桑普拉能源 (SRE) 2006 Q1 法說會逐字稿

Good morning, my name is Carla and I will be your conference operator today. At this time I would like to welcome everyone to the Sempra Energy first quarter earnings results conference call. [OPERATOR INSTRUCTIONS] Mr. Arriola you may begin your conference.

Thank you. Good afternoon and thanks for joining us to discuss Sempra Energy's first quarter 2006 financial results. A live webcast of this teleconference and slide presentation is available at www.Sempra.com under our section. With us this morning in San Diego from the Company are several members of our management team including Don Felsinger, our Chairman and Chief Executive Officer; Neal Schmale, President and Chief Operating Officer; Mark Snell, our Executive Vice President and Chief Financial Officer; Ed Guiles, the Group President of the Sempra Utilities; 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 facts and constitute forward looking statements within the meaning of the Private Securities Reform Act of 1995. Forward looking statements are not guarantees of performance, they involve risks uncertainties and assumptions. Future results may differ materially from those expressed in the forward looking statements. These risk uncertainties and assumptions are described at the bottom of today's press release and are further discussed in the Company's reports filed with the Securities and Exchange Commission. In addition, some of the financial information we'll be discussing today may contain non-GAAP financial measures. In those cases, we will reconcile those financial measures to the most directly comparable GAAP figures. With that, I would now like to turn it to Don who would begin with slide three.

Thanks, Dennis and thanks to all of you on the call for joining us today. Earlier this morning we reported first quarter 2006 net income of $255 million or $0.98 per diluted share. This is compared with net income of $223 million or $0.92 per diluted share in first quarter 2005. The improvement in net income was driven by strong results in our commodities business. The first quarter results in 2005 benefited -- benefited from $59 million net income relate together favorable resolution of prior year's income tax issues. Earnings in 2006 reflect a tax rate of 33% versus 3% for the same period last year. First quarter 2006 operating earnings increased 52% when compared with the first quarter of 2005. The weighted average number of diluted shares outstanding in first quarter of 2006 was 259 million compared with 241 million in the first quarter of 2005.

Now let's go to slide four and I'll provide a little nor detail to each of the major business segments beginning with our California utilities. Net income for San Diego Gas & Electric in the first quarter of 2006 was $47 million, compared with $59 million in the first quarter, 2005. First quarter, 2005 results included a $12 million benefit from the resolution of prior year's income tax issues. At Southern California Gas first quarter net income decreased to $49 million from $69 million in the first quarter of 2005. First quarter 2005 results included an $11 million favorable cost of service adjustments and a $4 million benefit from the resolution of prior year's income tax issues. In March, SDG&E assumed ownership and operation of the 550-megawatt Palomar Energy Center in Escondido, California, the first major power plant built in San Diego county in more than 30 years. Construction continues on schedule for the Otay Mesa Power Loop. The $209 million transmission project will be completed in July of next year.

Please go to slide five. First quarter 2006 net income for Sempra Commodities was $116 million compared with $29 million in the year earlier period. The increase was driven by significantly stronger results in our North American natural gas business. North American Power also produced robust results for this quarter. Commodities strong first quarter results were driven by increased volatility in both the gas and power markets. This volatility combined with high commodity prices also increased our VAR, or value at risk. First quarter 2006 results were negatively impacted by $44 million after tax related to the effect of the accounting rule EITF02-3. In comparison, the first quarter of 2005 was negatively impacted by $23 million for this accounting rule. Commodities excellent first quarter results continued a positive trend we have seen over the last several quarters and represents now the 29th consecutive quarter of profitability for this business unit.

Please now go to slide six. Sempra Generation first quarter net income was $43 million in 2006 compared with $45 million in 2005. First quarter 2006 earnings included a $15 million charge for an arbitration decision related to the supply contract with a California Department of Water Resources and a $15 million benefit related to incentive awards, profit and recover of previously expensed cost on the sale of Palomar Energy Plant to SDG&E. On April 20th this year, an arbitration panel issued a decision on claims brought by the CDWR. The panel ruled in favor of Sempra Energy on the most significant items and upheld the contract. However, the panel disallowed Sempra Generation's past through to the CDWR of certain amounts for fuel taxes, electricity transmission losses, and natural gas transportation charges. The arbitration decision awards the CDWR approximately $73 million pretax including interest for past actions. We had previously taken reserves of $48 million pretax for these issues. The difference resulted in a $15 million after tax charge to earnings in the first quarter. The five year earnings guidance we provided in March reflected similar results as those in the arbitration decision and therefore -- therefore those estimates remain unchanged.

Let's go to slide seven and talk about Asset Sales. I would like to give you an update on where we are with our asset sales. Last month Sempra Generation announced a pending sale of the jointly owned Coleto Creek Power Plant in Texas for $1.4 billion or over $1,800 per KW. Based on our research this is the highest paid for a U.S. coal fired power plant in more than a decade. Sempra Generation and its partner Riverstone Holdings acquired Coleto Creek for $430 million in July of 2004. The transaction is expected to close in the second quarter of this year. Also in April, Sempra Generation completed the sale of the 305 megawatt Twin Oaks plant for $480 million in cash. This plant was acquired by Sempra Generation in November, 2002 for $120 million. During the first quarter, 2006, Sempra Generation also entered into agreements to sell its energy facilities management and energy services businesses. In addition, we are reviewing offers for our small oil production company and expect to announce an agreement later this year. Combining the [excected] -- expected sales proceeds from all of these businesses, we plan to generate over $1 billion in pretax proceeds, exceeding the estimates we provided you in March.

Let's now go slide eight and cover Pipelines & Storage. For the first quarter of 2006 Sempra Pipelines & Storage reported net income of $11 million compared with $13 million for the same period in 2005. During the quarter, shippers entered into binding commitments for 100% of the 1.8 billion cubic feet per day rocket express pipeline. The $4.4 billion natural gas pipeline jointly owned by Sempra Pipelines & Storage and Kinder Morgan will come on line in segments with the final leg expected to be completed by June, 2009. In March, construction began on our Liberty -- our Liberty Gas Storage facility with operations to begin later this year. When complete, the project will have storage capacity of 17 billion cubic feet. Recently Liberty Gas entered into two additional storage contracts and the facility now has contracts representing over 80% of its capacity by 2009.

Please go to slide nine for an update on our LNG Business. For the first quarter, 2006, Sempra LNG recorded a net loss of $5 million unchanged from the previous year. Construction on both the Energia Costa Azul Terminal in Baja California, Mexico and Cameron LNG terminal in Louisiana is on schedule. Due to additional interest in capacity at our Energia Costa Azul Terminal, we are holding an open season for expansion of the terminal. The open season began April 17 and will -- will close on May 12. Expressions of interest from the open season will lead to formal negotiations with parties who are ready to enter into terminal capacity agreements and other commercial arrangements. We continue to negotiate definitive agreements for the initial 1.5 BCF per day capacity at our Cameron facility. On March 9, we announced a capacity agreement with Merrill Lynch commodities to import the equivalent of 500 million cubic feet of LNG per day through the Cameron receipt terminal. The agreement is contingent upon Merrill Lynch commodities finalizing it's LNG supply agreements.

Now please go to slide 10 for an update on Sempra Financial and Parent and Other. Sempra Financial reported first quarter 2006 net income of $5 million compared with $4 million in the prior year's quarter. Parent and Other had a first quarter 2006 loss of $30 million compared with $7 million in net income in the first quarter of 2005. First quarter 2005 benefited from $43 million due to the resolution of prior year's income tax issues. As a result of the asset sales I mentioned earlier, the Twin Oaks plants, facilities management, and energy services businesses have been reclassified to discontinued operations. In the first quarter 2006, discontinued operations include a $16 million tax benefit related to the sale of the Energy Services business.

Please now go to slide 11. In conclusion, Sempra Energy had a very strong first quarter. What is particularly encouraging is the ability of our underlying businesses to demonstrate continued earnings growth even at significantly higher tax rates as compared to prior periods. Our 2006 earning guidance of $3.40 to $3.60 per share, excluding asset sales remains unchanged. Our asset sales are progressing better than planned and will provide the additional capital we need to continue our focused infrastructure growth plans. Now before I turn the call over for questions, I would like to take this opportunity to acknowledge this is the last earnings call for Frank Ault, our Senior Vice President and Controller who is retiring this July. Many of you know Frank and are aware of the fantastic job he has done here at Sempra Energy. We wish him well in his retirement. Joe Householder, who is currently Vice President of Corporate Tax will become the Controller. With that, I'll now open up the call for questions.

[OPERATOR INSTRUCTIONS] Sam Brothwell, Wachovia Securities.

Good morning, Sam. Sam, are you there?

Sam, your line is open.

Why don't we come back to Sam. Let's go to the next question.

Scott Soler, Morgan Stanley.

Good morning.

Good morning.

Just had a question to ask I was just going through the guidance for the year was for commodities to be about 30% of earnings, the lower side of 30%. Obviously, that business is doing incredibly well. It's about 49% of earnings in the first quarter. I guess I had two questions. Is there any change to what percentage of earnings you guys plan to have that business represent? And in looking at the -- you all give a lot of detail around trading and marketing and what -- what was -- how much of that -- looks like there's a lot of new stuff that looks like it's a little bit longer dated and so I wanted to understand is there more origination business or just kind of understanding a little composition in '02, of -- of the profits?

Let me start by saying that when you look at our risk adjusted return on capital, that business is still generating about 37%. It was doing about 38% last quarter, so it's probably one of our best performing businesses. And from the standpoint of what percentage of our total we would like it to have, at these returns we will put all available capital into this business for these types of returns. I -- when I look at the table, I -- our book really isn't getting that much longer. When you look at the table E, and go down to the bottom line on table E. Our net unrealized revenue if you look at cumulative totals, that business still has about 72% converting to cash in the first 24 months. So the book is not getting any longer.

Well, I guess just trying to understand, given the fact that the operating earnings in that business that's has tripled from a year ago first quarter '05 to first quarter '06 [inaudible] just trying to understand the nature of where the earnings were coming from? And then I wasn't trying -- the length is not as important to us, just trying to understand the composition and the sustainability in trying to make sure of that when we're thinking about modeling the Company.

Well the earnings are basically coming from -- from natural gas and from power.

Right. Okay. Alright, Don, thank you.

Ashar Khan, SAC Capital.

Good morning.

Good morning.

Don, can you give some -- on the open season is there any comments you can make on the cost of the open season? Can you remind us when closes? And when you can publish results on that?

The date that it closes, I believe, is the 17th of this month. The 12th of this month. It started -- it was April 17th through May 12th. I can't mention the names of people looking for capacity because some of these people want to keep that confidential. But we are encouraged by the amount of interest that we see and we will, as quickly as we can, after the 12th of this month, provide the marketplace with what our plans are based upon the interest we receive in the open season.

Thank you.

Lasan Johong, RBC Capital Market.

Good afternoon. Nice quarter. I sure like to welcome your trading business. Is there any chance that Sempra could provide some sort of sharp ratio return over risk on the marketing and trading business?

Say that again?

Some sort of a sharp ratio. Something that measures return over risk?

I think --

[Inaudible] utilities business.

Lasan, if you go to table E and down, just -- there's a -- there's a column that starts with risk adjusted performance indicators, and it shows the risk adjusted return on capital. And risk adjusted return is -- is we take the average daily trading margin and divide that by the average daily VAR and come with those numbers. And it shows that this business is returning on a risk adjusted basis about 37%.

Okay. I'm looking at the table E and I'm not sure I -- ?

Go down to the bottom of the --

Oh, I see it. Okay.

Risk adjusted performance indicators. See that?

Yes. I must have miss that. Let me ask you this question then. How does that compare to, for example, the utilities business?

Much higher. I mean it's two and a half to three times as high.

Okay and then assuming that this level or something in this nature continues, what kind of a negative event would you have to have given the current record of 29 consecutive quarters in order to average a risk adjusted return near or at the utilities business?

I'm not even sure we think about it that way. So --

I'm just wondering, a lot of people are talking about how risky this business is. I'm wondering if you could like give a sense of what kind of risk is inherent in this business and how much shift you would have to take in order to get it down to a return on a risk adjusted basis similar to a utilities business?

Go ahead. Neal -- neal has a thought here.

Let -- let me take a shot at it. I -- I -- that's a -- that's a very difficult kind of comparison -- comparison to draw because -- because the nature -- the nature of the -- for example, the risks and the nature of the capital employed are different -- different in these -- in these businesses. I just have a lot of trouble figuring out how to make -- how to make -- make the kind of comparison you're asking us to draw.

Okay.

Because the return -- the return on inves -- first of all, what you're looking at here is return on risk capital, which is average daily margin divided by -- divided by value at risk. Another major return would be return on -- return on invested -- return on invested capital. And there, we typically, when you look at the yearly earnings divided by the combination of equity and debt in the business, the trading business has been in the 20% range. The utilities will typi -- typically be under -- under 10 on that measure but the Weyroc measure is simply one that doesn't apply to utilities.

Understand. Just then focusing on the guidance, 3.40 to 3.60, I think Scott had mentioned it was about trading [inaudible] expected it to be about 30% and now first quarter 49% falling on that seam, why isn't guidance going up?

Well, we had a great first quarter and I -- and I think it would be inappropriate to try and annualize this quarter for the year. Let let us see if we do this next quarter and third quarter and we'll come back to you on that. But it's -- I -- we're pretty comfort right now with the guidance that we gave you which is like 250 to $350 million.

Okay, and then in the Analyst Conference Mark had mentioned that there's potentially a funding gap in '07. How much of that funding gap has been knocked down given the new series of sales that -- the sales proceeds that we can expect over the year?

As I said in my remarks, we -- we have plans now to divest of assets that will bring in over $1 billion of -- of cash, revenue, and that money will -- will -- will go a long way towards addressing the capital program we have this year.

I can to -- to -- elaborate on that a little bit. Since our asset sales have exceeded our expectations, we're -- we're a couple of -- $150 million or so ahead on a pretax basis of where we thought we would be. And I think also to the trading -- the amount of capital being returned from trading even at their higher levels, their still returning -- their cash flow has been exactly on track with what we have expected.

Okay. Thank you,.

Leslie Rich, Columbia Management.

My question was already asked and answered, thank you.

Thanks, Leslie.

Paul Patterson, Glenrock Associates.

Can you hear me.

Yes, Paul. Go ahead.

I wanted to follow up on, I think, Scott's question on the duration on the mark to market. When I'm looking at the -- I see what you're saying about the total net unrealized revenues about 72% coming in in 24 months. But if you look at OTC -- OTC contracts and look at where they were -- I don't know, the second quarter of 2005 there does seem to be lengthening. It was more like 90% were -- were going to be recovered in a year. And now it looks like it has been pushed out a bit. I'm just trying to get an idea as to what's going on in the business that's -- that's causing that kind of lengthening?

Well that's -- let me do this. You have to take into account the exchange contracts so let me have Neal Schmale walk you through that.

Well Don just answered that. I think when you -- when you -- when you look at the trading operation, one of the key things you have to do is -- is look at it in totality as opposed to just looking at a piece. When you're looking at the -- at the open positions in -- in their entirety, those include both those who are -- those that are on the exchange and those that are over the counter, and that is why we've included the both of these in this -- in this table E. Just -- just to look at, for example, the over the counter positions compared to six months or nine months or a year ago, is just looking at one piece of a much more comprehensive picture.

I follow you. And I'm not criticizing it or anything I'm trying to get an idea as to why the OTC is sort of lengthened. And also if we do even take into account the exchange rated -- the duration of the realization period of one year which used to be about plus 90% has now gone down to 55%. So, I mean I'm just trying to -- I'm not -- I'm just trying to get a feel for, kind of some of the dynamics so if there's been any change or -- or if there's just -- what might be leading to that? Because -- and it seems to be pretty consistent, you -- quarter over quarter it seems like it's -- it's decreased -- it's decreased pretty -- pretty steadily, I guess since the second quarter of '05.

I think basically you kind of have two questions there. One is the relative fraction between the exchange and over the counter, and the simple facts of that are there's more -- the proportions change, there's more exchange in fewer over the counter or vice-versa. You can -- you can effect the transaction, either over the counter and on exchange. Just -- in terms of the -- in terms of the -- what I would characterize as very modest change in these numbers, I just think that's kind of normal variation in a very dynamic business.

Okay.

Let me add to that there. Recall going back four or five years when -- when people were exiting this business and marketing and trading was not in favor. There wasn't much liquidity beyond 18 or 24 months. And today with a lot of people getting back in the business we have a lot more liquidity and so there is more opportunity to do deals that are longer dated. And so as we do those deals we now have the ability both over the counter and through exchange contracts to hedge them. And so even though we are doing longer dated deals, the -- they are -- they are hedged on both the exchange and over the counter. And so from the standpoint of our overall book, the timing of our unrealized revenues really isn't going out any further because we're now getting cash in the exchange.

Okay. I appreciate it.

Paul Debbas, Value Line.

Good morning, Paul.

Hi. I have a few questions regarding slide seven on the Asset Sales.

Sure.

What is the -- what are the after tax proceeds that you expect?

Mark Snell.

It's about -- it's a little over 700 million based on what we have here, not counting what comes from the oil production company.

And how much of a gain on the sale would you expect to book?

Well, we've only given our earnings on an operating basis and so we haven't really put that out there yet, but it's -- it's about -- the gain should be between four and 500 million in '06.

Would that all be in the second quarter?

No, because some of it could be in the third quarter. It t depends on -- it depends on when we close Coleto. If we close Coleto in the -- in the second quarter most of it will be. The oil company sale won't close until -- until the third quarter or fourth quarter.

Right now, Paul, we're estimating that Coleto is going to close in the third quarter and that's obviously the largest component there.

And remember, none of those gains in sales are in our earnings forecast.

All right, I thought you said the second -- it was going to close in the second quarter in the remarks.

Yes, it should close sometime at the end of June but it could flip over to the first part of July.

Okay and how much income annually were all of these assets generating?

Was relatively small. If you look at the discontinued ops which doesn't include Coleto that number's for the -- for the quarter was about $3 million of operating earnings and the rest was a tax benefit related to some sales. And then the Coleto earnings, because their con -- because most of their output had been sold forward and hedged at lower numbers, it's about -- it was about $13 million in '06.

In total all of the assets that we are selling are in 30 -- $30 million range for a full year.

30 million. Is that pretax or after tax?

After tax.

Thank you very much.

Okay.

Rudy Tolentino, Prudential Equity Group.

Hi. I just had a couple questions. With the first one is a followup on Scott's question about how much of those earnings were really like opportunistic day-to-day trading optimization and about how much was from originated transactions?

Let me have Neal answer this.

I think -- I think that is a -- that is a number that we don't -- we don't track and it -- it's really hard to -- to quantify that -- the response to that kind a question. I think the -- you can kind of go back to qualitative statements around our trading company and that is that what set it's apart and what really makes it unique and particularly good is the -- is the underlying foundation of the -- of the physical business. And but to kind of go beyond that and quantify something, I think is -- is very difficult.

Okay. And also I know there's been some discussion earlier about the length of your -- the -- your contract. Does that apply that you guys are doing more originated-type business?

More what business?

More originated business.

No I just think when you take into account the exchange contracts and so forth, I'll stick by my previous statement which is what you're seeing here is sort of normal variation for this kind a business and still a short dated book.

And finally, last question I had was can you give a little more color on the CDWR arbitration segment? You mentioned that the ability to pass through fuel tax losses and gas transport was disallowed. Was that only in certain -- is that in all cases or does that just include the times that you maybe deliver from alternative resources other than your own?

Well we have with us, in this room, Javade Chaudhri who is our general counsel. Let me ask Javade to respond to you.

Yes, as you know the CDWR had sought to terminate the contract and claim several million dollars in damages as Don indicated, those claims were denied. These pass throughs, that you describe, that have to do with the few taxes and a few other miscellaneous items, the number we gave you are the historical claims that we have to pay. Going forward. It's something we're still getting our arms around, but depending on a little bit on who delivers the gas and under the contract, the CDWR has the right to deliver the bulk of the gas to us or we can acquire it on it's behalf. There there could be implications to how much -- how much effect it might have but I think this is pretty much all been factored into the financial information you have already been provided.

Rudy, this is Mark Snell. The forward projections that we gave at Analyst Conference anticipated a judgment along -- along the lines that we received and therefore we're not -- we're not changing our forward projections for -- for any of the costs that we can no longer pass through. We'd already considered those.

Okay. Thank you very much.

Faisel Khan, Citigroup.

Good afternoon.

Hi, Faisel.

Going to Costa Azul for a second, the cost of the expansion, is that public information yet?

It's not public.

Okay. The EIS on Port Arthur, is that been finalized? I think there was some -- there was some news out there that FERC had issued a final draft statement.

I believe two or three days ago we did get an EIS opinion from the FERC.

Just a preliminary opinion or was that a final statement?

It's final, but remember, we still have to wait and address the issues that were raised in the EIS before we can end up with a permit to actual construct and we don't have that yet.

What were the substantial issues outstanding?

I don't think I've read it.

Okay.

There were -- if you look closely at the release that came out around Port Arthur and the other two, they all -- all three indicated that the EIS has been approved but that certain remedial kinds of actions had to be taken for all of them. It was pretty much [boiler plate] language. We don't consider those to be particularly difficult to deal with.

Okay. Next on the working cash flow statement in terms of the positive -- the positive free cash flow and specifically the cash flow from working capital, what -- how much of the positive impact -- how much of the positive working capital cash flow came from just a normal turn of inventory of the gas utilities and how much came from the trading business?

See if we have that.

I do. It's -- the biggest chunk of the -- of the positive cash flow came proba -- came mostly from SoCal and the trading company, usually in the first quarter we don't expect a lot of -- a lot of capital in the first quarter because we have some relatively high payout of the previous years' expenses, compensation and those kind of things happen in the first quarter. So our cash flow is usually relatively small in the first quarter and it builds throughout the rest of the year.

Okay. Fair enough. Then in terms of the tax rate, using the 33% tax rate the rest of the year is that still reasonable?

Yes.

And at SoCal Gas, if I look at operating income so above the line -- the operating income at SoCal Gas is about 101 million compared to last year. About 126. What's the what's the major reason for the change in operating income there?

This is Frank Ault. Last year we had a special decision by the commission that was 11 million after tax. So on an operating basis almost 20 million and it was for a decision related to our cost of service decision that went back to some cost we had accrued in the prior year to pass through to the customer and they made the determination that we did not have to pass through through so those were recognized. So that was about 20 million of the margin change or the pretax operating income from 2005 that didn't not reoccur in 2006.

Okay on. And if I can just understand some of the one time items. I saw that you had the essentially the $15 million charge for CDWR. Then that was offset by the $15 million benefit related to Palomar and then you said that you had some gains that were in discontinued operations as well that were one time in nature. Is that right?

We had one $16 million tax gain in discontinued operations.

Okay. Okay. And then I believe on the -- on the -- on the settlement that you have with the -- with all of the parties related to California energy crisis, the Attorney General and I believe some other parties were trying to block the final -- a final decision by the judge in that matter. Where do we stand?

Let me have Javade go ahead and give you an update on where we are with the Continental [Forge] settlement which I think you're referring to.

Faisel, we have -- we have preliminary approval. There have been some objections. The hearing for final approval is on June the 8th based on the on going sessions we've been having with judge [Praiger] We expect the final approval to be received to June 8th or shortly thereafter. I think the objections that you mentioned relate to the -- to the fact that some of the objecting parties are concerned that this settlement may prevent them from making additional claims for damages on other cases that are pending. And our view, which we believe the judge completely agrees with, is very simple. We are setting all of these matters relating to allegations against us arising out of the energy crisis. And especially since we didn't do anything wrong to begin with, we only want to pay once. And so these releases we have obtained in Continental Forge should bar additional claims of any damages. And I think the judge's view, which is ours is, that if there is an issue about the subject it can be litigated in the future by anybody who has such an objection, but that the settlement is and we expect it to be approved in early June.

I appreciate the time. Thank you.

[Carla James, Calean Securities].

Hi, I was wondering if you could comment on what kind of traction you're seeing from the commodities division in new coal or [ethanol] product lines for an expanding the international market?

Your question is how much progress are we making into entering into coal and to ethanol.

Yes and expanding international markets in the commodity side.

Neal?

Well, you can see the breakdown of the product line in various businesses in the attachments to the table and we -- we look for opportunities in these -- in these markets as they -- as they develop, but we're -- we're pretty methodical and pretty careful about -- about the way that we -- that we enter those new markets. So the net effect of all of this is that the great bulk of the profitability in this business still comes from the traditional U.S. natural gas and electric business.

Okay. And I had another question. We keep hearing about increasing upstream LNG liquification costs and six months to one year delays in development projects. Can you comment on the current market environment for securing upstream supplies for the new LNG [inaudible] terminals.

I think your assessment is correct is that the biggest obstacle right now to receive LNG supplies in North America or other parts of the world is ability to bring online new liquid faction facilities. And there's a small amount currently under construction. And those of us that are in the business of building receipt terminals are -- are all trying to attract those gas supplies to come to, first of all, North America and then come to our terminals. But there's currently a shortage of upstream supply right now.

Okay, great, thank you.

Michael Lapides, Goldman Sachs.

Hey guys, Michael Lapides here. One quick kind of high level macro question. Thinking about the natural gas market, especially the forwards markets where we have over $8 gas kind of forecast through '09/10 according to the [inaudible] . What do you think the impact both on the gas forwards and also on the basis differentials will be once your LNG facilities come on line in '08?

Well, which basis differentials are you referring to because we do think about them?

I'm just kind of thinking on a big picture scale. I mean you could kind of discuss them for each -- meaning each facility because they're in different location what the impact would be on kind of the regional basis differential for that specific facility where you can kind of talk about it on a bigger picture level.

We think if supplies come into Costa Azul that the prices in the west ought to drop. And as we look at supplies coming into the the Gulf, the market for those gulf supplies are in the Gulf and the eastern corridor, so we'd look for those prices to drop. One of the things that we're doing, the Rockies Express Pipeline we're currently building with Kinder Morgan is driven by basis differential. The fact that pipeline can -- can get gas to the eastern markets where there's currently anywhere from a $2 to a $3.50 basis differential justifies that pipeline. So there's no doubt that increasing supplies in certain regions like the Rockies and the introduction of new LNG supplies in the Gulf or on the West Coast are all going to have an impact on basis differential.

Okay. Thank you.

[John Aleigh], Zimmer Lucas.

Thank you, my questions actually been answered.

Okay.

Scott Soler, Morgan Stanley.

Hi, Don I just had one followup question. The VAR on the commodities business, has that changed and is that -- what is the Company's one day and ten day VAR allowance and in short of whats the limitation on that ? That's the only other on question I had to follow up from earlier.

Well if you look at our -- if you look at our VAR, it has gone up to I think the number now is about 22 to $23 million I'm looking for it in the table here.

22 million.

22 million. It's gone up because all of volatility and just because of absolute prices. Even though the VAR has gone up from where we have historically been in overall numbers it's a very small number for Sempra so we're -- we're okay with it.

No doubt. No doubt it is a small number. I'm just trying to understand is there -- is there a VAR that is set that's higher than that.? Or is that as high as it would likely go? I'm just trying to understand that better.

Well we look at VAR specifically on each of our books and we don't have just one VAR. This is an aggregate VAR for the business but we have multiple VARs within the commodities business and we have not set an absolute VAR for Sempra.

Okay and so that's not something that you all intended -- is that listed anywhere that we could actually look it up?

No, it's not. It's something we think about and look at and anytime there's a change in the VAR in one of our books we sit down and talk about it. But we're not approaching a point where we have any discomfort.

Okay.

Thanks, Scott.

Sam Brothwell, Wachovia Securities.

Hi, can you hear me this time?

We found you, Sam.

Okay. Apologies, I don't know what happened. I think most of what I wanted to ask has been covered but maybe just a followup on the last thing. And in a very generic sense, Don, has Sempra's risked tolerance as you [inaudible] the CEO see. Has your risk tolerance vis-a-vis the commodities business stayed the same, has it increased over the past 12-18 months?

I think our risk tolerance has -- has basically stayed the same. What's changed is our comfort with the business as we've operated this business now for eight years and looked at how business is conducted and how we manage all parts of that operation. We're very comfortable in giving them more working capital. Letting them enter new lines of business and that's why the business is growing. The business is, over time, has gone from 100 employees to something over 400 employees. And each of the lines of business that we're in, we've expanded in scope where we trade. And our comfort zone with this business is -- is much higher than it was seven years ago, but our risk profile is pretty much the same.

Okay and just one -- one nitpicky one. Does your guidance include or exclude the discontinued operations?

It does not include discontinued operations.

Okay. Thank you very much.

Thanks, Sam.

At this time there are no further questions. Mr. Arriola,m now for your closing remarks.

Thanks for joining us on the call. If you have any followup questions, you can call the IR team here at Sempra. Have a good day.

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