CenterPoint Energy Inc (CNP) 2009 Q2 法說會逐字稿

Good morning and welcome to CenterPoint Energy's second quarter 2009 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 Ms.

Marianne Paulsen, Director of Investor Relations.

Ms.

Paulsen.

Thank you very much, Tina.

Good morning, everyone.

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

I would like to welcome you to our second quarter 2009 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 second quarter 2009 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 10Q filed earlier today are posted on our website, which is www.CenterPointEnergy.com.

under the Investors Section.

I would like to remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the Company's filings with the S.E.C.

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, August 12th, 2009.

To access the replay please call 1-800-642-1687, or 706-645-9291, and enter the conference ID number 17749079.

You can also listen to an on-line replay 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.

This morning we reported net income of $86 million for the second quarter, or $0.24 per diluted share.

This compares to net income of $101 million, or $0.30 per diluted share for the same period of 2008.

Operating income for the second quarter 2009 was $253 million, compared to $297 million for the same period of 2008.

In this challenging economic environment, I believe we had a solid quarter, and I am pleased with the Company's overall performance.

Let me give you a little more detail regarding the performance of each of our business segments this quarter, beginning with Houston Electric.

Our regulated transmission and distribution utility, Houston Electric, reported operating income of $129 million, unchanged from 2008.

Last year's second quarter included a $9 million gain from a land sale, an unusually large item for this business unit.

Excluding this gain, Houston Electric achieved a 7.5% increase in operating income.

This is excellent performance and reflects the continuing measures we are taking to improve its financial results.

Customer usage this quarter was down only slightly.

Much milder weather experienced in April and May was almost entirely offset by the very warm weather in June, and we didn't see a repeat of the first quarter's reduced customer usage.

We'll continue to monitor this, but for now, we believe the first quarter was not indicative of a significant new downward trend in customer usage.

Our service territory continued to grow with the addition of over 28,000 customers since the second quarter of last year.

We also benefited from increased transmission revenues, primarily from a tariff change implemented last fall.

As a result of the storm restoration legislation enacted in April of this year, Houston Electric recorded a regulatory asset of $41 million for carrying costs associated with the system restoration costs that we incurred following Hurricane Ike.

Of that amount, $14 million was related to the debt component and was reflected in second quarter results.

The equity component of $27 million will be recognized over the life of the storm cost recovery bonds we expect to issue later this year.

In a few moments, Gary will report on the storm cost recovery settlement that we announced last Friday.

This week, Houston Electric filed an application with the Department of Energy for $200 million in federal stimulus funds available through the American Recovery and Reinvestment Act of 2009.

In our application, we requested $150 million to accelerate the implementation of an advanced metering system and $50 million to support our Smart Grid Initiative.

As we have discussed in the past, Houston Electric is in the process of installing an advanced metering system.

Since March the 1st, we have put in forty-five thousand smart meters and are on target to install approximately one hundred, forty-five thousand smart meters by the end of the year.

Under our current plan, we will deploy more than two million smart meters across our service territory over the next five years.

If our request for the DOE stimulus funds is approved, we will accelerate our deployment plan to substantially complete the project by 2012.

Because the DOE funds require matching expenditures, there will be some acceleration of Company funding, but we don't expect it to be material to either cash flow or earnings.

Our natural gas distribution business also continued to make progress.

This unit reported operating income of $2 million, a slight decline from the $4 million we reported for the second quarter of 2008.

Due to its seasonal nature, this business typically has minimal earnings in the second quarter.

Benefits from rate changes and miscellaneous revenues totaling approximately $9 million were more than offset by increased pension expense of $10 million and increases in other operating expenses, primarily employee related.

We have worked very hard over the last couple of years to address delinquencies and bad debts, and we are seeing the benefits of that effort.

Both our delinquencies and bad debts are significantly lower than at this time last year.

Last month we filed two rate cases.

For our Houston service territory, which covers twenty-nine cities serving nearly one million metered customers, we filed rate requests for a revenue increase of $25.4 million.

In Mississippi, we requested a $6.2 million increase.

In both cases, we asked for approval to recover increased operating costs, driven in large part by higher pension and employee related expenses, as well as the increased investments in facilities since the last rate case.

In Houston, we also requested an adjustment mechanism that would annually adjust rates to reflect changes in investment expenses and usage, similar to the mechanism recently approved for our Texas Coast service territory.

We expect the Mississippi case to be decided late this year and Houston to be decided early next year.

In our Minnesota case, which we filed with the Minnesota Public Utilities Commission last November, we asked to increase rates by approximately $60 million and to de-couple revenues from the volume of gas sold.

In January, we implemented a $51 million interim rate increase, which is subject to refund.

Intervenors, in this case, filed their direct testimony in late June and hearings are scheduled to begin this month.

We do not expect final action on our request until early next year.

Our smallest business segment, the competitive natural gas sales and services business, reported operating income of $6 million for the second quarter of 2009, compared to an operating loss of $5 million for 2008.

We recorded marked to market gains of $3 million this quarter, associated with derivatives we used to lock in economic gains, compared to charges of $10 million last year.

Excluding these items, our energy service business was down approximately $2 million from last year.

Our commercial and industrial sales have been solid, but reduced basis differentials and seasonal spreads have reduced our opportunities in the wholesale sector.

Our interstate pipelines recorded operating income of $61 million for the second quarter of this year, compared to $101 million for 2008.

The second quarter of last year included an $18 million gain from the sale of two gas storage development projects.

So on an apples to apples basis, we are down about $22 million in operating income.

This decline is primarily due to reduced ancillary revenues as a result of lower commodity prices, as well as higher operating costs, including increased pension expense.

Our core business continued to perform very well, with increased margin from our Carthage to Perryville pipeline and increased revenue related to new firm contracts to serve power generation facilities on our system.

As I discussed on our last call, our strategy for this business is to emphasize firm, fee-based transportation revenues.

This year we expect 90% of our interstate pipeline's margin to come from fee-based transportation services.

Margins from these fee-based services continue to grow and are expected to exceed last year's by over 10%.

The balance of our pipeline margins are derived from ancillary services such as processing, park and loan, and balancing services.

As you know, these services are driven by market dynamics, natural gas and natural gas liquids prices, and basis differentials.

And provide up side beyond the more predictable and consistent fee-based revenue.

Due to significantly higher commodity prices in 2008, we recorded a record amount of ancillary services last year.

While we won't achieve that level every year, these services will continue to provide upside potential.

The Southeast Supply Header, or SESH, our joint venture with Spectra, began flowing gas last September.

While SESH has contracted for all but eighty million cubic feet of the one billion cubic feet per day of capacity, some of the capacity commitments phase in over the first three years.

We had expected that most of the remaining available capacity would be sold on an interrupt I interruptible, or short-term firm basis, but market conditions have limited such sales this year.

However, conditions have improved somewhat, and we've obtained commitments from customers for a significant portion of the open capacity through the remaining summer months.

For the quarter, we recorded equity income of $9 million from SESH, which included a $3 million fee earned in connection with the construction of the pipeline.

In the second quarter of last year, equity income was $10 million from allowance for funds used during construction.

Now let me turn to our field services segment.

We reported operating income of $23 million for the second quarter of 2009 compared to $32 million last year.

Revenue from new projects on our gathering system, since last year, was more than offset by revenue declines resulting from reduced natural gas and natural gas liquids prices.

We continue to project that fee-based revenue will account for approximately 75% of this year's margin.

The remaining margin is derived primarily from the sale of natural gas retained from efficient compressor operations and natural gas liquids from processing.

Due to high commodity prices, these revenues were much higher last year.

In addition to operating income, we also recorded equity income of $2 million from our jointly owned natural gas processing facilities, compared to $4 million the previous year.

The decline was primarily due to lower liquids prices, which have averaged about half of last year's price levels.

While drilling activity in the conventional basins is down over 50% year-over-year, activity in the unconventional shale areas, particularly the Haynesville, Woodford, and Fayetteville shales have been minimally affected with producer activity remaining steady.

Most of our growth projects for this year are concentrated in these shale areas.

One key aspect in our business model is to scale our capital deployment to meet producers' actual production timing.

And as we see activities slow in various areas, we were able to throttle back our capital spending appropriately.

In closing, I would like to remind you of the $0.19 per share quarterly dividend declared by our board of directors on July 23rd.

We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence the board of directors has in our ability to deliver sustainable earnings and cash flow.

With that, I will now turn the call over to Gary.

Thank you, David, and good morning to everyone.

Today I would like to discuss a few items with you, beginning with an update on the process for recovering our costs related to Hurricane Ike.

As you know, earlier this year the Texas legislature passed a bill that authorizes utilities to issue non-recourse system restoration securitization bonds to recover costs associated with hurricanes and other major storms that occurred subsequent to January 1st, 2008.

These bonds are similar to the three series of transition bonds we previously issued to recover our stranded costs.

The legislation requires two proceedings before the Texas Public Utility Commission.

The first is a determination of the system restoration costs that are recoverable.

In the second, the commission issues an appropriate financing order to recover those costs.

In April, we filed an application with the PUC detailing our system restoration costs associated with Hurricane Ike, in which we requested recovery of $678 million, including $70 million in carrying costs, certain debt issuance costs, and regulatory expenses.

Last week we reached an agreement with the parties to the case under which we would be eligible to recover approximately $663 million in storm restoration costs, a $15 million reduction from our original request.

The agreement is subject to PUC approval, and we expect the PUC to consider the settlement agreement later this month.

In July, we filed an application with the PUC to begin a financing order proceeding requesting permission to issue securitization bonds to recover the distribution system portion of the restoration costs.

Of the $663 million agreed to in the settlement, approximately $643 million is related to distribution.

The exact size of the system restoration bond issue will depend upon how the PUC chooses to handle deferred taxes related to the storm restoration cost and other matters.

We expect the PUC to issue its order in the next 30 to 60 days, and we expect to issue bonds shortly thereafter.

System restoration securitization bonds have the dual benefit of allowing us to recover our hurricane costs in a timely fashion and lowering the ultimate cost to consumers.

We plan to recover the transmission portion of our storm costs, or approximately $20 million plus carrying costs, through the rates set in our next transmission cost of service proceeding.

In February, we announced our intention to sell up to $150 million of common stock through a continuous offering program.

The sale of this stock was completed on July 1st.

The Company sold approximately 14.251 million shares at an average price of $10.53 per share.

To date, in 2009, the Company has also sold approximately $49 million of original issue common stock through its savings plan and its enhanced dividend reinvestment plan for a total equity raise of $199 million.

We continue to have a relatively large capital budget, which includes our franchise required capital and a number of very attractive projects, particularly in our pipeline and field services segments.

Producer activity continues to be fairly high in the shale plays where these businesses operate, and we remain committed to pursuing value-creating opportunities that this activity presents.

While we expect to generate sufficient internal cash this year to cover our capital program, plus common dividend, we recognize that external financings will be required to fund future growth opportunities.

Our objective is to ensure that we have the financial flexibility to execute our business plan, and we are committed to financing our operations using an optimal mix of debt and equity, while improving our balance sheet and enhancing our credit metric.

This leads me to my final topic, our 2009 earnings guidance.

This morning in our earnings release we announced that we reaffirmed our 2009 earnings guidance range of $1.05 to $1.15 per diluted share.

In providing our guidance, we considered various economic, operational, financing, and regulatory assumptions, including recovery of costs associated with Hurricane Ike.

We have assumed normal weather in both the gas and electric utilities, and we have not attempted to predict the effects of mark to market or inventory accounting on the earnings of our competitive natural gas sales and services business.

These effects are timing related and ultimately do not impact the economics of the underlying transaction.

In addition, we have excluded any impact to income from our pending true-up appeal and from any change in value of Time Warner stock and the related VIN securities.

Finally, we have assumed an effective tax rate of 35% for the full year.

This assumption takes into account our year-to-date effective tax rate and the recent settlement of tax audits related to 2004 and 2005.

As the year unfolds, we will continue to update you on these items as well as our earnings expectations.

Now I would like to thank you for your interest in our Company, and I will turn the call back to Marianne.

Thank you, Gary.

With that, we will now open the call to questions.

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

Tina, would you please give the instructions on how to ask a question.

At this time we will begin taking questions.

(Operator Instructions).

Our first question will come from the line of Carl Kirst with BMO Capital.

If I could first ask on the pipeline side, from what I recall, park and loan was about $30 to $40 million in 2008.

I'm not sure what processing added, but I was hoping that second quarter '09 versus second quarter '08 you could break out perhaps what some of the specific ancillary services were versus last year, park and loan, straddle plans, balancing, et cetera.

I'm just looking for the deltas.

Yes, the -- let me see if I can put my hands on that.

The Delta on purely the ancillary part of the business is right at $20 million.

A big part of that is our straddle plants and our processing, probably a little bit more than half.

The others are really scattered around balancing, system management, PALS.

It's spread through there, but that's the order of magnitude that we're talking about.

So primarily a processing pit from quarter over quarter.

That's correct.

I know you guys typically have not given segment guidance.

Considering, though that we're pointing to 90% of pipes being fee-based, as far as this year is that a number, given that there shouldn't be that much variability around that, is that a number you can share?

Well, we haven't given any guidance around that, but our base margin so far this year is almost $250 million.

And this business is pretty consistent quarter to quarter.

There are some seasonal changes, primarily around ancillary revenues.

But I would say that total margin this year will be between $450 million and $500 million, in that range.

And it will depend, though, the amount is going to depend on some of the ancillary services and where they end up the remaining half of the year.

I understand.

And just a quick follow-up on the LDC side.

There may not be much to add here, but with respect to the potential pilot of de-coupling in Minnesota, has there been any color to glean from the staff's position over the last three months?

Our next question will come from the line of Lasan Johong.

Tina, we still need to answer that question.

I was looking at Joe McGoldrick who heads up that business for us.

Joe is there any light you can shed on that?

We have a settlement with one party in the case, but it remains to be seen whether the other parties to the case will join that or not, so we're cautiously optimistic we might be able to make some progress, but we know that the staff and others have generally opposed de-coupling the way we think of de-coupling.

So remains to be seen where we are going to end up in this case.

Okay, so even though coming down from the legislature that you need to give a pilot to somebody, it sounds like you're still getting friction on that.

That's correct.

Okay, thank you.

And now we will hear from Lasan Johong with RBC Capital Markets.

It looks like field services went through a little bit of up and down that was, from my perspective, at least, unexpected.

Could you break out why there was so much delta between eight and nine in the second quarter?

I know part of that is probably appealed e-contracts.

I think you said your pass about 10%.

But what else could there be?

Let me give you a little color around this.

As I said in my remarks, this year about 75% of our total margin is going to come from pure fee-based revenue.

Last year, it was higher than that, and the reason is because we make a fair amount of money off natural gas we retain, because of -- from operating our compressors efficiently, as well as the natural gas liquids we retain in processing.

Those prices last year were substantially higher than this year, and so it's not a volume issue as much as it is a price issue, and prices are just down substantially, and that's the reason you have seen the field services business decline from last year.

Our base margin, our fee-based margin is up, but our commodity-based revenues are down.

Now, the commodity-based revenues aren't going to go to zero, because you're always going to get something for natural gas that you sell and for natural gas liquids, but last year at this time we were probably getting $7, $8 for gas, and $1.50 a gallon for liquids, and it's probably half that this year.

So that's the delta you are seeing there, Lasan.

So about 75% fee based, 25% commodity-price based, and that should be a relatively good formula without major price spikes?

That's correct.

Okay.

I will say, though, that we are -- are really focusing on fee-based revenue in this business as well.

And our new contracts that we're working on, we not only get acreage dedication, but we get throughput guarantees.

So if the gas doesn't show up, for whatever reason, we have a true-up mechanism, where we'll still get paid.

Right.

So it's very consistent number.

Yes.

Excellent.

Just quickly, on the pipeline business, I'm assuming by the rough calculation you gave me of $90.10 that last year's ancillary service was around $28 million.

For the quarter?

Yes.

More or less.

I think that's probably pretty close.

Okay.

And then the $200 million application to accelerate smart metering, you said $150 million was for the smart meters and $50 million was for the grid.

I just wanted to confirm that you said if you got it, it would accelerate the meter installation through 2011?

2012.

To 2012.

Right.

For all two million meters?

Correct.

But regardless of whether this is approved or not, or you get it or not, you're still going to go ahead and do the -- I'm assuming you're going to go ahead and still install the meters regardless.

Yes, we'll just install them on a five-year basis rather than a three-year basis.

We accelerate the program a little bit more than two years with the DOE stimulus funds, but if we don't get it, our plan is to install them all by 2014, rather than 2012.

And just to make absolutely clear, this is not money you have to pay back.

That's correct.

We just have to match it, but, as you know, we were planning on doing this ourselves.

Right.

So this is going to reduce the cost of this program to our customers.

Great.

Thank you very much.

Okay.

Our next question will come from the line of Faisel Khan with Citi.

On the short-term volumes signing up at SESH for the remainder of the next few months, what's causing that -- those short-term volume contracts?

Is it a pipeline outage, or is it short-term volume increases?

What's going on there?

I think it's the Florida markets.

Probably gas-fired generation, more than anything.

So weather and demand related.

Yes.

Okay.

And then on the electricity side, it looks like overall demand is up on the residential side 1%, but weather is lower by 3%.

So overall, what do you think is driving that increase?

I think last quarter you said maybe we'd see some price elastic demand come back, but trying to figure out what you guys are seeing.

Is there a demand increase?

First quarter, we saw what was an unexplained customer usage decline.

We weren't real sure if it was conservation or not, and we don't think there's a substantial amount of conservation in the second quarter.

We have seen electric rates in Texas come down substantially.

They're probably 60% of what they were last year.

But customers do have long-term contracts.

So, it takes awhile for some of these longer term contracts to roll off.

But, we don't think we're seeing a huge amount, or very much at all conservation so far.

Now, we're having a very hot summer here, no question, and we got the benefit of that in June, and we talked about that a little bit in our prepared remarks.

But, it looks like usage is just hanging in there, comparable to last year.

Okay.

Thanks a lot, David, appreciate it.

Our next question will come from the line of Tom O'Neal with green arrow.

If could you provide the latest available trailing twelve ROE for the electric distribution property, and then just your current thinking on when you might be filing?

First, we have to file in June, at the end of June of next year, July of next year, unless the staff and parties believe we don't need to file.

But we're obligated to file.

We'll wait and see where we are on returns then.

I don't have those trailing ROEs in front of me.

My guess, it would be right at 10%, give or take a few basis points.

That's what it had been tracking at.

So I don't think we're too far off from that right now.

Okay.

And then just curious on your comments on CapEx in the balance sheet, Gary.

Just wanted to make sure I understood what you were saying about equity needs for the balance of this year?

I had previously assumed you were done for 2009.

Just what you were thinking about 2010 levels versus '09.

Sure, we've raised approximately $200 million of equity this he year, $150 million through the continuous offering, then our benefits program.

Let me say our benefit programs, which have raised about $49 million, I think you can think probably another $20 plus million for the balance of the year, so that's a normal program.

I think in terms of any additional equity, it's really going to be driven by -- and for next year as well, it's really dependent on growth opportunities that we have.

So as I've said, our commitment is to ensure that we have a balance sheet that enables us to execute our growth opportunities, and our business plan, so we'll really have to look at the growth opportunities that we have.

That's basically where we are.

So this year was probably a bit outside; it's just in terms of balance sheet repair and CapEx?

I think that the continuous offering program was a thoughtful way to raise this equity capital.

I think it's in line with what we expected to do this year and the growth that we are already executing on.

Okay.

Thank you.

You're welcome.

Our next question will come from the line of Steven Gambuzza with Longbow Capital.

I just had a question on CapEx.

Looks like on field services you spent about $66 million first half 2009, and your full year guidance was $277 million.

Have you revised your growth plans there, and if you have, can you give us a sense as to where you think it might come out for the year?

We spent close to $100 million in the first half of the year.

We're monitoring this pretty close.

My guess is we're not going to spend the full $277 million based on the producers drilling activity.

But we'll spend well in excess of $200 million, so we'll match the first half of the year plus a little bit more, I would imagine.

We've got some very attractive projects in the shale areas that we're working with really good producers on.

And we stay in close contact with them, as we said, and if they throttle back, we throttle back, and we'll see a little bit of that this year, but we'll spend the majority of that $277 million.

Okay.

And it looks like from the guidance that you've provided for the full year, it implies earnings in the second half above what you put up in the first half, and I suppose part of that is just normal seasonality.

But as it relates to field services and the pipe specifically, would you expect relatively stable financial performance in terms of operating profit in the second half of the year versus what you posted in first half of the year?

I think so.

We'll have to watch the -- on the field services side, the volumes, to make sure that with the more conventional areas, drilling really falling off, we'll start seeing some of that start impacting us later on this year, but we think we have more than that coming on-line with these new projects.

So we probably should see about the same level, and then, of course, the commodity sensitive part of both pipelines and field services, it's anybody's guess there, but we think it ought to be pretty much the same as the first half of the year.

And you mentioned that this year it's going to be 75%/25% fee-based, and that it was higher in 2008.

Can you just give me some broad sense as to what that was in 2008?

Was it 60% or 50-% fee-based?

It was probably more like -- let's see if I can do this.

It's probably more like 60%.

Okay, helpful.

Final question for Gary.

On the securitization, you mentioned that the cash proceeds will be dependent upon how the PUC treats deferred taxes, and you guys had a fairly substantial deferred tax benefit in 2008.

Can you just bracket what the potential cash -- if you get the -- what the potential range of outcomes respective of treatment of deferred taxes is in terms of cash in the door later this year.

Well, look, I think part of it is binary in terms of whether they decide to do it on a gross or net basis, but let me just give you these numbers, because it really is to the extent the PUC decides to reduce the amount by the present value of the deferred taxes, then it depends, of course, upon the traunching and the tenor of the bonds, whether it's 14 years or 10 years.

So there's some -- you need some of that information as well, but I think you'd probably think of around $100 million would be the number.

But again, that's something that they're looking at as we speak.

So we'll know more about it.

Thanks very much.

Our next question will come from the line of Nathan Judge with Atlantic Equities.

Good morning.

Just wanted to ask if could you give us an update on the Texas Supreme Court case, if there's anything --

I'll ask Scott Rozzell to give you an update.

Hi, Nathan.

Oral argument is set before the Texas Supreme Court on both the true-up appeal and the associated CTC interest rate appeal for October 6th.

And so we'll -- that's about on the schedule that we've been anticipating all year, and as you know, the court doesn't have a required date by which it has to act, but I think we would expect to get a decision from them in the first half of '10.

Thank you.

And also, I think you mentioned something about pension expense deferrals related to the gas businesses, but could you just discuss -- I think there are some efforts to try to defer the pension expense, or do some type of regulatory solution to higher pension expense at the Houston Electric?

Could you just give us an update on that?

Okay, Houston Electric, we are able to defer our pension expense increases.

We had a little bit increase in the first quarter, but essentially from here on out we're deferring those increases.

In the gas side, we don't have the same mechanism in place that we can't defer.

We are talking with some of our regulators and staff about different ways that we might approach that, short of having to file a rate increase.

But at this stage, we're not deferring any of that.

So it's fully hitting the earnings, and I think it's a fairly substantial amount, $10 million or so, in the second quarter, and $20 million so far this year.

So if you look at the gas LDC's earnings, and you look at where they would have been, but for this, we're having an awful good year.

It's just unfortunately we don't have any way to defer this.

The NRG takeover of Reliant Energy on the retail business is now your largest customer in Houston Electric, and you noted something about lower bad debt expense.

Could you just talk us through if there's been any changes in relationship there and how that's playing out?

Thank you.

Yes.

Not really.

We haven't had any changes.

We have a good relationship with NRG, and we did with the old Reliant, as well.

We had a half a dozen or so REPs that went under last year during these really high electric price areas, and we haven't seen a repeat of that.

So the improvement we've had is really the fact that the market hadn't had those kind of impacts so far.

Thank you very much.

Our next question is a follow-up from Carl Kirst from BMO Capital.

Just a few follow-ups.

Can I just clarify what we were talking about with respect to the stimulus application that if we get the 200 million, if the DOE were to approve that, that really we're just going to be reducing the total project costs, so effectively we can look at it at the same sort of debt/equity split, if you will, in returns, we just reduce that project by $200 million?

Well, yes, that's true, Carl, except that $150 million goes to the advanced metering project, which is the project we announced earlier this year.

There's $50 million that goes to what we call the intelligent grid, which is automation of the distribution system, which was not part of the advanced metering system.

It is new for us, and that would advance something that we actually weren't going to start for a couple of years.

Okay, appreciate that.

It just improves the operation of the system better service restoration, better monitoring, sensors throughout the system.

Appreciate the clarification.

Lastly, a quick question on the $14 million of carrying costs of debt costs.

So is that basically a true-up, if you will, from the interest expense basically beginning from September 11th, or whenever Ike hit us?

That's right, it is a calculated number, and it offset interest expense that we've been incurring or recording since we started incurring these administration costs.

Perfect, thanks.

Okay.

Our next question will come from the line of Debra Bromberg of Jefferies & Company.

I was wondering if I could get clarity on your comment about the effective tax rate for the year of 35%.

I may have missed something, because I had thought it would be a bit higher than that based on guidance earlier in the year.

No, that's correct, Debra, earlier in the year we said 37% to 38%, but we've been able to settle two outstanding years with the Internal Revenue Service.

Then based on those moving parts what we're guiding you to now is to use an annual rate of 35%.

So you had it right before.

We just have lowered that.

Was there a one-time gain of some sort in this particular quarter because the tax rate was even lower than 35% this quarter?

That's right, I think some of it is reflected in this quarter, and some will be reflected in subsequent quarters.

But you put it all together, use 35% rate for the full year, and it was 33% in this quarter, that's right.

Could that put you at the higher end of your guidance?

It seems like it's a few cents per share.

Yes, it helps.

If you move it from the 37% to 35% or 38% to 35%, it's $0.03 to $0.04, so think about $0.04.

But again, we provide a range between $1.05 to $1.15.

But there were a number of moving parts, so certainly that was a positive when looking at the total, that's correct.

The other question I had pertained to the trailing ROE at the electric company of roughly 10%.

Do you know what that figure would be roughly if you normalized for Hurricane Ike effect?

Well, Hurricane Ike really didn't impact us that much, Debra.

It took away $17 million of revenue, but there was about $11 million or $12 million of expenses we did not incur as a result of that.

Or we'll incur them later, we just deferred some stuff.

So net impact is $5 million or so, $6 million.

So -- I don't think it really changes the result any.

Thanks, guys.

Our next question will come from the line of Danielle Seitz with Dudack.

I just have two more questions.

Due already have a sense of what the output was in July in your electric distribution?

It seems that you had above average demand.

I think we did have and above average demand.

I don't have those numbers in front of me, but I would suspect that we're talking about $5 million, $10 million of base revenue that we could be -- that we could receive as a result of this unusually warm weather.

Better than last year comparably?

Last year was not as warm as this year.

The second quarter, that was not true.

Actually, '08 was a little warmer overall than '09.

But I think July has been a very -- was a very hot month relative to last year.

We'll get some benefit from that.

And the SESH pipeline, does this first half, roughly, represent a normal return for you, or there are so many pieces in there, that it's really not very representative?

I hope it's not representative.

There's a few things that are going on.

One, as you might recall, we took a $5 million hit, because we came off at $71 million in the first quarter.

So would you need to adjust that.

And we had a fair amount of capacity that we sold, but it comes in over time, and we hadn't sold a lot of that this year and there's a couple hundred million a day of capacity there that we're -- we've been selling, trying to sell on a short-term or an interruptible basis.

So I really don't think we're going see a normalized run level until we get all these contracts in effect, which is going to be a year or two down the road.

Hopefully it is going to get better than what we've seen this year.

Next year will be better?

Should be?

Next year is going to be better, but this is not going to be the same profitability level as our Carthage to Perryville pipeline.

I understand.

Thank you very much.

Okay.

(Operator Instructions).

Our next question will come from the line of Lasan Johong with RBC Capital Markets.

Thank you.

Just a couple clarification questions.

The demand data you presented is weather adjusted, is it not?

On the electric side?

Yes.

No, those are raw --

Oh, those are raw numbers.

Just a quick follow-up.

Obviously C & I business was pretty lackadaisical.

Are you at all seeing signs of recovery in the C & I section?

We've seen both customers that were having to put on prepay and new customers that were able to sell to.

Volumes are off a little bit on the retail side, but by and large I think our retail business has been pretty solid this year, especially given the economy.

I think where we've seen the most weakness is in the wholesale sector, because there's just not a lot of seasonal variations in basis that we've seen in the past.

Now, the second quarter is historically a very mild -- the lowest quarter of the year from a wholesale side.

But the business is doing okay on the retail side.

I think the wholesale side is where we're seeing a little weakness.

Are you seeing any signs of recovery on the wholesale side?

Not a lot at this stage.

Okay.

And I'm assuming the July weather is equally as cooperative so far as -- or was as June month, month of June.

Is that correct?

Yes.

Thank you very much.

Okay.

Okay, I think that's it.

Thank you very much to everyone.

I would like to thank you for participating on our call today.

We appreciate your support very much.

Have a great day.

This concludes the CenterPoint Energy second quarter 2009 earnings conference call.

Thank you all for your participation.