CenterPoint Energy Inc (CNP) 2004 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the CenterPoint Energy and Texas Genco second quarter 2004 earnings call.

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

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2, on your telephone keypad.

Thank you.

Ms. Paulsen, you may begin your conference.

Thank you, Christie.

Good morning, everyone.

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

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

Thank you for joining joining us today.

We are holding a joint conference call this morning for CenterPoint Energy and Texas Genco to discuss the second quarter results for both companies, and the recent announcement regarding the definitive agreement for the sale of Texas Genco.

Management will also provide highlights on other key activities in the quarter, including CenterPoint Energy's true-up proceedings.

On our call this morning, are David McClanahan, President and CEO of CenterPoint Energy, and Chairman of the Board of Texas Genco, and Gary Whitlock, Executive VP and CFO for both Companies.

In addition, we have David Tees, President and CEO of Texas Genco and other members of management with us, who may assist in answering questions following the prepared remarks.

The second quarter earnings release for CenterPoint Energy is posted on its website, which is www.centerpointenergy.com, under the Investors section.

Texas Genco's earnings release can be found on its website, www.txgenco.com, under the Investor Relations section.

I would like 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 both Company's 10-Ks for the period ended December 31, 2003, and in their 10-Qs for the periods ended March 31st and June 30th, 2004, and in the Company's other SEC filings.

Before Mr. McClanahan begins, I would like to mention that a replay of our call this morning will be available until 6 p.m., Central time through Friday, August 13, 2004.

To access the replay, please call 1(800)642-1687, or (706)645-9291, and enter the conference ID number 7961699.

You can also listen to an online replay of the call via either website that I just mentioned.

We will archive the call on both websites, and it will be archived on CenterPoint Energy's website for at least 1 year.

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

David?

Thank you, Marianne.

Good morning, ladies and gentlemen.

Thank you for joining us this morning for our second quarter 2004 earnings call, and thank you for your interest in CenterPoint Energy and Texas Genco.

While in past quarters, we had a separate conference call for Texas Genco, we have combined the calls this morning as a result of the announcement of Texas Genco's pending sale.

So this morning, I will give the highlights of our second quarter financial results for both companies, provide an overview of the Texas Genco transaction, and discuss the status of CenterPoint Energy's true-up proceeding.

Gary Whitlock, our Chief Financial Officer, will then discuss the accounting and financial implications of the Texas Genco sale, and the credit rating agencies response to the sale.

Gary will also update you on the Texas Genco dividend.

Let me begin with an overview of our second quarter earnings.

As we reported this morning, on a consolidated basis, CenterPoint Energy had net income of $58 million, or 19 cents per diluted share for the second quarter of 2004.

This compares to $83 million, or 27 cents per diluted share, of income from continuing operations for the same quarter of 2003.

Last year's results included ECOM revenues of $101 million, which contributed 21 cents per diluted share, on an after-tax basis.

As most of you know, ECOM terminated at the end of last year, in accordance with the Texas Electric Restructuring law.

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

I believe we had a good, solid quarter financially, and made progress in a number of operational areas.

Texas Genco showed the most improvement for the quarter.

This morning, Texas Genco reported net income of $80 million, or 1 dollar per share, for the second quarter of 2004, compared to $33 million, or 42 cents per share, last year.

This performance was again, driven primarily by higher wholesale electricity prices for base load products.

The operation of our base load units was also outstanding during the quarter, with a lower than normal forced outage rate.

Our natural gas distribution businesses financial results were up slightly from last year.

This is a seasonal business.

And as a result the second and third quarters are typically the lowest earnings periods of the year.

Since the end of the first quarter, we have received favorable rate treatment in several jurisdictions, and have filed a number of rate increase requests in other jurisdictions.

These increases should continue to improve this segment's operating results as we move into next year.

Our interstate pipeline and gas gathering segment also had a good quarter, achieving financial results comparable to last year.

Our gas gathering business continues to expand, with increased drilling activity in the mid-continent area.

Our interstate pipelines are also pursuing several expansion opportunities, which should add value over the next several years.

Our electric transmission and distribution utilities financial results fell short of last year's performance, due primarily to milder weather and the impact of higher transmission payments this unit is making as a result of increased statewide transmission costs.

However, this unit continues to enjoy outstanding customer growth and solid operating performance.

Overall, our businesses perform well, and we continue to make progress that should position us for the future.

Now I'd like update you on 2 initiatives that we have been talking about for some time.

The sale of Texas Genco, and the recovery of our stranded costs, and other true-up amounts.

From Centerpoint's inception, we have stated our intent to monetize our investment in our generating assets through these 2 events.

Our objective is to recapitalize our Company by reducing our leverage, and to focus on building America's leading energy delivery company.

We have a great base to build from.

We are very pleased with the progress on our first initiative.

On July 21, CenterPoint Energy and Texas Genco announced a definitive agreement for GC Power Acquisition LLC, to acquire Texas Genco for approximately $3.65 billion.

GC Power Acquisition is a newly formed entity, owned by 4 private-equity firms.

The transaction will be accomplished in 2 steps.

In the first step, Texas Genco will purchase the 19% of its publicly owned shares for $47 per share.

Following this minority buy-out, a Texas Genco unit, that will be formed to own the coal, lignite, and gas- fired plants, will be acquired by GP Power Acquisition, thus completing the first step of the transaction.

The closing of this first step of the sale is subject to several conditions, including the following: (1) the filing of certain statements with, and clearance from, the SEC in connection with the minority buy- out; (2) the receipt of debt financing under a financing commitment entered into by the purchaser, and a separate loan agreement entered into by Texas Genco, to fund the minority shareholder buy-out; (3) expiration or termination of the pre-merger waiting period under the Hart-Scott-Rodino Act; (4) the FERC certification of the Texas Genco unit holding the coal, lignite and gas-fired generation, as an exempt wholesale generator.

We expect these conditions will be met, with the first step being completed during the fourth quarter of this year.

Cash proceeds to CenterPoint Energy will be approximately $2.2 billion.

In the second step of the transaction, which will occur after receipt of NRC approval, GC Power Acquisition will acquire Texas Genco, which will then have as its principal asset, its interest in the South Texas Project nuclear facility.

We expect the second, and final step to be conclude during the first quarter of 2005.

Cash proceeds to CenterPoint Energy from this step will be $700 million.

So in total cash proceeds to CenterPoint Energy from both steps of the transaction will be approximately 2.9 billion, or $45.25 per share, for our 81% interest in Texas Genco.

Total net after-tax proceeds are expected to be approximately $2.5 billion.

In connection with this sale, Texas Genco entered into a power purchase and sale agreement, under which it has sold forward a substantial amount of its available base load capacity through 2008.

Texas Genco had previously sold forward a substantial portion of its base load capacity for 2004 and 2005.

So this agreement primarily relates to 2006, '07 and '08.

Texas Genco's obligation under this agreement will continue, regardless of whether the sale is completed.

While we have been anticipating this event for some time as part of our plan in response to the 1999 Texas Electric Restructuring law, it is hard to let go of a business that has been part of our Company for so many years.

I'm proud of the management and employees of Texas Genco who have established such a fine Company.

But the time is right for CenterPoint Energy to execute the strategy upon which it was formed, to reduce its leverage, and to focus on its energy delivery businesses.

There has also been considerable progress in our true-up proceeding.

As we noted on our first quarter call, on March 31st we filed our stranded cost true-up application with the Texas Public Utility Commission.

Adjusted for the recent fuel reconciliation decision, our requested amount is $3.7 billion, excluding interest.

I am very pleased with the direct and rebuttal testimony we provided in support of our request, and I feel very strongly that we have followed both the spirit and the letter of the law.

As we expected, various interveners and the PUC staff challenged various aspects of our requested amount.

The PUC commissioners presided over hearings that were held for our case, from June 21st through July 7th.

Briefs and reply briefs from all parties have been filed with the commission.

The decision is now in the hands of the commissioners, and we anticipate a decision late this month.

Once the PUC quantifies the final true-up amount, 2 things will occur.

First, we will begin earning a return on the final true-up amount, at the utilities weighted-average pretax cost of capital, which is approximately 11%.

Second, a separate proceeding will be held to determine the amount to be securitized.

Our goal is to securitize the full amount of the final true-up balance approved by the PUC.

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 results of this proceeding 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.

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

Let me also update you on the interest issue.

Under the true-up rule adopted by the PUC, electric utilities are permitted to recover interest on stranded costs.

The PUC rule, however, ruled that interest should begin accruing only from the date of the PUC's final order, in the 2004 true-up proceedings.

We appealed that rule to the Texas Supreme Court, contending that Texas law calls for interest to begin accruing on January 1, 2002, the start date of retail electric competition.

On June 18, the Texas Supreme Court ruled that interest on stranded costs began to accrue as of January 1, 2002.

In its ruling the Supreme Court remanded the rule to the PUC, to review the interaction between the courts interest decision, and the PUC's capacity auction true-up rule.

A one-day hearing on the merits is scheduled for September 8.

We would expect parties will file written briefs shortly thereafter, and a decision by the commissioners would follow within a few weeks or so.

Before I pass the call over to Gary, let me summarize my thoughts on CenterPoint Energy.

I believe we made substantial progress towards executing our strategy of monetizing our generating assets and reducing our debt.

With the culmination of the sale of Texas Genco, and the recovery of our true-up amount, all of our energy will be devoted to building America's leading energy delivery company.

Our core businesses units had solid financial results this quarter, and we continue to invest in these businesses, and put in place initiatives that will position us well for the coming years.

We have a very solid set of businesses from which to grow, and we look forward to the future.

Now I will turn the call over to Gary.

Thank you, David, and good morning to everyone.

This morning we filed our 10-Qs for the second quarter, which include a discussion of the results of operations for each of our segments in the MD&A section.

So, I will not spend time reviewing this information as I normally would.

I would like to concentrate instead, on the financial impact of our pending sale of Texas Genco, and the credit rating agencies reactions to the sale.

First, I would like to describe to you, the accounting and financial implications to Texas Genco, now that we have signed the agreement to sell the Company.

Until the completion of the buy-out of Texas Genco's public shareholders, Texas Genco will continue to report its results in accordance with all legal and regulatory requirements, just as it has since its formation, and subsequent distribution of shares to the public in January of 2003.

Also as you may know, Texas Genco declared its quarterly dividend of 25 cents yesterday, payable on September 20th to shareholders of record as of August 26.

Until the buy-out of the public shareholders is complete, the transaction agreement allows the shareholders to continue to receive regular quarterly dividends, not to exceed 25 cents per share.

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

However, as a result of the sale agreement, we will begin reporting results of Texas Genco in discontinued operation, in the third quarter of 2004.

We will record an after-tax loss of approximately $250 million, related to the sale in the third quarter.

As a result of this transaction, future earnings of Texas Genco will be fully reserved, and therefore will not impact CenterPoint Energy's bottom line beyond this quarter.

In addition, Texas Genco's prior period results will be reclassified to discontinued operations in future CenterPoint Energy financial statements.

Now let me update you on our discussions with the credit rating agencies, and expectations following the announcement of the Texas Genco sale.

Obviously, this is a very significant credit enhancing event, and did not come as a surprise to the agencies.

As you know, we have been consistent in our commitment to communicate with the agencies regarding our strategy to monetize Texas Genco, and then to use the proceeds to pay down debt.

We believe all 3 agencies view both the excellent financial results, and timing of the sale, as an event that accelerates the stabilization and enhancement of the CenterPoint Energy family credit profile.

Of course, we also expect that the agencies will continue to take into consideration the expected results from the true-up proceeding, as they evaluate whether any rating actions may be warranted.

Although none of the agencies have changed their ratings recently, I would remind everyone that in April, Moody's announced that it has changed the outlook of our natural gas subsidiary, CERC, to stable, from negative in recognition of CERC's steady operating track record, combined with its adequate independent liquidity, and the regulatory protections under the '35 Act.

Our goal is to have CERC regain an investment grade rating from Moody's, which it currently has from S&P and Fitch.

We are hopeful that the successful monetization of Texas Genco will be yet another step to moving the CERC rate to investment grade, in line with its credit metrics, which we believe are investment grade.

However, as we are always quick to point out, we cannot speak to what actions any of the rating agencies might take, or when such actions might be taken.

Finally, we will keep the agencies informed of the expected closing dates of the transaction, and the specific use of the proceeds for debt reduction.

We are obligated to use the proceeds we receive from the sale, to first pay off the term loan of the parent company.

The amount of the term loan outstanding is currently $918 million.

We are then obligated to permanently reduce the commitments under the parent company revolver, to $750 million, from 1.425 billion.

This means that we would have to pay down any borrowings outstanding under that facility, to the extent they would otherwise exceed $750 million.

At the present time, total borrowings under this revolver, including outstanding letters of credit, total about $750 million.

Thus, the mandatory reduction in the size of the revolver is not expected to require us to repay much, if any, borrowings.

Beyond stating what we are obligated to repay, we are not in a position to provide specifics as to how remaining cash may be applied to further reduce outstanding indebtedness.

Let me thank you for your interest in the Company, and I would now turn the call back to Marianne.

Thank you very much, Gary.

We are now ready to take questions, but before we do that, I would request of you all that if you could please limit your questions to 1, that would help us in the interest of time.

All right.

Now Christie, if you could please instruct everybody on how to ask a question, that would help us out right now.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, 1, on your telephone keypad.

If you are on a speaker phone, please pick up your handset before asking your question.

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

Your first question comes from the line Paul Patterson of Glenrock Associates.

Good morning, guys.

I wanted to touch base with you on just, to get a little more of a flavor here.

For discontinued operations, if we were to back out the effect of Texas Genco right now, would we basically say to take out your pro rata $80 million, and I'm coming up with something like 20 or 21 cents a share on that, and then reapply the proceeds which are about 2.9 billion.

Is that correct?

Gross, yes.

Gross.

What's the net?

What's after tax?

2.5.

2.5.

Okay.

So we take that effect and that would give us an idea as to what you guys would have earned?

Correct.

You have to, pick and choose what debt you pay down, but that's exactly what would happen.

Could you give us an idea of what the average cost of debt is?

Hang on just a minute.

I don't know if that's really very useful, Paul, because you have to look and see what is callable, and then to the extent it's not callable, you are going to have to figure out what it's going to cost to get it in through some type of tender, or other method.

So obviously, the revolver and the term loan, we can give you that.

Mark, you might want to give them the interest on that.

Yeah, currently the term loan is LIBOR plus 350, and LIBOR plus 300 is for borrowings under the revolver of the [inaudible].

That was 750 million.

Is that right?

Under the revolver is drawn about 750, and that's LIBOR plus 300.

The term loan is 918, LIBOR plus 350.

Thanks a lot guys.

No problem.

Your next question comes from the line of Theresa Ho of Salomon Brothers Asset Management.

Thank you.

I was hoping if you could clarify the after-tax loss of the 250 million.

Is that based on an accounting standpoint, or a regulatory standpoint?

I'm not exactly sure if, what you are basing the book value on.

The book value is what we have on our books, our GAAP books, and that is just our financial accounting basis in Texas Genco.

So it's not a regulatory books.

These are GAAP accounting books.

What would that book value be on the accounting?

Jim?

Our investment is about 2.4 billion.

Our investment in 81%.

Okay.

Thank you.

Your next question comes from the line of Faisel Kahn of Credit Suisse First Boston.

Hi.

When you go out and issue the securitization bonds, and as you pass through the amortization interest through your income statement, is the amortization taxable on that, on the securitization of those stranded costs?

There is -- yes, it is taxable.

Okay.

So essentially, the 3.7 billion that you requested to recover, as that gets passed -- as that gets amortized through your income statement over 10 or 15 years, that amount does get taxed through the income statement?

Yes, but we do have deferred taxes set up in recognition of that.

So, it should have very little, if any, book income impact.

It will have some cash impact, but not an earnings impact.

Okay.

I see.

All right.

Thank you.

Your next question comes from the line of Jose Almonte of Clinton Group.

Good morning.

Just wondering if you could address something with respect to the true-up process.

Now that we have the TJ (ph) and the sale announcement out of the way, do you believe it's more or less likely that the Company may arrive at some settlement with some of the interveners?

The reason I ask is, to ward off any regulatory risk, if you will from the process.

As I read some of the briefs filed, I would agree that some of the arguments that the interveners make appear to be weak.

As I followed the TN&P case, looking at what the staff has written, they seem to be arguing that the intent of the law, supercedes I guess the letter of the law in this case.

I was wondering whether or not, if you could reconcile that difference between, from your stance, as well as their stance on the matter.

We are very interested in sitting down with the parties and talking settlement.

We have sat down with them I guess, beginning September of last year.

We've had numerous discussions.

We just haven't been able to find a point where both parties would agree on settlement.

We always stand ready to continue those discussions.

We are still hopeful that we will have further discussions.

But, up to this time, they haven't proved fruitful.

We are still hopeful that we can have more discussions.

With respect to the argument that the staff makes, versus the Company's stance, any thoughts on that?

You know, there is a lot of different positions I've taken, and most of those positions we disagree with.

We have filed rebuttal testimony to that effect.

So, we believe we have absolutely followed the letter of the law here, and we put together, I think, a very strong case, and we argued it hard.

We will just have to wait and see what happens.

Thank you.

Your next question comes from the line of Ali Agha of Wells Fargo Securities.

Thank you.

David, one procedural question I have is, the 19% public shareholders for TGN.

Are they obligated to accept the offer, or do they have a choice in the matter?

And I have just one follow-up.

I am going to ask Scott Rozzell, our General Counsel to answer that.

Ali, the shareholders, the public shareholders will receive an information memorandum sometime a little bit later, and the information memorandum will set forth all of their rights.

They are under Texas, -- under Texas law, a procedure for shareholders who want to dissent from this particular offer, to pursue those particular rights, and it's a very complicated process with a lot of individual steps, and that will be clearly spelled out in the information memorandum that is set out a little later.

My real question was, in the past, David, in some of your presentations, I think you alluded to the fact that you would hope that between the 2 steps, the Genco sale and the true-up, you would anticipate at least $5 billion of total proceeds, you used that number in the past.

Given where you are in the true-up, and given the Genco sale, could you update us on your thinking on where that number might be now?

Well as you know, we've, the Texas Genco sale will get us 2.9.

We have filed for 3.7 on an adjusted basis, in our true-up proceedings.

So, yes, we are still very hopeful that we will get at least 5 billion total, out of these 2 transactions, or these 2 events.

You would not raise the number?

Well, you know, it's hard to say what's going to happen in Austin.

We think we put together a very persuasive case.

It could be, I think the number between 5 and 6 billion is clearly a range that is appropriate.

But we think we ought to get north of $5 billion, based on what -- the case we presented.

I will be the first one to tell you, that interveners have put on their case due, and the commissioners have to weigh all the evidence, and they've argued for a lot lower numbers.

But our hope is that we are going to get something between 5 and $6 billion total, between these 2 transactions.

But we are just going to have to wait and see what the commissioners do.

Thank you.

Your next question comes from the line of Scott Engstrom of Hemiton Investment Management.

Just trying to figure out what this year's earnings are going to look like, with the Genco going to discontinued ops.

It looks like the 3 core businesses are generating around 800 million plus of EBIT and that's kind of the run rate of interest expense.

So does flat earnings for this year seem -- granted, and no application of the proceeds from Genco, kind of reported ongoing earnings for around flat, sound in the ballpark?

You know, it is difficult because we don't know when we will close the first step.

In the first step, we get 2.2 billion, and obviously if we get it a little earlier than in sometime maybe, early in the fourth quarter, then we are going to get the interest savings associated with that.

There's also an unknown related to the earnings we receive on the true-up balance.

Whatever the commission determines is the proper amount, we will begin to accrue interest on that, from that point forward at our pretax weighted cost of capital, which I think is a little over 11%, 11.37.

So those 2 latter items make it difficult.

Your comments with respect to our core operating businesses are fairly accurate, but I think it's the unknown, is when we get our proceeds and just what the commissions action is, later on this month.

Great.

Thanks very much.

Your next question comes from the line of Elizabeth Parrella of Merrill Lynch.

Just wanted to ask a follow-up on an earlier question, then I have a another question.

With respect to the $250 million after-tax loss, that you indicated you would report in the third quarter, I thought what Gary was saying, is that this would represent kind of reversing out all the earnings that CenterPoint has recorded from its ownership share of Texas Genco back to, what would it be, 01/01/02.

Is that what that represents?

No, that's not it at all.

This is sometimes hard to understand how this works, but beginning in the third quarter, any earnings of Texas Genco will basically be reserved, so we won't show any net earnings.

And the $250 million loss that we are going to record, will fall to the bottom line.

That's going to be the net impact of Texas Genco from this point forward, is our estimate.

So, we are going to record this loss, and then we are no longer going to report any net earnings that hit the bottom line from Texas Genco.

I'm not sure why you are booking a loss.

I thought earlier it had been indicated that you had the accounting book value of your 81% stake, was 2.4 billion, you are selling it for 2.9.

Yeah, I think there's some other components there.

Jim, that's not, there are other components to that.

I think he only gave you one piece of that.

The 2.9 billion includes having to pay, includes the minority shareholder piece.

You have to pay them back.

-- no , no -- remember, she is saying that 3.65.

3.65 includes that total.

Right.

I was just comparing the 2.9 to the -- okay.

Well, the tax basis is also substantially lower.

We have a large tax bill to pay to the IRS, even though we have a gain on the sale, which produces a net after-tax loss.

Okay.

On a pretax basis you might very well have a gain.

On an after tax basis, is where you get the loss, Elizabeth.

Okay.

And my other question, if I may, is just going back to the true-up proceedings.

Could you refresh for us what I think you said in the past is, when you get past all this, say looking out to '06, that you'd hope to get back to an earnings power level of about $1, and correct me if that's not right.

But what amount of debt would that, debt repayment was that predicated on?

And what types of capitalization or leverage ratios would that restore you to?

The dollar is an objective we have and, you're right, we have said that we want to earn by 2006, $1 per share, from our core businesses that we now have part of CenterPoint Energy.

Obviously, we are going to have to pay down a substantial amount of debt, and the majority of the proceeds we get will be used to pay down debt.

But it also assumes, and because we are dedicated to do this, is that these businesses are going to be earning more in 2006, than they are today.

We can improve the earning of our LDCs.

We have a number of things that we are doing on our pipeline gathering system.

And at that point in time, we will also have paid off the large loan that is at Houston Electric, which carries, today, 12.75% interest rate.

So, it's not just the pay down of debt that's going to get you to a dollar per share.

We are going to drive some performance in these units that also gets us there.

But we are working on a plan.

And we have put together a plan that we think can achieve that, and that's what we are going to work towards.

Thank you.

Your next question comes from the line of Levis Laveti of Prudential.

Good morning, gentlemen.

Following up on the last question about earnings power in '06.

What kind of share count are you guys expecting, that we should be using when we are doing similar calculations out in '06?

Well, today we have 306 million or so, outstanding.

There is a little equity issue, just in the normal course of our plans, employee plans here.

We will just have to wait and see if there's any other equity that's issued.

We've always said that, to the extent we needed to issue a little equity to get our balance sheet right, we would do it.

But at this stage we are looking at trying to deleverage from the reduction of debt and that's it.

So I think we have to kind of wait and see what the total earnings shares will be in that time frame.

But they increased 4 or 5 million a year probably just on the normal course, just through our employee benefit plans.

Okay.

And concerning the expected improvements in the core businesses going forward, is there any room at the electric T&D for earnings improvement, versus the allowed returns?

Or will the majority of the delta come from the pipeline and gathering sectors?

I think there's some improvement, relative to what they earned last year.

And if -- we are earning a pretty solid return there, but I think there's some room, we are continuing to invest in that business as well.

But the majority of the new earnings, I think, will come from getting our LDCs to be earning their full rate of return, for growth that we see in our commercial and industrial gas sales business, and in opportunities in the pipeline and gas gathering business.

Just to give you an idea, we recently had an open season for our pipeline expansion.

We are looking for, to expand our pipeline physically by over 100,000 a day.

We have a contract expiring of over 100,000 that was a heavily discounted contract.

So there's a couple hundred thousand a day that we think we are going to be selling beginning mid '05 at some attractive prices.

We have excellent response from this open season, and we fully expect that we are going to expand that pipeline.

And we have some other opportunities that we are working on as well.

So it's in the pipeline gathering, LDC business, and probably less so in the TDU.

Okay.

Thank you very much.

Your next question comes from the line of Nathan Judge of Atlantic Equities.

Good morning.

I wanted to get your thoughts on how you think the process is progressing, specifically now that we are getting close to the final period of time.

Is there anything that can be done by the interveners to delay the decision?

I don't think -- I think this commission is dedicated to rendering an order within 150 days of our application, which would be the ends of this month or shortly thereafter.

So, no, I don't think there's any likelihood of the interveners doing something at this point in time.

Could you give us when the Control Premium Panel is supposed to give their recommendation?

I'm sorry?

Say that again.

The dates for the control premium recommendation.

The control premium hearing is on the 8th of September -- excuse me, I am thinking of interest.

We are going to get an idea I think today, from the Control Panel as to their thinking.

We believe the commission will take this into consideration in rendering their decision later this month.

Thank you very much.

Your next question comes from the line of David Grumhow of Cobia Capital.

Wanted to go back on the accounting a little bit on the TGN loss.

Does that potentially get reversed, depending on how the true-up proceeding comes out, or is it just buried in the total amount of regulatory assets that you've booked?

It doesn't.

This is independent of the outcome of the true-up proceeding.

So it's not going to have -- the true-up proceeding will not have an impact on this number.

So the 3.4 billion that you talked about in regulatory assets in the Q this morning, that number won't be changed by the loss here?

That's correct.

Then basically we are going to compare what you get in the true-up to that 3.4 and the accounting will go flow from there?

Basically, that's right.

There is some regulatory liabilities, I can't recall what they are, but I think that your number is very accurate.

Okay.

Then on the, also on the accounting, on this interest that you will be able to start booking, with the Supreme Court decision, there's no way to book that interest earlier?

No, because the Supreme Court remanded the rule back to the commission to consider whether or not the true-up, capacity true-up had any impact on how much interest you could accrue.

That's the hearing that's going to take place on September 8.

So I don't think that we know enough now to begin, and not enough assurance to begin accruing any type of interest.

But we'll know something here pretty quick on that.

We have not accrued anything on our books for interest.

Right.

Okay.

Thanks a lot.

Your next question comes from the line of Margaret Jones of ABN AMRO.

Hello.

I have a couple of questions.

One of them is, would you still think that you could work on settling the true-up case after the PUCT order comes out at the end of the month?

I think there's a chance of that, yes.

Would you think that there would be a better chance at that time, or how would you assess the relative likelihood?

Margaret, you can probably judge that as well as we can.

I think it depends in part, on what the commissioners do, and what kind of order they render, and if it changes anybody's mind with respect to settlement , where you could avoid the appeals that are ultimately going to take place in connection with this case.

And a settlement after the commissioners rule is, might avoid a long appellate process.

And so, there's a possibility of that, but really it's hard to predict exactly what will happen there.

That leads into another question which is, what is your estimate of the potential amount of time that could be taken up in the appeals process, and your view on whether you would be able to implement a securitization during that process.

I am going to ask Scott Rozzell to handle that.

Well, the appeals process for something like this could be fairly lengthy.

I'll tell you that it has been our view, that once the commission issues an order, that it would be in all the parties best interests, including the interveners and the Company, to try to securitize the amount obtained in that order, as soon as possible.

The reason we think that's been the case is that, because the interest begins to accrue on the true-up balance at the time of the commissions order, at 11.37% or so as David indicated, the difference between that and the much, much, much lower interest rate on the securitization bond, gives everybody a financial incentive to try and go ahead and issue those even pending an appeal.

The question of whether or not interveners will try to slow that process down, is one that I think is anybody's guess.

We tend to try to review these things as if people will act in their economic self-interest.

That's not always the case.

Thanks. he last question, you had referred several times to hoping for, or expecting, or whatever the right language is, 5 billion of proceeds from, or more, of course, from a combination of the sale of TGN, and the securitization.

Is that before or after taxes?

That's pretax.

Okay.

Thank you very much.

Okay, thank you.

Your next question comes from the line of James Gallagher of Highbridge Capital Management.

Good morning.

Good morning.

Just going back to the hedges that you guys have layered on for Texas Genco '06, '08, I was just wondering if you could be a little bit more specific about volumes sold, prices, and any of the fuel hedging you guys have done for that.

As you know, most of the -- we had already sold forward through our normal capacity auctions, about 65, 70% in '05, 20, 30% in each of '06 and '07.

With this agreement, we have now sold probably about 70% of the capacity in '05, '06 and maybe close to 90% in '07.

We didn't sell capacity in connection with the PUC capacity auctions, because that will still have to be conducted by the new owner.

And obviously, we still have reserves that we keep, as well as there is some hold back of other capacity.

But it's a substantial portion of the future availability capacity other than the reserves and the capacity, or the PUC capacity auction amounts, which are 15% of our base load.

Gotcha.

Any sort of commentary on where the pricing has been, relative to what you've been seeing?

It was based on the forward strength at the time we executed the agreement.

Just one last question.

What are you looking at in terms of '08 hedging?

We don't have -- there isn't as much hedged in '08, probably about, pretty close to half our available base load for that year.

Great.

Thanks for the time.

Your next question comes from the line of Danielle Fife of Maxcor Financial.

Good morning.

Most of my questions have been answered.

Just one short one.

On the LDCs, what is your rate of return currently, and when do you think you will succeed in really earning a rate of return that's appropriate.

We are in a number of jurisdictions, as you know.

The average return on equity that we are being granted, is between a 10 and 11% depending on your jurisdiction based on anywhere from 45 to 50% equity.

We have several jurisdictions that we are not earning a full rate of return on.

For example, we just filed for about a $22 million rate increase in Minneapolis.

We filed for a $7 million rate increase in Oklahoma.

And by mid-October, within the next couple months, we will file for a rate increase in Arkansas.

Then there are also some areas in the rural Texas and the smaller towns that we need to get some rate relief.

We recently received rate relief in the city of Houston.

We've gotten Louisiana rate relief in both the north and south part of Louisiana, as well as Mississippi.

So we are in pretty good shape in those states, but we still have some work in front of us in these other states to get the rates exactly where we want them.

And in terms of earnings, how much would that, let's assume that you are getting there in '06, how much of an earnings progress would you see during that period between now and then?

Danielle, I don't have that in front of me.

Obviously if you just listen to the -- we've got 30 million pending, plus another 2 or 3, so there's going to have to be some additional rate relief from these jurisdictions in those, in those type of amounts, plus we just recently received a few.

So it's in that 30 to $50 million range.

Thank you.

Your next question comes from the line of David Frank of Zimmer Lucas Partners.

Hi, good morning.

I had a question for either Gary or Mark.

And it , there was a fixed income analyst at Citigroup last month, that FASB was indicating that they intend to change the accounting for contingency, or CoCo Converts (ph), they call them, and include the related shares in the earnings per share calculation for companies.

I know you have some of these issues.

Has the Company given any thought to what steps it might take with regard to, I think you have about 800 million of these securities, if it does turn out to be the case?

What are the call provision on those issues?

Hi, David.

This is Gary, good morning.

A couple of comments. s you know, that where that stands this is from the EITF is 048, and where the FASB staff plans, at this point, are to seek comments from constituents on this issue.

This has yet to play out.

We have looked at this.

As you know, we have 2 convertible debentures.

One, $575 million in the CoCo feature, $13.90, conversion price is 11.58, but it would have to trade 120% of that.

The other one is the 255 million, $12.81, it would have trade at 15.37.

Clearly just to share this with you, if we were to adjust our diluted shares for assuming that as it stands today, and we took no action for the impact on the Company's diluted EPS for the 3 and 6 months ended, that we just ended in June, would be 3 cents and 5 cents respectively.

So it would be dilutive.

What we would do, though, David, and again we are waiting to see what really falls out, we hear mixed signals on this issue from the staff of the FASB whether it will require an amendment to FAS 128 or how this will play out.

To the extent this rule is adopted as is, though, there are some constructs that can be put in place around amending these facilities to avoid the dilution.

Do you think you can somehow amend the, I guess the bylaws of this debt without actually having a tender for it, or redeem it?

There are some changes that can be made, that we are looking at obviously, as we speak.

What we don't wanted to, David, is step out in front until we understand -- this as you know, was quite a surprise for everyone when the EITF took this position.

So it's risen to the level, which it's somewhat unusual that they are seeking comment on this, so this is yet to play out but, yes, the short answer is on our 2 debentures -- the second one, by the way, can be settled in cash, which has the potential for a different accounting treatment.

You continue to use the treasury method.

The first one does not, but there are some changes that can be made to those instruments.

We will be prepared to address that once we know.

Okay.

That's great.

I just have one follow up on the transmission rates.

You said you were experiencing higher transmission rates statewide.

Could you give us some kind of indication on an annual basis what you think that increase is?

David, through the first 6 months of this year, it's been about a net $5 million impact to us.

That's probably not the -- you can't annualize that, I think, and get the right number, it may be a little bit more than that compared to last year.

Because most of the impact we've seen so far is simply higher transmission costs of service rates from other utilities that have invested in new transmissions.

We are able to go in twice a year and to get an increase in our rates, so we can recover that.

But there's another piece, which has to do with just the allocation of statewide rates, or statewide costs, and it's based on 4 coincidental peak demands of each utility and we are going to get a higher piece of that.

We are going to get about 25% I think, of the statewide amounts, versus last year we were less than 24%.

So that's going to create a little bit more cost there, too.

So, let me see if anybody knows the annual impact of what we see, is it 10 or $15 million here?

We don't have a real good number, but there is going to be, continue to be an impact from transmission rates, really charged to us from others.

Thank you.

I think we are running out of time, so if we could take one more question.

The last question comes from the line of Jeff Cobello of Duquesne Capital.

Good morning, how are you?

I wanted to see if you could walk us through what the effect would be, whether it would be a gain or a loss, I think, it might be a gain is my initial inclination, if you were to receive fully what you requested in the ECOM proceeding, I think it was $3.8 billion.

If we received, I think we've amended that -- if we got the full 3.7, would there be a gain or loss?

Is that your question?

That's my question --

I think there would be a small gain, because we haven't recorded every dollar.

I think primarily interest on excess mitigation credits have not been recorded on our books, which we requested.

But it would be a small gain.

Okay.

And then the interest on those costs that would you start receiving from 01/01/02, that's not on your balance sheet, either.

Is that correct?

That's correct.

Okay.

Great.

And I guess the biggest item is the EMC that's currently not accounted for.

Is there anything else?

Hang on just a minute.

Sure.

I think the easiest way to look at this, anything over 3.4 that we get, would be a gain.

And anything less than 3.4 is going to be a loss.

Great.

Thank you very much.

Okay.

Thank you.

Okay.

Well, thank you very much, everybody, for participating in our conference call this morning.

We, as always, appreciate your interest in CenterPoint Energy and in Texas Genco.

Have a great day.

Thank you.

This concludes your conference.

You may now disconnect.