CenterPoint Energy Inc (CNP) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

at this time i would like to remind everyone, if you would like to ask a question, press star, and 1 on your telephone keypad.

We'll pause for just a moment to compile the q & a roster. Our first question comes from mcdonald investments.

Good afternoon. I had a question with the ecom. What was it that was mark-to-market, the entire contract or just the sales this quarter? This is -- this refers the ecom that was recorded to the sales for the first quarter of 2002 only.

So we'll see one of these every quarter?

Okay.

Thank you very much.

Our next question comes from david frank of zimmer lucas partners.

Hi, good afternoon.

Hi, dave. Just wanted to ask on the ecom, are those earnings going to be booked at the it.

And d going forward?

I know you plan on doing the spinoff of a portion of the ercot genco. And since these are kind of generation-related earnings, i thought that perhaps that might go with the ercot -- in other words, once you do the ipo, will the ercot genco have the earnings that they report?

No, they won't. The texas genco will be a pure generating company. The ecom earnings really go with the regulated utility and it will be part of the stranded investment that the regulated utility will be entitled to. So the texas genco will not reflect any of the ecom earnings.

Okay. Well, I guess that's good from an acquisition standpoint for rri potentially.

One other question on the e com is this the true-up that you did for the quarter. 141 million, do you have an estimate what the full year's ecom benefit might be for '02?

You know, I don't have, david, because it depends a lot on what happens the rest of the year.

We still have some capacity that we are going to market for the past four years that haven't been auctioned yet so we didn't know their prices. And the way ecom works it really captures the difference in gross margin between what the puc assumed in their model first is what you actually would realize if you use those puc auction prices.

So we don't have all the numbers yet to determine that. Let me just also elaborate on one other thing when it comes to texas genco. What we are trying to do with the ipo is truly capture the market value of those assets because that's the price that reliant resources will have an opportunity to buy these assets for is the true market price and if you stick ecom in there, it will mask and muddle up the market price of those assets.

I'm sure.

So the ecom will be mark-to-market every quarter.

How much power have you sold forward through the balance of the year from those assets?

Roughly in terms of percent if you just want to give it base load or --

As you might recall, we have 14,000 megawatts of generation.

We market give or take about 12,500 megawatts of that 14,000 through the auction because this is firm power we're selling.

And we hold some back in reserve. We have already auctioned off approximately 80% of that 12,500 megawatts through august of this year.

There is another auction that will be held for the last 4 months of the year as we get into the summer.

But we have already auctioned off a lot of that capacity.

Okay. And how often does the texas commission true up the ecom assumption?

Is that done --

That's our -- that is only done once. It was done when the ecom model was developed. And so the prices and the margins in the puc models are already fixed.

And they are not going to change.

So that's set. Okay. Thank you very much.

Our next question comes from sack capital.

Good afternoon.

A few things here.

If I go back, I'm wondering if you can help us here a little bit now that we're into the first quarter. Can you help us a little bit with respect to how you -- from last june when you had your analysts conference down in houston, you kind of initially gave us the first breakdown of how you kind of considered how you get to your earnings outlook at that point in time. Can you update us a little bit with regard to some of the ebitda looks that underlied the 117 to 122 segment and how of those may have shifted around?

I don't have those numbers in front of me.

We probably need to update those later on.

I don't have them now. They have shifted, though. We probably have shifted some out of our gas ldcz bit from what was -- ebit from what was shown in that earlier presentation but we'll neat to get an update of that complete presentation.

Okay. And I'm wondering, can you update us a little bit with regards to, uhm, maybe, uhm, just not kept up on this part, I'm wondering where you stand with the agencies in terms of what a credit rating might be for centerpoint post spin and can you kind of talk through your cash flows right now and, uhm, I think you'll be starting at a fairly highly leveraged state, as I recall. Can you talk about how much cash will be available to take down debt over time?

We have had considerable discussions with the credit agencies starting when the scottie pippenoff was conceived. And we have kept them updated all along the way so they have a complete look at our plan that shows we are highly leveraged out of the box because we have these texas generation assets that we do not monetize until 2004.

So we'll start with a leverage probably around 80% level.

Our target is to get down to the 60% level with the monetizeation of the generation assets. The agencies believe we're in a transition period and they have looked through this to 2004 and all three agencies that we go to have rated our credit as investment grade, triple b, triple b-plus, and i think one has as at triple b-minus.

All of them are basing this on the fact that we are going to get to an end state which is appropriate for this business, which is a leverage of about 630% or -- 60 miles an hour or thereabouts.

In the near -- 60% or thereabouts. In the near term, we are not going to have cash flow, we are going to have negative cash flow because of a number of items. We have a large capital budget for texas genco.

In doing some knocks improvements over the next two years. We have some -- we have had to refinance some factoring facilities which we had factored with finance company.

We now are not doing that anymore. With the add vent of retail competition.

-- with the advent of retail competition. We also have this excess mitigation credit that is implied in the rates of the t&d charge over the next two years and that's causing some negative cash drain, as well. So this year is probably -- it's certainly a negative cash flow year and we'll come out of this, though, once we monetize the generating assets.

Well, then, to follow up on that, if we think about '02 and '03, if we start out of the box at about 80%, are you suggesting that the leverage initially goes up a bit above the 80 until monetizeation?

It's going to -- I'd have to look at the numbers.

It's going to stay in the 80% range plus or minus.

It may start out a little bit below that and go a little bit above it. But it's not going to get significantly worse than that.

And, uhm, what's the -- given that you know, we have seen valuations for generation assets, swing wildly over the last 12, 18 months, what sense can you give us as to comfort level that the agencies have with respect to the ultimate value of the monetizeation relative to meeting your leverage requirements and your credit targets?

Well, you know that the regulated utility is entitled to give back its cost, book value of its generating facilities plus it's ecom true-up in 2004.

It does this in two ways, one through market valuation when it sells it and then, second, the rest is through securitization and then with a special charge that the t&d utility can charge.

So the exact number of the market value of the generating assets is really not that important. The key is that we are assured of getting back all of our book value of our texas generation in 2004. There is some tax leakage with a high market valuation of texas genco.

But all in all, you still get back your money. And that is what this whole separation is based on. Is that the utility gets back its investment and its generation, it's able to pay down debt, its corporate debt and it's able to run these businesses as a purely regulated delivery business from there forward. Canada you remind us again exactly how much money would be got -- can you remind us again exactly how much money would be gotten back in aggregate for book value respective of what the market value turns out to be?

I want to say that the book value of the assets themselves are about 3.2 billion.

And then it's going to depend on how much ecom trueup is going to be as to exactly how much money we recover in 2004.

Obviously we started out the first quarter with 141 million.

That 141 would be a deduction off this book value?

In addition.

It's a regulatory asset.

Okay.

And can you give us a sense as to during 2002 and 2003 what type of net rate base growth we'll be seeing across, you know, the -- across the company in terms of assets that will support, you know, forward growth? The regulated utilitys both gas, pipeline and electric, have around 600 to 650 of kind of annual capital expenditures.

That's a decent run rate to look at.

On a go forward basis.

.

That's both electric and gas. Obviously, this year and part -- and next year, we have texas genco as well so we are spending some capital on those facilities, too. But they are not rate-based. Although part of it is in that it's knocks expenditures which we have the right to recover under the texas restructuring law, as well.

But those will be part of the true-up?

Correct.

All right.

If the regulators -- gas and electric is spending 650, 650 million in capital, what kind of depreciation run rate will those assets be running at then?

I don't recall off the top of my head.

We'll have to get that for you.

Thank you.

Let me mention one other thing.

Mood east and s & p they have given us indicative ratings of triple b platt.

They obviously wouldn't give you their officials ratings and report until after the spin and all that kind of thing, right?

That's right.

Thank you.

Your next question comes from peggy jones of abm amro.

Hello.

You've been going through what many of my questions were.

But just to add another one, is there any prospect of reaching a stranded cost settlement anytime between now and the official valuation date in '04?

Or of doing anything else to revise or fill in details about the specifics for the stranded cost recovery?

In terms of settlement, we had discussions earlier this year trying to look at ways to settle that and they really weren't fruitful.

I hold out little hope that we'll find a settlement on this stranded issue before 2004.

I think it's highly unlikely that that will happen.

Thank you.

.

The next question is from and did I levy from bear wagner.

Could we just go over the dividend for rei?

What can you give us help with on what we may or may not expect in your may board meeting?

I don't know if we can give you a.

Or some type of --

Anything.

If you can give us anything as far as guidance. Obviously, with the with the spinoff possibly being delayed until the end of the third quarter a big question, will rei continue to pay the dividend or will they not have the spinoff?

Andy, this is ledbetter.

Our board meet something wednesday.

So you may be able to -- it won't take you long.

I'll wait. Thank you very much. Your next question is from mcdonald investments.

Paul ridzon.

A couple follow-up questions. You had indicated that centerpoint standalone for the quarter was 50 cents. Do you have an '01 number?

Not really.

You know, we really weren't restructured in '01.

It's hard to have comparative data to '01. Electric sales growth to residentials was extremely strong. What happened there? Did you pick up a lot of customers? Or --

We have been growing about 2% a year.

And we picked up about 35,000 customers last year. So there's a healthy increase in customers. We also have a little -- it's a little unusual. We had, uhm, a little cooling load and we had a little heating load.

But in general, the weather was pretty normal. You know, when you got right down to the bottom of it.

So I think that's all related to customer growth and maybe a little change in usage per customer.

Am I reading the release right, it was 15% growth?

That's right. The kilowatt hour sales to the residential.

It looks numpblt it's just growth and some unusual weather patterns and --

Given the weakness in the gas ldc business, and they are obviously starting out in the hole for the year, I'm wondering why you're comfortable at 117 to 122, where you'll make up the shortfall.

Well, remember, the last -- the first quarter of last year we had come out of a very cold winter. And we had a good quarter, but subsequent to the first quarter, we basically gave back most of those earnings through very large bad debts in arkla and others. We don't have quite the revenue because we had a more normal just the heating degree days were 2% below normal. We think the rest of the year is going to be more favorable than the quarter's last year where we had those big bad debt reserves we had to take when customers simply couldn't pay for all those high gas bills.

Thank you.

Your next question comes from scott inning strom of hamilton partners. I just want to make sure i understood the ecom accounting between the segments t sound to me a bit of a zero sum game.

To the extent that prices in the market were to rise and approach the ecom model then we would see a smaller ecom credit and the it.

And d. And theoretically the ebit at the generating sector would then improve.

Is that a fair character nation is.

That's accurate.

Thank you.

Your next question comes from peggy jones of abn amro.

I had two other questions.

I was not clear on whether the 600 to 650 million-dollar annual cap-ex for the utilities included or didn't include the expenditures for the generation.

That was the first one.

It does not.

Okay.

The generation expenditures which are around 300 million in 2002....

Okay.

And then, uhm, will there be more in '03?

There will be additional but...

But substantial reduceed from that level. A big part of those expenditures, pegby, relate to knocks capital expenditures to improvement knocks situation for some of these units.

Okay. And secondly, it looks to me as if the spent interest coverage for redco or centerpoint might be about two times.

Am I roughly in the ballpark of where that would be?

I think before we monetize the generation assets, that's correct.

That's in the ballpark.

Okay. Thanks.

Your next question comes from sack capital. Just to follow up, you were talk a little bit about the seasonality in the earnings pattern, at least you would expect to see, given that we now have a 50-cent quarter in the books, can you give us any kind of sense how you would expect the other quarters would come in so we get to your range or if that's not available, just maybe what kind of some expectation at least on the second quarter?

I don't have the other three quarters in front of me.

When I talked about our energy delivery design changes, rate design changes, we have flattened out a little bit of the electric side so we put a few more revenues in the first quarter than typically would have been based on past rate designs.

So we flattened it a little bit.

But the residential rate is still energy-based. So clearly in the summertime, on the electric side, you are going to have the most earnings in the third quarter. Second quarter, both on the gas and electric side, there are just not a lot of energy sales and deliveries.

So 10 it's going to be our weakest quarter. I'm going a sense -- i understand the way earnings can be spread out. We have seen this with several other companies that have similar types of seasonality. Would we expect that the second quarter should be still in that earnings positive? Is there a chance that, you know, as part of the pattern, it may end up being a negative quarter on a going-forward basis?

I think it's going to be positive.

It's not going to be a real big number but it should be positive a sumg normal weather.

Okay.

Thank you.

Your next question comes from daniel stits of salomon smith barney. Could you remine me, do you recover the t&d capital expenditures?

[ danielle seitz ]

They are recovered through the depreciation provision in the cost of service as well as the return component of rate base.

Okay.

Does that mean that you accumulate you go on automatically change your rates or do you have to go and snil.

No, you have to file for a rate increase.

Is there a limitation as to how often you can do that?

[ file ]

No.

You can go in as often as you like. But... You have to, you know, use good judgment there.

I understand. Thanks.

At this time, i would like to give everyone an additional minute to press star and 1 for a question.

Your next question is from david frank of zimmer lucas partners. I was wondering if you could remind us of what the settlement was on the mrt pipeline, how that affects earnings.

Was there a rate increase or decrease there?

David, it was basically no change. Operating income stayed basically flat. And there was very little if any change stemming from that rate case.

That is required under a past settlement. We had to go in at this time and basically we were able to prove up that our rates were still adequate and didn't need to change.

That's where we wanted to come out. In oklahoma, I'm making the assumption that you guys will be filing for a rate increase there?

Yes. You know, we only have 110,000 customers in oklahoma. But we'll file in may.

Thank you very much.

.

Your next question comes from scott ingstrom of hamilton partner

Could you remind me of the ecom price is energy indexed or is it at a fixed price regardless of where gas prices go?

The wait ecom model works is they assumed certain market prices which are based upon certain assumed prices of natural gas and other fuel.

So in essence, they are indexed.

They begin or down with natural gas. And there is a margin that's calculated and it's that gross margin you true up against.

Okay. So in a sense, e com will change but not the margin will not change?

Ecom will change each quarter.

The way the puc model was developed was on the annual basis so we had to make some assumptions to -- to phase it in over the year.

So you'll see some changes as we get into the summer.

Thank you.

At this time, there are no further questions.

Thank you very much. I'd like to thank you all for listening in to the reliant energy first quarter 2002 earnings conference call.

And give me a call if you have any additional questions. Thank you very much. Have a great afternoon.

Thank you for participating in this afternoon's teleconference.