CenterPoint Energy Inc (CNP) 2002 Q4 法說會逐字稿

Good morning, my name is Melissa and I will be your conference facilitator.

At this time I'd like to welcome everyone to the CenterPoint Energy fourth quarter and year end 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 one on your telephone keypad.

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

Ms. Paulsen you may begin.

Thank you very much.

This is Marianne Paulsen Director of Investor Relations for CenterPoint Energy.

I'd like to welcome you to our fourth quarter and full year 2002 earnings conference call, and thank you for joining us today.

David McClanahan, President and CEO of CenterPoint Energy and Gary Whitlock, Executive Vice President and CFO will lead the discussion this morning.

And since we will review the results of Texas Genco, David Tees, President and CEO of Texas Genco is with us to answer questions related to that company.

In addition, we have other members of CenterPoint Energy management.

Before Mr. McClanahan begins I would like to mention a replay.

To access the replay, call 1-800-642-1687 and enter the conference ID number 7751117.

You can also access it on the website, www.centerpointenergy.com under the Investors section.

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

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

Thank you, Marianne.

Good morning ladies and gentlemen, thank you for your interest in CenterPoint Energy as well as Texas Genco.

I am pleased to welcome you to the earnings conference call for the fourth quarter and full year 2002.

As Marianne said, this morning Gary Whitlock will cover the financial suggestion meant including Texas Genco and also discuss the status of the financing plans.

But before he does.

I'd like to highlight for you some important events that took place over the last few months as well as our overall performance this past year.

The first day of the fourth quarter marked the beginning of the new CenterPoint Energy, having completed our legal separation from Reliant Resources on September 30th.

Our company and employees were well prepared for this day and were anxious to be focused on our regulated gas and electric businesses.

The fourth quarter, however, was going to prove to be a very eventful one.

In October, we refinanced a $4.7b credit facility that was due to terminate on October the 10th, just a few days after the spin-off of Reliant Resources.

We were very pleased with the general support of our bank grow however the pricing of this facility was expensive and very disappointing, and it contains mandatory commitment reductions that prove to create challenges.

In November $1.31b of three-year secured notes.

The proceeds were used to reduce the bank facility by $850m and to regain $400m worth of maturing debt.

Now, subsequent to this financing, it became clear that the overhang associated with the mandatory commitment reductions would continue to make additional financing very expensive as well as challenging.

We are currently in discussions with our bank group to restructure our bank facility, eliminate the mandatory commitment reductions, and extend the term beyond the monetization of our generating assets.

Gary will give you an update on this in a few minutes.

I'll say discussions have been constructive and we are optimistic.

Of course, we can't give assurances that we will be successful.

In light of those negotiations, our Board of Directors delayed consideration of our first quarter dividend until its March meeting which is presently scheduled for March the 5th.

This obviously was a difficult decision because we knew some would assume the worst.

I do believe it was the prudent course of action.

We look forward to resolving the uncertainties surrounding the restructuring of our bank facilities and our common stock dividend in the very near future.

On a more positive note, we successfully distributed 19% of Texas Genco to our shareholders on January 6th of this year.

As most of you know, this was a critical first step in the determination of the market value of our generating assets and the ultimate determination of stranded investment.

The publicly traded common stock value of Texas Genco will be used to determine the market value of the generating assets that were part of our integrated electric utility prior to the unbundling required by Texas law.

This methodology called the partial stock valuation method is set forth in the Texas law for determining stranded investment.

It will be used in 2004 in the true up proceeding before the Texas Public Utility Commission, and we expect a schedule for the stranded cost true up proceeding will be established a little later this year by the PUC.

In late January, we provided 2003 earnings guidance for Texas Genco of $1.10 to $1.30 per share.

We believe that higher power prices and lower capital expenses will make 2003 a much better year than 2002.

Last week, the initial quarterly dividend for Texas Genco was declared at a rate of $0.25 per share.

This dividend will be payable on March 20th to holders of record as of close of business on February 26th.

Texas Genco now trades on the New York Stock Exchange under the ticker symbol TGN.

Now, for the fourth quarter and full year '02, despite the distractions of the separation from Reliant Resources and the challenges presented by deregulation in Texas as well as our other refinancings, our business units turned in solid results.

Our gas LDCs were up significantly.

Our pipelines and gas gathering businesses showed solid results.

And our electric transmission and distribution business exceeded our expectations.

Earnings from continuing operations for the full year were $386m or $1.29 per share.

We knew results for the fourth quarter would not be robust, as it is typically a seasonally low quarter for our electric business.

We recorded a loss from continuing operations of $8m or $0.03 per share in the fourth quarter.

We had a number of items, however, that negatively impacted our results that were not typical.

We incurred charges of approximately $26m related to reduced staffing and early retirement programs in the fourth quarter.

Approximately 400 positions were eliminated, of which 89 were in Texas Genco.

I think that's 94.

Excuse me.

We incurred a charge of approximately $24m associated with the settlement of the company's final fuel reconciliation proceeding.

This proceeding resolved some $8.3b in fuel expenses incurred during the final four and a half years we operated as a fully-integrated electric utility.

Another $200m of fuel-related expenses were deferred for consideration until the 2004 stranded investment true up proceeding.

This settlement is still subject to approval by the Texas PUC.

We also incurred significantly increased financing and interest costs associated with the various financing of the bank facilities and the new $1.3b loan made in November.

Due to these fourth quarter charges, we came in slightly below our revised guidance for the year of $1.30 to $1.35.

As you may recall, our original guidance was $1.17 to $1.22 per share.

There were a number of very positive developments during 2002 that will help position our company as we move into 2003.

Customer growth in our service territories continue to be robust.

Electric and gas customers grew by over 100,000 meters in 2002.

This equates to a healthy 2% annual growth rate.

We aggressively pursued rate relief at our gas LDCs and were granted rate increases of over $50m, only a portion of which was realized in 2002.

We anybody initiated programs to improve our processes and assess our staffing needs which resulted in staff reductions of almost 400, as I noted earlier.

This is part of an ongoing effort to improve the efficiency of our company.

Further progress in this area is expected this year.

We were also able to substantially reduce our capital expenditures through reassessment of our requirements and prioritization of expenditures.

We under spent our original capital budget by over $100m in '02 without affecting service levels or reliability.

We'll use this same process as we go forward.

Over all, I believe we made significant progress this year that will improve the way we run our businesses as we move into 2003 and beyond.

Let me now turn to this year, 2003.

Like most other companies, we're faced with significantly higher pension and insurance costs.

Our overall interest costs will also be higher due to the financing that's completed in the fourth quarter and the higher interest rates associated with our bank facility.

We expect to offset a portion of these increases, but not all of them.

The full impact of the rate increases at our gas LDCs as well as other performance and productivity improvements across all our business units will certainly opinion help in '03.

Taking into account all these factors, we expect CenterPoint Energy to earn in the range of $0.85 to $1 per share in 2003.

Finally, I'd I believe like to high lie key spent of the overall corporate strategy.

First and foremost, I'm committed to keeping CenterPoint Energy focused on our core businesses and providing efficient and highly-reliable service add reasonable prices, and I believe we're making good progress.

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're making progress on getting the level and design of our rates where they need to be, and in striving for operational excellence, we are implementing operating practices designed to improve productivity and capture efficiency across all our business units.

Our overall investment objectives are simple and straightforward.

Namely, we're committed to maximizing total shareholder returns through a competitive dividend and reasonable growth.

We will accomplish this by managing our core businesses to produced consistent and sustainable earnings and cash flow.

And finally, we're committed to strengthening our balance sheet and improving financial flexibility.

We see a clear path to do this through the sale of Texas Genco and the securitization of our stranded investment.

Our corporate vision is to be recognized as America's leading energy delivery company.

I think we made good progress toward that goal this past year.

Now, let me turn the call over to Gary, who will discuss our operating results and financings in more detail.

Thank you, David.

As we discussed in our previous quarterly review, we now report two new electric segments as a result from the Texas Electric restructuring law and corresponding unbundling of the Texas Electric operation.

They are the electric transmission and distribution segment and the electric generation segment which is comprised of the operations of Texas Genco.

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

This is a reminder, retail electric sales are no longer included in the company's operation.

The unbundled transmission and distribution business which will remain regulated is reported in the electric transmission and distribution segment.

Also included in this segment are all the impacts from generation regulated assets recoverable by the regulated utility including the ECOM true up.

That stands for 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.

Therefore for 2002 and 2003, the Texas Electric restructuring law provides that a regulated utility may recover the difference between the market price of power sold at auction and the price of power in the PUC ECOM model as part of the 2004 stranded cost.

This amount has been reported as a regulatory aspect and the EBITDA, which is non cash, is reflected in the transmission and distribution segment.

The power generation operations in Texas which includes all the previously regulated generation assets called Texas Genco are reported in the electric generation segment.

This is a reminder in 2003, Texas Genco will remain a fully consolidated entity of CenterPoint Energy and be reported in the electric generation segment.

Albeit with a minority interest of 19%, which will be reflected in our financial result.

As you know, we expect Texas Genco to remain with CenterPoint Energy until 2004.

At that time, Reliant Resources has an option to purchase the stock that we hold.

If Reliant Resources does not exercise their option, we still tend to monetize these assets, as they are not part of our strategic direction, which you know we focus on the regulated energy delivery business.

Also I'd like to remind you that in accordance with the new accounting rule, we have discontinued the amortization of goodwill in 2002.

Full year of 2001 reflected goodwill amortization of $49m, including $12m in the fourth quarter of 2001.

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

This segment reported EBIT of $1.1b in 2002, and $175m in the fourth quarter, which as David said earlier is typically our seasonally low quarter.

This $1.1b EBIT was comprised of $421m earned by the T & D utility for the full year with $29m in the fourth quarter and $697m related to ECOM, with $146m in the fourth quarter.

The T & D utility continues to perform well and operates 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 service charge was a component of the bundled utility rate and, as a result, there is no meaningful quarter-over-quarter or year-over-year comparison.

I would also remind you that under the Texas Electric Restructuring law, our regulated transmission and distribution utility cannot buy and resell electricity unless it's no longer subject to commodity risks.

Operations, electricity deliveries to residential customers increased a robust 8% in 2002.

Metered customers increased at a 2% rate, and usage for residential customers rebounded a healthy 5% increase.

We now serve 1.79 million from either customers.

This increase in residential deliveries for the year was offset by an anticipated decline in deliveries to industrial customers, primarily due to a move to self generation.

We continue to be very pleased with the customer growth and average usage per customer in our service territory, especially in light to have the slowing economy.

We think this indicates to us the resiliency of the greater Houston area.

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 and establishing in our energy delivery rate.

Utility earnings were negatively affected by two items in the fourth quarter.

First, an $11m charge for severance cost from approximately 200 staff reductions.

We'll realize savings from these reduction in future periods.

Second, we incurred a $24m charge associated with the settlement of the fuel reconciliation proceeding.

This proposed settlement is good for the company because it removes uncertainty around $8.3b in previously unreconciled fuel costs.

Also, our continued focus on process improvements reduce the TDU capital expenditures for the year by approximately $64m or 19% versus our plan, with no degradation to the reliability of our system.

In addition, as a result of two revamped processes whereby we monitor storms better and deploy resources more efficiently, as well as perform proactive diagnostics on power lines, the electric utility achieved a substantial improvement in its reliability index in the fourth quarter.

The ECOM true up was $697m in 2002, including $146m for the fourth quarter.

This reflects the difference between auction prices and prices used in the PUC ECOM model and is to be recovered as part of the true up in '04.

As evident by the amount recorded, the prices realized by Texas Genco were less than the prices in the Texas PUC ECOM model.

We expect that the ECOM true up will be less in 2003, since power prices have increased significantly in recent auctions.

Now looking at electric generation.

This segment reported a loss of $130m in the year before interest and taxes including a $59m loss for the fourth quarter.

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 excess generating capacity in Texas resulted in low prices for our '02 Texas Genco products.

Substantially all of our capacity sales for the fourth quarter were sold at auctions conducted during this low gas price environment.

In response to the lack of market demand, Texas Genco has mothballed 3400 megawatts of cyclic and intermediate generation through May of this year which represents about 1/3 of its capacity.

This decision was made considering the current surplus of generating capacity in the market and the lack of bids in the units in our earlier capacity auctions.

The mothball plants are not required for reliability purposes.

In addition, Texas Genco offered an early retirement in the fourth quarter eliminating 94 positions and resulting in a charge of $12m in the quarter.

Looking ahead, though, we see a much improved outlook for Texas Genco.

As we discussed more fully in our web cast of January the 27, Texas Genco has conducted capacity auctions that covered approximately 74% of its available capacity for 2003.

These auctions resulted in substantially higher prices compared to prices received in last year's auctions, reflecting higher natural gas prices.

Now, I'd like to turn to the natural gas distribution segment which reported an improvement in earnings in 2002.

This segment reported earnings before interest and taxes of $210m, compared to $149m in 2001

Fourth quarter earnings before interest and taxes increased to $86m from $72m last year.

The 2001 period included goodwill amortization expense of $31m for the year, including $8m in the fourth quarter.

A substantial part of the improvement this year was a result of reduced bad debt expense.

Increases in other expenses were offset by revenue increases principally from customer growth and rate increases.

Rate relief in our gas LDCs, especially ArkLa, was a key focus in 2002.

The Arkansas Commission approved rate increases of approximately $34m.

In addition, the new residential rate design will help stabilize the new revenue stream.

The new rates became effective on September 21st and added revenue of $12m in fourth quarter of 2002.

In addition, in 2002, we obtained other rate relief of approximately $8m in various areas including Texas, Mississippi, and Arkansas.

And the Oklahoma commission I approved a rate increase of $7m effective in December of 2000.

We believe our rate relief actions and productivity initiatives reflect our strong commitment to improving the financial performance of ArkLa, as well as the other gas distribution businesses.

I'd like to mention that our gas LDCs continue to be recognized by their customers as solid gas distribution businesses.

In fact, in a recent J.D.

Powers customer satisfaction survey, Minegasco tied for first in region and Entex tied for fourth in the country.

Turning to the pipeline and gathering businesses, we reported EBIT of $158m for the year compared to $138m last year.

For the fourth quarter, EBIT was $36m compared to $31m for the same period in 2001.

Our margins improved this year, but were offset by increased operating expenses, including higher benefit cost.

The 2001 period included goodwill amortization expense of $16m, including $4m in the fourth quarter.

We think this is a business that continues to provide very consistent and stable earnings, and we expect this trend to continue.

In total, our business segments produced EBIT of $1.33b in 2002.

We will remain focused on the continuous improvement of each of our operations and their financial performance both by increasing revenue and enhancing our operational productivity in 2003 and beyond.

Once we get past our deleveraging event, the financial flexibility will improve and our regulated businesses will continue to produce strong and consistent earnings and free cash flow for the benefit of our stockholders.

Now, let me give you an update on the status of our discussions with our banks group regarding our financing plan.

I think it's important, though, to put this discussion in the context of events that have transpired over the past few months.

In October, we had successfully negotiated two new 364 day bank credit facility totaling $4.7b, which replaced facilities expiring on October the 10th.

The first facility at the parent level was for $3.85b and had two mandatory pay downs of $600m at the end of February and June of 2003.

The second facility of $850m was at CenterPoint Energy Houston Electric.

This facility also include add mandatory pay down of $450m in April of 2003.

Under the agreement with the banks, we were also required to raise $400m of third-party capital to replace maturing debt.

If the company had not been successful in raising that additional capital, the maturity date of both credit facilities would have accelerated to November the 15th.

We explored a number of options to address the need to rate $400m, but due to a combination of events and issues, including a downgrade of the parent company credit rating and a very disruptive capital market the company chose to issue $1.31b of secured notes at the Transmission and Distribution Utility.

The funds were used to redeem the $400m of maturing debt and to pay off the $850m bank facility, thereby meeting the requirements in the bank agreement and to meet our goal of reducing bank debt.

Subsequently, the company has continued to meet with multiple capital market sources to evaluate our access to the market on reasonable terms and conditions.

It became clear, though, that our ability to access the capital market is significantly constrained by the bank amortization overhang.

And in response to this situation, we are in advanced discussions with our bank group to modify the payment schedule and certain other terms of the $3.85b bank credit facility.

Our discussions have been constructive, but it would not be appropriate to discuss terms or various conditions being considered.

However, I'd like to make a couple of very important points.

First, our bank group has been very supportive especially given the events of the past year combined with the disruptions in the capital market and especially in the energy sector.

We are especially pleased with the support of our key lenders.

Second, let me emphasize that the discussions with our banks revolve around a mutually beneficial structure that removes the mandatory commitment overhang and allows us to efficiently and cost effectively address our financing needs.

This will allow the company to meet the primary need of the bank group which is reduction in exposure as quickly as possible, but we will do so in a disciplined and effective manner.

Our situation is different than other companies in the energy sector.

Our banks understand that the foundation of our financing strategy is a combination of the high-quality, regulated businesses which produce stable earnings and cash flow and our deleveraging event in 2004 when we reconciled our stranded investments and monetized Texas Genco.

I'd like to thank you for your interest in CenterPoint Energy and now let me turn the call back to Marianne.

Well, thanks, Gary.

And I understand that there might have been some difficulty hearing the information at the very beginning of the call.

I think it has improved.

But let me do two things: First, I want to reiterate the phone number to the replay, and that number is (800)642-1687 with the conference I.D. number 7751117.

That will be available 6:00 p.m.

Central Time through Thursday February the 20th, 2003.

And that will be available, also, on our website.

The other thing that I would like to mention prior to our going to Q&A is that we will, because of the difficulty in hearing at the beginning, we will be posting the prepared remarks on our website as soon as we can after this conference call ends.

So with that, I would like to ask Melissa if she could repeat the instructions on how to ask a question.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

To withdraw your question, press star, then the number two on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Tom Mockler with General Electric.

I wonder if you could review your liquidity situation and what kind of fallback ideas you might be thinking about if the banks elect not to go the way you want or in conjunction with a bank arrangement.

Are you contemplating any financings, convertible deals, something along those lines, perhaps?

Tom, let me address both of those.

First, liquidity issues, we had about $300m of liquidity when we ended last year, and we still have ample liquidity now.

We do have a maturing $150m medium-term note that comes due in mid April, I think.

So that's a target opponent for us to get out and do some financings before then.

Our banks are well aware of our strategy here, and I believe they agree with our strategy.

And that is these mandatory commitments are such an overhang on our ability to raise capital on reasonable terms.

Now, there may be capital out there, but we want to raise them on reasonable terms and not just raise capital for the purpose of raising capital.

We have a common goal of trying to restructure this bank facility to take that pressure off, which then opens up, we believe, more reasonable financing to us in the capital market.

And that's what our whole efforts are being devoted to is to get this bank deal restructured.

We expect to do some financing once we get it restructured.

The banks are interested in getting a pay down, and there will be probably some source of incentives built in to our bank facility to get us to do that.

Good.

When you say your liquidity is ample now, does that mean it's less than the $300m at your year end?

We have a little bit reduction the first quarter primarily because of large ad valorem tax payments on the electric side.

There's a little bit of reduction or negative liquidity, but it's still ample as we sit here today.

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

Yeah, hi.

Good morning.

I was wondering what the actual cash flow was in 2002 after CAPEX and dividends?

Yeah, this is Gary.

In 2002, this is a year that we had high-cash needs.

And maybe I'll describe like this.

Cash flow from operations, if you recall if you look at this calculation, we have two items you need to consider, one is ECOM which is this noncash earning, then excess mitigation credits that flow back and have no earnings impact but have a cash impact.

In '02 and then again as we said this year is going to with a high-cash need for a number of reasons which I'll describe.

The cash flow from operations is a little more than $100m.

CAPEX is about 850, so we really had a negative free cash flow of about $740m or so.

And then, as you recall, we had dividends this year that, for the first two quarters of the year, we paid the dividend at the higher rate prior to the time that we added RRI.

So this year we were net borrow of a little more than $1b this year.

And, now, in 2003?

In 2003, David, things change, as we've indicated.

First of all, cash flow from operations improved somewhat dramatically.

You know, we're looking at north of $700m.

In fact, if I summarize for the year a couple of things, one is capital expenditures will be less.

We'll drop those from $850m to $680m.

Cash flow from operations will improve.

And again part of that is the ECOM, the Texas Genco earnings increase, which are cash earnings, the ECOM then decreases.

So, if you will, the quality of our earnings increases.

In addition, we have improvement in our cash flow from operation.

And this year, by the way, in 2002, we had negative around a factoring agreement that had to be unwound early in the year as retail competition began.

So if you look at 2003, you're looking at improvement in cash flow from operations, lower CAPEX, and free cash flow.

So we can cover all of our CAPEX with cash flow from operations.

We don't quite cover the entire dividend payment, though.

So, we will have a fairly modest borrowing need or cash need in 2003, but it's quite modest, especially in comparison to 2002, which was our, if you L high year of cash usage.

Okay.

And do you have any balance sheet information you could give us for the end of the year, at least what the equity ratio was?

I can give you debt-to-equity ratio.

We don't have the balance sheet out.

The end of the year 81.7% total debt total cap.

And are there any preferreds?

There are.

And about how much are they?

The trust preferreds?

About $706m.

Do you know on a percentage basis about how much that is?

Just a second.

About 6%.

6%.

So about 13% common equity?

That's about correct.

Thank you.

Your next question comes from Paul Patterson with Glen Rock Associates.

I just want to follow up on some of David's questions.

In terms of the CFO of $100m in 2002 and approximately $700m in 2003 is that before or after working capital adjustments?

And what might those working capital adjustments be?

Yes, that includes working capital adjustments.

And in 2002, we had a factoring agreement that had to be unwound early in the year.

Once retail competition began, if we were selling to residential customers, or so, basically an agreement had to be unwound that's sort of a negative to us that plays out during the year.

In addition to that the businesses in terms of managing the -- their working capital needs, both on the receivables side and the payables side, the inventory management, has improved year-over-year.

So, 2003 will be a net improvement in working capital.

Okay.

Then what I wanted to ask you as well is given the capital structure that you guys just outlined, I know you guys are going to be security advertising.

What securitization are you going to be looking at in '04 and what's the goal in getting that debt number down?

I assume you feel it should be reduced?

Absolutely.

Yeah.

Paul, the total amount of -- let me back up.

And these numbers haven't changed enough from the last time we talked.

If you look at our book value of our generating assets plus the unwind of the redirected T&D depreciation and excess mitigation credits, which you need to add back to that, it's over $4b.

Plus you have the ECOM true up you add to that, and as you know we have over $700m through 2002, and we have this year ahead of us.

So, it's going to be $4.7b +.

Probably $5b in order of magnitude.

You have some environmental expenditures and other things in there.

So, that's the amount of money we expect to get back in two ways.

One is through the sale of Texas Genco.

And to the extent that we don't get back all of our proceeds, which we don't expect to -- we expect to have a substantial stranded investment number -- we'll set it back through securitization of stranded investment.

So that $4b or $5b, we're going to use that to restructure our balance sheet, to strengthen our balance sheet, to give us financial flexibility.

Our goal is to get back to a 40% to 45% equity level over time.

We think that after we get this money back, we will be in the 60% total debt to capitalization range.

We still have the trust preferreds in there of 6% as Gary noted today.

So, we would be in the low 30s in terms of common equity after we finished with the securitization.

Sounds like you guys will probably be issuing equity sometime between now and '04?

Does that make sense?

Well, we're not ruling out any of those items, Paul.

We think that we do have a thin equity level.

We're focused on that.

Obviously, we don't like our stock price right now in terms of issuing any kind of equity or equity-linked securities.

But hopefully, we'll get some improvement in that as we go through time, and that will be an avenue that we'll look at we haven't ruled out that's for sure.

Great.

Finally in terms of the negotiations that you're currently working through, is it possible you can tell us what the main sticking point might be in terms of what you're facing between now and the end of February?

I don't think so, really.

Okay.

Thank you very much.

Your next question comes from Michael Goldberg with Luminous.

Morning gentlemen, Marianne.

Is it possible to provide '03 EBITDA guidance by segment?

We don't provide EBITDA guidance by segment.

Certainly we're not prepared to do that today.

I think we could give you some overall guidance for the company, but not by segment.

Okay.

Well, if I take an EPS of $0.85 to $1 and then add back tax, by the way, interest expense, is it safe to assume that in your guidance you assumed your Q4 interest expense of 2.68 and multiplied by four?

I think that will produce a number that's too big.

There were some unusual items in the fourth quarter that would produce a number that's too big.

Okay.

So let's say we have reduced that number.

I'm getting an EBIT number of somewhere around 1.4 to 1.5, if I just backtrack into it.

There's about $150m of growth from '02 into '03.

Is it possible to give us guidance of where that growth is coming from?

The numbers you're talking about, I think, the 1.4 is certainly in the ballpark.

We have some improvements in all of our business units factored in to our EBIT by business segment.

I'm not sure we're prepared, though, to give any details around that.

Okay.

Is there any sort of light you can set on the ECOM true up performance with the $250m to $300m in terms of EBITDA given your guidance of '03?

Is there any way that will reflect the ECOM true up?

It's not necessarily dollar-for-dollar reduction, but certainly as the cash earnings in Texas Genco increases, you will see a corresponding decrease in ECOM true up.

But not necessarily dollar-for-dollar, but there will certainly be a decline there.

Any sort of ratio, any way you can quantify that amount?

Hang on just a minute.

I don't know that we have any kind of ratio that we could provide.

Okay.

No, I don't think so, Michael.

Okay.

And maybe I missed it, I think you might have mentioned, what was your cash balance at the end of the year and approximately where the cash is today?

Did you mention it?

Yeah, about $300m at year end.

And a little less than that but very close to that now.

Slightly less.

As David mentioned in his comments that we have some fairly high ad valorem tax payments during this time frame.

It was about $300m at year end.

Okay, so if you don't resolve your problems with the banks or your negotiations with the banks, there is no way you can make the $600m payment, at least based on your current cash balance?

We don't have cash available to do that.

Okay.

One more thing.

When you talk about interest expense in our '03 guidance, does that include the financing fees from the lone or do you back that out as one-time charges?

The fees are amortized over the life of the loan.

So in your 85 to dollar guidance that's included with an interest expense?

Yes.

And certainly your '03 guidance doesn't assume any positive or negative effects from refinance.

We have factored in what we think is a reasonable level, but we're not finished there yet, so we can't be assured of what we'll actually end up with.

But your current guidance, does that I assume any sort of effects of the refinance?

Yes, it assumes what we believe is kind of a middle-of-the-road estimate of what the impacts might be.

Can you say whether it's a negative or positive impact verse what the rates are today on the outstanding loans?

I don't think it's necessarily rates as opposed to fees but we've made an estimate and tried to factor those into our earnings guidance.

Okay.

But I guess I'm still trying to understand.

Does that impact reduce your guidance or increase it?

No, it reduces it.

It reduced EPS guidance?

Okay.

And just one more question.

What is the amount of minority interest that we should expect to see on the balance sheet post the spin independent spin-off?

Michael this is Gary.

About $146m.

$146m?

Yeah, about $150m.

Okay.

I really appreciate it.

Just one more final question.

You said Q4 '02 interest expense is higher than you expect as a run rate.

Is it possible to point out what exactly was high?

Yeah.

I would say the two key items were that we had upfront costs -- fee costs, if you will -- in the transactions we entered into in the quarter, and then we also had swap cost as well.

Earlier in the year we had entered into and settled a number of swaps, forward-starting swaps that had potential financing.

Those were settled and amounts from financing purposes.

These are noncash.

Those amounts are charged to interest expense in the quarter.

So what was the amount of swap cost?

Because the upfront cost for the bank, you can amortize those.

Yeah, during the quarter, there was about $80m of swap and upfront costs amortized.

These are the amortization amounts that occurred in the quarter.

Uh-huh.

And swap costs will obviously disappear, but upfront costs will kind of go throughout the whole '03 as the loan continues?

Well, no, I think there's a portion of swap cost will continue and obviously, as you just described the fees will continue on the amortization schedule.

So, both of the items will continue in '03, throughout the whole '03?

Right but not at the same amounts.

Okay.

Thank you very much gentlemen, I really appreciate your help.

Your next question comes from Paul Stebas with Value Line.

What's the average interest rate on your long-term debt now?

Paul, let us get back to you on that.

We can have it in just a moment.

Okay.

Also on some of the cost measures, is there any prospect for additional rate relief this year or planning to file any rate cases?

We are looking at some additional rate release in our gas LDCs, yes, and I expect we will file rate increases in some jurisdictions.

I don't expect that on the electric side or pipeline side you will see any changes there.

There's no regulatory agreement that would prevent you from filing anything on the electric side?

No, there is no reason why we couldn't other than that we think we're earning about what we need to earn from the electric side.

And what are you earning now from the electric and gas distribution?

Electric, we have an authorized ROE of 11.25.

On the gas side it's a little harder to say since we covered six states and a whole bunch of jurisdictions, but the who is most recent ArkLa case in Arkansas we were granted at about a 10% ROE based on 50/50 debt to capital structure.

And you're earning close to that, 11.25 in electric?

Right.

Thank you.

The next question comes from Peggy Jones with ABN Amro.

A lot of my questions have already been answered, but one no one else has asked, are there any potential collateral calls in '03 if you were downgraded again?

The only collateral, really, is in the Texas Genco area.

It is not material.

There could be some small amounts.

David, do you have any?

Do you want to address that?

Yeah, we have taken a look at if we did establish I don't know investment grade debt for Texas Genco, and we think in about three different areas we would have to furnish collateral, one is with [Bercot], which is the independent system operator.

And gas contracts, we think the cost for that collateral could vary between $5m and $7m.

So that's $5m to 7m in total?

Yes.

Okay.

And the other question that I had, could you run down the timing that we should be keeping an eye on with regard to proceeding to sell Texas Genco and recovering stranded costs?

Yes.

We believe that -- well, Reliant Resources has an option to purchase Texas Genco in January of '04.

That is also the time we expect to file our 2004 true up proceeding at the PUC.

I mentioned earlier the PUC is going to establish a schedule for each company to come in.

We're requesting that our schedule be in January of '04.

The sale of Texas Genco, if Reliant Resources does not exercise that option, then we will seek other buyers of either the stock and/or the assess of that assets of that company.

We can pursue the stranded cost recovery proceeding whether we sell Texas Genco or not, and we would expect to do that.

That proceeding is limited to 150 days from the date we file it.

So, if you assume a January 2004 filing, that would be probably June or so when that proceeding would be complete.

Then you have to get a financing order from the commission in a separate proceeding to sell securitized bonds.

We estimate fall of '04 before we can get to the capital markets with our securitization.

Essentially, then, with regard to the stranded costs, if there's no transaction in place to sell Texas Genco, you would proceed, of course, on the basis of the market's valuation of the company and go straight ahead forward with your stranded cost proceeding?

That's right.

We don't have to -- we'll use the same valuation method doling that's that methodology that's imbedded in the agreement and Texas law.

Thank you very much.

Your next question comes from Jeff Krosnowski with Deutche Bank Securities.

Can you give me an indication of what sort of the incremental gas rates we'll be seeing this year because you had several cases implement in '02 and I'm sure you didn't realize a full benefit that same year.

Can you give me what would be incremental in '03?

I believe there's at least $30m of incremental rate relief that was not realized in 2002.

Maybe a little bit more.

As you know, we had $50m worth of annuals rate rereef.

We realized $20m in '02.

So $30m plus some growth in '03.

I wanted to once again circle back to operating cash flow and I want to make sure I understand the components of operating cash flow better, because not I assume anything working capital improvements and just focusing on the three primary items there which would be net income plus D&A and less the ECOM true up.

I'm showing a deficit.

Can you explain some of the other items in a little more detail that will put me to less than a deficit or I guess a greater operating cash flow and less a free cash flow deficit?

Okay, Jeff.

This is Gary.

Let me see if I can help there.

First of all, you know, I think you've got to look at CAPEX is down from about 850 to 680.

I have that.

Then if you look at other items -- if you look at the earnings, then, a couple of items there.

One is ECOM is, this year, obviously, about $697m.

It will be less next year.

So the projected quality, less ECOM, more earnings or cash earning from Texas Genco.

Right, I have that factored in also.

You should be coming up to somewhere around -- just a second, I can give you more detail.

Sure.

I guess I want to look for, I guess, the other components of operating cash know, more specifically the working capital.

And I guess you mentioned ECOM credits, also.

I think if you adjusted for the ECOM as I just described, then the working capital, I think you'd have to take that into consideration.

That's not an insignificant amount.

For example, the factoring agreement has a year-over-year impact of about $140m just on the factoring agreement alone.

Okay.

Networking capital improved north of $200m.

So if you take the increase in the earnings and the cash from the earnings, the quality of the earnings -- in other words, less ECOM earnings or cash earnings --

Right.

The change in the working capital and deferred taxes you're going to get north of the $700m from cash flow of operations.

Okay.

I get close to that I guess, if I make some working capital assumptions.

Then we had, again, some interest rate swaps that were paid at -- you know, that continue to be amortized.

If you will include in that -- I am going to lump it as working capital, but there are noncash charges hitting the income statement.

Okay.

Adjust for those but you would end up with north of $700m cash flow from operations less the CAPEX, and free positive cash flow of, I'm going to say, circa $50m or so, and then you're going to have the dividends of course that we need to cover.

And what do you think is your best option of dealing with any cash flow deficit at paying out dividends?

I think we have to step back and look at where we are now and that is we are in very productive and constructive discussions with the bank.

Our goal is to remove this overhang, and we feel strongly if we remove the overhang in terms of the maturities that we have in front of us that we'll refinance those.

And, again, we are carrying, today, for example, $175m of control bonds that we're unable to market.

These are control bonds that were repurchased in the fourth quarter of last year.

Again, impacting the cash needs that we had last year.

So, again, from an operational perspective, we more than cover our needs for capital expenditures, and then removing the overhang allows us top address this, frankly, fairly minor cash need and meet our refinancing requirements as well.

Okay.

I guess just one last question, and this is related to the dividend.

Ever since you made that announcement the shares -- the share price has fallen, and my question is what do you expect the board -- or the primary consideration on March 5th when the board meets in regards to the dividend?

I think the market is factoring in some type of reduction here.

Would it be possible to go to zero?

Or do you think that it's in your -- it probably is in your best interest to maintain some sort of dividend?

Well, Jeff, let me talk to you philosophically and can't give you any specificity.

One is that the company as well as me personally believe that the dividend is very important.

But we have to look at the long-term interest of the company, and we obviously need to get this bank credit facility renegotiations behind us.

But we recognize, for a company like ours that's yield-oriented, that a dividend is important, and we'll talk all these factors into account including our liquidity in making this decision.

And we'll see where that comes out in early March.

Okay.

That's all I had.

Thank you very much.

Your next question comes from Debra Romberg with Jefferies.

Just a couple of quick questions.

Amortization built into your '03 guidance, if I were to assume $126m pretax, would I be in the ballpark there?

And also the $50m of severance and PUC fuel settlement charges in the quarter, are those numbers pretax?

Those numbers are pretax, Debra.

I think you're a little high on your amortization amounts.

Okay.

Thank you.

Your next question comes from Jonathan Rojowski with Goldman Sachs.

Hi, there.

I was wondering if you could quickly, Gary, review the one-time items and the individual line items that are recorded in the pretax number associated with it?

And also if you could break out the CAPEX number that you gave for this year until its sort of like a maintenance and development earning kind of buckets?

Okay.

Let me do CAPEX first.

This year -- excuse me.

Let me give you '03 and then I'll come back to '02 on the CAPEX.

The $680m we're projecting for next year, about $98m are environmental; about $483m are what we would describe as nondiscretionary in the sense of maintaining the businesses.

Obviously, as you know these are capital-intensive businesses.

About $99m maybe in the category of discretionary, but just needed is the items that we need to focus on.

The environmental by the way is Texas Genco.

So that's about the $680m.

The $850m we had this year -- just a second I'll break that down -- was driven substantially -- or a large part of it was driven by Texas Genco.

Let me get you the total. $280m in 2002 of Texas Genco expenditures in total.

So year over year, you can see a substantial decrease in environmental CAPEX from Texas Genco.

Does that help, Jonathan?

I'm not sure if we got your question answered.

$280m out of the $850m for '02, right?

What type of detail are you looking for?

You gave the nondiscretionary/discretionary for '03?

Yeah, let me get it.

Well, let me come back to that one.

Okay.

And do are you guys comfortable giving an '04 number.

In terms of CAPEX?

Yeah.

It will continue to decrease.

Ultimately, our run rate, Jonathan, we expect the rate to be between $550m and $600m.

Okay.

And create the main drivers that the environmental expenditures will continue to decrease in 2004.

Okay.

Excellent.

Jonathan.

On the CAPEX quickly, on the $850m, and maybe this is perhaps even a better way to look at it, $261m at the T&D utility, the generation $280m, natural gas distribution $196m, pipelines and gathering $70m, other $47m or so.

So that's basically the $850m.

And then the real driver then if you look in 2003, moving that down, the T&D utility remains about the same, and the generation moves from 280 total to 150.

Natural gas distribution about the same, pipelines and gathering a little less.

So the real driver, Jonathan, if you look at it year over year is Texas Genco.

We start moving those costs down.

Okay.

You also had a question on one-time costs?

Yeah.

These are the ones that I presume you're looking at the ones we outlined in the press release?

Yes.

What additional detail do you need on those?

Well, I think Debra asked if they were -- the numbers you gave were the pretax or after tax amounts.

I thought they were after tax.

They're all pretax.

Okay.

We can go through them quickly.

Severance charges probably and O&M.

So we have increased revenue from rate increases we described of $20m including $14m for the quarter.

Then if you look at the other items, the severance charges of $26m, that's a pretax number, and the $24m charge is obviously a pretax number as well, and noncash.

Right noncash, and recognize them in O&M, both?

Yes, they are.

Okay.

Perfect.

Your next question comes from Scott Ingstrom with Hamilton Investments.

If I took the charges after tax it's about $0.11; is that about right?

That's right.

Okay.

And just I wondered if you could provide a little more clarity on the fourth-quarter interest expense.

You mentioned there a number of $80m, and I just am not clear -- if you back $80m and that's an ongoing expense than what's in the balance sheet today or can you help me get what would be a clean number for interest expense in the fourth quarter?

Let me look at it.

I think we reported fourth quarter 2002 interest expense of $269m.

Right.

And adjust that by $80m, which is swap and upfront cost amortization.

All right.

Okay.

I think that would be your main adjustment.

Okay.

And that $80m will not reoccur, then, in '03?

No, a portion of it will occur in '03.

We'll have to provide some guidance on that.

In fact, just a second.

In '03, going forward, we would expect about $100m for the full year of swap and upfront amortization.

So maybe the way to look at it, if we took fourth quarter 2002 interest expense, adjusted it for the $80m, as you know we entered into the $1.3b buffet loan.

Adjusted fourth quarter is about $189m.

And then the two numbers you mentioned for '03 with respect to pension and insurance, the $50m pension and $20m insurance, any even ballpark of which operating businesses those will end up in?

The question is the '03 guidance on the pension and insurance increase year over year.

Just a question of where those will ballpark end up between utilities and the pipes, et cetera.

You took the $50m pension increase.

Is that $30m at the TDU and $10m at the LDC, that kind of thing?

You know, I don't think we have that kind of detail right now, Scott.

I want to tell you a big portion will go to the TDU and Genco because they just have a lot of employees.

But I would say it would be split half and half.

Okay.

Last question, and I know you've been pressed on sort of what the ECOM number will be for '03, but maybe to simplify the question a little bit, based on the guidance that Genco has been out there with and the $4 and their guidance being based on $4 gas, given that the ECOM is somewhat formulated relative to gas prices and the ECOM model, can you tell us if $4 ended up being the right number for gas or the year or what the ECOM would be in recognized in TDU then?

Well, it's not quite that simple, unfortunately, because you have to know what your generation is.

We have opportunity sales as well, and you have to take that into account.

It's not just the capacity auctions, it's how you run these units and sell energy from them besides just the energy sold from the capacity auction.

So, while I wish it was an easy formula there, it's not quite as easy as it would appear.

How about based on the Genco guidance for the earnings guidance and the $4.

Is that guidance -- could I infer from that roughly in the range of $200m decrease on the ECOM statement this year?

Would that be in the ballpark?

No, Scott, I think it would be more than that.

More than that?

OK

Scott, let me come back on this interest expense and clarify a couple of things.

One, let's, again, start with the fourth quarter 2002 interest expenses as reported of $269m and see if this will be helpful.

Less the swap and upfront costs which are about $80m, and then let's adjust that also for increased interest on the $1.3b loan of about 12.

I would then come up with what I'd describe as an adjusted fourth quarter interest of about $201m.

You could then annualize that and say that's an annualized look at our interest expense.

Then in 2003, you'd add to that $100m swap in up front amortization.

And I'll leave it to your devices as to what you think the interest rates will be on the short-term debt in 2003.

So if you took those items, you can start modeling, if you will, based on what you think rates will be in '03 and pretty to see our total level which is circa $4b of short-term debt.

That's very helpful.

Thanks very much.

Your next question comes from John Simon with River Capital Advisors.

Good morning and thanks for taking my call.

I was wondering if you had received read back from the S.E.C. to issue secured debt?

You're talking about the pledging of the Texas Genco stock.

Right.

Well, let me say that we have been in discussions for sometime with the S.E.C, and I think those discussions have gone well.

The filing is out for comment, and I think the intervention had to come by the 18th of February, so the S.E.C. could not take up that application before that date.

Thank you.

Your next question comes from Danielle Sietz with Salomon Smith Barney.

Can you issue any debt of the subsidiaries?

Yes, we do.

We have room for $300m worth of additional secured debt at the electric company.

We don't anticipate issuing any secured debt at the gas LDCs.

Great.

I just wanted to make sure.

Thank you.

I think we have time for one more question.

Marianne, also, Paul had a question earlier on our long-term debt -- averaged long-term debt rates and it's about 8.3%, that's excluding the transition bond.

The last question is from Joanne Wang with Credit Lianas.

You mentioned you have $50m increase in pension liability.

What's that in '03 and cash impact of this pension liability?

There is no cash impact in '03, and we'll get you the total I impact in just a moment.

Okay.

And also, is it a possible to give long-term debt maturity for the next five years?

Like for '03, how much will be mature and '04?

Let me first of all answer your question on the pension plan.

Total pension expense is $75m to $80m.

Okay.

As you can see that 50 is obviously an increase significantly year over year.

Long-term debt maturity over the next five years?

The next five years?

Yeah, what's the total maturity for '03, '04?

I think we can look at '03, it would probably be the best thing.

You look at '03, in April of '03, and I'll make another comment of this.

In April of '03, we have a medium-term note of $150m.

In November, we have a synthetic foot bond for $500m and we have a control bond at $17m in December.

Those are long-term debt maturities.

If you look at our bank, we have a revolver, a CERC, which is our gas and natural gas areas, of $350m in March.

And we have a receivables facility in November of $150m.

Well, those are short-term, right?

Those are short-term.

In 2004, I think they take away, there's virtually no maturities in 2004.

So, I would step back and say again, our view is that when we remove the overhang -- and this is why we feel this is very important to do.

As we remove the overhang, these maturities I've described the long-term debt maturities and the bank facilities that are maturing can be refinanced very effectively, and obviously, that's the key element of what we're trying to accomplish.

Well, the reason I ask this question is when I look at the 10K of last year for the 2001 10K, 2003 has about $1.2b maturity, but I couldn't find out where they are?

But it stated it has $1.2b maturity in '03.

I think that may be referring to the two $600m securities I immediate to check that.

That was total REI?

Yes.

One thing you have to be careful of if you look at those filings if they were on a consolidated basis and very easily could have included Reliant Resources.

I think it's much more effective to look at our most recent filings and then the 10K and we will file, hopefully before the end of March, as early as possible.

And it will describe all of those.

Basically, what I just described are the maturities that are going to occur in 2003, and there's virtually nothing in 2004.

Okay.

Yeah, well, I guess, you know, 10K, it seems to be separated IEI from RRI.

I may be wrong, but I will double-check it.

Thank you.

Well, thank you all very much for participating in this morning's conference call.

We, as always, appreciate your attention and support.

And have a great day thank you.

Thank you for participating in today's CenterPoint Energy fourth quarter and year end 2002 earnings conference call.

You may now disconnect.