桑普拉能源 (SRE) 2002 Q3 法說會逐字稿

Good day, everyone, welcome to the Sempra Energy third quarter earnings results conference call. This call is being recorded. Today's presentation will be available for a broadcast at 4:00 p.m. eastern today running through October 29th at midnight. You may access the replay by dialing area code 719-457-0820. And enter the confirmation code 618937. Again that's 618937 on your telephone. At this time for opening remarks and introductions I'd like to turn the call over to the Vice President of Investor relation, Mr. Dennis Arriola. Please go ahead, sir .

Thank you and good morning or good afternoon to you all depending upon where you are and thanks for joining us to discuss Sempra Energy's financial results for the third quarter of 2002. A live web cast of this teleconference and the slide presentation is available on our web site at www.Sempra.com under investor information and then presentations and conference calls. Additionally, you should have already received a copy of today's press release and slides. If you have not, you can call Sheila at 1-800-366-9831 and she'll fax you a copy. With us today from the company are several members of our senior management team. In San Diego with me are Steve Baum, Chairman, President, and Chief Executive Officer of Sempra Energy; Neal Schmale, Executive Vice President and Chief Financial Officer of Sempra Energy; Don Felsinger, group President of Sempra Energy Global Enterprises, Ed Guiles, Group President of Sempra Energy Utilities, and Frank Ault, our senior Vice President and controller of Sempra Energy.

On slide two you have our Safe Harbor statement so before handing the call over to Steve I'd like to remind you that this call contains forward-looking statements that are not historical fact and constitute forward-looking statements within the meaning of the private securities 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 at the bottom of today's press release and are further discussed in the company's reports filed with the Securities and Exchange Commission. With that, I'd now like to hand the call over to Steve, who will begin with slide three.

Thank you, Dennis, and thank you all for joining us. I'm pleased with our strong financial and operating results this quarter. Earlier this morning, Sempra Energy reported net income of $150 million for the third quarter of 2002, or 73 cents per diluted share, compared with $96 million or 46 cents per diluted share for the third quarter of 2001. Last year's results included a 12-cent-per-share charge related to our surrender of a natural gas distribution franchise in Nova Scotia. Adjusting results for that one-time charge, Sempra's earnings per share increased nearly 26%.

Based on our results year to date we are reaffirming Sempra's earnings per share guidance for 2002 of $2.55 to $2.65. Sempra has sufficient liquidity and cash flow to meet all of its planned operating needs without the issuance of additional equity. After reviewing our third quarter earnings I will address our earnings guidance for 2003.

Now I'd like to focus on the individual business segments, starting with slide four. The Sempra Energy Utilities continued their strong performance for the year and provided third quarter net income of 102 million compared to $100 million in the third quarter of 2001. Southern California Gas Company and San Diego Gas and Electric continued to provide Sempra with strong and predictable earnings and cash flow. For the quarter, SoCalGas earned 56 million compared 57 million in 2001. SDG&E had 46 million this quarter compared to 43 million in the same quarter of 2001. The increase at SDG&E included approximately $7 million in performance-based rewards approved by the commission. They were partially offset by approximately 3 million in higher depreciation expense associated with an increase in rate base.

Addressing regulatory issues, last month, California governor Davis signed AB-57 into law, which provides up-front approval of utility electric procurement plans and is intended to eliminate after-the-fact reasonableness reviews as long as the utility adheres to the approved plan. Based on our current projections, which include power allocated by the California Department of Water Resources, or CDWR, SDG&E's net short requirement will be less than 10% of its total power demand for 2003. I also want to update you on the AB-265 under-collection. The under-collected balance is now down to $270 million, and we project the entire amount will be repaid by mid-2005 at current rates.

Now, please turn to slide five, and I'll cover the results of Sempra Energy Trading. In the third quarter, Sempra Energy Trading earned $10 million, compared to $31 million in 2001. Energy prices in the U.S. remained relatively flat in the third quarter, and the lack of volatility impacted the entire trading sector. There are fewer players in the market today that are creditworthy counterparts. Sempra is and will remain a leader in energy trading and is picking up additional market share. The majority of our business revolves around transactions for customers, and they are looking to do business with companies they understand. We provide detailed financial information on our trading company. The more that customers and investors understand about trading operations and risk management, the better they will be able to differentiate between strong companies like Sempra Energy Trading and others.

Turning to slide six, let me review with you some of the risk metrics that we used to manage Sempra Energy Trading. First, the value at risk, or VAR, of our book indicates that we run a low price-risk portfolio. The average VAR of our book has been consistently within the five to seven million range. Second, we focus on shorter dated transactions which make our business highly liquid. Over 84% of our portfolio converts into cash within two years, and nearly 92% within three years. In addition, 94% of our unrealized revenues are valued using publicly available pricing sources.

Next, we manage credit risk very carefully. We focus on the credit quality of our customers and counterparties and manage credit exposure to predetermined limits. We also monitor carefully our liquidity risk to potential margin calls. Table D in our press release contains additional information on the credit quality of our counterparties.

There are three other factors that differentiate us in the market and make us remaining comfortable with our trading bottle. Sempra Energy Trading is unique by geography, diversity has helped us remain profitable consistently. Our trading energy is not our marketing arm for merchant generation. We report our results separately from our generation results. Lastly, the quality and experience of our people also differentiate Sempra Energy Trading from other companies. Our professionals manage our business for profitability. We have no incentive to increase volumes in order to be a leader in published rankings.

Now, let's turn to slide seven and talk about our generation business at Sempra Energy Resources. Sempra Energy Resources recorded quarterly earnings of $29 million compared to a loss of $9 million in 2001. Last year's loss was primarily related to energy we discounted to the California Department of Water Resources. We are on schedule to complete construction of 2,135 new megawatts by the end of 2003. We are scheduled to close on the acquisition of the 305 megawatt coal-fired plant in Texas by the end of October. Sempra Energy Resources will have nearly 2,660 megawatts in operation by the end of 2003, with more than 86% of the generation hedged under medium and long-term contracts.

Let me give you an update on our 10-year contract with the DWR. Both Sempra Energy and the CDWR continue to perform under the contract. We are providing energy to the state as specified under our agreement, and the CDWR is paying for that energy. We are negotiating under supervision of a FERC settlement judge with representatives from the state about terms of the contract. We have no revised agreement at this time. Although we are hopeful that both parties can come to a settlement, we're going forward with the FERC hearings.

Turning to slide eight, Sempra Energy International recorded third quarter earnings of $13 million compared to a loss of 7 million in the same quarter last year. Once again, last year's loss was primarily driven by the $25 million one-time charge related to Nova Scotia. Our International group is performing as we expect. Conditions in Argentina have stabilized, although we do not see a quick turnaround. The arbitration process is now underway against the Argentine government under the Bilateral Investment Treaty for its violation of the concession contract. This process may take several years to resolve. In Mexico, our Baha Norte pipeline is complete and is flowing gas. This shows our ability to develop, permit, and complete projects in Mexico on time and within budget. Our track record in Mexico makes us a front runner to build a new liquefied natural gas or LNG terminal in northwest Mexico. We now own our site and are in the permitting process with the Mexican government. We expect LNG to enter the west coast of Mexico by 2006.

Now let me spend a moment on slide nine and talk about our successes with Sempra Energy Solutions. For the quarter, Solutions earned $5 million compared to breaking even in 2001. Year to date, Solutions has earned $11 million, well above our original plan. Our business model provides large commercial and industrial customers with energy services, including commodities procurement, risk management, and optimization and facilities and efficiency management. We currently have over 1,300 megawatts under contract with customers.

Slide 10 provides a table of earnings results by business unit for the quarter and on a year-to-date basis.

Now, let's turn to slide 11. Our balance sheet and liquidity are strong. We recently entered into a new $950 million revolving line of credit at the parent, and on September 30 had over two billion in cash and available committed credit lines. In addition, we recently issued 250 million in 10-year bonds at SoCalGas. We have strong investment grade credit ratings and stable outlooks from all three rating agencies. We recognize the importance of this financial strength to our customers as well as to the equity and credit markets. We are committed to maintaining our strong credit quality.

I'd like to now address our 2003 outlook on slide 12. As I mentioned earlier, we are reaffirming our 2002 guidance of $2.55 to $2.65 per share. Our earnings guidance for 2003 is $2.60 to $2.80 per share. We expect the two California utilities to continue to provide solid earnings and stable cash flow. Our current plans do not include a drastic change in volatility in the energy trading markets but rather, factor in a full year's contribution from Sempra Metals. We believe our strong credit ratings and less competition in the trading sector will help us increase market share. We have reduced the expected earnings contribution from our Argentine investment for next year, and have factored in a full year of net income from our Baja Norte pipeline. Our capital expenditure plan for 2003 is $1.3 billion and we expect to fund it with operating cash flow. We will provide you with additional earnings detail on each of the business units following our fourth quarter conference call, after we have completed our planning process.

In closing, I'm very pleased with our strong results this quarter. Energy-related stocks have suffered this year, including our own. The market has not recognized the financial strength and diversity of our business. We are committed to our strategy, and we will continue to deliver solid financial results. This will differentiate us in the market. Sempra Energy will grow, and our long-term-focused investors will be rewarded. Now I'll open the call for questions.

Thank you, sir. Today's question-answer session will be conducted electronically. If you'd like to ask a question please signal by pressing star, one in your touch tone telephone. Again it is star, one for questions. If you are using speakerphone equipment please disengage your mute button. We'll take the first question from Mike Heim (ph) with AG Edwards.

Mike Heim (ph): Thanks. Would you update us on the portfolio of potential PBR awards and also any timetable for FERC hearings on the DWR contract.

Well, let me start with the DWR contract. Those hearings are currently underway, and in the sense that they've continued the settlement discussions until December. And we would expect the hearings then to -- the settlement discussions to come to an end at that time and the hearings to commence in December or early January.

Mike Heim (ph): Okay .

And with respect to the PBR awards, I think the most significant one is At So Cal Gas. We have a GCIM estimate that we are waiting to have approved by the commission and that we expect to come in the early part of 2003. That's for $31 million. There is a PBR awards at SPG&E that total about $38 million that we would also expect to come in, in 2003, and there's another DSM, small DSM award at SoCalGas for about 3 million. The total for all of those, all 2003 items is $72 million.

Mike Heim (ph): Okay, thank you.

We'll take our next question from Bob Selbin (ph) with UBS Warburg.

Bob Selbin (ph): Thanks. That covered most of my questions, but could you give me a little bit more breakout on comparing your 2003 guidance currently to what you had previously been looking for in your earlier outlook, your May outlook?

Yeah, Bob (ph). We had said 2.90 in kind of a point estimate before. I think, you know, we realize, given market conditions, that point estimates are really not very -- or guidance is not very helpful. I think -- and we've gone from a 2.90 to a range that tops at 2.80 and starts at 2.60.

Bob Selbin (ph): I guess the question is, which business units -- for instance, the Utility it still looks like you're looking for pretty good PBR payments. Is that still looking like 3.50?

The Utility?

Bob Selbin (ph): Yeah.

No, we would expect the Utility to do better than that. I think the major adjustment, it comes with the trading company in which we're revising -- we're looking at volatility and looking at counterparts and customer interest. We're revising somewhat downward our expectation for the trading company. And that's probably the most significant change in the guidance. I mean that would be the thing that I would point to.

Bob Selbin (ph): Okay. And it looks like the utility this year is going to come in significantly better than you thought. Is there anything that you can point to there? You had outlined about 3.60...

I'm going to turn this one over to Frank Ault, who is our controller who can give you thoughts on that.

The utilities are really having a very strong year this year. But the one item in the second quarter if you recalled was that we had a $25 million tax settlement issue with the IRS at San Diego Gas & Electric, so that's really the main thing that's boosting them up this year and might be giving them results a little bit stronger this year than what you might see next year.

Yeah, we don't expect another tax item like that next year.

Okay. Thanks.

We'll take our next question from David Maccarrone with Goldman Sachs.

Thank you. I was hoping you could talk a little bit about the solutions business and what accounts for the strength and better-than-expected performance. Is it more on the volume of activity, or have profit margins improved? And can you talk about the performance of that business segment in terms of cash flow as well?

Well, David, I think it's a combination of factors. Let me start with, you know, increasing market share. And we're one of the few companies left in this space, and probably, I think, the biggest and with the largest reach in that space. Secondly, we've seen a marked increase recently in commodity business, particularly focused in the west, and I think that's -- of all the factors, that's probably the largest. Obviously, the future of this business very much depends upon the pace of deregulation in the United States and the opportunities that customers have to manage their own affairs. We think that's a good possibility -- I mean that there's a good business there, particularly as others have exited the space.

And in terms of the performance on a cash-flow basis?

Well, they’re on market-to-market accounting. And, you know, we, generally speaking, look for relatively shorter term deals, and I am -- in the maturities -- I'm just looking at a chart now that have maturities for unrealized revenue in Solutions. We would get within 24 months in Solutions close to 87% of our mark-to-market and all but about 6% in -- within three years. So it's very comparable to the trading company’s short-dated book situation. And, you know, I think I'm not at all discomforted by this relationship of cash to mark-to-market in Solutions.

And let me just follow up. You indicated in Solutions and also in the Trading business that you're picking up market share. Can you give us idea of how you measure market share in each and what you think your market share is, and to the degree you can quantify it?

Probably I can't at this point. That's a qualitative judgment. There may become a time when we do -- you know, when we do try to calculate precisely market shares, but what we're doing is we're seeing a lot of new customers, I mean that's a -- I guess without saying how many or in what commodities, but we are seeing new customers, and we're picking up people. So that's -- I've given you a qualitative judgment. It gives us some greater confidence in the lower target within trading for next year.

Okay, and then just a little detail oriented question on LNG. And I think you said that you own the land there. Is that a capitalized cost? And if so, how much with regard to that LNG facility in Mexico?

Well, it's capitalized and it's under 20 million.

Okay. Thank you.

We'll take our next question from Theresa Ho (ph) with Banc of America Securities.

Theresa Ho (ph): Hi, how are you? Great quarter.

Thank you, Theresa .

Theresa Ho (ph): I had a question regarding your other operating expenses. I see that it went from 806 to 588, and if you could just sort of describe where that is coming from, and I guess tell us if that is sort of a sustainable level.

Yeah, I'm going to let Frank Ault who's got the detail on that.

The decline in the other operating expenses is really caused by a number of factors. Probably the largest single one is Atlantic Electric, the activity we have in the UK. Last year it was accounted for as a consolidated activity, so we had the revenue and the expenses both up in those lines. It's now, because of our ownership interest, being below 50%, it's not consolidated, so it actually now appears on the "other income" line further down on the financial statement. So that's one of the large declines.

The rest of the declines are kind of spread out amongst all of the business units. We had the charge against earnings last year of 35 million for the write-off of our investment on a pretax basis at Sempra Atlantic Electric and that was in that 806 last year. We've seen some lower prices in some of our other business units and kept our expenses down, at Trading, their activities are down a little bit. Our costs at Sempra Resources are down a bit as well as at SEI Mexico. So the rest of it is spread around to different sources.

Theresa Ho (ph): Okay. I guess that was my next question, on the "other income" line how come it went from positive to negative. Okay. That explains it.

Basically there are a couple major factors in there. One is the change in the accounting that I just discussed with Atlantic Electric, and the other is the interest income that we are earning has decreased a little bit. Interest rates are lower, and, of course, the interest income that we earn is based on either the cash that we have invested or the balancing accounts that the utilities have.

Theresa Ho (ph): Okay. And finally, continuing on to -- continuing down, as far as the taxes, effective tax rate went down from 37% to about 31, 32. Could you also elaborate what happened there and what should we expect effective tax rate should be going forward?

Well, there are two things that drove the effective tax rate down for the current quarter. First of all, Sempra Energy Financial had some very good results, and the tax credits that they earned were greater than what they were in the third quarter last year. And we would anticipate that to continue. We also had the advantage that, with the change of the ESAU tax laws we are now able to deduct for tax purposes and book purposes the dividends that we have for our 401(k) reinvestment plan. So that's another change that has occurred in the law that is working to our advantage. So those are both positives. I think that the effective tax rate going forward, we got things coming in that are going to help us there, too. And I would say that long-term you're probably going to see us in the 35, 36% range, something like that. I think the 31% or 32% for this quarter may be just a little bit lower than our long-term run rate.

Theresa Ho (ph): Okay. And that's because of the higher tax credits that you sought?

We have seen some additional tax credit, some of our investments that we have at Sempra Energy Financial.

Theresa Ho (ph): Okay. Thank you very much.

We'll take our next question from Maura Shaugnessy (ph) with MFS.

Maura Shaugnessy (ph): Good afternoon. Just a couple of questions. First, what's your expected capital spending and depreciation level this year? And you already mentioned the capital spending for '03, but what would the depreciation level be expected for next year?

Hi, Maura (ph).

Maura Shaugnessy (ph): Hi.

The capital spending for this year is about one eight. And, let’s see, depreciation levels.

Well, right now -- this is Frank Alt. We are sitting with depreciation expense for the first nine months, $447 million, and I expect that run rate to remain for the rest of this year. Most of the major capital investments that we're making right now are going to go into our operation next year.

Maura Shaugnessy (ph): And the cap spending in '03 of a billion-three, can you break that down a little bit more, what's maintenance, where is it going, is there much flexibility in that number, or how do you feel about that number, et cetera?

Yeah, let me turn this over to Neal. Go ahead, Neal.

The billion-three number for next year is still one that we're developing in the planning process, but as much as 800 million of that could be in the utilities. That number, in turn, would be affected by whether or not we could build a transmission line. The balance is in the unregulated businesses, and there's a fair amount of flexibility in that number, somewhere north of a hundred million dollars. We're keeping a flexibility capital program that matches our cash flow from operations, because we're mindful of the need to do that. But we're also mindful of the opportunities that are going to be available to us to make acquisitions. And that's why we want to maintain some flexibility in this plan.

Maura Shaugnessy (ph): So that maintenance capital spending number would be what next year, approximately?

Well, when you see "maintenance," if you mean spending out the utilities, that will be north of 700, as much as probably $800 million in utilities. In terms of the balance of the spending, I wouldn't characterize what we're doing in the unregulated businesses to complete the plants as maintenance, and the bulk of the balance of 500 million is committed expenditures in the unregulated businesses to complete those plants. So there's very little in the unregulated side that could be characterized as maintenance, and that's why I say there's a lot of flexibility in that budget.

Maura Shaugnessy (ph): Okay. You mentioned, you know, potential acquisitions. What are you thinking about there? You know, obviously you guys have the wonders of a good balance sheet, but what are you thinking about, what are you seeing, potential?

Maura (ph), as you're probably aware there are, I don't know, 30, 40, maybe more properties, maybe more than 40 properties now coming up for sale from companies that are in distress, not the least of which, of course, are Enron assets, some of which we already acquired in the Metals company. We're looking at a number of these opportunities, and the screens that we applied to them are, do they fit with our view of natural gas prices and the entry of LNG into the United States and Mexico -- into North America, I guess I should say. And that's a locational, as well as a gas competition kind of analysis. We're also looking at other assets that would fit with our current businesses. Some trading books, for example, are for sale, and are natural assets for us to look at. And even…

Maura Shaugnessy (ph): Are you confident that you'd be able to value a trading book? I mean that's...

Well, yes. The answer to that is an unqualified yes, although I recognize that many of these books have values which are mark-to-model. And we're pretty good at that, at making evaluation, and I think what you would expect to see any buyer doing of these books is purchasing them at substantial discounts.

Maura Shaugnessy (ph): And where do you think the balancing act between stepping up and buying some of these assets, where obviously there's a lot of distressed sellers out there and maintaining your debt rating, do you need to keep that rating, or...

Absolutely yes. And so that should the kind of acquisition -- an acquisition come before us that we would like to make, it would have to stand the test of independent finance and be fully understandable to the rating agencies within the context of strong investment-grade credit ratings or we won't do it.

Maura Shaugnessy (ph): And how would you think about issuing equity, as you mentioned, you know, your stock has been under pressure as well as the whole group. How would you think about issuing equity to do a deal?

Well, we -- you know, I said right in the beginning of my prepared remarks that we had no intention, under our current plan, to issue any equity. That could change. I mean if we were to buy, for example, one of -- and I'm not saying that this is something that we're going to buy -- but, for example, PGE is for sale in the Enron bankruptcy, that's a transaction of a size that would likely require the issuance of some equity. But, as I say, the deal would have to be a good deal from our perspective and be understandable for the issuance of that equity.

Maura Shaugnessy (ph): And my final question is just with regard to the trading business. Can you just characterize what is going on -- I mean many of the folks that perhaps you used to trade with aren't in existence anymore. Have the financial folks stepped up a lot? I mean just -- you mentioned some of the volatility issues. How would you characterize the trading business, and have things stabilized over the last month or two? And that kind of thing.

Well, we're seeing a number of factors. I mean including the ones that you mentioned. I mean bear in mind that Sempra is a little bit different. It's not just an electric trading house. I mean we trade a wide number of energy-related commodities in a number of different parts of the world, and so that diversity tends to permit to us prosper where others have been hit, particular if they were the kind of trading business that’s simply a marketing arm along electric position, so we're a little bit different in that regard.

Secondly, the majority of our business is done on behalf of customers. Now, we've seen, unlike some of the financial trading houses, I mean unless you consider the customers to be companies like ourselves, but we're talking about end-use customer, I'm talking about end-use customers. I mean what we're seeing is a little less interest in financial and physical commodity service when prices are low and relatively stable. So there's been a -- I mean that's not news to anybody. There's been a decline in that, with the decline in volatility and absolute price levels there's somewhat of a decline in customer interest. On the other hand, I mean we're still going on at a pretty good rate, and I would expect to see that rate pick up a little bit next year, not to the levels of 2001, where we saw extraordinary electric prices and volatility.

Maura Shaugnessy (ph): Great. Thanks for your responses.

We'll take our next question from Badulla Merte (ph) from SAC Capital.

Badulla Merte (ph): Good afternoon.

Good afternoon.

Badulla Merte (ph): A couple points of clarification. First you were talking about a bit about the FERC schedule in terms of hearings and when a settlement might be possible. I wondered if you might review that again. I got the sense that the hearings were supposed to start in December or January, and that the time for settlement will probably be right before the hearings begin, or did I misinterpret that?

Well, let me just give you the detail of that. The party -- the initial testimony was filed on October the 17th, rebuttal is due November the 14th. Depositions and discovery are proceeding as we speak. The opening of the hearings will be between sometime in the first half of December, not set, precisely, and with an expected preliminary decision by the middle of February of 2003. And so -- and then the FERC would act at some time after that, after you have a preliminary decision. Now, the settlement discussions are continuing into -- can continue, I believe, into December. Of course, they can continue at any time. I mean that's -- you know, whether or not you got a settlement judge sitting there, I mean litigants tend to settle at all different times. You might expect them most likely to settle on the courthouse steps or on the eve of an election, but we'll wait to see that. That’s my answer.

Badulla Merte (ph): Okay. Also wondering in terms of a clarification of cash, the cap ex of $1.3 billion. Are you indicating that both capital expenditures and common dividends will be covered via internal operating cash flow?

Well, I'll let Neal respond to that.

No, in general terms cash from operations should be around a billion-three. That is to say, earnings plus depreciation plus deferred taxes, and then working capital can go up or down. But generally it should be around that billion-three nobody. The capital budget will be about a billion-three. That in turn means that there will be another cash requirement of about 200 million for dividends.

Badulla Merte (ph): Okay. And I'm also wondering, on a different topic, in Argentina, I think your partner, you have a put opportunity back to them. What is the status of that?

The put is available to us should we wish to exercise it till the end of the year. And we're still looking at that and looking -- I mean we're evaluating the value of doing that, compared to the value of proceeding with the arbitration. And I believe that we're spending -- well, I don't believe -- we are spending more effort right now on the arbitration.

Badulla Merte (ph): I know in the past you said it's a very convoluted kind of thing in terms of the put option, but given that you said that the arbitration could take several years, why is it not, you know, a more direct path in terms of exercising the put option?

Well, I mean you put your finger on it, that it's a question of valuation.

Badulla Merte (ph): And it's not a -- which way would you think that the value tends to lean at this point?

Well, I mean we're obviously continuing to evaluate that situation. It's a moving target. And I wouldn't rule out any option at this point.

Badulla Merte (ph): And one last thing. I think in the past, you've indicated that the 2003 adjustment is principally due to energy trading. In the past, I think, it's been stated that, I think, a basic run rate would be like somewhere in the 120, $125 million area. Would you say that that's in your current plan for '03, that that's kind of a good working outlook?

Yes.

Badulla Merte (ph): Okay. Thank you very much.

As a reminder, hit star, one for questions. We'll go to Michael Goldenberg (ph) with Luminous Management.

Michael Goldenberg (ph): Guys, my questions have been answered, actually.

Okay.

We'll go next to McAndrew Rosasell (ph) with Trathaway Asset Management.

McAndrew Rosasell (ph): Hi, how you all doing? I just had a question, if you could clarify a little bit, assumptions that you all made regarding 2003 trading net income numbers. And if we should assume, based on this quarter's results, what kind of extrapolation we should make from that.

I don't think you should make any extrapolation from this quarter's results. And on an annual basis, which is a better way -- that's the way we think about it, not quarter by quarter, the last questioner, if you heard that answer, you know, put his finger on it.

McAndrew Rosasell (ph): That was 100 and...

You know, roughly in the 120 to 125 kind of...

McAndrew Rosasell (ph): Hundred and 25.

Maybe 130, you know, something in that -- it's no way to be too precise.

McAndrew Rosasell (ph): Okay.

And you can't be precise quarter to quarter.

McAndrew Rosasell (ph): All right. That was it. Thank you all.

We'll take our next question from Stephen Corn (ph) with Loews Corporation.

Stephen Corn (ph): Badulla (ph) got most of mine. Do you have the cash flow from operations for the quarter?

Well, let's see if we do. Hold on. I'm going to give this to Frank Ault who is going through his massive pile of paper here. Sorry, Frank.

Well, I've got an early draft of the 10-Q -- draft of the 10-K that I'm looking at. Go ahead with the question.

The cash flow from the quarter.

Stephen Corn (ph): Cash flow from operations if there's anything unusual with working capital.

The working capital, what I have in front of me is the 10-Q draft, which is nine months of cash flow. So I'm not sure about the quarter. But for the nine-month, actually there's very little of any surprise in there, if you really take a look at income plus depreciation, and from that you have all the pluses and minuses where you're balancing account and working cash and et cetera, and those cumulatively with less than 100 million, and they are slightly favorable.

Stephen Corn (ph): Okay, great.

If you took net income, took depreciation and something in the 50 to 100 million range, you'd have roughly what cash from operations is. And at a run rate that would get you right around the billion-three level that, you know, Neal was indicating that we're looking at for next year, because working cash has been pretty well neutral, a little positive this year.

Stephen Corn (ph): Okay. Thank you very much.

We'll take the next question as a follow-up from Theresa Ho (ph) with Banc of America Securities.

Theresa Ho (ph): Hi again. Yeah, I had a follow-up question regarding the kind of assets that you would consider acquiring. You mentioned, you know, distressed assets, but I guess part of the list of assets you had listed off did not include perhaps the PG&E's interest in the Baja pipeline. And I'm just wondering, as a partner with PG&E and given their circumstances at their national energy group level, do you have a right of first refusal or maybe perhaps preemptive sitting rights for that asset?

You know, I'd love to talk to you about it, but we're under confidentiality with respect to that particular asset.

Theresa Ho (ph): Okay. Could I get that asset, would that be considered as part of the assets that you would be interested in?

Well, I think that's a fair inference.

Theresa Ho (ph): Okay. Okay, thank you.

At this time there are no further questions. I would like to remind everyone that you may listen to a rebroadcast of this conference at 4:00 p.m. Eastern today through October 29th at midnight by dialing area code 719-457-0820, and entering the confirmation code 618937. At this time I would like to turn the call back over to Mr. Dennis Arriola for any additional or closing comments.

Thanks for joining us today. Karen, Bonnie, and I will be around for the next several days, obviously, if you have any additional questions, have a good time in the desert and we'll talk to you soon.

That does conclude today's Sempra Energy conference call. Again, thank you for your participation. You may disconnect at this time.