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Sempra Energy (NYSE:SRE)

Q2 2010 Earnings Call

August 03, 2010 01:00 pm ET

Executives

Steve Davis - VP of IR

Don Felsinger - Chairman & CEO

Neal Schmale - President & COO

Mark Snell - EVP & CFO

Debbie Reed - EVP

Joe Householder - SVP, Controller & CAO

Analysts

Greg Gordon - Morgan Stanley

Lasan Johong - RBC Capital Markets

Michael Lapides - Goldman Sachs

Winfried Fruehauf - W. Fruehauf Consulting Limited

Faisel Khan - Citi

Vedula Murti - CDP US

Craig Shere - Tuohy Brothers Investment Research

Michael Goldenberg - Luminus Management

Operator

Good day, everyone and welcome to Sempra Energy Second Quarter 2010 Earning Results Conference Call. Today’s call is being recorded.

At this time, I’d like to turn the conference to Steve Davis. Please go ahead, sir.

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 second quarter 2010 financial results. 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, Chairman and Chief Executive Officer; Neal Schmale, President and Chief Operating Officer; Mark Snell, Executive Vice President and Chief Financial Officer; Debbie Reed, Executive Vice President; and Joe Householder, Senior Vice President and Controller.

You’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 presentations are shown on a diluted basis.

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

Don Felsinger

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

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

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

Mark Snell

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

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

Now, let's go to slide five. Our Generation business recorded earnings of $48 million in the second quarter, compared with earnings of $33 million in the same quarter of 2009. The increase for the quarter is primarily the result of renewable energy credits from new projects, partially offset by lower earnings due to scheduled plant maintenance on two power plants and from expenditures related to earthquake damage at our Mexicali power plant in Baja, California.

For the first six months of the year, Generation recorded a loss of $5 million compared with earnings of $76 million in the same period in 2009. The decrease was primarily due to an $85 million charge related to a proposed energy crisis litigation settlement. Now, please move to slide six.

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

Now turn to slide seven. Sempra LNG had earnings of $13 million in the second quarter of 2010. That compares with the loss of $12 million in the prior year's period. The increase for the quarter was primarily due to higher earnings from operations. You will recall that the Cameron LNG facility became operational and our supply contract with Tangguh Partners for the Energia Costa Azul LNG facility became effective in the second half of 2009.

For the first six months of 2010, Sempra LNG had earnings of $45 million up from a loss of $19 million in 2009. 2010 results benefited from $11 million of earnings recorded in the first quarter related to payment for non-delivery of cargoes.

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

Now let’s move to slide nine. Here I’d like to address our progress with the sale of RBS Sempra Commodities joint venture. We concluded the sale of the metals, oil and European gas and power business to J.P. Morgan, which provided Sempra with roughly $1 billion in proceeds, including distributions of earnings related to the sold businesses.

I’ll touch on the remaining JV sales elements in a moment, but given the positive conclusion to the J.P. Morgan transaction, we will be moving up our share buyback plans, and we will begin a $500 million accelerated share repurchase program later this quarter.

As a reminder, there are two segments of our remaining businesses, the North American Gas and Power business and Solutions, our retail marketing business. We are still in active negotiations for these businesses and are on track to sell both. We currently expect to be able to announce something before the end of next month. We recognize this process has taken longer than we expected. This was due in part to the uncertainty around the Financial Reform Legislation coupled with a flat trading and the weak gaps in power markets. Once we finalize the sales process, we will address how and when we intend to deploy the remaining sales proceeds.

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

Don Felsinger

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

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

Finally at SDG&E and SoCalGas, we will be filing our applications for both utilities 2012 General Rate Cases later this year. The first step will be the filing of a Notice of Intent this month followed by a final rate case application in the fourth quarter of this year. The CPUCs rate-case plan calls for decisions by the end of next year.

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

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

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

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

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

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

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

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Greg Gordon of Morgan Stanley.

Greg Gordon - Morgan Stanley

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

Don Felsinger

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

Greg Gordon - Morgan Stanley

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

Don Felsinger

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

Greg Gordon - Morgan Stanley

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

Don Felsinger

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

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

Operator

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

Lasan Johong - RBC Capital Markets

What is the balance of the proceeds for the $1 billion of sale of the commodity sale of J.P. Morgan?

Don Felsinger

What’s the use of proceeds?

Lasan Johong - RBC Capital Markets

The balance of the 0.5 billion that you're not using to buy back shares.

Don Felsinger

Well, first off, let me say that the 0.5 billion that we're going to use to buy back shares, we're doing an accelerated share repurchase program at ASR, and actually, we think that 500 million is the optimal size to go out with, based on the pricing that we’ve gotten back from the various banks that are going to execute that for us.

And so, we would have probably done this buyback in tranches in any event. And so right now, the balance is going in to paying down debt and just staying on our balance sheet. But eventually, we'll take a look at what we're going to do with those proceeds as we move forward.

Lasan Johong - RBC Capital Markets

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

Don Felsinger

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

Lasan Johong - RBC Capital Markets

Okay.

Don Felsinger

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

Lasan Johong - RBC Capital Markets

Makes sense. I think it's a good idea. On the LNG front, just globally, just seems like that we're never going to see any gas come to the U.S., and I'm not sure what’s causing all these global dynamic. And the first question is, a, what’s happening with the global dynamic. Is this going to change in 2011, and second, do you foresee any potential problems with your long terms contracts to either Cameron or at Energia Costa Azul?

Don Felsinger

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

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

Lasan Johong - RBC Capital Markets

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

Mark Snell

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

Operator

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

Unidentified Analyst

I guess good morning from your perspective. I just wanted to get a little bit of a better perspective why is the volatility in the markets led to a delay in the process Mark, you mentioned, I couldn't understand that comment, could you elaborate a little bit more on that?

Mark Snell

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

Unidentified Analyst

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

Mark Snell

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

Unidentified Analyst

Okay. And then just going back, you mentioned that the buyback is still, right, so you had mentioned your assumptions were like 750 could be up to a billion. And, I guess, the forecast for next year, are you re-accreting that forecast as we stand today, based on the assumptions of the sale process?

Mark Snell

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

Unidentified Analyst

So the assumptions and the forecast are being re-accreted as we had given before?

Mark Snell

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

Operator

Our next question comes from Michael Lapides of Goldman Sachs.

Michael Lapides - Goldman Sachs

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

Don Felsinger

I don't think we talked about Copper Mountain having that much capacity. Our Mesquite facility in Arizona has the ability to have about 600 megawatts of solar development, and as I mentioned we have, in terms of land around our existing facilities, just the facilities being our combined cycle power plants, the ability to develop somewhere between 600 and a 1,000 megawatts of renewable.

We are fairly advanced in negotiations. We have different parties to develop these sites, and I think that as I mentioned in my remarks that in the next month or two we will be sharing with you kind of progress we’ve made on additional sales out of both of those locations.

Operator

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

Winfried Fruehauf - W. Fruehauf Consulting Limited

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

Don Felsinger

We’re flipping to the page right here. So I will have Joe Householder…

Joe Householder

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

Winfried Fruehauf - W. Fruehauf Consulting Limited

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

Mark Snell

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

Neal Schmale

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

Winfried Fruehauf - W. Fruehauf Consulting Limited

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

Don Felsinger

If you're talking about the storage assets that’s a continuing program. We expect to have 44 bcf in at the end of 2010, 34 at the end of 2012, and then kind of out in the 2015 range, we expect to have 57. So this is an on going process.

Mark Snell

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

Winfried Fruehauf - W. Fruehauf Consulting Limited

Okay.

Mark Snell

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

Winfried Fruehauf - W. Fruehauf Consulting Limited

Assuming the contribution from Rockies express included in Sempra pipelines and storage, what were the contribution of (Inaudible) in the second quarter of the last year versus the second quarter of this year?

Don Felsinger

Let Mark take this.

Mark Snell

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

Winfried Fruehauf - W. Fruehauf Consulting Limited

I see, so you're not disclosing what those numbers would be?

Mark Snell

We’re not.

Operator

Our next question will come from [John Ali] of Decade Capital.

Unidentified Analyst

Just a quick question. If you could give us an update on I guess what remains in the North American trading book. I know there’s two businesses, but previously you have given us kind of growth size in that book and that’s other information. Could you just give us an update on that?

Don Felsinger

Sure, well, just as a reminder, we have two businesses that are left in the North American Gas and Power book. We have the North American Gas and Power business, which is a wholesale trading operation, and then we also have our Solutions retail marketing business, which is separately run and actually headquartered out here in San Diego.

The tangible book value of the remaining business is about $1.6 billion then there’s some goodwill. There is about 350 or more of goodwill on that. So there is about 2 billion left of book value. A fairly large chunk of that is reflected in cash, and that’s about 700 million currently. But that varies, that goes up and down every day. It's down a little bit from the last time that we had this discussion, and that’s mostly investments and inventories, but it can go up and down, and we fully expect to realize those proceeds or realize that in the form of proceeds once we have complete the sales.

Unidentified Analyst

Before you guys really split out kind of what was North American trade, what was the trading, the power and electric and what was the Solutions, can you do that or is that?

Don Felsinger

Well, we can. I mean, the solutions business, overall, has been sort of $100 million a year, between, I would say, between $85 million and $105 million a year after-tax business. And then the North American power and gas business in the past has always been quite profitable. But in these current sort of low-volatility flat markets, it's been about a breakeven kind of business.

Unidentified Analyst

Okay. I mean just kind of gross size on that trading book?

Don Felsinger

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

Unidentified Analyst

For non-net, like the assets.

Don Felsinger

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

Unidentified Analyst

Okay, And you guys said, announced hopefully before the end of September and when do you think it will be closed?

Don Felsinger

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

Unidentified Analyst

Okay, great. It’s definitely before yearend?

Don Felsinger

Yes, we hope so. Yes.

Operator

Our next question comes from Faisel Khan of Citi.

Faisel Khan - Citi

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

Don Felsinger

We just made a presentation to the Board of Directors and I'll have Neal give you his version.

Neal Schmale

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

Now, the ratepayers, obviously, have to get a benefit from this and under the structure that’s been proposed, the ratepayers would get a benefit including the tax benefits associated with the renewables and including renewable attributes at a cost of less than what they would have to pay otherwise, because, generally, the power here is going to be cheaper. So this is a very good project, it brings the renewables to the ratepayers less expensively than if SDG&E just went out and contracted but also allows SDG&E to earn a rate of return and now that the general economic state of affairs that allows this to happen is that the rate of return, the tax equity investors are requiring in today's market is considerably in excess of what SDG&E's return would be. So in effect, what we’re able to do is ask that kind of benefit along to our ratepayers.

Faisel Khan - Citi

Okay. And then are these 209 megawatts, they're already ready to go if we were ready to invest in these assets or how does that work?

Don Felsinger

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

Faisel Khan - Citi

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

Don Felsinger

They have to be built out.

Neal Schmale

Built out.

Faisel Khan - Citi

Right, okay, got you. Okay, fair enough. And then just a clarification on SDG&E in the quarter, the wildfire liability premiums, was that a first quarter thing or was that also permeating in the second quarter?

Don Felsinger

You say wildfire premiums, is that about insurance or…?

Faisel Khan - Citi

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

Don Felsinger

Yes, it's actually both. We were able to secure additional wildfire insurance in the connected quarter and the premiums related to that were reflected in that quarter. We have gotten total wildfire insurance now; at one time we were limited to $400 to $500 million now we're at…

Mark Snell

950.

Don Felsinger

950. So we're able to get more insurance although it was quite expensive.

Faisel Khan - Citi

Okay. But this hasn’t been covered in rates yet? So this will be part of it…?

Don Felsinger

No, we have expensed it and we have not recovered it in rates but we will be. We’ve got several filings to do that and we’re fairly optimistic that we’ll get it but we haven't recorded it for accounting purposes yet.

Faisel Khan - Citi

Okay, understood and then on the Mexicali plant, is that facility back online right now?

Don Felsinger

It is.

Faisel Khan - Citi

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

Don Felsinger

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

Faisel Khan - Citi

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

Mark Snell

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

Operator

Vedula Murti of CDP US has our next question.

Vedula Murti - CDP US

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

Don Felsinger

Let Neal answer that.

Neal Schmale

Without talking about the gubernatorial candidates, I think the principle thing that’s going on in California with respect to the renewables is the proposition that would delay the implementation of the renewables until unemployment reached a certain level. Our judgment right now is that, that is probably behind a little bit in the polls and probably, based on what we know now is unlikely to pass. But that having said all that, the public utilities commission has set in place a whole set of integrated policy objective revolving around renewables, revolving around conservation and revolving around technology, and I think that we are supportive of that comprehensive and integrated approach to what’s being done in California.

Vedula Murti - CDP US

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

Neal Schmale

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

Vedula Murti - CDP US

Okay.

Neal Schmale

And…

Don Felsinger

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

Vedula Murti - CDP US

Okay. And secondarily, when it comes to the second tranche of our proceeds when the remainder of the remaining sale gets closed, so I think we talked about various options and I think you indicated about making acquisitions as possibly is one of the options for proceeds.

When you look across your business lines right now, where in all likelihood would you be focused on wanting to look for an acquisition or bolster at least or at least consider that as the primary focus if you were to look at an acquisition as opposed to the other alternatives?

Don Felsinger

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

And that said, as we look at the landscape, I do think that there is a possibility some time if we saw the right opportunity, we don't shy away from it and we do look at a lot of opportunities but I think most of our looking right now is may be in the utility space. Because we think that’s one of the best investment opportunities are but generally speaking I think we're pretty satisfied with the investment program that we have right in front of us.

Vedula Murti - CDP US

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

Mark Snell

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

Don Felsinger

And I think along those lines to what Mark was saying, is that in projects where we don't have 100% ownership, we may be looking at buying up if our partners went out, I'm talking about the El Paso transaction that we did but we have 10 partner. And they're going to be looking actually some part of that business. So it's really the stuff that we have in our development pipeline, plus those assets we own and we think are good assets but we don’t own 100% of them.

Operator

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

Craig Shere - Tuohy Brothers Investment Research

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

Don Felsinger

No, what I said was that when you look at the storage build out, when you look at the acquisition costs, what we're spending, we're going to have about a 1.6 billion invested in storage at the end of the five-year period that would generate about $200 billion of EBITDA.

Craig Shere - Tuohy Brothers Investment Research

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

Mark Snell

Well, and this is Mark. We haven't broken that out, and I think we would prefer to kind of look at this as a total business unit. We're absorbing those extra costs within the business unit. But I think generally speaking, Don's point is that, we're working towards the program that’s going generate $200 million a year of EBITDA on a – but a $1.6 billion investment and that will reflect – that reflects all of the costs.

We're in the early stages now, but our earnings from our pipes and storage business is in line with our expectations and with that plan we gave you at the last analyst conference. And we have not found any really material change in that. If we did we'll let you know.

Craig Shere - Tuohy Brothers Investment Research

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

Don Felsinger

Well, I would just say that when you look at the overall plan, we're doing this in steps and each step will develop 5 to 7 Bcf but we only develop that if we're satisfied the market we’ll contract for it so we haven’t worst off and made commitments to develop all 50 Bcf in storage out of Bay Gas and Mississippi Hub. We're doing it in a cabernet of time, 5 to 7 1/2 Bcf and we’re only doing it when we have market indication that it makes sense to go forward because we get the returns that we expect.

Craig Shere - Tuohy Brothers Investment Research

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

Don Felsinger

I'm sorry, I don't quite – I am not sure I understand that question.

Mark Snell

I hope he said.

Don Felsinger

And you mean that income?

Craig Shere - Tuohy Brothers Investment Research

Yes.

Don Felsinger

(Inaudible)

.

Craig Shere - Tuohy Brothers Investment Research

Okay.

Mark Snell

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

Operator

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

Michael Goldenberg - Luminus Management

Good afternoon. I missed part of the call, lost contact. But did you discuss much on the court hearing in Mexico on the LNG? What’s the update there, I think, that might have been hearing in July 20?

Don Felsinger

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

Michael Goldenberg - Luminus Management

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

Don Felsinger

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

Michael Goldenberg - Luminus Management

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

Don Felsinger

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

Michael Goldenberg - Luminus Management

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

Don Felsinger

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

Operator

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

Lasan Johong - RBC Capital Markets

Thank you. Don, lot of talk about that vehicle makes its way, particularly in California; A, do you see evidence of this? And B, are you taking any steps to make it a reality? And C, how do you so it impacting SCG not SDG, but SCG?

Don Felsinger

The impact on SoCalGas?

Lasan Johong - RBC Capital Markets

Yes. Most of the electricity in covering is produced gas again, Correct?

Don Felsinger

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

Operator

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

Michael Lapides - Goldman Sachs

Hey, guys, a basic question. Any impact related to the oil spill in the Gulf on the development of potential net gas storage (Inaudible)

?

Neal Schmale

No impact.

Don Felsinger

That was Neal.

Michael Lapides - Goldman Sachs

Okay.

Operator

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

Don Felsinger

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

Operator

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

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Source: Sempra Energy Q2 2010 Earnings Call Transcript
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