桑普拉能源 (SRE) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Sempra Energy fourth quarter earnings results conference. As a reminder, today's conference is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr.Jeff Martin. Please go ahead, sir.

Thank you, and good afternoon. I'm Jeff Martin and I'd like to thank you for joining us to discuss Sempra Energy's fourth quarter and full-year 2006 financial results. A live webcast of this teleconference and slide presentation is available on our website under the investor section. With us today in San Diego are several members of our management team, including Don Felsinger, Chairman and Chief Executive Officer, Mark Snell, Executive Vice President and Chief Financial Officer, Debby Reed, President and CEO of the Sempra Utilities, Joe Householder, Senior Vice President and Controller, joining us telephonically is Neal Schmale, President and Chief Operation Officer. You'll note that 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 meaning of the private securities litigation reform act of 1995. Forward-looking statements, as you know, are not guarantees of performance. They involve risk, uncertainties and assumptions. Future results may differ materially from those expressed from the forward-looking statements. These risks and 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. Some of the financial information we'll be discussing today contain non-GAAP financial measures. In those cases, we'll reconcile those financial measures to the most directly comparable GAAP figures and the reconciliations will be attached as Appendixes to our slide presentation. In addition, all the earnings per share amounts in our presentation today are shown on a diluted basis. With that, I'd now like to turn it over to Don, who will begin with slide 3.

Thanks, Jeff, and thanks to each of you for joining us today. As part of today's call, we're going to do three things. First, Mark Snell and I will present Sempra Energy's 2006 financial results. Secondly, I'll update you on the status of some of our key infrastructure projects, and then finally, I will briefly cover our priorities going forward, including updated guidance for 2007. Earlier this morning, we reported our eighth consecutive year of record earnings, with 2006 net income coming in at $1.406 billion, or $5.38 per share. These results include income of $315 million from discontinued operations related to asset sales. In comparison, Sempra had 2005 net income of $920 million, or $3.65 per share. We also incurred $311 million in litigation expense in 2005, related to the energy crisis.

We've previously provided guidance that our earnings from continuing operations, excluding asset sales, would exceed $4 per share. I'm pleased to report that we achieved $4.24 per share. This number excludes asset dispositions and the write down of our Argentine investments. In the fourth quarter of 2006, our earnings were $125 million, or $0.47 per share compared with $355 million or $1.38 per share during the same period in 2005. Excluding the Argentine impairment, earnings from continuing operations for the quarter were $1.33 per share, compared with $1.39 per share a year ago. At this time, I'm going to ask Mark to walk you through our comparable earnings and business unit results starting with slide 4.

Thanks, Don. After eliminating asset sales and other unusual items, our comparable earnings for 2006 were $1.080 billion, or $4.13 per share compared with $987 million in 2005, or $3.92 per share. Comparable fourth quarter net income was $375 million, or $1.42 per share versus comparable net income of $432 million, or $1.68 per share for the same period last year. Now, let's walk through each of our business units results, starting with our utilities on slide 5.

Sempra Utilities reported 2006 net income of $460 million compared with $473 million a year ago. Fourth quarter 2006 net income was $110 million compared with $120 million in the fourth quarter of '05. San Diego Gas & Electric's net income for 2006 was $237 million compared with $262 million in 2005. Fourth quarter net income in 2006 was $55 million compared with $72 million a year ago. The change in net income for the quarter and full year was due primarily to the positive effect of a demand side management incentive settlement, and favorable resolution of tax and regulatory issues, all of which occurred in 2005. Comparable net income for both the quarter and the full year in 2006 were up significantly, lead by a lower effective tax rate and higher net income from electric generation, which includes the addition of or new Palomar facility. At Southern California Gas, 2006 net income was $223 million, compared with $211 million in '05. This change was due primarily to energy crisis litigation expense in '05, offset by the favorable resolution of tax and regulatory issues. SoCalGas' fourth quarter 2006 net income rose to $55 million, from $48 million in the same period last year, Comparable net income from the quarter was 55 million up from 41 million a year ago, due primarily to lower taxes.

Now, let's go to slide 6 and talk about the results of our commodities business. Sempra Commodities turned in another record year with 2006 net income rising to $504 million compared with $460 million a year ago. Fourth quarter net income was $214 million in 2006 compared with $244 million in the prior year. This change was due largely to reduced margins in the petroleum and power marketing. Commodity fourth quarter 2006 mark-to-market earnings were $158 million compared with $209 million in the year-ago period. Full year mark-to-market earnings were 487 million compared with $491 million in '05. Commodities excellent results continue the positive trend we've seen over the last several quarters. With that, we'll move on the slide 7 and cover Sempra Generation.

Net income for our Generation unit in 2006 was $375 million compared with $149 million a year ago. Earnings in 2006 benefited from a $204 million gain on the sale of our Topaz Power Plants in Texas. Other asset sales in 2006 were recorded as discontinued operations, and they include the Twin Oaks Power Plant, our Oil and Gas unit, and the Energy Services operation. Excluding the impact of these asset sales, litigation reserves and the 2005 write down of unused turbines earnings for 2006 were $189 million compared with $209 million for the same period last year. The variance and comparable earnings for both the quarter and the full year is due primarily to mark-to-market gains on forward electricity sales reported in 2005. To assist you in understanding the accounting impact of the asset sales, we've provided additional detail in the appendix to this presentation.

Moving to slide 8, let's go over pipelines and storage. In 2006, Sempra Pipelines and Storage reported a net loss of $165 million compared with net income of $64 million in 2005. Both the quarter and full-year results for Sempra Pipelines and Storage were impacted by the company's writedown on its Argentine investments of $221 million, and by $24 million in tax on repatriated foreign earnings. Comparable net income for both the quarter and the full year improved due to lower taxes and improved results from Peru.

Please move to slide 9. This slide provides a summary of our business unit results, and I'd like to start by briefly discussing our LNG business. In 2006, Sempra LNG reported a net loss of $42 million compared with a net loss of $25 million in 2005. This variance is largely attributable to a $13 million mark-to-market loss related to a marketing agreement with Sempra Commodities. In 2006, parents and other reported a net loss of $41 million compared with a net loss of $208 million in 2005. The prior year results included $193 million in after-tax litigation expense. In comparison, 2006 results were reduced by lower affordable housing tax credits, due to the effective sale of that investment in mid '06.

Now please turn to slide 10. The company produced robust earnings growth in 2006, even in the face of significantly higher tax rates. Earnings in 2006 reflect a tax rate of 33% versus 4% in 2005. Another key metric, EBITDA or earnings before interest, taxes, depreciation and amortization, was up approximately 11% on an adjusted basis year-over-year. These adjusted EBITDA numbers are shown on slide 15. When you look at our balance sheet, it's important to note that successful asset sales, coupled with the outstanding operating performance of our business units have strengthened our financial position. At the end of 2006, our debt to total cap improved to 42% from 48% last year. And we had $920 million in cash, and over $6 billion of available credit lines to support our businesses. Now, let me hand things back to Don for an operational update on slide 11.

Thanks, Mark. As you can gather from Mark's review, 2006 was an absolutely great year for Sempra Energy. As I look at 2007, there are three things that we're going to focus on. First, is executing our robust capital plan. Secondly, completing our utility rate cases. And then finally, continuing to fund the working capital requirements of our commodities business. And let me now give you some progress on these issues. We now have an expanded five-year capital expenditure program under way, which calls for investments of over $11 billion in identifiable high-quality projects. At our utilities, we're in the permitting process for the $1 billion Sunrise Power Link project and expect a final decision in the first quarter of 2008. When complete, this 500 KV transmission line will provide added reliability for the San Diego region, serving as a superhighway to deliver new energy supplies, and this line will also increase reliability and be a line that will help provide renewable energy to customers in San Diego.

On February 9th, we reached an all parties settlement with rate-payer groups on a decision for deployment of advance metering infrastructure, or AMI, within SDG&E's service territory. The decision calls for a capital investment of approximately $500 million, including an increase of $50 million for technology enhancements over our previous filings. If approved by the California Public Utilities Commission, meter installations will begin in late 2008.

At our Pipelines and Storage business, we, along with our partners Kinder Morgan and Conoco Phillips, recently completed construction and placed into service the 192-mile segment from the Wamsutter hub to the Cheyenne hub. Our permitting and construction remains on target for this $4.4 billion pipeline. Our 17 billion cubic foot Liberty Gas Storage facility is under construction and scheduled to be complete in March with full operations beginning in the second quarter. Based on customer interest, Sempra Pipelines and Storage also commenced an open season for an additional 5 billion cubic feet per day of expansion capacity at that facility.

On the LNG front, construction progress continues on Energia Costa Azul, which is now approximately 65% complete, and on our Cameron receipt facility which is almost 40% complete. Construction for both terminals is targeted for completion in 2008. Energy at Costa Azul is fully contracted, and our Cameron facility is sufficiently contracted to earn a return on our investment. We continue to hold discussions with interested parties on the remaining capacity at Cameron, as well as expansion capacity at both terminals. In December, we filed a general rate case for both utilities. We expect a decision by the end of this year, with new rates effective January 1st, 2008. We're also asking for these new rates to be in place through 2013.

Now let me discuss our commodities business which continues to perform exceptionally well. The current levels of volatility in the energy markets encourage our customers to seek risk management services and enhance our ability to grow this business. While it's impossible to predict when less volatile prices will return to energy markets, it's our belief that natural gas will remain volatile. These conditions will be mitigated over time by improvements in infrastructure, such as increased storage and pipeline capacity, and added LNG receipt points providing new supplies. As this business continues to grow, it requires additional capital. Fortunately, every year a strong performance adds equity in the form of retained earnings. This reinvestment allows measured growth in our commodities business as we move forward, largely keeping within the overall growth profile of Sempra Energy.

Now, I'd like to sum up our results on slide 12. As stated earlier, 2006 was our eighth consecutive year of record earnings. Going forward, that's a lot to be excited about. Early in 2006, we announced that we're focusing our growth strategy around investments in natural gas and utility infrastructure. We said we would help finance our plans by divesting nonstrategic assets. We have not only executed on the majority of those asset sales, but we've also received proceeds well in excess of what we had forecasted. This is important because our increased balance sheet strength supports our expanded capital program. In addition, last week, Sempra Energy's Board of Directors approved a 3% increase in the dividend to $1.24 per share. The first quarterly installment of the new dividend is payable April 15, 2007.

We've also updated our underlying assumptions for 2007 earnings guidance. You will recall our previous guidance for 2007, which we provided you in March of last year, was a range of $3.50 to $3.70 per share. We are now increasing that today to a range of $3.75 to $3.95 per share. We will be providing business unit detail at our analyst conference on March 29th, here in San Diego. And with that, let me now open up the call and take your questions.

Thank you. The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] We'll go to Sam Brothwell of Wachovia.

Good morning.

Good morning, Sam.

With respect to your debt to capitalization ratio as you alluded to continued growth in the commodities business, is there kind of a target range that you're shooting for there? Are you comfortable where it is now?

Let me give this to Mark, but we're very happy with the direction it's heading.

Well, we do want to see continued improvement in that area. And the rating agencies, because of the way that they look at that debt to cap ratio, they kind of want to see it in the, in the mid to low -- mid to high 30s. And we keep moving towards, in that direction. So, I think that that's all a very positive sign for our ratings and for our ability to continue to grow the business. And we're just relying on the strong earnings from that business to keep adding to our equity.

So you don't, at this point, you don't anticipate issuing any new equity to goose it along further?

No. In fact, our capital plans currently do not require us to issue equity. We will be doing some financings later this year, and one of those financings may be, we may do some hybrid securities to get -- which are essentially debt securities that get some equity credit because of their deep subordination.

And back to my comments, this is Don again. One of the reasons that our asset sales and the way we executed was so important to us, because we were moving down a path of avoiding having to issue new equity. And the fact that we've got more money than we anticipated from these asset sales has put it in a very nice position.

Okay. Thank you very much.

Thanks, Sam.

We'll go next to Paul Patterson of Glenrock Associates.

Can you hear me?

Yes, Paul, go ahead.

Just briefly, the, I noticed that there was a bit of a jump in the commodity business with the below investment grade assets going up to about 30%. It isn't a giant jump or anything, but it's a little notable, and I was just wondering if there's been a change in strategy, or if this is an anomaly or a normal variation that we might see, or if there's been a change in the customer mix or what might be driving that?

From my standpoint, it's just a normal variation, but Mark, do you have any other thoughts?

No, there's been no change in strategy. We had a couple larger deals towards the end of the year that were not investment grade but were asset backed and that contributed to it. But it's not anything, not any kind of pattern or anything.

Okay, great. The ninth circuit ruling in December on the FERC interpretations CR mobile, how does that, does that impact you guys? Or, just where are we at, with respect to what that means, or could you just comment on what you think that means, or doesn't mean anything?

Obviously, we're concerned about it. The FERC has been handed back from the ninth circuit. Their decision that market-based contracts in the public interest need to go back and be reviewed under the just and reasonable standard and we're not sure what FERC is going to do with this. We're going to take this all the way to the Supreme Court if we have to. And it's something that I think the industry is very concerned about. There's a lot to play out here. What the ninth circuit has said is, FERC, go back and take a look at these long-term contracts and see, if in fact, you've applied the appropriate standard. That's where this is right now, and it's going to take a few years to play out.

Okay now, are you guys going to, is -- just explain the procedure here. Do you appeal this ninth circuit ruling, or do you wait to see how it plays out at FERC? How does the process go from here, considering that you guys are unhappy with the ninth circuit ruling? Do you appeal the ninth circuit ruling to the Supreme Court now, or do you -- how does it work from --?

We're going to appeal it now, and if you'd like more flavor, I can ask Javade Chaudhri, who is on the phone, to just weigh in and give you what the next steps are. Javade, can you hear this okay?

Yes. We are, as you implied, this is something we could have taken back to the ninth circuit. I think the collective wisdom of all of the parties who were affected by this and as you know, we're one of large number, was that that was not the best approach. And so, it is likely going to be appealed to the Supreme Court because we think that the ninth circuit's interpretation of this 50-year-old doctrine [inaudible] doctrine, is something the Supreme Court ought to be interested in. So that's likely the next step. So if that happens, FERC won't be doing anything about it for quite a while.

Okay. And when do you guys appeal it? When will it go to the Supreme Court?

In the next several weeks.

Okay. And then in terms of just to clarify this, the hybrid securities, if I heard you right, there's really no equity component to this, right? This doesn't of any -- correct?

No, it does not. It's just a deeply subordinated debt offering, essentially.

Okay. Just wanted to clarify that. Can you give us any sort of elaboration or flavor on the earnings guidance, what's driving it and what have you? The change in it? I know you guys are going to give out more detail at the analyst meeting but, can you give us a little bit of a preview or is it just something you want to wait until then?

I'll, we'll give you a little bit of a preview. The biggest issue is, the big thing is that our, the increase in the guidance for '07 is driven primarily by sort of a more bullish outlook in our commodities unit. If you recall from last year, we had predicted '07 commodities to be a 250 million to $350 million kind of run rate for that business. We believe that that's higher now and our new guidance reflects that increased fully.

Okay, great. Thanks a lot.

Okay.

We'll go to Lasan Johong of RBC Capital Markets.

Good morning, or good afternoon. Nice quarter and year.

Thank you.

Don, I read somewhere that you might be interested in doing some prudent [liquefaction] investments. Would that be something in the near term, how would you go about structuring it? I'm assuming you won't take, or Sempra will not take commodity price risk in attempting to do so. And is it a way to kind of jump-start the Port Arthur project? Can you kind of walk us through all that?

Well Lason, what I was commenting on is that we have a very full plate for the next five years of capital projects. As a matter of fact, we're going to be spending, as I said, around $11 billion. But as I look at growth beyond this period, you look at what Sempra's strengths are, and the fact that we are one of the largest gas marketers in North America, and have a large presence in Europe and Asia. It would be a natural for to us take that skill set upstream. So, whether it's investments and liquefaction plants to get access to supply, whether it's in the shipping business for arbitrage opportunities,it's something we're looking at. I mean there is nothing firm here except that we are looking at kind of where we go beyond this coming five years.

I see. So it's a more of a longer-term plan.

Yes, exactly. It's just taking the skill sets that we have and how we apply those in the market we see emerging.

Don't get me wrong. I kind of like the idea, just a little bit different from what I'd been hearing from you guys previously. Also, there was something about the Sunrise [inaudible] being opposed by local residents because of, I'm guessing it mars the view of the park on a 27-mile stretch of highway. So, is this really going to be problematic, or is this something that a normal part of your everyday getting a banana syndrome? I'll ask Debby Reed here to give you more flavor. But we are in the large infrastructure business. And it's difficult to find anybody that really likes the things that we build, although they like the results of the things that we build. So, whether it's a power plant, a transmission line, a pipeline, all these things go through a process where we collect a lot of public input, and it's really good input. At the end of the day, when we have public input, we end up with better projects in the way they're routed and their sited. So, I consider all of this the normal process which will help us end up with a better project at the end of the day. And Debby, do you want to just talk about where we are?

Yes. Where we are right now on Sunrise is to emphasize again, this is a reliability project principally for San Diego that would bring 1,000 megawatts into our region, and also have access to renewables. The area that you've talked about, where there have been some public hearings, the commissioner that is assigned to this has used a very public process to gather input. So that she can support the decision that comes out of the CPUC and avoid any unnecessary appeals. And so, the process has been very, very thorough in soliciting input. As we go through the desert region that is the focus of your comment, in that desert region, we do have an existing transmission line. And our proposed route would basically follow our existing right of ways along that transmission line for the most part. So, we feel pretty confident after going through this process that, as Don said, these infrastructure projects are never easy, but we have a lot of experience dealing with it.

Understood, understood. One last question for Mark. If I read your kind of implications correctly, the $0.25 move in guidance is roughly $65 million in net income. I might infer that your new kind of prognosis for where Sempra Commodities would be, somewhere between $3 and $400 million? North of that maybe even?

We're going to give you business unit data and some, firm those numbers up. But a majority of the increase in the guidance is attributable to commodities and so can you do the math.

Why are you guys being so conservative?

Yes, Lason, we earn about, when you think the asset sales out of 2005, we earned about $400 million. 2006 was a very good year for us. I think we are just saying that business is going to continue to perform as it has. If we could project volatility to the nth degree, we could be more precise, but we can't do that.

Okay. Appreciate it. Thank you.

We'll go to Faisel Khan of Citigroup.

Good afternoon.

Hi, Faisel.

Hi. Just on the $11 billion CapEx plan, what percentage of that would you say is maintenance CapEx?

Is maintenance CapEx?

Yes.

It would mainly be at the utilities, and they've got about 60% of that budget long-term. But I would imagine it's probably, 10% to 15%, I don't have a number, Debby, do you?

Yes. About, the maintenance CapEx that we have in our budget is about, about 400 million a year in each utility is the typical for distribution type maintenance CapEx.

Okay. And then on the LNG facility at Cameron, any updates on what's going on with [Sonatrac]and I think [Suez]? I know you have the agreement with Merrill, too, but, are those [MOUs] still active, or are they -- what are we looking at on the status of those two agreements?

I believe they're all active. We're working them, so they're active from that standpoint. The issue, as I'm sure you understand, is that there's been a delay upstream in liquefaction, and this is causing everyone to kind of recalibrate their timeline when they need capacity. But I know that the Merrill Lynch agreement is still active, and the other two, we're still having discussions with.

Okay. And then on the west coast facility, is some of these announcements, I believe by Peru, to build a liquefaction facility, would some of those volumes be eligible for your facility on the west coast, or have you had any conversations with the people involved down there?

I would just say that we have a lot of interest in the expansion of Costa Azul. And without talking about those negotiations, I think people look at the reality of having a project that's under construction that will be online in about a year, versus projects that are currently contemplated to get permits and get built.

Okay. And I guess with the, with Rockies Express, I use the first segment coming online, I believe you're treating the commodities business has about 200 million cubic feet a day on that segment?Is that correct or is that --

That is correct.

I guess, how is the, how are you guys taking advantage of the current situation right now with basis spreads? Did that come online, was that January when the first segment came online?

The Wamsutter to Cheyenne just came on within the last month or so.

Okay. So you guys would be able to benefit from any sort of basis spread between those two areas?

That's what we do for a living.

Okay. Fair enough. And then you talked about how, I guess on the commodities business that you're earning a pretty healthy earnings stream? And I guess, are you saying that you'll plow back 100% of those earnings into the business, or would you plow back 110%? What's your--

We've been leaving the earnings in that business. We have said going back many years ago, that we were wanting to make sure that this business didn't grow faster than Sempra grew.

Okay.

And the fact that they have had these fairly robust years from an earnings standpoint, we've been able to leave those earnings in the business, which gives us the ability to keep growing it. And that's where we are.

Okay. And then, I don't mean to pin mark down on this, but on the hybrid security, you talked about, I guess early in the year, last year, you had talked about how that might be a security, you might need, given your CapEx projects, and I think towards the middle of the year, given that the asset sales were coming in ahead of your expectations, I guess, my understanding was, I thought you didn't need to go back to the well for that sort of security. But it sounds like that's changed a little bit? Is that fair to say?

I don't think that we -- we've always kept it in our quiver to do, and I think we would like to do that, especially the new versions that are out now since they have no equity component to them and they're not dilutive from an EPS perspective, other than the interest and that the spread, on those securities over our normal borrowings is relatively modest. All of those things add up to make it a prudent thing to do from a ratings standpoint. So, it helps to support our capital structure. If the spread widened, or the market dried up and they had to go to a convertible feature, I wouldn't do it. But, I think, given what we've got, what the market is making available, these are very attractive products.

Okay. And then last, on Sunrise, is that going along the timeline you expected or is that a little bit delayed now?

It's right on our schedule now.

Okay, great. Thanks, guys, for the time.

Thank you.

And we would like to remind you to limit yourself to one question and one follow-up. We'll go to Carl Kirst of Credit Suisse.

Good morning, afternoon, everybody. Just to follow up on, as far as what is going on with the marketing, and Mark you mentioned the 250 to 300 million of earnings basically. I just wanted to get a better sense of, is the baseline moving up under normal volatility, or is that it simply, your more bullish on the level of volatility that's out there right now?

I guess I would just repeat what I said. In 2005, when you took out some asset sales that we made that were in commodities, it was a storage unit, we earned about $400 million. In 2006, with all kinds of volatility, we earned over $500 million. As we go forward into 2007, we are increasing the range of earnings expected in that business up to the range that Mark talked about, between $350 and $450 million. It will really depend next year, on this yer, on what the drivers are in volatility, and where we have the strongest positions. But if you'll take the time and spend the day with us next month, we're going to spend a lot of time discussing each of our businesses and the assumptions we're making about their forecasts for this year or next year.

Great. Look forward to that. Just a quick follow-up. If I've got the number correctly, of the $2.7 billion of invested capital of commodities at year-end, how much of that is equity now? Where are we on sort of the retained earnings in the commodities business?

Let's see if we have a breakdown here on retained earnings and borrowing.

The borrowing --

This is Mark Snell.

Oh, sorry. The borrowing is about $450 million. And essentially, the rest of it is retained earnings, less about $200 million of original capital.

So, the vast majority is retained earnings equity?

Right.

Great. Thank you.

We'll go next to Rudy [Tolentino] of Morgan Stanley.

I notice that, here in the marketplace, that liquidity in the outer months are improving. Do you intend to do more trading [inaudible] like in the outer months to hedge the long-term deals like power plants and play that arena?

Rudy, we look at that. We have made this business by keeping a fairly short dated book. We are able to hedge longer-term deals when customers ask for them. But I think it's really deal specific. There's obviously a lot more liquidity now in the out years, and there are occasions when we have transactions where we take advantage of it. But our strength has really been having a book of business that converts to cash within 24 months.

Okay. And just out of curiosity, with, generation assets pricing increasing in the marketplace, do you have any intent of selling your competitive generation fleet?

You know, as we look around, at what is happening in the construction world, all assets are going up in construction costs, whether it be pipelines, LNG receipt facilities or generation. So, the absolute capital costs are going up. Really, what drives the value of these assets, and especially in the electric generation, is the forward curve. So, we keep a close eye on the forward curve. If we felt there was an opportunity to create value above and beyond what we think we could do otherwise by transacting these assets, I think you've seen our past actions. We will sell assets when we think they demand a premium in the marketplace.

Okay. Thank you very much.

We'll go Mike Heim with A. G. Edwards.

Thanks, just one more question on the convertible comments. Last March, I guess, you were talking about maybe 500 million in trust preferred. Did that number come down?

No, it's probably talking about that and they won't be a convertible feature to it, but we're talking around that. One of the points I guess I didn't make earlier is, we have about $600 million of debt that's coming due this year that has to be refinanced. So, we'll, that would be the primary reason for doing this, too.

That 600 million that's coming due, is that utility debt though?

It's not all of the utility, it's a combination.

And maybe finally, if I could, where do we sit with the possible project financing of some other projects?

We still have the intent the project finance of our LNG facilities when they come online, although we are reevaluating whether we do project financing at Mexico or not, just because of some of the complications of the structure down there and the way that we, the way that it would have to be done. There's some negative tax aspects to it. But all of our large projects, the Rockies Express Pipeline, the Cameron LNG facilities, our LNG Pipeline, all of those will likely be project financed.

Okay. Thank you.

We'll go to Mike Lapides of Goldman Sachs.

Hi. Real easy question. Can you just give an update on the permitting process for both the LNG and the pipeline projects?

LNG is fully permitted. Both Cameron, of course we have all of the permits that's at [ECA]. What we have done is at both, at Cameron, we have gone in and asked for expansion permits. We have those in place so we can expand Cameron, and we now have the permits for the construction of Port Arthur. So, from a permitting standpoint, the only project that we are currently seeking expansion permits for is Energia Costa Azul in Mexico.

Great. Thank you.

We'll go to David Grumhaus of Copia Capital.

Good morning, good afternoon. Just a question for you on taxes. You talked about at the utilities, how some of the improvement was due to lower tax rates. And I just wanted to get a sense of, what were the tax rates and where do you expect them to go in '07, and then, contrasting that it sounds like on a consolidated basis, that taxes actually were up, effective tax rates were actually up a lot in '06.

David, let me give this to Debby Reed.

Yes, I'll start in, if you have any further questions, I'll have Joe Householder add. In terms of the utilities, the tax rates at SDG&E for 2005 were 24.97%, 2006, 38.52%, and we're expecting somewhere, a little less than 2006 rates for 2007. And that, if you look at SoCalGas, the rate for SoCalGas in 2005 was 31.34, 43.15 in 2006 and we're estimating a little below the 2006 level for 2007. These are the full-year rates. Now that includes, when you look at the 2005 tax rate, that includes a lot of the tax settlements that were in there from prior years that are on your unusual item table, page 5.

Right.

So that is affecting the tax rates, but in addition to that, what we're also seeing is at SDG&E, we had an after the unusual items for the year, we had lower taxes at SoCalGas, after the unusual items for the year, we had higher taxes. And so, that's the comment that was saying that that was the driver of the different year to year at SoCalGas of the tax rate.

Okay.

Can I just go back to what Mark had in his report? And that is at Sempra, we're going to be a full taxpayer for 2007, so when you look at our earnings, we're paying the full bill.

Is that full bill going to be comparable to what we saw in '06, which I think you guys said was 33? Or is it going up be up to 36 or 38?

Yes, 38.52 was SDG&E.

Overall for '07, we're estimating it will be around 31, 32%.

Okay, great. That's helpful. Thanks for the time, guys.

We'll go to Becca Followill of Howard Weil.

Thank you. My questions have been asked and answered.

Thanks, Becca.

We'll go [Steven Long] of [Citadel] Group.

Hi. I just had a quick question related to your discussions with the rating agencies in regards to how, and the trading, on how the accounting works, for how much debt to cap you guys need. I believe you guys were in discussions with them, maybe not just yourselves, but the industry as a whole as to taking it, accounting more like agricultural firms.

Correct.

What's the status on this right now?

This is Mark Snell.

We are still having discussions with them on this. But, yes, it's true in the agricultural world and some of the other foreign European energy trading companies, even. They give full inventory credit against the debt, to the extent that that inventory is sold forward. We're having discussions with the agencies about that and we would expect to get some break there down the road.

If you looked at those other comparable companies, and if the agencies was to grant this new view, what would the hypothetical debt cap structure type would be? Would it be instead of mid-30s to high 30s, would it go to low 40s to mid-40s?

I think it would go to the high 30s, low 40s kind of number. You know, for us, we tend to carry inventories you know, in the 600 million to $1 billion kind of range at times.

Okay. Great.

So, you've got to reduce that much debt.

Okay. Thank you.

We'll go to [John Edwards] of Morgan Keegan.

Yes, hi. Nice quarter.

Thanks, John.

Hi, could you just remind -- you've probably said it on the call and I missed it, the rate case filing, the base rate increase? Can you remind me what that, what you filed for?

Well, we have filed for rates at both utilities. We would expect to have new rates in place on January 1st of '08 and we're asking for a five-year period.

And how much are you asking, what's the increase amount?

Debby, do you have those numbers?

Yes, I have those numbers.

And it's '08 to '13, right?

It's a six-year period that we have requested. The way that we filed is, they are based upon our 2006-based revenues. So, if you look at 2006 based revenues that will ask for a revenue increase of 221 million at SDG&E and 167 million at SoCalGas.

Okay. And that would be the increase over '06 starting in '08, correct?

Yes, exactly.

And that's base rates, right? That's not --

That is actually the rate revenues that we would have to collect. So the amount we would have to collect more after other adjustments would equate to those numbers.

Okay, but it's not fuel related? It's related to rate base, right?

Absolutely, as a reminder, our rate case, we have pass-through for our fuel costs and we are not at risk for consumption, variability and consumption. That is all balanced for both utilities. So, this is just our base margin which has our own [in] costs, our return on our capital, our interest taxes as part of the base margin.

Okay, great. And then on, you mentioned the $11 billion of capital spending. How does that spread out over the next five years?

It's about 2, 2.1 to $2.2 billion a year.

So pretty evenly?

It's pretty evenly spread.

Okay. Has anybody asked you about any plans you have for setting up an MLP?

We look at our capital structure all the time. The thing that we do is just make sure we have flexibility in all the contracts we negotiate. So when these projects come online, we can look at the market, and look at what makes sense for shareholders, and we'll take that path.

Okay. So, you do look at it from time to time.

Yes, we're leaving those options open but we've, go into upfront work to give us that flexibility to, if we want to put an MLP in we can, and with a project finance, we can.

Okay, great. Thank you so much.

Thank you.

We'll go to Carl Kirst of Credit Suisse.

Yes, just a quick follow-up, guys. Don, I thought I read in a [Roiter's] article that you guys were considering investing heavily in Brazilian ethanol, and I was just wondering if you could give us a little bit more flavor around your thoughts there.

That article was a little ambitious. What we've done, Carl, is there's a firm in Brazil that is in the process of putting together about a $4 billion project to make ethanol from sugar cane. We have signed an MOU with them to market the outtake of that facility. So, there's a lot of work to be done before we actually get there. But, yes, we are having discussions, it is a plant that's proposed, and right now we just have an MOU where we're negotiating.

But the context is around, essentially Marketing offtake, not necessarily hard asset investment, or --

That's correct.

Okay, thank you.

Thank you.

We'll go to Ashar Khan of SAC Capital.

Hi, good afternoon. Sorry, I joined the call late. Mark, if I remember, you have $900 million of cash. The business is going to throw off 1.7 or so operating, CapEx is 2.2, dividends are $200. You still are left with cash, if I'm right, unused cash, even if you fund all the CapEx by the end of the year. I'm just trying to understand, holding on to this billion of cash. I know it goes down as the year progresses. How should we look at management holding this cash? And if you can just talk of other opportunities, if you can, in terms of use of this cash.

Well, I think you should look at management very favorably. [Laughter] We are holding a lot of cash. But we do, we do have a an $11 billion capital program in front of us, which we're committed to. We have lots of other projects that haven't made it into our capital plan because it hasn't been firmed up, but they look very attractive. So, we think there's potential growth on top of that. We did actually, we raised the dividend a little bit and we plan to continue to raise the dividend a little bit every year. So, I think we have --, in fact, if you come to our analysts' conference in March, we'll give you some great detail on the cash flow of the company and where all of this is going. But, I think you can take some comfort that we're not going to just stuff it in a mattress and have it, not put it to use. We will put it to use.

Okay. And just on the regulated front, if I understand the rate case filings-- doing it, you're asking for the increase for the first year and then you're asking for the average increases over the past three historical years to be imputed for increases going forward in each of the next fiscal years. Is that the right way to look at it? Is that hey, you get your 2000 and it's a settlement if this case gets approved in the manner that you like, that you get your first year, and then the next year increases would be like the average of what the increases have been in the rate base over the last three years? Is that the way to model it, then?

Let me have Debby tell you how the attrition process works for the following years.

Yes, what we've filed for is a 2008 base year. And then, we have attrition years, each year after that. And so usually, there would be a formula for the attrition. Like, we have this right now, the same type of mechanism right now, where each year you take the base. When we do our base, we estimate what we think our capital investments are going to be in our base business. And then we would go in for any incremental capital investments that are in excess of $50 million. We would do individual filings for those, and then they would go into rate base when they were approved. The attrition mechanisms are generally a CPI type mechanism that has a small productivity factor in it. And that that would take our base margin and index our base margin annually by that factor.

Okay. So do we understand it, you get an attrition mechanism on the cost and on the rate base, anything above $50 million gets added and you get an imputed revenue increase for that return on investment. Is that a short way to look at it?

Yes, for the [CPOC] side. Now, for the FERC side, I should add that we have a formulaic rate mechanism at FERC. And so every year, it, basically it trues up for our rate base, our actual rate base, with the authorized return, and then it's also gives us the actual O&M expenses for the year. So, FERC is a little different, but the same general concept.

And because this is such a key opponent of our business going forward, at our March analyst meeting here in San Diego we'll walk through this in a lot more detail.

Okay, I appreciate it. Congratulations.

Thank you.

We'll go to Faisel Khan of Citigroup.

Yes, all right. Just a couple of follow-ups. In terms of the part of [inaudible] you have to file at cost of capital filing, and in terms of, we've seen some changes at the CPUC in the last few years, and I am trying to figure out, is there going to be a change of philosophy in terms of how you guys [next] file your cost to capital versus what you did in the past?

I'm not sure what you're referencing, Faisel.

Before you asked for that, I think it was a, you got like a 10.5% [RWE], and I guess going forward now, is that a fair return on equity for your utilities, or is there, given what we've seen with some of the other utilities in the state, is it reasonable to assume that we could get more?

The logic that I've been given as to why our return is lower than the utilities is the fact that they were troubled, and they were coming out of the bankruptcy or near-bankruptcy and needed some support. But I think going forward, we would expect to be treated the same as the other two utilities.

Okay, fair enough. Previously in the past, you guys had a small buyback program in place. Is that program still in effect?

I think that what we are doing right now is for options and get exercised, and we are -- are we buying -- we're buying those back [inaudible]?

We were buying them back through the end of the year, and then starting in the beginning of the year, we have issued some shares that were authorized and previously unissued shares for some comp program issues, things like 401K matching and things like that, but these are relatively small amounts.

Okay, got you. And can you just remind me again what your allowed [RWEs] at the FERC transmission lines?

It's 11.25%, I believe.

Okay, thank you.

Thank you, Faisel.

And at this time, I'll turn the conference over to Mr. Don Felsinger for closing remarks.

Well, thanks to all of you for joining us. As you can tell, it's really been a -- this past year was a great year for Sempra. And if you have any follow-up questions, get a hold of Jeff, Karen or Glen, and if you haven't registered for our March 29th conference, make sure and do so, and we'll see you then. Thanks.

And are that concludes today's conference call. We thank you for your participation.