桑普拉能源 (SRE) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Sempra Energy second quarter earnings results conference call. As a reminder this call is being recorded. Today's presentation will be available for rebroadcast at 4:00 PM Eastern Time today running through August 14th at midnight. You may access the replay by dealing 1-719-457-0820. Again that number is 719-457-0820. Then you will enter the the confirmation code of the 745256. Once again that confirmation code in 745256. At this time for opening remarks and introduction, I would like to turn the call over to the Vice President of Communications and Investor Relations, Mr. Dennis Arriola. Please go ahead sir.

Thank you and good afternoon or good morning depending upon where you are and thanks for joining us to discuss Sempra Energy's 2003 second-quarter financial results. A live webcast of this teleconference and slide presentation is available on www.Sempra.com under our investor section. I also want to mention that we have added a full balance sheet and cash-flow statement to our press release today in addition to the tables we normally provide you. 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; Don Felsinger, Group President of Sempra Energy Global Enterprises; Ed Guiles, Group President of Sempra Energy Utilities; Frank Ault, Senior Vice President and Controller of Sempra Energy; and Joe Householder, our Vice President of Corporate Tax. On slide two you have our Safe Harbor statement so before handing the call over to Steve Baum for today's financial update, I would 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 Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed to the for 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 would 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. Earlier this morning, we reported net income of $116 million for the second quarter of 2003, or 55 cents per diluted share compared with $147 million in the same quarter in 2002, or 71 cents per diluted share. Second quarter 2002 earnings included a $25 million or 12 cent per share after-tax benefit San Diego Gas & Electric or SDG&E. From the favorable resolution of tax issues from prior years and an extraordinary gain of $2 million or 1 cent per share related to Sempra Energy Trading acquisition of the metals business. Year-to-date, Sempra Energy reported earnings of $204 million or 98 cents per share in 2003, compared with $293 million or $1.42 per share during the first six months of 2002.

The 2003 results are impacted by both the cumulative and ongoing effects of EITF 02-3. For the six months ended June 30, the accounting change reduced earnings by $45 million or 21 cents per share, consisting of $29 million for the cumulative impact and $16 million for the ongoing impact. The let me remind you, these are adjustments which do not affect the timing of the receipt of cash. In 2002, our six-month net income of $293 million included the previously discussed $25 million tax benefit and the $2 million gain on the acquisition of the metals business.

This was a solid quarter for Sempra Energy. Now let's turn to slide 4 and I will review the quarterly performance of each of the business units. Sempra Energy Utilities contributed net income of $78 million in the second quarter of 2003, compared with net income of $102 million in the second quarter last year. Second quarter 2002 earnings included the 25 million tax benefit at SDG&E. Net income in SDG&E and the Southern California Gas Company was negatively impacted by the end of sharing and merger savings, our ability to share in the savings greater by the merger that formed Sempra Energy ended in December 2002.

In the second quarter, SDG&E had earnings up $41 million down from $51 million in the same period last year. And the 2002 second quarter earnings included that $25 million I referred to before. And $3 million related to merger savings. SDG&E's second quarter 2003 net income benefited primarily from the increased margins and increased output at Santa Nova the nuclear plant.

In the second quarter of 2003, SoCalGas earned $37 million, down from $51 million in the second quarter of 2002. The decrease was primarily due to the end of sharing merger savings and higher operating expenses associated with legal costs, principally related to antitrust litigation. Merger savings at SoCalGas in the second quarter of 2002 were $8 million. The two utilities currently have $119 million pretax and performance-based rate making incentives awaiting California Public Utilities Commission or CPUC approval. The commission is scheduled to address incentives for both SoCalGas and SDG&E totaling $66 million at it's scheduled August 21st meaning. We expect SoCalGas to receive $48 million from two-years of it's GCIM or gas costs incentive mechanism and expect SDG&E to receive $18 million in operational performance awards for years 2000 and 2001. The GCIM award will likely be subject to refund pending the outcome of the CPUC border price spike investigation. But we will book that award.

Let me now talk about our cost of service proceeding for SoCalGas in SDG&E. On May 22nd, the assigned commissioner issued a revised procedural schedule with hearings set for this October. No specific dates have been established for a final decision, but it is expected by the end of the first quarter of 2004. In 2002, the CPUC reaffirmed the appropriateness of the SoCalGas GCIM mechanism going forward. Performance-based incentives of an operational nature were filed in the cost of service proceedings for both SDG&E and SoCalGas. These PBR issues have been separated from the cost of service proceeding we expect a positive resolution in 2004.

Now please turn to Slide 5, where we will discuss the results of Sempra Energy Trading. For the quarter trading reported net income up $35 million, up 67 percent from net income of $21 million in the second quarter of 2002. Net income for the quarter would have been $42 million absent the impact of the EITF 02-3. Trading reported earnings of $17 million year-to-date versus $63 million in the first six-months of 2002. On a comparable basis, adding back the $28 million Cumulative Effect and the $16 million ongoing impact of the EITF 02-3, trading would have reported year-to-date 2003 earnings of $61 million. Both trading volumes and margins increased this quarter with significant gains in natural gas and oil trading. Our focus continues to be on a short dated portfolio that converts to cash relatively quickly. As of June 30, unrealized revenues from over-the-counter sources were approximately $378 million. Over the next 24 months, we expect 90 percent of this to convert into cash.

We saw a rebound in customer activity and increased physical trading in all energy commodities. Recently we made progress on several issues before the Federal Energy Regulatory Commission. First, on July 23rd, FERC accepted Sempra Energy Tradings compliance report on price reporting and late last week FERC dropped Sempra Energy and Sempra Energy Trading from the physical withholding probe.

Now please turn to slide six and I will give you an update on Sempra Energy Resources, our generation unit. Resources reported net income of $5 million in the second quarter 2003, compared with $34 million in the second quarter of 2002. The lower 2003 second quarter earnings were primarily related to the requirements of our CDWR California Department of Water Resources contract. As well as startup expenses related to our new power plants. Based on the scheduled increase in megawatts under the contract, Sempra Energy Resources is on plan to meet its 2003 net income target of 55 to $65 million.

Our three new state-of-the-art power plants in Arizona, California, and Mexico are now operational. Together they produce about 1500 megawatts of power to help meet the energy needs of the Pacific Southwest. An additional 625 MW will come online by December 2003 from the second phase of our Mesquite plant in Arizona.

Over the last few months, we received several favorable legal and regulatory rulings. The Federal Energy Regulatory Commission upheld our contract with the CDWR. Rejecting the claims of the CPUC and the energy oversight board which sought to nullify the contract. The California Superior Court also upheld our contract, finding it to be valid and enforceable. The court ruled that we may deliver power from any plant or market source. With respect to our Mexicali plant, we received a positive ruling from a federal judge in San Diego allowing for the continued use of the transmission lines to export power from the plant to the United States. Yesterday, we also received approval from the California Energy Commission for a Palomar Energy Project in northern San Diego. Consistent with our hedging strategy, we will begin construction on this 550 MW project once we have sufficient capacity sold forward. Sempra Energy Resources now has ever 2000 MW online, with an average of 85 percent of our capacity hedged through 2005. And, 82 percent hedged through 2010.

Turning to Slide seven, Sempra Energy International reported second quarter 2003 earnings of $18 million compared to $9 million in the second quarter 2002. The increase was primarily due to the successful resolution of the dispute with an Argentine gas vendor. We also are beginning to see an improvement in the operations of our Argentine investments. We are making progress in our claims against the Argentine government and expect a decision in our bilateral investment treaty proceeding in late 2004.

Now I would like to give you an update on our liquefied natural gas or LNG projects. Sempra Energy has been building an LNG business for the last three years, and we are ahead of the competition, to bring on the next two receiving terminals in North America. On April 23rd, we completed our agreement to acquire an LNG project in Louisiana from Dynegy. We expect the project named Cameron LNG to have the necessary FERC approvals before the end of the year and we plan to have it fully constructed by 2007. In April, we received the environmental permit for our Costa Azul LNG site located in Baja California and expect to receive the remaining two key permits in the third-quarter. Once the projects are complete, Cameron and Costa Azul will provide Sempra with the regasifcation capacity of 2.5 billion cubic feet per day of natural gas, making Sempra the owner of the largest LNG import capacity in North America. We're actively marketing the capacity of these facilities. We hope to announce some long-term contracts later this year.

Slide 8 provide a summary of our earnings for the quarter. Let me review a few items. Sempra Energy Solutions reported net income of $8 million for the quarter. Compared to $5 million in a net income from the same period of 2002. The CPUC's affirmation of the California direct access exit fee had a positive impact on this business. Solutions also signed several new contracts for energy supply and risk management services during the quarter. Earnings from Sempra Energy financial increased to $8 million from $7 million in the second quarter of 2002.

In the parent and other line, after-tax expenses increased from $31 million in the second quarter of 2002, to $36 million the second quarter 2003, due primarily to higher parent interest expense. The net income contribution from Section 29 tax credit in the quarter was $10 million, with $6 million from Sempra Energy Trading, and $4 million from Sempra Energy Financial. Our outlook for the year anticipates contributions to net income of approximately $20 million from the Section 29 credits during the second half of 2003. For a total of 2003 net income contribution of approximately $40 million. The Internal Revenue Service recently issued in announcement regarding the validity of test procedures and results related to Section 29 tax credits. As part of its recently commenced routine audit, the IRS notified Sempra that its intention to audit the synthetic fuel operations of both Sempra Energy Trading and Sempra Energy Financial. Each of these facilities and operations are the subject of private letter rulings that conclude they produce solid synthetic fuel from coal and qualify for the Section 29 tax credits. We believe the IRS will uphold our rulings and allow these credits.

Slide 9 provides a reconciliation of our previous 2003 earnings guidance. And our new outlook for earnings per share in the range of 270 to 290. This new guidance is on a GAAP basis. IT includes the effect of cumulative accounting changes. IT also reflects favorable resolution of tax issues that are expected to more than offset the Cumulative Effect of mandated accounting changes. I want to go over the three non-cash items that are expected to impact reported earnings in 2003. First, we have the 14 cents per share related to the previously identified Cumulative Effect of the EITF 02-3. In addition, in the third quarter 2003, the company will adopt FASB Interpretation No. 46 known as FIN 46 requiring the consolidation of variable interest entities. Sempra Energy has identified to variable interest entities, the synthetic lease at our Mesquite power plant, and an investment in the United Kingdom energy marketing company named Atlantic Electric and Gas, or AEG. This company is similar to Energy America, the electric retail company we have built and sold for profit in 2001. In the third quarter, we will consolidate the synthetic lease and AEG on our balance sheet, adding an estimated $650 million in assets and liabilities.

FIN 46 will also result in a non-cash cumulative downward adjustment to earnings of approximately 14 cents per share, primarily related to AEG. The company is currently in the process of finalizing several tax issues with the Internal Revenue Service, primarily related to utility balancing accounts. We expect favorable resolution of these tax issues which will result in a positive contribution to earnings in 2003 in excess of $75 million. Since the addition to earnings from the resolution of tax issues is expected to more than offset the non-cash effect of EITF 02-3 and FIN 46, we're revising our 2003 reported earnings guidance to 270 to 290 per share. There is no change however in a net income expectations for our business units in 2003. We still expect the base business to deliver in the range of 260 to 280 per share.

I would like now to turn to our last slide. Slide 10. Overall, Sempra Energy remains financially strong. With $325 million in cash and $1.9 billion of committed credit available. During the second quarter, we extended our $500 million revolving line of credit for Global Enterprises by an additional two years and renewed our $500 million credit agreement at the utilities for another year. We are in the process of extending our $950 million credit facility at the global parent and should have it completed this month.

Capital expenditures and investments year-to-date are 575 million. Based on our current plans, CAPEX and investments should be approximately $1.2 billion. Cash flow from earnings plus depreciation and amortization and deferred taxes should approximately equal CAPEX and investments for 2003. In conclusion, our solid second quarter results demonstrate that we are on track to meet our targets for the year. We've made significant progress in illuminating several of the legal and regulatory uncertainties surrounding our business. We're continuing to focus on liquefied natural gas an important part of our growth for the future. With that I will open the call for questions.

The question-and-answer session will be conducted electronically today. (CALLER INSTRUCTIONS) Donato Eassey of a Royalist Research.

Hi Steve and everybody. Congratulations on a decent quarter. Your marketing segment really had a stellar quarter. We're hearing a lot out there about the marketers with staying power really have an opportunity to gain a considerable amount of market share and certainly by the physical statistics being gas up 47 percent, electric up about 124 percent, and liquids up another six percent, not to mention the earnings performance, I'm just curious -- are we going to see an increase in VaR or are you going to stay in this 9 to $10 million range where you're at? How you feel about it going forward, because there was a lot of indigestion earlier in the year but now it appears that things are back on track?

No, we're not, the VaR of our business is not increasing. That has been a very consistent Value-at-Risk both in our trading operations and frankly in our other operations through, over several years. That is a measure that we keep very close tabs on. We're not increasing our risk in order to chase earnings.

Thank you. Good luck the rest of the year.

John Edwards of Deutsche Bank.

Hi. Decent quarter given all of the controversy on trading. You also, I noticed your international was above, given that your resolution of disputes in South America. Is there are a sustainability issue here? Can we expect a higher earnings out of international from South America for the rest of the year?

I think the answer to that is that the operations down there are tied to the -- pretty much tied to the well-being of the economy. There is a slow improvement that we are seeing in Argentina. The other side, outside of Argentina the other South American operations are doing just fine, particularly in Chile, Peru as well. The gas supply disputes were based on whether or not we had to pay in dollars or we could pay in pesos.

It turned that we can pay in pesos which is very valuable to us. Since all of our expenses there are peso denominated, we're not caught in Argentina in a situation where we have dollar expenses against peso income. So, I think as the economy improves modestly in Argentina we should see improved operations, and we're proceeding on our claim under the bilateral investment treaty which we would expect to have a result in 2004.

Okay. Great. On the utility, it appears for the first half, it looks like you ran a little bit behind what the guidance was at the earlier part of the year. Perhaps I'm not understanding that correctly. Maybe you could comment on that?

I would not characterize it that way. The wild-card here, if there is one, is the timing of awards that we receive under our performance-based ratemaking mechanisms. As I mentioned in my discussion, we do expect to get significant awards that are scheduled for this month under the GCIM and several other awards. And so, I think you'll see for the year that we're going to be pretty much as we projected.

Okay. You mentioned the interest expense were a little bit higher for Parent and other. Could you give a little more color on that given the low-interest rate environment that we are in?

Bear in mind we did a financing during the quarter of 400 million in which we went from using commercial paper to finance our power plant construction to putting in a facility that is a ten-year facility. But Frank Ault, our Controller, can address that in detail.

Steve I think you hit it right on the head there. Even though the interest rates are very low right at the moment, to take into consideration expansion of the business, we have issued that 400 million loan earlier this year and we do have interest expense associated with that. That is exactly what is causing it.

Although that came in at a pretty good rate, I think it was right around six percent which was very pleasing to us.

Any change to the tax rate for the rest of the year?

Not -- our anticipated tax run rate is just about as we have said, in that 17 to 20 percent range. Obviously, these favorable tax resolutions that we expect in the third quarter will impact the effective -- will impact the amount of cash taxes that we pay, but on a projected operating basis, our rate will be in the 17 to 20 percent.

Okay. Great. Thanks a lot.

Teresa Ho with Banc of America Securities.

Thank you. Just to follow-up on the South American resolution. What was the impact from the resolution? Is that really just the 9 million increase?

The impact of that basically was the change that you saw for the quarter. It was very close to that same number.

As far as that amount, I'm assuming that is nonrecurring. Is that amount part of your guidance, your operating guidance of 260 to 280?

I think so. We had anticipated a favorable resolution of that issue. It is ongoing in the sense that -- the turnaround of the reserve is not, but the effect on our expenses is an ongoing effect.

Okay.

They are .

Okay. Just moving on, with the FIN 46, what is the leverage after the impact of FIN 46?

I guess that is a balance sheet question.

It was obviously a pro forma you said in your notes about $150 million of assets and liabilities, that will have some leverage impact on us, I have not done the actual calculation on a pro forma basis to see what that would be.

The only thing I would add to that is that in connection with of our discussion with the rating agencies, they have always looked at the synthetic lease and the associated debt when they evaluated us, so in terms of rating impacts, I don't consider this to be something they would consider.

Okay. It is always debt recourse?

Effectively yes.

Just two more questions if I may. On the LNG, where are you in terms of obtaining supply?

We're in the middle of a number of discussions and as I mentioned in my remarks, we would hope to make some announcements about supply in the third and fourth quarters.

Okay. For supply, because I noticed that several trains have already been picked up by others.

Let me just say that there is a -- are a number of discussions underway which would range from simply marketing capacity to taking the commodity at a discount to index, and we are in a favorably position because through our trading company, we can offer alternatives for marketing to suppliers that may not have that ability themselves. Some of the large oil companies of course can do that. But, other producers lack that capability. We offer that service.

My last question, then I will let somebody else to get on here. Your comments on the synthetic fuel, and the IRS, you seem to be quite confident in the resolution there, and I'm just trying to get a sense of where that is coming from?

Let me turn it over to Joe Householder, our Vice President in Corporate Tax and he will give you a little bit more color on that but I would say that we are confident, yes.

We believe very strongly that because we have private letter rulings on each of the facilities that we operate, that the IRS will not try to disallow these credits because there have been numerous discussions going on with the IRS in Washington D.C., and they have basically told the industry, so long as there are no material misrepresentations in the private letter ruling process, that they will not revoke the rulings and all of our outside counsel that have worked on these rulings are confident that there were no material misrepresentations.

One last thing. How much of your guidance, I guess in '04 would be taxed in-tax from synfuel?

About 20 cents.

Thank you.

(CALLER INSTRUCTIONS) Paul Patterson of Glenrock Associates.

Good morning. Just a question on depreciation here. It looks like it was down $3 million for the quarter, and I was wondering what drove that? Because you got a growing business and maybe I missed it on the call?

It is largely driven by the affordable housing or section 42 investments we have it Sempra Financial. In the period we have some adjustments there to a couple of those investments, we have 1300 individual properties depending on how those properties are, some of them get into foreclosure and have other difficulties, so we will have some unevenness to the depreciation and we may have to occasionally adjust that. So, what you saw there as a slight decrease in the second quarter this year would not the anything we would expect to see going forward. We would anticipate based on investments that we're making and the power plants coming on in the second half of this year that you would see a increase in depreciation expense going forward.

How much was the actual Section 42? What was the impact of it and how much did it drive down if you were isolated, it was probably more than $3 million because your run rate would be going higher I would think?

The effect in the second quarter was $9 million from the normal run rate. From Sempra Energy Financial.

Does that benefit net income on a pretax basis?

That is on pretax.

So that would be something that was sort of unusual for this year, is that right?

Yes. We have a lot of properties so it is hard to predict what will happen with each of those properties going forward, but absent that, we would have been up about 6 million in depreciation in the second quarter and certainly as these power plants went on in June it, like Steve talked about, we will have a substantial increase in depreciation for the rest of the year.

That is very helpful. Also in terms of the merger synergies which you guys had in 2002, could you remind us how much you benefited from that and I guess in terms of how much will go away in 2003 now? Obviously you mentioned in the quarter I'm just trying to get an idea about how much the annual impact of merger synergies will be going forward in 2003?

We had in the merger decision the commission had established that the total savings were about $124 million. This excludes, this is after amortizing the cost to achieve. And basically up through the fifth year, we were able to take half of those. If you take really the impact of the 124 tax affect in the 80 million range, so in the past about half of that as flowed through and about half went to the customer. This year it is all flowing through, so we're going to see an impact on after-tax basis this year, somewhere in the 42 to $43 million range.

And that would just be isolated to this year, we would not have anything in '04? Right.

Again there will be no delta for this issue between '02, '03 and '04, because we will in fact be giving 100 percent back this year. In the cost of service which we will get a decision on next spring. That will of course do away with the savings and they will be embedded in normal rates.

Just to clarify, the last question that Teresa I think with asking on the 20 cents a share in '04, is the estimated tax benefit from synfuel, total benefit I would assume both taxes minus the cost of plans. In 2003, is it noticeably different?

No. I believe Steve in his comments said that we have about $40 million on an after-tax, on a per-share basis that is about 20 cents.

I just wanted to clarify that. That's very helpful. Thanks a lot.

Paul Debbas of ValueLine.

I have a couple of questions. First, is there any change in your '04 guidance?

No.

What are your current thoughts about the dividend?

Let me start out by saying we have no present intention to change our dividend policy but I will tell you that we have had quite a robust discussion at the board level concerning the dividend, and the new and greater financial efficiency of paying a dividend. If you look at our projections that we put forward in terms of CAPEX and cash flows, that we have put out forward at our analyst conference, we are essentially as we have mentioned even today in balance for this year, and the discrepancy does not begin to increase. That is, the excess of cash flow to CAPEX does not really begin to increase until 2005 and beyond. So, because we have identified investments that we are going to make, right now there isn't compared to plan really any access cash that we would pay out of earnings per dividends. Now having said all that, we are on the lower end of a scale of payout ratio, if you compare us generally to the utility industry, and as our yields decline, I think we are going to be mindful of our position with respect to the investor set that we have. I think in my view, this is a personal view, is that a dividend increase would be neutral to slightly beneficial with respect to the profile of our investors. So, were going to continue to think about this issue and continue to discuss it, but currently we have no present intention to change our policy.

Thank you.

Michael Milarkey Marquis Investment Management.

I would like to go back to Donato's question earlier. Specifically marketers with staying power. What position in the industry do you see yourselves occupying? In other words, when traders are ranked from 1 to 100, what ranking would you be comfortable having Sempra at?

I have to parse this question, because I think they're a number of cuts one would want to take at it. First of all, I consider us to be ranked right up at the top in terms of the liquidity of our business. That is the amount of cash that we generate, and the timing of the generation of that cash. We have a very short duration book generally speaking. So, when you see our earnings, you're seeing cash. And you're also seeing a significantly lower risk because of the short duration of the book, so I think from a risk profile in that sense, we're right up at the top of the industry. I would say with respect to our Value-at-Risk, which indicates another price risk, we are probably right at the top in the price risk category as well. In terms of where we fall in the spectrum of type of trading business, we are essentially a customer based business. We are 70 percent of our business is physical commodity sales to customers, and that distinguishes us significantly from the financial players like the banks who are really not in the physical business, and distinguishes us significantly from companies that have a long electric portfolio that they have to manage. Our trading company does not have assets. Sempra does but the trading company does not have assets that represent long unhedged positions. Or short long-term short positions for example fuel supply. So, it is a different kind of business, customer-oriented business. So, I am not sure that we have a really very many peers in that sense in which to compare ourselves. Now we're a major player in a number of commodities, and for example in the natural gas business, we are one of the I think outside the major oil companies, we are the largest seller of physical natural gas, and that is a position that we have come up to not because we tried to claim credit for those things, but that has been a natural outflow of the nature of our business. We just were recently ranked number one in customer service by a leading publication. So, let me put this way. I don't really care how we stand against others. I care about how this business is for us, and to us it is an essential engine to Sempra's success and it will be a major contributor to our success in LNG.

My second question is, you have negotiated an industry debicle with reasonable elegance. There are now a lot of assets available at theoretically dirt-cheap prices. When we look at Sempra Financial and 1300 individual properties, affordable housing properties, does it make sense to say shift the emphasis from affordable housing to investing in energy assets that might be available at rock bottom prices? Given the fact that you have done so well when so many of your peers got crucified.

First, let me say that we are not increasing our position in the affordable housing market. We're going to let that business at least the current intention is to let that business runoff over the life of those investments. Clearly you are correct in identifying what we think we agree with you as a large opportunity in currently in our industry. But, I just want to emphasize we take a very disciplined approach to making investments, and as you may have inferred from my remarks earlier, and I have said this to investors rather consistently, we will not engage in speculative merchant investments without a hedging strategy in place around them. So, with respect to the many power plants that are for sale, in the United States, we have to come to the conclusion that we would have a hedging strategy with respect to them. That is the way we're looking at these investments and we continue to look, but we're going to do that on a very disciplined basis.

Last question. At the end of the day, do you think you'll actually make any acquisitions in terms of the power plant?

I hope so. We have formed, I guess we call it a fund, a partnership to make such investments where we can lever our equity and use our operating expertise and we're looking at a number of opportunities and combine that with our trading expertise on the fuel and take-away side. I would expect that we will make some investments but again they have to meet our rather stringent criteria.

Thank you very much.

Doug Christopher of .

Thank you very much. I just have a two quick questions. Regarding the LNG Plant, in Baja, we are still, are you expecting a permit by the third quarter. Is that still in 2006 completion?

Yes. With respect to the permits, la Commission de regulation de l'electricite or the CRE is the permit issuer for Costa Azul facility. It has been well satisfied for sometime with all of our filings and is in a position to issue the permit. Recently there have been a two lawsuits brought that have resulted in what in Mexico called which Amparos which are similar to a restraining order. That are not filed against us, they were filed against the CRE and by some landowners in the area. One of them has already been dismissed, we would expect the other to be dismissed rather promptly, but while those little bit of sort of ankle biting legal wrangling is going on, the CRE is delayed issuing the permit.

Thank you. The last question I have is just with regard to trading you mentioned that 90 percent of the approximate $378 million cash over twelve months. 24 months?

Yes.

Does that fluctuate much at all? What is the lower-level? Is it seasonal? Looking out 12 to 24 months? Is there a range, is that 90 percent usually a --

That has been a fairly constant number. But, the thing that I find quite good about this business is that by and large you can look at our reported earnings and know that they are cash. We are not in a situation in which the cash is lagging behind the reported earnings. Now, there are lots of ways to look at that. Sometimes if you have more cash in the reported earnings that could mean a shrinking business, but we have constrained the amount of capital available to the trading company at about the level that it has been running around $1 billion of capital deployed in the business, and we don't intend to increase that until Sempra itself grows or we increase it as Sempra itself grows. So, this is a self-imposed limitation. So, what you're seeing in our earnings and earnings projections are pretty much equivalent to cash flow. At a relatively steady state of growth in terms of deployed capital with the growth of Sempra.

Thank you very much.

(CALLER INSTRUCTIONS) Michael Goldenberg of Luminous Management.

I just wanted to ask a quick question. Sempra Energy Resources, $5 million for the third quarter, I'm sorry for the second quarter, did that have something to do with FIN 46? Is that where FIN 46 came through?

The answer to that is no. Categorically no, but let me ask Don Felsinger who is our President of Global Enterprises in which resources resides to comment on the earnings of the resources unit in the CDWR contract.

Let me start by first saying that we provided guidance that Sempra resources will earn between 55 and $65 million this year and we still expect that to take place, as a matter-of-fact we're looking for that unit to come in at the high end of that range. The reason for the earnings in the second quarter of $5 million is strictly tied to CDWR contract. It is the volumes we have sold and the prices we sold at under prior arrangements. Now that our generation plants are coming online, we're selling at lower margins but higher volumes. Those plants just came online and so you'll see in the second half of the year this business unit getting back to its projected year end target for earnings.

So, where does FIN 46 come in at. What is the ongoing affect of FIN 46?

The FIN 46 adjustment comes in with respect to a business we have in Britain called Atlantic Electric and Gas. And it is a third quarter adjustment, we are projecting it now. It is not in the second quarter. It is a 14 cent, third quarter adjustment caused by the consolidation of Atlantic Electric and Gas into our reports and has nothing to do at all with our domestic operations in the U.S.

Okay. But is that going to be an ongoing effect since the lease has been reconsolidated?

The Atlantic Electric and Gas will have the onetime adjustment that Steve has talked about in the third-quarter. Basically Atlantic Electric and Gas shows up on our financial that you see at summary level by business unit in parent and other, it is not in the resources or in our international unit. There will be a slightly negative impact on an ongoing basis for the second half of the year compared to what we had an our original plan. But certainly would allow us to stay within the original 260 to 280 range that we had.

Okay. One other question would be, now that you have one CDWR ruling, and you still want to have a good working relationship with California, it seems the power plant is a good sign that you have working together. Are you planning to maybe restructure that contract or have they given up on it, any updates there given that you guys have the upper hand now?

I wouldn't say, I don't like to characterize our position that way. We have remained open all along to revising the CDWR contract with the state. In order to accomplish what we have identified as being maybe as much as $1.5 billion of savings for customers in California by revising the nature of the contract from being a take-or-pay energy contract to being a capacity based dispatchable contract, and now that the CDWR has reposed our contract in the hands of Southern California Edison Company for administration, it is even more clear that their load shape and their requirements don't fully match the terms of the contract which after all you will recall was entered into with the state when the state was entering into 40 or so contracts for a full state supply. When you take you pull out of that one contract and assign it to one service territory, no one would really expect to have a perfect match. We would be delighted to discuss reforming that contract. On the other hand, there are many other issues that we have with the state, including some rather large class action type litigation and other things which are also concerned with benefits to California customers. So, from our perspective now, we're happy to try to find these $1.5 billion or more in savings which doesn't really affect the economics tor us. But we really need to ramp up a number of other issues that we have with the state and I think that there is a wonderful opportunity for the Attorney General and for the Public Utilities Commission and the CDWR to enter into a settlement with us which would bring these benefits to everybody and get a lot of the controversy of the energy crisis behind us.

Okay. Thanks.

(CALLER INSTRUCTIONS) Sam Brothwell of Merrill Lynch.

Good morning. Just a question on the trading business. The breakdown of your margin. Is it safe to assume that most of what is in other is the Section 29 tax credit?

Yes, go ahead Frank.

I would just like to respond exactly that way. The bulk of the body is the Section 29 credits.

Do this come in fair, because I think you alluded to about $40 million over the course of the year? Are those somewhat lumpy in quarterly allocations?

No they are not very lumpy, but they are not all at Sempra Energy Trading. We have one investment there, we have the other investment in Sempra Energy Financials, so we do have credits coming into both of those business units.

So, if I'm looking at other of $27 million of margin, what else would be in there?

Remember that is margin so that is on a pretax basis, so that is grossed up. That is not the net income coming from that particular operation.

Got you. Okay. Thanks.

Michael Readinger of Satellite Asset Management.

Good afternoon. You may have already mentioned this but I don't think you covered it. On the LNG Terminal at Costa Azul there was a recent article from three of the oil majors mentioning that they're looking to contract regasification at that site. Is that your plant or can you say if that is your plant and if not, can you tell us if yours is the only plant at that site?

There are several developers that are looking to develop sites in the same area that we are in Mexico. And it is safe to say that from a permitting standpoint that we are ahead in terms of all of the permits necessary to build and I think that people that have gas are looking at the capacity are having discussions with all of us.

Okay. Thank you.

Bob Sullivan of UBS.

Just a couple of clarifications. On the solutions business, you mentioned that they benefited from affirmation of exit fee. What was that exactly?

The backup and think about the way the state went after the energy crisis the CDWR bought a very large quantity of energy in terms of long-term contracts. Needs to recover the cost of that energy over the life of those contracts. So, the issue then is if an entity contracts away from the local utility, how does the state collect the revenue? That would be lost by that exit from the local utility whose rates are recovering the costs for the CDWR? So the Public Utilities Commission after a number of hearings set a fee that would be charged to these entities that already have existing bypass contracts or would enter into new ones or renewals to in effect to compensate over time for the amount of their share of that theoretical share of that purchase of energy that was made by the CDWR. There was a lot of controversy around how much that exit fee was going to be, and it ranged up to rather high numbers. A high number would be very discouraging to the bypass and would kill off a number of opportunities that companies had to benefit from a direct contracting with generators. After the dust settled, it was in the $2.70, I think it is, 2.07 cent, and so that is the fee that is being charged for this direct access. It is called in exit fee, but it is a fee that is an ongoing charged by the local utility as part of its delivery service in connection with energy that has been bought from a third party not from the utility. The fact that it stayed relatively low has not killed off the existing direct access business, and that was good for Solutions because Solutions as a lot of that business. And that is why I mentioned it, it is kind of a long answer, but that is why I mentioned it.

That's helpful. Thank you. On the corporate and other I'm still a little on the increase from the first quarter run rate from 24 to 36 and I think your guidance that your meeting was for right around 95 to 100, which I assume at that point you were probably aware of the bond offering. Is there anything else in there to be aware of? What is the run rate now?

The run rate was a little bit higher in the second quarter. We have some intercompany consolidated issues that are timing issues that we had in the second quarter that go away in the second half of the year. So, we're up a little bit because of that, we are up a little bit because of the interest which was in our planned numbers. I would think that if you looked at the run rate for the first half of the year, we will be below that for the full year and should be back in line with the guidance that we previously gave.

Great. The $48 million you expect for the gas cost adjustment. You mentioned that you expected a portion of that or all that would be reversed?

Let me turn it over to Ed Guiles who is President of Sempra Energy Utilities.

This is the gas cost incentive mechanism for SoCalGas we call GCIM. It represents years seven and year eight. That is $48 million pretax. And I want to reiterate that the commission has reaffirmed the mechanism going forward. The issue is on the agenda for the CPUC meeting August 21, and so we expect that to be voted out.

The comment you made about the reversal? Am I missing something?

I think the comment you heard us talking about is we anticipate that the commission may approve those subject to refund. The issue is if it is subject to refund, because of the investigations that the state has going on on price of gas and all of that, we would anticipate that we would go ahead in record the award that has been given, and we will separately evaluate if there is any exposure at all on this other issue.

So you would not take a reserve right away, you would book it and see what happens?

We had no basis right now to put a reserve on it. Now, if we look at the final wording of the commission decision and that may change our mind at point in time, so, right now we're doing it on what we think may be that decision, obviously the exact words of the decisions could change the outlook.

Okay. Great. Thanks.

Michael Worms of Harris Nesbitt.

Good afternoon. A quick question for you. On Sempra Energy International, can you tell us what your guidance was for the year?

Yes. The guidance for 2003 for International was 25 to $30 million.

So then I assume that means you are not looking for a lot of contribution going forward? You already have 25?

The 2004 guidance that we gave was 40 to 50.

Okay. Fair enough. Can you quantify for us what the exit fee was in Solutions, how much that contribute?

It was 4 to $5 million after-tax.

Thank you.

John Edwards of Deutsche Bank.

Just a follow-up on that. On the run rate then, in Parent, and other you had given the guidance was -65 to -35, and so that is then, that is still a good run rate going out for the future?

One thing to be very careful about in the earnings outlook that we gave, the run rate of -35 to -65 includes Sempra Energy Financial. We have left that in so when you look at it compared to what we had in those slide you show a couple minutes ago were we broke out Sempra Financial and Parent and other separately, the guidance we gave had those two combined.

Okay.

Basically, if Sempra Energy Financials run rate is going to be, say in the 30 million or so range, then you would add that back in to look at Parent and other.

So - 65 to -100.

Yes.

Thank you.

This does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Arriola for any additional or closing remarks.

Thanks. Thank you very much for joining us today, hopefully, you got some good information. If you have any follow-up questions you can obviously get a hold of us at the Investor Relations Group you can give me, Karen, or Bonnie a call. Have a good day and we will talk to you soon.

That does conclude today's conference. Again I would like to remind everyone that you may listen to a rebroadcast of this conference at 4:00 PM Eastern time today through August 14th at midnight. By dialing 719-457-0820 and enter confirmation code 745256 on your touchtone phone. Once again thank you for your participation have a great day. (CONFERENCE CALL CONCLUDED)