桑普拉能源 (SRE) 2005 Q1 法說會逐字稿

Good afternoon. My name is Anisa, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sempra Energy first quarter 2005 results conference call 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] Thank you.

I would now like to turn the conference over to Mr. Dennis Arriola, Vice President of Communications and Investor Relations. Please go ahead, sir.

Thanks. Good afternoon and thanks for joining us to discuss Sempra Energy's first quarter 2005 financial results. A live webcast of this teleconference and slide presentation is available on our website at www.sempra.com, under our Investor section.

With us today from the Company are several members of our management team, including Steve Baum, our Chairman and Chief Executive Officer; Don Felsinger, President and Chief Operating Officer; Neal Schmale, Executive Vice President and Chief Financial Officer of Sempra; Ed Guiles, Group President of Sempra Utilities; Mark Snell, our Group President of Sempra Global; and Frank Ault, our Senior Vice President and Controller at Sempra Energy.

On Slide 2 we have 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, 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'll be discussing today may contain non-GAAP financial measures. In those cases, we will are 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 on Slide 3.

Thanks, Dennis. And thanks to all of you on the call for joining us today. Earlier this morning we reported first quarter 2005 net income of $223 million, or $0.92 per diluted share, up 13% over first quarter 2004 net income of 197 million, or $0.85 per diluted share.

In the first quarter of 2005, net income included $59 million related to the favorable settlement of Federal and State income tax issues from prior years. The impact was $43 million at the parent company, $12 million at San Diego Gas & Electric, and $4 million at Southern California Gas. These tax items are included in the high end of the net income ranges that we provided at our analyst conference in March.

First quarter 2004 earnings were impacted by a $24 million loss from discontinued operations, 16 million in net income related to the favorable resolution of income tax issues, and 8 million in net income due to the gain on the buyout of a liability related to our Cameron LNG facility.

Income from continuing operations, before income taxes, was down on a year-to-year basis, primarily due to strong results from our Commodities business in the first quarter of 2004. Sempra Commodities had a solid start for this year and we expect it to meet its plan of 150 million to 220 million of net income for the year. Last year, Commodities had a record year of 320 million in earnings, which were driven primarily by high volatility in all of our major product lines, especially in the metals markets.

Now let's turn to Slide 4 and go into a little more detail in each of the major business segments, beginning with the California Utilities. The Sempra Utilities reported first quarter 2005 net income of $128 million, compared to 106 million in the first quarter of 2004. Net income for San Diego Gas & Electric, or SDG&E, in the first quarter was 200 -- the first quarter 2005 was 59 million, compared with 50 million in the first quarter of 2004. The increase was due primarily to the favorable resolution of income tax issues.

Net income for Southern California Gas, or SoCalGas, increased to 69 million in the first quarter of 2005, from 56 million in the first quarter of 2004, due primarily to an $11 million favorable adjustment from the implementation of Phase II of the utilities recently approved rate plan, and the favorable resolution of income tax issues.

In March 2005, the California Public Utilities Commission, or CPUC, approved the second phase of the Sempra Utilities Cost-of-Service rate cases. Phase 1, which was approved in December of 2004, established the capital and operating plans for each of the utilities. Phase II, set mechanisms for annual inflation adjustments, revenue sharing, and performance incentives for the years 2005 to 2007.

The decision establishes performance-based measures at SDG&E and SoCalGas for customer service, safety, and reliability, with reward and penalty potentials of approximately $22 million annually combined. The CPUC did not provide these -- for these incentives in 2004, and also eliminated the requirement for 2004 revenue sharing, which resulted in a favorable adjustment in SoCalGas' first quarter results.

At the end of the first quarter, the Sempra Utilities had $98 million of pre-tax -- pre-tax of earned performance-based, rate-making awards awaiting approval at the CPUC. In December of 2004, they entered into a settlement with the Commission's staff on the Demand Side Management or DSM awards, which make up 87 million pretax of the pending $98 million in total awards.

If the settlement is approved by the Commission, the award will be recorded in earnings in two phases. We will recognize approximately 50 million of the settlement award immediately upon approval and record the remaining $37 million over 36 months. We expect the DSM settlement to be approved in the second or third quarter of 2005.

SDG&E is moving forward with its generation and transmission plans for the summers of 2005 and 2006. Including placing an operation of peaking combustion turbine and a major transmission upgrade. We are also on track to have the 550-megawatt Palomar plant, being built by Sempra Generation online by June 2006. These projects will provide reliability for the coming summers and add over $500 million in utility rate base.

Please turn to Slide 5. First quarter 2005 net income for Sempra Commodities was $29 million, compared with $57 million in the year-earlier period. This difference was primarily due to lower earnings in natural gas and metals trading. While volumes are somewhat lower in these areas, we also have been affected by accounting rules that impact the timing of earnings. I would like to briefly expand on the impact of the accounting changes enacted two years ago.

Since 2003, the FASB has required that physical inventories and certain other assets, such as pipeline capacity and storage be valued at cost, while the associated forward sales be mark-to-market. This accounting treatment can cause profits or losses to be reported in different periods than the economics would dictate.

I emphasize that the earnings guidance that we provide you is GAAP accounting. Given that most of our transactions are short dated, the earnings impact in most cases is changed only by a matter of quarters. With our solid start in the first quarter, we expect Sempra Commodities to meet its 2005 earnings guidance.

Now please turn to Slide 6. Sempra Generation's first quarter net income was 46 million in 2005, compared with 35 million in 2004. The increase is primarily a result of additional power sales from the Company's generating facilities in Texas, including the Coleto Creek power plant. Sempra Generation acquired its share of the Coleto Creek facility and eight other power plants in 2004. Sempra Generation's portfolio of active generation now totals over 3,600-megawatts. Approximately 80% of the capacity is under contract through 2007, providing stable earnings and cash flow.

Now let's turn to Slide 7, and cover Pipelines & Storage. For the first quarter, net income for Sempra Pipelines & Storage increased to $13 million in 2005 from 11 million in 2004, due primarily to improved results from the Company's Latin American utility operations.

The Company is developing two new natural gas storage facilities in Louisiana, that will compliment our LNG activities on the Gulf Coast. In March, our Liberty Gas Storage project filed for its FERC permits. Open seasons for both our Port Arthur and Cameron pipeline projects were recently held. Results of the open season will be evaluated and potential shippers contacted regarding project specifics later this month. Initial results of the open seasons confirm our beliefs that these are excellent projects, and the market has strong interest in utilizing these pipelines.

Please turn to Slide 8 for an update on our LNG business. For the first quarter 2005, Sempra LNG recorded a net loss of 5 million, related to ongoing investments compared with a 6 million gain in 2004. The first quarter 2004 included an $8 million after-tax gain on the settlement of a liability related to the purchase of the Cameron facility.

We're pleased that our liquid natural gas business is making good progress. In the first quarter, we commenced construction on the fully-contracted Energia Costa Azul terminal in Baja California, Mexico, which is expected to be operational in 2008. We are working towards finalizing several non-binding preliminary agreements this summer for capacity at our Cameron LNG terminal in Louisiana, and expect to begin construction later this year.

Finally, last week we announced a preliminary agreement with Gazprom, the world's largest natural gas producer, which wants to enter the North American market with sufficient quantities of gas to launch our Port Arthur LNG terminal in Texas. We expect to receive Federal regulatory approvals for this terminal by year end.

Now please turn to Slide 9, and we'll finish up with the results for the quarter. Sempra Financial reported first quarter 2005 net income of 4 million, compared with 10 million in the first quarter 2004. This expected decrease -- expected decrease is due primarily to the sale of its Section 29 tax credit business in July 2004.

Earnings for parent and other in the first quarter 2005 were 8 million, compared with a 4 million net loss in the first quarter 2004. First quarter 2005 results benefited $43 million from the favorable impact of the previously-discussed income tax issues. 2004 results included a $16 million impact of resolving tax issues.

Excluding the tax items, parent and other expenses increased this quarter primarily due to cost retained to the parent and consolidating entries. Sempra Energy's effective tax rate for first quarter 2005 was approximately 4%. The full-year 2005 effective tax rate is forecasted to be approximately 25%. Based on the resolution of income tax issues, we now expect our 2006 to 2009 effective tax rates to be slightly below the ranges we provided at our analyst conference in March.

Finally, I want to discuss our prospects for the remainder of this year on Slide 10. Today based on the solid performance of our business units, we are reaffirming our 2005 earnings per share guidance of $3.10 to $3.30 per diluted share. We also believe that there is a greater probability that earnings will be at the higher end of the range, given the favorable resolution of the tax issues.

The earnings per share guidance assumes an average of approximately 250 million diluted shares, with the increase in shares relating to the equity units. In addition, our Board of Directors recently approved a $250 million share repurchase program. Periodically we plan to use the program to offset the impact of new share issuance from our dividend reinvestment and options programs.

In closing, this was a solid start for the year. At our California Utilities we have completed both phases of our Cost-of-Service proceedings. Our LNG business has taken great strides in having three terminals operational -- towards having three terminals operational by 2009. We once again had consistently strong quarters from our Generation Pipelines & Storage businesses. And our Commodities business had another solid quarter.

Now I'll open the call for questions.

[OPERATOR INSTRUCTIONS] Your first question will come from Paul Patterson with Glenrock Associates.

Good morning, guys. Or good afternoon. I wanted to touch base with you on the depreciation and amortization number. It seemed to decline slightly in '05 and I'm wondering if you could -- I mean over the quarter. I'm just wondering if you could describe what happened there.

This is Frank Ault. The change there was really as a result of the utilities Cost-of-Service decision that came out in December of last year, that changed some of the depreciation rates for the California Utilities. So we had a slight decrease in the depreciation and amortization of the utilities and a slight increase in other parts of the business, net it was a decrease of four.

Okay. And then in terms of the tax -- the tax benefit that you guys got this quarter, what -- what led to that? You mentioned 43 million at the parent and then a little bit different numbers for the subsidiaries. What actually caused that? What triggered that?

Well, we have had ongoing audit issues with both the California State Franchise Tax Board and the Internal Revenue Service for periods starting in the mid-1990s into 2000, 2001 time frame. Multiple issues at both agencies. And as you go through that audit process, and discussions, and trying to settle some of those open issues, we were successful in getting resolution of it, a number of different issues at both of those entities in the first quarter of this year. So it is not just one issue.

It's just all sort of came together, I guess this quarter?

Yes, we got letters closing out the state audit that was open, and we got a letter from the IRS resolving some of the issues. There are still some disputed ones left further litigation.

And finally, the $250 million buyback. You mentioned that you will do it opportunistically, et cetera. Is there any -- any update in terms of what kind of time frame we might actually see the program become completed or can you elaborate a little more on that?

Well, this is Steve Baum. We want to maintain on a weighted average basis for 2005 the approximately 250 million shares outstanding. So we have gone to open market purchase for our dividend reinvestment plan, and for our 401K. And so we will account for those purchases together with any options exercises and, perhaps some other purchases during the year as maybe necessary to reach that weighted average 250 million shares outstanding.

Okay. Thanks a lot.

Your next question is from Tom Thompson with Thompson Siegel.

Thanks. Steve, I'm sorry, I missed the break down of the allocation of the tax benefit between the parent and the subs. Could you give it to us again?

This is Frank Ault. The benefit of 59 million was 12 million at San Diego Gas & Electric, 4 million at Southern California Gas Company and $43 million at the parent level.

Right. Thanks. And as a follow-up, given that that is now in the bank, what factors or uncertainty are keeping you from actually raising the lower end of your guidance range?

Well, if you -- I don't know if you were able to attend the analyst conference, but at that point we had a very wide range of potential outcomes for the year. $190 million range from 660 on the low end to 850 only the high end. And within that, we had a lot of regulatory, legal, tax uncertainties. But when we looked up the actual earnings guidance that we gave of $3.10 to $3.30, we were actually up toward the higher end of that wide range in potential net income. So as a consequence of that, by settling these issues and still having some open ones, we still believe that that is a valid range to be in, but as Steve indicated, we probably have a bias towards the $3.10 to $3.30 range.

Yes, this is Steve Baum. As we go through the year and as our quarters unfold, we'll periodically consider revisiting that issue.

Thanks very much.

Your next question come is from Jay Hatfield with Zimmer Lucas.

Good morning.

Good morning.

I just wanted to talk a little bit more about the parent item. The -- my calculation shows if I backed up that tax adjustment, that you would have negative 35 million at the parent. And I wanted to find out whether that's something -- is that sort of the normal amount, because I'm looking back at the prior quarters, like, first quarter of '04, you are at negative 20 million, and first quarter of '03, and that seems to be sort of the run rate is closer to like 20 million. Is that sort of a new higher level of parent that we should expect? And that, therefore, you would not hit your guidance, I guess this 40 to 70? Or is it more of an unusual event or something that's going to reverse later in the year?

No, the normal run rate would be something in the vicinity of 20 million or so a quarter, and if you look at the fact that -- we'll say that was the case of the next quarter, so that would be 60 million, minus the 12. It would be around 50 million or so for the quarter. That's the low end or the positive end of the range. We had originally put out that we would lose 40 to 70 million at the parent and we will be at the better end of that range.

The consolidating entries that we make are timing issues between quarters, and they eliminate themselves basically by year end. So we feel very comfortable that we are going to be probably well within the range and probably on the higher end of the range more on the minus 40 or 50 million.

Okay. So if we were trying to just for our own purposes to come up with a kind of run rate for the quarter, you should really probably add back that $0.06 or $15 million to figure out, like, if you are trying to predict what next year's quarter would likely be?

Yes, I think that you would probably be pretty safe to say the normal is going to be more on the 20 million range, plus the fact that we had the positive effect of the taxes and we'll have some of the consolidating stuff going away. Again as I said, probably if you look at just the parent and the other, that we would be in that range.

Now, there's a little difference between what we show in the tables here, which we have Sempra Financial broken out separately, and what we use at the analyst conference. The analyst conference, we included in parent and other Sempra Financial which was 16 million is our estimate for the year on that, and we are right on the run rate of that with 4 million in the first quarter.

Okay. Thank you very much.

Your next question is from Winfried Fruehauf with National Bank Financial.

Thank you. Good morning. What is your estimated 2005 capital spending program on plant, property and equipment?

Just a moment, Winfried.

Thank you.

Good afternoon to you or good morning. We're just go to the table. Hang on a second. Are you -- you're looking for the estimated for 2005.

We don't really have any change in our estimated outlook for capital expenditures and investments in 2005. We gave a number of 1.650 billion at the analyst conference, I think that number is roughly right.

Okay. Thank you. The other question is on your LNG business. I'm trying to find our where Sempra and/or Sempra LNG are at with respect to the Alaska Gasline Port Authority in its all-Alaska project.

Winfried, this is Don Felsinger. As you are probably aware, this concept of bringing Alaska gas to the West Coast of North America is starting to gain some traction. The State of Alaska not yet made a decision on which route that they would prefer. We are still working with the Alaska Gasline Port Authority to bring forward the benefits on all Alaska route that would have LNG and the ability to ship that to the West Coast. So I would expect more progress this year, but that -- that issue is still being worked in the State of Alaska.

I have no idea, of course, as to how much money you have been spending, but I take it that whatever you have spent, you have been expensing?

Yes. That's correct.

Okay. So you hope for some resolution, either in favor or against the all-Alaska project sometime this year.

I would think that the State of Alaska who has a desire to get this gas to market is going to try to come to some resolution about the best way to get it to the Lower 48, and my expectation is that decision will be made this year.

Okay. Thank you very much.

Your next question is from Anatol Feygin with Banc of America Securities.

Good morning or afternoon to everyone again. I just wanted to get a sense for the Commodities business, what that would look like, kind of to think through what happens in the rest of the year. You guys showed a negative $15 million margin in the gas business, since it's unlike you guys to actually lose money in any of those books, I'm assuming that that's a function of timing. If you guys could provide some color on what gas and storage position is, or what kind of margin you have visibility on, if let's say nothing else changed from here on out, just in the gas book or any kind of sense you can give us for how much of the locked-in earnings would come in in the rest of the year or 12-month period.

This is Mark Snell. No, we -- you're right in assuming that the gas business is the one that is the most affected by the -- sort of these accounting issues, because they tend to carry the largest inventory balances, and also control most of our pipeline capacity and storage capacity. So they are very -- very much affected by that.

But I think our position here is that, as we look at how that business performed this quarter, and look at what the effects will be coming up, we're confident that Sempra Commodities will hit its targeted numbers that we've already articulated.

Thanks, Mark. Maybe if I could take another cut at this. If we take the extremely profitable fourth quarter in gas aside, and kind of look at the run rate that that business has had, we've been in a relatively comparably volatile gas environment, is it safe to assume that the gas business will have kind of mean reverting performance, let's say fourth quarter of '04 aside.

Yes, I think it is safe to assume that we believe the gas business will be profitable on a -- it will be profitable on the -- over the course of this year. And we -- we would expect the kind of anomalies that happened because of accounting to reverse themselves during the year. But overall, we're predicting 150 to 220 million for the Commodities business. And I think one of the advantages we have is that we have a lot of different products now. And so we can be a lot more confident in our overall numbers and we don't really try to predict the underlying profitability of each of the individual books.

Thanks, Mark. Two quick follow-up questions. In the fully-diluted share count of 241 million, how much is roughly attributable to the dilution from the mandatory converts?

I believe there's a little bit in there. But we're going to have to get a precise number on that, we'll have to -- we'll have to dig at that a little bit and get back to you later in the call. Certainly, the -- the bulk of the effect of the -- of the equity units, which is -- which will be around 20 million shares later this month is not in there, but there's a little bit of a calculation, as I recall around the edge of that, that gets into the current calculations. We'll check on what that number is.

Thanks, Neal. That will be great. And just, I'm sure I have these notes, but if you guys could remind us what the tax rate guidance was that Steve referred to for '06 through '09? And kind of give us, I think Steve mentioned that now you guys believe it will be lower than that, if you could just remind us of where you were and maybe give us some sense for the magnitude of how much lower.

This is Frank Ault. At the analyst conference, we showed them that the rate was going from the low 30s in 2005 up to 40% or so by the time we get to 2008. Remember that the Section 29 credits will end at the end of '07. So by the time you have '08, you don't have those, as well as the Section 42 Housing credits that Sempra Financial are phasing out. So when tax credits are gone, we should be up close to the statutory rate.

Steve did indicate that with these adjustments, we are going to have -- with the tax settlements some -- a little bit of a favorable adjustment. So I would anticipate rates will run just slightly less than what we had given you the last time. But it isn't going to be that material by any means.

And by "slightly less," Frank, you mean several percentage points or even less than that?

Well, it's hard to predict, because a lot of it is going to depend on where the earnings are. There are different tax rates and different jurisdictions in some of our businesses. So it is very difficult to point out and say it's an exact number.

Okay. Thanks. And if I could just follow up on that for a second. You had mentioned that the state tax audit has been resolved and there are some outstanding issues with the IRS. Can you give us a magnitude for -- for how much is still in question at -- with the IRS?

I don't have that information available.

All right. Thanks very much for your time, everyone.

Your next question is from Leslie Rich with Columbia Management Group.

Hi, I'm sorry if you went through this and I missed it. If you could talk about in Commodities, when you put gas in storage and you had to do a negative mark-to-market, I assume that's what you meant just how much --

Please speak a little louder.

You were talking about the negative impacts of, I assume putting gas in storage and then doing a negative mark-to-market on that as the gas prices rose. Is that sort of generally what occurred during the quarter?

Yes. That's -- the problem from a gas accounting standpoint is that inventories and -- inventories and storage and pipeline capacity are not mark-to-market any longer. So when we sell gas forward, and hedge it by buying it and putting it in the ground, the piece -- the half of the hedge that's in the ground stays at cost, and the piece that's sold forward gets mark-to-market and in a rising market that creates a loss if not offset by a gain.

So how much was that loss during the quarter?

We're not disclosing that.

Okay. But it's non-cash?

Yes.

Right. But it is included in your reported results?

Yes, it is.

Okay.

And we report -- Leslie, we report on a GAAP basis.

Right.

We run the business on an economic basis. I mean, we look at it -- maybe you will have several quarters long, or even a little more than a year-long transaction, and so you may carry inventories for significant period of that duration, and at the same time, be marking the forward sale up and down. And whereas the inventory position may only go downward. And when it closes, and we deliver the gas, the economics of the transaction are expressed that were there in the beginning. Had we remained on a mark-to-market basis, you would have had that reported initially when the transaction was fully hedged.

Okay. And then separately on Port Arthur, when did you file your application for that? And when can we expect for the decision?

That application was filed -- this is Don Felsinger. It was filed last year. We would expect the FERC to act on that application by year end.

Okay. Great. Thank you.

Your next question is from Rudy Tellintino with Prudential Equity Group.

Could you give us an update on the progress of your Continental Forge lawsuit?

Yes, at this point, we're -- we have no -- really no new information regarding that litigation. As I -- or we mentioned before, our companies really have done nothing wrong. We continue to treat this as a risk management exercise. We take into consideration the complex nature of the litigation. There are uncertainties resolving around jury trials. We will continue to keep our website updated with relevant information. We're not going to comment on the status of any private discussions with parties to the litigation.

All right. Thank you very much.

Your next question is from Fasel Kahn with Citigroup Smith Barney. Good afternoon.

Good afternoon. Just a few questions here. What were the exact impacts of the remaining Section 29 tax credits and the Section 42 tax credits in the quarter?

This is Frank Ault. For the quarter, we had a positive impact on earnings of about $10 million from the Section 29 credits that we hold and about $4 million from the is Section 42 credits.

Thank you. Then on -- can you tell us what the exact mark-to-market was in the quarter?

Of what?

Your overall trading book.

No, we report GAAP, not mark-to-market.

All right. Did you make any more legal -- did you have any more legal reserves in the quarter?

No, we did not change our legal reserve.

And on the MOU with Gazprom, can you elaborate in terms of what those volumes or quantities look like?

This is Don Felsinger. In the meeting with Gazprom last week, they are the largest gas producer in the world and they are looking at North America as being a market for some of their stranded gas. The discussions we had with them were along the lines of bringing to North America about 2 billion cubic feet a day, which is about the size of our Port Arthur facility. So we signed an MOU to look at deliveries to Port Arthur and also deliveries to our Mexican facility in Baja, California. They liked the fact that we had delivery points, both in the Gulf and the West Coast, and so we now have study teams put together to look at the timing and other business issues around bringing this gas.

The other thing that Gazprom wanted to emphasize in the discussions with us is they liked the fact that we are one of the largest non-affiliated upstream marketers of gas. And so the fact that we move between 10 and 12 B's a day, and don't have any upstream competing gas we're trying to market, makes us an ideal marketer for their potential deliveries to North America.

Okay.

We would be out of the Stocking [ph] field up in the Bering Sea, this is a large gas field that they are in the process now of working with others to bring into production.

Is there a, I guess a delivery date, it says 2010, 2011, is that --?

2009, 2010 are the time frames they are talking about with us.

Okay. And then on the generation side, what was the capacity factor for your overall generation fleet for the quarter, I guess between Texas and California?

Mark Snell is going to look at the number, but it was in the high 85% range.

Fair enough. Thank you.

Your next question is from David Grummhaurs with Copia Capital.

I have a couple of quick questions. On the utility, obviously, I assume the 50 million that you will get from the settlement is in the guidance?

This is Ed Guiles. That's correct, it was in the guidance in the range that I covered at the analyst conference.

I might mentioned that the $50 million is a pre-tax number.

Okay. That's helpful to know. When you look at the tax settlement and you look at the help -- the settlements, is the utility still tracking or are the utilities -- were they weaker this quarter than expected?

This is Ed Guiles. We had a very solid quarter and we're on track consistent with the guidance we gave at our analyst conference.

Okay. And can you talk broadly across the business about the cash flow outlook? Are you largely on what you were thinking about at the analyst conference, or with the lowered trading -- lower trading outcome, are you seeing some additional cash flow?

This is Neal Schmale. In general terms, we are on track with the cash flow that we talked about.

Great. Thanks for the time.

Your next question is from Vidula Merke with Tribeca Global Management.

Good afternoon.

Afternoon.

In terms of the pending litigation that I was curious about, is there a date that's been fixed yet for when that's supposed to start?

This is Steve Baum. The Judge -- the Judge has set an early June date for motions in -- motions in Limnae [ph] to narrow the issues with respect to the case. There are several other motions that have been made which are currently under consideration. And it's early September, currently set for a trial date. Now those dates have not been changed by the Judge, but there are a number of issues under his consideration right now, which may or may not affect those dates.

Okay. So these other motions, so they could potentially narrow or expand the scope of what could be considered in the case?

Well, the motions in Limnae are typical motions made in every case, which would try to reduce or simplify the matters to be considered. And they are standard stuff. In addition, because the plaintiffs have amended their complaint recently, there are a series of other motions that have been made with respect to those -- the amendments in the complaint and those are also under consideration by the Judge. Depending upon the outcome of the Judge's decision in those matters, the schedule may be affected.

Okay. Thank you very much.

Your next question is from Dev Halstuch with Alliance Capital.

Hey, good morning and afternoon. Just to help sort of work with this, the trading question that I think a lot of people are working with, is it possible to get the cash flow from operations reading? You disclosed it annually --

I can't hear you. Sorry. You broke up.

I'm sorry. You disclosed annually the cash flow from trading and it was told by the analysts meeting that you would probably expect that cash flow would sort of reverse its negative or the working capital used from last year, and maybe it would be helpful to get the cash flow from the trading business to understand that that indeed happened or that put more clarity around this accounting issue that makes it more murky?

Well, be careful of reading too much into any one number from the trading, but in general terms, the -- the cash flow from the trading business so far this year has been -- has been roughly flat. The extent to which trading cash flow turns around, if you will, from what happened last year, and then becomes a generator of cash depends on a lot of factors, including, for example, how much we have in inventory, and -- and the price of that inventory.

We have yet to see that sort of reverse, again, given that the level of activity will be high, at the year end we would expect to be break even if it was today?

In general terms, here's what you can think about the trading company. When earnings are stable, in a stable state, the trading company will tend to throw off cash flow roughly -- roughly equal to its earnings. So when the earnings grow or when they build inventories, it will tend to build working capital and usually a little bit of cash, just like any other business. But I think, under normal circumstances, with stable earnings you should expect the trading company to throw off cash flow roughly equal to its earnings.

Okay, I guess a tough year, that you had lower earnings for the accounting reasons, yet we don't see the cash flows. We don't know what they are. That's sort of the disconnect.

No, I understand what you are saying and that's -- that's why I made the comment about being -- being careful about trying to read -- read too much into -- into the cash flow. If you are trying to -- if you are trying to back into some earnings number, based on cash flow, I would be very skeptical of your ability to do that.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Your next question is a follow-up from Leslie Rich with Columbia Management Group.

Sorry to keep harping on this. But on your balance sheet there's a liability, under current liabilities called "temporary LIFO liquidation," would you describe what that is?

It is a very unique thing that occurred in how we treat the inventory for rate making purposes in California. Basically, we are on a LIFO method, and under the LIFO method we have a situation where the inventories are very high at the beginning of the year, go down in the middle of the year, and then build back up. And LIFO is based for the full year, for how we do it for regulatory purposes. So during the quarter, as we have taken gas out of inventory, we are getting down into some of the older, less expensive price levels, but the price that we are charging the customer is still at the higher level, because inventories, as they build back up with the higher price of gas that we are incurring now, will cause the price to increase later in the year. We use a flat rate with the customer.

So in essence, it's almost like a regulatory balancing account where we have overcollected from the customer, compared with what we have taken out of inventory, but that reverses over the end of the year and it will be zero by the time you get to year end. So when you look at the balance sheet, you saw December, it was zero and it will be back down to a zero by the end of this December as well.

Okay. And then separately, Steve, I wondered if you could just talk about the outlook for power in California this summer.

Well, I might ask Ed to comment too. If we could predict the weather accurately, I could give you a much more certain answer. The supplies from -- just as we look at it across the West, from my perspective, supplies are tight, and we could have -- if we have very severe weather conditions, some severe system problems. But Ed, why don't you --

Yes, Leslie, if you look at the analysis that's been done by the California ISO, it's a little bit better in the northern part of California, but focusing on what we call SP 15 of the southern half of California, they look at different probabilities, 50/50, 80/20 and 90/10. The 90/10 probability is the one where we'd have an extremely hot summer. And if you get into that circumstance, and you look at the reliability calculations, where we look at, for instance, in our service territory, simultaneously having hot weather, the loss of the largest rotating generating unit within our load center, and then on top of that, the loss of our largest transmission line. If we get into that circumstance, where we're basically able to cover our load, but no more and if we had any further outages we'd have to curtail a load.

What we have done with the ISO and what we are doing across the state is educating customers, making sure that we have our demand reduction programs in place, so that if there were any outages required, principally by hot weather or contingencies, fires, et cetera, that we can cover that. We -- again, I will just reiterate, we are comfortable in our service territory that we meet our reliability requirements and we're working with customers to make sure we are prepared for contingencies.

Okay. Thank you.

Your next question is a follow-up from Jay Hatfield from Zimmer Lucas.

Hi, it's actually Craig Lucas. Good afternoon.

Good afternoon.

I know that you guys spent a lot of time talking about this, but I'm slightly confused. There's a tax item of utilities, a tax gain and you have used that word that it was pretax. Is that true? How can a tax item be pretax?

This is Frank Ault. When I mentioned something was pretax, what I was talking about was the comment that was being made in regard to the settlement that we have for the DSM awards. The $50 million that Ed Guiles made mention to. That 50 million is a pretax number. Clearly, the tax settlement of 12 million at SDG&E and 4 million at the gas company our after-tax and pretax are one and the same.

Okay. If I were to look at the net of tax impact at the utility, as well as at the $0.06 parent tax item, what is the -- if I were to net those two, what is the total net tax gain per share for the Company?

Well, as we indicated earlier, that the total impact of the settlement of the state and federal tax issues in the quarter was a positive 59 million.

Right.

And that was composed of the three components, the positive impact 12 million at SDG&E, 4 at SoCal and 43 million at the parent, so a total of 59 million positive impact, which would have an effect on EPS basically of about $0.24.

Okay. That's helpful. And then when we go back and talk about your earnings guidance of 3.10 to 3.30. So you are reiterating the guidance. You mentioned that you had a mark-to-market in the trading business that was really a timing issue, so you expect to still be on target for the 1.50 to 2.20, I believe you said that earlier in terms of the trading business. And you reiterated you guidance of 3.10 to 3.30, but mentioned that that $0.24 is in your guidance.

What I said was that the favorable outcome in the tax -- in the tax matters would place us -- it would -- there's a greater probability that we will hit the higher end of that range. We haven't changed the range. We just said that we -- there's a greater probability that we would hit the higher end of that range.

Oh!

That's made up of the favorable tax results, the favorable continuing tax effects, and our belief that the trading company, based on what we see, will make its numbers.

What is the component that is the continuing tax effect?

Well, there's -- part of the tax settlements result in a -- result in a slightly lower effective tax rate than we had predicted.

On a going forward basis?

Yes.

Oh, I see. So essentially -- essentially if I wanted to represent your earnings, including the -- excluding the one-time item, I would say that at a minimum you are at the low end of the band currently?

That's why we give you what -- we give you a range of earnings for the year of 3.10 to 3.30 and what we have said is that we think we'll come out on a GAAP basis near the higher end of that range for a variety of reasons.

I see. Okay. I understand now. Thank you. Thank you for the clarification.

Your final question will come from Paul Patrick with First Manhattan.

Hi. Good morning or afternoon. I wanted to ask you a question on Gazprom. Could you maybe elaborate a little bit on -- you mentioned it was the memorandum of understanding. What's the difference between that and a heads of agreement? How long have you been talking to them? And is there a -- what's the potential to do business beyond just the LNG terminal-related business. You mentioned the marketing side of things. Is there a potential to go beyond just LNG terminals and do marketing-related business with this entity? Thank you.

This is Don Felsinger, Paul. An MOU, and a heads of agreement basically accomplish the same things. They put you in an audience where you are discussing business opportunities. But we have three things we're working on with Gazprom. One is utilization of our terminals and that may or may not include an equity contribution by them into either Port Arthur or Cameron. It was to have a team look at the marketing opportunities to move that gas to market in North America. They will be working with our Commodity Group.

And there's also a third team looking at generation opportunities, another way to monetize their gas would be to commit it to some gas-fired power plants. And so we have some plants that we have that are operational and some that we have planned, and Gazprom would like to better understand what some of the generation opportunities may be.

So we have three teams working together to address those three issues and the teams have already started working together and I would imagine in the next three to six months, we'll determine whether or not any one of those three makes sense for both us and Gazprom.

Great. Thank you.

Neal has, I think, the answer to a question asked earlier.

Yes, the question was asked earlier if any portion of the weighted average number of fully-diluted shares reflected the equity units, and the answer is about 4 million of the 241 million fully-diluted shares relate to the equity units in the first quarter.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Arriola, are there any closing remarks, sir?

I think that's it. We appreciate everyone joining in today. If you have follow-up questions, you can call the IR number and Karen, Glen and I will be around to answer your calls. Thanks a lot and have a good day.

This concludes today's Sempra Energy first quarter 2005 results conference call. You may now disconnect.