CenterPoint Energy Inc (CNP) 2004 Q3 法說會逐字稿

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

(OPERATOR INSTRUCTIONS)

Ms. Paulsen, you may begin your conference.

Thank you very much.

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

I would like to welcome you to our third quarter 2004 earnings conference call and thank you for joining us this morning.

CenterPoint Energy management will discuss the third quarter results for the Company this morning and will also provide highlights on other key activities in the quarter, including progress on our sale of Texas Genco and our true-up proceeding.

On our call this morning are David McClanahan, President and CEO of CenterPoint Energy and Gary Whitlock, Executive Vice President and Chief Financial Officer.

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

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

I would like to remind you, that any projections or forward-looking statements made during this call, are subject to the cautionary statements on forward-looking information in the Company's 10-K for the period ended December 31, 2003, and in its 10-Qs for the periods ended March 31st, June 30th, and September 30, 2004, as well as 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 Tuesday, November 16, 2004.

To access the replay, please call 1(800)642-1687, or (706)645-9291, and enter the conference ID number 1215670.

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

We will archive the call on CenterPoint Energy's website for at least 1 year.

And 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 and thank your for your interest in CenterPoint Energy.

This morning I'll give the highlights of our third quarter financial results, provide an update of the pending sale of Texas Genco and discuss the status of CenterPoint Energy's true-up proceeding.

Gary Whitlock, our Chief Financial Officer will give you an update on the planned use of the proceeds from both the Texas Genco sale and the securitization of the approved true-up balance.

He will also review our recent interaction with, and feedback from the credit rating agencies.

Let me begin with an overview of our third quarter results.

This morning we reported a net loss for the third quarter of $1.1 billion, or $3.66 per diluted share.

This compares to net income for the third quarter of last year, of 182 million, or 59 cents per diluted share.

This quarter's results reflects 2 significant charges.

First, we recorded an $894 million after tax extraordinary charge, to reflect our estimate of the PUC's actions in our true-up proceeding.

Although the commission has not yet issued a final order in this proceeding, we have estimated the financial impact, based on the deliberations held by the commissioners, in 6 open meetings.

We have not recorded any interest, however, pending further clarifications of the methodology that the commission will utilize.

The second charge relates to the pending sale of Texas Genco.

Third quarter results reflect a $259 million net loss from discontinued operations, due to the impact of the sale.

All historical results of Texas Genco are also now reported as discontinued operations.

Until the closing is complete, earnings from our interest in Texas Genco will be reserved, since we no longer benefit from these results.

While we are very disappointed in the magnitude of these charges, we're pleased that we are reaching the end of our transition period, and soon will be able to begin reducing our indebtedness.

Now let me give you the results of our core operating businesses.

Income from continued operations for the quarter was $17 million or 5 cents per diluted share.

This compares to 147 million or 48 cents per diluted share for this same quarter of 2003.

Last year's results included an after-tax impact of the capacity auction true-up which we have called ECOM revenues of $149 million or 47 cents per diluted share.

ECOM terminated at the end of last year in accordance with the Texas electric restructuring law.

As most know, these financial results continue to be burdened by a significant amount of interest, since progress on deleveraging our balance sheet will not start until later this year.

Now, let me describe the results of each of our business segments and I believe we had a good solid quarter.

Our electric transmission and distribution utility, Houston Electric, achieved financial results significantly better than last year's performance when the impact of ECOM is excluded.

Operating income for the regulated transmission and distribution operations was $169 million, compared to $151 million last year.

This unit continues to enjoy outstanding customer growth and solid operating performance.

Metered customers grew by nearly 51,000 or approximately 3 percent over last September, contributing to the increase in revenues.

Increased operations and maintenance expenses from environmental remediation costs and increased transmission payments, were more than offset by the income received from a land sale.

Overall this was a solid quarter for our electric unit.

Before I leave this business segment, let me say how proud I am of our electric employees who spent 7 weeks helping with the restoration efforts following the hurricanes this devastated the state of Florida and surrounding states.

I also want to commend the employees who remained at home and had to bear an even heavier load when our employees were helping with these restoration efforts.

I believe our mutual assistance program, by which utilities help each other at times like this, is one of the unique strengths of our industry.

Our natural gas distribution business reported financial results up slightly from last year.

We incurred a $2 million operating loss, which was a $3 million improvement over last year.

This is a seasonal business and the third quarter is typically the lowest earnings period of the year.

Since the third quarter of last year, we have added 45,000 customers or, approximately, a 2 percent increase.

We've also made headway in our rate relief efforts since our last call.

We received increases in several jurisdictions and have filed a number of rate increase requests in others.

So far this year, we have received $22 million in annual rate increases; and currently have 32 million in rate requests pending.

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

Our interstate pipeline and gas gathering segment produced financial results somewhat lower than 2003.

Operating income was $35 million, or $4 million below last year.

Our gas gathering business continues to benefit from the increased drilling activities in the mid common (ph) area.

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

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

Now I'd like to give you a little bit more detail on the 2 initiatives that we've been talking about for some time.

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

Since 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 serving our customers better while improving our overall capital -- cost structure through productivity improvements and efficiency gains.

We have a great base from which to build.

We're very pleased on the progress of the sale of Texas Genco.

As you may recall, in July, we announced a definitive agreement to sell Texas Genco to GC Power Acquisition for approximately, $3.65 billion.

The transaction is to be accomplished in 2 steps, the first of which includes Texas Genco purchasing for $47 per share, the 19 percent of its shares that are owned by the public.

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 GC Power, thus completing the first step of the transaction.

The closing of this first step is subject to several conditions.

Two conditions have already been satisfied.

The Hart-Scott-Rodino wedding period has expired, which means there were no anti-trust issues raised.

And the FDRC has certified the Texas Genco unit to be sold in step 1, as an exempt wholesale generator.

In conjunction with the minority buy-out, we are required to mail an information statement to shareholders detailing the transaction.

We are currently working with the FCC to receive their clearance, and expect this statement to be mailed within the next week or so.

In addition, the purchaser needs to receive the debt financing under a financing commitment they entered into, and Texas Genco needs to receive funds from a separate loan agreement they entered into to fund the minority shareholder buy-out.

We've made good progress with these efforts and are on track to complete the first step of the transaction before the end of the year.

Cash proceeds to CenterPoint Energy from this depth will be about $2.2 billion.

In the second step of the transaction, which will occur after we receive NRC approval, GC Power will acquire Texas Genco, which will then have as its principle asset, its interest in the south Texas nuclear project.

This step will occur after we receive NRC approval.

We filed the application with the NRC in mid-October; it typically takes 6 months or so to receive such an approval and we anticipate completing this step in the first half of next year.

Cash proceeds to CenterPoint Energy from this step will be $700 million, bringing the total to about 2.9 billion for our 81 percent in Texas Genco.

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

Now I'd like to turn to our true-up proceeding.

We believe that the public utility commission will render a decision soon in our true-up proceeding.

As you may know, on March 31st, we filed our stranded cost true-up application with the Texas Public Utility Commission.

Adjusted for a fuel reconciliation decision our requested amount is $3.7 billion excluding interest.

During 6 open meetings, the PUC commissioners discussed their respective positions on each of the items and the amounts in our request.

Based on these deliberations, we estimate the allowed true-up amount to be approximately $2 billion, excluding interest.

The PUC staff is in the process of writing the draft order and has indicated that they should have it ready for review at tomorrow's open meeting.

Once the PUC issues its final order, we'll begin earning a return on the final true-up amount at the utilities weighted average pre-tax cost of capital, which is about 11 percent.

We will also work to complete 2 new filings and begin the appeal process.

The first filing will seek to begin the process of issuing securitization bonds.

Our goal is to securitize the full amount of the final true-up balance approved by the PUC, which would save customers millions of dollars in carrying cost and allow us to pay down significant amounts of long-term debt.

This proceeding should take no more than 90 days and we hope to have a financing order in the first quarter of next year.

A second filing will seek to establish a new competitive transition charge.

That CenterPoint Energy will bill to retail energy providers.

This charge will enable the Company to begin collecting the true-up balance, plus interest, until the securitization of the approved true-up amount is completed.

Finally, based on the PUC deliberations today, the Company anticipates filing a motion for re-hearing.

This filing must be made no later than 20 days after a final order is issued.

The motion will ask the Commissioner to reconsider items that the Companies believe are not in compliance with the PUC or the Texas electric restructuring law.

If sufficient relief is not obtained through a re-hearing, we may appeal certain PUC rulings to the Texas state courts.

This appeal process could take up to 3 years to complete.

Before I turn the call over to Gary, let me summarize the status of our fourth quarter common stock dividend payments for both Texas Genco and CenterPoint Energy.

Last Thursday the Board of Directors of Texas Genco declared its regular quarterly dividend of 25 cents per share for holders of record on November 26th.

This dividend is scheduled to be paid on December 20th.

If step 1 of the Texas Genco sale has not occurred before the record date, this dividend will be paid.

Next week the CenterPoint Board of Directors will consider its fourth quarter dividend.

As we have disclosed in the past, the spin-off of Reliant Resources in October, 2002 resulted in the the Company having a retained deficit.

Under the 1935 Public Utility Holding Company Act, the Company is limited to payment of dividends from current earnings unless specific authorization is obtained from the SEC.

The Company is continuing to assess its fourth quarter earnings and is working with the SEC staff on this matter.

The Board of Directors is expected to consider the dividend at a Board meeting schedule for next week.

Now, I'll turn the call over to Gary.

Thank you, David and good morning to everyone.

This morning, we filed our 10-Qs for the third quarter which included detailed discussion of the results of operations for each of our business segments in the MD&A section, so I will not spend time reviewing this information with you.

However, I would like to update you on our planned use for the cash proceeds, both from the sale of Texas Genco and from the securitization of our true-up balance.

Also, I'll like to update you on our most recent dialogue with the credit rating agency and their feedback.

Now let me discuss the use of proceeds.

As you know, it has always been our goal to use the cash proceeds from our monetization event to reduce debt and improve our balance sheet.

As David has shared with you this morning, Texas Genco will be sold in 2 steps.

The first part of our 2-step sale transaction of Texas Genco, the sale of the fossil assets, is expected to close in early December.

At that time, we'll receive approximately $2.2 billion.

The second step of the transaction, the sale of our remaining interest in Texas Genco, consisting primarily of our share of the south Texas nuclear project, is expected to close in the first half of next year with proceeds to the company of $700 million.

We also will receive $177 million from Reliant Energy, related to the Price to Beat club (ph) act upon the issuance of the final order.

Under the terms of CenterPoint 's parent company credit agreement, we're obligated to apply the net proceeds received from the sale of Texas Genco to pay off the term loan component of that facility.

The amount of the term loan is now approximately $915 million.

Second, we are obligated to permanently reduce the commitments under the revolving credit component of that same facility to $750 million from 1.425 billion.

This, of course, means that to the extent our borrowings would otherwise be greater than $750 million we would have to use a portion of the proceeds to pay down borrowings under the revolver.

As of November 3, 2004, we had borrowings under the revolving facility of approximately $733 million and although we're not obligated to pay down -- paid drawn amounts below $750 million, we expect to pay down any draws under the revolver.

Of course we can keep the debt capacity in place.

However, as a practical matter, we are contemplating the replacement of the current facility, with one of similar size but with a longer tenor and with less restricted covenants.

In addition, we expect to achieve better pricing and terms consistent with our significantly improving credit metrics, than was the case when the existing facility was put in place in October of last year.

I'd also like to draw your attention to 2 other considerations.

First, we will have a tax payment due on the Texas Genco sale at end of the first quarter 2005.

We anticipate that the cash tax payment will be approximately $470 million.

Therefore, whatever deleveraging strategy we ultimately execute, will have to take into consideration this large cash outflow at the end of the first quarter next year.

Second, we're considering whether to pre-fund some pension contributions that we expect will otherwise have to be made over the next several years.

Minimum contributions for 2005 through 2009 are estimated to be approximately $500 million.

We're considering pre-funding all or a portion of these required future contributions.

This would reverse the charge to other comprehensive income related to our pension liability which we recorded in 2002, and which reduced our equity.

This will also reduce the level of future pension expense.

We will make the decision before year-end.

As David mentioned earlier, at this point we expect a true-up amount of approximately $2 billion, excluding interest.

Now with respect to the $1.31 billion term loan at CenterPoint Energy Houston Electric, the T&D utility, we do not have the right to prepay that loan prior to its maturity date of November 11, 2005.

There is no call or early termination provision included in that agreement.

Therefore, we plan to retire this loan with the proceeds from our securitization bond offering, anticipated to occur in 2005.

Remaining amounts above the $1.31 billion will be used to retire other debt.

Now, beyond what we are obligated to pay back, additional debt repayments will be based on the most efficient use of funds, and we are in the process of refining a specific plan.

Now, let me update you on our most recent discussions with the credit rating agencies and their feedback.

As you know, we continue to keep the rating agencies informed of the monetization activities and our deleveraging plan.

We met in person with each of the rating agencies at the end of the September and had what I thought were very good discussions.

In particular, we talked about the PUC public deliberations regarding our stranded cost application and what we thought that would mean in terms of an improved true-up balance.

Subsequent to our meeting, S&P issued a release in which they affirmed the ratings of CenterPoint and its subsidiaries at the current levels.

But also maintained the ratings on negative outlook.

Fitch had previously issued a note in September in which they would consider revising the outlook to "stable", once the outcome of the PUC review becomes more clearly defined.

There's been no public comment on CenterPoint from Moody's during this period.

Our assessment is that the current level of expected proceeds from our 2 monetization events and our commitment to pay down debt are acceptable to the credit agencies.

I think it is fair to say that all of the agencies will be interested in reviewing the written, final order from the Texas PUC when it is issued, and as David mentioned, we expect that to occur later this month.

Finally, many of you have asked us about our position on providing earnings guidance for next year and beyond.

Frankly, just as we have done historically, our goal is to provide meaningful earning guidance when we can.

However, as we described this morning, there are a number of unique variables, mainly timing-related that will impact our earnings per share.

For example the timing the monetization proceeds and the impact on earnings of specific debt repayment.

We will consider providing earnings guidance early next year if we have enough clarity around these events to do so.

Now, let me thank you for the interest in the company and I'll turn the call back to Marianne.

Thank you very much, Gary.

It's now time for questions and answers.

If the Operator could please provide the instructions on how to ask a questions, I'd appreciate it.

(OPERATOR INSTRUCTIONS)

Ali Agha, Wells Fargo Securities

Two questions.

One was specific to the third quarter numbers.

Gary, could you explain to us why the effective tax rate was so low in the quarter?

And what we should expect going forward?

Also how much was the gain on the land sale you referred to in the utility business?

Let me take the second one first.

The gain on the land sale, just a second.

I'll get you that. $11 million on the gain on the land sale.

On a go-forward basis on the taxes, I'll ask someone to help me for just a moment, on this quarter.

But on a go-forward basis we would expect the tax rate to be approximately 36 percent.

Let me give you -- come back to you on a specific around this quarter.

As you're looking at that, my other question related to the true-up process as well.

Have you gotten any clarity from the Commission or the staff on how ECOM will be treated?

Whether you can securitize that or collect that through CTC?

And how important is that $5 billion total number that S&B has referred to in the past based on your conversations with them?

Let me take the pc the ECOM portion first.

The rule that's in place allows us to securitize the ECOM.

It is not directly addressed in the Texas legislation and the question has been raised as to whether or not we can.

It's our view that it's really in everybody's best interest for us to do that, in that the carrying cost is going to be much lower if we securitize it than if we continue to keep it in right base and earn an average cost-to-capital on it.

So, we're not sure why anybody would oppose that, but there is no clarification around it, other than the rule permits us to do it as it stands today.

Gary, the other question was around the $5 billion and what the credit rating agencies have said about that.

You know, Ali, we have met with the agencies on the 5 billion.

As you know there was some discussions that the 5 billion, especially from S&P, was a litmus test.

And I think they've been clear that it really was not a litmus test and of course, we're tracking very close to those numbers.

So, I think that issue in terms of truly being a singular test is really off the table.

Okay.

Gary, were you able to sort out of the third quarter tax rate issue?

Our tax rate is 36 percent.

I think what you're looking is you're doing a calculation -- I think you have to look at the way we're presenting it with the discontinued operations.

Okay.

I'll work offline as well on that.

Ashar Khan.

Could you mention to us that the -- how much would pension expense be reduced if you did this 500 million equity infusion at the end of the year?

I think the best way to look at that, is today -- and of course your assumptions around pension changes, but we use a 9 percent assumed return on assets in our pension plan.

Now, all of that doesn't drop to the earnings line because lots of benefits are capitalized in connection with work that is done that we capitalize.

So it will probably -- it would probably be in the 35 or so million dollar range is our kind of estimates based on today's assumptions.

And can I just ask you, could you give us some -- what is the timeframe of the appeal process regarding the order?

How does that work once you file it?

Is there a time period under which it has to be -- the decision has to come out?

I'm going to ask Scott Rozzell, our General Counsel to address that.

The motion for re-hearing process, which is a jurisdictional prerequisite for filing appeals, has to be completed within 45 days after a final order is issued.

The true-up proceeding itself can be subject to 3 levels of appeals.

It goes to the district court first and from there, any party who wants to appeal that would take it to the court of appeals, and from there, any party who wishes to appeal the court of appeals decision would take it to our Supreme Court.

And while each one of these steps may take a varying amount of time, I think the good rule of thumb that we have applied is a year to complete each one.

We've said that in the past, it's 3 years, but it's probably better -- your'e probably better off thinking about it as to each step individually, because of the appeals process can end at any point.

David Frank, Zimmer Lucas Partners.

I just wanted to -- real quick question.

Was that gain on the sale of land, was that net $11 million?

Or was that pre-tax?

Pre-tax.

Pre-tax $11 million.

Okay.

David, I wanted to ask you, longer term, looking at the Company, what is the strategy for repairing or strengthening the capital structure of the Company?

I mean, obviously, this write-off was devastating to the equity level.

How do you get yourself to more normal capitalization?

David, I think it's a good question.

First, I think you need to look at really, our credit metrics and our coverage ratios to really look at the from the credit side, and I don't think that we see a big problem with that.

Obviously, we hoped it would be better, but the coverage ratios, we think are investment grade.

Now, clearly with the write-off of $1.1 billion, we've lost a substantial amount of equity in our debt to -- debt-to-total cap ratios are going to be too high and our equity-to-total cap are going to be too low.

And that's something we just can't fix overnight.

And it's really just the math of this.

The good news is the Company is not under any financial stress and if we recognize kind of how we got there, then it keeps it in perspective.

We do and we intend to, over time, improve our balance sheet and as I think we've talked in the past, there is a -- the SEC staff, the '35 Act staff has a rule of thumb where they want their registered companies to have 30 percent equity-to-total capital capitalization.

So, we're working on that.

We're working through this.

Certainly this pension contribution could go to help that, because that would reverse the charge of almost $400 million to equity we took in -- into 2002.

So, there are going to be things like that where we can improve the optics of our balance sheet and we're certainly going to work to do that.

Was that $400 million net of tax?

Yes.

Maybe you could remind us on the time -- the duration of the waiver you have from the SEC?

I know the one on the dividend, I think ex-- I think you have a couple of waivers.

Maybe you could just clarify what waivers you have and when, exactly, they do expire.

The SEC issued an order -- a financing order and an order allowing us to declare dividends out of current earnings, but for the second and third quarter, they basically said that to the extent we had any unusual charges related to the sale of Texas Genco, or the true-up proceeding, then we, in fact, could declare dividends out of surplus.

And that's kind of -- that financing order runs through next May.

May of '05, I think.

Or June of 2005.

So from this point forward, we really are focused on either getting an additional exemption or basically paying dividends out of current earnings.

Once we get this debt paid down, that's going to be achievable.

Now, the 30 percent test , there is not a date certain on that.

We certainly have believed that we could get there by the end of 2006, prior to this latest, large charge we took.

And we are, basically, relooking at ways to improve our balance sheet and to work with the SEC on exactly when we can achieve that ratio.

But there is no bright line or end-date that we have to achieve it but, it's something clearly the SEC staff is interested in and, in fact, we're very interested in it as well.

Well, like you said, it's good you're not under any duress and your cash flows look intact.

Thanks a lot.

Good luck.

Roy Astrachan, Camden Asset Management.

My question was about the FASB changes on the treatment of contingent convertibles.

I was wondering if you intend to begin fully diluting for your converts starting next year?

Or if you've looked at some of the alternate strategies that people have taken?

The short answer is looking at alternate strategies.

Roy, as you know, we have 2 convertible debentures.

We have 1 -- there were 2 done in 2003 and I'll address the second one,first, which is the 255 million, 2 7/8ths.

And that one we can unilaterally amend and plan to do so.

So we'll continue on that one from an accounting perspective to use the treasury stock method, rather than to inconvert it.

On the $575 million convertible debenture that we did in May, I think, of 2003, we're going to -- the short answer is yes, we are going to look at alternatives and certainly are putting that into our plans now to think that through as to what the best path forward will be.

As you know, we also are required under the accounting rules and will do so to amend -- to restate our previous year earnings 2002, 2003, 2004.

And the share we expect the impact of that to be in 2000 -- on a restated basis, 2003 -- would be 10 cents a share.

You're required to make the change even if you address the -- ?

If we --

-- address it by year-end?

On the 255 million, if we address it before December, we would -- short answer, again, yes, you would still make the change on a retroactive -- restated basis.

That's correct.

I think the real issue that we're really focused on are what's the best -- what's in the best economic interest of our shareholders.

So again, the 255 million, we can unilaterally change that indenture, and will do so.

The 575, we'll consider the best approach for which could be an exchange offer.

We'll look at all the various alternatives.

As you know this was sort of an -- it was October 13 that the FASB formally adopted the EITF 04-08 so we'll be looking at it.

David Kromus (ph), Cobia Capital

Good morning, couple questions for you.

On the interest proceedings, once you get that number, is that a benefit to equity?

Yes.

It will be.

So we can basically tack the fact whatever the amount -- we think the amount's going to be and add it to equity, right?

Correct.

We haven't recorded any interest yet.

So we expect whatever the amount to be will flow after tax to the bottom line.

On the pension, the potential 500 million, is that something that you would do with cash is it potentially something you would do with stock?

Are you looking at all options?

We probably would not use stock.

Our thought today is to look at the proceeds we're getting from some of these monetization events as one of the ways to fund that.

And lastly, the earnings pick-up that would come from the pension investment, is that split among the different subsidiaries, is most of it in electric?

It really is split among the subsidiaries, and it really follows the employees.

So it's -- I don't have that split, but we've got about 4500 employees in our gas distribution business and we have, probably, about 3,000 in our electric business. 7 to 800 in our gas business and then some corporate and business services.

So, if would be spread based on really where the employees are.

Debra Bromberg, Jefferies & Company.

Hi, a couple of questions.

What was your retained earnings balance as of September 30?

And then I also had a couple of other questions if I could get them in.

Okay.

We had a total shareholders equity of 639 -- or $640 million at the end of September.

Negative retained earnings of $1.8 billion.

Okay.

Also, could you update us on any discussions you might have been having with regulators regarding the termination of the excess mitigation credits post-true-up.

Particularly if you believe any of the outcomes might be earnings-neutral for you guys.

Debra, the only discussions that have been held are really on the -- at the open meetings of the commissioners and they've talked about whether or not they're going to continue that or not.

But, there have been no other discussions that I'm aware of.

And, then, just, one other question, you had reclassified interest expense to discontinued operations of about $38 million year-to-date.

Could you tell us what was actually tied to debt at Texas Genco and the amount that you expect to be reclassified in the fourth quarter, just to get an idea what it would be for the full year?

Really there was no substantial debt outstanding at Texas Genco this year.

So, all of that debt that was reclassified, related to the term loan, as I understand it, that -- that's going to be paid off with the proceeds from the sale of Texas Genco.

Deborah, this is Gary.

We have -- when you get a chance to look at the press release -- the details of the press release, I think we have described, and think it's a good question and I think a number of folks are going to be interested in that.

So we have put an interest expense detail that outlines that and actually shows cash amounts, those amounts that have also been reclassified because of discontinued operations.

So you can then see, very clearly, the year-over-year cash impact of interest expense.

And then on a go-forward basis for the fourth quarter you can, basically, extrapolate to see how much is impacted -- will impact the fourth quarter.

Now, we'll caution you whenever we close on Texas Genco, the first step of the transaction, we will immediately pay down the term loan.

So, you'll have some impact of that in the month of December.

And again I'd say we're tracking mid-December to do that.

But, I think we've put a pretty nice schedule in the financials that hopefully will help you and other investors and analysts.

Joanie Jensen (ph) with Nick Main Securities (ph)

Hi, I just wanted to ask a little bit more on the whole CoCo dilution issue?

You said you're considering the options including a potential exchange offer.

If you were to do that, do you expect to do it before the December 15th guideline?

And, also, is -- are you potentially considering tendering for the CoCo to avoid dilution with some of the proceeds, is that one of the bonds that's being considered?

I'll take the first part of that first.

We're on the -- again on the 255 million, we will, we have the unilateral right to amend that and we will do that.

On the 575, I would not anticipate that we would do anything prior to the 15th, which I think comes to your second question.

We're going to look at all of the options available to the Company.

And it could range from the exchange offer or taking other actions to address that.

And then could you just clarify a little bit more on the dividend issue for the fourth quarter?

What exactly needs to happen for you to be able to pay that?

Well, I think there's -- and I -- this is a Board decision, but what they'll consider is, one, what are our earnings from continuing operations in the fourth quarter; and do we have adequate earnings in order to declare them without any further SEC action?

Are -- do we need some type of action by the SEC to declare them?

One thing I think you need to keep in mind and that is today, in essence we've got about 4 -- excuse me, $5 billion that really have not been earning anything.

Our true-up balance has not -- we've not recorded any interest on it and we are due interest on that and so that's going to -- that's going to mean a significant amount, hopefully in the fourth quarter.

And you know we're not getting anything out of Texas Genco either.

So, the sooner we close that transaction, at least step 1, we're going to get $2.2 billion and hopefully we'll be able to put that to good use.

And so we think that the fourth quarter, there's some potential for some additional earnings pick-up there that, perhaps, others haven't been looking at.

Because of the clarity hasn't been there.

So the fact is, we're continuing to look at our potential for fourth quarter earnings as well as continuing our dialogue with the SEC staff on this issue.

And if you were -- if you were -- if you had to suspend the dividend for the fourth quarter, would this be probably a one-time only event?

And once all the other -- you receive the proceeds, from your various actions you'd be able to resume it?

How do you view this?

Yes.

I hate -- the hypothetical is the difficult one because suspending the dividend is not something that we obviously want to do.

We understand our shareholders value that dividend and in part that's the reason they hold our stock.

But, if we would have to do it, yes, I think we would look hard at whether -- how we could make up the difference, the shortfall, absolutely.

One last question.

You mentioned you could be in compliance with the public utility company holding act 30 percent equity ratio by the end of '06 I think you said?

Is your sense the SEC is going to work with you on that timeframe, rather than mandating you do it sooner?

I probably misspoke if I did.

What I intended to say was that prior to this large write-off, we expected to achieve a 30 percent test by the end of '06.

With the write-off, that is not nearly as probable unless we find some other ways to bolster our equity accounts.

For example, the pension contribution would go to that very issue of increasing our equity.

But the SEC staff was aware that it was going to take us to the end of 2006, prior to this event.

And so we're working with them, they understand our situation.

And we don't have any answers as to what the ultimate outcome of those discussions will be.

But, I do know that the SEC staff is fully apprised and understands our company well, and we're working with them to work through this difficult issue.

Paul Ridzon, McDonald

Do your comments --?

Do I understand your comments correctly, that you're now withdrawing any former guidance you may have made about '06?

We haven't ever really ever provided any guidance around '06, to my knowledge.

You may be thinking of an earnings aspiration we put out between 85 cents to $1.00 by '06, once we get through this transition.

But those were aspirations, not true earnings guidance and we understand that we're -- that the market is interested in what our aspirations are and if they've changed any.

Generally, we believe by early next year, we'll be in a position to give some additional input on that subject.

Rudy Olentino (ph.).

My question's been answered, thank you.

(OPERATOR INSTRUCTIONS)

Faisal Kahn (ph), Credit Suisse First Boston.

I wanted to make sure I got the timing, timing right.

When is the -- do you know the exact date of a final order?

You said the PUC was working on it, but do we know whether that's going to be in the next week or at their next meeting or what's the schedule over there?

The PUC is going to meet tomorrow.

There's an open meeting.

We're on the agenda.

A couple of weeks ago, the staff had indicated they will have a final order ready for the commissioners to review at tomorrow's meeting.

It could happen as early as tomorrow.

We have not seen a draft of that final order yet.

Based on, just the complexity and the size, we would expect it -- they may take a few days after they review this order before they take final action.

We still believe it's going to happen sometime fairly soon and certainly in the month of November is our expectation.

It could happen as early as tomorrow.

We just don't know.

The good news, I think, is that the staff is committed to getting out a draft order for everybody -- for the commissioners to review at tomorrow's open meeting.

After that you, its -- then you would issue your filing to issue securitization bonds?

Based on the order?

That takes 90 days, is that right?

Correct.

And you have -- you basically have that filing ready to go as soon as they issue their order?

So 90 days from whenever they would issue?

Is there timing difference in between?

It will take a few days before we file that -- make the application.

Within a week or so after the final order we will file the application for our financing order for the securitization bonds.

Okay.

Fair enough.

Next question, please.

Follow-up question from Paul Ridzon.

What's the SEC [inaudible] for?

To remove the dividend restrictions?

Is it a positive retained earnings balance, or is it achievement of a 30 percent equity ratio?

Well, the '35 Act says you can pay dividends out of retained earnings or out of current earnings.

But like I said, it's -- we don't have any retained earnings as a result of the spinoff of Reliant Resources.

What you'll see in our 10-Q is we're looking at a quasi re-organization, which would have the effect of resetting our retained earnings to zero.

And so we would kind of get out of this problem we have with retained earnings.

That work is ongoing.

We won't have an answer for a month or so, maybe longer, but our -- that would be a good solution for us if we could reset retained earnings to zero and then be able to accumulate them for future dividend payment.

The 30 percent equity level is not directly tied to this dividend issue.

It's only indirectly tied.

Is this -- the plan to do this re-organization, I assume that's going to be neutral to equity?

Yes, you wouldn't increase your overall equity.

You basically would close your net -- your current negative balance against your surplus and reset your retained earnings to zero.

That's the -- mechanically what would happen.

But, you have to go in and you have to value assets.

It's a fairly exhaustive list of things you have to do and we're working to understand all the implications of that, to make sure that there are no -- nothing that we haven't seen that would keep us from doing that.

But, a number of companies have done that that are '35 Act companies.

Margaret Jones, ABN AMRO

Hello, I have two questions.

The first is really quick.

When did you say you would be receiving the retail clawback payment?

When the -- excuse me, when the PUC issues its final order, concurrent with that.

And how much is it?

177 million.

Okay.

And then with regard to the securitization, do you see any prospect for being able to reach a settlement regarding doing that?

And accomplishing it more easily or more expeditiously than would be the case with the formal filing process?

Well, we've -- I'm not sure whether we're hopeful of that.

We certainly are meeting with the parties.

We've already met with all the parties to this case, explained to them what we intend to do and why, and so I think is not going to be surprises here.

Commissioner Smitherman, at the last open meeting, indicated that he wanted to see us get this done now.

This securitization, when rates are low.

So I think there's some momentum on the side of going ahead and getting this done, whether that would mean we could get everybody to settle on a number, I think, is yet to be seen.

But we certainly will work with the parties to see if we can find a way to do that.

When do you think we'd see evidence of something like this coming together, if it's going to come together?

I would say after we receive a final order and get -- make our filing -- our application with the commission.

That within 30 or 45 days after that.

If something is going to happen, I think it will happen then.

Jeff Coviello, Duquesne Capital

Two quick questions, the first, I might have missed it earlier.

There was some litigation charge, I think it was in the pipes business.

I was wondering if you could just quantify that amount.

And my second question just relates to the S-3 you filed today, I was wondering what those shares are exactly for, and how the plan is going to function?

Okay.

Jeff, let me take the first one.

The first one, it was between 3 and $4 million, it was in that magnitude on the litigation on the pipes.

On the S-3, Jim do you want to update on that filing?

I think it's just a filing in connection with our dividend reinvestment plan and shares were getting low so we simply replenished those shares, which is a normal thing we do from time to time.

But is there any specific issue?

No.

Didn't seem like it was going to be a -- when I first saw it it seemed like a small public offering but it doesn't -- that's not how it read.

So it's just a dividend reinvestment plan?

Yes.

It is simply a dividend reinvestment.

We're registering those shares.

Got it.

That makes sense.

Thank you very much.

Scott Engstrom, Hamilton Investment Management.

Quick question on the dividend, again.

Is there anything in particular you or the Board is waiting to hear before their Board meeting that would make it?

Or is it more a case of internal analysis and board deliberations?

I think we want to hear what the commissioners do tomorrow.

You know, there's an open meeting they will certainly -- all expectations are they'll have a draft of a final order and they will address some of these issues, I'm sure, like interest calculations and other things.

That's a very important consideration for management and for our Board.

So I think that's one of the things we've been waiting on.

And on the interest expense table, you gave breaking down the amount of amortization, I think for the quarter, was 19 million.

Is that a good run rate of how much non-cash interest you're accruing going forward or will some or all of that fall off when you repay debt with the proceeds?

Yes.

I would careful about looking at that on a run rate.

Obviously, that's the amount and we've disclosed, it I think very clearly.

And you're right I think you need to, all of that -- that will be impacted as we look at reconstructing our bank credit facilities and the debt -- the specific debt that we pay down.

Don't look at it on a run rate basis.

With the Genco moving to discontinued operations is there some overhead that used to be sent to that part of books, that's now in other operations.

Is that -- the 5 million number in there -- or almost $4.5 million in the quarter is that a decent run rate for corporate and other?

Yes.

I think that's a decent run rate.

And yes, that is related to the corporate overhead that was allocated or charged to Texas Genco.

And last, a couple of quick last questions.

The gain on the land sale, did that show up as against O&M at HO&P?

Yes it does.

Lastly on the pipes, a good bump up in throughput for the quarter, somewhat offset by continuing O&M increases in this quarter and throughout the year?

I was wondering if you -- are those trends -- is throughput up a third quarter phenomenon or are you seeing that across the system going forward and trends for O&M and pipes and gathering?

We are seeing increased throughput, lots of interruptible-type activity, transport-type activity, storage activity on our system.

A lot of it related to basis differentials across our system, as well as natural gas price volatility, current versus future months.

So, just a lot of activity on that system and I expect at end of the day they'll have a good year.

And is O&M, is any of that particular to this year?

Or is this kind of a new-higher stepped up level of O&M and just related to increased benefits and et cetera in that business?

We have to be careful, when you look at O&M, that includes expenses related to our pipeline services business.

Which we do for other companies and not just our own business.

So you have a revenue that's offset by these increased, basically, cost of sales of those businesses.

But, we do have some increased expenses associated with pipeline integrity and this litigation reserve we talked about as well.

So but I think that, perhaps, we need to clarify the cost of sales for our pipeline services that's in that O&M number.

Okay.

Great, thanks very much for your time.

Operator, we're over our time, if we could take one more question that would be great.

Your last question comes from Daniele Seitz, Maxcor.

Just a quick question, in the best case scenario, how much do you anticipate to be able to redeem in terms of debt by your end '05?

I understand that there's a lot of unknown and more a matter of your choices, as to if you can redeem earlier than anticipated?

Well, if you look at the three big pieces, we have $2 .5 billion after-tax coming from the Genco sale.

We have 2 billion from securitization and maybe more, depending on interest calculations and we've got a little less than than 200 million from the retail clawback, so that's probably approaching $5 billion, slightly less than 5 billion.

Part of that could go toward our pension contribution.

But the vast majority of it would go toward repayment of debt and recapitalization of our company.

Thank you very much for listening in this morning and we appreciate your interest in the Company and your support.

Have a good day.

This concludes today's conference call and you may now disconnect.