CenterPoint Energy Inc (CNP) 2001 Q4 法說會逐字稿

My name is

, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Reliant Energy fourth quarter and full-year 2001 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one, on your telephone keypad.

And questions will be taken in the order that they are received.

If you would like to withdraw your question, press star, then the number two, on your telephone keypad.

Thank you.

Miss

, you may begin your conference.

Thank you very much,

.

This is

, Director of Investor Relations. I'd like to welcome you to

Reliant Energy's fourth quarter and full-year 2001 earnings conference call. And thank you for joining us today.

As I'm sure you know, Reliant Resources also released earning today, and I would direct you to their Web site, www.reliantresources.com. for a replay of their conference call.

This afternoon, we will mainly concentrate on the regulated businesses of Reliant Energy.

Leading the discussion, we have Steve Letbetter, our Chairman, President and CEO. Also participating in the call will be David McClanahan, Vice Chairman, President and Chief Operating Officer of the Reliant Energy Delivery Group.

We also have other members of management present who may assist in answering your questions following the prepared remarks.

Before Steve begins, I would like to mention that a replay of this call will be available until six p.m. Central Time on Friday, March 22nd. If you need details regarding this replay, please call me on the Investor Relations number, which is 713-207-6500.

You can also listen to an online replay of the call via our Web site at reliantenergy.com, under the Investors section.

I also need to remind you that any projections or forward-looking statements made in this call are subject to the cautionary statements on forward-looking information in the company's SEC filings.

And with that, I'd like to turn it over to Steve Letbetter.

Steve?

Thank you,

.

And good afternoon, everyone, and thank you for your interest in Reliant Energy.

Today, we reported 2001 diluted earnings per share of $3.35. This compared to diluted earnings per share of $1.56 in 2000. As adjusted, diluting -- diluted earnings -- our -- as adjusted, the diluted earnings per share were $3.41 for 2001, compared to $2.92 for 2000.

This increase was largely due to improved performance in our wholesale and retail energy segments, partially offset by decreased electric operations earnings, which were due to mild weather and reduced customer usage.

I'm glad to be able to finalize our restatement today and to discuss our successes in 2001 and our outlook for the future.

Today, we announce the details of our restatement for the second and third quarters of 2001. Revised earnings for the second quarter are

million, or $1.08 per diluted share; and for the third quarter are $355 million, or $1.21 per share.

The net effect of the restatement is the recording of an additional $108 million of net income for the first nine months of 2001.

The restatement relates to a correction in accounting treatment of a series of structure transactions that were inappropriately accounted for as cash-flow hedges for the period of May 2001 through September of 2001.

These transactions should have been accounted for as derivatives with changes in fair value

to

through our income statement.

We have discussed our restatement with the SEC and the accounting staff agrees with our revised accounting for these transactions.

Today, we also filed with the SEC and

that provides information regarding the transactions and the accounting.

This restatement has been very difficult for us, and let me assure you that we are taking all necessary steps to ensure that this does not happen again.

As most of you know, we released earnings for Reliant Resources this morning. And as

indicated, complete details and a replay of that call are available on the Reliant Resources Web site.

On this call, we plan to focus on the business segments that will comprise

Energy going forward.

Now let also give you a quick update on where we are in our separation process. On December 17th, our shareholders approved the formation of

Energy as a new holding company. The actual restructuring will occur about three weeks after we receive a

from the Securities and Exchange Commission regarding our 35 Holding Company Act exemption. At the moment, we do not have a clear indication of when we might expect the holding company exemption to be forthcoming.

As most of you know, I will remain as

Chairman of

Energy for the remainder of my term, which currently will end in 2004. I'm excited to be able to continue to participate in successes of

.

At the time of the separation, David McClanahan will become the CEO of

and a member of the board of directors. I am very proud of

accomplishments during his long tenure at Reliant Energy, and am confident that he will lead

with the integrity, diligence and focus on shareholder value that he has exhibited throughout his career.

With that,

, I'll now turn it over to you to go over the regulated segments of Reliant Energy.

Thank you, Steve.

Good afternoon, ladies and gentlemen.

I'd like to review the regulated businesses fourth quarter and annual operation results, and I will focus on the three core business segments that will remain as part of

energy after the full separation. These segments include our electric operations, our natural gas distribution businesses and our pipelines and gathering operations.

I'll also remind you that for the 2001 period discussed today, the electric operations segment reflects the full integrated utility operations of

.

Beginning next year, the transmission and distribution business will be reported in the electric operations segment, and the Texas Power Generation business will be reported as a separate segment.

Texas

, as it will be known, is expected to remain with

Energy until 2004, when Reliant Resources has an option to purchase the stock not then held by the public.

As I discuss each of our segments, you'll notice a few common themes impacting our operating results. Like many other companies, we experienced the negative effects of mild weather during the fourth quarter of 2001, and to a lesser extent, the impact of a softening economy.

Weather impacted both our electric operations as well as our gas operations, especially relative to last year, when we experienced a colder than usual fall and early winter.

Further operations results

to be impacted by increased benefit costs associated with our health and welfare plans and our retirement plans.

Offsetting these impacts on operations were the benefits of significantly lower interest rates.

Looking first at our electric operations, operating income for the fourth quarter was $127 million, compared to $203 million last year. Approximately three quarters of this decline was related to reduced electric sales, while the remaining decline was primarily related to certain non-recurring expenses.

Turning first to the decline in electric sales, firm megawatt hour sales were down 10 percent compared to the fourth quarter of 2000.

Milder weather impacting our air conditioning load early in the quarter and our heating load later in the quarter, so we had negative impacts from both cooling degree days and heating degree days quarter over quarter.

We also continued to experience the impact of reduced customer usage on a weather-adjusted basis. We attribute most of this to our customers' response to prices that were almost 30 percent higher in 2001 compared to 2000, due to the high cost of natural gas used in power generation.

Operating revenues were also negatively impacted in the quarter due to the August implementation of the pilot program for Texas

.

Fortunately offsetting these declines in megawatt hour sales was continued strong growth in our customer base. We experienced customer growth of two percent in both the fourth quarter and the full year

2001. We added almost 35,000 customers in 2001 and ended the year with 1.77 million customers.

As to operating expenses, the most significant expense was a $20 million charge taken in the fourth quarter of 2001 associated with the early termination of an accounts receivable factoring agreement. With electric restructuring and the separation of our two companies, the original factoring agreement no longer met the intent or the needs of either party to the agreement.

Expenses were also higher due to increases in contract services associated with the timing of maintenance outages for our generating

and to a continuation of increased employee benefit costs.

These increases were partially offset by the timing of the 2001 system benefit fund contribution, which was made and expensed in

fourth quarter

2000 pursuant to a

directive.

For the full year

2001, our electric operations reported operating income of 1.1 billion, compared to 1.2 billion in 2000. Like the fourth quarter, substantially all of the decline in operating income for the year was attributable to a decrease in electric sales.

The primary drivers for the decline were the same as I described for the fourth quarter, mainly milder weather which accounted for 84 million of reduced base revenue. Lower customer usage. And the effect of the retail pilot program. And additional impact to the 2001 results was the reduction in rates charged to certain governmental agencies as mandated by the Texas restructuring law.

On the expense side, the increases in benefit cost and contract maintenance services were more than offset by reduced amortization of the impairment associated with our generating assets. And reduced system benefit comp front cost that I discussed earlier.

In summary, the decline in 2001 operating income from the previous year was primarily the result of milder weather.

I'd like to now turn to our natural gas distribution segment. Operating income for this group of companies in the fourth quarter was essentially flat with the prior year at $68 million. Natural gas sales declined due to the mildest winter weather in many years in our service territories. In fact, our in

service territory experienced the warmest fourth quarter weather on record in the Minneapolis, St. Paul area.

On a positive note, expenses declined driven by a significant turnaround in bad debt expense, that as you may recall had been an issue in the second and third quarters due to the higher bills the previous winter.

Fourth quarter reflected a significant decrease in bad debt expense versus the same period of last year, as our collections improved and we were granted a favorable order in Arkansas that allowed us to recovery some $4 million of delinquencies associated with low income customers who were reconnected in December.

These decreases were partially offset by increases in employee benefit costs.

For the full year 2001, our natural gas distribution companies operating income increased by $12 million to 130 million. Primarily due to the recognition of a significant charge in 2000 in connection with exiting unregulated gas businesses in certain retail markets outside our LDC footprint.

Despite the progress made in the fourth quarter, bad debt expense was significantly higher for the full year 2001 than for 2000. And in addition, employee benefit costs were also up significantly.

Turning to our pipeline and gathering businesses. We reported operating income of $31 million for the fourth quarter, compared to 38 million for the prior year. Revenues net of fuel costs for the quarter were comparable to last year. However, operating expenses were up primarily due increased franchise taxes, rate case expenses associated with our Mississippi River transmission business and increased employee benefit cost.

I'm pleased to report that we reached a settlement in our rate case, and it has been approved by the FDRC. It essentially provides that our operating income levels for that business will remain at levels comparable to the past. There is also no requirement for a future rate case, as had been the case in past settled cases.

For the full year 2001, the pipelines and gathering business as operating income of $137 million was essentially compared to last year. The increased expenses in the pipeline business associated with the MRT rate case, employee benefits and franchise taxes were offset by margin improvements in our gathering business.

On the international front, we were unsuccessful in selling our remaining properties in Argentina. As you might recall, at the end of 2000, after having sold our investments in Brazil, Columbia and El Salvador, the remaining Latin American assets were two facilities in Argentina. A wholly owned co-generation facility and an electric distribution company.

During 2001, we were in negotiation to sell these investments and had anticipated completing the sales by the end of 2001. As a result, we have been reporting these Latin American company results as discontinued operations. With the political and economic turmoil in Argentina, negotiations for the sales of our remaining properties were terminated. Since the sales of the assets were not concluded in the year 2001, we have reclassified these businesses into continuing operations.

We have evaluated these operations and determined that an additional impairment of $43 million after tax was required and taken in the fourth quarter. The carrying value of the remaining assets in Argentina is approximately $8 million. Going forward, we will continue to operate these businesses in the near term while evaluating strategic alternatives. Our intent is to exit these businesses as soon as feasible. These businesses should have minimal earnings and cash flow impacts in the coming year.

Overall in 2001, our regulated businesses contributed $1.73 to REI's reported consolidated earnings per share.

Now let me update you with -- on some key transition and regulatory issues, as well as give you an outlook for the business for 2002. Several important developments occurred during the fourth quarter. We completed our offering of a $749 million in securitization bonds. We securitized the recovery of a significant portion of our regulatory assets. This transaction represented the first sale of such bonds pursuant to the deregulation law that had been enacted in Texas. We were able to sell these bonds on very attractive terms and on very low interest rates.

We conducted our first capacity auctions for Texas Genco. Low natural gas prices coupled with ample generating capacity in Texas created a week price environment for these auctions. As a result, the price levels realized in these auctions were significantly less than the levels assumed by the PUC staff in their stranded cost model.

In accordance with the 1999 electric restructuring law and PUC rules, the effects of the differences in these prices on gross margin will be reflected in the stranded cost of the termination. The company will report such differences as a regulatory asset through 2003.

Our electric operations, HL&P was awarded a 2001 emergency response award by the Edison Electric Institute for its out standing restoration efforts in the wake of tropical storm Allison in June of last year. We're product not only of the tremendous skill of our workforce but of the team work and coordination demonstrated during that crisis.

As you know, the Texas electricity market opened to retail competition on January 1st 2002 as scheduled. Now

in Texas, as well as almost two million customer in the Houston area can now buy electricity from a supplier of their choice. Considering the magnitude of this efforts, and the few small glitches that were experienced, I feel that the transition from pilot program to open choice has gone very well.

We continue to work closely with the independent system operator and various retail energy providers to resolve the few remaining open issues.

With respect to our gas businesses, we continue to focus on divisions that need write release, as well as on our overall expense levels. In November of last year, 2001, we filed for a $47 million rate increase in Arkansas. This was the first rate request since 1994 in that state. We expect to seek additional increases in several other states later this year.

I continue to be excited about this year and the prospects for our regulated businesses. Our near term focus is on improved efficiency and productivity as well as securing needed rate relief for our gas businesses. And while weather has continued to be somewhat mild in the early part of this year, we continue to believe that our previous earnings guidance of $1.17 to $1.22 per share for the regulated businesses is appropriate.

As you know, we declared a thirty-seven-and-a-half cent per share quarterly dividend in the first quarter of this year. This was REI's normal dividend level, and reflected the delay we have experienced in separating the company. A decision on the second quarter dividend has not been made. And will depend in part on how soon we expect business separation will occur.

Thank you for your interest in Reliant Energy and soon to be

Energy. And now we'll open up the floor to questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. If you're on a speaker phone, please pick up the handset before asking your question. Please hold. Please hold for your first question.

Your first question comes from

of

.

Hi, guys. Actually you answered my question. It was about the dividend. Thank you. Have a good weekend.

All right,

.

Please hold for your next question. Your next question is from

of Jefferies & Company.

Hi, a couple of questions. One, could you tell us what the weather impact was on earnings per share in the fourth quarter, versus normal? Electric and natural gas if you have it. And then I have a couple of other questions.

Do you have it there handy, David?

Yeah, let me take a quick peak here and see if we have it.

Then on the gas distribution side can you just tell us what you might have pending for rate request and other jurisdictions besides Arkansas and what your outlook is for getting rate release this year or in '03?

And then also, can you just generally discuss your earnings outlook for '03 and what are some of the key factors that will effect it?

Well first, let me talk about the rate request that we have pending. As I mentioned in our remarks, we filed in Arkansas. The Arkansas staff has been on site doing their audit. They are getting close to completing that. We expect to have testimony this summer, hopefully June. And we expect a fall determination of that cash in Arkansas in less we're able to reach a settlement of some sort.

We have a series, especially in our rural areas, of what are called cost of service cities. And these are areas where we go in annually and we receive rate increase due to simply increases in expense cost. We think that the overall level of rate increases from these little small cities will be approximately $5 million this year. And that would go into effect this year. That's an annualized impact.

We continue to look at the need for rate release in Oklahoma and in Texas. We have not made a determination of whether we're going to file the Texas case. I expect we're going to seek some rate relief in Oklahoma later on this year.

We recently -- we have what are called incentive base rates in both Louisiana and in Mississippi. And we received some small increases in Mississippi, I think around two, $2-and-a-half million. Earlier, well it was actually in February. And we think that the rates in Louisiana are OK.

In terms of the impact in the fourth quarter, on an earnings per share basis compared to normal. Electric was approximately -- well let me -- this is compared to last year, not compared to normal. And the fact is we probably don't have the compared to normal. But compared to last year the impact was nine cents for electric and seven cents for gas.

OK. Nine cents and seven gas. OK.

Right.

OK.

Now I'll remind you though, last year in 2000, we had a little colder than normal fall and early winter. And we got the benefits of that in both the gas and the electric sides. So those aren't normalized amounts that I just gave you.

OK. Maybe I could follow up with that. And then the last question was the outlook for earnings in '03 and maybe some of the key factors that we should watch for.

We -- on the electric side, you know, we believe that our delivery rate that was approved by the PUC last year and just went into effect is adequate. And we'll continue to focus on our productivity efficiency. But we don't think we'll need any rate relief on the electric side.

On the gas side, you know, we hope to realize a substantial part of the rate request we made in Arkansas all of next year. And that's going to be a big plus for us. And we will -- the additional rate increases that we're going to be seeking this year, will also be fully annualized and reflected in the 2003 year. So I would say that from a rate release standpoint, we'll have additional rate relief. And that we think it will be fairly substantial on the gas side.

And we continue to try to take cost out of our business by looking at ways to run the business better and get synergies across all of these delivery businesses.

Just one quick follow up question, if you have the information, what kind of ROE are you looking for in Arkansas in your rate case?

If I'm not mistaken it's -- I think it's around 11-and-a-half .

Great. Thank you.

Your next question comes from

from Zimmer Lucas Partners.

Yeah, hi. Good afternoon.

Good afternoon.

Hi,

.

I wanted to ask you a couple of questions. One goes back to something

touched on. You probably don't have it, but I was going to ask what the weather effect was for all of 2001 on the electric and gas operations. I don't suppose that's something you might have.

Hang on just a minute.

Versus normal, excuse me, not versus the prior year.

Yeah. We're not going to have it quantified. But let me just take -- give you an idea. For the year, 2001, from a cooling degree standpoint it was fairly normal. This is on the electric side but was 12 percent below normal from a heating degree standpoint. And obviously we get most of our revenues on the electric side from cooling.

So I would say it was slightly below normal. But 2000 was very much above normal. So that's why we have such a dramatic change from two -- from the year 2000.

On the gas side, the year 2000 from a heating degree standpoint was five percent below normal. And the fourth quarter to give an example was 20 percent below normal. So it -- there was a fairly significant impact on the gas side due to mild weather.

OK. And just to touch on the pipes for a moment. You talked about this higher franchise and tax expense. And I think you said that you were offsetting some of that or all of it at least in the fourth quarter with some cost cutting?

The -- actually the expense increases we realized in the pipeline business, we're more than offset for the full year due to improvements in our gas gathering business.

Last year, there were lots of wells drilled in the mid continent area and we got our fair share of those wells. And basically the additional margin from those wells more than offset the increased expenses that were incurred on the pipeline side of the business.

And is that something you would expect for 2002 that those additional well heads would continue to offset the higher expenses associated with the new expenses.

We're going to see obviously some of that continue. The wells drilled in this area have a fairly rapid depletion rate. So it won't be -- the first couple of years are the highest producing years. And we also continue to see a fair amount of drilling going on in the mid continent area, although not at the same level or pace as occurred in 2001.

But we still think there's going to be a fair amount of new drilling activity. And we think we'll get our share of that business.

OK. And just to turn for a second to the

generation, I believe in your business separation plan, there was a requirement that you IPO 20 percent of that by June 30th of this year. Do you have any timing you could provide for us from when you might be looking to do that IPO? And at the time of the -- well, I guess I don't know if it's actually separated now or it's going to be separated from HL&P, but can you give us an idea of the cap structure at the

? Will it carry any debt with it, and what percent do you think of the consolidated HL&P equity might it take with it?

I'm not sure I'll be able to answer the last question, but let me give you an answer for the first two.

From an IPO standpoint, we plan to get that done sometime this year -- not by June 30, but before

. We are in the midst of preparing the documentation, and we are going to be prepared to IPO it anytime after probably June or July of this year. We'll have -- we'll be ready to go and we'll just be waiting for a good market to be able to do that. So before the end of the year, we should see -- we should see an IPO -- if not an IPO, a distribution to our shareholders.

Secondly, with respect to the capital structure, initially there was no debt on the

books. They have a fairly substantial capital program in connection with environmental expenditures. Those expenditures are recoverable as stranded investment as part of the Texas restructuring law. But we're going to spend about $300 million -- I think -- I'm pretty sure that's right -- this year in

, and there'll be a fair amount of inter-company debt until we

. After we

, then we might very well do some of their own third-party debt.

OK. But currently there's no debt, you said. And is there some kind of ratio you could give us for what its cap structure looks like now? Obviously it's no debt, but maybe an amount of equity or percent of the equity that came over from HL&P, if any?

Not -- I really don't know. We'll have to look at that, but it's 100 percent equity essentially.

, it's Steve Naeve. You know, the book value of

we could give you in a few minutes. But you've probably got that right now. But in effect it's kind of meaningless because it -- that all, you know, it's just

cost recovery, right?

So if I took whatever it's on the books for and multiplied it by what the equity ratio was at the end of last year at the utility, would that be a reasonable proxy for how much equity it was carrying with it?

No, I think you'd get too low because we had a cap structure that was about 55 percent equity. And I mean there are some deferred taxes and some liabilities, but essentially on a permanent capital structure, it's 100 percent equity at the outset of its existence, which was January of this year.

naeve OK. And one last question -- do you think you could remind us again of some of the public auction prices that you got for power from that -- from that -- those assets? I know some were made public and some were kept private.

You know, and I cannot recall. We have filed with the

the various prices. And we

four different products, base loads, intermediate gas, cyclic gas, and

gas, and it's by month or one-year strips or two-year strips.

I will tell you generally the -- they were weak prices and base load power was in the $30 to $35 range for summer months. Now, throughout a -- throughout the year, they were even less than that.

It's hard to convert some of these

, cyclic, and intermediate to a number that's comparable because it depends on how much you run it. But a base load plan, assuming you base load it, you're -- you know, it's in the $30 to $35 range for this summer.

For this summer -- OK. Thank you very much.

Again, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad.

Your next question comes from

from McDonald Investments.

Wondering if you've given any more thought to what you think an appropriate dividend payout ratio is. And then, secondly, longer term -- the next three or four years, what you think a reasonable underlying growth rate expectation is for the company.

The -- we have given the dividend a lot of thought and we've conducted a study and the only thing we can say at this time is that it is going to look like a regulated company's dividends, which means it's going to be more than 50 percent but less than 75 percent of our projected earnings for the company. So, that's about as much as we can say today. Hopefully, we'll get the companies separated and we'll be able to talk more definitively about it in a month or so.

In terms of our earnings profile, the next couple years with

being part of the mix, it's a little bit more difficult to talk about a growth rate. But longer term, we believe a three to five percent growth rate for this business is where we're targeted, both from a -- just a native growth in our service territory plus other synergies and potential participation in industry consolidation long-term.

Do you think that longer term you'd maybe want to try to enhance that growth rate with some -- with some smaller unregulated

that might have a stronger growth potential?

We'll certainly look at that. You know, we haven't -- we haven't put together any definitive plans yet. We do have some unregulated businesses in our portfolio now. We have a commercial and industrial sales business where we sell gas to about 5,500 customers along the Gulf Coast and in the Midwest. And that's all unregulated.

Our field services business is unregulated. We have a home service plus business in Minneapolis that is unregulated but very closely aligned with our gas distribution business, and it produces gross revenues each year of $100 million or a little less.

So we have some things that we can build from. I'll say this -- we're not going to get far from our

. We're going to try to find businesses that we can add value to and that are complimentary of our core regulated businesses. And we think there's some opportunities out there, but there's really not anything that we can talk about at this stage. We'll certainly be looking at it.

I guess longer term still, how do you approach the question of scale and appropriateness with regards to achieving efficiencies?

Well, you know, we're -- depending on how you count, we're either the second or third largest gas and electric combination company in America. We've got almost five million gas and electric meters. There are some overlaps there in the Houston area. We have probably 4.2 to 4.3 million customers. We have plenty of scale today. We're a big company. We haven't taken advantage of that scale as much as I think we can. We've run our businesses pretty independent and we're trying to find ways to run them more efficiently and find the synergies that are available among these businesses.

So, you know, there are -- there will be some consolidation certainly in the gas industry, and we'll be looking at that and seeing if there is areas that it makes sense to participate in that.

Thank you very much.

Your next question comes from

of Salomon Smith Barney.

I just was wondering -- the long-term cap structure you visualize -- is it going to be something like 50 percent equity -- 50 percent debt after the split?

Long-term, which is after we securitize the stranded investment and/or monetize our generating asset, we're targeting a 60 percent debt capital structure, which is a little bit higher leverage than we used to think about in the integrated utility days. But these businesses don't have any commodity risk to speak of. We think they have a risk profile of about a three out of ten. And we think leverage in the 60 percent range is appropriate and that's what our target is.

Immediately after separation, we'll have a little bit more debt than that until we get this -- get our generating assets sold and securitized.

And I am assuming -- and I know you wouldn't want to list -- you won't answer that, but I'm assuming you're going to be assessing the dividend on the long-term

. You don't want to have this

jagged-edge style of dividends -- correct?

Right. We're going to look -- make sure it's sustainable, so we'll look at longer-term as well as near-term earnings.

Thanks a lot.

At this time, there are no further questions.

Well, thank you very much for participating in our call with us today. Thank you for your interest in Reliant Energy, and have a good afternoon.

Thank you.

Thank you for participating in today's conference call. You may now disconnect.

END