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Sempra Energy (NYSE:SRE)

Q1 FY08 Earnings Call

May 2, 2008, 01:00 PM ET

Executives

Jeff Martin - VP, IR

Donald E. Felsinger - Chairman and CEO

Mark A. Snell - EVP and CFO

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

Neal E. Schmale - President and COO

Joseph A. Householder - Sr. VP, Controller and Chief Accounting Officer

Analysts

John Kiani - Deutsche Bank

Lasan Johong - RBC Capital Markets

Samuel Brothwell - Wachovia

Mark Segal - Canaccord Adams

Michael Lapides - Goldman Sachs

Faisel Khan - Citigroup

Paul Fremont - Jefferies & Co.

Asher Khan - Sac Capital

Paul Patterson - Glenrock Associates

Michael Patchen - Deutsche Asset Management

Operator

Please standby we are about to begin. Good day and welcome to the Sempra Energy First Quarter Earnings Results Conference Call. As a reminder today's conference is being recorded. For opening remarks and introductions I would like now to turn the call over to Mr. Jeff Martin. Please go ahead sir.

Jeff Martin - Vice President, Investor Relations

Good afternoon. I'm Jeff Martin; I would like to thank you for joining us to discuss Sempra Energy's first quarter 2008 financial results. A live webcast of this teleconference and slide presentation is available on our website, under the Investor section.

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

You will note that slide 2 contains our Safe Harbor statement. And please remember that this call contains forward-looking statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know they involve risk, uncertainties and assumptions that future results may differ materially from those expressed on our call. These risks and 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.

Some of the financial information we will be discussing today contain non-GAAP financial measures. In those cases, we will reconcile those financial measures to the most directly comparable GAAP figures and the reconciliations will be attached as appendices to our slide presentation. In addition it's also important to note that all the earnings per share amounts in our presentation today are shown on a diluted basis.

And with that, I would like to turn it over to Don, who will begin with slide 3.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Jeff. And thanks to you for joining us on this Friday. Here's how I would like to proceed with today's call. First, Mark Snell and I will start with financial results, than I'll update you on the status of our key business activities and finally we will close with any questions that you may have.

I would like to briefly update you on several things that have been... that have occurred since our February earnings call. First of all, we held our analyst conference in New York in March. At the conference we presented our 2008 to 2012 financial plan which increased our long-term EPS growth rate to 11%. Based on our earnings forecast and our new target of 35% to 40% payout ratio, our dividend is expected to grow on average 12% a year, more than tripling our previous target of 3% to 4% annual growth.

Also the majority of our earnings are expected to come from long-term contracts and our regulated utilities as well as from the preferred return we'll receive from our new joint venture with RBS. All of this is important because it means our earnings are becoming increasingly more predictable than in the past.

The balance of slide 3 shows our recent accomplishments. I'll get into more detail on these later on the call. Let's now go to slide 4 for financial results.

We had a strong first quarter with each of our operating businesses performing well. We also had income contribution for the first time from Rockies Express West which you will recall began service in January. These factors help improve our EPS by 7% over the previous year's quarter. We saw an even stronger improvement in EBITDA, up 17%. All-in-all a great start for 2008 putting us on track to achieve our targets for the remainder of the year.

And with that I'm going to ask Mark to take you through the financial results in more detail.

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

Thanks Don. Earlier this morning we reported first quarter net income of $242 million or $0.92 per share; up from first quarter 2007 net income of $228 million or $0.86 per share. Don alluded to it earlier, but the key takeaway for the quarter is the continued strength we're seeing across all of our businesses. As I go through the slide, I'll make a point to call out some of the areas of notable improvement starting with Sempra Utilities on slide 5.

Sempra Utilities first quarter 2008 net income increased 12% to $131 million from $117 million in the year ago period. San Diego Gas & Electric's net income for the first quarter improved to $74 million compared with $62 million in the year ago quarter. 2008 results include $9 million of favorable tax adjustments. At Southern California Gas first quarter 2008 net income was $57 million, up from $55 million in the prior year quarter. It's important to note that first quarter 2008 revenues for both utilities do not include the anticipated increase from pending general rate case settlements.

Now, let's go to slide 6, Sempra Commodities reported first quarter net income of $59 million in 2008 compared with $71 million in the prior year quarter. Since the RBS transaction didn't close until April 1st, first quarter 2008 results represent 100% of Commodities earnings. Now, Commodities did see improved margins in the quarter led by our North American power segment. However, during the quarter, commodities took $17 million write down related to an issue with the mining counterparty.

We have terminated our contracts with that counterparty and our remaining net exposure is less than $5 million. First quarter 2007 results included an $18 million benefit from the gain on sale of equity investments.

Now, let's move to slide 7. First quarter net income for our generation business was $45 million compared with $54 million in the same quarter in 2007. First quarter 2007 results were positively impacted by $6 million mark-to-market gain on long-term hedges with Sempra Commodities and other counterparties. 2007 results also benefited from $4 million of intercompany interest income.

Please move to slide 8. In the first quarter of 2008 Sempra Pipelines & Storage reported net income of $26 million compared with $16 million in the same period in 2007. The new Rockies Express West pipeline, which went into service in January, contributed $5 million of earnings in the quarter. 2008 also benefited from favorable foreign exchange rate effects on our investments in Chile and Peru and some improved operations.

Now please turn to slide 9, this slide provides the summary of our business unit result and I will highlight a few points starting with our LNG business. Sempra LNG recorded a net loss of $9 million in the first quarter of 2008 compared with a net loss of $10 million in the prior year period. The decrease in loss was primarily due to $10 million after-tax cash payment we received. This was the result of an early termination of a capacity agreement at our Cameron LNG terminal.

That benefit was offset by $6 million in higher income tax expense related to Mexican currency adjustments and some mark-to-market losses on our marketing agreement. All other items totaled to net loss of $10 million in first quarter of 2008 compared with a net loss of $21 million in the first quarter of 2007, primarily due to reduced net interest expense.

Now let's turn to slide 10, we are very pleased with the start of the year. Earnings per share and EBITDA improved significantly, all largely driven by our California Utilities and Pipeline segment. We closed the RBS transaction in April and began repurchasing the first $1 billion of our common stock as part of our planned $1.5 billion to $2 billion repurchase program. We expect to complete the first $1 billion of our repurchase program in the fourth quarter. We also increased our quarterly dividend 3% in the first quarter, and expect our Board to increase it another 9% to $0.35 per share for the next dividend payable in July.

Now I'll turn it back to Don with slide 11.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Mark. Let me start with a short business update beginning with our utilities. With regard to our general rate cases for SDG&E and SoCalGas, we've reached settlements on major aspects of those proceedings late last year. Some key aspects of those settlements include $197 million revenue increase in the first year with fixed escalations in the following year averaging $96 million per year.

Under the settlement, it's also important to note that we're not affected by changes in our customer base or productivity gains and there is no earning sharing. We now expect to receive the final decision from the California Public Utilities Commission later this quarter. We filed for rates to be retroactive to January 1st of this year.

Our $500 million smart meter program at SDG&E will begin the initial phase of installations this quarter. Large scale installations will begin in 2009 with completion in 2011.

Also we're currently evaluating the installation of natural gas smart meters in the SoCalGas territory. We plan to file an application with the CPUC later this year with a decision anticipated in the second half of 2009.

Regarding the Sunrise transmission project, in the first quarter, we received a draft environmental impact study. We expect a final decision on the project by yearend which would result in the line being placed into service in 2011.

Now let me update you one our LNG business on slide 12. At our Energía Costa Azul terminal we received our first LNG cargo. That ship left our facility this past Monday and we expect another cargo to arrive in the next several days. The commissioning is now underway and we expect the project to begin commercial operations and start receiving revenue later this month. This is the first LNG receipt terminal in the West Coast of North America, an accomplishment that we are all extremely proud of.

In Louisiana our Cameron receipt facility is now 80% complete. This project remains on track to be completed by the end of the year. As Mark mentioned earlier, Merrill Lynch terminated their capacity agreement for Cameron.

As you'll remember from our Analyst Conference, we have invested about $2 billion in this LNG business. And just based on our current contracts and the forward curve for natural gas, we will receive an 8% to 9% un-levered return from our LNG portfolio, and we have significant additional upside based on our ability to contract the remaining supply.

Now let's move to slide 13. There has been a lot of recent progress on the Rockies Express Pipeline project. In January we began service on the Rockies Express West portion of the pipeline that runs from Colorado to Kansas. Approximately 1.2 billion cubic feet per day of gas is now flowing. Service on the entire 700 mile western portion of the pipeline should begin later this month. As per Rockies Express East we received the final environmental impact study from the FERC last month. We expect to receive final approval to construct later this quarter and begin construction early this summer. We are still targeting a yearend in service date but that's dependent on the timing of FERC approval.

Please go to slide 14. In summary, here are a couple of key highlights. We had a strong first quarter led by contributions from our California Utilities and our Pipelines & Storage business. We remain focused on the completion of our major construction projects and regulatory proceedings. And finally I'd say, it's been a busy start to this year. We have gotten a lot accomplished, we are focused on execution and we look forward to providing you additional updates on our progress as we go through the year.

And with that I am going to open up the call and take any questions that you may have.

Question And Answer

Operator

Thank you sir. [Operator Instructions] We will go first to John Kiani with Deutsche Bank.

John Kiani - Deutsche Bank

Good morning.

Donald E. Felsinger - Chairman and Chief Executive Officer

Good morning, John.

John Kiani - Deutsche Bank

Can we assume that... at least at this point, you are not going to build Tatostin [ph] and PJM since FERC did not pass the CONE [Cost of New Entry] increase?

Donald E. Felsinger - Chairman and Chief Executive Officer

I think it's safe to say from our perspective that the economics that currently exist don't warrant us making an entry at this point-in-time.

John Kiani - Deutsche Bank

Okay. Thanks Don. And then another question I have is, is there anything that you all can do or you plan to do to extract value from the land that you own at Port Arthur?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, we have mentioned, I think, for the last year or so that we are exploring, putting in a marine cargo terminal. That region around Port Arthur is doing a lot of expansion in terms of the refinery growth. And we happen to be situated on the waterway with a lot of land that's in excess of our needs for an L&G terminal that could be utilized for a marine oil terminal. We have an open season some months ago, it was very positive, we're in the process right now of evaluating those responses, and should we get enough firm commitments to launch that project, we will.

John Kiani - Deutsche Bank

Can you provide or have you provided any type of estimate for what type of capital investment that would entail?

Donald E. Felsinger - Chairman and Chief Executive Officer

The size of terminal that we're looking at, the capital cost could be between $350 million and $500 million depending on how much we build up.

John Kiani - Deutsche Bank

And that's obviously incremental to the current capital spending program and growth guidance you've provided recently at your Analyst Meeting?

Donald E. Felsinger - Chairman and Chief Executive Officer

May ask Mark to make sure that wasn't included in the forecast.

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

Well, in our capital we had some discretionary sort of capital that we hadn't committed to specific projects, so it is kind of included in there.

John Kiani - Deutsche Bank

Got you, in the discretionary?

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

Right.

John Kiani - Deutsche Bank

Thank you

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks John.

Operator

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

Lasan Johong - RBC Capital Markets

Good afternoon. Nice quarter by the way. One of the facts that you guys keep your conference calls very short. Couple of questions, first of all there has been some chatter about RBS maybe being a little bit behind the curve in meeting its obligations with the joint venture because of its troubles, are you seeing anything like that at all?

Donald E. Felsinger - Chairman and Chief Executive Officer

Absolute not Lasan. This joint venture got launched and never missed a beat. As you know the management is all in place. And we and RBS are moving forward as though that there has been no change to the business.

Lasan Johong - RBC Capital Markets

Excellent. Kind of a strategic question. Sempra has done a phenomenal job of taking some of these distant dreams of accomplishing some unregulated businesses and actually coming fruition and realizing the grand plan, so to speak. I hate to duce [ph] you, Don, but what's next on regulated side. Also the very obvious and new to impair [ph], are you thinking of something more draconian and dramatic, dramatic that we haven't thought about?

Donald E. Felsinger - Chairman and Chief Executive Officer

I don't think there is any surprises, Lasan. We have signaled that in many different forums that we're all about organic growth, and that we have a lot of organic growth opportunities. And so I think the area that we continue to be focused is natural gas infrastructure, which we think the country is going to need a lot more of, especially with this whole debate on global warming and constraints on emissions. And beyond that we are actively ramping up our renewables business, and over time you will see us become a bigger player in the renewable space.

Lasan Johong - RBC Capital Markets

And again thoughts on going overseas for liquefaction. I know you've talked about kind of maybe potentially looking at that?

Donald E. Felsinger - Chairman and Chief Executive Officer

We have... we mainly have been looking at it in the past from the standpoint of having the marketing capability coming out of new terminals. If we found a location in the world where it made sense for us to invest in upstream liquefaction, after giving our proper consideration, we'd look at it.

Lasan Johong - RBC Capital Markets

What are the criterias you'd be looking at?

Donald E. Felsinger - Chairman and Chief Executive Officer

What country it's in, what advantage that gas supply would have based on its location, who our partners would be... the typical stuff.

Lasan Johong - RBC Capital Markets

Would that involve an intermediation of the joint venture with RBS, and then maybe taking some capacity on Cameron?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well I think, one of things that we expect to have happened is because RBS is so spread around the world in terms of number of projects they finance that we would expect to have more opportunity to make investments upstream.

Lasan Johong - RBC Capital Markets

Okay, Mark, not to put a damp on you or anything, but we were kind of expecting $9 million expense for the delay in bringing... I think it was Cameron online a little bit, we thought that was going to be the first quarter of this year, is that not the case?

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

I am actually not sure what you are referring to, $9 million delay payment.

Lasan Johong - RBC Capital Markets

Yeah, charge or something like that.

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

I don't know. I mean Cameron is right on target and there is no, there is nothing, there is no penalties or anything facing us with respect to that.

Lasan Johong - RBC Capital Markets

Okay. I'll take it offline with, Jeff, just in case. What was the background on this write-down with the mining company?

Donald E. Felsinger - Chairman and Chief Executive Officer

We'll have Mark Snell take that.

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

The mining company was, it was the company called Black Diamond, it was a coal mine. And we had... they had hedged some of their forward production, we were one of the parties that they had hedged it with. With the rapid increase in coal prices they became exposed to us. We called for adequate assurance on margin, they couldn't meet the margin call, we closed about, and that was the end of it.

Lasan Johong - RBC Capital Markets

I see. Just one last question, what can we expect in terms of kind of ongoing contribution from the joint venture to Sempra's earnings going forward, now that you've kind of closed the deal and moving forward?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, just as happy... we anticipate that we gave a range of $2.50 to $3.50 for this year and we anticipate meeting... being in that range.

Lasan Johong - RBC Capital Markets

And no change given the current gas price forecast and coal price forecast and the metal prices going nuts all over the world, all prices along with it.

Donald E. Felsinger - Chairman and Chief Executive Officer

We are not changing our estimates at this time.

Lasan Johong - RBC Capital Markets

Wow. Okay. Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Lasan.

Operator

We will go next to Sam Brothwell with Wachovia.

Samuel Brothwell - Wachovia

Hi, good morning guys.

Donald E. Felsinger - Chairman and Chief Executive Officer

Good morning, Sam.

Samuel Brothwell - Wachovia

Couple of quick one. Just off of that last issue with this write-off in commodities. Given the situation in the credit markets, do you expect to see a little bit more in terms of credit issues and perhaps a little bit elevated level of write-offs relative to the past or are you comfortable with your exposure.

Donald E. Felsinger - Chairman and Chief Executive Officer

Let me have Mark Snell take this.

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

Sam, we historically, credit reserves and credit write-offs have been a very, very insignificant part of our business. And even in this... that's premise on the fact that we have a fairly aggressive credit department, especially in trading. And we margin quite aggressively. And we really don't let these things try to get out too far ahead of us.

When you have rapid changes in commodity prices it can cause counterparties to be greater exposed than they had anticipated. And so it can cause some liquidity problems. And that's what causes us to close it out. Now this... we may very well not lose as much money as we've written off on this. I mean we have good claims and the mine is producing and they are going to... hopefully they'll pay us off. But we just... we move quickly on these things and we move aggressively, and that's why we've had very little problems and we don't anticipate anything out of the ordinary going forward.

Samuel Brothwell - Wachovia

Okay. Don, you hinted at possibly doing more in the future in the renewable space, can you give us any kind of a hint as to what area of that very broad theme you might be looking at?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, Sam, what I would say is... as you are aware, in the West, almost all of the utilities have some fairly aggressive renewable portfolio goals. And we have been staking out some positions with land and with land options, so we can expand on the footprint we already have in Mexico with Lagu da Moreca [ph] and also around some of our existing generation sites.

So I think you could look forward as the prices support our entry, seeing as to some wind and some different types of sore.

Samuel Brothwell - Wachovia

Okay. We'll keep an eye on that. Thanks a lot.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We'll go to Mark Segal with Canaccord Adams.

Mark Segal - Canaccord Adams

Hi, yes, hi, good morning. Just a couple of quick questions regarding your AMI deployment. Have you made a final selection regarding all the related vendors for that project ahead of the Q1 '09 expected rollout?

Donald E. Felsinger - Chairman and Chief Executive Officer

Mark, let me have Debbie Reed respond to that.

Mark Segal - Canaccord Adams

Okay.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Good morning, Mark. We are in the process of negotiating our final arrangements and we are not going to be announcing a vendor until we negotiated a contract and that will probably be towards the end of May.

Mark Segal - Canaccord Adams

Okay, and then is there any further regulatory approval or permitting that needs to take place for that?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Well, let's put it into two pieces. For the San Diego Gas & Electric side we've received full regulatory approval for $572 million, $500 million of which is capital. And we don't need any further approval to deploy. On the Southern California Gas Company side, we are looking at deploying the AMI technology on the gas meters for the SoCalGas customers, and we would be making a filing for that later this year with the hopes of getting approval in 2009.

Mark Segal - Canaccord Adams

Okay, and lastly, with regards to your plans for SoCalGas. Will that deployment leverage existing infrastructure in place with SoCalEdison?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

That will be one alternative that would be look at, we'll also look at standalone and do a comparison so that we will look at. If we do it on a standalone basis, we would deploy it throughout all of the meters and it would be about $1 billion investment. And we think that that would probably be a good long-term solution for our customers is to have all customers on the same platform. But we will look at the cost if we were to do it on the Edison overlap which would be about $600 million for deployment there. And look at the comparison between the two, and that's why we're taking sometime now to do request for proposals and gather that information before we make our regulatory filing.

Mark Segal - Canaccord Adams

Okay, thank you very much.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Mark.

Operator

We'll go next to Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Hey, guys congrats on a good quarter.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Michael.

Michael Lapides - Goldman Sachs

Two, three questions one on we're still in the process in California where the CPUC and the CAL, ISO [ph] and CEC and all the interveners are debating what the capacity market structure might look like. Can you talk about your view and how in-city versus system resources might be treated in whatever gets designed?

Donald E. Felsinger - Chairman and Chief Executive Officer

Let me ask Debbie, if she has a point of view from the person that will be taking this capacity?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Good morning, Michael. We are working actively to get a capacity market established in California. We think that that is the best solution for our customers. And the way that we would envision the capacity market working is that there would be a number of nodes and we would bid our capacity that we have and we own into the market at cost and then buy that back. So, I am not sure if I understand specifically your question about in-city resources versus... it would be a market for the whole state and then there would be regionalized nodes that would have different pricing at those nodes.

Michael Lapides - Goldman Sachs

I guess the question is would all assets be treated equally, meaning new versus old, because of... as I understand how the capacity market works right now, local system resources get treated... local resources get treated differently pricing wise than system resources. And also in the capacity market debate there has been some discussion about treating new versus old assets differently from a pricing perspective?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

That's right. That is something that the CPUC is looking at as part of the transition and that really has to do a lot with our ability right now to go out for a request for proposal for resources and ensure that there is incremental capacity being added. It's less about... being ahead of the pricing when you have a whole market structure put in place. But the CPUC is looking at that and determining how that is going to be handled on the long-term. I think that the way that we would envision it is that all resources would be treated equal when you have enough resources, but that we would be able to go out for proposals to get added resources when we needed to have added resources when we needed to have added resources to meet the resource adequacy requirement.

Michael Lapides - Goldman Sachs

Okay. And Don or Mark, kind of taking it up a step and thinking about your non-regulated generation, you've actually seeing some pretty different prices for asset transactions recently. Just curious, kind of, how you think about at what stage you are a seller?

Donald E. Felsinger - Chairman and Chief Executive Officer

We look at it... and we look at it all the time. We have a contract that runs through 2011, and it's obvious that prices are moving up which is a recognition that this region needs more capacity. So I think we always, if you are talking about from the standpoint of our assets, something we would sell, is... was that's your question?

Michael Lapides - Goldman Sachs

Yeah. Your gas generation plant?

Donald E. Felsinger - Chairman and Chief Executive Officer

Yeah, I think the way we look at it is... when this contract... before this contract expires we are going to take a look at what people are willing to contract for the output of those plants. We know what those plants transact for in the open market, and so from our standpoint if we can't get what they are worth. And I think one of the things we would consider is should we sell the plants.

Michael Lapides - Goldman Sachs

Okay. So you'll likely wait until the contract actually expires before going to that process?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, we've started doing some feelers now. We are taking some smaller amount of capacity and going out and seeing what the market is willing to pay. And it looks like that we are getting about... in terms of the offers we received so far for energy, that we're getting about 80% to 85% of the cost of the new bill. So that's probably about where we think we should be. Neal had a comment here.

Neal E. Schmale - President and Chief Operating Officer

We'll just make one other comment... we've looked at this a lot of times, and it's pretty difficult to make the sales of these kinds of assets. It depends a lot when you look at the tax leakage associated with the sale. And when you also look at new build cost, I think you would come to the conclusion that these assets are going to be very valuable assets going forward.

Michael Lapides - Goldman Sachs

Understood.

Operator

We will go next to Faisel Khan with Citigroup.

Faisel Khan - Citigroup

Good afternoon.

Donald E. Felsinger - Chairman and Chief Executive Officer

Hi, Faisel.

Faisel Khan - Citigroup

With regards to the Costa Azul revenues coming on stream next month. Is that for both the Shell and the Tangu [ph] revenues or is it just one of the other.

Donald E. Felsinger - Chairman and Chief Executive Officer

It's just the Shell contract the Tangu [ph] delivery starts a little over a year from now.

Faisel Khan - Citigroup

Okay. Got you. And on the California Phase II cost-to-capital proceeding. I believe ALJ [Administrative Law Judge] issued some recommendation. Is there anything that we should read from those recommendations that would change your ROE assumptions or capital ratios for the utilities?

Donald E. Felsinger - Chairman and Chief Executive Officer

I'll let Debbie get into this, but it's a recommendation that we are pretty satisfied with.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Basically the cost of capital recommendation that came out in the proposed decision is almost identical to what San Diego Gas & Electric has been operating with under the last several years. So we were quite pleased with a proposed decision.

Faisel Khan - Citigroup

Okay with regards to the smart metering rollout for SDG&E. In your pilot programs can you discuss a little bit what, can you discuss a little bit about what you saw in some of those program in terms or per capita consumption and declines or increases or... did the program work, I think that's why this has all being ruled out.

Donald E. Felsinger - Chairman and Chief Executive Officer

Go ahead, Debbie.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Yes, Faisel. I can talk about the pilots that were done on a statewide basis. We are going to be rolling out our own pilot of the first meter deployment at SDG&E of a large group of meters, 5,000 meters, in about a month. But we did some statewide work early on where we tried different, different... with the meters and different technologies being used to give price signal to the customers including colored orbs and things like that, to let them know when there were extreme peak days.

What we found is that the reduction in demand was 12% to 15% during some of those pilots. And what we also found is that the combination of the metering and then something in the home that gives the customer more information, really help to sustain that type of demand reduction, absent that there was erosion over time. So what we are really looking at is how do we combine our energy efficiency and demand response programs with the smart meter to do that.

Faisel Khan - Citigroup

Okay, got you. Do you have any estimates in terms of what that might shave off, some of your peak demand numbers in SDG&E.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Well in our Ks my recollection is there was around 200 megawatts of demand reduction after full deployment that we were looking at in our system coming from the smart meters.

Faisel Khan - Citigroup

Okay, got you. And on the smart metering for the gas customers, any estimate in terms of what that would cost?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Yeah, if we did full deployment across our customers, we would be looking at about $1 billion. And these are very rough numbers, I would say, as we haven't gone out and gotten any specific proposals. We are using, kind of, the SDG&E data and extrapolating that for SoCalGas.

Faisel Khan - Citigroup

Okay, do you guys have the same sort of program that PG&E has for reducing customer usage with regards to their gas utility customers also, the 10/20 plan?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

I'm not familiar with that.

Faisel Khan - Citigroup

Okay. Where customers basically are incentivised to reduce their consumption and they get a rebate along those lines, you guys don't have a similar program?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

That's... I think you said on the gas side, that's on the electric side.

Faisel Khan - Citigroup

Okay.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Yeah, and we've have that historically. We have a lot of summer programs that provide peak demand reduction where we incent customers to cycle air conditioning, where we incent commercial and industrial customers to offload during peak. And well there is a whole variety of programs we have in that regard.

Faisel Khan - Citigroup

Okay. And one last question on the Sunrise transmission line. Is there any change from your previous comments on the timing of when a decision is supposed to be reach, you said late this year, but is that changed at all?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Faisel, no. In fact the hearings, we think the hearings are going to be over today or early next week. And that the ALJ has indicated that it appears that he will be able to maintain the schedule at least that's what he's telling us which would get us a final EIR, EIS in June, a proposed decision sometime in July, and then a final decision, hopefully, by the end of the year.

Faisel Khan - Citigroup

Okay. Great. Thanks.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We'll go next to Paul Fremont with Jefferies.

Paul Fremont - Jefferies & Co.

Alright, two quick questions. One as the... as California moves to a multi-year cost of capital proceeding, is there something in the process that makes the establishment for all three companies of the cost of capital parameters more standardized or do you still expect it to be still very individual for each company?

Donald E. Felsinger - Chairman and Chief Executive Officer

I'll let Debbie take a shot at this, but my sense is the Commission will have the flexibility to custom tailor this for issues that each utility may have.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Yeah, I would just add that the mechanism that's been adopted now would be the same mechanism for each company, but it would trigger off of our authorized ROEs that we received last year. There are provisions though in this too... if there are extreme type of blowouts or modest changes in interest rates or whatever that each utility can go in and on in independent basis make an individual filing to address those issues.

Paul Fremont - Jefferies & Co.

No, on a longer term basis than your [ph], you would not expect sort of the differences that currently exists to potentially narrow in terms of... because there seems to be a fairly good spread between ROEs and his bag [ph]

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Yeah, we would be able to back end [ph] in 2011 to have any new ROEs authorized effective in 2011. But that we would use this mechanism between now and 2011.

Paul Fremont - Jefferies & Co.

And then my other question... I guess this is a trading question other entities have sort of been hurt or were caught in being long heat rate. How was it that your operation would be able to avoid that and do you believe that the situation that occurred in the first quarter with respect to heat rate was more of an anomaly?

Donald E. Felsinger - Chairman and Chief Executive Officer

Are you speaking to the heat rate change that took place in PJM?

Paul Fremont - Jefferies & Co.

Yes.

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, I guess, first of all we didn't have a dog in that fight, so... but we are watching it from a far to see if there is any learnings from it. I don't think that I know enough that I could give you any intelligence as to what we think is happening there, except that there was just a short drop in the average market heat rate over a very short period of time.

Paul Fremont - Jefferies & Co.

Okay. Thank you very much.

Operator

We'll go to Asher Khan with Sac Capital.

Asher Khan - Sac Capital

Good afternoon. I was trying to wonder is there is some way you could give us an idea that if the settlement had been around what the higher earnings could have been from the utility business in the first quarter?

Donald E. Felsinger - Chairman and Chief Executive Officer

Debbie, do you want to address this.

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Yes. Asher, what I would say is that the ranges that we gave you at the Analyst Meeting in March that were $4.85 to $5.35. We would hold to those for the year, that reflects the adoption of the settlement. And that we would feel that the ranges that we gave you are right on track.

Asher Khan - Sac Capital

But you can't tell you how much incremental the first quarter could have been and what you have been accruing?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

Well, we haven't... the way that we book for the first quarter is based upon the 2007 revenue requirement. We have even seen a propose decision yet to say that the settlements is been adopted, although we would anticipate that. And so I hope you understand that until we get that we're just really focused on our annual results. We do watch it closely and we are very confident with those annual ranges that we gave you.

Asher Khan - Sac Capital

Okay and second, I just want to go back to the Chile and Peru assets. You said you were looking them. Could you tell me what the status is in terms of them, whether it's going to stay on part of the Sempra family or it's still a review that is going on?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, longer term we've said that we're going to exit South America, and that is the plan. These are not strategic assets. The assets in Chile and Peru are very good earning assets though and so as we look at... at the appropriate time to exit, we want to make sure that we get value for those assets and we've got something else to invest that money, and it will give us some equivalent returns.

Asher Khan - Sac Capital

So, you haven't reached that point yet Don, is that correct?

Donald E. Felsinger - Chairman and Chief Executive Officer

That's correct, we have not.

Asher Khan - Sac Capital

If I can finish off, Mark how much and I know you're going to replace this with something else down the road. But how much in the 2012 earnings would you say the Merrill Lynch contract contributed?

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

Well it was very little, in fact, and if you recall from our... I don't know if you were at our Analyst Conference or not. But at the Analyst Conference I gave a something that's a breakdown of all of our earnings and showed that only, roughly 12% of our 2012 earnings were attributable to kind of, it's not just spot cargos, Tatostin [ph] Sunrise all of the things that are not 100% definite that we are going to do... that could happen. All of those things combined only contributed 10%, 12% of our total earnings.

Asher Khan - Sac Capital

Okay, so this is a small portion of that, is that correct to look at out of that 100%.

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

It's a very small portion.

Donald E. Felsinger - Chairman and Chief Executive Officer

Sure, I want to come back to it to the comments I that gave at the beginning of this call. We are building, we have build these assets for the long-term 30 years or more. And one of things that we did upfront is we make sure in our contracting that we have the ability to get a return of and a return on that investments. And that's why there is $2 billion of LNG investment that we have is going to generate just with the contracts that we have in place about an 8% to 9% un-leveraged return. And so, that gives us a very good position now to watch what's happening in the market and decide at what price and when we will release additional capacity to the market.

Asher Khan - Sac Capital

Okay, and if I can end up sorry the remaining $0.5 billion of buyback, when could we expect the decision whether it could be a buyback or reinvestment is that something for January next year when you report.

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

Well right now we've committed to do $1.5 billion to $2 billion and... we are still on track to do that, we'll wrap-up with $1 billion we'll close out this year in the fourth quarter and then we'll launch into the next $500 million and whether we go beyond $500 million or not we haven't decided yet.

Asher Khan - Sac Capital

Thank you very much, Mark.

Operator

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

Paul Patterson - Glenrock Associates

Good afternoon guys can you here me?

Donald E. Felsinger - Chairman and Chief Executive Officer

Yes, Paul go ahead.

Paul Patterson - Glenrock Associates

I apologize if you have already gone over this. The Kentucky power plant and with new CONE and heat rate situation at PJM, any the additional thoughts on that?

Unidentified Company Representative

Well, yeah I did answer that's earlier and that is that new the CONE was published and they --the process PJM in submitting their new CONE to the FERC. Didn't get approved for procedural reasons, we have decided not to enter the market based upon capacity prices. Now that does not mean that we are... that we are not out shopping with utilities for a contract. But currently the economics in that region don't support us going forward with the new build, without a contract or a hire CONE.

Paul Patterson - Glenrock Associates

Okay now you saw Exelon recent announcement and you have seen other companies in terms of what they are willing to do. Any thoughts on those submarkets or just in general and when you look at that heat rate decline in PJM. What do you guys make of that, I mean from your trading perspective in general just. What do you think is fundamentally driving that and just any other favor we have on that?

Unidentified Company Representative

Well as I said, we look at it with interest not because we have a position there. But just because we are trying to figure out what is taken place in that marketplace. I think we have points of views. We were sitting around this morning before the call talking about that. I don't think we have consensus among our management as to what is talking place there.

Paul Patterson - Glenrock Associates

Really, okay. That would be interesting to find out more of that or may be we won't go over right now. But then I'm sorry about this... the currency impact for the quarter. What was that?

Unidentified Company Representative

Currency impact.

Paul Patterson - Glenrock Associates

Yeah.

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

This is Joe Householder, there is... it was exchange rates in South America. Those currencies are pushing against the dollar, improved earnings in South American business,

Paul Patterson - Glenrock Associates

How much was that again?

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

That was about $4 million.

Paul Patterson - Glenrock Associates

Okay. Thanks a lot guys.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

Now we'll go to a follow-up from Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Yes, Debby last we chatted... we had talked about potentially securing new gas sources for SoCal and any kind of progress on whether you might have a strategic alliance with one of the existing pre-proposed pipes or may be from a foreign source?

Debra L. Reed - President and Chief Executive Officer of San Diego Gas & Electric and Southern California Gas Co.

No nothing to report on that regard Lasan. We're continuing to look at... at that as some of our interstate capacity is expiring but nothing to report on that.

Lasan Johong - RBC Capital Markets

Okay that's fine. Thank you very much.

Operator

We'll go next to Michael Lapides with Goldman Sachs.

Michael Lapides - Goldman Sachs

Hey guys, my follow was already asked and answered. Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Mike.

Operator

We'll go to Mike Patchen with Deutsche Asset Management.

Michael Patchen - Deutsche Asset Management

Alright, thanks, could you tell us what would be the triggers to buy the remaining share buyback after the $1 billion you have planning to buy $2 billion?

Donald E. Felsinger - Chairman and Chief Executive Officer

Mark, go ahead.

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

Okay, I've talked about this earlier, but again we've committed to $1.5 billion to $2 billion program. We will do $1.5 billion, so after the billion dollars is closed out in the fourth quarter, we'll launch into the next $500 million and that will probably would be in the first quarter of next year or may come a little sooner and then beyond that, beyond the $1.5 billion the decision whether to go from $1.5 billion to $2 billion, we will make it at that time.

Michael Patchen - Deutsche Asset Management

Okay. And this 11% earnings growth you mentioned earlier. Is that coming of the '07 base?

Donald E. Felsinger - Chairman and Chief Executive Officer

Of the '08 base.

Michael Patchen - Deutsche Asset Management

Okay. Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Mike.

Operator

And at this time we have no other questions. I would like to turn the call back to Don Felsinger for any additional or closing comments.

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, thanks again for joining us for our first quarter 2008 earnings call. If you have any follow-up questions, you know how to get a hold of Jeff, Glen or Scott. You guys all have a great weekend.

Operator

And again it does conclude today's call. Thank you again for your participation. Have a good day.

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Source: Sempra Energy Q1 2008 Earnings Call Transcript
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