桑普拉能源 (SRE) 2005 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Sempra Energy third-quarter 2005 results 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 session. (OPERATOR INSTRUCTIONS).

Mr. Arriola, you may begin your conference.

Thank you. Good afternoon and thanks for joining us to discuss Sempra Energy's third-quarter 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, our Group President of Sempra Utilities; Mark Snell, the Group President of Sempra Global; and Frank Ault, our Senior Vice President 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 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 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 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 third-quarter 2005 net income of $221 million or $0.86 per diluted share, compared with third-quarter 2004 net income of 231 million or $0.98 per diluted share. Third-quarter 2005 consolidated earnings benefited from several items, including 71 million in net income from favorable resolution of prior year's tax issues, a $38 million gain from the sale of Sempra Commodities' natural gas storage asset and a $27 million benefit at San Diego Gas & Electric from an electric transmission cost settlement. The quarterly results were negatively impacted by a $189 million after-tax effect from an increase in litigation reserves at the parent company and several of its subsidiaries, almost entirely for continuing litigation. Excluding these items and the impact of discontinued operations, third-quarter earnings were 275 million, up 21% from comparable earnings of 227 million for the same period last year.

A reconciliation of the quarter and the year-to-date results can be seen here on slide three. In the prior year's period, comparable net income included the effect of a $9 million gain from the sale of property and 5 million in tax issues that negatively affected earnings. For the first nine months of 2005, Sempra Energy's earnings were $565 million or $2.26 per diluted share, compared with 549 million or $2.36 per diluted share for the same period in 2004. Comparable net income for the nine-month period was 588 million, compared to 539 million for the same period in 2004. Year-to-date weighted average shares outstanding increased to 250 million, compared with 232 million for the same period last year.

Sempra Energy's strong operating results in the third quarter, especially from our commodity operations, have contributed to an improved outlook for the year. We are increasing our 2005 earnings outlook to $3.40 to $3.60 -- that's a range -- per diluted share on a GAAP basis from a range of $3.20 to $3.40 per diluted share, and later we will go through the drivers of the increased guidance.

Now, let's turn to slide four and go into a little more detail in each of the major business segments, beginning with the California Utilities. The Sempra Utilities reported third-quarter 2005 net income of $138 million, compared to 128 million in the third quarter of 2004. Net income for San Diego Gas & Electric or SDG&E in the third quarter 2005 was $102 million, up from 60 million in the third quarter of 2004. Third-quarter 2005 results included a 39 million benefit from the resolution of tax issues.

SDG&E also recorded a $27 million after-tax benefit from the approval of a settlement with a California independent system operator for recovery of charges associated with the 500 KV electric transmission line that connects San Diego to Arizona. These positive items were partially offset by the effect of a $27 million after-tax increase in litigation reserves.

At Southern California Gas, net income decreased to 36 million in the third quarter of 2005 from 68 million in the third quarter of 2004, due primarily to the effect of a $53 million after-tax increase in litigation reserves, partially offset by an $18 million tax benefit. Third-quarter 2004 results included a 9 million gain from a property sale. Combined net income for Sempra Utilities for the first nine months of 2005 has increased to 353 million from 314 million in the first nine months of 2004. In the third quarter, SDG&E signed two major power purchase contracts for wind and solar power. With these contracts, SDG&E is well on its way to meeting its goal of supplying 20% of its customers' needs with renewable energy by 2010. Also in the quarter, the CPUC improved the construction of a $209 million electric transmission project to improve reliability in the southern part of SDG&E's system.

Now, please turn to slide five. Third-quarter 2005 net income for Sempra Commodities was 161 million, compared with 46 million in the year-earlier period. The increase was driven primarily by improved margins from North American and European natural gas and power sales. Third-quarter 2005 results benefited from the $38 million after-tax gain on the sale of Bluewater and Pine Prairie gas storage projects, as well as $16 million from the resolution of tax issues, partially offset by the effect of a $14 million after-tax increase in litigation reserves.

Third-quarter 2005 results were positively impacted by 8 million in after-tax earnings recognized under accounting rule EITF 02-3. In comparison, the third quarter of 2004 was negatively impacted by $38 million of after-tax marked-to-market losses. At the end of the third quarter, our Commodities group had approximately $66 million of unrecognized marked-to-market after-tax profits, 40 million of which we expect will be recognized as GAAP net income by the end of the year.

Now, please turn to slide six. Sempra Generation's third-quarter net income was $30 million in 2005, compared with 64 million in 2004. Third-quarter 2005 earnings were impacted by the effect of a $5 million after-tax increase in litigation reserves, $19 million of marked-to-market losses on forward purchase and sales agreements and higher development costs. For comparison, third quarter 2004 included approximately 7 million in marked-to-market gains.

These temporary marked-to-market gains or losses are driven by fluctuations in market prices on gas purchases and electricity sales we have made for future delivery. As the spreads widen from our locked-in prices, we record temporary marked-to-market losses. And as the spreads tighten, we record marked-to-market profit. Our 2005 earnings guidance assumes there will not be a significant marked-to-market impact by year end. The locked-in margins will be realized when the power sales contracts mature in two to seven years.

In the third quarter, Sempra Generation completed the acquisition of the remaining 50% ownership of the 480 MW El Dorado power plant in Nevada. With this acquisition, Sempra Generation's portfolio of in-service generation now totals approximately 3,900 MW. In addition, construction of the 550 MW Palomar power plant north of San Diego is on schedule to go into service in 2006. When complete, the plant will be transferred to San Diego Gas & Electric.

Now, let's turn to slide seven seven and cover pipeline storage. For the third quarter of 2005, Sempra Pipelines & Storage reported net income of $19 million, compared with 7 million for the same period in 2004. The increase was due primarily to improved performance from distribution operations outside of the United States.

During the quarter, Sempra Pipelines & Storage entered into a memorandum of understanding with Kinder Morgan Energy Partners to pursue development of a proposed 1,700-mile natural gas pipeline that would link producing areas in the Rocky Mountain region to the Upper Midwest and Eastern United States. As designed, the pipeline would have a capacity of up to 2 billion cubic feet per day. Due to increased interest in this project, the scope and size has already expanded. The total joint investment is now expected to total approximately 4 to $4.5 billion, depending on the final delivery point. Initially, Kinder Morgan would own two-thirds of the equity in the proposed pipeline, and Sempra Pipelines & Storage would own one-third. Several important parties have already expressed an interest in supporting the pipeline project, including EnCana and the Wyoming Natural Gas Pipeline Authority. The project will be constructed in three phases, and we expect to receive Federal Energy Regulatory Commission approval on the first phase of the project in early 2007.

Please turn to slide eight for an update on our LNG business. For the third quarter of 2005, Sempra LNG recorded a net loss of 5 million compared with a 4 million loss in 2004. For the first nine months of 2005, Sempra LNG recorded a net loss of 15 million, compared with breakeven earnings in the first nine months of last year. Results of 2004 included an 8 million benefit in the first quarter related to the favorable buyout of a future obligation on the Cameron LNG project.

As most of you know, earlier this summer, Hurricane Rita directly hit Cameron Parish, Louisiana, the site of our future LNG terminal. We've been working closely with local government and community leaders to help restore the damaged areas. As for our LNG project, we don't expect any material delays in the project, and construction is fully underway.

Last month, Sempra LNG announced that is it is proceeding with detailed negotiations to deliver Algerian natural gas to our Cameron LNG receipt terminal. The negotiations follow a Heads of Agreement or HOA signed with Sonatrach, one of the world's leading energy firms based in Algeria. The non-binding HOA contemplates a 20-year capacity agreement for the equivalent of 250 to 500 million cubic feet per day of natural gas. Sempra LNG also signed a 20-year agreement in the third quarter with Eni, one of the world's leading oil and natural gas companies, for approximately 40% of Cameron's capacity. We expect operations at Cameron to begin in late 2008.

In Mexico, construction on the Energia Costa Azul terminal is progressing on schedule. The foundation work for the first storage tank is nearing completion, and the construction of the walls of the full containment structure will begin in November. The 1 billion cubic feet per day fully-contracted terminal is expected to be operational in early 2008.

The Port Arthur LNG terminal in Texas recently received its draft environmental report, or EIS, from the Federal Energy Regulatory Commission. As a result of Hurricane Rita, the FERC has officially extended the comment period for the final EIS by 60 days. We know expect the final EIS to be issued early next year. We are very pleased with the progress of all three of our LNG projects.

Please turn to slide nine. Sempra Financial reported third-quarter 2005 net income of 8 million, compared with 10 million in the third quarter of 2004. Expenses for parent and other in the third quarter 2005 were 129 million, compared with expenses of 20 million in the third quarter of 2004. Third-quarter 2005 results were impacted by the effect of a $90 million after-tax increase of litigation reserves and increased tax expense to reflect the Company's consolidated effective tax rate. Consolidating tax entries at the parent will reverse by year end.

I want to address the overall increase in legal reserves in this quarter. For the quarter, we increased total legal reserves by $319 million pretax, which had a $189 million impact on earnings. As of September 30th, the Company had 554 million pretax in total legal reserves related to energy crisis-era litigation. This amount represents our judgment regarding the costs in conjunction with our current energy crisis litigation, including the Continental Forge case, based on ongoing settlement discussions, estimated trial costs and the uncertainties inherent in complex jury trial litigation.

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. On October 24th, the first phase of the trial began in San Diego Superior Court. Even though the trial has begun, we continue to have discussions with the plaintiffs' attorneys and other parties in an effort to reach an appropriate resolution of the issues surrounding this case.

In September, the trial court approved a stipulation agreement with respect to the size and scope of the first phase of the trial. The first phase of the trial will be limited to two plaintiff subclasses -- residential gas and electricity customers in Ventura County, California and other residential customers of Southern California Edison Company. The plaintiffs estimate the damages of these subclasses to total approximately 80 million and 1.2 billion, respectively. If a judgment favorable to the initial customer subclasses were to be entered at the conclusion of the trial, Sempra Energy and the California Utilities could appeal the judgment by posting a bond in an amount not to exceed $75 million.

On October 29, we announced a legal settlement with the County of Los Angeles and 11 other plaintiffs that fully resolved their claims related to the Continental Forge case. Terms of the agreement were not disclosed. This settlement represents a very small part of the overall class-action litigation and an insignificant portion of our litigation reserves.

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.

Now, finally, let's turn to slide ten. Finally, I want to discuss our outlook for the remainder of the year. Driven primarily by the favorable resolution of regulatory issues at the Utilities, the outstanding year-to-date performance of Sempra Commodities, we are increasing our 2005 GAAP earnings per share guidance to a range of 3.40 to 3.60 from our previous range of 3.20 to 3.40.

There are several fourth-quarter items that are included in our 2005 guidance. First, on October 27th, the California Public Utilities Commission approved an $87 million settlement with our California Utilities for awards related to demand-side management and energy efficiency programs. With this approval, the Utilities will recognize approximately 30 million in net income in the fourth quarter of 2005.

At Sempra Commodities, our guidance assumes approximately 40 million of the EITF 02-3 impact will be recognized in net income in the fourth quarter. Given the favorable resolution of the previously-mentioned tax items, including the fourth-quarter reversals of consolidating tax entries of 39 million, we expect that our effective tax rate for 2005 will be approximately 8%. In summary, we're very pleased with the performance of our businesses this year, and are optimistic about our prospects for the future.

Now, finally, as some of you know, this is my last quarterly earnings call. I will be retiring in February, and Don will be leading next quarter's conference call. Let me just say what a pleasure it has been working with all of you. I am very proud of what we have accomplished in my time here, and I know the Company will be in good hands with Don and the rest of our management team. For those of you whom I don't talk to between now and February, I wish you much success. Thanks for your ongoing interest in the progress of Sempra.

And with that, I'll now open the call for questions.

(OPERATOR INSTRUCTIONS). Lasan Johong, RBC Capital Markets.

Nice quarter. A couple of questions, like one to guidance and two specifically (ph) generational operations for the quarter. It looks like, if you take out all the extraordinary items, it was $54 million versus $71 million last year. What contributed to that decline?

Now, you are referring to --?

Sempra Generation.

To generation?

Yes.

I will turn it over to Frank Ault. But let me just mention that Generation has this marked-to-market adjustment that's caused by having entered into a series of power sales contracts, which have locked-in profits in them. But as the spark spreads rise above the levels of the sales, we have to record a marked-to-market loss. This will all turn around as the contracts play out. But, Frank, I don't know if you want to comment further on that.

As Steve mentioned in his comments, we had a $19 million negative impact in the quarter related to the marked-to-market impact of those particular positions. Last third quarter, we had a positive impact of 7, so the delta that impacted earnings when you compare quarter to quarter is actually $26 million. In addition, we had $5 million of litigation costs, Generation units and we had some slightly higher development costs. So in totality, the recorded earnings for that business unit decreased by 34 million from 64 million last third quarter to 30 million this third quarter.

Let me ask it another way. Did you guys have any -- was the output at Generation lower or higher on a megawatt-by-megawatt basis?

The operation of the power plant and the business unit is normal.

So it was comparable to last year.

Yes. Let me just comment, too, on one thing further. I just want to be clear for everybody that $189 million in legal reserves is the total number, but we have also pushed down the components of that 189 million into the respective business units. And so, I don't want anyone to make the mistake of totaling the business unit reserves and then the 189 million. It's a total of 189 million after-tax new reserve this quarter.

Just to be more specific on the volumes of sales from Sempra Generation, in our earnings release in Table E, in the middle, there's a tab that says Sempra Generation. And it does show the power sales, and they are basically flat this quarter with the same quarter last year and up a little bit on the nine-months basis.

On the guidance for Commodities, that's a pretty big increase from 180 to 220 to 320 to 340. What's driving that in the fourth quarter? Because it looks like you are going to be making about 100 million and 20 million (ph) in the fourth quarter.

Well, in general, their business is really going very well. But maybe Mark Snell might want to -- or Don might want make a -- go ahead, Mark, make a comment on it.

Well, as we have previously disclosed, there's about $40 million of EITF adjustments that will turn around in the fourth quarter as we approach the end of the year. And that primarily relates to gas that's in inventory that has been sold forward in January in February. And as we move towards the end of the year, the pricing on that will reflect -- we'll use up that 40 million that we have taken as a reserve.

And then, just really the volatility in the underlying gas market and the level of activity is just very high right now, and just looking at the run rate through the end of the year, we think we will hit the numbers that we've disclosed.

Basically, it's a combination of volatility and absolute high demand?

It's probably closer more on the volatility, but there is a high demand, too.

And then, on the Sempra Pipeline business, it looks like capacity was increased from a B a day to 2 B's a day. Is that correct?

Are you talking about the Kinder Morgan/Rockies Express pipeline?

Yes. Or was that always 2 B's a day?

I think it was always 2 B's. What has happened is the size of the project has gotten a little bit bigger, in terms of the length of the pipeline and the entry of EnCana into the picture.

Okay, I see. Now I understand it. And did you say that Cameron was under construction now for LNG?

Yes.

Scott Soler, Morgan Stanley.

Steve, congratulations. You'll be getting a lot more rest than the rest of us will. It's great.

Two questions for you -- I was just trying to get a little clarity on the litigation accrual, real quickly. And only in terms of this -- when you guys are estimating the accrual, I am assuming you are estimating what is estimable or what is probable. But it does that just encompass legal costs plus current claimants, which you are working towards a settlement, and not potentially what might also be out there? I guess, how encompassing is that number?

Well, the number -- and the number regards existing litigation. And you are quite right in characterizing it as a judgment that we make about the cost of the litigation and any judgments we make arising out of settlement discussions.

And so, Steve, I'm sorry if I'm not being clear on it. But there was an announcement in the last few days with a handful of claimants. Does that 554 include that handful of claimants or any potential claimants above and beyond that handful of claimants?

No, it includes all of the energy crisis litigation claimants. And the settlement that we entered into with those some 11, we have agreed not to disclose the number. But it's a very small fraction of the reserve.

That's what we figured. And then, my second question is -- and maybe this is for Mark. But with the rise in volatility in the last couple quarters around Commodities, is there a level of business that you think -- when you guys had addressed this earlier in the year, sort of a base level of Commodities profits per year, has that changed, any in terms of -- in other words, picking up additional customer business that you think is somewhat repeatable versus otherwise trading on volatility?

Let me just start, and then I want Mark to comment. But I said over several years that I thought there was kind of a baseline of 120 million a year in that business. I think that number is now low, too low. And I think the baseline is now more in the 150 or so or somewhat higher level. Mark, go ahead and comment.

I think it's great that as Steve retires, he's committing us to more higher and higher numbers. But I think it has moved up. The biggest surprise this year, and probably one of our good, bigger accomplishments is that our gas business in Europe and our electric business in Europe is really now sort of hitting on all cylinders. So we have the growth of that business, and a big chunk of that will manifest itself into repeatable business over time. So we do think that our underlying base is expanding, and we will probably update that more thoroughly as we approach the end of the year and have our analyst conference.

Sam Brothwell, Wachovia Securities.

With regard to the effective tax rate on the last slide of 8%, I think on the last call, you had elaborated a little bit on what would constitute a more normalized effective tax rate and some of the factors that are driving that. I was just wondering if you could quickly run through that again.

I'll let Frank Ault handle this question.

Basically, we started the year saying that on a normal basis, our effective tax rate probably would be in the high 20's. And we have been working very diligently to resolve a lot of open tax issues, both at the state and federal level. And we did announce in the first quarter of this year that we had settled some of the issues, and in fact had some positive impacts on our earnings in the first quarter. And that drove our expected effective tax rate for the year down into the low 20's.

As Steve mentioned in his call, we had a net income effective about 71 million in the third quarter of this year, as we resolved some open audit issues with the Internal Revenue Service and with the State of Connecticut. So, with that in place, that is driving our rate for the year down to 8%. We don't anticipate, in the forecast that we have put forth, that there will be any more tax benefits coming in during the fourth quarter of this year.

But I'm thinking prospectively, as we look out, I know there are some credits and other things that are driving it down, but is it reasonable to consider something in kind of the mid 20's to 30% range over the next 12 to 18 months?

I believe that we will find it is in the mid-20's, maybe even in the high 20's. What we have is we started disclosing last quarter in the Q, which you will see later today or tomorrow it's filed, that we have about $49 million remaining of tax reserves or issues that we are currently litigating that we may or may not be successful with. These are things we certainly don't know what the outcome is, but we would hopeful that we could resolve at least some of those in a favorable matter.

That number is down considerably from the number we reported last quarter, primarily because of the issues resolved in the third quarter of this year. So there are some open issues, but there are not a lot. So I think the effective tax rate in the mid to high 20's is probably pretty good as you look to next year.

Two other quick questions, if I may. Steve, I think you alluded to the lengthening of the Rockies pipe. Are you speaking of the wrapping in of the Integra pipe, or are you contemplating extending it further east on this end?

Well, it certainly includes the wrapping in of the Integra pipe, coming in with EnCana. And potentially there are some other extensions.

Can you elaborate on that?

Well, I don't know if Don wants to --

We have said that we're going to bring the pipe westward and pick up the O'Paul (ph) basin, and then, with EnCana, is the major increase in the cost of the pipe. There's no additional pipe we have planned going east.

You referred to the baseline business in Commodities perhaps moving up. Does that carry with it the need, potentially, to increase Sempra's capital commitment to that business unit?

Well, I have said right along that we want to try to keep the Commodities business, in general, in terms of its use of capital, growing more or less with the growth of Sempra. And right now, the use of capital of the business runs anyplace from about 1 billion 1 to 1 billion 6. And that's up a little bit from a year ago, but then again, Sempra is a bigger company, as well. And we think the ROICs in that business justify that kind of commitment of capital.

In general terms, at lower earnings levels, the Trading business would use less capital than it is right now at the higher earnings levels.

(OPERATOR INSTRUCTIONS). Ashar Khan, SAC Capital.

First, congratulations, Steve. You had a great inning (ph), so congratulations. Can you just tell us the timing of the reserves, why at this time is that more that -- I just want to get why the timing, why now, say not, say, a quarter ago. Can you just elaborate a little bit more on that?

Yes, that's quite a fair question. Of course, we make judgments as we make our financial reports, which are done on a quarterly basis. The settlement discussions in the case have evolved and become more pointed. And of course, the litigations themselves have moved forward. And so, we are able to make judgments now based on a lot more information, if you will, in the evolving situation. It's not any more complicated than that.

Steve, you had mentioned one of your goals was that, before you left, probably you would get this settlement resolved. Is that something still doable, as the timeframe now shortens? I think it was one of your goals in the beginning of the year.

Yes. It's one of my written goals with the Board of Directors to reach satisfactory resolution before the end of the year of the energy crisis litigation. And I expect to meet my goals.

Winfried Fruehauf, National Bank Financial.

Steve, don't take this the wrong way, but I have observed many persons retiring lately, the average age becoming younger and younger. In any event, my question is on Continental Forge. When Sempra first started to comment on that case, it said that this case has no merit. Now is prepared to settle. If Sempra has been so sure that this case has no merit, why does it settle? Because all that means is other people can come out of the woodwork and claim frivolously damages. And Sempra, if it follows a settlement here, will always be following with more settlements.

(AUDIO DIFFICULTY. PLEASE STAND BY.)

So I think you will be tied up in court for a long time. So why not litigate this thing to the end, since you were so sure that there was no wrongdoing on your part?

Well, those are very good comments. And they comprise discussions that we have here, and it's quite a legitimate issue. I think, as we pointed out and will point out in the Q and have pointed out in previous filings with the SEC and in these remarks, we don't think these cases have merit. On the other hand, we are in front of a jury in San Diego that went through the energy crisis, and the plaintiffs have an appealing story and are trying to appeal to the emotions of those jurors. And there are inherent risks in a jury trial.

And so, because we found this -- one of the foundations of the way we manage this company is the management of risk, we make appropriate judgments and assessments about how to handle those risks. And so we have been pursuing settlement discussions, not because we're guilty of anything but because we believe in risk management.

Rudy Pollentino (ph), Prudential Equity Group.

In your release, you mentioned that development costs were higher at Sempra Generation. And I was just wondering if you could just kind of give us an idea of the progress -- development projects that you were thinking of? I know you were (multiple speakers).

I was having a little trouble hearing you, but if I understood your question, you said you thought we said development costs were higher in Sempra Energy Generation, and I --

And what is driving those (multiple speakers).

And what is driving them. Go ahead. That's not my impression, but go ahead. It's Mark Snell.

Our development costs -- we are a little higher compared to the previous period. It was primarily for some studies and things that we have done with respect to our coal plants, our potential coal plants in the West. And we would expect those development costs to taper off now that a lot of those initial studies are done.

Does it look like these projects are going to happen anytime soon, or is that something that's still ongoing?

Well, we haven't fully committed to them yet, as far as approved them for future development and to go forward. But we are looking -- we are kind of evaluating those projects to see if they make sense and if the market is receptive to those. And we haven't really gone through kind of the open season kind of process to determine who would buy the power and how much they would want.

Okay, thank you very much and best wishes to you, Steve.

Faisel Khan, Citigroup.

Congratulations on your pending retirement, Steve. I just wanted to clear up something on the '05 guidance. If I were to strip out all the one-time items or unusual items and kind of this tax issue, which operating lines would you say are contributing to the increase in guidance?

Faisel, could you speak up?

Yes, sorry. I said, if I strip out the kind of one-time or unusual items from the '05 guidance and I kind of look at it on a normalized basis, what operating lines are contributing to the higher guidance for '05?

It's the Commodities business unit, almost entirely. I mean, the Utilities are doing a bit better, probably. The others are kind of on our plan.

And then, on the LNG side, with Sonatrach and Eni signed up, I didn't hear anything about Tractebel. Are they still involved in the HOA process, or --?

Yes, but Don Felsinger may want to talk about that.

Well, we said earlier with Cameron that with the signing of the contract with Eni that we would expect to sign more contracts in the first part of '06. And we're still on track to do that.

But in direct answer to your question, yes, we're still negotiating with Tractebel, as well, now, as Sonatrach.

One last question -- between your California plants and your Texas plants, can you give us a breakdown in terms of the dispatching, in terms of the utilization rate on the California and Texas plants for the summer?

Mark Snell, I think, can give you the word on it (ph). We've got to look up the detail in our book here. Just a minute.

Faisel, why don't we do this? Why don't we continue with the next question, and we'll finish up the call with that information as we get it.

Sounds good. Good luck, Steve.

John Kiani, CSFB.

Congratulations, Steve. What is the timing on the cost-of-capital hearings for SDG&E? And is it correct for us to think that the indication is that there is more upward room for movement rather than downward in the SDG&E ROE, especially relative to some of the utility peers in the state?

Go ahead, Ed.

Yes, the hearings have been done. And we would expect a decision by the end of the year. When you look at our current ROE, SDG&E is at 10.37, and SoCal is at 10.82. And remember the ask on our part was 12. Edison and PG&E are a little bit higher, in the 11.22 range or thereabouts. So we would expect something north of 11, but we can't predict precisely what that will be. But we expect a decision by the end of the year.

Great. And then, can you just give us a quick update on the potential development of the Granite Fox coal plant in Nevada?

Mark, do you want to --?

Again, we just talked about that earlier. We're still spending some money on development there. We are looking at the market and trying to make an assessment of what the demand will be for the power. And we're also, at the same time, looking for potential partners that would take off-take, that would be partners in the project. And so we're still undergoing that kind of evaluation process.

Rachel Lauber, ING.

Looking at Table A, Statements of Consolidated Income, on your release, there are two lines, Other Cost of Sales and Other Operating Expenses --

Can you speak a little bit louder?

Yes, I'm sorry. Just on the Statement of Consolidated Income, Table A, two lines -- Other Cost of Sales and Other Operating Expenses -- just looked like they had very large deltas year over year, for the first nine months but also, especially in this quarter. Can you just sort of break out for me what the big stuff is that's included in those?

Yes, it's Frank Ault.

If you really take a look at it, you have to look at that along with the increase that you have on the operating revenue side, because as we deal particularly in the Commodities business, as we increase our sales there, the costs of the sales go up as well. On the Generation side, you have got similar issues. So you can't just look at those lines by themselves. Clearly, the other operating expense, the big increase there is related to the litigation reserves that we talked (multiple speakers). That's the biggest driver on the other operating, while the cost of sales really relates to the revenue increases.

Paul Patterson, Glenrock Associates.

You made a comment on one of the previous questions about a higher baseline in the Commodities business. I think you mentioned 150 million or higher. Is that correct?

Well, that was my opinion. And I'm being shot a lot of darts from Snell and Felsinger about having done so. But it is my opinion, yes.

And then, the idea that is driving that, I guess, was in part the rollout in Europe. And I wasn't clear on what else was it. Do you guys believe that there is a higher volatility in the business? If you could just elaborate a little bit more on that?

Well, we're seeing higher volatility. We're seeing higher prices, and we're seeing a growth in our business, that is, in its geographical scope and just in its general size. And Don may want to comment a bit further, as well.

I think it's safe to say, as we look at the natural gas markets, that there's nothing that is going to happen between now and 2009 to provide any relief. So we are right on the edge now with gas supplies and gas consumption. So any cold weather, any hurricane coming to the Gulf, is going to cause a lot of volatility. So as we look out for the next three years, we see ample opportunity to have increased business in the natural gas sector.

And then, just a bookkeeping item. The changes in other liabilities on the cash-flow statement and also just the changes in working capital seem to have gone to your benefit. And I was just wondering if you could just elaborate a little bit on what is happening there?

Either Frank or Neil might want to (multiple speakers).

A lot of companies are finding the opposite with higher prices and what have you, that their working capital is a little bit -- you guys are finding the -- I guess it's helping you guys out? Or something is. I'm just wondering what it is. If you get back to me, if I've --

First of all, if you look at the working capital -- this is with reference to the cash-flow statement -- there's a $387 million use in other working capital components.

Right, down from 519.

Yes, down from 519. But nonetheless, the absolute number reflects a little bit of the usage.

The bulk of the decrease that you're seeing there really is a change of the accounts receivable area. That has come down, so that really is what is benefiting us there.

Why is that? Anything in particular? I mean, it goes from 21 million to 349 million.

Well, if you look at the volume of revenue we have, it doesn't take too much of a change in the payments, et cetera, to influence that number pretty easily. So there are seasonal factors involved, there's payment patterns of customers, et cetera. So (multiple speakers) that, that variation is not out of the norm.

Actually, in the corresponding time period, another thing is the Trading business or the Commodities business actually used a little bit less year over year. But there's just a lot of moving pieces in this particular portion.

Anatol Feygin, Banc of America Securities.

I want to add my congratulations to Steve. Thanks for all the time, and we'll certainly miss you going forward. A quick question on the marked-to-market. First of all, I just wanted to make sure, the 40 million and I guess 19 million in Generation that you guys expect -- that's a net-of-tax number?

Yes.

And you had also mentioned that that was primarily natural gas price driven. So as we have seen commodity prices come off their highs as of quarter end, is it fair to say that we might see that $40 million number actually increase if they continue to trade at prevailing levels, or even trade down somewhere at year end?

Let Mark talk to that.

The $40 million item at Trading -- it's actually fairly straightforward. It relates to the fact that we bought inventory, put it in the ground and sold it forward for January-February delivery, so the delivery period being the first quarter of next year. And what happened, frankly, is that the pricing -- when we mark those forward sales and the inventory to market at the end of every quarter, the spot prices right now have not converged with the forward sales prices. As we have approached the end of the year, those two numbers will come into agreement, and the $40 million will reverse.

I just want to make sure. This 40 million number was as of quarter end, as of 9/30? Or was it as of yesterday's close kind of thing?

No, it's as of quarter end.

So if you had sold forward this gas on the $40 million marked-to-market as a result of the market kind of moving away from those sales, if the market in fact comes in and, let's say, at December 31st we trade flat with January-February, then would you not recognize even more earnings that you would have recognized in the first quarter of next year?

No, because that forward sale is locked in. We essentially brought inventory for $5 and sold it forward for 7. And as we approach the end of the year, the inventory value will approach the 7 that we sold it forward to. Or, if the forward sale price is 8, you will have a loss on the forward sale and a larger gain on the inventory, which will completely offset each other 100%.

But that's gas for actual physical delivery.

Right, yes. This is gas for physical delivery.

Sure. Understood, but the physical inventory isn't marked, and the sale is, right?

Well, the physical inventory is marked to spot, which is the current price. And then the forward sale is marked to the forward sale prices, and there has been a big delta in those numbers, but that will close as we approach the delivery point.

Because the near month is really -- and the spot are the same price (ph).

Right.

Kind of a follow-on question to that -- I think, Steve, you mentioned that there was 66 million in total that would fall into this bucket. Is the other 26 going to be recognized in sort of the typical Sempra two-year fashion, kind of just in line with the book?

It will be recognized as the forward sales converge with the inventory deliveries.

Sure. And just roughly, the timing on that is --?

During '06.

Vic Khaitan, Deutsche Asset Management.

Congratulations to Steve. Best wishes. Just a question -- maybe you won't answer it. But your '06 outlook you won't be able to provide now? But could you provide the pluses and minuses, just like what you have on page 10 here?

Well, we are going to give an update on '06 with our analyst conference in February. So it's not too far away.

I see. But do you have some kind of expectations in terms of what kind of long-term sustainable growth this combination of these businesses will provide?

Well, let me just comment that we are on track in all of our business units with our plan, and see no serious disruption to the accomplishment of our objectives. So, for example, in LNG, we are getting the contracts we have expected to get, and we are building pretty much on the schedules that we expected. Our Generation fleet operates well and should continue to do so. And the Utilities are performing well and maybe will have, as Ed pointed out, perhaps a bit better return on equity.

So the business itself is chugging right along kind of on plan. So I'm not revising our estimates. We will do that in February, but you can make whatever reasonable inferences you wish to make from what you see today.

And could you also comment a little bit about cash flow, operating cash flow against CapEx, where do you stand there for future years?

Go ahead, Neal. I mean, we are pretty much in balance.

We are looking at the capital spending for the year to be probably between 1 billion 550, kind of 1 billion 6, as we continue the development of the LNG operations. In terms of operating cash flow and the capital budget, we try and keep those things in reasonable balance over time. There will be some variations, because of the uses of working capital. The Trading company has had a very, very good year. So we have used some working capital there. But over time, we try and keep these things in balance, and pay a lot of attention to the credit ratings.

Winfried Fruehauf, National Bank Financial.

Regarding the joint Kinder Morgan pipeline project, what are your current thoughts as to the interties (ph) that this pipeline might be connecting with in Ohio?

Don Felsinger will address that.

I would say at this time that there's a couple of reactions. One is there's a lot of shipper interest, and people seem to like the project and they like the Kinder-Sempra development team. We're about to do an open season. That open season will take place in about two weeks, and that open season will help us determine what pipelines people want to interconnect with. So we will hold off on that until we get shipper interest. And then we're going to be filing with the FERC probably the end of this month on our pre-NEPA filing. So there will be a lot happening on the project during the month of November.

But, given that your company and Kinder Morgan are hard-nosed businesspeople, I'm surprised that you wouldn't disclose sort of the markets that you think shippers might want to address.

Well, we have some ideas what the most attractive markets are and what the most attractive interconnections are. But our customers will determine at the end of the day where they would like to have gas delivered.

And even though I'm only allowed one question, perhaps you will allow me one extra one related to Cameron and Port Arthur. Will the experience with the hurricanes lead to any increase in capital costs, not triggered by timing but triggered by, perhaps, the need to just reinforced the structures a bit more?

I would say what we learned is this -- that the structures are very well-designed. You take a look at the CMS facility, and it withstood all of the brunt of the force of the hurricane. Where the weakness was in the system was loss of electrical power. I think you'll now see all LNG developers going back and reassessing the need to have power generation onsite to keep their operations under way.

Steven Rountos (ph), Talon Capital.

I wanted to ask you kind of a detail question on the Trading side. I noticed that if you just net out the Trading asset liabilities and sort of an estimate of OCI, that excluding OCI, that the net Trading book was down about 111 million. And that kind of dovetailed with the unrealized revenue at September 30th, which was 600 million. That was down from about 900 million at the end of June. It looks like you were kind of shrinking your Trading book and taking some profits here. Is that what's happening?

I didn't quite understand the question. Which balance sheet items and which schedules are you referring to, again?

Looking at all the Trading-related receivables, derivative Trading, commodities, on the asset and the liabilities sides, as well as the fixed-price contracts and other derivatives, if you net those all together from June 30th till September 30th, there was a negative change in the net assets of 111 million. And I wanted to know if that related to the net unrealized revenue, which was on Table E, right in the middle of the page, the net unrealized revenue at September 30th was 600 million. And that was down from about 900 million in June.

Let me try and tie the balance sheet a little bit to Table E, and I will also try and talk a little bit about how these things fit together for the Trading company as a whole, but this may take a minute. But first of all, if you look at Table E and don't look at that $600 million number but go up a little bit, and about the middle of the page there's an $876 million number, total OTC fair value. That number is pretty close, and there's some consolidation adjustments and so forth that will cause this not to be exactly the same as exists on the consolidated balance sheet. But that number is going to be pretty close to the difference between derivative Trading instruments of 5547 on the asset side and derivative Trading instruments of 4742 on the liability side. So that's about 800 million, which ties up pretty close to Table E.

Then, if you want to look at the Trading business as a whole -- and again, there's going to be some consolidating things that will affect this a little bit -- just add up the three categories in both the asset side and the liability side -- that is, Trading-related receivables, derivative Trading instruments and commodities owned. Those three things represent more or less the asset side of the Trading business, and if you go down to the liability side, Trading-related payables, derivative Trading instruments and commodities sold with agreement to repurchase represent more or less the liabilities side. And the difference between the sums of those kind of represents capital employed, and the changes in all of those things represent changes in cash that's used. So all of this stuff ties together. You just have to deal with the details.

That was my specific question, that if you net out the assets and liabilities for September, you get 1.23 billion. And at the end of June, it was 1.34 billion. So there has been a negative -- or a decrease in the net assets. And I just wanted to know, is that because you have been selling down some of your positions? And that was my question about whether it dovetailed with the unrealized revenue decreasing by 300 million quarter over quarter.

I'm a little cautious about inferring too much from looking at pieces of this. I think what you need to do when you look at these things is look at it in kind of a large, macro basis and just make the comparisons that I made. If you try to infer much more from looking at this and parse it too closely, I think it's probably not the right way to do it.

That's fair. Then, let me ask you bluntly, what are you doing with your Trading book?

The Trading operation is getting bigger. There's a lot of price component to what's going on in the Trading book, though, as well, both on the asset side and on the liability side.

I guess I'm surprised to see your net assets shrinking, though. If all your positions were going up with the gas prices and power prices and oil prices year over year, I thought you would expect from June 30th to September to see those net assets be increasing, not decreasing?

I think if you look at --

Dennis just gave me the June balance sheet, and I have not done the math on that, but I did with respect to a comparison of year end '04 with where we stand at the end of the third quarter. And so I think, once again, I will go back to my basic statement -- be careful about drawing too many conclusions from looking at individual pieces of this.

I'll just follow up off-line about the more detailed pieces of that.

You can give us a call, Steven. We can walk --

That's right. The net asset, if you just take the net numbers -- okay, now they have done the math here. If you just take the net asset -- that is, the difference between the three categories of assets and the three categories of liability, on June 30 that was 1 billion 481. The same number at the end of nine months is 1 billion 647, so in general terms, yes, the book is growing a little bit.

If you have got follow-up questions, Steven, we can talk about that.

I'll just do it that way.

Lasan Johong, RBC Capital Markets.

I'm a little confused about the ongoing Sempra Commodities business having a baseline about 150 million. If Sempra did 320 million last year, and we haven't seen a 150 million number in a couple of years, at the very least, expecting 320 to 340 this year, the last year of Trading is increasing, liquidity is improving, there's more volumes in general, more need for risk management -- why isn't the sustainable number 300 million?

They are mad at me for increasing it from 120. I just happen to think -- we take a very conservative view about what the run rate is, and you'll see -- please come, as I think you do, to our analyst conference. And we'll show you the forecast numbers for the periods in question and what we're predicting for Trading. And I just happen to be very conservative about it. I just raised my low estimate by about 25%, and they get mad at me for doing that. You may well be right, but I'm not saying that.

I think it's fair to say that the number that Steve put on the table a couple of years ago was a customer-driven business with very, very low volatility. If we come to the conclusion that we're going to have volatility in the future, we will add volatility to that number.

At this time, there are no further questions. I will now turn the conference back over to Mr. for any closing remarks.

Before we conclude, I just wanted Mark Snell to go over Faisel Khan's question regarding the output of our plants.

Looking at the third quarter, the western fleet had an availability of about 98.6%. And that is up from its year-to-date availability, because we had some transformer outages earlier in the year. And then, on the Texas fleet, we were running at about a 94% availability factor, and that's pretty consistent all year.

With that, we're going to wrap up the call. We appreciate you listening in and your questions. And if you have any follow-up questions, you can get ahold of me, Karen or Glenn (ph) and the IR team. Thanks a lot. Have a good day.

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