桑普拉能源 (SRE) 2007 Q3 法說會逐字稿

Good day and welcome to the Sempra Energy third quarter earnings conference call. As a reminder, today's conference is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Mr. Jeff Martin. Please go ahead.

Good afternoon. I would like to thank you for joining us to discuss Sempra Energy's third 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 Operator Officer, Mark Snell, Executive Vice President and Chief Financial Officer, Debbie Reed, President and CEO of Sempra Utilities, and Joe Householder, our Senior Vice President and Controller.

You will note that slide 2 contains our Safe Harbor statement. I would like to remind you that this call contains forward-looking statements that are not historical facts, that 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 such statements. These risks, uncertainties, and assumptions are described at the bottom of today's press release, and are further discussed in the Company's reports filed with the Securities and Exchange Commission. In addition, all of 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 3.

Thanks, Jeff. And thanks to each of you for joining us today. Before I get into the results for the quarter, I would like to provide a brief update on the wildfires here in southern California. As many of you know, there were more than 35 fires last week, that covered an area of around 800 square miles.

In the San Diego region alone, over 500,000 people were evacuated from their homes. At the worst point during the crisis, we were able to limit service disruptions to roughly 30,000 customers. And as of last night, we reduced that number to something less than 4,000 customers. Our focus during the wildfires was to keep the lights on, and now we have transitioned our focus back to rebuilding some of our distribution facilities. We haven't fully assessed all of the costs at this point. But have opened up an account with the Public Utilities Commission to track our incremental costs and seek full recovery in rates.

The bottom line is our utility management spent a lot of time and energy managing the fire situation, but our major regulatory initiatives, and the financial help of our utilities were unaffected. Our rate cases remain on track. We are expecting a proposed decision on our cost of capital proceeding this month. And our Sunrise Powerlink proceeding continues forward.

So moving on to the business at hand, here is how I would like to proceed. We will start with our overall and then business unit financial results. I will then update you on the status of our key business activities, and then finally we will close with any questions that you may have.

Before turning the call over to Mark Snell, I would like to mention how pleased I am with the strength of our financial results. All of our operating businesses performed well for the quarter. Many of you will recall that our previous guidance was $3.75 per share to $3.95 per share. Based on our year-to-date performance and outlook for the remainder of the year, we are raising our 2007 earnings guidance. We now expect earnings for the full year to exceed $4.00 per share. How much we end up above $4.00 will largely be a function of how well our commodities business performs in November and December.

And with that, I am going to ask Mark to take you through the financial results for the quarter.

Thanks, Don. And thanks to all of you for joining us today. Earlier this morning, we reported third quarter 2007 income from continuing operations of $330 million, or $1.24 per share. Third quarter 2006 income from continuing ops excluding $211 million of gains from asset sales, was $332 million, or $1.27 per share.

Net income for the third quarter was $305 million, or $1.15 per share, compared with third quarter 2006 net income of $653 million, or $2.49 per share. For the first nine months of 2007, income from continuing operations increased over 10% to $837 million, or $3.16 per share, from $758 million, or $2.91 per share in 2006. Excluding of course $204 million from the favorable impact of asset sales.

Now let's preview the financial results for each of our business units starting with Sempra Utilities on slide 4. Sempra Utilities reported third quarter net income of $186 million, compared with $131 million in the year-ago period. San Diego Gas and Electric's net income for third quarter 2007 was $123 million, compared with $70 million in the third quarter 2006. Third quarter 2007 results benefited by $26 million, from the favorable resolution of some regulatory matters, and $20 million from the resolution of prior year's income tax issues.

Results in the third quarter of 2006 included a net benefit of $9 million, due to the resolution of regulatory and tax issues. At Southern California Gas, third quarter 2007 net income was $63 million, compared with $61 million in the third quarter of '06. For the first nine months of 2007, Sempra Utilities net income increased to $408 million, from $350 million for the same period in 2006. The improvement in 2007 was due primarily to the resolution of tax issues, and higher generating and operating margins.

Now let's go to slide 5. Sempra commodities reported third quarter net income of $87 million in 2007, compared with $105 million in the prior year's quarter. Led by natural gas and metals, commodities had strong margins across all of its major product lines. However third quarter 2007 results were negatively impacted by a $21 million litigation charge, and $18 million of lower earnings from synthetic fuel tax credit operations. The fuel credits are automatically reduced as oil prices increased as they did this quarter.

For the first nine months of 2007, commodities reported net income of $313 million, an increase from $290 million in the same period in 2006. GAAP results for the first nine months of 2007 do not include $42 million of mark-to-market profit. These profits relate to commodity inventory storage and transportation contracts used in forward sales transactions, and we expect to recognize them later this year.

Now moving to Slide 6, let's cover our generation business. Net income for our generation business in the third quarter of 2007 was $58 million. Excluding asset sales, third quarter 2006 net income was $54 million. Third quarter 2006 results included $211 million related to the sale of the Topaz power plants in Texas. For the first nine months of 2007, net income for Sempra Generation was $122 million, compared with $118 million in the first nine months of 2006, excluding $204 million in asset sales.

Let's move on to Slide 7. This slide provides a summary of our business unit results, and I will highlight a few points here, starting with our Pipelines & Storage business. In the third quarter of 2007, Sempra Pipelines & Storage reported net income of $17 million, compared with net income of $19 million in the same period in 2006. For the first nine months of 2007, net income was $50 million, compared with $58 million in the same period in 2006. Last year's results included $9 million for the favorable resolution of prior year income tax issues.

Sempra LNG recorded a net loss of $4 million in the third quarter of 2007, compared with a net loss of $13 million in the prior year's period. The improved results were due primarily to the tax effects of foreign currency adjustments. Parent & Other reported a net loss of $14 million in the third quarter of '07, compared with net income of $36 million in the third quarter of '06. The 2006 results benefited from a $38 million favorable resolution of a state income tax matter.

Discontinued operations had a net loss of $25 million in the third quarter of 2007, compared with net income primarily from asset sales of $110 million in 2006. The loss in '07 was primarily due to higher-than-expected tax expense, related to the [inaudible-audio break] cash on hand, and $5 billion in unused committed credit lines.

During the quarter, we also completed a previously authorized $161 million stock repurchase, and along those lines, our Board recently approved the new share repurchase program. As previously announced, we plan to repurchase between 1.5 and $2 billion of stock after the RBS transaction closes.

Now let me hand things back to Don, for an operational update starting with Slide 9.

Thanks, Mark. Let me start with a short business update, and I will begin with our utilities.

At SDG&E's cost of capital proceeding we expect a proposed decision this month, and a final decision by year end. We continue to expect an increase to it's authorized return on equity. Our general rate cases were SoCalGas and SDG&E are progressing, and we are in settlement discussions with several of the intervening parties at this time. If we are unable to reach a settlement, we expect a final decision from the California Public Utilities Commission in the first quarter of 2008. If this is the case, we expect rates to be retroactive to January 1, 2008.

As for the Sunrise Powerlink, 500 KB transmission project, we continue to work closely with the Commission staff to ensure the project goes forward with as many system and customer benefits as possible. We expect a final decision on the $1.3 billion project in the second half of 2008, with the line being placed in service sometime in 2011.

During the quarter, the U.S. Department of Energy designated the Southwest as a national interest electric transmission corridor. This designation highlights the same concerns at the federal level that we have been focused on here locally. In short, we continue to believe that the Sunrise Powerlink is an important project for our customers. It will improve the liability for the region, and as a project we think will move forward.

In addition, I am sure many of you in the investment community are interested in the financial impact the fires will have on our business. When I opened the call, I mentioned that our utilities had recently set up a special account with the Public Utilities Commission to track fire-related costs. This account is known as a Catastrophic Event Memorandum Account, or SEMA. As was the case with the fires in 2003, we expect these costs will be recovered over time and rate.

Now, let me update you on our LNG business on Slide 10. Construction continues at Energia Costa Azul which is now 90% complete. There have also been several notable developments. First one of our customers has asked us to build a nitrogen injection facility at the terminal. Having a nitrogen facility co-located at the terminal will allow the plant to accept natural gas from a wider range of locations around the world, and process the gas to meet North American standards.

We have agreed to develop, own and operate this nitrogen facility, in exchange for a negotiated return on our additional investment. That investment is expected to be about $125 million. As many of you know, it is necessary to bring in initial volumes of LNG, to test our processing operations before going commercial. We have now secured initial test cargos for the Energia Costa Azul facility, which puts us on-track for commercial operation in early 2008.

Also, we have recently received the last of the major approvals for our proposed expansion at Energia Costa Azul. Although we don't have immediate plans to expand the facility, the permit puts us at a competitive advantage to expand our facility, when there is sufficient market interest to do so. In Louisiana, our Cameron receipt facility is over 60% complete. We have recently purchased initial start-up cargos for this facility as well, and this project also remains on-track for operations in early 2009.

Now let's move to Slide 11 for an update on Pipelines & Storage. The expansion of the Bajanorte pipeline in Baja, Mexico is now over 80% complete. What we call the spur line portion of the project has been completed. You may recall this 45-mile, 42-inch pipeline will bring natural gas from our LNG facility to the current Bajanorte pipeline. The $200 million project is scheduled to go into commercial operation at the same time as the Energia Costa Azul LNG facility.

During the quarter, an international arbitration panel awarded Sempra Energy $172 million for a dispute involving the Company's minority ownership in two Argentine natural gas utilities. The dispute relates to actions taken by the Argentina government in early 2002 that breeched our agreements, and resulted in a reduction in the value of our investments. We are now in the process of enforcing the arbitration award. The positive financial impact of this action will be recognized when monies are collected.

As many of you are aware, there is renewed interest in a pipeline project that can bring gas from an end point of Rockies Express to the northeastern markets. Together with our partners Kinder Morgan and ConocoPhillips, we have announced an open season earlier this week, to gauge market interest for such a project. Should there be market interest, our team is as well-positioned as anyone to build it. Together with our partners, we have got a great track record.

The Rockies Express and any pipeline extension to it, is a very competitive transportation option. And we already have many of the key relationships necessary to support a new pipeline involved in our Rockies express project. We will know more at the end of the open season early next month.

Now let's move to Slide 12 for an update on the Rockies Express Pipeline. We along with our partners have already placed in service the 328-mile segment of the Rockies Express Pipeline, that runs from the Meeker hub in Colorado, to the Cheyenne hub in Wyoming. This segment is reflected on the map in blue.

Construction is progressing on a 713-mile Rockies Express West portion of the pipeline, which runs from Colorado to Missouri. This segment is reflected on the map in red. We expect this leg of the pipeline to be flowing gas early this coming January.

As many of you are aware, the FERC issued its permitting schedule in September for the 638-mile Rockies Express East portion of the project. This segment is reflected on your map in green. The schedule that was issued has a permitting timeline that is several months later than we anticipated. As you would expect, we responded to the FERC, and are working closely with them to do whatever possible to accelerate the permitting schedule. The FERC understands all of the issues and has been receptive to working with us, so we are still targeting for this portion of the project to begin service in the first quarter of 2009.

Gas prices in the Rockies region continued to demonstrate a strong need for the Rockies Express Pipeline. And the same can be said of the Northeast Express Project that we are proposing in our open season.

Now, I would like to briefly update you on the RBS Sempra Commodities joint venture on Slide 13. We are moving forward with the close of our announced joint venture with RBS. On the regulatory front, we have received approval from the FERC and have responded to questions from the Federal Reserve and the U.K.'s financial service authority. We currently do not expect any surprise in this process, but it is taking several months longer than originally anticipated. At this point, we are targeting a close in January 2008.

The recent liquidity concerns in the financial markets highlight the importance of this joint venture for Sempra Energy. Although we were financially prepared for the recent credit crunch, the crisis reinforces the value of having a strong financial partner like RBS. In short, partnering at RBS secures the balance sheet strength that we have always thought was necessary to grow this business at a double digit rate into the future.

Let's now move to Slide 14. Let me conclude by reminding everyone that we refined our business strategy last year. You will recall that we set a goal of focusing our capital and resources on the business opportunities that would produce the best long-term returns for our shareholders. That is the path we have been on. And it is the one that we are continuing to follow. Growing our California utilities, and continuing to invest in natural gas infrastructure.

As our financial results demonstrate, we continue to make progress, all of our businesses are performing well, both our quarter and year to date results were strong, and we are running well ahead of last year's operating results. Because of this, we are raising our guidance for 2007. We now expect full-year earnings to exceed $4.00 per share.

Also, we now have a finish line in sight for several of our key projects. We are expecting to close the RBS transaction in January, commission our Costa Azul regas facility in early next year, and also complete the second leg of our Rockies Express Pipeline.

And with that, I will be glad to open up the call and take any questions that you have. Operator we are ready for calls now.

(OPERATOR INSTRUCTIONS) Please allow one moment for the first question.

Paul Patterson, I see you are up.

Operator, we are prepared to take the first question. Please go ahead. Operator, are you still on the line?

Yes, I am still on the line. One moment, please.

Thank you.

You're welcome. Sorry, folks, about the delay.

Thank you. Our first question is from Paul Patterson. Please go ahead.

Can you hear me?

We can hear you. Go ahead.

Okay. Good. The litigation charge, could you just elaborate a little bit more on that, and what is associated with it? And also the Supreme Court case schedule that you see going forward?

Javade, do you want to respond to this?

This is Javade Chaudhri. Let me take the Supreme Court thing first. Just to remind you, most of our DWR litigation from our perspective has already been resolved, because it got resolved by arbitration a while ago. But several people brought a case that basically challenged the so-called public interest standard, which assures contract sanctity for long term contracts based on market rates, and that standard was essentially altered or overturned by the 9th Circuit here in California.

We along with a number of people around the country felt that this was an incorrect decision, and we took the matter to the Supreme Court, which has accepted [Circ]. And so this case will be heard early next year. It is our hope and expectation I guess, that the Supreme Court will uphold this 50-year standard, which applies to these long-term contracts. So we would hope and expect that our contract will be upheld as it has been in the past by the FERC.

As to the issue of the litigation charge, what we had in this last quarter was a case which again at the 9th Circuit, which expanded the scope of potential refunds that could be provided, with respect to short-term sales during the energy crisis, we have made the judgment that in order to satisfactorily resolve this case, and bring it to its logical conclusion, we needed to take charge, and so we have done so.

So we are pretty much finished with the litigation going forward, or at least the costs associated with it, the majority should be [covered]?

I will let Mark help me here, but that is certainly our view, because as you have seen over the last two years, we have pretty much resolved all of the major pieces of litigation. I think of these as some of the minor things, these never got resolved, there are a few odd things out there but they are really very minor.

And the syn fuel impact it sounded like it was $18 million for the quarter, and I was just wondering year-to-date what has that impact been, and what is driving, the tax rate seems a little bit lower this year than last, and I am just wondering what the impact of syn fuel has sort of been this year, and I guess we should expect it not be there at all in 2008, right?

That is correct. It won't be there at all. But this year, the impact, the $18 million, that was really not a result of the change in the tax rate, I mean I guess it had that effect, but it was really the rising prices. So because the prices were up, there was a phase-out of the syn tax fuel credit, and that is the effect, the effect of that was about $18 million in our Commodities business. And then the other part of your question was are --

Well, year-to-date, I mean what we're trying to figure out what the syn fuel in fact it has been for 2007, or just will be in general for this year, what has it been so far? I mean how much have you benefited or lost from syn fuel?

Year-to-date, it has been about $14 million.

Negative?

Positive.

Positive. Okay. And then finally, the currency impact, I'm sorry, you cut out a little bit, I am afraid. What was the currency impact for the quarter in the last nine months?

The currency impact?

Yes, I believe you guys indicated there was an impact due to currency. Maybe I misheard it. Is there any substantial currency impact?

No there was not any substantial currency impact.

That was an issue, a tax matter, where in Mexico, we have effects from our tax return on U.S. dollar denominated debt in the Mexican and subsidiaries, and so there was a slight effect tax on that currency.

Okay. Thanks a lot.

Our next question is from Sam Brothwell, Wachovia. Please go ahead.

Hey, Sam.

You indicated your customers indicated you build this, is that just dedicated to their use?

We are building a facility where a piece of it is dedicated to a customer, and we are keeping a piece for our own account.

Okay. And that's all in the, so you are investing the 125 but you have modified the agreement with the customer, and they will compensate you above --, upon return?

That is correct.

Okay. Thanks a lot.

Our next question is from Faisel Kahn, Citi. Please go ahead with your question.

Just wondering, we recently heard from another California utility today that they are experiencing cost pressure at their core utility operation, going forward. Are you seeing anything on your cost side of your utilities that might lead us to believe you might experience cost pressure in the future of any particular core of the utility operations?

As a matter of fact, we're pretty happy with where we are are with our utilities, but let me have Debbie Reed give you any color to that.

If we don't get here we are right now. We are currently operating under that margins that we're collecting and rates, and as you know, we have a rate case that is pending, where those margins would be increased per our request. So we feel very comfortable that we have the funds necessary to operate. And that we are managing those funds carefully, and stay within our authorized allowances.

Is there anything out of the ordinary in terms of inflation, and either replacing steel on the ground, or with your labor force that is different in the past than it is today?

No. As a matter of fact, interestingly, we just completed the Otay-Metro Powerloop, and it was $40 million under budget. So we have, you know, we see some increasing costs but we have been able to manage those effectively.

Okay. Are there any kind of lessons learned from the recent fires on your infrastructure on your grid, and your pipeline system in California? Is there a need for additional investments, or does this make it more clear that Sunrise needs to get approved and done sooner rather than later?

Since we had the two transmission corridors affected by the fire, and we were on the phone with the ISO trying to keep the system in place, it really tells us that we need to reinforce the transmission infrastructure to our region, and add a third transmission corridor to deal with situations like this.

In addition, we have generation that is going to be added in base, and as you know we have a purchase power agreement with the Otay-Met, Mesa power plant that Calpine is building, and that should be completed in May of 2009. So we are on our way to add the infrastructure we feel is necessary, and we think this reinforces the need for Sunrise.

Are there any sticking points on the Sunrise, the routing now? Has that been pretty much resolved?

That is under the consideration at the CPUC right now, they will come out with a draft EIR, EIS in January, and we will look at the routing. We still feel that a third corridor is a better approach for the region. But that is something that the CPUC will look at.

On the LNG facilities, can you remind us a little bit the terms of the timing of when your contract starts, and the timing of when the facilities are actually going to be up and running? Is there a gap that gives you the ability, if you had the opportunity to absorb some spot cargoes?

Let me kick this off and I will ask Neal to provide some detail, but we are going to, as I mentioned, we are going to bring start-up cargos in, and commission Costa Azul in the first couple of months of 2008.

Once we deem the plant operational by running it through its tests, and our contract with Shell starts, and we start receiving revenue, and then following that, about nine months or a year later, the BP Tangguh contract starts, there is a short window in there, about 9 or 12 months, that we have been looking at spot cargos to fill that facility up.

With Cameron, we are still targeting start-up with Cameron in 2009. As you are aware, we have got a 500 million a day contract with Merrill Lynch, and 600 with ENI. So we have about 400 million cubic feet a day of capacity. It is not of the contract, we will fill that, try to fill that with spot cargos, but we are also negotiating long term contracts for that remaining volume.

Okay.

Is that pretty accurate, Neal?

Yes.

On the Merrill Lynch contract, isn't that more of an option? Or does that get converted to a contract?

It was an option when it first started. It is a contract now that has walk-away provisions and penalties that go with it.

Okay. Fair enough. Okay. Thanks for the time, guys.

Thank you.

Your next question is from Winfried Fruehauf of W. Fruehauf Consulting Limited. Please go ahead.

Good morning. I have a question on property plant and equipment, and on depreciation and amortization. From the end of December last year, PPE has risen from 13.175 billion to 14.329 billion. Depreciation and amortization has risen from 491 million to 514 million. The increase in the plant component is about 8.8%. Depreciation is only about 4.7%. Why the difference?

Well, this is Mark, the difference is primarily the fact of construction in progress, which isn't being depreciated yet until it is online, and so those amounts are being added, you know, that is the LNG facilities, and what not, and none of that is being depreciated yet.

And I have a similar question on short and long-term debt and interest expenses. For the nine months, your short term debt rose from 252 million, to $1.206 billion, or by about 379%. The long-term debt was essentially flat with last year. But interest expense decreased from 273 million, to 204 million, or by 25.3%. Why is that? Is that because of capitalized interest? Or is there something else?

It is capitalized interest.

Solely?

Primarily. Yes.

And I have a question on the Port Arthur LNG project. How much money has Sempra spent to date on that project?

Winifred, I don't have a rack-up in front of me, but the land for that project was already owned by Sempra, so what we have really spent would be the permitting costs and the engineering costs, and looking at the feasibility of the project. It is got to be something within 10 to $20 million at the most.

Are you still confident that you will be developing this property, or might you expect to sell this land?

No, I think we are going to hang on to it, because we recognize the importance of, as an LNG facility, but also as a terminaling facility also, we have been contacted by several parties that would like to increase tankage capacity for the Port Arthur area, and so when we look at this property, it is well positioned. It has multiple uses. And I think longer term, it will be developed.

Okay. Thanks very much. That is all I have.

Thank you.

Our next question is from Lasan Johong of RBC Capital Markets. Please proceed with your question.

Thank you. Good afternoon. A couple of questions. First, on the guidance, Don, you said it was going to be $4.00 plus. What do you see as the driver for the increase in guidance? Is it Sempra Commodities? Or is it Utilities? Or what are you coming up with that excess?

Everything is driving our guidance. All of our businesses are operating at or above kind of what our expectations are. So when we sat down and took a look at where we plan to end the year up, the only unknown for us is how well Commodities will perform in November and December. And so looking at where they are, some of the ITF that we plan to have turn-around, you know, we are pretty confident we're going to be above $4.00 this year.

Great. On the Merrill Lynch contract, you said there was a walk-away provision. What would trigger those walk-aways?

Well, each of our contracts have penalties in it. If the shipper does not perform, and so when we look at the Merrill Lynch contract, it is just like the rest of the contracts that we have, that they have an obligation to take capacity, there is a penalty that they would pay, if in fact they want to walk away from that agreement.

So there is nothing unusual?

No.

Okay. And then on the REX extension to Princeton, New Jersey, a couple of questions. One, how much are you expecting to benefit if this does go through? And second, why would you compete or choose to compete with Williams, that has already a Transco corridor already established there?

Well, we have put forward in the open season a range of rates that the shippers would pay to get from Clarington to Princeton, and let me just back up and say that this is a non-binding open season.

It is really to gauge the interest that either shippers or customers would have, in having a project that would take gas from the Ohio area, in further into the northeast. And you know, I think we are as well positioned as anybody here. We have got a track record of building a pipeline. We have got good partners. We've got good relations with the shippers. The issue right now is really all about market interest. And are people willing to step up and sign contracts that would allow us to go forward.

We have published, you know, a proposed rate in the open season of around $0.58 for moving the gas from Clarington to Princeton. It looks like it is pretty competitive. But at the end of the day it is all going to be about what shippers' needs are, and if in fact they are willing to sign a contract.

And if you do build this, A) how much would it cost, and B) would you need to increase the capacity of the pipe from at least the western portion of the pipe? Would you need to increase capacity there? Instead of 1.8 Bs would you have to increase that to like 3B's or something?

We wouldn't have to increase it, but we have given potential open season customers an option, that we would expand the pipeline back a few hundred miles to the west. But there is not a requirement to do that.

And as far as the overall cost of the projects, I don't think that we have been explicit about that, for competitive reasons, but we have put out a transportation rate for the segment that we would propose to build.

One last question. On the wildfires, obviously there is going to be some costs incurred in the fourth quarter, could you tell us kind of how you would deal with the mitigation of that cost, is it going to be pass-through rates? Is it going to be dealt with in some other way? Insurance, for example?

Well, first of all, this area has been declared a natural disaster area because of the fires. And the Commission in California has a policy for unusual events like this, to allow utilities to capture their incremental costs, and apply to have those costs recovered. And we would expect that in this situation, the same thing would happen, that we would incur the costs that we are currently incurring. They are incremental. We would make a filing with the Commission. And as we did in the fires of 2003, make an application, and we recovered those costs in a little over a year's time period.

Great. Thank you.

Our next question is from Ashar Khan of SAC Capital. Please proceed with your question.

Good afternoon. Just trying to get a sense, the increase in guidance mentioned today, is that coming in basically on what grounds, better utility results? Or the sense that the commodity business is going to be doing exceptionally well?

Well, if you will remember, that when we gave you guidance back in February, and then again in July, we gave a range of outcomes for each of our businesses, and we kind of took an expected outcome for each of the businesses to come up with a range. As we get to this time of the year, we are now seeing that all of our businesses are performing at the high end of their range. That gives us the comfort that in fact we can increase the guidance.

Now as we look at what is going to happen the next few months, all of our businesses are pretty steady state, except for Commodities. So the only wildcard here, is how much above our expectations does Commodities come in in November and December. So we are very confident we are going to get to $4. How much above $4 is the real question mark for us.

Which is going to be a function of the Commodities business?

How much volatility there is, and how much of our EITF amount that we have turns around between now and year-end.

Okay. And if I can ask, [PDS] has mentioned that they filed a petition yesterday for a review to allow an efficiency saving order which came out a month ago. Did you join in that petition or no?

We did.

You did.

And this is all about giving the certainty of how you recognize income each year, instead of every three years.

I understand. Thank you, sir.

Our next question is from Carl Kirst of Credit Suisse. Please go ahead with your question.

Thank you. Good morning, everybody.

Good morning.

Most of my questions have been answered. Just a few additional. On SDG&E, backing out the regulatory or the lumpy items, just looking at something that looks closer to the 77 versus 61 last year on a little bit lower volume, was there any one particular thing that was --

Can you repeat the last part of that question, please?

On SDG&E, looking at backing out the regulatory and more of the lumpy items, it looked like net income was 77 million, versus 61 last year. And I was just wondering if there was any one specific thing driving that delta?

Debbie, do you want to --

Sure. This is Debbie. Carl, the key things, if you look at on the quarterly basis, we did have some higher incentives this quarter. We had a PBR award of 5 million after tax that came in this quarter. And then there were some other things. For the year, we had higher transmission margin, and we had a full year's effect of Palomar driving the results for the year. For the quarter, it was largely the higher incentives and a lower estimated tax break. So those were the two major items for the quarter.

Okay. That is helpful. Thank you. And with respect to the Powerlink, could you refresh my memory with respect that this is coming on in 2011, how does this impact the renewable mandate?

Go ahead, Debbie.

Sure. The renewable mandate requires 20% by 2010 of energy. And we will have that under contract, we are quite confident. We are about 13.5% today under contract, and have negotiations that would put us well under the 20%, well over the 20%. The way the law is written, is that it gives some provisions for flexible compliance, and an out if transmission is the inhibitor in getting deliveries. And so with the delay in Sunrise, we would have about half of the contracts we already have signed, that would have difficulty getting in, absent the construction of Sunrise.

We would anticipate that the Commission would take that under consideration. The same issues are present in other parts of the state, in Tehachapi, as an example, in the Edison territory. And while it is not absolutely clear, we would anticipate that as long as we had contractual commitments, and we had done everything possible to get to the 20%, that there would be some allowance for the lack of transmission. Just so you know, the penalties range up to a maximum of $25 million per year.

Okay. That is very helpful. Thank you. And then just lastly, and I know these are smaller items in the grand scheme of the capital projects, but focusing in on storage, I know Liberty Storage went, I believe went into service earlier this year, but there is also an expansion out there, can you touch on those and any other maybe additional storage projects you may have?

Neal, do you want to give an overview?

The only thing I would add there is that we have required a facility near the existing Liberty Storage, which has the potential to significantly expand the storage capacity that we have in Louisiana, and I think that is the key thing we're looking at right now.

Along the same lines of capital investment as Liberty?

We are still pinning down what the capital costs would be on that. And of course, those costs right now are influenced a lot right now by what is going on in the oil industry. So you have to be pretty careful before you put a number out there.

I think the key thing for us is we are still very upbeat about storage, and the opportunities in the storage arena, and so we have purchased some more land, so we have the ability to develop more storage in that region, and the fundamentals remain as strong as they always have. Our customers that have signed contracts with us are staying with us, as we go through this process of developing a new cavern, so we are still pretty excited about the prospect of storage.

Great. Thanks and good luck.

Our next question is from Rudy Tolentino of Morgan Stanley. Please proceed with your question.

Can you tell me the intent that you have with your Latin American assets, given the fact that Public Service has announced that they are selling, with your portion, do you intend to buy their portion? You can give any color on that?

Let me just remind you what I have said before is that our long-term strategy is to exit South America. The exact timing, we have not been specific on for obvious reasons. I would say with the PSEG transaction, that we are very pleased with the price they got. I think it reinforces the economic value of our ownership. And going forward, we are going to take whatever steps necessary to ensure the best outcome for our shareholders. And can you also remind me, I know PG&E said the cap for the energy efficiency for them was 180 million.

How much is the cap for you guys?

Debbie?

The cap for SDG&E is 50 million, and the cap for SoCalGas is 20 million.

Okay. Thank you very much.

The next question is from Michael Goldenberg of Luminous Management. Please proceed with your question.

Good afternoon.

Hi, Michael.

Hi. I'm sorry, I didn't hear, I missed part of the call, but I remember Ashar was asking about, you know, drivers to increase guidance. Can you maybe qualitatively talk about which drivers, since it is the Azul business unit, which drivers are expected to continue in to '08 and beyond. Obviously the trading businesses is maybe viewed as more as one-time, but some of the other assets and businesses, and you are just seeing greater profitability in those businesses ongoing, than versus what you originally expected?

No, I think it is just continued progress in each of the businesses. When you look at our Utilities, and what they are doing to invest in capital, and get a return, we have got a rate case, we have got a cost of capital proceeding ongoing, and when you look at our pipelines, and the fact that we get Rockies Express into service next year, and we start to get revenue from our LNG facility, all of our businesses are kind of where we would like them to be right now, at the end of this year, and for next year.

And so with that, we decided to increase the guidance for this year, and we will sit down and take a look at the full year 2008, and when we meet with you early next year, we will give you guidance for '08.

Okay. And secondly on Rockies Express East, can you talk more, and once again you may have covered it, can you talk more on the potential delay and what you are doing to resolve that?

As I said during my comments, the staff came out with a schedule that ended up with some delay in the permitting for that portion of the project. When we had a chance to look at what they had done, we had a conversation with the staff, and with FERC commissioners, saying it is really not a month for month delay, because there are certain windows in which we have to construct the pipeline, and so when we got back to them and told them what our issues and concerns were, they were very understanding.

The FERC wants to get gas out of the Rockies to market. That is a high priority for them. And they have agreed to work with us if we do our part. So we are working diligently to address their concerns, it is our current expectation that we can meet their concerns, and stay on schedule.

When you say stay on schedule, you mean first quarter '09?

The first quarter '09 for the Eastern portion.

Got it. Thank you.

Thank you.

Our next question is from Michael Worms of BMO. Please proceed with your question.

Thank you. I would just like to go over the Supreme Court ruling, if you can. And just kind of give us an idea of what that risk, should you lose this decision?

I will have Javade go through this again, but I think having the Supreme Court take this issue on is not only good for us, but it is good for the industry, because this whole industry is built around the sanctity of contracts. And so having the standards reinforced that are currently out there, will be a key issue for how generation and other projects get developed going forward. But Javade, do you want to jump in here?

Yes, Michael, I think Don captured it. The Supreme Court is really looking we believe, to reaffirm a standard which has existed for 50 years on the basis of which merchant generation relies across the country.

With respect to our contract, you know, we believe if you look at the economics of it, that we have a contract that falls within what the 9th Circuit calls the zone of reasonableness. If the Supreme Court, just to take the hypothetical, were to agree with the 9th Circuit, what would happen is that this case would then go back to the FERC, which would have a bunch of hearings to evaluate whether and which contracts were entered into the period in question should be reviewed, and the filter through with which they will reviewed. I think we continue to believe that we have a contract which meets the appropriate requirements in any case.

Thank you.

The next question is from John Kiani of Deutsche Bank. Please proceed with your question.

Hi.

Hi, John.

Can you give us an update on the potential to expand the La Rumorosa wind project, please?

Well, we have secured land rights to develop about 250-megawatts, and we are currently in negotiations with land owners in that same area, to get additional land holdings to increase that development way beyond that. I don't know if we made any progress, Neal, in the last couple of weeks in securing land, or if that is still under way?

It is still under way. But certainly there is the potential over time to expand that project. It is very well situated.

I think the think we like about La Rumorosa is that having a good wind project is really about the quality of the wind. And this region of Baja California has a good wind resource. And so we have been focused in on securing land for this contract that we signed with Southern California Edison, but also to secure land to build beyond that, and it is our expectation to in fact secure more land, and have this as a bigger development.

And do you think this could be expanded to something like 1,000-megawatts? Is that the order of magnitude we can think of from a hypothetical perspective?

When we made the original announcement, we said it would be our intent to get enough land to expand this project up to 1,000-megawatts.

Great. And as far as other wind projects are concerned, obviously outside of rate base, can you talk to us a little bit about your intention to grow more there? You have mentioned it a little bit in the past. Is there anything new there that we can think of?

Well, first of all, La Rumorosa is outside a rate base. It is not a utility project within Sempra Generation. But Neal and I were having this conversation last night, and as we continue to look at the price of energy driven by natural gas and oil, it looks like there are more and more opportunities for renewable development. Both within the Sempra companies, and in the Sempra utility. So we are spending a lot of time evaluating potential renewable energy projects, and you will hear more about us in the future on that probably.

Great. That is helpful. And just one more question, going back to the PSE&G sale of [Jal] Quinta and Luz Del Sur. I guess those went for over 9 times EBITDA. If hypothetically you were to monetize those or other Latin American investments, can you talk a little bit about what the use of proceeds might be or -- ?

That is, I want to say is the limit. It is really an opportunity. We are making about $60 million a year on those investments in those two utilities. And as we look around at opportunities right now, to dispose of those assets, pay the taxes that are due, and then reinvest that money, it is a timing issue for us.

We have got a lot of projects we are working on right now that are funded, but I just come back and say that we are pleased with the results that PSE&G is getting for the value of those assets. It will make our exit at the right time more feasible. And so we are watching the developments there, and we will be exiting at some point in time in the future, but no immediate plans.

Great. Thanks a lot.

Our next question is from Faisel Kahn of Citi. Please go ahead with your question.

Just a couple of follow-ups. The debt trading book for the quarter was I think $2.6 billion. How do you expect that book to move as you get to the end of the year and close the transaction? Will it go up, or does it stay where it is?

Let me ask Mark Snell to address that.

Well, generally speaking, I mean we expect the trading business to be profitable through the end of the year, obviously. And so those unrecognized profits would tend to increase the book, although we are seeing some reductions because of the cash that we are collecting. So I think ne/-net, probably we would expect it to stay about the same. But, you know, if we have a really good last couple of months, it could go up a little bit.

Okay. And can you comment a little bit about what went on on the gas marketing, on the gas side? I think your margins were higher than last year, and they seemed pretty high compared to other competitors who are in storage and marketing business.

Well, I don't want to, I can't tell you exactly on the transactions that we did but I will say that generally speaking, we had a good quarter on the gas side, and it was primarily around our hedging business. They did a very good job. And also some of our proprietary trading did very well.

Okay.

And when I look at the potential Northeast Express expansion on your Rockies line, would your gas marketing business be a likely tenant on that pipeline?

They are certainly a potential tenant. They haven't made any commit to take any capacity. But that's in their area that they do a lot of transactions, so it wouldn't be surprising at all if they bought some capacity.

Okay. And then in terms of the regulatory approval needed to close the transaction with RBS, I remember that you initially talked about being able to possibly close the transaction a little bit earlier, and had talked about January. Is there something that is happening in the U.K. regulators that is pushing this timeline a little bit back?

Nothing that is happening that is, I mean I guess the answer to that is, is that the lack of anything happening quickly is probably what is taking so long. It is just we were probably a little optimistic about how quickly we could get it through the regulatory process, you know, we weren't that familiar with all of the banking timelines and things, and so I think it took us a little longer than we expected. But it is not, there has been no surprise,s none of the questions we have gotten back, or any of the issues that have come up, there is nothing that looks like even a hint of a problem. So we don't expect any issues.

As you know, RBS went through a large transaction with ABN, they in the middle of, that may have diverted some of the regulator's attention. But we don't know that for a fact.

But generally speaking, in fact along those lines we are pretty excited about the ABN transaction, because it just made a market for our trading business, and it looks like the outlook for the JV is a lot more positive now than it even was before.

On the stock repurchase, what is your affinity to the type of repurchase you would like to do? Is it more kind of revisit it from time to time, or some sort of other methodology?

No, we have announced previously that we would do an accelerated share repurchase program. And we still intend to do that. We would launch that program fairly close, after the close of the transaction. And we expect to be in the market with that well into the first quarter.

Okay. Great. Thanks for the time.

Our next question is from Paul Patterson of Glenrock Associates. Please proceed with your question.

Hi, can you hear me?

Sure.

Actually, you have answered almost all of the questions I had. One sort of little question that I had is the investment, the credit quality of the trading assets has been the proportion that is non-investment grade has increased over the last year or two, and I was just wondering, is that because of a change in the credit quality of the actual customers that you had been serving, or is that more of a move into the sort of a different customer class? Any thought about that, and what it looks like going forward?

It is really actually more of a move to a couple of longer dated transactions that we had with generators, and not really any real major shift to our credit classes.

Okay. So it is not a figure trend that we will be seeing or anything?

No.

Okay. Thanks a lot, guys.

Our next question comes from Michael Lapides of Goldman Sachs. Please proceed with your question.

Hi, guys. Two questions for you. One related to REX East. If the project is delayed just due to the EIS process, can you quantify what the impact would be, if any?

It is very small.

There is no depreciation.

Yes, we wouldn't be depreciating the project. We continue to capitalize interest and the loss of revenue. And I forgot the exact net number, but it is a relatively small number and it wouldn't change our guidance.

It is not material to Sempra or the business units.

Right.

I was just reading the filing that tender made to the FERC, where they talk about losing crews if there is up is to a six-month delay, and typically when you lose crews you wind up paying higher costs, because you have to pay for start-up?

That is the issue and I think that is one of the things that the FERC staff didn't understand, that it wasn't a month for month delay, or week for week delay, that if we start losing crews, we would have to restaff the project again, and this goes counter to what the FERC is trying to accomplish, so I am convinced that they are going to bend over backwards to work with us, as long as we do our parts, and we are going to do our part to keep this project on schedule.

Great. Thanks. Second question, California capacity market, the debate over [SDFMs], can you talk about where you see that going over the next few months, and when you think it gets resolved?

Well, you know, as people look to invest money into generation, they want to have a capacity market. I think that has been demonstrated in other regions of the country.

I think California is going to get there. The exact path we take to getting there is still kind of somewhat up in the air. My opinion. But I do think we will have a capacity market in California.

And any view on whether it looks like the currently proposed forward capacity market structure, or some other structure?

I wouldn't place a bet today. It is still an active discussion. I think the Commission is going to take a look at what does it need to do to ensure the marketplace that adequate capacity is built. So they are taking input from all of the parties, including the IEPs, and the Utilities and others, and at the end of the day, I have the confidence that this Commission understands the need to have assets built in California, and will come up with a capacity market that works.

Great. Thank you.

Our next question comes from Paul Patrick of First Manhattan. Please go ahead with your question.

Thank you. Hi, can you hear me?

Sure.

I think I read somewhere about additional investments potentially in LNG liquefaction. Is that correct? And could you elaborate on what you are considering if you are looking at that more closely?

I think, Paul, what we have said in general, is that we would not have an issue investing in liquefaction, if in fact it gave us additional marketing rights for the output of those liquefaction plants. So we have looked at several. We have not adverse to making some small investments, as long as those investments come along with it, the ability to market some of the LNG output.

Okay. And then just on, a question on the Commodities business, I noticed that the margin increased year-over-year, but the value at risk increased a lot more. Is there any particular reason?

Two things. One, we had a fair amount of volatility, but the biggest thing is the higher prices. The higher prices is causing the VAR to go up, and that has been the biggest driver.

Thank you.

Mr. Felsinger, there are no further questions at this time.

Well, thank you. Hey, thanks to all of you for joining us on this third quarter earnings call. If you have any follow-up questions, as in the past, go ahead and give Jeff or Glenn or Scott a call. Have a great day!

This concludes the conference call. Thank you everyone for joining. You may now disconnect.