桑普拉能源 (SRE) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Sempra Energy second quarter 2010 earning results conference call. Today's call is being recorded. At this time, I'd like to turn the conference to Steve Davis. Please go ahead, sir.

Good morning, and thank you for joining us. I'm Steve Davis, Vice President of Investor Relations. This morning we'll be discussing Sempra Energy's second quarter 2010 financial results. A live webcast of this teleconference and slide presentation is available on our website under the investor section.

With us today in San Diego are several members of our management team, including Don Felsinger, Chairman and Chief Executive Officer; Neal Schmale, President and Chief Operating Officer; Mark Snell, Executive Vice President and Chief Financial Officer; Debbie Reed, Executive Vice President; and Joe Householder, Senior Vice President and Controller.

You will note that slide two contains our Safe Harbor statement. Please remember that this call contains forward-looking statements that are not historical facts and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve 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 the Securities and Exchange Commission. It's important to note that all the earnings per share amounts in our presenting are shown on a diluted basis.

With that, I will turn it over to Don, who will begin with slide three.

Thanks, Steve. And, again, thank you all for joining us.

On today's call, I would like to accomplish several things. First, review with you our second quarter financial results, and then give you an update on the status of the RBS Sempra Commodities joint venture sales process. And finally, I'll give you an operational update on our utilities and infrastructure businesses.

Now to the financial results. Earlier this morning, we reported second quarter quarter earnings of $222 million or $0.89 per share, compared with $198 million or $0.80 per share in the same period last year. All of our core operating businesses performed well in the quarter. We have also announced that we'll begin a $500 million share repurchase later in the quarter.

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 second quarter were $75 million, compared with earnings of $70 million in the year-ago quarter. For the first six months of 2010, SDG&E's earnings were $158 million, compared with $169 million last year. The decrease was primarily due to $11 million of higher liability insurance premiums for wildfire coverage.

At Southern California Gas, the second quarter 2010 earnings were $69 million, that is up from $65 million in the second quarter of 2009. For the first half of 2010, So-Cal Gas's earnings were $134 million, up from $124 million in 2009. The increase was due to improved operating results and a lower effective tax rate on operations, and that's offset by a $13 million tax charge recorded in the first quarter due to the passage of the health care bill.

Now, let's go to slide five. Our Generation business recorded earnings of $48 million in the second quarter, compared with earnings of $33 million in the same quarter of 2009. The increase for the quarter is primarily the result of renewable energy credits from new projects, partially offset by lower earnings due to scheduled plant maintenance on two power plants, and from expenditures related to earthquake damage at our Mexicali power plant in Baja, California. For the first six months of the year, Generation recorded a loss of $5 million, compared with earnings of $76 million in the same period in 2009. The decrease was primarily due to an $85 million charge related to a proposed energy crisis litigation settlement.

Now, please move to slide six. Sempra Pipelines and Storage recorded earnings of $39 million in the second quarter of 2010, compared with a loss of $27 million in the same quarter of 2009. The current quarter included $5 million of earnings from the El Paso Pipeline acquisition, which was completed at the end of April. Last year's loss was primarily due to a $64 million asset write-off at our Liberty Gas storage project.

Now turn to slide seven. Sempra LNG had earnings of $13 million in the second quarter of 2010. That compares with the loss of $12 million in the prior year's period. The increase for the quarter was primarily due to higher earnings from operations. You will recall that the Cameron LNG facility became operational, and our supply contract with Pandu Partners for the Energia Costa Azul LNG facility became effective the second half of 2009. For the first six months of 2010, Sempra LNG had earnings of $45 million, up from a loss $19 million in 2009. 2010 results benefited from $11 million of earnings recorded in the first quarter related to payment for non-delivery of cargos.

Now, let's move to slide eight. Sempra Commodities broke even in the second quarter of 2010, compared with earnings of $85 million in last year's second quarter, due primarily to lower results in crude oil, oil products and natural gas, as well as higher costs for employee retention. The break-even performance during the quarter was consistent with our expectations, and is not expected to improve significantly prior to the completion of the joint venture sales process.

Let's move to slide nine. Here I would like to address our progress with the sale of the RBS Sempra Commodities joint venture. We concluded the sale of the metals, oil and European gas and power business to JPMorgan, which provided Sempra with roughly $1 billion in proceeds, including distributions of earnings related to the sole businesses. I will touch on the remaining JV sales elements in a moment, but given the positive conclusion to the JPMorgan transaction, we will be moving up our share buyback plans, and we will begin a $500 million accelerated share repurchase program later this quarter.

As a reminder, there are two segments of our remaining businesses. The North American Gas and Power business, and Solutions, our retail marketing business. We are still in active negotiations for these businesses, and are on track to sell both. We currently expect to be able to announce something before the end of next month.

We recognize this process has taken longer than we expected. This was due in part to the uncertainty around the financial reform legislation, coupled with flat trading, and weak gas and power markets. Once we finalize the sales process, we will address how and when we intend to deploy the remaining sales proceeds.

And with that, I will turn it back over to Don, who will begin with slide ten.

Thanks, Mark.

Let me update you on activities at our California utilities. Last month, San Diego Gas & Electric received approval from the US Forest Service for the Sunrise Powerlink transmission line. Now that all major approvals have been received, we are moving forward with construction on $1.9 billion project. When completed in the second half of 2012, the 500-kilovolt line will have the capacity to carry 1,000 megawatts of clean, reliable energy.

Turning to our Smart Meter program at SDG&E, we have now installed more than 1.2 million meters. We remain on schedule to have all 2.3 million gas and electric meter installations completed by the end of next year. Also at SDG&E, we recently filed an application for a $600 million tax equity investment in a proposed 309-megawatt wind farm in Montana. SDG&E had a previously-approved power purchase agreement with this project. Financing for renewable projects is difficult in this economy, and this investment by SDG&E will make this project a reality, while providing cost-effective renewable energy to our customers, and utility-type returns to our investors.

Finally at SDG&E and SoCal Gas, we will be filing our applications for both utilities' 2012 general rate cases later this year. The first step will be the filing of a notice of intent this month, followed by a final rate case application in the fourth quarter of this year. The CPUC's rate case plan calls for decisions by the end of next year.

Now, let's go to slide 11. At Sempra Generation, construction continues on our Copper Mountain solar project. This 48-megawatt project is adjacent to our existing 10-megawatt Eldorado solar facility. The power generated will be sold under a 20-year contract to PG&E. We energized the first block of power in June, and currently have 18 megawatts in service, and we will continue to bring this project online in phases through the end of this year.

Following the April earthquake in Baja, California, Sempra Generation's Mexicali power plant was out of service for several weeks for inspections and repair of some relatively inexpensive but critical equipment that was damaged during the quake. The repairs were completed ahead of schedule, and the plant is now back in service.

At our Pipelines & Storage business, we closed on our acquisition of the Mexican pipeline and gas infrastructure assets from El Paso during the second quarter, and our natural gas storage development program remains on track. We'll bring the first 7.5 billion cubic feet of storage online at Mississippi Hub later this quarter.

At our Bay Gas facility, we expect to put an additional 5 billion cubic feet of storage into service by year end. In total, we expect to have 24 billion cubic feet of storage capacity in service by the end of the year at these two facilities.

Now, please go to the final slide. I'm very pleased with the solid operating results of our core businesses for both the quarter and year-to-date. Last month, two milestones were reached. We received the final major regulatory approval required to move forward with the construction on the Sunrise Powerlink transmission line; and with this approval, over $3 billion of key infrastructure projects at our utilities have now been approved, all of which help to solidify the earnings growth projections in our plan.

And we closed the sale of RBS Sempra Commodities' metals, oil and European gas and power business to JPMorgan. This transaction enables us to begin a share repurchase program of $500 million. We continue to work to complete the remaining sales process for the Commodities joint venture, and we'll update on you our progress.

And as we discussed with you at the analyst conference earlier this year, we have a number of attractive projects in our development pipeline. We look forward to sharing our progress in the weeks and months ahead on a few of these projects.

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

(Operator Instructions)

Our first question will come from Greg Gordon of Morgan Stanley.

Thanks, good morning. I have two questions. The first one is the -- on a fairly obvious topic. With regard to the sale of the different assets in the JV, is there a scenario in which -- that you foresee now because you're -- that is not the case, that you might retain part of this portfolio of businesses?

Well, Greg, I will have Mark give you additional flavor on this, but we have been at this process for several months now, and a lot of that work was kind of slowed down by the financial reforms that were causing some uncertainty as they were being developed in Congress. I think that is all clear and behind us. We have had a lot of people look at our book, look at these businesses, and we're very comfortable now with what the book value of that business is, and my sense is we're going to end up selling all of this business and announce something within the next month or two.

And you did not put in your official slides or in your presentation the $2 billion sort of book value bogey; does that infer that you now expect to sell it for mess or more, or is there anything that we should or shouldn't be inferring from that?

Well, at the analyst conference, for those of you who attended, we said that we expected to get about $2 billion of proceeds out of our portion of the sale of the business. We got $1 billion of proceeds from this transaction with JPMorgan, and we expect to get about $1 billion from the remaining piece. So I think we're still on track with what we told everybody.

Great. Changing tacks, can we talk about the utilities and the regulatory backdrop? You know, my sense is that there is a general -- some general trepidation about this rate-making cycle, just as it pertains to the economy in California, it being an election year, uncertain leadership in the Governor's office. You have been around the hoop a long time in California through a lot of regulatory, economic and political cycles; can you tell us how you feel about your ability to continue to generate the types of returns on a business that you have historically in the context of this environment?

Well, I mean, here at Sempra, and our two utilities, we have a high level of comfort about where this condition is going, and about the desire to continue to keep the utilities healthy, to implement the things that we're currently implementing in terms of infrastructure development and renewable procurement.

So -- remember in the State of California, that the regulatory commission is its own statutory entity removed from the legislative branch of government. And every signal we get from the Utility Commission, and even from some of the politicians in Sacramento, is that California is doing the right things to avert another energy crisis that took place, you know, back in the early part of this decade. And so the things that we're doing to build out infrastructure, to put in smart meters, to develop renewables and get them to market, are all the things that are being pushed at us from both Sacramento and from the Utility Commission in San Francisco.

Thank you.

Thank you.

Our next question will come from Lasan Johong with RBC Capital Markets.

Thank you. Good quarter. What is the balance of the proceeds for the $1 billion of the sale -- of the Commodities sale to JPMorgan?

What is the use of proceeds?

The balance of the $500 million that you're not using to buy back shares?

Oh. First off let me say that the $500 million that we're going to use to buy back shares, we're doing an accelerated share repurchase program at ASR, and actually, we think that $500 million is the optimal size to go out with, based on the pricing that we have gotten back from the various banks that are going to execute that for us. And so, we would have probably done it in -- you know, done this buyback in tranches in any event. So right now, the balance is going to paying down debt and just staying on our balance sheet. But eventually, we'll take a look at what we're going to do with those proceeds as we move forward.

What is the range of pricing that whoever is doing this repurchase for you settled on?

I don't think we'll be talking about that, but we do expect to get this process underway here pretty shortly.

Okay.

Yes, Lasan, if you remember at the analyst conference, we talked about doing this ASR when we had the entire business sold, and we have such confidence now in what the remaining half is worth, and the fact that when they get to the finish line with the second half, we decided to go ahead and start the ASR early.

Makes sense. I think it's a good idea.

On the LNG front, just globally, just seems like we're never going to see any gas come to the US, and I'm not sure what is causing all of this global dynamic. The first question is, A, what is happening with the global dynamic, is this going to change in 2011? And second, do you foresee any potential problems with your long-term contracts at either Cameron or at Energia Costa Azul?

I think you hit on it. I don't think any of us in this room feel like we're smart enough to know where markets are going to be next year or the year thereafter, and that's why when we build the facilities, we always contract at the time that we build them or before we build them, to make sure we get a return of and on our investment. That is all we have done with these two terminals.

I think longer-term, we still expect that LNG is going have the pricing opportunity to compete with domestic supplies, whether they be from shale or some other source of gas. So long-term, we feel good about our position and are looking for the opportunities to bring in additional cargos.

Excellent. And one last question. Mark, what was the financial impact of the earthquake in Mexico?

It was relatively small. We had some damage that was about $5 million, and we expect -- we actually expect to get most of that recovered in insurance, but we haven't got that set up yet.

Excellent. Thank you very much.

Thanks, Lasan.

We'll go next to Ashar Khan with Visium Asset Management.

Good morning, from your perspective.; I just wanted to get a little bit of a better perspective. What is the -- why has the volatility in the markets led to a delay in the process) Mark, you mentioned that. I couldn't understand that comment. Could you elaborate a little bit more on that?

Oh, sure. Actually, all I was really saying was that the low volatility in the gas and power market has led to relatively flat markets and flat pricing. And so, therefore, the profitability in those markets has been low. I think that had something to do with sort of some of the delays of people reassessing where the markets were going. But I think probably the biggest thing that has delayed us has been this financial reform, which kind of put everyone on edge for a while but we think most of that, that is really behind us now.

Okay. And then do you expect the sale to happen, I guess, in two pieces? Are we going to have two separate announcements? Is that how we should look at it, the process going forward?

If that is where the most value is, yes. It would be our desire just for simplicity have one party we're negotiating with, but we know what the value of the book is for the business, and if it means we have to break it in half to recapture that value, that is what we'll do.

Okay. And then just going back, you mentioned that the buyback is still, right, you mentioned your assumptions were like $750 million, could be up to $1 billion and, I guess, the forecast for next year, are you reiterating that forecast as we stand today, based on the assumptions of the sale process?

Well, with respect to the sales process, we said that we would do between $500 and $1 billion of stock that we would buy back, and it's our intention to stick with that. This is this first $500 million then we'll reassess, you know, the amount that we do after this once we get the second half sold.

Okay. Okay. So the assumptions and the forecast are being reiterated as you had given before?

Yes, we're not changing our minds here. We think that we'll still do between $500 million and $1 billion, you know, and as I said at the analyst conference, we used -- for modeling purposes, we used $750 million, and we are still online with that.

Okay. I appreciate it. Thank you.

Our next question comes from Michael Lapides of Goldman Sachs.

Hey, guys, you can talk about renewable development, and just kind of if we think about it by year, what do you think the rollout of Copper Mountain will be to where you get not just to the 48 megawatts but all the way to the -- I think it was 400 megawatts to 500 megawatts that you had talked about? And then other renewable development that is going to happen over the next year or so, next two to three years outside of the utility?

I don't think we talked about Copper Mountain having that much capacity. Our Mesquite facility in Arizona has the ability to have about 600 megawatts of solar development, and as I mentioned, you know, we have, in terms of land around our existing facilities, existing facilities being our combined cycle power plants, the ability to develop somewhere between 600 megawatts and 1,000 megawatts of renewable. We're fairly advanced in negotiations with different parties to develop these sites, and I think, as I mentioned in my remarks, in the next month or two we will be sharing with you kind of progress we have made on additional sales out of both of those locations.

Got it. Thank you.

We'll go next to Winfried Fruehauf with W. Fruehauf Consulting Limited.

Thank you. I have a couple of questions. The first one is on the earnings contribution of your South American operations in the second quarter last year and this year, what were they?

Flipping to the page right here. I will have Joe Householder --

The earnings contribution for the quarter from South America is $23 million, and was approximately in that range last year, approximately the same for the quarter.

Okay. A couple of questions on pipelines and storage. If -- they were not exactly a barn burner, I would say, especially if you add back last year's loss of $64 million, which gets us to sort of an adjusted averages contribution for last year, second quarter, of $37 million, versus $39 million this year. If you back out $5 million from the El Paso Mexican pipeline acquisition, we're down to $34 million. What accounts for this performance?

The pipeline and storage performance is roughly in line with the prior year. I mean the increase that -- the Mexican operations were roughly in line with the prior year, but for -- they were up $5 million because of the El Paso acquisition. South America, as I said, is roughly the same in the midstream operations, when you add back the write-off of liberty from last year or roughly in line. So it is pretty much similar. Neal?

To elaborate a little bit, I think we're generally on track with what we've told you in the past with respect to the earnings growth in the pipelines and storage business. Remember that particularly the mid-stream business, the storage business is still in the development stage, so we haven't seen much in the way of earnings out of that business yet, but generally this business is on track.

When do you expect this development process to be substantially completed?

If you're talking about the storage assets, that is a continuing program. We expect to have 24 BCF in at the end of 2010, 34 at the end of 2012, and then kind of out in the 2015 range, we expect to have 57; so this is an ongoing process.

If you look at our storage business, I can't remember the numbers, but I think over the five-year period, we're spending about $1.6 billion in capitol and about $200 million of EBITDA coming out of that investment.

Okay.

The $1.6 billion would be the cumulative investment in it at the end of the period, with a couple hundred million bucks of EBITDA, and those numbers compare very favorably with what you see with publicly-traded entities in this space.

Thank you. Assuming the contribution from [rock express] are included in the Sempra pipelines and storage, what was the contribution of [rex] in the second quarter of last year versus the second quarter of this year?

Let Mark take this.

The numbers were slightly higher this year than they were last year, but we haven't traditionally broken those numbers out separately.

I see, so you're not disclosing what the numbers would be? Okay. That is all I have. Thanks very much.

Thanks, Winfried.

The next question is from John Ali of Decade Capital.

Hi, guys. A quick question. If you could give us an update on what remains in the North American trading book? I know there are two businesses, but previously you gave us growth size and net book, and that type of information. Could you give us an update on that?

Sure, well, just as a reminder, we have two businesses that are left in the North American Gas and Power book. We have the North American Gas and Power business, which is a wholesale trading operation, and then we also have our Solutions retail marketing business, which is separately run and actually headquartered out here in San Diego. The tangible book value of the remaining business is about $1.6 billion, and then there is some goodwill. There is $350 million or more of goodwill on that, but -- so there is about $2 billion left of book value.

A fairly large chunk of that is reflected in cash, and that is about $700 million currently, but varies, it goes up and down every day. It's down a bit from the last time we had this discussion, but it's -- and that is mostly investments in inventories, but it can go up and down, and we fully expect to realize those proceeds, or realize that in the form of proceeds once we complete the sales.

Before you guys were able to split out what was North American trade, what was the trading, the Power and Electric, and what was the Solutions? Can you do that or is that --

Well, we can. The Solutions business, overall, has been sort of a $100 million a year -- between, I would say, $85 million and $105 million a year after-tax business. And then the North American Power and Gas business in the past has obviously been quite profitable, but in these current sort of low-volatility flat markets, it's been about a break-even kind of business.

Okay, and then just kind of gross size on that trading book?

Well, net, I just gave you the net book value of it.

I was looking for non-net, kind of the assets --

Gross receivables and liabilities. Well, it runs -- and I don't have the exact number in front of me, but it's approximately $7 billion of assets and like kinds of liabilities, but that varies quite a bit.

And you guys said the announcement by the -- hopefully before the end of September, and when do you think it would close?

I actually think the announcement will be some time between now and the end of September, that is what we've said in our remarks. I'm hedging my bets a little bit here, because we've been more delayed than we thought we would be; but I think in that period we'll get something done, and it should close relatively soon after. There are some regulatory hurdles that we have to go through, but they're relatively quick to get done, so we -- I think a close within 60 days or so is certainly reasonable to expect.

Okay. Great. So definitely before year-end?

Yes -- well, we hope so, yes.

All right. Excellent.

Absolutely.

Thank you very much.

Our next question comes from Faisel Kahn of Citi.

Hi, how are you doing?

Good, how about you?

All right. Thank you. I was wondering, could you explain this tax equity investment in the 309 megawatts of wind power, and how that works at SDG&E and how or if you will earn on those assets?

We just made a presentation to our Board of Directors, and Neal did it, so I'll have Neal give you his version.

It's not anything that is particularly simple to explain without the benefit of slides, but what we're talking about is a 300 megawatt investment. The tax equity of $600 million represents about three quarters of the total cost of it, and in the structure that we proposed, SDG&E would make that $600 million tax equity investment, and would earn a rate of return on that investment, just like any other utility and investment.

Now, the ratepayers, obviously, have to get a benefit from this and under the structure that's been proposed, the ratepayers would get a benefit including the tax benefits associated with the renewables, and including renewable attributes, at a cost of less than what they would have to pay otherwise, because generally the power here is going to be cheaper. So this is a very good project, in that it brings renewables to the ratepayers less expensively than if SDG&E just went out and contracted, but also allows SDG&E to earn a rate of return.

Now the general economic state of affairs that allows this to happen is that the rate of return the tax equity investors are requiring in today's market is considerably in excess of what SDG&E's return is going to be. So in effect, what we are able to do is pass that kind of a benefit along to our ratepayers.

And are these 309 megawatts, they are already on ready to go if you are ready to invest in these assets, or how does that work?

Actually, that represents a contract that had already been entered into and previously approved by the CPUC with SDG&E.

Okay. There would be a build out of wind power, or are these assets that already exist today?

They have to be built out.

Built out.

Okay, right. Got you. Fair enough. And just a clarification on SDG&E in the quarter, the wildfire liability premiums, was that a first quarter event or was that also permeating the second quarter?

You say wildfire premiums, you are talking about insurance?

Insurance premiums, sorry. Yes, the higher liability insurance premiums?

Yes, it is actually both. We were able to secure additional wildfire insurance in the second quarter, and the premiums related to that were reflected in that quarter. We have gotten total wildfire insurance now, at one time we were limited to $400 million to $500 million, and now we're at $950 million, so we were able to get more insurance, although it was quite expensive.

Okay. But this has not veen recovered in rates yet? This will be part of --

No, we have expensed it, and we have not recovered it in rates, but we will be -- we've had several filings to do that, and we are optimistic that we will get it, but we haven't recorded it for accounting purposes yet.

Okay, understood. And on the Mexicali plant, is that facility back online right now?

It is.

Okay. And did you have to make any power purchases underneath your power purchase agreement to meet that?

The fortunate thing, if there is anything fortunate about an earthquake, is that it happened in April, and the markets were pretty lethargic, so that plant didn't have to go out and buy replacement power.

Okay, got you. And the last question, with any sort of proceeds you may get from the future sales of North American assets, would you be interested in some of the renewable assets that could be available by B,P, or are you still interested in the Mexican pipeline assets that is in -- that is the other half of what you would guys own down in Mexico now?

I think it's safe to say, Faisel, we have a fairly robust list of projects that we're currently pursuing, and we're always in the market looking at what is out there that we can buy versus what we can develop, and so we're doing both. I think when we get to the close of the second half of this business, we'll look at how to use the proceeds, whether to do our greenfield projects, or to do an additional share buyback, or to go buy something.

Okay, great. Thanks for the time.

Thank you.

Vedula Murti of CDP US has the next question.

Good afternoon.

Hi, Vedula.

A couple of things, one, I'm wondering and I apologize if you addressed this earlier, I had to come on late. Can you talk a bit about, with the Governor's election and everything like that, should Meg Whitman win, you know, my recollection is that there has been talk about wanting to do an offramp, and trying to reduce the renewable mandate that the utilities would be required to meet, and I wanted to get your view as to your understanding of where she stands on this, or kind of her viewpoint, et cetera, and if there was an offramp, how should we think about that?

Let Neal answer that.

Without talking about the gubernatorial candidates, I think the principal thing that is going on in California with respect to the renewables is the Proposition that would delay the implementation of the renewables until unemployment reached a certain level. Our judgement right now is that that is probably behind a little bit in the polls and probably, based -- based on what we know now, is unlikely to pass.

But having said that, the Public Utilities Commission has set in place a whole set of integrated policy objectives revolving around renewables, revolving around conservation, and revolving around technology, and I think we are supportive of that comprehensive and integrated approach to what is being done in California.

I mean that said, if for some reason this proposition were to succeed, what, at least as of now, would be the practical implications for you?

The practical implications would be minimal. The contracts that the utilities have signed have all been approved by the Utilities Commission and the contracts that we've entered into on the unregulated side have all been approved by the Utilities Commission, and that is an independent body. So I think there is, effectively, no impact if the Proposition were to pass.

Okay. And --

That wouldn't be the same for general industry. I think the long-haul trucking and heavy manufacturing industry would have some impact. But I think the regulated utilities are all on a path to get 33%, and that is under the jurisdiction of the Utilities Commission.

Okay. And secondarily, when it comes to the second tranche of proceeds when the remainder of -- the remaining sale gets closed, I think we talked about various options, and I think you indicated about making acquisitions possibly as one of the options for proceeds. When you look across your business lines right now, if -- you know, where in all likelihood would you be focused on wanting to look for an acquisition, or bolster, or at least consider that as the primary focus if you were to look at an acquisition as opposed to the other alternatives?

I think first and foremost, the thing to recognize is that we do have a $15 billion capital program in front of us, so we have -- we're fortunate in that we have a lot of high quality investment opportunities on our plate, and when you think about spending $15 billion over the next five years, those are representative of fairly good-sized acquisitions. So I think first and foremost, we're going to concentrate on executing our plan, and we're not really dependent upon acquisitions nor have we built any in, really, to our projections.

And that said, as we look at the landscape, I do think that there is a possibility sometime that if we saw the right opportunity, we don't shy you away from it, and we do look at a lot of opportunities, but I think most of our looking right now is maybe in the utility space, because we think that is where the best investment opportunities are. But generally speaking, I think we're pretty satisfied with the investment program that we have right in front of us.

So at least at this point in time, should we work with the assumption that it's a lower probability that some type of lower acquisition would occur, as opposed to simply redeploying capital towards the existing growth program you laid out?

I think bottom line with Sempra, we're nothing if not opportunistic. If we saw something that looked like a compelling deal, we would do it. But I generally speaking, we're satisfied with the opportunities we have in front of us and in our capital plan that we disclosed to you all, and I don't think there is anything in that that would indicate that we're going to do anything other execute on that plan.

And along those lines, to what market was saying, is that in projects where we don't have 100% ownership, we might be looking at buying up if our partners want out. I'm talking about the El Paso transaction we did, where we had Pemex as a partner, and they're going to looking to exiting some part of that business. So it's really the stuff that we have in our development pipeline, plus those assets we own that we think are good assets, but we don't own 100% of them.

Okay, terrific. Thank you very much.

Thank you.

We'll go next to Craig Shere of Tuohy Brothers Investment Research.

Hi, a good quarter. Don, I think you mentioned in response to Winfried's question that there was maybe $200 million of EBITDA being spent from 2010 through 2015, if I heard it right, on storage development; did get that figure right?

No, what I said was when you look at our storage buildout, when you look at the acquisition costs plus what we're spending, we're going to have about $1.6 invested in storage at the end of this five-year period; that would generate $200 [million] (corrected by Company) of EBITDA.

Okay, understood. Winfried brought it up this time and I think last time that the actual storage is not necessarily contributing as much currently, given the burden of the development cost overhead. Can you quantify what those development costs are, and how they will trend over time?

Well, and this is Mark, we haven't broken that out, and I think we would prefer to look at this as a total business unit. We are absorbing those extra costs within the business unit, but I think generally speaking, Don's point is that we're working towards a program that's going to generate $200 million a year of EBITDA on about a $1.6 billion investment, and that reflects all of the costs. We're in the early stages now, but our earnings from our pipes and storage business is in line with our expectations, and with the plan that we gave you at the last analyst conference, and we have not had any really material change in that. If we did, we'll let you know.

Okay. A part of is that is, obviously, what you have in development, which is the majority, is not, you know, contracted or hedged out currently. Can you speak to where the markets are now versus on your analyst day, in terms of the ability to contract out, and the pricing that is available?

I would just say that when you look at the overall plan, we're doing this in steps, and each step we will develop 5 Bcf to 7 Bcf that we only develop if we're satisfied the market will contract for it. So we haven't rushed off and made commitments to develop all 50 Bcf of storage out of Bay Gas and Mississippi Hub; we're doing it a cavern at a time, 5 Bcf to 7.5 Bcf, and we're doing it when we have market indications that it makes sense to go forward, because we get the returns that we expect.

Understood. Is it fair to say that one could assume profitability for storage, including the development costs in 2011?

I'm sorry -- I don't quite -- I am not sure I understand that question. You mean net income?

Yes.

We haven't traditionally broken that out, but I will tell you that it's relatively small, because we're still heavy in development at that time, you know, it's in the single-digit millions.

Okay, great. I appreciate the help.

Thank you.

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

Good afternoon. I missed part of the call, I lost contact, but did you discuss much on the court hearing in Mexico and the LNG? What is the update there? I think that might have been the hearing on July 28?

Let me, for the benefit of everyone on the call, this is really an issue, in my mind, of not much importance. We have a website that just details what is happening around a land dispute in Mexico. But to put this in in perspective, after we had applied and received all of our permits to operate the LNG facility, we then acquired additional land, and it's one of these additional parcels of land that has no bearing on the operational plants that is in dispute in a Mexican court, and there are some enterprising individuals that are trying to extort money from us by claiming they have some form of title to that land. That will be resolved separately, but I would not expect that any court action or decision would do anything to jeopardize a decision around the operation of this plant. There are hearings that are scheduled around this issue later this week, and then going into the next month or two, but this will resolve itself on its own and will not have any impact on the operational plans.

So, you're saying whatever the decision is, the plant will definitely continue to operate?

Yes, there is absolutely no requirement in any of our permits that this parcel of land that is in dispute is necessary for us to own and to have operating permits that are valid.

Right. Okay. But what about the hearing itself? What kind of decision do you expect, and do you think will be decided?

The judge has been asked to determine whether or not this parcel of land is a requirement for us to have a permit to operate. I believe he now has in his hands all the evidence from all the regulatory bodies that this land is not required as a permit requirement.

Okay. So irrespective of what he does to the land, you can continue, but if you lose, you may still want to buy land just in case, right?

That could always be the case. If it's determined at some time in the future that we don't own this land, which we think we, then that would be the issue.

Got it. Thank you.

Thank you.

Our next question will be a follow-up question from Lasan Johong with RBC Capital Markets.

Thank you. Don, There's a lot of talk about electric vehicles making its way, particularly in California. A, do you see evidence of this, and B, are you taking any steps to make it a reality and, C, how do you see it impacting SCG, not SDG but SCG?

The impact on SoCal Gas?

Yes, most of the electricity in California is produced by gassified gen, correct?

Very small, because the amount of gas throughput through that system to generate electricity for electric is probably, at least in the next five to 10 years, is not going to be dramatic. SDG&E is well underway in promoting the introduction of electric vehicles within its service territory. And I think all the utilities in California see this as an opportunity for increased utilization of infrastructure, but because of the way that we have balancing accounts for sales of electricity, really what happens is the customer becomes a net beneficiary, because we just utilize the system better.

Got it. Thank you.

Thank you.

We'll go to our next follow-up question from Michael Lapides of Goldman Sachs.

Hey, guys, a basic question. Any impact related to the oil spill in the Gulf on the development of potential nat gas storage caverns down in the Gulf South?

No impact.

That was Neal.

Okay.

We have no other questions at this time. I would like to turn it back to Donald Felsinger for your closing remarks.

Again, thank you all for taking time out of your day to join us for our second quarter 2010 call, As always, if you have any follow-up questions, please get a hold of Glen, Scott or Steve. Have a great day, guys.

That does conclude today's conference. Thank you all for your participation. Have a great day.