桑普拉能源 (SRE) 2002 Q4 法說會逐字稿

Good afternoon. My name is Mitch and I'll be your conference facilitator today. At this time I would like to welcome everybody to the Sempra Energy fourth-quarter and year-end earnings results teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during that time, simply press star, then the number 1, on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. Thank you.

I will now turn the call over to your host for the afternoon, Mr. Dennis Ariola (ph), vice president of investor relations. Mr. Ariola, please again.

Thank you. And good afternoon everyone and thanks for joining us to discuss Sempra Energy's 2002 fourth-quarter and full-year financial results. A live web cast of this presentation is available at www.sempra.com under our investor section.

With us today from the company are several members of our management team including 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 Alt, senior vice president and controller of Sempra Energy.

Turning to slide 2 and before handing the call over to Steve Baum for today's financial update, I'd like to remind you that this call contains forward-looking statements that are not historical facts 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 3.

Thank you, Dennis, and thank you all for joining us.

I'm very pleased to report that Sempra Energy had another strong year in 2002, with solid results in the fourth quarter. Earlier this morning, we reported net income of $591 million for the full year of 2002, or $2.87 per diluted share, compared with $518 million in 2001, or $2.52 per diluted share.

In the fourth quarter of 2002, we recorded earnings of $148 million or 72 cents per share compared to 107 million, or 52 cents per share for the fourth quarter of 2001.

Our acquisition of the metals trading business resulted in an extraordinary gain of 8 cents in 2002, 7 cents of this was recorded in the fourth quarter. Excluding that one-time benefit, Sempra's full-year earnings per share increased 11% compared to 2001.

Our financial results demonstrate that our business strategy is working well. Since we formed Sempra Energy in 1998, we have grown earnings per share from $1.24 to $2.87, an average of 23% annually. Our California utilities are financially strong, and our unregulated businesses within global enterprises continue to grow and diversify our earnings base.

We are managing our capital programs prudently and remain committed to maintaining our strong investment-grade credit ratings.

Now, let's turn to slide 4.

A strong balance sheet and substantial liquidity help differentiate us from others in our sector. With strong investment-grade credit ratings and stable outlooks from all three rating agencies, Sempra has financial flexibility to deal with challenges in the market, as well as opportunities. We are committed to maintaining our strong credit profile.

We closed 2002 with $2.1 billion of liquidity, of which 455 million was cash. In January, Sempra issued $400 million of 10-year debt at 6%. The proceeds were used to repay short-term debt and commercial paper related to our investment programs at global enterprises. This is consistent with our goal to match long-term financing with the life of assets. The financing we completed in January provides us with more financial flexibility as we evaluate new investment opportunities in the market.

As of today, we have over $2.7 billion in total available liquidity.

Now I'd like to spend some time on the results of the individual businesses, and we will conclude our comments with a review of our 2003 plan. Please turn to slide 5.

Sempra Energy utilities had another solid year in 2002, earning $415 million compared to net income of $384 million in 2001. Both of our utilities finished the year with a strong balance sheet and strong investment-grade credit ratings.

In the fourth quarter, SDG and E generated earnings of $53 million, compared to $45 million in the fourth quarter of 2001. The increase is primarily due to tax benefits and higher electric distribution revenues. The fourth quarter of 2001 included a one-time gain on property sales. For the full year, SDG and E had a net income of 203 million versus 177 million in 2001.

Earnings in 2002 included a $25 million benefit in the second quarter due to final settlement of prior-year tax issues.

In the fourth quarter, SoCalGas earned 45 million compared to 51 million in 2001. The decrease is primarily due to higher O&M expenses. For the year, SoCalGas had net income of 212 million, compared to 207 million in 2001. The increase for the year is primarily due to lower interest expense.

SDG and E recorded performance-based rate awards or incentives of $10.3 million pretax in 2002. At year-end, both you -- for both utilities, there was approximately $113 million in pending awards and incentives awaiting California public utility commission approval. The utilities did not record any performance-based rate awards or incentives in the fourth quarter of 2002.

In December, both utilities filed their cost of service cases with the California Public Utilities Commission, and we expect to have the process completed by the end of the year, with new rates effective in January 2004. Both utilities were authorized new return on equity rates for 2003. SDG and E had its ROE increase from 10.6% to 10.9%, while SoCalGas had its ROE reduced from 11.6 to 10.82%.

The SoCalGas reduction was tied to lower interest rates.

The projected earnings impact for 2003, of the changes in return on equity, is a reduction of approximately $5 million after tax.

In January 1 -- on January 1, 2003, SDG and E returned to the electric procurement business, as required by the CPUC. As a result of a long-term California Department of Water Resources contract, allocated to SDG and E, we project that SDGE and will be purchasing less than 10% of its overall demand in the market this year. Approximately 4% of our total power requirements in 2003 will be supplied through renewable resources.

Now let's turn to slide 6 and cover the results of Sempra Energy trading.

In the fourth quarter of 2002, Sempra Energy trading earned $53 million compared to $10 million in 2001. The improvement in earnings is primarily due to increased trading activity amidst more volatile market conditions. The acquisition of our metals business resulted in an extraordinary gain of $14 million after tax in the quarter, and 16 million for the full year.

For 2002, trading generating earnings of $126 million, including the gain from metals. The implementation of the emerging issues task force rule no. 02-3 did not have a material impact on our 2002 results.

I am pleased with our performance in 2002, especially given the difficult market conditions. We're one of the few creditworthy players in the industry that has both physical and financial expertise. Customers recognize this and we're beginning to see a stronger flow of business that previously went to other competitors.

In January 2003, we bought a portion of CMS' gas trading book for $17 million. The term of the contracts and the credit quality of the customers closely matched our existing book of business, and will positively impact 2003 results.

Let's turn to slide 7. Slide 7 contains a summary of the variables that drive our trading company business model.

We continue to run a low price risk portfolio as measured by value at risk or VAR. The VAR of our book has been consistently within the 5 to 7 million range. The average VAR in 2002 was $6 million at a 95% competence level. Sempra Energy trading has consistently focused on shorter-dated transactions. This strategy makes our business highly liquid and allows us accurately to verify the value of our trading portfolio. As of year end, 87% of our outstanding net unrealized revenues related to over-the-counter contracts are scheduled to convert to cash within 36 months.

We will continue to focus on transactions that convert into cash in a short period of time and that can be valued using publicly available pricing sources. We paid a great deal of attention to credit risk. Managing credit risk is as important as managing price risk and portfolio liquidity. We conservatively manage credit exposure to avoid credit-related surprises. Our credit professionals work closely with our marketers to gather information that aids us in setting appropriate credit limits for counterparts. Our corporate risk management group and treasury group also work together to model and analyze liquidity requirements.

Our entrance into the metals trading business in the first quarter of last year was a deliberate strategy to diversify our product line and expand our geographic profile. We're very pleased with the contribution from the metals business in 2002. We expect metals to be a stable earnings provider in future years. We also expect future growth in our European and Asian businesses, as those markets continue to open up.

Our trading company focuses on customer-based business. We provide tailored products and services to end-use customers like utilities, municipalities, pipeline companies, and others. The resurgence in market volatility has increased customer interest in energy risk management services, and new financial players have brought back some liquidity. Customers are looking for suppliers like Sempra that have solid credit ratings and product expertise. Sempra Energy trading provides customers with the physical and financial tools that they need to run their businesses.

Energy trading is a profitable business that we understand. We have an experienced and conservative team running that business. The trading company also provides Sempra with strategic information and marketing expertise that benefit our other global enterprises businesses. Given our current earnings mix and liquidity position, Sempra Energy trading is the appropriate size for our company. We will continue to manage this business for profitability, not for volumes.

Now, if you'll turn to slide 8, I'll give you an update on Sempra Energy Resources.

Net income for the full year 2002 was right on plan at 60 million, compared to a loss of 27 million in the prior year. In 2001, the company incurred a loss selling power under our contract with the California Department of Water Resources, or CDWR, to discount to market prices. Resources fourth-quarter earnings for 2002 were break-even compared to a $13 million loss in the same period in 2001. In the fourth quarter of 2002, earnings were impacted by seasonal variations in both volume and pricing in our contracted power sales to the CDWR.

Our three new generation units are all on schedule to be completed and operational by the summer of 2003, adding 1,510 megawatts to our portfolio. We have commenced first-fire testing on all of these natural gas turbines. The second unit of our mesquite plant in Arizona is scheduled to be on-line by December 2003. We will finish the year with six plants and 2,660 megawatts in operation, including the 305-megawatt coal-fired plant in Texas we acquired last year.

Through 2005, an average of 85% of our peak general rating capacity generating capacity is sold forward. Our 1900-megawatt power supply contract with the CDWR is the largest contract we have in our portfolio. CDWR is taking power and paying for it as contracted. We're pleased that the FERC -- that is, the Federal Energy Regulatory Commission -- is moving forward with a timely decision on the state of California's challenge to the validity of the contract. FERC is expected to render its decision on our contract this March.

Now, turning to slide 9, Sempra Energy's -- Sempra Energy International's full-year earnings were up slightly in 2002 at $26 million compared to 25 million in 2001. In the fourth quarter of 2002, international posted a $4 million loss, primarily related to income taxes associated with foreign operations. This compares to 14 million in earnings for the fourth quarter in 2001. While the tax charge reduced earnings for the year below our original plan, overall operations performed as expected. Our distribution companies in Chile, Peru and Mexico performed well with good customer growth. Given the strengthening of the Argentine peso relative to the dollar, we had a favorable adjustment to other comprehensive income on the balance sheet. The OCI adjustment related to Argentina improved from 258 million to 245 million.

We are proceeding with our arbitration claim against the Argentine government for violations of our concession agreements. This process will take at least a year. In September, we completed the construction of the Baja Norte pipeline in Mexico and natural gas is flowing as planned. This pipeline is strategically located to serve the growing energy demand in northern Baja, California, and is important infrastructure for future liquefied natural gas supplies.

Sempra Energy International is in the permitting process to build an LNG receiving terminal about 60 miles south of San Diego in Baja, California, and we hope to receive the final approvals to go forward in a few months.

We expect liquefied natural gas to enter the west coast of Mexico by 2006.

On Tuesday, we announced a transaction to acquire Dynegy's Hackbury (ph) liquefied natural gas project near Lake Charles, Louisiana. Once we complete both Hackbury and Costa Azul (ph), the name of our site in Baja, California, Sempra will have one of the largest positions in liquefied natural gas terminals in the United States, with processing capacity of 2-and-a-half billion cubic feet per day of natural gas.

Now, turning to slide 10, Sempra Energy Solutions continues to -- continued to grow in 2002 and had a very successful year. Solutions generated earnings of $21 million in 2002 compared to $1 million in 2001. Earnings were driven primarily by our expanding commodity sales nationwide. In the fourth quarter, solutions net income increased by -- to $10 million versus 5 million in the same period in 2001. Primarily due to increased commodity sales in the Western United States. The implementation of EITF 02-3 had no material impact to solutions in 2002. Our solutions group is a national leader in its segment that provides energy services to large industrial and commercial customers. We now have over 2,000 megawatts under contract.

Slide 11 provides a table of earnings results by business unit for the quarter and for the full year. The income statement provided on table A of our press release shows Sempra Energy on a consolidated basis, and I would like to spend a moment discussing our tax position.

We reduced Sempra's effective federal tax rate from 29% in 2001 to 20% in 2002. The factors contributing to this improvement included the second-quarter tax -- the second-quarter tax settlement at SDG and E and higher section 29 tax credits. In the future, we expect our effective federal tax rate to run in the high 20s to 30%.

Now I'd like to focus on our outlook for 2003, on slide 12.

In October 2002, we announced a range of $2.60 to $2 and 80 cents earnings per share for 2003, and we are reaffirming that target today. We estimate the cumulative effect of the implementation of EITF 02-3 will be below $20 million. This change in accounting will reduce our first-quarter results.

We expect the majority of our business units to perform at approximately the same levels they did in 2002, absent the higher tax benefits. We also believe that Sempra Energy trading will contribute between 125 to $150 million of net income. Trading should benefit from a full year of results from metals and an improvement in customer business. We will provide you with a complete breakdown of earnings by business unit at our analyst’s conference in May.

Capital expenditures and investments totaled $1.7 billion in 2002, of which 700 million was related to the construction of our generation plants.

In 2003, we expect capital spending to be approximately 1.3 billion, including development costs related to the Hackbury LNG project. From a funding standpoint, we expect net cash from operations to be roughly in balance with our capital spending program in 2003. Approximately 750 million of 2003 capital spending is related to the utilities, with the residual available to our global enterprises businesses.

There is room in our capital plan at global enterprises to take advantage of other opportunities in the market.

Overall, we're in a strong position entering 2003, and expect no major financial challenges this year. We have sufficient cash on hand and liquidity to meet our capital plans and dividend requirements.

Now, let me close by saying that I'm very pleased with our success at Sempra Energy in 2002. Our financial results demonstrate that our strategy is working well. We are focused on growing earnings and cash flow. We have increased earnings per share an average of 23% annually, since we formed Sempra in 1998. We pride ourselves in delivering results, not promises, and our track record speaks for itself. We'll continue to deliver results and build businesses that generate cash and shareholder value.

Now I'll open the call for questions.

Ladies and gentlemen, I would like to remind everyone in order to ask a question, please press star, then the number 1, on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of David Macarrone (ph) with Goldman Sachs.

Thank you. Steve, I was wondering if you could talk a little bit about the income tax rate, and also more directly address the issue of cash taxes and what you expect going forward in terms of cash taxes paid as relates to total cash flow?

Hi, David. I'm going to turn the question to Frank Alt, our controller, and give you a breakdown.

David, basically we had a very successful year, you know, on the tax side this year. The investments that we have made in our affordable housing and our Section 29 tax (inaudible) plants performed very well, and as you noticed from Steve's prior comments, that our effective tax rate had decreased in the current year to reflect that improvement, as well as the very successful outcome we had with the IRS we reported in the second quarter, picking up 25 million at San Diego Gas & Electric.

We anticipate that our effective tax rate will increase next year, back closer to the 29% that we had last year.

From a cash perspective, one of the biggest things that affect the taxes, of course, is the impact of our balancing accounts at the California utilities. Whether we're over or under-collected in a given year, though it doesn't affect the earnings, will affect the cash flow, and it is a little difficult at this point to know precisely what the effect in 2003 will be of any over-or under-collection.

Okay, and just a related question on that. The international tax issue, can -- does that work through one of the equity accounts, or one of the equity investments that would then directly impact your reported income taxes?

The -- it does not affect the income tax there. I mean, it is in our equity of our South American business units, yes.

Okay, and a different question. On LNG in '04 we were expecting you guys to turn significantly free cash flow positive if this Hackbury projection goes forward. How do you expect that to impact your free cash flow and how would you anticipate financing LNG over the long term?

I don't think -- this is Steve Baum again. I don't think that Hackbury should affect our free cash flow during the period.

Why not?

Well, the -- the -- the payment stream for Hackbury is stretched out over a period of time through 2007, I guess, and the total payment we expect to make should not exceed 700 million. And so if you take a look at our cash flows through that period, we believe we're able to accommodate that -- that construction project in our uncommitted capital expenditures inside global enterprises.

Okay. So what you're saying is that you're -- your base budget on cap-ex long-term already includes kind of undefined projects such as Hackbury?

That's exactly right. And we won't need any special financing to cover that project.

Do you anticipate using any off balance sheet financing or, you know, non-recourse financing?

No to the off balance sheet financing, and I -- we haven't made any decision as to whether we would try to project-finance that. Currently, it's scheduled to be handled through operating cash flow.

Okay. Thank you.

Your next question comes from Mike Heim (ph) with AG Edwards.

Thanks. With the tax issue, would the affordable housing also be the explanation why the financial section had a good jump up this quarter?

The -- I believe you were -- we're having a little difficulty hearing the question but I believe you were asking about the effect of the tax credits on the fourth quarter?

Specifically, why did the financial group have a nice jump up in net income this quarter?

Our investments in the Section 29 coal credits are largely at our Sempra Energy financial subsidiary and as a consequence of that, we have the stronger results in the fourth quarter.

What happened at that particular unit is they have four plants. Two have been in operations for a number of years; two were at a location that did not have an adequate supply of coal fines. We moved those plants this year, and in the fourth quarter had all four of the units in operations.

Okay. Could you go a little bit more in depth on the -- the 8-cent non-reoccurring gain from the metals trading? Is that simply the case of having bought stuff at a discount and marking it up, and if so, why is that being realized in the fourth quarter instead of an earlier quarter?

That -- yes.

This is Frank Alt. The reason that was recognized in the fourth quarter, the deal had a requirement for an audit associated with the acquisition, and we had to wait until that was complete to know what the number was and to book it.

Can you give any general idea on what type of similar impact we might have with the CMS acquisition?

The CMS acquisition of the book, which is entirely a 2003 item --

Uh-huh.

-- the -- what I can say about it is that the -- that the book is approximately matched to the -- to the tenor of our existing book, and so we'll see those profits that come from that acquisition roll off during 2003, approximately as the rest of our unrealized income rolls off.

But it is fair to probably assume that it was purchased at a discount to book and there will be a gain from mark --

Well, yeah, there will be profits.

Okay.

We're not identifying specifically what the profit was in that acquisition.

Okay. Finally, on the utility cost of service case, are there any road signs we should be watching? What's the next step?

Well, I'll let Ed Guiles, who is responsible for the utilities, answer that question.

Yes. We have filed, as you know, in December for both utilities, and we've had one pre-hearing conference. A second pre-hearing conference is scheduled for March 7th, and we expect a schedule to be set for the remainder of the year.

We're anticipating and hopeful that we can get the case through completion by the end of the year to have rates in effect 1/1/04.

Okay. Thank you.

Your next question comes from Raymond Niles (ph) with Salomon Smith Barney.

Thank you. Good morning. I have two questions. One, on the -- in terms of trading, there's a pretty large increase this quarter in oil profits and I'm just wondering how that might be affected, should we see a decline in oil prices over the -- you know, sometime over the course of the year.

Well, the -- the trading -- the oil trading results, Ray, are really more driven by the volatility rather than the absolute price, although, as you know, you know, higher absolute prices for commodities tend to -- tend to have -- lead to higher absolute margins. And as best we can -- we can predict for this year, oil prices will continue to be affected principally by the Iraqi situation. And so we expect significant volatility.

I think the prediction that we have longer term is that if, as we expect, we'll be successful in Iraq, that -- and as Iraqi production comes back onto the world market in greater volume than it has been, that that should lead to more stabilized oil prices and probably lower oil prices, but that may not be in effect until 2004 or later.

And then the other question I had is -- can you give some flavor for the product breakdown in North America versus Europe on the trading side across the different commodities?

No.

Like, for example, just gas versus power --

I don't have that information available.

Okay. Maybe then I'll just ask one more, if I can. Just -- just one other line item. "Other." "Other" in terms of products, that's a pretty substantial increase there. Can you give us a sense as to what that comprises?

This is Frank Alt. It's really made up of two things. Primarily, the Sempra trading unit also has an investment in Section 29 coal credits, and that is reflected there as well, and the improvement that they've had in that area. And they do get involved in some other products other than those listed here as well.

Okay. Right. Thank -- maybe just -- any profits at all in power in North America or is it mainly gas related? I don't know if you can tell me that.

We're looking. Hang on a minute, Ray. Let's see what we can do here.

You want to do that?

Yeah, I'll do this. The --

This is Neal Schmale. If you look on the table D that's attached to the press release, the margin in power is largely North America.

Okay. Great. Thanks very much.

Your next question comes from Laura Shaughnessy (ph) with MFS.

Hi, a couple of questions. First, the infamous March ruling by the FERC on the California contract, do we have any idea of the timing? Do we have any sense of -- that it actually is going to happen in March? Is there any information out there that hasn't been put forth in the press that, you know, I may not be aware of?

Hi, Laura. I had some conversations with Pat Wood (ph), who indicated a really interest in getting these matters resolved. Now, he didn't indicate anything that we don't know publicly about the actual timing of the -- of the commission decision, but we expect it to occur at the end of March or possibly in the early part of April, and we continue to be pretty confident in the result.

Yeah. I mean the initial commentary on various things have been relatively positive. It just would be like nice to put this wonderful issue behind us.

We would like that as -- certainly as much as any investor.

Second issue, the trading business. You said that the trading business, quote-unquote, was the appropriate -- it was already the appropriate size for the company. What does that mean in terms of doing further acquisitions? What does that mean in general that the -- and that was said at the initial part of the call.

Well, that's a qualitative judgment that we've made as a management that with respect to the cash flows and asset base of Sempra, and the perceived relative risks of those -- on those assets and cash flows that the trading company probably is about right sized for our current profile.

Now, that's not -- that's not quantitative, particularly, and it wouldn't bar us, for example, from making acquisitions in the trading company like the CMS book where we have a clear line of sight towards what the P&L effects of that -- of such an acquisition would be.

But as you know, or may know, we're looking at an unprecedented time in our industry in which many quality assets are coming onto the market, and to to the extent that Sempra may -- may make acquisitions of those assets and grow our business in a -- through asset acquisitions that are cash flowing and more transparent, that may allow greater room for additional capital to be deployed in the trading company. And I -- really, it's not much more quantitative than that.

Okay. Can you -- if it's possible -- talk about the process in buying this CMS book, the degree to which you are actually able to look inside the can I mow notice, so to speak, et cetera? Can you go through the process of -- I don't even know if you can, but can if you can.

Well, I mean we've -- you know, we were able to examine the trades that were in the book in their entirety, and make a judgment based upon our knowledge of the market as to whether or not those were good or bad trades, and to actually value them.

And was that a negotiated deal with CMS or did they open the book out to a bunch of people and you guys had the best price?

I believe -- I believe that it was negotiated, but, you know, there aren't too many companies around that can take on these -- take on these books. There are a few, but, you know, we're -- we're in a position where we -- we not only can do financial trades, but we can do physical trades, and that makes us, while perhaps not unique, it's a very small group.

In terms of the free cash flow comments, getting back to David Macarrone's question in '04, what does that imply on your cap spending level in '04? Did you give out a specific number or band there?

Yeah, Neal will deal with that. I think we put a number in the K.

We've consistently said that we expect that the capital spending in '03 and beyond would be in the billion three range, so I'd expect '04 to be about like '03, but with a -- with lot more uncommitted in '04, which gives us the flexibility to accommodate the kinds of transactions we've been talking about.

I was just wondering, in terms of the acquisition criteria, can you talk about, you know, initial comments that -- at the call were a lot about available liquidity, et cetera, et cetera. I mean, what kind of size of acquisitions you'd -- you know, what kind of -- what's the maximum amount you feel that you could buy before you'd be stretching your balance sheet and risking your ratings?

Yeah. Well, first of all, let me make it -- I will reiterate what I said in my remarks that we are -- we are committed to strong investment-grade credit ratings, and we are not going to do anything that is going to lever up the company and change that rating posture. So to the extent that we would do acquisitions -- and this is hypothetical, Laura.

Uh-huh.

-- to the extent that we would do acquisitions that are beyond the flexibility within our current cash flows, they would be funded by additional equity and debt offerings, which would be associated with that particular acquisition and be transparent to the marketplace.

Okay. Thank you.

Your next question comes from Michael Goldenberg (ph) with Luminous Management.

Good morning, gentlemen.

Good morning.

Just wanted to ask you, your utilities EBIT was down about 50 million in '02 versus '01 from 854 down to 805. Was that mostly PBRs or did it have anything to do with transportation exchange deliveries of gas?

This is for Frank Alt.

Yeah. A lot of the decrease that we had there really stemmed from the fact that we had some positive tax things. We talked about the $25 million tax item at San Diego Gas & Electric and of course that doesn't figure into your EBIT. And so I think that we've had that on one side. Last year, we had some positive things from the sale of some property that did affect EBIT that didn't reoccur this year.

What about PBRs, '02 versus '01 I guess? In '03 you flowed 10 million through the income statement?

Yeah, the PBRs over the last year or two have been relatively flat. There have not been anything -- real significant. We do have a lot pending, as Steve mentioned earlier, including a large PCIM or gas incentive mechanism item at the gas company that's being considered by the commission right now, so it is possible that in 2003, we will see an uptick in that number.

In your guidance, you assume a certain number of PBRs, a certain amount of PBRs?

Yes, we do. Within that 20-cent range.

20 cents?

No, no, no. Within the 20-cent range.

Oh.

(inaudible), within that, there is the assumption that we will is have some PBRs. There's a lot on the table and it's hard to predict specifically which ones will or will not get approved during the calendar year.

So you can't quantify approximately how much you expect in PBRs?

The -- this is Steve Baum. The problem, Michael, is that we don't control the commission's timing and agenda for making these decisions. We have an expectation as to result, but we don't know when.

Uh-huh.

And, in fact, we expected earlier on that some that have not materialized in 2002 would have, and have now been pushed over into 2003.

Okay. Just a couple of more questions. I see your trading book, the average life of your cash flows has somewhat increased. It used to be that approximately 85, 90 percent went through the first 24 months. Now it seems to have dropped to about 70-plus percent. Is that been kind of the new direction you're taking in terms of taking on longer duration trades?

I wouldn't infer anything from that. That's a -- we consider that to be kind of a normal variation, and it does -- you should not take that as a change in business practice or intent.

Uh-huh. So I guess is it safe to say in the future, you'd expect something in the -- about the 80% range, as more or less historically?

Yeah, we -- let me put it more qualitatively. We -- our business is running with a particular emphasis on short-duration transactions where we want to and expect to recover the cash in a relatively short period of time. So -- and that is the way we will continue to run our business. Within that intention, you'll get some variation around the -- the timing of the realization of cash out of unrealized book.

Okay. Just one more question. I think you mentioned that EITF will be a $20 million hit in the first quarter?

Yes.

Less than 20.

Less than 20. That has to kind of reverse itself over time because it has to flow into your income statement.

That's correct.

Is -- can you give us any guidance how that flows back into the income statement?

We would expect much of that -- although we can't say with any precision how much, because we're not predicting or able to predict quite precisely, but much of that will return in 2003.

Okay. So overall throughout the course of '03, it should have no effect?

Well, I won't say "no effect," but it will be mitigated significantly by results in 2003.

Thank you very much.

Your next question comes from Teresa Ho (ph) with Bank of America.

Hello. I have several questions.

First, starting on the LNG, could you give us the status of your agreement with CMS, now that they're -- or they're planning to sell their LNG facilities to Southern Union and AIG?

Well, the only agreement we had with CMS had to do with the operation of our Costa Azul facility in Baja, California, and in that case, they are no longer an equity participant, and -- and really, so that's going to be a project that's substantially a hundred percent Sempra. And we were interested in the LNG facility at Lake Charles, but as you pointed out, that was sold to AIG.

Now, what AIG's plans may be with respect to that facility and whether they're going to keep it conjoined with trunk line or not, we don't know, but we remain interested, as -- as should be quite obvious, in growing a position in LNG importation and terminals, and we are and would be -- continue to be interested in discussions around that Lake Charles facility, but that's really a matter up to AIG now, as it sorts out its business.

Okay. And on other LNG facilities that are on the selling block, in particular to El Paso's LNG facilities are you interested in those assets or other types of other LNG assets?

Well, maybe I -- I'd turn this over to Don Felsinger, who is responsible for that business, and let him give his opinion.

Teresa, we continue to look at all the available LNG assets that are either on the market or we think will come on the market, and that's about all I can say is we do have an interest. As Steve said, we think that there's a growing imbalance between supply and demand in North America, and LNG is going to be the solution to that problem. And so we continue to look at every opportunity to participate in the LNG market.

And just -- just further to talk about LNG and cash flow, on the 1.3 billion in cap-ex that you outlined for, I guess, '03 and '04, could you actually give us what the uncommitted level is?

We haven't published what the uncommitted --

What's the question?

Her question was of the approximately 1.3 billion of cash flow and -- and/or -- and cap-ex --

Uh-huh.

I guess it's the cap-ex question.

Cap-ex.

What proportion is uncommitted? And --

Well, in 2003, oh, round numbers, a hundred million bucks is uncommitted. And in 2004, several hundred million would be uncommitted.

Several hundred million. And is it fair to say that for the Hackbury plant, the development costs would just sort of be even from '04 to '06.

Even meaning -- what do you mean by mean?

Say 700 -- you know, like about 200 and something over, you know, each year?

I don't -- normally large capital projects don't -- don't come out even over years. There tends to be peak years just as there were peak years in our power plants. But I think the key point is the one we made earlier, that the hack bury plant, given the level of uncommitted capital in our plans in the '04, '05 range, is -- is -- can easily be accommodated in that -- in the numbers we've given you.

Okay. Just on the Hackbury plant, is that more front-end loaded in terms of cap-ex?

Is it -- was the question was it front end?

Yeah. Is it front end loaded?

No. No.

I mean --

If what you're trying to get at is how much did we pay for it and out the door in the beginning and how much will be applied to capital.

Uh-huh, uh-huh, yes.

-- very little was paid in the beginning. I think we -- it's about $20 million that we paid Dynegy up front, or will pay them when it closes up front for the project, and then there are some additional staged payments, depending on the occurrence of certain events that would be tied to construction. And so there may be some confusion about it, I guess, in somebody's mind if we, you know, have some big lump sum to pay to Dynegy, but that's not the case.

Okay. Going to solutions, you reported a good quarter there. Could you tell us the -- the sort of -- I guess if you could just elaborate on the types of contracts, the length of contracts? Could you go a bit further into that business?

I'll let Don address the question.

The majority of the increase that we saw in solutions' profitability was driven by opportunities in the commodity market in the west this past year, and, you know, as we go forward with that business, we still expect commodity opportunities, but that business is also growing in terms of doing things like performance contracting and outsourcing of energy requirements of customers. So it -- it has a very bright future.

And in terms of the earnings for the quarter, how much of that was marked to market?

All of that was marked to market in terms of commodity.

All of that was marked to market, okay.

There's very little -- of that $20 million adjustment from -- in the '03-2 requirement, a very -- a small portion of that 20 is associated with solutions. Most of the contracts that solutions has is -- has are -- remain on mark-to-market. But the tenor of that book is also relatively short.

Are we talking five years? Ten years?

Less than -- less than that.

Less than 18 months.

You know, they're --

Okay.

-- fairly short.

And finally, on the DWR contract, my PV of the CUPC was in town not too long ago -- in New York that is -- and he seemed to indicate that -- some confidence in the renegotiations of your Sempra contract, even before the FERC would deliver its opinion. What is your view in terms of the renegotiation?

Well, we have had --

Or have you found -- I'm sorry.

We've had a dialogue with the state negotiators for over a year, and we have discussed many, many things, even to the point of -- of reaching an understanding about what could be a revision to our contract, converting it from a take or pay energy contract to a capacity-based contract, which would allow the states significant flexibility, because -- in terms of dispatch. After all, the state wants to assign and have -- assign is probably the wrong word. Administer the contracts through the utilities. And our contract is being -- or will be administered by Southern California Edison.

And a -- converting the contract from a take or pay energy contract to a dispatchable capacity contract would allow Edison to follow its load instead of having to take power in blocks. And that would be very good for the state. We've estimated that the revision could save the state in excess of billion-and-a-half dollars over the life of the contract simply by being able to avoid gas purchases which are, for the account of the state. We don't possess the gas risk in our contract, the state does.

So we've had these discussions. They didn't reach fruition because by the end of 2002 -- because the public utilities commission then headed by president Lynch wanted price concessions which we were not willing to give.

We continue to be ready to talk to the state about the -- about this contract, and we've remained open to these negotiations, and believe that a satisfactory settlement could be reached that would be good for California. There is an additional issue that has arisen, however, which is that the legislation which enabled the state to enter into these contracts called for the expiration of that authority at December 31, 2002, and the question then is a factual one as to whether or not revisions to a contract which would be as substantial as the ones we contemplated would be authorized under that legislation. And that would require, we believe, opinion of counsel or additional clarity from a court or potentially additional legislation.

So the matter has become somewhat more complex. We remain open to trying to reach a good solution with the state, and so Mike is probably right when he says that something could occur, but -- but it is a little bit more complicated than it was prior to December 31.

Now, we also expect that the FERC, as I -- as I mentioned earlier, will decide that the contracts are valid, and that will also, I would think, influence the state in its position.

Do you think that in terms of the state position, that the tone has turned more positive with Mike Peevey (ph) leading it?

I think he's doing a very good job, in terms of focusing the commission on some issues that have to be resolved, and Mike's a very experienced person. He understands the business, obviously, from his background, and I think that's a very encouraging thing.

Thank you very much.

Your next question comes from the line of Ronald Smith (ph) with CitiGroup.

I'm sorry, gentlemen. My -- my question was answered earlier. Thank you.

Your next question comes from the line of (inaudible) with Royalist Research.

Good afternoon, and thanks for, again -- once again, delivering there Steve. You've done a great job and once again, I the market will start to appreciate it.

Thank you.

I had a question on EITF, what you answered in '03 and you answered that. And more a kind of covered (inaudible) I was just curious are you interested in getting into the pipeline business or the MLP business here of late? And if so, but be it that asset or others, again you've kind of touched upon this, but what is your level of debt that you're -- that you're shooting for, you know, say within the next 18 months to three years? That you'd be happy with.

Yeah. Well, of course, Neal is going to answer this question in greater depth --

Right.

But let me just say that, you know, I'm not sure we have a target -- we have a target debt. We certainly do if we don't buy anything. But if we buy something, then the debt, of course, will change, depending on what we buy. But go ahead, Neal.

I think Steve basically made the key point which is that we do not target specific debt ratios and we -- or for that matter, a specific absolute level of debt. What we target are credit ratings, because the -- the rating agencies have a very robust way of looking at all the factors that are relevant -- relevant to credit, and we want to maintain a strong investment-grade rating, which means where we're at right now, and I think Steve indicated how all that fit together.

Okey-doke. Thank you all. And continued success, Steve.

Thanks.

Your next question comes from Paul Patterson (ph) with Glen Rock Associates.

Good afternoon. Can you hear me?

Yeah. It's a little bit fuzzy.

Okay. Sorry about that. On table B, you have a section called credit quality of unrealized trading assets net of margin, and I was wondering, with the below investment grade portion of that increasing, what's the dollar value that you guys actually have at risk, I guess, in terms of that below investment grade group?

Let me -- I've just got to locate myself in the table.

Okay. This -- which -- this shows a slight increase in below investment grade credits.

Right. It's gone from about 20% in June of 2002 to about 30%.

Yeah. I mean that -- let me say that that's reflective of generally what's occurred in the market. That's not a -- a search on our part for business by, you know, dropping our credit quality requirements for customers or counterparts, and I think it's -- it is, first of all, reflective of the general condition.

But secondly, we -- we monitor those investment-grade -- not below investment grade credits very, very carefully, and we establish credit limits for them, and margin requirements for them. And much of that -- and we enforce that -- those requirements very, very carefully, and so that that -- that risk is taken into account and managed.

Much of our -- much of that -- much of that business is relatively short-term, and I've -- I don't have the exact statistic in front of me, but a lot of it -- maybe something like between 70 and 80% of that -- rolls off, that is recycled, if you will, in a 30-day period. So we're -- that is very short-term debt, and doesn't pose the kind of risk that you might imagine it would simply by thinking of, you know, a 30% -- 10% of our business is suddenly fallen into a non-investment grade category that would raise the risk. We don't consider that as raising the risk of our business, particularly, given the way we handle it.

Okay. Let me ask you this: In terms of looking at the -- the chart right above that, which has a total net unrealized revenues of $180 million, is that pretty much the fair value that you guys have of energy trading, which was about 447 million?

No.

That's what I have.

No. You got to look at that -- that chart is a liquidity -- that is a liquidity chart, and it's -- and let me plow through this because it can be a little bit confusing.

The-- what that 180 is, is a netting of positions as of December 31, which are -- which are -- how do I put this. We have unrealized cash as of that date of I believe it's 321 million, and we have paid out, as of that date -- that's cash out -- 141 in exchange contracts.

So that was in -- that's intended to show you the liquidity difference, if you will. We have cash out the door paid to the exchanges in variation margin on that date of 141 million, and unrealized earnings in non-exchange contracts or positions of 321. So we expect to get in $321 million --

Okay.

-- as of that point. That is unrealized cash.

Now, those positions, of course, vary as commodity prices change on a daily basis, and we may get cash back from the exchange contracts or put out cash in those exchange contracts.

Okay. Let me ask you this -- what was the revenue recognition -- total revenue for the trading business in 2002?

400 and -- where is that listed?

Well, that's basically the number that you'll see in table -- this is Neal Schmale. That's basically the number you'll see in table D, the roughly $476 million.

Yeah.

Okay. Great. And then finally, in terms of the book value number that was on table B -- as in boy -- if doesn't look like it's growing that much compared to how well your earnings were. I mean, it looks like you guys, you know, you're only paying out a dollar in dividends and you made about $2.87 on a reported basis, yet the common equity -- the book value per share doesn't really increase that much year over year and I'm wondering if I'm missing something.

Yeah. You probably haven't taken into account the OCI adjustment.

Okay. So the rest is basically being made up in OCI?

Yeah. Unfortunately.

Okay. Okay. Thank you very much.

Your next question comes from Brian Chen (ph) with Salomon Smith Barney.

My questions have been answered.

Your next question comes from Sam Rothwell (ph) with Merrill Lynch.

Thanks. My questions have been answered.

Your next question comes from the line of Wen Chin (ph) with ABN AMRO.

Hi. I just have a couple of quick questions here. First of all, how much did the asset sale at the utility contribute?

In 2001?

Wasn't that 2002?

I can't hear you, Wen.

Sorry. You had an asset sale at the utility in 2002, I think.

No. It was 2001. That was the disposal of some property at Blythe (ph) that we had held for water rights for many years, in association with a power plant that we didn't build, and I don't know that we actually disclosed the -- the gross number of that, but -- and that was a sale of some desert property associated with water rights.

Okay. I'm sorry, I misheard that.

And then your operating cash flow in 2002, how much was that?

Operating cash flow in 2002. Just a moment. You want to do that or --

The operating cash flow in 2002 was around a billion three.

Okay. And you expect another billion three this year?

Yeah. Remember that these numbers -- these numbers include -- include working capital -- include working capital changes and the working capital can go -- go up or down a couple hundred million dollars in any given year, and in 2000 -- in 2000 -- excuse me, in 2002, we actually generated cash from operations from working capital and in 2003 we actually think we'll use a little bit, so that explains why the cash from ops on a GAAP basis should be relatively flat, even though if you looked at it in another way, earnings plus add-backs are actually growing from year to year.

Okay. And how much cash do you have on hand right now?

This is Frank Alt. 455 million at the end of December.

And as of last night, 723.

Okay. Since your OCF and your cap-ex are about equal this year, you will be paying out your dividends from cash?

Yeah. It will -- it will -- I mean that gets financed, I guess it's fair to say.

Okay. And my last question, did you mention how much of your trading profits were marked to market non-cash?

Were mark-to-market? Of trading profits. Virtually all. You know, that 20 million has some number of -- from trading and some number from solutions, but it's minor, and so, yeah, virtually all.

I'm talking about the 126 from trading.

The $126 million of earnings --

Uh-huh.

-- reported earnings are calculated and reported on a marked to market basis.

Okay.

That's difference from how much cash we got.

Yes. How much cash did you get?

More than that, actually. I don't know if we have the number reported but --

Yeah, this is Frank Alt. Basically as the table shows, you know, we basically have 180 million of unrealized revenue, but we've had all of the unrealized revenue from prior positions that have turned into cash, so the key is looking at that number there. That number is down a little bit from where it was last year, which meant we got more cash in than we increased -- so we did not increase our position as far as the unrealized revenue.

Okay. That was my question.

As you look at a trading operation over time, I mean it's a -- it's a cyclical matter. You know, sometimes when your unrealized is increasing, versus -- versus cash flow, you can be -- on one hand, you might be a little nervous because you're -- you're -- you know, your cash is lagging behind your unrealized revenue on market to market basis.

Uh-huh.

But that means your business is growing. Then when the -- when the business may be contracting a little bit, or you're doing much shorter transactions, and your cash is greater than your mark-to-market, that could be -- it's a good sign because you're getting the money from the previous business that you did, but you might also be nervous if it indicated a trend.

Now, there's no trend here other than normal fluctuations, and I'll just say that, in terms of -- in terms of our business. We're very pleased with our business, and I consider this variation in cash flow to unrealized earnings to be a normal phenomenon and what you should look at is just the general history of how quickly re-realize cash to mark-to-market on a general basis. Coupled with our VAR.

In general terms, the trading business is returning cash to the parent right now in an amount at least equal to its earnings. The earnings are relatively stable in that business, and like any other business, when earnings stabilize after a period of growth, it starts throwing off cash equal to the earnings. We had a big year of 196 million in earnings a couple of years ago, so actually cash coming back right now is a little bit in excess of earnings, but you got to be really careful about doing this on a quarter-by-quarter basis because there's a lot of variation around those numbers.

Okay. Thanks very much.

Your next question comes from Chris Beasery (ph) with Morgan Stanley.

Thank you. Just a couple quick questions. How much remaining spending do you have to complete the buildout of your power plant portfolio?

About 150 million.

And that will get you to the -- the six projects?

And that brings the projects in. As we reported, by the beginning of the summer of this year, we will have three of the -- of the four units on-line. The fourth unit being the second unit at mesquite coming in in December. And we've had first fire on all of the three that are coming on. That means we've tested them and run combustion, you know, and so forth. Things are really right on schedule.

Okay. One other quick question. How much in Section 29 credits did you book in '02?

Frank? I don't know if we've broken that out.

We do not break that out or disclose it because we've got, you know, Section 42 credits as well. I don't have the absolute number of the credits because if you look at the earnings of CIMP Sempra financial, that's after, of course, your expenses of operating those facilities so the credits are somewhat larger than what you saw the increase in the results at Sempra financial. But I don't have the absolute number with me.

Okay. Great. All my other questions have been answered. Thanks.

Your next question comes from Val Murphy (ph) with FAC Capital.

Good afternoon.

Good afternoon.

A couple of things. One, I think in a previous meeting that I've attended, you've talked about the balance of businesses in terms of potential acquisitions, and one of the things you'd indicated was you were looking possibly at Portland general under bankruptcy proceedings for Enron at this point. Any additional thoughts as to whether that still possibly fits your objectives in terms of business mix and potential acquisitions?

Yeah. We have backed away from interest in that -- in that asset, and the reason for it was that as we annualized the effect -- and I -- the effect of PUCA, Public Utility Holding Company Act, on such an acquisition, and we factored into that analysis the -- the current view of the Congress and I think of the government with respect to enforcement and sort of activism, if you will, under PUCA, we decided that the restrictions, the potential restrictions, made that acquisition unattractive.

Okay. Secondly, in terms of the 113 million of PBR, you know, awards that are pending, what's your normal success rate in terms of percentage that gets approved ultimately by the CPUC and you'd indicated there was a large gas one that's coming up here? Can you talk roughly about how you'd expect that 113 to flow through over the next couple of years?

Well, let me -- let me let Ed Guiles talk to that.

Well, we do have -- as Steve mentioned, the 113 number, that's primarily made up at SoCalGas in the gas cost incentive mechanism. We've got pent-up there years 7 and 8, $48 million. Then we have a category that's principally at SDG and E, which is for basic operating parameters, safety, service, and reliability, and then we have a host of awards that we've earned but not yet received in the area of demand-side management.

It's very difficult to predict precisely when we'll get the decisions for releasing those pent-up amounts. And then, of course, as we've filed our cost of service proceeding going forward, in both SDG and E and the gas company, we have recommended and included in our filing performance-based operating objectives at both companies. So it's difficult to exactly determine an amount year by year. For purposes of 2003, we are including in our planning the gas cost incentive mechanisms at the gas company that we've not yet received, and then a typical annual amount for the operating parameters for performance-based rate-making. So that's a -- that's a summary of where we're at.

That would be fair to say then 2003 then includes the $48 million you referenced plus maybe -- and also, say, approximately another 10 or so which is reflective of what you realized in '02?

Yeah, that would be in the ballpark.

Okay. Third, I'm wondering in terms of for our modeling purposes, share counts, '03 and '04, can you remind us when some of your convert issues that you've done convert over and what we should be using for fully diluted share counts going forward?

Well, the year -- the year of conversion is 2005, and the number of shares, of course, will depend upon the market price, and of course I hope it's not too many years.

Okay. I mean so it's out in '05, so '03 and '04 --

It's in '05. Yes, the convert is -- the convert is in '05.

Okay. And one last thing. You talk about how you'll have several hundred million dollars of uncommitted capital available going forward. Given that, you know, the valuation of the stock continues not to -- continues to languish in some respects versus some of your peers, does your credit metrics and your maintenance of your credit ratings facilitate the possibility of equity repurchase in the '04 time frame?

We have no present intention of re-purchasing our equity in that time frame. I mean, put it in the context -- I mean, I would never rule anything out, but you put it in the context of the unprecedented availability of quality assets that would fit our business plan, and the more likely outcome, I would -- compared to that scenario, would be acquisition of assets rather than repurchase of shares.

Okay. Thank you very much.

Your next question comes from the line of David Macarrone with Goldman Sachs.

Thank you. I was wondering if you could tell us what the achieved ROEs were at SoCalGas and SDG and E in '02.

Yeah, hi, David. This is Ed Guiles. SDG and E was right around 18% and at the gas company, I think 16.2.

And as we look forward to '04 and with many expecting a significant rate cut, I was wondering if you could refresh my memory on how you guys overcame a major rate reduction in SoCalGas back in '98 to, you know, still well exceed your authorized return, and talk a little bit about the prospects for additional performance-based rate making in this upcoming rate case, or rate cases.

Well, we do have a margin indexing approach at the gas company from its last PBR, as you -- as you recall, and we've continued to improve efficiency at the gas company. If you look forward, we've suggested, as we've done at SDG and E in a more prominent way in the past, introducing additional performance-based rate-making mechanisms in the base side of the business that primarily are sort of bread and butter safety, customer service, reliability related measures, and those we've put in our case for both SDG and E and for the gas company.

We've been working with labor in that regard to ensure that they're -- they're behind us, as we -- as we carry that forward, and that will be -- be handled throughout the case in the next year.

What would lead you to be optimistic about not seeing a substantial reduction in your achieved returns in '04 from the '02 levels?

Well, it will be a continued challenge. I mean, we have a significant amount of investment in capital in both companies that will principally -- more so at SDG and E -- that will be updating our rate base and earning as we go forward, and then we're -- we continue to drive efficiency in the organization. So that's our challenge.

David, Steve Baum. Listen, tthe big problem for the gas company back in '97, I guess it was, or '98 -- '97 -- was a reduction in rate base. It was -- and so that the -- when you talk about overcoming rate -- rate of return on equity, I mean in effect we -- it was -- the rate of return was on a lower base. Now, the question is, would we -- would we face a similar reduction in rate base in this -- in this case? And we don't expect that to occur.

The conditions that existed in '97 do not exist in 2003, and the kind of rate base that we have been adding and will continue to add in both those companies is what I call bread and butter rate base. You're talking about ordinary describe Boggs facility expend -- capital expenditure, and there are no large lumps, no -- no stranded real estate investments, you know, no power plants that are going to get a disallowance and that kind of thing that historically may have been a basis for reducing rate base in the utility, and the customer growth and reliability criteria of both utilities would seem to suggest that those expenditures are both necessary, ordinary, and proper, and will be properly recorded in rate base.

So the focus is going to be a cost of service and operating performance focus versus rate base this time around?

Yeah. And we expect to get a -- the continuation of the PBR regime, maybe not at the same level of incentive that we have seen in the past, maybe with some reduction of opportunity in terms of targets, but if you look at the O&M portion of the case, the principal drivers in the request for increased O&M are coming out of pension costs and out of -- out of medical or health -- health costs. Both of those are provable transparent increases and are strongly supported by labor. And so we don't expect -- we don't expect this commission to be harsh with respect to those expenses.

Okay. Thank you very much.

Gentlemen, at this time, we have no additional questions. Do you have any closing remarks?

No. Just we're very pleased with the year, and very pleased, I should say. See you in May.

Ladies and gentlemen, this concludes today's Sempra Energy fourth-quarter and year-end earnings results teleconference. Thank you for your participation. You may now disconnect.