CenterPoint Energy Inc (CNP) 2004 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the CenterPoint Energy first-quarter 2004 earnings conference call.

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

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Ms. Paulsen, you may begin your conference.

Thank you very much.

Good morning everyone, this is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy.

I would like to welcome you to our first-quarter 2004 earnings conference call.

Thank you very much 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 Texas Genco conference 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.

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

Our first-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 the call are subject to the cautionary statements on forward-looking information in the Company's Form 10-K for the period ended December 31, 2003 and in the Company's other SEC filings.

Before Mr. McClanahan begins, I would like to mention that a replay of the call will be available until 6:00 PM Central time through Thursday, April 29, 2004.

To access the replay, please call 1-800-642-1687 or 706-645-9291 and enter conference ID number 654-0405.

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

And with that( 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 first quarter 2004 earnings call, and thank you for your interest in our company.

This morning I will give the highlights of our first-quarter financial results, discuss the status of our true up filings in the sale of Texas Genco, and update you on the progress of our process improvement efforts.

Gary Whitlock, our Chief Financial Officer will then discuss the performance of each of our business segments and update you on our most recent financing activities.

As we reported this morning on a consolidated basis, CenterPoint Energy had income from continuing operations of $74 million or 24 cents per diluted share for the first quarter of 2004.

This compares to $81 million or 27 cents per diluted share for the same quarter of 2003.

Last year's results included ECOM revenues, which terminated at the end of last year.

So from a cash standpoint, our earnings this year are of a much higher quality.

I'm very pleased with our overall financial results for the quarter.

Our electric transmission and distribution segment as well as our Pipelines and Gathering segments had solid quarters.

Our gas distribution segment's performance was adversely impacted by mild winter weather and severance associated with staff reductions.

And Texas Genco had another outstanding quarter.

I am also very pleased with the progress being made by each of our core businesses and the implementation of their respective strategies.

As I said in the past, 2004 and 2005 are transition years for the Company.

We remain focused on recapitalizing the Company through our two deleveraging events, which I will review in detail with you shortly.

At the same time, we're focusing the organization on comprehensive processed improvements to ensure that we are operating each of our businesses as efficiently and effectively as possible.

The combination of these two strategic initiatives will position the Company for value growth in the future.

Now I would like to update you on our two key events beginning with our true up proceedings.

On March 31st we filed our stranded cost true up application with the Texas public utility commissions 43.8 billion, excluding interest.

This is one of the final steps in the implementation of the Texas Electric restructuring law that was passed in 1999.

As I mentioned in our year-end earnings conference call, 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, recovery of stranded costs.

I think most everyone agrees that the Texas market has been a real success.

CenterPoint has actively worked to support this new market and the principles upon which it was restructured.

We are pleased that we finally reached his final stage of recovering our stranded cost, and we are looking forward to presenting our case.

Under this statute, the PC has 150 days in which to render a decision regarding the quantification of the Company's true up balance comprised of our stranded costs and certain regulatory assets, the largest being the Company's capacity auction ECOM balance.

The PDC commissioners have decided to preside over the hearings, which have been scheduled for June 21st through July 9th.

We anticipate a ruling in this case in late August at the end of the 150 day statutory period.

Once the PDC quantifies the final true amount, two things will occur.

One, we will begin earning a return on the final true up amount at the utilities weighted average cost of capital; and two, a separate proceeding will be held to determine the amount to be securitized.

Our goal is to securitize the final true up balance approved by the PDC.

This proceeding should take no more than 90 days, and we hope to have a financing order before year-end.

I think it goes without saying that the result of this preceding are extremely important to the long-term financial health of the Company and to our ability to invest in the necessary infrastructure and systems that make the Texas electric market so successful.

The impact on residential customers should be relatively modest.

Assuming securitization of our requested true up balance and today's interest rates, we estimate the impact on our residential customer would be less than a half of a cent per kilowatt-hour.

This would represent less than a 5 percent impact on most residential customer’s current rates.

Customers may ultimately find their monthly bills to the impacted by their retail energy provider's treatment of several factors, including the final true up balance, determination of excess mitigation credits and fuel cost adjustments.

We look forward to the completion of this whole process and the subsequent reduction of our indebtedness with the use of the securitization proceeds.

The second significant undertaking in 2004 is the sale of our interest in Texas Genco.

As I mentioned in our last call, we have engaged Citigroup as our financial adviser and our actively pursuing a sale of our 81 percent ownership interest.

We launched this process in January when we Reliant Resources did not exercise its option to purchase our interest.

So far we're very pleased with the level of participation and the overall interest shown in this asset.

However, as with any transaction of this nature, this process will take time to play out.

We expect that by midyear we will have determined our best course of action.

Let me emphasize that Texas Genco continues to operate well and is financially self-sufficient.

Texas Genco has sold a significant portion of its available capacity for 2004 and 2005 at attractive prices.

In fact, through the March auctions, their forward sales for 2004 include over $1 billion of capacity revenues under contract with approximately 94 percent of their available baseload capacity so forward.

For 2005, over 620 million of capacity revenues are under contract which includes 66 percent of available baseload capacity.

Next month we plan to hold additional auctions for both 2004 and 2005 capacity, and we continue to explore opportunities to secure attractive margins in later years.

Earlier today, Texas Genco announced solid first-quarter results, and we expect 2004 will be a significant improvement over 2003.

CenterPoint's third key initiative for this year centers around improving our operating practices.

We continue to focus on improvements that will enhance the way we serve our customers, reduce our cost structure and position the Company for the future.

As I mentioned in last quarter's earnings call, we are evaluating all of our key processes over the next 12 to 24 months.

These efforts are well underway as evidenced by the restructuring charge incurred in the first quarter.

This charge related to reductions of approximately 200 positions in our rural gas distribution operations stemming primarily from the implementation of improved technology.

I am very pleased with the way our employees have embraced this process improvement effort and expect significant new enhancements in savings to be identified as the year progresses.

Let me briefly mention that CenterPoint Energy's annual meeting of shareholders will be held on Thursday, June 3rd at 9:00 AM Central time at the Company's headquarters.

Shareholders who hold shares of CenterPoint Energy as of April 5th will receive notice of the meeting and be eligible to vote.

We hope many of you will be able to attend.

Before Gary briefs you on our business unit results for the quarter, let me say a word about 2004.

As I indicated in February, we are not providing earnings guidance for this year.

We do not believe meaningful guidance can be given in light of the timing of our two key delevering events that I just described.

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 Texas Genco.

Now I will turn it over to Gary.

Thank you, David and good morning to everyone.

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

I would like to review with you the performance of our four business segments, beginning with our three core businesses, Electric Transmission and Distribution, Natural Gas Distribution, Pipelines and Gathering, and then I will review Electric Generation or Texas Genco.

Let me begin our review with Electric Transmission and Distribution segment.

This segment includes the regulated transmission and distribution utility or TDU as well as the operating income impact of the Transition Bond Company.

From this quarter forward we will separately disclose the operating income impact of the Transition Bond Company.

We are doing so in order to provide clarity regarding the operating results of the TDU.

The operating income associated with transition bonds is offset by a corresponding amount of interest expense.

We will also disclose interest expense on the bonds separately.

In addition, let me remind you that prior to 2004, Excess Cost Over Market or ECOM was also recorded in this segment.

As David mentioned earlier, ECOM terminated at the end of last year.

So now let me talk about the TDU's results.

For the first quarter of 2004, the TDU reported operating income of $75 million compared to $64 million for the same period of 2003.

The TDU's revenues increased for the quarter was attributable to continued strong growth in metered customers with approximately 48,000 customers added since March 2003.

This increase was partially offset by milder weather which negatively impacted the quarter by $6 million.

Operation and maintenance expenses were negatively impacted as a result of higher payments to transmission providers within ERCOT.

We were able to mitigate these expenses by our continued focus on productivity improvements and to a lesser extent the delay of expenditures for various services, mainly due to weather conditions in the quarter.

Operating income associated with the Transition Bond Company was $10 million for the first quarters of 2003 and 2004.

In addition, as I mentioned, ECOM is no longer recorded beginning in 2004.

ECOM revenue recorded in the first quarter of 2003 was $132 million.

Capital expenditures were down $5 million quarter-to-quarter as the TDU continues to optimize capital spending while at the same time improving system reliability.

So to summarize, the electric TDU continues to benefit from continued solid customer growth and efficient and effective operations.

Now I would like to turn to our natural gas distribution segment.

This segment reported operating income of $117 million for the first quarter of 2004 compared to $129 million last year.

Operating income was negatively impacted by three factors.

Mild weather and reduced contributions from non-competitive commercial and industrial sales business combined with a charge related to staff reductions impacted the quarter by $21 million.

Depreciation expense also increased by $2 million due to higher plant investments.

These negative impacts were partially offset by continued customer growth with the addition of over 38,000 customers since March, 2003; higher revenues from rate increases of $3 million and reduced spending.

The strategy and is businesses to ensure that we realize our authorized rates of return through a combination of rate increases and productivity improvements.

As part of our productivity improvement efforts, we are reducing our labor costs by reorganizing our operations in various parts of Arkansas, Louisiana, Oklahoma and Texas and implementing new technology to serve our customers better.

As a result we incurred a charge of $8 million in the first quarter of 2004.

We will realize the cost benefits of these staff reductions in future periods.

In addition in 2002, we began a concerted effort to seek rate relief to accomplish our strategy of earning our allowed returns in each of our jurisdictions.

We have made significant progress in 2002 and 2003, but we have more work to do.

We have pending across our combined service territories over $20 million of additional rate relief.

We are making progress in both our productivity improvements and rate increases.

However, we are not earning our allowed returns in certain jurisdictions, and those will remain a continued focus for a combination of further rate relief and productivity improvements.

Turning now to our Pipelines and Gathering businesses, we reported operating income of $45 million for the first quarter compared to $43 million last year.

The increase in operating income of $2 million in the quarter was primarily due to an increase in throughput and enhanced services related to our gas gathering operation.

Operation and maintenance expenses increased primarily due to spending related to pipeline integrity and higher employee related costs.

Our strategy is to grow this business through both investments in our assets and a focus on our service companies.

We will grow our Pipelines and Gathering assets through a combination of system expansions and Greenfield development projects.

For example, we are currently holding an open season for 100 million cubic feet per day expansion on our pipelines.

We remain very pleased with the consistent financial performance of this business segment.

And the last segment I would like to review is electric generation or Texas Genco.

Texas Genco is a fully consolidated entity of CenterPoint Energy, and we report the 19 percent of shares we do not own as minority interest in our financial results.

Texas Genco's operating income for the first quarter of 2004 was $90 million compared to an operating loss of $17 million for the same quarter of 2003.

Our strategy in this business remains one of operating our baseload capacity at high operating rates and selling capacity forward on an opportunistic basis to lock in probability.

This morning we reported substantially increased revenues for the first quarter.

Revenues increased by $80 million or 22 percent over the first quarter of 2003 primarily due to higher capacity auction prices received for our bank baseload products driven by continued high natural gas prices.

Most of these baseload products were sold in capacity auctions held when natural gas prices were higher than we sold our capacity for 2003.

Also in revenues was $4 million from the sale of surplus air emission allowances associated with nitrogen oxide.

We will continue to look for opportunities to sell surplus emission allowances.

Operation and maintenance expenses declined $4 million in the quarter compared to the first quarter of last year primarily because of lower costs associated with planned and unplanned outages.

In the first quarter of last year, we had a six-week planned outage at one of our limestone units and an unplanned outage at one of the units in the South Texas project.

In the first quarter of this year, the nuclear units are operating well, and we had four weeks of planned outages on our coal units.

Texas Genco's capital expenditures declined by $21 million as we are winding down our current capital expenditure program for Knox Environmental controls.

In summary, we are very pleased with a significant improvement in the profitability of Texas Genco in the quarter.

In total, then, our businesses produced operating income of $335 million in the first quarter of 2004 compared to $361 million in 2003.

Our core businesses, excluding the Transition Bond Company and the impact of ECOM revenue in the first quarter of 2003 produced operating income of $235 million compared to $236 million in 2003.

In addition, Electric Generation produced $90 million of operating income compared to a loss of $17 million.

We are very pleased with these financial results and the quality of our earnings this quarter.

And 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 we take questions, let me review my most recent our most recent financing activities.

Following a very productive 2003 in terms of financing transaction, we continue to look for opportunities to reduce borrowing costs and enhance financial flexible and liquidity.

Let me briefly reduced on our most recent financing.

In January, CenterPoint Energy Resources Corp, or CERC, our natural gas distribution and pipeline and gathering subsidiary, replaced $100 million receivables facility with a $250 million receivables facility, which will terminate in January 2005.

This new facility offers greater capacity and lower costs.

In January, we redeemed $250 million of higher cost trust preferred securities with proceeds from securities sold in late 2003.

In March, CERC replaced a terminating one-year $200 million credit facility with a new three-year $250 million credit facility, which has a fully drawn cost of LIBOR plus 150 basis points.

This facility offers greater capacity, extended maturity and lower costs.

Also in the first-quarter, $229 million of the loose (ph) control bonds were refinanced at lower costs.

At lower rates -- excuse me.

On a consolidated basis, at the end of the first quarter we had in excess of $1 billion of liquidity in the form of cash investments and available capacity under bank credit lines.

And our businesses generated sufficient cash from operations in order to pay our dividend, to cover our capital expenditures and to reduce borrowings.

Now I want to thank you for your interest in our Company, and I will turn the callback to Marianne.

Thank you very much, Gary.

We are now ready to take questions.

So Linda, we would appreciate it if you could please provide the instructions on how to ask a question.

(OPERATOR INSTRUCTIONS) Tom Scocia (ph) of Delaware Investment (ph) .

Good morning.

A quick question on the general market down at ERCOT we're starting to see some grumblings that the market is kind of going to come back to the equilibrium of capacity margins of 15 percent a lot sooner than people had thought maybe six months ago.

And I'm wondering if you are kind of seeing and hearing the same things and if that is translating into any sort of price appreciation in the forward curves?

We really haven't seen that yet.

We are -- we still have a lot of excess capacity in ERCOT, and we expect that to be worked out off over time but we haven't seen any near-term price changes other than driven by natural gas prices.

Okay.

Thanks.

Ali Agha of Wells Fargo Securities.

I've got a couple of questions.

First on the true up filings that you have now put in place, in your opinion what line items or what areas of that filing you expect to get the most opposition from as this process unfolds?

I guess it is a couple of areas that they are going to look at.

One is there looking very hard our book value and our balances on our balance sheet.

We haven't been in for a rate case that was fully litigated since 1992.

And so they will look at all those capital expenditures in Genco and that is fair.

But we feel good about what we spent.

So I don't think there is going to be an issue.

And of course under the law, we have an obligation to mitigate stranded investment.

We think we've done a good job in that, but obviously that is going to be a focus by the interveners as to whether or not we've done everything we should've done.

Okay, and what is the chances of reaching some settlement with the PUC prior to this whole process playing out on schedule?

We continue to talk to the parties, and that's good.

But I think it would just be speculation to kind try to guess if we could reach a settlement.

But we are still talking to the parties.

One other question on Genco.

Given the strength that you continue to see in that business and especially even the visibility into '05, what are the chances that you may reassess your plans to sell it or at least delay the sale for a couple of years?

Well, we have a strategy that we set out when we originally split off or split up Reliant Energy into two pieces.

CenterPoint Energy is highly leveraged.

We're focus on regulated businesses.

Our strategy is regulated businesses.

So we really want to monetize our interest in Texas Genco.

We are not going to fire-sale it, but so far we've gotten a lot of good interest as we go through this process, so we are optimistic.

But we are not going to delay it just because all of a sudden we like the business.

We basically believe that we have too much leverage on our balance sheet, and we are intending to reduce this indebtedness.

And that's what we plan on doing.

If we don't get a fair price, in our judgment, then we would consider something else.

The good news is that Texas Genco is doing fine.

It is self-sufficient; it is not a cash drain.

So it is not the end of the world if we have to keep it a few extra months.

But our focus here is on selling Texas Genco.

On the gas distribution business, as you have said a couple of times, you are still under earning that you're allowed (indiscernible) Could you give us a sense or quantify how much of a gap that is between where you were earning and what you are allowed to earn?

Ali, I don't have those numbers in front of me.

We clearly have some jurisdictions that we are under earning in, and so we have to get those businesses earning a fair, solid, regulated return.

We just finished the rate case in Houston earlier this year.

It's a big part of our operation, so we will -- that what business will start performing well again.

But we have a couple of jurisdictions, Arkansas, Oklahoma, some parts of Texas, that we simply are not earning our solid return and we need to get them back on track.

Thank you.

Chris Melendez (ph) of UBS Principal Finance.

I had a question on the interest on stranded cost that you guys submitted for recovery.

The $631 million is -- I understand some of that is not under dispute, is that correct and if so, what amount is not under dispute?

The rule does not provide for the accrual of interest, and we appealed the rule to the courts, and it’s gone through several levels of court review.

And now is at the Supreme Court.

But the interest -- all of these $631 million I think is subject to the ruling at the Supreme Court of Texas as to whether or not we are entitled to interest or not.

But the rule does not provide that we received interest until the true up balance amount is determined by the P. U. C.

I understand.

So this is all for interest associated with everything before when the true up amount is determined?

Yes.

And so what is the update on the Supreme Court?

When do you expect a ruling?

No, the hearings were held February 17 or 18, in that time frame.

We don't know when it's going to happen.

We hope that it happens before the end of the true up proceeding, obviously.

But it's really hard to guess that, Chris, as to how soon that might happen.

Okay.

Thanks for the update.

Elizabeth Parrella of Merrill Lynch.

Regarding the true up filing in TNT's (ph) case, I guess the staff made some recommended or supposing from disallowance is in their recovery.

Just wondering, is there any or read across or implications for how you see your true up filing?

You know, the TNT at CenterPoint are much different.

They did not use the same valuation methodologies.

They sold their plant.

So I'm not sure you can necessarily draw any inferences from that proceeding.

But I will have to say I am not intimately familiar either with all of the arguments being made there.

So, but I do know that they have a fairly different situation than we do.

And on the weighted average cost of capital that you would be using two (technical difficulty) to book that non-cash return, once the true up filing decision is made, would that be from the last rate case back in '92 or would the commission look at that again?

It would be from the delivery rate case, which was 2001.

It is more recent than that.

What is that weighted average cost of capital?

It's 11.37 percent.

Just another question on the LDC side, the restructuring charge that you took?

Can you talk about what the annualized cost savings are from that and when you would expect to hit that on a run rate basis?

I think you could probably assume it's pretty much one-to-one in terms of what our expected annual savings will be.

So it will be in the 8, 9, $10 million range on a going forward basis.

We expect there to be a little bit more of that of restructuring in those businesses to occur later on this summer.

It is not all complete.

We've completed the first phase of that.

I would suggest that probably 2005 will be a time when you see the full impact of the restructuring there.

Okay, thank you.

Carol Coale (ph) of Prudential.

A couple of questions.

The first one, if you could break out your commercial and industrial sales?

You mentioned that the sales were a negative contributor to your gas distribution performance.

Prior to this quarter you gave us a breakout between residential, commercial and industrial.

Do you have those numbers?

I think -- are you talking about on the gas distribution side?

Yes, in gas distribution.

I'm just trying to get a feel for whether it's industrial sales that were the negative contributor, if it was commercial or whether it is relevant?

You know, we have a fairly sizable competitive small industrial commercial business.

The overall impact really was driven in 2003.

Gas price volatility drove some margin there.

Overall it's about a $3 million impact from quarter-to-quarter comparison.

It is primarily around the volatility of gas that occurred in 2003 that did not occur in 2004.

We haven't lost a lot of customers or anything like that.

This is around the volatility part of this.

Also you went through -- or Gary went through the refinancings in the first quarter.

Do you anticipate additional refinancings this year, and do you have a ballpark of how much you are expecting overall on an annual basis to save in interest expense?

Annually?

Clearly what we are hoping for, of course, is we will pay down the debt this year on the two delivering events.

We will see how those play out in terms of the timing of those, but there are no other refinancings planned.

In terms of interest expense, if you were to take the first quarter and annualize it, you will be fairly close to what we would expect the interest expense to be for the year.

With the caveat of course, is that we do have some floating-rate debt that could be impacted depending on what the rates do, the short-term rates do over the rest of the year.

I think you'll be in the ballpark with that number.

How much of your debt is floating?

Total, about 2.3 billion out of the total.

Okay, that's -- ?

Including the buffet (ph) loan.

Okay.

Thank you very much.

Peggy Jones of ABN Amro.

I had a couple of questions.

The first one, you had referred to being ready to make a decision by midyear on what to do with the Texas Genco, and I just wondered if you meant by that that you would be able to decide if you had n appropriate bid or -- will you be announcing something to investors at that point?

And then the other question that I had was a very specific point with regard to the staff recommendation in the TNT true up filing.

The staff felt that TNT had not taken the excess depreciation and netted that against the value of their generating plant as evidently they had been directed to do by the PUCT.

And I just wondered if your Company had a similar situation with regard to excess depreciation and if you had netted it against the value of Texas Genco in your filing?

Peggy, starting, with that last question, I'm not real familiar with the TNT filing.

I will have to admit that.

But I am not aware of any issue as it relates to excess depreciation; certainly any excess depreciation has been applied to our net investment.

So I don't think we have the same issue there.

But subject to understanding what that staff actually recommended.

In terms of what we expect to happen by midyear, we obviously hope to have a buyer of our interest in Texas Genco by midyear, and certainly if we have that we will announce it to the public.

Secondly, if we don't, if for some reason we don't find a buyer, we hope to be in a position to know where we're going to go otherwise.

So I think by midyear we are going to know where we're going with Texas Genco.

Thank you.

Ken Weddle (ph)of Fifth Third Asset Management (ph) .

My question involved the parties who have expressed interest in the Genco assets.

Had they been expressing interest in all the assets or just pieces of the assets?

We've actually asked that only expressions related to our whole 81 percent interest.

That's what we are interested in doing is selling our total 81 percent interest and not individual assets.

So that's the basis upon which we are marketing this -- (multiple speakers)

One follow-up question, then.

The type of -- what are the type of parties interested basically or is it the financial buyers or other utilities?

There is a whole mix of parties that are interested and have shown interest.

Thank you.

Daniele Seitz of Maxcor Financial.

I just was wondering if you could give us the average ROE on the gas LTC at this time and how long do you anticipate it will take, 2 to 3 years to bring them to a more normal ROE?.

Daniele, did you ask for what the average ROE is today?

Yes.

Authorized, or what we are earning?

On the LDCs and on the one that is on average right now and how long do you anticipate it will take for the one that are not earnings ROI to get to a normal level?

You know, our authorized ROE's range from 10 to 11 percent, in that range at our gas LDCs and I think we are earning that in some of our jurisdictions.

But I would say on average the ones that aren't are in the single digits and we need to get those back up to the double-digit level as I described.

We have a program that over the next couple of years we are going to get those LDCs earning their full return.

As you know, it does take time.

You have to file rate increases, and many times in the gas business that will take from 9 to 12 months to fully litigate and get new rates into effect.

So hopefully within two years, we will be to the point where we are earning our full return in all our jurisdictions.

And in terms of the staff recommendation, is there a date when the staff will make the recommendation on the true up case?

The staff recommendations -- I don't know what that schedule is.

It's probably going to be sometime in late May or early June.

There is no precise date yet?

I'm sure that date has been laid out.

I am just not familiar with it.

If we get before the end of the call, we will give it to you.

If not, it is available -- you can call the company.

We can give it to you later on.

Last one.

You asked for 631 million on interest.

I assume the rule currently is giving you -- assuming you get the decision in August; you will be getting a pro rata of that number for the remainder of the year.

Is that the way to look at it?

The way the rule works now is once the PUC determines what our true up amount is, then we start to accrue interest or earning at our average weighted cost of capital.

That is what the rule says today.

What we have appealed to the commission, we've appealed that rule and have asked that interest accrue from a start of the deregulation date, which is January, 2002.

So the $631 million relates to any time frame prior to the final order date.

And it does not take into account any earnings after the final order date, which is not in dispute.

And we will get those once the true up amount is determined by the PUC.

Thanks.

Debra Bromberg of Jefferies & Co.

I had a question on the less than half cent impact on residential rates that you are expecting to in order to recover stranded costs.

Does that only generation related stranded costs are securitized?

And then I had another question.

That assumes that the full true up amount that we requested of 3.8 billion is securitized at today's interest rates.

And typically I think we've assumed a 15-year amortization end period for that.

And the other question was, could you tell us what the cash interest expense was in the quarter?

Just a second.

If you look at the quarter, it recorded total interest expense of 204 million underdated 3.5 in cash, non-cash was 21.

Great.

Thank you.

Jonathan Rojewski of Goldman Sachs.

I was just wondering, under a sort of hypothetical situation where you did find someone to purchase the entire position in TGM, could you sort of walk us through what the mechanics might look like and then also what the tax implications would be if you were to sell your stake for less an equal to or more than the market price that has been determined under the partial stock valuation method?

First part, I think it is pretty straightforward if we get a purchaser for our 81 percent interest.

There will be certain approvals required and notices given.

I think the one that we've always said could take the longest is at the NRC, which is a six to nine-month period.

But once all the approvals are gained, then I think it is simply a normal transaction.

Simply cash in the door?

Cash in the door, and that's exactly right.

That is our expectation.

Would that be taxed at just your normal corporate tax rate?

Right.

We expect that cash you know, there could be some -- there could be some capital gains, capital losses, but primarily it's an ordinary gain situation.

We've got about $1 billion in tax bases in our 81 percent interest -- let me correct one thing.

Jim Bryan (ph) tells me there would be a capital gain -- part of this would be capital gains.

Would that change, then, to the plus or minus if it were to be sold for or is it related at all to sort of the $2.9 billion bogey that is in the filing?

It is unrelated to that.

Obviously if we do not get at least what the PUC uses in there market valuation, the Company is at risk for that amount.

That's correct.

We have to at least achieve that amount of value.

So give or take a couple percentage points, then if you were to receive say $2 billion for in cash for your 81 percent stake, then you're going to tax effect at the corporate tax rate and that should probably get you in the ballpark what you are going to be able to have in your pocket?

Yes.

Less the basis.

The proceeds less the basis and how much of that is capital gains and how much it would be ordinary.

I think it's probably all capital gains.

Could you repeat that?

I couldn't hear very well.

I think the calculation would be the proceeds less the tax basis in those shares.

Okay.

Great.

Thanks for the explanation.

Ryan Watson (ph) of Sand Hill Capital (ph) .

Two questions.

Looking at your cash flow statement, I don't know if you said this already, but on the cash flow from operations there was a big swing and I'm looking to find what that is attributable to and it looks like its working capital or change in other assets and liabilities?

Did you go through why that looks like almost 300 million over $300 million swing?

Hang on just a minute.

Just a second.

I wanted to talk about your natural gas distribution business and just on not being able to or not achieving your allowed ROE.

Do the regulators sometimes say this is what we allowed you to do if you can't do it, tough, and we're not going to allow you to raise rates?

Sort of maybe you can walk me through as to how you intend to achieve that required ROE.

You said through rate increases, but don't you have to go through those same people that allows you that prior rate in order to get those rate increases?

You have to go back to your regulators, yes.

And you have to prove up that your cost of service is reasonable and prudent and that you are not -- you're spending money appropriately.

In many of these jurisdictions, though, it has to do with the demographics of your customer base.

In some of the rural areas, we are losing some of our customer base.

And so the feeling determinance has changed, and that affects how much revenue you recover.

So but just like in any regulatory proceeding, you'd have to go in and lay out your case and defend it and hopefully get an opportunity to recover those costs and earn a reasonable return.

But it's not just filing.

You have to present a good valid case.

Could that happen over the next year, then?

We have two cases pending today.

We'll probably file later on this year.

Three additional cases.

And so all those take time to play out.

And that is the reason I said earlier that I think over the next two years we will be getting these rates much, much closer to where we want them.

I think your question if you look at the cash flow statement that we provided, which we hope investors find helpful.

We also supplied the balance sheet this quarter as well which we have not historically done.

If you look at the net cash provided by operating activities, let me give you the highlights of those which I expect may fall out in the line items up above it.

But the positives were, if you look at that total of 392 I will give you about 387 million of it.

Genco cash flow from operations is about 88 million.

Increase in the sale of receivables, we had 100 million.

We had a change of course year-over-year in terms of our change in gas accounts receivable and accounts payable, mainly driven by gas price changes of about 130 million.

Fuel recovery of about 20 inventory change of 34 and other about 15.

So that was basically the drivers of the positive change in the net cash provided by operating activities.

Is a lot of that captured in the other assets and liabilities line?

Yes.

It is.

So when we model out the company and look at that, should we -- some of this is attributable to higher gas prices and selling some A/R.

How should we look at the change for next year or on a year-over-year basis?

I think on a go forward basis what I would do is separate the balance sheet for just a moment.

You will have the cash flow obviously the cash flow from operations -- excuse me the net income adds back depreciation, but if you then look at those changes, those accounts payable/accounts receivable changes will be driven certainly by a large part by commodity prices.

So you will have to take that into consideration.

So it's gas prices (multiple speakers) .

It should not impact in terms of net -- it impacted cash but it's on a timing basis.

Okay, so as gas prices go up, then --?

We have to obviously we have a higher carry if gas prices are going up.

Sure.

And that allows you to build cash?

You're saying?

No, as gas prices are going up, we are spending more cash for to feed our supply requirements.

And there tends to be a little lag between when you spend the money and when you collected all from your customers.

And obviously if gas prices are lower, you don't have as much lag there.

The amount and the impact of lag is less.

So you will see a change on those statements.

Okay.

I had just thought you had said that part of the change, the positives change was due to an increase in gas prices.

Lower gas prices.

This year relative to the same quarter last year.

Oh.

That's right, that is on the spike last year.

Okay.

Got you.

Thanks.

Teresa Ho of Solomon Asset Management.

I understand that TNT's filing is very different from yours but I was actually kind of interested in the fact that at least in proceedings for their true up that the P. U. C. T. had commented on ECOM, the fact that it is not really intended to provide any kind of windfall for any utility.

And I was just wondering if you could comment on that on the ECOM issue and how that could play out in your proceeding?

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The question had to do with the TNT's ability to use the ECOM true up versus ours.

The commission did rule that TMP was not entitled.

This is my understanding, not entitled to the capacity auction ECOM because they did not auction their power, which is a big difference between us because we auctioned all our power.

So I think there is clearly a difference between what is happening at Texas Genco and CenterPoint versus TMP.

I guess maybe my thinking or how I was interpreting was the fact that their comments about ECOM was that it was never intended for any kind of windfall.

And I was a sort of looking at your ECOM number.

I believe over 1.3 billion and that seemed to be a quite sizable number.

So I'm just wondering how you would sort of explain that to the PUCT?

Of course the way the rule works is that you take the PUC auction prices that we actually receive for the power versus what was the estimates that were made by the commission staff in the ECOM model some years ago.

And the way the rule works is you get to recover the difference in that amount.

So I am very comfortable that we have followed the ECOM rule and that the true up capacity realized it was laid out by the commission and to my knowledge, there is no windfall here.

Okay.

Thank you.

Michael Goldenberg of Luminus.

I wanted to ask a couple questions.

There was some -- one the previous questions asked about what capital gains and I was wondering if there is anyway you can defer those and if not, if you can ask PUC to remedy those?

I guess, reimburse for them?

What was the question again, Michael?

Michael, could you repeat it one more time?

I think one of the previous questions focused on capital gains from Texas Genco sale, and I guess potential tax liability stemming from those.

I was wondering if there was any way you could defer those and if not, if there is anyway you can ask Texas PUC to get remedied for those expenses?

Certainly on the second part of it, absolutely not.

The first part of it what we will do, when we fill our share interest we will try to obviously pay the lowest tax possible but it will be a combination of -- it will be the proceeds less our book value and some of that I think a majority of it will be capital gains and we will apply the tax rate to that.

But and try to mitigate that as much as possible, Michael, but there no one is going to hold us in terms of clear from that tax, if that's what you're getting at.

Also I wanted to ask you as far as this negotiation discussions with the staff, is there a kind of timeframe we should be looking for and if we don't hear anything, we should be assuming that discussions are not yielding much?

Michael, I don't think so.

Discussions of this nature, they continue on through the hearing, perhaps even.

So I don't think that there is any special timeframe that you ought to be looking at.

We are, like I said, we are always willing to talk to the parties.

But I think we'll just have to wait and see what happens here.

My final question.

There's been discussions about overearning and underearning and so on.

Just wanted to ask you when you talk about your allowed return, is it based on rate based as percent equity or just based on book equity amount because it seems like your book equity amounts are somewhat bigger than the rate based as a percent cap.

We look at it from the standpoint of how the regulators set the rates, and they use the rate base and they use a certain capital structure.

So that's the way we look at the business because that is the way you are able to set rates and recover costs.

So book equity amounts are meaningless from the standpoint of your regulatory return and overearning/underearning?

That's right.

I wouldn't say it's a meaningless, but they don't always coincide.

Right.

They are not always the same about, that's correct.

And thus, rate base takes preference if there is a discrepancy?

Absolutely.

Thank you.

Zack Schreiber of Duquesne Capital.

My questions have been asked answered.

Thank you.

We're going to take one more question.

Basil Kahn of CSFB.

I was wondering if you could clear up the tax liability associated with T Gen one more time?

Is the cash tax liability based on the book value of the assets or the tax basis?

And can you offset any of these cap gains by your previous losses associated with the RRI spend?

Tax gains are based on tax basis.

You take the value less your tax basis and so that absolutely is how it is calculated.

And yes, we have some;

I think some capital loss carryforwards that certainly could be utilized to offset any capital gains.

Can you quantify that?

Can we quantify it?

I'm sorry,

Can you quantify the amount of the loss carryforwards that you have?

No, I don't think we want to quantify those now because of course these are timing issues of will be available at the time that this transaction occurs.

But in the simplest form, again, maybe we're not being as clear and I want to be clear on this is that if we sell the shares, you will have proceeds from the sale of those shares.

There's a tax basis associated with those shares and the difference will be a capital gains, and we will mitigate it with capital loss carryforwards to the extent they exist at that point in time.

All right.

Got it.

That will be the process we will follow.

Okay, all right.

That is about all we have time for.

So I thank you very much.

We appreciate your participation in our conference call this morning, and we do appreciate your interest of course in CenterPoint Energy.

So thank you for joining us today.

And have a great day.

This concludes our conference call.

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