桑普拉能源 (SRE) 2009 Q4 法說會逐字稿

Good day, and welcome to the Sempra Energy fourth quarter 2009 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, sir.

Thank you and good morning. I'd like to thank each of you for joining us, we know this is a busy time for everyone. This morning we'll be discussing Sempra Energy's 2009 financial results. A live webcast of this teleconference and slide presentation is available on our website under the investor section.

Here in San Diego we have 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, our 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 risks, 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 with the Securities and Exchange Commission. It's important to note that all the earnings per share amounts in our presentation today are shown on a diluted basis.

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

Thanks, and again, thank you all for joining us. On today's call, I'd like to accomplish several things. First, review with you our 2009 financial results. I'll then discuss our sale to JPMorgan of a portion of our commodities business, and provide some additional color with respect to our next steps. And then finally, I'll give you an operational update at our utilities and infrastructure businesses.

Now, the financial results. Earlier this morning, we reported fourth quarter earnings of $288 million or $1.16 per share, compared with $319 million or $1.30 per share in the same period last year. For the full year 2009, earnings increased to $1.12 billion or $4.52 per share up from $1.1 billion or $4.43 per share. Earnings per share for 2009, without the impact of a $0.26 per share write off earlier this year, improved 8% over last year's results. Last week, when we announced the sale of a portion of the commodities joint venture, we provided guidance for 2010 of $4.25 to $4.50 per share. This guidance assumes the sale of the metals, oil, and European energy business closed by mid year and a full year earnings contribution from the commodities joint venture of $150 million to $250 million.

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 & Electric, earnings for the fourth quarter were $67 million, compared with earnings of $81 million in the year ago quarter. The decrease was primarily due to $9 million of reduced incentive awards, and $4 million of higher wild fire related insurance expense in the fourth quarter of 2009. Full year 2009 earnings increased to $344 million, from $339 million in the previous year. At Souther California Gas, fourth quarter 2009 earnings were $75 million, up from $54 million in the fourth quarter of '08. The increase was due to $10 million of higher margin, and $7 million of lower litigation expense in the fourth quart of '09. For the full year 2009, SoCal earnings were $273 million, up from $244 million in 2008. The 12% increase in earnings for the year was due to continued strong operating performance.

Now let's go to slide five. Sempra Commodities earnings in the fourth quarter of 2009 were $71 million, compared to $164 million in last year's fourth quarter. The last quarter of 2008 benefited from great performance across all of our product lines. This year, the business performed modestly in the fourth quarter of 2009, it was led by oil and metals. Power also performed well, but results in the gas book were weak, due to low volatility and a flat basis differentials during the final quarter of the year. The quarter was also impacted by retention costs and higher foreign taxes within the joint venture. For the full year 2009, commodity earnings of $345 million were in line with '08 results.

Now, let's move to slide six. Here, we show how income is allocated at the joint venture for the last quarter and for the full year of 2009. Couple of highlights. First, the joint venture had income of $28 million during the quarter. After applying the income allocation methodology, the distributable income to Sempra was $24 million. After adjusting to US GAAP and for the impact of taxes, Sempra's joint venture income for the quarter was $74 million, that's down from $162 million in the same quarter in '08. For the year, the joint venture had distributable income of $407 million, and Sempra's after tax share was $352 million. The US GAAP conversion adjustment of $55 million for the quarter, and $163 million for the year, is primarily the recognition of storage and transportation earnings from 2008 that could not be recognized under US GAAP until 2009.

Now, lets move to slide seven. Fourth quarter earnings for our Generation business were $43 million, compared with $60 million in the same quarter in '08. The decrease for the quarter is primarily the result of $16 million of Mexican income tax benefits in the fourth quarter of 2008. For the full year 2009, the Generation business recorded earnings of $162 million, compared to $222 million in the prior year. The decrease was due to $31 million in reduced earnings due to lower gas prices in '09, the Mexican tax benefit in 2008 that I just mentioned, and $9 million of solar investment tax credits in 2008.

Now, let's move to slide eight. Sempra Pipelines and Storage recorded earnings of $37 million in the fourth quarter of 2009, that's up from earnings of $22 million in the same quarter of 2008. Fourth quarter 2009 results include $5 million of higher earnings from natural gas operations in Mexico, $5 million of higher earnings from investments in South America, and $2 million of higher earnings from domestic pipeline and storage assets. For the full year, 2009 earnings were $101 million, compared to $106 million in 2008. The decrease was due to a $64 million write off related to the liberty gas storage project. The write off was largely offset by $29 million in higher earnings from North American operations, $13 million of favorable tax benefits in 2009, compared with $9 million of unfavorable tax adjustments in 2008, and $8 million of higher earnings from South American investments during 2009.

Now please turn to slide nine. This slide provides a summary of our business unit results. I'd like to highlight a couple of things here. Sempra LNG had earnings of $35 million in the fourth quarter of 2009, compared with with a loss of $13 million in the prior year's period. The increase for the quarter was primarily due to the start-up of marketing and terminal operations. I'd point out that the fourth quarter of 2009 was the first full quarter that we received revenue from all of our long-term contracts. For the full year 2009, Sempra LNG recorded earnings of $16 million compared with a loss of $46 million in 2008. For 2010, we expect annual earnings to be in the range of $70 million to $90 million.

At Parent and Other, we recorded a loss of $40 million in the fourth quarter, compared with a loss of $49 million in the same quarter in '08. For the full year 2009, the Parent recorded a loss of $122 million, compared to a loss of $97 million in 2008. This increase is primarily due to increased interest expense.

Please turn to slide 10. Overall, our results for the quarter and for the year were very strong. Earnings at our California Utilities were up a combined 6% for the full year. Operating cash flow during 2009 was up 57% over the prior year, and from a liquidity perspective, we still have $3.6 billion availability under our committed bank lines at the end of the year.

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 our business activities starting with our commodities joint venture. Last week, we and RBS announced an agreement to sell the metals, oil, and European energy segments of RBS Sempra Commodities to JPMorgan for an expected $1.7 billion. Sempra's share of the proceeds is expected to be $941 million. We also expect to distribute approximately $500 million of excess cash in the business, of which Sempra would receive half.

Please go to slide 12. Last week, I commented that we were still exploring options related to the remaining North American gas and power business. These options included selling the remaining business, or finding a new partner or other relationship to provide liquidity and financial support that would cap our exposure to the business and allow us to reacquire RBS's share without issuing equity.

We have continued to explore several options for third party support, but in this market, we no longer believe we can find a cost effective long-term alternative to equity. Because of this, a sale of the business is now our preferred outcome. We have several interested parties, and believe a transaction can be completed quickly and in a fashion that delivers the best result for our shareholders.

Please go to the next slide. In a sale, we anticipate receiving 49% of the remaining book value, which equates to approximately $800 million, plus a premium. This assumes all the previously discussed distributions have been made. The combination of the sale to JPMorgan, the subsequent cash distribution, and the expected proceeds from the sale of the North American natural gas and power business, should mean total cash proceeds to Sempra in the neighborhood of $2 billion or more.

Please go to slide 14. We plan to use these proceeds to fund new growth, reduce debt, and upon an exit of the business, a share repurchase. If you assume we complete our exit of the business before year-end, and we earn $150 million to $250 million in the commodities business in 2010, we would expect our earnings for 2010 to be between $4.25 and $4.50 per share. For 2011, assuming we repurchase $500 million to $1 billion in equity before the start of the year, and given the growth in our utility and infrastructure businesses, we expect to earn between $4.35 and $4.65 per share in 2011.

Now go to slide 15 please. What I'd like to do now is update you on the activities at our California Utilities. 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 to receive in the next couple of months. A number of activities are underway to support the start-up construction later this year. We placed orders for key components, including towers and underground cable, and are now focused on completing the construction agreements and acquiring land rights.

Turning to our smart meters programs, at SDG&E we're well underway with the installation of smart meters, and have now installed almost 600,000. The meters are being installed at a rate of about 7,000 per day. We expect to have 1.4 million meters installed by year-end, and to complete installation of all 2.3 million gas and electric meters by year-end 2011.

At SoCal Gas, proposed and alternate decisions were issued earlier this month by the CPUC on our proposed gas smart meter project. This is a $900 million capital project that involves installing 6 million gas smart meters in phases from 2012 to year-end 2017. While the proposed decision issued by the administrative law judge didn't support the project, the alternate decision issued by the assigned commissioner in the proceeding recommended approval, provided certain conditions are met. We think this is a workable outcome, and we look forward to receiving a final decision from the Commission by mid year.

At San Diego Gas & Electric, the CPUC recently approved our request to defer the next cost of capital proceeding by two years. We were originally scheduled to file a cost of capital application with the Commission this year, but will now file in 2012. The cost of capital would be effective in 2013. SDG&E's current CPUC authorized return on equity is 11.1%.

Before moving on, I'd like to update you on SDG&E's litigation regarding the 2007 wild fires. After considering the amounts incurred for homeowner's settlements, additional reserves, and estimated defense costs, SDG&E's remaining insurance coverage is approximately $20 million.

Although additional costs necessary to resolve the remaining claims are likely to exceed the remaining insurance, the ultimate economic impact will be determined after taking into account amounts we expect to recover from other potentially responsible parties, including Cox Communication, and amounts SDG&E will file to recover in rates. SDG&E's rate recovery mechanisms, along with regulatory treatment of previously incurred large and unusual costs such as environmental liabilities, and the court's application of the strict liability standard to these fire related damages, all support cost recovery.

From an accounting perspective, the timing and our ability to accrue recovery for these costs, either from utility customers or other third parties, may vary from the time the cost is known and recordable, and the time of our payment and subsequent recovery. While this may have an effect on our reported results and cash flows, we expect to recover the vast majority of these costs.

Please now go to slide 16. At Sempra Generation, we've now began construction on our Copper Mountain solar project in Boulder City, Nevada. This project is a 48-megawatt expansion of the existing 10-megawatt El Dorado solar facility. The power generated by this expansion will be sold under a 20-year contract to PG&E. We'll bring this project on-line in phases, and expect to complete construction later this year.

Also last year, Sempra Generation acquired a 50% interest in the Fowler Ridge II wind farm located in Indiana. We're equal partners there with BP and this 200-megawatt project, which began operations in December. Moving to our LNG business unit. We've completed construction on $125 million nitrogen injection plant at our Energia Costa Azul terminal. This project became operational in December, and provides us with another source of contracted revenue.

At our Cameron LNG terminal in Louisiana, we've received two spot cargos from RasGas, one in the fourth quarter of last year and one so far in this quarter. The US is seeing an increase in LNG flows, and we're optimistic about receiving additional cargos this year from cutter under our agreement with RasGas. Both of our LNG terminals are supported by 20-year contracts that represent nearly 65% of their total capacity.

At our Pipelines and Storage business, The Rockies Express pipeline project was completed in November and is now fully operational. And in our natural gas storage development program in the Gulf Coast region, we expect to bring an additional 12.5 billion cubic feet of storage capacity on-line by the end of this year at our Bay Gas and Mississippi hub facilities.

Now please go to slide 17. Yesterday, we announced a definitive agreement to acquire El Paso's pipelines in Mexico. We'll acquire interest in two natural gas pipelines connected to the US, a natural gas pipeline connected to Pemex System in northern Mexico, and a propane pipeline near Monterrey. Three of the four assets are coned with Pemex in a 50/50 joint venture, and one will be wholly owned by us.

The Mexican government has announced its desire for our new partner, Pemex, to dispose of their ownership interest in these assets. Pemex will hold an open auction to facilitate the sale, which is subject to our right of first refusal. Pemex long-term contracts to utilize these pipeline capacities will remain unchanged. The assets are all in operation, and provide stable revenue streams under long-term contracts, representing a weighted average length of 13 years with Pemex and the Mexican Federal Energy Company, or the CFE.

The acquisition, which will be part of our pipelines and storage business, extends Sempra's existing infrastructure footprint in Mexico, which currently includes natural gas pipelines, distribution companies, a power plant, and our Energia Costa Azul LNG terminal. The total purchase price for the acquisition of the assets from El Paso is $300 million, or $260 million net of cash and debt. We expect the transaction to close mid year, and to be slightly accretive to earnings this year, and contribute $0.10 per share in 2011.

Now, the next slide please. Let me just wrap up by saying, I'm pleased with our results in the fourth quarter and for the full year. I'm also proud of our accomplishments in 2009, which include the completion of a five-year construction program in our natural gas business, and the continued progress of our major utility projects.

We have decided on our approach for the remaining business at RBS Sempra Commodities, and as we exit the trading business, the proceeds will help fund our robust capital program of $14.5 billion over the next five years, and lead to strong predictable growth. We'll be giving you more detail on that capital program and on our earnings projections at our upcoming conference in San Diego on March 25.

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

Thank you. (Operator Instructions). We'll take our first question today from Craig Shere with Tuohy Brothers Investment Research.

Hi, good quarter, and congratulations on the process of thinking through the solution of the JV. How quickly do you think final news regarding the JV, are we talking still weeks, which you talked about last time on the call?

Well, I think Craig, we said last time that we expect to close the transaction with JPMorgan some time early summer. And as far as, as far as the sale of the remaining business, we and RBS are starting a dialog now with those people who have already expressed interest.

Do you think we could have some feedback on that by the time of your conference?

I think so. I mean, the plan is to, is to move as quickly as we can on this. That's RBS's desire, now that we've made a decision to follow them, I think we'll work together to make this happen sooner versus later.

So assuming you do consummate that, and you have over $2 billion in total proceeds, less the $500 million to $1 billion share buy back, and the cost of the accretive El Paso acquisition, you're still going to have a few dollars left over. How are you thinking that through, are you keeping that powder dry for possible right of first refusal on the Pemex interest?

Well, as I mentioned, we have a fairly robust capital spending program of $14.5 billion, so as we look at what we're going to be doing in our utilities, looking at some of the growth opportunities that we've been looking at, we'll make a decision which of those to pull the trigger on and how much share buy back we'll do.

And last question I guess, after this kind of exit from the trading JV, your remaining assets are pretty low risk, even though you're out performing today, maybe you're at roughly an 11 times, 2011 multiple given the middle of your guidance. Whereas peers are maybe 12, 13 times plus, what do you think it takes to close that gap?

Well, I think the steps we're taking right now are going to do that. This was a decision that we had a lot of agonizing over, but as we went through the options of staying in the commodities business or selling it, and looking at the growth opportunities before us, it became pretty clear that the best outcome for our shareholders was to go ahead, sell this business and reinvest into businesses that have higher growth potential and hopefully a higher earnings multiple.

Right.

We'll let the market kind of catch up with the new direction we're going, but we would expect with the portfolio of businesses that we have going forward, that we ought to see an uptick in the multiples in those businesses.

Great. Thank you.

Thank you.

Next we hear from Barry Klein with Citi.

Hi, guys.

Hi, Barry.

With regard to your guidance in 2011, do you include any marketing earnings in those numbers?

No, there's not. We're assuming we're out of that business in 2011.

Got you. And what portion of proceeds do you expect to spend? Do you expect to spend any of proceeds from the incremental $800 million from the sale of that, or do you expect to just sort of leave that on the books in cash?

We're going to take all the proceeds, and basically recapitalize the business, keeping it at a 50/50 debt equity structure that we have now. But remember, we have a fairly robust capital spending program, and a lot of opportunities to buy things, like you just saw that we bought yesterday. And so as we go forward, we'll redeploy that into growth projects, and we're not satisfied that we're getting the return on the projects that either we have before us within our businesses or acquisitions.

Right. I was getting at, if you included any of that, the earnings impact from those repurchases in your guidance for 2011.

Yes, they do.

You do. Okay. And then also, did you, have you reserved anything for, when you talked about the wild fire litigation, is there any incremental reserves related to that that you've put onto your books?

No, there's not.

Okay. All right. Thank you.

Thanks, Barry.

Next we'll hear from Paul Patterson with Glenrock Associates.

Good morning, guys.

Hi, Paul.

Couple things. When you guys first announced the sale of the European business, you guys were mentioning that you guys didn't want to go any lower than triple B. With the new structure, with the new lower risk profile, obviously without the trading business, how do you feel about that now?

Well, we have spent a lot of time in the past couple of months working with the rating agencies to get an understanding of what it would be like with and without the commodities business, and also looking at what we need to support the businesses we have, where we've got some counter-party commitments in our Generation and LNG business. Now, I think we're okay once we're out of this commodities business to let our credit rating maybe slip a little bit, but it's still very important to us going forward, because of robustness of our capital program.

So this, I guess gives you more flexibility but doesn't really necessarily change your goal in terms of how you reach this.

Let me ask Mark to give you some more flavor on that. As I said, we spent a lot of time in the last couple of months going through this.

This is Mark. I think generally speaking, we probably don't want to move our credit rating too much. We do have effectively A ratings at all of our utilities, and we don't want to have the Parent to be too far separated from those in the rating side, but I think the flexibility that we're going to get by moving away from the trading business is our business profile that the rating agencies look at is much more secure. That in and of itself allows us a higher leverage ratio and lower coverage ratios than what we would have needed to get the same rating with the trading business.

So I think as you see us going forward, we have a little more flexibility in our balance sheet structure and how it looks while maintaining the same ratings.

Okay. Great. When we go back to the $1.6 billion, that's tangible book value, correct, that you guys have in the business right now, and your $2 billion assumption basically indicates that you get no premium over that, is that correct?

Right. Correct. What we're saying is, well that includes the premium on the sale to the JPMorgan business.

Sure.

But we're not, we just did that without saying what we thought the premium would be on the North American power and gas business, and obviously we're not going to communicate that number, what we think it is now, because that will be all we'll get. And so we'll let the market decide what that is.

I guess what I'm saying is that it seems that you guys are using a conservative estimate here because one would expect that there would be a premium, correct?

Absolutely.

Okay. And can you remind us what the premium was for the JPMorgan European transaction?

$460 million.

Off of the tangible book value.

Correct.

Okay. Now, if you were to get a premium, I would assume there would be a tax impact, could you just give us a little flavor because of course, this is a little bit convoluted with the RBS JV. What kind of tax impact we might be seeing in terms of any premium on top of that.

We think the tax impact will be relatively small. We do have some good will on the books that would absorb some of the gain, but once we, if you get a large premium, most of the North American power and gas business is in the US, obviously. There's some in Canada, but both of those rates are going to be in the 38% kind of range.

Okay. And the good will, the good will offset you were thinking about, how much would that be?

We do have some good will on the books, and it's about $100 million, it's between $100 million and $150 million.

Okay. And then the Pemex assets that are going to be up for auction, can you give us a little bit of a flavor for what the size of those are.

Well, they're a 50/50 partner, so you can assume what we paid for them is kind of what the market is going to have as a starting point for their 50% ownership.

Okay. I got you. So basically it's, okay, I got you. Thanks so much. Thanks a lot guys, congratulations.

Thank you.

Next we'll hear from Andrew Levi with First New York.

Hi, Andrew.

Just, obviously you said your risk profile's going to change, a lot of things are going to change. How are you going to view the dividend now. Because obviously you've had a traditionally low payout ratio, profile changes, does your approach towards the dividend change.

Andrew, here's the dilemma, we're still a growth company, talking about spending $14.5 million over the next five years. When you look at the next couple of years, we're going be out borrowing about half of that to fund that growth, so increasing the dividend at this point in time would not be appropriate. And I think as long as we're still on a rapid growth cycle as we are, we're going to keep our dividend policy as it is. But as soon as we get to a point that we're leveling off on our capital spending, I think we'll go back and revisit that.

Thank you.

Thank you.

Next we'll move on to Leslie Rich with Columbia Management.

Hi, I wondered if you could talk about the implication strategically of not being in North American gas and power trading, more particularly gas trading, because you've often discussed the benefit that that has given you in terms of your investments and assets, and sort of the strategic intelligence. And just wondered if you, how you would replicate that, or if you would plan to have some sort of internal department monitoring that going forward, or sort of how to think about you being right out of the business entirely.

Well Leslie, that's a good point, it's one of the things we're going to cover when we meet with you next month, but we have a lot of natural gas assets with our pipelines and storage, our generation and our LNG business, and so you should think about us building up an optimization program or a natural gas trading program around our existing businesses.

Okay. But one could assume that wouldn't be a very capital intensive, high volume kind of business. You're not trying to replicate what you had.

That's correct.

Okay. Thank you.

Our next question comes from the Lasan Johong with RBC Capital Markets.

Hi, Lasan.

Hi, Don. I think you know where I'm going to come from. What would entice you to buy back the commodities business. I know you said you couldn't get the right credit facilities or agreements, but at some point the price becomes so stupid, you say, you know what, I don't want to sell this, I want to buy this. What is that break off point?

Well, Lasan, this is one of those things that we have noodled from every direction trying to find a way to buy RBS out of their piece, and my sense is, is they're such a robust interest on this remaining piece that it's not going to be discounted at all. As a matter of fact, it will go for a premium.

When we looked at staying in this business, it was really an issue for us of having to go out and issue about $2 billion in equity just to maintain the earnings that are in this business. And looking at the options that we have of deploying this money into growth projects, it just didn't come out where it was even close, from a shareholder outcome, of us staying in this business or growing it in an area where we can achieve earnings that will get a higher multiple.

Fair enough. Can you tell me, I have a sense that, Don, you're kind of looking at the, your Mexican acquisition with something more than just a stand alone business. Can you kind of give us a grand strategy around why you're doing this particular acquisition, is it to connect eventually to Baja Norte and Energia Costa Azul and create kind of a pathway for gas back and forth from gulf coast to the US west coast, what's the grand strategy here that lays behind this strategy.

Well, when you think about our position in Mexico, one is, Mexico has some of the same environmental issues that we're trying to address here in the States. Natural gas is becoming the fuel of choice in Mexico. The areas that we're investing in have high growth. So when you look at the portfolio of assets we're putting together in Mexico, we plan to take advantage of what we see as a fairly robust opportunity for these businesses to grow.

Do you try to duplicate Southern California gas in Mexico?

Well, I'm not sure that our design schemes are that big, but we have found Mexico to be a very favorable place to invest money. The regulations are very clear, it's an environment that is conducive to the long-term types of assets that we're building, and the direction of the government in terms of their environmental and energy policies are right in line with the types of investments that we're making. So we plan to get bigger there, and we have some other things that we're thinking about in terms of that business, but I'm not going to talk about them in this call. But when you show up at or analyst conference, we'll give you some more flavor, but once again remember, these assets are fully contracted for the next 13 years.

Got it. Any chance you can give me a rate of return on that business?

It's in the, the IRR is unlevered at low double digit.

Nice. Thank you.

Thank you.

Next we'll here from Vedula Murti with CDP US.

Good morning, good afternoon, depending on time zone.

Hi, Vedula, how are you.

I'm well, thank you. I'm wondering given the capital program you discussed, and I happen to wholeheartedly agree about the dividend comment you made earlier, should we then kind of take from that the organic opportunity plate you have in front of you would then probably preclude any kind of material or significant corporate M&A, in terms of proceeds and utilization of balance sheet?

Well, Vedula, first of all, take my comment with a grain of salt about issuing equity to remain in the commodities business. We don't have any aversion against issuing equity around here if we can do it for the right reasons, and if we saw an opportunity to buy something that we thought was a good purchase, and it required issuing equity, we would do that in a heartbeat. But so far the things that we have that are organic growth within our existing businesses, and some of these smaller things that we're seeing on the fringe that have great returns, really are the direction that we're currently going.

Yes. I very much concur, I'm just trying to kind of frame in terms of what I think, in terms of what might be realistic expectations as an example, if there's a difference between doing like an energy south kind of transaction as opposed to something that we've seen, more recently within the energy space as well as the utility space. I'm just trying to kind of get a sense of scale as to, given your organic opportunities and the hurdle rate that something more significant would require.

It's kind of hard for me to give you a general answer, but it's, one is, if we found a transaction no matter what the size is, and it had the right returns and it was in the space that we're looking at, we would find a way to make it happen, issuing equity or not. We have just found that many of the larger deals that we look at, because of the premium required, and when they're utility deals and the sharing you have to do back with customers, they just don't work out for our shareholders.

That's, that was basically the point I was getting at, and that's what I wanted to try to make sure I understood at this point. Thank you very much.

Thank you.

Next we'll move onto Michael Goldenberg with Luminus Management.

Hi, how are you, I wanted to get a better understanding on the sale of the commodities business. I guess originally you selected JPMorgan and everything was going well. And then US Government made several comments, at least to us outside it seems to have tempered JPMorgan's interest in the overall business. Now you're saying, because you can't work it out with RBS you're going to sell the business. You mentioned you have several interested buyers, just to give us a flavor. The parties that are interested, are they less concerned about potential Federal regulations, are they not subject to those Federal regulations, what makes them interested now that they weren't interested when JPMorgan originally was around. Or maybe they were, and I just don't know.

Let me start and I'll have Mark give you the flavor since you've worked on this, but we had different types of buyers that had an interest in this business. We had some of those that wanted to buy the entire business. And then we had others that wanted the pieces. Going forward, it's those that wanted smaller pieces of the business that we think we'll end up transacting with for the North American piece. But Mark, do you want to shed some --.

Without naming any names, I can say that I think the people that are interested in the North American Power and Gas business are not worried about the Federal regulations as it applies to financial institutions. A lot of them are not financial institutions, or they're not financial institutions in the sense of being large depository banks, so I think from that perspective, it's a little bit different universe. This is, this now actually is much more attractive to a lot of people, because it's of a size that's more manageable for companies that aren't JPMorgan size or Deutsche Bank size. So I think from that perspective, I think it's a more manageable, more easy to do kind of transaction, and there's high interest. So I think we're fairly optimistic that we'll get a good price.

And my other question is, just on the numbers, you seem to be, when you announced the first transaction with JPMorgan, you reduced earnings guidance, so as to imply that that sale of the business, even with the great proceeds, was dilutive. Now, your new guidance for 2011, which is going to have no earnings in the business, no earnings from the commodities business, actually we're seeing upward trajectory in earnings from 2010 to 2011. I'm trying to reconcile that in my head.

Does that mean that maybe 2010 was conservative and including, when you included commodities you were trying to be extra conservative, or is that just this big share buy back that's creating accretion even though your selling another half of the business when the first half was dilutive, something is numerically is difficult to reconcile.

It's not really that difficult. I think at the end of the day it's a matter of timing. We have two things going on. One, the 2010 guidance adjusts for the fact that we have a very much reduced commodities expectation in that number. And we're getting the monies from the proceeds from the sales towards the middle to the end of the year. And with 2011 we can redeploy those proceeds in some of them which will give instant earnings accretion, which is like for instance the share buy back, and would have some new investments coming online like our Mexican pipeline assets.

And then also just reflective of the fact that our other businesses have fairly good growth. Our utilities are going to grow, our other businesses are going to grow, and so that's all reflected in the 2011 guidance.

So I think from a, one of the things that we're showing here is, yes, we are kind of resetting the bar where we're going from a move forward position, but we're absolutely going to grow this business robustly into the future, and this is where, and this is the direction it's going to be, and it's going to be growth in things that I think our shareholders are going to appreciate, give a higher multiple to and we think it will be a better stock.

No question about it. Maybe it just seems to me that 2010 probably, to me seems like could have some up side, if you're going to hang onto the business a little longer than I guess estimated. Anyway, thank you very much.

There's always upside with us.

Thanks, Michael.

That's true, thank you.

Our next question comes from Michael Lapides with Goldman Sachs.

Hi, guys. I actually have a couple of questions if time will permit. I want to come back to the utilities. I actually want to come back to, raise it a notch or two and come back to the State of California. The State of California is having pretty difficult financial time right now. I think even in the last 24 hours there was some news flow about bond issuances.

At what point do we think about California potentially as a regulatory environment for utilities mean reverting, it was not ten years ago where people would have looked, maybe it was 11 or 12 years ago that people would have looked at California and said, it was the worst in the country. It's probably spent the last five or seven years at the very best in the country. Is what's happening in California as a State financially or economically, the driver that over the next couple of years, maybe not sends it right back down to number 50, but mean reverts it back from being kind of the best regulatory environment in the nation.

I'm going to have, Michael, let me ask Debbie to weigh on this, but let me just provide at least a view from my perspective. California, like the rest of the country, for the last 20 or 30 years hasn't had an energy policy. And customers have kind of swung up and down depending on the price of oil and natural gas because of that. California adopted a policy about four or five years ago to go its own way, and to become less dependent upon fossil fuels, and to have a higher build out of renewables along with energy efficiency and demand side management. And that direction had support not just from the regulators at the Commission, but also from the elected officials in Sacramento. And even today, there's no doubt that we have a tough economic climate in California.

When you look at the fact that the one thing that we're blessed with in California is fairly decent weather, and we don't have a large base of industrial customers, this has not been an issue. Now, that doesn't mean that it can't be at some point in the future, but everything today says we're going to stay the course, we're going to continue down this path we've been on for the last five or 10 years, because what we want longer term is price stability in California from the energy sector.

Let me just stop there and have Debbie--.

Michael, I don't have much to add to that. I would say that we have some of the lowest bills in the US, and to emphasize that, and that's because California has invested so much in energy efficiency to reduce customer bills, and that is a bipartisan leadership position of our State. From the Governor to the Legislature to the Commission and the regulatory agencies, there's true alignment of where the State sees the future in this area.

As a matter of fact, there was just recently a discussion at a Commission meeting on this issue, and the discussion was around the need of the Commission to provide the stability in regulation to ensure that these long-term investments can be made to create that future that they envision. And I think the most recent example of that is we just got the decision from the assigned Commissioner on smart meter for SoCal Gas, which reinforces, I mean this is a $1.1 billion project, and the assigned Commissioner is proposing approval of that. I think that's an example that our Commission is really focused on achieving this long-term vision of infrastructure, development and stability for customers.

Okay. One follow-up question unrelated business, when you're looking down at the Gulf and looking at post the acquisition of energy storage, I mean, energy south, about how many storage caverns you anticipate building over the next few years, both at Bay Gas and Mississippi hub. Has that changed since your prior outlook, given what's happening just to electricity demand down there.

I'm going to have Neal give you a perspective. But I would just say, Michael, that you have to come back to the way that we develop and contract these facilities. We don't build any of these things unless there's a customer requirement or demand to sign up for storage capacity. So we've always approached this business that, yes, gas prices will be volatile and they'll be less volatile, but what really counts here as we look at building these projects in good locations is whether or not we can get customers to sign up to use these facilities, and that's, that will always be the direction we go forward with our development program in the Gulf. Neal?

Short answer is we're still on the same trajectory that we've communicated earlier, we have a little bit over 11-BCF of capacity that's fully contracted and operational, and we're going to increase that by about 12.5 by year-end, and a significant portion of that is contracted as well. So I just would underline what Don said, which is that our fundamental approach to these kinds of businesses is to contract a significant portion of the capacity before we commit to the construction.

Got it. Okay. Thank you, guys.

Thanks, Michael.

Next we'll here from Leon Dubov with Catapult Capital

Hi, good morning.

Hi, Leon.

I realize this is kind of a fairly unlikely scenario. But maybe you can kind of humor me. If for some reason there is not enough interest in the North American business, what are your kind of fall back plans if you can't sell it? Would you prefer to just wind it down or would you then look at owning the whole thing in some kind of scaled down version?

First of all, let's go with the premise that RBS is going to get out of this business period, and so with that, there will be an exit that is planned. It's hard for me to see how we would stay in this business just looking at the amount of robust interest that's already been expressed in buying the remaining parts.

Mark, do you have any--?

Well, I would say that I think it is, I think the premise is actually, it is quite remote, but if it were to be the case, an alternative, you could wind down the business, and I don't think we would have any problem getting our book value out of it at the kind of a worse case scenario, so I think from that perspective, it's a relatively low risk kind of perspective. And one of the reasons I cap a lot of comfort in that, is that as we've discussed previously, the North American Gas and Power business right now, because of a relatively flat basis across the country, and with the contangos that have come in lately, I think you find that we don't have a large, we don't have as large a net investment in that business as we've had in the past, and so we're sitting on a fair amount of cash.

We've talked about some distributions already, and there's still a cushion in the business, so I don't think it would be a tough thing to do, but I think generally speaking we think that's a very, very remote outcome. And it just makes so much sense for so many different parties to step into this thing at this time, that I just really don't think it's going to happen.

Fair enough. What kind of time frame do you think we'd be looking at in this continued unlikely case of a wind down to get the book value out sort of similar worst case outcome to a sale, but in a different format?

Well, I think, like I said, most of the money is already in cash, and so the remaining amount which would only be less than $500 million is average book life is 18 months, so you would roll off in roughly that period.

Okay. Fair enough. Thank you very much.

Thanks, Leon.

We'll move on to Jesse Laudon with Zimmer Lucas.

Hi, good afternoon

Hi, Jesse.

Just had a quick question regarding some of the proceeds. The size is very clear just in terms of, on the exit from the commodities business, but just with respect to the earnings, I know you earned about $345 million this year, and as I understand it, you usually get the dividends next year, and you're projecting in your 2010 guidance of about $200 million. So how should we think of that kind of extra $500 million of earnings, is that included in the proceeds or would it be incremental?

That is, the extra $200 million is not included. Last year's earnings is included in the proceeds.

Okay. Great. Thank you.

Thank you.

[Nisin Dehiha] with Numero Securities has our next question.

Hi, most of my questions have been asked. But I just wanted one clarification on your comments regarding the target rating. Now obviously if you sell this business, you can keep the triple B positive rating at the rating agencies I would think. But in terms of your targeted rating, are you still looking at triple B flat or better, or now that you're not going to get the commodity business, you're looking at triple B positive, and would like to stay there?

I think we'll always be triple B flat or better. And even with the commodities business, we consider that where we'd be. We're triple B plus right now, we think that this, that for the most part, the rating agencies will will keep us at that. We don't expect to change even with these plans.

I would think so, but in terms of you're targeting, are you targeting triple B positive now?

I think we're, we would not go below triple B flat. We're targeting triple B positive.

Great. Thank you.

Thank you.

Next we'll here from Rudy Tolentino with Morgan Stanley.

Hi, Rudy.

If you're using a speaker phone, depress your mute function.

Oh, sorry about that. Hi, this is Rudy. Looking ahead to 2012. Should we expect 2012 earnings to be flat given the roll off of the CDWR contracts net the, any new growth investment?

You know what, Rudy, we've got to save something for the analyst call. We've given way more information than we normally give at this point in our planning cycle, and so we're really not going to address 2012 or other future years until you come and see us in April.

Okay. But can you just maybe give me a sense of what your plans for hedging your gas generation assets going forward, once the CDWR contracts expire, or is that another reason for, well, I'll let you give a shot at that?

Well, look, I think what we're looking at to do is obviously to try to maximize the revenue potential of those assets. We're looking at a lot of different ways to recognize that potential, and obviously, there will be some degradation in income in that business unit, but we think we have other business units that are going to do much, much better, so generally speaking we'll be fine.

Okay. But is this something that you're looking to hedge some more, or are you thinking about selling the (inaudible).

No, I think generally speaking we're going to continue to operate those assets.

Okay. Thank you very much.

Thanks, Rudy.

Next we'll hear from John Ali with Decade Capital.

Hi, everybody. I was just wondering if you could clarify something for me. I heard earlier, you guys were saying you are targeting a 50/50 capital structure, is that right.

That's what we have now, and with this capital program we have underway, that's what we're going to try and maintain.

Okay. Because in the past you said if trading weren't really an issue, you'd look to take it to more 40% or 60/40.

No, I think, that's probably something that I had said in the past, and let me just be clear, what I said was, is that our non-utility businesses could support a little, probably could have a little bit higher leverage, but our utility businesses, which are a vast majority of our balance sheet are a 50/50 capital structure, or even a little less leverage. And so when you average the two, we still kind of come out around 50/50, and to be honest, really, we don't, we frankly don't manage to a capital structure from that perspective. We manage to a coverage ratio. And when we are in a growth mode, as we are currently in, and building projects ahead of their cash flow, we tend to have to manage to a slightly better leverage, less leverage just to maintain our coverage ratios. And that's really where we operate.

Now, with that, I will say, the fact that we're selling the commodity business gives us a little more flexibility in our coverage ratios because our earnings are now a lot more predictable and a lot more certain, we don't need as high a coverage ratios as we have in the past, but even with revised ratios we'll still be around 50/50 coverage, that's the way it will work out.

Great. Thank you.

Okay.

Our next question comes from Mike Bolte with Wells Fargo.

Hi, guys.

Hi, Mike.

I just had, in terms of the 2011 guidance, if you do get a premium on the North American commodities business, does that like represent maybe some potential upside to the 465 high end, or is it sort of included in there.

It's not included. It would be a little bit of upside depending on how we're able to deploy the proceeds.

Okay. Thank you.

Okay.

Thanks, Mike.

At this time there are no further questions. I'll turn the conference over to Mr. Don Felsinger for closing remarks.

Thanks again to all of you for taking time this afternoon to join us for our fourth quarter earnings call. Any follow-on questions, get a hold of Jeff, Lynne or Scott. Have a great day, and we'll see you on March 25 in sunny San Diego, take care.

This does conclude today's conference, thank you for your participation.