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Executives

Jeff Martin – Vice President, Investor Relations

Donald E. Felsinger – Chairman and Chief Executive Officer

Mark A. Snell – Executive Vice President and Chief Financial Officer

Neal E. Schmale – President and Chief Operating Officer

Debra L. Reed – President and CEO of San Diego Gas & Electric and Southern California Gas Co.

Joseph A. Householder – Senior Vice President, Controller and Chief Accounting Officer

Analysts

Lasan Johong – RBC Capital ets

Michael Goldenberg – Luminous Management

Mark Barnett – Morningstar

Sam Brothwell – Wachovia Capital Markets

Annie Sal – Alliance Bernstein

Michael Lapides – Goldman Sachs

Leon Dubov – Catapault Capital Management

Colin Rush – Broadpoint Capital

[Charles Sherritt] – Credit Suisse

[Tom O'Neil – Green Arrow]

Paul Patterson – Glenrock Associates

Presentation

Sempra Energy (SRE) Q4 2008 Earnings Call February 24, 2009 1:00 PM ET

Operator

Good day, and welcome to the Sempra Energy fourth quarter 2008 earnings results conference call. (Operator instructions). At this time I would like to turn the conference over to Mr. Jeff Martin. Please go ahead.

Jeff Martin

Good morning. I’d like to thank each of you for joining us. This morning we’ll be discussing Sempra Energy’s 2008 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, Neil Schmale, President and Chief Operating Officer, Mark Snell, Executive Vice President and Chief Financial Officer, Debbie Reed, President and CEO of our utilities and lastly Joe Householder, Senior Vice President and Controller.

You’ll note that slide two contains our Safe Harbor statement. Please remember that this call contains forward-looking statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know they involve risk, uncertainties and assumptions so future results may differ materially from those expressed in 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 is important to note that all the earnings per share amount in our presentation are shown on a diluted basis. And with that I’d now like to turn the call over to Don Felsinger who will begin with slide number three.

Don Felsinger

Thanks, Jeff, and again, thanks to each of you for joining us. I couldn’t be more pleased with the strength of our financial results especially when considering the current market environment. All of our operating businesses performed well for the quarter and for the full year, and several of our businesses have record earnings.

I’m also pleased with all of the successful milestones we reached during the year. We accomplished a lot in 2008 but more importantly we laid the groundwork for our future growth. As a result, we’re reaffirming our previously announced 2009 earnings guidance of $4.35 to $4.60 per share.

Now to the financial results. Earlier this morning we reported fourth quarter net income of $319 million or $1.30 per share up from fourth quarter 2007 net income of $289 million or $1.10 per share, an 18% increase in quarterly EPS.

Net income for the full year 2008 was $1.1 billion or $4.43 per share compared with $1.1 billion or $4.16 per share in 2007. As we go through our 2008 results there are a couple of things to keep in mind. First, our earnings per share results reflect the benefit of the share repurchase program that we initiated last April. Also, our full year results were negatively impacted by the reduced ownership in our commodities business.

Now let me hand it over to Mark Snell. He’ll take you through each of the business unit financial results beginning with slide four.

Mark A. Snell

Well, our California utility saw improved earnings in 2008 helped by a strong fourth quarter. At San Diego Gas and Electric, net income for the fourth quarter was $81 million, an increase from earnings of $47 million in the year-ago quarter. The increase was due primarily to $16 million in higher operating margin, $11 million to a lower tax rate and $8 million in higher regulatory awards.

Full year 2008 net income increased to $339 million up from $283 million in the previous year. At Southern California Gas fourth quarter 2008 net income was $54 million compared with $58 million in the fourth quarter of 2007. SoCal Gas was impacted by higher litigation expense during the quarter.

Full year income increased to $244 million in 2008 up from $230 million in 2007. Now let’s go to slide five.

Sempra commodities reported net income of $164 million in the fourth quarter of 2008 compared with $186 million in the prior year's quarter. Led by crude oil and petroleum, the joint venture had strong contributions from all of its product lines.

Full year 2008 income was $345 million compared with $499 million in 2007. 2008 net income benefited by $67 million from the gain on sale from the formation of the joint venture with RBS, offset by $30 million in charges primarily related to litigation and tax matters that occurred in the second quarter.

This is our third reporting period under our new joint venture with RBS and reflects our reduced ownership in the business. You’ll recall that prior to the second quarter of last year Sempra had 100% ownership of the commodity business. Now let’s move to slide six where we’ll review how income from the joint venture with RBS is allocated.

Here we show how income is allocated as a joint venture both for the quarter and its first nine months. A couple of highlights; first, the joint venture had income of $374 million during the quarter. After applying the income allocation methodology the distributable income to Sempra was $253 million. After adjusting to U.S. GAAP and for the impact of taxes, Sempra’s joint venture equity earnings for the quarter were $162 million.

In the first nine months since its formation, the joint venture earned $1.4 billion in margin on a mark-to-market basis. After operating expenses, the JV earned $675 million. Sempra’s after-tax share of the earnings since April 1st was $252 million. Now please move to slide seven.

Fourth quarter net income for our generation business increased to $60 million compared with $40 million in the same quarter in 2007. The improvement in the fourth quarter of 2008 was due primarily to lower income tax expense.

Net income increased to $222 million for the full year 2008, a 37% increase over last year's net income of $162 million. The increase was driven by improved plant operations due to the absence of maintenance outages we had in 2007. Also, lower income tax expense and solar investment tax credits that were earned from placing the El Dorado Energy solar facility into service. Please move to slide eight.

Sempra Pipelines and Storage net income in the fourth quarter of 2008 was $22 million up from $14 million in the same period in 2007. Mexican pipeline operations contributed $11 million in the fourth quarter compared with $3 million in the same quarter in 2007. The increase was primarily due to earnings from LNG-related pipeline contracts.

The Rockies Express West Pipeline, which went into service in early 2008, contributed $10 million of earnings in the quarter compared with no contribution in 2007.

For the full year in 2008 net income increased to $106 million up from $64 million in 2007. Full year 2008 includes $27 million of earnings from Rockies Express and $18 million of improved earnings from Mexican pipeline operations. Please turn to slide nine.

Now this slide provides a summary of our business unit results. I’d like to point out a couple of things here. First, Sempra LNG recorded a net loss of $13 million in the fourth quarter of 2008 compared with a net loss of $19 million in the prior year. The improvement was primarily due to a tax benefit related to currency and inflation adjustments.

At Parent and Other, we recorded a loss of $49 million in the fourth quarter compared with a loss of $38 million in the same quarter in 2007 primarily due to losses on non-qualified assets in support of executive retirement and deferred compensation programs.

I’d like to note also the fact we had a very low effective tax rate in the fourth quarter. There’s principally two things going on here. First, we have a dollar-based debt related to our Mexican assets. A weakening peso in the quarter created a Mexican tax deduction and drove a large tax benefit. Second, and what complicates it here, is that earlier in 2008 we put into place a hedge at the parent to offset the impact of Mexican foreign currency changes. This hedge negatively impacted operating income in the fourth quarter.

Removing the effect of the hedge loss and the Mexican peso adjustment, the tax rate would have been 22% and our net income for the quarter would have been reduced by $22 million, or something less than $0.10 a share. For the year the tax rate was 29% and the effect of the hedge loss and the Mexican currency adjustments reduced income by $12 million.

Now please turn to slide 10. Now I'd like to update you on our liquidity position through the end of the year from what we've previously provided on our third quarter call.

When the debt markets opened up briefly in the fourth quarter, we felt it was prudent to take advantage of a market window that had been completely closed for several weeks. We issued $1 billion of new debt at the holding company and SoCalGas.

As of December 31st we had $3.2 billion of cash and availability under committed bank lines. After adding our planned sources of cash, including $300 million in issuances of utility debt and the re-marketing of $200 million of IDBs, we expect to have $5.5 billion of total funds available. After netting our planned uses for the year, we still expect to have excess liquidity of $2.2 billion at the end of 2009.

Now please turn to slide 11. In summary we expect our current liquidity to cover our net funding needs through the end of 2009 by over three times. Since our last update in November we improved our excess liquidity position by about $700 million. We also have the flexibility to defer some capital spending if necessary. But keep in mind this liquidity outlook assumes we issue no debt outside of our utilities. It is much more likely, markets permitting, that we would issue debt and strengthen our liquidity position going forward.

Now please turn to slide 12. We're really very pleased with our financial results, particularly in a difficult environment. Earnings per share for 2008 were up 6.5% over 2007's results, even after considering that we sold 51% of our commodities business at the end of the first quarter. We had record results in several of our operating businesses. We have ample liquidity and last week we increased our dividend over 11% in accordance with our previously announced dividend policy.

And with that I'd like to turn it back over to Don who will begin with slide 13.

Donald E. Felsinger

Now let me update you on some operational priorities starting with our utilities. In December we reached a major milestone with the California Public Utility Commission's approval of the Sunrise Powerlink transmission project.

After several years of thorough review the commission concluded that the Sunrise project was the best option to increase reliability and bring renewable energy to the San Diego region. We're continuing pre-construction activities and expect a $1.9 billion transmission line to be placed in service in 2012.

Turning to our smart meters program at SDG&E we'll begin full scale installations next quarter. Our goal is to have 200,000 meters installed by the end of this year and have all installations completed by year end 2011. And at SoCalGas we have filed for regulatory approval of $1.1 billion smart meter program of which $900 million would be capital. We anticipate the program will be approved later this year and installations will begin in 2011.

Before moving on, I'd like to briefly you on the litigation resulting from the 2007 wildfires. As many of you know, SDG&E is facing numerous lawsuits relating to this issue. The largest claims are from insurers who have thus far paid out approximately $1.4 billion to homeowners.

There are several defendants involved in addition to SDG&E, with various amounts of insurance coverage. We are the largest with $1.1 billion of insurance and Cox Communications, the local cable company, is second also with substantial coverage. In light of the other defendants and given that we would expect the claimants to compromise as part of any settlement, we have not accrued or reserved for any amounts except for our normal deductibles.

Now moving to some of the projects we have under development at Generation, LNG and Pipelines and Storage, in the fourth quarter we placed into service the 10 megawatt El Dorado Energy solar facility. This project is the largest thin-film solar powered project in North America.

At peak production El Dorado Energy Solar generates enough electricity to power over 6,000 homes. All of the output of the plant is sold for 20 years through a power purchase agreement with Pacific Gas & Electric.

Turning to our Cameron LNG receipt terminal we've experienced some delays in construction at Cameron, and we're currently in discussions with our contractor to see if we could accelerate the timeline for completion.

Nonetheless, in our best judgment we expect to receive our first start-up cargo at the end of next quarter and begin testing the facility, all with the view toward commencing terminal operations in the third quarter. The associated Cameron Pipeline is complete and ready to transport gas from the terminal when it comes online.

Now let me update you on our natural gas storage strategy in the Gulf Coast region. As you know, we believe natural gas will become an increasingly important fuel in this country and it's in our pipelines and storage business that we are focused on getting new sources of gas to premium markets. That's why we're increasing our presence in the Gulf.

Whether the gas is coming from new, unconventional production or LNG or both, the southeastern market needs storage services. And our recent acquisition of EnergySouth storage assets puts us in a position to build out a total of almost 90 Bcf of high-deliverability storage by 2015.

We have over 11 Bcf of storage in operation today and just last month we were able to increase our ownership in Mississippi Hub from 60% to 100%. Currently Mississippi Hub's first 15 Bcf of storage capacity is under construction. Operations are targeted to commence next year. Our development plan calls for eventually increasing the total Mississippi Hub capacity to 30 Bcf. You'll recall that Mississippi Hub was part of our October 1st acquisition of EnergySouth.

A quick update on our Liberty Gas Storage project. For the last couple of months we've been looking at several low-cost solutions to improving the well integrity at one of our caverns. We have testing underway to determine the effectiveness of our corrective measures, and we expect to know more in a couple of months. In a worse case, were we not successful, we would have $65 million on an after-tax basis at risk if we have to impair this asset.

And finally regarding our 25% interest in the Rockies Express Pipeline, progress continues on the east portion of this pipeline. We anticipate interim service next quarter, with the line fully complete by year end. Labor escalations and some of the work-around issues that were required as part of the permitting process for the east portion have placed cost estimates for the entire Rockies Express Pipeline now at $6.2 billion.

Let's now go to slide 14. Let me just say, in summarizing where we are, that I'm very pleased with the strength of our financial results for the quarter and full year 2008. Most importantly we've accomplished all of this against the backdrop of a tough economy which I think reflects favorably on our business approach of strong risk management and contracted returns with certainty of cash flows.

Two thousand eight was a busy year for us, and we accomplished many major milestones that will provide a great platform for growth in the future. A combination of our business approach and recent accomplishments has allowed us to reaffirm our 2009 guidance in a very trying market.

We'll be getting into more detail around our strategic initiatives and our five-year financial outlook at our annual analyst conference March 26 in New York. We look forward to seeing many of you there and with that what I would like to do now is open up the call and take questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Lasan Johong – RBC Capital Markets.

Lasan Johong – RBC Capital Markets

Congratulations on a great quarter, quick questions on the commodities business. There's been a lot of news floating around RBS. Anything change over there that we need to think about in terms of how it affects the JV?

Donald E. Felsinger

Well, Lasan, thank you for your comments. We are extremely pleased with the relationship that we have with RBS. There have been a lot of rumors circling around about whether RBS is a long-term player in this market and I would just say this, that we have had several board meetings and other meetings with our principals that we interface with at RBS, and the only discussions we have had are about how we implement our strategy to grow this business, to fund it, and take advantage of the unique position we have in the marketplace today, as we have had other people exist from this commodities arena.

Lasan Johong – RBC Capital Markets

So can we expect $200 million in earnings the first quarter?

Donald E. Felsinger

Well, we like the position we're in. As you see we have extremely low commodity prices right now and this business I think is attractive both to us and to RBS because, one, we are one of the few players that are still left in the marketplace and we have a goal to keep growing this business out side of North America. That's the current plan for both us and for RBS.

Lasan Johong – RBC Capital Markets

Excellent. On the LNG front, can give us a sense of how much you expect to see coming to the U.S. and if Cameron will benefit from that upside on the open uncontracted volumes at Cameron?

Donald E. Felsinger

Well, Lasan, I think the way I would answer this for you is that we have been saying for a number of years that there is a lot of liquefaction capacity coming online in the next few years. And that capacity will outstrip the ability of Asia and Europe to absorb it and that means that North America will be the final destination for many of these cargos.

The position that we are in with our LNG facilities, we 'e probably as well positioned as anyone because not only do we have facilities on the East Coast, on the West Coast, and the Gulf, but we are only 65% contracted and so we have the ability to take advantage of spot cargo opportunities. So it is a position that we kind of look forward to participating in.

Lasan Johong – RBC Capital Markets

Excellent. One last question, any decisions on whether REX will continue to Princeton, New Jersey?

Donald E. Felsinger

Well this is a very, very troubling economic market for a lot of the people that would be looking as off takers on this pipeline. My optimism about this pipeline moving forward anytime this year has been diminished. I think we're going to have to wait until we see the market turn around, some of the distribution companies getting into a much stronger environment before anyone will make a commitment to sign up for capacity where we can extend this pipeline further east.

Operator

Your next question comes from Michael Goldenberg with Luminous Management.

Michael Goldenberg – Luminous Management

Still trying to understand a couple of things as they relate to taxes, as well as other income on Corp front; if I just looked up the Corp segment by itself, there is obviously a very large tax benefit and I’m still having difficulty reconciling it. Do you mind breaking down the negative $99 million head or $99 million benefit to taxes on the Corp level? And then I also wanted to ask about other income at the Corp level.

Donald E. Felsinger

Well that would be good. I think that that's probably something we ought to talk about, because I noticed coming in here this morning that there were several things that came across my computer screen that talked about the strength of our earnings in the fourth quarter being tax-driven. That is entirely untrue. We had from an operating standpoint both a very good year and a very good quarter, and I think we ought to spend some time talking through why that is.

You want to take this one Mark?

Mark A. Snell

Sure. Michael, as I think you probably recall, but others on the call may not, in – we did get a benefit in the fourth quarter from our position in Mexico. And that benefit derives from the fact primarily because we have some dollar, some U.S. dollar-denominated debit in Mexico. And when revalued that for tax purposes into the peso, depending on the strength of the peso it, with a weak peso, that becomes a tax benefit and it can become a tax liability with a strong peso.

And what happened in the fourth quarter was we had this rapidly declining peso which created a large tax benefit and the problem or the issue there was, when you look at it, it resulted in a very, very low tax rate. Now that's only half the story, because during the year, and on the early part of the year we had a strengthening peso, a very strong peso, was creating a tax detriment and we in order to prevent that from getting any worse we had put a hedge in place.

So when you look at table A, that was in the package that we released this morning, you'll see other income expense net a negative 77, which is approximately $100 million swing from the prior year. Well a big chunk of that almost, half of that is the loss on the hedge, which is offsetting that tax benefit and also in that number is some other kind of one time items, the biggest one being some losses on assets related to deferred comp and other nonqualified pension plans that were sort of one time drops.

But just the two tax items, they don’t necessarily offset each other, but like I said in my scripted remarks, if you take out the effect of the hedge and take out the effect of the benefit from the change in the peso, you end up with about a 22% tax rate for the quarter and about $22 million left income.

But for the whole year, when you look at the whole year, we had a tax rate that was roughly 30% and the actual – the effect of these hedges and the currency adjustments actually reduced income for the whole year by $12 million. So it's really a misnomer to take a look at the strong quarterly earnings and just attribute it all to tax benefits, because you're really not taking into account the extra expense in other income.

Michael Goldenberg – Luminous Management

Just to summarize, the minus 77 for the quarter, if you assume roughly half, so there was roughly $35 million pre-tax loss in that 77, is that correct?

Mark A. Snell

It is actually $44 million, and then that was the loss on the hedge, and there is actually $57 million related to those assets, of a loss related to those assets for deferred comp and other nonqualified plans. And then those two numbers are offset by some positives.

Michael Goldenberg – Luminous Management

And how much was the tax gain in that 99?

Mark A. Snell

The tax benefit, yes, $30 million was the benefit.

Michael Goldenberg – Luminous Management

Okay, that makes sense.

Mark A. Snell

Okay.

Michael Goldenberg – Luminous Management

I’m sorry I must have missed this. What is the latest for in service date for REX East?

Dan Felsinger

The end of this year.

Michael Goldenberg – Luminous Management

End of this year, okay. Thank you.

Operator

Your next question comes from Mark Barnett – Morningstar.

Mark Barnett – Morningstar

just had a quick one also about the Rockies Express. I’m wondering if given your new, your updated cost outlook, I’m wondering what sort of returns you guys are targeting now for that project?

Donald E. Felsinger

The unlevered returns on that project are currently about 6%, 6.2% or so.

Mark Barnett – Morningstar

6.2%?

Donald E. Felsinger

Unlevered.

Mark Barnett – Morningstar

Unlevered. All right, thanks guys.

Operator

Your next question comes from Sam Brothwell with Wachovia.

Sam Brothwell – Wachovia Capital Markets

Hey. Obviously commodities had a very strong fourth quarter. Would you – kind of the character where that came from, is that driven mainly by just the very favorable commodity environment that you were in or is this also driven by some new business resulting from bringing in RBS as a JV partner.

Donald E. Felsinger

Well, Sam, it's really all those. I think the thing that we've talked about in quarters and years past is that this is really five little small businesses. We're not tied to any one commodity. We're a strong physical player, but we're in oil, natural gas, electricity, metals, all of those businesses in a quarter perform very well. Helped by the fact that RBS has been taking us around the markets we haven't been in. So, it's a combination of all those things working very effectively.

Operator

Your next question comes from Annie Sal – Alliance Bernstein.

Annie Sal – Alliance Bernstein

My question's been answered but I – it's the same question as to do with the large tax benefit in the – at your corporate level. But I have a follow-up question. You said if you take out the $22 million in income the tax rate should be about, the whole year should be around 30%? Is that right?

Mark A. Snell

No, Annie, the tax rate for the year is roughly 30% and for the year we had a tax detriment because of the – between the hedge losses and the currency adjustments of a negative $12 million. And then for the quarter, if you take out the Mexican currency adjustments and the hedge loss we would have had a tax rate of 22% and our income would have been reduced by $22 million. So we benefited by $22 million in the fourth quarter.

Annie Sal – Alliance Bernstein

So what kind of normalized tax rate we should use for '09?

Donald E. Felsinger

For '09 we expect to be a pretty much a full taxpayer.

Unidentified Corporate Participant

Yes, low to mid-thirties.

Donald E. Felsinger

Annie, but you know I would suggest and I'll make this offer, is that any of you that want to pursue this in more detail, as always, you can call Jeff, Glen or any of the staff here. But the message I want to leave you with, that we had just great operating results for the year, and great operating results in the fourth quarter. So we want to make sure and clarify with you that what you're seeing here are not one-time items coming in to impact earnings. But it really came from the strength of our operating business.

Operator

Your next question comes from Michael Lapides – Goldman Sachs

Michael Lapides – Goldman Sachs

Question for you, is there an update on the Liberty Gas Storage project? I apologize. I missed the first few minutes of the conference call, so if you discussed it in the first five or ten minutes I'm happy to follow-up offline.

Donald E. Felsinger

You did. But let me just repeat that again. We mentioned to you, I think the last call, that we were struggling with the integrity of one of our caverns. For the last few months we have been going through and putting in place some low-cost solutions that we're currently testing out.

And I would expect that within the next several months we will have an answer on whether or not we can get this cavern to work. In a worst case scenario, where we have to abandon this cavern, we would be looking at a write-off of something that would be around, $65 million after tax.

Michael Lapides – Goldman Sachs

Separate and a little bit unrelated question, when you think out the next five to seven years at pipeline development in the western U.S., which are the major pipelines, whether yours or someone else's, that you think actually get built in that time horizon?

Donald E. Felsinger

Well, we spend a lot of time thinking about that, and we've been watching with a lot of interest the activities of both Sunstone Project and the Ruby Project. In a rational market we would think only one of these would get built. In an irrational market, and then sometimes the way we behave, both could get built. We currently don't have an active MOU with either party.

And so we are sitting on the sideline here taking a look to see if we have any position that we would want to take with either one of these pipelines. But I do believe a pipeline will get built. There's enough gas in the Rockies that can supply the needs in California. And I think this next year ought to be kind of interesting to look at what takes place in that pipeline competition.

Michael Lapides – Goldman Sachs

Are there any of those two pipelines or the others that have advantages or disadvantages in terms of permitting right-of-way, siting, etc.?

Donald E. Felsinger

I think that they both have strengths and weaknesses from the standpoint of their routes and their market opportunities.

Operator

Your next question comes from Leon Dubov – Catapult Capital Management.

Leon Dubov – Catapult Capital Management

Two questions. You guys, when you originally gave '09 guidance you gave us some breakdown of which business contributes what. Could you just update us, today, where we stand on that and what percentages come from the utilities versus what percentage of guidance of '09 is expected to come from commodities?

Donald E. Felsinger

Well, we're going to do this in a lot of detail when we travel to New York at the end of March to update you on our five-year plan. I think we can do that for '08. I'm not sure we want to do it for '09 right now.

Leon Dubov – Catapult Capital Management

Can you just give us a rough idea to maybe what percentage regulated versus unregulated? Is that easier?

Donald E. Felsinger

Mark, why don't you go ahead and just give a general overview?

Mark A. Snell

Yes, I think, generally speaking, the breakdown that we gave you last year, with the targets by business unit, are going to be very similar. There's going to be some little bit trading between the units but I think especially as to the split between commodities and the non-commodity businesses that should be roughly the same.

Leon Dubov – Catapult Capital Management

On a different note, we kind of hear a lot in the news about the economy in California and them having trouble balancing the budget. Is this having any effect at all on the regulatory environment or are the Commissioners more conscious of it? We're seeing the Edison general rate case being delayed and I'm curious if you guys have a view as to what effect this might be having?

Donald E. Felsinger

I'm not sure that the status of the various utilities and their regulatory applications. But I think one of the things that we have done, is we got through the regulatory process and put in place a four-year rate plan. And we're currently operating off that. So we don't plan to go back to the Commission for another two to three years to ask for any changes.

I think we got everything that we wanted that works well in this environment. As you know, in California we don't have any commodity exposure, we don't have any shareholder sharing mechanisms with customers in the settlement. And from the standpoint of our attrition years we just have fixed-dollar amounts not tied to customer growth.

I think the thing that's going on in California is we do have a troubled economy right now but from our standpoint the good news is, is that commodity prices are really down. And so when we look at the billings that go out to our customers they are probably at a low point right now. So it means, from an affordability standpoint, that people can look at their utility bills as something that are manageable to pay. Debbie, do you want to add to this?

Debra L. Reed

I would just add that 2008 was a great year in getting rid of any risks in our business. We got our general rate case, as Don mentioned. We also got the Sunrise decision. We had our storage incentive mechanism approved by the CPUC, and our energy efficiency approved. And so, last year we cleaned out a lot of cases and eliminated a lot of risk in our business. And now we're moving forward with our growth plans to get our Smart Meters installed, to get Sunrise constructed and to move forward.

Donald E. Felsinger

I think there's a certain amount of foresightedness that we have at this commission led by [Mike Peavy], and that is taking the long-term approach. And so looking at what we need to set the state on a course that is driven by renewables and energy efficiency and some control over our energy future, we are spending money today for infrastructure to make that happen. And I see that commitment, not only at the CPUC, but also at the Governor's office.

Operator

Your next question comes from Colin Rush – Broadpoint Capital.

Colin Rush – Broadpoint Capital

Can you talk a little bit about the roll out of solar in your asset base, how you see that playing out? And how you're benchmarking pricing going forward if you're looking at the wholesale electricity market, or if there's another benchmark that you're using?

Donald E. Felsinger

Neal, do you want to talk about solar for a second, both at the utility and at Sempra Generation?

Neal E. Schmale

We have solar activities going on, as Don mentioned, both in the utilities and in Sempra Generation. Starting with Sempra Generation we recently dedicated a 10 megawatt thin-film plant outside of Las Vegas, Nevada. And it's the largest thin-film plant that’s been built and we are looking at the possibility of expanding that by about another 50 megawatts in that area and what we need to do in order to expand that is to sign a long-term contract to take the output as we have done with respect to the first 10 megawatts. So that’s going ahead and I think it should go ahead reasonably well assuming we can get a contract.

We also control several thousand acres of land where we can build more solar particularly around Mesquite plant in Arizona. So there’s a lot of opportunity for us to develop solar to sell into the markets in the southwest near our existing power plants. Now that’s all on the Sempra Generation side.

On the utility side, they put in an application to spend up to $250 million to develop solar in basin in the San Diego area and that’s currently in the hearing process. And given the kind of support that the California Commission has exhibited for these kinds of projects, I think there is some potential that that could go ahead on a fairly large scale as well.

Colin Rush – Broadpoint Capital

Are you looking at the market price referent plus the time of use premium for pricing these systems or is there another metric that you guys are using?

Neal E. Schmale

Well without getting into the details of the pricing as a practical matter when you’re selling into the California markets, you have to look at the time premiums that are there in the market reference price because those are the kinds of things that are considered in the regulatory regime and that’s basically what we’re dealing with, what the regulatory regime will allow in terms of purchases.

Donald E. Felsinger

But Colin, I think you can expect to see us both at our utilities and our Sempra Generation business pursue solar investments.

Neal E. Schmale

And just one final question and thanks so much for all the detail on this. Are you evaluating any other technologies other than the thin-film technology that you worked with on your 10-megawatt facility?

Donald E. Felsinger

Yes, we’re evaluating various technologies.

Operator

Our next question comes from [Charles Sherritt] – Credit Suisse.

[Charles Sherritt] – Credit Suisse

Could you walk me through the scenario in which RBS says that they don’t want to be part of this JV anymore on their call on Thursday? Would you take the trading book back on your balance sheet? What’s your thinking there?

Donald E. Felsinger

Well, they’re not going to say that on Thursday so we’ll start with that but I will have Mark walk you through the agreement we have with RBS and it starts from the standpoint that we have a four-year agreement not to transact the business by either party. Mark?

Mark A. Snell

Yes, a couple things. I mean, again, let me just reiterate what Don just said, which is we have been in constant talks with our partner and you know I can’t speak for them but I will tell you what they have said, which is if there was to be any change in the JV status, they would have informed us by now and I can say they have not. So we feel very comfortable that this JV will stick together.

But with that said, if they down the road decided to change their minds, the first hurdle is, is the agreement itself has a contractual obligation that neither party would try to sell or get out of the agreement for four years. We’re not quite a year into that yet but we have about, we have roughly three years to go on that. So I think contractually they’re bound to do that.

We do think that the support that they’re getting from the U.K. government would completely eliminate the possibility of any kind of a fire sale or something where we had to do something very quickly without careful planning and thought. I think we’re kind of in a stable position now with RBS and the government influence that they have on the bank has stabilized them to the extent that if we were to do something, it would be we would have a negotiation, we would figure out what the right thing to do is.

And we kind of think as our worst possible downside is sort of getting our capital back at book, which is $1.6 billion, which is what we have invested in the business. And I think that’s sort of a downside and frankly that’s about $6.50 a share so you can do your own math and decide whether there’s more than $6.00 a share at our stock now for the commodity business.

But I think as we look at this business going forward, the opportunities for growth and the ability to really capture a market with not very much competition right now is so good and our results for the last quarter and our ongoing results have been so positive, that I think that this is a very valuable asset in the long run and I think the bank recognizes it and I think we certainly recognize it and it’s something we’d like to stay in for a while.

[Charles Sherritt] – Credit Suisse

And in follow up, so does that mean that under this worst cast scenario where you get the capital back, you would take the business back? Is that the right way to think that?

Mark A. Snell

Yes, I think we’d certainly have an opportunity to do that if we wanted to. I think our ideal would be to find another partner if that was the case. One of the things with this business is it would be hard to run it in the size that it is on our balance sheet; that’s the reason we looked for a financial partner in the first place, so I don’t know that we would take, you know that we would take it all back but I think what we would do is work it out over time with the bank and figure out something that makes sense for everybody.

[Charles Sherritt] – Credit Suisse

So you would take a smaller piece of it back?

Mark A. Snell

Probably.

Operator

And our next question comes from [Tom O’Neil – Green Arrow].

[Tom O’Neil – Green Arrow]

Just a quick question on the utility. The GRC was struck in a pretty highly inflationary environment and subsequent to that, we’ve seen some pretty good deflation or it looks like we will. Just, if I understood your comments correctly, those were fixed revenue increases that don’t really have a [inaudible] mechanism that would reflect change in environment?

Mark A. Snell

You’re correct.

[Tom O’Neil – Green Arrow]

And just your comment about not going back in for the next two to three years, could you just remind me when that rate deal runs through?

Donald E. Felsinger

Debbie, do you want to walk through this?

Debra L. Reed

Yes, just to, Tom, to give a little flavor the fixed revenue requirement. We will be getting about $95 million, $93 to $95 million each year for the next three years and the end of the rate period. It started in 2008 and it goes through 2011.

Operator

Your next question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

A lot of my questions were answered but I just wanted to, and I’m sorry if you guys went over this and I missed it, what’s the effective tax rate you guys are expecting in 2009?

Male

Thirty percent.

Operator

Your next question is a follow-up from Mark Barnett – Morningstar.

Mark Barnett – Morningstar

Hey guys, just one more question. Sorry, I had forgotten to hit this on the first time around. But I was wondering if you had, in your expectations for LNG shipments for the year, if you had maybe an explicit forecast for cargos that you’re expecting? I know you had said you’re expecting one cargo in Louisiana for the test but I’m wondering if you had an explicit sort of forecast for what would be hitting your facilities?

Donald E. Felsinger

We have nothing in our earnings outlook for cargos. The cargos that we are anticipating bringing in at Cameron are for start-up. We do expect spot cargos to make themselves available to North America in the second half of this year.

Mark Barnett – Morningstar

Okay, so you had said you were 65% contracted and the rest, that 35% you’re expecting spot cargos?

Neal Schmale

We do expect, this is Neal Schmale, we of course do expect cargos from [Tangu] to come into the eco-plant later in the year, if that’s what you’re referring to?

Donald E. Felsinger

Contractually, our BP cargos start arriving later this year. Spot cargos we look at as strictly being opportunistic and of course in Cameron there’s going to be a function of when our plant goes into operation, which I said we plan to have that happen the middle of this year.

Operator

And that does conclude our question-and-answer session for today. I would like to turn the conference back over to Mr. Don Felsinger for any additional or closing remarks.

Donald E. Felsinger

Well once again, thanks to each of you for taking time to join us today. If you have any follow-on calls, you know how to get a hold of Jeff, [Ben] or [Scott] and look forward to seeing you in about a month in New York and laying out our five-year plan. You guys have a great day.

Operator

And ladies and gentlemen, that does conclude today’s conference. Thank you for you participation.

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Source: Sempra Energy Q4 2008 Earnings Call Transcript
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