CenterPoint Energy Inc (CNP) 2006 Q1 法說會逐字稿

Please stand by for the CenterPoint Energy conference call.

I will now turn the call over to Marianne Paulsen, Director of Investor Relations, Ms. Paulson.

Thank you, Tiffany.

Good morning, everyone.

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

I'd like to welcome you to our first quarter 2006 earnings conference call.

Thank you for joining us today.

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

In a 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.

Our first quarter 2006 earnings release and our first quarter 10-Q, filed earlier today, are posted on our website which is www.CenterPoint Energy.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 Thursday, May 11th, 2006.

To access the replay please call 1-800-642-1687, or 706-645 -9291 and enter conference ID Number 7651247.

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 the call over to David.

Thank you, Mary Ann.

Good morning, ladies and gentlemen.

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

Today, I'll summarize our first-quarter earnings and touch on a few of the factors affecting our results.

Gary will provide the details for each of the business segments as part of his remarks.

I'll also address some of the opportunities as well as challenges that are facing the Company.

This morning, we reported net income for the first quarter of 2006 of $88 million, or $0.28 per diluted share.

This compares to net income of $67 million or $0.20 per diluted share for the same period last year.

Our regulated local gas distribution businesses as well as our electric transmission and distribution utility suffered the effects of an extremely mild winter.

In some of our service territories it was the warmest winter on record.

Financial gas prices also adversely effected customer usage and bad debt expense, compounding the negative impacts on the operating results of these businesses.

These impacts were more than offset by strong performances in our pipeline, field services and competitive natural gas businesses, as well as by a significant reduction in interest expense.

Our pipeline and field services group continues to benefit from higher throughput and ancillary services, while our gas services business captures significant earnings due to gas price volatility and basis differentials.

Overall, we had a very solid quarter which would have been even better with normal weather.

I also believe the value of the diversity in our business portfolio was evident this quarter.

Part of CenterPoint's strength and value, relative to others, is our geographic, regulatory, and business diversity.

I continue to be excited about opportunities that will provide both significant growth potential for our business as well as marked changes in the way we operate.

We are currently enjoying numerous growth opportunities in our pipeline and field services group.

Driven in large part by the current natural gas market dynamics they have the potential to push this segments earnings to a new level.

Last fall our pipeline group announced the project to construct a 172 mile pipeline between Carthage, Texas and our Perryville hub in northeast Louisiana.

This pipeline had an initial design capacity of almost a billion cubic feet per day.

XTO energy signed a ten year contract as anchor shipper for about 60% of that capacity.

Due to demand by shippers for additional capacity, we subsequently increased the pipeline to about 1.2 billion cubic feet per day.

The current estimate of the cost of this project is approximately $425 million.

With timely receipt of permits we hope to start construction later this year and place the project in service within four months or so after the start of construction.

We are currently holding an open season to gauge the level of interest in additional firm capacity which we could add through compression or pipeline looping.

This is an excellent project and a capacity constrained area and is expected to provide attractive returns to the Company beginning next year.

We are also evaluating two additional projects.

Last November, subsidiaries of CenterPoint Energy and Duke Energy signed a Memorandum of Understanding to evaluate market and develop a potential new southeast pipeline connecting our Perryville hub to Duke's partially owned gulf stream natural gas system.

A non-binding open season was held last December and there was exceptional interest shown in the project.

We are in the process of negotiating definitive agreements and if sufficient agreements are concluded this pipeline could go into service as early as mid-2008.

In March of this year, we announced an open season to gauge the level of interest in a major new pipeline that would connect western Oklahoma and the Texas panhandle to pipelines on the eastern side of our present system.

And therefor, to the major consuming markets in the eastern U.S.

Beside providing transport capability for gas reserves along the pipeline it would also transport Rockies Gas via pipeline back hauls.

Projected to be 800 miles in length, the project could be in service as early as the fourth quarter of 2008.

The open season will run through the middle of May, after which an assessment of the viability of the project will be made.

Besides these pipeline projects, we continue to evaluate a number of additional opportunities in our field services business.

I think that it's safe to say that we haven't seen this level of activity in a very long time.

In addition to new growth projects, we continue to focus on ways to run our existing businesses better.

In January, our electric utility, Houston Electric, announced a limited deployment of an intelligent grid technology focused on enhancing the efficiency and reliability of our utility operations.

With IBM as our technology partner, the intelligent grid uses broadband over power line technology to provide real-time data and remote operations capabilities.

This will allow us to use automation, to read electric and gas meters, turn service on and off, detect power outages, and in many cases restore power remotely.

Our ultimate goal is to have fewer and shorter outages, improve operating costs, and higher productivity.

While we're in the early stages of this trial, we're encouraged by the initial results.

We expect to have enough information to make a decision on full deployment in the third quarter of this year.

Besides these opportunities, we have several challenges facing us on the regulatory front.

Of course, I can't recall a time when we didn't have some issues to address from our regulatory perspective.

It just goes with being regulated.

There are three proceedings facing Houston Electric this year.

In December of last year, the PEC ordered the TDU to submit a rate package in April of this year to show that it's rates are just and reasonable.

On April 14 we filed our cost data and other information which supports a 3.7%, or $50 million rate increase to retail energy providers and an increase of $43 million to our wholesale customers.

Discoveries underway and we expect a hearing this summer.

We have had encouraging settlement discussions with a number of the cities in which we provide service and we expect to continue to have settlement discussions with all parties.

If we can reach an agreement with enough parties we may be able to avoid an extended rate proceeding over fairly small changes in rates.

The Commission also initiated a rule making proceeding regarding the appropriate rate of return to use for the competition transition charge.

As part of the final order in our CTC case, the Commission ordered the use of an 11.075% return which is currently Houston Electric's authorized [weighted] cost of capital.

The staff of the PUC has suggested that a debt rate would be more appropriate.

We strongly believe that the current rate should be continued.

We expect the Commission will take action on this rule making in the second quarter of this year, although there is no statutory time frame for the Commission to act.

Also in April, the Texas Utility Commission considered an issue that had been remanded to the Commission by the Austin Court of Appeals following it's review of our 2001 rate case.

It is our view that the Court had asked the Commission to provide a further explanation of the basis for it's decision regarding the amount of projected capital cost that it had approved in 2001 for the TDU's rate base.

In it's April 14 open meeting, however, the Commission indicated that it planed to remove from rate base $57 million and ask it's staff to quantify the impacts and to proceed with compliance filings to implement the results.

In our views the Court's opinion does not compel the Commission to reach the result it did, and in fact, we believe that the Commission could simply uphold it's original order based on the evidence in the record.

If the Commission maintains its present position we will ask them to reconsider.

It's too early to tell what the final results will be in this matter.

In our earnings release this morning we announced that we continue to expect 2006 diluted earnings per share to be in the range of $0.90 to $1.00.

The same range that we announced earlier this year.

In considering our earnings estimate for the year, we made certain economic and operational assumptions including the outcome of the various regulatory proceedings that Houston Electric and our LDC's.

However, it is important to point out that we have excluded from this guidance any impacts related to the ZENS and any associated federal income tax consequences or any consequences of the 2001 re-man I've just discussed.

Before I turn the call over to Gary I'd like to remind you of the dividend action taken by our Board of Directors last week.

They declared a $0.15 per share quarterly dividend payable on June 9th to shareholders of record as of May 16th.

We believe that our dividend demonstrates a strong committment to our shareholders.

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

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

Thank you, David and good morning to everyone.

I would like to discuss a number of items with you this morning; however let me start by providing you highlights about the performance of each of our business segments.

I'll begin with our electric transmission and distribution business, CenterPoint Energy's largest business segment.

Excluding the transition bond company, the TDU reported operating income of $78 million for the first quarter, 2006, compared to $71 million in the prior year, a 10% increase.

Houston Electric's first quarter revenue benefited from the implementation of the competition transition charge, or CTC, through which we are recovering the portion of our approved true-up balance we did not recover through the sale of transition bonds last December.

In addition, the TDU continues to enjoy strong and consistent customer growth, adding nearly 67,000 metered customers since March of 2005.

However, milder weather and decreased customer usage tempered revenue growth in the quarter.

Operating expenses, excluding the impact of transition bonds, were essentially flat quarter-over-quarter.

Higher expenses related to transmission costs billed to us from other electric utilities, costs associated with staff reductions and higher franchise fees, were mitigated by gains from a sale of land.

Our pipeline and field services segment had another excellent quarter.

This group achieved operating income of $73 million in the first quarter of 2006, an increase of $9 million or 14% over the same quarter of 2005.

Both our interstate pipelines and our field services operations contributed to the operating income improvement in this segment.

Let me give you the results for each.

The interstate pipelines recorded operating income of $49 million for the first quarter of 2006, which was a $1 million increase over the prior years quarter; however, excluding one-time favorable items recorded in the first quarter of both years, operating income actually increased by $4 million or 9%.

The improvement was primarily driven by an increase in system capacity, combined with increased transportation across our systems due to significant natural gas basis differentials as well as increased balancing and ancillary services.

Our field services business had another outstanding quarter.

This business includes our gas [gizing] and processing operations as well as Service Star, our wellhead monitoring and communications service.

Field services had operating income of $24 million for the first quarter of 2006 which was a 50% increase compared to the first quarter of 2005.

The improvement was primarily driven by higher throughput due to increased well connects, increased services and the benefits of higher commodity prices.

In addition, our field services business had a 50% interest in a jointly owned gas pricing operation, the Waskom plant in east Texas.

We recorded equity income of $2 million in the first quarter of 2006 related to our 50% interest compared to $1 million in the first quarter of last year.

These financial results are recorded and other income and expense and are not captured in this segments recorded operating income but are a part of the business.

Our regulated natural gas distributions segment reported operating income of of $103 million for the first quarter of 2006 compared to $123 million for the prior year.

Improvements in operating margin that we achieved through rate increases and by adding almost 42,000 customers were more than offset by the negative effect of warm winter weather and decreased customer usage and increased bad debt expense resulting from high natural gas prices.

In addition, we incurred $6 million in costs associated with staff reductions in this segment.

We are working diligently to improve the financial performance of this segment and expect that the results of the rate cases we have pending, combined with operational productivity improvements that we are pursuing, will enhance the financial performance of this segment.

Next, I'd like to review our competitive natural gas sales and services segment.

This is our non-rate regulated natural gas sales and service marketing business operated by CenterPoint Energy Services or This is our non-rate regulated natural gas sales and service marketing business operated by CenterPoint Energy Services or CES. .

As a reminder, CES is engaged in the marketing of physical natural gas and services to nearly 7,000 retail and wholesale customers ranging in size from small commercial customers to large utility companies.

CES maintains the portfolio of natural gas supply contracts and utilizes owned and contracted pipeline capacity and storage to fill customers requirements.

It's profitability is driven by optimizing its overall supply and asset positions to take advantage of market opportunities and by growth in it's customer base.

We're pleased that this segment achieved excellent financial results this quarter.

With operating income of $25 million compared to $16 million for the first quarter of 2005, a 56% increase.

A significant portion of the year-over-year operating income increase was a result of greater wholesale activity combined with a continuation of natural gas price volatility, partially offset by $13 million write-down of natural gas inventory to the lower of average cost or market.

I would like to point out that we recorded this right down to current market prices based on the decline of natural gas prices from year-end 2005 levels; however since we have hedged future sales for the periods when we expect this inventory to be delivered, we should realize an increase in operating income in those future periods.

While no one can predict how long the current dynamics and the natural gas markets will last, we are very pleased that we have positioned ourselves to take advantage of those dynamics by providing the services and products our customers need in this environment.

In summary, even in the face of less than favorable weather, we had a good quarter, and as David mentioned we believe our financial performance demonstrates the benefits of our diverse business portfolio.

Now, I'd like to update you on our income tax rate for the quarter and discuss the impact of the zero-premium exchangeable subordinated notes or ZENS.

Our first quarter 2006 effective tax rate of 45% included the addition of $14 million or $0.04 per diluted share to the reserve, to the tax reserve related to Z ENS.

The total tax reserve as of the end of the first quarter of 2006 for the ZENS issue is now now $135 million.

You may recall that we established this reserve when the IRS took a position that would deny us the current-period tax deduction that we have been taking in connection with this security.

The Company disagrees with the IRS and we are contesting the issue.

The matter is currently in the IRS appeals process and we're hopeful that we can reach a resolution before year-end 2006; however we cannot predict with certainty either the timing or the result of the appeal.

Let me now remind you of the changes to our bank credit facilities during the first quarter of 2006.

Over the last 3 years we have steadily and significantly enhanced our liquidity due to improvement in size, price, and tenor of our working capital facilities.

In March, we further improved each of our three bank credit facilities, which now mature in 2011.

We increased the parent Company's revolver to $1.2 billion from $1 billion and lowered the first drawn interest rate to LIBOR plus-60 basis points.

We increased the revolver at CenterPoint Energy resources, our natural gas subsidiary to $550 million from $400 million and lowered the first drawn interest rate to LIBOR plus-45 basis points.

And we increased the revolver at CenterPoint Energy Houston Electric to $300 million from $200 million and lowered the first drawn interest rate to LIBOR plus-45 basis points.

All of these actions reflect a consistent and significant steps we have taken to improve the credit metrics of both the parent Company and our utility subsidiaries by reducing leverage and corresponding interest expense.

In fact let me point out that interest expense, excluding interest related to our transition bonds, declined by $58 million to $115 million.

In addition, we are pleased that both of our utility subsidiaries have investment grade credit ratings with a stable outlook.

Our goals since our formation has been not only to achieve financial stability but also to obtain the financial flexibility needed to invest in and grow the profitability of our businesses, and we have done so.

Now let me discuss our financial priorities as we move from our transition phase and turn our full attention to improving and growing the profitability of our businesses.

As David mentioned, we have a number of excellent growth opportunities.

We plan to finance these opportunities as well as our ongoing capital requirement through internally generated cash flow and if required, the optimum mix of debt and equity.

And we remain committed to take the steps necessary to maintain and enhance the credit metrics and credit ratings of both the parent Company and our utility subsidiaries.

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

Thank you, very much, Gary.

We'd now like to take your questions but in the interest of time, I'd ask you to please limit yourself to one question and a follow-up.

So, Tiffany would you please give the instructions on how to ask a question?

[OPERATOR INSTRUCTIONS.] Your first question comes from Danielle .

Hi.

This is Daniele.

I just wanted to ask you, how much rate increases do you have pending currently in your gas operations?

We have one major increase pending and it's in Minnesota.

We filed a rate increase last year for a little over $40 million.

The Commission approved an interim rate that we put into effect earlier this year of about $34 million, and we have held that hearing and we expect to get a decision on that case probably early fall.

Okay.

Thanks.

I'll come back.

Your next question--

Tiffany?

Hello?

Your next question comes from Elizabeth Parrella with Merrill Lynch.

Thank you.

Wanted to ask, on your discussion of the regulatory issues for the electric TDU's, the third item that you mentioned in terms of the Commission suggesting that $57 million-- I guess come out of rate base.

Are they indicating that there should be a revenue change associated with that or are they going to roll that into the show-cause proceeding on rate of return or would it just be-- would there be a revenue change in the next time you filed a rate case?

What would be the kind of the impact of doing that if they proceeded with that?

Elizabeth, we haven't seen a written order and the Commission didn't take a long time in the open hearing when they addressed this issue, I guess a couple weeks ago, but I believe that yes, it would have an impact on our current rates regardless of this show-cause order we're in now.

So it does address our current rates and I don't think that it's going to be wrapped up in this proceeding that we have going on right now.

Okay.

Thank you.

Next question?

Your next question comes from Lasan Johong with RBC Capital.

Sir, your line is open.

Thank you.

Quick question on what Gary's last comment.

Am I to understand that CenterPoint is not looking to do any capital markets activities for all of it's growth projects including the 3 pipeline, the potential 3 pipeline projects?

No.

I think what we're doing is, as you know, we generate a significant amount of cash, Lasan, and I really think that it's really waiting to do the optimum mix of debt and equity.

So I don't think that we're ruling anything out.

We're going to finance these in the most optimum way.

As you know now though that those projects are in front of us and I think that we have time to make the right decision on that.

I see.

And could you quickly review along what lines of discussions are going on the rate case for Houston Electric?

Thank you.

You know, I will say that we've had good discussions and they've been frank, candid discussions trying to find a solution to this issue.

I don't think that we're at liberty to discuss and reveal what those discussions are at this time.

We're still talking to the other parties, but we feel encouraged by it but we're not -- we don't have an agreement certainly with all of the parties and we're continuing to work on that.

Your next question comes from Faisel Khan

Good afternoon.

With Citigroup.

Good afternoon.

Good afternoon.

Just want to make sure that I understand the guidance-- so your guidance for this year includes the reserves you're currently taking right now on your taxes; is that right?

It does not.

It does not.

So, the guidance is using a more normalized tax rate?

Right.

Our guidance is based on basically-- what we're producing from our continuing operation excluding this kind of anomaly related to the ZENS that we hope to resolve later this year.

Okay.

And what did you guys do in 2005 from the commercial energy services business?

We made $60 million in operating income there.

That was up from about $45 million in 2004.

Okay, thank you.

Your next question comes from Paul Ridzon with KeyBanc.

I have a question on some of the unusual items.

You mentioned a land sale gain and then just the other one you talked about was a $13 million right-down of gas and inventory.

That would come back eventually and I was wondering the tenure of when that would come back.

Well of the inventory, this is Gary, on the inventory this is a $13 million right-down again following normal accounting procedures, as you know natural gas prices decline.

I think you'd probably look at this over the next year.

It could be a bit longer but basically in the next, , maybe a bit shorter than that but I would say through the winter, so I would think of that from March to March is the way I would look at it, it should reverse.

And to say reverse, we'd realize the margin on that.

As you know, we do hedge the sales forward.

And on the land sale gain?

This was simply some property that we sold at our Electric Company and it was a large gain from the sale of land that we had held this land many, many years, and I think that it was on the order of $14 million gain and the way that the accounting worked for that, it's actually a credit in your operating expenses as opposed to reported as a gain.

So it offsets some of the expense increases we had in our business.

That's an after-tax or pre-tax number?

Pre-tax.

Thank you.

Your next question comes from Michael Goldenberg with Luminous Management.

Good morning, guys.

Good morning.

Had a question for you regarding the discussion on the return on the stranded costs that are currently taken out by Commission.

I guess my first question is, could you just remind me again as to exactly what the schedule is for the proceeding?

And secondly, could you just talk about how the Commission is approaching this?

How do they view these costs and how that's ultimately their approach and they are thinking about it, these things will effect the outcome hopefully in your favor?

Well, the schedule is really there's no statutory time frame.

We think they'll take it up in the second quarter.

The parties to the case have filed their briefs and pleadings and in terms of approach, the Commission has considered this issue on five or six different occasions between our Company and AEP and they have always found that this was the appropriate rate, the 11.075%, which was our rate in 2001.

So we're not sure what they're going to do here.

It would purely be speculating but we believe strongly that it should be a weighted cost of capital, it shouldn't be just a debt rate.

And the only alternative that we have provided is that-- if they update the cost of capital in a rate proceeding, they could use an updated cost for this investment we have.

But I think it'd purely be a guess on my part to know where the Commission is going to go with this.

I think that we've provided really good testimony in this case and I think we're just going to have to wait and see where they go with it.

Okay, just to follow this up, so if the Commission were to follow precedent, they would basically side with you; that's No.1, and No. 2, if they were to update cost of capital and use your current ROE which is 11.5%, I think, could you tell us what that cost of capital would blend into if they did adopt your methodology?

There wouldn't be much of a change.

I mean if we believe 11.25% is the right ROE, the fact is our cap structure we're arguing should be 50% equity and 50% debt, so I haven't run the numbers out but I imagine it would be probably very close or maybe a little higher than the 11.075%.

It would be just a tad higher than that under our proposed capital structure and return on equity.

What's the cost of debt?

It's about 6.8% our blended cost of debt that we filed in this case.

So if it's 50% of 6.8 then 50% of 11.25?

Right.

Okay.

Got it.

But your saying, your impression is the Commission should side with you?

Well, I would love for them to, Michael, but that would purely be conjecture on our part.

I think we'll just have to wait and see.

I think that there's a lot of good testimony in this case.

We feel optimistic but that doesn't mean that we're going to be right so I think we have to let this play out.

Gotcha.

Thanks a lot.

Your next question comes from Charles Finner with Prudential Equity Group.

Good morning, guys.

Good morning.

Two questions; first one: what's the status of the normalization issue that disclosed in the K?

Really, there's been no new developments there.

The IRS has not finalized those proposed regulations yet.

Now, we did appeal that issue in the Appeal of the Commissions order and there has been no action at the appeals level on that, as yet.

So really, no new developments there.

I think first the IRS has to take final action and then we did have that item on appeal though.

Okay.

Second question: You took some severance charges during the quarter and you mentioned something about productivity improvements going forward, do you have any sort of productivity improvement goal on an annualized expense basis or is there any sort of guidance that you can give there?

Well, the charge we took I think was $8-10 million this quarter that in packed both Houston Electric as well as our LDC's.

We expect at least that much savings on annualized basis on a go-forward after we get out of this quarter.

So we are continuing though, to look at ways to improve the business model and to operate these businesses more efficiently.

We have a number of things we're working on that we will be implementing as the year plays out, but we haven't really quantified exactly what that number is going to be at since it's still in development but there's still more to come there.

Thank you.

Your next question comes from Josh Golden with J.P.

Morgan

Hi, thank you.

Quick question.

You talked a little bit about some of your credit ratings and aspirations there currently your split rated at the holding Company in mid to low triple D at the of-co, just what exactly are your aspirations?

Do you have particular targets that you want to achieve in terms of credit ratings?

We do, because our credit ratings as we said from day one are solid investment grade credit ratings are important for the business and the type of business that we do and our aspirations are to improve them.

Certainly we aren't comfortable being split rated.

As a parent our utilities, of course are as you mentioned BBB minus and a stable outlook so aspirations are continuing to improve these credit metrics and we're going to do that through a creed of projects a creed of [inaudible] the right mix of debt and equity.

So, our goal is certainly move these up and we need to be solid BBB and above in both the parent company and the utilities especially.

Josh, I basically believe that we need to be an A-rated credit in our utilities longer term.

Now we can't get there overnight, but for a longer-term aspiration, at least low single A's is where I'd like to see us get.

Okay.

Thank you, gentlemen.

Your next question comes from David Grumhaus with Copia Capital.

Good morning, guys.

Good morning.

On your LDC businesses, obviously had bad weather.

You talked a little bit about bad debt as well.

Are there particular geographies or utilities where you're having issues or is it sort of across-the-board?

Well, in terms of weather, it was across-the-board.

We had just extremely mild weather.

Weather tends to effect our northern utility more than our southern utilities.

We have a little less weather sensitive down south, but I would say that it kind of cut across-the-board in several jurisdictions, certainly our northern most, Minnesota this was the warmest winter on record, they have a rate design that is weather sensitive.

If they don't sell gas, they don't fully recover all of their cost and return.

From an ROE perspective, if you weather-normalize it, are there particular jurisdictions that are well under earning?

We have several, I would say, the biggest one is Arkansas.

We were very disappointed in our rate case last year, where we came out of that without any rate increase.

Matter of fact , it was a rate decrease but they changed depreciation rates so from an earnings standpoint it didn't impact us negatively, but we plan to go back into Arkansas and see great relief there.

If we continue at the performance level that we are in that state.

And would that mean this year?

Probably late this year.

We haven't finalized the timing there but that's my expectation is late this year.

It could be early next year but I expect it to be late this year.

And any other jurisdictions where you're well under earning?

We just finished putting in new rates in all the Texas [environs] and small cities so I think that we're okay there now for a number of years.

The city of Houston, one of our biggest areas we're fine.

Louisiana and Mississippi we're fine and Oklahoma, so I think that it's Arkansas and Minnesota are the two areas that we really need rate relief, and of course we're right in the midst of the case in Minnesota today.

Minnesota you got a big interim increase, I realize that it's subject to final approval.

Right.

On a weather-normalize is it fair to say with that you're earning near the allowed?

If we would achieve the interim rate, yes.

We would absolutely be probably right on the money there, maybe a little low but with -- we continue to look for efficiency saves there too.

Okay.

Thanks for the time.

Your next question is a follow-up question from Elizabeth Perrella with Merrill Lynch.

Is it possible for you to quantify the weather impact on the quarter on the electric and gas businesses?

From a normalized weather basis and these are the way we estimate these are through models, but it's about $20-- almost $25 million.

It's about $8 million or so at the electric utility and $16 million at the gas LDC's versus normal weather.

We tend to think that we may understate the impact of whether a little bit on the electric side so it could be a little bit more than that, but it's in that ballpark, Elizabeth.

And those are pre-tax numbers?

Those are pre-tax numbers.

And just to clarify on your earnings guidance the$0.04 additional reserve you took in the quarter for the tax reserve related to the ZENS, is excluded from the $0.90 to $1.00 guidance?

Yes.

Okay, thank you.

Okay.

Your next question comes from Faisel Khan with Citigroup.

Just had a couple of follow-up questions.

One is in terms of well connections that you get at your field services business what do you guys see this last quarter versus sequentially the quarter before?

We were up fairly significantly quarter-over-quarter.

You might recall we reported last year that we had something like a little less than 400 well connects last year.

We had projected that would slow down a little bit this year, but in fact it hasn't.

We connected well over 100 wells in the first quarter versus last year it was a little less than 100, probably we probably got 20-plus more wells connected this quarter than we did the same time last year.

Okay.

And was there any market-to-market impacts at all in the quarter from your energy, your international gas supply business?

I think they were immaterial.

It was probably $1 million or so, but it was essentially very modern.

And then one question on the appeals process regarding the, your appeal to increase your stranded cost amount, where does that stand right now in the courts?

It's at the appeals court level.

Those hearings, those briefings have been filed and they have not scheduled oral arguments yet.

We had hoped they would do that before June because they tend to not hear arguments in the summer, but they have not scheduled as yet, so I guess it could be as late as fall before they hear the oral arguments, but really, nothing more to report there than we've done in the past.

Okay, thank you.

Your next question comes from David Frank with Pequot Capital

Yeah, hi.

Good morning.

Good morning, David.

Dave, could you and I apologize if this was asked already , what was the ROE that you filed with or can you tell us what the ROE for HLMP that you filed with the Commission recently ?

11 flat, I think.

Or it was 11.25.

I think it was the same rate that we had approved in our last case, David, 11.25%.

Okay and that's on roughly a 50% capital, 50/50 cap structure?

Yes.

And, David, is it possible for you guys just to talk a little bit about what some of the driving influences this year on the electric utility are, such as you mentioned I think in the past higher [aircot] transmission expenses, is O&M up and things that might be working for you obviously the savings from the buffet loan would be a big factor.

Right.

From a revenue side, David, we still have really robust growth here.

We saw $60,000-- $6 or 7,000 last year and we continued to see growth in the 3% range so that's really good news. ow, having said that, we have very high electric retail prices here and there is some concern that you'll see some conservation by customers as a result of high electricity prices and obviously that will impact us if the volumes do go down.

We haven't been able to quantify that, a material amount yet, but we're cautiously watching that.

On the expense side, T-cost, net T-cost is going to be up a little bit.

Not a lot.

That's the good news.

We continue to spend some additional money to insure reliability, tree trimming, maintenance, and that will push costs a little bit higher but we're also looking for ways to become more efficient, so we're hoping that there not going to be any huge cost drivers on that side.

So I think that the main thing on Houston Electric is the rate filing and the show-cause order, we need to get through this and make sure we come out okay.

Obviously storms are something we can't control, and we've seen what happened last summer and we were fortunate that we didn't incur a huge amount of dollars.

I think it cost us around $30 or 40 million, but those are always unknowns.

Don't have huge impacts in terms of expense because most of those are deferred, but obviously it impacts the whole service territory, and growth.

Okay.

Well thank you very much.

You bet.

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

Hi, guys.

Good morning.

Just two quick questions here.

Could you quantify the impact of the increase in bad debt expense in the quarter and just tell us how that compares with your expectation?

Yeah, let's see here.

Bad debt wasn't up as much as we predicted and the reason is because revenues were not up and gas prices, to be very honest, weren't quite as high as we thought they were going to be.

I think bad debt at the LDC's were up probably $3-4 million.

We had projected a much higher increase there, so I think with -- that's one of the favorable impacts of mild weather.

The bill didn't get as high as they otherwise would have gotten and we didn't have as much bad debt expense.

Okay.

And separately, on the ZENS issue?

Initially, I know you had hoped that this could be resolved with the IRS by mid-year.

It seems like the time frame may be slipping a little bit.

Is it possible that this could go into 2007?

Do you have a feel for that?

Well as I said earlier, we had hoped to have it revolved by year-end.

I don't expect it to slip -- these are issues that obviously both parties take seriously and we're actively involved in the briefing process an the process with the appeals officer so I would not expect it to slip and we will hope to have it revolved this year.

Great.

Thank you.

Your next question comes from Daniele Seitz with Dahlman Rose.

Thanks.

I just was wondering what type of a return are you estimating on this pipeline construction?

Is there any way you can give us a hint on that?

Well I will give you a hint.

That's probably a good way to describe it.

We evaluate these projects using a typical pipeline capital structure typically 50/50, maybe a little higher equity and use solid pipeline returns in the 11 -12% equity return, so and these pipelines they meet all of those tests, so but beyond that, I think that it would not be appropriate for me to say much more than that.

Oh, that's okay.

Thank you.

Your next question comes from David Grumhaus with Copia.

A couple follow-ups.

The ZENS charge that you took this quarter, is that about, will that be pretty even in each of the next 4 quarters or does that move around with your income level?

Well, if we have to, you know, if we don't get a resolution I think it will be fairly even.

I think hopefully we'll get it, but if we don't it'll probably be $0.03 or $0.04 a quarter.

Okay.

And then you talked about the opportunities in the pipeline side.

You gave a cost number on the first one.

Can you give us a cost number on both the Duke pipeline as well as the western Oklahoma or the eastern system pipeline?

Well, let me kind of give you some parameters here.

One is on the Duke pipeline, that's obviously a joint venture.

We haven't sized that pipe yet because we just don't know how much demand and long-term contracts we can sign up, so the project could be probably as low as below $500 all the way up to $600 million.

Now, we would expect this to be and it will be a 50/50 joint venture.

We will finance it, a large part at the project level, and if you use some conservative estimates you've put 50% leverage on the venture, you're talking about $150 million, $125-150 million worth of investment on our part, probably in a project of that size.

Now, on the one we call the mid-continent crossing, which is a much longer pipe, that's 800 miles, I would say you're pushing somewhere between a $1.5 billion a pipe, maybe a little north of that.

I would also say, I would expect we would have a joint-venture partner in that as well, so once again, we would do a fair amount of financing at the project level and then so our actual investment requirements would not be really big.

It would be a good project for us, but I think we could deal with the capital requirements, very handling

That's helpful.

Thanks.

Okay, Tiffany, I think we have time for one more question.

Okay your next question comes from Lasan Johong with RBC Capital.

Thanks.

Sir, your line is open.

Yes, thanks.

Quick question on the comment in the press release that said that the gas sales utilities were up.

I'm wondering how that reconciles with the fact the weather was much warmer.

Well, I'm sorry, is this the gas LDC's?

Yes, gas LDC's.

Well the only thing that I can think of is the price was greater in the first quarter of this year than last year, but let us take a quick peek at that.

Okay and while you're looking at that I just want to follow-up question on the IRS tax charges.

My understanding was it was going to be a fairly flat $12 million and it went to $14 million this quarter.

Did I misunderstand the previous guidance?

No.

I don't think you misunderstood.

I think that we said it was a range $12-15 million, so no.

It moves around and depends on a number of variables, Lasan, that I had mentioned before, but it's going to be in that zip code, significantly more--

Got it.

--or significantly less than that.

And again as I said, we're confident that this will be resolved this year and-- but at this point we'll be taking this reserve until such time we do have this issue resolved.

Okay.

Lasan, I think simply the natural gas prices were greater in '06 than in '05, and so it's not -- it was reduced volume but higher price so that's the reason you had revenues higher.

Okay.

Thank you.

Okay.

Thank you very much, everyone, for participating in our call this morning.

We very much appreciate your support and have a great day!

This concludes CenterPoint Energy's first quarter 2006 earnings conference call.

Thank you for your participation.