockies Express. For the first nine months of 2009, earnings were $64 million. The decrease as compared to the prior year's results is due to the $64 million writeoff related to the Liberty Gas storage project that was recorded last quarter. Now please turn to Slide Nine.

Now, this slide provides a summary of our business unit results. I'd like to highlight a couple of things here. Sempra LNG broke even in the third quarter of 2009 compared with earnings of $4 million in the prior year's quarter, which included $13 million in mark-to-market earnings. The third quarter of 2009 included $5 million higher earnings from the start-up of terminal and marketing operations as well as higher income tax benefits. At Parent and Other, we recorded a loss of $37 million in the third quarter. That compares with a loss of $16 million in the same quarter in 2008. The increase in loss was due to the combination of higher interest expense and higher income taxes. Please turn to Slide 10.

Overall, our results for the quarter and the first nine months of the year were excellent. Excluding the Liberty Storage writeoff last quarter, earnings per share were up 16% over the first nine months of 2008. Year-to-date, 2009 operating cash flow more than doubled over the prior year period. A notable contributor was over $400 million in cash we received this year from RBS Sempra Commodities. We ended the third quarter with roughly $800 million in cash on our balance sheet and $3.1 billion available under our credit lines. From a credit perspective, there are a couple things I would also like to highlight. Last month, Sempra Energy issued $750 million of 30-year debt at a 6% coupon. And S&P affirmed Sempra Energy's credit rating of BBB plus and raised our outlook to stable. And with that, I'd like to turn it back over to Don who will begin with Slide 11.

Thanks, Mark. Now let me update you on some of our business activities, starting with our utility projects. Our largest project, the Sunrise Powerlink transmission line, is scheduled to be in service in the second half of 2012. We're awaiting the final approval from the US Forest Service which we expect in the first quarter of next year. Turning to our Smart Meter programs at SoCalGas, we're seeking approval from the CPUC to install six million gas meters in phases from 2012 to year-end 2017. We hope to have a final CPUC decision early next year. At SDG&E, we're well underway with the installation of smart meters and have now installed almost 150,000 meters. We expect to have over 200,000 meters installed by year-end and to complete all 2.5 million installations by year-end 2011. I'd also like to point out one of our new projects, we've recently announced, the Echo Substation, a renewable energy hub in east San Diego County.

This project will greatly expand SDG&E's capability to both receive clean, renewable energy from areas east of our service territory and deliver that power to customers here in San Diego. In August, we filed an application with the CPUC for this $270 million project. We hope to receive commission approval in the first half of 2010, which would enable SDG&E to begin construction next year with a view toward placing the substation in service in the first half of 2012. This project is incremental to the capital program that we presented in March of this year and is another good example of the growing role that renewables and related infrastructure will play in our future capital spending program. Now, if you would go to Slide 12.

We recently made two key filings with the CPUC, and I'd like to briefly detail them. First, we filed a petition with the Commission to request a one-year extension in the filing of our rate cases for SDG&E and SoCalGas. This was a joint request in conjunction with the division of ratepayer advocates and would require a full Commission vote to approve. If approved, the decision would essentially extend the current framework by one year to 2013, with an attrition year revenue increase in 2012 consistent with prior years. The second filing I'd like to mention is related to SDG&E's cost of capital. We asked the CPUC to defer the next cost of capital proceeding by two years. Our current cost of capital was established last year as a part of a joint proceeding with PG&E and Southern California Edison, and all three utilities were originally scheduled to file a cost of capital application with the Commission in 2010. If our request is approved, we would file the next application in 2012, which would be effective in 2013. And this would be on the same schedule recently approved for PG&E and Southern California Edison. Now, please go to Slide 13.

In September, Sempra Generation acquired a 50% interest in the Fowler Ridge II Wind Farm located in Indiana. We're equal partners with BP in this 200-megawatt project which is now under construction. We expect to complete construction and bring the project into service by year-end. Consistent with Sempra's contracting strategy, the power generated by this project is fully contracted for 20 years. This project has attractive economics and also enables us to increase our hands-on experience with wind projects as we evaluate similar opportunities here in our core geographic area of focus, the Southwest. Now let's move to Slide 14.

As many of you know, we benefit from controlling a large amount of land around two of our existing natural gas plants which are located in desert areas and are ideal locations for solar generation. And with ready access to major electric transmission corridors, Sempra Generation is well situated to become a leading owner and operator of solar generation in the Southwest. The 10-megawatt El Dorado solar project which is adjacent to our El Dorado combined cycle gas plant in Nevada, is currently in service and selling its power under a 20 year contract to PG&E. We plan to expand the capacity at this location by 48 megawatts in a project we call Copper Mountain Solar. We've secured agreements for both the construction of the plant and the sale of the power under a long-term contract. The power sales agreement also with PG&E is now before the CPUC for approval. We expect to receive this approval before year-end and plan for the project to be brought online in phases through early 2011. A much larger opportunity exists near our Mesquite natural gas-fired plant outside of Phoenix where we own roughly 4,000 acres. We expect that our land position there could support up to 500 megawatts of solar.

Before we move to the next slide, I want to update you on the litigation related to Sempra Generation's contract with the California Department of Water Resources. On October 26th, a jury trial began here in San Diego Superior Court involving the 10-year power contract Sempra Generation signed in 2001 with the California Department of Water Resources, or CDWR. The litigation involves power deliveries and the decision not to build a temporary peaker facility at the Elk Hills power plant. Essentially the CDWR is seeking damages or recision of the contract. We believe that we have abided by all of our contractual obligations. We do not believe these claims have any merit, and, therefore, have not taken any reserves for this case. Now let's go to Slide 15.

I'd like to remind you of the new sources of revenue at our Pipelines and Storage and LNG businesses. At Pipelines and Storage, the Rockies Express pipeline is nearing completion of the full 1.8 billion cubic feet per day of capacity to Clarington, Ohio. And we continue to make progress with our gas storage developments in the Gulf Coast with the goal of bringing an incremental 12.5 billion cubic feet of capacity online at Bay Gas and Mississippi Hub in the second half of next year. At our LNG businesses, we're now receiving revenue from all of our major long-term contracts. In the third quarter, we began receiving revenue for the full contract quantities of the BP tango contract at our Costa Azul terminal, as well as from the contract with ENI for capacity at the Cameron terminal. With these new contracted revenue streams, LNG will start to show a continuing profit beginning next quarter. Now please go to the final slide.

I'd like to conclude by saying that I'm pleased with our results in the third quarter and even more so for the first nine months of the year. If you step back from today's results, one of the key takeaways is our business is continuing to grow with a fair degree of certainty. Our utilities are expecting capital spending to increase by over 50% next year, and that's all within a regulatory compact where we earn solid returns without exposure to commodity sales. Our large, four-year construction program at our natural gas business is nearing completion, and that means a full year's benefit in 2010 from new cash flows from long-term contracts. And what you'll see us do for the remainder of this year is focus on areas where we can continue to improve the certainty of that growth story. We will do that by increasing the certainty of our cost of capital, extending our general rate case at the utilities through year-end 2012, and completing projects at our infrastructure businesses that will capture new contracted sources of revenue. With that, let me stop and take any questions that you might have.

(Operator Instructions) We will now take our first question from Lasan Johong with RBC Capital Markets.

Thank you. Good quarter. Just on the RBS transaction, do you anticipate any changes in your future growth rate because of RBS having to eventually pull out? Or in other words, are we confident that RBS will continue to support this joint venture while it owns it?

Well, there's a lot to be learned here. This business is well positioned to grow under the right circumstances and with the right partners. So I think that in the next several months, I can give you a better answer to that. But this business, the reason we have the platform we have with RBS was to take it places that are global. And I think as RBS looks to replace themselves with a new partner, that will be one of the key considerations we'll look at.

Then is there an opportunity -- or do you know of other firms who could deliver the same kind of international and global growth that RBS promised? Or had looked to be able to deliver?

You bet. One of the things that is interesting is that this deal just got announced -- or this statement by RBS that they're divesting. And the number of calls -- the amount of interest we've seen in this are really amazing. I think it goes to the fact that people just recognize what a valuable franchise we have. Everybody wants to be a part of it.

Then Don, I know it's not possible now. But in four years' time if there is not a suitable partner, would Sempra consider stepping in and taking it back?

Lasan, I think everything is on the table. It's very early. I think the only thing that I can say with certainty is that Sempra's going to be a part of this business whether it's alone or with a partner.

Okay. Could you talk about your guidance? It seems that it's kind of conservative at this point. Fourth quarter should be shaping up better than kind of the $0.98 to a $1.23. Any thoughts on when or how much you might increase your guidance?

Well, I think we're satisfied with where we are for the year. We've -- the thing that I think is interesting, when I look at our guidance, is remember, we put this guidance together for 2009 over a year-and-a-half ago and during that time period, a lot of things have happened. We ended up getting the RBS deal done. We had a global meltdown. Credit markets shut down. The economy went in the tank. We had gas prices that dropped to some very low levels. We had a big writedown with Liberty Gas Storage, and with all that going on, we're still keeping our same guidance for the year. So I think it says a lot about the strength of our businesses that we have, and we're comfortable with the range we provided -- the $435 million to $460 million for this year.

Okay. One last question. The Echo Substation you said was not part of your original budget plans. How much more of this upside CapEx spending can we foresee over the next couple of years?

That's the interesting thing about this business, is not only do the utilities have more opportunity because of the 33% goal that's being put forward by the state, but the opportunities we have in our non-utility businesses. When I look at the five-year plan we shared with you back in March, there's probably another $1.5 billion of projects that aren't in that forecast that we're currently working on. So I would say that the opportunities for us are quite bountiful right now.

Excellent. Thanks very much.

We will now take our next question from Leon Dubov with Catapult Capital.

Hello. Good morning.

Good morning.

I just wanted to double check. I guess you said that at least one of the options on the table would be for you to take back -- for at least part of Commodities. And I'm wondering if you can comment on what that would mean in terms of capital commitment? Is there some part of this business that you're more likely to take back, and what the capital associated with that would be?

Leon, I would say that's -- it's probably too early in the process right now to answer that. With the amount of interest that we have seen so far, my expectation is we'll find a good partner that will want to step in and take RBS's position and somebody that we're happy with. I do think the thing that's key here is that people have been asking me -- do we have a desire to stay in this business? The answer is absolutely yes. This is a business that we've been in now for going on 12 years. We grew it to this point. It's a business we understand. It's a business that we know what makes it work. It's a business that's got great employees and a great franchise. So you will see in whatever outcome we have here, Sempra's name attached to this business.

Can you comment at all on who this interest is stemming from? Is it other banks or other types of players?

I'll let Mark talk to this, but we have seen people from all spectrums of the business community.

Yes. Look, I think that's the exciting thing that's happened -- maybe surprised us a little bit. We figured that there would be some financial players that would be interested, and there certainly are. Some of the -- obviously, some of the bigger banks, both domestic and international that have not received or have paid back all of their government assistance. They are interested. I don't know if you saw the JPMorgan article that was out a couple days ago with some statements by Jamie Diamond and their commodity folks about their interest in the physical commodity business. That is indicative of all the financial institutions are looking at this as a real area of interest for them and an area of potential growth. I think the thing that was more interesting to us was in the number of industrial companies -- traditional, commodity-oriented companies that are looking at this that include other financial institutions and other types of things -- big funds, big sovereign wealth funds, and some of the industrial players with large commodity presences in the oil companies and those kind of things that are looking at it. So at the end of the day, I think there is a lot of interest. It's all pretty positive. I think all of it bodes well for the future growth of the business, no matter who the partner is. And I think we're probably more excited about this business than ever. So I think from that perspective, we have a great franchise. It's highly valuable. It's highly profitable. We're in it, and we're going to stay in it. And we'll come up with a new partner or new configuration that makes sense for us.

Okay. Well, thank you. I appreciate the color.

Thanks, Leon.

We will now take our next question from Leslie Rich with Columbia Management.

Hello.

Hey, Leslie.

Could you -- why did you delay the GRC by a year?

Well, there was a workload issue at the Commission, and they found themselves ending up with two GRCs in the same year. And when we had a conversation with the Division of Ratepayer Advocates, and one of the options for them was for us to extend us for a year. It gave us certainty, and I think that's one of the things -- I'll let Debbie continue this answer here. But it's one of the things we like about our businesses is certainty, and the fact that we have another year now of knowing what the attrition increase is going to be plays well into the way we run the business. Any other attributes? Debbie, you want to add to that?

Let me just comment, Leslie, that when we filed our original rate case, we had asked for a five-year period of time for the reasons that Don is speaking of. When we know what revenue requirements we get, it gives us the opportunity to manage our costs very efficiently during the period of time -- to hedge costs as part of our business. And so the longer period of time works well for us. I would also say you have to remember that for us, our base business capital is in our general rate case. But for projects like the Echo Substation, we go in and request incremental capital for that type of growth. And so this is really managing our base business, and when we have the certainty of an incremental $100 million of revenue requirement, which we settled for with DRA. That that gives us the opportunity to start now planning on how we're going to manage the business.

Okay. And on the Mesquite Solar, tell me again what's the status on that? That's a project that you're currently looking for PPAs?

That's correct.

But you could go up to 500 megawatts?

Yes, it depends on the technology. If we went to the less efficient thin film panels that we put in at El Dorado, we probably would -- could develop it out to about 350 or so megawatts. Going to more efficient panels, go up to 500 megawatts. We have found that in this current competitive environment, that the cost of the [Elkin] solar has dropped off significantly. And we are having discussions with a number of parties for off-take agreements from the Mesquite project.

Okay. Great. Thank you.

Thanks, Leslie.

We will now take our next question from Adam Weitzman with Luminus.

Hello. Two questioning here. First, when is the CPUC scheduled to rule on the cost of capital request? Have you seen any opposition from TURN or DRA?

Let me have Debbie respond to that, Adam.

For our cost of capital delay, requesting the two years. The CPUC did rule in Edison and PG&E's case, and this is a settlement that we filed in support. DRA, the Division of Ratepayer Advocates, is in support of our cost of capital delay to be on the same schedule as that of the other two utilities that's already been approved by the CPUC. We just made the filing, and so, it will probably be in the first quarter of next year that we would expect a decision from the full Commission on this.

Okay. Thanks. And then, you also just mentioned a moment ago with the solar project, the decision between the less efficient thin film and the other technology. Where do you stand on that today?

We're kind of technology agnostic. We look at prices we can get from vendors, and the attributes of whatever it is we're installing and go with the option that provides the best returns.

Great. Thanks.

Thank you.

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

Good morning. How are you?

Hey, Paul. Fine, thanks.

Just wanted to follow back on the RBS deal. I've got to assume that it would be in the best interest of everyone to under normal circumstances to have the deal go as quickly as possible as opposed to it taking more than a year or so to get a picture on this. Just because of the human factor. Am I right about that, or -- how much time should we think about a potential deal probably taking?

Well, I think you're correct in that assessment. Even though the contract that we have with RBS puts a time frame of April 2012 before either party can transact, we want to do what's right for the business, what's right for the employees, and what's right for the customers. And probably looking at the level of interest that we're getting in the marketplace, that you could expect that this would transact sooner versus later.

Okay. And then, what I'm also wondering is in that context, we're also in a very different market. You struck a very good and a very timely deal when you did. And I guess what I'm wondering is is that -- what's the potential of the deal perhaps being restructured in order to get something done? Or I guess how anxious is RBS to exit this business because there's always the potential that maybe they won't exactly see what they got when they bought into it, if you know what I mean.

Well, I think that RBS would say that this has been a good transaction for them. And I think as parties come along and look at the value of this franchise, we'll have to make a decision on whether or not they want to step into RBS's shoes exactly or negotiate some other arrangement. But remember, we will have a seat at the table during these negotiations.

Okay. So we should probably not expect a material -- you do not foresee a material change in the outlook of the economics associated with the JV right now from any potential transaction going forward? Or, is that how -- am I reading the body language correct in that?

I don't want to speculate, but if we were to be asked to take a different deal, I would expect to be compensated for that in the transaction.

Fair enough. Thanks a lot.

Thank you.

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

Two questions. First of all, when you look at the natural gas infrastructure side of the business, so -- especially pipelines. Given the volatility we've seen in gas prices over the last 12 to 18 months, what are you seeing in terms of the best possible growth initiatives or growth alternatives for that piece versus what you saw 18, 24 months ago?

Well, we still have with the amount of gas that's been identified in North America, a need for new and different types of infrastructure to move this gas to market. And so, we are still bullish on certain types of pipelines, but probably even more bullish around the need for storage. And that's one of the reasons that we have a $1 billion storage program in our capital budget.

Okay. And what about the flows of LNG to the US over the next year, year and-a-half? As you start thinking out to whether significant amounts or insignificant amounts of LNG will actually flow here.

Michael, I think the key thing that's going to determine that outcome is what is going to be the eventual cost of shale gas production. And there's a big debate going on right now on whether that's $6.00 or $8.00. I think as that plays out, there's no doubt in my mind that LNG can compete with either price scenario and be ready to bring incremental supply into the US at either one of those prices. So I think that we feel pretty good about where we're positioned, where our terminals are. And the fact that LNG is going to compete in this marketplace, and the fact that the other facilities that we are building out -- I'm talking about storage here -- are going to be well used because of the concern around volatility of prices. And the fact that the bigger projects we have -- the pipelines -- that we've got them contracted for 10 years or more puts us in a fairly nice position.

Okay. Last question. Just balance sheet. You've got a lot of cash on the balance sheet. You've got what I would call a healthier balance sheet compared to your peers. Just curious for your thoughts over the next year or so in terms of how you plan on utilizing the balance sheet? And whether there are potential returns of capital or even further debt reduction opportunities if other new growth initiatives don't emerge?

I'll preface this before I turn it over to Mark to say that we're entering some interesting times right now as we look at the ultimate outcome of RBS and our commodities business. So we're going to be very conservative with what we do with our balance sheet.

Well, just to add to that. I would say that our -- while we are in a good position. Just bear in mind that we do have a robust capital program ahead of us of a lot of internal projects that we think have excellent return characteristics. And we want to pursue those. And over the next five years, we've got almost $12 billion of capital in our plan already. And we're finding -- we're uncovering new projects all the time and adding to that. So I think we have sufficient uses for our capital going forward, and I think we feel very comfortable where we are.

Got it. Thanks.

Thank you.

Our next question will come from Charles [Sharrett] with Credit Suisse.

Hi. Good morning.

Hey, Charles.

I wanted -- hi. I wanted to be clear that it's your -- is it your preference to take the commodity business -- or excuse me, to have someone step into RBS's shoes for the commodity business? Or is there a scenario where you look at different economics for a deal and decide you want to take the entire thing back?

Well, I think the objective that RBS has is to have somebody come in, step into their position. And so, what we will be concerned about in that scenario is who the partner is, and do we have the same level of interest aligned toward growth of the business and what geographic regions? So yes, I do think that probably more probable than not is that there would be somebody who would want to come in and take over RBS's position.

Do you have right of first refusal if RBS chooses someone that you don't think would be a good partner?

We have the right of first offer.

Okay.

Which means we can make them an offer. Let me ask Mark Snell to follow up.

I think one important note is that we do have contractual obligations on the behalf of RBS not to sell the business for four years. And so, any kind of quicker sale will require a mutual consent. So I think that gives us a pretty strong hand at the stable, just to make sure that this is a partner that meets the requirements that RBS ostensibly met when we did this deal. And I think now where we are is we have a -- we can pick. We can pick a partner that makes sense. Or there may be some other kind of financial combination of support from other entities that allows us to do more with this business than we've done in the past. And we're going to look at all of those options, and I think they're all available to us.

And I would just follow on and say that RBS has been a very good partner. They have followed through on all their commitments. We understand the pressures they are under in the EU and the UK, and we're going to work with them every way we can to have them meet their objectives of exiting this business in an orderly way.

Are the parties that you're talking to -- are they interested in using their balance sheet the same way that RBS is -- to support the business?

I think it's too early to get into that right now.

Okay. And one last question on the favorite topic for the call today. Do you -- what businesses would you take back? Have you looked at it in that context in terms of what you can support with your balance sheet?

We're going through that process right now. We like all these businesses because we're the ones that aggregated them together. And it's like which of your kids would you get rid of, right?

Right.

We're not there yet.

Okay. Thank you very much.

Thank you.

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

Good morning.

Hey, Faisel.

Hi. Can you comment a little bit more on the strength and profitability at SoCalGas, and what drove that this quarter?

You bet. This is -- look, this is one of the best natural gas distribution businesses in the country. And it kind of lays there, all by itself. Great franchise. Debbie, why don't you talk about the quarter?

Sure. The quarter was really a good quarter for us, but it -- based on the foundation that we have in this strong, strong business. And we do see some future growth in this business as well. As you know, with the Smart Meters that we have filed, and we have some other projects that we're looking at in terms of biofuels and all. But for the specific quarter, it's really managing our cost against our rate case was the largest contributor to what we saw this quarter. After you take off the effect from the retro rate case adjustment of $7 million last year. We've also seen some decline in some of our bad debt expenses, and that was a positive impact for the quarter. But I think the key thing is -- and I said that when I talked about the benefits of extending the general rate case. If we know how much money we have to operate within, then we can really manage these businesses quite well and ensure that our cost structure is within the authorized amounts that we have in our rate case.

Got you. Can you talk a little about the LNG business in terms of the actual volumes that you have received so far? Or what type of volumes you expect from, for example, the RasGas contract?

Let me have Neil talk about this. The thing we want to focus on is the fact that the business is not so much driven around volumes but around contracts.

Sure. First of all, in the third quarter, we did not have any volumes come in under the RasGas contract. I think over the course of that contract, we fully expect to have volumes delivered into Cameron. But in terms of discussing the near-term potential, obviously for contractual reasons and confidentiality reasons, we can't talk about exactly what's going on at any particular time. And I would also underline the point that Don made, is that these businesses are largely dependent and well served by the long-term contracts that we entered into. And I suppose finally, the third point I'd make, which is kind of a follow-on to an earlier discussion about what's going to happen in the natural gas markets going forward. I would say we all need to remember that one thing we know for certain, and that, is that the natural gas market is now a global market. And heretofore, it had really been a North American market. So the position that we have in this global market I think is a very strong one.

Great. Thanks for the time.

Thank you.

Our next question will come from John [Ali] with Decade Capital.

Hello. Good quarter. Two questions. One on transmission and one on trading. What if any hurdles are left on the Sunrise Powerlink side on the regulatory front?

Well, I'll have Debbie expound on this, but really we're waiting for one permit. And that's from the US Forest Service.

Yes, John. We had three major permits that we needed to get, and we've gotten two out of those three significant permits. We've also been working with the Forest Service to meet all of their data requests and provide them all the information to have a decision by the first quarter of next year from the Forest Service for the remaining approval that we need. So we're going ahead with our pre-construction activities and getting ready to start construction in June of 2010, to be in service in 2012.

So the final path is decided?

Excuse me?

The final path of the line?

It has been. It's all there. It's just this permit. This is a $1.9 billion project. We've roughly spent 10% of that in preparation for getting this permit. So we're fairly confident that it's going to happen and happen in the next four or five months.

Okay. And on the trading side of the business, have you looked at to what extent your balance sheet can handle, I guess, the incremental capital from taking back parts of those businesses or a part of that business?

Let me ask Mark to address this.

Sure.

I think, look, I think the reality is is that to the extent that we go down that route, and it is not clear at all that we would do that or need to do that. But if we did, I think what we would make certain is is that whatever businesses we brought on to the balance sheet or do, just like anything else we do, we make sure that we can fund it in the long term. We make sure that we can fund it in low commodity price markets and high commodity price markets. And we're not going to do anything that would actually create a situation where we could have a problem down the road. So we would make sure we had adequate capital and adequate liquidity to do anything that we were going to do. But we're looking at all the options. The world is different than it was when we did this transaction. It changes all the time. There are several options out there, and we're exploring them all.

Seems like you have a lot more interest this round than you did when you sold it initially, and the markets are as you said vastly different now. Why do you think that is?

I don't know that we have a lot more interest this time around in the sense -- but I think the last time we were looking for a specific type of transaction, we found a good partner to do that with. They were well poised to grow the business globally. They had a lot of financial problems, and a lot of issues that, obviously, we didn't foresee. Nor did they, I don't believe. And I also believe that this time around the physical commodity business looks a lot more attractive to financial and other financial institutions and other types of companies than it did before. I think one of the things that's happened with the changes at the CFTC, and a lot of the emphasis on some of the new regulations is that the people that are in the physical commodity business like us are probably in the best position to take advantage of some of the future opportunities. Whereas in the past, I think a lot of times the emphasis had been on the financial side of the business.

So you think this round could come together a lot faster than the initial deal did?

Well, we do. And there's lot of other reasons for that, too. Some of the contractual arrangements we had from our prior partners or prior management team were bought out. So it makes the transaction a lot more easy for us.

Thank you.

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

Good afternoon.

Hi, Annie.

Hi. Can you update us on -- follow-up the question on CFTC. What's the latest, and are we expecting anything coming out soon?

Are you talking about the regulations that are coming out?

Yes.

Yes, Mark has been following these, but I would say that the focus so far has been to put some controls around speculative trading. And that's not the business we're in, and we don't expect to see any major impacts of what we do with our customer and our physical business. But Mark, any insights?

Well, I'll just say this. I think what we've seen generally -- what we've seen proposed to date, and there are several different proposals and we're moving toward some resolution on this. I think there will be some limits on the amount of speculative holdings a particular company can have. We think that those limits, as they're currently being discussed, look workable. So that we can still adequately serve our clients, and at the same time, effectively hedge our exposures that we have in the marketplace. That's what's most important to us. The other thing is that I think there will be some relief for some of the primary physical requirements in the business, i.e., from producers, generators, and those types for them not to have to do all of their transactions on a regulated exchange where there's margining requirements. And that it will allow people like us -- like we have been doing in the past -- so we've been doing this for a number of years, is to take different forms of collateral to be able to support our customers' hedging activities. And I don't think there's any intention among the government to restrict a producer or a generator or a local utility from hedging their position. However, some of these rule changes could have been very, very detrimental to some of those. And I think those voices have been heard loud and clear, and I think the movement these days is that for these types of physically oriented transactions, there's going to be -- it will be business -- pretty much business as usual for us. There may be higher capital requirements, and there may be some limit restrictions on open positions. But we think all of that's pretty workable for a physical business like ours.

Do we expect something by the end of the year, in terms of -- ?

I have no idea. I think this is -- I think healthcare is going to take the predominance of the activity between now and the end of the year. I don't know when this will actually come in for a vote. I doubt that it will get voted out this year, but I don't know.

Thank you.

We will now take our next question from Lasan Johong with RBC Capital Markets.

My questions have been answered. Thank you.

If there are no more questions, I want to thank you all for taking time out of your schedule to join us today. We're very pleased with the quarter and where we are year-to-date. I think it speaks well for the business model we have and the strength of our portfolio of businesses. Have a great day.

This does conclude today's Sempra Energy third quarter 2009 earnings results conference call. Thank you for joining us, and have a wonderful day.