桑普拉能源 (SRE) 2005 Q2 法說會逐字稿

Good afternoon. I will be your conference facilitator. At this time I would like to welcome everyone to the Sempra Energy second quarter 2005 results conference call. 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. Arriola. Sir, you may begin your conference.

Thank you. Good afternoon and thank for joining to us discuss Sempra Energy's 2005 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, our 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 Sempra Utilities, Mark Snell, Group President of Sempra Global and Frank Ault, our Senior VP and Controller of Sempra Energy.

Slide two contains our Safe Harbor statement. I would like to remind you that this call contains forward-looking statements that are not historical facts and constitute forward-looking statements within the meaning of the Private Securities 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 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. I would also like to point out that we have some new information we are providing beginning this quarter. On our Website we have post stood additional tables with detailed income statement information by business units. We are also providing additional disclosure on our commodities business. With that, I would now like to turn it over to Steve who will begin with slide three.

Thanks Dennis and thanks to all of you on the call for joining us today. Earlier this morning we reported second quarter 2005 net income of $121 million, or $0.48 per diluted share, compared with the second quarter 2004 net income of 121 million, or $0.52 per diluted share. For the first six months of 2005, Sempra Energy's earnings increased to $344 million or $1.40 per diluted share, from 318 million or $1.37 per diluted share during the first six months of 2004. Sempra Energy's strong performance for the first six months of the year, combined with improved expectations for the second half of the year, primarily at Sempra commodities and Sempra utilities have increased our 2005 earnings expectation to a range of $3.20 to $3.40 per diluted share, up from $3.10 to $3.30 per diluted share. We will review the individual business unit expectations for 2005 later in the presentation.

Now, let's turn to slide four and go into a little more detail on each of the major business segments beginning with the California Utilities. Sempra utilities reported second quarter 2005 net income of 87 million, compared to 80 million in the second quarter of 2004. Net income for San Diego Gas and Electric, or SDG&E in the second quarter 2005 was 29 million. Down slightly from 30 million in the second quarter of 2004 as a result of reduced revenues and higher operating costs attributable to the Company's share of San Onofre nuclear generating station. At Southern California Gas, net income increase to 58 million in the second quarter 2005 from 50 million in the second quarter 2004, due primarily to lower operating expenses. Combined net income for Sempra utilities has increased 16% for the first six months of 2005, to 215 million, from 186 million in the first six months of 2004. SDG&E recently put into a service a critical transmission line, Miguel-Mission 2, a full year ahead of schedule using innovative techniques and materials. SDG&E expedited this project in order to increase reliable and help alleviate concerns about tight power supplies for the summer. The $50 million project increases import capability to SDG&E's system by up to 400 megawatts.

Please turn to slide five. As you can see we've expanded the information we provide on our commodities group to include information on mark-to-market profits. Second quarter 2005 net income for Sempra commodities was 26 million compared with 46 million in the year earlier period. However, at the end of the second quarter our commodities group had approximately $50 million of unrecognized mark-to-market aftertax profits. Most of which we expect will be recognized as GAAP net income by the end of the year. Sempra commodities is ahead of last year's pace. With 129 million in mark-to-market earnings for the first six months of 2005, compared with 99 million for the first six months of 2004.

Generally speaking, since the issuance of EITF 02-3 the FASB has required that certain physical assets such as pipeline capacity and storage be valued at cost. While the forward sale of the related gas or oil is mark-to-market. This accounting treatment creates temporary profits or losses that do not reflect the economics of that period's operating results. The information we are now providing on mark-to-market earnings will allow to you evaluate this business on the same basis as we manage it.

Slide six is a summary of commodities margin, which we provide every quarter in our press release tables. The EITF impact previously discussed is evidenced most in the natural gas book. This is primarily driven by the unrecognized increased value of gas and storage. The difference between the current and future natural gas prices has been at historical highs in Europe. The strong margin in our power book is a result of higher volatility and prices in that market. We have also expanded our power operations since last year.

Now please turn to slide seven. Sempra generation's second quarter net income increased to 27 million in 2005 compared with 19 million in 2004. The Company benefited from increased power sales from its Texas generating facilities including the Coleto Creek power plant, which was acquired in July, 2004. Second quarter 2004 results included a provision for litigation expense. Last weeks Sempra generation completed the acquisition of the remaining 50% ownership of the 480 Megawatt El Dorado power plant. With this acquisition, Sempra generation's portfolio of inservice generation now totals over 3,900 megawatts. The acquisition gives us additional capacity to take advantage of improving spark spreads in the west this summer.

Now, let's turn to slide eight and cover pipelines and storage. For the second quarter, net income for Sempra pipelines and storage was 16 million in 2005, down slight from 17 million in 2004. However, second quarter 2004 results included 5 million from the sale of a portion of our Loseville(ph) sewer investment in South America and two offsetting non-recurring items. Pipelines and storage recently sold 25% of its liberty gas storage project. A 3 million gain from the sale was recorded in the second quarter. Liberty Gas Storage filed for its FERC permits in March. Given the recent favorable open season results, we expect Liberty to be in service in the second quarter, 2006.

Please turn to slide nine for an update on our LNG business. For the second quarter 2005 Sempra LNG recorded a net loss of $5 million, compared with a $2 million loss in 2004. For the first six months of 2005, Sempra LNG recorded a net loss of 10 million compared with a net income of 4 million in the first six months of last year. Our 2004 results included an $8 million benefit in the first quarter related to the favorable buy-out of a future obligation on the Cameron LNG project.

Yesterday we announced the signing of an important terminal service agreement with Eni of Italy, an energy products and services company. The 20-year capacity agreement will be for 600 million cubic feet of gas a day, or approximately 40% of Cameron's capacity. With the Eni agreement finalized and additional commercial negotiations progressing, we will commence construction on the Cameron LNG terminal this quarter with operations beginning in late 2008. In addition, Eni entered into an agreement with us to purchase capacity on the Cameron pipeline we are developing. The 20-year contract is for 600 million cubic feet per day.

In Mexico construction on the Energia Costa Azul terminal is progressing. The 1 billion cubic feet per day fully constructed - - excuse me, contracted terminal is expected to be operational in 2008. The Port Arthur LNG terminal in Texas is waiting to receive Federal regulatory approvals, which are expected by year end. We are very pleased with the progress of all three of our LNG projects.

Please turn to slide ten. Sempra financial reported second quarter 2005 net income of $7 million, compared with 6 million in the second quarter 2004. I also want to give you an update on the status of the Continental Forge class action case. Part of the California Energy Crisis litigation. Since our last earning calls in May there have been several status conference calls held by the presiding judge in the case. And we have continually updated our Website to reflect additional information and new filings. We continue to have discussions with the plaintiff's attorneys and other parties in an effort to reach an appropriate resolution of the issues surrounding this case. We will not however be disclosing any of the details of those discussions.

Here are some key information that was decided at a status conference held on July 27 with Judge Craigger(ph). On August 24, the Judge is scheduled to start hearing over 30 pretrial motions. It is uncertain how long that process will take. And on August 29, the Judge is scheduled to hear a motion for summary judgment and a motion for continuance of the trial start date. The Judge has also rescheduled the trial start date to September 12, 2005. The Judge indicated that he may revisit the trial date after he resolves the pretrial motions, which include motions that may impact the scope of the issues to be tried. Obviously there is a lot of work that has to be completed between August 24 and September 12 in order for a trial to commence.

I also wanted to give you an update on the filing Sempra made to the Federal Energy Regulatory Commission on June 22. We filed a petition seeking a declaratory order from the FERC that it has exclusive jurisdiction with respect to the issues raised in the Continental Forge case that preempts the California proceedings. A FERC ruling in our favor would not in itself dispose of the California litigation. We expect a FERC decision shortly. If FERC rules that it has exclusive jurisdiction, as we believe is the case, then we will ask the court to dismiss the case. We continue to view this case and related matters as a risk to be managed and are focused on trying to reach a satisfactory resolution.

We will continue to update the company Website with relevant information on these matters. Finally, I want to discuss our outlook for the remainder of the year on slide 11. Based on the solid performance of our business units for the first six months of the year, and our prospects for the second half, we are increasing our 2005 earnings per share guidance at a range of $3.20 per share to $3.40 a share from our previous range of $3.10 to $3.30. I want to review the major assumptions underlying our outlook for the second half of the year.

At Sempra utilities we expect two major regulatory approvals later this year that were in our original guidance. In December, 2004, the California Public Utility Commissions Office of Rate Payer Advocates approved a settlement with our California utilities for awards related to demand site management and energy efficiency programs. If the Commission approvals the settlement as we expect, the utilities will recognize approximately 30 million in net income in 2005. The SEC issue relates to a segment between SDG&E and the California Independent System Operator for the recovery of charges associated with the 500 KV electric transmission line that connects San Diego to Arizona. If the settlement is approved by the FERC as we expect SDG&E will record approximately 25 million in net income. This settlement will also have an ongoing positive impact to SDG&E.

The utilities' strong performance year-to-date as the expectations of these two items occurring this year led to us increase our net income range to 450 to 470 million for the utilities. As separate commodities we have increased lower end of our net income range to 180 million from 150 million. We continue to grow our business base in Europe in both the power and natural gas markets. And we are seeing increased profitability in our North American power business.

Our guidance assumes most of the approximately 50 million EITF 02-3 impact will be recognized this year. At Sempra generation we increased the bottom end of our earnings range to 150 million from 130 million to reflect increased operating efficiencies, our recent acquisition of an additional 240 megawatts of El Dorado energy in Nevada and opportunities related to improving spark spreads in the west and Texas.

At parent and other, our previous guidance anticipated some amount of tax benefits. A first quarter favorable tax settlement of 43 million at the parent and improved performance from Sempra financial has led to us positively adjust guidance. Our forecasted effective tax rate for 2005 is approximately 20%. Our plan also assumes approximately 250 million average shares outstanding for the year. In the second quarter, the Company repurchased approximately 2.3 million shares in the open market. Combining our solid year-to-date results with our identified prospects in the second half, we are confident that we can deliver results in the 320 to 340 range for the year. And with that I will now open the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Ashar Khan of SAC Capital.

Can I ask a question on the updated guidance? Would updated guidance, higher guidance for the utility can we assume that utility earnings would be higher next year as well because of the rate base growth? And so the positive upward guidance should also, the factors should also carry on through for next year?

Let me ask Ed Guiles to comment on that, Ashar. We are not currently revising our 2006 guidance. But I think we could comment on the fundamentals within the utilities rate structure. Go ahead, Ed.

Yes, the - - this is Ed Guiles, Ashar. The two utilities we are very positive about what's happening with respect to control of our expenses and with respect to the cost of service proceedings, which now we've gotten finalized. And in addition next year, I think as many of you know, we continue to work on improving the quality of earnings and we will be placing the Palomar unit in rate base as SDG&E, which is over a $400 million addition. So we continue to feel very positive about our growth in the utilities. We have shown to the analysts at the analyst conference that over the long term we expect earnings to grow in the 3% to 4% range and we feel confident we can deliver on that.

So Ed, you expect utilities earnings next year to be higher, correct?

This is Frank Ault. I might add just two more things. One of the things that Steve Baum just talked about, which was the pending settlement with the California State ISO, that will have an ongoing positive impact to us on our earnings moving forward. As well as the pending resolution we have with the Commissions where we've asked them to relook at the cost of our San Onofre facility where we got a little bit less on our last decision. They have agreed to rehear that issue and we are an anticipating upward adjustment there. As well as we have filed for our higher ROE and our cost of capital filing and if that is approved that would go into effect in beginning of next year as well.

And Steve, just going to LNG, initially had you made a comment that you would like 100% of your capacity tied in before you begin construction. And on this one with 40% tied in, if I am correct, you are starting construction. Could you just tell us a little bit why the change, I guess strategically?

Well, just to clarify, the rule that I had imposed on our developers was that we would need to be able to to be assured through contract on the recovery of our investment with a return. It had not insisted that we had 100% of the capacity or the throughput contracted. It did happen that in that was the case in Energia Costa Azul. But we are really quite of confident with respect to the Cameron facility because of negotiations that are in advanced stages with other parties for capacity at that terminal, in addition to the 600 million per day now contracted by Eni.

So, can we expect by the end of this quarter that would you have majority of that capacity done up? Is there another timeframe you could tell us?

Well, these negotiations are ongoing and we are quite confident of them. I don't want to tie them to a particular timeframe. But the - - I just want to emphasize the 600 megawatts completely pays for the terminal with a return. And we have enough interest so that actually the interest is sufficient to spill-over significantly to our Port Arthur facility.

And any update as to how you plan to finance? You had mentioned you were look at project financing. Can you just update us any more as to what is the way this financing is going to happen?

Let me ask Neal Schmale our Chief Financial Officer, to discuss the project financing.

As we've indicated in the past over time, we expect these to be project financed.

Okay. Neil but so is that pretty firm now and could you tell us how much would be project financed?

Well exactly how much would be project financed kind of depends on the market conditions at the time the transaction is done. But I would point out though with the kind of contracts that we have supporting these facilities, they are very amenable to project financing.

Okay. But you've gotten up was it - - 60% percent, 70% you don't have anything that you can share?

No, not right now. It really does, in fact depend on market conditions and at the time you transact. And what your general views are at that time.

Thank you very much.

Your next question comes from Michael Goldenberg of Luminous Management.

A couple of questions. First of all on the Eni deal that you guys announced, can you give us any sense of the pricing or return any sort of number in - - any part of the income statement that we could use?

We've agreed with Eni to keep that - - the actual - - it's a capacity deal. And it include the contracting on our take away pipeline. But we've agreed with Eni to keep that, the terms of that capacity deal confidential. You can understand that this is a very competitive marketplace and it could be a disadvantage to be publishing our actual numbers.

By capacity deal you mean basically [like a rent price there's absolutely - - there's a discount to gas a percent discounts to gas on it.]

That's correct.

Secondly, could you remind us how many other HOA's you have outstanding that you haven't signed off a partial contract yet?

I may have to this about this a minute. I think it's either - - it think it's four but, I think - - John Felsinger.

I think that's right. I think we've said that we have four more outstanding and we've identified the names of one of those. The other three are confidential.

What is the name of one of those?

I have to check here, Tractabell(ph).

Okay. Wasn't there something with the [inaudible].

Yes and I think we did identify an agreement or an agreement to negotiate with the gas pump.

Okay. Secondly just wanted to [inaudible].

You are breaking up, Michael.

I'm sorry. Give me one minute, please. On this generation front, is there anything on the new coal plant that you may want to discuss just other than more in detail in sort of the timing, considerations for the new coal plant that you've announced in Texas?

Michael, this is Mark Snell. We've just applied - - started the permitting process in Texas and kicked off the expansion. We really don't have anything new to report there. And the facilities that we are looking at in the west we are still evaluating those facilities and working on some of the preliminary stages of the permitting to see and we will make a decision later this year weather we will go forward or not.

But haven't you decided already to go forward with Twin Oaks plant?

Yes.

When do you think if you - - I should start at building, when do you think that could be operational?

We just started the permitting process so we really don't have a time frame yet for construction.

Okay. And final question on the Continental Forge, if a settlement were to take place, as you've said you're in discussion right now; is it more likely that it will come before the trial begins, during the trial? Is there anything in terms of once the trial begins that could make the settlement more or less likely in anyway?

Settlements generally are - - settlement - - and I'm speaking generically now, this is not about us in particular. But settlements generally occur right up to the courthouse steps. And even in some cases while the trial is ongoing or even in some cases when the jury is out. In fact even sometimes after the jury comes back and gives an award. Now we're working - - going to trial is not the end of the story. But I don't want to leave the impression that somehow there is brinkmanship here. This is something that we would like to reach a satisfy resolution on and we are dealing with as a risk management matter. And we are in discussions with the plaintiff's in this case about a resolution.

Thank you very much, gentlemen.

[OPERATOR INSTRUCTIONS] Your next question comes from Leslie Rich of Columbia Management Group.

Hi, I wonder, Steve, if you could go back to the commodities results and walk through where you said you saw strength in the quarter and where you saw weakness? I thought you said gas and power market in Europe were strong but yet if I look at the geographical breakdown of your, results seem negative gross margin.

Hi, Leslie. Let me ask Mark Snell to comment on this. I think what I said was that the power business in the U.S. and the gas business in Europe had picked up. But go ahead, Mark.

Okay. Leslie when you look at the commodity accounts margins that we've shown on the slide and also attached to the press release, keep in mind that these are GAAP results. And therefore don't always reflect the underlying economics as we've discussed as relates to the EITF adjustments. And it's true that the gas- - the Europe and Asia numbers look low being negative. But that is where most of the EITF adjustment is coming from as relates to gas and storage. And that's primarily the result of having a fairly large inventories in Europe that we are holding and the fact that the spread between current prices and forward prices are at record highs there.

And you've sold that gas forward?

Yes, we have.

Why don't you give - -.

I can, let me just for those on the call give an example here. The best way to explain the EITF adjustment is to kind of look at something that's kind of simple. But if we by gas today at $6 including the related cost of storage and sell it forward for January delivery of, say, 7, we've made $1. And but if we assume prices rise by $1 we've experience no economic impact and we still have our $1 of locked in profit but the GAAP results is quite different. GAAP would have us record $1 loss on that forward sale and we wouldn't recognize the corresponding gain on the value of the inventory and storage. Then of course as we approach the winter delivery dates the GAAP earnings and underlying economics come into agreement. And that's what we will see here as we approach the last, fourth quarter of the year. As we get closer to our delivery points those numbers will all come into agreement.

And then what was the comment you made on oil?

Well, on oil the, some of that loss in oil is a result of the same kind of EITF adjustments because of some inventories. But that's really a relatively small part of the oil loss. And the rest of it is really just attributable to sort of the ups and downs of having a diversified trading book.

Okay. Thank you.

Your next question comes from Paul Patterson of Glenrock Associates.

The ongoing impact, that $25 million in the IFF settlement was that an ongoing impact? I wanted to clarify that, sounds like some of it was ongoing or just in 2006?

No, but Ed Guiles will clarify that.

Hi Paul, this is Ed Guiles. We have been working on the settlement with the ISO. This goes back a number of years and the $25 million number really is catch up for a number of years. The ongoing impact is somewhere between five and $10 million a year pretax. So there will be an ongoing benefit of getting this resolved.

And then also just PBR's in 2006, you gave us an outlook for 2000 for the rest of this year but anything else that we start to - - you guys seem to sort of always get them but they come in a little bit unusually?

As you know we continue to work on them. We have plus or minus 22 million at risk at the two utilities. With respect to the demand site management settlement we expect to get that approved this year. There is a piece of that settlement for SDG&E. The total is $87 million, 73 million at SDG&E, 14 million at the gas company. That 87 is pretax. A portion of that we expect to get this year. And then the remainder will be amortized over 36 months. So we will have some benefit from DSM next year. And then of course we will be continuing to work on developing operational savings that would be part of our normal PBR

Then finally the DWR contract, I'm sorry if I missed this, but the appeals court ruling, what do we - - what's the procedure now and how are arbitration discussions going on there?

Well, there are two, there are really two cases that are involved here. One is a Superior Court case that will be, where we will go back now, that we have won summary judgment. And the appeals court reversed the summary judgment ruling. So we will at some point, later this fall I believe, have perhaps be back in trial on issues in the contract in Superior Court in San Diego. And then with somewhat related issues there is an arbitration proceeding under the contract. Now, the contract has an arbitration provision in it but in the earlier court case we had agreed with the State to go to court. We had gone in on a declaratory relieve action and that's what had started it. So you have two proceedings. One is this contract interpretation case that's been sent back for trial. And the other is an arbitration that's going on having to do with similar but also some different matters having to do with delivery of gas under the contract and some related technical issues.

When do you think the arbitration we might hear something more on that or do you think that - - ?

Both of those, well, the arbitration, one way or another will get resolved this year.

Okay. And then the coal plant in Texas? Just if you can give us a little more thought on the PPA's that you are sort of looking at? I know you guys are looking at getting some PPA's in place on, and just sort of what the costs might be on that for KW and what have you?

Well, Mark.

You are right we are looking at several different potential customers for that output. And we are in the early discussions stages now, so I don't really have anything to report. But we would have something signed-up before we would ever agree to a construction program. And then what was the second part of your question?

Just as the cost on it, I mean the cost per KW. It sound like it's an expansion of an existing facility so I was just wondering if you can give us a flavor as to what the capital costs might be for that? And I also wanted to follow up on the PPA again.

We've like I said we haven't really done the permitting yet and so we don't have construction estimates yet. But it should be less expensive than a greenfield plant. But we would expect it to be something between $1000 and $1,500 a KW. Maybe going up as much as 1,800.

Okay. And then when you talk about the PPA's would they have to be, can you give us a flavor for - - I mean I assume they would have to be investment grade parties that you would have it with or does that matter? Give me - - does it all have to be contracted out or would you guys be willing to take some spec if you know what I mean, considering how bullish you guys have been on gas prices? Any more flavor you can give? I know it's preliminary, I know it's early on. But whatever you can tell me would be appreciated.

Look, I think a lot of things can change between now and the time that a plant like that could come on line. But generally speaking as we have with our LNG facility and as we have with all of our major capital projects we would have enough of it contracted that we would not be exposed to an economic loss if we didn't sell any of the other power forward. Now, would we keep some of it for sale later in the market? I think it's really too early for to us make that kind of judgment now.

Okay. Thanks a lot, guys.

Your next question comes from Faisel Khan of Citigroup.

Good afternoon. On the request to increasing ROE.

I can't hear you.

I'm sorry, can you hear me?

Yes.

On the request for the - - to increase the ROE at the utilities, would that really have a material impact in 2006 given kind of where your earnings levels are right now at the utilities?

I will take that. Hi, Faisel, this is Ed Guiles. We've made the filing as you know in May. And we expect hearings and a decision before the end of the year. I think if you look at going from where we are today at 10.31 up to 12 and we've also asked for a slight increase in our equity ratio, you would see an increased revenue requirement of about $39 million.

Fair enough. On San Onofre, what were - -what's going on over there in terms of - - can you give us a little of an update? Are you going to have to put in the CapEx into that facility? And what was the impact of these, the higher operating expenses from San Onofre?

Yes. This is Ed again. There are three things I will just mention to you. One is a carry over from our cost of service proceeding it's really getting revenue recognition for the full amount we are being billed. That's about a $19 million pretax issue. And we would expect that to get resolved either late this year or the first part of next year. The second issue is just on a year-to-date basis Edison is spending for our purpose above authorized. That's costing us just under $5 million in O&M. And then on an ongoing basis, as I think you think you know, Edison has filed to replace the steam generators long-term. We have made a filing with the Commission indicating we did not want to participate in that. Although we would consider taking a power purchase agreement back. That matter, I think, will get decided by the Commission toward the ends of this year and we will just await that outcome.

On the commodity side what was the result of the strength in the power business? Has something in the market changed in the last quarter that kind of gave you guys better results?

I will let Mark Snell respond to that.

Faisel yes, we've had a good growth in the power business both in the U.S. and in Europe. And just as on a quarter by quarter over quarter comparison we've just have done a lot better. We have a bigger group now. We have more people in it than when we had last year. And we've just seen some stronger activity.

Is there increased liquidity in the forward markets on power? Is there a significant amount of increased liquidity, I should ask?

Yes, there is. Most of it is on the financial side. We have seen a big increase in financial activity. It could be, I mean there's speculation because of the hedge funds that have entered this business that's provided a lot more liquidity. But we are seeing a lot more business being done. And then of course our physical business is always sort of the backbone of that for us and that's remained strong, also.

Thank you.

Your next question comes from Vedula Murti of Tribeca Global Management.

Good afternoon. I was wondering in terms of the contract that you signed with Eni for Cameron, can you discuss a little bit the kind of what you are seeing as current market dynamics? Whether Eni considered other proposed facilities in the region? And what the competitive advantage turned out to you for yourselves such as that Eni chose to work with you as opposed to one of the other developers? And I have a few follow-ups.

Let me ask Don Felsinger to respond to that and I take what may lie behind your question a bit, is there a coming commoditization of LNG capacity? What about Shanir's(ph) announced expansion, is that what you are getting at?

I'm trying to just get a bit more sense of the market dynamics right now and whether there will be incremental demands going forward? Or whether you feel that you have a unique competitive advantage and that this will kind of start tapping out a little bit some of the LNG demand in that region?

Okay. Don.

Well, I guess the way to approach your question is to go back to some thing we have said earlier. We still believe that by 2012 that the country will need seven to eight new terminals. And the majority of those will be located in the Gulf. We feel very confident with the location that we have at Cameron and Port Arthur that we are kind of in the sweet spot of the Gulf in terms of access to pipelines to take away the major markets and to take advantage of basis differential. As far as why Eni would negotiate with us I think that's a question you should ask them. But I think they felt very comfortable with our terminal and with the prices that we were offering. And as we continue to have discussions with the individuals that we signed HOA's with, as Steve mentioned earlier, we have a lot of confidence that we will filling up remaining capacity at Cameron some time by year end and then turn it over and start working on Port Arthur.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Matthew Jones of Catalyst Funds.

Hi, thanks, guys. I had to jump on and off the call. I don't know if you spoke about it but in your prepared remarks you discussed in the generation segment that part of what you guys are looking for in your numbers in the second half of the year is for improved spark spreads. Could you be more specific as to what your assumptions are for the spark spread in the second half of this year?

Sure, Matthew. The - - this is Mark Snell. It's - - for the second half the of year, look I think most of the improvement in generation will come from owning 100% of El Dorado. So that's number one. And then the second part of it is we had some pretty good operational efficiency improvements, which will contribute to that. And then we are seeing stronger spark spreads and also just a typical sort of hot weather spark spreads that we will experience later on this summer and throughout the fall, the early fall, primarily in California. But we are also picking up a little bit in Texas, too.

Thanks.

There are no further questions at this time. Mr Arriola, are there any closing remarks?

No, we appreciate everyone joining us for the call and if you have any additional questions you can call Karen, Len or myself. Thanks a lot.

This concludes today's Sempra Energy conference call. You may now all disconnect.