桑普拉能源 (SRE) 2002 Q1 法說會逐字稿

Good day everyone. Welcome to the Sempra Energy first quarter earnings results conference call. This call is being recorded. Today's presentation will be available for rebroadcast. You may access the replay by dialing 1-719-457-0820. Again, that is 1-719-457-0820. Entering confirmation code 432662 again that confirmation number is 432662. At this time for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Dennis Arriola. Please go ahead.

Good morning and thank you. Thanks for joining us to discuss our financial results for the first quarter of 2002. A live webcast of this teleconference and accompanying slide presentation is available at our website on www.sempra.com under investor information and presentations and conference calls. Additionally, you should have already received a copy of today's press release. If you have not please call Sheila at 1-800-366-9831, and she will have a copy faxed to you. With us this morning here in San Diego are several members of our Senior Management Team including Steve Baum, Chairman, President and Chief Executive Officer; Neal Schmale, Executive Vice President and Chief Financial Officer; Don Felsinger, Group President of Sempra Energy Global; Edwin Guiles, Group President of Semi-practice Energy; Frank Ault, Senior Vice President and controller. Before handing the call over to Steve Baum for today's financial update, I would like to remind you this call contains forward-looking statements that are not historic 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, they involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. These risks, uncertainties and assumptions are described another the bottom of today's press release. They are further discussed in the company's reports filed with the SEC. With that, I would like to hand the call over to Steve who will begin on slide three.

Thank you, Dennis. Thank you all for joining us. I am pleased to go our first quarter results. In today's call, we will also discuss some of the recent announcements by the credit rating agencies. Our plans to issue new capital, and our earnings target for 2003. Now I would like to turn your attention to slide 3. Sepra energy reported earnings for the first quarter of 2002 of $146 million or 71 cents per diluted share compared with 178 million or 88 cents per diluted share for 2001. Last year's first quarter included a 10 cents per share one-time gain related to the sale of our investment in energy America. Overall, I am pleased with this quarter's performance. Our diversified base of energy businesses is continuing to provide both stable cash flow and solid earnings. We are also beginning to see a pick up in customer business from the fourth quarter and our trading and solutions groups. We are off to a solid start to reach our earnings per share target this year of $2.65. I also want to point out beginning with this quarter we have expanded the financial information attached to our earnings release. We believe that this new information will help investors and analysts better understand our businesses. The new information includes earnings before interest and taxes by business segment available liquidity under available sources and an expanded section for our trading group. I would like to turn to the individual business segments starting with slide 4. Let's start with our California utilities.

Southern California Gas Company and San Diego Gas and Electric. Edwin Guiles is the group president for Sempra Energy Utilities. For the first quarter of 2002, Sempra Utilities contributed 113 million in net income compared to 103 million for the same period last year. So-Cal gas earned 60 million in this last quarter compared to 51 million in the first quarter 2001. The improvement was primarily related to lower operating and interest expenses. [SG&A] earnings were up year on year with 53 million in first quarter 2002 compared with 52 million in first quarter 2001. [SG&A's] reduced from 392 million at year-end 2001 to 338 million at the end of the quarter. The undercollected balance peaked at 747 million in March of 2001. Based on our projections, which include no new positive settlements with the california public utility commission, the balance should be completely repaid by the middle of 2005. The utilities continue to maintain strong credit ratings and have sufficient internal cash flow to meet their operating and capital needs and to provide dividends to Sempra. Now, please turn to slide five and I will cover our businesses within Sempra Energy global enterprises starting with Sempra Energy trading. As we said in our January conference call, the fourth quarter was a tough one for the trading business. The economic impact of September 11th and the demise of Enron hit all business sectors more than most people expected. I am pleased with the positive rebound we have seen in the last several months. For the first quarter 2002, Sempra Energy trading earned $42 million compared to 86 million in the first quarter of 2001. The more important comparison is probably how we performed versus last quarter. In the fourth quarter of 2001, trading earned $15 million excluding the 5 million after tax reserve for Enron. We continued to believe trading will earn between 150 and $200 million this year. Net income was higher than the fourth quarter of 2001, reflecting an increase in the company's business which slowed after September 11th. We had an especially strong performance in the U.S. gas markets in international oil markets. All commodity prices were down substantially compared to the same period last year. Recent weather changes and international events including the Middle East and Venezuela have increased oil price volatility. I would now like to focus on the new financial information attached to the press release. Going forward, we will include financial information on [unrealized] revenues, a breakdown of the unrealized revenues, and how we validate their fair value, as well as the timing of when they become real cash. In addition, investors will be able to see the credit quality of the trading assets, as well as specific risks metrics that we use to manage our business, including valued risk at both the 95 percent and 99 percent confidence levels. Risk adjusted return on capital. We will spend more time on these metrics, and why we think they are important at our annual conference on May 9th here in San Diego. Needless to say, I am very pleased with tradings performance and the momentum we have in place. We continue to maintain a relatively low value risk of 6.5 million. The liquidity of our portfolio remains solid with nearly 67 percent of the assets converting to cash within the next year and 96 percent within two years. Turning to slide 6. I would also like to talk about the recent acquisitions in the trading group. On February 4, 2002, Sempra Energy Trading completed the acquisition of London-based Enron Metals Limited for $145 million. The company has been renamed Sempra Metals Limited and is expected to contribute positively to this year's earnings. On March 18, 2002, Sempra Energy Trading announced an agreement to acquire the metals concentrate business of New York-based Enron Metals and Commodity Corp. The purchase is subject to approval from the U.S. Bankruptcy Court. On April 2, 2002, Sempra Energy Trading announced an agreement to acquire the Liverpool England-based Henry Bath Limited Metals Warehousing business. If successfully completed, the two transactions will tow at that time approximately $68 million and are expected to contribute positively to Sempra Energy's 2002 earnings. The acquisitions broaden our product offering and expand our geographic presence. These businesses have been profitable over the last 30 years and compliment our energy trading business. They will provide our existing customers with additional risk management tools and give us access to a new group of customers. We believe that on an annualized basis these businesses should provide trading with 20 to $25 million per year in earnings and help us achieve the 150 to $200 million earnings target for 2002. Now I would like to turn to slide 7 and Sempra Energy Resources, our generation business. Sempra Energy Resources reported a loss for the first quarter of $3 million compared to net income of $4 million in the first quarter of 2001. The loss was primarily due to lower electric commodity prices in 2002, and development costs related to our [Generation build-out] program. We are progressing as planned with our Generation build-out program and will have approximately 2,004 megawatts fully operating by the end of 2003. On April 1, we began to deliver energy to the California Department of Water Resources. We continue to perform all our obligations under the contract with CDWR. The California Public Utilities Commission has petitioned the Federal Energy Regulatory Commission to abrogate long-term contracts entered into by the CDWR, including our contract. Our contract with the CDWR is valid. And we expect the FERC to uphold it. The contract is providing California with low cost, reliable capacity in energy for the next decade. We will continue to perform our obligations under the contract and expect the cdwr to do the same. We remain open, however to amendments to the contract that are mutually beneficial to the parties. Turning to slide 8. Sempra Energy International reported first quarter evenings of $8 million compared to $5 million in the same quarter last year. The increase was driven by higher -- Argentina had no negative impact to earnings in the first quarter. We expect to see an impact on Argentina's operations take place in the second and third quarter, which are the colder periods in that country. I want to spend a little time on the situation in Argentina. The economic and political environment in Argentina has not improved since the last quarter. The Argentinian peso has continued to devalue relative to the U.S. dollar. As a result of the currency change, we have adjusted accumulated other comprehensive income on the balance sheet by an additional $94 million. This is a noncash reduction to shareholder equity. We are working with representatives of the argentine government to try and clarify how our gas distribution businesses will be regulated in the future. We have also commenced proceedings under the bilateral investment treaty between the U.S. and Argentina and will pursue our rights vigorously. On a more positive note, we are on schedule to complete the construction of the Mexican portion of the Baja Norte Pipeline. Sempra Energy International will complete its part of the pipeline by this summer. We are in negotiations with Pacific LNG, a consortium comprised of [Repsol], YPF, Pan American Energy regarding a supply agreement to bring natural gas from Bolivia to North America. It would be liquified and delivered to a terminal we are developing with CNS Energy on the Pacific Coast of Baja, California, Mexico. The facility would be operational by 2006. Slide 9 has a table of earnings results by business unit, and I would briefly like to go over a few of those. I have not already covered them. Sempra Energy Solutions continues to grow. In the first quarter solutions had earnings of $1 million compared to a loss of $6 million in the first quarter 2001. The improvement was related to agreeing customer base and better profit margins on energy contracts. We are optimistic that our solutions group will continue to grow profitably. Large competitors have left this market, including Enron Energy Services. Sempra Energy Solutions is one of the only major national players to focus on the large commercial and industrial market place. The other category within global enterprises contains corporate expenses related to the group and other smaller discounted businesses. In 2001 the $13 million in earnings was due to the 20 million gain on the sale of Energy America. Parent and other was down from 35 million expense in the first quarter 2001 to 21 million in the first quarter 2002. The main difference is the higher tax expense incurred in the first quarter of 2001. Now, I want to turn to slide 10 and discuss the recent credit rating agency actions and Sempra Energy's plans to raise new capital. On April 4th, Fitch confirmed Sempra Energy's a rating for unsecured debt what a stable outlook. On April 17, Standard and Poors lowered the unsecured rating one notch to a minus but improved the outlook to stable. Yesterday afternoon, Moody's placed Sempra Energy and San Diego Electric's ratings under review for possible downgrade. Sempra Energy currently has an unsecured rating of a 2 and [San Diego Electric] has secured rating of double a three. Moody's did, however, confirm SDGE's commercial paper rating and So-Cal gas's rating with a stable outlook. What does this mean for Sempra Energy and businesses? Despite all the challenges and changes that have impacted the energy industry over the last year from the California energy crisis to Enron, we believe the credit ratings consider to consider Sempra Energy and its utilities strong investment grade companies. We have shared our business and capital spending plans with the agencies and they understand our strategy. They also recognize the success and growth of our global enterprise businesses. We remain committed to maintaining strong investment grade credit ratings at our companies. We have no problem with any rating triggers with any of our credit agreements and we do not expect any material change in our business prospects including at Sempra Energy Trading. We continue to maintain strong liquidity and have over $1.9 billion available in cash and committed credit lines. Now, let's switch to the capital issuance plans. We have consistently said we want to grow our Sempra Energy global enterprise businesses. We want to maintain a strong balance sheet. For those reasons, we announced today our plan to issue $450 million in equity units. This new capital will provide funding for our growing unregulated businesses and help maintain our strong credit ratings. We expect to issue the equity units within the next week. In conclusion, I want to reiterate that we are confident we will meet our 2002 earnings per share guidance of $2.65. This guidance includes the issuance of equity units. This was a solid quarter and a great way to begin the year. In addition, consistent with our plan to grow earnings eight to ten percent per year through 2006, we are establishing a 2003 earnings per share target of $2.90 per share. We will discuss the details of the 2003 target at Sempra Energy's May 9th analyst conference here in San Diego. Now, I'll open the call for questions.

Today's Q&A session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the one. That is star one if you would like to ask a question. We'll pause a moment to assemble the rosters. First Carl Kurst Merrill Lynch.

Good morning, everybody, and congratulations on a good quarter and certainly the additional break down of information.

Thank you.

Two quick questions. The first, if I could get some more specifics on 265 targeted number. There's quite a wide range out there for the targeted net income. Are you taking basically the bid points you of the expected range to come up with the 265 number or is it a portfolio approach? And specifically, if I remember correctly, prior to the peso devaluation, there was about eight to ten cents coming from Argentina. Are you including or excluding that?

Okay. I would invite your -- we have distributed these earnings breakdowns in the past, anyway. The outlook in -- we are using what I guess to select among what you said, a portfolio approach. We have a fairly flexible plan, but we have a high confidence level we will reach this number. I think obviously the most question would arise out of tradings operations given that we depend upon continued volatility in the markets. We have had an excellent start with respect to that and we have a confidence we will reach the $150 million bottom of the range that we forecast for trading. Argentina represents a different issue, and it's a little early to tell how we are going to come out in Argentina. We have excellent claims under the bilateral treaty, and we believe -- there's an excellent record of recovery under the treaty. We believe that we are likely to get good results with respect to the impacts of the government changes, but we are currently negotiating with the government. And we would expect to get some results of that negotiation later in the year. The worse case with Argentina, if we didn't make any of the earnings, coming from that business unit and this year would be about 8 to 10 cents which we believe our plan is flexible enough to accommodate.

Great. One other issue if I could. Just on the undercollection, if you could talk about maybe what discussions you have had with California on your power contract. Is this being at all tied to the undercollections and whether the PUC is making any movement to accelerate the coverage?

Well, you know the [PUC] has not directly linked the discussions under the contracts to the undercollection. And the current rates in effect today, which we don't expect to be revised, are sufficient to collect the undercollection over a relatively short period of time. I would emphasize that we are entitled by law to recover those amounts. The only contingency had been a prudence review of our purchasing practices which we settled. And we settled that last year. We have an absolute right to recover the monies and we will. The question is just over what period of time. And as I mention in my remarks, there's a five-year -- until 2005, excuse me, would be what we would forecast under the current rate structure. Turning to the potential for amendment of our DWR contract which, as I say is not linked by the PUC although it has been attacked, I would like to ask Don Felsinger to bring you up to date on that subject.

We continue to have dialogue and discussion with DWR, and their agents and have yet made no progress.

I want to emphasize that we believe that contract is valid and enforceable as I mentioned in my remarks. And the -- it still remains one of the least expensive, if not the least expensive in the state's portfolio. I thought it was interesting in the governor's press conference yesterday that they announce to revisions to Cal Pine's agreements and several other small ones which were considerably more expensive than the Sempra contract. In fact, as best we understand the amendments to those contracts, their prices are still above the price of our contract. Even after the renegotiation. So one might infer that our contract is in pretty good shape. We believe there is room for some amendment to our contract that would be mutually beneficial. We placed the ideas before the state. I think they have been concentrating on the more expensive ones first, which would be a logical thing to do.

Sure. I appreciate the additional details. Best of luck.

Thank you.

Paul Fremont, Jefferies.

I was sort of going for ask the Calpine settlement, does that, in your view, change the position of the parties that have not yet settled in order to basically abrogate the contracts, they will have to basically show market manipulation. Isn't that going to be much harder for them to do if they are unable to do that in the context of the Calpine agreement?

Well, we have not thought that there was a very good case that could be made for market manipulation affecting these contracts. Remember that, and the FERC is looking at that. Remember if there were market manipulation, it would have affected the spot market prices in the summer time, what 18 months ago. And -- or a little less. And these contracts were entered into for 10 or 20-year periods. And so the linkage between a spot market manipulation and agreed price going that far forward, would be tenuous at best. We don't think there's any legal connection. And so I also do think that the outcomes in the negotiation with Calpine such as they may be used as a marker, would seem to indicate kind of a base line, if you will, of acceptable prices which is in the high 50s, low 60s. And I would think, therefore, that contracts that were lined below that band, would kind of [INAUDIBLE] be okay. Now, the state hasn't withdrawn its claims. But I think that will play out that way. I would also point out that as another benchmark under normal state utility regulation that is cost of service regulation, the price of similar plants would be in the low -- in the upper 40s to about $50. The range of cost of service prices are comparable to Sempra's contract with a great deal more risk placed on the seller in that case.

And sorts of as a follow-up to that. If the CDWR pursues its claim of default, how quickly could you see a ruling out of, I guess what would presumably be a state court if they take it to the next step?

I think you've gotten way ahead. First of all, they have in the -- the contract has an arbitration provision in it. The state has not commenced an arbitration. They have been very careful in their language. They called into question our building schedule for the power plant up near Bakersfield at Elk Hills. They said we had an obligation to build a simple cycle first and put it in service for this summer and produce energy under it. That's not what the contract says. And I'm going to take a moment here to just quote some provisions from the contract, because I think it's interesting that the state would have made a, you know, a public statement in light of this language. Or stated that we were this default. It says, "Under the purchase and sale of energy," - I'm quoting from section 201 of the contract - "seller may provide the energy from any project, market source or combination of projects and/or market sources and may deliver energy at any delivery point or combination of delivery points." section 205C under energy scheduling [states], "seller may deliver all or part of the energy to any delivery point regardless of whether such energy is generated at a project associated with such delivery point, or obtained from market sources. And without regard to the maximum capacity at the delivery point specified for any project." And then to cap it off, section 210, which provides, "We have no obligation to construct any facility. Said seller shall make commercially efforts to achieve commercial operation of each projects. But nothing in this section or any other provision of this agreement shall be construed as obligating seller to commence or to continue efforts to achieve commercial operation of any project." And it didn't make any sense to build a simple cycle this summer, because spot market prices are well below the cost of a simple cycle. Furthermore, it's polluting. And why would we want to pollute the atmosphere and produce energy at a higher cost than you could buy it in the market place? That doesn't make sense for us. It's not commercially reasonable and wont have made any sense for the state.

But if, in other words if they were to proceed to try and take the -- their claim to the next step, what would be the venue that they would pursue this in? Would it be state court or federal court?

It's an arbitration.

It would go to arbitration instead of court?

Yes.That's what the contract says.

Okay.

If they went to court, we believe they would be thrown out and sent back to arbitration.

Thank you.

Next Vegila Murdy.

Good afternoon.

Let's see, a couple of things. One, in terms of Argentina, I'm trying to recall, I think you have a partner down in Argentina under your arrangement, or whatever, I recall at some point in time there had been an indication about a put back provision that would allow you to force your partner to buy you out at book value?

We do have such an arrangement. It's a little more complex in its calculations. And that put right comes into effect in the last six months of this year. But the formula for calculating the price in the put is a combination of a historical operation from last year and the forecast of the business operation for this year. And it is partially payable in dollars and partially payable in pesos. Obviously, this is a very complex situation given the breach of numerous agreements by the government and a variety of claims that the company itself has with the government. And since we have noticed the argentine government under the bilateral treaty, that we are going to make some claims, the value of those claims or the outcome of the negotiation would bear on the valuation of the put. So, we are going through a period of time which we are evaluating our rights. I can't give you a very precise answer as to A) what the value of the put would be at this point, or b) whether or not we would exercise it, or we would, instead, perhaps pursue both the company's claims and our own under the bilateral treaty. But you are correct, we do have this right. We will evaluate it and see if it makes sense to exercise it. We believe we would still be able to exercise it after we know the -- pretty well the outcome of the bilateral treaty claims.

So those claims in terms of under the treaty can be known within the -- by the end of the year so that you do not run outside of your put back period, which lasts [only] the second half of this year, or does it extend beyond the second half of this year for some reason?

The put right would end unless we renegotiated with our partner, would end as of the end of this fiscal year. Or this calendar year. We believe that the claims will have been to a point where we know what they are. We can make a calculation, maybe even settled before the time that the put would expire. But, even if we didn't exercise the put, we believe we would have claims under the treaty that would be liquidated in effect by what that put right would have been. I think we have kind of a double option here which is better than it might be.

Of course] now, what I'm suggesting here is that there is certainly a floor and an exit option should things continue to progress in a negative fashion.

Well, yes. I guess the put does provide a floor. And it's true. But I want to emphasize about the operations in Argentina. I mean we ultimately think the situation will stabilize there. There have been nine claims made under the bilateral treaty and the Argentine government has settled in favor of the plaintiffs in every single one of them. The bilateral treaty is quite strong. And should we get a judgment under the treaty, which we think we would, we can enforce that against any asset -- private asset that the Argentine government has, including payments owed to it worldwide. And that's a very -- and also under the Helms Amendment and U.S. legislation, United States takes certain action against Argentina if it hasn't settled such claims. So, there's a real forcing mechanism to require that government to settle these claims favorably.

On another topic with respect to resources. Back in October when you came to New York and laid out the '02 outlook, you give an estimate of approximately $60 million was kind of the target for resources. And I'm wondering if you can comment on that target currently given the state of power markets, spark spreads and things of that nature?

Yes. That 60 million is almost entirely accounted for. I think it is entirely accounted for by the contract with the DWR, and they are taking the energy under that contract. What they say publically, and what they do privately may very well be different things. We fully expect them to perform it and pay us.

Thank you very much.

Next Mike Heim, AG Edwards.

Thanks. Two quick questions. Can you tell me if S&P was aware of the size and time of your issuance when they made the lowered ratings last week. Two on the average teen situation can you tell me if there were any adjustments prior to the quarter or have we written down the purchase price of that fully?

S&P was aware of the offering. So that takes care of that. And as I take your question, we made an adjustment to OCI at the end of the fourth quarter. For the annual result, and I think that was $155 million adjustment. And then we added to that in this quarter the $94 million additional adjustment. It's a relatively complex calculation having to do with company debt in [Argentina], having to do with some of our debt and having to do with our equity investment. In any event that's the answer. We made an adjustment at earned and we'll make another adjustment every quarter as the situation evolves. Could be the other way, too.

Okay. Thank you.

Next, David Maccarrone, Goldman Sachs.

Thank you. I was hoping you could review the acquisition of the trading businesses. In terms of what assumptions you made to get to the 20 to $25 million projection in terms of interest costs and so forth, what you see is the growth potential there, and what sort of minimum threshold return criteria you think the company requires for business that can be volatile like trading?

Well, let me start by saying that the metals trading business is probably the least volatile of all the trading businesses. It's a regulated business in England. The volatility of base metals is much less than say natural gas or particularly electricity. You have a little less volatility, generally, and it's a regulated business. And with a limited number of customers worldwide with whom this company has had a very long history. So -- and in that regard, we went back and looked historically at the results of that company and made an estimate based upon its historical results, which I believe to be a conservative estimate of 20 to $25 million a year of earnings. We have changed the business model that enron had in that. They forced everything in that business onto enron on line, and we have gone back to a more customary commission business, and restored the management that was in place at the old Gazell shop business before Enron bought it. We have a history, we have a management we know and we have a group of customers we know pretty well. Those customers have now returned to doing business with this company. So we have a pretty high confidence level in that earnings number. Now, you asked the question about hurdle rates and growth. This made a -- this was well in excess of our hurdle rate in looking at its book of business. Our internal hurdle rates which we will not disclose, but it was one of the better, higher rated return businesses. Secondly, given what we paid for it. And I would contrast that Enron paid over $400 million for this assembly of businesses about 19 months ago, except they included the scrap metal business which was sold separately. And we paid, we will wind up paying a little over 200 for that same group of businesses. And I think that probably answers the question.

Let me also ask Paul's question from earlier. Why does mark to market accounting not apply to at least a portion of that contract, given that you are not required or you don't necessarily plan to deliver output from certain of your facilities. I'll let neal answer the accounting question. I know accrual accounting applies to that business unit and the contract. It moves the output. Go ahead, Neal.

That's exactly right. We use accrual accounting in this particular case because of the matching under these circumstances which are different than in the trading business.

No, I mean most of it is just a matching of the contracts with the production that we have there in the fiscal volumes. It is potential that we could restructure how we operate the businesses in the future and put ourselves in the situation where we would possibly have a market to market operation but not the way we are operating the business today.

Did the extent that you are buying that in the open market or have plans to do so, why doesn't mark to market accounting apply in that case?

We have, last year, of course we did buy some and we had contracts for last summer. Those have already closed out and we have the losses from that. A lot of the going forward we have some that were made by from a short intermediate term. We may buy some on the stock market. We don't have the contract amount locked up for the full 10 years. We clearly expect to have our own power plants on the operation. We have the option at that point in time of either buying on the market or using our own generation.

Okay. Thank you.

I'd like to remind participants asking questions please pick up your hand set to cut down on background noise. We'll go to Chris Betzler, Morgan Stanley.

Hi, good afternoon it's Carrie Stevens.

How are you, Carrie?

I'm doing well, thank you.

Are you feeling better about trading results?

I am feeling better. It was an impressive quarter. Hopefully we can keep up the strong run rate for the year.

Yes, we think we will.

Good. Good. I just had a very general question about the guidance you've given for 2003. I know you said you will be discussing further details at your analyst conference that's coming up soon. But your growth rate, if I'm calculating right, is about 9.4 percent year-over-year. That's kind of at the higher end of your eight to ten percent range. And I was just curious if maybe you could go over very generally what you feel -- why you feel that such robust growth is in store for next year? Specifically, maybe if you could target what your assumption is for the trading and marketing business and also comment on the utility. I know you were expecting flattish-type of results. I believe you got an [URG] filing and also some information on the I-chip. I was curious if maybe some of that more robust growth is related to some of the outcomes of the regulatory decisions?

Carrie, are you going to come to the conference?

Um -- I believe I am.

We are going to outline, you know, the segment data for 2003 at the conference. And I would prefer to do it there.

Okay. So right now, just when, you know, we are kind of looking at our '03 estimates, no real, you know, buckets of higher than expected growth, real generally?

What I would say is there is a fairly predictable trajectory under the CDWR contract.

Right.

That provides a significant amount of it. And the growth is coming from trading international and resources. Those are the three components.

Okay.

to the utilities particularly. I always have hopes that they do better than they forecast, but really it's those three business units where you will see the pick up. And just as a teaser, we will complete our pipeline in Mexico.

Right.

And we are going to bring on line on power plants. And all of those things are execution of our plan.

Exactly.

And we have pretty good confidence in the results.

Right. So I guess, just from the comments, then I would say that you are expecting growth in trading year-over-year from '02 to '03?

Well, wait for the conference.

Okay. Wait for the conference. I've got it.

Beat up on?

Yes.

Just curious. These are two kind of technical questions. I notice you were a winning participant in the recent New Jersey BGS auction. I was just curious if you could give us an idea of the magnitude of megawatts you are supplying?

This is in the solutions?

No tradings.

I don't know the answer to that question. Do you know, Don?

I don't.

We could follow-up off line on that. Lastly, curious about the remaining investment that you have on your book for Argentina.

You mean, that isn't accounted for in the OCI adjustment?

Yes.

It's about 100 million.

100 million.

Bear in mind that varies constantly.

Right.

Due to the situation there.

Right. Okay. That gives me a little bit better idea. Great. Thanks for all your help.

Bye-bye.

Bob Sullivan UBS Warburg.

I had one quick question about the tax rate for the quarter. If you could talk about that a bit and what we should look at for the year.

I'm going to turn this over to Frank Ault. I would say our average run rate is around 30 percent.

Our effective tax rate last year if you looked at the 10k was just over 29 percent. And for the quarter it was just a slight bit under 29 percent. Based on the 265 earnings projection, I would see the effective tax rate should be about 30 percent for the current year.

30 percent?

Yes.

Okay. Thanks.

Next, Peggy Jones ABN Amro.

We are going to get on in a few minutes and ask questions. Thank you.

Next Jeff [Gilder] Marcus Research.

Thank you. You put out some nice information in the trading again, and I think you expand in the product line. And there is a nice sequential improvement from Q4 to Q1. I was wondering if you had the trading margins by product line for Q4?

No. We don't have that here. And I don't think we are going -- maybe we do? For Q4? Do you have it, Frank? We are looking here. I don't have it in front of me. You could call Karen and she can give you that. If you want to do it that way.

Great. Thank you.

Sure.

Next, Michael Lewis, JL Advisors.

Hi, good afternoon. You guided the 150 to $200 million of trading income is consistent with what I believe I say -- you said in the fourth quarter. Just for clarification when you gave the guidance in the fourth quarter, it did not assume the acquisitions that you have made that you have outlined in this presentation; is that correct? If so, what would the apples- to apples number be?

Well, if you'll recall what I said in our January call, what I said was that I didn't think the fourth quarter was representative of a sort of an African run rate. What I said was a more typical quarter, if one were looking at a low sort of basic run rate for trading, would have been the third quarter of 2001. Which we made, I think it was 30 -- yeah, $33 million or something like that. And -- but just be warey of multiplying, taking our first quarter and multiplying three times 33. I mean that is a number, but these were estimates that I gave. The fourth quarter, we thought was [INAUDIBLE]. It is true the fourth quarter did not include anything to do with nor the third quarter of last year with the acquisition. These acquisitions will add to tradings results. We have drafted a range for this year of 150 to 200. And within that 50 million spread, I think you would find ample accommodation for those additional earnings.

Just -- am I remembering incorrectly, didn't you say 150 to 200 at the end of the fourth quarter as well for '02 guidance for trading operations?

I did, yes.

You are staying with 150 to 200 even with the three new acquisitions?

Yes. They didn't go up like mushrooms in an overnight rain, you know. We knew about them we hadn't disclosed them yet.

They were in your 150 to 200 guidance at the time you had given it?

I was aware we were negotiating to buy the businesses.

In terms of further equity issuance, given, I guess justifying where you want to be with the credit rating agencies and weighing that against further equity issuance or equity linked issuance, in order to fund your cap-x that you will need to fund, or the buildout that you wanted to do which is currently anticipated over the next several years over the next six to 12 months, do you need to issue anymore equity or is this it?

I will let Neal answer the question about our capital spending and our plans, but I -- for now, this equity offering is all we have on our plate. Go ahead, Neal.

We are in good shape for the next 12 months. We have a capital program this year that will probably run to about a billion seven. We have a couple hundred million dollar dividend requirement. So there's about a billion nine in cash that will be spent. We have cash from operations on the incoming side of about a billion two. The equity offering will be about a half billion dollars. And the balance of a couple hundred million dollars can easily be accommodated from cash that we have on hand, or from our committed lines of credit that we have.

I'll take a moment and talk about policy. I mean we think, it's one of our objectives we published to maintain strong investment grade credit ratings. My preference is to stay in the a -- some kind of a category, because I think it's a distinguishing feature of our business. It helps our trading company, and it gives great confidence to counter parts. I believe it's worth keeping, if we can, that kind of a rating. And with a very small universe of companies in our business that have some kind of a credit rating. I think it's very important. Now, at any cost, perhaps not. But I would prefer if we can, to maintain these strong ratings. We are committed to it.

Does that, the cash flow analysis you just went through assumes all the funding of all the projects that you have on your plate?

Yes, it assumes the funding of all the projects that we think will be entered into this year. And with a little bit of flexibility. If some of the money will slip to next year, some of the it might not get spent, but yes.Thanks.

We'll go next to [Win] Chin, ABN Amro.

Hi. I wanted to know what the level of unrealized market-to- market earnings were for the first quarter?

Let me invite your attention to, which we think is the more important statistic, or set of statistics.

Right.

we think that is a better place to look to get a sense of what the conversion of unrealized income to cash is. And that should -- that is a, I think a better story. I don't think particularly breaking it out quarter by quarter tells you the same, is as valuable to you, frankly, as that table.

Okay. Could you tell me what the change in the book was from the end of last quarter to this quarter was?

The change in the book?

Okay. Oh, I'm sorry I have to look down in here. Yes. Well, the fair market value of the book was 617 at end -- March 31. And you wanted -- .

December 31st.

I think the change is from 405. So it was 212.

Okay. Thanks a lot.

Next Karen Miller UBS Warburg.

Yes, just following up on that question. The amount you give - that will be realized over the next, I think it was 12 months, is that the calendar year 2002 or is that the, you know, the actual 12-month period?

It's the actual 12-month period. Rolling.

Okay. Thank you. What would be the percentage for this year?

I don't have that number precisely. This is a fairly steady run rate.

Okay.

It kind of rolls off about the way you see it. That hasn't really changed very much from last year.

Okay. Thank you.

Obviously a little more cash rolled off in the fourth quarter because the quarter was down. So we were ahead. There was more realized than unrealized. That shifts back sort of under the general train that you see in the chart.

John Riley, Fairlong Capital.

Yes. Question. You mentioned that 24 percent of the trading assets are below investment grade and that was 20 percent at the end of last year. I was wondering if you would give us a year-over-year number so if it was march 31, '01. And also to the extent you can, let us know how well collateralized the trading assets are to the below investment grade counter parties. You know what percentage of that fair market value have they posted as collateral?

Well, I don't have the first number that you asked for. And we have rigorous agreements with our counterparts which require collateral. I don't have some number for you that is the total amount of posted collateral. CONNECT to BD-X Transcript Server at Tue Apr 23 13:55:23 2002OK - Ticker is SREOK - Call name is Q1 2002 EarningsOK - Start time is 04/23/2002 16:30 GMTREADY - Start transmissionThat varies constantly. But we are very careful to assure we have such arrangements. I think our track record is very good in that regard. We have had very little fail in the trading business in terms of credit.

The other thing - this is Neal Schmale - I would add to that in this particular category of customers, it's not a high concentration of credit to anyone customer. It's a lot of much smaller credits.

Was the increase from 20 percent to 24 percent more a function of you taking on investment grade counterparties or investment grade counterparties becoming non-investment grade?

I think it's really what you are seeing widely in the market place that a lot of counter parts that had been good credit are less good credits. And Enron, which was thought to be a good credit disappeared and was a major counterpart to a lot of people, not just our trading company.

Thanks you guys.

Teresa, Bank of America.

Yes. I just had a quick question on trading. The 150 to 200 million, I understand that possibly included some of the acquisitions, Enron Metals, Metals Concentrates. Going forward, are you assuming additional acquisitions with embedded in the 150 to $200 million number?

No, not right now we are not. And, you know, I may have given someone a little bit of disquiet that I had in my mind we were working on these other acquisition. We were towards the end of the year but we are not currently. So this forecast is net of any additional acquisitions. And the confidence comes from the metals business, but it comes from our steady organic growth and the way we manage the book and the kind of customer business that we have. And this is not, you know, the large part of tradings business is a customer business. It's not proprietary trading. And I want to mention to you that one of the things that gives us a lot of satisfaction, and one of the keys to our success is that we were voted the number -- not voted, we were named, Sempra Energy Trading was named The Number-One Company in Customer Service in March by Masteo and Company in a survey they did have all trading companies. We have excellent customer relationships. That's where our success comes from. It's first class intellectual capital, excellent relationships and careful management. Actually, on that front, in solutions you are continuing the grow reflecting, is guess increased customer base and could you elaborate on how, I guess, how much of that growth is actually coming from the absence of Enron in the market?

Well, Don Felsinger, maybe you would like to take a crack at that.

Some of it is coming from Enron. We have seen Enron exit the business, but a lot of these customers are coming to us because there are very few businesses like ours in the space. We find ourselves today publically the only retail energy services businesses that does business nationwide. We have a lot of regional players, but in a contract that we have just announced with IBM, that's a customer we have been pursuing for a while. It's indicative of the type of customers we go after.

Thank you very much.

We'll go next to Elizabeth Noble, Vanguard.

Wonder if you could tell me of the 2400 megawatts in energy resources, how much whose been contracted for?

80 percent.

And then do you do any financing that would not appear on the balance sheet through your guarantees with each of your subsidiaries? In other words, the sale leasebacks, or independent power production [SNF].

I'll let Frank Ault, our Controller, answer that question.

In the 10K, we talk about the fact we have a synthetic lease that is financing the construction of one of our power plants. Under that at year-end we were at 225 million and that has grown now to be around 250 million at the end of the quarter and probably will grow up closer to 300 in the next month or so.

And that's all you plan to do?

Well, we are in discussions, and we may, in fact, increase the size of that synthetic lease. But right now the capacity of that lease is right around there.

Thank you.

We have a follow-up from Mark Kursch from Merrill Lynch.

I know this is a long call, so I appreciate the call. I wanted to touch on David's Metals business from a return standpoint. With 20 to $25 million of targeted returns and 213 million investments it looks like after tax equity returns of 10 to 12 percent, are you assuming that that is ramping up to give you a higher IRR? Is that being funded with cap equity that might skew the target returns, or is 10 to 12 percent of right rate to look at non-regulated acquisitions going forward?

Well, I would just say that the 20 to 25 million is a solid conservative, and I guess I would emphasize conservative estimate. And I think we would probably have higher expectations from that business. We bring -- that 20 to 25 was a conservative estimate based upon historic earnings of that business. We bring several additional -- we bring some synergies to that business in that we have a customer base in trading that we bring to that business and it brings to our trading business. So, we're going to get some additional advantage out of that. Those overlap of customers. Number two, we can utilize that -- our systems of controls in a way, and our market information in a way that was not available historically to that business. So, that is - we see a lot of markets that they didn't. And so we have an expectation of synergies to those numbers. So I view them as being conservative. I believe they are certainly achievable. I would expect us to do better.

Great. Thank you.

There are no further questions at this time. I would like to remind everyone that you may listen to a rebroadcast of this conference at 4 p.m. Eastern Time today through April 30th at midnight by dialing 719-457-0820 entering confirmation code 432662 on your telephone. I would like to turn the call back over to Dennis Arriola for any closing remarks.

Thank you very much. Thanks for joining us today. As steve mentioned, we will have an analyst and investor conference here in San Diego on May 8th and 9th. If you need any additional information, you can get hold of myself or Karen Sedgewick.