CenterPoint Energy Inc (CNP) 2002 Q3 法說會逐字稿

Good afternoon my name is Ashley, and I will be your conference facilitator. At this time I would like to welcome everyone to the Centerpoint third quarter 2002 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, press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you, Ms. Paulson. You may begin your conference.

Thank you very much, Ashley. This is Marianne Paulson. I would like to welcome you to our third quarter 2002 earnings conference call, and I'd also like to thank you very much for joining us today. David McClanahan, President and CEO of Centerpoint Energy, and Gary Whitlock, Executive VP and CFO, will lead the discussion this afternoon. Also present are other members of Centerpoint management who may assist in answering the questions following the prepared remarks.

Before David begins, I would like to mention a replay of this call will be available until 6 p.m. Central Time through Thursday, October 24th. To access the replay please call 1-800-642-1687 and enter the conference ID number 6018429. You can also listen to on online replay of the call via our website at www.Centerpointenergy.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 this morning's press release and in the company's SEC filings.

And so with that, I would like to turn it over to David McClanahan.

Thank you, Marianne. Good afternoon, ladies and gentlemen. Thank you for your interest in Centerpoint Energy. I'm very pleased to welcome you to Centerpoint Energy's first earnings conference call as an independent company.

Let me highlight for you some important events that took place during the third quarter and the first few days of this month. In late August we formed Centerpoint Energy as a new registered utility holding company. As part of this restructuring, both the electric transmission and distribution utilities and Texas Genco, our Texas generating units, became subsidiaries of a holding company. Prior to they were part of the holding company. This new structure will facilitate financing being considered at the operating unit level.

A milestone in the company's history was completed on September 30th with the send off of Reliant Resources to our shareholders. Centerpoint Energy is now positioned as a very unique company relative to most of its peers. One, it is a large, low business risk regulated utility with a diverse portfolio of delivery and gas operations.

As most of you probably know, we began trading as Centerpoint Energy under the symbol CNT on October 1 on both the New York and Chicago Stock Exchanges. Earlier this month we declared a regular cash dividend on our common stock of 16 cents per share payable on December 10th to shareholders of record on November 15th. And finally, we successfully negotiated new bank credit facilities for $4.7 billion just last week. Gary will focus more on this last point later.

Just let me say that this refinancing got the company past the major hurdle. While we were extremely disappointed in the fees and spreads that we have to pay over this 364-day facility, we are dedicated to offsetting as much of these higher borrowing costs as possible through improved business performance. We're also committed to tapping other markets and reducing other reliance on commercial banks.

As most of you know, last week Standard and Poors reduced the company's corporate credit rating by one notch, to triple B flat from triple B plus. In taking this action, S and P noted the high cost with this new facility and the gig prepayment the company faces over the next year. While S and P's actions were disappointing, they did acknowledge the strength of our regulated businesses and the low business risk profile.

As you know, the company is in a transition. We will continue to own the previously regulated generating assets until 2004. At that time we will monetize those assets and securitize our stranded investment as is clearly provided for under the Texas deregulation law. At that time we'll substantially reduce our debt with a targeted leverage ratio of between 55 and 60 percent.

Until that time, our plans are straightforward: Continue to improve the performance of our operating units and at the same time raise capital at the operating unit and holding company levels and reduce our reliance on commercial banks.

As far as the stranded cost determination in 2004, the Texas Electric Restructuring Law allows for the quantification of stranded costs for our generating plant to be determined using a partial stock valuation method. In order to comply with this legislation, a partial distribution to our shareholders of Texas Genco's common stock must be completed before January 10th, 2003, so that the stock will have traded for one year before it's used in determining stranded costs. As a result, we are preparing for a distribution of approximately 19 percent of Texas Genco's common stock to our shareholders later this year or early next year.

Now, let me turn to our third quarter earnings results. I'm very pleased with our strong performance this quarter. Today we announced third quarter income from continuing operations of $161 million, or 54 cents per diluted share. For the same period last year, which was prior to full implementation of the Texas restructuring law, income from continuing operations was $183 million or 63 cents per diluted share. Of course last year's results reflected the results of a fully integrated electric utility, so it is not necessarily meaningful to try to compare quarter to quarter results this year.

Results for both periods exclude the earnings of Reliant Resources which we spun off to shareholders on September 30th. Gary will review the third quarter operating results in detail in just a few minutes.

We continue to be pleased with the progress of our operating unit, and we are exceeding our 2002 annual guidance of $1.17 to $1.22. In fact, for the first nine months of this year we reported income from continuing operations of $1.32 per diluted share. Each of our business units with the exception of Artha [phonetic] where we have taken proactive steps to obtain rate relief is meeting or exceeding its EBIT target implicit in our 2002 guidance. This morning we announced an increase in our 2002 earnings guidance, which we now expect to be in a range of $1.30 to $1.35 per share. This increase takes into consideration the company's strong performance to date. The fact that the fourth quarter is usually the lowest quarter for our electric operations, higher borrowing costs and the uncertainties regarding additional financing this quarter as well as other variables associated with our business.

As we look to next year, we expect the full impact of the rate increases of our gas LDCs to be realized as well as other performance and productivity improvements across all our business units. However, higher borrowing costs discussed earlier and pension related increases facing most companies today will negatively impact next year's earnings. While we're not prepared to present specific guidance for next year, we do expect 2003 earnings per share will be below our previous 2002 guidance of $1.17 to $1.22 per share.

Finally, I would like to highlight some key components of our overall corporate strategy. First and foremost, I am committed to keeping Centerpoint focused on our core businesses and operating those businesses with excellence and highly reliable service at reasonable prices.

We have a strong portfolio of low risk businesses with attractive and diverse service territories and assets. Our near term 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, capture efficiencies across all our business units.

Other overall investment objectives are simple and straightforward. Namely, we are committed to maximizing total shareholder return through a competitive dividends 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. To this end, we are committed to reducing our reliance on commercial banks by executing longer term financing at our operating units as well as at the parent.

Let me now turn over the call to Gary, who will discuss our operating results in more detail.

Thank you, David. I think it's worth reminding you of the changes to our reporting segments that we made this year. We discussed in the first and second quarter, we now report two electric segments that resulted from the Texas Electric Restructuring Law and forwarding a bundling of our Texas electric operation. They are the electric transmission and distribution segment and the electric generation segment. The other two segments which we will continue to report are a national gas distribution business and our pipeline gathering operations.

Let me summarize for you the changes to our segment reporting. First, retail electric sales are no longer included in the company's operation. The unbundled transition and distribution business which will remain regulated is now reported in the electric transmission distribution segment. Also, transition 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 [inaudible].

ECOM stands for excess cost over markets and refers to stranded cost model developed by the Texas Public Utility Commission in connection with industry restructuring. Stranded investment will not be determined until 2004. For 2002 and 2003, Texas Electric Restructuring Law provides that a regulated utility may true up a stranded investment and recover in 2004 the difference between the market price of power sold at auction from the previously regulated generation and the price of power in the PUC's ECOM model. This amount is recorded as a regulatory asset in the EBIT impact which is noncash is reflected in the transition and distribution segments.

Power generation operations in Texas, which includes all the previously regulated generation assets, all of Texas Genco are now related 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 an option to purchase the stock that we hold. If Reliant Resources does not exercise that option, we still intend to monetize these assets.

Also, I'd like to remind you in accordance with the new accounting rules we have discontinued the amortization of goodwill in 2002. Second quarter of 2001 reflected goodwill amortization of $12 million.

Now let me begin with our first segment, electric transition and distribution. This segment reported EBIT of $407 million in the third quarter, which is typically our strongest quarter due to high customer usage. It is comprised of $167 million earned by the Transmission and Distribution Utility and $240 million related to ECOM. 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 to an energy delivery rate. Prior to this year the energy delivery rate, energy delivery service charge was a component of the bundled utility rate and as a result, there's no meaningful quarter over quarter comparison.

I'd 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. Also, the design of the new energy delivery rate based on 11.25 percent return on equity differs from the prior rate design. This new design will tend to lessen some of the pronounced seasonal variation of revenue.

Looking for the operations of the T and D utility overall, electric delivery to residential customers increased 3 percent due to customer growth and increased usage per customer. By the slowing economy total residential metered customers grew by over $32,000 excuse me, 32,000 people since September of last year for approximately 2 percent. We can currently serve 1.77 million metered customers. This increase in residential delivery was offset by an anticipated decline in deliveries to industrial customers due to a move to self-generate.

We're particularly pleased with the customer growth and increased average uses per customer in our service territory. This indicates to us the resiliency of Houston's economy.

On the expense side we continue to realize productivity improvement while maintaining quality customer service and reliability. Our overall operating expenses are in line with those included in establishing our energy delivery rate. Also, our continued focus on process improvements will reduce the TDU's capital expenditures for the year by approximately $45 million plus 13 percent versus our plan.

ECOM true up was $240 million in the third quarter, reflecting the difference between auction market prices and market prices used in the TUC's ECOM model and is to be recovered as part of our true up proceeding in 2004. As is evident by the amount recorded, the price is realized by Texas Genco over less than the price in the Texas TUC ECOM model.

Now, looking at the electric generation, this segment reported earnings before interest and taxes of $7 million in the third quarter compared to a loss of $52 million in the first quarter and the loss of $26 million in the second quarter of this year. This sequential improvement was driven primarily by seasonal factors combined with improved operating margin.

As you may recall, Texas Genco sells substantially all of its available generating capacity through auction. Low natural gas prices at the time of the 2001-2002 auction combined with ample generation capacity in Texas resulted in low prices for a 2002 Texas Genco product. Substantially all of our capacity sales for the third quarter were sold at auction invested during this low cash price environment.

We recently completed our first capacity auction for next year. The results are very encouraging and base load capacity prices were up significantly compared to prices received in last year's comparable auction reflecting higher natural gas prices. During the 2002-2003 transition period while we own and operate these generation facilities, we will continually seek to profitably operate all our units as well as reduce costs where we stand. To that end, earlier this month we announced that Texas Genco has moth balled 3400 megawatts of gas by cyclic and intermediate generation through at least May of 2003. This represents about a third of its total gas capacity.

This decision was made considering the current surplusage generating capacity in the Urcom [phonetic] markets and the lack of bids for these markets in our earlier capacity auction. These units are less efficient than new generation and thus run fewer hours. As a result there's been little demand for these units, making it difficult to cover their operating costs and operate profitably.

We've assessed the impact of this decision on the market, and we don't believe this will have any effect on the adequacy of electricity supply in Texas. We've asked Urcom [phonetic] to determine what any of these moth ball plans require for reliability purposes, and we are waiting for their decision.

We'll continue to assess whether additional gas prices [inaudible] moth balled its market command is insufficient to allow us to operate them profitably.

Now I'd like to turn to our natural gas distribution segment which reported on operating improvement in the third quarter. This segment had a loss before interest and taxes of less than $1 million compared to a loss of $20 million reported in the third quarter of last year. The 2001 period included goodwill amortization expense 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 customer usage because of the extreme 2000-2001 winter and higher natural gas prices. The customers gas bills increased which led to an increase in bad debt expense. Improved collections and lower gas prices this year have contributed to the improvement in bad debt expense. In addition, contributing to the improvement in EBIT was subsequent growth of 2 percent primarily in our metropolitan area.

I would also like to remind you that the Arkansas commission approved an increase in base rates for Arkansas of approximately $32 million and a gas main replacement surcharge which is expected to provide additional revenue of $2 million in 2003. The settlement provides for a new residential rate design which will help stabilize our revenue stream. The new rates became effective on September 21st.

In addition we have obtained other rate relief of approximately $8 million and have filed for a rate request of approximately $14 million in Oklahoma where we serve approximately 110,000 customers. We expect a decision by the Oklahoma commission by the end of the year. Frankly, as you know, Arkla [phonetic] has been underperforming and I believe that these rate relief actions are major steps and reflect our strong commitment to improve the financial commitment of Arkla [phonetic].

Turning to our pipeline and gathering businesses we report EBIT of $43 million for this quarter compared to $34 million for the same quarter last year. Goodwill amortization expense recorded in the third quarter of 2001 with $4 million. This business continues to provide very consistent and stable earnings, and we expect this trend to continue.

Now let me give you an update on our financing. As I'm sure you know, on October the 11th we announced the successful negotiation of two new 364-day bank facilities totaling $4.7 billion which replaced the facilities expiring on October 10th. The first facility at the parent level was $3.85 billion and has two mandatory paydowns of $6 million in February and June of next year. Pricing on the facility is based on rates under a pricing grid tied to the company's credit rating. Interest rates for the term loans as our credit rates would be the liable [phonetic] rates of 400 basis points, an increase of 100 basis points over the prior facilities.

The second facility of $850 million is Centerpoint Energy Houston Electric which is the Electric Transmission and Distribution Center. This facility also includes a mandatory paydown of $450 million in April of 2003. Interest rates for a term loan under this facility would be liable [phonetic] plus 300 basis points for $400 million and liable [phonetic] plus 350 for the next $450 million, an increase of 50 and 100 basis points respectively.

Under the agreement with the banks we also must raise $400 million of third party capital to replace maturing debt. If the company does not succeed in raising that additional capital, the maturity date of both credit facilities will accelerate to November 16th.

Now let me discuss our plans to address this $400 million. First we are exploring all options to raise this capital. However, our preference and our focus is to raise secured debt, and we are confident we'll be able to do so. The obvious question which we've been asked is, do we plan to issue new equity or equity linked securities at the rate of $400 million. We have been consistent in our position that equity is not our preference for two reasons.

First, in 2004, we had a significant deleveraging event when our generation invests in its recovery. Second we feel our current share price does not reflect the inherent value of our company. Having said this, we will not rule out equity if and when market conditions or other factors would deem it appropriate.

Another question we've been asked is, did we pay too much for our bank facility. David said earlier we were very disappointed in the fees spreads that we will have to pay, but I'd like to make a couple of points. First, the cost of capital in today's market is significantly higher than in recent years due to the market disruption in the power sector. We believe that the pricing on our deal has less to do with our credit profile but rather as a reflection of current market conditions.

Second, I would comment that substantially all of our bank group is very supportive, especially given the current market conditions, and we are especially pleased with the support of our key lenders. At the end of the day, all of our banks came through in support of the company.

Now let me address our financing strategy. First, we have been very consistent in communicating our strategy, the foundation being the 2004 deleveraging event. Until then, as David said earlier, our plan is to tap the debt capital market and reduce our reliance on the commercial bank.

Our financing plan includes issuing debt in the capital market by the end of this year, either at the parent level or at a subsidiary level. We then expect to raise additional capital to meet our requirements in 2003.

Our financing plan takes into consideration maturing debt as well as the prepayments required under our credit facility. Although we will look at a number of options to raise this capital, again, our primary focus will remain on the debt capital market.

Let me also mention, however, that under the securities laws and regulations we are restricted at this time from discussing the details of any specific transaction.

I want to thank you for your interest in Centerpoint Energy, and now let me turn the call back to Marianne.

Thank you, Gary. Now we'd be pleased to take your questions, so Ashley, could you please remind folks of the procedure and give instructions and we'll take your questions.

At this time I would like to remind everyone, if you would like to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q and A roster.

Okay. Your first question comes from Jonathan Rohowski [phonetic] with Goldman Sachs.

Hi, this is Jonathan. Can you hear me?

Yes. Hi, John.

Hi guys. Quick question. Could you review what expected operating cash flow is for this year and for next year, how much you guys have drawn down on those facilities at the present point in time, and also take us through some of the uses for that cash flow for this year and next year. I'm just trying to get a sense for these paydowns that you have in '03 of $600 in February and in June. Sort of trying to figure out if you guys are going to be at a point in time where you're going to have to actually fund that, fund those repayments.

Jonathan, this is Gary. [inaudible] And our financing plan includes addressing maturities that we have, and I think the first thing to look at those maturities, as you know, we are going to raise $400 million in new capital, as I mentioned, take that into consideration. Then we had in November 15 a $300 million maturity, then we had two other maturities this year. That's $175 million total but $75 million November 1st and then December 1 $100 million [inaudible] bonus. The total of that 175, by the way, we would expect to remarket those.

We currently have liquidity of approximately $600 million, and if you like look at - excuse me, we have one additional maturity next year, April of next year $150 million. And we have the mandatory paydown that I referenced, and our financing plan includes - obviously takes all of these into consideration in terms of the our liquidity position.

Mm-hmm. In the 3.85 that you've just renegotiated, what's remaining on that?

4.7.

Yeah.

In terms of what's drawn down?

Yes.

Fully drawn.

We have $600 million worth of liquidity -

Right.

- remaining under the 4.7.

Okay. And then if I recall correctly that you guys were sort of running on a, you know, given the capex and understanding that there's a some pretty big environment suspending in the capex budget for this year and next year, you guys were operating sort of on a cash flow negative basis and I'm just sort of - I think you know where I'm trying to go with this because it seems like in this time of difficulty in refinancing and having access to more capital that upcoming you guys have got close to - is it one and a half billion dollars?

Jonathan, I think the first thing to look at, and David can answer this as well, but in terms of our capex, yes, we have had in Texas Genco driven by the noxious emission requirements. We have had higher than normal capital expenditures. A lot of that is behind us, if you will. This has been our most difficult years in terms of uses of cash which has been to fund a substantial capex program. That capital program is being reduced fairly substantially and continues to move downward.

We feel that, you know, next year we are not quite - [inaudible] cash flow in terms of improved operating results. In addition to that, as I mentioned earlier, we have just had the results of our Texas Genco auctions. We have not factored any of that in. We expect that to be favorable as well. I think the very high use year has been 2002. As we go through, we have a substantial amount of that capex program behind us.

Well, let's assume, I mean, you've got $600 available cash currently. And then you've got the two pieces that we just talked about, the 175 and 150, all right, so that's three and a quarter plus the 450 in April of '03. So I'm just - that means it looks to me as though you're going to have to come and do some pretty big pieces of debt and/or equity in, you know, within the next six months.

I think you need to look at it a little bit differently. First of all, Jonathan, take the [inaudible] that we have placed $400 million of these capital. The 175 million of loose control bonds will be revamped, and we have a maturity in November of $300 million, we have an April maturity. Then between now and those times we will access the best capital market which will cover these mandatory paydowns. Our liquidity position is adequate, and our current position is managed.

Okay. Thanks for answering the questions.

Your next question comes from Michael Lucas with Opa-Luca [phonetic].

Hi, how are you doing. I have a question is on the [inaudible]. Have you guys explored any issues with a fraudulent transfer in terms of depending on whether you get the financing done or not?

No, we - you know, we had very good counsel on that before we made the distribution. We looked at all those issues, we had third party experts give our board advice, so we don't think there's any issue around that.

I mean potentially if you weren't able to raise the $400 million in November.

That's right.

Okay. And then I guess so the only amount that you have to access the capital market - is the 400, you figure our going to roll the 175 and you'll be able to finance your capex and work capital needs with just doing the $400 million deal?

Yeah, we clearly need to get the $400 million done in the next 30 days. That's kind of the linchpin in this whole financing plan. We do believe as we get into next year, as Gary said, that our capital requirements and cash needs we can fund substantially from internal sources. So we do have some financing hurdles in front of us. The first one is this $400 million, and that's the key one for us.

Okay. All right. Thank you.

Your next question comes from Jay Modia with Forbes Investment [phonetic].

Hi, I have a couple questions. First is, can you tell us the total amount of cash that you expect to receive from the - from the true up in 2004 and what risks there might be to that amount of risk that you might receive to pay down debt?

Are you talking about our total investment in the generating assets?

Yeah, you said that - you said that the way it works is the difference in market price versus the model price, that's the regulatory asset that you guys record and then you'll receive back in 2004, is that the total amount that you receive back in 2004 or is there some other component to it that is linked to the - you know, the selling price of Texas Genco and you end up getting rid of it? How does that whole thing work?

Okay. Let me just - so far this year we've recorded a little over $600 million in the ECOM true up based on the capacity prices and auction prices. You know, that's going to change over time, but certainly that amount is more for the rest of this year we'll look to get back as part of our expanded investment in 2004. It's north of $600 million. We just have to see how these capacity prices come out for next year to see how much bigger their number builds.

But in 2004 we also get to recover our full generation investment including the - which is our net book value including the reversal of mitigation efforts we took in the past is probably a $4 billion, a little north of $4 billion today. And also we have made some environmental expenditures which are also recoverable under the Texas law. So it's going to be a fairly sizable number that we're looking to recover.

We're going to get that from two different sources. We'll get it through selling those assets and to the extent that the sales through this partial stock and distribution that we talk about is less than this overall value, then we'll get to securitize the difference and get our money back at that time. But we get to get our full book value plus the ECOM amount we're recording to the end of 2003.

Okay. So there's no risk to you getting that total value at some point in 2004? There's no risk to that, right?

We think the law is very clear in Texas. And it is, you know, we're counting on that law. We've always counted on it. That was the basis for really passing the law, so we believe that the law is clear and we'll get our money.

Okay. And second question is, with the - with the $400 million, you get the raise in the capital market, what you're saying is that $400 million is not going to be a prepayment on the facility, that is just some kind of capital market test, if you will, to see if you can raise it and then pay down your maturities outside of the facility?

It is not a paydown of the present facilities. The fact is we do have this maturing debt coming upon us and the bank simply didn't want us to borrow money from them to repay another lender. And so we have to seek other capital, which we had planned to do anyway, although it's in a little shorter time frame than we anticipated, so but that's - it is not to pay down any part of the facility.

Okay. And then with the bank facility, the $3.85 billion portion of it is unsecured, now, if you would have opted to secure that, could you have gotten a better interest rate on this thing? Why wouldn't you have explored that option? Is there a reason or -

It's very difficult as a registered utility holding company to secure parent company financing. You can't pledge the stock or assets of any of your utility companies so you're very limited in the amount of security you can give commercial banks as a parent company.

Okay. And final question is, what is the capex going to be for 2003?

Let's take a quick peek here. It's - I think the number that we looked at last year for - or this year for next year is something around $700 million. We're obviously working to get some reduction in that, but I think as a starting point of 700 and we'll reduce it from there.

And some ballpark measure of operating cash flow to get that, do you think you can give -

I don't think we can give any specifics. I will tell you I think we have enough internal sources to cover that capital.

Okay. Well, thanks a lot. And congratulations on a good quarter.

Thank you.

Our next question comes from Howard Amster [phonetic] with Raymond Securities, Incorporated [phonetic].

Could you talk a little bit about when the distribution of that 19.9 percent of Texas Genco will be distributed and some kind of approximate valuation where it might trade, and then could you talk about the effect of these true ups in 2004 and how that might affect 2004's earnings to give us some guidance.

Okay. Addressing the last one first, the true ups don't have any impact on earnings at the time. In essence we record earnings now and we record what simplistic terms, receivables and we would get our cash for that receivable in 2004. So no impact on earnings in 2004 from the ECOM true up.

With the cash and the paydown of debt have some positive effect, though?

Yes, it will, it absolutely will. Now, let me also suggest to you that today the way in essence the ECOM true up basically allows us to continue to earn what is effectively a regulated return on our investment in our Texas generating assets, and of course that goes away in 2004 as well. But we're going to substantially reduce our leverage and of course once we reduce our leverage our financing rate and our things are going to improve as well, so yes, we look forward to that day. We think it will be very positive for us from an earnings standpoint.

Do I understand that's directly of an infusion of $4 billion into the company or did I misunderstand you?

$4 billion? No, we have an investment today in our Texas assets north of $4 billion.

That receivable number would be how much that would be converted to cash, just approximate?

Well, we expect to get all that $4 billion back in 2004 through a combination of selling the stock in Texas Genco and then recovering the - our stranded investment through the sale of secured type bonds.

Okay.

Now, let me address your first question, Howard. The we really can't tell you how the value of Texas Genco, I think, the market will tell us that. We expect that to happen either late this year or early next year. It will be a taxable event for our shareholders, so to the extent we can push it into next calendar year we plan to do that, but there's a few moving parts around there and we want to make sure we get this off successfully and we're working hard to do that. If we can do it it will be early next year, but it could be late this year if things don't go exactly - to make sure we get the execution of that off.

That's great. And then I guess the last question, just to get some clarity on the 2003, did I basically understand you correctly that your guidance for 2003 is some number less than $1.17; is that correct?

Correct.

And can you put any kind of range on it at all?

At this time, Howard, we're not going to do that. We will do that later on this year or early next year, but we're not prepared to do that at this stage.

Okay. Could you say that you're comfortable with your 64 cent dividend? You know, that it would be a reasonable payout of what you think the earnings would be?

When we established our 16 cents a quarter dividend we took into account our earnings power and our cash flow, so we feel comfortable with the 16 cents a share dividend today. Our board just declared it payable in December. And so while there are never any guarantees, we feel very confident that our current dividends is in keeping with our earnings for next year.

Thank you very much, and best of luck.

Thank you.

Your next question comes from Peggy Jones with ABM Rowe [phonetic].

Hello, I had a couple of questions. First of all, what's the estimated savings from moth balling on the plant side, the $3400 megawatts as opposed to keeping them ready to go at a moment's notice? And also, could you outline what you understand is the timing for the various orders that would be evolved in recovering the ECOM in 2004.

Let me - okay. Let me address both those. We are still working on moth balling, but we know it's a minimum of $20 million a year.

Okay.

We haven't finalized that, but I think that's a ballpark figure that we're working with at this stage. We may refine that as we go through time.

In terms of the procedures in 2004, you first have a stranded investment procedure where the commission determines how much stranded investment you have. Following that, then, you have to get a financing order to actually sell securitize bonds. So there's two procedures. The first one is the key procedure which is basically how much stranded investment you have, and then the second one basically sets out the type of terms in the financing order.

Okay. Oh, and on the question of internal cash generation available in '03, to pay for the capex, how much again of the EBIT is noncash booking of ECOM? And when you indicated that you thought internal sources would be adequate to fund the capex, would they also be adequate to meet all of the other needs that you would have as well as the capex, or would you anticipate being in a net cash short position in '03?

The first issue, this year EBIT represents a fairly substantial number, I think a little north of $600 million towards the first nine months.

Right.

It was based on very low capacity prices this year. We don't expect based on the auctions occurred so far that ECOM will be that much next year, i.e., we'll have more cash and less ECOM next year is our expectation. We have not given out any specific point estimates on that, and I hesitate to do that at this stage. We will be filing with the SEC the results of these auctions later on and then some estimates can be made by us at that time.

So -

In terms of cash flow for the rest of next year, we certainly can cover our capital. There's a good chance we can cover substantially all the rest, but we haven't fully reflected all these new capacity auctions in our forecast and there could be a shortfall there, but it will not be substantial.

Thank you.

Certainly 2003 - excuse me, 2002 was the most difficult period for the company. 2003 improves substantially from that.

Thank you.

Your next question comes from Paul - your next question comes from Paul Siegel with Luminous Management [phonetic].

Hi, can you hear me?

Yes, go ahead.

Hi, Gary. Earlier when you were talking about the $400 million outside infusion of capital, you said that it would either likely take the form of - I thought it was secured debt or equity.

Secured debt.

What would you secure the debt against?

Hold on just a second. Well, this time we haven't determined. We will have adequate capacity or should have adequate capacity in our TMV [phonetic] facility.

So it would be secured at the utility level?

Right. We don't want to go into the details of any transaction. I'm sure you appreciate that.

Sure. Also in the release you mention that one of the expected drags on earnings for next year is a pension item. Can you walk us through what that is and whether that will be a cash item or just an earning, an accounting item?

Well, this is noncash and we're being - as you know, most companies in America today have certain assumptions as to the return on assets and the discount rate that you discount your liabilities at. The expectation is that you're not going to be able to use rate of return at this time and lots of companies using anywhere from 9 to 10 percent, and our expectation is we're going to have to reduce ours a little bit.

I think we used 9.5 today in terms of rate of return on pension assets. And then the discount rate is really based on interest rates in the market at the time. It would be a noncash item, and of course, lots of things can change between now and the end of the year, but the expectation is that we're going to have higher pension costs, and I would think almost every company in America is facing the same issues.

Okay. Thank you very much.

Your next question comes from David Frank with Zimmer Lucas Partners.

Hi, good afternoon.

Good afternoon, David.

I had kind of a conceptual question. Something I've been wondering about, and that is in 2004, what happens if you're unable to sell the Texas generation assets? Presumably there's some value, but currently you've booked about - you said $600 million of ECOM which is really negative margin. If power prices are still where they are in '04, where they currently are, then presumably, at least, as a fleet as a whole is not clearing the marketplace just on its cost to produce the actual power. Is there any thought as to what you might do to mitigate any drag if you are -

Well, David, I think, as you know, in order to securitize our stranded investment we don't actually have to sell the assets. We use the valuation that comes out of the partial stock valuation methodology. Whether we sell that stock or not, we can still determine the market value of those assets, determine stranded investments and get the rest, you know, get any difference. And based on today's prices, we expect stranded investment would be a fairly significant number.

But now, if we continue to hold those assets just like we're doing today, we're going to mitigate everywhere we can the drag on earnings. Today there's not a big drag because we have ECOM true up. In 2004, you know, the ECOM true up goes away but the fact is we'll be able to securitize a large portion if prices continue to stay low.

Right. I have no problem about your recovering the stranded portion. I would fully expect you to be able to securitize $4 or $5 billion, whatever the number would be. But just from an operating standpoint, are you able to sell some of those plants? In other words fully recover your stranded costs but sell some and if you're forced to run some others at a loss, what do you do then, just try to bring down operating costs or shut down more plants?

Absolutely. Yes, I mean, we haven't - we haven't looked specifically at how we would operate it, but if Reliant Resource does not exercise the option to buy our ownership in Texas Genco, then we'll look at a number of different options as to how we minimize the impact of continuing on those units [inaudible].

Okay. Thank you.

Next question comes from Paul Patterson with Glenmark Associates [phonetic].

Hi, can you hear me?

Yes, we can, Paul.

Just a little bit of clarification there on this Texas Genco. What do you anticipate the tax will then be? How much are you talking about in terms of what shareholders would have in terms of the taxable liability?

The tax is based on the average trading price that it trades. Of course you have to figure out what it's going to trade at on the first day to be able to estimate that. And that's kind of conjecture at this time. I really can't help you with that.

Okay. I hear you. Then the $7 million in EBIT that the Texas Genco has in the third quarter, can you give us an idea to date what that amount was?

Negative $71 million.

$71 million?

I might also add that of course that $71 million reflects the full depreciation on the original book cost of those assets and that tends to be a fairly high number, as you would expect.

Okay. And then going forward in 2003 these prices alone you also spend about $20 million in pretax savings associated with [phonetic].

Correct.

Then does [inaudible] have an option of buying the shares of the Texas Genco or just the assets of the Texas Genco?

They have an option on the shares.

And then the ECOM they have an option of the shares?

All of the shares that we own at this time.

The shares that you own but not the 19 percent.

[inaudible].

That we own.

And how is the price determined? Would the price in terms of [inaudible] exercised be determined on whatever you're putting out the bid for, whoever bids the highest?

There's a formula written into the Texas law which is the highest 30 consecutive trading prices in the last 120 trading days prior to the determining, you know, stranded investment. So essentially take the last half of next year and you take the highest 30 consecutive trading days and that's what the value - how you determine the price.

Right. And then the ECOM, the ECOM would stay with you; is that correct?

Correct, the ECOM stays with us.

Okay.

I might also add and I failed to do that, under the Texas law the commission through holding a hearing can determine to add up to a 10 percent premium on that value, determine that 30 consecutive trading days and so it's up to a 10 percent premium they can add, which is the same price that resources would pay us as well.

All right. In any event you see yourself selling all the remaining 21 percent of the shares that you would be having?

81 percent.

81 percent, excuse me, yes.

Yes.

Thanks a lot.

Okay.

Your next question comings Mr. Jeff Goldman with First Capital.

Yes. I think the market has had a lot of, you know, difficulty assessing the ability of the company to raise any money in the fed capital market. I think your strategy is clear but ability to execute is a greater question. What else can you do or to give comfort that it can be done and is there any reason to believe it wouldn't be just as difficult in dealing with the debt capital markets as relative to the bankers?

Well, I'm not sure how to answer that, Jeff. Yes, you know, it's not going to be easy, but we're still confident based on what we've - what we've done so far to date that this is accomplishable, but in these markets I don't think raising any amount of debt capital is easy, but we think still it's very achievable.

Also the first thing of the September 30th for separate [inaudible], separate standalone company, the utilities, it's easy to get the fee business now. We've had what I described as a structural impediment as long as we had our rides, that's no longer there. I think there will be clarity in the market as we continue to go forward, clarity of our storage. We will see how it plays out ch.

Can you give us any successful examples of similarly troubled utilities being able to tap the debt capital markets at this time?

I think, as I said earlier, I think frankly one can [inaudible] prices on our bank facility that our banks are supportive. I think that's a - they certainly feel we'll be able to do that.

Jeff, I think another distinction is if you look at the credit rating agencies, they have looked at our situation, the fact that we're very highly leveraged but we have such a clear path of deleveraging the company based on Texas law that they continue to rate us investment grade, solid investment grade.

So I think we're much different than a troubled utility because we have such a clear path as to how we, you know, pay off all this debt, and that's the difference between us and others and of course we have to convince people that that's - that we are different because we think we are.

Can you maybe just reiterate what you think in your mind is the clear path?

Well, the clear path is the ultimate recovery of our generation assets. The law is very clear and 2004, David is right, that process will start in terms of the deleveraging process, and that's basically the path and that's what we're executing against.

Those proceeds will then be used to pay down debt at that time?

All right. Thanks.

Your next question comes from Michael Longo [phonetic] with West Broadway Partners.

Good afternoon. You mentioned in the press release a $4.2 billion noncash charge, the writedown of your investment in the IRI [phonetic]. Can you tell us how that effects any of the covenants of your existing lines and your debt agreement?

There's no impact.

Okay. Is there any regulatory restriction on asset sales as the company makes its way through the deregulation process with securitization process?

There would be some restrictions at the electric utility because if you sell a major division you would have to get approval of the commission.

Are there any specific provisions in the deregulation law that prevent sale?

No, no, nothing in regulation prevents sales, but sales of regulated assets typically have to have regulatory approval, which takes some time, generally.

Last question. The pricing grid on the terms of spread above lipra [phonetic] that you pay on the credit line, would you describe how that pricing grid works, how that spread, what increments that spread increases and whether it depends on one rating agency or all three rating agency? Can you give us a little more color on that pricing grid.

I think it drops down to below investment grade would be [inaudible] update at this point.

And between here and below investment grade you remain at this spread?

Yes, that's correct.

Is that just one rating agency or two or three?

One.

The lower of.

S and P.

Thank you.

Your next question comes from James Peckler with Facil Cap [phonetic].

Yes, I was just wondering if you could help me out as you move through the transaction period at the end of 2004. The cash that you are going to recoup through the securitization, what is the - as well as the cash that you're earning on the - return you're earning on the ECOM, what are the returns you're earning on those two sort of, I guess, regulatory assets or that sort of cash flow? And is the right way to look at it that you would be effectively redeploying that at either the cost of debt or whatever sort of return you could get if you decide to buy back stock with that cash?

I think that the latter point is correct. Today the regulation utility earnings about 11.25 percent on its rate base, about based on about a 40 percent equity level. In just looking at the results of our ECOM, that's what it produces, something very close to that. That type of return in the 11 to 11.25 percent, I believe, but obviously we'll use that, those dollars that we get for selling and/or securitizing this investment and pay down, pay down debt.

Okay. Thank you very, very much.

Okay.

Your next question comes from Kevin Bernardi with Redwood Capital.

Hi, [inaudible] Bernardi, actually. Are depreciation and amortization for T and D business going forward can you give us some sense of what that number is on an annual basis?

Yes, we can. I tell you what, let us get that. We're looking through our folder here. We'll get that in just a moment.

Okay. Can you also give us what the book value is of the equity at the electric utility places?

Yeah. We'll have to pull that out, Kevin.

Thanks.

Your next question comes from Alex Mazer [phonetic] with Lehman Brothers.

Yes, could you just give me your total debt balances as of 9-30?

Total debt?

Yes.

These are going to be approximate numbers. Obviously once we file our 10-Q a little bit later on they'll be specific. [inaudible] is the way you do that. Short-term debt of about $4.6 billion.

Okay.

Long-term debt is currently $5.2.

That includes -

That includes securitization debt of 717.

We typically exclude as we look at this because obviously that is nonrecourse to the company. It's triple A rated debt and while we have to leave it on our balance sheet, we don't view it as our debt.

But that's basically, [inaudible] again debt and then [inaudible] that's first few numbers are the ones to look at.

What about cash?

Cash on hand?

Yes.

That's net of cash on hand.

Okay. What about your working capital going forward for not only next quarter but 2003?

I'm sorry. Would you ask that again, please?

I was just asking about your working capital assumptions for next quarter and next year.

Just a second. Basically working capital continues to have modest improvement in the next year. This year somewhat of [inaudible] issue early in the year we had a receivable facility, factory agreement that we eliminated and had a significant impact on the working capital requirement this year. They are stabilized now and basically include working capital in the fourth quarter and into next year.

Do you think working capital will be a source of funds next quarter or use of cash?

Next quarter?

Yes.

Source.

Source?

These are not high inventory. Payable receivables.

Thank you very much.

Let me back up to the earlier number. Hang on just a minute.

Okay. Your next question comes Mr. Elizabeth Cirrelo [phonetic] with Merrill Lynch.

Hang on just one minute. I apologize. To go back to the depreciation amount of T and D Utilities this year, about $235 million plus or minus book value of equity is about $2.2 billion.

I'm sorry. Go ahead, operator.

Elizabeth, I apologize.

That's okay. Equity number is just as a T and D company? Total book value of equity?

As of the June 30 pro forma. We're using the numbers that we published in the 10-K we filed as of June 30th.

There was one figure I wanted to ask. You gave us the debt figures of September 30th, wonder if you could tell us what the cap ratios are or just alternatively just give us the remaining piece of the capex so we can calculate it.

The cap structure is between 75 and 80 percent, the way we calculate it, anyway. We exclude securitized debt in that. But it's right at, as I recall, right at 78 percent.

Okay. Another question would be on the capex per year for next year of $700 million, is that including the gas LDC and pipeline with the total capex figure?

Yes.

It is. It will be a little bit less than $700.

Okay. Turning to Texas Genco for a minute, you only had $7 million of EBID in the quarter, a big loss in the first half. Is that mostly due to seasonality effects around pricing, or are there some other factors that we ought to be thinking about?

No, it's really pricing, summer months, peak demand, prices go up and that's more of a reflection of prices than anything. I would also say, Elizabeth, you know, that's capacity auctions where most of that were held last year in October and we had a very low natural gas environment then and they were fairly depressed. That has changed some. And that helps us because so much of our base load unit comes from late night [phonetic] coal and nuclear and rising natural gas prices do not hurt us. If the price goes up our fuel cost stays about the same, so all of this increase goes right to margin.

And I'm sorry, I know you were talking about this earlier, but have you had a capacity auction for next year at that point? Can you talk a little bit about that?

We have had capacity auctions. We just finished it. We can't really speak to any specifics. I will say that prices were up quite a bit from last year higher natural gas prices for these [phonetic] units really did push the prices up.

And that's why you believe that next year the mix of cash versus ECOM will be more in favor of cash than the ratio was more toward the cash side in '03 versus where we were this year?

We are absolutely going to have more cash. I don't know what those ratios will be exactly but we expect to have more cash and less noncash ECOM.

And of course the two regulatory proceedings, first, the stranded cost through process with the commencement and then the financing order approvals. Just turning to the first for a second, when do you expect that process would kind of kick off?

Well, the commission determines the order of the - of which company goes first. We assume that it's going to be the one that applies first and we intend to apply first so we can get ours kicked off first. But it is the commission that determines that.

But would that be something that might start as early as say the first quarter of '03? Can you roughly ballpark of when the timing would be, how long this might take?

We would expect to file that as soon after January 20th as possible or January 10th as possible. It might very well be filed before the end of January to get the ball rolling. They have I think 180 days maximum to make a decision. We hope they don't take that long.

I'm sorry. Dick Schaffer tells me that's 150, not 180.

Okay. And one last question, going back to your comment about pension expense next year, is it possible to talk about how much of a drag that might potentially be in '03 versus '02 levels?

I think it's premature to do this at this stage, Elizabeth. You know, a lot of things are going to happen. We expect that we're going to have to make some changes in our assumptions, but we have not made that determination and won't until we get beyond the end of the year.

Thank you.

Your next question comes from Daniel Sietz [phonetic] with Salomon Smith Barney.

Question answered. Thank you.

Your next question comes from Howard Kaminski [phonetic] with King Street Capital.

Hi, good afternoon. I would like you to elaborate a little bit more on the true cash that you might or might not generate next year. By my calculations it looks as though after you net the noncash items associated with the ECOM true up that you're reasonably generating cash EBITDA this year of something in the order of a million two and you've got interest charges that by the fourth quarter should increase on a run rate basis to close to 750 which could be higher because of incremental bank financing costs.

You've got capex of well north of - well, this year it's going to be higher than the 700 next year, but I don't see how you generate precash next year and how the whole ECOM true up issue doesn't force you to continue to [phonetic] your balance sheet. That's a big question if you wouldn't mind just addressing it.

Well, I think, you know, if you look at -

Where we're at least in our current numbers, we will generate funds from operations, essentially positive, we'll have operational positive cash flow greater than our capex. The capex next year will be less than $700 million, but I can't reconcile the numbers with you but in terms of net income and, you know, look at our EBITDA, changes in working capital next year, remember this year we had a substantial negative item on a working capital that we, if you will, absorbed the impact of that, reduced our capex this year from, say, start at $850 plus million to well below $700 million, it basically gets you to near the breakeven level. This has been our most difficult year, Howard.

Maybe I'm just a little bit thick, but unless you generate a fair amount of cash next year of working capital, it would be very difficult for you not to build debt next year, or from asset sales.

Yeah, in terms of building debt, as I say, these will not be - to the extent we build debt will be very unsubstantial. It will be somewhat of a minor amount, if you will. These are roundabout, but certainly not in a very large number at all.

Okay. With regard to the banking agreement and I understand that it - enormous facility, but you did draw down the full balance of that bank line prior to completing that agreement. I just would have thought that you would have had a little bit more leverage in negotiations. It's surprising that the banks would have given you as restrictive an amortization schedule as they actually did because they made your life very, very difficult for a lot of reasons, but especially if one were an equity holder because it's going to force you to constantly be in the marketplace for incremental capital between now and the next eight months on almost a continuous basis. And I know there have been a number of questions about that, but nobody is finding it easy to raise money through either secured financings or unsecured financings in this market, and I just want to know why you feel more comfortable than virtually every other regulated utility or unregulated IGT [phonetic].

Well, a couple of things as I said in terms of [inaudible], we have an amortization that in front of it that we think is manageable, balance of the maturities that we have. We think we can execute against it.

You're absolutely right, Howard, it's a very difficult marketplace but these market changes drastically up as they do down. You know, we have confidence now, that subsequent September 30th, as David described earlier, we have our structures [inaudible] interest the T and D Utilities in terms of subsidiary structure, ability to issue secured debt. You know, I think the clarity of our story to ultimately past that we have the clear path to deleveraging I think is very clear, and we have confidence the market will understand our story and enable us to execute this strategy.

And just one last question, it is with regard to securitization and '04. I've done - I was hoping you might be able to help me out, but I'm not aware of a securitization that's ever been done in the marketplace as large as $3 billion. And I mean, are you - has there been a rate reduction bond for a single utility or utility holding company of that magnitude?

There was some very large securitized bond issues that I want to tell you how - I can't quote the exact size of those, but there's been some very large ones. You know, a couple billion dollars at least.

I'm sure that in the state of California most of the California utilities have great utility bonds that are multibillion dollars range but they're much larger utilities. And you don't anticipate any issues in terms of a rate that you've got 1.7 million customers. In order for you to amortize this over a 15-year period the impact on your customers could be substantial.

Well, you know, we've done a little calculation along those lines. It really depends on how big the stranded investment number is. Our view, though, that today we're thinking it might be a penny out of a nine cent bill, you know, you're talking about 10 percent or maybe a little bit more left and you know while that is not, you know, small, it is not a huge hill to climb to get that done.

Thank you so much for the information.

Thank you.

Okay. I think we have time for about - another question if there is another question.

Okay. Your final question comes from Stephen Tarter with Barrel Henley [phonetic].

Hi, can you hear me?

Yes.

Okay. Just have - well, looking at the current status of the market, I mean, as, you know, and this isn't anything new that we've talked about on the call, you're looking at your - what I'm pulling up on my screen here, you've got your stock at about 26 percent of book value and then you've got some other businesses as part of your company that generate, you know, that are pretty good businesses that are saleable in this kind of environment. Would you consider selling those?

Well, I think that your book value number probably includes the Reliant Resources peak. I think we're a little above 26 percent.

Is it that - okay. Then - okay. I'm sorry. Continue on.

Anyway, but I think the fundamental question is would we consider selling assets. We really like this set of assets that we have. We have a great mix of assets. Once we get through this transition, we're going to be about 50 percent electric and 50 percent gas and a nice mix of gas LDCs and interstate pipelines.

So we really don't want to sell assets. That's the answer. We have no plans to sell assets. But, you know, and it would have to be a last - a last kind of option for us for us to do it.

So if you raise $400 million in equity, where your stock is trading now, I mean, you're looking at some pretty substantial dilution, and whereas if you sold a business I doubt that the dilution would be that severe.

Our plan is not to sell equity; we'll focus on the debt capital market.

Thank you.

Okay. Well, thank you very much, everybody for tuning in. We appreciate your support and we look forward to talking to you next quarter. Thank you for participating in today's Centerpoint third quarter 2002 earnings conference call. You may now disconnect.