CenterPoint Energy Inc (CNP) 2005 Q1 法說會逐字稿

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

At this time I would like to welcome everyone to the CenterPoint Energy First Quarter 2005 Earnings Conference Call.

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

After the speakers’ remarks there will be a question-and-answer period. [Operator Instructions]

I would now like to turn the conference over to Miss Marianne Paulsen, thank you.

Miss Paulsen, you may begin your conference.

Thank you, Michelle.

Good morning everyone.

This is Marianne Paulsen, Director of Investor Relations.

I’d like to welcome you to our First Quarter 2005 Earnings Conference Call.

Thank you very much for joining us today.

David McClanahan, President and CEO and Gary Whitlock, Execute VP and Chief Financial Officer will discuss our first quarter results and will also provide highlights on other key activities.

In addition to Mr. McClanahan and Mr. Whitlock we have other members of management with us who may assist in answering questions following our prepared remarks.

First quarter 2005 earnings release is posted on our 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 filing with the Securities and Exchange Commission.

Before Mr. McClanahan begins I would like to mention that a replay of this call will be available until 6:00 pm central time through Friday, May 6th 2005.

To access the replay please call 1-800-642-4687 or 706-645-9291 and enter the conference ID number 5524249.

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

We will archive the call on CenterPoint Energy’s website for [inaudible] year.

And with that I would now like to it over to David McClanahan.

David?

Thank you, Marianne.

Good morning ladies and gentlemen.

Thank you for joining us today and thank you for your interest in CenterPoint Energy.

This morning [inaudible] to give you our first quarter results and summarize the performance of each of our operating units;

I believe that all three of our business segments are performing well and are well-positioned for the future.

I will also update you on the status of two milestone events that the Company has been pursuing since its inception; the sale of our generating assets and the recovery of our stranded costs true-up balance.

Finally, I will remind you of the dividend actions that we took in the first quarter and update you on the status of our efforts to address the technical issue around our dividend declaration.

Following me Gary Whitlock, our Chief Financial Officer, will describe the actions we have taken recently to further strengthen our balance sheet and enhance our financial flexibility.

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

This morning we reported net income for the first quarter of $57 million or $0.20 per diluted share.

This compares to net income for the first quarter of 2004 of $74 million or $0.22 per diluted share.

Last year’s earnings included $45 million in net income from discontinued operations related to our generation business.

Since this business was sold last year there is only a minimal amount of income from discontinued operations in this year’s results.

Income from continuing operations for the first quarter of 2005 was $67 million, or $0.20 per diluted share compared to $29 million or $0.09 per diluted share for the first quarter of 2004.

The first quarter of 2005 included after-tax income of $22 million related to interest on our true-up amount.

While we are entitled to a return of 11.075% on our true-up balance until it is fully recovered, generally accepted accounting principles only permit us to currently recognize the debt component of the return at an annual rate of approximately 6%.

We will recognize the equity component of the return in earnings as we collect it through rates in the future.

From my perspective the Company will not have completed its transition until we pay off Houston Electric’s high-cost term loan that matures in November of this year.

Once we have paid off this loan a more normal, overall earnings level will be evident; however from an operating standpoint I believe that for the first time these first quarter results more closely represent the true core operating income without the impact of electric restructuring in Texas or non-strategic business operations.

Now let me give you some details about the performance of each of our business segments.

I am very pleased to say that our core businesses performed well in the quarter.

Houston Electric continues to enjoy solid customer growth, adding 43,000 needed customers since March of last year.

We also experienced higher revenues for transmission cost recovery offsetting most of the increased transmission costs billed to us from other electric utilities in Texas. [Inaudible] our higher state franchise and property taxes as well as increased depreciation expenses contributed to a $4 million decline in operating income to $71 million for the first quarter of this year.

Our natural gas distribution segment reported operating income of $139 million, a $22 million increase compared to 2004.

We’re very pleased with the progress we’ve achieved in this business segment.

Certainly our efforts to increase our base rates have been a large contributor to this improvement.

We’ve also added 43,000 customers since March of last year and had a good financial contribution from our competitive natural gas marketing unit.

While operation and maintenance expenses are significantly down, last year’s results reflected an $8 million charge related to staff reductions associated with the restructuring of some of our rural operations.

Excluding this charge, expenses are essentially flat year-to-year.

We continue to focus on optimizing the cost structure of this business as well as on rate relief where necessary.

I believe we’re making good progress.

Finally, our pipeline gathering group achieved operating income of $64 million, an increase of $19 million compared to 2004.

We continue to enjoy favorable market conditions in the first quarter, very similar to the fourth quarter of last year.

Natural gas price volatility and basic (ph) differentials led to increases in ancillary services and increased transportation services at our interstate pipeline.

Our gas gathering business segment also enjoyed increased throughput and enhanced services.

New well connects, increased gas processing and increased sales of data monitoring services continued at rates above historical levels.

While no one can predict how long the current dynamics in the natural gas markets will last, I’m very pleased that we have positioned ourselves to provide the services and product our customers need in this environment.

Continuance performance this quarter;

I believe we are making the improvements and enhancements necessary to position us for the future and to achieve long-term profitability and growth.

Now let me update you on our two milestone events beginning with the completion of the Texas Genco sale.

As you may recall last July we announced an agreement to sell Texas Genco in two steps for approximately $3.65 billion.

We completed the first step last December which included the buy-out of the 19% minority interest and the sale of our coal, lignite and gas-fired plants.

CenterPoint Energy received cash proceeds of $2.231 billion from this step.

Earlier this month we completed the second and final step which involved the sale of the company’s remaining assets; primarily our interest in the South Texas Nuclear Plant.

CenterPoint Energy received $700 million in cash from this step, bringing the total to about $2.9 billion for our 81% interest in Texas Genco.

This sale was a strategic milestone for us.

When we formed CenterPoint Energy we developed a corporate strategy that focused on excelling in regulated electric and natural gas delivery businesses.

Unregulated power generation was not an element of that strategy.

Further, we were highly leveraged and needed to recapitalize our Company.

We consistently expressed our intent to sell the generation business and we are very pleased with the resulting transaction which allowed us to reduce our indebtedness by almost $2.5 billion.

Now I’d like to turn to recovery of our true-up balance which is another major milestone for the Company.

As outlined in the Texas Electric Restructuring law, electric utilities are allowed to recover their stranded costs and other items [inaudible] the transition to competition.

We relied on this law to establish the capital structure of CenterPoint Energy when it was formed.

On March 31st of last year we filed our stranded costs true-up application with the Texas Public Utility Commission.

We requested $3.7 billion, excluding interest.

In December, the PUC issued its final order allowing us to recover approximately $2.3 billion which included interest through August 31st of 2004.

It is an understatement to say that we are disappointed in the amount granted by the commission since we believe that we followed both the letter and the spirit of the law.

Consequently in January of this year we began the appeals process by filing an appeal with the Travis County District Court in Texas.

The value of our issues on appeal is approximately $1.3 billion.

The district court has ordered mediation which we expect to occur in late May.

The court has also scheduled a hearing for early August.

We anticipate that the full appeals process may take up to three years to complete.

There are two ways to recover our true-up balance as outlined in the law.

One is through securitization on the issuance of transition bonds for which we need a financing order from the PUC.

And the second is through the implementation of a Competition Transition Charge for which we need a CTC order from the PUC.

Let me describe where we are with each of these recovery mechanisms.

Last December we filed an application for a financing order asking for the authority to issue transition bonds to securitize the true-up amount.

The PUC issued a financing order in March which would allow us to securitize approximately $1.8 billion including amounts for additional excess mitigation credits we pay and interest which we have accrued since August 31st of last year.

With the financing order in hand we had expected to issue transition bonds by mid-year, taking advantage of the current low-interest rate environment which would be especially beneficial to consumers.

However, because several parties have appealed the financing order, the issuance of transition bonds will now be delayed.

The second recovery mechanism is a Competition Transition Charge or CTC.

In January we filed an application with the PUC to establish a CTC that will enable the Company to recover the remaining amount that has not been securitized.

Hearings were held earlier this month and we expect the PUC to issue a CTC order in late May.

The Company has requested authority to implement a CTC for the full true-up balance until the appeals are resolved and the transition bonds are issued.

In the meantime, the true-up balance continues to increase as interest accrues.

Before moving on to a discussion on dividends let me briefly talk about the termination of the excess mitigation credits, or EMC that we’ve been paying; under a settlement reached among various parties in Reliant Energy’s recent price to beat (ph) proceedings, our payment of excess mitigation credits will end today and two very positive benefits will be realized.

First our monthly cash flow will improve by almost $20 million, and second our true-up balance will no longer increase to reflect payment of EMCs I believe this is a real benefit to consumers in the long run.

This is good news and I’m please that the era of EMC is behind us.

Before I turn the call over to Gary I’d like to close with a brief recap of the dividend action that our Board of Directors took in the first quarter.

First let me give you some background.

As we have disclosed in the past, the spin-off of Reliant reinforces an October 2002 resulted in a retained deficit instead of retained earnings for the Company.

Plus last year we recorded an extraordinary charge to earnings related to the true-up and a loss on the sale of our generation assets, further increasing our retained deficit.

Since we currently do not have retained earnings, the Public Utilities Holding Company Act of 1935 limits the payment of dividends to current quarterly earnings unless specific authorization is obtained from the SEC.

Our Board of Directors declared a $0.10 per share regular cash dividend for the first quarter which was paid on March 10th, and an additional $0.10 cash dividend which was paid on March 31st.

This second March dividend was in lieu of the regular second-quarter dividend.

The reason for this is that our businesses are seasonal and the second quarter is typically our lowest earnings quarter.

In addition, as I indicated earlier, we are carrying a high-cost term loan until November which further burdens our earnings.

Because the first quarter is generally the strongest quarter for our gas distribution business, we were confident that our earnings in that quarter would be sufficient to cover the two dividends declared and pay in the same quarter.

We had hoped to eliminate the retained deficit by undertaking a quasi-reorganization.

Under such a reorganization you revalue your assets and liabilities and reset your retained earnings.

Unfortunately we have now determined that this revaluation would have resulted in a significant reduction in common equity which would be contrary to our efforts of enhancing our cash common equity amount and would have also introduced other complexities in reporting subsequent earnings.

Accordingly our Board of Directors took formal action on Wednesday to not undertake the quasi-reorganization.

We believe that the action we took in the first quarter demonstrates our strong commitment to our dividend.

And we understand that our shareholders expect a competitive dividend.

As we have previously stated our long-term objective is to pay a dividend of between 50 and 75% of sustainable earnings.

Let me close by stating that I am pleased with the progress we have made in implementing our strategy.

We are executing on the plans that we developed and communicated to you prior to the formation of CenterPoint Energy.

Our businesses are performing well and continue to improve their financial and operating results.

We look forward to making further progress as our transition comes to an end.

Now I’ll turn the call over to Gary.

Thank you, David and good morning to everyone.

David gave you the highlights of our quarterly results this morning and now I’d like to update you on three items.

First I’ll update you on our specific plans to address the two maturities occurring later this year.

Second I’ll provide you an update regarding our proposed exchange offer on one of our convertible securities.

And finally I’ll review our discussions with and the recent actions taken by the credit rating agencies.

Let me begin with our maturities.

We have two maturities occurring this year; specifically a $325 million note that matures in July at CenterPoint Energy Resources Corp., our natural gas distribution and pipeline subsidiary; and the $1.31 billion term loan due in November at CenterPoint Energy Houston Electric.

We are analyzing a number of options including refinancing to address the $325 million July maturity at CERC but have made no firm decisions at this time.

However we anticipate that CERC will have sufficient cash on hand and capacity under its bank facilities to enable CERC to retire this debt at maturity if necessary.

Therefore we believe that we have the flexibility to select from a number of alternatives.

And now let me turn to our $1.31 billion term loan due in November.

As David mentioned several parties have appealed the true-up financing order which will delay our securitization.

In anticipation for the potential for delay we put in place a $1.31 backstop facility in March of this year.

By establishing this backstop facility at CenterPoint Energy Houston Electric we took a proactive step to ensure that we will be able to satisfy the $1.31 billion term loan in the event that sufficient proceeds from the issuance of the transition bonds were not received prior to its November 2005 maturity.

This facility, as drawn (ph) would be secured by CEAG general mortgage bonds and would have an interest rate of LIBOR plus 75 basis points.

Any borrowing under this facility may be termed out for two years.

Therefore a delay in the receipt of funds from securitization will not cause a liquidity problem for us.

Now because of the importance of liquidity let me briefly summarize our current liquidity position for CenterPoint Energy and its subsidiaries.

CenterPoint Energy and its subsidiaries have an aggregate of approximately $1.5 billion in credit facilities of which very little has currently been utilized.

In addition, our temporary investments totaled over $450 million as of the close of business yesterday.

Also, as I mention a moment ago, CEAG has available to it the $1.31 billion backstop facility.

We are obviously very pleased with the strength of our liquidity position, both the amount and tender.

However I believe the real take-away is that we had positioned the Company to efficiently fund the current and future growth our businesses.

Now let me discuss the actions we have taken to date and plan to take relative to the convertible securities that we issued in 2003.

After December 31st of last year we adopted EITF 04-8 related to contingently convertible securities.

For each of the first quarters of 2004 and 2005 the diluted impact was $0.02 per share related to our $575 million convertible securities.

The indenture for the $255 million convertible notes was amended last year without the need to obtain bondholder consent to arrive at the principle amount of $255 million must be settled with cash upon conversion.

Since this occurred prior to our adoption of EITF 04-8 this security does not impact the Company’s diluted EPS.

However, the indenture for the $575 million convertible notes does not provide the unilateral flexibility for the Company to choose whether to settle the conversion in cash or stock.

Therefore it is not possible to similarly amend that indenture.

The Company considered various alternatives for decreasing the diluted effect of these convertible notes, including an exchange offer.

In anticipation of the exchange offer we filed a registration statement with the SEC in March which is currently under review.

Again, our goal is to substantially diminish dilution in future periods resulting from these options of EITF 04-8.

Turning to our credit rating agencies credit ratings, we like to keep you abreast of our discussion with the rating agencies and I’m pleased to be able to say that we have had some positive developments.

In March Moody’s notified us that they had placed the debt of CERC and CenterPoint Energy on review for possible upgrade.

They also changed the outlook for CEHE to stable from negative.

Of course we cannot tell you when specifically Moody’s will complete its review or what action they will ultimately take, but we are nonetheless very pleased that Moody’s is reassessing these ratings in light of the significant accomplishments that we believe the Company’s achieved to improve our credit profile.

Now let me thank you for your interest in the Company and I will turn the call back to Marianne.

Thank you very much, Gary and now it’s time for the Q&A period so Michelle would you please provide instructions on how to ask the questions?

Thanks.

[Operator Instructions] Your first question comes from the line of Lasonge Johans (ph) with RBC (ph) Capital Market.

Hi everyone, I wanted to ask you a couple questions about competition transition charge.

Am I to understand that the application is for $3.7 billion less the $1.8 billion that is authorized for securitization?

No, it’s for the full amount that the commission authorized.

And the commission authorized $2.3 billion plus interest and EMCs that accrued after August 31st.

You won’t need to use that if you get the $1.8 billion securitization for the bond issue later this year, correct?

Right, if you get – you basically subtract the amount of the securitization from the amount that we would otherwise have in the CTC.

I might also add that you have to reduce those amounts by the benefits associated with certain deferred taxes which was about I think $300 million is what the commission determined.

But you take that total amount and you bring it up to date and then you – whatever you securitize you reduce that and what you have left is you collect through CTC.

So basically $200 million?

No, I think today if we securitized $1.8 we’d have about $600 million recovery through our CTC.

Do you think you have to reduce that amount by $300 million of deferred—

No, that’s already reduced.

I’ve already taken that into account.

If you look at the amount that the commission authorized, you add to it the interest accrued since August 31st, EMCs accrued or paid since August 31st, less the deferred taxes, you would get about $2.3 or $2.4 billion and then that’s how much the maximum amount right today we’d securitize.

If we are only able to securitize 1.8 then you would subtract 1.8 from that amount and the resulting amount is what would be left in CTC.

Can you also return to the 11.075%?

As long as we’re not recovering either through the CTC or the transition bonds then we are accruing interest at 11.075 or return.

Now we’re only booking that at 6% on our income statement but we are entitled to recover 11.075 and we’ll recognize the remaining piece of that as we collect it through rates.

I see.

With regards to the starting cost recovery, original deadline was somewhere in the middle of the year and last time I checked management thought it might be November of – by November of this year.

Has that schedule changed any?

Well we thought we would be able to [inaudible] securitization by mid-year.

We got a financing order but unfortunately that financing order has been appealed by a number of parties.

As a result of that it’s going to delay the issuance of transition bonds until these appeals work their way through the court.

That could take 12 months or so, so it may be some time next year before we actually issue transition bonds.

In the interim we hope to start recovering that through the CTC and if we don’t get it fully in the CTC we’ll certainly be able to accrue interest on it so it’s not going have a big impact on earnings.

I see.

One last question, on the additional recovery potential – the $3.7 billion less the 2.3, am I to understand that the court has ordered CNP and the commission to enter into arbitration hearings?

Not arbitration, mediation.

We have appealed that in the aggregate total of $1.3 billion.

And the other parties to this case have also appealed their point.

The court has ordered that the parties enter into mediation.

That mediation is scheduled for the end of May.

And then depending what happens there, he’s also scheduled for hearings on this case to be held in August of this year.

I see.

Then is there a threat to the recovery of or the starting cost recovery of $2.3 billion?

We believe that we’re due more than that and that’s why we have sought an appeal of the commissioned order.

Other parties to this case think that we deserve less.

I guess there’s always a risk when you have somebody appealing an order.

We obviously still feel very strongly that we have a good solid case and we don’t put a lot of weight on that risk.

But there’s clearly parties taking another position here.

Would you say that kind of historically this is likely to – based on historical evidence would you say – or precedence would you say this is likely to occur, at least that $2.3 billion?

Commission orders – they get appealed all the time.

I think the court tends to defer to the commission’s judgment on orders unless they find an error in law.

So I don’t think they’re going to question the commission’s judgment, but they’re going to look at – did they do something that didn’t follow the law of their own rules.

In which case that would favor CNP?

We believe that to be the case.

Thank you.

All right.

Your next question comes from the line of Daniele Seitz with Maxcor Financial.

Good morning. [Inaudible] the legislature and at least the Senate chose a rule that would allow you to securitize all of the true-up amount without the chance for this all to go through the House, and assuming it does [inaudible], would that change some of the plans you have just mentioned?

I’m going to ask Scott Rozzell to address the legislation –

Bringing up as you probably have seen the securitization bill was reported out of Senate and is over on the outside now.

I think the prospects of that passing are relatively good.

I think they are relatively good because I believe that reflects the original intention of the people who drafted that particular law to allow the true-up balance to be securitized.

But I will say this; the legislative session that we have in Texas has about 30 days to run it.

It is a session that continues for a finite period of time, whether all legislation that is currently being considered will actually make its way through the legislation is anybody’s guess.

But I believe that that particular piece of legislation has a good chance of passage.

And assuming it does -- a measure [unintelligible] or these plans or as in the appeal overrides everything else?

I don’t think it will have any effect on the appeal, Daniele.

No?

Okay.

So unless something happened at the hearings in August, even if the law passes, I guess you would be able to securitize a larger amount after that decision?

Yes.

Once we get through this appeals process we could ask for – if the law passes – for another financing order, another finding that the commission would permit us to securitize the full amount and not just the amount they’ve done so far.

But we’ve got to get through these appeals before we can issue any transition bonds.

Right.

Just a quick question on the – obviously the natural gas is having a very good trend, am I supposed to be – I mean those results in the first quarter were very (ph) good, was there any specific issues during the first quarter or are we just to assume that actually in general business is good?

Well I think that our businesses are operating very well.

We have good, solid businesses here.

Now we are enjoying the benefit as I indicated in my prepared remarks, of a natural gas market that’s creating some opportunities in our pipeline business that we don’t know how long those will be there but our businesses are good, sound businesses and they’re operating well and I think we’re taking advantage of the market that are in place today.

Just one last question, on the rates increase, rate signing (ph) area, do you – what’s essential to the amount of rate signing that you still have sending?

We have a $9-billion cash in Minnesota that has been settled and we expect it to be approved by the Minnesota Commission I think in June of this year.

We’ve already implemented it in our rates to it won’t have any impact from a cash or an earnings standpoint.

But we think that will be completed later this year.

We have a pending case in Arkansas for $34 million.

It will probably be later on, probably in the fall before a quarter comes out in connection with that case.

We just received a – almost a $2-million increase in the small environs in Texas, the railroad commission approved that here earlier this month.

We expect to file in some other Texas jurisdictions later on this year, the specific amounts and the timing has yet to be determined.

Great.

Thanks a lot.

Your next question comes from the line of John Keoni (ph) with Credit Suisse First Boston.

Good morning.

Good morning.

Have you all considered applying for a waiver from the SEC to pay dividends every quarter regardless of the level of current income?

Yes.

We’ve talked with them about that a lot and we continue to have discussions but we have not I guess come to any resolution along those lines (ph).

Okay, just one more question; what are your current capital investment plans for 2006 for Houston Electric?

I think it’s almost $280 million for next year.

Let’s just verify that – excuse me $295 million is our budgeted capital expenditures for 2006.

We’ll spend a little bit less than that this year, about $280 million.

Okay, great, thanks a lot.

You bet.

Your next question comes from the line of Basil Kahn with Citigroup Smith Barney.

Good afternoon.

In terms of now that you have a possible upgrade of Moody’s and given the backstop facility at CE, what are the possible permutations that could cause you to issue equity at this point?

That’s my first question.

Actually, there’s two, perhaps three.

One is that if we were required to do it by the SEC in order to achieve our 30% common equity ratio that clearly would be a triggering point.

Second is if it would be absolutely required to be able to maintain our credit rating, that would be a second one.

But I think what we would really rather do, if we issue equity we want to issue equity into a growth story where we’re actually improving our Company, adding a valuable asset to our Company.

Those are the types of opportunities that we’re looking for now.

At CE here, as your true-up (ph) cost recovery balance increases over time and now securitization is kind have been delayed and balance continues to grow, do you see any trapped cash at CE because of the growing balance?

I know you have some offsets over there but is that a potential risk?

I don’t think so.

We have to make sure that we can move cash around and certainly we’ll be moving some cash out of Houston Electric up to the parent.

We have asked in connection with an order out of the commission for our securitization bonds out of the SEC for some flexibility around moving cash in terms of getting our capital structure right.

At this stage we don’t anticipate any problem with that but we have asked the SEC to give us that [inaudible].

And is the pipeline unit – has the re-contract of capacity come up for the – kind of the re-contracting yet or is that still in the works?

We’re in pretty good shape on re-contracting.

There are two big customers of our pipelines on our – CEGT is really our own affiliate—the old ARCWA (ph) system – those contracts have been extended for seven years and the Arkansas Commission has approved that extension.

Approval of the extension is before the Oklahoma Commission and the Louisiana Commission has not taken – has basically said that it’s okay with them but they haven’t formally approved it nor will they -- in advance.

But the other main contract is with Liqueed (ph) in St. Louis.

That contract expires if I’m not mistaken in 2007.

One last question on your operating cash flows compared to last year, a bit negative number compared to last year.

What was driving that beside the EMC credit?

Is there anything else that kind of brought that number down?

What we had in March if you recall [inaudible].

[Audio Break]

A couple of questions, one Gary an accounting question, looking at your [inaudible] on a effective tax rate in the quarter was unusually high at 48.6% if my math is right, could you address that and what we should expect going forward.

Okay, I’d be pleased to and you’re right on your math.

Let me give you two answers to this.

First of all I think I’d like you to focus first of all on our effective tax rate on a normalized basis, and that’s basically 40%.

That’s made up the federal tax rate which is 35% and then if you look at the states where we do business all in and all done it’s basically another 5%.

So on a normalized basis, it is about 40%.

What we have now and we’ve disclosed this in our 10-K as well, and the most significant item that impacts it is that we have an addition to the tax reserve of approximately $10 million.

And this relates to the contention of the IRS that the current deductions for the original issued discount on the Company’s in (ph), should be capitalized and what that does is it converts what would be ordinary deductions into capital losses.

So that adds another $10 million and respectively brings the rate up to this 49%.

So to answer your question on a go-forward basis on that issue, by the way, we feel we have a very strong position and one of two things that will happen.

One we’ll prevail on it and be able to deduct those currently.

And certainly if not what you’ve done is taken something that is not currently deductible and you add it to the basis of Time-Warner shares and we’ll look at tax planning strategies on a go-forward basis to offset.

In the near term though I think you need to look at the tax rate of the Company at 40% normalized and then you’re going to have the issue around this OIB deduction that will impact it as it did this quarter on go-forward quarters until we can address that issue.

I see.

The second question, going back to the different strategies going on with regards to the stranded cost recovery, to the extent that you go back and ask for and receive permission to move everything into CDC [audio break] all the field processes going on, if I understand that correctly obviously you won’t get the cash up front, but it should have a positive impact on your earnings because you start booking it at that higher return, is that right?

That’s correct.

And I understand that isn’t that only on the agenda today at the PUC?

Let me have Scott—

We have all three of our dockets on their agenda today.

We haven’t seen anything in the way of a preliminary order or anything that would give us any reason to anticipate what the scope of those discussions, if any, will actually be.

It would be timely for the commission to take up the motions for re-hearing on the ADFIT (ph) portions of our financing order pegged (ph), but I have not seen anything that would indicate that that’s what they are going to do.

I see.

Assuming they do approve it, you’ll start that booking as soon as the final order comes out or would you go back and assign booking it for the beginning of the year?

I actually misunderstood your question.

It’s possible that the commission could issue a decision on the CTC application that we have before them as well, but the briefing schedule has not yet run for that application so I would not anticipate that we will have a decision on the CTC today.

If we did get a decision and they include the full amount of our true-up amount in the CTC we will then start recovering the cash and booking potentially 11.075 because that’s what we’re going to be recovering through our CTC so it would have a very positive effect on both cash and earnings.

All right, and my last question, David obviously the regulatory (ph) agenda is higher on your plate, a lot of things going on; how active are you given that advisement in looking for acquisitions and is that something that is also on the front burner right now?

I think for the first time we believe we are close to coming out of the transition.

So we are absolutely looking to the future.

We believe we have a good, sound set of businesses here.

We think we can grow these businesses and to the extent it makes sense for our shareholders, yes we will be looking at other acquisitions.

Thank you.

Your next question comes from the line Jenny Jensen with Nick Main Securities.

Hi, a couple of questions.

First with respect to your exchange offer, you mentioned that you’re still awaiting approval or review by the SEC of your document.

Do you have sense as to the timing for their review?

And then secondly, once it’s effective when do you think the exchange offer would be effective?

As I mentioned we have filed and that it’s under review.

Obviously we’re being very responsive to that but really can’t predict the timing on that.

But obviously we are being responsive.

And second in terms of once we’ve declared effective I believe we have 20 days from that point to move forward with the exchange offer.

That’s sort of the timeframe following the effective date.

Okay, and then secondly as a follow up to one of the earlier questions, you were talking about potential equity issuance, how are your discussions going with the SEC as far as your 30% debt-to-CAP requirement?

And is this something where you think they will push you on that or something you can work with?

We have good discussions with them.

We’ve always had a timeframe that it was going to be ’06-’07 before we could achieve the 30% common equity which means that we will have issued all our securitization bonds and other things.

So they’re fairly very interested in it.

I don’t think I would call them pushing us on it, but there is an expectation on their part that we will have a plan in place to achieve the 30% common equity balance and obviously we’re working hard to do that.

And what about the credit rating agencies?

I think that we are not getting any push from them on that.

They clearly have an interest in it, but I would not call it having a push.

Okay and then lastly, as far as your dividend, do you anticipate based on your current projections having to do double dividends again, or are your projections such that you think you’ll be able to pay the dividends out of current quarter earnings?

You know this is something that we monitor very closely to the extent we need to take special action we will.

We hope that we can do it on a normal quarterly basis, but we understand that our shareholders expect a dividend and we want to make sure we deliver so we’ll be monitoring that, our projections very closely to ensure that we do that.

Okay, thank you very much.

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

Thank you.

I just wanted to go back to the appeals process discussions to make sure that I understood what you were saying.

I think you indicated that there was going to be mediation next month and a hearing in August.

And I think you were referring to the appeal you filed in January of the true-up order.

I’m just wondering – the appeal that was filed by interveners of the financing order in March, is that on a separate legal track and if so could you walk through with us on how that plays out?

They call it a concurrent legal track the appeal of the financing orders has a briefing schedule that has been established by the judge and the judge who will hear the appeal of the financing order is the same judge that will hear the appeal of the true-up case itself, and he has set the hearing on the financing order appeal for immediately following the conclusion of the hearing from the true-up fee appeal.

So those will both be held the first week in August.

And the timeframe on that in terms of getting that resolved?

The true-up and the financing order appeals are subject to a special provision in our law and it requires the courts to take them up on an expedited basis and they omit the intermediate level of appeals, meaning that the financing order goes to the district court and from there to the party if you want to appeal further to the Supreme Court of Texas.

Having said that they are subject to expedited processes, they are not to specific deadlines that have been put in place.

I can tell you that the initial financing order, the first one issued under the Texas statute was appealed on Constitutional grounds and on the limited statutory grounds and that one took about 15 months to go all the way through the Texas Supreme Court.

Because the Texas Supreme Court has decided the Constitutional issue, that’s no longer a part of our appellate process.

Okay, thank you.

Your next question comes from the line of Debra Bromberg with Jefferies & Company.

Hi, good morning or afternoon.

If the PUC transfer request for a CTC for the full stranded cost balance, could they (ph) have said that that would add something like $10 million of earnings per month?

Just a minute, we’re making a quick calculation here.

I think you’re pretty close but –

And then while you are doing that separately, the amortization of deferred financing cost was pretty high last year, about 92 million, could you provide some guidance of what that might run the next couple of years?

Because I don’t think – I know I’ve tried to get that information, I think it’s a little difficult to figure—

Debra, could you repeat, you said the what – the financing costs?

Amortization of deferred financing costs in your income statement was 92 million last year, could you provide some guidance as to what that might be running the next couple of years?

Hang on just a minute.

Debra?

Yes:

This is Gary; on the interest expense I think you’re asking -- what’s the non-cash portion of the interest expense effectively?

If you looked at this quarter’s interest expense which I – and there’s a table that we describe because of these discontinued op.

If looked at 184 million of interest expense, 165 of that is cash interest expense and 19 is non-cash interest expense.

Now going forward of course, once we pay off the term (ph) loan, those amounts will – I don’t want to get into any projections of that, but once we pay that off that accelerates also some on the non-cash interest expense.

So for the quarter those are the amounts.

Okay so next year we could expect that to drop off considerably?

Yes, you’ll see that drop off, that’s correct and of course you’ll see interest expense drop off fairly significantly obviously as well.

With respect to your first question Debra, since we’re already recognizing 6% currently, there would be another 5% of “earnings” related to the equity portion that we pick up, although this all being cash now, we’re not getting any cash.

And that would be about $10 million a month.

Great, thank you.

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

Hello, I had a couple of questions on the CTC.

My first question was, what happens after you receive an order which presumably you will from the PUCT that authorizes collection of the stranded costs through the CTC, what is the potential appeal process for that and do you anticipate any likelihood of that being delayed or what are the different points in the process?

And then secondly, do you think that you would be able to eventually if you wanted to, choose to continue the recovery process through the CTC and just drop the securitization?

With respect to your first one, parties clearly would have the right to appeal a CTC order but that would not delay the implementation of the rate so we fully expect that that rate will be implemented whether or not it’s appealed.

Secondly I think your second question is a good one.

If you start recovering this and you’re getting a good, solid return, would we continue?

The fact is we believe that securitization is a lower-cost form of financing for our customers and we’re going to go ahead and securitize as much of it as we can whenever we are permitted to do it, and we’re going to pay off debt, regardless of the fact that it might have a little earnings plus if we didn’t do that.

Thank you.

Your next question comes from the line of David Grimhouse (ph) with Kobia (ph) Capital.

Good morning.

A couple of follow-up questions for you; it sounds like your cash balance is pretty strong right now and I guess that’s a result of getting the proceeds from South Texas.

What are your plans for that?

Are you going to try to pay down further debt with it?

Do you feel like you need that much cash?

How are you thinking about that over the next six to twelve months?

We’ve taken those proceeds and we have reduced our indebtedness since the end of March.

So we certainly have used that cash to pay down debt.

We still have some cash proceeds obviously, some temporary investments and a lot of that is being generated from current operations and we will ultimately use that in the most cost-effective way we can – either paying down debt, a lot of that is at our CERC subsidiary and we have a maturing debt in June, July of this year and we might very well use all or part of that, as Gary indicated.

Next question, the interest rate on the CTC, has that been resolved – it’s still being debated by the commission, is that correct?

The interest rate on the CTC is still being decided by the commission.

We had one of the commissioners who stated his position in the public – the 11.075 -- but it takes to votes and that is a contested issue.

And you’re likely not to get that until the final ruling at the end of May?

I think the commission will resolve the interest rate at the same time that they issue their full CTC order and that should be some time toward the end of May.

Okay.

Any chance, given all the conflicting appeals on everything that you could get some type of settlement here or are people just too dug in and this is just all going to have to play out in the courts and take some time?

I think we have been committed to try to settle this matter since before it was even filed.

We have not had good success on those efforts but we continue to be hopeful but we can explore ways that would make sense given the posture of cases.

And I think Judge Deetz (ph) at the Travis County District Court in setting this case for mediation has been [inaudible].

So we will have that process play out and see what are – the other stakeholders have to say about the possibility of resolving the case.

Are the other stakeholders at least showing up at the table to have discussions, or maybe this mediation will force them to?

The mediation is a required mediation, court-ordered mediation.

Every party to the case has to be included (ph) in that mediation.

The commission itself has a bit of a different status and it would have to be the implementer of any settlement that comes out of the mediation but with that exception all the parties to our various appeals will be participating in that mediation.

Okay, great.

Thanks for the time.

Michelle, we’ve got time for one more question.

Your final question comes from the line of Zack Schreiber with Duquesne Capital.

Last but not least.

Hi, Zack.

Hi guys, just a question you mentioned some moving cash around out of CE and you mentioned some SEC processes and approvals that were pending that you thought you were going to get them.

Could you sort of remind us on that issue and just sort of confirm for us and this isn’t any reemergence of some of the old issues or the old concerns at least that – moving cash out of – the utility was going to deplete the equity.

I remember we crossed that bridge before and that issue was sort of resolved and you could get cash out of CE without tipping the equity balance via sort of inter-company loan note receivables and so forth.

Is this not that kind of an issue or is this that kind of an issue again?

No, it’s really not that kind of an issue.

The main problem we have is that Houston Electric also has negative retained earnings.

So it’s subject to the same issues that we talk about as a parent and basically what we’ve asked the SEC to do is to allow us to move money around to be sure that we get the capital structure right at CE and we’re not left there with a bunch of cash just sitting around.

And we have no reason to think that they’re not going to be sensitive and accept that.

So far they’ve been receptive to it.

We don’t have an order yet, I think we’ve got one on file.

But now that the transition bonds are delayed there’s probably not any urgency to get that out like tomorrow, but that’s the reason we’ve don it, is we have negative retained earnings here too and that limits your dividend ability when you’re part of a [inaudible].

Got it.

Okay and you expect that order when?

You said it’s on file so soon, right?

Well we filed it but I think some of the urgency is probably off from the SEC staff position because of its appeal with the transition financing order.

But we continue to talk with them about it and encourage them to go ahead and get this completed.

Okay, thanks so much, guys.

Thanks.

Thank you very much everybody for participating in our call today.

We appreciate your interest and support.

Have a great afternoon.

Thank you ladies and gentlemen; this concludes today’s CenterPoint Energy’s First Quarter 2005 Earnings Conference Call.

You may now disconnect.