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Sempra Energy (NYSE:SRE)

Q2 2009 Earnings Call

July 31, 2009 1:00 pm ET

Executives

Jeff Martin – Vice President of Investor Relations

Don Felsinger – Chairman and Chief Executive Officer

Mark Snell – EVP and Chief Financial Officer

Joe Householder – SVP, Controller and Chief Accounting Officer

Debbie Reed – President and CEO of Utilities

Neal Schmale – President and COO

Analysts

Leslie Rich – Columbia Management

Rebecca Followill – Tudor Pickering & Co.

Michael Lapides – Goldman Sachs

Annie Tsao – Alliance Bernstein

Ella Vuernick– RBC Capital Markets

Mark Rogers – Gagnon Securities

Asher Khan – Incremental

Michael Bolt – Wells Fargo

Faisel Khan – Citi

Operator

Good day everyone, and welcome to the Sempra Energy second quarter 2009 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Martin.

Jeff Martin

Good morning! I want to take a quick moment and thank each you for joining us. A live webcast of this teleconference and slide presentation is available on our website under the Investors section.

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

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

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

Don Felsinger

Thank you for joining us. Earlier this morning, we reported second quarter earnings of $198 million or $0.80 per share compared with $244 million or $0.98 per share in the same period last year. It’s important to note that our second quarter results include the negative impact of the $64 million or $0.26 writeoff related to the Liberty Gas Storage project. For the first six months of 2009, earnings increased to $514 million or $2.09 per share, up from $486 million or $1.90 per share.

Our results for the first 6 months of 2009 without the impact of the one-time writeoff were up 19% over last year, a very strong performance in the midst of a difficult economic climate. The combination of our strong first half results and several new revenue drivers starting up in the second half of the year has allowed us to reaffirm our previously announced guidance range of $4.35 per share to $4.60 per share.

It’s important to keep in mind that the guidance we provided in March of this year did not include a negative impact of the Liberty writedown. We feel the increased expectations we have for other areas of the business should mitigate the impact of the $64 million write-off.

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

Mark Snell

At San Diego Gas and Electric, earning for the second quarter were $70 million, up from earnings of $61 million in the year ago quarter. Second quarter 2009 results benefited from $18 million of higher operating margins. Second quarter 2008 results also benefited from $8 million of regulatory awards.

At Southern California Gas, second quarter 2009 earnings were $65 million, an increase from $56 million in the second quarter of 2008. The improvement was primarily due to higher operating margins. Before we move on, I’d like to update you on a couple of items related to the wildfire litigation at San Diego Gas and Electric.

Since our last call, SDG&E reached an agreement with numerous homeowners insurance company plaintiffs settling a portion of the wildfire claims. Under the agreement, SDG&E will pay the insurane companies $740 million to settle approximately $1.3 billion of claims. Discussions are continuing with the remaining homeowner insurance companies for settlement on substantially the same terms.

We currently have $940 million reserved for these exposures, offset by a like amount of insurance receivable. In addition to the claims of the homeowners insurance carriers, there are a variety of other claims that may take several years to be fully resolved. We do not have sufficient information to estimate the amount of exposure to these remaining claims. Therefore, no reserves or offsetting insurance receivables have been recorded.

Now, let’s go to slide 5. Sempra Commodities' earnings in the second quarter of 2009 were $85 million compared with $130 million in the prior year's quarter. Second quarter 2008 results benefited from a $67 million gain on the sale of the business to the joint venture with RBS, and that was partially offset by $30 million in charges for litigation and tax matters.

For the first half of the year, commodity earnings have increased to $199 million, up from $189 million in the first half of 2008. The first half of 2008 included the net benefit of the one-time items I just mentioned as well as Sempra Energy’s 100% ownership of the commodities business in the first quarter.

While the commodities business as a whole continues to post good results, the price and volatility of natural gas and power which actually represents our two largest business lines have been relatively flat. Low natural gas prices coupled with exceptionally low basis differentials across the country have reduced the number of profitable trading opportunities. Since the third quarter is traditionally a slow quarter for trading, we don’t expect much improvement until the fourth quarter; however, our oil and metals businesses continue to do well.

Now let us move to slide 6. Here we show how income is allocated at the joint venture for the quarter and the first half of the year. A couple of highlights: First, the joint venture had income of $142 million during the quarter. After applying the income allocation methodology, the distributable income to Sempra was $102 million. Adjusting to US GAAP and for the impact of the income taxes, Sempra's joint venture equity earnings for the quarter were $87 million, compared with $93 million in the same quarter of ’08.

For the first six months of 2009, the joint venture had income of $296 million, and Sempra’s equity earnings were $203 million. These results reflect the stabilizing effect of how profits are allocated in the joint venture, and this has removed much of the volatility of our earnings. In periods with low joint venture, we receive a higher overall percentage of the allocated profits, and in time periods with higher joint venture earnings, we receive a lower overall percentage of the profits.

Now, let’s move to slide seven. Second quarter earnings for our Generation business were $33 million, up from $23 million in the same quarter in 2008. Second quarter 2009 was impacted by $8 million of lower earnings from operations as the result of lower market prices. Second quarter 2008 earnings included $20 million in mark to market losses on forwards contracts.

Now let’s move to slide 8. Sempra Pipelines & Storage recorded a loss of $27 million in the second quarter of 2009, compared with earnings of $24 million for the same quarter last year. The loss in 2009 includes a $64 million impact of the writeoff related to the Liberty Gas Storage that Don mentioned earlier. Second quarter 2009 results benefited from about $6 million of higher earnings from our Mexican pipeline operations.

Now please turn to slide 9. This slide provides a summary of our business unit results. I would like to highlight a couple of things here. Sempra LNG recorded a loss of $12 million in the second quarter of 2009, compared with a loss of $28 million in the prior year. The improvement was primarily due to the new revenues from our contract with Shell, offset by startup costs, ongoing operating expenses, and pipeline fees paid to Sempra Pipelines and Storage. We also had $9 million in lower mark to market losses on a marketing agreement with RBS-Sempra commodities as well as lower Mexican taxes.

At Parents & Other, we recorded a loss of $16 million in the second quarter, compared with a loss of $22 million in the same quarter in 2008. The improvement was primarily due to higher tax expense in the second quarter of 2008.

Now turn to slide 10. We are really pleased with our results for the quarter and the first half of the year. Excluding the impact of Liberty Storage write-off, results were up by 7% from the second quarter of last year and 19% over the first half of 2008. We’ve also had strong operating cash flow led by $375 million in cash we’ve already received this year from RBS Sempra Commodities. These cash dividends from the joint venture are helping to fund our infrastructure build-out program which in turn will deliver consistent earnings and cash flow for years into the future, and with over $800 million in cash on our balance sheet and $3.6 billion available under our credit line, we have a very strong liquidity position.

Also during the quarter, I’d like to point out, we issued over $1 billion of new debt at rates between 6% to 6.5%.

And with that, I would like to turn it back over to Don, who will begin with slide 11.

Don Felsinger

Now let me update you on some of our business activities, and I’ll start with our utilities. Regarding Sunrise Powerlink transmission project, the California Public Utilities Commission recently reaffirmed its December 2008 decision of approving the project. During the quarter, we continued our pre-construction activities and expect to start construction next summer on this $1.9 billion project in order to have it in place in the second half of 2012. We’ve already received approvals from the CPUC and Bureau of Land Management and expect the final major approval from the US Forest Service later this year.

Turning to our Smart Meter program, at SDG&E, we have now installed more than 50,000 meters, and at year end we expect to have over 200,000 meters installed with a goal of completing the installation program by year end 2011.

At SoCalGas, we’ve filed with the CPUC for a program to install 6 million gas meters by 2016, and we expect to receive a final decision from the commission in the latter part of this year.

On the Generation side of our utility business, we’ll be putting a new peaking plant into service next month—the 48 MW Miramar 2 facility which will be co-located with another peaker that SDG&E owns and operates. The addition of this plant will help meet higher summer power demand.

Please go to the next slide. Now, I’ll move to some of the projects we have under development at our infrastructure businesses. At Sempra Generation, in April we announced a 48 MW solar expansion projection that will be located adjacent to our existing El Dorado solar facility. Earlier this week, we announced that we signed a 20-year agreement with Pacific Gas & Electric where they purchased all the power generated by the plant. We expect to start construction later this year and to complete the project in 2011.

Now for a quick update on the Rockies Express Pipeline where we have a 25% ownership interest, on June 29th, a major milestone was reached where REX-East began service to the Lebanon hub in Ohio with a current capacity of 1.6 billion cubic feet per day. Construction on the easternmost portion of the line continues, and completion of the line to Clarington, Ohio, as well as increasing capacity to 1.8 billion cubic feet per day is expected late this year.

Now go to slide 14. At our Cameron LNG receipt terminal, we have completed construction, and commercial operations began this week. We’re now earning revenue under our contract with Eni which is for 40% of the terminal’s capacity. The associated Cameron pipeline is also complete and generating revenue from a contract with Eni. We are now the only company to own and operate LNG receipt terminals serving both the Pacific and Gulf Coast of North America.

Before I move on, I would like to also give you some more color on the Liberty Gas Storage project at Pipelines & Storage. As many of you know, Liberty Gas Storage is a development project in Louisiana for salt cavern natural gas storage facilities. Sempra Pipelines and Storage owns 75% of Liberty, and we have a partner that owns the remaining 25%. As we have discussed in past quarters, we’ve experienced some service issues at the northern facility. This quarter, we reported a $64 million write-off after determining that this portion of the project will not provide future economic benefit. We’re still moving forward with the development of an additional 17 billion cubic feet of capacity in our southern location in Cameron Parish.

What I’d like to do now is remind you of some of the key events from a revenue generating perspective that are happening at our LNG and pipelines and storage businesses. As many of you know, we’ve been investing heavily in our natural gas infrastructure businesses over the last five years, and many of the projects that we’ve been developing are now coming on line and providing new sources of revenue.

We’re now seeing the benefit of new revenue from REX-East service to Lebanon and from the start of a long-term capacity contrast with Eni on the Cameron Pipeline. Cameron LNG has just started operations, and we’re now earning revenue under the Eni contract. In June, we announced an agreement with the RasGas Liquefaction project in Qatar to bring LNG to the Cameron terminal, and we could receive cargos into our terminal from RasGas through the end of 2010.

In addition, at our Energia Costa Azul terminal, revenues under our contract with the LNG project will also begin later this quarter, and finally in the fourth quarter, the REX-East pipeline should be completed, as well as a nitrogen facility that we’re building at the Energia Costa Azul LNG terminal which will also provide additional income.

Please now move to the last slide, and what I’d like to do here is just conclude by saying that I’m pleased with our second quarter and first half results. Even after the impact of the write-off of our Liberty Storage assets, we’re still on track to meet our financial goals for the year. I think what I’ve just said says a lot about our business model and the growth platform we’ve put together.

This is a great time at Sempra, when we have several major infrastructure projects coming on line delivering incremental cash flow and earnings, and at the same time, we’re ramping up investment in our California utility businesses on the front end of the largest capital program that SDG&E and SoCalGas have ever undertaken. These utility investments also have the benefit of delivering earnings immediately and will provide cash flow well into the future.

Let me end by stating that this is truly an exciting time at Sempra, and set the stage for strong growth in the future years, and with that, let me now open up the call and take any questions that you may have.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Leslie Rich – Columbia Management.

Leslie Rich – Columbia Management

The Copper Mountain Solar Project, what’s the capex involved in that, and when would that start? Is it starting construction in 2010, or is that underway now?

Don Felsinger

We’ve just filed that contract with the CPUC, and we expect to get approval from them sometime at the end of this year. We’ll have Neal go through and talk about the capital requirements.

Neal Schmale

On the solar projects, we haven’t typically estimated the exact capital cost of these particular projects fundamentally for competitive reasons, but the cost of this will be very consistent with what we’ve spent on the first 10 MW that we put in place last year.

Leslie Rich – Columbia Management

Is it already in your Capex forecast?

Neal Schmale

Yes.

Leslie Rich – Columbia Management

In terms of Cameron, I guess the agreement with Eni is that they can send both there, if they feel like it. Do you have a sense of what kind of volumes to expect for the rest of the year?

Don Felsinger

You’re talking about the capacity contract that Eni has at Cameron?

Leslie Rich – Columbia Management

No, I’m not. I’m talking about RasGas.

Don Felsinger

RasGas has the option of bringing their gas to our terminal. How much they actually bring I think will be a function of worldwide market. We’re fairly optimistic, Leslie, when you look at just what’s going on in the world that incremental supply is coming on line, and net-net will have to end up in North America, and this is all upside to that plan.

Operator

Your next question comes from the line of Rebecca Followill – Tudor Pickering & Co.

Rebecca Followill – Tudor Pickering & Co.

Did your previous guidance include taking a write-down on the Liberty, and do you expect that in the original guidance?

Don Felsinger

We did not.

Rebecca Followill – Tudor Pickering & Co.

So, this is effectively raising guidance. My second question is can you just talk a little bit about lots of noise with the CFTC regulating commodities markets. How do you guys think this could possibly shake out and how it impacts the JV?

Don Felsinger

There is obviously a very rigorous debate going on, and I think the objective of Congress is to try and regulate or put a stop to a lot of speculative trading going on. When we think about our business model, we really do a lot of physical delivery of commodities, plus we do hedging activities for customers that need to hedge their supplies or hedge their purchases. So I sense that something is going to happen this year. I think the impact on our business is not going to be as impactful as it could be on those people that are just strictly out there doing screening trading, but let me ask Mark to give some color to his perspectives on this.

Mark Snell

This is something obviously we’ve been following pretty closely, and the closer you follow it, the more you realize that the amount of agreement is not really that close on a lot of these issues, but I do think that a couple of things will happen which is there is a definitely a movement to increase the amount of capital that counterparities have with respect to the kinds of trading, and there will be a movement to put as much of the derivative trading action that includes commodities as well as other financial derivatives on exchanges, which will create margining requirements. I think the push from the commodities traders and us in particular is that there is a recognition that these markets were effectively set up for end-users, i.e., producers, power plants, and those kinds of companies that use these markets to hedge their output or to hedge their raw materials, and I think from that perspective, I believe that business will probably get some kind of exemption from the margining requirements so that they can continue to do that, and that’s really what’s core to our business. With a lot of these, we see these as real benefit, our merger with RBS and the joint venture because I think that having the kind of capital that a commercial bank has behind the business will be the kind of thing that people will have to have, and I think for dealing with the customers, our ability to extend credit to those kinds of end-users will be critical to keep the market functioning. All in all, we pretty much support the activities around more transparency and the elimination of systemic risk, and we’re just here trying to protect our customers in this legislative battle that’s going on, but I think generally speaking we feel that this is probably going to come out and be fine for us.

Operator

Your next question comes from the line of Ella Vuernick– RBC Capital Markets.

Ella Vuernick– RBC Capital Markets

LNG and the commodities business, do you see LNG coming to the US in the second half of ’09, and I wanted to see if you had any color as to how much you see, what the timing looks like, and what the ramp of that acceleration may look like?

Don Felsinger

I’d go back to my earlier comment, and this is strictly an observation from my standpoint that with the global economy like it is, when you kind of add up the increases and decreases outside North America, it’s a net zero, and so any LNG that would ramp up this year would end up coming into North America. The ramp-up of that is what’s in question—whether we end up at the end of this year with getting another 4 BCF or another 6 BCF of supply is really a function of how quickly people commission their plants and these plants into operation and start making deliveries, but what I come back to again is that our model is based upon having long-term contracts which we do with the majority of our capacity in Mexico and in Louisiana, and anything that happens with spot cargos coming into either facility is an upside for us. It’s not in our plan.

Ella Vuernick– RBC Capital Markets

You had mentioned in your comments that third quarter is typically a slower quarter for the commodities JV, and you expect to see some improvements in the fourth quarter. I wanted to see if you had any further color that you could share with us about what you forecast for the rest of this year. I know this is difficult to do.

Don Felsinger

I’d just say that we’ve owned this business for almost 12 years now, and it seems like the last part of summer is always a slow time in the commodities business, and if you go back and look at our performance for the last 10-12 years, the third quarter has always been one of our lowest earning quarters, and so that comment is because of the fact that nothing has changed in the market place. A lot of people go on vacation, not a lot of business gets conducted, and we just see the impact of that. It wasn’t anything else about the market.

Operator

Your next question comes from the line of Michael Lapides – Goldman Sachs.

Michael Lapides – Goldman Sachs

Given what’s happened to the demand for electricity down in the Southeastern corridor of the US, can you talk about how this impacts the potential need in the next 5-6 years or so for natural gas storage projects and whether that has any impact on your spending plans for Mississippi at Bay Gas?

Don Felsinger

Michael, there is no doubt that we’re in a time period right now where gas demand is off for several factors—the economy, the amount of gas used for electric generation, industrial requirements for natural gas. Our philosophy going forward with these storage projects is that before we spend incremental capital, we take a look at the market and see what the market is willing to contract for, and if the market is willing to buy gas storage, then we move forward. We’ll continue to test the market, but our sense is that people look to see a lot of volatility and seasonality in the market place, and that’s why storage comes into place, so even though consumption and demand overall may be down, just the seasonal variations are enough for people to want to have more storage.

Michael Lapides – Goldman Sachs

Can you update us in terms of timing and which of the projects down in that region in terms of major storage projects? Any changes at all to what you disclosed in your 10-K or maybe it was the disclosure right around the time you did the Energy South deal?

Don Felsinger

Let me have Neal just walk you through what we have down there, the development status, what’s under contract and so on.

Neal Schmale

Just by way of summary, we have in the Gulf Coast area we’re developing three projects that when they’re all done would have a total capacity of around 74 billion cubic feet, and three projects are for Bay Gas, where there is 11.4 BCF currently operating and that’s fully contracted. There is 5 BCF at Bay Gas which is under construction. It’ll be in service late 2010, and of that 3.2 BCF is contracted. Now, the potential ultimate capacity of Bay Gas is 27 BCF. That’s Bay Gas. Mississippi Hub, the second one has 15 BCF under construction, 4 BCF is contracted, and we expect first cavern in service. The ultimate capacity is 30 BCF. Finally, Liberty South, the other portion of Liberty, there we expect to develop another 17 BCF by 2013.

Michael Lapides – Goldman Sachs

So it seems that there’s a decent of both Bay Gas and Mississippi Hub that’s uncontracted. It strikes me a little different than maybe your prior strategies of rarely breaking ground on something until you’ve got it more 50-60% contracted.

Neal Schmale

No. I don’t really think we’ve changed the strategy much at all. Remember that these caverns are developed a little bit at a time, and we contract as we go forward, so I think what you’re seeing there is very consistent with what we’ve done in the past. They’re not developed in big chunks at one time.

Operator

Your next question comes from the line of Annie Tsao – Alliance Bernstein.

Annie Tsao – Alliance Bernstein

If you look at the commodity margin and if you look at the breakdown in the margin, you see a tremendous weakness mostly driven by power and gas in the quarter. Is there anyway you can quantify how much is from demand and how much is really from the prices?

Mark Snell

Annie, there are a couple of things going on here. First off, let’s recognize that the year ago quarter was a record quarter, so it is much higher than what we would normally experience, but that said, it is absolutely true that we have probably some of the lowest gas prices and lowest power prices across the country that we’ve had in a long time, and that’s in sharp contrast to some of the highest prices we had a year ago, so that has taken the value of volatility really out of those markets. The other thing too, and this isn’t so evident by just looking at the outright prices, but I think for physical traders like us, we think of us as almost like logistics experts. We make our business in the gas and power business by getting gas and power to end-users through a network of pipeline capacity, transmission, and things that we control or own, and we’re kind of logistics experts. Differentials across the country are about as low as they’ve ever been. California which traditionally trades at a steep discount to Henry Hub is actually even with Henry or jus few cents above, so all of those kinds of factors have led to this above, so all of those kinds of factors have led to the power and gas business being tough trading environment currently. That won’t last forever, and frankly it will probably change as we approach the fourth quarter. I think we could see some difference there, and the market will return more back to normal, but right now it’s a tough environment. I think one of the things that’s most important as look at our trading results is that we have a pretty diversified group now, and the good thing is that while we have been lower in gas and power, we have done exceptionally well in oil and in metals, and we continue to see those as strong businesses through the end of the year, so it’s helped us balance our portfolio, and then I guess the last point is just again with the joint venture, because of the way the income sharing is, our shareholders are not really seeing the full impact of the volatility around the trading earnings any longer because as I said in prepared notes, if we make less money, we get a higher percentage of the income, and if we make more money, we get a lower percentage, and so I think you’re going to continue to see fairly consistent trading results.

Don Felsinger

If you look at the last 48 quarters of earnings, we have had almost every quarter a different mix of some type of product and geographic diversity that has helped contribute to earnings, and as Mark said what we have going forward now is not only the product diversity and geographic diversity, as we now have a profit sharing plan with RBS Sempra Commodities that basically gives us a level of protection going forward.

Annie Tsao – Alliance Bernstein

Is there anything that benefits you from the stimulus package?

Don Felsinger

We’re looking at some things in the utility that have haven’t made a decision to go forward on, things like electric vehicles or that sort. Debbie, anything you want to talk about in the stimulus package?

Debbie Reed

I would make a couple of comments. The things that we are looking at under the stimulus package are really all incremental to what we have in our plan, and so the rate base that we’re investing, the smart meters and all, we’re not going to go apply for stimulus dollars for those kinds of things, so what we are doing is using that platform as an opportunity to go for stimulus dollars to add on in areas like smart grid and tying in all of the electric vehicles to that smart grid, and then looking at some of the communication networks that will get us to the full usage of some of the things we’re putting in with our smart meters which are the home area network, so all the stimulus that we are looking at would be really incremental to what we had in our plan.

Operator

The next question comes from the line of Mark Rogers with Gagnon Securities.

Mark Rogers – Gagnon Securities

My question is regarding the smart grid rollout. Are you guys dual sourcing your smart meters and, if so, what was the split of the 50,000 meters shipped to date, and then I have a followup.

Debbie Reed

Our meters are being provided by Itron for the SDG&E project. What I would say is that we put 50,000 in, we’re expecting to put 200,000 to 300,000 by the end of this year. It’s going on really well. On the SoCalGas side, we have a pending application before the CPUC, and we have not determined any of our vendors on that.

Mark Rogers – Gagnon Securities

The 50,000 meters that are installed to date, what are your customers seeing right now with respect to their usage changing?

Debbie Reed

The first meters that are going in, we have not started the smart meter billing yet. That will happen in around September of this year. What we are seeing though is we have done a lot of orientation meetings with customers before, and our customers are saying if they haven’t received it when can we get this. We’re really interested in having the access to the information that would be provided by these meters, so there’s been a great acceptance. It’s really gone extremely smoothly with our first 50,000.

Operator

The next question comes from the line of Michael Bolt with Wells Fargo.

Michael Bolt – Wells Fargo

I was wondering if you could tell me what the total regulatory capital at the commodity JV was in Q2?

Mark Snell

It’s a little over $2 billion.

Michael Bolt – Wells Fargo

Absent any big rebound in commodity prices, would the rest of the year be somewhere at that level to be reasonable?

Mark Snell

Yes, I think it’s pretty safe to assume that it would stay about that level. You hit the nail right on the head. The only thing that would change that is if we had a huge rebound in commodity prices.

Operator

The next question comes from the line of Asher Khan with Incremental.

Asher Khan – Incremental

Don, you mentioned even with the write-off, you are fine with the forecast. Which segment is performing better than expectations?

Don Felsinger

It’s basically our utilities. They have a much higher margin than what we had over this time period last year.

Asher Khan – Incremental

You expect based on what you provided at the analyst conference that the utilities are going to better than those numbers. Is that what the year is telling you?

Don Felsinger

That is what I believe. Debbie and I have a disagreement over this, but I think the utilities will do better than we had forecasted.

Operator

(Operator Instructions). The next question comes from the line of Faisel Khan with Citi.

Faisel Khan – Citi

On the cash balance that you guys have for the quarter of about $800 million, give us an idea of how that cash balance is going to move throughout the portion of the year and how that will be applied to the utility projects?

Mark Snell

Faisel, that $800 million, the vast majority of that is cash at SoCalGas, and the biggest thing is we are still injecting for the upcoming season, and the gas prices are just a lot cheaper than they were last year, so we are sitting on a little more cash than we are used to.

Faisel Khan – Citi

Could that be a permanent return of capital to you guys?

Mark Snell

Well, let’s try to play out and see where that goes. We have a lot of big capital projects at the utilities, and so it may delay from borrowing and some other things if it sticks around, but I think right now our cash flow plans are such that we won’t be having big dividends coming back from the utilities yet.

Faisel Khan – Citi

Just on the write-down, just trying to understand the after tax number, between the after tax and pretax amount, I think $64 million was the write-down after tax but $132 million pretax?

Don Felsinger

That’s correct. The pretax was for the entire project.

Joseph Householder

The 132 is 100% of the liberty. We only own 75%, so really 99 of that is ours. The 33 is added back down below on that line that says earnings losses attributable to non-controlling interest.

Faisel Khan – Citi

On the power link line, have you ordered all the major components for that line yet? All the major capital equipment and materials been ordered?

Don Felsinger

I’ll have Debbie give you an update of where we stand both with preconstruction activities and purchasing.

Debbie Reed

What we have done is we have looked locking in the long lead time equipment for that project. We have a budget that’s been approved by the CPCU of about $1.9 billion and to the extent that we have long lead time equipment that we can lock in and especially if we can lock it in that amounts less than what was budgeted. We’re moving forward with doing that. We are doing our preconstruction activities which include the land acquisition, all the permitting, and then we are waiting for just the final permit or the final approval from the national forest service which we expect towards the end of this year, and we will begin full-out construction in the middle of next year.

Faisel Khan

One last question on your prepared remarks on the wildfire litigation, I got a little confused some of the numbers. What’s the net liability outside of the insurance claims and everything to Sempra?

Don Felsinger

I don’t know if we have an exact number, but let me just say that we had some really positive developments this past quarter. When we won, we’re able to reach settlement with the insurance company for some of the homeowners for about $0.57 or $0.58 on the dollar, and we got the judge to deny class action status, so those are two good things. The fact that we’re able to settle with some of the insurance companies for a significant piece of the claim, we think going forward with the homeowners the $940 million reserve that we have at this time appears to be accurate with the information that we have. Going forward with the remaining claims that are out there, the non-homeowners, and these would be like governmental entities, firefighters, others, we aren’t able to determine an exact number, but when we look at the fact that we have additional insurance coverage that we will not expend, the fact that we have a claim against Cox Cable, and at the end of the process, if we end up needing to have additional recovery, we don’t have insurance, we would apply to the commission for relief, so we feel pretty good about where we are at this point in time. Obviously, this has several more years to play out, but we like where we are.

Operator

We have a followup question from the line of Mark Rogers with Gagnon Securities.

Mark Rogers – Gagnon Securities

You are still at 2.3 million end-points for your total program, so that’s roughly a million a year between 2010 and 2011, is that correct?

Debbie Reed

We would expect to be at about 200,000 to 300,000 installed this year and then do the rest of them over the next two years through 2011 at SDG&E, and then assuming approval by the CPUC for SoCalGas smart meters, that’s 6 million endpoints for the gas side only, and we would begin installation of those meters around 2012 and complete those by about 2016.

Mark Rogers – Gagnon Securities

And the 2.3 million gas and electric, what’s the split on gas and what’s the spilt on electric for SDG&E.

Debbie Reed

It’s 1.4 million for electric and about 900,000 for gas.

Operator

There are no further questions in the queue. I’ll turn the call back over to you Mr. Felsinger for any additional remarks.

Donald Felsinger

Thanks to all of you for taking time to join us on the second quarter call. As always, if you have any follow-on questions, get a hold of Jeff, Glen, or Scott. You guys have a great day.

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Source: Sempra Energy Q2 2009 Earnings Call Transcript
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