桑普拉能源 (SRE) 2007 Q4 法說會逐字稿

Good day and welcome to the Sempra Energy fourth quarter and full year 2007 financial results 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, sir.

Good afternoon. I would like to thank you for joining us to discuss Sempra Energy's 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 an 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 Sempra Utilities; and Joe Householder, Senior Vice President and Controller.

You'll note that slide two contains our Safe Harbor statement. I would 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 risk, uncertainties and assumptions. Future results may differ materially from those expressed on our call. 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, it's also important to note that all of the earnings per share amounts in our presentation today are shown on a diluted basis. Finally, I want to mention that we're hosting our analyst conference on March 27, this year. Because we're holding it in New York City there's been a lot of interest and we're hopeful you'll each make time to join us. With that I would like to turn it over to Don who will begin with slide three.

Thanks, Jeff and thanks to each of you for joining us. Here is how I would like to proceed with today's call. Mark Snell and I will start with the financial results. Then I'll update you on the status of our business activities and finally we'll close with any questions that you may have. Before turning the call over to Mark, 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 and for the full year. In fact, 2007 was a record year for income from continuing operations. All in all, a very good year and a great foundation for our future growth. Based on our outlook for the remainder of this year, we're reaffirming our previously announced 2008 earnings guidance of $3.65 to $3.85 per share. This guidance reflects the closing of the Royal Bank of Scotland transaction and our reduced ownership in Sempra Commodities and the positive impact of our planned share repurchase program. And with that, I'm going to ask Mark to take you through the financial results in more detail.

Thanks, Don. Well, earlier this morning we reported fourth quarter income from continuing operations of $288 million, or $1.10 per share. Fourth quarter 2006 income from continuing operations was $129 million, or $0.49 per share. This included $221 million for the impairment of our Argentine assets. Net income for the fourth quarter was $289 million or $1.10 per share, compared with net income in the prior year quarter of $125 million or $0.47 per share. Income from continuing operations increased to a record $1.13 billion, or $4.26 per share, for the full year 2007. That's up from $1.09 billion or $4.17 per share in 2006. Last year's results included $204 million in gains on asset sales and the Argentine write-down. Now let's review the financial results for each of our business units. I'll start with Sempra Utilities on slide four.

Sempra Utilities reported fourth quarter net income of $105 million compared with $110 million in the year-ago period. San Diego Gas and Electric's net income for the fourth quarter was $47 million, that compares with $55 million in the year-ago quarter, primarily due to lower taxes in 2006. At Southern California gas, fourth quarter 2000 net income was $58 million, that compares with $55 million in the prior year's quarter. For the full year 2007, Sempra Utilities reported net income of $513 million. A 12% increase over the $460 million posted in '06. Net income for SDG&E rose to $283 million in 2007 from $237 million in 2006. That was due primarily to favorable resolution of tax issues together with higher electric transmission and generation earnings. 2000 net income for SoCal Gas increased to $230 million from $223 million in 2006 due primarily to higher operating margins.

Now let's go to slide five. Sempra Commodities reported fourth quarter net income of $186 million in 2007, compared with $214 million in the prior year's quarter. This was primarily due to reduced earnings from our natural gas and synthetic fuel tax credit operations. For the full year of 2007, Sempra Commodities recorded net income of $499 million, compared with 2006 earnings of $504 million.

With that I'll also bring you a short update on our planned joint venture with RBS. We plan to close the transaction by April, depending on the timing of our last regulatory approval. You'll recall that the transaction was approved by the FERC and the UKs financial services authority last fall, and we're now awaiting approval from the Federal Reserve Board which we expect in March. At this point, we don't envision any material issues and we believe we will receive federal approval by the end -- as previously mentioned by the end of the quarter. While we are and RBS are disappointed that the approval process has taken longer than anticipated, there certainly has been some other significant issues in the financial market that have taken up a lot of the regulator's time and attention.

One change I would like to mention is that the amount of regulatory capital or equity the commodity business requires has increased over our original estimates. The change, this is driven by significant increases in commodity prices since the deal was first announced and recent changes in banking regulations. Considering this, and the 15% preferred return dictated by the partnership agreement, we requested and the partners agreed to increase our investment. As currently contemplated Sempra will now invest 1.6 billion to $1.7 billion at closing. This increased from 1.3 billion to $1.5 billion that we had originally contemplated does not affect any other aspects of the transaction, nor will it affect our planned stock buyback or our dividend increase. With respect to those, post closing, we begin the first $1 billion of our 1.5 billion to $2 billion share repurchase program and again will raise our dividend. Earlier this month we raised our quarterly dividend 3.2% to $0.32 per share and we expect to increase the quarterly dividend a second time to $0.35 a share once we close the transaction. This will reflect a 35 to 40% payout ratio and annual rate of $1.40 per share.

Now I'll move on to slide six. Fourth quarter net income for our generation business was $40 million, compared with $53 million in the same quarter in 2006. Due primarily to a three month outage at the Company's El Dorado energy plant in Nevada and higher taxes. The El Dorado plant was placed back in service on January 7, of this year. For the full year 2007, net income for Sempra Generation was $162 million, compared with $375 million in 2006. Which included $204 million related to the sale of the Topaz power plant.

Please move to slide seven. In the fourth quarter, 2007, Sempra pipelines and storage reported net income of $14 million, compared with a net loss of $223 million in the same period in 2006. Fourth quarter 2006 results included a $221 million write-down on the Company's Argentine utility investments, together with $24 million in taxes on repatriated foreign earnings. For the full year 2007, net income was $64 million, compared with net loss of $165 million in 2006. The prior year results included the previously mentioned write-down and taxes on repatriation offset by $10 million from the favorable resolution of prior year tax issues.

Please turn to slide eight. This slide provides a summary of our business unit results and I'll highlight a few points and I'll start with our LNG business. Sempra LNG recorded a net loss of $19 million in the fourth quarter of '07, that's compared with a net loss of $7 million in the prior year. The increase was due primarily to a mark-to-market loss on a marketing agreement with Sempra Commodities where this loss was offset by a corresponding gain. Parent and other reported a net loss of $38 million in the fourth quarter 2007, compared with a net loss of $18 million in the fourth quarter of 2006. Primarily due to increased charitable contributions and income taxes.

Please turn to slide nine. We are very pleased with our 2007 results. Income from continuing operations set a new record for the Company, and our financial results were bolstered by strong earnings from our California utilities and Sempra Commodities. Second, we continued to have a strong balance sheet, ample liquidity with over $650 million of cash on hand and $5 billion in unused credit lines. We also finished the year with a debt to total cap ratio of 39%, a 3% drop from 2006. That's noteworthy because as we close the RBS transaction, we've made the commitment to restructure our balance sheet by repurchasing shares and increasing the dividend. Both of which will directly benefit shareholders. Now I would like to turn it back to Don with slide 10.

Thanks, Mark. Let me start with a short business update beginning with our utilities. In December, SDG&E received a final decision on its cost of capital proceeding which increased its authorized return on equity to 11.1% from 10.7%. This increase was effective on January 1. You'll also recall that last year the FERC increased our authorized return on equity on transmission assets to 11.35%.

In regard to our general rate cases for SDG&E and SoCal Gas, we've reached settlements on major aspects of those proceedings. We now expect a final decision from the California Public Utilities Commission in the second quarter of this year. And we have filed for rates to be retroactive to January 1, of this year.

In November, SDG&E's purchase of Sempra Generations El Dorado power plant was approved by the CPUC. The purchase will be effective in late 2011. As for the Sunrise Powerlink 500 KV transmission project, we received a draft environmental impact study last month which is an important project milestone. We expect a final decision on the project in the second half of this year, which would result in the line being placed into service in 2011.

Now let me update you on our LNG business on slide 11. Power Energia Costa Azul terminal will begin operations in the second quarter. While the revised start date is a couple of months later than expected, the net income impact of this delay is negligible. As you would expect, there is a lot of excitement about placing into service the first LNG receipt terminal on the West Coast of North America. We have secured initial test cargoes for the commissioning and completed the connecting pipeline. At the end of 2007, we also finalized an agreement to develop a $125 million nitrogen injection facility at the terminal. As many of you know, California has adopted some of the most stringent gas quality specifications in the country. This new nitrogen facility will allow gas from the expanded number of sources around the world to meet these more stringent specifications.

Recently, an affirmation of our LNG strategy was reiterated by FERC Chairman Kelleher who forecasted that the U.S. would become the largest LNG importer by 2011 due to heating and natural gas fuel generation growth. Chairman Kelleher also said that our Energia Costa Azul project is very important because with its commissioning, the U.S. will be the only LNG importer with ready access to both the Atlantic and Pacific markets. This will make the U.S. market increasingly attractive to LNG importers. In Louisiana, our Cameron receipt facility is 75% complete. This project remains on track for operations in early 2009 and we're still focused on contracting the remainder of capacity at Cameron.

Now let's move to slide 12 for an update on pipelines and storage and the Rockies Express Pipeline project. A major milestone occurred in January when we began interim service on the 500-mile segment of the Rockies Express West portion of the pipeline that runs from Colorado to Kansas. We expect the entire 700-mile Western portion of the pipeline which ends in Missouri to be in full service next month. As for Rockies Express east we're continuing to work closely with the FERC on permitting and expect to receive approval sometime this spring. This will enable us to start construction in early summer and meet a December 2008 interim service date.

The total cost of the Rockies Express Pipeline is now estimated to be $4.9 billion an increase of $500 million from the original estimate. Sempra Energy's 25% share of the overall project cost is roughly $1.2 billion. As many of you know, there continues to be a lot of interest in a follow-on project to the Rockies Express Pipeline that would deliver natural gas to markets further east. Late last year, we completed an open season for the Northeast Express Pipeline project that would extend service from Clarington, Ohio to Princeton, New Jersey. We're now negotiating with interested parties for firm contracts with a view toward making a final decision on a project sometime in the next quarter.

Please turn now to slide 13. In summary, here's a couple of key highlights. First, all of our businesses units have performed well. 2007 saw record income from continuing operations, driven in large part by a strong year from our California utilities and our commodities business. In addition, we have some important milestones taking place this year. The closing of our joint venture with RBS, the conclusion of our general rate cases, REX-West is now flowing gas, we're commissioning our Costa Azul receive facility in the second quarter and we have several more major projects coming on line this year, an exciting time as many of our projects and activities move into the operations and earnings phase. With that, our outlook for 2008 has a lot of certainty and we reaffirm our earnings guidance with a range of $3.65 to $3.85 per share. In 2009, we'll be seeing the first full year of operations for many of the projects I just discussed, and that will be reflected in significantly stronger earnings growth in the future. We'll get into the detail behind that growth at our analyst conference coming up in March. And with that, let me now open up the call and take any questions that you might have.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from John Kiani with Deutsche Bank.

Good morning.

Good morning, John.

I know you made some comments earlier on in your discussion about the RBS commodities joint venture. Can you talk a little bit about any -- have you had any recent discussions with RBS or with the U.S. Fed?

Let me have Mark answer your question. But we are in contact with RBS almost on a daily basis and just want to reaffirm to you that we expect this transaction to close here within the month.

Yes, John, this is Mark. I think the transaction took a little longer to close than we had anticipated, but I don't think anybody could have anticipated the kind of financial turmoil that the regulators have been in. And I want to say that I think they've done a -- in my conversations with them, they are being diligent and they are really trying to get this done, trying to get the attention of all of the people that they need to get. It's been understandably difficult and I think they just took longer than they expected as well and so -- but we're getting there and I think we expect to get that this month and we expect to close shortly thereafter and as far as the conversations we have with RBS, they're meeting with us on a daily basis. We're working to integrate the two businesses and I think from the get-go, we're going to be ready to move forward.

Okay. Thanks. That's helpful. And then can you talk a little bit about this gas fired power plant that you have in early stage development in Maryland? I think I saw something for around 500 or 600 megawatts.

We have had a site in Maryland for a number of years that we have not developed because the market hasn't given us the right price signals and as we look at what's taking place right now in PJM and the fact they've gone out for capacity payments in 2011, if in fact these capacity payments get approved by the FERC, which we think they will, and we're able to deal with some local issues regarding taxes and get our construction cost to the point that they make sense to us, it's a project we will move forward with. But there's still a few open items but it looks very positive from the standpoint of what we're seeing today.

So just to be clear, it sounds like your expectation is that the new and higher cone prices are approved and therefore we might continue to see pretty robust PJM capacity pricing and specifically in the region in which you have -- subregion where you have the site. If that's the case you may very well push forward with this development?

Well, I think as you've watched construction costs for a new combined cycle, we're seeing cost in the range now of 900 to $1,000 of megawatt or KW. When we look at what's happening in PJM, they need capacity and we think the prices that they have adopted and they've sent to the FERC to get approved would in fact support new generation. We also think we have one of the few sites that's ready to be built upon and meet the 2011 date. So once again, if the prices get approved by the FERC and we're able to get our construction cost estimates coming in at a price range that supports our economics and deal with one or two other minor issues, it's a project that in fact we will move forward with.

Okay. Thank you very much.

Our next question comes from Lasan Johong with RBC Capital Markets.

Thank you. Don, first of all congratulations on a good year. More kind of looking out globally, I can't imagine you sitting back and saying to yourself there are no acquisition opportunities on the horizon or in the mix today that you're looking at. I can probably name you three companies that might be of interest to you. How are you kind of looking at the landscape today relative to the fact that you're throwing off enormous amount of free cash flow or are expected to?

Thank you for the congratulations on the year. We're always looking at opportunities to buy assets whether they be assets or companies. We're no different than anyone else. The key thing that we have before us is to close the RBS transaction, so in fact that we can do a restructuring of our balance sheet. And so that's primary in our focus and we're going to do that and when we see a right opportunity come along that makes sense for us in the space we want to be in, we'll be an active player.

Okay. Mark, you had mentioned that the capital infusion at the JV would probably have to increase by at least 100 million to $200 million it sounds like. Is that a physical cash injection or is that a -- the amount of capital returned will be reduced. How is that going to work.

I think they're one and the same. Let me make it clear that it's not something we have to do. It's something that we wanted to do. It helps us -- it helps preserve our earnings and actually increases our earnings slightly because of the preferred return. It just -- when these new regulations came out and with the high commodity pricing, the regulatory capital calculation was higher than what we had originally anticipated and we just sat down with our partners and worked out something that was equitable for both of us.

So is it a cash infusion or is it a less cash returned?

I guess it's less cash returned. There's about two days difference between the two. So I'm not sure it makes any difference.

Okay. In terms of global liquefaction capacity, are you guys seeing anything differently? It seems like there's more announcements coming out about new liquefaction capacity.

Neal, you want to address this?

I think generally our view of this market is pretty consistent with the way we've seen it. There's a lot of liquefaction capacity going to be coming on in the next few years and that will have an impact on the market. But generally our view around this global market has been positive and it continues to be so.

Okay. And any kind of thoughts on what Schneier announced recently about a strategic review?

Neal will follow-on with that.

Well, just consistent with what I just said. I think we don't generally comment on other companies but since the Schneier announcement came out we looked at the company and looked at what the market is sort of saying about Schneier and I think the -- once again, in general terms, when you look at the long-term for energy and the long-term for LNG, market has a pretty good view of Schneier and I think it reflects very well on the assets that we hold.

If I may, one last question. There's a lot of discussion going on about building a REX equivalent to the West, Ruby and Bronco are two that I can think of. How is that going to impact REX? Is there going to be enough capacity out of the Rockies to feed both sides of the equation?

Lasan, the reserve forecast, when we looked at building REX to the Eastern markets, there were adequate reserves to support that project for 20 plus years and there have been reserve increases in the interim so no one would build a pipeline unless they felt comfortable about the reserves being there versus those that had been committed. So I think that yes, the reserves are in the Rockies to support a pipeline project to the West.

Why give them an opportunity to build it. Why don't you just take it away by building another spur on REX?

If the opportunity presented itself for us to do that, we would. We're looking at all the options that are out there with gas flowing to the West. We've made no decisions.

Okay. Thank you.

Our next question comes from Paul Patterson with Glenrock Associates.

Good morning.

Sir, your line is open.

Can you hear me.

Yes, go right ahead.

Sorry about that. Wanted to touch base with you first on the timing between the Fed approval and the actual close. You mentioned that you thought it was going to be I guess the approval would happen in March and that you would actually close it in April?

Yes, that's right.

It's Mark Snell.

Assuming that we get the Fed approval in the next few weeks, we would -- our plan is to close it on April 1. We have been looking at trying to close it on the first of the month, it made it easier for some things but we're also exploring the possibility of closing it mid-month.

So it would happen earlier than April.

It could.

Okay. And then in terms of Port Arthur, you guys I think have sort of delayed due to the contracting situation there the LNG development and I was just wondering if you could sort of comment on that and what your thoughts are in terms of the pricing environment that we're going to have to see in terms of the LNG outlook going forward in the U.S. vis-a-vis other markets?

Well, I think we had a discussion the last call or maybe the call before that as you're aware, we have gone forward and seeked the expansion approval for both Costa Azul and for Cameron. We now have the ability without launching Port Arthur to increase the capacity at our Mexican facility up to about 2.5 Vs a day and about 2.6 Vs a day at Cameron. What we've done is just left ourselves some wiggle room to look at how the upstream market develops. If it made more sense to expand one of our existing facilities for incremental supply or to launch a whole new facility. So we're fairly well positioned. We can expand in Mexico. We can expand at Cameron or we have permits in place where we can move forward with Port Arthur. I think it really is a function of how quickly the liquefaction market develops and how robust the market is in the U.S. to support new LNG supplies. At the end of the day we have as much flexibility as anybody out there to take advantage of what happens or what doesn't happen.

Right. I guess I'm wondering is when do you think that liquefaction market will show up and what kind of contracting are we looking at in terms of when we actually might see that development, that additional development take place?

Well, I mean, just looking at the projects that are currently under construction, it looks like the watershed years are going to be 2011 and later.

And the contracting, you would expect that to sort of develop, when do you think that we'll see a clearer picture of the contracting?

I would think that as most of these projects get 18 months or so away from completion, that I would expect that upstream suppliers would start making sure they have a place to unload this someplace, whether it be in North America, Asia or Europe.

Okay. And then finally, the level of non-investment grade on the trading book seems to have increased again over the quarter. Can you just elaborate a little bit more on the activity that's happening there and driving that?

Mark you want to take that?

Sure. There really hasn't been -- it's a relatively small difference and I think these are just things that happen from time to time. And we really aren't noticing anything really different in our book of business. And frankly, if you're thinking that it might be a reflection of some of our customers being downgraded, that really hasn't happened yet with the majority of our customers so I think from the most part, it's just a fluctuation that will probably correct itself over time.

Okay. Great. Thanks a lot.

We'll go next to Sam Brothwell with Wachovia.

My questions have been addressed.

We'll go next to Winfried Fruehauf with Fruehauf Consulting.

Good morning. My first question is on the allowance for funds used during construction. What was that amount in the fourth quarter and the year versus 2006?

Hang on just a second, Winfried.

Thank you.

Don't want to guess here. Want to given you the right answer, so.

Okay.

Winfried, why don't you go ahead and give me your second question and we'll.

All right. The second question relates to the large increase in short term debt year-over-year on your balance sheet to a little bit over $1 billion. What does that reflect and how are you going to refinance this large amount of short term debt?

That just reflects some of our current borrowings that we've taken down. One of the things that we have done is moved out of some of our commercial paper markets and our notes that are long-term notes that reprice on a monthly basis. We moved into more shorter term paper. But we have adequate -- our credit lines if we don't end up going back into the bond market, we'll just use our credit lines to finance that and they're all multi-year lines.

Okay. What is your current estimate of the final construction cost of Costa Azul given the cost of the (inaudible) facility and some delay? And if you could please tell me whether that includes, excludes an allowance for funds used in construction.

I'm going to give this to Neal.

At Costa Azul we estimate that the final cost will be about 975 million, now, that includes capitalized interest and it excludes the nitrogen plant of 125 million and some preexpansion costs of around $66 million.

Okay. And next question is on Entrega, what was the net income contribution from Entrega in the fourth quarter?

In the fourth quarter?

2007, yes.

Entrega. Do we have that broken down?

No, we don't disclose that.

If I had it I couldn't give it to you.

All right. Okay.

And I don't.

We have the answer to the first question.

All right. Let's go back to your first question.

Thank you.

This is Joe.

The AFUDC for the year for SDG&E, equity was 17 for the year and SoCal was 5.

And for the quarter?

Five for SDG&E and two for SoCal.

Thanks very much.

Thanks, Winfried.

We'll go next to Michael Lapides with Goldman Sachs.

Congrats on a good year. When we think about the incremental cost for REX, the 125 million to you, how does that impact your returns on invested capital on the project?

It's negligible from the standpoint of the overall return. I think it moves it a few basis points.

These kinds of numbers will move it kind of in proportion of the capital, or a little bit less. But it's a very small impact.

I mean, it's almost a 10% price increase, cost increase if I look at it from the overall project level. How should we think about it in terms -- maybe I'll rephrase the question. What's the right, whether it's ROE or ROIC target that investors should think about in terms for this project?

Once again, when you look at the impact of this kind of a capital increase, it will move it more or less in kind of in proportion to the total capital, now, on an ROE basis, should be a little bit less because of the impact on leverage. But our return on total capital basis, the arithmetic just works out that way.

Understood. What's the ROE assumption for REX?

I don't think we ever gave that.

Okay. And last question, and this is kind of touching base on the utilities a little bit, haven't had a lot of utility related questions today. How do we think about what the new generation needs are especially after the CPUC filings at the back end of the year '07 for San Diego Gas and Electric?

Debbie, you want to address this?

Sure, we have to -- this is Debbie Reed, Michael. We have to file at the CPUC a ten year long-term resource plan which was just basically approved by the CPUC that looks out on the generation needs going forward. And as Don mentioned in his remarks, not only do we have generation assets that are part of our portfolio today, but we did receive approval to acquire El Dorado in 2011. And so we will have quite a bit of utility owned generation as part of our portfolio. We will then add a complement, a peaking generation to meet our reliability and resource adequacy needs going forward and that in addition to the Calpine plant that is under construction as well as our acquisition of El Dorado and then some peaking generation should meet our needs for the next 10 years or so.

And if Sunrise is delayed, I think that 10 year procurement approval by the CPUC mentions about another incremental 400 megawatts of capacity if Sunrise is delayed. Where would that 400 come from?

Again, we would look at principally peaking generation and we would go through the required CPUC request for proposal process necessary to get that.

Got it. Okay. Thank you.

We'll go next to Patrick Forkin with Tejas Securities.

Good morning. I was wondering if you could give us an update on your advanced metering program. Have you made the technology selections and what's your timetable for regulatory approval?

Debbie Reed again.

Hi, Patrick. We received regulatory approval for our smart meter program last year and the CPUC authorized $572 million budget, 500 million of which, approximately, is capital. We will begin deployment of the first 5,000 test meters in the second quarter of this year. And then we will begin full deployment in Q4 of this year of all of the meters to be completed, and installed in SDG&E service territory by early 2011. And that will be 1.4 million electric and 900,000 gas. We are still negotiations with a vendor and so we are not at a point where we can release the name of the vendors that we've selected yet.

Okay. But on the core metering you have made a technology selection?

Yes.

Okay. Thank you very much.

We'll go next to Peter Hark with Talon Capital.

Hello, Don and Mark, it's Peter Hark, how are you doing.

Hi, Peter how are you?

Just a couple of quick questions on the RBS deal. First, could you review for us in more detail the factors that influenced your decision to revise the agreement in the first place and is there a possibility that there would be further revisions coming and lastly, is your increased capital contribution being matched by RBS also so that your respective ownership interests are intact?

Our partnership agreement calls for a 15% preferred return on regulatory capital and so as we saw the numbers go up, we decided that it would make more sense for us to put a little bit more -- to leave a little bit more money in the business. A couple of things have happened. Because some of this was driven by higher commodity prices, we're actually going to be -- when we sell the business, because we're essentially selling kind of a book value, we're actually pulling a little more money out of the business and our cash flow from the business has been higher this year than we anticipated. So actually our net proceeds that are coming out are going to be roughly the same as what they had been, what we had had anticipated earlier and just they would have been a little bit higher. And so it was a pretty easy decision for us to make. We are still under the agreement limited in how much that we can be required to put in or how much we can -- we may want to put in. So we don't expect to be -- to see any further changes in that.

And then long-term, we think -- partly this was a relatively short term issue with us. These new bank regulations that drove some of this is -- I'll refer to it as BASL 2 which I think some of you might be familiar with and that started to affect the European banks as of January 1, and it will come into play here in the U.S. next January. That drove up some of the requirements. But under that, under that BASL 2 requirement as well as the old requirements, we will be able to go to a VAR based model for determining regulatory capital instead of the formulaic model that's -- that happens before you can get your VAR model approved. And once we do that, that will bring the capital back down again. We're thinking that this is more of a 12 to 15 month kind of issue and we'll get the capital numbers back in balance of where we thought we were a year from now.

Oh, thank you Mark for explaining that. Just to be clear then RBS is not posting additional--?

I'm glad you brought that up. They'll post about an equal amount more too. Because the initial ownership percentage is 51, 49, they'll always be just slightly more capital than us.

Okay. Perfect. Just also to be clear, is any of this being driven by either credit or collateral obligations?

No. It's really just -- it's driven by the pure fact that the commodity prices are higher so things like -- that requires more capital in the business. Then the other part is, like I said, there's these regulatory changes which until we -- we knew they were coming but until we had worked through all of the numbers we really didn't know how they were going to turn out.

And lastly for clarification, I think the answer to Jason's question I think you said there was a two day difference in calculating the return. I'm not sure what you meant by that.

I'm sorry. I probably was a little bit fleety. All I was really saying was that he was asking -- Lasan was something whether we were putting more money in or taking less money out. I said it happens about the same time. It's hard for me to tell which is which. The net result is about the same.

Okay. Thank you very much, Mark.

Okay.

Thanks, Peter.

(OPERATOR INSTRUCTIONS) We'll go next to you Faisel Khan with Citi.

One follow-up question on the RBS transaction. The profits will still get paid out at the end of every year; is that correct.

Correct.

That's correct.

Assuming the transaction goes through, will you bring down the notional amount of your credit lines also?

That's correct.

Okay. And in the -- can you discuss what happened with the tax rate in the fourth quarter? It seems relatively high compared to the last?

The tax rate in the fourth quarter?

That's right.

The fourth quarter was a little bit higher. That was partially because of the phase out of the Section 29 credits went up quite a bit. Also we had lower income from lower tax jurisdictions in the quarter. For the year it's about 34% in both years. Next year we expect it to go up about 3% because there are no Section 29 credits.

That was Joe Householder.

Got you. Then in terms of your guidance, does that include any potential settlement discussions you're having on SDG&E and SoCal Gas?

It includes our best estimate of what the year is going to look like.

Okay. Fair enough. In terms of the cool down cargo you're receiving at Costa Azul, are those part of -- is that part of the capital that will be -- part of the invested capital in Costa Azul or is it?

Think of that as working gas, yes, it's like capital.

And any -- given it will be operational in the second quarter, are there opportunities that you're looking at for potential spot cargoes, given that there's a time difference between when your contracts ramp up between when the facility comes on line.

Yes, there is.

How are you guys looking that?

Well, I mean the opportunity here, just as an aside, we were in a different meeting yesterday and had some people on the phone and it was interesting that we had LNG people all over the world and they're out selling capacity and looking for spot cargo. As this facility goes operational and there is the ability to bring gas into it before the BP contract starts, we will be out there trying to convince people to bring it to Costa Azul.

Okay. Any way to talk about the cost per Mmbtu that the test cargoes cost?

I would only say that it's -- we're paying market prices and as we went through the analysis of what these things are worth to us, we -- we can't start getting revenues from our customers until such time as we can prove the facility is commercial. You can't make it be commercial until you run test cargoes through it.

One point on that, these test cargoes are part of the start-up operation and they're capitalized.

You were asleep when we said that.

Oh.

Fair enough. On the Port Arthur, you guys talked about the open season for oil terminal capabilities. Where are you guys in that open season.

I'll have Neal address this. On the surface we announced that in fact, we are having an open season. That was the end of last year. We had good response. We're in a process now of looking at those responders and seeing if in fact there's enough interest to turn these into contracts to build terminally.

There's really not, in terms of the open season, not a lot to elaborate there. But I think it is worth underlining that both with respect to its possible use as an LNG terminal and with respect to its use as a possible oil terminal, the plot of land that we have down there is very well located. So long-term, this is going to be a very quality asset with a lot of potential.

Okay. And on the -- at the generation segment, the outage at El Dorado, I take it that was a forced outage?

It started out as a planned outage. As we started the plant up there was a problem in the way it was put back together so it turned into a forced outage.

Did you guys talk about the impact from that forced outage on income.

It was negligible.

Okay. And then looking at the wind farm assets that you guys have under construction, where are you in terms of construction of those assets, the first phase and how are the second phase and third phase kind of looking at this point?

I think you're referencing the wind project that we have in Sempra Generation.

That's right, the 1000 megawatts of potential wind capacity.

I think the status is we have secured a good resource in terms of land and we signed a contract with Southern California Edison. We have not started construction. We have two factors that are impeding that. One is, as you are -- I guess we're all painfully aware, we just don't have transmission in this region to move renewables to market. Our project that we have in Mexico is a victim of that same outcome. We're waiting for the transmission issues to get resolved. Beyond that, assuming the equipment prices come in as planned, we'll move forward once we have the transmission issues resolved.

Are you talking about having Sunrise transmission be a link to those assets?

Sunrise or some other transmission solution and our generation Company is working both with the ISO and with the Governor of Mexico to see if we can't find a transmission solution. Okay. Great. Thanks for the time, guys.

Thank you.

We'll take a follow-up from Winfried Fruehauf with W. Fruehauf Consulting Ltd.

Thank you. Regarding the Paloma outage, are you in any way protected either by warranties or -- and/or insurance, business interruption or other insurance?

We have a claim pending against the people who did the repair work.

Are you in a position to assess the chances of your succeeding?

Well, if we didn't think we had a chance we wouldn't waste the time filing it, so.

Can you disclose the amount that is -- that you are claiming?

Not at this time.

Okay. That's all I have. Thank you.

Thank you.

We'll take a follow-up from from Lasan Johong with RBC Capital Markets.

Just three quick follow-ups. How is the sale of the Argentine business going?

I didn't hear that. Go ahead.

Sale of the Argentine business?

Well, as you know, we are still trying to collect up on the claim that was awarded in our favor in Argentina and so our plan there is to pursue a, two courses of action. One is to dispose of those assets in the market and secondly collect on the claim against the government and we are moving on both of those.

Okay. And then if I understood your comments on REX Northeast correctly, sounds like there was enough interest in terms of people wanting to reserve capacity so it sounds like it's coming down to negotiation of price. Is that about the sum of it?

Well, I guess I would maybe approach it a little differently, Lasan. I don't have a correct count here but there were something between 8 and 12 projects that were at one time proposed that would basically take gas further East and they ended up in different locations. They carried different volumes. What we are doing is we are having discussions with the people that participated in our open season and we are, as you know, are building a much larger pipeline that has a much lower rate but it requires much larger volumes to make it work and we will see in the next couple months whether or not there's enough market interest to have people sign up a long-term contract to make this project a reality. I would say, again, that of all the people that are out there from the standpoint of those that have a track record, have the credibility, have the team put together, that we have a good -- as good a shot as anybody in fact in extending this pipeline into the Eastern markets.

Okay. And then last question. Don, a while ago when we chatted you said there was a potential that Sempra may take a position in a liquefaction facility somewhere else. Is that still kind of what you're looking for, hoping for, to achieve.

Well, I think it's a space that we looked at, that we bring some strengths to with our marketing capabilities. So as we're afforded opportunities to participate in liquefaction the interest is not so much in having equity in liquefaction but having the marketing rights to go with it. In every case we are looking at the opportunity to invest in liquefaction, where in fact we can have a disproportionate share of the offtake to market.

Got it. Thank you.

Thank you.

We'll take a a follow-up from Faisel Khan with Citi.

Sorry, couple more questions. What did you guys book in the -- for the year for your attrition filings at SDG&E, SoCal Gas and SDG&E.

This is Debbie Reed here.

In 2006 to 2007, our attrition was about $73 million for both utilities.

Okay. And then if I look at the operating income of both utilities over that time frame, there was not that much growth in your operating profit number. I assume that the attrition amounts got eaten up in higher O&M?

Well, there was actually a number of factors on the operating income side and we did end up having at SoCal Gas a positive benefit from the attrition mechanism. And a slight positive benefit at SDG&E last year. And those were offset by some things like litigation costs and other items.

Generally the attrition amounts seem to be working the way they were supposed to, basically offsetting cost inflation and your overall operations?

Absolutely. And we manage our costs based upon this. We look ahead and we forecast what the attrition is going to be and we manage our business so that we can stay within that attrition amount.

In terms of your other performance based mechanisms, GCIM or other purchase gas cost mechanisms, where did you guys stand with that?

If you looked at all of our mechanisms for 2007, we had a total of $33 million pretax and $20 million after tax out of all of the incentive mechanisms for both utilities. That was about $10.6 million pretax at SoCal Gas from the PVR and the GCIM year 12 and then at SDG&E from the PVR it was about $8.8 million pretax, a DSM incentive of $12 million and then a PBR on the gas purchasing of about 2.3 million.

Okay. I got you. And then last question on the equity earnings of certain non consolidated subsidiaries under your pipeline and storage segment, I think you have roughly $59 million for the year. Can I assume that a lot of that is related to your equity interest in REX or is that something else?

It could also be South America too.

Okay. Got you. Thanks.

Thanks, Michael.

With that, we have no further questions in queue. At this time I would like to turn the conference back to Mr. Don Felsinger for closing remarks.

Well, once again, thanks to all of you for joining us for our 2007 earnings call. If you have any follow-on questions give Jeff, Glen, or Scott a call. If not we'll see you end of March in New York. Have a great day.

This does conclude today's conference ladies and gentlemen. Again, thank you for your participation and you may disconnect at any time.