CenterPoint Energy Inc (CNP) 2002 Q2 法說會逐字稿

Good afternoon. My name is Anthony, and I'll be your conference facilitator. At this time, I would like to welcome everyone to the Reliant Energy's second-quarter 2002 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 1 on your telephone keypad. If you would like to withdraw your question, please star, then the number 2 on your telephone keypad. Thank you.

Ms. Paulsen, you may begin your conference.

Thank you, Anthony. I'm Mary Ann Paulsen, director of investor relations for regulated operations. Welcome to Reliant Energy's second quarter 2002 conference call and thank you also for joining us today.

As you may know Reliant Resources also released earnings today and had a conference call this morning. If you would like to listen to a replay of the Reliant Resources conference call, please go to the investor relations section of their website, www.ReliantResources.com. On this afternoon's call, we will focus on the primarily regulated businesses of Reliant Energy, those which will comprise CenterPoint Energy after restructuring.

Leading the discussion, we have Steve Letbetter, Reliant Energy's chairman, president, and CEO. Also participating in the call will be David McClanahan, currently vice chairman, president, and chief operating officer of reliant's regulated businesses, and central point's future president and CEO. Also present are Steve Naeve, vice chairman, and other members of management 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 6:00 p.m. central time through Friday, August 2nd. To access the replay, please call 1-800-642-1687, and enter the conference ID number 4836766. You can also listen to an on-line replay of the call via our website at www.ReliantEnergy.com under the investor 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 would now like to turn it over to Steve Letbetter.

Thanks, Mary Ann, and welcome to our second-quarter earnings call.

The purpose of our call today is to review our second-quarter performance. However, before we start, I feel obligated to comment on the obvious fear affecting the recent performance of the Reliant Energy and Reliant Resources stock and of other companies in our industry.

While it is not appropriate for me to comment on the businesses of other companies, I can tell you that we have two solid companies, and each company continues to execute its strategy with success.

The Reliant Resources business model, combining strong retail - a strong retail business in Texas with a diversified portfolio of power generation assets is a valid business model that continues to perform well, even in today's very weak market conditions. And our regulated operations are performing very well and continue to deliver solid results.

I am shocked at the decline in our stock prices this week, and know that we will gain back the market's confidence as we demonstrate that our businesses are strong and continue to perform.

Today we announced second-quarter earnings of $236 million or 79 cents per diluted share. Solid earnings from our retail operations, natural gas LDCs, and electric transmission and distribution segments were offset by very weak wholesale market conditions, coupled with an increase in reserves for potential refunds and plant cancellation and closure costs in our wholesale segment.

As indicated, we discussed ROI results this morning and David McClanahan will go through the details on the regulated operations in a moment.

But before I turn it over to David, let me give you a brief update on the spinoff of Reliant Resources from Reliant Energy. We remain committed to and focused on completing the formal separation as soon as possible. I am pleased that we are one step closer to making that happen. As you know, on July the 8th, we announced that we received authorization from the SEC to go forward with the formation of CenterPoint Energy, our new holding company, and the spinoff of Reliant Resources. The only remaining regulatory action is an extension of the IRS private letter ruling previously issued in January of 2002. Once we have had the extension in hand, we can complete the restructuring of CenterPoint Energy, which should facilitate its access to the capital markets.

While there is no requirement that we make progress in our bank negotiations prior to the spinoff, we believe such a step would be prudent. We would then present the spinoff for final approval by our board of directors in the late August or early September time frame. Once the spinoff dividend is declared, the distribution will actually be made about three weeks later. During that interval, we expect to do road shows for both companies to tell our story more fully to the investment community.

It is important to reiterate our firm belief that the spinoff remains the right strategic step for both companies. Each is well positioned for success in this market sector, and as separate entities, Reliant Resources and CenterPoint Energy will both have better access to capital than the combined company.

We spoke of the strengths of Reliant Resources this morning. I am also confident that CenterPoint Energy will perform well as a stand-alone entity, since CenterPoint will be one of the largest U.S. energy delivery companies serving 4.8 million metered customers. It also has a diverse portfolio of strategically located physical assets. It has a consistent reliable earnings stream with strong cash flow from operations and is committed to maximizing total return while maintaining a competitive dividend.

Now, let me turn you over to the person who will make sure that CenterPoint Energy succeeds, David McClanahan, for details about the quarter.

Thank you, Steve. Good afternoon, ladies and gentlemen. This afternoon, I'll review our regulated businesses' second-quarter operating results, but before I do, I'd like to remind you of the changes to our reporting segments that we made this year.

As we discussed in the first quarter, we now report two new electric segments that resulted from the restructuring and corresponding unbundling of our Texas electric operations. They are the electric transmission and distribution segment and the electric generation segment.

The other two segments which we will continue to report are our natural gas distribution businesses and our pipeline and gathering operations.

Let me summarize for you again the changes to our segment reporting. The unbundled transmission and distribution business, which will remain regulated, is now reported in the electric transmission and distribution segment. In addition, this segment captures the operation of the prior integrated utility that occurred in January of this year during the transition to a competitive retail electric market in Texas.

Also included in the electric transmission and distribution segment are all impacts from generation-related regulatory assets recoverable by the regulated utility, including the ECOM true-up component of stranded costs.

ECOM stands for the excess cost over market and refers to the stranded cost model developed by the Texas public utility commission in connection with industry restructuring.

As you know, stranded investment will not be determined until 2004. For the next two years, the Texas restructuring law provides that a regulated utility may true up its stranded investment and recover in 2004 the difference between the auction price of power sold from the previously regulated generation and the price of power in the PUC's ECOM model. This amount is recorded as a regulatory asset and the EBIT impact, which is non-cash, is reflected in the transmission and distribution segments.

The power generation operations in Texas, which includes all the previously regulated generating assets and will be called Texas Genco are now reported in a second new segment called electric generation. We expect Texas Genco to remain with CenterPoint Energy until 2004, when stranded costs will be determined. At that time, Reliant Resources has the option to repurchase the stock not then held by the public. I also would like to remind you that in accordance with the new accounting rules, we have discontinued the amortization of goodwill and do not reflect an expense in 2002. The second quarter of 2001 reflected goodwill amortization of $12 million.

Now, let me begin with our first segment, electric transmission and distribution.

This segment reported EBIT of $277 million in the second quarter, comprised of 107 million earned by the transmission and distribution utility and 170 million recorded for ECOM true-up. The transmission and distribution utility continues to perform well and operate in accordance with our plan. Since the opening of the retail market to competition in January, the regulated utility now recovers the cost of its service through an energy delivery rate. Prior to this year, the energy delivery service was a component of the bundled utility rate, and, as a result, there is no meaningful quarter-over-quarter comparison.

The design of the new energy delivery rate, which is based on a 11 and a quarter percent return on equity differs from the prior rate design. For example, the winter/summer rate differential for residential customers has been eliminated, and large commercial and industrial customers rates no longer have energy - an energy-based component.

This new design will tend to lessen some of the pronounced seasonal variation of revenues. As a result, revenues were somewhat higher this quarter than would have been under the prior rate structure.

I would also remind you that under the Texas electric restructuring law, our regulated transmission and distribution utility cannot buy or sell electricity and, thus, is no longer subject to commodity risk.

Looking at the operations of the transmission and distribution utility, residential customer usage increased 9% due to customer growth, a slightly warmer spring, an increased demand from non-weather-related factors such as price elasticity. Also, despite a slowing economy, total residential customers grew by 32,000 since June of last year, which approximates a 2% annual growth.

We currently have 1.75 million metered customers. This increase in residential usage was offset by a decline in deliveries to industrial customers, primarily due to self-generation and to a lesser extent the impact of a weak national economy.

On the expense side, we continue to realize productivity improvements while maintaining quality customer service and reliability. Our overall operating expenses are in line with those used in establishing our energy delivery rate.

As we discussed in the first quarter, Reliant Energy HL and P continued to serve retail customers on a regulated basis through the customer's first meter reading in 2002. As a result, we recognized $14 million of EBIT in the first quarter from these nonrecurring transitional sales. This quarter, we continued to incur transition expenses of $7 million. We expect to incur additional expenses the rest of the year, which we anticipate will substantially offset the EBIT related to these activities.

The ECOM true-up was $170 million in the second quarter, reflecting the difference between auction market prices and market prices used in the PUC's ECOM model, and will be recovered as part of the utility's stranded investment in 2004. As is evident by the amount recorded, the prices realized by Texas Genco were substantially less than the prices in the Texas PUC's ECOM model.

The electric generation segment reported a loss before interest and taxes of $26 million in the second quarter compared to a loss of $52 million in the first quarter of this year. Low natural gas prices, along with ample generating capacity in Texas resulted in low prices for our Texas Genco products. As you know, Texas Genco's sells substantially all of its available generating capacity through auctions. Substantially all of the capacity sales for the second quarter were sold at auctions conducted last year. We conducted an auction in July, just a few weeks ago, to sell the remaining available capacity for September through December of this year, and saw no meaningful change in pricing.

Beginning in September, we intend to hold auctions to sell a substantial portion of the capacity available for the year 2003.

During the two years of transition, while we own and operate these generating facilities, we will seek to optimally dispatch these units, as well as reduce costs where we can, in order to mitigate some of the pressures of the weak price environment.

I'd like to now turn to our natural gas distribution segment. Earnings before interest and taxes for this group was $14 million, compared to a loss of 41 million reported in the second quarter of last year. The 2001 period included goodwill amortization of $8 million. A substantial part of the improvement this quarter was a result of reduced bad debt expense. If you recall, we experienced high bad debt expense in the second and third quarters of 2001 due to a combination of higher usage caused by the extreme 2000/2001 winter and high natural gas prices. Both the customer's gas bills and bad debt increased as a result.

Improved collections and lower gas prices this year have contributed to the improvement in bad debt expense.

Weather was a positive factor this quarter, as we experienced cooler weather in some of our service territories than the second quarter of last year. Usage in the quarter increased 2% compared to the same period last year, primarily from higher residential and commercial demand resulting from the cooler weather and a higher customer count.

Last year's second quarter was also adversely impacted by changes in estimates of both un-billed revenues and deferred gas costs.

In Arkansas, we filed a rate request of $47 million in November of last year. This week, we reached a settlement with the principal parties to this case which, if approved, will result in an increase in base rates of approximately $32 million. The parties also agreed to a gas main replacement surcharge which is expected to provide an additional $2 million in 2003.

The settlement provides for a new residential rate design which increases the monthly customer charge from $5.20 to $9.75, thus helping to reduce the amount of fixed costs reflected in the variable component of the rates.

These new rates are expected to be effective at the end of September of this year.

In May, we filed a rate change request for 13.7 million in Oklahoma where we serve approximately 110,000 customers. We expect a decision by the Oklahoma commission by the end of this year.

Turning to our pipeline and gathering businesses, we continue to produce consistent and stable margins. We reported EBIT of $41 million for this quarter compared to 34 million for the same period last year. Goodwill amortization recorded in the second quarter of 2001 was $4 million. We continue to see growth opportunities in our pipeline and pipeline services businesses, especially around new merchant generating plants.

Now, let me discuss several issues that we will be addressing over the second half of this year.

I know that you're all interested in our dividend, so let me update you on that.

Management will recommend to our board early next month that the third-quarter dividend be declared at the level that CenterPoint will be paying going forward. CenterPoint is fully committed to paying a competitive dividend. We will be primarily a regulated company, with consistent and stable cash flows after spinning off Reliant Resources to shareholders. We have provided guidance for 2002 earnings per share in the range of $1.17 to $1.22. We will recommend a dividend payout based on our earnings outlook and taking into account the transition we're in. We believe that our payout ratio and yield will be competitive with other regulated utilities. The next dividend payment date is scheduled to be September 10th, 2002.

As part of the stranded cost determination in 2004, the Texas electric restructuring law allows for the quantification of stranded costs for our Texas generation plants to be made using a partial stock valuation method. In order to comply with the legislation, either an initial public offering or a distribution to our shareholders of approximately 20% of Texas Genco's capital stock must be completed before January 10th, 2003, so that the stock will have traded for one year before its use in determining stranded costs.

Given the weak present IPO market, we are now considering and preparing for a distribution of approximately 20% of Texas Genco to our shareholders later this year.

As I'm sure you are all aware, on July 12th, Reliant Energy received a 90-day extension on our $4.7 billion credit facilities. The extension takes us to October 10th, 2002. However, a majority of the commitments represented by the banks can vote to reduce the extension to 60 days.

During the 90-day extension period, we expect to accomplish the following: Restructure into a registered holding company; establish the transmission and distribution utility and Texas Genco as separate subsidiaries of the holding company; access the capital markets to relieve the pressure on our bank lines; and syndicate a new credit facility.

We are currently engaged in discussions about both capital market transactions and extending our bank lines, and while preliminary, these discussions have been very constructive.

On January 1st of this year, we implemented FASB 142, goodwill and other intangible assets, which required discontinuing amortization of goodwill and an evaluation for impairment.

During the second quarter, we completed the evaluation of goodwill for our two reporting units requiring such an evaluation, the natural gas distribution segment and the pipeline and gathering businesses.

The evaluation compared their fair value with their carrying amounts, including goodwill. The evaluation concluded that at January 1, 2002, the fair value of these reporting units exceeded the carrying amount, and no impairment is required to be recognized.

In summary, we are pleased with the performance of our regulated operations this quarter. The businesses that will make up CenterPoint Energy after full business separation contributed 29 cents per share to Reliant Energy's second-quarter consolidated earnings per share, and have contributed 78 cents per share for the first six months.

Our outlook for our earnings per share for this year has not changed. As you know, we provided earnings per share guidance for CenterPoint on a stand-alone basis of $1.17 to $1.22 per share. While we are further along than we had anticipated, we continue to believe that this guidance is appropriate.

We benefitted in the first half of the year from lower than expected interest expense due to the delay in the sale of long-term debt. We do expect to see an impact from higher interest expense in the second half of the year. We also benefitted from the new rate design change in the transmission and distribution segment, which lessens seasonal variations in revenues, but is not expected to have an annual impact.

Other factors such as the timing of budgeted operating expenses and a slow start to Houston's typical summer heat could offset some of our first-half performance, so we still believe our earlier guidance is appropriate.

Finally, I'd like to highlight some of the key components of our overall corporate strategy.

First and foremost, I'm committed to keeping CenterPoint focused on our core businesses, and operating those businesses with excellent and highly reliable service at a reasonable price.

We have a strong portfolio of low-risk businesses, with attractive and diverse service territories and assets. Our near-term business focus is to continue to improve the financial performance of our existing businesses. We are making progress on getting the level and design of our rates where they need to be. In striving for operational excellence, we are implementing operating practices designed to improve productivity and capture efficiency across all our business units.

For now, we're concentrating on growth opportunities from our present businesses. Our overall investment objectives are simple and straightforward. Namely, we are committed to maximizing total shareholder return through a competitive dividend and reasonable growth. We will accomplish this by managing our core businesses to produce consistent and sustainable earnings and cash flow, and we will concentrate on strengthening our balance sheet and improving financial flexibility.

Thank you for your interest in Reliant and CenterPoint Energy, and now we will take your questions.

Anthony, we'll take some questions now. 00:50:40

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1, on your telephone keypad. We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Steve Valentine of Valentine capital.

Yeah. Hi. I wanted to ask a couple questions on the spinout.

What kind of potential obligations are there remaining at REI to a spinout of RRI, given the possibility of possible credit issues there going forward? I mean, are there any Williams, Williams communications type issues that you could have there, if RRI should not get its bank lines extended prior to a spinout?

No, we don't have any obligations of that nature, Steve.

So you don't see any way that if RRI was spun out and it ultimately was not independently successful, that you would have claims coming back to you from that?

Not from any credit implications. As you probably know, we have an indemnity from RRI related to any litigation, and that would be the only thing that could spring back. But not anything related to credit.

Okay. In the earlier call with RRI, you had given a time line of talking to the banks in late August/early September, which is the same time that you've given us for the board vote on the spin.

Can you elaborate on - if you want to know where you stand with the banks, you know, how will you know anything at that point in time, and isn't it somewhat inconsistent to expect the board to go ahead and approve a spin when you won't know until say well into September where you stand with them on RRI restructuring?

Steve, I think there's a miscommunication, if that's what you understood. We're actually engaging in dialog with the banks currently.

But I understood from the previous call that they were doing basically renewed due diligence based on the changes in the markets that have occurred since they last looked at the company, and that was going to take a period of time and that, I thought you had stated you were going to be making a - sort of a proposal to them in that same end of August/early September period, at which time they would take three to five weeks to conclude some sort of a restructuring talk.

No. We're actually operating in parallel.

Okay. So you expect to basically then be done with the RRI restructuring by the end of August/early September?

Well, we will at least be far along in the discussions.

Okay. I - you know, I guess the bottom line is, I'm trying to understand, although it's not contingent on restructuring, if there are problems in that - in those talks with the banks on the RRI financials, given your statement that it would be prudent for you to know where you stand, you know, what could get in the way? I know you don't want anything to get in the way, but it seems to me it's illogical that you would go ahead, if that isn't satisfactorily resolved or apparently imminently satisfactorily resolved to spin it.

I mean, you know, we - the approach that we're taking and Rick went over the reasons why we believe RRI is eminently refinancible based upon its own merits. You know, we're basically going along a path that will accommodate all of this to occur.

Okay. And then question on the dividend letter of REI or CenterPoint's dividend level. Can you give us a little more information on what you see as a competitive payout or what, you know, is a ballpark area that you're likely to recommend.

Dave, in the past - and this is consistent today, we've said that, you know, we think the - a competitive dividend is in the 50 to 75% dividend payout level, and we're going to be at the lower end of that as we kick off the new company and as we transition out of this two-year window when we still have stranded investment yet to - to be determined.

So that's off of the 117/122 earnings level correct.

Yes.

Okay. Thank you.

Your next question comes from Jay ma IDEA of forest investments.

Yeah. Hi. Thanks. Just wanted to ask, as far as the - as far as the bank negotiations for the REI level why are you looking to the capital markets? Is it - is it something to do with that the bank negotiations of a revolver of that size aren't practical or . . .

Jay, let me - the bank facilities we put in place in July of 2001, over a year ago, were made up of two revolving credits of - lines of about 2.9 billion and a bridge facility of 1.8, and it was always anticipated we would go to the capital markets and that that 1.8 wasn't a permanent piece of our bank lines. Because the spin was delayed, we did not get to the capital markets in the past year. We're still committed to doing that. We personally believe that, you know, we don't like to have that much short-term bank debt either, and so we're - we're going to look to the capital markets to just reduce the amount of that bank facility.

Okay. And then, you know, while I - I agree with you that it's, you know - we're all very confident that everything's going to work out perfectly with the bank financings at the REI and RRI level, I just wanted to ask that the same way that you - you said it would be prudent to get the RRI financing done before approaching the board for - you know, for the spinoff. Is it also prudent to get - are the banks saying that it would be prudent at the REI level to get the spinout done before they give you the revolver at the REI level?

I don't think that they've said that you have to do the spinout. Obviously there's - there's lots of interest in this spinout, and when it happens, but there is nothing tied directly to it. But the banks clearly want to see the direction the company's taking. The 90 days gave us, we thought, an adequate amount of time to get this decision made, and - and so we don't think, though, that we're going to - it's directly tied to that decision we make in late August or early - early September.

And are you looking at security or covenants or anything like that as far as the REI level bank financing?

We haven't discussed any type of security at this stage, no.

Okay. And final question is: Let's say the spinout just for the sake of argument were not to happen or were to get, you know, delayed for whatever reason. Are these two companies separate companies from a credit perspective in the sense that if RRI had some kind of problem and it hadn't spun out yet, would that have any implication on REI's credit?

Well, they're clearly separate credits. RRI's credit is completely separate from REI's.

Uh-huh.

So - now, if you're asking does RRI impact REI, the answer is yes, today. No doubt about it.

Uh-huh.

But from a purely credit standpoint, RRI is a stand-alone credit entity.

How does it impact it today? Are there - is there a lot of - as far as business back and forth - loans back and forth, things like that?

No. We have no loans. We have nothing of that nature. Reliant Resources is a buyer of capacity. They have a very big retail business, and we own generation, so they buy generation from us through capacity auctions, but those are commercial transactions held through public auctions.

Uh-huh.

I think the - the - and you can ask some of the people that follow this a lot closer than I do, but there's concerns about if you have a big large subsidiary, would Reliant Energy put more money into Reliant Resources if they needed it, and that's where I think the risk comes in at the REI level.

So you think that that is a risk at the REI level?

Well, I don't think it's a risk. I think that's what's being perceived by the markets.

Okay.

We're not intending to put any more money into Reliant Resources, to my knowledge.

Okay. Thanks. I appreciate that.

Your next question comes from Paul [DeBoss] of Value Line.

Hi. What ROE was specified in the settlement in Arkansas and are you planning to have any other rate cases besides what's pending in Oklahoma?

The - the ROE was slightly - I want to say it was 9.9 or 10%. Right in that level in Arkansas. We had requested, as I recall, 11 and a quarter, and the staff recommended something like 9.4 to 10.4, and they picked that kind of midpoint there at 9.9, 10.

The - we have - we are evaluating some additional rate cases in our other service territories, but there has been no decision yet to file in any of those other jurisdictions.

Do you know when you might come to some sort of decision?

I would say it's going to be late this year or early next year. Most of the other rates are not nearly as bad a need for a rate increase as was Arkansas and Oklahoma. But we think there are some other areas that we need to look at real hard. There very well may be some rate changes that are needed.

All right. Thank you.

Your next question comes from Paul [Razone] of McDonald Investments.

Good afternoon. Just a couple clarifications. When you say you want to tap the capital markets, are we talking fixed income markets?

Yes.

Exclusively?

Yes.

And not to harp on this, but, you know, in the event that Reliant Resources couldn't get a solvency letter or an extension of the PLR from the IRS, is there any recourse to stop you from perhaps just handing Mr. Naeve the keys and bidding him farewell?

If you don't get the IRS extension? Well, I mean it's a fairly big risk involved, because it might be a - you know, if you distribute it without the IRS extension, is that what you're asking, Paul?

Or just, you know, just walk away from RRI.

Well, I hadn't ever thought about just walking away from it. I -

If there were some unforeseen difficulty arising.

Let me ask Mr. Letbetter, see what he thinks.

Paul, you know, I can't speculate. You know, I can't - I can't hypothesize really what you're talking about. I mean we're looking at REI and the REI shareholder and what's good for the interests of the REI shareholder and the board would do what was in their best interests.

Okay. Thank you very much.

Your next question comes from Bill Bonn of Ft. Washington investment advisors.

Good afternoon. I wonder if you could go over the stranded asset issue again on what going to become CenterPoint. You're recovering funds that will be used to retire bonds?

Right. In 2004, Bill, in January 2004, we'll file our stranded investment case and we'll - it will be based on the book value of generating assets as of December 31, 2001, plus any qualified environmental expenditures that have occurred since then, less the market value of those assets, based on reference to the partial stock valuation of Texas Genco, and then you make that calculation and you add to that your ECOM amounts that we're recording today plus any over and under-recovery of fuel.

And do you have a target capitalization in mind that you're going to try to work toward?

We believe these businesses can operate very comfortably at 55 to 60% debt to total capital. And that's where we're targeting in 2000 - into 2004 to be, once we get the stranded costs proceedings behind us.

Now, do you choose that because you think that that results in a certain target bond level, bond rating?

Well, these are low-risk businesses, very consistent cash flow, very consistent earnings. In Texas, in our wire - our transmission/distribution rate-setting, they've used a 60% debt, 40% equity level in setting rates, and it's all based around the risk of the business.

All right. Thanks very much.

Your next question comes from Matthew Mark of Mark asset management.

I had a question that I think it would just be helpful to try to hear the answer spelled out to.

Why does it make sense to tie the spinoff, at all, to Reliant Resources making progress with its bank group? If Reliant Energy doesn't have any intention of putting more money into resources, why should it matter how much progress resources makes on its bank group? I mean, I could guess at a couple answers but I just think it would be helpful to try to spell that out for people.

Well, first, it's not tied to the bank renegotiation, but in the board's deliberations around declaration of a dividend, they need to consider all the factors that are in the best interest of the Reliant Energy shareholders. It would seem prudent for the board to at least have information and indication of implications, you know, for RRI also, as it - it's going to be distributed to REI shareholders.

Just to push back a little, what if Reliant Resources bank negotiations don't go according to plan? You know, what could the Reliant Energy board do, short of putting more money into resources? How could it help?

I can't - I really can't speculate for the board as to - you know, I'd have to look at the conditions and what gave rise. You know, we've indicated - you know, I think Rick provided a very compelling outline of the creditworthiness of Reliant Resources. We believe that the path that we're down - going down will end up satisfying, you know, both companies, both sets of banks, and, you know, it will be a very viable solution for all concerned.

Thanks for tolerating the question.

Your next question comes from Danielle sites of Salomon Smith Barney.

Just a review. I was wondering your $1.20 or so estimate, does that include a potential increase in the debt cost you are likely to incur when you roll over the - your loans?

Yes, it takes into - it takes that into account, Danielle.

Okay. And it's - looking at 2003 - I mean, since that increase in cost is not really going to have much - is not going to be there a long time, you know, too, is 2003 supposed to be affected to a point where actually the earnings are likely to be difficult to be sustained at that level?

I believe that with normal weather -

Uh-huh.

- and with the rate increases that we're able to accomplish, that we'll see a good solid year in 2003.

Uh-huh. Just do you have in mind how much is the average cost on the - on the revolvers that you have to refinance?

In terms of long-term debt costs?

Yes, yes.

You know, I'd hate to speculate today. These markets are so difficult. I think -

I mean relative to the amount you are paying now.

Danielle, I'm sorry, I didn't hear that question. Ask it again.

Relative to today's - to the cost of interest that you are paying currently.

You know, I - I'd have to get out the - our forecast, but I think that today, you know, we have $4.2 billion outstanding under our bank lines.

Uh-huh.

And we're paying, you know, a bank rate. If you look at what you pay when you go to the long-term capital markets and you get longer-term maturities, it's going to be higher than that.

Uh-huh. Okay. Thanks.

Your next question comes from Steve [Tarter] of [Barrow Handling]. Mr. [Tarter], your line is open. We will proceed to the next question.

And your next question is from [Sungo] [Wan] of [Samcor] capital.

Hello?

Hello.

Yes, hi. I just had a quick question on the dividend payout just for clarification. There seems to be a great deal of confusion out there regarding your actual cash payout ratio. You're guiding to $1.17 to $1.22 of earnings for 2002 just for CenterPoint, and I understand that some part of that will be non-cash in the form of true-up, so the actual cash payout ratio is actually higher than about 50% you're forecasting, so if you can comment on that, that will be great. Thanks.

[Sungo], you're accurate that part of that $1.17 to $1.22 is non-cash because it comes from ECOM true-up but we're going to base our overall dividend policy on earnings as we look out over time, and it is going to be based on our earnings and not just the cash portion of our earnings. So when I said 50 to 75% earlier in the lower part of that, it is based on book earnings and not cash earnings.

So you have enough cushion in your earnings to pay that notional 50% payout ratio?

Yes.

Great. Thank you.

Your next question comes from Jonathan [Rojeski] of Goldman Sachs.

Hi, everybody. How are you doing.

MARY ANN PAULSEN:

Good.

Fine.

Just to quickly run back through some of these numbers, if I could. The refinancings that you've got this extension on for the bank facility and the bridge, you said, David, was 4.7, 4.2, which you've drawn on, is that correct?

Correct.

Okay. And so also I think that there was a total of five or six hundred million dollars of just regular senior note maturities that you had for this year. Is that - do I recall that properly?

We've already experienced some of those. The next - the next maturity is in November, Jonathan.

Uh-huh. Okay. And do you know what that amount is.

It's 300 million.

Okay.

I might also mention that we have - those aren't the only lines of credit we have. We have some at our gas businesses, too, that are undrawn.

Okay. Are those facilities things that need to be renegotiated or extended in 2002 or 2003?

One of the facilities is in next year. We have a receivables facility that is due to be renewed next month, and it's a secured facility.

Okay. And then I think next year, the 1.2 or $1.3 billion of senior note maturities, could you comment on that a little bit further?

I must have missed your question. What -

Well, I mean I think it says also that you have about 1.3 billion next year in maturities, debt maturities, in the 10-K.

Gosh -

And I was just wondering, you know, sort of from a - we've talked a little bit about liquidity and refinancings and accessing the debt markets and such, and I'm just wondering sort of what your - you know, what your thoughts are on that in terms of, you know, possibly just refinancing that or if you're going to have to, you know, take it out and just issue more debt is what I would assume that you would try and do, but I just wanted to sort of get your comments.

Jonathan, I don't think there's that much. There's a maturity that comes up in April of next year.

Yeah.

Of $150 million. Some of the other maturities may be referring not to CenterPoint debt.

Okay. Okay. Well, why don't I follow up with you guys off-line. We can spend some more time on that.

Okay. We'll look at that too. I don't think that's the case.

Thanks.

Your next question comes from medulla myrrh de-of SAC capital.

Good afternoon.

Had I, medulla.

Let's see. I think I'd like to ask Paul [inaudible] question another way. If for some reason say the IRS were not timely or willing for some reason to provide a - you know, a tax-free nature and, you know, would you still consider - would you still consider it in the best interests of both sets of shareholders to execute a distribution, you know, on a taxable basis?

Well, as it relates to the IRS letter ruling, medulla, I mean we can't do it without it, and so, you know, I mean it doesn't - you know, the decision is made for you.

Oh, okay. So you - so for instance there -

I'm sorry. It would end up being a taxable event and we'd just have to look at it and see what the implications were to the shareholders at that point in time.

Well, I'm wondering -

I really can't get a situation of answering for the board now in a hypothetical sense. We've got to look at what's there. I can tell you that, you know, we think it makes the most sense for both companies to do the actual spin. We're pursuing it with, you know, deliberate speed and we're going to continue forth and, you know, I - we'll present the recommendation to the board and they'll exercise their fiduciary responsibility in that August/September time frame.

Okay. My second question is kind of wondering when you kind of look a little bit towards '03 at CenterPoint, when you execute the 20% distribution of Texas Genco, what would you currently be estimating or what would it be, say, off of this year's Texas gen come - what would 20% end up being in terms of a - you know, a subtraction going - in '03?

You mean a subtraction of the contribution or lack thereof to earnings?

Correct.

You know, I don't think we've got into the granularity of estimating what Texas Genco's earnings will be. The fact is, that will be driven a lot by the auctions that we hold in September/October of this year, because that's when we sell the - the capacity for next year, medulla.

Okay. Thank you very much.

Your next question comes from Jeff Goldman of first capital.

Yes. When is the earliest time that you could spin off or IPO the Texas Genco?

From a practical standpoint, I think it would be - the earliest would be probably November.

Okay. And who are the bankers you are primarily engaging with on the refinancing discussions?

Well, I - let me - there's - we're dealing with a number of bankers. J. P. Morgan and Citibank were our agents on our bank facility refinancing, and they continue to be advisors to us at this time as well as others.

Okay. And lastly, maybe going back to a different kind of question, can you give me some sense of the sensitivity to your earnings as it relates to the cost of refinancing? I know you mentioned that it is included in your - in your earnings guidance, but, you know, we're having a little trouble maybe gauging what the sensitivity is to earnings as regards the refinancing costs.

You know, I guess the - it's really hard to say. It's costing us today a hundred basis points in additional cost, and it really depends on what the market is later on this year as to what the long-term - long-term costs will be.

It will clearly be higher than what we paid the first six months, and we're hopeful that these markets will settle down and we'll have a receptive market for our bonds.

Will you also be able to - you mentioned on the RRI call that some of the covenants are, let's say, loose on the facility on the RRI side. Is it the same on the REI side, that you could simply tighten it up to satisfy some of the bankers?

Well, I guess, you know, all the bankers will look at covenants. There's no doubt about it. We don't have any real onerous covenants in our bank lines, but I'm sure that those will be part of the negotiations as we go forward.

Thank you.

At this time, there are no further questions.

Okay.

Thank you very much. We appreciate your interest and would like to thank you for participating today and have a great day.

This concludes today's conference. 01:18:19 You may now disconnect.