Sempra
Q4 2007 Earnings Call Transcript

Published: 27 Feb 2008

[Operator:]

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.

[Jeffrey W. Martin:]

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 and Chief Executive Officer; Neal Schmale, President and Chief Operating Officer; Mark Snell, Executive Vice President and Chief Financial Officer; Debbie Reed, President and CEO of Sempra Utilities, and Joe Householder, 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, and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of performance. As you know they involve risks, uncertainties and assumptions that 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 are hosting our Analyst Conference on March 27 this year. Because we are holding it in New York City, there has been a lot of interest and we are hopeful that you will each make time to join us. And with that, I'd now like to turn it over to Don who will begin with slide 3.

[Donald E. Felsinger:]

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, and I will update you on the status of our key business activities, and finally we will close with any questions that you may have. Before turning the call over to Mark, I'd 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 are 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 am going to ask Mark to take you through the financial results in more detail.

[Mark A. Snell:]

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 4. Sempra Utilities reported fourth quarter net income of $105 million, compared with the $110 million in the year ago period. San Diego Gas & 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 2007 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 (sic) [2007] net income for SoCalGas increased to $230 million from $223 million in 2006, due primarily to higher operating margins. Now let's go to slide 5. Sempra Commodities reported fourth quarter net income of $186 million in 2007, compared with $214 in the prior year's quarter. This is primarily due to reduced earnings from our natural gas and synthetic fuel tax credit operations. For the full year 2007, Sempra Commodities recorded net income of $499 million compared with 2006 earnings of $504 million. And 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 UK's Financial Services Authority last call, 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 as previously mentioned by the end of the quarter. While we and RBS are disappointed that the approval process has taken longer than anticipated, there certainly has been some other significant issues in the financial markets that has taken up a lot of the regulators' time and attention. One change I would like to mention is that the amount of regulatory capital or equity of the commodities business required 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 returns 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 increase 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 dividend increase. And 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 the second time to $0.35 a share once we close the transaction. This will reflect the 35% to 40% payout ratio at an annual rate of $1.40 per share. Now we will move onto slide 6. 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 3 month outage of the company's El Dorado Energy plant in Nevada and higher taxes. The El Dorado plant was placed back in service on January 7th 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. Now please move to slide 7. In the fourth quarter, 2007 Sempra Pipelines & 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 of 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 8. This slide provides the summary of our business unit results, and I'll highlight a few points and I will 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 of 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 9. 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 continue to have a strong balance sheet, ample liquidity with over $650 million of cash on hand and $5 billion in unused credit line. 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.

[Donald E. Felsinger:]

Thanks Mark. Let me start with a short business update beginning with our utilities. In December, SDG&A 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 1st. You will 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 SoCalGas, we 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 1st of this year. In November, SDG&E's purchase of Sempra Generation's 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. Our Energía Costa Azul terminal will begin operations in the second quarter. While the revised start date is a couple of month later than expected, the net income impact of this delay is negligible. As you would expect, there is lot of excitement about placing into service the first LNG receipt terminal on the West Coast of North America. We secured initial test cargos for the commissioning and completed the connecting pipeline. At the end of 2007, we also finalized an agreement to develop the $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, Kelliher, who forecasted that the U.S. will become the largest LNG importer by 2011, due to heating and natural gas fuel generation growth. Chairman, Kelliher also said that our Energía 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 are 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 are continuing to work closely with the FERC on permitting and expect to receive approval sometime in the spring. This will enable us to start construction in early summer and need 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 are now negotiating with interested parties for firm contracts with a view towards making a final decision on the project sometime in the next quarter. Please turn now to slide 13. In summary, here is 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 are commissioning our Costa Azul receipt facility in the second quarter and we have several more major projects coming online 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 will 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. Question And Answer

[Operator:]

[John Kiani:]

Good morning.

[Donald E. Felsinger:]

Good morning, John.

[John Kiani:]

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

[Donald E. Felsinger:]

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

[Mark A. Snell:]

[John Kiani:]

Right.

[Mark A. Snell:]

[John Kiani:]

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?

[Donald E. Felsinger:]

We 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 on PJM and the fact that 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 at a point that they make sense to us, it's a project we will move forward with. But there is still a few open items, but it looks very positive from the standpoint of what we're seeing today.

[John Kiani:]

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

[Donald E. Felsinger:]

Well, I think as you watch construction cost for new combined cycle, we're seeing cost in a range now of $900 to $1000 of megawatt or KW. When we look at what's happening in PJM, is they need capacity and we think the prices that they have adopted and they 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 are able to get our construction cost estimates coming into the price range that supports our economics and deal one or two the minor issues, it's a project that in fact we will move forward with.

[John Kiani:]

Okay, thank you very much.

[Operator:]

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

[Lasan Johong:]

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

[Donald E. Felsinger:]

Lasan, thank you for the congratulations on the year. We are always looking at opportunities to buy assets or it may be assets or companies, we are no different than anyone else. But 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 on our focus and we are going to do that, and when we see a right opportunity come along that make sense for us in the space, we want to be in, we will be an active player.

[Lasan Johong:]

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 the amount of capital being returned would be reduced, how is that going to work?

[Mark A. Snell:]

No, I think they are one and the same, but let me make it clear that it's not something we have to do with, something that we know that we wanted to do may help us, it helps preserve our earnings and actually increases our earnings slightly because of the preferred return. It is... 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.

[Lasan Johong:]

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

[Mark A. Snell:]

I guess it's less cash return. There's about 2 days difference between the two, so I am not sure it makes any difference.

[Lasan Johong:]

Okay. In terms of global liquefaction capacity, are you guys seeing any differently? It seems like this more announcements coming out about either for fraction capacity?

[Donald E. Felsinger:]

Neal, you want to address this?

[Neal E. Schmale:]

I think generally our view of this market is pretty consistent with the way we have 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.

[Lasan Johong:]

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

[Donald E. Felsinger:]

Neal, follow on with that.

[Neal E. Schmale:]

Just consistent with what I just said. I think we don't generally comment on other companies, but essentially Schneier announcement came out, we looked at the company and looked at what the market resource saying about Schneier. And I think 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 access that we hold.

[Lasan Johong:]

Okay. And if I may, one last question, there is lot of discussion going on about building a REX equivalent to the West; Ruby and Bronco would do that and 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.

[Donald E. Felsinger:]

Lasan, the reserve forecast we have... when we looked at building REX to the Eastern markets, there were adequate reserves there 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 which have been committed slightly, but yes, the reserves are in the Rockies to support a pipeline of project to the West.

[Lasan Johong:]

And why give them an opportunity to build and why don't you just take it away by building those spur on REX?

[Donald E. Felsinger:]

If the opportunity present itself for us to do that, we would. We are looking at all the options that are out there with gas flowing to the west and we have made no decisions.

[Lasan Johong:]

Okay, thank you.

[Operator:]

Our next question comes from Paul Patterson with Glenrock Associates.

[Donald E. Felsinger:]

Good morning.

[Operator:]

Sir, your line is open.

[Paul Patterson:]

Hi, can you hear me?

[Donald E. Felsinger:]

Yes, go ahead.

[Paul Patterson:]

Okay, sorry about that. Wanted to touch basically first on the timing between the Fed approval and the actual close? You mentioned that you probably are going to be I guess the approval would have in March and it should actually close it in April?

[Mark A. Snell:]

Yes that's right.

[Donald E. Felsinger:]

It's Mark Snell.

[Mark A. Snell:]

I... 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 and made it easier for some things, but we are also exploring the possibility of closing at mid month.

[Paul Patterson:]

So it could happen earlier than April?

[Mark A. Snell:]

It could.

[Paul Patterson:]

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

[Donald E. Felsinger:]

I think we had a discussion in the last call, maybe the call before that as you are aware we have gone forward and seek the expansion approval for both Costa Azul and for Cameron. So we now have the ability without launching Port Arthur to increase the capacity in our Mexican facility up to about 2.5 Bcf a day and about 2.6 Bcf at Cameron. And what we have done is we have left ourselves from little room to look at how the upstream market develops and if it made more sense to expand one of our existing facilities for incremental supply or to launch a whole new facility. So, we are very well positioned, we can expand in Mexico, we can expand in Cameron or we have permit some place where we can move forward with Port Arthur. So, 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 the new LNG supplies. That's 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.

[Paul Patterson:]

Right. So, I guess I am wondering when do you see 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 to take place.

[Donald E. Felsinger:]

Well let me just looking at the projects that are currently under construction, it looks like the water shed years are going be 2011 and later.

[Paul Patterson:]

Right. And the contracting, I mean you would expect that to sort of develop, when do you think there will be a picture on the contract?

[Donald E. Felsinger:]

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.

[Paul Patterson:]

Okay. And then finally, the level of non-investment grade on the trading book, it seems to have increased again over the quarter. Just elaborate a little bit more on the activity that is happening here in driving that?

[Donald E. Felsinger:]

Mark, do you want to take that?

[Mark A. Snell:]

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. We really aren't noticing anything really different in our book of business, and frankly, if you are 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.

[Paul Patterson:]

Okay, great. Thanks a lot.

[Operator:]

We'll go next to Sam Brothwell with Wachovia.

[Samuel Brothwell:]

Hi, thanks. My questions have been addressed.

[Donald E. Felsinger:]

Thanks, Sam.

[Operator:]

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

[Winfried Fruehauf:]

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

[Mark A. Snell:]

Hang on just a second, Winfried.

[Winfried Fruehauf:]

Thank you.

[Mark A. Snell:]

I want to get you... I want to give you the right answer so.

[Winfried Fruehauf:]

Okay.

[Mark A. Snell:]

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

[Winfried Fruehauf:]

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

[Mark A. Snell:]

That just reflects some of our current borrowings that we have taken down, one of those things that we have done is moved out of some of our commercial paper market and our and... notes that are long-term notes that re-price 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 will just use our credit lines to finance that there are almost multiyear lines.

[Winfried Fruehauf:]

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

[Donald E. Felsinger:]

I want to give this to Neal.

[Neal E. Schmale:]

Yes, 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 pre-expansion cost of around $66 million.

[Winfried Fruehauf:]

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

[Donald E. Felsinger:]

In the fourth quarter of?

[Winfried Fruehauf:]

2007, yes.

[Donald E. Felsinger:]

We have that -- broken down?

[Mark A. Snell:]

No, we won't disclose that.

[Donald E. Felsinger:]

Yes, if I had, I couldn't give it to you.

[Winfried Fruehauf:]

All right, okay.

[Donald E. Felsinger:]

And I don't. Let's go back to your first question. This is Neal.

[Neal E. Schmale:]

I will cover. The AFQDC for the year for SDG&E equity was 17 for the year and SoCal was 5.

[Winfried Fruehauf:]

Okay and for the quarter?

[Neal E. Schmale:]

5 for SDG&A and 2 for SoCal.

[Winfried Fruehauf:]

Okay. Thanks very much.

[Donald E. Felsinger:]

Thanks Winfried.

[Operator:]

We will go next to Michael Lapides with Goldman Sachs.

[Michael Lapides:]

[Mark A. Snell:]

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

[Neal E. Schmale:]

This time the numbers will move it kind of in proportion of the capital a little bit less so it's a very small impact.

[Michael Lapides:]

[Neal E. Schmale:]

Once again, when you look at the impact of this kind of a capital increase, it will move in more or less in kind of in proportion to the total capital. Now on an ROE basis, it should be a little bit less because of the impact of the leverage, but on ROA, return on absolute capital basis, that we've given particular forecast.

[Michael Lapides:]

I understand. What's the ROE assumption for REX?

[Donald E. Felsinger:]

I don't think we ever gave that.

[Michael Lapides:]

Okay. And last question, and this is kind of touching based on the utilities a little bit, had a lot of utility related question today. How do we think about what the new generation needs are especially after the CPUC filings at the backend of the year '07 for San Diego Gas and Electric?

[Donald E. Felsinger:]

Debbie, you want to address that?

[Debra L. Reed:]

Sure, we have to... this is Debbie Reed, Michael. We have to file at the CPUC a 10 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 own generation as part of our portfolio. We will then add a compliment of 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 at El Dorado and in some peaking generation should meet our needs for the next 10 years or so.

[Michael Lapides:]

And if Sunrise is delayed, I think that 10 year procurements approval by the CPUC mentioned about another incremental 400 megawatts of capacity at Sunrises delay, where would that 400 come from?

[Debra L. Reed:]

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

[Michael Lapides:]

I got it. Okay, thank you.

[Donald E. Felsinger:]

Thanks, Michael.

[Operator:]

We go next to Patrick Forkin with Tejas Security.

[Patrick Forkin:]

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

[Donald E. Felsinger:]

Debbie Reed again.

[Debra L. Reed:]

Hi Patrick. We received regulatory approval for smart meter program last year and the CPUC authorized $572 million budget, $500 million of which approximately of capital. We will begin deployment of the first 5000 test meters in the second quarter of this year and then we will be again 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 in negotiations with the vendor and so we are not at a point where we can release the name of the vendors that we have selected yet.

[Patrick Forkin:]

Okay, but on the core metering you have made a technology selection.

[Debra L. Reed:]

Yes.

[Patrick Forkin:]

Okay, thank you very much.

[Donald E. Felsinger:]

Thanks Patrick.

[Operator:]

We will go next to Peter Hark with Talon Capital.

[Peter Hark:]

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

[Donald E. Felsinger:]

Hi Peter, how are you?

[Peter Hark:]

Very good. Thank 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 will be further revisions coming. And lastly, is your increased capital contribution being matched by RBS also so that your respectable ownership interest are intact?

[Mark A. Snell:]

Okay, well the decision, our partnership agreement that 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. The couple of things that happened, because some of this was driven by higher commodity prices, we're actually... when we sell the business because we're essentially selling the kind of a book value, we are actually pulling a little more money out of the business and our cash flow from the businesses 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 would had been, what we have been anticipate earlier and just they would have been a little bit higher. And so it was pretty easy decision for us to make. We are still under the agreement limited on 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 relatively short-term issue with us. Then these new bank regulations drove some of the... I will refer to it as Basel II, which I think some of you might be familiar with and that have started to affect the European bank as of January 1st. And it will come into play here in the U.S. next January. That drove up some of the requirements, but under that Basel II requirements as well as the old requirements, we will be able to go to a far based model for determining regulatory capital instead of the formal lag model that happened before you can get your bar model approved. And once we do that, that will bring the capital back down again. So we are not... we are thinking the business more of a 12 to 15 months kind of issue and we will give the capital numbers back in balance where we thought we were a year from now.

[Peter Hark:]

Thank you, Mark, for explaining that and just to be clear then, RBS is not posting additional --?

[Mark A. Snell:]

I am glad you brought that up, they will post about an equal amount more too, they will always, because the initial ownership percentage is 51.40, 49 they will always be just slightly more capital than us.

[Peter Hark:]

Okay, perfect. And then just also to be clear, is any of these being driven by either credit or collateral obligation?

[Mark A. Snell:]

No, it's really just is driven by the pure fact that commodity prices are higher so things like that requires more capital in the business and then the other part is like, like I said that these regulatory changes which until we... yes, 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.

[Peter Hark:]

I got you. Thanks. And then lastly, for clarification I think, answer to Jason's [ph] question. I think you said there was a two day difference in cap rating return, I am not sure, what you meant by that.

[Mark A. Snell:]

I am sorry, I was probably was a little misleading. All I was really saying was that he was asking... Lasan was asking whether we were putting more money in or taking less money out and I said, this happens about the same time, it's hard to tell, which is which, but I think the net result is about the same.

[Peter Hark:]

Okay. Thank you very much, Mark.

[Mark A. Snell:]

Okay.

[Donald E. Felsinger:]

Thanks Peter.

[Operator:]

[Operator Instructions]. And we will go next to Faisel Khan with Citi.

[Faisel Khan:]

Good afternoon.

[Mark A. Snell:]

Hi Faisel.

[Faisel Khan:]

Hi. Just one follow-up question on the RBS transaction. The profits will still get paid out at the end of every year, is that correct?

[Donald E. Felsinger:]

Correct.

[Mark A. Snell:]

That's correct.

[Faisel Khan:]

Okay. And assuming the transaction goes through, will you bring down the additional amount of your credit also.

[Donald E. Felsinger:]

That's correct.

[Faisel Khan:]

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

[Donald E. Felsinger:]

The tax rate in the fourth quarter?

[Faisel Khan:]

That's right.

[Mark A. Snell:]

The fourth quarter was a little bit higher. That was partially because of the phase out of the Section 29 credit went up quite a bit and also we had lower income from lower tax jurisdictions during the quarter, just for the year it's about 34% in both years, next year we expect them to go up 3% because there are no Section 29.

[Faisel Khan:]

Okay.

[Donald E. Felsinger:]

And that was your householder.

[Faisel Khan:]

Got you. And then in terms of your guidance, does that include any potential settlement discussions you are having with ISTG and inside CalGas?

[Donald E. Felsinger:]

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

[Faisel Khan:]

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

[Donald E. Felsinger:]

I think of it as working gas. It is like capital

[Faisel Khan:]

Okay. And any, given your operational in the second quarter other opportunities that you are looking at or potential spot cargoes given that there is a time difference between when your contracts ramp up, between what the facility comes on line?

[Donald E. Felsinger:]

Yes, there is.

[Faisel Khan:]

And how are you guys looking at that?

[Donald E. Felsinger:]

Well, I mean the opportunity here is just as... just this 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 outselling capacity and looking for spot cargoes. So, 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.

[Faisel Khan:]

Okay. Anyway to talk about the cost for MMBTU, the test cargoes cost?

[Donald E. Felsinger:]

I would only say that we are paying market prices and as we went through the analysis of what these things are worth to us we can't start getting revenues from our customers until such times as we can prove that facilities commercial and you can't make it be it commercial and so you run test cargo through it so.

[Faisel Khan:]

Okay.

[Neal E. Schmale:]

One point on is that these test cargoes are part of the start up operation in their capitalized.

[Donald E. Felsinger:]

You were sleeping when we said that.

[Faisel Khan:]

Fair enough. On the Port Arthur, you guys talked about the open season for oil terminal capabilities, where are you guys at open season?

[Donald E. Felsinger:]

I'll have Neal address this but I just on the surplus we announced that in fact we are having an open season that was the end of last year and we had good response and we are in the process now of looking at those responders and seeing there is in fact there is enough interest to turn these into contracts to build terminaling.

[Neal E. Schmale:]

Now this really is not in terms of the open season a lot to elaborate there, but I think it is worth underlining that both with respect to its possible uses in LNG terminal and with respect to its use at the 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.

[Faisel Khan:]

Okay. And on the... at the generation segment, the outage of El Dorado I think it was a forced outage?

[Donald E. Felsinger:]

It's started out as a planned outage and as we started the plan up it was a problem in the way it was put back together so it turned into a forced outage.

[Faisel Khan:]

And did you guys talk about the impact from that forced outage on income?

[Mark A. Snell:]

You know it was negligible.

[Faisel Khan:]

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 is the second phase, third phase kind of looking?

[Donald E. Felsinger:]

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

[Faisel Khan:]

That's right. The 1000 megawatts potential wind capacity?

[Donald E. Felsinger:]

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

[Faisel Khan:]

And are you talking about having Sunrise Transmission via linked to those asset or is it versus --?

[Donald E. Felsinger:]

That's Sunrise or some other transmission solution and our generation company is working both with the ISO and with the government of Mexico to see if we can find a transmission solution.

[Faisel Khan:]

Okay, great. Thanks for the time, guys.

[Donald E. Felsinger:]

Thank you.

[Operator:]

And we will take a follow-up from Winfried Fruehauf with the Fruehauf Consulting Company.

[Winfried Fruehauf:]

Thank you. Regarding the Paloma outage, are you in anyway protected either by warranties and or insurance business interruption or insurance?

[Donald E. Felsinger:]

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

[Winfried Fruehauf:]

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

[Donald E. Felsinger:]

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

[Winfried Fruehauf:]

Can you disclose the amount that you are claiming?

[Donald E. Felsinger:]

Not at this time.

[Winfried Fruehauf:]

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

[Donald E. Felsinger:]

Thank you.

[Operator:]

And we will take a follow-up from Lasan Johong with RBC Capital Markets.

[Lasan Johong:]

Yes, just three quick follow-ups. How are sales of Argentine business going?

[Donald E. Felsinger:]

I didn't hear that, go ahead.

[Lasan Johong:]

I am sorry, sales of the Argentine business?

[Donald E. Felsinger:]

As you know, we're 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 those assets in the market and secondly, collect from the claim against the government, and we are moving on both those.

[Lasan Johong:]

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

[Donald E. Felsinger:]

Well I guess I would maybe approach it a little differently, Lasan, as they were... I don't have a correct count here, but they were some between 8 and 12 projects that were one-time proposed that would basically take gas further east and they ended up in different locations, they carry different volumes. What we are doing is we're having discussions with the people that participate in our open season and we are as you know we're building a much larger pipeline that has a much lower rate, but requires much larger volumes to make it work. And we will see in the next couple of months whether or not there is enough market interest to have people sign up long-term contract to make this project to reality. I would say again that of all the people that are out there from the standpoint of those that have track record, have the creditability, 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.

[Lasan Johong:]

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

[Donald E. Felsinger:]

I think it's a space that we look that we bring some strengths to with our marketing capability, so as we're afforded opportunities to participate in liquefaction, the interest is not so much in just having equity in liquefaction, but having the marketing rights to go with it. And so in every case, we are looking at the opportunity to invest in liquefaction we're in fact we can have a disproportion share of the uptake to market.

[Lasan Johong:]

Thank you.

[Donald E. Felsinger:]

Thank you.

[Operator:]

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

[Faisel Khan:]

Sorry, couple more question. What did you guys book in the year for your attrition filing, SoCalGas, SDG&E?

[Donald E. Felsinger:]

It's Debbie Reed here.

[Debra L. Reed:]

Yes, in 2006 to 2007, our attrition was about $73 million to both utility.

[Faisel Khan:]

Okay, and then if I look at the operating income of both utilities over that timeframe, there was not that much growth in your operating profit number, so I assume that the attrition amount have been higher than O&M?

[Debra L. Reed:]

There was actually a number of factors on the operating income side and we did in that having at SoCalGas a positive benefit from the attrition mechanism and a slight positive benefit at SDG&E last year and these were offset licensing like litigation costs in other item.

[Faisel Khan:]

Okay. But generally, the attrition amount seemed to be working in a way they were supposed to basically offsetting cost inflation overall of operation?

[Debra L. Reed:]

Absolutely, and we manage our costs based upon as 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.

[Faisel Khan:]

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

[Debra L. Reed:]

If you look at all of our mechanisms for 2007, we had a total of $33 million pre-tax and $20 million after tax out of all of the incentive mechanisms from both utilities. That was about $10.6 million pre-tax at SoCalGas from PVR and GCIM 12 and then at SCG&E from the PVR was about $8.8 million pre-tax, a DSM incentive of $12 million and then PVR on the gas purchasing of about $2.3 million.

[Faisel Khan:]

Okay, I got you. Then last question on the equity earnings of certain of the subsidiaries underneath your pipeline storage segments. I think you have roughly $59 million for the year. Can I assume that a lot of that is related to your equity interest interact or is that something else?

[Mark A. Snell:]

It's in ultimately South America too.

[Faisel Khan:]

Okay, got you. Thanks

[Donald E. Felsinger:]

Thanks Faisel.

[Operator:]

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

[Donald E. Felsinger:]

Well, once again, thanks to all of you for joining us for the 2007 earning call. If you have any follow-on questions, you have Jeff, Glen or Scott a call and if not, we will you see you end of March in New York. Have a great day.

[Operator:]

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