桑普拉能源 (SRE) 2004 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Sempra Energy third-quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Dennis Arriola, Vice President of Communications and Investor Relations. Please go ahead, sir.

Thank you, and good afternoon and thanks for joining us to discuss Sempra Energy's third-quarter 2004 financial results. A live webcast of this teleconference and slide presentation is available at our website www.Sempra.com under our investor section. With us today from the Company are several members of our management team including Steve Baum, Chairman and Chief Executive Officer; Don Felsinger, President and Chief Operating Officer; Neal Schmale, Executive Vice President and Chief Financial Officer; Ed Guiles, Group President of the Sempra Energy Utilities; Mark Snell, Group President of Sempra Energy Global Enterprises and Frank Ault, our Senior Vice President and Controller of Sempra Energy.

Slide 2 contains our Safe Harbor statement. I would like to remind you that this call contains forward-looking statements that are not historical fact and constitute forward-looking statements within the meaning of the private securities reform act of 1995. Forward-looking statements are not guarantees of performance. They involve risks and uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. These risks, uncertainties and assumptions are described at the bottom of today's press release and are further discussed in the Company's reports filed with the Securities and Exchange Commission.

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. 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 third-quarter net income of $231 million or 98 cents per diluted share compared with 211 million or $1 per diluted share for the same period of 2003. The improvement in net income was driven by strong results in our generation and Trading businesses.

For the first 9 months of 2004 Sempra Energy's earnings were $549 million or $2.36 per diluted share, up 19 percent per share over 415 million or $1.98 per diluted share for the same period in 2003. Earnings per share in 2004 were impacted by a greater number of shares outstanding. The weighted average number of diluted shares outstanding through the third quarter is 232 million compared with 210 million for the first nine months of 2003.

Now let's turn to slide 4 and go into a little more detail on each of the major business segments, beginning with the California Utilities. The Sempra Energy Utilities reported third-quarter net income of 128 million compared with 173 million in the same period last year. Net income for San Diego Gas & Electric was 60 million in the third-quarter 2004 compared with 120 million in the year ago period. The third-quarter 2003 results included a positive contribution of 65 million related to a settlement on power contracts. Earnings for Southern California Gas Company in the third-quarter 2004 rose to 68 million from 53 million in the year earlier period driven by higher revenues and a $9 million onetime gain from a property sale.

SoCalGas third-quarter 2003 results included a $48 million pretax and performance-based ratemaking awards and an after-tax charge of 32 million for litigation costs and losses associated with a sublease. Let me now address the status of a few regulatory and legal proceedings starting with the cost of service. In December 2003 the utilities filed settlements on Phase I of their cost of service rate cases with the California Public Utilities Commission. Phase I deals with capital and operating costs at each of the Utilities.

On September 28, 2004 the CPUC's administrative law judge and the CPUC Commissioner assigned to the cost of service proceeding issued differing recommended decisions for consideration by the Commission. We believe that either decision if adopted would increase revenue requirements from those proposed in the settlements. The bottom line impact of either of the two decisions should not be materially different from the settlements we filed.

At last week's CPUC meeting the Commission held a decision on Phase I at the request of Commissioner Brown in order for him to prepare an alternate proposed decision. We believe the CPUC will ultimately approve the settlements that both Utilities and the interveners filed for last year. There are three remaining commission meetings in 2004; November 19, December 2, and December 16. We continue to expect a decision on this matter in 2004.

The CPUC previously decided that any changes in rates resulting from the costs of service proceeding would be effective retroactively to January 1, 2004. Beginning in the first quarter of 2004 the Company has accounted for revenues consistent with the proposed settlements as described in our second quarter 10-Q. On July 21, 2004 the active parties in Phase II of the cost of service proceeding filed for adoption of an all party settlement for most of the issues, including annual inflation adjustments and revenue sharing.

Although Phase II covers performance incentives, these were not addressed in this settlement and are expected to be decided in early 2005. A settlement requires the California Utilities to file their next rate cases based on new rates going into effect January 1, 2008. For the interim years of 2005 through 7 the consumer price index would be used to adjust base rate revenues with a floor and ceiling on percentage changes.

Now let me give you an update on authorized returns at the Utilities. Effective January 1, 2005 SDG&E's authorized return on rate base or ROR and return on equity or ROE will be 8.18 percent and 10.37 percent, respectively for its electric distribution and natural gas businesses, down from 8.77 percent and 10.9 percent, respectively. The change will result in a $10 million reduction to SDG&E's net income in 2005. The decrease is a result of the CPUC's automatic triggering mechanism which resets ROR whenever Moody's AA utility bond yield changes by more than a specified amount.

The electric transmission cost of capital is determined under a separate FERC proceeding. The ROE mechanism provides for 11.25 percent return. SoCalGas' authorized return on rate base and return on equity of 8.68 percent and 10.2 -- excuse me 10.82 percent, respectively, are not impacted by SDG&E's stages.

In November 2002, the Commission instituted an investigation into the Southern California natural gas market and the price of natural gas delivered to the California Arizona border between March 2000 and May 2001. Hearings have been completed and briefs have been filed. This proceeding was reopened for one day on October 25, 2004 for additional testimony. On the last day of testimony the ALJ, that is the administrative law judge, stated that a decision in the case was not imminent. The company is now waiting for the ALJ to issue a proposed decision in this matter and schedule oral arguments in front of the Commission.

Although this proposed decision from the administrative law judge could be adverse, the Company believes that the CPUC ultimately will once again reaffirm its prior decisions that Sempra's California Utilities acted in the best interest of its core customers, of their core customers, and that none of the Sempra Energy companies was responsible for price spikes. The Commission's office of ratepayer advocates has filed testimony supporting the gas cost incentive mechanism and the actions of SoCalGas during this period and those filings are available on our website.

Now we would like to spend a moment on the status of the antitrust litigation. As you may know, our California Utilities and Sempra Energy are defendants in a class-action lawsuit commonly referred to as the Continental Storage (ph) class-action cases. Our companies and employees have acted legally and ethically, and the allegations made by the plaintiffs are false. This lawsuit is without merit. At this point the new judge assigned to the case has established no trial date. We have asked the California Court of Appeal to review the retiring judge's denial of our summary judgment request. Acceptance of the review is entirely at the discretion of the Court of Appeal. We will keep investors informed of major public developments in this case as they occur.

Now given the live nature of this litigation we will not be answering questions that revolve around litigation strategy or the potential for any settlement. On our website we have provided investors with additional information surrounding the litigation, including answers to frequently asked questions and several of the material filings in the case. We will continue to update the website with relevant information as it becomes available. I will say, though, that risk management plays an important part in our thinking at Sempra Energy. Working with our legal advisers we will continue to evaluate all means to bring this litigation to a satisfactory conclusion. This litigation could take some time to resolve, but we will take the course of action we believe is best for our shareholders.

Now please turn to slide 6. Sempra Energy Trading had another strong quarter reporting third-quarter 2004 net income of 44 million, double the 22 million earned in the same period last year. The increase was driven primarily by higher profitability in oil and products. From an economic perspective gas Trading also had a strong quarter. However, the GAAP results listed in Table E attached to our press release showed the Trading margin for natural gas as -13 million. Current accounting rules on valuing energy commodity inventory and storage and transportation contracts resulted in a reduction of our reported results for the quarter of $38 million. We expect that most of the 38 million will reverse into net income in the fourth quarter. We continue to see the successful results of Tradings' diversified business model, both geographically and by product line. Additionally the recent high volatility in the commodity markets is creating profitable opportunities. Please turn to slide 7.

At Sempra Energy Resources net income rose to 64 million in the third quarter 2004 from 33 million in the year earlier period due to an increase in contracted power sales and a full quarter of contributions from our new Texas power plants acquired in July 2004. In the third-quarter 2004 Sempra Energy Resources delivered 6.4 million megawatt hours of power compared with 4.0 million in the same period last year.

Now let's turn to slide 8 and cover our other businesses starting with International. At Sempra Energy International third-quarter 2004 net income was 7 million compared with a $32 million loss last year during the same period. Quarterly results last year included an after-tax charge of 50 million related to the write-down of the carrying value of assets in Frontier Energy, our North Carolina-based gas utility subsidiary.

For the quarter Sempra Energy LNG recorded a net loss of 4 million related to development costs. Year-to-date Sempra Energy LNG is breakeven including an $8 million benefit related to the Cameron LNG project in Louisiana.

In the third-quarter Sempra Energy Solutions recorded net income of 1 million compared with breakeven in the same period last year. Sempra Energy Financial reported net income of 10 million compared with 13 million in the same period last year due to the sale of its Section 29 credit business. Expenses at parent and other were 19 million in the third quarter compared with net income of 2 million in the same period of 2003. Last year's positive contribution was related primarily to an adjustment to reflect the Company's consolidated effective tax rate.

Expenses for the nine months ended September 30, 2004 were 61 million compared with 58 million in the same period of 2003. Sempra Energy's effective tax rate for the nine months of 2004 was 25 percent and is expected to be approximately 25 percent for the full year. The tax rate is slightly higher than we estimated earlier this year, given that our earnings are up and tax credits have remained flat. Year-to-date our income from continuing operations is up nearly 31 percent.

Please turn to slide 9. I want now to discuss some planned organizational changes at the Company. Effective January 1, we will modify the names of some of our business units so that they more closely describe their primary activities. Sempra Energy Global Enterprise is the holding structure that contains our non- California regulated activities, will be renamed Sempra Global.

Sempra Energy Trading will become Sempra Commodities and Sempra Energy Resources will become Sempra Generation. Sempra Energy International will be renamed Sempra Pipelines and Storage. The operational results for our Latin American investments will be recorded in pipelines and storage; both Sempra Energy LNG and Sempra Energy Financial will remove energy from their titles. Now I want to spend a moment on Sempra Energy Solutions.

As Don Felsinger mentioned in our analyst conference in June, we have been evaluating the prospects of our Solutions business. There are 3 primary business activities within the solutions company. Commodity sales to large industrial and commercial customers, facilities management and energy efficiency and retrofitting. We have decided to separate the Solutions businesses and to integrate the commodities business into Sempra Commodities allowing our wholesale commodities business to take advantage of our back office retail system and access our numerous retail customers. The other two businesses will be folded into Sempra Generation.

These changes could result in cost savings of up to $10 million a year. No charge will be associated with these organizational changes. We will continue to evaluate whether any or all of these business activities are strategic to Sempra in the long-term or potentially more valuable to another company. We will continue to provide our Solutions customers with high-quality service and deliver on all of our commitments.

Now please turn to slide 10 for an update on our recent LNG activities. Last month Sempra Energy LNG announced two milestone agreements through which the Company has contracted for 100 percent of the processing capacity of its Energia Costa Azul liquefied natural gas or LNG receipt terminal in Baja California, Mexico. The agreements ensure that Sempra Energy LNG retains full ownership and operating responsibility to the Energia Costa Azul terminal. In October the Company signed a twenty-year agreement with Shell International Gas Ltd. to provide Shell with half the capacity of the terminal. Sempra Energy LNG also signed a twenty-year agreement with British Petroleum and its Tangu part (ph) LNG partners to supply the other half of the terminal's capacity with LNG from Indonesia.

The total initial gas processing capacity for the Energia Costa Azul facility is one billion cubic feet per day. We are in the process of finalizing the construction agreements and plan to have them in place by the end of the year. Site preparation has begun in Mexico. The total capital investment for the receipt terminal, breakwater and associated pipelines is approximately $900 million to $1 billion. Operations are scheduled to begin in 2008.

In addition, active discussions are underway with existing customers and others for expansion of the facility. Based on the design of the breakwater and our available land, we can expand the capacity of this receipt terminal from one billion cubic feet per day to 1.5 billion cubic feet per day. The incremental 500 million cubic feet per day will cost significantly less than would a new LNG receipt facility. We have taken this expansion potential into consideration in the design and engineering of the takeaway pipelines. Energia Costa Azul will be the first new LNG receipt terminal built on the West Coast of North America and will provide new supplies of natural gas to Mexico, California and the Southwest.

Finally, I want to discuss our prospects for the remainder of the year on slide 11. Based on our year-to-date performance and positive outlook for the remainder of the year, we are raising our 2004 earnings per share guidance range to $3.15 to $3.25 from $2.90 to $3.10. This EPS guidance is on a GAAP basis and takes into account the 32 million or 14 cents per share loss from continued operation, discontinued operations. It also assumes an average of 233 million shares outstanding. We are raising our guidance based on strong results at the utilities, Trading and Resources. We expect the utilities to earn in excess of $400 million this year. Based on Tradings’ year-to-date performance and our third-quarter natural gas Trading activities that we previously discussed, we expect Tradings' earnings to exceed $200 million in 2004. And at Resources with year-to-date earnings of 123 million we expect that generation business to report net income in excess of $170 million.

We will address our 2005 earnings guidance during our fourth-quarter earnings call in February of this year. I am pleased with our execution, results and prospects. We continue to advance our LNG business and are seeing progress in finalizing our cost of service cases at the Utilities. Our balance sheet continues to strengthen with total debt to total capital at approximately 52 percent. Our liquidity and credit ratings remain strong. This was a solid quarter for Sempra Energy and we are on course for record net income and earnings per share this year. And now I will open the call for questions.

(OPERATOR INSTRUCTIONS) (indiscernible) with J.P. Morgan.

Congratulations on a strong quarter. I was wondering if you could break down your working capital components from the cash-flow statement.

I will ask Neal Schmale, our Chief Financial Officer to answer that question.

I think more particularly you are probably looking in the net changes and other working capital components in table C in the press release, which shows that we used a lot of working capital during the quarter. Just in general -- or excuse me, during the nine months to date. In general the large usage of working capital so far this year has been associated with the Trading Company, but to kind of give you a sense of how this compares to our plans and what we talked about in the past, I said in the past that we would probably end the year up with around $5 billion in total debt. We had a little bit less than 5 billion in total debt at the end of the third quarter. I think capital spending will be a little bit higher in the fourth quarter and working capital will be a little bit better, so to sum all this up and put it in perspective we are going to end up very close to where we've said we have been all along.

Okay. Is it going to continue to be a drain on cash flows?

No, I don't think so. I think the key point I just tried to make was that for the rest of this year the working capital situation will actually go the other way.

Tom O'Neil (ph) with Lehman Brothers.

I was wondering if you might be able to break down some of the upside in Resources in 2004, first maybe how much is tied to (indiscernible) marketing (indiscernible) the repeatability in '05? Secondly how much (indiscernible) benefit on the TWR contract and then any other areas you might point to.

Tom, I am come going to ask Mark Snell to illuminate on that.

Tom, the primary thing affecting Resources has been that our availability percentages have run much higher than we planned. We've been running our fleet average in the West is about 97.5 percent, and the Texas fleets have been running at about 98 percent availability. And that has contributed to the bulk of the difference. As you've noted in the contract, there are some GAAP (ph) arbitrages but most of it is related to this availability percentages.

And about RMR contracts (inaudible)?

We do have RMR contracts on a couple of the gas plants that we acquired, and those plants -- they did operate this quarter, but their operations, their fluctuations in operations don't have much differences related to their underlying contribution to the margin.

Paul Patterson with Glenrock Associates.

I wanted to touch base with you on just to go through and make sure I understand what was happening in SoCalGas. You had a $48 million benefit last year from PBR and a $32 million litigation expense. Is that right?

Ed Guiles or Frank Ault, maybe you would like to address that.

That's correct.

(multiple speakers) 37 million versus the $59 million?

That is just litigation.

Let me just clarify one thing. One of those numbers, the incentive awards was a pretax number; it is 39 (ph) million on an after-tax basis, very equivalent to the 32 million from the litigation and sublease loss. So those two really pretty much wash each other out. And the increase that we have is truly driven by the gain on the sale of the asset of 9 million.

That is helpful. I guess that is my one question. I will get back in the queue.

Rachel Lauver (ph) with ING.

Thank you very much for taking my question. You had mentioned when you were talking about plus six that there were accounting rules that affected the way that you, that your valuation of storage and transportation and commodity inventory. Can you provide a little more detail on that? It's not clear to me exactly what that is.

I'll ask Mark Snell to do that.

Well, the 38 million that we are referring to, the activities around that, that consisted primarily of buying gas, putting that gas in the storage and then selling the gas forward for January and February delivery. These transactions under hedge accounting, the forward sale is mark to market, but the inventory is recorded at the spot price. When there is a large differential, and that is what we experienced in the third quarter, a profitable differential, when that differential is recognized for accounting purposes it is not recognized until the month prior to the delivery period, and in this case that recognition will be primarily in December.

Fifel Khan (ph) with Credit Suisse First Boston.

Actually my question was answered. Thank you very much.

Anatol Feygin with Banc of America Securities.

Good afternoon everyone, a couple questions just to clarify the 32 million as it relates to the gas loss for the quarter in the Trading business, those are largely related kind of forward gas sales? Is that how we should interpret them?

Go ahead Mark. I think that we.

I think (multiple speakers) I just went through that but it is 38 and it is forward gas sales, correct.

It is just a deferred gain. It will get recognized primarily in December.

Understood, but that is on the forward spread on gas storage, basically?

Yes.

The question on Trading is you have had a couple of quarters where you have consistently done better in Europe than the comparable quarter a year ago. Is that something that reflects greater scale you've achieved in Europe, the competitive landscape, is that sustainable basically?

I think its two things. Our metals business has done quite well which is headquartered in London. And that has been a real performer for us. And then the other part is that we are continuing to make improvements in our gas business in London. And we've had good results in our oil Trading business in Geneva.

Thanks Mark. And to switch gears on the (multiple speakers).

It's not a scale change. It is really a business conditions result.

And you don't foresee the competitive landscape, then, changing dramatically to negatively impact the results going forward?

Not at all. This is much more market condition driven than competition or scale.

Thanks, Steve. On the Costa Azul LNG Plant, the cost there has come up quite a bit. Can you just give us some more insight as to what is driving that? Is it on the breakwater mostly, is it commodity costs? What is the big upside driver there? And also, how are you thinking about financing that? Is Shell going to put up upfront capital for part of it, or what the considerations are there?

I would ask Don Felsinger to address this question.

Anatol, the numbers we provided, the $900 to $1 billion include everything necessary to get gas to the markets of Mexico and the U.S. So there is breakwater, there is the terminal and there is substantial pipeline investments. I think as we talk about this in the past we have not been specific about how much pipeline investment is required. From the standpoint of Shell, no Shell is not going to do anything to support the financing except the contract. And as I've mentioned before, as we put these agreements together we've always contemplated that we would like to have the option to do project financing. And so whether we decide to finance this internally or do project financing, the decision won't make later on based on what is the best outcome for Sempra.

I would like to emphasize that we've gone from talking about having half this project with Shell being a partner to a situation which we own the entire project and Shell has taken capacity. And so you basically have the number doubling in terms of the capital commitment. But this project is now fully contracted for 20 years. And the risks inherent in going forward now are construction risks, principally. And operating risks. And we would certainly think that this project is imminently project financeable, particularly given the returns that we expect to have from it.

I would just add one other thing and that is that we have been through this entire project with the rating agencies and they understand what we are doing. And also, and Standard & Poor's considered the project in Mexico when they recently reaffirmed our rating. The other thing I would say is that we have the capability to finance these projects with internally generated cash flow. There is a modest increase in the capital budget, but I think those of you who have looked at this in details will recall that our capital spending allowed us to have a lot of free cash flow in the out years of the plant. So even though we have the capability to do this, we probably over time, in time will project finance it.

And just to follow-up on the incremental pipeline investment, the way that the contracts are structured based on this California index, the net back incorporates resume with some of a return, a fixed return on that pipeline investment as well?

Yes, that's correct.

Thanks very much, everyone.

Vic (indiscernible) Asset Management.

Good numbers, Steve, and everybody. Looking at your June forecast when we were up there, both the resource and the Trading has gone above your upper limit of that guidance for '04. So does that mean that -- are these numbers well above normal, or how should we look at it from a going future point of view that these are normal numbers or abnormal numbers, so that we have to adjust the '05?

Well, first of all, we are very pleased that these numbers are coming in as they are. I think that when we look at the resource number, let's start with that, as Mark earlier pointed out, we are seeing greater availability than we targeted in our forecast from these plants. And as we get that, we have more energy to sell in the spot market or under short-term contract arrangements, and effectively the value in those sales net of just variable cost drops right to the bottom line. So we see a disproportionate increase in profitability as our availability goes up. And I think that we will talk more about this in February, but we may take a somewhat more robust view of our Resources forecast for 2005, as a result of these availability numbers.

Now, in Trading, I've said historically that we were looking at kind of minimums of 120 million a year. I think market conditions, and as we've certainly seen this year where we are now forecasting to exceed 200 million for the year, market conditions if they persist as they are today should provide more robust earnings for Trading than we perhaps have seen historically. But beyond that, we will talk much more to this subject in February.

Could I follow-up on the cash flow side that how are you doing on your cash flow in terms of free cash flow generation?

Neil?

Well, once again, and referring to Table C which was attached to the press release and basically stating what I said before, we had cash provided by operating activities of some 493 million. And when you go through all the details cash provided or cash used in investing activities of a -294. So roughly 200 million of free cash flow in the first 9 months, this is all very consistent with what we've been talking about in the past as I've indicated. We expect total debt to go down this year, and we expect the working capital situation to get slightly better during the fourth quarter.

It sounds more ahead of your plan, though, not on plan.

I beg your pardon?

What I am saying is that it sounds like you're ahead of the plan, not on the plan.

We're pretty close to plan. I track this every day, and obviously because of working capital changes, sometimes we are ahead of the plan and sometimes we are below the plan, but compared to our plan for the year we are right on it.

Okay. Thank you.

Mara Shaughnessey (ph) with Massachusetts Financial Services.

Two questions. First I was wondering if you can flush out a little bit off the purchase of the assets in Texas, I know it was not a huge amount of equity but sort of returns that you are hoping to generate and obviously looks like those returns are being exceeded. Second, just wondering think about the Trading business over the last couple of years, things got more bumpy and you guys rode through them quite well. And now you have some big people out there with big balance sheets and big checks. Just wondering if that is an asset, the Trading business that you guys need to own yourselves.

Well, Mara, I am going to ask Mark to answer the first one of your questions and I will talk about the second.

The acquisitions of our power plants in Texas have gone much better than we anticipated. I think when we went into that business and if you recall Riverstone/Carlyle, which is a private equity group is our partners in that business. We had anticipated in investing 60 to 80 to almost $100 million of capital; turned out we are only investing about $50 million of capital individually because the debt markets were so robust and we were able to finance it at a much higher level that we anticipated. And then the returns on that investment we've exceeded the numbers that we expected because our gas plants have turned out to be more valuable than we had anticipated, and they are running at levels that we didn't expect. And so as a result, the anticipated returns and sort of the high teens that we expected are being exceeded in we're getting returns on our equity now probably in the 25 to 30 percent range.

Let me comment a bit about Trading. As I've said in the past, our Trading company is integrated to a degree into our LNG strategy and into the management of our generating Resources. And so we have essentially synergistic reasons for keeping the Trading company as part of the Sempra family of companies. Now we are not unaware of course of what you point out that there are some of the large banks are quite interested in getting involved in energy Trading. And we remain open to the sale of any asset that we have at the right price. And if it is more valuable in someone else's hands than it is in ours and we can realize a good profit on that sale, we will do that. We would have to in the case of the Trading company, we would have to re-create some of the capability that it represents, particularly in our LNG business and in the management of our generation Resources. We can do that by contract. We don't have to own that capability, but it is one that we would have to replace. But we have nothing to announce in this regard. As you know and as I have said many times, we are quite satisfied with the risk that the Trading company represents within the family of Sempra companies in how we and in how we manage it and the fact that it cash flows to earnings.

And I also what to remind everybody listening that we are generally a physical trader of commodities. This is not a business that is Trading in financials. But we do that. But we are the second-largest mover of physical natural gas in the U.S. and above 13 billion cubic feet a day. And a number of the new entrants in this business being mostly in the financial end really have become our customers with respect to our Trading business. So we've actually seen it pick up through increased liquidity on the financial side. And a little bit more robustness in the market.

Fifel Khan with Credit Suisse First Boston.

The net Trading book in this quarter was about 1.3 billion compared to roughly 930 million last quarter. I am just wondering is the increase in the net book, is that because of more business being done and being backlogged, or is it because of the mark-to-market moves and the positions?

Mark, why don't you comment on that?

The biggest increase in the book is inventories. We have a much bigger inventory position, which you will see go down as the withdrawal season comes in the winter.

That makes sense. And with regard to Coleto Creek, you talked about the higher returns you're realizing, are you realizing any cash distributions in that partnership yet, or is it, right now your investing capital or are you getting capital back from that investment right now?

Right now we are paying down debt.

Okay, when do you think you might be able to realize cash on that investment?

We actually didn't anticipate realizing a lot of cash for about 2 1/2 years. It may be a lot sooner than that now. In fact, the markets for refinancing look so appealing that we may, we could do something there.

Thank you very much.

Ashar Khan (ph) with SAC Capital.

Steve, when you gave us your EPS forecast in June, which was the original one 290 to 310, did that have the discontinued operations as part of it or no?

Yes. That was a GAAP number and did.

Under which line item were these losses? Was it in the international business, I mean in the discontinued operation would show under which line item? Can I ask you?

(multiple speakers) The question is how do we classify -- where did we classify the discontinued op?

Discontinued operations (multiple speakers) is on its own line, t.

Its on its own line below the continuing operations if you were to look at the.

Where had it been?

It had been within parent and other prior to discontinuation of the operation in January of this year.

Okay, so when you show this number the parent and other number of loss of 75 to 50 million which was in your June forecast that had the discontinued ops in that number?

Not in the June number because we had already discontinued. At the time of 2003 when we were still operating the facility in the UK, that was the part of parent and other but as it relates to 2004, it is all in a separate line as discontinued ops.

I don't know if you have this page what you gave us on your presentation in June, which showed the different line items which came to and then you showed us your earning estimate. I was just trying to understand where the discontinued operations in which line item. So you are saying it is in parents and other and the parents and other number was a -75 to -50. Was it in that number, or is that what you are saying?

Yes.

Okay.

Paul Patterson.

Just to go over a few things here, I think you said that -- I calculate 31 percent tax rate for the third quarter. And as you guys said 25 percent for the nine months and that you expected the year if I understood you correctly to be about 25 percent.

Yes.

So we should expect a lower tax rate in '04? In Q4, I'm sorry fourth-quarter?

Basically the tax rate is calculated, we take our estimate for the year, which currently is in the 315 to 325 per share and we come up with our effective tax rate so we use that on a year-to-date basis against the income for the nine months. Because we had a lower estimate earlier in the year and a lower effective tax rate we had a higher rate in the third quarter to get us on a year-to-date basis up to our expected effective tax rate for the year of 25 percent. And based on the outlook that we've given you 25 percent would be the appropriate rate for the full year.

Is it too early to ask you what the '05 tax rate might be?

That is not possible to put together until we have our detailed financial plan for 2005 complete, which will be announced at our earnings call in February.

And also just to switch topics here, the ALJ, the timing associated with the judge's PFD?

Are you talking about the cost of service case?

The gas case, the border gas case.

Ed, do you want to take this.

This is Ed Guiles. I mean, the hearings have been closed. The assigned, the administrative law judge basically has just indicated that the decision is not imminent. We would expect it is very possible we could get a proposed decision sometime between now and the end of the year but the full Commission then would not act on any recommendations or create additional alternates until 2005.

And I would just remind everybody that there will be two Commissioners who will leave the Commission at the end of the year, Carl Wood and Loretta Lynch. Loretta Lynch is the assigned Commissioner in the RII. She would not be around to vote on the final decision.

And the proposal for a decision might be not too good? You indicated it might be somewhat negative?

We don't know, but she has been critical of us, and so that is what drives our statement, not anything fundamental in the record. It is just been her criticism of us.

And then on the Trading business, as you know S&P has a market credit event liquidity analysis ratio, so you guys are pretty familiar with that, right?

Yes.

How does that apply to you? When you last looked at it, what does it look like for Sempra Trading?

We're fine.

Your fine.

We are well above the basic ratios.

Okay. Thanks a lot.

Winifred Fruehauf (ph) with National Bank Financial.

I came in a little late so this question might have been asked, but I am wondering about the status of the litigation that arise recently where you've been accused of all kinds of horrible things and I'm just wondering whether there has been any change in litigation.

Well, in my prepared remarks, Winifred, I did mention that we wouldn't be commenting on strategy with respect to that litigation because it is an ongoing matter. The event of course that you're referring to was a press release by the trial lawyers who are pursuing this case. And what I did say in my prepared remarks was that we haven't done anything wrong and the case is without merit. Now because of the interest that their press release generated, we have posted extensive information on our website concerning the matter, including Q&A and reference to a number of basic filings in the case. And so what I will do is refer you to our website. We will update that information if anything material may evolve in the case. We filed a writ to the Court of Appeal asking that the Court of Appeal revisit the dismissal of our summary judgment that was given by the judge who then retired after he did that and we have a new judge. So there is a lot more procedural matters to go through in this case before anything substantive occurs. I just want to emphasize again we consider this case to be without merit. But we also consider this to be a risk management exercise.

Thanks for that explanation; I wasn't going to ask you about strategy. I was only wondering if anything had evolved at the Court of Appeal and apparently not so far.

No, in fact there is no schedule on which the Court of Appeal has to act. And so we just wait to see what they are going to do and they are not bound to do anything. So I think we will hear from them eventually, but there isn't any schedule. And the next event that is scheduled is a pretrial hearing with this new judge in which a number of matters will be discussed, including schedule.

Thanks for that, I have one more question, if I may. Back in June Entergy sort of certainly shocked me when it announced it was pursuing maximizing value of its energy coke Trading operation because that contrasted very strangely with some very strong statements about this operation being virtually sacrosanct by Entergy CEO two years ago at EEI. And I understand that people are entitled to change their mind and Entergy changed its mind. But my question is with respect to Sempra, are you continued to be committed to your Trading marketing and risk management operation, or are you also toying with the idea of selling this off?

Well, Mara Shaughnessey asked me a similar question, and I'll give just a very thumbnail answer. Trading is integrated with our current strategy; if we were to sell that company we would have to do something to replace that capability. But having said that, all business units at Sempra are for sale at the right price. And we think we like Trading. It is part of our strategy. It has been very successful. We built it up and manage it we think in a very careful and successful way and cash flows to its earnings. Having said that, though, we will sell it if someone offers us right price for it.

I appreciate that. On the other hand, I don't think too much about outsourcing in general and certainly not outsourcing of Trading, marketing and risk management. And because I think you have the best knowledge and the best insights into that business and you also know what it means to all of your activities. So that's all I have for today. Thanks very much.

Thank you, Winifred.

Michael Goldenberg with Luminous Management. (ph)

This has been probably asked in one form, way or another, but just to be clear now that you are actually starting to build Costa Azul, is the opposition going to die down because of the costs associated with preventing a project that is in the process of being built?

Are you talking about the occasional injunction that is sought by landowners and that sort of thing?

Yes, exactly.

What happens as Don Felsinger likes to say the cost of poker is going up because as we begin to spend dollars on the project which we are now doing the bond that has to be posted in association with any of these and they have all proved to be frivolous attempts to hold us up, the bond amount goes up considerably. And none of these challenges have had any merit to them. And they really are all about people who wanted to sell us land or are unhappy that we didn't pay them as much as they thought they should get or one thing or another like that. And I expect all about to die down.

This is not the first project we built in Mexico that we have had intervention. We built pipelines, power generation and we have experienced a similar process, so this is not unexpected.

So you feel confident that once you start putting dollars in, opposition is just going to wither away?

That's correct.

And finally just on the other LNG project, when do you think we will hear --

As I said before the building of receipt facilities doesn't determine when contracts get signed, so what we are doing is we are still in commercial discussions with numerous parties for our Cameron facility and we are in the licensing process at FERC for the Port Arthur facility.

No idea on timing of DP (ph) type announcement even if it is LOI?

Nothing that we can talk about now.

Okay, excellent. Thank you very much, guys.

Oh by the way, just to clarify anyone who tries to bring an action there at Costa Azul, it is the plaintiff or the person seeking the injunction that has to post the bond. We don't have to put up any money. They are the ones that have to put up money and that is why I said the cost of poker is going up. Thanks.

There are no further question at this time.

I would like to thank you again for joining us on the call. Karen Sedgwick, myself and the rest of the IR team will be available for follow-up questions. Thanks. Have a good day.

This concludes today's conference call. You may disconnect at this time.