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Sempra Energy (NYSE:SRE)

Q1 2010 Earnings Call Transcript

May 4, 2010 1:00 pm ET

Executives

Steve Davis – VP, IR

Don Felsinger – Chairman and CEO

Mark Snell – EVP and CFO

Joe Householder – SVP, Controller and Chief Accounting Officer

Neal Schmale – President and COO

Analysts

Faisel Khan – Citi

Craig Shere – Tuohy Brothers Investment Research

Lasan Johong – RBC Capital Markets

Paul Patterson – Glenrock

Michael Lapides – Goldman Sachs

Vedula Murti – CDP US

Becca Followill – Tudor Pickering Holt

John Ali [ph] – Decade Capital

Operator

Good day and welcome to the Sempra Energy first quarter 2010 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Steve Davis. Please go ahead, sir.

Steve Davis

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 first 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; Debby Reed, Executive Vice President and Joe Householder, Senior Vice President and Controller.

You'll note that slide two contains our Safe Harbor statement. Please remember that this call contains forward-looking statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve risks, uncertainties and assumptions. So, future results may differ materially from those expressed on our call. These risks, uncertainties and assumptions are described at the bottom of today's press release and are further discussed in the Company's reports filed with the Securities and Exchange Commission. It's important to note that all of the earnings per share amounts in our presentation are shown on a diluted basis. With that, I'll turn it over to Don, who will begin with slide 3.

Don Felsinger

Thanks. And again, thank you all for joining us. On today's call, I would like to accomplish several things. First review with you our first quarter financial results, then give you an operational update on our utilities and infrastructure businesses. Before I get into our financial results, I would like to spend a moment on the litigation settlement we announced last week.

I realize that some of you may have been surprised by this but I strongly believe the settlement was the best solution to put to rest litigation that has gone on for nearly a decade and could have continued for years to come. I'll discuss the settlement in more detail later in the call.

Now to the financial results. Earlier this morning we reported first quarter earnings of $106 million, or $0.42 per share, compared with $316 million, or $1.29 per share in the same period last year. The decrease in earnings was primarily due to $ 96 million or $0.38 per share impact of the litigation settlement and reduced results from the RBS Sempra Commodities joint venture. Earnings, excluding the settlement amount were $202 million or $0.81 per share. Due to the impact of the litigation settlements and assuming break-even performance at RBS Sempra Commodities, we now expect earnings of $3.15 to $3.40 per share in 2010.

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 4.

Mark Snell

Thanks, Don. At San Diego gas and electric, earnings for the first quarter were $83 million, compared with earnings of $99 million in the year-ago quarter. The decrease was primarily due to $5 million of higher wildfire insurance premiums and a $3 million charge due to the elimination of a tax benefit that was associated with the recent passage of the healthcare bill.

The first quarter of 2009 benefited $5 million from the favorable resolution of a litigation matter. During the first quarter, STG&E recorded a $107 million regulatory asset relating to reserves for wildfire claims that exceeded our $1.1 billion of insurance. We believe that STG&E will ultimately recover substantially all wildfire costs in excess of its insurance limits.

There are codefendants in the litigation and other responsible parties that STG&E has a claim against. In addition, based on our regulatory experience, we believe STG&E will be able to recover substantially all wildfire related costs that exceed our coverage and are not recovered from other responsible parties.

At Southern California gas, first quarter 2010 earnings were $65 million, up from $59 million in the first quarter of 2009. The increase was due to $9 million of higher margin, $3 million of higher regulatory awards and $2 million of lower bad debt expense. These benefits were offset by a $13 million charge due to the passage of the healthcare bill.

Now let's go to slide 5. Our generation business recorded a loss of $53 million in the first quarter, compared with earnings of $43 million in the same quarter in 2009. The decrease for the quarter is primarily the result of an $84 million charge related to the energy crisis litigation settlement. The quarter was also impacted by $12 million of lower earnings from operations, primarily due to increased scheduled maintenance and associated downtime.

Now, please move to slide 6. Sempra pipeline and storage recorded earnings of $38 million in the first quarter of 2010, up from earnings of $37 million in the same quarter of 2009. The quarter benefited from $6 million of higher earnings from foreign currency exchange rate effects, offset by $4 million of lower earnings from its storage operations.

Now turn to slide 7. Sempra LNG had earnings of $32 million in the first quarter of 2010, compared with a loss of $7 million in the prior year's period. The increase for the quarter was primarily due to the start up of marketing and terminal operations. We also benefited in the quarter from $11 million of payments related to non delivery of cargoes and from $7 million of mark to market earnings.

Let's move to slide 8. Sempra Commodities recorded a loss of $5 million in the first quarter of 2010, compared to earnings of $114 million in the last year's first quarter. The loss was due primarily to reduced margins in oil in European natural gas marketing, as well as higher costs for employer retention and a $12 million charge related to the energy crisis litigation settlement. Just in the last few days, we received $197 million cash distribution from the joint venture related to 2009 earnings. This distribution will be reflected in our second quarter results.

Now let's move to slide 9. This slide provides a summary of our business unit results. I would like to highlight our results at Parent & Other where we recorded a loss of $54 million in the first quarter, compared with a loss of $29 million in the same quarter in 2009. The increase in loss is primarily due to the impact of $17 million of higher Mexican taxes. The quarter was also impacted by a higher consolidated tax adjustment and additional interest expense.

And with that, I'd like to turn it back over to Don who will begin with slide 10.

Don Felsinger

Thanks, Mark. Before I get into an update on our business activities, I want to provide some additional color on the energy crisis litigation settlement we announced last week. The $410 million settlement ends two main pieces of litigation, each of which is funded separately.

$260 million will be funded from RBS Sempra Commodities and $150 million from Sempra Energy and Sempra Generation. The after tax cash effect to Sempra is $96 million. This settlement ends the FERC refund proceeding. As many of you may recall, this proceeding relates to the FERC's formulaic adjustment of market prices for short term energy sales in the years 2000 and 2001.

The settlement also ends the litigation related to Sempra Generation's contract with the California department of water resources. Although we have successfully defended this contract numerous times, this settlement will put an end to the continued litigation, appeals, and arbitrations.

As many of you know, we've been dealing with energy price litigation for nearly a decade. This settlement gives us the opportunity to put to an end this litigation which could have continued for many more years and had unforeseen risk. We can now move to a more constructive relationship with all of the California parties.

And, with that, I'll have you go to slide 11. Let me now update you on the activities at our California utilities. We still expect the Sunrise Powerlink transmission line to be in service in the second half of 2012. We're awaiting the final approval from the U.S. forest service which is expected to this quarter. Procurement and (inaudible) work still continue. We have now locked in half of the material and roughly 80% of the construction costs.

Turning to our Smart-Meter Programs, at STG&E, we have now installed more than 800,000 meters and we expect to have all 2.3 million gas and electric meters installed by year end 2011. At SoCalGas, in April, our $900 million gas smart meter project was approved. We will be installing 6 million smart gas meters in phases from 2012 to 2017.

The CPUC approved our $900 million gas Smart-Meter project and we will be installing in 6 million gas smart-meters in phases from 2012 to year end 2017. At San Diego Gas & Electric and SoCalGas, we will be filing our applications for both utilities 2012, general rate cases in the second half of this year. The CPUC rate case plan calls for decision by year-end 2011.

Now please go to slide 12. At Sempra Generation, we've began construction on our Copper Mountain solar project in Boulder City, Nevada. This project is a 47 megawatt expansion of existing 10 megawatt El Dorado solar facility. The power generated by this expansion will be sold under a 20 year contract to PG&E. We'll bring the project online in phases and expect to complete construction by the end of this year or at the very latest, very early in 2011.

Moving to our LNG business unit, we have recently announced a supply agreement with Gazprom. Under this multiyear agreement, Gazprom will play Sempra LNG for the right to deliver up to two LNG cargoes per month at the Cameron LNG terminal at a predetermined price formula. This agreement will commence in June of this year.

This agreement, along with our previously announced RasGas arrangement will utilize available capacity at our Cameron LNG terminal. These two agreements are in addition to our 20 year contracts that account for nearly 65% of our combined LNG total capacity.

At our pipelines and storage business, we have now closed on our acquisition of El Paso's pipeline and gas infrastructure assets for $300 million, or $260 million net of cash and debt. The acquisition includes a natural gas pipeline and compression assets in the Mexican state of Sonora and a 50% interest in a joint venture with PMEX, a Mexican state-owned oil company. The joint venture operates two natural gas pipelines and a propane system in Northern Mexico.

PMEX has filed a plan with the Mexican government to dispose of their 50% ownership in the joint venture. Any sale is subject to our right of first refusal. PMEX's long term contracts to utilize the pipelines capacity will remain unchanged. The assets are all in operation and provide stable revenue streams under long term contracts, representing a weighted average length of 13 years with PMEX and the Mexican federal electricity company.

In early April, a 7.2 magnitude earthquake hit the Mexicali region of Northern Baja, Mexico. Our pipeline, LNG and power plants located in that area did not suffer any major damage. Our Mexicali power plant has been out of service since that time, waiting for replacement parts for some relatively inexpensive, but critical equipment that was damaged during the quake. We expect the plant to be back in service later this month.

Before we move on, I would like to update you on the progress of our sales process at RBS Sempra Commodities. We are moving forward in obtaining the necessary approvals for the sale of our metals, oil, and European energy segments to JPMorgan. We anticipate the closing of this estimated $1.7 billion transaction early in the second half of this year. The closing was delayed several weeks because of the inability to schedule meetings with European Union regulatory officials due to a volcanic ash situation that impacted travel and business throughout Europe.

Negotiations for the sale of our North American Power and Gas segments are moving forward as well. We have narrowed the list of successful bidders through a second round of offers and expect to announce a buyer within the next four to six weeks. Our assumption of break even earnings for the joint venture, prior to a sale has not changed our expectations that total proceeds to Sempra Energy from both transactions will be approximately $2 billion.

Now please go to the next slide. While the results for the quarter at our Commodities joint venture were disappointing, our core utility and infrastructure businesses continue to perform well. This year, we have settled major litigation and reduced risk to our shareholders. We're moving forward with major projects at the utilities. Our recent approval of the SoCalGas Smart-Meter program and the progress we've made for the construction of Sunrise Powerlink are very positive.

At our infrastructure businesses, we're focused on the continued development of our storage and solar projects and we're making progress with the completion of the sale transaction RBS Sempra Commodities. The proceeds from those transactions will help fund our robust capital program, facilitate our expected share repurchase program and lead to strong predictable growth.

With that, let me stop now and take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll go first to Faisel Khan with Citi.

Faisel Khan – Citi

Good afternoon.

Don Felsinger

Hey Faisel, how are you?

Faisel Khan – Citi

Okay, how are you doing? On the joint venture, I just want to understand, the premium – the sale to JPMorgan is based on a fixed premium, based on the book value of the assets and so I guess with the loss that you guys incurred, specifically in the crude line, I guess it's only $13 million but is there any significant sort of impairment to that book value?

Don Felsinger

No, there is not. Let me ask Mark if he could maybe spend just a few minutes on the sales process in general.

Mark Snell

Well, Faisel, you're absolutely correct in that, that it is a fixed premium to book value and we did have some small losses on those businesses. But they really didn't impact – they were really minor impacts on the book value and it really doesn't change our expectation of proceeds.

Faisel Khan – Citi

Okay. Great. And then just on the different product lines, it looks like except for crude oil, everything else did okay. Was there anything in particular in the crude business that didn't go well for you in the quarter?

Don Felsinger

Well, we just didn't make as much money as we had expected. There's nothing that – there was no major blowout or big problems. We just didn't see some of the opportunities that we had anticipated and we had some dropping prices during that period. But I think generally speaking, the rest of the business performed okay. But we also coupled it with the charge from the litigation and also with some higher retention and employee compensation costs that we instituted at the end of the quarter and those things affected the earnings negatively.

Faisel Khan – Citi

Okay, I have just one more question and I'll get back in the queue. Specifically on the healthcare costs at Sempra Utilities, both at STG&E and SoCalGas, it looks like some of the costs were in the tax line and some of them were in the operating line and they seem to be different between SoCalGas and STG&E. I was hoping you could help us reconcile what's going on with what appears to be a one-time hit to expenses.

Don Felsinger

I believe they were all tax. Let me have Mark to validate that.

Mark Snell

No, that's right. They all affected the tax line, both of them. It basically is a tax benefit that most companies had recorded that was eliminated as part of this package and, it affected us as it did just about everybody else.

Faisel Khan – Citi

Okay. And it's just a onetime item. Is that correct?

Mark Snell

Yes, it is, correct.

Faisel Khan – Citi

Okay, great. Thank you.

Don Felsinger

Thanks, Faisel.

Operator

And we'll go next to Craig Shere with Tuohy Brothers Investment Research.

Don Felsinger

Hey, Craig.

Craig Shere – Tuohy Brothers Investment Research

Hi, thanks for the call. So, Don is the final sale of the U.S. portion of the JV being impacted at all by turmoil in the financial players or proposed restrictions on their activities?

Don Felsinger

Craig, no, it's not. As a matter of fact, we are in the second round of activity now with selling the second half and Mark was telling me this morning that we expect to open up those bids for the second round sometime either late this week or early next week.

Craig Shere – Tuohy Brothers Investment Research

Great. And Mark, I was a little confused about the comments about the wildfire insurance. When I heard the word higher premiums I thought, well you guys had to tap that insurance and they raised their rates on you going forward. But then what I heard in your discussion was that there are some costs that you expect to recoup later on for past issues. I'm just trying to get a sense for what kind of ongoing expense that might be and if you think all of it, including higher ongoing premiums would be recouped?

Don Felsinger

Well, we do have a filing that we have before the regulatory agency in California to recapture the higher premiums that we have been paying since the wildfire. Do you want to take this Mark?

Mark Snell

Yeah, sure. As Don said, we do have a filing. We expect to do that, but we don't know what the outcome of that is going to be. So we expensed the higher premiums currently. And then in my comments, I also commented on some settlements related actually to the fires that we had and those settlements now exceed some of our insurance coverage and therefore we have recorded a regulatory asset for that. We do expect over the long term to collect all of that money from either responsible third parties first or through our normal tariffs.

Craig Shere – Tuohy Brothers Investment Research

Great. And last question, I don't know if you all could comment a little about the market for gas storage. I think we have heard from another Sea Corp that has a good growing gas storage business that there's still opportunities for maybe $0.20 per Mcf month of contracting and there was recently, – I know you don't need any cash but there was recently a very attractively priced MLP IPO in the (inaudible) gas storage space. I just wonder if you can comment about, is the market for contracting storage looking any better? How does it look in terms of how assets are being valued, in terms of just physical assets and down the road, even if you don't need the money, if there's such a wide disparity in evaluation of this part of the business, would you consider some other type of place for them to reside?

Don Felsinger

Well, I think your comments tend to capture the whole realm of opportunities that are out there. Everybody I think by now is seeing the recent transaction and valuation around the Pine Prairie and the Bluewater assets that at one time I think we owned and sold. But as we stand in the storage business right now, we have about 11.5 B's [ph] of operational storage that's been fully contracted and by the end of this year we will have another 12.5 Billion's [ph] that will go into service and we've already sold four, about 60% of that. So we are able to access the market, get customers to pay for the storage and so our opportunities are to develop and sell this forward. And at some point in time, if we're satisfied that the real opportunity is in transacting around these facilities, we'd also look at that.

Craig Shere – Tuohy Brothers Investment Research

And are you seeing a healthy market for continuing to contract forward? There were some comments at the analyst day, a month-plus ago, that the market was a little weaker but starting to perhaps, recover?

Don Felsinger

Well, it is still fairly weak. You look at the natural gas market in general, prices are pretty low, volatility is flat. But as we continue to talk to customers, the long-term desirability of having the ability to store natural gas is something that customers are still willing to contract for. We're not seeing the prices that we saw two or three years ago, but they're robust enough to give us comfort we can go ahead and develop.

Craig Shere – Tuohy Brothers Investment Research

Great. Thank you.

Don Felsinger

Thank you.

Operator

And we'll go next to Lasan Johong with RBC Capital Markets.

Lasan Johong – RBC Capital Markets

Good afternoon. Let's see. Can you give us a little more clarity on the Gazprom contract? You said that Gazprom is contracted to pay Sempra LNG. Is this a monthly fee? Is it like a terminal use agreement?

Don Felsinger

Well, good afternoon Lasan. We have been talking for probably the last six months or a year about the opportunities to do something with unsold capacity that exists at Cameron. And that started out with doing a transaction with RasGas for them to bring in spot cargoes. And we have a similar arrangement, although a little bit different in the way that it's structured for Gazprom for them to be willing to pay to use our facility for a number of years to bring in cargoes.

I can't get into the details for commercial reasons but I think it bodes well from a couple of standpoints. One is, there's a lot of unsold LNG capacity in the Gulf, and the fact that we have two major players that want to transact with us, I think it says something about Sempra and it says something about the location of our facility. So I think these are all positive developments. I'm sorry I can't give you more details around the financial arrangements.

Lasan Johong – RBC Capital Markets

Can you at least tell me if it's a predictable stream of cash flow or is it an intermittent stream of cash flow?

Don Felsinger

We will be getting basically a payment to use our facilities that will happen over time and then the opportunities as cargoes come in to make more money.

Lasan Johong – RBC Capital Markets

I see. On the healthcare charge, in response to Faisel's question, it's a one-time charge. Are there any ongoing recurring cost increases that you expect?

Don Felsinger

That's it, a onetime charge.

Lasan Johong – RBC Capital Markets

Okay. That's good. And then lastly, do you know if and when you would perhaps take a look at the PMEX piece of the Mexican assets?

Don Felsinger

Well, it's hard for me to speak for PMEX. They have a requirement, as I understand it by the Mexican competition commission to dispose of their assets. My general understanding is they're going to do that by the end of this year but it's hard to predict their timing. At a point in time when they do transact, because of our right of first refusal, we'll definitely take a hard look at it.

Lasan Johong – RBC Capital Markets

One last question. Cargoes of LNG have been flowing very vigorously to the UK and the prices over there are really high. Does that change your thinking on the global oversupply that's currently in place?

Don Felsinger

I missed the last part of your question, Lasan.

Lasan Johong – RBC Capital Markets

Oh. The UK has been importing a lot more LNG than would have been originally expected several months ago and it sounds like the global oversupply is kind of being soaked up by the Europeans. Does this change the way you view the flow of LNG in the world or is this just a temporary phenomenon in Europe?

Don Felsinger

As a matter of fact, this is kind of what we expect is going to happen, that LNG will flow to the market that pays the highest price for it and I think we're on the very early stages of seeing a global natural gas market where it will flow freely to the location that has the highest price.

Lasan Johong – RBC Capital Markets

Okay, great. Thank you.

Don Felsinger

Thanks Lasan.

Operator

And next we'll go to Paul Patterson with Glenrock.

Paul Patterson – Glenrock

Good morning, guys.

Don Felsinger

Hi, Paul, how are you?

Paul Patterson – Glenrock

All right. The Sempra generation scheduled maintenance, is that a sort of one-timer? Could you just elaborate a little more on how that might be throughout the year?

Don Felsinger

Each of our power plants – I think it's around every three years – goes through a major shut down for anywhere from a 40 to 60 day period where we tear everything apart and take a look at it. EDM was returning last month from one of these major overhauls and had just come up and was operating possibly less than a day when the earthquake hit and the earthquake had so much ground shaking that some ceramic insulators on top of one of the transformers cracked and that's the inexpensive but critical piece of equipment we're now in a process of fabricating.

Paul Patterson – Glenrock

Okay, and then with the LNG mark-to-market, does that reverse the $7 million LNG?

Mark Snell

Yes, that's actually a reversal of earlier losses. So it is the reverse of something that happened several months ago.

Paul Patterson – Glenrock

Okay, great. And then just, I'm sorry if missed it, because there have been a few things going on, but it would seem to me that there should be no change in your 2011 and beyond outlook that you guys gave us just recently because the RBS JV was going to be gone anyway. So look if there's any impact from our understanding in terms of what your sales expectation would be. So is it safe to assume that things probably haven't changed much with respect to the forward outlook.

Don Felsinger

The only changes that we are making are for the year of 2010.

Paul Patterson – Glenrock

Okay. And then was the last time that this business had a break even? I'm just sort of curious. Do you guys know?

Mark Snell

We had a loss quarter. It was about a year and a half ago.

Don Felsinger

But we have a long history of profitable quarters and this was one of only two or three that we've actually broke even or lost money.

Paul Patterson – Glenrock

Okay. And could you elaborate a little bit more about the change in Parent & Other?

Don Felsinger

Sure. It's primarily from increased interest cost because as we bring things online, we're no longer capitalizing interest and maybe I'll ask Joe if he can elaborate on any of the other pieces.

Joe Householder

Sure. There are two other pieces. The Mexican taxes are affected by the exchange rate between the dollar and the Mexican peso and last year we had a benefit there. This year we actually had a detriment of 10. So there was a $17 million swing. And then, the effective tax rate caused us to have about a $13 million negative hit this quarter which will turn around over the course of the rest of the year. Don't know which quarter exactly it will turn around but that $13 million negative in the quarter will turn around by year-end.

Paul Patterson – Glenrock

Okay, great. Thanks a lot.

Don Felsinger

Thanks, Paul.

Operator

And from Goldman Sachs we'll go next to Michael Lapides.

Michael Lapides – Goldman Sachs

Hey guys. Quick question on Sempra Generation. Can you talk; your K disclosed roughly 400 megawatt to 500 megawatt solar opportunity at one of the sites. But can you talk three wide [ph] how many megawatts of potential leveraged [ph] within the next three or four years or beyond that. I'm just trying to understand the real estate availability of potential solar megawatt additions at your existing gas sites or other lands that Sempra generation controls.

Don Felsinger

We have got 58 megawatts, 10 of which is in operation, and 48 being developed in Nevada around an existing site. And in some around Mesquite with the land position we have there, depending on what technology we use, we're thinking about 600 megawatts of photovoltaic. And then we have other land positions in Mexico that are primarily being held for wind development and we have some other wind projects that we're pursuing around the country. But around our existing sites, I would look at the 600 megawatts in Arizona and the 50 megawatts that we're building in Nevada as the primary opportunities.

Michael Lapides – Goldman Sachs

Okay. And when we look at – what happens to the land that is around the El Dorado or El Dorado plant that's being sold back into STG&E? Does Sempra Gen control any additional land that’s around that facility or does the land et cetera outside the fence, inside the fence, whatever, go to the utility?

Don Felsinger

The utility is buying a power plant and the footprint on which the power plant sits and the land around that belongs to Sempra Generation.

Michael Lapides – Goldman Sachs

And is there room there for Sempra Generation to continue doing above and beyond the –

Don Felsinger

That's correct.

Michael Lapides – Goldman Sachs

Okay. Thank you.

Don Felsinger

Thank you.

Operator

And our next question comes from Vedula Murti with CDP US.

Vedula Murti – CDP US

Good afternoon.

Don Felsinger

Hi, Vedula.

Vedula Murti – CDP US

Two things. One you mentioned in your prepared remarks about the distribution coming here that will be recognized in the second quarter and you alluded to that there would be an earnings affect breaking on to 198 or approximately that number. So can you just kind of explain how that would then translate between what sounds like as a gross cash flow number and how that translates to net income?

Don Felsinger

I'm going to have Mark address this. I think that I may have confused you.

Mark Snell

No, I think you may have misunderstood. All I was saying was is that there was an expectation of getting our distribution by this call and we did get it just prior to the call, $196 million. But it's a cash flow only item. It doesn't have any effect on earnings.

Vedula Murti – CDP US

Okay. And secondarily, when you talked about to the $2 billion, is it correct for me to be thinking that that implies on the North American piece here that would be talking about at book value but that – at least I think in the past you've alluded to some possibility or probability of being able to achieve above book value. Can you kind of comment a little bit on that?

Mark Snell

Yeah, our expectation and what we've been signaling is about tangible book but there is a possibility for us to get more than that. Especially on parts of the business, we're seeing some pretty robust bids. But we really can't say anything until we actually announce something.

Vedula Murti – CDP US

And now that you're in second round or in that type of thing, I know you have allowed to, I think close by the end of the year, if I'm not mistaken. Given where you are do you feel like by the end of the second quarter, by the time we have the second quarter call or something like that, an announcement will have been made or can you just elaborate a little bit about, given where you know where you're at, at what point do you feel like you'll be able to tell us what the conclusion is?

Don Felsinger

Well, Vedula, when we started this process and at the analyst conference, we have made the assumption that we would probably be in this business through year-end. Based upon the progress we've made with JPMorgan and the progress we're making in selling the second half, we are fairly comfortable now – and it's hard to control the timing – that we'll be out of this early in the second half of this year.

When I say early, my expectation is by July or August we'll be out of this business. Now, I don't control that schedule. There are a lot of parties involved but we're working as hard as we can so that by the time we have this next call, we'll either be out or be close to being out. That will be in the July-August time frame.

Vedula Murti – CDP US

So just to make sure I'm clear, when you're out, that means announced and completely closed and all the checks have crossed each other and that type of thing?

Don Felsinger

That's correct.

Vedula Murti – CDP US

Okay. And I guess one last thing is do you have the authorizations in place, in term of flexibility for stock buybacks and that type of thing or is that something that you would want to take to the board and have that authorized at the conclusion of this process?

Don Felsinger

The board has already given us authorization to move forward with stock buyback.

Vedula Murti – CDP US

Okay. Thank you.

Don Felsinger

Thank you.

Operator

And our next question comes from Becca Followill from Tudor Pickering Holt.

Becca Followill – Tudor Pickering Holt

Hi, guys, two quick ones.

Don Felsinger

Hey, Becca.

Becca Followill – Tudor Pickering Holt

Hey, On Sunrise Powerlink, you guys were previously thinking that you would get approval in the first quarter. Now we're seeing second quarter. Something had definitely changed. Are there any issues, or is it just timing?

Don Felsinger

Hey, Becca. I'm an optimist here and even though the record has been complete and published for a year or more now, the fact that the remaining approval we need is from the U.S. forest department. I'm somewhat less concerned about the timing, even though I'm anxious because what they're doing is making sure that they have a complete record before they issue their decision, which will make it more litigation-proof going forward.

So the fact that they may take another week, two weeks or a month, even though it causes me frustration, I think at the end, when we get that decision, it will be a better decision. So we don't expect any holdup. We're still waiting for approval. We firmly believe we're going to get it, just can't pinpoint the week.

Becca Followill – Tudor Pickering Holt

Okay. Thank you. And then back on the storage subject, $4 million in lower storage earnings. Can you talk specifically what that goes to, where the delta comes from?

Joe Householder

Becca, this is Joe Householder. That really is about a $2 million loss this quarter and there was a $2 million gain in the year-ago quarter. And it's a variety of small issues, some G&A, some depreciation, and property tax and a little bit of mark to market and some optimization. It's a whole variety of very small issues.

Becca Followill – Tudor Pickering Holt

So the storage that you have is producing a net income loss?

Joe Householder

The storage operation as a whole had a small loss this quarter. Last year, a year-ago quarter it had a small gain.

Becca Followill – Tudor Pickering Holt

And do you expect that loss to continue for the rest of the year?

Joe Householder

I don't believe so, no. That's not our expectation.

Becca Followill – Tudor Pickering Holt

Can you talk a little bit about what kind of swing we could see? I mean, will overall and annual basis, the 11.5 storage be positive net income for the year?

Don Felsinger

We're looking here at the numbers. I'm not sure what it's burdened with right now in terms of other cost. But let us do this. Let us take a look and see if we can give you a more cogent answer and then maybe post it on our website?

Becca Followill – Tudor Pickering Holt

That's great. Thank you.

Don Felsinger

Thank you.

Operator

And we'll go next to John Ali [ph] with Decade Capital.

John Ali – Decade Capital

Hi guys.

Don Felsinger

Hey, John.

John Ali – Decade Capital

Just a quick question. I apologize if you've already covered this. There's a few other calls coming on but the book value of North American trading, it had been around 800. Is that still fairly consistent?

Don Felsinger

The book value in North American trading is actually quite a bit less than that and it is sitting on a fair amount of cash, which we would expect to distribute. And so the total cash distribution would be probably a lot more than just the book value, because we would distribute the cash prior to sale.

John Ali – Decade Capital

Okay. Can you give any numbers around what the total number or the total value left post the JPMorgan transactions?

Don Felsinger

Well, the JPMorgan transaction was 1.7 billion in total and our share of that was, I think it was like nine something and then after that, the remaining balance is the North American Power and Gas business. But the big difference there is the net book value is more in the 200 range to 250 range. We expect there's a fairly big cash distribution because we had a big cash build up for when we closed the deal with JPMorgan. It will pay off the inter company loans, and so that's why we expect our total proceeds be to around 2 billion.

John Ali – Decade Capital

So that $2 billion number in total proceeds hasn’t changed?

Don Felsinger

Right, it has not changed.

Mark Snell

And Becca, if you're still there, we have found a sheet that has the numbers on it. Let me have Neal walk you through what our existing storage business has for earnings this year and then in the out years.

Neal Schmale

Yes, the sheet we dug up has some very fine print on it, Becca. But in any event, we expect the storage business to be just slightly positive this year and then it will be even more so next year, make a few million dollars and then continue to grow. So the results that we're seeing here are consistent with the plan.

Don Felsinger

Next question?

Operator

And we'll go next to Craig Shere with Tuohy Brothers Investment Research.

Craig Shere – Tuohy Brothers Investment Research

Hi, just a follow-up on that storage question from Becca and the answer just given, it makes sense to me if in fact you're burdening storage with the overhead development costs for the significant build out you have because you're talking about a build out that's very large compared to the base. Are you folding all of that together in the numbers that you just gave? Is that what's going on?

Don Felsinger

The answer is yes.

Craig Shere – Tuohy Brothers Investment Research

Okay, great. That makes sense. Thanks a lot.

Don Felsinger

Thank you.

Operator

And we have a follow-up question from Faisel Khan with Citi.

Faisel Khan – Citi

Sorry, just a couple of follow-ups. On is just on the LNG business, the $11 million related to the payment from our counter party for non delivery, is that the Tangu [ph] contract?

Don Felsinger

It was at our Costa Azul facility. That's really the extent of what we want to say about it.

Faisel Khan – Citi

For example, if there were deliveries that actually took place in the foreseeable future than in theory the earnings from those volumes would be there, and so this is to make up for the volumes that weren't there, is that correct?

Don Felsinger

Yeah, just take this as this was both kind of a start up issue on the other end of the LNG business, meaning the supplier, and I would not expect to see these reoccur.

Faisel Khan – Citi

Okay, got you. And then just on the wind assets that you've recently purchased into, the Hawaii project, and also I believe the projects in Indiana. Were those contributors at all to the generation earnings this quarter?

Don Felsinger

I don't believe they were. The Fowler Ridge I think will show up next quarter.

Faisel Khan – Citi

Okay, and Hawaii, is that the same thing too?

Don Felsinger

There's no earnings for Hawaii yet.

Faisel Khan – Citi

Okay, got you.

Joe Householder

Faisel, this is Joe. There is a small amount of Fowler Ridge earnings in there but not a lot.

Faisel Khan – Citi

And in going forward how you guys plan to book the tax benefits from these renewable facilities, I take it on a GAAP basis you're going to amortize this stuff over a long period of time?

Joe Householder

On the GAAP basis, currently, we're on the flow-through method. We're taking them as they construct.

Faisel Khan – Citi

Okay, understood. Thank you.

Operator

And there are no further questions at this time. I'll turn the call back over to Mr. Felsinger for any additional or closing remarks.

Don Felsinger

Well, once again, thanks to all of you for joining our first quarter 2010 call. If you have any follow-on questions, as always, feel free to contact Steve, Glenn, or Scott. Thanks again. Have a great day.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

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Source: Sempra Energy Q1 2010 Earnings Call Transcript
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