CenterPoint Energy Inc (CNP) 2005 Q2 法說會逐字稿

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

At this time I would like to welcome everyone to the CenterPoint Energy second quarter 2005 earnings conference call.

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

After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]

Thank you.

Ms. Paulsen, you may begin your conference.

Thank you very much, Angela.

Good morning, everyone.

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

I would like to welcome you to our second quarter 2005 earnings conference call.

Thank you for joining us today.

David McClanahan, President and CEO and Gary Whitlock, Executive VP and Chief Financial Officer, will discuss our second 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.

The second quarter 2005 earnings release as well as the Company's report on Form 10-Q filed earlier today, are posted on our website which is www.CenterPointEnergy.com under the "Investor" 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 filings with the SEC.

Before Mr. McClanahan begins, I would like to mention that a replay of this call will be available until 6:00 p.m. central time through Monday, August 15, 2005.

To access the replay, please call 1-800-642-1687 or 706-645-9291, and enter the conference ID number 7308411.

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 one 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 today and thank you for your interest in CenterPoint Energy.

This morning, I will review our second 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 the recovery of our stranded cost true-up balance.

And finally, I will review our recent dividend actions and other aspects of our business.

Following me, our Chief Financial Officer, Gary Whitlock will discuss certain financial matters.

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

This morning, we reported net income for the second quarter of $54 million, or $0.16 per diluted share.

This compares to net income of $57 million or $0.19 per diluted share for the second quarter 2004.

Last year's earnings included $60 million of net income from discontinued operations, related to our generation business, which we sold in 2004.

This quarter, we recorded a $3 million loss from discontinued operations related to that business.

In addition, now that we have received all final PUC orders in our true-up case we recorded an after-tax extraordinary gain of $30 million in the second quarter.

In the second half of last year, we had recorded a $977 million after-tax extraordinary loss, based on the commission's actions to that point.

Income from continuing operations for the second quarter of 2005 was $27 million, or $0.09 per diluted share, compared to a loss of $3 million or $0.01 per diluted share for the second quarter last year.

The second quarter of 2005 includes after-tax income of $23 million related to interest on our true-up balance.

While we are entitled to interest of 11.075% on our true-up balance until it is fully recovered, Generally Accepted Accounting Principles only permit us to currently recognize interest at an annual rate of approximately 6%.

We will recognize the rest of the interest in earnings as we collect it through rates in the future.

From our 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, our results now more closely resemble or represent the true core operating income without the impact of the generating assets we sold last year.

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

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

Houston Electric, excluding the transition bond company, reported operating income of $113 million, compared to $118 million in the second quarter of last year.

Last year's operating income reflects the benefit of a $15 million partial reversal of a reserve that we had previously taken for our final fuel reconciliation.

Houston Electric continues to enjoy solid customer growth, adding over 48,000 metered customers since June of last year.

We also experienced higher revenues resulting from favorable weather and increased usage.

This quarter, the increased revenue that we received from transmission cost recovery offset the increased transmission cost billed to us from other electric utilities in Texas.

On the expense side, excluding the $15 million reversal of the fuel reserve last year, our operation and maintenance expenses increased by $13 million, which was primarily related to higher tree-trimming costs, and increased transmission costs that I just mentioned.

Other miscellaneous expense increases were partially offset by reduced pension expense.

Other taxes increased in the quarter primarily related to higher state franchise and local property taxes.

Our natural gas distribution segment reported operating income of $19 million compared to $23 million last year.

This is a seasonal business and the second and third quarters are typically the lowest earning periods of the year.

The slight decline in operating income in the second quarter is not indicative of the progress we've made in this business.

Year-to-date operating income is up $18 million over last year.

We have added nearly 47,000 customers since June of last year, and we continue to focus on improving the overall cost structure of this business.

We've also been actively pursuing rate relief.

Cases are pending in Arkansas, and a number of smaller cities in Texas.

Finally, our pipeline and gathering group had another outstanding quarter, achieving operating income of $52 million, an increase of $10 million compared to 2004.

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

Our interstate pipelines experienced increased transportation services due in large part to higher basis spreads.

Our gas gathering business, also benefited from 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 products our customers need in this environment.

In summary, I'm pleased with our operating unit's performance this quarter.

I believe we're making the operational improvements and enhancements throughout the Company necessary to position us for the future and achieve long-term profitability and growth.

Now, I would like to turn to the recovery of our true-up balance which is a major milestone for the Company.

As most of you know, we filed our stranded cost true-up application with the Texas Public Utility Commission in March of last year, and in December, the PUC issued its final order allowing us to recover approximately 2.3 billion, which included interest through August 31, 2004.

We subsequently filed our appeal in January with the Travis County district court seeking reversal of about $1.3 billion of disallowances.

The district court held a hearing last week regarding our appeal as well as the other parties' appeals.

Although we expect a timely ruling from the district court, we anticipate that the full appeals process on the true-up order may take an additional two years after the district court rules.

There are two ways to recover our true-up balance.

One is through securitization or the issuance of transition bonds and the second is through the implementation of a competition transition charge or CTC.

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

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

The PUC issued a financing order in March allowing us to securitize a portion of our true-up amount.

We had expected to issue approximately 1.8 billion of transition bonds by mid-2005, taking advantage of the current low interest rate environment.

However, several parties appealed the financing order.

Last Thursday, the Travis County district court denied those appeals.

We have now reached agreement to not further appeal the PUC's order with all but one party, who has 15 days to file any further appeal directly with the Supreme Court.

We will not be able to issue transition bonds while any such appeal is pending.

Last month, we received an order from the PUC allowing us to implement a CTC to collect the remaining portion of the true-up balance.

Approximately $570 million over 14 years, plus interest at an annual rate of 11.075%.

Based on the accrual of interest provided for in the CTC order we expect that this amount will increase to approximately $600 million by the end of the third quarter, which is when the CTC is expected to be implemented.

The CTC order also allows us to collect about $24 million in rate case expenses over three years.

I'm very pleased that we will soon begin to recover a part of our true-up balance through the CTC, and I hope that any further appeal of the financing order can be resolved quickly so that we can issue transition bonds to recover the remaining balance.

I would like to now turn our attention to the dividend actions that our board of directors has taken thus far this year.

First, let me give you some background.

Our Company has a retained deficit instead of retained earnings, primarily due to our separation from Reliant Resources in October of 2002, and the 2004 extraordinary charge to earnings related to the true-up proceeding.

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

Because of the quarterly earnings limitation, our board of directors declared two $0.10 per share cash dividends in the first quarter.

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

When we became comfortable with our core business earnings projections for the second quarter we declared a $0.07 per share dividend, bringing the total dividend paid through June to $0.27 per share.

It remains our goal for this year to pay a total of $0.40 per share, which is the annualized amount that we have paid over the last couple of years.

We believe that the actions we took in the first and second quarters demonstrate our strong commitment to our dividend.

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 and we hope to be in a position to begin a measured increase in the dividend in 2006.

We are very pleased that today President Bush signed into law the new energy bill.

The law contains a number of provisions that will lay the foundation for a more secure, reliable, and affordable energy future.

Although we are unlikely to see many near-term effects, I believe the longer term impacts will be significant.

However, one near-term effect for us is repeal of the Public Utility Holding Company Act, effective six months from today.

This means that we will continue to be subject to the dividend restrictions for the remainder of this year, but from a practical standpoint, these restrictions won't impact our dividend decisions next year.

The repeal of the act will also eliminate the 30% equity capitalization guideline imposed under the act.

Although we will no longer be obligated under the act to achieve certain capitalization ratios, we remain firmly committed to strengthening our balance sheet over time.

Before I turn the call over to Gary, I would like to close with a review of our recent strategic evaluation.

With the sale of our generation business completed, and the true-up case nearing resolution, we conducted a comprehensive evaluation of our strategy and portfolio of businesses.

Our evaluation validated our strategy and identified opportunities to enhance and optimize our performance.

We will continue to focus on building a single brand identity, CenterPoint Energy, and leveraging our scale and implementing common systems where appropriate.

We are committed to achieving our goals of providing top quartile costs and service, together with delivering top quartile shareholder returns.

We will continue to pursue productivity improvements and operational enhancements toward that end.

Growing our business remains an important focus for our strategic direction.

We will seek sources of additional growth, both from existing businesses, and from new complementary businesses.

In evaluating our current portfolio of businesses, we continue to discover opportunities for growth.

For example, we will seek to expand our customer base in the natural gas marketing business.

We have a number of natural gas storage and pipeline expansion projects under way.

And in our gathering operations, an opportunity for growth lies in the expansion of our remote data monitoring and communication services business which we call ServiceStar.

We will also continue to explore growth opportunities that are related to or complement our energy delivery focus.

For example, we are currently testing broadband over power lines, or BPL, in a pilot program in Houston.

We will be assessing this technology not only from a telecommunications service point of view, but also its potential to enhance our existing energy delivery systems through applications such as automated meter reading, realtime system monitoring, preventative maintenance, and outage detection and restoration.

We still have a lot of work to do to determine the viability of BPL as a business for us, including potential regulatory treatment and ultimate profitability and value creation to our portfolio.

Another potential growth opportunity that we're currently exploring is the participation in the retail electric business in Texas.

We particularly see opportunities around the commercial and industrial customers to whom we currently provide natural gas services.

We also plan to evaluate the mass retail market in Houston.

Our goal in evaluating these new growth opportunities is to seek value creating opportunities for our shareholders without changing our overall corporate risk profile.

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

We are executing on the plan 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 will 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 would like to update you on a number of additional items.

Let me begin with an update on the exchange offer for one of our two contingently convertible securities.

In March of this year, we filed a registration statement for an exchange offer for our $575 million 3.75% convertible notes.

This registration statement was declared effective by the SEC on July 19 at which time we commenced the exchange offer.

This offer will expire on August 17.

The new notes are essentially identical to the old notes with the exception that upon conversion, the Company will have the right to settle the principal portion of the new notes in cash rather than stock.

This modification will allow the Company, on a prospective basis, to decrease the dilutive effect of these securities resulting from EITF 04-8, which we adopted after December 31, 2004.

Next, I would like to comment on Moody's positive credit ratings action.

As you may know, Moody's recently upgraded the parent Company's ratings including its senior unsecured debt to Ba1 from Ba2.

In addition it upgraded the ratings of CERC, our natural gas distribution and pipeline subsidiary, including its senior unsecured debt to Baa3 from Ba1.

Moody's also affirmed the Baa2 senior secured rating for our CEHE, our electric T&D subsidiary.

Moody's ratings outlook is now stable for all three entities.

We are very pleased that Moody's has now assigned investment grade ratings to both of our utility subsidiaries, as well as moving the parent Company's debt ratings a step closer to investment grade.

We believe we have taken consistent and significant steps to improve the credit metrics and risk profile of both the parent Company and our utility subsidiaries which we think Moody's recognized in taking its positive ratings action.

We will continue to take the steps necessary to enhance the credit ratings of the operating companies and the parent Company.

Next, I would like to comment on our liquidity and sources and uses of cash since March.

First, we closed on a replacement credit facility at CERC in June.

The prior facility was a $250 million three-year facility that was due to mature in 2007, on which we were paying LIBOR plus 150 basis points.

In the new facility, we upsized the amount to $400 million.

Extended the tenor out five years to 2010 and lowered the fully drawn borrowing cost to LIBOR plus 65 basis points.

We are very pleased with the terms of this new facility, which not only provides additional liquidity of CERC but also demonstrates the significant improvements in CERC's credit profile and the financial performance of its businesses.

Including this new facility, CenterPoint Energy and its subsidiaries now have in aggregate approximately $1.6 billion in credit facilities.

Also, I would like to remind you that CenterPoint Energy Houston Electric has available to it a $1.31 billion backstop facility to repay the $1.31 billion term loan that matures in November.

This facility, if drawn, would be secured by CEHE general mortgage bonds and would have an interest rate of LIBOR plus 75 basis points, a 900 basis point reduction from the rate on the maturing term loan.

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

Also in the second quarter we received $700 million from the final step in the sale of our generation business.

As we have committed to do, we utilize these proceeds primarily to pay down debt.

And in July, CERC paid off a maturing $325 million note from its liquidity.

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

However, I believe the real take-away is that we have continued to position the Company to efficiently fund the current and future growth of our businesses.

Finally, I had planned to update you this quarter on some of the key elements of the financing order that we received in June from the SEC which replaced our prior order.

However, I won't go into great detail since we included a broader discussion regarding the order in our 10-Q.

In addition, as David mentioned, the recently enacted energy bill repeals the Public Utility Holding Company Act, so we will be subject to the financing order's provisions only until the effective date of the repeal -- the repeal of the act early next year.

Let me just say that in the interim, there is nothing in the financing order that we can't live with.

Now let me thank you for your interest in the Company.

And I will turn the call back to Marianne.

Thank you, Gary.

It's now time for the Q&A period.

So, Angela -- sorry about that -- Angela?

Yes, ma'am?

Thank you.

If you could please give the instructions.

Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from Paul Patterson with Glenrock Associates.

Hi.

Can you hear me?

Yes, Paul.

With PUHCA gone, you guys mentioned that you want to make your balance sheet stronger.

I was wondering how much stronger and over what time frame might you guys be looking at it?

Well, the first thing we do is we look at the credit metrics.

We have a desire and a commitment that our operating utilities will be investment grade, and we also want to eventually get the parent Company back to investment grade.

So we want to make sure we have strong credit metrics at the parent and over time, that is going to happen, and we don't have a timetable.

We've been asked many times in the past, are we committed to -- are we going to issue equity, and of course, when we had this 30% equity test staring us in the face, it was a little bit -- it was a better question, I think, than today.

However, we're still committed to strengthening our balance sheet and if we issue equity it will be into a growth story.

Okay.

Your next question comes from Faisel Khan with Citigroup.

Good morning.

Just a couple of questions here.

First, David, I think in your call -- the call or your prepared remarks you talked about the interveners appeal that has been denied, and then there is I guess one more intervener out there with an appeal?

Is that what it was or -- ?

That's right.

We had -- there were a number of parties that appealed.

All but two dropped their appeal prior to the hearing.

And then subsequent to a hearing, one other intervener dropped their appeal.

So the appeal has been denied, and we don't know what the remaining intervener will do with their appeal.

What is the timing of that?

Do they have a certain time limit they have to appeal to the Supreme Court now or -- ?

Yes, they do, they have 15 days from last Thursday.

And of course, this is the appeal of the financing order that you see, not the true-up order.

Right.

And then the one other thing, on your -- you said something interesting about the participation in retail electric market in Houston.

I'm just wondering if you could tell us what you think at this point, given your brand name in the area, what your potential acquisition costs could be per customer?

How far along the line have you guys looked at this, looked at the retail market?

We don't have any data that we will share with you at this time.

We obviously have -- we were operating under a noncompete agreement following our separation.

And that noncompete expired earlier this year.

We have take an look that this market.

We continue to look at it.

And while we have made -- we have made no decisions yet, whether we're going to enter it or not.

But there are some aspects of it we find attractive, the real question is, can -- can we make money at it, and can we have the proper controls from a risk standpoint to make sure it doesn't impact our risk profile.

And it has got to meet both those hurdles.

It's got to be profitable but we're not intending to change our Corporate risk profile with any type of venture.

Okay.

And then on the O&M and T&D sequentially that was up at Houston Electric.

What caused that?

The biggest piece -- there were two big pieces.

One was tree trimming costs.

We've enhanced and increased our vegetation management program to make sure our service reliability stays outstanding.

Second is, we were hit with some increased transmission costs billed from other utilities in Texas.

The good news is on the revenue side, those increases were offset with revenues.

So the increases look a little bigger than they actually are in terms of hitting the bottom line impact.

Probably those two pieces were more than half of the total increase.

Okay.

Thanks.

I will let someone else answer a question.

Thanks.

Your next question comes from Elizabeth Parrella with Merrill Lynch.

Thank you.

I actually wanted to follow up on a couple of the questions that were just asked.

Just going back on the retail market -- considering getting into the retail mass market, wouldn't that represent something kind of a step back into the business of managing commodity risk?

How do you feel about that in terms of meshing with the current strategy?

Elizabeth, it clearly would entail a commodity risk.

As you know, we have, I think, a very solid competitive gas business.

We sell over 0.5 Tcf of gas a year on a competitive basis.

We manage that commodity risk very effectively.

We have excellent risk management systems in place.

So if we decided to do this, we think that we can put in the proper commodity management systems.

It is a new kind of business for us, and it would introduce the electric commodity back into the picture.

And that's one thing we absolutely have to get comfortable with, if we're going to do this.

Okay.

And then just two related questions on the legal side.

Assuming that the remaining intervener issue is resolved, how quickly do you think you could come to market with the securitization debt?

And then on the other appeal, that is pending of the true-up order itself, you mentioned that you thought the Travis County district court would act expeditiously.

Can you be a little bit more specific in terms of when you think that might be forthcoming?

Okay, I would think that if we had a clearance to go today, we would be 60 days. 60 to 90 days to market.

So that would be, November-ish time frame.

In terms of when the district court rules, we think it will be within two to four weeks is at the -- kind of the latest.

The judge has indicated he is going to take up these matters and issue his findings fairly quickly.

So we don't think it is going to be a long time.

Okay.

Thank you.

You bet.

Your next question comes from Lasan Johong with RBC Capital Markets.

Hi.

President Bush has just signed the release of PUHCA and I'm just wondering how that changes your electric acquisition strategy.

Well, what it does is, up until now, we really were limited to those companies that were adjacent to ours, that were integrated with ours, in order to be able to make an acquisition of an electric utility.

So I think it opens up more opportunities, but, there still has to be something, a value added to make an acquisition.

Okay.

And I think -- the way we look at it is we've got to be able to run the new company better than the old owners are.

It doesn't really make a lot of sense to do.

So I think it does open up a little broader set of companies, but I'm not sure from a practical standpoint, it changes a lot.

Can we assume that the natural [inaudible] sphere acquisition would be in areas where you already own natural gas utilities?

Well, I think that would be an area that would be of interest.

I don't know if that is the only area.

But I think it would clearly be an area that would be of interest.

And just one other question on this retail mass market business.

The core competency of CNP to date has been essentially collecting tolls.

And you said that the risk profile would not change with the introduction of the retail electric mass market business.

Could you kind of help me understand how that does not change the risk profile?

Well, just -- today, we have a competitive gas marketing business.

It is not a tariff.

It is -- we go out and we sell to commercial industrial customers, and we manage that risk.

We do not speculate.

We keep a balanced book.

And that's the same thing we would do on the electric side.

We would not speculate on the commodity.

We would keep a balanced book.

And we have a fair amount of risk management capabilities and tools because of our participation in the natural gas markets.

The way you hedge commodity -- electric commodity prices in Texas is primarily with natural gas products.

Because that's what the incremental or marginal cost of electricity is tied to.

The electric commodity market is not that robust.

So I think we have some skill sets there.

Now -- but we are going to have to be comfortable that we don't introduce an amount of risk here that we're not willing to accept.

Because we're not intending to change our risk profile significantly here.

Certainly not in any way that is material.

I see.

Can you quickly talk about how much it is going to cost you to open up the pilot program on the BPL.

Actually that pilot program has been ongoing since the spring of this year.

We've got a -- we've got about 30-plus customers that have been using Internet service and telephone over the Internet.

We have also opened up a demonstration -- excuse me, a lab where we demonstrate a number of the utility applications -- automated meter reading, outage detection, things of that nature, so this has not been a very costly endeavor for us.

And the main -- the expenses have already been reflected in our expenses to date that we've reported.

And timing on both the mass market retail business, and BPL going commercial.

The decisions?

Yeah, a little longer, I think BPL is something we're definitely going to use on the utility side, without question.

I think it is a little longer time frame, it is not going to happen overnight.

But that's going to roll out over time.

Whether or not we will be involved in the telecommunications business through some type of Internet service or something like that, I think it is way too early to tell whether or not that is a business that there is any money to be made.

It is a fairly competitive business, as you know.

I think -- so it is a longer term decision.

In terms of the retail electric, I would say by early next year, we will be in a position to know for sure what we're going to do.

Thank you.

Your next question comes from Daniele Seitz with Maxcor Financial.

Thanks.

Most of my questions have been answered.

But I was wondering, you were originally thinking that the appeal process would take two to three years.

Could you -- has there been any changes in this expectations or this new developments have changed that?

Oh, the appeal process?

The appeal process we thought it would take three years from the time we started the appeal.

We're now eight months into it.

We're going to get an order -- we think we will get the district court's ruling shortly, and then it will be about another two years from that point.

So think we're right on the three-year timetable that we earlier described.

Maybe a little bit accelerated from what we thought.

Maybe it will be a little closer to two and a half years.

But I think we're still thinking two and a half, three years from the date we began this.

Okay.

The other thing also is that in terms of acquisitions, do you have a sense of magnitude, especially in the retail area?

Or you don't know yet?

I think it is really too early to tell there.

Okay.

Thanks.

Your next question comes from John Tiani (ph) with Credit Suisse First Boston.

Good morning.

Good morning.

Just wanted to clarify one thing on your REP discussion.

Are you thinking of focusing more on large C&I?

Because it seems that your gas marketing business is obviously much more large C&I focused.

I think you keep a pretty balanced book and I believe your bar is actually very low, right around $1 million and that movement into some of the smaller customer segments, such as the small business and residential, entails taking on a lot more weather risk that is not easily hedgeable in the derivatives market.

Whereas in the large C&I space, your customers don't appear to be as weather dependent and you don't face as much switching risk, either.

I think the way you described it is accurate, John.

We have a lot of relationships with large commercial industrial customers.

The way you described their usage profile, I think, is accurate.

So that is our primary focus initially.

But we're going to take a hard look at the mass retail market in Houston, which today we have over 1 million gas customers right here, and so we have a fairly large presence.

Whether that or not that can translate into some value creation for our shareholders with a risk tolerance we can accept, is yet to be determined.

That's what we are really studying today.

Okay.

And then -- thank you for that.

As far as the securitization is concerned, and the one outstanding appeal, is it possible to come to some type of an agreement with that last party on let's say a smaller amount, maybe closer to $1 billion?

Because it seems to me that from their standpoint, you're obviously going to get something.

And they put themselves in a position where they're short interest rates on a very large notional amount and they're paying a significant cost of carry on a fairly sizable notional amount, when they realize -- they must realize that you are going to get some level of recovery.

John, we have had extended discussion with the interveners and we continue to discuss with them.

We haven't found that solution yet.

I think the way you described it is accurate, but we just haven't been able to reach an agreement.

What we're hopeful is that, they'll ultimately say, there is very little risk here for us, because if we would lose on our true-up appeal, there is full protection that nobody gets hurt and they get -- they're not going to pay for something they shouldn't have.

So, from our standpoint, we ought to be issuing 5% bonds.

And they ought to be paying on 5% bonds and not 11% return, which is what we're getting today.

So we've -- we're surprised that we haven't been able to get something accomplished here.

But we continue to push hard.

Okay.

Thanks a lot.

You bet.

Your next question comes from Josh Levin with Lord Abbett.

Good morning.

Good morning.

You talked about being committed to improving your credit rating.

Then you also talked about possibly entering the retail market.

Have you spoken with either of the ratings agencies regarding possibly entering the retail market?

We haven't had any substantive discussions with them, no.

Okay.

Also you talked about your strategic plan on possibly acquiring other businesses.

I mean on the flip side, has management every considered spinning off the gas business?

We have looked at our portfolio, and whether it would be value enhancing for us to sell our -- any of our businesses, and we concluded that there is more value creation with our portfolio than with -- than taking something out of it.

So we have considered that, and we have decided at this time that that is not the best interest of our shareholders.

Okay.

Thank you.

Your next question comes from Vikas Dwivedi with Prudential Equity Group.

Good morning.

I had a question on the interaction of the true-up filing status versus the securitization filing status.

And I know there was a issue at first about the true-up balance had to be kind of free and clear before the securitization could be completed, is that finished now?

Well, the judge in the district court ruled that the commission's order is the final order, and that we can securitize, based on that final order.

But there is still one party contesting that issue.

And if we can -- if we're successful in either that party not appealing or not -- or winning at the Supreme Court, then we can issue securitization bonds.

But it is all around the issue -- around securitization is, is it a final order or not.

We've contended all along it is, the district court says it is and we will see what the Supreme Court says if they appeal it further.

Okay.

All right.

Thank you.

And then on the retail business, the -- what is the ability for your current IT systems to -- just kind of move into, either by scale or scope, electric retail?

I mean is it pretty good transportability from the gas business to the electric at least by way of the infrastructure?

We've done some work around that.

Obviously, it will take some effort to get that done.

I would suspect if we would decide to get in this business, we would have a more low-cost strategy, make sure that this is a business where we can make some money before we spend a lot of money on modifying our IT systems.

And there are some options today to do that.

But we have -- we use SAP, enterprise-wide system, it is a robust system, all our gas businesses are on it, and our old -- our electric utility is not on it at the T&D level -- at the customer care level.

Okay.

All right.

Thank you.

Your next question comes from Joanie Jensen with McMahon Securities.

Hi.

On the securitization financing order, if you're unable to reach agreement with the remaining intervener, what is the worst case time frame for having this go through the Supreme Court appeal?

Well, the law provides for an accelerated process at the Supreme Court, but of course, you can't -- I'm not sure what that means.

I would say, probably six months is what we're looking at.

So in other words, the worst case is six months plus the 60 to 90 days to issue the bonds?

I think that is a fair estimate, and I will have to say that is an educated guess more than anything.

Okay.

Thank you so much.

Your next question comes from Nathan judge with Atlantic Equities.

Good afternoon.

I just wanted to ask, on the dividend, how much importance is there in the Company's mind with regard to securitization and having that finish before you look at the dividend?

I really believe that we need to get this high cost term loan paid off.

We need to understand when we're going to -- when we believe we are going to issue the securitization bonds.

I don't think it has to be necessarily completed.

But I think we have to get a few of these things behind us, before we consider that decision.

As I said in my prepared remarks, we will look at this next year, once we have a -- our sustainable earnings are cleared, then we will decide where do we want to go in our dividend.

Are there any other considerations besides the securitization and the obvious constraint or trying to improve the balance sheet with regard to the dividend?

Is there anything else we should be considering?

Well, we're just looking at sustainable earnings and cash flow.

That will be the primary guide.

You did go over this, but if I could just get some repeated on this, on the convertible bonds, did you mention how many -- what percentage of that has been tendered so far, or agreed to the changes?

Nathan,this is Gary.

At this point we don't have any indication.

I think the date is August 17.

These tend to be -- bond holders will late until very late in the process.

So at this point, we don't have any update on that.

Great.

And then just lastly on the retail business since it has been a lot of questions, I thought I'll ask one.

With regard to the returns on invested capital in that business, and have you looked at that as far as being able to provide or get a return higher than perhaps your competitors over a long term?

Well, we've looked at the -- and what we're looking at today is the ability to make a profit and sustain that profit over the long term.

Obviously, this retail market is evolving.

And the margins you see today may not necessarily stay for the long term.

So we're doing some long-term modeling around that.

And we haven't reached any conclusions as to whether or not this is something we're definitely going to do or not.

Would it be that CenterPoint would provide a superior service or superior IT system?

What would it be that CenterPoint does better than your competition?

Well, I mean part of it is you have very high margins in this business.

You can compete to some degree on price.

But I think that is not sustainable in the long term.

I mean it is a commodity business.

It is going to have to be service.

Great.

Thank you very much.

Your next question comes from David Frank (ph) with Piedmont (ph) Capital.

Yes, hi, good morning.

David, you mentioned you'd looked at selling or I guess spinning off different parts of your businesses and whether it would add value.

I'm just wondering, is that fair to assume that takes into consideration the valuation that ITC recently got on its electric transmission business?

David, we did that analysis before that IPO, so we used what we thought were reasonable valuations assumptions for all our business, so I feel fairly comfortable with our analysis.

But it did not -- I'm not sure if it took into account the specific multiples that that went out at.

Right.

Fair enough.

And David, the other question I had is now that PUHCA is being repealed, why an emphasis on repairing your balance sheet and have you considered a stock buyback even?

We haven't considered a stock buyback.

Our view is that we want a good, strong balance sheet.

We want good credit metrics.

We want an investment grade parent.

We're in -- we're primarily a utility business and it is our belief that utilities need to be investment grade.

And so now, we're not trying to reach AAA credit ratings here, but we want to be -- have a good solid investment grade company and then we -- once we reach there, we will consider some of the things, some alternatives.

Okay.

But we should just think of you as kind of a long-term growth utility story?

We're in this for the long term.

We're long-term operators.

We do -- we build value over the long term.

We can't create value just overnight.

It is something we work at and we build for the long term.

Okay.

Great.

Thank you very much.

Your next question comes from Reza Hatefi with Zimmer Lucas Partners.

Good morning.

Just wanted to clarify the financing order and the potential scenarios.

Meaning that if the intervener decides to drop out or you reach a short-term agreement, you can issue the transition bonds say, early in the third quarter.

And if not, and if it goes on to a Supreme Court decision, you're talking something like six or seven months?

That's right.

I would say it is sometime in the fall that we reach agreement today, versus sometime perhaps the second quarter of next year, otherwise.

Late in the quarter probably.

Great.

And of course, if it goes full bored into next year, there is no telling on the amount?

Anything changed or not, I guess.

The amount will simply continue to grow.

Because it is accruing interest at 11%, and that is about -- that is about $14 million a month on just the true-up amount, not the CTC amount.

And that will be added to what is today about 1.8 billion or 1.9 billion, so it will be a bigger amount next year if we sell -- when we sell securitization bonds than today.

And also, I was wondering for your original issued discounts from the ZENs that are not tax deductible.

What is the amount of that original issue discount?

The amount of interest that is being challenged by the IRS?

Correct.

I guess, the reason your tax rate actually goes up to 40% I guess is as a result of these original issue discounts, which are not tax deductible.

Am I correct on that?

This is Gary.

That is correct.

We described that in the Q and last year's K. It increases at this point, about $12 million per quarter.

I think the amount at this time reserved is about $105 million.

Excuse me, $101 million reserved on that.

And that increases about $12 million per quarter until such time as we resolve that issue.

So 48 million, or 12 million per quarter is not tax deductible.

Is that how I should look at it?

That is the increase to -- I would describe it as an increase to your tax expense per quarter.

Okay.

The way to look at our tax rate for a year, for example, would be -- our normalized rate is federal tax 35%, a little less than 5% for state taxes, so it is a little less than 40%.

Apply that to any pre-tax income, and then you will add 12 million, if it is on a quarterly basis or $48 million annually so you will see that increases your effective tax rate until we resolve that issue.

Thank you very much.

You're welcome.

I think we have just enough time for two more questions.

So if you could go ahead.

Thank you.

Your next question comes from David Grummhaurs with Copia Capital.

Good morning, guys.

Good morning.

A question for you on your interest expense.

From the first quarter to the second quarter it was -- it looks like it was up slightly.

Do you expect that will start trending down this year or are we likely not to see any improvements until the Buffet loan is paid off in November?

This is Gary.

In terms of the interest expense, one thing you have to be careful of is trying to annualize anything.

As you know in the second quarter, we had the receipt of the step two of the Texas Genco sale.

Of course later this year we will have the Buffet retirement refinancing, the termination then of the amortization of the up front Buffet loan fee and then in July we retire the $325 million CERC note.

So what you will see is a continual -- a continued decrease in interest expense, obviously.

The big -- the major timing event of course is the receipt of the securitization proceeds.

I would mention, David, as you know, regardless of the timing of those proceeds, we have a backstop facility that would reduce our borrowing costs by 900 basis points on the 1.310 billion.

So again, interest expense will go -- will continue to decrease based on those events.

But I think what you will find, unless I'm looking at something wrong here, is that interest expense declined from the -- from this year, versus last year, and year-to-date, this year versus last year.

Right.

And that will accelerate, obviously, with the -- we will pay off the high cost term loan, and as Gary mentioned if we just refinance that with the present backup facility, you will save 900 basis points on 1.3 billion.

I think what I was getting at is it looks like from first quarter to second quarter, it went up a little bit, it looks like the 700 million in proceeds coming in from the nuclear plant sale and some of that may be seasonal financing debt at the gas companies.

But it was more trying to understand that.

Plus, we made a large tax payment, over $400 million late in the third quarter;

I think that probably had a little impact.

We paid that off later on in the quarter.

But I think there is a few (ph) round about there.

Second question for you.

The hearings on the amount of the stranded costs that were part of the hearings at Travis County.

Any comments on how that went, and what the judge seemed to be focused on.

I guess it is too early to say.

The judge is a very thorough judge.

He asked both -- all parties to the case lots of detailed questions.

I think it is really hard to say where he is going to come out.

But I think we will know here very shortly.

Okay.

Thanks for the time.

Okay.

One more question.

Thank you.

Your last question comes from Paul Patterson with Glenrock Associates.

Good afternoon, guys.

The pipeline conditions that you guys talked about, how sustainable do you think they are?

Well, there's a couple of things going on.

One, we see basis differentials between the west and east side of our system that are above historical norms, and it's been that way now for six, seven months.

Right.

We expect those will decline over time to more normal levels.

I don't think it is anything that is going to happen tomorrow, but it will decline.

The rest of the uptick is in -- due to the high natural gas market, or prices, we see lots of drilling activity in the mid-continent.

We're connecting lots of new wells to our system.

So I think that will stick around as long as natural gas prices stay high.

And you know what?

There is no indication that I see that natural gas prices are going to fall in the near term.

If you look at the forward strips, they're pretty high.

So you would expect some moderation, but a lot of this to continue for the foreseeable future?

Is that right?

We think it is going to -- a big part of it will continue.

We can't predict the future, when it comes to basis differentials, but we do think, certainly this year a lot of this will continue.

Okay.

And then the weather impact versus normal for the year-to-date, what was that?

Where we've been hurt is in the gas LDCs.

We had milder weather.

I think -- I mean we have some figures here.

Sort of warmer weather for the utility, I am just wondering versus normal on a corporate-wide basis.

Versus normal, year-to-date, we're -- our estimates are we're about $11 million below --

Normal?

But versus last year, we're probably a little above last year, because June was a very warm month in Houston, Texas and our -- and Houston Electric enjoyed the benefit of that.

So probably we're up a little bit versus last year, just because the electric utility -- TDU is having a good year, versus weather.

Great.

Thanks a lot guys.

Thank you.

Ladies and gentlemen we have reached the end of the allotted time for questions and answers.

Ms. Paulsen, are there any closing remarks?

No, that's fine, Angela.

Thank you.

I just wanted to thank everybody for participating in our call today and thank everyone again for their support.

So have a great ret rest of the day.

This concludes today's CenterPoint Energy second quarter 2005 earnings conference call.

You may now disconnect.