CenterPoint Energy Inc (CNP) 2006 Q4 法說會逐字稿

Good morning and welcome to CenterPoint Energy's fourth quarter and full year 2007 earnings conference call with senior management.

During the Company's prepared remarks, all participants will be in a listen-only mode.

There will be a question and answer session after management's remarks. [OPERATOR INSTRUCTIONS]

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

Ms. Paulsen?

Thank you very much, Casey.

Good morning, everyone.

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

I'd like to welcome you to our fourth quarter and full year 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 fourth quarter and full year 2006 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 their prepared remarks.

Our earnings press release and Form 10-K 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 Wednesday, March 7, 2007.

To access the replay, please call 1-800-642-1687 or 706-645-9291 and enter the conference ID Number 6934500.

You can also listen to an online replay of the call through 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 will now turn the call over to David McClanahan.

Thank you, Marianne.

Good morning, ladies and gentlemen.

Thank you for joining us today and thank you for your interest in CenterPoint Energy. 2006 was a good year for us and I'm pleased to summarize our performance.

Let me begin with an overview of our fourth quarter 2006 results.

This morning, we reported net income of $67 million for the fourth quarter of 2006, or $0.20 per diluted share.

This compares to net income of $81 million or $0.25 per diluted share for the same period last year.

Net income for the fourth quarter of 2006 includes the impact from the final settlement of the Company's ZENS tax issue which reduced earnings by $12 million or $0.04 per diluted share.

Gary will review the resolution of this issue in his remarks.

Operating income was was $235 million for the fourth quarter of 2006 compared to $252 million for the fourth quarter of 2005.

The decline in operating income for the quarter was driven in part by milder weather and decreased usage at both Houston Electric and our gas utilities, which reduced their operating income by approximately $26 million.

Houston Electric implemented a base rate reduction in the quarter and increased its spending on low income assistance and energy efficiency programs which reduced operating income by another $19 million.

In addition, our Minnesota LDC wrote off $21 million of purchase gas cost related to the years 2000 to 2004 that were denied recovery by the Minnesota Public Utilities Commission.

These impacts were partially offset by continued solid customer growth in our service territories which, together with rate increases at our LDCs, added over $16 million to operating income.

Our Interstate Pipelines, Field Services and Competitive Natural Gas Marketing businesses reported solid results due in part to the continued favorable dynamics in the natural gas marketplace.

I think it is important to note that the market dynamics in the fourth quarter of 2005 were extremely favorable due to the impacts of Hurricanes Katrina and Rita which makes the 2006 fourth quarter results all the more notable.

Following the completion of a thorough analysis of the market potential and the associated economics, we also made the decision to discontinue the development of the Mid-Continent Crossing project.

This resulted in the write-off of approximately $11 million of project development costs.

While it remains clear to us that additional pipeline capacity is needed to provide market access for the Barnett , Woodford and Fayetteville shale reserves, as well as some other mid-continent reserves, we concluded, along with our joint venture partner Spectra, that the project was not viable at this time.

Discussion with producers in these areas are ongoing and we will continue to evaluate other potential opportunities.

Now I'd like to review our full year 2006 performance and highlight a number of significant events.

Overall, 2006 was a solid year for us and I believe that we're continuing to make progress in achieving our business and financial objectives.

Net income for 2006 was was $432 million or $1.33 per diluted share compared to $252 million or $0.75 per diluted share last year.

Our 2006 full year results include the impacts from the resolution of both the ZENS tax issue and Houston Electric's 2001 unbundled cost of service remand.

Excluding all of the impacts related to these issues, our full year 2006 earnings would have been $1.11 per diluted share.

As you may recall, our earnings guidance on this basis was $1.00 to $1.10 per diluted share, so we came in slightly above the top end.

Houston Electric reported operating income of of $450 million for 2006 compared to $448 million in 2005.

Customer growth remained strong.

In fact, 2006 marked the tenth consecutive year that customer growth was 2% or better.

However, we were negatively affected by milder weather and some reduced customer usage which we believe was a response to high retail electricity prices.

We've seen some moderation of prices in recent months.

During the year, Houston Electric reached the settlement of its rate case, the effects of which were implemented in October.

As part of the settlement, we agreed to reduce our base rates by by $58 million per year and to increase our spending on energy efficiency and low income assistance programs by a total of $20 million per year.

The settlement also resolved all issues regarding the remand of the 2001 new cost proceeding for which we recorded a $32 million charge in the second quarter.

We are pleased with the operational performance of Houston Electric and as important to have these issues behind us.

We now look forward to rate stability and certainty which will allow us to focus on improving our operations and financial results.

Our Natural Gas Distribution business reported operating income of $124 million for 2006, which was a $51 million decline compared to 2005.

We obviously were extremely disappointed in these results.

The main drivers of the decrease were mild weather, reduced customer usage driven primarily by high natural gas prices, costs related to staff reductions, the purchase gas cost write-off in Minnesota, and higher bad debt expenses.

On the positive side, we continued to benefit from solid customer growth, adding over 42,000 customers in 2006 and the implementation of new rates and increased service fees.

Last month, the Minnesota Public Utilities Commission issued a final order granting a rate increase of $21 million to our Minnesota LDC.

Interim rates have been in effect since January of last year so this increase was already reflected in our 2006 revenues and results.

Last month, we also filed a rate case in Arkansas requesting additional annual base revenues of of $51 million.

As part of this filing, we proposed a mechanism that would help to stabilize revenues, minimize the need for future rate cases, and be consistent with the Arkansas Commission's initiative to promote energy efficiency.

We expect a decision from the Arkansas Public Service Commission later this year.

In late 2006, we made a number of changes to improve the operational and financial performance of our gas LDCs.

We have reorganized the businesses into regions in order to reduce structural costs, eliminate duplicative functions and ensure the implementation of best practices across all our service territories.

In addition, we reorganized our regulatory organization to more effectively pursue rate strategies, to mitigate the impact of weather and decline in customer usage and earn our authorized returns.

Given these changes, together with the more normal winter weather we've been experiencing, 2007 should be a much better year.

Our Competitive Natural Gas Sales and Services segment had a very good year.

It reported operating income of of $77 million in 2006 compared to $60 million in 2005.

This business continues to benefit from natural gas price volatility in both locational and seasonal price differentials.

Operating income in 2006 reflects a a $66 million write-down of natural gas inventory due to declines in natural gas prices during various times of the year, offset by a $37 million favorable change in unrealized gains resulting from mark-to-market accounting for financial derivatives used to lock in economic gains to be realized when the gas is sold.

This business owns or has under contract a significant amount of gas storage which provides for substantial opportunities but does create the potential for the related accounting impacts experienced in 2006.

We plan to continue to profitably grow this business by leveraging our market knowledge scale and capabilities.

Our Interstate Pipeline segment continued its trends of strong performance with 2006 operating income of of $181 million, up about 10% compared to 2005.

This increase was driven by strong demand for transportation and ancillary services.

Our pipelines also benefited from the sale of excess cushion gas which was no longer required as a result of improvements we made at one of our gas storage facilities.

We are are pleased to have had several opportunities to grow our Pipeline business.

These growth opportunities have the potential to push this segment's earnings to a new level.

In the fall of 2005, our Pipelines announced a project to contract a 172-mile pipeline between Carthage, Texas, and our Perryville hub in northeast Louisiana.

Last October, we received PERC approval and began construction.

We had initially expected the first phase of this pipeline with a capacity of about 1 billion cubic feet per day to be in service in the first quarter of 2007.

However, we experienced an exceptional amount of rain along the construction path and had a number of areas completely under water for an extended period of time which has delayed completion of certain parts of the new pipeline.

We now anticipate that the first phase of Carthage to Perryville will be in service in the second quarter of this year.

We continue to expect a second phase to be placed in service late this summer, bringing the capacity to a little over 1.2 billion cubic feet per day, and based on strong interest for a third phase, and subject to the receipt of regulatory approvals, we plan to expand this project to a total of 1.5 billion cubic feet per day by increasing the maximum allowed operating pressure.

This remains an excellent project in a capacity constrained area and is expected to provide attractive returns.

Once the three phases are complete, we expect that this project should add between $85 to $95 million of operating income per year.

A second major project under development is the Southeast Supply Header or SESH, a joint venture with Spectra.

In August, Florida Power and Light signed an agreement for about half of the plan, 1 billion cubic feet per day capacity.

In December, SESH signed agreements with affiliates of Progress Energy, Southern Company, Tampa Electric and ELG Resources bringing the total subscribed capacity to 945 million cubic feet per day of the 1 billion cubic feet capacity.

We expect that the total cost to build this pipeline will be in the range of $800 to $900 million.

This project is expected to be in service in mid-2008.

Natural gas production areas near our existing pipeline remain very active and additional pipeline capacity is needed to get these reserves to market.

We remain very active in pursuing other projects.

Our Field Services segment reported operating income of $89 million in 2006, a 27% increase compared to 2005.

Field Services again benefited from strong drilling activities in the Mid-Continent area with over 400 new well connects added in 2006.

This is the third year in a row that we've experienced that level of activity.

Last year, we approved capital expenditures of over $100 million for new growth projects, a portion of which we will spend in 2007.

This compares to average expenditures of $30 million or so in prior years.

We continue to be very pleased with the financial results of this segment.

We will continue to grow earnings through on-system expansions combined with leveraging our skill set and customer relationships to capture off-system growth opportunities.

Now let me provide you an update on some other initiatives.

Houston Electric continues to invest in new electric transmission infrastructure.

Our Hill-G project, which is a high voltage line designed to improve reliability and relieve congestion, is expected to go into service later this year.

In 2006, we invested almost $100 million in various electric transmission projects.

Over the next five years, we expect to invest over $400 million in a number of other transmission projects in our service territory.

Under the terms of our electric rate case settlement, we have the ability to seek a change in our transmission cost of service rates in 2008 to earn on our investment in these transmission projects.

Houston Electric is also actively pursuing a distribution grid automation strategy which involves the implementation of an intelligent grid using broadband over power line technology.

We are currently installing approximately 10,000 smart meters to further evaluate any issues relating to systemwide implementation.

This exciting technology has the potential to significantly improve metering, grid planning and the operation and maintenance of our system while providing the market with on-demand retail usage data.

We believe this technology will improve the operational efficiency and reliability of our system while furthering retail electric competition.

The Texas PUC has proposed incentives to provide more timely recovery of automated metering investments.

We expect the final rule to be approved later this year.

Any decision to move forward with a comprehensive systemwide implementation will be contingent upon successful results in the limited deployment program and our ability to recover the investment on a timely basis through rates.

We're very pleased with all these projects and continue to seek additional opportunities that fit our energy delivery strategy.

Finally, let me provide a brief update on our true-up appeal.

As you recall, we have appealed decisions by the Texas PUC that in the aggregate total $1.3 billion.

Interveners have also appealed various aspects of the PUC's final order.

Our appeal remains at the Third Court of Appeals where oral arguments were held last month.

There is no statutory time frame under which the court has to render its decision but we would expect it to act by mid-year.

Of course, regardless of the outcome, we expect parties to appeal the decision to the Texas Supreme Court.

Before I turn the call over to Gary, I'd like to remind you of the $0.17 per share quarterly dividend declared by our Board of Directors on February 1st which represents a 13% increase over the quarterly amounts that we paid in 2006.

I'm very pleased that we have increased our dividends two years in a row and I believe these increases demonstrate a strong committment to our shareholders and the confidence the Board of Directors has in our ability to deliver sustainable earnings and cash flow.

So to summarize, I'm very pleased with our overall performance in 2006.

I believe that our performance reflects the strength of our geographic, regulatory and business diversity.

We have continued to capture opportunities created by volatile natural gas environment in our Pipelines, Field Services, and Competitive Natural Gas Marketing businesses.

We settled the Houston Electric rate case with terms that provide rate stability, allowing the TDU to focus on new infrastructure and technology growth initiatives.

Further, Houston Electric has put in place new franchise agreements extending for 30 years our right to do business in 61 of our 92 cities including the City of Houston.

We have taken steps to significantly improve the operational and financial performance of our Natural Gas Distribution business.

We have resolved a significant number of legacy issues, including the resolutions of our ZENS tax dispute and the 2001 new cost remand.

And finally, I feel that we've positioned our Company to take advantage of future opportunities in each of of our businesses.

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

Thank you, David, and good morning to everyone.

I would like to discuss a number of items with you this morning.

Let me start by updating you on our final ZENS settlement.

As you know in July of last year, we reached an agreement with the IRS on the terms of a settlement regarding the tax treatment of the ZENS and our former [ASys] securities.

At that time, we signed a closing agreement for the tax years 1999 through 2029 with respect to the ZENS.

These agreements were subject to approval by the Joint Committee on Taxation.

As a result of these agreements, in the second quarter we reduced our previously accrued tax and related interest reserves by $119 million or $0.37 per diluted share.

In January 2007, the settlement with the IRS was approved by the Joint Committee on Taxation with certain revised terms.

Under the terms of the final agreement, we will accelerate payments totaling $109 million of previously accrued taxes and we will reduce our future interest deductions associated with the ZENS.

Our fourth quarter 2006 results were reduced by $12 million or $0.04 per share to reflect the difference between the agreement reached in July and the final approved settlement.

Obviously, we are very pleased to finally resolve this complicated legacy tax issue.

This agreement clarifies the ongoing tax treatment of the ZENS securities and allows the Company to benefit from current tax deductions, although in a reduced amount.

Now, let me review some of our accomplishments in 2006 and discuss our financing goals and objectives for this year and beyond.

Over the last few years, our financial focus has been on reducing our level of debt excluding, of course, transition bonds.

In 2006, we saw the benefit of our debt reduction efforts in a significant $200 million decrease in interest expense relative to 2005.

Over the last several years, we have also been focused on enhancing our liquidity and in 2006, we once again improved the size, price, tenor and terms of our bank credit facilities.

This year, we will continue to remain focused on improving and growing the profitability of our businesses while at the same time adhering to the financial discipline necessary to maintain and improve our credit metrics.

In addition, we are hopeful that a bill will be adopted in the Texas legislature this session that will permit us to secure the balance of our true-up costs that we are currently recovering through a Competition Transition Charge or CTC.

Bills have been introduced in both the Texas House and Senate which support this securitization.

Assuming the legislation passes, we will work with the Texas Public Utility Commission to obtain a financing order that would allow us to issue transition bonds as soon as possible.

We believe this would result in a win-win situation in that our customers save money while we accelerate the collection of the remainder of our true-up balance.

In addition, if we are successful in our true-up appeals, we also plan to securitize any amounts allowed by the courts.

However, we do not expect the appeals process to be complete this year.

Finally, as David mentioned, we are progressing on a number of growth projects.

We plan to finance investments and growth opportunities as well as our ongoing capital requirements through internally generated cash flow and liquidity provided by our credit facilities and by accessing the capital markets as appropriate.

Specific to the pipeline projects, we do not contemplate any additional external financings to fund the construction of the Carthage to Perryville pipeline.

Unlike the Carthage to Perryville pipeline, the Southeast Supply Header is a joint venture with Spectra, and we expect to evaluate various financing alternatives to fund our portion of the project, including assessing the desirability of financing a portion of the project's costs at the joint venture level, thereby reducing the capital contribution required of CERC.

Ultimately, any permanent financing to fund our growth projects will consider the optimum mix of debt and equity consistent with maintaining and enhancing the credit metrics and credit ratings of both the parent Company and our utility subsidiaries.

Before I leave the topic of financing, let me review with you our recent financing transactions.

In December of last year, we called our 2.875% convertible notes for redemption on January the 22nd at 100%.

The notes became immediately convertible at the option of the holders upon our call for redemption.

Substantially, all of the $255 million of notes were converted.

The $255 million principal amount was settled in cash and the excess value due converting to holders of $97 million was settled by delivering approximately 5.6 million shares of our common stock.

In February of this year, we redeemed our $100 million of 8.257% trust preferred securities at approximately 104%.

We also issued $250 million of senior notes at the parent which are due in 2017 and carry an interest rate of 5.95%.

The proceeds from the sale of these notes were used to repay debt incurred to provide cash for the conversion of the convertible notes.

Additionally this month, CERC issued $150 million aggregate principal amount of senior notes which are due in 2037 and carry an interest rate of 6.25%.

The proceeds from the sale contribute additional liquidity to CERC.

Finally, this morning in our earnings release, we announced that we expect our 2007 earnings to be in the range of $1.02 to $1.12 per diluted share.

In making our earnings estimate for the year, we have assumed normal weather and made certain economic and operational assumptions including the outcomes of various, of the various regulatory and legal proceedings.

We will, of course, update you on these factors as the year unfolds.

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

Thank you, Gary.

With that, we would now like to take your questions.

In the interest of time, I'd ask you to please limit yourself to one question and a follow-up.

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

At this time, we will begin taking questions. [OPERATOR INSTRUCTIONS] Your first question comes from Lasan Johong.

Good morning, or good afternoon.

Nice quarter and year.

First question, obviously on everybody's mind, TXU going through this tumultuous transaction.

There are opportunities for CenterPoint to benefit specifically with potentially acquiring TXU's T&D business.

Is that a question, Lasan?

Yes.

[LAUGHTER] Well, energy delivery is our business.

I think it's not a secret we love to grow our T&D business whether it's here in Texas or elsewhere, but we'll just have to wait and see how this unfolds.

I think it's way too early to predict what's going to happen there.

Would that include the potential acquiring of the retail business or is that still off the books?

Retail is not part of our strategy at this time.

Excellent.

We looked at it a couple years ago, and it's not part of our strategy today.

Wonderful.

Gary, how much is left on the CTC balance and if that were to be securitized, what would that mean in terms of an income?

Yes, I think, well not in terms of income.

In terms of cash coming in, again as I mentioned, we expect this legislation to pass.

We're looking at north of of $500 million.

Okay.

Now why would that not be an income hit?

Well, again this is previous -- this is the -- we're recovering --

Did you say pass through?

Yes.

We do have an income impact today from the standpoint that we receive about 8, I guess a little north of 8% on the CTC .

That would go away.

We would convert that, of course, into cash through sell of securitization bonds so you'd have an impact between the difference -- between the interest rate received on the CTC and of course having less interest expense from having that cash.

But the absolute amount of 500 has been recorded previously in our true-up.

Okay, and one last question.

David, you had mentioned you harbor some ambitions to grow the business in other areas and in doing other projects.

Can you kind of give us a clue or a sense as to what you were thinking or what you are thinking, I should say?

Well, we're interested in growing all of our business segments and we operate in five business segments but the ones that are most obvious are the ones I talked about.

We have two wonderful Pipeline projects we're working on.

Our Field Services business continues to have some good opportunity, so those are the areas that I think we've been successful in the last year or so, but we'll continue to look in the other business segments as well.

So Pipeline and Field Services have the most near-term opportunities?

So far, that's where our opportunities have been and we've been successful.

We continue to look in other areas but certainly the projects that we're investing in, we think are excellent projects and they provide some excellent growth for the future as we look ahead.

Great.

Thank you very much.

Your next question comes from Daniele Seitz with Dahlman Rose.

Thanks.

I was wondering if you're anticipating similar return on your -- on the Southeast Pipeline as in the first pipeline.

You have already suggested a return on that.

Daniele, that's going to be a good project.

We haven't released any operating income projections yet, in part, for two reasons.

One is it depends on where we do the financing of the pipe and if we do it at the joint venture level, then the equity pick-up would obviously be lower than if we financed it on our balance sheet, and secondly is we're still finalizing the costs associated with that project, so as soon as get -- we're in a position to provide the market an estimate, we will.

It's going to be a good project for us.

I don't know if I'd compare it directly to the Carthage to Perryville though.

And could you comment on obviously the weather has been a little bit more favorable this year as far as the first few weeks.

Could you comment as to it being above average as far as your Company is concerned?

No.

I think we're experiencing a little colder weather than normal.

I mean, it's not a blowout year but yes, I think based on our plan, we're certainly above our plan.

It's certainly a much better way to start out than we did last year.

Last year, weather impacted our business, both electric and gas, compared to '05 by about $35 million so to get some normal weather is very helpful to us.

And that is in your forecast or you have just used normal?

No.

We are using normal weather to base our forecast on.

I think it's too early.

We have weather impacts at both Houston Electric and our gas LDCs and the $35 million covers both, but certainly our gas LDCs, and to some lesser extent our Houston Electric, has benefited the first two months but we haven't tried to factor that into our earnings guidance.

And the weather effect just on the natural gas business, do you have a number for that?

Our estimate for the year was around $18 million compared to '05.

Okay, great.

Compared to normal though, it's much bigger than that because as you recall, all of 2005 was warm too.

I think if you compare it to normal, it's closer to $30 million.

Okay.

Great.

Thank you so much.

Okay.

Your next question comes from Faisel Khan with Citigroup.

Good morning.

Good morning.

On the transmission projects you were talking about, there's the $100 million project, the Hill-G project you talked about, and the $400 million of other transmission projects.

Is -- does those $400 million of other transmission products include the intelligent grid that I guess you'd laid out before or is it -- ?

No, it does not.

Those are purely big, those are major transmission lines, not the distribution or the intelligent grid so they're separate.

And they would be above kind of your maintenance CapEx and depreciation, is that correct?

If you look at our 10-K that we filed this morning, I think Houston Electric shows something on the order of $400 to $450 million worth of capital expenditures in each of the next five years, and that's above our normal D&A.

I think I can't recall.

It's something around $250 to $275 million, so we're building a bigger Company here, not just replacing assets.

I got you.

On the competitive Natural Gas Sales and Services business, there was no unrealized gain in the fourth quarter.

Is that correct?

Not -- from mark-to-market gains?

That's right.

No.

There -- nothing significant.

There were some minor things but not anything of note.

One last question.

On the gas distribution business, you talked a little bit about how O&M was up year-over-year on some of the issues like bad debt expense and I guess some retire -- some labor retirement costs.

Is it fair to say that those costs should mitigate over this next year or is that something that we'll see continue over time?

Well, we incurred about $17 million of what we call restructuring costs which were severance costs and associated benefit costs.

That charge will not reoccur and we should get the benefit because we have a smaller staff.

As a Company, last year, we -- at the beginning of the year, we had around 9,000 employees.

We now have a little north of 8,600 so we've been resizing in a number of areas, certainly in the LDCs was one, but that $17 million will not repeat.

Great.

Thanks for the time.

Okay.

Your next question comes from Nathan Judge with Atlantic Equities.

Good afternoon.

Just wanted to ask, I did not hear any comments on MLPs.

Just kind of discuss that, and I know you've had a variety of comments on that in the past but can you just give us your current outlook on possible MLP opportunities in your pipelines?

We continue to look at that.

We've said it in the past.

We're not opposed to it but it has to make sense for our Company.

Obviously MLPs provide a lower cost of capital which is attractive but it comes with it, you have to essentially sell off part of your business.

You give up some of the growth, but I think there's a time and place for an MLP and we continue to look at it and up to this point, we haven't decided it was the time.

Is there a -- you mentioned a lower cost of capital in the markets that you see that you're bidding for on these natural gas projects.

Do you feel compelled to almost have an MLP to be competitive in those bids?

I don't think compelled.

I will say that a number of our competitors are MLPs and so they're dealing with the lower cost of capital which give them an advantage from that standpoint.

We have to build off of our skill set, our relationships, our customer service, to win these projects, but that's part of what we continued to look at, Nathan, is are we at a competitive disadvantage by not having an MLP and we'll continue to study that hard.

Great.

Thank you very much.

Just as a follow-up question on your guidance, could you just give us your normalized tax rate that you're using for 2007?

Yes. 2007, this year, Nathan, as you know, we've had a number of ins and outs and twists and turns with ZENS and others.

Going forward, use 36% for 2007.

And as far as the income from ZENS going forward, will we still see that same kind of relationship that we have in the past or how does that work now going forward?

Yes, remember on ZENS, there's really no income effect other than on the income statements a treatment of the derivative and also our, the carrying value of the Time Warner shares, so you'll see that same relationship.

The ZENS instrument in terms of the tax benefit is of course we get cash but you reduce tax expense current and you turn right around and increase deferred tax expense so it's net neutral from a tax perspective but you do get the income statement and those variables are the same on the income statement.

Okay.

That's very helpful.

That's very complicated but thank you.

Yes.

Your next question comes from Charlie Spencer with Morgan Stanley.

Good morning, gentlemen.

Good morning.

Quick question, as always, I'm trying to get to a cleaner EPS number.

Do you have the magnitude of your gains on sales of natural gas inventory during the quarter and for full year 2006?

I would say that it was something on the order of, the margin from it, around $34 million.

Okay.

And are you talking about the cushion gas or the gas out of inventory sales?

Both within the, just across the Company in general.

Oh, okay.

Well that's a little harder to come up with.

The cushion gas for the year was around $18 million.

Cushion gas was $18 million?

Yes.

And then the 4Q '06, like the full year mark-to-market gains, were, what were the total of the full year mark-to-market gains?

$37 million.

Okay.

Thank you.

Okay.

Your next question comes from Steven Gambuzza with Longbow Capital.

Good morning.

Good morning.

A couple questions on the CapEx.

Just looking at kind of what has changed since your 2005 10-K , for the kind of Pipeline and Field Services which used to be lumped together.

It looks like CapEx has gone up by about about $500 million.

And so my recollection was that last year, you weren't including anything for the Southeast Supply Header or the Mid-Continent Crossing which is no longer moving forward, and so I'm just trying to understand part of that discrepancy is, part of of the $500 million growth is explained by the Southeast Supply Header.

Is there another growth project that has yet to be identified in the CapEx forecast or is there just higher spending at Field Services?

Could you just provide some commentary there?

I think there's two things.

One is the, as I recall, Carthage to Perryville wasn't in last year's numbers and it is in this year's numbers and that's $500 million or so.

I don't think SESH are in these numbers.

We're treating SESH as not a capital expenditure per se since it's being done on a joint venture.

We have raised, however, our level of expenditures for our Field Services over the next five years.

We see more and more opportunities there as we go along.

Let me double check one thing on the Carthage to Perryville.

Was it in last year's numbers, Christy?

Hang on just a minute and let us --

Sure.

-- just get this clarified.

I misspoke.

It is -- we did have Carthage to Perryville.

What's in this years are just the most recent numbers.

We have put SESH in.

That's the biggest difference, so I was looking at the wrong schedule and we do have the SESH numbers in our capital expenditures.

And SESH is about $250, $300 million; is that right?

It would be, hang on just a minute.

It's about $180 million in those numbers.

Okay, and so the other growth then, is that all at Field Services?

There's a lot at Field Services, not all.

I mean, we don't have any new major project, but every year, we plan for some growth projects in our Pipeline business and we have seen more opportunities of recently in that area than we had some time ago.

Okay and then if I could just ask one separate question on your Gas Services business.

When I look at what you reported and then kind of the impact of one-time items, is it fair to say that the $60 million, the, sorry, the $77 million of operating income included a negative mark of $66 million from write-downs and a positive $37 million from mark-to-market?

Yes.

Both of those things should reverse in subsequent periods?

That's not quite right, because some of that inventory has already turned, so it's already been -- the lower value of that inventory has been reflected in the margin we reported.

I think there's about $34 million that would turn or that's already turned and $32 million that will turn in '07.

Okay, and it looks like you've also, while these numbers are small in relation to the entire Company, you've also meaningfully expanded the amount of capital you're devoting to this business.

I think you have about $50 million of CapEx versus essentially none in your last 10-K.

What are you spending money on and given the extremely good operating environment you've been in and how well you've done, is this something you think you can grow in 2007 and 2008?

Two major items.

One is storage.

We've spent money expanding a storage facility and second is our intrastate pipeline which falls under this arm.

We've had some opportunities and continue to have some opportunities to expand or extend our intrastate business so it's those two items that we're spending money on.

And do you expect growth in this business in '07?

Yes, we do.

Okay, thank you for your time.

Yes.

Your next question comes from Carl Kirst with Credit Suisse.

Good morning, everybody.

Most of my questions have been answered.

Just a couple of other really quick ones.

The first is on the Southeast Supply Header, the $800, $900 million of growth capital, that was a little bit higher than what I had in my model.

Are we actually seeing cost creep in that area and I guess are we still exposed to that or is the $800 to $900 a pretty firm number that you guys are comfortable with?

Well, compared, we -- Sonat now is part of that project.

Right.

There's a fair amount of the pipe that we've increased to 42 inches to serve Sonat's needs so that increased the price of the project compared to when they weren't part of it and that's a fairly big part of the increase but I think it is fair to say that since we conceived this project that prices and costs have gone up.

What we've seen in the Pipeline business is both the pipe as well as putting the pipe in the ground is much more expensive today than it was a year ago and a lot more than two years ago, so we hope we factored all those in.

We have not finalized all of our contracts.

We have finalized the construction contract, but we're still working on a few.

Okay, great.

Thank you.

Just a couple other very quickly.

David, I think you mentioned in your very opening remarks there was $26 million impact from adverse weather in the fourth quarter.

Did I record that number correctly?

That's weather and reduced usage.

Weather and reduced usage?

Yes.

Can you split that up between what was coming from the gas and what was coming from the electric side?

Yes.

On the electric side, we're estimating about $5 million weather and usage are really two components. $9 million for your normal residential small commercial and then a couple million for your big guys.

They're built on demand and they had lower demand factors in '06 than the previous year, and in the gas side, there was about $6 million of weather and $4 million of usage.

Great.

That's very helpful.

And then last question and this may be a discussion quite frankly better for off-line if it gets a little bit too complex, but I just want to make sure I'm understanding the risk of this issue related to the whole true-up process.

This normalization violation exposure and what that could potentially mean and I guess what I'm trying to get at is that the position of the other parties, that if we don't get, say for instance any more relief from the Third Court of Appeals, is that necessitating a normalization violation or does that just kind of put us one step towards that and there's still many other events that could happen that would keep such an event from happening?

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

Well, normalization issue, as you know, Carl, is one of the ones that is before the courts right now.

There have been a couple of developments that might be instructive here.

The Commission, our Public Utility Commission, and an AEP case took some steps in their order.

While that issue remains live in that case, the impact on the Company has been reduced until such time as that appellate process works its way through.

I think there is a risk if the courts don't turn the Commission around on this that we would be faced with the situation of being forced into a normalization violation, but having said that, our Commission has never put a utility in a situation where they had to have a normalization violation, and I will remind you that at the time the Commission entered its order, the IRS had promulgated proposed regulations that would have caused the Commission's actions not to be a normalization violation.

We also have been advised through the briefing process that a number of the parties to our case are taking the position that they don't want us to be faced with a normalization violation either, so that's a long way around saying that it is clearly a risk that if the appellate process turns out to be unfavorable to the Company that we would be facing one but there are opportunities for us to try to get the Commission to readdress that question and I think past history and the position of the parties would give some possibility that that would be -- that that could be successful.

Okay, so the position of the other parties is, or at least some of the other parties is that they absolutely don't want to see this event happen to you guys?

I will tell you that the more sophisticated parties in our case don't believe that a normalization -- forcing the Company into a normalization violation would be in their best interests either.

Okay, and I apologize for this, but what happens if you do get a normalization violation?

And I guess I'm a little unclear on that aspect as well just purely from a risk management standpoint?

Well if we were faced with a normalization violation, it would preclude our use of a number of the tax tools that we'd otherwise have available to us, the use of accelerated depreciation and things like that.

Okay.

Thanks for your time.

[OPERATOR INSTRUCTIONS] Your next question comes from Leon Dubov with Zimmer and Lucas.

Hi.

Good afternoon.

I just wanted to double check.

I am sorry if you guys went over this.

I joined late.

What is the ROE that you guys are assuming for Houston Electric in your '07 guidance and also, what was the rate base as of the end of 2006?

We don't really assume a ROE there, Leon.

We have a rate case settlement.

We have rates frozen.

In our last case, rate base was about $3.2, $3.3 billion.

We had sought an ROE of 11.25.

Obviously we didn't get one that high, but we didn't actually arrive at an ROE, I don't believe.

We just arrived at a set of rates that are frozen.

Okay, but I guess in your guidance, do you sort of assume that you earned some sort of an ROE and what's considered the industry norm, I guess, of like 10.5% to 11% ROE or will you be somewhere less than that?

We don't really assume that.

What we do is we take our present rates and we project out our sales and demands and the revenues are what they are.

We don't assume, try to back into an ROE.

Now, it's going to produce an ROE less than 11%.

It's going to, I would say, it would be between the 10% and 11%, but that's not the way we develop our plan.

We basically forecast sales, use our rates and that's what revenues turn out to be.

Okay, fair enough.

Thank you.

And we have no further questions at this time.

Ms. Paulsen, do you have any closing remarks?

Well, thank you very much everyone for participating in our call today.

We appreciate your support very much.

Have a great day.

This concludes CenterPoint Energy's fourth quarter and full year 2007 earnings conference call.

Thank you for your participation.

You may now disconnect.