桑普拉能源 (SRE) 2005 Q4 法說會逐字稿

Good afternoon, my name is Tamara, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Sempra Energy fourth quarter 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] Thank you.

I will now turn the call over to Mr. Dennis Arriola. Sir, you may begin your conference.

Thank you. Good afternoon, and thanks for joining us to discuss Sempra Energy's fourth quarter 2005 financial results. A live webcast of this teleconference and slide presentation is available at www.Sempra.com, under our Investors section.

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

Slide 2 contains our Safe Harbor statement. I'd like to remind you that this call contains forward-looking statements that are not historical fact, and constitute forward-looking statements within the meanings 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 that we'll 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'd now like to turn the call over to Don Felsinger, who will begin with Slide 3.

Thanks, Dennis. And thanks to all of you on the call for joining us today. Earlier this morning, we reported 2005 net income of $920 million, or $3.65 per diluted share, compared with net income of $895 million, or $3.83 per diluted share in 2004. The improvement in net income was driven by strong results in our commodities and utility businesses.

For the fourth quarter 2005, Sempra Energy's earnings were $355 million, or $1.38 per diluted share, compared with $346 million, or $1.46 per diluted share for the same period in 2004. The fourth quarter results in 2005 were negatively impacted by an after-tax increase in reserves, related to energy prices litigation of $116 million.

The reserves were primarily at the parent company, related to the settlement agreement on the Continental Forge litigation. The Company also reported after-tax litigation reserves of $74 million in the fourth quarter of 2004. Excluding these litigation reserves and other unusual items, fourth quarter earnings were $436 million, up 36% from comparable earnings of $320 million for the same period last year.

Earnings per share in 2005 were affected by a greater number of shares outstanding, the weighted average number of diluted shares outstanding in 2005 was 252 million, compared with 234 million in 2004, with the increase primarily related to the settlement of our equity units in May of 2005.

This slide, as you can see, contains a substantial amount of detail related to unusual items for the quarter and the year. We hope you find this information helpful in understanding the difference between our GAAP earnings and comparable net income. We've also used the same format for some of the businesses in this presentation. Going forward, we will continue to provide you with detailed information that we hope will help you analyze the core earnings of our Company.

Now let's go to slide 4, and go into a little more detail on each of the major business segments, beginning with our California utilities. Sempra Utilities reported fourth quarter 2005 net income of $120 million, compared to 126 million in the fourth quarter of 2004. Combined net income for Sempra Utilities for 2005 increased to $473 million, from $440 million in 2004.

Net income for San Diego Gas & Electric in the fourth quarter 2005 was $72 million, up from $68 million in the fourth quarter of 2004. Fourth quarter 2005 results included a $22 million benefit from a settlement of Demand Side Management awards, and a $23 million benefit related to a contribution deduction on a previously owned power plant. Fourth quarter 2004 results include a $16 million benefit from the settlement of the rate case, offset by $11 million for the impact of increased legal reserves related to California energy crisis litigation.

Comparable earnings were down for the quarter, due primarily to increased operating expenses, included increased expenses at the San Onofre Nuclear generating station, and the negative timing impact of the effective tax rate, which is offset at the parent.

At Southern California Gas, fourth quarter net income decreased to $48 million, from $58 million in the fourth quarter of 2004. Fourth quarter 2005 results include 9 million in Demand Side Management awards, and $4 million in energy crisis litigation reserves. Fourth quarter 2004 results included a $39 million gain from favorable regulatory rulings, and a $24 million increase in litigation reserves.

The utilities continue the successful execution of their infrastructure growth strategy. At SDG&E construction began on the $210 million Otay Mesa electric transmission line in southern San Diego. In addition, SDG&E and Calpine recently entered into a preliminary non-binding letter of intent, that could lead to SDG&E purchasing the assets, related to the 570-megawatt Otay Mesa power plant.

No definitive agreement for the purchase of the plant has been reached, and any final agreement will require approval by the Bankruptcy Court overseeing Calpine's actions, as well as the California Public Utility Commission. When this project moves forward, it will provide SDG&E customers with another efficient natural gas fired generation facility in our region later this decade.

A filing was also made this quarter at the CPUC to begin the approval process for a new 500 KV electrical transmission line, which will improve system reliability, reduce congestion and customer cost, and connect our electric system to renewable energy resources in the Imperial Valley. This line could be in service as early as 2010.

And finally, construction is nearly complete on the 550-megawatt Palomar plant located in northern San Diego, this plant is being built by Sempra Generation, and is scheduled to be transferred into SDG&E's rate base in the second quarter of this year.

Please go now to slide 5 and let's review Sempra Commodities. Fourth quarter 2005 net income for Sempra Commodities was $244 million, compared with $171 million in the year earlier period. The increase was driven by improved margins from our North American and European natural gas power and oil businesses. Fourth quarter 2005 results were also positively impacted by $35 million in after-tax earnings, recognized under accounting rule EITF 02-03. In comparison the fourth quarter of 2004 was positively impacted by $66 million for this accounting rule.

For the year, EITF 02-03 negatively impacted commodities results by $31 million. For the full year 2005, Sempra Commodities recorded net income of $460 million, compared with a net income of $320 million in the prior year. 2005 results also benefited from the $41 million after-tax gain on the sale of Blue Water and Pine Prairie gas storage projects, which happened in the third quarter, as well as $26 million from the resolution of tax issues. Those benefits to earnings were partially offset by a $10 million after tax increase in litigation reserves.

This was a record year for Sempra Commodities. And the fourth quarter represents its 28th consecutive quarter of profitability. Our commodities business is growing in both scope and scale, as we add additional personnel in key product lines, and as markets continue to develop. The strong volatility in commodity prices we witnessed for most of 2005, appears to be continuing in 2006. This environment will give us the opportunity to continue our profitable operations. Although it is difficult to forecast if we'll have another record year, we do expect another solid year at Sempra Commodities in 2006.

Now, please go to slide 6, Sempra Generation. Sempra Generation's fourth quarter et income was $61 million in 2005, compared with $19 million in 2004. Fourth quarter 2005 earnings included a $38 million after-tax write-down of unused turbines, and $47 million of mark-to-market gains on forward purchase and sales agreements. Fourth quarter comparable earnings also benefited from improved operating results at the Company's Western U.S. power generation fleet, which includes the full ownership of the El Dorado power plant in Nevada.

Net income for Sempra Generation in 2005 was $164 million, up from $137 million in the prior year. Last month, Sempra Generation announced the pending sale of the Twin Oaks power plant in Texas for $480 million. This transaction is expected to close in the second quarter, and will result in an after-tax gain of approximately $215 million for 2006. We originally purchased this generating facility for $120 million.

We are also in the process of either selling or refinancing our Topaz Power assets in Texas, which includes the Coleto Creek coal-fired generating facility. We expect to make an announcement on the status of this process in the very near future.

Now let's move to slide 7 and cover Pipelines & Storage. For the fourth quarter 2005 Pipelines & Storage reported net income of $16 million, compared with $28 million for the same period in 2004. Fourth quarter 2004 results included an $11 million benefit related to the resolution of income tax issues.

Net income for Pipelines & Storage in 2005 was $64 million, compared with $63 million for the prior year. 2005 results reflect improved operating performance in Mexico, Chile, Peru, and Argentina. Results in 2004 included $12 million for a gas vendor settlement, and a $5 million gain on the partial sale of Luz del Sur in Peru.

During the quarter, Sempra Pipelines & Storage and Kinder Morgan Pipelines, announced that binding conforming commitments totaling over 1 billion cubic feet a day, were received during the recent open season to solicit shipper support for the Rockies Express Pipeline project.

Additionally a variety of nonconforming bids were received, and Rockies Express is currently in negotiations, with these and other shippers to finalize binding precedent agreements for transportation on the Rockies Express Pipeline. The total cost of the project, including the cost of the Entrega pipeline, and capitalized interest during construction, is expected to be in the 4 to $4.4 billion range. We are working closely with Kinder Morgan, and expect to provide additional information on the status of this project within the next week.

Please now go to slide 8 and let's have an update on our LNG business. For the fourth quarter 2005 Sempra LNG reported a net loss of $10 million, compared with an $8 million loss in 2004. For the full year 2005, Sempra LNG recorded a net loss of $25 million, compared with a loss of $8 million for the previous year. Results in 2004 included a $8 million benefit in the first quarter, related to the favorable buyout of a future obligation on the Cameron LNG project.

Construction on both the Energia Costa Azul and Cameron LNG terminals is on schedule, and we recently surpassed an important milestone at Energia Costa Azul in Baja, California, by completing more than 1 million man hours of construction work, which represents approximately 20% of the project total. In addition, all this work was completed without a lost time accident.

Now, if you have a chance, you can see recent construction photographs of both the Energia Costa Azul and Cameron projects by logging onto our website, and we have a section in the Investor area called "At a glance." We continue to negotiate definitive agreements for the initial 1.5 BCF a day capacity at our Cameron plant, and given the strong interest we have received from potential LNG suppliers, we recently commenced the prefiling process to expand the Cameron LNG site from 1.5 BCF a day, up to 2.65 BCF per day. We also expect the final regulatory approvals for our proposed Texas LNG facility at Port Arthur by the middle of this year.

Please go now to slide 9 for an update on Sempra Financial, and parent and other. And if you look midway down this page, you'll see a line item called Sempra Financial. Sempra Financial reported net income in the fourth quarter of $4 million, compared with $10 million in the prior year's quarter. Sempra Financial reported 2005 net income of $23 million, compared with $36 million in 2004, due to reduced Section 29 and 42 income tax credits.

In July 2004, Sempra Financial sold all of its investments in section 29 tax credits, due to the Company's Alternative Minimum Tax position. In addition, the Section 42 affordable housing tax credits continued to wind down. The line below that is Parent & Other. Expenses for Parent & Other in fourth quarter of 2005 were $74 million, compared with expenses of $7 million in the fourth quarter of 2004.

Results in the fourth quarter of 2005 included an increase in after-tax litigation reserves of $103 million, primarily due to the settlement agreement for the Continental Forge litigation. Fourth quarter 2004 results included an increase in after-tax litigation reserves of $30 million. Excluding the litigation reserves, the fourth quarter 2005 results improved from the same period last year, due primarily to a consolidating adjustment for the Company's effective tax rate.

For the full year, Sempra Parent & Other reported after tax expense of $230 million, compared with after-tax expenses of $68 million in 2004. Full year results in 2005 were impacted by a $193 million after-tax affect from an increase in litigation reserves. I want to focus for just a moment on the increase in legal reserves.

As we explained during our January 4th conference call, the primary driver for the increase in legal reserves was related to the Continental Forge litigation settlement agreement. In the fourth quarter 2005, total pretax legal reserves were increased by $190 million, or $116 million on an after-tax basis. As of December 31st, the Company had $743 million pretax in total legal reserves, of which $585 million relates to matters we have settled, or have agreements to settle.

Finally, I would like to discuss with you our outlook for 2006 on slide 10. Driven primarily by our increased confidence in the performance of Sempra Commodities, we are updating our 2006 GAAP earnings per share guidance to a range of $3.40 to $3.60, from our previous range of $3.20 to $3.40. We'll provide you with additional details by business unit at our Analysts Conference on March the 28th and 29th in San Diego. But let me just address some of our key drivers. The increased guidance does not include the gain from any of our planned asset sales. Now I'll say that once again.

The increased guidance does not include the gains from any of our planned asset sales. It does assume, however, that operating earnings from the assets that are sold declined from prior years, since the transactions are expected to close in 2006. This guidance also assumes that Sempra's effective tax rate will increase from 5% in 2005, to approximately 30% in 2006.

Lastly, while we expect a solid contribution from Sempra Commodities in 2006, we are not forecasting another $400 million record year. Our goal at $3.40 to $3.60 per share in 2006 is achievable, and we will continue focusing on efficiently operating our businesses, and effectively managing our costs.

Yesterday we announced the Board's decision to increase our annual dividend approximately 3.5%, from $1.16 to $1.20 per share. Let me just continue by saying, that our plan is to continually to carefully evaluate how we use cash flow from the Company, in order to grow long term shareholder value. We believe based on our past experience, that the most effective way to grow shareholder value over the long term, is to identify and invest in good projects.

In 2006, we expect capital expenditures and investments of approximately $2.3 billion, compared to $1.5 billion in 2005. Approximately half of this budget will be invested in our California utilities, and will help grow our rate base, and strengthen our generation, transmission, and distribution systems. We plan to use the proceeds from our asset sales to help fund our expanded capital program, and will continue to effectively manage our balance sheet. Once again, you'll get a detailed breakdown of our projects by business unit at our upcoming Analyst Conference.

Let me close by saying, 2005 was really a challenging year for Sempra Energy. We entered into an agreement to resolve the most significant litigation arising out of the energy crisis, and as a result of that, there will be no major impact to earnings going forward. We can now devote more of our time on growing the business. We had record net income in 2005, despite the large legal reserves.

Our Company is constructing two large LNG terminals, that will process much needed natural gas in the U.S. and Mexico, and we're bringing new energy to our customers through new power plants, and we're planning new transmission lines that will allow SDG&E to deliver more power from renewable resources.

We're proud of what we've accomplished. We're focused on executing our plans and developing new ways to grow the Company. This is a very exciting time to be associated with Sempra, and I look forward to sharing more information with you as time goes on.

And with that, what I'm going to try and do,, is put this call back on the speakerphone and give you a chance to ask some questions.

Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from Lasan Johong with RBC.

Hello.

Good morning, Lasan.

Hey, good afternoon. This is actually [JB Juvey], I'm working with Lasan, first of all, congratulations on these great results. I hope that you are safe in your building by the way right now. [laughter] A quick question for you, what is the update on the CPL initiative? Do you have any changes in CapEx, and how do you expect to manifest that?

Would you repeat that question again please?

Yes. I was wondering about the communication for both of the power line initiatives?

Communication over power line. BPL. We call that our BPL, broadband over power line.

Okay.

Let me have Ed Guiles give you an update.

This is Ed Guiles, the Broadband over Power Line, it is just an initiative in its early stages here in California, we've been working with the Public Utilities Commission, there's what's called an order instituting rule making, and we're awaiting that within the next quarter or so. And basically we're at the early stage of doing some pilot work. We're doing work with actually five different companies. And we've got a couple of pilots up and running.

And so it is in its very infant stages. We have some aspirations, if you will, to look at that communication technology as it would relate to our advanced metering down the road, as a possible communication medium. So we're still sort of in the infancy stages here with it.

Okay. So I guess you're still thinking about the utilities implication of that, rather than actually providing any Internet services, right?

That's right. And ultimately we'd like to use it as a communication medium. It's possible that it could also provide some grid support services, in how we operate the electric system.

Okay. Just one more quick question. I think it was mid-December we heard about that Chinese trader, [Yue Kibine], who was trading on behalf of the Chinese SRC, and he had been missing like mid-December after placing a trade I believe on copper, that had not been going his way, and the name of Sempra had been quoted. So I don't know, were you actually impacted by that trade, which was significant in size or -- ?

Let me have Neal answer this. But let me just say first that we do do business with China. And we don't talk about individual transactions or traders that we do business with. And, Neal, do you want to add to anything?

No. I think that that's a key point. Obviously it's a big market for us from a metals standpoint, but we do not comment on individual transactions, and finally everything that happened in 2005, is included in the 2005 record results for trading.

Okay. Fair enough. Thank you. Thanks very much.

Your next question comes from Sam Brothwell with Wachovia Securities.

Good morning, Sam. He dropped. Let's go to the next caller.

Don?

Speaking.

Sorry, we may have had a power failure here as well. I bet that you are never going to forget your first earnings conference. [Laughter]

You guys must have the same utility service that we do.

I think we're buying from Sempra Commodities. Anyway, just to clarify on the, I know you characterized your '06 guidance as not including a repeat of the very strong performance that you had in 2004, and if I remember on the last call you kind of characterized I think we collectively goaded Steve into describing a base line for that business in the $150 million area. I was just wondering if I could get you to revisit that?

Let me say, Sam, if you go back and look at the performance of this business over the past three years, its averaged about 302 or $303 million a year. You know, I'm not sure what the right baseline is. It's probably higher than $150. And I think if you talk to the officers around this table, that we would all feel probably some comfort in a range somewhere between 200 and $300 million. But this business is really driven by a lot of volatility.

And you know, the foundation of it is always based upon doing customer business. But we really make money when in fact, there are high prices and volatilities, because that is when customers run for cover, and want to do transactions with us. But we thought what we would do, is try and spend a little bit more time on this subject at our Analyst Conference, and give you more of our thinking of what you can expect going forward out of this business unit, in both volatile years and in normal years.

Okay. Thanks. And if I could ask one quick follow-up. You alluded to where your legal reserves stand at the end of the year. Can you just update us if there has been any further development on the Attorney General front?

We happen to have our General Counsel, Javade Chaudhri, in the room, but for the most part things have been quiet. We have two cases at the AG, we think one is going to be dismissed, and the second case, the one on curtailments has been referred to the California Public Utility Commission. We would expect that both of those will get resolved one way or another this year, but let me ask Javade if he wants to expand on that.

Sam, I think the open thing to add is the main settlement to which most of the reserves relate, is going as expected we have the judge's preliminary approval, notices have gone out to the class.

We would expect as is always the case with such settlements, to get various people objecting, and those objections will be in by mid-April, and then the judge will hold a hearing in early June to give final approval.

And these other cases, I think, are in very early procedural stages. But as Don indicated, I think we expect on various procedural and substantive grounds that they will resolve themselves here in due course.

Okay. Thank you very much.

Your next question comes from John Kiani with Credit Suisse.

Good afternoon.

Hello, John.

Just to touch base on Sam's question, does the $3.40 to $3.60 per share '06 guidance then imply net income from the trading business of around 300 million? Can I draw that inference or -- ?

Yes, you could make that assumption and be fairly safe.

Okay. And then as far as the baseline is concerned, the 150 that you were referring to, is that the kind of recurring, or more market making-like activity in the business?

The baseline we have in the past referenced was that level of comfort we would have year to year, just based on customer business.

Right.

And as we've grown this business, both in scale and scope, hired more people, we do business with more customers, we need to update that. And we will update that at our Analyst Conference.

Okay. And then just one more question, the changes in the working capital in the cash flow statement in 2005, could you just walk through what that was driven by?

You bet. We just went through that a couple of days ago. Let me have Mark Snell.

Thank you.

Hi, this is Mark. The changes were primarily driven by trading. And I think the best way to look at this is our trading results over the last two years, the earnings that we earned on those, is a reflection of about a 20% return on invested capital. And when we have a much higher trading year than the year before, we tend to invest more capital in the business. And so of the change in working capital that you see on the cash flow statement, is far and away the bulk of that is additional investment in trading working capital.

Okay. Thank you.

Your next question comes from Faisel Khan with Citigroup.

Good afternoon.

Hi, Faisel.

Hi. Just going back to John's question on the working capital issue, how much cash is, or capital is tied up in the trading business right now?

This is Mark again. Today it's about 2.3 billion.

And that's the net asset value of the trading book, right?

Yes.

Okay. That's the amount of kind of also the cash collateral that's posted as well, or is there any cash collateral.

No. Well, that includes cash collateral that's posted, but it does not include letters of credit.

Okay. And if you can sort of, on the generation mark-to-market, what is the source of those mark-to-market [inaudible] on the generation side again?

Well, on the generation side, we had one long-term hedge in place, where we had sold power forward, and bought gas forward. It was essentially a spark spread hedge.

Okay.

And it just reflects the market movement in those two independent derivatives.

Okay. And then on the duration of the trading book, when I look at the net unrealized revenues that you guys put out, it looks like there's been an increase in the 25 to 36-month range.

Yes. Let me address that. That $297 million increase in that range, that those are completely hedged on the exchange. And if you look at the exchange contract lines that's below the percentages on the same table E.

Right.

You'll see a negative 272 million.

Okay.

Those two are completely offsetable. Those are all forward deals sold on, hedged on the exchange. But because we fund the exchange currently, it doesn't show us unrealized, because it has actually been realized. We've funded it already.

And so we really haven't had a stretch in our book that much when you consider that if you net those two together, we're really about where we've always been. It just happens that we did those deals on the exchange.

Okay. And then on the power margin side, you had $209 million of margin on the power side. Can you just comment on what drove that increase in the quarter?

Well, we have had a good growth in our power business over the last year. And we saw some, because of high gas volatility that you saw in the fourth quarter, we had some high volatility on the power side too, and we were able to capitalize on that. But it also reflects, we've grown our power business, not just in the U.S. but also in Europe, and so there's been some increases there as well.

Okay. Just a quickly on the utility side, your increased CapEx budget, that you basically had last time I checked, like 1.5 to $1.8 billion in CapEx for '06, but now it's 2.3. I take it the utility business, is driving at that CapEx up. Is that because of Otay Mesa, or is it because of the sunrise transmission line.

It's both the utilities and our non-utility businesses. You look at our CapEx budget as planned for '06, and it's about 50/50. Half of it is going into the utilities, and half into other projects, I'll let Ed talk about some of the specific projects, but it is basically is transmission, generation, other infrastructure for the two utilities.

Yes, Faisel, this is Ed, principally in '06 we've got the Palomar plant being built by Sempra Generation, we'll transfer that into our rate base we're expecting here before the end of the second quarter. We have construction going on our $210 million Otay Mesa transmission line, and then we've got base expenditures, we're in the early licensing and approval stage of our Sunrise power line, the 500 KV line, and so we've got lots going on in the capital area at the utilities.

I was trying to figure out if the incremental, 2.3 billion in '06 now, and I was trying to figure out what the incremental CapEx.

The Rockies Express Pipeline is a big piece of that.

Okay. I got you.

LNG.

Okay. Fair enough. Thank you very much.

Thank you.

Your next question comes from Anatol Feygin, Banc of America Securities.

Hi.

Hi just to follow-up on Faisel's questions. In the 2.3 B are you guys including the full acquisition costs of Palomar by SDG&E?

No. This is Frank Ault. No, the 2.3 is the total for the corporation. And because we've already spent most of the money at the Generation business, utilities will, of course, pay for generation, will get a credit, the 2.3 is net of both sides of the transaction.

No double counting here.

Got it. Okay. How shall we think about the LNG expansion at the Cameron, where you guys have prefiled to build up to 2.65 BCF a day? Is that contingent on getting a certain level of firm contracts in place for the 1.5 of capacity, or would you guys be comfortable at this point looking at the interest that you are seeing, to expand the facility prior to getting things nailed down, beyond the Eni contract?

I'm going to have Neal touch on this, but I think it's the latter, as we're in discussions with people about filling up, they want to have the initial capacity we're seeing interest that goes beyond that, and that's what caused us to want to go ahead to prefile at the FERC, and get the process underway to have the ability to expand up to the larger capacity. Do you want to add to that, Neal?

No. I just want to say you'll see us continue to do in the LNG area, what we've done in other areas in the past, and that is not commit to these big construction numbers, until we get some pretty good level of contracts behind us.

Okay. Thanks. And last question, probably mostly for Frank, if you could remind us as we look to '06 and '07, of what the status is of Section 29 and 42 credits?

Basically of course the Section 29s really only run through '07, they will end at that point in time by law, there is the uncertainty about what oil prices will do. There is a possibly that if oil prices were high enough, there could be some reduction in those Section 29s. As you know, we did sell our section 29 credits owned by Sempra Financial.

On the housing credits, the section 42 ones. We have not entered into any new transactions in a number of years, and so those old ones are starting to run their course, and we will see a decrease in those credits, as we move out over the next two to three years.

And, Frank, is it about $12 million a year, for the declines?

No. I think that our credits are going to be going down a little bit in the upcoming year, and then '07. But then you get the significant drop after that, because of the fact that the Section 29s will end in '07.

Right. But are the 42s, there's if memory serves, there's a step function kind of change to those over the next couple of years.

Yes. The Section 29s basically are going to go down relatively ratably from where we are right now through in to 2009.

Those are Section 42s.

42s.

And by the end of '09, they're all gone.

Anatol, this is Dennis, we'll also give you more information at the Analyst Conference and how those work within the Company going forward.

Okay. Great. Thanks for your time, everyone.

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

Good afternoon.

Hi, Vedula.

Just wondering in terms of Sempra Energy trading, I think there are a lot of us who recognize that given the stellar performance, that sometimes in terms of equity valuation, it may not receive the valuation that its performance might merit. I'm curious what your current thoughts are as to ways to, you know, extract value that is within Sempra Energy trading, such as in the fashion that we saw [Entergy] was able to do so, given their JV with [Coke] and the sale to Merrill Lynch, I was wondering wondering whether any types of JV's, or any other type of structural, you know, types of things might be be being considered at all, in order to make the value realization of Sempra Energy trading more transparent?

Well, I think, you know, from our standpoint, we have built a world-class commodities organization. And the fact that we have had the earnings track record we have had for the last seven years with, as I said earlier, about 28 quarters now of profitability, we continue to seek ways to get the value of that business recognized in our share price. And from time to time we have discussions with people about different relationships around the commodities business.

But we have found nothing yet that really works for us. We'll continue to explore that. The business is integral to so many things that we do in our natural gas and LNG business, that it's important that we maintain the ability to manage it and grow it.

But, you know, we have nothing to announce. And there are no discussions underway about any, you know, any changes in this business.

I'm wondering when you said that you've, you know, kind of looked at it and haven't had anything kind of come together that works for you, can you discuss in broad terms what would work for you, or what you would, in theory, seek that might meet your objectives?

No. Because the people we may want to talk to may be listening. But we can you know, we can share more of some of the things that we think about regarding this business, when we meet in March at our Analyst Conference, but there's nothing I'd want to add in this call.

Okay. Thank you very much.

Your next question comes from [Stacey Fall with WH Reed].

Hi. I was just hoping to get a little bit better breakdown of capital expenditures in the non-regulated space.

Stacey, I tell you what we're going to do we'll give you a very detailed breakdown in March. I don't think that on this call we're going to go into the detail of all of the projects, but from a key driver its $2.3 billion, as I said we're going to fund part of it from asset sales, and its broken down about 50/50, between utility and our unregulated investment opportunities.

Okay. I'll get my answers in March then. Thank you.

Thank you, Stacey.

Your next question comes from Josh Golden with JP Morgan Asset Management.

Hi, just a quick question, I missed the first part of the call, I am sorry if this question has been asked, roughly the $2.3 billion in the trading business of the book, two quick questions for you. Is that hedged out, so you'll actually realize that 2.3 billion, even in net mark to market on the balance sheet.

Let me ask Mark to address that.

Yes. The piece of it that is unrealized profit is about 1.5 billion, and then the rest of that is represented as investments in inventory. That's the bulk of those two numbers. And so when you say hedged out, I mean, it is the sort of profits that are inherent in the book that have yet to be realized. Although we've recognized them for book purpose, and haven't realized yet, that's about 1.5 billion. And the rest is inventory. That would, of course, if you liquidated the book, all of it would come in.

Okay. The other question I have is roughly the equity in that book is throughout the past few quarters here, is making us a considerable amount more of your shareholders' equity. Are there any plans to sort of curtail back the book somewhat?

Well, I again, I just want to point out that our return on invested capital in that book has been roughly around 20%, which is one of our better returning assets. I guess there's also a natural limit given the size of the Sempra organization of how big that book can be, but we haven't had to curtail it. And as long as we think that there are, you know, good opportunities we'll continue to invest. But, I mean, there could be a time where we would, you know, if we had to, we could reduce the size of the book, and our earnings accordingly.

Okay. So in theory, I mean, you could have a mark-to-market adjustment that would hit the balance sheet, and it would reduce the equities in that book, correct?

Well, it's hard to see how that would happen. I mean, almost all of our transactions are hedged, and so it's you know, usually when we have a mark, I mean, that's not to say that you can't have losses, I mean you could have. It is potentially possible to have losses. But to have a large impact on the book, because the book is relatively hedged, you wouldn't be able to see that, and that your assurance for that is somewhat reflected in the VAR calculation. You see that the VAR that we run is a representation of kind of the degree of uncertainty in the book.

Okay. Thank you.

Okay.

[OPERATOR INSTRUCTIONS] Your next question comes from Zack Schreiber with Duquesne Capital.

Hi, guys, it is Zack from Duquesne, can you hear me.

Hello, Zack.

Just a quick question to follow up on the question of Anatol Feygin's question, in terms of the expansion of Cameron LNG, did you say that based on your conversations with LNG suppliers, that you are confident enough that you do not need a contract to expand it, or did you say that your historical track record requires you, you know, to get a contract for support before you shell out substantial incremental capital expenditures? I wasn't clear on that?

Zack, our philosophy has been with each of our assets that we build, that we want to have enough of the capacity sold forward or contracted to get a return on our investment back, and so even though we have prefiled at the FERC, we have prefiled based upon interest of people that we're talking to, to go beyond the 1.5 Billion a day. But we would not do any major construction work on expansion, until we had enough of the current facility contracted to support any expansion.

Got it. And just to kind of play out the timelines here, how long will the FERC process take on the approval of the expansion, how long will all of the mobilization take, and sort of when do you need incremental contractual support, to really make the decision to spend your precious capital or not?

Well, the way we typically approach these is that we will start off in the construction program with an eye toward expansion, because what you'd like to do, when you are building a project, if you know that you are going to expand it, you'd like to be able to utilize construction crews that are on-site to continue with expansion.

And so if you just think about that for a second, we would then if we're going to expand this facility, we would like to have the indications from the market, that the expansion will be contracted for by the time we're about 40, 30 or 40% into the construction of the original plant, which would put us sometime into next year.

So sometime middle of '07, or sometime early '07?

I would just guess today that if would were going to move forward with expansion, that we would probably make that decision some time by the middle of next year.

Great. Okay, guys. Thank you so much. We'll see you in March.

You have a follow-up question from Faisel Khan with Citigroup.

Yes, sorry, I just had one question. On the Otay Mesa power plant, have they broken ground on that plant yet? Have they spent any capital on that plant?

Let me ask Ed Guiles, who has been out there.

Yes, this is Ed Guiles. Calpine has most of the equipment stored on-site, but construction has not yet started. So, you know, as I indicated, we've entered into a non-binding letter of intent, and we're pursuing the development of a definitive agreement at this time.

What was the online date of that plant, when were they projecting the plant to be online?

Our objective is by the summer of '08.

Okay. Thank you.

There are no further questions at this time. I would now like to turn the call over to Mr. Dennis Arriola for closing remarks.

Well, we appreciate it, everybody dialing in and listening it our excitement here. It has been a great year in 2005. As Don mentioned, we're going to have our Analyst Conference here in March on the 28th and 29th in San Diego, and for those of you who can spend a little bit more time with us, we're going to take a tour of the Costa Azul facility in Baja, California. Look forward to seeing you in March. If you have any follow-up questions, call us up. We'll be around. Have a good day!

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