CenterPoint Energy Inc (CNP) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to the CenterPoint Energy third quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS).

Ms. Paulsen, you may begin.

Thank you very much.

Good morning everyone.

This is Marianne Paulsen, director of Investor Relations for CenterPoint Energy.

I'd like to welcome you to our third quarter 2003 earnings conference call.

Thank you for joining us today.

As you may know, Texas Genco also released earnings this morning and had a conference call as well.

If you would like to listen to a replay of the Texas Genco call, please go to the Investor Relations section of their website -- www.txgenco.com.

On our call this morning, although we will comment on Texas Genco's results, which are recorded in CenterPoint Energy's electric generation segment, our primary focus will be on the other segments of the Company.

On our call this morning are David McClanahan, President and CEO of CenterPoint Energy, and Gary Whitlock, Executive VP and CFO.

In addition, we have other members of management here who may assist us in answering questions on CenterPoint Energy following the prepared remarks.

Our third quarter earnings release which we issued this morning is posted on the CenterPoint Energy website, which is www.CenterPointEnergy.com, under the investors section.

I also 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 form 10-Q for the quarterly period ended June 30, 2003, and other SEC filings.

Before Mr. McClanahan begins, I would like to mention that a replay of the call will be available until 6 PM Central time through Tuesday, October 28, 2003.

To access the replay please call 1-800-642-1687 or 706-645-9291 and enter the conference ID number 2939620.

You can also listen to an online replay of the call via our website under the investors section, which we will archive for at least one year.

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

Thank you, Marianne.

Good morning, ladies and gentlemen.

Thank you for joining us this morning for our third quarter earnings call and thank you for your interest in the Company.

This morning I will give the highlights of the third quarter's financial results and discuss some key activities and developments; following me, Gary Whitlock, our CFO, will discuss the performance of each of our business segments.

As we reported this morning, on a consolidated basis CenterPoint Energy had income from continuing operations of 183 million, or 60 cents per diluted share.

This compares to 162 million, or 54 cents per diluted share, for the third quarter of 2002.

I'm very pleased with our performance for the quarter.

Our core businesses performed very well.

Texas Genco reported significant improvement, and ECOM was somewhat higher than we expected, as Gary will explain in a few minutes.

And we've continued to make good progress towards implementing our strategy and positioning the Company for the future.

That progress is reflected in our improved outlook for this year.

As I am sure you all have read in our press release, we raised our guidance for 2003 earnings per share from continuing operations to $1.30 to $1.40, from 85 cents to $1.

This guidance reflects both our performance today and our outlook for continued solid operational performance from each of our business units.

Gary will discuss this a little bit further in a moment.

Let me mow update you on a couple of items that may be of interest to you.

As you may be aware, on September 15, the Federal Energy Regulatory Commission -- or FERC -- issued a show cause order relating to CenterPoint Energy Gas Transmission Company's reporting and posting of information for negotiated rate contracts.

CEGT is one of our two interstate pipelines.

After reviewing the matter -- these matters raised in the show cause order, CEGT provided the Commission with a substantial amount of material in an effort to provide information prior to our formal response and in order to reach a prompt resolution of this issue.

In order to give the Commission time to review the material we had provided, we filed for and were granted a 30 day extension to file our formal response to the show cause order.

We now expect to file our response on November 14 unless further extensions are granted to allow CEGT and the staff more time to reach an agreed-upon resolution.

We continue to believe that we have complied in all material respects with the applicable requirements in this matter.

However, we are prepared to correct any deficiencies in our filings and (indiscernible) improve our policies and procedures, if that is necessary.

You may also be aware that Reliant Resources has an option to purchase the stock we own in Texas Genco in January of 2004.

Although we cannot predict what Reliant Resources will do, we are actively preparing contingency plans.

We are working with our financial advisers to evaluate alternatives in the event Reliant Resources doesn't exercise its option.

We'll be prepared in either case.

The pricing period for the RRI option began July 22.

The option price is based on the highest average consecutive 30-day closing price of Texas Genco.

As of October 28, the highest average consecutive 30-day closing price was $24.34, which would equate to an option price of approximately 1.6 billion for our 81 percent interest in Texas Genco.

This could change since the pricing period ends on January 9, 2004.

In addition, a 10 percent premium can be added to this price if the Public Utility Commission includes a control premium in CenterPoint Energy's true-up proceeding.

The pricing period for the fair value calculation in the stranded cost true-up proceeding began on October 8 and runs through March 30 of 2004.

Before Gary reviews the business results, allow me to reflect on our first year as a stand-alone company.

On October 1, we celebrated our one year anniversary at CenterPoint Energy, a new company with a 130-year heritage.

Our first year as a new company was a challenging one, but I believe we've built a strong foundation from which to grow and excel.

We've been able to improve our financial stability and liquidity through a number of financing activities.

This year alone we raised over 3.5 billion in the capital markets, reduced the Company's bank facilities, extended our debt maturities, lowered interest expense and enhanced our liquidity.

We've made substantial progress in executing our strategy of one company, get it right and grow.

For example, we have sold or are in the process of selling all non-strategic assets, including our remaining international investment in our energy management services business -- in line with our vision of being a domestic energy delivery company with primarily regulated operations.

We executed a partial distribution of our Texas Genco common stock.

We settled a significant portion of our $8.5 billion fuel reconciliation case at the Texas Public Utility Commission.

We have begun to improve the rate of return in our gas delivery segment by filing for and implementing rate increases.

Since January of 2002, we've been granted approximately $50 million in annual rate increases and there are another 34 million in pending requests.

We are standardizing processes to run our businesses in the most cost-effective and efficient way possible.

Process improvement efforts are under way across the Company, with over 300 employees participating on 70 teams.

Their efforts will ultimately result in improved operations and improved customer service.

We believe process improvement will not only be an essential catalyst to being one company, but also for our future growth.

Overall, I think we had a good first year and have begun positioning the Company for a bright future.

Now I will ask Gary Whitlock to update you on the performance of each of our business units.

Gary?

Thank you, David.

I'm pleased to report on yet another overall positive quarter of business unit performance.

As you know, we report 4 business segments -- the electric transmission and distribution segment, the electric generation segment, the natural gas distribution segment and the pipelines and gathering segment.

Let me begin our review with the electric transmission and distribution segment.

The T&D business, which remains regulated, is reported in our electric transmission and distribution segment.

Also included in this segment is ECOM, which I will explain in a minute.

First, let me discuss the results for the ongoing electric business -- the transmission and distribution utility, or TDU.

The TDU business segment within this segment reported operating income of $161 million in the third quarter of 2003 compared to $159 million for the same period of 2002.

The TDU's positive results for the quarter were driven primarily by revenue increases from strong residential and commercial demand.

We have added over 50,000 metered customers since last September, or approximately 3 percent growth.

The positive impact of customer growth was partially offset by a $4 million decline due to milder weather than in the same quarter last year.

Operating expenses for the TDU increased in the quarter.

Higher pension and employee benefit costs were somewhat mitigated by productivity savings and the benefit of reduced staffing.

In addition, on a comparative basis, the higher expenses for the quarter were partially offset by the lack of certain expenses incurred last year related to the transition to a deregulated market.

Also, our process improvement efforts contributed to the TDU's $4 million reduction in capital expenditures versus the same quarter last year, while at the same time improving system reliability.

The next component of the electric T&D segment is operating income from ECOM.

ECOM stands for Excess Cost Over Market, and refers to the stranded cost model developed by the PUC in connection with industry restructuring.

Under the Texas electric restructuring law, a regulated utility may recover ECOM in its 2004 true-up proceeding.

The PUC has established March 31, 2004 as the Company's stranded cost true-up filing date.

The Company calculates ECOM true-up in accordance with the PUC's true-up rule, and records it on its books as non-cash operating income -- and that's a regulatory asset.

A breakdown of the calculation in the rule shows that ECOM true-up is the difference between -- one, a gross margin calculated using the auction prices from the state mandated auctions and actual generation of fuel expense; and two, the gross margin derived from the PUC's ECOM model.

For the third quarter of 2003, this resulted in ECOM of $222 million.

Although ECOM is $18 million less than the same quarter last year, it is higher than the projection (indiscernible) in our original earnings guidance.

The higher than projected ECOM amount in the quarter is the result of a different mix and price of auction products sold and utilized by all of Texas Genco's customers, versus the mix and price of the PUC auction products, which are the only products used in the PUC rule formula.

We expect this effect to continue in the fourth quarter.

And coupled with continued core business operating improvement and our increased earnings guidance at Texas Genco, we have revised our 2003 earnings guidance, as David mentioned this morning.

To summarize, the regulated TDU business continues to benefit from solid customer growth, productivity savings and operating improvement and higher ECOM, which will continue to provide noncash earnings through the end of this year.

The next segment is our electric generation segment, Texas Genco.

For reporting purposes, Texas Genco is a fully consolidated entity of CenterPoint Energy and we report the 19 percent that we distributed to shareholders in January 2003 as minority interest in our financial results.

As David discussed, we expect Texas Genco to remain with CenterPoint Energy through at least a portion of 2004.

Texas Genco's operating income for the third quarter of 2003 was $125 million; a substantial improvement compared to operating income of $7 million for the same quarter last year.

As we discussed on Texas Genco's call this morning, the primary driver of the improved third quarter performance was higher capacity auction revenues, which increased $73 million, or 41 percent, over the same quarter of last year.

These higher revenues resulted from continued higher natural gas prices, which led to higher (indiscernible) auction prices.

Gross margin increased to $271 million from $154 million last year, due to higher revenue (technical difficulty) auction, as well as much improved margins on the optimization of our portfolio through efforts such as field switching and serving gas products with low-cost baseload operating reserves and purchase power.

Therefore, although we sold nearly 1 million megawatt hours less in the third quarter of 2003 than last year, the margin improvement more than made up for the reduced volumes.

Texas Genco's operation and maintenance expenses this quarter increased by $2 million over the same period of last year.

Increases in pension and employee benefit expenses and repair costs associated with outages at STP Unit 1 and at Unit 8 of WA Parish coal plant were partially offset by a reduction in technical support costs and lower labor costs due to early retirement.

Texas Genco's capital expenditures declined by $25 million for the quarter to $30 million, due to a reduction in capital expenditures for environmental controls.

To summarize our electric generation segment, we were pleased to report a significant improvement in our financial results, as evidenced by $118 million increase in operating income and strong capacity auction results.

Now I would like to turn to our natural gas distribution segment, which reported an operating loss of $5 million compared to a loss of $4 million last year.

As you may know, this is a seasonally low quarter for this business segment.

An important focus for us last year was to obtain rate relief on our gas LDCs, especially at Arkla.

Those efforts are bearing fruit, as the implementation of rate increases produced revenue gains in the third quarter of $6 million.

In addition, we added over 37,000 customers in this segment since last year, or over 1 percent.

These positive revenue drivers were negatively impacted by higher pension and employee benefit expenses, increased depreciation and higher property taxes.

Additionally, the costs associated with the receivables facility, which was modified in November 2002, reduced operating income by $2 million because prior to the modification, these costs were recorded as interest expense.

We believe our rate relief actions and productivity initiatives reflect our strong commitment to improving the financial performance of our gas distribution business, and we continue to see the positive impact in this segment's financial results.

Turning to our pipeline and gathering businesses, we reported operating income of $39 million for the quarter compared to $43 million last year, resulting primarily from an increase in pension, employee benefits and other miscellaneous expenses.

This segment continues to provide consistent and stable earnings and cash flow.

In total then, our operating business segments produced operating income of $549 million in the third quarter of this year compared to $431 million for the same period of last year.

We remain focused on improving the financial performance of each of our business segments, both by increasing revenues and enhancing operational productivity.

Now before I turn the call back over to David for some final comments, let me review our most recent financing activities.

In September, we continued the momentum of the first half of the year by refinancing our $2.85 billion bank credit facility.

We raised an additional $500 million in the capital markets.

We issued $200 million of senior notes at the parent and $300 million of general mortgage bonds at the TDU.

The proceeds were used to reduce the bank credit facility to $2.35 billion.

Subsequently, we replaced the $2.35 billion bank credit facility with a restructured 3 year facility, which extended to October 2006, secured by a pledge of Texas Genco common stock.

This new facility is composed of a $1.425 billion revolving credit facility with a 12 bank syndicate, and a $925 million term loan with institutional investors.

The interest rate on the restructured revolver is LIBOR plus 300 basis points, and the rate for the term loan is LIBOR plus 350 basis points.

When compared to the prior $2.35 billion bank credit facility of LIBOR plus 450, we will save over 100 basis points -- or approximately $24 million annual savings -- at current borrowing levels.

The restructuring of this facility was accomplished without incurring significant incremental out-of-pocket expenses, since a fee of $21 million would have been payable in October on our prior 2.85 billion bank credit facility had it not been refinanced.

With this new facility in place, we have reduced our exposure to banks from $4.7 billion a little over a year ago to the current 1.425 billion.

More importantly, these actions, coupled with continued strong core business unit performance, have provided us with the financial stability and flexibility needed as the Company approaches our two key deleveraging events of monetizing Texas Genco and recovering our stranded costs next year.

Now I will turn it back over to David.

Thank you, Gary.

In summary, we are pleased with the progress being made by our businesses.

Each business continues to implement their respective strategies in support of our vision of being recognized as America's leading energy delivery company.

Our recent success in financing allows us to turn our full attention to improving our businesses and earning our (indiscernible) rates of return.

We'll use the next 15 months or so to reexamine our key processes and business models and make improvements.

We'll also continue to seek rate relief where warranted.

I'm convinced we'll be a stronger company and one ready to grow when we are finished with these efforts.

Finally, let me reemphasize our focus remains on our core electric gas and pipeline businesses.

We have a good balanced mix of businesses and a solid base from which to expand.

With that, I would like to thank you for your interest in the Company.

And now I will turn the call back to Marianne.

Okay.

Thank you, David.

We are now going to open it up for questions.

In the interest of time, I would like to ask you to please limit your question to 1 and 1 follow-up.

I would appreciate, Christy, if you could provide everybody with the instructions on asking a question now.

(OPERATOR INSTRUCTIONS).

Elizabeth Parrella (ph), Merrill Lynch.

A question on the regulatory side.

A number of intervenors have filed jointly asking the Commission to reconsider the calculation of the true-up with respect to ECOM specifically.

I'm just wondering if you could speak to their arguments or what you think the merits, or lack of merit, of their argument, and how you think the Commission will look at this?

Elizabeth, they filed a petition here two or three weeks ago asking for the PUC to reconsider the ECOM rule.

They make a number of arguments, and I don't think I'm in a good enough position to explain them all;

I am not sure I understand them all, to be very honest.

But I guess it's the Company's position that this ECOM rule was completely litigated when it was adopted -- lots of testimony taken.

And in our view, the Commission has already done this once.

And this is they are trying to get another bite at the apple and change the rules in midstream.

So I think we are going to have to be prepared to answer what they laid out there, but we haven't seen any new arguments in this position that was filed.

It's the same arguments that were made earlier.

Just a follow-up, a different regulatory question.

I think that earlier this year you had filed to kind of stop pass-through of excess mitigation credits, and I think that was largely opposed by the staff and the (indiscernible).

I'm just wondering where that stands?

Is that something you are still working on or is that just going to be pushed off to your (indiscernible) filing in March?

The Commission has not acted on our petition to stop the (indiscernible) the mitigation credits.

In fact, what we have been doing is we have been holding several discussions around a number of issues in connection with the true-up proceeding (indiscernible).

And I think the Commission is encouraging all the parties to do that.

We continue to talk, but the Commission at this time has not acted on that petition we filed because these other talks are ongoing.

J. Dobson, Deutsche Bank.

Good morning, Gary.

I was wondering if you could give us a little more insight into this lack of change in ECOM despite the TGN results.

And I think you are attributing it to the mix of sales TGN made versus the mix of sales assumed in ECOM.

I was wondering if you could just break that down a little bit and give us a better handle on that?

Let me take that question, and Gary can jump in here.

The PUC ECOM rule basically uses the prices in the 15 percent PUC mandated auction.

In terms of setting the price that you apply to the generation in sales to come up with your gross margin, you compare that to the gross margin that's in the actual ECOM model to get your ECOM true-up.

What happens -- and this can go either way -- the mix of product -- the actual use of the products in the TGN auction and the actual use of the products in the other auctions aren't always the same.

So you get a price that you apply to a different mix of generation and sales, and that's what happened this third quarter is the mix in the use of the products in the non-PUC auction was different than the mix in the PUC auction.

And it produced a little higher ECOM than we had anticipated all along, and it simply is the way the rule works.

So if I have this right then, you realized higher prices at TGN than ECOM would have assumed maintaining ECOM higher than it would have been otherwise?

What happened is -- this is mainly related to not baseload capacity, it's related to gas capacity.

And in the gas capacity, it wasn't dispatched as much in the PUC auction products.

And with high gas prices, that means it wasn't as high a price there as -- in the non-PUC auction you had more dispatch, primarily because the people who participated were using those products.

And with real high gas prices it produced a little higher price than in the PUC mix.

So that's the reason why we had anticipated a lower number, because obviously at the beginning of the year, you don't know how exactly this might turn out.

As you know, in this rule it could go the other way, too.

It doesn't always work for you if you want to call it that; it can work against you if the mix -- if the price is higher as opposed to the non-PUC (indiscernible).

Ali Agha, Burnham Securities.

The first question, David -- now that you've got 9 months of ECOM under your belt, and you obviously made an assumption for that in your full year guidance, could you give us a sense of what you think '04 earnings would be looking like for you?

'04?

Yes.

Let me tell you why we can't do that.

One is that we have to get by this resource option period.

We have to know if Texas Genco is going to be part of our company or not, at least for a while longer.

If Resources exercises that option, we have always assumed that we would close that transaction by midyear.

Since it is up in the air whether or not they are going to buy it or not, I think we really can't provide guidance.

Obviously, ECOM will go away.

There will be no ECOM in 2004.

So we're going to provide guidance sometime late January or thereafter, but I think it's just too early to provide guidance at this time.

David, in terms of all the different options for Texas Genco that you're considering, is it possible to have a scenario in which the Genco assets remain with CenterPoint with your current 81 percent ownership, or is that not an option at all?

Our strategy and our vision for our business is to be an energy delivery company, primarily regulated.

And that's where we're focused.

But we're not going to have a firesale next year, so it may be we have to operate these plants a little longer than we had always assumed.

But at this time our focus is still energy delivery, and we don't expect in the long-term that Texas Genco is going to be part of our core business.

So no change in strategy but I will say this, we have to make sure we get full value for these assets when we sell them.

And you just don't know how long that will take and what you will run into when you start down that path.

Just to clarify that, David -- there is no regulatory or other issue that compels you to sell those assets?

No.

We can absolutely own them.

We don't have to sell them.

There are some segregation of duties if they were to remain within our company, but we don't have to sell them.

David Grumhaus, Copia Capital.

Just following up on that, have there been any discussions with Reliant to date, or are you just basically going to wait for the January date for moving on to the next steps?

We have seen them, we have talked to them.

They have not indicated to us what they are going to do, nor do I expect them to do that until January.

So no indication there.

On the guidance front, have you thought about maybe trying to give guidance in the event that RRI does exercise or doesn't exercise?

Obviously you're sitting out there with First Call estimates somewhere $1 below what you are going to earn for this year, and you really haven't led anyone any direction one way or the other.

On the other hand if you do decide to keep TGN, that may change things dramatically.

Any thoughts about trying to lay out scenarios so people can get a little bit more comfortable about what's going to happen next year?

We've thought about it but we've concluded that we are just going to have to wait.

I understand that everybody is interested, but next year there are so many things happening early in the year -- we just have to get through that time frame before we provide any guidance.

Dave Miller, Elliott Associates.

With the end of the transition period, are you anticipating any planned retirements at TGN, as opposed to just temporary mothballing?

One is that, that depends in part I think on the exercise of the Reliant Resources option.

We're not -- we are precluded from permanently shutting down anything until we get through that option period.

But I think we are going to do what's economically the right thing.

The good news is we can shut down these plants temporarily, move our people around, and it doesn't cost any money to do that -- not a substantial amount of money to have them in mothball stage.

And to be very honest, we just don't know what this market will do in the future.

So we're kind of keeping all options available.

But we will continue to look at that and if it makes sense to do it, we would permanently shut them down.

But this doesn't cost you very much to keep that option open, and that's what we would probably continue to do for a while, at least.

Would you anticipate that there would be considerable expenses associated with any permanent shutdowns and have you provisioned for any such expenses?

We haven't made an estimate of that.

Most of the gas-fired plants don't have a large amount of book value, but there's some there.

But in terms of -- I'm not sure exactly how we would shut them down.

I don't think we would go in and dismantle or anything like that at this stage.

So we haven't made any estimates on that front yet.

Peter Quinn, Goldman Sachs.

I wanted to follow up on some of the prepared remarks with regards to the interest expense.

If we look back at the bank deal that was done in October of last year, can you tell us how much of the interest expense and financing fees for this year's performance is related to the higher interest, both on a spread basis as well as the fees associated with the bank deal, as well as the restructuring and the improvement in the bank deal this year, versus how much is simply diversifying the short-term debt at the banks by moving out into the capital markets?

Okay, give us just a second.

Thanks.

Paul Patterson, Glenrock Associates.

Hang on just a minute.

We haven't finished with Peter's question yet.

Peter, this is Gary.

We can go off-line in terms of specifics.

It's difficult to address that specifically.

Let me give you some information on interest expense. (indiscernible) year-to-date, there's about 703 million.

If you take that, I think we have been clearly fairly clear to folks that you can basically -- and if you annualize that you'll get about 938 million.

And that's going to be pretty close to the amount of interest expense we'll have for the year.

Reference I think sort of gets at the point you are looking at, is how much of this is cash and non-cash interest, because you have a lot of movement around these financings that we've had in previous fees that are being amortized into this year and next. (inaudible) broke that down -- if you annualized our interest expense you would get around 940 million.

And if you wanted want to break that down it would be about 140 million non-cash and about 800 million of cash interest expense.

That's where I was heading, and I'll follow up with you.

Thanks very much.

Next question please?

Paul Patterson.

My question has been answered.

Thanks a lot.

Paul Ridzon, McDonald Investments.

Could you tell us, of the new guidance $1.30 to $1.40, how much of that is ECOM earnings?

We just made an estimate, Paul, (indiscernible) both Texas Genco, ECOM using the rule as it's written today, and the projected performance of all of these businesses.

I don't have a specific breakdown of that, what's ECOM versus Texas Genco versus the TDU.

Debra Bronburg (ph), Jefferies & Co.

Just one question regarding the scenario where you kept your share of Texas Genco for an extended period -- let's say hypothetically two or three years.

Have you discussed with the rating agencies this scenario and what steps you might have to take to support the current rating?

Obviously, we are in very close contact with all the rating agencies.

And this is an issue that Mark and I and other members of management have discussed.

I think we get back to David's original point -- our strategy is to be a regulated energy delivery company.

And we are very good wed to that and that's where we are going.

As David described, we're just not going to put ourselves in a firesale situation.

Over the long term, keeping merchant generation would change the risk profile of the Company dramatically, and that would have an impact at the rating agencies.

Frankly Debra, they have been clear about that.

It's not problematic for us because our long-term objective is to be in the regulated energy delivery business.

But again, as David described, we have to focus on shareholder value and we are not going to firesale the business.

And the good news, I think, if you look at the financial performance and projections for Texas Genco, I think we do have some flexibility to monetize that in a very methodical way to optimize value.

The short answer is yes, we have been in contact with the rating agencies.

To change our strategy certainly would change the risk profile of the Company, and change the credit (inaudible).

Jim Flannery, Copia.

Following up on Debbie's question, I think the risk profile is pretty interesting.

We have kind of historically high gas prices here at 550, and it seems like Texas Genco's earnings are obviously highly leveraged to that.

And also historically low interest rates;

LIBOR is 150.

I just wonder if you have run any scenarios where those two numbers are reversed and really considered the consequences in the interim, as it relates to EBITDA and how fundamentally risky is not firesale-ing these assets?

And I guess with gas at 550, one would expect that the prices for those assets would be relatively robust right now.

We're not prepared to tell you what -- we run all kinds of scenarios looking at change in interest rates and how that impacts the Company and what changes in natural gas prices do to Texas Genco.

Obviously, a decline in natural gas prices is going to reduce profitability at Texas Genco.

Now the good news is for next year, we locked in over $700 million worth of capacity revenues and a little over 200 million in 2005.

So in the near term, not nearly as sensitive in earnings and cash flow.

But longer-term, I think that's what you have to look at when you look at this portfolio of assets.

And who knows, everybody has their own estimate of where natural gas prices are going.

But I don't think the value of Texas Genco is predicated on today's natural gas prices;

I think they're based on whoever buys (indiscernible) long-term view (technical difficulty) natural gas prices, and that's how they will be valued -- or they should be valued, anyway.

John Raleigh, Goldman Sachs.

I think in the TGN call you laid out the time period for RRI exercising the option between January 10 and January 24 of '04.

Could you just lay out a potential timetable for a possible auction?

Would it occur right after the 24th?

Have you thought about that?

And also, have you received any expressions of interest from any buyers at this point?

We are -- we have engaged a financial adviser.

We're preparing the next steps in the case they don't (indiscernible) Reliant Resources doesn't exercise its option.

We're not prepared at this stage to disclose that because it's still work in progress, but we're going to be ready.

So as soon as we know what resources is going to do, we're going to either sell it to them or get on with seeing how we get somebody else to buy it.

Does your financial adviser think that if you go the second route and RRI doesn't elect the option that you can close the deal in '04?

I don't know that we've reached a conclusion on that yet.

I think there is a possibility, but I think the longer you wait, obviously the harder it's going to be to close the deal in 2004.

Michael Ratinger (ph), Satellite Asset Management.

I just wanted to make sure I understand on this ECOM -- year-to-date it's 455 million?

Is that right?

Yes, I think that's correct.

We will check that, Michael.

Make sure I heard you correctly.

455.

And then fourth quarter would I assume add something in the neighborhood of 100 to 125 million to the total, just ballpark?

I think it depends on a lot of different factors.

It's really hard to estimate this in advance.

Jeff Gildersleeve (ph), Millenium Partners.

I wanted to ask you if you had a shelf and what the capacity was on that?

And in addition to that, given the recent strength in your stock price would you consider issuing equity?

Hang on just a minute, Jeff.

Jeff, in terms of our current shelf there's not much left there in terms of (inaudible) to do anything.

Do you plan on maybe replenishing that shelf at some point, prior to the end of the year?

We are going to evaluate that.

In fact, we are in the process of evaluating what (inaudible).

David Frank, Zimmer Lucas Partners.

David, I'm trying to figure out why you guys would even want to sell TGN?

If I just extrapolate the upside in the guidance for next year and then I take this year's revised guidance for CenterPoint, I could come up with something like $1.65 next year.

Regardless of which way gas prices go it looks like there's a higher level of earnings potential out there for you.

Have you looked at just keeping this asset, and aren't you better off if Reliant doesn't exercise the option?

There's lots of variables there.

Obviously, a merchant energy business is a fairly risky business.

Yes, in these high natural gas press environments, you can make a fair amount of money in this business.

Which is reflective of our forward sales, but you have to look at a long-term perspective.

You have to understand that gas prices can go down just as easily as they have gone up.

So lots of issues to consider.

We're looking at all those things as we do our studies, but it's fundamentally a different risk profile than the regulated businesses that we are in today.

We know how to run power plants .

Obviously we've done it for 130 years.

It's not the operations side and how we run them, it's just the market side and the volatility implied in this merchant energy market.

Michael Goldenberg (ph), Luminous Management.

I just wanted to understand a couple of things.

With this guidance increase, is it -- I know -- can you try to break out maybe for us in some way this 50 -- 40 cents increase in guidance, (indiscernible) Texas Genco and T&C and ECOM, if possible at all?

Michael, we just don't have that in front of us now.

And we have to make assumptions as to a lot of things, and that's the reason you put out of range.

We do know that we believe Texas Genco will have a pretty good quarter.

They've sold their capacity forward.

You would have to wait and see how that ECOM formula will turn out.

We'll see how the plants are dispatched.

That's kind of a tricky calculation, because you don't know what's going to happen and how the holders of the capacity will use the capacity.

We've done our best in trying to give you a range as to where we think the fourth quarter will come out, and thus, the rest of the year.

As I look into next year out of those three things -- Texas Genco may or may not be in '04, ECOM will not be in '04, and TNG may show increased performance in '04.

Is that a fair assessment?

Did you say CNP?

TNG may show better performance in 2004, ECOM will not be recurring in 2004 and Texas Genco may or may not be there in 2004.

We have a very focused effort to try to improve the operations of all our businesses -- the T&D business, our gas business, our pipeline business.

That's what our process improvement efforts are all about and our rate cases are all about, so we hope to continue to improve all these businesses.

This is Gary.

Just to add to that (inaudible) coming back to your question on guidance, I think it's important to note that it's really all three of them.

The core business has improved versus our (indiscernible) original guidance -- TGN ECOM.

So it's really a combination of the entire portfolio, not just one element.

Okay.

One other question I had on reporting.

Since you've been discussing so much about selling Texas Genco, is that going to be held as assets for sale in 2004 regardless of whether you sell it or not?

And thus, all the income will be reported separately on CenterPoint's income statement?

Michael, at this point we'd expect it would be.

Yes.

And my final question would be cash proceeds from Texas Genco certainly come from two sources -- the dividends and intercompany loans.

That's correct, right?

That's correct.

Is there any situation under which you would actually be borrowing money from Texas Genco?

No.

The parent cannot borrow money from Texas Genco.

A follow-up question from Elizabeth Parrella, Merrill Lynch.

Just one follow-up on the ECOM.

I'm trying to recall whether earlier in the year you had given us guidance on ECOM for the full year, and/or if you didn't if you could give us an indication as to what you would have expect it to have been in the third quarter versus the 20-odd number, 22 I think it was, that you actually reported?

Elizabeth, we have not given separate guidance on that.

So I don't think we can do what you are asking there.

Okay.

Just one follow-up on the interest expense.

Given the refinancings, etc., that you've done, should we expect to be a lower number on kind of a quarterly run rate basis beyond the fourth quarter?

I'm just trying to get a handle on what might be a good quarterly run rate interest expense pro forma for all the refinancings that you've done?

This is Gary.

There's quite a mix in there, but I think in the short answer, you can expect a modest decrease on the quarter run rate.

Okay.

Looking at the clock, we have time for one more question.

J. Dobson, Deutsche Bank.

Just a quick follow-up, hopefully easy.

Could I get just total debt level at the end of the quarter -- cash on hand and cash equivalents?

And then categorize just the regulated return for the trailing 12 at the TDU and the gas LDC?

You have a long list there.

Sorry about that.

Let me start with (inaudible) debt at the end of the third quarter, total debt -- this includes the transition (indiscernible) -- 10.389 billion; transition bonds at 717.

So the total debt excluding the transition bond is 9672.

I think you have to add to that now the trust preferreds as well.

According to the accounting rule change, I think it's FAS 150, which is 706 million.

In terms of --

I think a point to make there just to reference is that if you look at that for the entire year, that's very little difference for the entire year.

If you recall earlier in the year, that was our objective.

And I think that's where we're coming out.

So 9672, excluding the transition (indiscernible) 706; add to that for the trust preferreds.

I think your second question was on liquidity?

Yes.

Just cash on hand.

In terms of -- I think you ought to look at total capacity (indiscernible) in terms of what's available capacity.

We're at approximately $600 million of total available liquidity.

I think (indiscernible) be enhanced somewhat by the end of the year for some tax refunds that we are working on.

We are trying to keep around 600 million; that's about where it is.

Excuse me -- (indiscernible) from a family perspective, because Texas Genco is putting a revolver in place.

So they (inaudible).

What your other question?

Just the regulated returns, trailing 12, for the TDU and the gas LDC?

Don't have that with us.

Okay.

I will follow-up afterwards.

Thanks so much.

Thank you all very much for participating in today's call with CenterPoint Energy.

We appreciate, as always, your attention and support.

Have a great day.

Thanks again.

Thank you for participating in today's CenterPoint Energy third quarter 2003 earnings conference call.

You may now disconnect.