桑普拉能源 (SRE) 2004 Q1 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conference facilitator. At this time I would like to welcome everyone to the Sempra Energy first-quarter 2004 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. (Operator Instructions). Thank you. Mr. Arriola, you may begin your conference.

Thank you. Good afternoon and thanks for joining us to discuss Sempra Energy's first-quarter 2004 financial results. A live webcast of this teleconference and slide 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 Ault, Senior Vice President and Controller of Sempra Energy.

On slide two is our Safe Harbor statement. I would like to remind you that call contains forward-looking statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Reform act of 1995. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. These risks, uncertainties and assumptions are described at the bottom of today's press release, and are further discussed in the Company's reports filed with Securities and Exchange Commission.

In addition, some of the financial information we will be discussing today may contain non-GAAP financial measures. In those cases, we will reconcile those financial measures to the most directly comparable GAAP figures. Before turning the call over to Steve, I'd like to remind you that Sempra Energy will be holding its annual analyst conference on June 2nd to the 4th in La Jolla (ph) California. You should've received information through e-mail by now. If you need additional information please feel free to contact any of us on the Investor Relations team.

With that, I would now like to turn the call over to Steve who will begin with slide 3.

Thanks, Dennis, and thanks to all of you on the call for joining us today.

Earlier this morning we reported first quarter net income of $197 million or 85 cents per diluted share -- more than doubled last year's quarterly earnings of $88 million or 42 cents per diluted share. Overall, it was a great first quarter for us with our trading and generation units, as well as our California utilities, performing very well.

First quarter 2004 results included a $24 million loss related to the discontinued operations of Atlantic Electric & Gas, a United Kingdom based retail energy marketer, which we sold earlier this week for approximately $160 million.

Sempra Energy's first quarter income from continuing operations was $221 million or 96 cents per diluted share. This compared with first quarter 2003 income from continued operations of 120 million or 58 cents per diluted share -- which was before a $3 million loss related to Atlantic Electric & Gas discontinued operations. As well as the negative impact of a $29 million cumulative adjustment related to the implementation of accounting principle EITF 02-3. Now let's turn to the individual business units, starting with slide 4.

Net income for San Diego Gas and Electric rose to $50 million in the first quarter 2004 from $45 million in the year ago period. The increase resulted from higher transmission and distribution revenues, partially offset by the elimination of the incentive rate mechanism for the Company's 20 percent interest in the San Onofre Nuclear Generating Station.

Southern California Gas Company reported first quarter net income of $56 million compared with $58 million in the same period of 2003. First quarter 2004 results include a $6 million pretax award for year nine of the gas cost incentive mechanism, which was more than offset by higher operating and depreciation costs.

Let me spend a moment on the status of several utility regulatory proceedings.

On December 19th, we filed settlements of our cost of service rate case with the California Public Utilities Commission. The SoCal gas settlement is an all party settlement, and the SDG&E agreement is a multiparty settlement that includes the CPUC's office of ratepayer advocates. The final resolution of these cases is expected in the second quarter 2004, with rates retroactive to January 1, 2004.

Earnings for the quarter for both SDG&E and SoCal gas were recorded based on the terms of the proposed settlements. During the quarter, SDG&E received positive proposed decisions from a CPUC Administrative Law Judge and the assigned commissioner, supporting the utilities long-term electric resource plan filed in October 2003. The plan provides for the purchase of a mix of local generation assets -- including renewable energy and a new, 550 megawatt power plant being built by Sempra Energy Resources for SDG&E in Escondido, California -- as well as energy conservation initiatives.

Both proposed decisions recommend that the commission approve all five of SDG&E's suggested electric resource contracts, and the alternate decision by the commissioner includes a 50 basis point additional return on equity on portions of SDG&E's generation investment. The CPUC is expected to issue its final decision in May.

Please turn to slide 5 and we will cover our energy trading businesses.

Sempra Energy trading reported first quarter 2004 net income of 59 million. In the same period last year, the Company earned $10 million before the cumulative impact of accounting principle EITF 02-3. All of the trading segments posted margin increases this quarter, with a significant increase in metals trading profits and an upswing in European power and gas trading.

The European wholesale market is very important to us and we see growth opportunities there.

Sempra Energy trading has recorded 21 consecutive profitable quarters, excluding the first quarter 2003 negative cumulative effect of the EITF 02-3 implemented in January of last year. This customer focused business excels as a result of solid risk management and a diverse portfolio of products. The tradings daily value at risk -- or VaR -- had a 95 percent confidence level, average $5.7 million for the first quarter.

The business focuses on shorter-term transactions, where it can validate market prices. Approximately 69 percent of its unrealized revenues as of March 31st converts to cash within the next twelve months -- and over 80 percent within the next 24 months. Please turn to slide 6.

First quarter net income for Sempra Energy Resources rose to $37 million from $10 million last year, due to increased power deliveries to the Company's portfolio of supply contracts.

During the quarter, Resources sold 4,477 million kilowatt hours of power compared to 1,403 million in the same period last year.

During the quarter, Sempra Energy announced a 50-50 joint venture agreement with Carlyle/Riverstone an energy and power focused equity fund, to acquire American Electric Power's 632 megawatt coal-fired Coleto Creek power station, and nine other Texas power plants, for 430 million.

Sempra Energy resources will provide asset management services for the joint venture, including operation of the plants. The Sempra/Riverstone partnership is working closely with several interested banks, and we expect to obtain project financing for a substantial portion of the cost of the acquisition.

Based on the preliminary indications we have received from the banks, Sempra Energy's total equity investment for this acquisition should be less than 100 million -- which fits well within our capital budget for 2004.

We're also finalizing off-take agreements and plan to make announcements either prior to or at the closing. The acquisition is expected to complete in July 2004, and be accreted to earnings. Now let's turn to slide 7.

Sempra Energy International and Sempra Energy LNG, on a combined basis, earned 17 million in the first quarter of 2004, up from 7 million in the year earlier period. The increase stemmed from improved results from the Company's South American operations; and an $8 million contribution from the favorable buyout of the future obligation related to the Cameron LNG project.

Sempra Energy LNG last week announced plans to develop a new liquefied natural gas -- LNG, that is -- received (ph) near Port Arthur Texas, with a daily processing capacity of 1.5 billion cubic feet of natural gas. The Company initiated the regulatory review process for the terminal with the Federal Energy Regulatory Commission on April 21, 2004. The $600 million terminal could begin operations as early as 2009.

The Port Arthur project joins two other Sempra LNG received terminal's under development in North America. Energía Costa Azul in Baja, California, Mexico and Cameron LNG near Lake Charles Louisiana.

Both of these projects are expected to commence construction later this year, and begin operations in 2007.

We're finalizing the supply and partnership agreements our Energía Costa Azul facility in Baja, California. In addition, we expect to announce commercial agreements for our Cameron facility in the very near term.

In mid-April, we also announced our plans to develop a natural gas storage facility in Louisiana. This project is strategically located, allowing for interconnections with up to nine interstate and intrastate pipelines, providing customers additional natural gas storage options.

This project will operate under the name of Pine Prairie Energy Center and will be close to Henry Hub, the nation's largest natural gas trading center. Pine Prairie is targeted to begin operations by the fourth quarter of 2005, with a total working capacity of 24 billion cubic feet of natural gas.

Please turn to slide 8 for a summary of our business unit results.

In the first quarter, our retail marketing group, Sempra Energy Solutions, recorded a loss of $4 million. Solutions was breakeven for the same period last year before the mandated change in accounting principles. The variance is primarily due to lower commodity margins. We still expect Solutions to provide a positive earnings contribution for the full year.

Net income at Sempra Energy Financial, which contains section 29 and section 42 tax credits, was nearly flat at $10 million in the first quarter compared with 11 million in 2003. Expenses at Parent and Other were 4 million in the first quarter compared with 21 million in the same period of 2003. This favorable change is due to income tax benefits of 16 million -- primarily related to certain prior year state tax issues.

For the quarter, Sempra Energy's effective tax rate was 21 percent and we expect it to be approximately 20 percent for the full year.

Before opening for questions, let me just say that I'm very pleased with our results at Sempra Energy this quarter. Our utilities, generation and trading businesses are performing extremely well, and our California utilities continue to make progress on important regulatory matters. We're also bullish on our LNG opportunities.

Based on our strong first quarter results, we will update our 2004 earnings guidance at our analyst conference in June, and provide you with additional information by business segment.

Now, I will open the call for questions

(Operator Instructions). Leslie Rich (ph), Banc of America Capital Management.

Steve, of your trading earnings, just wondered what percentage of that, or what dollar amount of that, was mark-to-market? You know, non-cash?

Let me just -- Frank, do you have that maybe?

The issue really there is of the gain -- what you have happened during any period of time is you have new contracts that are -- that are mark-to-market. But you also have (indiscernible) prior mark-to-market contracts that have now been realized and closed out for the cash flow (indiscernible). So, from a cash perspective, you can have even with an increase in earnings and maybe some new mark-to-market contracts coming out, you can still have piles of cash coming in the business unit.

I don't have a split out of the current amount of outstanding recognized revenue there, that related to the current versus prior period. We do have, if you were to look at the table on the earnings release table, (indiscernible) in back, you'll see in the middle there we have unrealized revenue. And you can see as of March 31, the value was 327 million. But I don't have available right now how much of that came in in the third -- in the first quarter of this year.

Okay. I see.

This Steve Baum again -- the only thing, generally speaking, we have been consistent in our run rates realization. And I think we had that in my prepared remarks -- the amount of some 60 some-odd percent that comes in within one year. And about 80 percent within two. I don't believe there's any significant change to our -- that general structure for the quarter.

Okay. And then, in trading, you pointed to metals and Europe being particularly strong -- do you have any comments on how U.S. power and gas markets were during the quarter?

Yes. Well, U.S. gas market was strong during the quarter. I don't have the power market numbers. Just a minute.

This is Frank Ault, again. We were up in U.S. gas -- basically flat, I should say, in U.S. gas I should say in U.S. gas compared to the first quarter of last year. We were up in the U.S. power market in the first quarter of (indiscernible) compared to the first quarter of last year -- even though we were flat, basically, on the U.S. gas is still was the largest component of the domestic margin.

Okay. Then what is the cost of that storage facility that you have announced -- the Pine Prairie?

This is Don Felsinger. It depends how we develop it. It can develop in stages. But if we were to develop it all the way out to the 24 bcf capacity that we think will be its eventual size, it could be slightly less than $200 million including the working gas.

And that -- you would plan to commence construction this year?

We just acquired the site and the rights. We're going through a process now of getting indications of interests from customers and it would be our plan -- assuming those interests are as positive as they have been so far -- to start construction later this year, and have it operational next year.

Okay and then finally, on solutions, what is your outlook for that business? Would you view the quarterly loss as an anomaly? Or have your (multiple speakers) waned or?

I think as I said in my prepared remarks, that we expect that business to be positive this year. As we said in previous calls and our analyst conferences, we're still positive about that business. It does not consume a great deal of capital on its current plan. And we think the conditions are -- in the market are there for that business to do well. Go ahead, Don.

I would just say -- Don Felsinger -- as you go back and look at the performance of this business the last two years, the first quarter has always been the lowest performing quarter in the year. We're seeing nothing unusual this year. Deal flow that we current have and are working on gives us every indication this business unit will earn money this year.

Thank you.

Misha Khan (ph), SAC Capital (ph).

Congrats on a nice quarter. Can I just go to the utilities? I guess you had forecasted utilities to be down this year versus last year. And now with the settlement done, with flat results coming in, can we see the utilities holding up to similar results as last year?

I don't think you should make a projection based on this quarter with the utilities. But, Frank, maybe you want to add something to that.

Last year, the utilities had an extraordinary good year. They earned 543 million. Included in that were two very large unusual items. One was the settlement of some cash issues that helped them significantly in the fourth quarter, as well as the recognition of about a $65 million gain on some contracts that had been in dispute with the California Public Utilities commission. That occurred third quarter of last year.

So, those would not repeat this year. So I would not anticipate them being at 543 million again as they were last year. But I think the first quarter is a pretty good indication of the performance we have been anticipated from the utilities over the course of the year.

And the results of the utilities for the first quarter represents the -- in effect -- the implementation of the settlements that have been entered into, but not yet approved by the Public Utilities Commission. And Ed, you might want to the (multiple speakers)

This is Ed Guiles, I would just add a couple of things. Reflective in the first quarter, of course, on the electric transmission side at SDG&E is the FERC settlement that we finished last year and is now put in place. And when you really look at our overall business, we have related to the cost of service proceeding we have a memorandum account in place. And we have basically the all parties settlement at the Gas Company and the multiparty settlement at SDG&E.

So as we move forward, think of those settlements, assuming they get approved by the commission, providing the base revenue that we need -- year-to-year it's about an $86 million increase. And this will, in effect, offset the ice up as it relates to San Onofre going away, and the true up of the rate base at SDG&E in particular. So it gives us a good foundation to meet our customer's needs going forward.

If I can just follow up, I was using operating earnings at the utility of 413 for '03. So, from that level, as on operating basis, you came up flat. And I guess, Ed, you mentioned that the revenue increase could be offset by that. So can we expect from a 413 operating number, earnings to be the similar level this year?

Well, we will be updating this in detail at our May conference. We do not have a proposed decision yet from the commission on our cost of service settlement. But we would expect to have a PD from the commission in the next few weeks. So we will be able to give you an update at that time.

Steve, can you just follow up -- on overall basis it seems like that all businesses are above projections except for the Solutions business. And so, it seems like that you're pretty much on the upper end of your forecast, and even exceeding it as you look just at the first quarter results. Are there something negatives to look forward in terms of variances in the remaining three quarters which can dampen some of the outperformance in the first quarter?

Let me just say, we spent a long time debating this question of updating our guidance -- whether we would or would not update our guidance. I am -- I just would like to get away from quarterly guidance updates. And let me go back to what I said my prepared remarks.

The first quarter is excellent. We like it very much. It is very positive to our plan. So, we're going to revisit the -- on that basis -- we're going to revisit the earnings updates at our analyst conference. There is nothing negative -- there is no alligator under the surface here. It is all positive. We will just update it at our analyst conference.

And if I can just touch on LNG, can you just help us where you are on the Mexican facility? And when can we hear some contracts on the U.S. facility?

Well regarding Coast a Sual (ph) in Mexico, we announced that we have an HOA in place with BP. We're working that through and it would be my expectation that sometime in June or July that we and the government of Indonesia and BP would be ready to sign a final contract.

Regarding Cameron -- Cameron, like our facility in Mexico has all permits in place. And we're negotiating right now an agreement that we ought to be able to, assuming that we stay on the same page, to announce something in the next month or two.

These are extremely difficult negotiations because the dollar amounts involved and the up stream commitments have to be made. And they're just very time-consuming.

We're seeing, though, more interest in our facilities than we have capacity for. That was the reason that we recently announced another facility in Port Arthur, Texas. Because, as we have been going through these negotiations, it's very evident to us that there are more people out there that need access to the U.S. market and need to have confidence that people can build these facilities. And so we went ahead and announced the third terminal.

Okay. And on the Mexican facility, there is the issues where we had probably heard sometime ago that they were holding back your permits. Is that all over and resolved?

We have been in -- not we but the surrounding land owners around our facility have been filing claims against different Mexican government agencies about the process that was used to issue permits -- namely environmental permits. We have had injunctions against the permit, they have been suspended. We currently have an injunction pending. We expect that it will be suspended. And we will go forward.

But as we have developed projects in Mexico, what we're seeing here is a very common pattern that the court system in Mexico can be used by interveners to stop projects, to a certain point, and as soon as construction starts and significant capital investment is made, interveners then have exposure because the have to basically post bonds based upon the impact they would have on a project by stopping construction. So we expect to continue to see opposition to our project. But we also plan to start construction this June. And the table stakes of poker is going to go up for interveners at that point in time and we would expect to see less activity in terms of intervention.

David Maccarrone, Goldman Sachs.

I was hoping you might help us understand the nature of the improvement in Sempra Energy Resources earnings? And maybe provide some color on how much of the increase related to the additional volumes under contract verses sales of noncontracted power? And within the contracted power, how much higher gas prices helped you?

First of all, resources is having a good year. And as you correctly point out, the large volumes there are contracted for -- there has been some increase in the benefits, I guess, if you will, from the power that is being sold at spot prices. But I think, in this business what you just have to look at is -- it's a little bit better kind of across-the-board in all the segments that they are involved in. So I would not point to any one single factor as dominating the improvement.

I would just follow on, David. This is Don Felsinger. The majority of the sales increase is driven by the fact -- there was a step up in the sales we made to the state under the VWR contract.

The majority of the output of those plants ends up being sold to the state of California. We don't take any gas price risk in those sales. If you remember in our contract, that's a risk that the state carries. They have not hedged that, to my knowledge, and so that is their exposure. Beyond the state of California, we sell into the marketplace, and we have one or two small contracts for 100 megawatts or so.

Just a follow-up, it was my understanding that the contracts with the state include provisions related to heat rates, where it's my understanding that your actual plants, assuming those are the ones supplying the contracts, are more efficient then. And that was the point of the question with respect to the gas price impact. Is there an ability to quantify that?

I cannot do it here.

Please limit all questions to two questions per participant. Tom O'Neal (ph), Lehman Brothers.

I was wondering if you had any comment or interpretation on the governor's letter to the CPUC? I guess I was thinking, relative to the Palmar (ph) project -- were there any future generation building opportunities in the state?

I would just say, by and large, favorable. And we have proposed a -- and are comfortable with -- a core, non-core electric market, which he supports. And my take away from it is -- that it's a reason to compromise among the various positions. It leaves open the market for independent power production -- merchant power production. But it also may give the utilities more stability and certainty around their resource planning -- which is a very good thing.

I also, in reading it, was quite taken with the comfort level that the governor has with the Public Utilities Commission playing a very, very active role. Here you have a Public Utilities Commission that is all Democrats, and you have a Republican governor who is putting forward a proposal to let that commission really do its work. I think it means that it's an indication of support for President Peavy (ph) and the way he is running the commission.

And anything further since his appointment with regard to the PWR contract and the potential restructuring of it?

Well, as I have said, probably repeatedly in previous calls, we are quite willing to renegotiate that contract to provide what we think are very, very substantial savings in energy and gas usage to the state.

But in the context of the settlement, of a variety of other claims that have been made against us -- not (indiscernible) simply on its own. We have had some discussions with parties involved in these various claims -- quite recently, in fact. And it is my hope -- I'm not quite sure yet whether to say expectation -- but it is my hope that we will reach some kind of resolution of a bundle of these issues -- which quite well could include the savings which the state could avail itself in the contract before the end of year.

Sara Namsadey (ph), Merrill Lynch.

It's actually Samuel Brothwell. A couple of questions on (multiple speakers)

A little louder, Sam. Can't hear you.

A couple of questions on trading.

Number one, can you comment at all on the recent downturn in the metals market and how that might affect you in the current quarter?

And secondly, of the upside that we saw in the first quarter, I don't know if you could maybe give us a sense of how much of that was already in the pipeline versus how much of it was taking advantage of conditions that you saw during the recently closed quarter?

Well, I can give you kind of a general comment about it, without great specificity as to particular positions and so forth.

But, the market for metals has been in, generally speaking, in backwardation in the past quarter. And really towards the end of last year. And that has resulted because of the way we're positioned. To (ph) very good results for us.

The markets, actually -- even though the curbs have moved a little bit recently -- is still generally in backwardation. Although there is a lot more choppiness in the market, we are continuing to do quite well in that market.

If you look at it though over a longer-term, I think it's fair to say that these backwardation events come along periodically. And do result in very good results for us because of our storage positions. And our warehousing business. But -- it would be, I think, difficult to project the current results over very long periods of time.

But we will continue to do well in those markets -- but not, maybe, as extraordinarily well as we have done quite recently.

I would just -- this is Don Felsinger -- add a comment. We have now owned the metals business for about two years. During this two-year period one of the key objectives was to rebuild the business, because we lost a lot of customers in the acquisition from ENRON.

We are at a point now where that business is back to where it was in the early days, in terms of customer relationship and customer business.

And, I think the other thing about our trading book that is important here is -- even though we saw a lot of volatility this past quarter in metals -- mainly aluminum and copper because of the tremendous need in the China market -- the thing about our trading business is the fact that is so diversified in terms of commodities we trade and geographies in which we trade. And so, the fact that we had a good quarter in metals, I would look for another commodity to have volatility in the next quarter. And we may find two or more commodities to have volatility. So the fact that we are as diversified as we are in commodities and geography -- I think we're well positioned as a Company to take advantage of the commodities where we trade.

Let me just add -- this Steve Baum, again -- I have said repeatedly, I guess, that I think you should not try to look at our trading business on the quarter-to-quarter basis, and make (indiscernible) particular inference. But, rather think of it more on an annual basis, as we do. In which -- and our expectation and we're very comfortable with this expectation, is the business should run around 120 million on a kind of a baseline basis.

Now, with some additional growth that we're getting from something like the Blue Water storage and so on -- and from time to time, we will have very good quarters -- like this past one coming -- from particular market conditions. As Don says, across a wide variety of different commodities. And so, this year has started off very well and above our normal run rate.

Okay thanks very much.

Winfried Fruehauf, National Bank Financial.

I have a question on your Mexican LNG projects -- and I'm just wondering if Shell is still in or is it out as a partner of yours?

Shell is still in as a partner. But Mike (multiple speakers) still heavily in the sort of the final stages of negotiating that partnership agreement.

Has the inability to complete that agreement been due to the difficulties that seems to have developed in Sa Caline (ph) with respect to the development of natural gas?

No. We see no -- the negotiations on the partnership are proceeding right along the time that we expect them to.

Craig Parry (ph), King Street Capital.

Good quarter. I just have two quick questions. One is -- if you could update us -- and you'd already made mention of the construction timetable at Baja -- if Cameron was as well scheduled to start in June? I thought I had heard that earlier on a prior earnings call. And two -- if the Port Arthur announcement increases the likelihood we're going to see a partnership on Cameron as well?

Well, as Don mentioned, we would expect to have some agreement or reach some conclusions with our -- the potential user or users at Cameron in the next couple months.

I have made it a matter of policy in corporation that we will not commit to heavy capital expenditure in these projects until we have ascertained that we have a future cash flow with respect to the project. And from a good credit worthy counterpart. And so those two things have to dovetail.

So, we are ready to commence construction this summer on the expectation that we will complete an agreement on Cameron in the next couple months. But one has to come before the other.

But, there is no delays in terms of -- away from signing both supply and offtake agreements -- finalizing -- there are there no delays in terms of ability to get the hole in the ground started (inaudible) (multiple speakers)

This is Don Felsinger. There are absolutely no delays. As a matter of fact, we're on the timeline that we announced when we announced our Shell joint venture in Mexico.

You should expect that sometime late summer we will have a final joint development (indiscernible) in place with Shell.

Regarding the two LNG sites, as Steve mentioned, we're spending limited capital this year. But one of the things we have done at both sites is we have hired the owner's engineers -- so we're starting engineering work, which is a small capital expense to stay on schedule for deliveries at the end of 2007.

And the people we're negotiating with at both of those sites understand what we're doing, are supportive of it, and are moving as fast as they can to bring these agreements forward.

Okay. Terrific.

As a reminder, please limit all questions to two per participant. Michael Goldenberg (ph), Luminous Management.

Congratulation on the good quarter. I just wanted to ask you a couple of questions on trading.

First of all, we have seen some pretty good weather -- pretty hot weather -- right now in California. And I would imagine that implies higher (indiscernible) spread. Just wondering -- given your DWR contract, are there any megawatt hours available for merchant sale?

Yes. As I said -- let me just put a little behind that. We have about 2200 megawatts of installed generation available to us in the West, and we have sold 1900 of it. It's actually 2350 megawatts, and we have sold 1900 of it. And 100 others on contract. 1900 to the DWR. That leaves us about 350 megawatts to be sold into the merchant market.

Okay. Understood. And, also just -- wanted to ask you about your trading numbers. I understand you are very well diversified and we've seen pretty equal margins through gas, power, oil and metals. But, as we have seen some of your other competitors in these quarter's report, maybe gas and power numbers they were not as strong. Is there any portion of the numbers that is attributable to one particular large trade? Or has it just been good throughout the quarter?

You know, I cannot account for other people's trading. Our business is really -- to use the baseball analogy. It's just singles. Lots and lots of -- get on base, and get around. It's not -- we don't -- it's not based on large long data transactions. It's just lots and lots of customer business.

We are the second in gas. We're second-largest physical merchant of natural gas in the United States, with over 13 billion cubic feet a day of product.

We have a -- it's a customer business. It's not big one ops, or positions. That's why I mentioned the bar being down there as low is it is. We have a flat book -- lots of small transactions related to customers.

Thanks you very much. Congrats again.

Teresa Hoe (ph), Salomon Brothers Asset Management.

Congratulations on the quarter. I just had two questions. The first one -- on the excess power, I'm just wondering if you have locked in (multiple speakers)

I lost what you said.

On the excess generation, have you locked in the gas for that generation?

No we have not.

All right. Second, I guess on the (multiple speakers)

(multiple speakers) we had a contract.

I'm sorry?

We lock in the gas if we have a contract.

Okay. Fair enough. Second, on the utilities, I know the PPRs are on a separate track from the rate settlement. And I was just hoping that you could perhaps comment on how that is going?

Ed?

Hi, Teresa. This is Ed Giles. We have got -- when you look at our impending incentives, and as you know, we really don't book them until we get a positive decision from the CPUC. But, we've got a pent-up -- a little bit over $50 million of items. The principal piece of that is in the demand-side management area, when you look at the two utilities, that's about $46 million.

The other thing is at SDG&E, we have operational incentives that we have recently filed for 2003 performance. And we have not gotten a decision on that yet. That is $8 million. So that's really in the PBR area.

Thank you very much.

Phavaell Khan (ph), Credit Suisse First Boston Corporation.

Just a couple of questions here real quick. Can you talk about how the higher aluminum and steel prices might be affecting your CapEx projections for LNG?

And then, after that, if you can talk about -- if you plan to replace the roughly $900 million you paid down for long-term debt with new financings -- your cash balances seems pretty high. Do you plan to maintain that going forward?

Let's start with the upward pressure on materials costs for construction. Go ahead, Don.

There are couple areas. One is with the Alomar (ph) generation project that we're currently building, and then going to sell to utilities. We, about two weeks ago, locked in (indiscernible) construction costs for that, that had (technical difficulty) that had been previously bid. So that we are protected on.

And looking at the two LNG facilities, our current estimate is that current market prices for the steel we're going to use -- that we're looking between 20 and $25 million of cost increase per facility. So, our share of that would be half of it in Mexico and whatever ownership we have in Cameron.

Both of these increases are manageable, and we're also looking at the opportunity to hedge specialty steels going forward, assuming there's an opportunity.

This is Neal Schmale. The second question dealt with the balance sheet. And as you correctly point out, we are in very, very strong position now, with good cash balances and the long-term debt is down -- down quite a little bit.

What I would point out here is, first of all, there is kind of a seasonal pattern to it. We generally have strong cash flows, particularly from the gas Company in the first quarter of the year. So that has been driving the cash up, and obviously, the commercial paper balance down.

Similarly, the capital expenditure program tends to be heavier in the latter part of the year. And that's really what is going on here right now.

In general terms though, I would underline that from a credit perspective, things look great. The debt is stable, we're funding these projects with internally generated cash flow -- the cash flow is strong. And we think all the credit metrics, as I have indicated in the past on numerous occasions, are good and improving.

Okay, thank you.

Paul Patterson, Glenrock Associates.

I wanted to touch base with you on was -- not to sort of focus too much on these trading results -- but considering they are so good, could you give us a sort quantification as to how much is coming out of metals or Europe in terms of a percentage of the whole? Any sort of clarity there? That's the first question I have.

And then the second question I have, I guess is -- the tax rate looks like it went up a little bit. And I was wondering -- you know, if you could comment a little bit on that? Is that just simply because your net income is going up and the tax credits and stuff are pretty much standard or whatever -- stable?

Yeah. Let me -- Frank Ault will handle the second -- the tax part. But, let me invite your attention to the last page of table E attached to our press release. We do have a geographical breakdown by trading margin. And also, a margin breakdown by product line in that table

This is table E?

It is table E, the last page attached to our press release.

Okay I see it here, sorry about that.

I think that answers your question.

I think that takes care of it. Absolutely.

And Frank, on the taxes.

The effective tax rate for the first quarter was up a little bit over the first quarter of last year -- about 21 percent. And as Steve said in his comments, we expect a run rate right now about 20 percent for the year. Largely, you hit it right on the point when you said that -- our earnings are up and our tax credits (indiscernible) about flat. We anticipate about the same level of credits that we had last year coming in this year.

So, if the earnings are all robust as they were in the first quarter, of course you'll see a slightly higher effective tax rate.

Okay, great, thanks, guys.

Paul Debbas, Value Line.

Is there anything new regarding the synfuel's issue for you?

There may be hearings in that permanent committee. Whether that goes anywhere or not, I don't know. There is some indication in the press that maybe there were going to be hearings on the subject and that there were some negative comments made about section 29 -- section 29 tax credits. We don't anticipate that there would be any retroactive effect whatsoever -- even were there to be some real traction coming out of those hearings. Sort of the worst case that we could think about is that maybe credits might not -- if Congress got excited about it, might be limited going forward.

But you know when you look at it, the whole thing expires in 2007. And our best take on all of it is -- there's just some politics at work here. And sort of posturing and that it's probably not going to result in any change to the program.

How much are you expecting in income from the credits this year?

He asked how much income from the credits this year.

Yeah, this is Frank Ault. We anticipate, probably, having net income in the $40 million range -- approximately -- about equal to where it was last year.

Okay. And if I could ask one more question -- what are your CapEx expectations for this year?

CapEx.

Same number. We said 1.1 billion. And we still think it will be around that number.

Very good. Thank you.

David Grimhouse (ph), Chovia Capital (ph).

Congrats on a nice quarter. Two questions for you. One, the state tax benefit that reduced your parent and holding Company expenses, can you talk about what that was, and is that just a one quarter effect? Or is that going to have some benefits to the rest of the year as well?

Frank?

We have a number of open issues with state of California. And you saw the results of some of that this time. There are still some open issues with the state, and it's hard to predict right now what the outcome of discussions with them are in the audit they are currently conducting, or the time frame in which that audit will be complete. It's possible we could see some impact, either positively or negatively, toward the end of this year or it might spill over into next year.

But at least for the next couple quarters that won't be in the numbers?

I would be very surprised to see anything pop up in the second quarter. Timing-wise, it is conceivable -- the statement is very quick on resolving some things -- maybe something in the third quarter. But most likely, probably, the fourth quarter or early into next year on some of the remaining issues.

Okay great. Second question for you. I know you talked about negotiating an offtake contract on a Texas plant that is scheduled to close, I think, in July. Are we're likely to see a two or three-year contract on that, or do you think there's an opportunity to take it out 5, 7, 10 years.

Those will be in the midrange -- the 5 to 7 year range.

That's helpful. Thank you very much.

Peggy Jones, ABN AMRO.

I wanted to follow up on, first of all, what is the audit that is going on in California? And when would you anticipate resolution of questions about future power supply? And the core non-core situation?

Those are quite separate issues. You're meaning them to be separate issues right?

Yes.

Go ahead on the tax audit, Frank.

I got my two questions.

(laughter)

This is Frank Ault. You see an audit -- it's just a routine one, where they come in every so many years and take a look over the last three or four years, whatever is in the scope of their audit plan. There is no special audit. It's just normal of state returns. So it deals with all issues on the return from all of our business units. So I would anticipate this one hopefully will be wrapped up, as I said, early or late this year. There might be another year or so, and they will start looking at the next seven years.

And the second question, maybe Ed.

Yeah, with respect to the schedule, the investor owned utilities, and specifically in our case, SDG&E is working directly with the Public Utilities Commission on our long-term resource plan requirements.

We would expect that they will act on that either by late May, early June -- that deals really with our great reliability needs.

On the larger question, some people think of this as Assembly Bill 206. It relates to the market structure itself. I think the target people have in mind is some sort of legislative modifications by the end of this year. But if you look at the directive, as Steve outlined earlier, in the letter that the governor had written to the CPUC, he is really focused on having the CPUC implements much of these items related to the market structure -- whether it's long-term contracting under AB 57, or it's whether it's the designation and split between core and non-core, and how, then, the IOUs would go forward to meet reliability requirements. So, I would give you the general answer of late this year before you will see any legislative change.

But it's not clear, because -- and I haven't done a side-by-side laydown of the governor's proposal with the Nunez Bill. And it is not clear that the governor would necessarily be in a position to sign the bill as we see it today. And I was stating the fact that Edison Company has pulled out all of its stops (ph) to try to get that legislation to push through. And, as you can understand, there is political tension around whether or not and not -- whether or not we will have, and if so, what size it would be of a competitive marketplace in California.

I think it's fair to say the governor leans towards having competition help to keep cost prices down for wholesale energy. And also, having the CPUC have a large role -- and both of those items may be somewhat in conflicts with the current posture and the proposed legislation.

Thank you.

This does conclude the question-and-answer portion of today's conference call. I will now turn the call back over to Mr. Arriola for any closing remarks.

That's it. We appreciate you joining us for the call today. If you have any follow up questions, give Karen or myself a call and we hope to see many of you out here in June. Take care.

Thank you for participating in today's Sempra Energy first-quarter 2004 results conference call. This call will be available for replay beginning at 4:00 PM Eastern Standard Time today through 11:59 PM Eastern Standard time on May 7, 2004. The conference ID number for the replay is 7021323. Again, the conference ID number is 7021323. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. This concludes the conference. You may now disconnect.