Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Jeff Martin - VP, IR

Donald E. Felsinger - Chairman and CEO

Mark A. Snell - EVP and CFO

Neal E. Schmale - President and COO

Debra L. Reed - President and CFO for Sempra Energy Utilities

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

Analysts

Lasan Johong - RBC Capital Markets

Michael Goldenberg - Luminous Management

Faisel Khan - Citigroup

Paul Patterson - Glenrock Associates

Michael Lapides - Goldman Sachs

Samuel Brothwell - Wachovia Capital Markets

Rebecca Followill - Tudor Pickering Holt

Annie Tsao - AllianceBernstein

Michael Worms - BMO Capital Markets

Elvira Scotto - Banc of America Securities

Sempra Energy (SRE) Q2 FY08 Earnings Call August 7, 2008 1:00 AM ET

Operator

Good day and welcome to the Sempra Energy's Second Quarter 2008 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Jeff Martin. Please go ahead, sir.

Jeff Martin - Vice President, Investor Relations

Good afternoon, I'm Jeff Martin. We know how busy everyone is with earnings season, so we appreciate the fact you've taken the fact to join us today.

This afternoon we will be discussing Sempra Energy's second quarter 2008 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, 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. Please remember that this call contains forward-looking statements that are not historical facts and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know, they involve 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. It's important also to note that all of the earnings per share amount in our presentation today are shown on a diluted basis.

And with that, I'd now like to turn it over to Don, who'll begin with slide 3.

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, good morning. Thanks Jeff, and thanks to each of you for joining us.

Here is a format for today's call. First, Mark Snell and I will start with the financial results. And I will update you on the status of our key business activities. And then, as we usually do, we will close with any questions that you may have.

Now to the financial results; earlier this morning, we reported second quarter net income of $244 million or $0.98 per share compared with second quarter 2007 net income or $277 million or $1.05 per share. We are pleased with our performance for the first half of 2008 with strong results from our California utilities and a great start for our new joint venture, RBS Sempra Commodities. Based on the strength of our first half performance combined with an improved outlook for the reminder of the year, we are increasing our guidance to a new range of $3.80 to $4 per share, a $0.15 increase over our previous guidance.

Now I'd like to hand it over to Mark, who will take you through the business unit results beginning with slide 4.

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

Thanks, Don.

Well, Sempra Utilities second quarter 2008 net income increased 11% to $117 million from a $105 million in the year ago period. San Diego Gas & Electric net income for the second quarter improved to $61 million compared with $51 million in the year ago-quarter, primarily due to the performance incentives recognized during the quarter and the impact of a lower effective tax rate.

At Southern California Gas, second quarter 2008 net income was $56 million, up from $54 million in the second quarter of 2007. For the first six months of 2008, Sempra Utilities net was $248 million, up from $222 million in 2007. It's important to note that earnings from our utilities for the first six months of 2008 do not include any revenue increase from the rate case decision we received last week. As a result of the revenue increase now being retroactive to January 1st of this year, earnings for this first six months of 2008 would have been approximately $42 million higher. That increase will be recognized into the third quarter.

Now let's go to slide 5. Sempra commodities reported second quarter net income of $130 million in 2008 compared with $155 million in the prior year's quarter. This is the first reporting period under our new joint venture with RBS and reflects our reduced ownership in the business. All prior periods represents Sempra's ownership at the 100% level.

Second quarter 2008 net income included $93 million in equity earnings from the joint venture and a $67 million gain on the transaction with RBS, offset by $30 million in charges primarily related to litigation and tax issues. The excellent results from the joint venture in the quarter were driven primarily by the strong contributions we had from our natural gas and power segment.

Now let's move to slide 6. What I'd like to do here is to go into a little more detail on the earnings allocation from our new joint venture. The JV had an extremely strong quarter with $646 million of margin on a mark-to-market basis. After operating expenses, the JV had $334 million in pre-tax distributable income or about $220 million on the standalone after-tax basis, well above the year-ago quarter.

Now let's review how the partnership income is distributed. First, Sempra gets the 15% return on its $1.6 billion of invested capital, which for the quarter equaled $60 million. After RBS received its return on capital, then Sempra gets 70% of the next $500 million in annual earnings, which for the quarter was $87 million. Finally, Sempra gets 30% of all remaining earnings or in this case $18 million for the quarter.

For the total distributable earnings to Sempra for the quarter were $165 million. After adjusting the U.S. GAAP and for the impact of U.S.... for the impact of taxes, Sempra share of the joint venture equity earnings was $93 million. One quick note: overtime, we expect the U.S. GAAP adjustments to eventually go away as we completely transition of moving certain contract that are held at the joint level over to RBS.

Please move now to slide 7. Second quarter net income for our generation business was $23 million compared with $10 million in the same quarter in 2007. The improvement in the second quarter of 2008 was due primarily to $17 million in increased earnings from plant operations due to scheduled maintenance and associated downtime that impacted the operations in 2007.

Now, please move to slide 8. In the second quarter 2008, Sempra pipeline and storage reported net income of $24 million, a 41% increase over the $17 million reported in 2007. The Rockies Express West Pipeline, which went into full service in May, contributed $7 million of earnings in the quarter. Also for the first six months of 2008, net income increased to $50 million, up from $33 million for the same period of 2007. The improvement was primarily due to $12 million of earnings from Rockies Express.

Please turn slide 9. This slide provides a summary of our business unit results and I'll highlight a few points starting with our LNG business. Sempra LNG recorded a net loss of $28 million in the second quarter of 2008, compared with a net loss $13 million in the prior period. The higher losses were primarily due to higher income tax expense related to Mexican taxes on the appreciation of the peso with respect to the U.S. denominated debt. And we also had higher market loss on our marketing agreement with RBS Sempra commodities.

For the year, we expect this business unit to come in within our guidance of negative $40 million to negative $60 million. Under parent & other, we recorded a net loss of $22 million in the second quarter of 2008 compared with net income of $6 million in the prior year's period primarily due to an $80 million from an interest rate swap recorded in last year's quarter.

Please turn to slide 10. In summary, we had strong quarter. And as Don indicated, our improved confidence for the reminder of the year allows us to increase guidance to a range of $3.80 to $4 per share. Income our from California utilities increased to 11% before the benefit of our general rate case decisions. Our new commodities joint venture is off to a great start, and we believe this demonstrates potential for continued strong growth.

In April, we began repurchasing the first $1 billion of our common stock as part of our plan $1.5 billion repurchase program. We had over 15 million shares delivered to us already, and we expect to complete the first $1 billion of the program in the fourth quarter. And finally, we've increased our quarterly dividend 13% this year from $0.31 to $0.35 per share in accordance with our targeted 35% to 40% payout ratio.

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

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks, Mark.

Let me begin with an operational update starting with our utilities. Last week, we received a final decision on our general rate cases for SDG&E and SoCalGas. This decision together with our updated capital results in a $209 million revenue increase this year retroactive to January 1st with fixed revenue escalations in the following year averaging $95 million or over just... just over 3% year per year.

As a result of the decision, we are not affected by changes in our customer base or productivity targets and there is no earnings sharing, both of which are important protections for shareholders and more broadly demonstrate the constructive nature of the California's regulation, particularly given the down term in the economy.

Regarding the Sunrise Transmission project, we still expect a final decision by year-end, which would result in the line being placed into service in 2011. Last month, we also filed a request to develop a series of solar projects at SDG&E. This program would have an initial target of developing 70 to 80 megawatts of solar electricity about two-thirds of which would be utility owned with the reminder owned by third parties.

Pending commission approval SDG&E expects to add up to an additional $250 million of rate base to develop these projects over the next five years. The first installations are targeted to be operational as early as next year. And finally, we recently began installing smart meters in SDG&E's territory and also announced Itron as our meter vendor. Full deployment will begin in 2009 with completion targeted in 2011.

Before, I move on to our recent EnergySouth announcement, I'd like to briefly touch on what's driving the early success that we are seeing out of our commodities joint venture with RBS. As mark mentioned, the strong results we saw this quarter were driven primarily by natural gas and power. Another key development that we are seeing is increased deal flow, this coming from both new customers and of new areas of business.

At the moment, we have a pipeline of about 50 large deals pending, many of which combined customer needs for financing with their need to hedge some form of commodity related exposure. As you'll recall, these are exactly the types of transactions we were targeting by partnering with RBS.

Now let's move to slide 12. Last week, we announced our plans to acquire Mobile based Alabama EnergySouth for $510 million in cash. EnergySouth consist of two business lines: a growing midstream business that is in the midst of a major build up of its natural gas storage facilities that should reach 57 billion cubic of capacity when completed and an Alabaman natural gas distribution company that serves the Southwest Alabama region.

This acquisition directly supports our broader natural gas strategy, much like our role in bringing in Rockies Gas to premium markets in the Northeast with the Rockies Express Pipeline. By expanding our Gulf Coast operation, this transaction allows us to better serve key markets in the Southeast for gas demand outpaces the national average. These two assets compliment our existing operations in the region and position us with growth in the future. This transaction is expected to be slightly accretive to earnings in 2009 and depending on our natural gas markets to develop will contribute up $2.30 earnings in 2012.

Now to slide 13. This slide provides more detail of the business service comprise EnergySouth. EnergySouth midstream owns 91% of Bay Gas Storage, a facility located 40 miles north of Mobile. What we find most attractive about Bay Gas Storage is the eastern most storage facility on the Gulf Coast and we believe it's the position storage facility to directly serve the growing Florida market.

Currently Bay Gas has more than a 11 Bcf of working storage, all of which is contracted and operational. An additional 5 Bcf is over 90% contract and is under construction with the schedule 2010 in service date. There are also plans to increase the facility's total capacity to 27 Bcf by the end of 2011.

Their midstream business also owns 60% of Mississippi Hub gas storage. This facility has planned direct interconnections to the growing natural gas production areas in eastern Texas, Oklahoma and Arkansas. Currently, the facilities first 6 Bcf of storage capacity is under construction and commitments are in place for 4 Bcf of this capacity. Operations are slated to commence in 2010. There are also plans to increase the total capacity to 30 Bcf by year end 2015.

Sempra Energy share of the capital cost to build out the total storage of both Bay Gas and Mississippi Hub will be between $475 million and $525 million. You'll recall that we've talked about the growing importance of natural gas storage given the combination of high prices and continued volatility in commodity markets. That's why we think this business will compliment our existing goal portfolio.

On the utility side, Mobile Gas serves over 90,000 customers in Southwest Alabama, a region that stands to benefit from strong economic development. Alabama has a constructive regulatory environment that authorized ROEs in the 13% range, and mechanisms in place to minimize sales and volume risks. Overall, it's an attractive regulatory environment with the risk profile some of that what we have here in California. In short, these are great businesses that will be a nice additions to the Sempra family of companies.

Now let's move to slide 14. This slide shows EnergySouth locations in the Gulf region. In the center you'll see EnergySouth's existing business, the Mobile Gas utility, Bay Gas Storage and Mississippi Hub gas storage. You can also see that they are uniquely located to capitalize on new shale producing regions in Texas, Oklahoma, and Arkansas, as well as future LNG growth in the Gulf. Along with our current LNG pipeline and storage development in the region, we believe the EnergySouth acquisition helps lay the foundation for a highly profitable natural gas business in the gulf.

Now let's move to slide 15. There has been a lot of progress in recent months on Rockies Express Pipeline project. In May, we began full service on the Rockies Express west portion of the pipeline that runs from Colorado to Missouri. Approximately 1.5 Bcf per day a gas is now flowing. We've also began construction of Rockies express east in July. We still target interim service by year end with completion expected in the third quarter of 2009.

As you may have seen, total project costs for the entire pipeline are now expected to be $5.6 billion was Sempra's share of $1.4 billion. There had been a number of things that have gone well with this project, but challengeable has been around cost increases on the eastern most segment of the pipeline. These increasing cost pressures are primary due to labor escalations and changes in our preferred route.

Even with this cost increases when Rockies Express is fully operational, we will have around $650 million of equity invested and be receiving dividends each year of about $70 million to $80 million, an attractive return on our investment. I think it also bears mentioning that today's high cost environment makes it more difficult for new pipeline projects to compete with Rockies Express.

Early on, we were able to lock in certain costs such as steel and labor for the first half of the pipeline. That type of hedging is not available in today's cost environment. The key point is that Rockies Express or any similar pipeline couldn't be duplicated at the same price.

Moving to LNG, at our Energía Costa Azul terminal, we began commercial operations in May and started receiving revenue on half of the terminal. We also planned to start construction on $125 million nitrogen injection plant in the third quarter and expect completion by year end 2009. In Louisiana, our Cameron receipt terminal remains on track to be completed by the end of the year.

Now let's move to slide 16. Let me close with a couple of summary comments. Very pleased with our strong financial results for the quarter and where we are for the first half of the year. What's important to focus on is what's driving our financial performance. First it's our California utilities; up 11% for the quarter and 12% in the first half of the year. And that excludes the impact of increased revenues from the rate cases, which will be retroactively applied to January 1.

Secondly, it's from our pipelines and generation business. Pipelines is up over 50% in the first half with new contributions from Rockies Express and to our commodities business, producing solid growth with less risk to Sempra. On the basis of those results and our improved outlook for the remainder of the year, we've raised our 2008 guidance to $3.80 to $4 per share.

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

Question And Answer

Operator

[Operator Instructions]. And we'll take our first question from Lasan Johong from RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Good morning. Don, the EnergySouth transaction looks very compelling, but I'm kind of wondering what you're going to do with 93,000 customers.

Donald E. Felsinger - Chairman and Chief Executive Officer

Of course, I mentioned, Lasan, the distribution utility came with a transaction. It's a good utility with good regulation. And for the current time, we plan to keep it.

Lasan Johong - RBC Capital Markets

Any opportunities to do some bolt-on type acquisitions around that small utility?

Donald E. Felsinger - Chairman and Chief Executive Officer

As I mentioned that that's a growing area of the U.S. from an economic standpoint. And we look at it something that we would plan to look and make it even a better utility.

Lasan Johong - RBC Capital Markets

So, you're going to operate it first, try to improve it and then maybe kind of abate [ph] to launch more potentially more acquisition.

Donald E. Felsinger - Chairman and Chief Executive Officer

I think you should a look at everything that are doing in the Gulf is a way to enlarge out footprints. We think this is a key area for growth and for natural gas infrastructure, having storage pipelines, LNG receipt terminals and a distribution utility there give us the foundation to kind of build from.

Lasan Johong - RBC Capital Markets

I think that's the great idea. This is probably a question you're going to laugh at and probably say you can't answer, but I'm going to ask it anyway. What would have Sempra been able to do with the commodities business having not have the joint venture?

Donald E. Felsinger - Chairman and Chief Executive Officer

I think we'd be struggling in today's credit markets.

Lasan Johong - RBC Capital Markets

So, you may not have gone to your $93 million?

Donald E. Felsinger - Chairman and Chief Executive Officer

It's hard to get into hypotheticals of what we could have done or not done. We know that this is a very difficult market from a credit standpoint. Having the strength of RBS behind this transaction, looking of where commodity prices are and the positions we would have been able to hold, I think all bodes well for this. Note the fact that I mentioned, Lasan, just the deal flow that we are now getting with RBS that we didn't have access to before, makes us a really great outcome.

Lasan Johong - RBC Capital Markets

Understood, and I can't disagree with that. What's the progress on getting additional contacts at Cameron and ECA?

Donald E. Felsinger - Chairman and Chief Executive Officer

Let me, I will go and just start here that and I will let Neal talk about where we are contracting, but I think it comes back again to how we thought about this business. And remember we said this before that when we launched it, we launched in a way that we were able to get a return of and on our invested capital. The fact we have done that puts us in a much different position to other people that are in the space today. Because we have... there is no urgency for us to go out and do something, but we give away capacity. So, we are sitting here with full contracts at Cameron. And in total, we are getting about a 9% on lever return on that investment. We are now looking at what's happening upstream with new LNG supplies and we see them coming on stream, but let me have Neal talk about exactly what we are doing.

Neal E. Schmale - President and Chief Operating Officer

Well, I don't know what else has to be commented [ph]. Just to say that we are actively talking to a lot of people in the industry about how capacities will be at the Cameron. And I think, the key point is that our fundamental view of the LNG markets really hasn't changed that much. It's absolutely true that there has been a little bit of slowdown, because these plants have taken longer to come of stream, but over the lifetime of this facilities, we think the economics are going to do as basically as we they were original.

Lasan Johong - RBC Capital Markets

Very nice.

Donald E. Felsinger - Chairman and Chief Executive Officer

I think the thing that we see Lasan is that gives us encouragement is that the liquefaction coming on stream that is currently either finishing up construction are going to start up testing right now is going to increase the world's LNG supply by about 50% towards the end of next year. This bodes well, because a lot of this gas will be looking for a home.

Lasan Johong - RBC Capital Markets

Right.

Donald E. Felsinger - Chairman and Chief Executive Officer

And so we believe that we have... our terminal in Cameron and we look at as location, access to pipeline, access to storage. We think it's probably one of the better terminals in that region.

Lasan Johong - RBC Capital Markets

I agree. One last question if I may. What's the status of progress of Rockies Express Northeast?

Donald E. Felsinger - Chairman and Chief Executive Officer

Remember, when we launched Rockies, it was driven by producers. Any expansion off of Rockies going into the further east is going to going to be driven by the marketplace. And we have a very cost effective pipe solution. Our competitors have a smaller pipe, and I think it's going to depend on what the market wants. If they want a bigger pipe solution, there is no doubt that we with the pipe that we have and the partner that we have can come with that solution. But we are still waiting for the market to decide what it wants.

Lasan Johong - RBC Capital Markets

Understood. Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Michael Goldenberg with Luminous Management.

Michael Goldenberg - Luminous Management

Good afternoon, gentlemen.

Unidentified Company Representative

Hi, Michael.

Michael Goldenberg - Luminous Management

Excellent results, I wanted to ask to questions; first of all, just one of the gain, a better understanding for the increase some guidance; Is it any specific unit that is performing stronger than expected or is it just overall?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well,I'm going to have... I'll have Mark Snell give you some more detail. But we sat down, Michael, a week or two ago and just kind of took a look at all of our businesses. And when we look at the fact, when we started this year, we had a lot of uncertainty. We didn't have the RBS transaction done. We didn't have our LNG terminal in operation, Rockies West wasn't flowing gas, our utilities were waiting on the outcome of the rate case. We now have got closure on almost all of those items. So when you look across the board, we see improved financial results, so we see uncertainties being eliminated and pipelines in our LNG business and our utility business and our commodities business. And it was the combination of all those things that caused us to take a look at our ongoing outlook for these businesses and increased guidance.

Michael Goldenberg - Luminous Management

If I look at March 27 presentation from this year, and you had the detailed break down of 2008 outlook. Any specific numbers you can assign that have been moved up and by how much?

Donald E. Felsinger - Chairman and Chief Executive Officer

This is Mark Snell.

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

Yes, Michael, I would say just generally speaking the commodity, the utilities are operating at more towards the high end of their original guidance.

Michael Goldenberg - Luminous Management

Okay.

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

We took that into consideration. The JV is performing better than we expected early out of the box. And so we took that into consideration. And most all of our other business units are you know kind of right where we thought they would be. Actually generations is moving a little bit ahead of where we thought they would be. So, just it seems like everything was firing on all cylinders and it may tends to go ahead and make some adjustments.

Michael Goldenberg - Luminous Management

And specifically on utilities and generation, would you feel comfortable saying that the strength you are seeing in 2008 should carry over into 2009 and beyond?

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

Well, certainly in the utilities because the strength that we are seeing doesn't reflect yet the new revenues that we are going to get from the rate case. So we definitely think that, that business is going to continue on with strong performance. The generation business, some of that is a little more specific to commodity pricing and things of the particular time. But we think certainly the bulk of our income there comes from the DWR contract. And so we'll have that next year into '09 and '010.

Michael Goldenberg - Luminous Management

Got you. Excellent. And just one more follow-up, specifically on the power and gas units of the trading business that have performed particularly well. I understand you are... you have your hands tied a little less to what you can say. But was it kind of directional bets, was it increased customer flow, was it long, short position? Can you provide more color as to what specifically on gas and power made you so much money this quarter?

Donald E. Felsinger - Chairman and Chief Executive Officer

Generallyspeaking, it's all of those and none of those. I mean we had definitely more deal flow from the bank which is what we expected. We had... because we had a rapid increase in commodity prices in the first quarter and with volatility kind of staying at historical percentage averages but those percentages translated into bigger dollars. Because of that volatility we were able to take advantage of that. And so generally speaking, we had a very good quarter.

Michael Goldenberg - Luminous Management

Okay. This may be a little premature but we all know that in Q3 some of the commodities have retreated. Just wonder, would you be able to make us feel comfortable that Q3 is still kind of... nothing has happened to make you worry about Q3 or Q4?

Donald E. Felsinger - Chairman and Chief Executive Officer

I would say this, I would say that we had a really good second quarter in commodities. We did not anticipate that continuing through the end of the year, at that same pace. And so we took that as a consideration when we raised guidance.

Michael Goldenberg - Luminous Management

Understandable. Excellent, thank you very much. Congratulations again.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Faisel Khan with Citi.

Donald E. Felsinger - Chairman and Chief Executive Officer

Hi Faisel.

Faisel Khan - Citigroup

Hi. On the commodity deals that you guys were talking about that you couldn't do last year but now you can do. Would the deals that you are now able to do, are those deals that would extend the maturity of the trade book that you guys have with RBS?

Donald E. Felsinger - Chairman and Chief Executive Officer

Let me have Mark Snell addressed that.

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

Faisel, some of them are longer term that, what we would have dealt with in the past. And one of the primary reasons that we liked this transaction was that the bank afforded us the liquidity to be able to enter into some longer term transactions. Most of them are probably in the neighborhood of four years and five year kind of deals because that's typically how long the banks... they're lending money to a company on let's say 5-year maturity for a bank lending operation and we're hedging against that.

Faisel Khan - Citigroup

Okay. Got you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Neal,Mark and I attended the first Board meeting of this joint venture a couple of months ago. And I was laughing at David Messer who runs the business now, because he said that RBS had been dragging around the world on an airplane, introducing to us all their customers. And so when we talked about the fact that we've got 50 large deals in the pipeline, these are really deals that RBS is introducing Sempra Commodities too as a new arrow in their quiver they didn't have before. So they are out there making sure that their customers are aware that they now have this commodity hedging opportunity.

Faisel Khan - Citigroup

Got you.Okay. If I am looking at the way you get down to the equity earnings from that business, the U.S. GAAP conversion impact, the distributable income that's an IFRS basis, is that kind of similar to what you guys reported previously on kind of the real earnings?

Donald E. Felsinger - Chairman and Chief Executive Officer

It's essentially a mark-to-market number. The IFRS number doesn't have the EITF adjustments. The bottom line is under IFRS we are allowed to mark our inventories that we use in hedging transactions. And, we are allowed to mark our pipeline of storage capacity to market. And that's really the big differences.

Faisel Khan - Citigroup

Got you. That makes sense. On the RECs, previously Sempra Commodities had contracted for capacity on RECs, where does that capacity sit within the firm?

Donald E. Felsinger - Chairman and Chief Executive Officer

It actually... it's reported the results of it we report in the commodities business.

Faisel Khan - Citigroup

Okay.

Donald E. Felsinger - Chairman and Chief Executive Officer

Inthe commodities segment we've actually managed here in San Diego.

Faisel Khan - Citigroup

Okay. Got you. And the full economic benefit though is still split between you and RBS?

Donald E. Felsinger - Chairman and Chief Executive Officer

No, it's not. It accrues the full economic benefit of that capacity, accrues 100% to Sempra. But we thought that because it is closest related in... its source is closest related to trading type of activity that we reported with commodities but we actually manage it here and it's not shared.

Faisel Khan - Citigroup

If the differential between the Rockies and say the Ohio region is much wider than your tariff, that in theory that would be an economic benefit --

Donald E. Felsinger - Chairman and Chief Executive Officer

That's absolutely right.

Faisel Khan - Citigroup

Okay. Got you. Then on the EnergySouth deal, was that a competitive transaction or was that something you guys think that --

Donald E. Felsinger - Chairman and Chief Executive Officer

That was competitive.

Faisel Khan - Citigroup

Okay. And on the Sunrise transmission line, you are saying now you are looking at approval for the entire line by year end Or when is the environment approval slated to be completed by?

Donald E. Felsinger - Chairman and Chief Executive Officer

Let me ask Debra Reed just to give everybody an update and I know it's on a lot of your minds.

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

The Sunrise Power Link, we are looking at approval in the fourth quarter of this year. And that it would be in service in 2011 if we received approval then. As you recall, we have had numerous hearings on this line. And we are in the process now of getting the final EIR/EIS to come out and that's supposed to be scheduled on October 13. Then the ALJ proposed decision is supposed to come out about a week later. And the first opportunity for the commission to vote is about November 21st, that's what we will be looking at.

Faisel Khan - Citigroup

And what's the estimate of the project cost on that line?

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

Well, the estimated cost is about $1.5 billion without mitigation. And so whatever the CPC might order in mitigation may change that costs, that are estimated about $1.5 billion.

Faisel Khan - Citigroup

Have you guys made any preparations for major component costs in that line?

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

We have had discussions with contractors, but until we get the line approved, we aren't going to be doing any hedging. So we are looking at... we did redo our estimate most recently and filed that. We filed an update but these costs are updated costs based upon those estimates.

Faisel Khan - Citigroup

Okay. Understood. Thanks for the time guys.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Faisel.

Operator

We'll take our net question from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning guys.

Donald E. Felsinger - Chairman and Chief Executive Officer

Hi Paul.

Paul Patterson - Glenrock Associates

How you doing?

Donald E. Felsinger - Chairman and Chief Executive Officer

Good. Thanks.

Paul Patterson - Glenrock Associates

I am ifI missed this but it looks like the data you used to provide on the commodities business regarding the realization of the mark-to-market and al that stuff. I can't find it, is it somewhere in the appendix or something or --

Donald E. Felsinger - Chairman and Chief Executive Officer

Are you talking about tenure of the contracts?

Paul Patterson - Glenrock Associates

Yes, the time that they become realize and turn into cash, it looks like this... at least I was unable to find it on this... evenly find it on the news release?

Donald E. Felsinger - Chairman and Chief Executive Officer

Because it's not there.

Paul Patterson - Glenrock Associates

Okay. Are you guys as... now as a result of the joint venture, not going to be providing this information?

Donald E. Felsinger - Chairman and Chief Executive Officer

That's correct.

Paul Patterson - Glenrock Associates

Okay. And that because I guess, RBS is the one of provider or...

Donald E. Felsinger - Chairman and Chief Executive Officer

We are providing everything that RBS is providing.

Paul Patterson - Glenrock Associates

Okay. As far as the distributable cash, was it distributed to you guys or it is still at the...

Donald E. Felsinger - Chairman and Chief Executive Officer

I'll ask Mark Snell on that.

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

The distributable cash represents the amount of cash that will be distributed at the end of the year. We... during the year the that we get distributions for... what our tax obligations are related to those... related to the earnings. And then at the end of the year, we distribute the rest of the cash to us.

Paul Patterson - Glenrock Associates

Okay. Just back to the disclosure, will the 10-Q have this? Or is this something that you guys aren't going to be... because of the deal you're not going to provide any more?

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

Because this is now an equity investment we are still talking with RBS about what kind of disclosures we are going to make. This is our first attempt here to give people what we think they need to sort of model the business adequately. And so we have a fairly good breakdown of how the JV income is allocated between the partners. And we also have provided some... the information on geographic and product sales. But we aren't going to give the tenure of the book or the bars any longer.

Paul Patterson - Glenrock Associates

Okay. Well I thought you guys did a great job with that. And I will miss it. I guess I understand you guys have a JV now and it's a little different.

Donald E. Felsinger - Chairman and Chief Executive Officer

What we are trying to do provide the information that we think will help you guys have insight into our business and to be able to model it. We think we are giving you that information. And if we hear a lot otherwise, we will address it in the future. But, I mean, we have to be cognizant of the fact, we have a majority partner who doesn't give out that kind of detailed information even on the bank. And so we have to appreciate that.

Paul Patterson - Glenrock Associates

I appreciate it. Thanks guys.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

We will take our next question from Michael Lapides, Goldman Sachs.

Michael Lapides - Goldman Sachs

Hi, guys. Can you summarize the changes in your long-term capital spending plan that have occurred since your Analyst Day Meeting? Meaning the solar is the good example, obviously EnergySouth is a good example. I don't know if I'm missing anything else.

Donald E. Felsinger - Chairman and Chief Executive Officer

Yes, as I look at our capital spending we gave you guidance that we're going to spend about $2.1 billion this year. And then over the remaining for years I think we are averaging about $2.3 billion or $2.4 billion a year. We are not changing that. This transaction we did for EnergySouth will in essence still avoid that we have because we are not doing Contextion [ph]. And when we look at the solar program being done by our utility, we have some other unidentified projects where we had placed all the dollars for. I think in general, we are comfortable with the numbers that we gave you several months ago. And when we take a look at the end of this year and provide guidance for next year and beyond, we will update that as we've progressed on those smartmeters of SoCalGas and any other thing that we see that it's going to come to fruition.

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

Michael, it's Mark Snell. Let me just make one other comment too. One thing that might be throwing your numbers off a little bit in that spending is, we redeemed $400 million of industrial development bond during that sort of auction rate note debacle that all of the companies were going through. So, we redeemed those bonds and we are reissuing some more types of bonds later on this year. So that will be kind of in and out but it may be throwing your number off because it's $400 million.

Michael Lapides - Goldman Sachs

Gotit. One other question, I think little bit unrelated but thinking about it Sempra Generation opportunities for solar development. Can you talk a little bit about kind of what you think is possible in terms of megawatts over the next four or five years? And second, what types of contracts would you be seeking?

Donald E. Felsinger - Chairman and Chief Executive Officer

Neal, do you want to talk about this?

Neal E. Schmale - President and Chief Operating Officer

Sempra Generation is actively involved in developing solar projects next to their facilities in Nevada and in Arizona. They have announced that they're going to have a 10 megawatts facility online later this year in Nevada. We have acquired land and we should have the capacity ability from the land standpoint to add several hundred megawatts of solar capacity around the Nevada facility and in Arizona over time. And in terms of contracting, the intent is to fit into the various RFPs that the utilities have, all the utilities in the region have.

Michael Lapides - Goldman Sachs

Okay but you are making this decision on the first 10 megawatts to build without having actually having a contract on the other side. Is this just kind of like a test run?

Donald E. Felsinger - Chairman and Chief Executive Officer

That's correct. We just decided to build that facility and go ahead with it. We are confident that we will be able to sell the output.

Neal E. Schmale - President and Chief Operating Officer

I think the way to look at this is we have a technology that we are looking at that we think longer term is going to be the technology from a solar perspective that is going to be the generation of choice. We want to go ahead and get some experience on what it costs to build these. How they operate and so this $40 million, 10 megawatt announcement we have, based on how the construction goes, how they actually operate will set the stage on what we do next year and beyond in terms of looking at bidding this stuff on a larger scale into the Southwest region.

Michael Lapides - Goldman Sachs

Got it, thank you guys, congrats on the good quarter.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Samuel Brothwell with Wachovia.

Samuel Brothwell - Wachovia Capital Markets

Hi, Couple of quick ones. Just to be clear on the guidance as you updated '08 with respect to commodities. Did that include the gain on the transactional gain net of the losses?

Donald E. Felsinger - Chairman and Chief Executive Officer

Sam, it did. Let me have Mark give some more color?

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

Yes Sam, it's Mark. It did. I would think about it this way. As our operational earnings for the quarter were kind of right at our results of the $0.98 the gain on the commodities sale was offset by some litigation reserves and taxes that we took with respect to commodities and also the Mexican tax piece that hit our pipeline business and LNG business. And those are kind of one-time unusual things. But if you take those out of it, operationally we were right at about where we were for the quarter. And given that plus the improvement at the utilities, the retroactive adjustment of the rate case and how we were performing at commodities and the other business units, we made a judgment of where we thought we would end up at the end of the year. So, that's why we increased the guidance.

Samuel Brothwell - Wachovia Capital Markets

Got You. I forgot my other question. I will jump back in the queue. Sorry.

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

Okay.

Operator

We will take our next question from Becca Followill with Tudor Pickering Holt.

Rebecca Followill - Tudor Pickering Holt

Hello folks. First question on EnergySouth, the range that you have is basically breakeven on in 2009 and up $0.30 what determines that... was it return [ph] how that would play out? I know it's a time in the development of storage but, how much more just kind of what progression you guys are looking at?

Donald E. Felsinger - Chairman and Chief Executive Officer

Beccafor 2009 remember, we don't close this transaction until November maybe December. So, there is not a whole lot that's in here for the rest of this year. When we look at what this business will generate over time it really gets down to what the value of storage is. And we've made some assumptions that when you look at storage costs that are in the range of $0.30 to $0.40 that we think this business can generate, about on the high end, about $0.30 of net income in 2012.

Rebecca Followill - Tudor Pickering Holt

So that by 2012 how much storage would have to be developed to get to that?

Donald E. Felsinger - Chairman and Chief Executive Officer

That's building out essentially all the storage we have that is identified. I don't know if it's in your chart or not.

Rebecca Followill - Tudor Pickering Holt

It's got 27Bs by 2011 for Bay Gas, but Mississippi Hub is upto 30 by 2015, so how much of the Mississippi Hub would be developed?

Donald E. Felsinger - Chairman and Chief Executive Officer

Ofthe 57 we are acquiring about 40 of it, or about 40 Bcf of new storage in operation in 2012.

Rebecca Followill - Tudor Pickering Holt

And what determines whether or not you develop a just demand?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, I mean it's like everything else we do. We will lay out a plan for that area, we will go out and talk to customers. And if we can enough contracts signed up for the right price to launch we will, and so this would be no different. We are seeing very strong interest right now. As you notice that we already have about 20Bs contracted. So we are seeing strong interest in the marketplace to develop more. We will actually get contracts in place for the majority of that before we launch the next increment.

Rebecca Followill - Tudor Pickering Holt

Great, thank you. And then on the commodities business, you said that you have 50 large deals pending, from your reference, what was this like a year ago at this time? How many large deals did you have pending and --?

Donald E. Felsinger - Chairman and Chief Executive Officer

The types of deals that we are talking about here are really deals where RBS is providing financing, and the customer is looking for some way to hedge the output of that... the solar that's being financed, we really weren't doing any of these deals.

Rebecca Followill - Tudor Pickering Holt

Okay. So all this is incremental. And then for going forward you guys have three months under your belt with the JV. What you guys have seen so far in July... it's tremendous performance for just three months under a JV. Are you seeing continued momentum going into July and August?

Donald E. Felsinger - Chairman and Chief Executive Officer

One month or three months don't make a business. Markets are fairly volatile. And we do have confidence looking through the rest of this year that, to give us enough comfort to make a change to our guidance that coupled with other businesses, I just wouldn't forecast what we plan to see in terms of what the commodity markets will give us.

Rebecca Followill - Tudor Pickering Holt

Okay. Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks, Becca.

Operator

We'll take our next question from Asher Khan [ph] with SAC Capital.

Unidentified Analyst

Good afternoon, congrats. I had a question on the rate case, if you can. You mentioned on the slide that $42 million earnings benefit related to the first half of 2008. Can we multiply that number by two and say the benefit for the year would be 84?

Donald E. Felsinger - Chairman and Chief Executive Officer

Could but you would be wrong.

Unidentified Analyst

Could you tell us what's happening in the second half?

Donald E. Felsinger - Chairman and Chief Executive Officer

Asher, let me have Debbie just kind of walk you through how to think about that.

Unidentified Analyst

And Debbie, if you could also, because now it's a final decision, could you hope you can elaborate what the rate case means additional earnings for the next three years also based on the decision?

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

Well, Asher, let me try to address your first question which was the 42. The 42 reflects the adjustment for the first half of the year. We will have additional revenues of $209 million split between the two utilities. But of course, we do have additional costs, and we have been operating under our 2007 authorized margin is what we were recording for the first half of the year.

That we would... we have looked, as Mark has said, at what we would expect for the remainder of the year. We had a very strong first half and we do believe that we would be at the high end of our range, as a result of the rate case decision and how we are managing the business. We don't forecast now for the next two to three years. We will be... when we do the analyst meeting next year we will be revising all of our forecasts at that time.

Unidentified Analyst

You would have some sense, I guess, to additional earnings the next one, two, three years under the rate case. So you are saying the utility... you will go through the process of revision by spring of next year, though the numbers are going to be higher. Is that a fair conclusion?

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

Yes. We have laid out... we laid out for you our plan in the analyst meeting and showed that plan reflected the settlement in the rate case and what we would anticipate that. That we will look at that again as we do every year and make any revisions that are necessary but that plan as we showed you back in the spring reflected the settlement in our rate case.

Unidentified Analyst

Okay. Thank you very much

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks Asher.

Operator

We have a follow up question from Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Thank you. Don, it strikes me as being self evident that the best use of your new storage assets from EnergySouth will come through the Sempra Commodities business. But since that is now a majority owned by somebody else, how do you structure the integration and the benefits from the two coming together?

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, obviously Sempra Commodities... Sempra-RBS Commodities will have access to the storage like any other third party would. And the --

Lasan Johong - RBC Capital Markets

Do youcharge the JV a fixed fee for utilizing the space like you and any other third party --

Donald E. Felsinger - Chairman and Chief Executive Officer

Remember we have partners in these projects. So we can't do anything that is favorable to our own affiliate.

Lasan Johong - RBC Capital Markets

Okay I understand that. Don, it seems to me also that given the current credit situation that having done a lot of transactions in the private equity for generation that there might be some potentially opportunistic acquisition scenarios developing, would that be a fair statement?

Donald E. Felsinger - Chairman and Chief Executive Officer

I think it's a standard answer. I always give you Lasan that we are always looking at opportunities where we think we can either do something at attractive price or will bring some strategic value to something that we look at buying or building.

Lasan Johong - RBC Capital Markets

But has the environment changed to favor with that kind of analysis?

Donald E. Felsinger - Chairman and Chief Executive Officer

I would say so. I mean we've... you look at there are fewer people in the marketplace today, there are fewer people they can do deals and so being financially strong as we are I think that if we saw deal that we wanted to do that I'd have more confidence we can get it done.

Lasan Johong - RBC Capital Markets

Got it. And lastly, conservation; are you seeing any evidence of that in your utilities?

Donald E. Felsinger - Chairman and Chief Executive Officer

Yes, Debbie would address that.

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

And actually on the electric side, we are continuing to see peak low growth of about 1.5% to 2% per year and sales growth of about 1.5% through year on an 12 months running average. So, we are not seeing much in that regard at all.

Lasan Johong - RBC Capital Markets

What about the gas side, the gas and electric?

Debra L. Reed - President and Chief Financial Officer for Sempra Energy Utilities

On theSoCalGas side, we are seeing about 0.8% growth and customers about 45,000 meters, and our consumption is level there, and it's pretty level there for several years.

Lasan Johong - RBC Capital Markets

Interesting, thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thanks, Lasan.

Operator

We will take our next question from Annie Tsao with AllianceBernstein.

Annie Tsao - AllianceBernstein

Good afternoon. Just wondering in terms in your commodity sector, power and gas, can you give a little bit of color in this quarter? Do you see the liquidity come down because of the financial player being pulled down, because we heard from a lot of other sources?

Donald E. Felsinger - Chairman and Chief Executive Officer

Your question is, was there less liquidity in the market, because there is fewer players in gas and power sector?

Annie Tsao - AllianceBernstein

Yes.

Donald E. Felsinger - Chairman and Chief Executive Officer

I don't believe we have seen that. Mark, do you have any?

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

No, I think... generally speaking through the second quarter, I think the amount of liquidity and activity was pretty good. We had a fairly rapidly rising commodity market, and I think there was... again, we tend to deal more in physical and the physical side of the business, and that hasn't been affected as much by some of the financial players dropping out. But how that continues on, we will wait and see.

Annie Tsao - AllianceBernstein

And on the share repurchase program, should we assume this about $200 million left for the rest of the year?

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

How many millions left?

Annie Tsao - AllianceBernstein

About $200 million.

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

No, I don't...

Annie Tsao - AllianceBernstein

Is it from your $1 billion to $1 billion?

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

What we did? We did an accelerated share repurchase program as you remember, and we committed to buy $1 billion dollars worth of stock back this year. We have been delivered about 15 million shares so far. That was early on and now we are just... they're wrapping that program up. And it will wrap up in the fourth quarter. We will bring in a $1 billion worth this year.

Annie Tsao - AllianceBernstein

Okay. And lastly does this Sempra Utility, you have about $4 million benefit from the San Diego Gas & Electric from lower tax rate? What kind of tax rate we should assume going forward?

Donald E. Felsinger - Chairman and Chief Executive Officer

Joe Householder, would you take that?

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

Sure. Going forward for the year for SDG&E, the tax rate for 2008 about 36%.

Annie Tsao - AllianceBernstein

Okay, all right. Last... I do have one more question. CapEx; do you have any changes since the last time?

Donald E. Felsinger - Chairman and Chief Executive Officer

I think I said that earlier; if you missed it, that we expect of CapEx to kind of be what we have forecasted for the year.

Annie Tsao - AllianceBernstein

Okay. Thank you.

Operator

We'll take our next question from Faisel Khan with Citi.

Faisel Khan - Citigroup

Just curious, the Supreme Court came back on the western contracts issue, and looks like the remanded some issues back to the FERC and upto Mobile-Sierra, is there is sort of impact to you guys over the next 6 to 12 months in terms of...

Donald E. Felsinger - Chairman and Chief Executive Officer

Faisel,I don't. We actually thought that decision was right in line with what we thought that the Supreme Court would do. It's been remanded back to the FERC and it's going to take its time work through that process, but don't expect any change this year.

Faisel Khan - Citigroup

Okay. Thanks, guys.

Operator

We will take our next question from Michael Worms with BMO Capital.

Michael Worms - BMO Capital Markets

Thank you very much. Can you just go over for me what the tax change was at the utility company in the quarter?

Donald E. Felsinger - Chairman and Chief Executive Officer

Michael, you are fading out. Could you...

Michael Worms - BMO Capital Markets

Sorry, can you hear me for now?

Unidentified Company Representative

Yes.

Donald E. Felsinger - Chairman and Chief Executive Officer

Yes.

Michael Worms - BMO Capital Markets

Just wondering what the lower tax rate was at the utility company what drilled that and what drilled the tax rate be going forward to rest of the year.

Donald E. Felsinger - Chairman and Chief Executive Officer

What drilled the lower tax rate at the utility?

Michael Worms - BMO Capital Markets

Yes.

Donald E. Felsinger - Chairman and Chief Executive Officer

Joe Householder, again.

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

Hi, what was really driving it in the quarter is we have additional software expense, which flows right through to the rates. We get immediately deducted in that actually flows rate through the rate in the rate making.

Michael Worms - BMO Capital Markets

Okay. So we will... it will just continue throughout rest of the year?

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

Yes, that's the projection for the year, and it's actually driving effective rate down for the year it's blended in.

Donald E. Felsinger - Chairman and Chief Executive Officer

So, the 36% is for the entire year.

Michael Worms - BMO Capital Markets

Okay,fair enough. And then on the at the commodities level, can you just go over that second bullet on slide 5, the $67 million gain? What was driving that or what drove that? And then what was offset was on the litigation impact matters?

Donald E. Felsinger - Chairman and Chief Executive Officer

I'vegrabbed the slide here, so slide five commodities?

Michael Worms - BMO Capital Markets

Yes.

Donald E. Felsinger - Chairman and Chief Executive Officer

Yes, Mark Snell.

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

Maybe there is some surprise, because we have basically signaled that we sold the business or half of the business to RBS at book. And so maybe the fact that we are having a gain surprises some people. But I think generally speaking we did sell it at book and for the most part since we mark-to-market all of the assets on a daily basis or most of the assets, you would expect there to be fairly little gain. But there were some assets that under U.S. GAAP we couldn't mark-to-market and the purchase agreement allowed us to mark those assets to market, especially under IFRS. That was primarily transportation, inventories, and storage that we owned. And so we did mark that to market and we were able to realize the benefit for that.

Now the full benefit, the full gain on those types of things we only recognized half of it, because we continued to own half of the business. So that we didn't really recognize the full gain on that, but we recognized half of it. And then there was some other items too that things like they are building in some other assets that we mark-to-market. So, that was really the differences. It didn't amount to that much, but it was significant.

Michael Worms - BMO Capital Markets

Okay. And can you talk a little bit about the litigation and tax matters, what was that?

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

Well, litigation was just additional reserve that we took on litigation that we indemnified identified our RBS for and those related to things around the California energy crisis that involved trading. We had some reserves on the books already. And we just pumped those up as part of the close. And then the other things were the tax matters was... it was a UK expense, we lost the case in the UK equivalent of the tax course, and so we made an accrual for that.

Michael Worms - BMO Capital Markets

And one final question, thank you. The U.S. GAAP conversion impact, you said, will go away over time. Can you kind of quantify time?

Donald E. Felsinger - Chairman and Chief Executive Officer

We are hoping that by the end of this year we'll have no weighted all of the significant agreements over to the bank. And it's a little complex, but let me just take a stab at simplifying it. As we move all of these contracts to the bank, the bank will pay us the fee for managing exactly equal to the IFRS or the international accounting standards profit on those contracts and that will eliminate the GAAP adjustments.

Michael Worms - BMO Capital Markets

Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

We will take our next question from Elvira Scotto with Banc of America Securities.

Elvira Scotto - Banc of America Securities

Just one quick follow up on the Rockies Express; just on the cost side. The $5.6 billion the total costs; is that... you think that's a good number now or is there still potential for that to move higher? Is there anything kind of outstanding and how should we think about that?

Donald E. Felsinger - Chairman and Chief Executive Officer

The project team, led by Kinder, went through this about a month or a month and a half ago, revised all the numbers up. There is always the uncertainty. We had quite a few conditions from the FERC that we are going to meet. And as we look at those environmental conditions and the routing decisions, there is always the chance that the cost could change. But we think the $5.6 billion with what we know today is a good number.

Elvira Scotto - Banc of America Securities

Okay, great. Everything else I had has been answered. Thank you.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Manuel Garcia with Banc of America Securities. Yes, we'll go back to Sam Brothwell with Wachovia.

Samuel Brothwell - Wachovia Capital Markets

Yes, I'm sorry. You had mentioned some charges in the LNG segment that appeared close to the formation of the JV. What... can you elaborate on that how we should think about it?

Donald E. Felsinger - Chairman and Chief Executive Officer

Sam,I'm sorry, I couldn't hear you very well; you have faded out. Could you just... if you're little closer to the phone and speak.

Samuel Brothwell - Wachovia Capital Markets

I'm sorry; you mentioned some charges in the LNG segment that seem to crop up post formation of the commodities JV. Could you elaborate on that and how we should think about it?

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

Well, I'm not sure exact... maybe there is a little bit of misunderstanding. We had some charges on the LNG segment related to the Mexican taxes and what those are we have U.S. dollar denominated that in Mexico. And under the Mexican tax law, if the Peso appreciates, the amount of Pesos required to pay down that debt is reduced, and therefore we have a gain and we pay tax on gain. So as the peso strengthens against the dollar, we have a tax expense based on the fact that it takes less pesos to pay the debt. It has nothing to do with the JV.

Samuel Brothwell - Wachovia Capital Markets

I thought I heard you say something about the JV, my apologies.

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

This is Joe Householder. Sam, I think what you are talking about is also in the LNG business, there was a loss, $12 million due to the contracts that LNG has with RBS Sempra Commodities. It's a mark-to-market contract on the sale of the natural gas. And so that's in there every quarter. There is a mark-to-market, and gas prices went up, there is a loss.

Samuel Brothwell - Wachovia Capital Markets

And that's just something in the prior structure that would have just netted out.

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

This would have eliminated; company wise, it doesn't eliminate now. But it's been there every quarter. That one we don't really consider or not... that's going to be there as gas price goes up and down, it will be a gain sometimes and a loss sometimes. It's non-cash, and it will all turnaround as we start to sell the product. It's just basically represents a part of the marketing fee.

Samuel Brothwell - Wachovia Capital Markets

Got it. I appreciate your patience.

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

Okay.

Donald E. Felsinger - Chairman and Chief Executive Officer

Thank you.

Operator

We have no additional questions at this time, and I'd like to turn the call back to Don Felsinger for any additional or closing comments.

Donald E. Felsinger - Chairman and Chief Executive Officer

Well, once again thanks to all of you for joining us for the second quarter 2008 call. If you have any follow-up questions, you know how to get a hold of Jeff, Glen, or Scott. Thanks, have a great day.

Operator

This concludes today's conference. We thank everyone for your participation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sempra Energy Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts