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.