桑普拉能源 (SRE) 2007 Q1 法說會逐字稿

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

Thank you, and good afternoon. I'm Jeff Martin, and I would like to thank you for joining us to discuss Sempra Energy's first quarter 2007 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; Neal Schmale, President and Chief Operating Officer; Mark Snell, Executive Vice President and Chief Financial Officer; Debbie Reed, President and CEO of the Sempra Utilities; and Joe Householder, Senior Vice President and Controller.

You will note that slide two 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 are not guarantees of performance. As you know, they involve risks, uncertainties and assumptions, and 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.

Some of the financial information will be we will be discussing today contain non-GAAP financial measures. In those cases, we will reconcile those financial measures to the most directly comparable GAAP figures. In addition, please also note that all the earnings per share amounts in our presentation today are shown on a diluted basis. And with that, I would now like to turn it over to Don, who will begin with slide three.

Thanks, Jeff. And thanks to each of you for joining us today. What I'd like to do on today's call is first update you on our financial results, follow that with an update on our key activities and infrastructure projects, and finally, answer any questions you may have. But let me first begin by saying how pleased I am with our results this quarter. All of our operating businesses performed at or above last year's levels. With respect to commodities, our economic performance is essentially equal to last year, which you may remember was a record quarter. However, our accounting results do not reflect $86 million of mark-to-market profits from natural gas storage and transportation contracts, which were deferred under current accounting rules. We do, however, expect the majority of those profits to be recognized later this year. Our positive first quarter results have us on track to meet our 2007 earnings per share guidance of $3.75 to $3.95 per share. With that, I'm going to ask Mark Snell to take you through our more detailed financial results, and I'll be back in a bit.

Thanks, Don. Well, earlier this morning we reported income from continuing operations for the first quarter of 2007 of $227 million or $0.86 per share, compared with $234 million or $0.90 per share in the first quarter of 2006. Net income for the first quarter of 2007 was $228 million or $0.86 per share, compared with first quarter 2006 net income of $255 million or $0.98 per share. First quarter 2006 net income included $21 million of earnings from discontinued operations, of which $16 million was a one-time tax benefit.

Now let's take a look at our business unit results, starting with Sempra Utilities on slide four. Sempra Utilities reported first quarter 2007 net income of $117 million compared with $96 million in the year ago period, an increase of 22%. San Diego Gas & Electric's net income for first quarter 2007 was $62 million compared with $47 million in the first quarter of 2006. The increase for the quarter was due primarily to higher earnings from the Palomar Energy Center, which came on line March 30, 2006, and the San Onofre Nuclear Generating Station. At Southern California Gas, first quarter 2007 net income rose to $55 million from $49 million in the first quarter of 2006. The increase was due primarily to improved operations.

Now let's go to slide five. Sempra Commodities first quarter net income was $71 million in 2007, compared with $116 million in the prior year's quarter. Don mentioned this earlier, but this quarter over quarter change was largely due to the effects of accounting rules that defer mark-to-market profits on natural gas storage and transportation contracts that are used in forward sales transactions. The change was also impacted by reduced margins in natural gas and power marketing, but these were offset by higher margins in metals and an $18 million gain on an equity interest entered into as part of an energy marketing agreement. Commodities first quarter 2007 mark-to-market earnings were $157 million, about even with the $160 million of a year ago period. Commodities' excellent results continues the positive trend we've seen over the last several quarters.

Now let's move on to slide six and cover Sempra Generation. Net income for our Generation unit in the first quarter of 2007 was $54 million compared with $41 million in the first quarter of 2006. The improved earnings at Sempra Generation were due primarily to a favorable change in mark-to-market profits on long-term contracts with Sempra Commodities, and increased interest income arising from the higher cash balances associated with our successful asset sales program.

Moving to slide seven we will cover Pipelines and Storage. In the first quarter 2007, Sempra Pipelines and Storage reported net income of $16 million compared with net income of $11 million in the same period of 2006. Net income for the quarter improved due to lower income tax expense and improved results in our Mexican and South American operations.

Please move now to slide eight. This slide provides a summary of our business unit results, and I'd like to start by briefly discussing our LNG business. In the first quarter of 2007, Sempra LNG reported a net loss of $10 million compared with a net loss of $5 million in the prior year's period. This change is largely attributable to a $4 million mark-to-market loss related to a marketing agreement with Sempra Commodities. Parent and Other reported a net loss of $21 million in the first quarter of '07 compared with a net loss of $25 million in the first quarter of 2006, primarily due to lower net interest expense.

Please turn now to slide nine. In summary, I just want to say that we are really pleased with the quarter, and here's a few take aways. First, Sempra Utilities had excellent results, with earnings up 22% from last year. Second, operating cash flow improved in the quarter to nearly $1.4 billion compared with $855 million in the prior year's period, leaving us with nearly $1.7 billion of cash. However, we have $600 million of debt that we'll be retiring with that cash in the second quarter. And lastly, I will note that at the end of the first quarter of 2007, our debt to total cap ratio improved to 40% from 42% at the end of last year. Now let me hand things back to Don for an operational update starting with slide ten.

Thanks, Mark. And let me start with an update on our utilities. In early April, the California Public Utilities Commission approved SDG&E's Smart Meter program which will dramatically change how SDG&E delivers service and will help customers conserve and manage their energy use. SDG&E plans to spend $572 million, which includes $500 million of capital, through 2011 to replace an estimated 1.4 million electric meters with Smart Meters, and to retrofit approximately 900,000 gas meters throughout its service territory, and this will all begin in 2008. I would just like to mention that the CPUC voted unanimously in support of our Smart Metering program, which sends yet another signal that the State of California understands the key roll that utilities need to play in order to meet expected growth here in the state. In that regard, we are continuing to work through the permitting process for the $1 billion Sunrise Powerlink project, and expect a final decision in the first quarter of 2008. When complete, this 500 kV transmission line will provided added reliability for the San Diego region, serving as a critical transportation link to deliver new supplies of energy. The line is also expected to reduce the overall energy cost (inaudible) customers and provide access to clean, renewable energy.

Many people are surprised to learn that in the category of 500 kV transmission lines, that there are 46 of these high-voltage lines supporting the major population centers in California, but only one of these lines is connected to the San Diego region. This is why the California grid operator, the California Independent System Operator, has been supportive of the Sunrise Powerlink. Last week we were also pleased to have the United States Department of Energy designate the Southern California/San Diego region as a region needing more high-voltage transmission.

In December of last year, you'll recall that we filed a general rate case for both utilities. We still expect a decision by the end of this year, with new rates effective January 1st, 2008. And remember, we are also asking that these new rates be in place through 2013. Also the $210 million Otay Metro Transmission project, which will increase reliability throughout the San Diego region, is expected to be placed in service before this summer.

Let's now go to slide 11 for an update on our Pipelines and Storage projects. Our Pipelines and Storage business, along with our partners Kinder Morgan and Conoco Phillips, now have in service the first 328-mile segment of the Rockies Express project, which runs from the Meeker Hub in Rio Blanco County, Colorado, to the Wamsutter Hub in Sweetwater County, Wyoming, to the Cheyenne Hub, which is also in Wyoming. This includes the 192-mile segment that was placed into service earlier this year. And just last month, Rockies Express received approval from the Federal Energy Regulatory Commission to begin construction on the Rockies Express-West project, which extends the pipeline from Colorado to Missouri. This 713-mile leg of the pipeline is expected to be in service in early 2008. Also earlier this week, we filed with the FERC seeking approval to construct the 638-mile Rockies Express-East portion of the project. This final segment of the Rockies Express Pipeline is expected to begin interim service as early as December, 2008, and to be fully operationally by June, 2009. Our permitting and construction remains on target for this $4.4 billion pipeline.

At our Liberty Gas storage facility, our transportation-related services will start this month. We've had some construction delays and now expect to begin storage service in the second half of this year. 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 this facility.

Now let's go to slide 12 for an update on our LNG activities. Construction progress continues on Energia Costa Azul, which is now over 70% complete, and our on Cameron receipt facility which is now 45% complete. Construction for both terminals is now targeted for completion in 2008. Energia Costa Azul is fully contracted, and our Cameron facility is sufficiently contracted to pay for our investment. We continue to hold discussions with interested parties on the remaining capacity at Cameron, as well as expansion capacity at both terminals.

Now let's move on to slide 13. As stated earlier, we had excellent results at Sempra Utilities. Our Smart Metering program was approved, and is now moving forward. Our major infrastructure projects are on track. We also had a great year and a great quarter at Sempra Commodities, with deferred profits expected to be recognized later this year. And we are on track to meet our earnings guidance of $3.75 to $3.95 per share. And with that, let me open up the call now for your questions.

(OPERATOR INSTRUCTIONS) Lasan Johong, RBC.

A couple questions on the commodities business. I'm understanding what you said, Don, is that the accounting of the business has changed, but your cash expectation or economic expectations has not changed going forward based on the first quarter results. Is that a fair statement?

Lasan, that's correct.

Excellent. Second, the margin of negative $56 million in the gas business, that sounds like therefore then is mostly mark-to-market adjustment, as opposed to an economic loss. Is that correct?

Let me ask Mark Snell to address that.

Lasan, that -- the amount of earnings that we weren't able to recognize is what's driving those margins down. It's essentially profit from Pipelines and Storage contracts which aren't being recognized for accounting purposes. That $86 million that we referred to, if you gross that up to the margin, it's roughly three times that. And the majority of it relates to our gas business. So that negative margin is just a result of not being able to recognize the profit on some of our infrastructure that we have in place.

So again, it sounds like you guys are right on track in terms of your expectations?

Very much so.

Lasan, I would just say that this -- when you look at our first quarters in commodities, this is one of our best performing quarters on a mark-to-market basis, and I think it's one of our second or third highest quarters overall in that business.

That's great. That's good news. Then on the approvals for the rate cases going forward, remind us again how much you've put in for rate increase?

Let me ask Debbie Reed to take this.

If you look at the -- Lasan, if you take the base margin adjustment from what we are collecting right now in 2007, and we are looking at an increase of $372 million from what we are collecting in 2007 base margin adjustment.

Okay. Great. And the metering program, is there anything that you would want to connect to in terms of the next step, say, is there some plan for, say, retail deregulation, or using it for something other than the utility purposes?

I would say that we are putting an infrastructure here that we don't fully comprehend today what can happen in the future. Obviously, the customers will become a lot more informed about how much energy they are using and what the real time price of it is. But our expectation is is that over time, there will be smart appliances that are developed that will communicate with the Smart Meters. And so as we go forward, there will be a lot of things today that we are setting the stage for that we don't fully comprehend, but they are all going to be good things for customers.

I would just add that at the analyst meeting we did talk about some additional opportunities. And those are the kinds of things that would fall into those additional opportunities categories of investment opportunities that are tied to Smart Metering.

Great. Thank you.

John Kiani, Deutsche Bank.

I know you've touched on this in the past, and recently as well, but can you provide a little bit more color around the decision making process in general to credit enhance Sempra Commodities, or to enter into some type of a transaction with that business to free up some of the excess balance sheet capacity at the parent Company? Is this -- in other words, is this a long-term option that you always keep and retain, and nothing really appears compelling right now? Or what's your view on that?

I am going to have Mark address this. But let me just remind you that we have been saying for the past couple of years that we really have three options before us, and one is kind of status quo, and that is to keep growing the business as we perform well and are able to keep retained earnings in that business. The second is to look at a stand alone credit rating for that business. And the third is to look at an appropriate financial partner. So we are still down the path of doing all three of those. And I will ask Mark if he wants to expand on any one of those.

Well I don't think there is really much to expand on, just to say that we are active in the market and talking to potential partners and looking at alternative capital structures for the business. We don't have anything to announce, but we will keep you informed.

Okay. Thank you.

Paul Patterson, Glenrock Associates.

I wanted to touch base with you on the EITF 02-03. Has there been a change in that? Or is it just simply that the type of operations or the type of activity that you are engaged in in commodities is just being -- just happens to apply more to EITF 02-03 than it did before?

EITF 02-03 has been around for awhile. Let me ask Mark to explain why it's having a bigger impact.

Paul, there was -- there has been no real change in the accounting in the sense of creating these kinds of differences. In the first quarter of last year we had about a $44 million adjustment for these similar types of items. It just happened to be a lot larger this year, and it's just a reflection of the particular types of basis spreads and time spreads that we had in the market as we closed the books at the end of the quarter. It just turned out to be a much larger number than it had been in a past.

And the overall size of our business.

Right. Yes, and the size of these investments are bigger than they were last year.

I usually think of EITF 02-03 being involved in those transactions designated as hedges. Is that the case in this case?

No, what really happened there with 02-03 was that it changed the rules at that time -- three things that we used to mark-to-market -- that we still actually mark-to-market, but we are no longer able to recognize. One was just inventory. We can -- we were no longer able to mark-to-market our natural gas inventories to the spot price. We are not able to mark-to-market the value of storage contracts, and we are not able to mark-to-market the value of transportation contracts. Those three items contribute the 99% of the bulk of the differences between our mark-to-market earnings and our accounting earnings. But because we have a very short-dated book, all of those things tend to turn around during the year, and this usually is reflected in the fact that we make investments based on our traditional seasonal spread. As we get closer to the year end and into the winter withdrawal season, all of those things tend to turn around.

Okay. And then with the income tax rate, it looked like it was a little bit lower. You mentioned, I think at the beginning with your remarks about a benefit. If you could just elaborate a little bit further what's happening with the tax rate, and also how it impacts the cash flow item? I noticed a large amount of the big increase in cash flow that you guys had seems to be like a $700 million increase in working capital. There also seems to be a little bit more of a drag associated with deferred taxes. And I was just wondering if you could just elaborate a little bit on those things?

Will do. There are two or three things that are driving our income tax rate this quarter. Let me have Joe Householder just walk you through those.

Yes, we expect to have a 30% rate for the year, which is a little bit lower than last year. And last year, as you know, we had a a lot of gains on asset sales, which drives the rate up a little bit. In the quarter in particular, there were three things that drove the rate down below that 30% just for the quarter. One was we had a true-up on our Section 29 credits, the phase out was a little bit lower than we expected at year end. Secondly, we had, as we tend to have from time to time, some benefits from Mexican inflation on our debt that's down in Mexico. And then the Utilities for this year at SDG&E, have a little bit lower rate because some of the capital programs that they are on, the regulatory tax structure there gives us a benefit that goes right through earnings. The item you mentioned in the cash flow statement is these mark-to-market earnings we had in Commodities with the strong quarter, those go through into taxable income right now. There's no deferral in taxable income as there is in the accounting earnings.

Okay. And then the movement in the working capital? Why -- I mean, it seems like we have a $700 million benefit in that, whereas sort of before working capital cash flow is down, in part because of the tax, and I guess other items as well.

Let me have Mark Snell address that.

On the working capital side, we essentially have a large benefit. We had several, what we refer to as one way margining agreements, which are with customers where we receive margin from the customer, but we don't post margin with that customer. And on those -- and when we entered into transactions with those customers, they are such that we are receiving a lot of margin and we are not posting corresponding margin. So we have a little bit higher cash balance and a little -- and much lower working capital than what we would normally have in that business. So we don't expect that to stay that way all year. It could turn at any time.

What drove that?

Well just depending on the credit quality of our counter parties, we have several of them that we have day one margining with, or even sometimes advanced margining with before we will enter into business. It's typically hedge funds. When we do business with hedge funds, we don't extend a lot of credit.

So the difference between last year's quarter and this year's quarter is the nature of your counter parties?

It just happens to be for that quarter. This could change in a thirty-day period.

Okay. Great. Thank you very much.

Rudy Tolentino, Morgan Stanley.

My question is in Table F, I notice there is a $46 million income from -- for Commodities from equity earnings. Can you remind me what that's from?

We can. Let me just set the stage. We have many different transactions at Commodities where we will make a small equity investment in return for getting the marketing rights with the counter party. And this is one example, and I will have Mark walk you through it.

This one, it actually relates to an energy supply agreement with a Canadian energy retailer that's called Universal Energy. We acquired stock in Universal during the quarter and it went public -- we acquired stock earlier on, we've been holding stock for some time. And the company went public this quarter, and we sold some of that stock. And this transaction, it resulted -- actually even though you see the number on Table F, that when you net it out of total cost, taxes and compensation expense and all that, it's a net $18 million gain that's reflected in the mark-to-market earnings, but it's not part of the trading margin. And that's where you see the big difference on Table E., too, between the trading margin and the mark-to-market results.

Okay. So the $18 million is included in the $157 million mark-to-market earning?

It is.

Okay. Thank you.

Faisel Khan, Citigroup.

Just going back, I think to Paul's question on the working capital. Does that have anything also to do with the net value of the trading book on your balance sheet? Where do you guys see that at the end of the quarter versus the end of last year? It looks to me like it's lower than it was last year, which means that you would have pulled pulled cash back into operations.

Yes, let me ask Mark Snell to respond to that.

Faisel, well, trading assets did go down. And it's essentially earnings from the prior year that turned into cash during the quarter, so we pulled a lot of cash out of the business. It's the nature of that book. It will vary, as you know, quite a bit. A big chunk of it was inventory, but it just happened to be a little bit lower in the quarter.

Okay. Then just going back to the last question that was just asked about the $46 million in equity earnings. You said that was part of the -- your mark-to-market earnings?

Correct.

Okay. And then, if I'm looking at the gain in -- ?

Faisel?

Yes, sure.

But it's only -- the net is 18, not 40.

The net is 18.

Right.

I've got you. And then on the generation side I think you also had a mark-to-market gain there. Is that correct?

We did.

What was the amount of that?

Let me just double-check it.

Okay.

$8 million.

Okay.

That one, though -- that was with our trading business, probably offset on the trading side in consolidation.

So that would offset on the consolidation side.

Right.

Okay. And then if I'm looking at SDG&E, I understand the putting in -- putting Palomar in place added to your earnings. But you also talked about [song] as well adding to earnings? What component of the difference year-over-year was from [song]?

Let me have Debbie Reed.

Faisel, from Palomar we had a little over $9 million, and that is prefinancing costs, preinterest costs, but after tax. On the [song] side, we had some differences year to year. As you might recall, we were able to get an agreement that was approved by the Commission that now has us balanced for O&M expenses. And so last year we had some negative effects of Edison spending more on O&M than was authorized, and this year all of that is balanced.

Okay. Got you. Great. Thanks a lot, guys.

But Faisel, let me just remind you again that in our Commodities business, we quite frequently will take equity positions, whether it be in a copper mine or it could an ethanol plant, it could be a retail marketing operation, in order to get these businesses started and to do some of the off take and marketing. And we have, I don't know, somewhere between 12 to 15 of these. So going forward, you would expect that we would be looking at monetizing these equity investments over time.

Okay. Was that a cash benefit that you guys received in the quarter from that monetization?

Primarily.

Okay. Great. Thanks.

Ashar Khan, SAC Capital.

If I can just go back to, Mark, the way you -- if I understood you correct, if I see the market-to-market differential between last year and this year, it's around $40 million being unrecognized. And you said you could multiply that by three to get to the gross margin number, that would imply something like 130, 140. So is it fair to say that if you take that effect on the gas line, if you attribute everything, we are something 179 versus $80 million or $90 million? And then my next follow-up to that is, what is the differential between the 179 and the $80 million or $90 million this quarter, if I'm doing my math right?

That's roughly correct. The difference is the gross up on the Universal gain, that's part of it. And then we also just had some lower margins in gas and in power.

Okay. And that was just because -- it was just not because of anything specific, just lower margins, correct?

Right. Nothing particular, it just happened to be a little bit lower than the prior year.

Okay. Okay. Thank you, sir.

Michael Lapides, Goldman Sachs.

-- really one related to Commodities, one related to LNG. On the Commodities side, what do you view not as the earnings power this year, but the cash flow generation by the Commodities business in 2007, and how that may differ from earnings power? And on LNG, what's the latest for the Port Arthur facility?

Let me start with Mark and I will have Neal talk about Port Arthur.

Michael, on -- for cash flow for Commodities, since we are still expecting to make a little less in Commodities than we made last year. If you recall, last year we made $500 million. This year we will probably -- our estimate is something lower than that. So what we would really expect to throw off in cash flow is essentially about the earnings of Commodities. So if Commodities earns $400 million or $350 million, we would expect to throw off that or a little bit more, just because we had significant earnings last year. If the earnings turns out to grow above $500 million, then it will -- it won't throw off as much money.

Okay. And on Port Arthur?

This is Neal Schmale. In the Port Arthur facility, as you'll recall, we have -- as a risk management process around here, we don't start construction on these projects until we've contracted a large portion of the capacity. And in the case of Port Arthur, we are just simply waiting on the worldwide liquefaction development to catch up there. As you all know, there have been some delays in the development of liquefaction facilities, and that's had a ripple effect into Port Arthur. It's a prime site, and I think our long-term expectations in the LNG business are unchanged.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Michael Goldenberg, Luminous Management.

Quick question. I wanted to focus on the gas operation of the Commodities business. I guess I'm trying to understand, the product line margins are before EITF 02-03? Meaning the fact that gas lost $56 million this first quarter, that had nothing to do with the EITF 02-03 accounting, right?

Well, no, it actually did. Because we are not able to recognize the profits on storage and transportation contracts, it appears like our margin is much less. So when you look at these margin numbers, they are on a GAAP basis. And so therefore, they do not take into account the profits that are not being recognized, which is because of EITF. And that number -- if you're looking at Table E and you look at that number of $86 million on a net basis, if you gross that up to margin, it's a little over $200 million.

And is all of that gas?

Most all of it is gas. A little bit of it's oil.

So would you say that if we remove any effect of EITF 02-03, at least the gas segment of the business, is it performing on par with three months of 2006?

Absolutely. Frankly, I mean, Don said this, but it probably bears being repeated. Our economic performance in trading, and in both margin and mark-to-market earnings, is essentially one of the top three quarters we've ever had. It's just that unfortunately, we just can't recognize it all for (inaudible) purposes, but we -- but it will come in before the end of the year.

Understood. So, now that you have gone through what is four-and-a-half months -- I'm sorry, four months of Commodities business, would you be able to provide any more color from your last analyst conference as to the performance, if we remove any effects of accounting?

I think if you remove the effects of accounting, we would stay right where we were at the analyst conference, which is the range that we gave at that conference. I think we are sticking by that. We feel very comfortable with it. I think this quarter performance gives us a lot of comfort that we are going to hit those numbers. I don't think we're willing to -- we are not going to change our guidance, though, at this time.

Understood. Thank you.

[Tom O'Neill], Pinerich.

Just curious on your status quo option on the trading business. I guess I would just be wondering where you would think about optimally running the balance sheet in sort of the 2010, '11 time frame, when some of the other projects are up and flowing cash, relative to your prior comments about running the balance sheet with a little bit more leverage.

Let me have Mark Snell address that.

Well, Tom, like I said, we -- if you look at our -- and you recall from our analyst conference, if you look at our balance sheet when we get out to the end of our sort of CapEx program, with the earnings and everything, we are down in the mid 30s kind of debt to cap ratios. That's probably underleveraged for an infrastructure kind of business. And provided that we've taken care of the Commodities business, I would expect us to go into a more balanced infrastructure. Now that can take many different forms. Ideally, it means that we have a lot more growth projects to put money into, and we can kind of -- we grow back into a normal kind of 50/50 sort of structure. Or it could mean that we end up with a lot of excess cash. Which, if we don't have good projects to put it into, we will balance our capital structure in other ways. And that could -- it could be obviously different things that we've talked about, the dividend or buying back stock. But that's down the road, and after we -- it's after we take care of the Utility -- the Commodities side of the business, and after we've attacked this large CapEx program that we have. And I think we can look at all of those -- look at those options, and we are going to be pretty smart about that.

Okay. And when you say take care of it, you mean explore and pursue one of those other options that would meet the -- .

-- or decide, basically look one way or the other to figure out a way to remove Sempra as the primary credit for the trading business.

Got it. And just a second question, in the past you've talked about potentially exiting the metals business. The performance was pretty strong this quarter. Just curious on any updated thoughts on kind of long-term commitment to that business.

I think we are quite committed to the business. It's -- it has performed very, very well this year, which -- it gives us a lot of growth opportunities around the world because it's a much more global business than some of our other businesses. Neal, I don't know, maybe if you have -- ?

The only other thing I would add is that it is one of the strengths of our trading business, is that it has four commodities that it deals with. So it's not dependent on any one market segment in any quarter. And I think when you look at these things, will you see that in some quarters, some of these product lines make more than others, and that's an advantage of this business.

Thanks.

(OPERATOR INSTRUCTIONS) [Leslie Rich], Columbia Management.

You've touched on the gas trading results, but I wondered if you could talk about (inaudible) for the power markets, anything in particular that led to a decline in those margins in that commodity, and also your outlook for Europe.

Just to make sure, you are coming kind of faint here. But your question was what is our outlook for the power markets and our Commodities book.

Well, if you could just sort of explain the results for the quarter.

Leslie, this is Mark Snell. Let me just say on margin we are down about $20 million. I actually don't see a lot of significance in it. I mean it is what it is. But it's -- there isn't -- the EITF issue doesn't really -- isn't really that prevalent in the power business, obviously, because there's no inventory. But it was just a little bit slower than the year ago quarter. But keep in mind, the year ago quarter was one of our record -- it was probably one of our highest quarters ever, we are just down a little bit from that. I think it's not really that important.

The only thing I would add, and I'm not really adding anything, is this kind of a change is just normal variation for these kinds of businesses. We have not changed the fundamental way we run this business.

How would you characterize volatility during the quarter?

Volatility -- there was a fair amount of volatility on the gas side. But it was -- to be honest, we really didn't have a strong view on which -- on a position of which way it was going to end up going. And so I think from our perspective, we didn't have a -- we didn't have any real big position in the market.

And Europe? Anything incremental in terms of your position developing there?

Well, we had very good results this year, this quarter so far. We continue to grow our gas business there, and we continue to develop our electric business there. And we think it's probably one of our better trading opportunities for growth.

And does the metals business, is that characterized in Europe or North America, or both?

Most of it is in Europe, yes.

Okay. Thank you.

Lasan Johong, RBC Capital Markets.

Neal, you mentioned the liquefaction situation is a little precarious at this time. Can you, A, shed a little bit more color about how much capacity has been delayed and how much you think may be coming on line over the next say, five years or so, whether this is going to be kind of gushing in at the same time, or at once, as typically the commodities market seems to do? Or is this going to be more of a structured phase in and it is delayed one, two, three, whatever number of years?

Go ahead, Neal.

Once again, this is Neal Schmale. I don't think I'd characterize the liquefaction capacity growth or situation in the world as precarious. What I think I would characterize is going on is that there's just a lot of problems of implementing very large infrastructure projects that are as complex as these LNG projects are. Just sort of the normal difficulties associated with getting these things on line has caused the delay. So you'll recall from our analyst conference that we showed you some estimates of how liquefaction capacity was going to develop. And we really haven't changed our view from that time.

So no real new developments, just a continuation of the same saga?

No, these things take a long time to play out in terms of the changes. And so a couple of months is not going to change our view of that.

Great. Thank you.

Lasan, our discussions around the table here have been that we are seeing somewhere between a year to two years delay. But what has not changed are the market fundamentals.

Yes.

I mean, if you look at today's market, there's even a stronger market signal for the need for LNG. We are trading today at $8 a million Btu, and the forward strip is out at eight to ten (inaudible). If anything, it's even a stronger environment for people to get their acts together and get these things built.

Agreed. Thank you.

Paul Patterson, Glenrock.

I just want to follow-up on something and make sure that I have got the thought process here right. If you were to take the EITF 02-03 of $86 million and add it back basically to the gas loss that you guys had, I mean, I'm looking at Table E of about negative 56. And you were to take the $44 million in '06 and apply it to the 179, that would give you a rough approximation as to what your gas business would have done if we didn't have EITF 02-03, roughly speaking. Is that correct?

Let me have Mark address this. And, Paul, you're thinking about the right thing here, because the only thing that's unusual about our business this quarter, the fact that all of our businesses are up, is the fact that in commodities, we have this EITF adjustment that's deferring income.

Paul, you have it exactly right. I just want to make sure that you get the numbers right. The $86 million and the $44 million EITF adjustment that you see on Table E, that is a net number. And so in order to bring that up to the margin line, you essentially, effectively triple it, which takes it to total margin. Because that accounts for the income tax effect and the selling cost effect. And so you're a little -- so it's about a little over $200 million add back to the negative 56, and a little over $100 million add back to the other one.

Okay. Thanks a lot.

Thank you. And once again, thanks to all of you for joining us on our first quarter call. If you have any follow-up questions, please contact Jeff or Glen. And have a great afternoon.

That does concludes today's conference. We thank you all for joining us.