CenterPoint Energy Inc (CNP) 2003 Q4 法說會逐字稿

Good morning.

My name is Judy, and I will be your conference facilitator.

At this time, I'd like to welcome everyone to the CenterPoint Energy fourth quarter and full year 2003 earnings conference call.

All lines have been place on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. (Operator Instructions).

Ms. Paulsen, you may begin your conference.

Thank you very much, Judy.

Good morning everyone.

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

I'd like to welcome you to our fourth quarter and full year 2003 earnings conference call.

Thank you for joining us today.

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

If you would like to listen to a replay of the TexasGenco conference call, please go to the investor relations section of their Web site -- www.txgenco.com.

On our this call this morning, although we will comment on Texas Genco's results, which are reported 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, Exec.

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 fourth quarter and full year earnings release, which we issued this morning, is posted on the CenterPoint Energy Website, which is www.centerpointenergy.com, under the investor's 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 September 30, 2003 and in the Company's other SEC filings.

Before Mr. McClanahan begins, I'd like to mention that a replay of this call will be available until 6 PM Central time through Thursday, February, 19th, 2004.

To access a copy, please call 1-800-624-1687, or 706-645-9291 and enter the conference ID number 488-4912.

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

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

Thank you, Marianne.

Good morning ladies and gentlemen.

Thank you for joining us this morning for our fourth quarter and full year 2003 earnings call and thank you for your interest in the Company.

This morning, I will give the highlights of the quarterly and annual financial results, discuss some key developments during 2003 as well as review the important strategic activities facing the Company in 2004.

Gary Whitlock, our CFO, will discuss the performance of each of our business segments.

As we reported this morning, on a consolidated basis for the fourth quarter, CenterPoint Energy had income from continuing operations of $149 million, or 48 cents per diluted share.

This compares to a loss of $24 million, or 8 cents per diluted share for the same quarter of 2002.

For the full year of 2003, we reported income from continuing operations before the cumulative effect of an accounting change of $496 million, or $1.62 per diluted share compared to $369 million, or $1.23 per diluted share for the prior year.

Our financial performance for the fourth quarter and for the full year was very good.

TexasGenco contributed significantly to our increased earnings.

Houston Electric, our electric transmission and distribution utility, also had strong results.

We made improvements in every one of our core businesses with each business unit reporting increased operating performance over 2002.

I am very pleased with our overall financial performance and I am particularly indebted to our employees who maintained their focus and commitment to our customers as the Company faced a number of challenges early in the year.

Let me recap CenterPoint Energy's first full year as a separate public company.

It began as a difficult and challenging year for us, but I believe we accomplished a lot this year and have built a solid foundation from which to grow and excel.

We improved our financial stability and liquidity throughout the year.

We restructured our bank facilities early in the year, which in turn opened up the capital market where we raised almost $4 billion.

Later in the year, we restructured our bank facilities again to improve our borrowing costs and extend maturities beyond our transition period.

Early in the year, we distributed 19 percent of TexasGenco common stock to our shareholders as a special dividend.

This was done to establish a market trading value for TexasGenco, which will be used in our stranded cost true-up proceeding letter this year.

TexasGenco shareholders enjoyed a significant increase in their stock price as the year progressed, as well as an attractive dividend.

We continue to exit non-strategic businesses.

We sold our remaining international investments and our local energy management services business.

We now hold only our core electric and gas energy delivery businesses, plus TexasGenco.

We initiated a process improvement effort across the company, designed to standardize and optimize processes across all of our businesses and to take advantage of our scale.

While we realized some benefits from these efforts in 2003, I believe the most significant improvements still lay ahead of us.

Our gas distribution businesses continued to seek and receive needed rate relief.

Over the last two years, we've been granted almost $60 million in rate relief., Unfortunately, we're still not achieving our authorized rate of return in a number of jurisdictions.

A combination of rate relief and cost reductions through process improvement will be necessary to do this.

There are several rate applications pending and several additional applications that will be filed in 2004.

In summary, 2003 was a very good year for us.

Our financial performance improved and we began positioning the Company for the future.

Overall, we feel very good about what we were able to accomplish.

Before discussing the upcoming year, I'll ask Gary Whitlock to update you on the 2003 performance of each of our business units.

Thank you, David.

I am pleased to report on an overall positive quarter of business unit performance.

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

Let me begin our review with the electric transmission and distribution utility, or TDU.

The regulated TDU is reported in our electric transmission and distribution segment.

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

For the fourth quarter of 2003, the TDU reported operating income of $78 million, compared to $23 million for this same period of 2002.

The TDU's positive results for the quarter were attributable to two primary factors.

First, the results of 2002 included a charge of $22 million associated with the settlement of issues in our field reconciliation proceeding and a $10 million charge related to severance costs.

The remaining positive change resulted from continued strong growth in metered customers and our emphasis on the operational and productivity improvements in the TUD.

For the full year of 2003, the TUD reported operating income of $446 million compared to $399 million for 2002.

The increase in operating income was driven by growth in metered customers of approximately 3 percent.

We ended the year with total metered customers in excess of 1.8 million.

Through our focus on process reengineering and productivity improvements, we were able to offset significant increases in both pension and insurance costs.

In addition, our process improvement efforts contributed to the TDU's $44 million reduction in capital expenditures in 2003 versus 2002, while at the same time improving our system reliability.

The next component of the electric TND segment is operating income from ECOM.

ECOM stands for -- excess cost over market -- and refers to the capacity auction true-up mechanism 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 Company calculates ECOM in accordance with the PUC's true-up rule.

We then record ECOM as non-cash operating income and as a regulatory asset.

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

For the fourth quarter of 2003, this regulation resulted in ECOM of $206 million, which is $60 million more than the same quarter as last year.

For the full year 2003, ECOM was $661 million compared to $697 million for 2002.

The reduction occurred as higher gross margins at TexasGenco were realized from the state-mandated auctions.

I'd like to remind you that ECOM ended at year end 2003.

Thus beginning this year, ECOM is no longer a contributor to earnings.

So to summarize, the electric TND segment benefited from continued solid growth customer growth, productivity savings and operating improvements and ECOM, which provided non-cash earnings through the end of 2003.

The next segment is our electric generation segment, TexasGenco.

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

TexasGenco's operating income for the fourth quarter of 2003 was $64 million, a substantial improvement compared to an operating loss of $59 million for the same quarter of 2002.

We reported substantially increased revenues for the fourth quarter.

Capacity and other revenues increased by $118 million, or 157 percent over the fourth quarter of 2002.

The primary driver for this increase was higher capacity auction prices for our baseload products.

Also included in these revenues were $10 million from the sale of surplus air emission allowances associated with nitrogen oxide, or NOx.

We have made substantial investments in equipment that significantly lowered the NOx emissions from our plants, which left us with access allowances to sell.

Energy revenues increased by $15 million in the quarter, more than offsetting the increase in our field and purchased power cost.

Fuel costs remained flat quarter over quarter while purchased power expense increased $11 million for the quarter, reflecting our opportunities to utilize third-party generation whenever there was a cost advantage to our own generation.

The net results for the quarter was that our gross margin increased to $216 million from $93 million in the fourth quarter of 2002.

Operation and maintenance expenses declined $18 million in the quarter, compared to the fourth quarter of 2002.

Cost incurred in the fourth quarter of 2002 primarily related to an early retirement program and a refueling outage at our South Texas project unit two, contributed to the comparative degrees in expenses.

Taxes other than income taxes increased by $17 million attributable to higher property taxes in 2003 and to reduced state franchise taxes in the fourth quarter of 2002.

Turning now to the full year 2003, operating income for TexasGenco was $222 million compared to an operating loss of $133 million for 2002, a 267 percent increase.

Revenues increased by $461 million due primarily to a $334 million increase in capacity and other revenues.

Higher natural gas prices drove increased wholesale electricity prices, which in turn resulted in significantly increased capacity auction revenues for the year.

Capacity and other revenues also reflected the sales of surplus air emission allowances totaling $16 million.

The increase in energy revenues more than offset the increase in fuel and purchased power costs, reflecting in large part our ability to optimize our fleet.

The net result for the year was that gross margin increased to $832 million from $458 million in 2002.

Operation and maintenance expenses increased $20 million in 2003 relating primarily to higher pension expenses and the net impact of costs associated with various planned and unplanned outages.

These increases were partially offset by lower labor costs due to early retirements and to the absence in 2003 of the early retirement expenses recorded in the prior year.

TexasGenco's capital expenditures declined significantly as we neared completion of our capital expenditures for environmental controls.

In summary, we're very pleased with the significant improvement in the profitability of TexasGenco from 2002.

Now I'd like to turn to our natural gas distribution segment.

This segment reported operating income of $56 million for the fourth quarter of 2003, compared to $84 million last year.

The decline was primarily the result of a change in the estimate of the margins earned on unbilled revenues which negatively impacted quarterly operating income by $17 million.

In addition, reduced usage at the LDC (ph) and mild weather in the quarter also contributed to the decline.

Operation and maintenance expenses declined in the quarter as productivity improvements more than offset increases in pension and bad debt expenses.

The natural gas distribution segment reported full year operating income of $202 million for 2003 compared to $198 million for 2002.

The implementation of rate increases contributed $33 million for the year and we added over 38,000 customers in this segment.

However, the net increase in revenue was partially offset by higher pension and bad debt expenses and increased depreciation expense as well as the change in estimate I discussed earlier.

Additionally, the costs associated with the receivables facility which was modified in November, 2002 reduced operating income by $7 million for 2003 because prior to the modification, these costs were reported as interest expense.

We will continue to improve the profitability of this segment through a combination of productivity improvements and rate relief.

Turning now to our pipelines and gathering businesses, we reported operating income of $34 million for the fourth quarter compared to $35 million last year.

The slight decline results primarily from increased operation and maintenance expenses.

The pipelines and gathering segment reported operating income of $158 million for 2003 compared to $158.3 million for 2002.

An increase in throughput and enhanced services at our gas gathering businesses helped offset a small decline in our interstate pipeline business.

Overall operation and maintenance expenses were essentially flat.

In total then, our business has produced operating income of $435 million in the fourth quarter of 2003 compared to $260 million in 2002.

And for the full year 2003, operating income increased to $1.7 billion from 1.3 billion in 2002.

We remain committed to the implementation of our respective business strategies that focus on improving the operational performance, productivity and financial results in each of our businesses.

Now before I turn the call back over to David for some final comments, let me review our most recent financing activities as well as our interaction with the credit rating agencies. 2003 was a very important and busy year for financing transactions.

We accessed the capital markets for approximately $4 billion and in so doing, we lowered our overall borrowing costs and extended important debt maturities.

As important as the interest cost reductions, these actions enhanced our financial stability and flexibility and improved our liquidity as we moved through our transition.

Now let me briefly describe our most recent financings.

In October of last year, we replaced our $2.35 billion bank credit facility with a restructured three-year facility which extended the maturity date to October, 2006.

Pricing on the $1.425 billion revolving component has been lowered by 150 basis points and pricing on the $925 million institutional tranche has been lowered by 100 basis points.

In November, our natural gas distribution pipelines and gathering subsidiaries, CenterPoint Energy Resources Corp., or CERC, issued $160 million in a ten-year senior unsecured note at a coupon of 9.95 percent.

In December, CenterPoint Energy Inc. sold $25 million of 2.875 percent convertible senior notes due in 2024.

The net proceeds from this offering were used to redeem in January of this year $250 million of 8-1/8 percent trust-preferred securities.

Also in December, TexasGenco closed on a 364-day, $75 million bank credit facility with a rate of LIBOR plus 150 basis points.

I might also add that our financing activities continue in 2004 in order to lower interest expense.

We have just closed on two series of (indiscernible) control revenue bond, the proceeds of which will be used to retire two higher coupon series of bonds and we have also closed on a new receivables facilities at CERC.

The new receivables facility replaces a prior facility at CERC and offers both greater capacity and lower cost.

Now regarding the correction with the credit rating agencies, with our key deleveraging events upon us, we have and will continue to keep the rating agencies apprised of both our plans and the key developments affecting our businesses.

As you've heard me say in the past, we're naturally reluctant to speculate about any actions one or more of the agencies may take, and we certainly cannot speak for them, but I assure you that we do intend to be very proactive during this important period for our company.

I want to thank you for your interest in the Company and I will now turn the call back to David.

Thank you, Gary.

Now let me conclude our prepared remarks by discussing the key events facing us in 2004.

At the end of next month, we will file our stranded (ph) cost true-up application.

This is the final step in the implementation of the Texas electric restructuring law that was passed in 1999.

The law has several key principles that balance the interest of a broad range of participants.

First, reliance on competitive markets; second, customer choice; third, protection of customer rights and finally, full stranded cost recovery.

The new market opened in January of 2002, giving consumers in Texas the right to choose a retail energy provider and enjoy the benefits of competition.

However, the determination of stranded costs for the once integrated electric utility was delayed until two full years after retail choice began.

CenterPoint has done its part to support these principles.

The time has now come for the final step, the recovery of our stranded cost, to be completed.

CenterPoint Energy will use the partial stock valuation methodology to determine the market value of its once regulated generating units.

Using this methodology, the average stock price for TexasGenco during 30 consecutive trading days chosen by the PUC in the 120 trading days prior to March 31 of 2004 will be used to determine the value of these generating assets.

This value can be increased by up to 10 percent if an independent panel chosen by the PUC determines a control premium should be added.

CenterPoint's position on the control premium will be spelled out its filing.

Suffice it to say we do not believe a control premium is appropriate.

Using the most recent thirty-day average trading value of approximately $33 per share would result in a value of $2.7 billion before any adjustment.

The true-up balance is composed of two parts.

The first is stranded cost and is calculated by subtracting the market value I just described from the regulated book value as of December 31, 2001, adjusted for certain required environmental expenditures.

The other component includes the capacity auction ECOM true-up balance, the outstanding fuel reconciliation balance and certain regulatory assets.

All of these items are clearly set out in the legislation.

Under the statute, the PUC has 150 days in which to render a decision regarding the quantification of the Company's true-up balance.

The PUC has the ability to extend this deadline only after a showing of good cause.

Once the true-up amount is determined, a second proceeding will be held to determine the amount to be securitized and the issuance of a financing order.

This proceeding should take no more than 90 days.

We hope to have both of these proceedings completed before year-end.

In light of the recent attention paid to the Texas market and stranded cost, allow me to digress for a moment and brag a little bit about the Texas market and to put into perspective for you the potential impact of stranded costs on consumer prices.

By most accounts, the electric restructuring in Texas has been highly successful.

Industrial and large commercial customers in ERCOT have switched at very high rates, enjoying the benefits of competition through cost savings estimated by some to be in the hundreds of millions of dollars.

Switching in the residential and small commercial classes has been high by national standards, but not as robust other customer classes.

Consequently, most residential customers remain on the price to beat rate.

We estimate the effect of the stranded cost transition charge on the price to beat rate will likely be in the range of 5-7 percent, depending on the amount of the final true-up balance and interest rates.

As you can tell, we are proud of what we've been able to accomplish in Texas and in our efforts of encouraging competition and believe that CenterPoint has more than upheld its end of the restructuring bargain.

By completing the final step this year, the market in Texas can continue to flourish and provide a robust retail market through customer choice and healthy regulated utilities as the backbone.

We have been preparing for the true-up proceedings for some time now.

We're anxious to get our case file so that we can get it completed on a timely basis.

The second significant undertaking in 2004 will be the sale of our 81 percent interest in TexasGenco.

As you will recall, Reliant Resources declined to exercise its option to purchase our interest in TexasGenco in January of this year.

We had anticipated this could happen and have been evaluating various alternatives for monetizing our interest for some time.

Our first preference remains the sale of our 81 percent ownership interests which we are actively exploring at this time.

We will fully evaluate this option before seeking another alternative.

In that regard, we have engaged CitiGroup as our financial adviser to assist us in the sale.

We expect that this evaluation process could take up to six months or so.

In the interim, we will continue to run this business in the long-term interest of its shareholders.

We sold a significant portion of the available capacity for 2004 at attractive prices and expect 2004 to be a very good year.

We will also seek to sell forward additional capacity to secure contracted revenues for 2005 and beyond.

Besides these two major events, we will continue to have an intense internal focus on improving the way we operate our businesses.

We have a unique opportunity during this transition period to reevaluate our core processes, improve our cost structure and enhance the way we serve our customers.

We intend to evaluate all of our key processes over the next 12-24 months so when we complete the transition, we will have earned the right to grow our company.

Let me close by indicating that we're not providing earnings guidance for 2004 at this time.

We do not believe meaningful guidance can be given now in light of the significant events I just described.

The timing of the PUC true-up (indiscernible) will determine when we began to accrue a return on our true-up and ultimately when we are able to pay down debt.

Under the PUC's rule, we will begin receiving a return on the true-up balance once the PUC has rendered its decision.

The timing of the sale of TexasGenco will also have an effect on 2004 earnings and our debt reduction.

We will reconsider whether to issue earnings guidance as we gain more clarity around the timing of the completion of the true-up proceeding and the sale of TexasGenco.

Thanks again for joining us today and your interest in the Company.

I would now like to turn the call back to Marianne.

Thank you.

We're now ready for your questions, so Judy, could you provide the instructions for asking a question.

Thank you.

(Operator Instructions).

Jonathan Rojewski, Goldman, Sachs & Co.

Good morning everyone.

David, I was wondering if you could discuss -- I seem to recall that back when you could make a decision as to how you were going to determine the market value of the generation piece.

One of those options was to do a full IPO of the generation.

And sort of given the high prices that the market is assigning to that piece that is outstanding, is that something that you could backtrack and maybe do to monetize your portion without having to go through an auction process to I guess bidders that are outstanding?

Jonathan, as you might recall, there's basically three, maybe four ways to value assets under the Texas law.

One is the partial stock valuation methodology, which is what we're using.

The second is a 50 percent or more sale of your interest, and then there is no control premium if you use that stock value.

The third is you sell all of the assets and you use the asset sales to determine market value.

And fourth, there's some administrative procedures you could go through at the PUC.

When we presented our business separation plan to the public utility commission, which presented the whole split-up of Reliant Energy into two pieces, we told them then we were going to use the partial stock valuation methodology and the change at this time would delay a lot our whole stranded cost true-up proceeding.

So while theoretically, you could do that but I don't think it is the proper thing to do at this time.

And of course we have told the PUC and they approved our business separation plan based upon what we told them.

Mechanically, if you were to take that route, how would that work?

You would sell more stock in Genco, we could sell more interest in our --

In terms of dealing with the commission, given that they agreed to the business separation plan, do you have to sort of draw up new papers and then go to the commission and have them sort of review that and interveners and have a whole process?

Johnathan, we really haven't thought too much about that.

We would obviously need to think long and hard about exactly the process we would go through.

Yes, we would probably file something with the commission, but it is just not in the cards at this stage.

We're going to file in a little over a month using this partial stock valuation method.

Right.

If you guys were, if you go through the filing with the commission as you have stated, does that sort of preclude you from going back and reevaluating, that is pretty much your plan is set in stone?

Yes.

I think once we have filed, that is the method that the PUC will use because the Company gets to choose it and (multiple speakers) it will be done.

That makes sense.

Lastly, I was looking for the gigawatt hour sales that you guys had per customer class, and I noticed only provided the residential numbers.

Do you have the full breakout that you might be able to provide, either on the call or maybe Marianne could send me an e-mail?

I'm trying to recall why we don't provide that.

I guess in part, Jonathan, what has happened is under our new rate structure delivery rate, we have a much different type of rate and it's not nearly as volumetic (ph) based on the big commercial industrial, it is more customer base.

So it really does not matter to us as much as it did back when we were a fully integrated utility.

So we have not been keeping track of that and providing it through our releases.

But if I am looking at the electric revenues for the year of like, $1.5 billion and you were to apply to look at that in comparison to the gigawatt hour sales for residential customers, that is not representative of what the average rate that you received, because that does not include all of the megawatt hours delivered, correct?

You could not do that type of speculation.

You're saying that the full megawatt hours delivered is a number that you're no longer going to be providing?

Yes, because it really doesn't -- it is not his meaningful for CenterPoint when we're just a delivery company because our rates are -- large, commercial and industrial -- are not as volumetric as they once were; it is more based on a customer charge and a demand charge.

We will see if we have those numbers handy.

Why don't you give Marianna call if you need them and we will see if we can get them.

But we have not been providing them since we got into this new market.

Thanks, David.

Ali Agga (ph), Burnham Securities.

Thank you.

David, going back to the Texas Genco outlook, if I heard you correctly, I think you said that given a financial adviser, you think you could wrap up the sale in six months.

I thought that what I heard you say.

Do you have the flexibility or is there anything thinking on your part to delay the sale and not have it in '04 and maybe push it into '05?

What is your thinking there?

I probably misspoke, Ali.

Let me tell you what I intended to say.

We started the process today to see if we can sell our 81 percent interest and that is going to take some time just to understand the interest in the marketplace.

So I don't expect that by midyear, we will have sold Texas Genco.

But I think we'll have a very good idea as to whether or not we have a real buyer out there for 81 percent interest and it will be an inflection point for us.

Our guess is if we find a buyer, then we can get it closed by year end or plus or minus a few months.

There some approvals that are going to be required once we sell it and that is probably going to drive the closing more than anything.

I see.

One other question, more of a financial question from the fourth quarter results.

The drop in gas distribution operating income, you mentioned that you changed the estimate margins on unbilled customers.

Could you elaborate a but more on that and just the minus as we look into '04, how much of a factor that could be?

Let me try to give you a layman's description of that.

One is we have a fair amount of revenues we have to accrue each month that are unbilled, we haven't rendered a bill, and depending on your closing cycles in the customer service system, sometimes that's a fairly large amount of your revenues for the month.

We have been using an estimate of how do you figure out how much margin is in that gas when you don't know which customers used it and whether they were big, small and so forth.

So there's a fair amount of estimation that has to take place.

We changed that estimate and the way that we do that estimate in the fourth quarter, which resulted in a lower amount of margin being captured than the old way we did it.

And it is simply that I would look at our revenues for 2002 and say that those are Representative of the year -- excuse me -- 2003 as being representative of the year.

But David, the reason you changed the assumption, was that a commodity price difference or what was behind that?

We felt that we just came up with a better methodology to do the estimate.

We think this estimate is a better estimate than we had before.

And it is all an estimate.

I want you to know that you have to make the estimate just how much money do you make for these unbilled gas that you have sold, not knowing exactly which customer you have sold it to.

And obviously depending on who it is, there is a different amount of margin in it.

So if that is the reason it is an estimate and there is some imprecision in it.

My last question was the link between the ECOM income and Genco income both jumped up considerably and I thought there should be somewhat of an inverse correlation there.

Could you elaborate a little bit on what happened?

Sure.

I think we talked about this last quarter because it's a little higher than we expected.

What happens under the PUC rule, you take the PUC capacity auction prices in just the PUC part of our capacity auctions.

And you take those prices and the way the power was used by the customers in those auctions to get a price for power, and you apply that to the all of your sales in the Company, and you compare that number less fuel and purchased power cost to the numbers that were in the original ECOM model.

What happens is that the Texas Genco, all of the customers at Texas Genco use power differently than the customers just in the PUC auction piece of this, so you have difference in kind of the blend of power and the prices of power and so you cannot look at all of Texas Genco to determine which way ECOM should go.

Now obviously, that can go either way.

It just so happens that in the last half of this year especially, the usage of gas products by the holders of capacity rights in the PUC auction, they have used that power much differently than in the other parts of the auction.

The other item, and I will remind you of this, is ECOM true-up is based on it -- has been based on an estimate for the last seven quarters.

The ECOM model used by the PUC was not a quarterly model, and so you have to take the full 24 months in that model and you had to (indiscernible) allocate it back over this two year period.

And in the fourth quarter, we finally had all of the actual to compare to the estimates that were in the original PUC model.

And so it kind of all came together in the fourth quarter and fully reconciled and all of the accounting is now complete.

Thank you.

Elizabeth Pirella (ph), Merrill Lynch & Co.

Thank you.

Regarding Texas Genco, I would assume that you're going to include the earnings (indiscernible) and your results for the indefinite future until it is clear that you're going to either sell the shares at some point?

Yes, Elizabeth.

Unless there is a probable sale, we will continue to include it in continued operations.

And just going back to an earlier question on this process that you will be going through with the financial adviser approximately six months, if I understand it correctly, you are saying it could take that long just to pursue your preferred action, which is to sell your equity interest, your shares in Texas Genco?

And then if that were not to work out and you go to the next alternative, we're talking about beyond that timeframe?

Is that what you are indicating?

Partially.

One is we're going to gain a lot of knowledge here in the next few months, and we think that if in fact we find a buyer, that it could take up to six months.

But as we go through the next six months and as we learn a lot more, we could make a decision to go a different way earlier.

But I think to be fair, we have to fully let this process play out.

We think there's some interest out there, we just have to make sure we fully evaluate it and go from there.

We intend to sell our interest in Texas Genco.

We would prefer to sell it by selling our stock.

If we can't do that, we're going to monetize it in another way.

Just a few questions on the true-up filing itself.

Would you be seeking to recover all of those costs through securitization or would some of them be securitizable and some through some type of wires charge over time, rather than up front securitization?

I think it is in the best interest of our customers to securitize as much as we can, because the interest cost, carrying cost on that is much lower than if we leave it in our rate base and we recover a return and an amortization amount.

So our goal is to securitize it all and we don't think -- and we're not sure why anybody would not want us to do that, so that is the path we're going down.

And your ability to book the carrying charge, that would be when the commission issues the decision on the true-up filing, right?

You would not have to wait for the securitization order?

That is right.

I guess the Supreme Court has elected to hear your appeal on the carrying -- booking carrying costs earlier.

Any feel for timeframe on that?

Just a little information around that, we appealed the PUC rule that did not provide for carrying cost on the true-up balance, except when the final order was issued.

We felt that the law was that you ought to get it from day one, January of 2002 when the competitive markets open.

We feel it has gone through several levels of appellate courts and the Supreme Court a week or so ago agreed to hear that argument on February 18.

So it will be heard next week, oral arguments, and then in takes a while for all of that to play out and I am not sure how to guess if it is going to be six weeks or six months.

But it will be sometime after that before we see the results of that.

One last question.

The wires rates would be adjusted only at the time of the securitization order.

Is that when you'd actually -- there would be a change in the T&D rates, which the commission would then have to decide what they do with price to be (ph) on the other side?

That would be at the time of the securitization order?

Yes, generally.

I guess there is a way to get an interim CTC prior to the financing order.

But if it goes those fairly quickly, then I think you're right.

It will be at the end of that financing order that the transition charge would be modified in the delivery charge.

I think that there is a way to get an interim charge in there prior to securitization, but I think for practical purposes, it is probably going to occur at the time the financing order is issued.

Thank you very much.

Deborah Bromberg (ph), Jeffries & Co.

Could you discuss the implications of selling some of the Texas Genco assets piecemeal as it regards the minority interest?

For instance, if you wanted to sell the peakers?

I think the key thing in making that decision is that we do have 19 percent minority shareholders in Texas Genco.

So the independent board members of Texas Genco would have to find that it was in the best interest of those shareholders that we began to liquidate and sell units.

So they would have to reach that conclusion, which means they would have to go down through a series of analysis, probably using external consultants and advisers to do that.

But I don't think we could go forward unless they concluded it was in the best interest of the minority shareholders.

Separately, could you briefly discuss the prospects for a stranded cost settlement prior to your stranded costs filing?

And if you don't have a settlement by that date, your chances of a settlement decline just because the parties will be tied up in that proceeding?

We have been having discussions.

They started last fall with the parties that will be part of this proceeding.

We've given them a lot of information.

We have had a number of discussions with the group.

They are continuing to try to speculate whether or not we will reach a settlement.

I think it would be just that, it would be speculation, probably would not be worth -- my (indiscernible) isn't any better than yours at this time.

As to once we get our application filed, if past rate cases are any indication, you continue to hold settlement discussions even when you're in discovery and in a full hearing.

So I would not eliminate the prospects that you might get a settlement once the application is filed.

Thank you.

David Frank, (indiscernible) Partners.

Good morning, David.

That six-month process, did that begin back on January 25, or is that just something that started as you said today?

We started that the last couple of weeks.

It's fairly recent.

At the end of the valuation period for the stock, the regulatory valuation period and to say the stock is marked either at the current stock price or at some other price, why wouldn't you just sell the balance of your ownership into the market if there is this demand?

I would think it would be faster, you would be able to get the cash faster.

That's certainly one of the alternatives we've been looking at.

We reached the conclusion that this first alternative is the one we ought to pursue initially.

But that is selling our ownership interest into the secondary market.

There's always an alternative.

There are some downsides in that, so it's not all as easy as one would expect in terms of impact on stock prices and so forth.

But we certainly will consider that alternative as we go down the road.

Good luck guys.

Thanks a lot.

David (indiscernible).

Good morning guys.

Focusing a little bit on the six-month process.

I assume this will be a typical auction process where you will get some first-round bids.

Can you maybe give us any more detail on what you're envisioning for a schedule there?

We're certainly going to try to get indicative expressions of interest in the next couple of two or three months.

And depending on what that looks like, we'll try to get more firm bids after that.

It is not going to be anything unusual.

It is going to be how these processes are normally conducted.

And so this is not going to be something that is unusual to what people normally see.

The speed, two, three, or four months, given that you sort of knew the date was coming, are books out there, are you moving on this, or were you sort of just waiting for the Reliant option to expire?

We did not do anything in the external markets until the option expired.

Now that the option has expired, we have a financial adviser who has been engaged to help us and we are out in the marketplace.

Another question for you.

There has been some stuff out there that you might be able to reclassify certain regulatory assets as equity following the final piece of the order, which would help your debt to capital ratio.

Can you comment on that at all?

Is that true and you've always sort of said you'll get to 60-65 percent at the end of the day.

This would certainly help that.

Can you comment on that all?

David, I haven't heard that.

I would be interested in knowing what it is, but I'm not familiar with what you're talking about.

Okay.

So as far as you know, there's nothing of that nature?

Yes, I have not heard of it and it has not been brought to my attention anyway.

Last question.

Interest -- can you give us a sense of a run rate interest number, assuming no securitization and no sale for the year?

Can we take the fourth quarter and do it at four times that, or (indiscernible)?

I don't thank you can take the fourth quarter and then use that as a run rate.

I think the best way to look at it -- the reason for that by the way, we have amortization with the various financings that we had, we had amortization of the financing cost in that number.

I think if you look at our interest expense for '03 and if you look on a go-forward basis -- and of course, this assumes that same level of leverage is in place throughout the year, interest costs will be lower in 2004 than in 2003.

Can you give us a magnitude on that?

I am cautious -- hesitant to do that from the standpoint -- it depends on in terms of where LIBOR will be.

I think -- our debt levels in terms of fixed and floating are very clear, and I think (indiscernible) do your calculation and expectation of where you think LIBOR will be.

Can you at least give us a level of amortization fees and the type of thing over and above what we can do the calculation on, in terms of what is out there?

Sure. 2003, the non-cash or the amortization -- non-cash interest was about $139 million out of the total.

And that will be less in 2004, and I will give you that number -- about 88 million.

88 million total?

88 million.

If you take our debt profile, David, and just make (indiscernible) assumptions on the floating, and it's $88 million on the amortization.

That's helpful.

Thanks for the time.

Peggy Jones (ph), ABN Amro.

Hello.

A couple of questions.

One, do you feel that there will be any change in the attitude of the PUCT with the new chairman?

And the second question I had was -- what are the tax implications for your company of a piecemeal sale of the assets into Genco?

Let me take the second one first.

I think the underlying assets have a tax base that is very comparable to our basis in the stock, which is a little over $1 billion.

So I think the tax implications from an asset sale versus a stock sale is not that significant.

Second, on the first question, I am sure there's not going to be a change with the new chairman.

They are all there to do and serve the state of Texas.

And (indiscernible) long, I'm sure that's what they're going to do.

So I think she will do a great job.

A follow-up.

Could you summarize the most important factors that have led you to be so focused on the sale of the entire Genco, rather than the individual assets, other than the question of the Genco directors having to decide that anything was in the best interest to the minority shareholders?

Let me make sure I understand that question.

Why are we so focused on selling the stock as opposed to selling assets?

Yes.

First, let me correct something that the PUC chairman is a he and not a she -- I misspoke there and I apologize for that.

Second is -- I don't think there is a clear difference between selling stock and selling assets.

The sum of the pieces of selling assets versus selling stock; it's not clear that you're going to get anymore or any less.

I think you probably open up a few more buyers if they just sell a few of the assets, but you may not optimize your total value for this portfolio if you just started selling them off in pieces.

So I think you have to be real careful as you go down this path of selling individual assets.

Because we think this portfolio, this fleet of base load and gas-fired capacity is very valuable as a portfolio.

And that's what you get when you keep it together in one company.

And I would say that it doesn't mean we won't consider selling assets, but I think it is premature to do that at this stage.

Thank you.

Scott Angstrom (ph), Hamilton Investment Management.

Hello.

Question on the ECOM calculation.

Is there any subjectivity in that at all, or part my ignorance on the formula, if we walked it over to the PUC, would you just sort of put it in a spreadsheet and everyone comes up with the same numbers?

I think once the two-year period is now complete, that's right.

The rule, it describes how you do it and we filed the rule.

What has happened over the last two years is you've had to make estimates on how you allocate this over the two-year period.

But now that we have all of the numbers done, we have the actuals versus the original estimates, I think that is right.

So most of the numbers essentially came from the original PUC model, you just added in the results from the PUC auctions, which obviously are public information and not subject to subjectivity?

You have to take individual pieces out of this model.

I'm not going to suggest to you that there's just one number that sits out there.

You have to take various pieces and make the calculation in the model and you have to do the same comparable calculation based on actual results, and then you get the difference.

So yes, if you have the model and you know what every one of those pieces in that model do, you ought to be able to produce the same result we have produced.

There's complexities around this.

Don't let me mislead you on that.

I'm just trying to get a sense of whether or not that will be something -- I mean I'm sure, given the size of the true-up filing, everything will be contested, but in a matter of gray sort of whether or not that number is going to be a number that everyone kind of stipulates walking in the door, or you expect that one to be highly contested?

I think they're going to look at every one of our calculations, every one of our numbers and make sure that we have done it right.

So it will be fully reviewed and litigated.

In terms of the guidance, I understand on the financing side, lots of balls up in the for the year, but I would not suspect that that really has an impact on say the operating performance of the TDU or the LDCs or the pipeline business.

Is there a reason you're reluctant to talk about operating performance in those areas?

No, other than we typically don't give guidance by our various business segments, we give it for the company, but you're right.

The electric utility, our gas distribution businesses, our pipeline field services -- we are going to -- those businesses are solid, sound businesses.

We're going to continue to try to improve the results.

But that is not what we can't estimate.

It is everything around it because we provide these estimates for the Company itself.

And a company policy, you prefer not to sort of share with us where you think those businesses are headed in '04 over '03?

As a general rule, we have not done that in the past and we just don't think it's a good idea to start piecemealing this stuff out.

Okay, very good.

Thank you for your help.

Ted O'Shansky (ph), Scotia Capital.

I had a couple of questions actually.

The first is -- you mentioned some of the different options or alternatives you would pursue if you were unable to sell Texas Genco.

I did not hear you say anything about whether or not you would consider placing debt or putting debt down at Texas Genco.

Would that be something you would consider?

That really doesn't monetize our interest in Texas Genco, Ted.

Clearly, there is no leverage on it now and the new owner or anybody else could put leverage on it.

But that does not get us out of our ownership interest in Texas Genco, which is what we're trying to do.

Right.

As far as -- you had talked about the timeframe that the PUC had to act on the request on stranded costs, and you also spoke about the potential for a delay if there was good reason.

I wonder if you could talk a little bit more about how long the delay there could potentially be if there were a good reason and what some of those reasons might be for the delay?

The law itself says that this case should take no longer than 150 days.

But under the general PUC kind of rules, they can use a little bit more time if for some reason, there was a good reason to do it, then maybe we did something where we weren't providing information timely.

But we are very sensitive to this item and we have started sharing with the other parties as much information as we can at this stage so there won't be any delays and they have more information than they typically would when we file an application.

So we're doing everything in our power to make sure that 150 days doesn't slip.

It would have to be something where the commission determines that in order to fully prosecute the case, they need more time to do it.

And there has to be a reason other than somebody did not do something I think in a timely way.

And under the PUC rules, is there a maximum delay that they have talked about or that is embedded in the rules, or would it be sort of an indefinite delay until the information that they requested was given to them?

No, there is no number of days or limits, but they have to prove a good cost.

It can't be just they (indiscernible), there has to be a good cause for it.

And based on the good cause, then probably it will be determined.

But it is not indefinite and I don't think people ought to be thinking about it being indefinite.

My sense of it is the commission want to go ahead and prosecute this as fast as they can.

And so there should be no reason to delay.

The fact is if we can get this thing done in these below interest rates period, this is a great time to be selling securitization bonds, and that is why we're so anxious to get this thing filed and get it completed.

And these are extremely attractive interest rates that hopefully we can capture for the benefit of our customers.

Okay I had one more question.

You talked a little bit about rate filings within your gas T&D business.

I was wondering if you could give us some rough idea of in the aggregate, how much new in revenues you will be seeking during those rate requests?

We recently received a rate increased from the City of Houston of something like -- between $7-$8 million.

We will get a similar amount in the surrounding cities; that is what we have applied for.

So that is one that is pending.

Just two days ago, the State of Louisiana agreed to a $2.3 million rate increase for our Entex business in Louisiana.

We expect -- and we have filed one in northern Louisiana for our Arkla, which is -- I want to say that is -- I can't recall the exact numbers.

The northern Louisiana increase request is almost $16 million.

Now there are a number of others that we are continuing to consider.

We have not quantified those yet.

But we have several jurisdictions that we are not earning our full rate of return on and we expect to sometime later this year make an application.

Okay, thank you very much.

We are outside of our timeframe, so if we can just take two more calls.

Zach Schreiber (ph), Duquesne (ph) Capital Management.

Are you actively considering selling TGN (ph) stock to the market or not?

I think obviously what seems like it would make some sense, but I thought what you were saying is that would create regulatory complexity because you were filing -- you had filed your business separation plan and you will be (indiscernible) true-up on the basis of the partial stock IPO.

But I was actually under the impression that how you valued TGN (indiscernible) purposes was completely separate how you actually monetize (indiscernible), so I don't really understand why or how there would be a second bite from the PUCT on how you actually monetize it.

Could you please clarify that for me?

I probably misspoke.

I did not mean to imply that there was any connection with us selling stock in the secondary market and now the Texas Genco stock is used in the market value in the true-up.

It's unrelated.

Once we get through March 31st, which is the end of the 120 day period, which is going to be the period used by the PUC, if we want to go out and sell stock we could.

But what I have tried to imply earlier is that our first alternative is to find a buyer of our full 81 percent interest in Texas Genco.

That, we think, is the best alternative.

We will look at other alternatives, including selling stock in the secondary market if in fact this first one we decide is not the path to go.

It doesn't have anything to do with the proceeding in Austin.

In terms of the rating agencies, are you comfortable that they're going to give you a time to evaluate these different options and give you the leeway to carefully consider, weigh all of the pros and cons of different options here, and that they are not going to be proactive and reactive and that they will let you take your time to make these very important choices or not?

Just (indiscernible) staking a little bit longer.

A couple of comments.

How are you doing?

We have kept the rating agencies informed every step of the way.

And obviously, this goes back to the original cost structure of CenterPointEnergy.

And so I think what they expect of us and what we must deliver on is a very methodical plan that we're going to execute as David described.

I think that’s what they expect.

We have said that Texas Genco, we will attempt to sell the 81 percent interest and we have a plan in place and we will describe that and have described to them and will describe that in even more detail and keep them apprised every step of the way.

So our expectation is that they will allow us to move through our transition period and with these two deleveraging events and execute the game plan that we've put in place three years ago.

Can you refresh us -- the only rating agency that took any action was S&P when (indiscernible) chose not to exercise its option, or did Moody's follow suit as well?

S&P I think --

They put you on negative watch, right?

Yes, negative outlook on that.

And it was an event obviously with our not exercising the option, and it introduced then issues around the timeframe, that is correct.

On this new chairman of the PUCT, how can we say with such certainty unless we know who this guy is and know him inside out, that there is no change at all?

It seems like Rebecca Klein (ph) has really very forceful and really has known exactly what she wanted to do and had stayed the course.

Can you give us a little bit of background information on this new chairman who comes in at such an important time for you guys?

I'm not going to get into personalities, but Paul (indiscernible) new chairman.

He's fairly new to the commission, but the law sets out that the rules that they have to follow.

And these folks know that and they're going to follow them.

So we're very confident that the new chairman will do just as good job as the old chairman was doing and we are not concerned about it.

Final issue is -- I think this goes back to (indiscernible) -- has it been totally clarified at the commission yet whether the CTC will be layered in on top of the price to beat, or whether it will be layered onto the T&D rate, and hence, squeeze the margins of the suppliers?

I don't think that has been decided yet.

Do you have any expectation or any presence of how that works out?

Certainly, the commission has the right to modify the price to beat rate to reflect this.

Is there any precedent as to how they've dealt with this for other companies yet, or is this all unchartered water?

I don't think we see anything on this yet.

Thank you for your time.

Good luck.

We'll take one more.

Paul Patterson (ph), Glen Rock Associates.

Hello, how are you?

Just a little clarity here.

It sounds like your preference number one is the sale of equity to a buyer just to have one transaction such as that.

And then after that, I'm a little bit less, little confused as to what your preferences would be if that wasn't available.

Would it be a stock sale to the public, would it be asset sales?

If someone was to buy the whole fleet, it seems to me that they would probably be willing to buy all the equity too.

I don't know if there would be a difference between the two for them.

Could you elaborate on that?

We really haven't made that decision.

We have those alternatives out there, but we have not decided which one would be the preferable course.

We are obviously studying those in case we have to go down that path, but we have not made any conclusions yet.

Have you heard anything about the issue of market power at all or a preference to have the assets sold to other than a single wire, anything like that?

Has there been any rumblings at all to PUC, or have you heard anything federally or anything such as that?

I know guys aren't -- I know that before you've (indiscernible) market power, but I wonder if there was any issue associated with that at all.

We have not heard anything of that nature.

Thanks a lot guys.

Thank you very much everybody for participating in our conference call this morning.

We do appreciate your interest in CenterPointEnergy so thank you very much.

This concludes today's conference call.

You may disconnect at this time.