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CenterPoint Energy, Inc. (NYSE:CNP)

Q3 FY08 Earnings Call

November 5, 2008, 11:30 AM ET

Executives

Marianne Paulsen - Director of IR

David M. McClanahan - President and CEO

Gary L. Whitlock - EVP and CFO

Scott Rozzell - EVP, General Counsel and Corporate Secretary

Analysts

Lasan Johong - RBC Capital Markets

Carl Kirst - BMO Capital Markets

Mark Siegel - Canaccord Adams

Michael Goldenberg - Luminous Management

Steve Gambuzza - Longbow Capital

Faisel Khan - Citigroup

Yiktat Fung - Zimmer Lucas Partners

Debra Bromberg - Jefferies & Co.

Danielle Seitz - Seitz Research

Operator

Good morning and welcome to CenterPoint Energy's Third Quarter 2008 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]. Thank you.

I'd now like to turn the conference over to Marianne Paulsen, Director of Investor Relations. Ms. Paulsen?

Marianne Paulsen - Director of Investor Relations

Thank you very much, Tina. Good morning, everyone. This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy. I'd like to welcome you to our third quarter 2008 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 third quarter 2008 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-Q 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 SEC.

Before Mr. McClanahan begins, I would like to mention that a replay of this call will be available until 6:00 PM Central Time through Wednesday, November 12, 2008. To access the replay, please call 1-800-642-1687 or 706-645-9291 and enter the conference ID number 68361847. You can also listen to an online reply 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 to David McClanahan.

David M. McClanahan - President and Chief Executive Officer

Thank you, Marianne. Good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. I am pleased to summarize our performance for the third quarter of 2008.

This morning, we reported net income of $136 million for the third quarter or $0.39 per diluted share. This compares to net income of $91 million or $0.27 per diluted share for the same period last year.

Operating income was $337 million for the third quarter of 2008 compared to $287 million for the third quarter of 2007. I believe our overall financial results continue to demonstrate the benefit of our balanced portfolio of electric and natural gas assets.

Before I review the performance of each of our businesses, I want to discuss the significant event that occurred in September. Hurricane Ike struck our service territory early in the morning of September 13 and over 90% of our customers lost power as a result of the storm. Many of our customers suffered extensive damage to their homes and businesses.

I am extremely proud of the employees from all of our business units and the 11,000 personnel from 35 states in Canada who responded to our call for assistance. Together, we restored power to all customers capable of receiving service in just 18 days. I cannot say enough good things about their efforts and response of the communities we serve during this difficult period.

Some work is ongoing to replace temporary pairs that we made in order to restore power as quickly as possible. But, we expect to have our system return to its pre-Ike condition soon.

We have estimated that the total cost for this storm restoration effort will be in the range of 650 to $750 million. These costs are being deferred for future recovery and therefore do not affect our third quarter earnings. Gary will explain the recovery process and expected timing in his comments.

Now let me review the performance of each of our business segments beginning with Houston Electric. Houston Electric reported operating income of $169 million in the quarter compared to operating income of $155 million last year. As a result of the timely restoration efforts after Ike, the estimated loss of third quarter revenue was limited to $17 million, which was partially offset by expense savings of $5 million as normally incurred operating and maintenance cost were postponed because of the storm.

The quarter benefited from strong growth in our Houston service territory, where we added over 42,000 customers in September 2007. While this growth has moderated since the first half of the year, the Houston economy has not been as adversely affected as other parts of the country and we still expect solid customer growth for the year.

We also benefited from increased customer usage in July and August when compared to last year. In addition to these factors, taxes other than income taxes declined by $10 million as a result of the state margin tax being reclassified as income tax in 2008 and a state franchise tax refund.

Over the last several years, we've continued to invest in a number of new electric transmission projects in our service territory. In order to recover the increased cost related to them, we filed for a transmission cost of service rate increase in September, in which we requested an increase of $22.5 million over our existing rates. Since about 74% of that increase will be paid by other ERCOT utilities, we expect an annual operating income increase of approximately $17 million. This morning the Public Utility Commission approved this request and it is effective immediately.

As you know, utilities in Texas can change their transmission rates to reflect new investments without going through a complete rate case, which mitigates the regulatory lag associated with transmission investments.

Houston Electric continues to pursue an advanced metering system and the implementation of an intelligent grid. In May, we filed an initial advanced metering deployment plan and surcharge request. We've been exploring ways to settle the timing and nature of our deployment with the other parties in this proceeding. As you would expect, these discussions were interrupted as a result of Hurricane, Ike and have just recently resumed. However, no agreement has been reached so far.

In the interim, the PUC has an approved... has approved an agreement between us and the retail electric providers in our service territory, which allows REPs to request the early installation of up to 125,000 advanced meters so long as the requesting REP agrees to fund the associated cost. Today, there has been only limited participation in this voluntary program.

Now let me turn to our natural gas distribution business. Our gas distribution system was also damaged by the various hurricanes that affected our service territory. We incurred approximately $3 million of Hurricane Ike related cost, which are also being deferred for future recovery. Our gas operations personnel responded quickly to safely restore the system following Ike enabling them to then assist in the electric restoration. I am extremely proud of our employees who work diligently to ensure the public safety and reliability of our system.

This unit reported an operating loss of $6 million compared to a loss of $8 million for the same period of 2007. Due to its seasonal nature, the third quarter is typically the weakest quarter for this business. We do continue to benefit from solid customer growth, adding nearly 26,000 customers since September 2007. We also benefited from a rate increase implemented in Arkansas last November.

We are continuing to pursue right strategies to decouple our revenues from the volume of gas we sell to encourage conservation and to recover cost on a more timely basis. This strategy encompasses mechanisms such as weather normalization clauses, revenue and cost of service adjustments and decoupling. These strategies are particularly important in the current volatile natural gas price environment, which has increased the focus on conversation and energy efficiency.

Last year, we were successful in implementing right decoupling in Arkansas, and this year we obtained weather normalization in Oklahoma. Recent decisions in our Texas Coast jurisdiction provides for an annual cost of service adjustment mechanism to recognize changes in usage, operating costs and investment.

Earlier this week, we filled a request with the Minnesota Public Utilities Commission to increase our Minnesota rates by approximately $60 million. As part of this filing, we are also asking to decouple revenues from the volume of gas sold. Last year, the Minnesota Legislature enacted legislation encouraging utilities to pursue decoupling initiatives and promote energy conservation. Our decoupling request is based on this new legislation. We do not expect final action on our request until the fourth quarter of next year. However, interim rates are expected to be effective January 2009, subject to refund.

Our competitive natural gas sales and services segment reported operating income of $35 million for the third quarter of 2008, compared to $4 million last year. We did not experience the same volatility in the natural gas markets after Hurricane Ike as we did in 2005 following Hurricanes, Katrina and Rita.

Our core business of selling natural gas to commercial and industrial customers increased by approximately $7 million, due primarily to favorable locational and seasonal price differentials. In the third quarter of this year, we recorded a $24 million of write-down of natural gas inventory to the lower of average cost to market compared to a $5 million inventory write-down last year. This quarter, we also recorded mark-to-market gains of $46 million associated with derivatives we used to lock in economic gains compared to $2 million last year.

Our interstate pipeline segment recorded operating income of $55 million compared to $17 million last year. Higher income from our pipeline between Carthage, Texas and our Perryville Hub in Northeast Louisiana help offset reduced ancillary services and higher operating expanses.

Operating income for the third quarter also included a $7 million charge associated with pipeline assets that were removed from service.

The third quarter of last year included tax refunds of $4 million related to settlements of certain state tax issues and a gain of $5 million associated with the sales of our pipeline services business.

We have built a number of new laterals off our existing pipelines to serve new customer facilities. In addition, producer interest in the Woodford, Fayetteville and Haynesville shale areas near our facilities remains high, and we continue to work with producers on getting new natural gas production to market.

In September, the Southeast Supply Header or SESH, our joint venture with Spectra was placed into commercial operations and begun flowing gas primarily to the Florida markets. SESH is well positioned to serve the growing southeast market, and there are future expansion options if warranted by market demand.

SESH has applied for a waiver to operate at higher operating pressure, and that waiver should be received later this month. Upon receipt of this waiver, SESH will have a capacity of 1 billion cubic feet per day, of which a substantial portion is already under long-term contracts with a solid group of shippers.

Now let me turn to our field services segment. We reported operating income of $44 million for the third quarter of 2008 compared to $26 million for 2007. This business unit continues to benefit from the strong drilling activity and increased production in the Mid-Continent area.

Our field services business also has a 50% ownership in natural gas processing facilities that continue to expand. The equity income that we recorded from this joint venture increased to $4 million compared to $2 million in the third quarter of 2007.

Well connects in and around our existing gathering footprint in the Arkoma, Anadarko and ArkLaTex basins are running significantly ahead of last year, but we are beginning to see a reduction in drilling activities in these basins.

However, in the Woodford, Fayetteville and Haynesville shale areas, drilling activity remains high resulting in a substantial increase in new project opportunities. We will continue to pursue attractive growth projects in our footprints in order to enhance the long-term profitability of this business.

In closing, I would like to remind you of the $0.1825 per share quarterly dividend declared by our Board of Directors at the end of last month. 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'll now turn the call over to Gary.

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

Thank you, David and good morning to everyone. I would like to discuss a few items wit you this morning.

First, let me describe the process we will pursue to recover our cost related to Hurricane Ike. When the Texas Legislature convened in January 2009, we will seek enabling legislation similar to that which was passed in 2006 following Hurricane Rita. Such legislation would allow us to issue storm cost recovery securitization bond similar to the three series of transition bonds the company has issued in connection with the stranded cost recovery, and would require the Texas Public Utility Commission to review our call and issue a financing order.

These bonds would have the dual benefit of allowing us to recover our Ike cost in a timely fashion by lowering the ultimate cost to our customers. We believe that this securitization method of recovery has the support of state and local officials and our Public Utility Commission.

Assuming early passage of storm cost securitization legislation, we hope to be able to complete the regulatory process and issue bond by next summer.

Now let me address recent credit rating agency action. Following the review of the impact of Hurricane Ike on our liquidity, profitability and the regulatory recovery process for storm cause, both S&P and Moody's affirmed the ratings and ratings outlook on CenterPoint Energy and its subsidiaries, Houston Electric and CERC in reports issued on October 9. All three rating agencies continue to have stable outlook from the debt of the parent company and its subsidiary.

I would now like to address our liquidity position in light of the storm cost and the unprecedented conditions and turmoil in the capital markets. Over the years, we have taken significant steps to augment our liquidity in order to ensure that we maintain financial flexibility and a strong liquidity position even in the phase of disruptions like Hurricane Ike and its related costs.

Currently, we have a $1.2 billion credit facility at the parent company, a $300 million facility at Houston Electric, and a $950 million facility at CERC. These facilities do not expire until the second quarter of 2012 and do not contain mad clauses [ph].

In August, we amended the financial covenant ratio of consolidated debt to EBITDA in the parent company credit facility, so that the permitted ratio of debt to EBITDA will remain at five times for the duration of the facility. We did so with 100% support from our bank group, while needing only a 51% vote. This action had the effect of increasing our debt capacity for 2009 and beyond since the covenant was scheduled to reduce to 4.5 times at the end of 2008.

There are no covenants in the Houston Electric or CERC facility that would be expected to limit borrowings under those facilities.

As of September 30, CenterPoint Energy had liquidity of approximately $1.2 billion under its various committed credit facility. Considering the estimated storm cost and our other cash requirements for the remainder of 2008, we believe our liquidity under the existing facilities coupled with other cash we expect to generate from our businesses will be adequate to satisfy our projected requirements even if we took no further steps.

In light of the continued disruptions in the capital markets however, we are taking additional steps to further strengthen our liquidity position.

First, we are in the process of amending our parent company credit facility to in effect exclude the storm cost from the covenant calculation by increasing the debt to EBITDA ratio to 5.5 times. The ratio would revert to five times at the earlier of December 31, 2009 or when we receive securitization proceeds.

Second, we are working with our banks to syndicate a new $450 million, 364-day revolving credit facility at Houston Electric, although the ultimate size of the facility could vary. This facility will provide additional liquidity if needed.

At this point, we do not anticipate a need to drawn on this facility, but we think it is prudent to have a backstop facility in place for the next year's protection in this period of contingent instability and uncertain access to the capital markets.

And finally, we're taking steps internally to enhance our liquidity position, while improving and growing the profitability of our businesses. Our business performance remains solid and generated significant operational cash flow. We'll continue to prudently allocate capital to our regulated operations, as well as the value creating opportunities in our pipelines, and field services businesses. However, we're actively identifying discretionary capital expenditures that can be either deferred or eliminated without affecting the reliability of our system, or limiting our long-term business prospects. In addition, we are focused on efficiently managing our working capital.

Let me also point out that the consolidated Group has no material debt maturities until September of 2010, when $200 million of parent company debt comes due.

There are a couple of financing developments that I wanted to share with you this morning as well. First, as many of you know, CERC's receivable facility expired on October 28. Advances under the facility of $150 million were repaid on termination. Due to the disruption from hurricane Ike, the due diligence process necessary to implement a new one year facility was delayed for a few weeks. We anticipate that CERC will have a new one... a new one year facility, one year receivable facility in place shortly.

Second as David indicated, the SESH project, our joint venture with Spectra, was placed into service in early September. Both partners have been funding their respective shares of the construction cost so far. We have been working jointly with Spectra in planning a permanent financing for the project and once we can access the capital markets in an efficient and cost effective manner, our intention is to do so.

Finally, I'd like to discuss our revised earnings guidance. This morning in our earnings release, we announced that we now expect our 2008 earnings to be in the range of $1.25 to $1.35 per diluted share. In increasing our guidance, we considered our performance to date in addition to various economic, operational and regulatory assumptions. We have assumed normal weather in both the gas and electric utilities for the rest of the year and we have not attempted to predict the timing effects of mark-to-market, our 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 transactions.

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 will now open the call to questions. In the interest of time, I would ask you to please limit yourself to one question and a follow up. Tina, would you please give the instructions on how to ask question?

Question And Answer

Operator

[Operator Instructions]. Our first question will come from the line of Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Good morning, nice quarter. On the recovery of the storm damage, Gary if there is a delay in the legislation or the legislature say, you know we will pass on this one for whatever reasons, what would be the contingency for recovering the storm damage cost?

David M. McClanahan - President and Chief Executive Officer

Why don't we... I'll ask Scott Rozzell to answer that.

Lasan Johong - RBC Capital Markets

Okay.

Scott Rozzell - Executive Vice President, General Counsel and Corporate Secretary

Well Lasan, there is a couple of permutations probably that I might mention. The passage of a legislation is something that we'll be working very hard to achieve and that could be done early in the section or perhaps later on, early in the session requires some procedural steps that are unusual, but which we think are lined up pretty well for this time around. In the event if there is not legislation passed, we have a history of a storm recovery process in the state that allows us to for those costs and recover in this part of the normal rate making process.

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

Lasan, this is Gary. Our focus really I think we feel confident about the process I outlined in my comment. What we are doing is ensuring frankly of that we have and we do have adequate liquidity as I mentioned, we are going to put a backstop credit facility in Houston Electric. I think the thing that's concerned or has concerned us probably in the near term is really been access to the capital market. And in the... I don't expect it to happen but we would have to go down a path of a rate case to recover these costs and we would look at permanent financing, but I think the key now is to ensure that we have the adequate liquidity which we do, and this process will play out over the next number of months and we feel confident about what I outlined in my prepared comments as the process that we will follow.

Scott Rozzell - Executive Vice President, General Counsel and Corporate Secretary

And Lasan, David I think mentioned in his comments that securitization process which we have some experience with here in Texas is one that generally enjoys wide spread support because it allows us to get our money relatively quickly, but it also ultimately lowers the cost that is paid by the ultimate customers. Storm restoration recovery periods in the past before we used securitization were actually reasonably short, so you would have a fairly large amount recovered over a fairly short period of time if you were the traditional out. That's why I think most people favor securitization.

Lasan Johong - RBC Capital Markets

But pardon me for asking this kind of silly question or dumb question, but if the capital markets are somewhat discombobulated either one of two things I suspect will happen, either the interest that need to be paid on the securitization bond be very expensive or the size of the facility may intimidate enough that it may not happen. So in either case, even if legislation was passed, I would assume CenterPoint would defer access to capital market and the sort of question is if that does happen in the mean time, are you able to collect as if this were a normal part of your rate base?

David M. McClanahan - President and Chief Executive Officer

Lasan, I think it's going to be a normal part of rate base, but as you saw in our standard cost recovery, we did recover interest from the date we incurred the cost until we recover those through the sale of the transition bonds. It wasn't a full rate of return, but it was more like an interest component.

Lasan Johong - RBC Capital Markets

And that interest component will be based on your current cost of capital or your current debt cost of capital?

David M. McClanahan - President and Chief Executive Officer

I am not sure exactly how we did that. I know Entergy got interest when they recovered their storm cost back following Katrina and Rita and I don't recall how the commission set that interest. But I may... I mean it would set to cover the cost that the utility is incurring to carry the storm cost.

Lasan Johong - RBC Capital Markets

Got you. On the field services business, you mentioned that in the ArkLaTex area, the drilling activity is kind of slowing down, but in the Haynesville, Woodford and Fayetteville shale plays, the drilling activity seems to still robust. Can I assume that the two kind of cancel each other out?

David M. McClanahan - President and Chief Executive Officer

Yeah, I think we still have plenty of opportunities, plenty of well connects there that we are pursuing. And this is all around the weakness we're seeing in natural gas prices the last couple of months, and really the amount of gas that is being produced in this Mid-Continent area. This could be just a temporary slowdown or it could be a sign of more to come. But today we still see lots of opportunities and also when you look at the big picture.

Lasan Johong - RBC Capital Markets

Okay. And just quickly on price of commodities. On the oil and gas side, how does the change in price affect your earnings from field services?

David M. McClanahan - President and Chief Executive Officer

It doesn't really affect it very much from an oil standpoint. We do have a little commodity exposure. We have some processing facilities where we take a percentage of proceeds, so liquid prices do matter. They've been holding pretty firm to be very honest. And we have a little exposure on to natural gas prices because there is some system imbalance, and gas we sell each month. But these are not big impacts, but they can impact I guess 5 or $6 million with every dollar or so declining in the price of natural gas.

Lasan Johong - RBC Capital Markets

5 or 6 million for every $1 change in gas price?

David M. McClanahan - President and Chief Executive Officer

Yeah, that's just kind of a general guide. I think that's a fair guide.

Lasan Johong - RBC Capital Markets

Okay. On the SESH project, I am assuming the same parameters would hold, if the market is chilly, you wouldn't go and access the capital markets at a higher cost of capital, you'd wait until the better situation, correct?

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

I think that's exactly right, Lasan. I mean, like these are unprecedented situations at the moment. Although, I think what I would say, getting better to be honest about it. But, credit spread widen, this is a great project from a financing point of view for both ourselves and our partner. I can't speak with them, but certainly we're both going to be patient at least that's our decision at this point, and we have the financial stability and flexibility to take the time necessary and hope these capital markets do start getting better, sooner rather than later, just not only for our company, but frankly for all companies.

Lasan Johong - RBC Capital Markets

That's great. Excellent. One more question, if you don't mind. Can you talk about how if at all this destruction in the credit market is affecting your capital expenditure plans going forward and if you are delaying projects or if you are pushing back CapEx spending on typical maintenance stuff and things like that?

David M. McClanahan - President and Chief Executive Officer

Yeah Lasan. As you would expect and like probably every other company in America, we are absolutely looking at all our capital plans and all our expenditure plans whether it's capital or operating or maintenance. And I expect that we are going to be able to push some out. Now, as you know in the business we are in, there is a certain amount of dollars you just have to spend. We are not going to do anything that would jeopardize our system reliability or public safety, so there is a given level of expenditures you have to spend each and every year and we are going to do that. But there is some timing of some of those expenditures we are looking at and there are some discretionary projects that we can defer either off until later next year or beyond or just cancel all together. So, we are actively looking at that putting together new budgets and so I feel pretty good about the approach we are taking now.

Lasan Johong - RBC Capital Markets

If I can imply something for what you just said, would it be correct to say that your net overall growth rate over 3 to 5-year period is unchanged, maybe the shape of is all different but generally is unchanged?

David M. McClanahan - President and Chief Executive Officer

I think it's way too early in this process, I think we will some tempering of capital expenditures in the near term. We are just going to have to see how all this plays out beyond that.

Lasan Johong - RBC Capital Markets

And that's in the longer term, no?

David M. McClanahan - President and Chief Executive Officer

Well if the opportunities are still there, sure. We hope to be able to do it, but we don't... we just hard to go beyond a year or two and suggest all this capital will be spend in the future.

Lasan Johong - RBC Capital Markets

Okay, thanks very much. I appreciate your help.

David M. McClanahan - President and Chief Executive Officer

You bet.

Operator

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

Carl Kirst - BMO Capital Markets

Hey, good morning everybody. Some of my questions have been asked, let me just a few follow-ups. Actually, just a couple of clarifications first. With respect to guidance, just want to make sure we are on the same page. When you guys are using the $1.25 to $1.35, that's based on the year-to-date results of $1.05 implying the 20 to $0.30 fourth quarter, just to be clear?

David M. McClanahan - President and Chief Executive Officer

Yes.

Carl Kirst - BMO Capital Markets

Okay.

David M. McClanahan - President and Chief Executive Officer

We do this... we don't look at mark-to-market or inventory write-downs even in the actuals. We eliminate those in making our estimate for the year.

Carl Kirst - BMO Capital Markets

Okay, just wanted to make sure I was on the same page. Second small question. Hurricane Ike impact $17 million in the third quarter. Is it... do you have a sense of what kind of follow-on impact will be in the fourth quarter here as we kind of get it back up to pre-Ike level?

David M. McClanahan - President and Chief Executive Officer

There shouldn't be a significant impact, we've got probably around 5000 customers down along the coast, residential customers that are without power because their homes have been substantially impacted and destroyed in some cases. But I don't think that will... you will be able to really detect that in the number. So I would suggest that the impact from a revenue standpoint should be very, very minimal going forward.

Carl Kirst - BMO Capital Markets

Appreciate that. And then last question, just going back to field services that has nice bump up in the EBIT. I guess I just wanted to make sure, I understood what if any of the commodity component was in there year-over-year, if you look at volumes lines were up a little bit just purely on kind of a tariff revenue divided by volume, there was a nice big spike in the implied fee, if you will, I just want to make sure I understand specifically what's going on there?

David M. McClanahan - President and Chief Executive Officer

Third quarter commodity prices had little impact, if any, on our EBITDA. I would say it's negligible. All of that increase came from two areas. One was just throughput. We had more facilities, we had greater volumes and that's the reflection of really a lot of the investment we've been making over the years.

And secondly, we did have a... some system gas due to system imbalances that were trued up, and we had a $7 million favorable gain from that. That's a one-time that happens from time-to-time, but it's not... certainly not something you count on. But I think to look at our run rate, you eliminate that $7 million from the change, and you get a good run rate year-over-year.

Carl Kirst - BMO Capital Markets

Okay. Thanks for the clarification.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

Our next question will come from the line of Mark Siegel with Canaccord Adams.

Mark Siegel - Canaccord Adams

Hi, good morning. With regards to your plans to implement AMI, do you still anticipate the PUC ruling by year-end, and what are your endpoint deployment volume expectations for '09?

David M. McClanahan - President and Chief Executive Officer

It's really hard to say, Mark. My guess today is that we will not get an order out of the commission. There have been no hearings held, all those hearings were put on hold as we talk and the parties continue to talk, but I think there is a lot of issues we're talking about there now. So I would expect that it will be into next year before we get in agreement that we get before the PUC, or PUC may actually have to hear the case. So, I think it will be well into next year before we start spending a lot of money on advanced metering.

Mark Siegel - Canaccord Adams

Okay. And then any sense of what participation levels had been like in the accelerated 125,000 endpoint opportunity?

David M. McClanahan - President and Chief Executive Officer

Very minor, I mean, a handful I would say. Reliant Energy was very interested in that, and I think they've run into their own issues and they have slowed down a lot.

Mark Siegel - Canaccord Adams

Okay. Thanks so much.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

Our next question will come from the line of Michael Goldenberg with Luminous Management.

Michael Goldenberg - Luminous Management

Good morning.

David M. McClanahan - President and Chief Executive Officer

Good morning.

Michael Goldenberg - Luminous Management

Congratulations on an excellent quarter. I wanted to further ask about your liquidity position and just ability to generate cash flow and investment capital expenditures even if there is a delay in recovery of the storm cost? Could you walk me through that again, just in case there is a delay?

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

Okay. I'll be glad to. This is Gary. I think if you go back to my prepared comments, obviously we have our credit facilities are available to us and liquidity they are undrawn on those. I think Michael, you have to really start looking at our businesses which are very solid businesses. So if you think about sources of cash in the company, the sources of cash or operating cash flow from our businesses. And as David described, we're very focused on working capital management and management of allocating frankly fixed capital as well.

So, we're going to continue and if you think about the fourth quarter and you think about in the next year, we're going to generate sources of cash from our operational cash flow, which will fund our CapEx and our dividend and will fund Ike. We may draw some of our facilities to fund a portion of the Ike cost, but frankly that depends on the capital markets. As I said earlier, Michael, one source of cash for us will be the SESH financing issue, as I mentioned earlier.

We have been funding that. Our partner has been funding as well and our expectation is to permanently finance that into the capital markets. So, that'll be a source of cash. But we will continue to generate operational cash flow. We're going to do one other thing as I mentioned on the call, we're going to... and this is really for timing purposes and I don't expect to draw it, but we are going to put a backup credit facility at Houston Electric, a backstop credit facility. We've launched it at $450 million, we think it's prudent.

Frankly, not from the standpoint of the process that we'll follow with the... both the legislative process and the PUC, it's really the capital market and making sure that we have a good solid position behind the capital markets ensuring that they open up and they open up effectively into next year. And as you know, this is a financing for next year, so fingers crossed for everyone that capital market start opening up.

So we have set ourselves up with solid liquidity facilities that support our business and then we generate a significant amount of liquidity ourselves and we'll manage that as well responsible.

Michael Goldenberg - Luminous Management

And you've cleared your plan with rating agencies and all on board and everything is fine with them?

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

Well, the rating agencies, we have an active dialogue and I just mentioned, I just updated on the rating agencies discussion, and they absolutely see where we're going with the company in this regard.

Michael Goldenberg - Luminous Management

And finally, maybe I missed this one point, but as the 650 to 750 cost, how much have actually already been paid. What percentage of invoice has already been settled?

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

Look, through September as you would expect, through September 30, it's about $72 million of the amount have been paid. If you look at year end, you will probably have another $600 million of that. The total cost, some of these will trail into next year, we don't have it all accrued obviously by the end of the year, so about 72 million paid September 30, there is another $600 million that will be paid in fourth quarter.

Michael Goldenberg - Luminous Management

Got it. Thank you.

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

Thank you, Michael.

Operator

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

Steve Gambuzza - Longbow Capital

Good morning.

David M. McClanahan - President and Chief Executive Officer

Good morning.

Steve Gambuzza - Longbow Capital

I was wondering if you could comment specifically on the field services CapEx. I think your prior guidance was something for around $85 million of CapEx in '09, down from like around $150 in '08. Can you just comment on what do you expect '08 to be and if the '09 outlook for field services CapEx is still around that level?

David M. McClanahan - President and Chief Executive Officer

Yeah. Let me just remind myself on... I think we are continuing to see a lot of opportunities in this area. We have got a lot of good solid producers we are working with. I expect that the capital opportunities in '09 are going to be at least, if not more than the opportunities we saw in '08. In '08 we had a total capital budget of about $166 million. We may not spend all of that, but we see lots of good opportunities out there. We've got some great relationships with some producers that... we are working with them very closer to make sure that we understand the timing of their drilling and their production. So we don't put facilities in place until they are absolutely needed. But I think we are going to have some very attractive opportunities next year, Steve.

Steve Gambuzza - Longbow Capital

What was the spending for the first nine months of the year in field services?

David M. McClanahan - President and Chief Executive Officer

Let's see, is about... about 77... about $80 million.

Steve Gambuzza - Longbow Capital

About 80 million?

David M. McClanahan - President and Chief Executive Officer

Yeah.

Steve Gambuzza - Longbow Capital

Okay. And so you expect '09 should at least be at an equal run rate with '08 based on what you see for that?

David M. McClanahan - President and Chief Executive Officer

Yeah, I think that's exactly right. I actually think it's going to be more than '08 given some of the opportunities we see today.

Steve Gambuzza - Longbow Capital

Okay. And it looks like the volume growth in this quarter and really frankly for the first nine months of the year, is somewhat decelerated from what you've seen in past years. And I am just curious, you mentioned some regional differences in some of the areas you operate, and I am just curious if you have a view on kind of how the markets you are operating in how they are growing versus how your business is growing? Do you still see the market growing in excess of what you are growing at or is it the other way around?

David M. McClanahan - President and Chief Executive Officer

I haven't ever made a study of how our throughput compares to kind of the overall increase in the marketplace. I do know this, the shale plays whether it be Fayetteville, Haynesville, Woodford, there is lots of drilling and that production is way up and the traditional basins that we gathered in for many, many years that production continues to be up as well. It hadn't been up as much as the shale plays because they are starting in terms of percentage wise, they are starting from a much different point. But I think that we are seeing substantial production in both the traditional and new shale plays.

The real question I think is will the traditional basins, will they still continue the level of drilling in those areas? The last 4, 5 years we've connected 400 wells to our system each year, most of those have been in these traditional basins. And certainly, I think there is going to be continued drilling. It's not going to fall off the wall, but we think that it could ratchet back from the 400 level. Back five years ago, before natural gas prices started accelerating, we would see around 220 to 250 wells a year connected to our system. So, it's probably going to be somewhere between where it was back then and what we see in the last few years.

Steve Gambuzza - Longbow Capital

So I guess based on you view to commit high levels of capital for the business, and in total you expect volumes to continue to grew, is that fair?

David M. McClanahan - President and Chief Executive Officer

Yes, I think that's exactly right.

Steve Gambuzza - Longbow Capital

Okay. And then my final question is on another topic, for Houston Electric, in terms of the storm cost. Are you able to capitalize the interest cost associated with funding those expenditures until you securitize them, or they would be expensed, the interest cost would be expensed between now and securitization?

David M. McClanahan - President and Chief Executive Officer

Let me... I don't think we capitalized them, but we expect to be able to recover the carrying cost once we get into securitization, but until we get our financing order out of the commission, we are not going to be capitalizing any of the interest carry on those storm costs.

Steve Gambuzza - Longbow Capital

So, there will be somewhat of a timing mismatch, you know you're going to have expense in the first two quarters, and then revenue recovering to offset those expenses once...?

David M. McClanahan - President and Chief Executive Officer

That's correct. There will be somewhat of a mismatch in timing.

Steve Gambuzza - Longbow Capital

Okay. Thank you very much.

Operator

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

Faisel Khan - Citigroup

Hi, guys.

David M. McClanahan - President and Chief Executive Officer

Hi, Faisel.

Faisel Khan - Citigroup

Just, if you can... can you remind us what the process was for Entergy when they went through this? And how long it took them from when they went to the legislature and then when they got the recovery bond?

Scott Rozzell - Executive Vice President, General Counsel and Corporate Secretary

Faisel, it's Scott. Their situation was a little different in that the storm that they were dealing with, Rita and Katrina happened at almost the same time during the year, September timeframe. But they were in a off year, so they actually had their legislation passed as part of a special session.

So, the two timeframes are not exactly consistent. But my recollection is that the storm within September, the legislation was passed, they took their... made their application before the Public Utility Commission, and then settled their financing order and their cost recovery docket with the various interveners in that case. And then I believe they actually issued there securitization bond about a year after the storm.

Faisel Khan - Citigroup

Okay, got you. In the case that we are talking about your... you're looking at a legislature meeting in January, and then the projected issuance of securitization bonds before the end of the third quarter, is that right?

Scott Rozzell - Executive Vice President, General Counsel and Corporate Secretary

Right. And let me explain to you. There is... we're speculating a little bit in that we expect our legislation to mirror the Entergy legislation. And the Entergy legislation had a 150-day timeframe for the PUC to act, once the application for the securitization bonds was filed, the application for the cost recovery timeframe. So we expect the legislature to begin meeting in January, which it will and in Texas, the Governor has the ability to include within his call to the legislature a series of legislation that can be acted upon within the first 60 days.

And we anticipate that the Governor will include in that call all of the various hurricane-related pieces of legislation that the legislature has to take up. So our hope is that we will have the legislative authorization done relatively quickly in this session and then the timing will be related to how quickly we can actually file with the commission for a cost recovery and how quickly the commission will act on that or we're able to work out a settlement with our various parties the way Entergy did.

David M. McClanahan - President and Chief Executive Officer

And Scott, the only other thing is you mentioned by the end of the second quarter, hopefully, we can do that quickly, but it maybe into the third quarter before for these bonds get out of the door. It really depends on how quickly this process goes there, Scott.

Faisel Khan - Citigroup

Okay, got you. Then... thank you, Scott. Gary, I believe you said the available liquidity... can you remind what the available liquidity is currently, I know you mentioned it but I missed that number?

Gary L. Whitlock - Executive Vice President and Chief Financial Officer

1.2 billion.

Faisel Khan - Citigroup

Okay, got you. And then the incremental rates that you guys got on your transmission assets for new capital that went into those into that PP&E. The $17 million in operating income is what you expect, is that kind of... is that next year?

David M. McClanahan - President and Chief Executive Officer

We'll give a little bit this year because it went into effect in... well, today maybe a couple million dollars, but the majority of it will be next year.

Faisel Khan - Citigroup

And then Minnesota, the Minnesota rate case, the $60 million rate request. That's been filed and what's the timeline on that?

David M. McClanahan - President and Chief Executive Officer

We probably will not get an order until the fourth quarter of next year.

Faisel Khan - Citigroup

Okay. And is there a potential for a settlement there or is that going to be litigated [ph] there?

David M. McClanahan - President and Chief Executive Officer

It's... I'm not sure how to answer that. We always try to settle our cases. We'll put in interim rates in January. So there will be I think some emphasis to try to settle, but we have not been as successful in Minnesota in settling rate cases as in the other jurisdiction. So, I think you can probably assume a fully litigated case here.

Faisel Khan - Citigroup

And on the... in terms of the number of customers you have in competitive natural gas business; that seems to have jumped up quite substantially over last year. What's the... what's happening there, just kind of give us a little color around that?

David M. McClanahan - President and Chief Executive Officer

I think that relates to a small book of business we bought last year and it's really that was the increase from last year. It's reflected in this year's numbers that happens since the third quarter of last year. So it's simply the customers we purchased in essence. And then there are... we've added some customers, but not that magnitude.

Faisel Khan - Citigroup

David, one last question on the AMI kind of interest, you said there was only a limited amount of participation by the REPs. Clearly the REPs are having their own issues right now. I mean given that the PUCT seems to have a desire to put this cap... put this technology in place what you think the end game is here, given the situation when the REPs and given the desire by the PUCT to put these meters in place?

David M. McClanahan - President and Chief Executive Officer

Well, I think ultimately we are going to have full deployment across all our system. Faisel, I think the real question is one of timing, and I think it's when we get started and how fast we go, but I think over a five or six-year period, I think we are going to have fully deployed advanced metering system in Houston.

Faisel Khan - Citigroup

Okay, great. Thanks for the time, guys.

David M. McClanahan - President and Chief Executive Officer

Okay

Operator

Our next question will come from the line of Yiktat Fung with Zimmer Lucas Partner.

Yiktat Fung - Zimmer Lucas Partners

Hello?

David M. McClanahan - President and Chief Executive Officer

Hello, yes.

Yiktat Fung - Zimmer Lucas Partners

Good morning. First a couple of questions regarding the revision in guidance. I was just wondering exactly which segments are currently performing than... better than what you expected at the beginning of this year?

David M. McClanahan - President and Chief Executive Officer

I would say that, we've had good performance to be very honest, across the board, but certainly our field services and our pipeline segments have performed better than our expectations. Gas LDCs are performing more or less the way we expected them to. Houston Electric, especially given Ike I think is doing well, but the biggest increases have been in our pipeline and field services over what we expected at the beginning of the year.

Yiktat Fung - Zimmer Lucas Partners

And then when should we expect the company to issue 2009 guidance?

David M. McClanahan - President and Chief Executive Officer

We usually do that when we release fourth quarter earnings, which would be in February, March of next year... February of next year I guess.

Yiktat Fung - Zimmer Lucas Partners

Earlier in the call you were talking about half the field service segment has a bit of exposure to commodities through processing contracts. I was wondering what portion of this contracts are fee-based versus commodity sensitive?

David M. McClanahan - President and Chief Executive Officer

If you look at our pure gathering, it's 95% fee-based. But we do have processing facilities that are not completely fee-based and... but we have no keep whole contracts but we have a percentage of proceeds, so we take liquids in and we sell those liquids and those prices have been very attractive. So we've done well with those. But I would say that 90% of our revenues are fee-based, but we have some exposure to both natural gas prices and liquid prices for that other 10%.

Yiktat Fung - Zimmer Lucas Partners

And just one last question, you talked a bit about the transmission rate increase versus electric, I was wondering when the next distribution rate case would be?

David M. McClanahan - President and Chief Executive Officer

Well we are in a rate freeze today. We have to... we can file as early as 2010 using a test year I think 12 months ended 2009, so December 2009. So first time, we could file with the... in June of 2010.

Yiktat Fung - Zimmer Lucas Partners

Thank you very much.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

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

Debra Bromberg - Jefferies & Co.

Hi, good morning. I just wanted to get clarification on something regarding the expected timing of the issuance of securitization bonds, if you go in that direction. Did you say that you're looking at sometime mid next year?

David M. McClanahan - President and Chief Executive Officer

Yeah. We've said by the summer of the next year and that's a pretty wide range, we recognize that. But it just depends on how quickly we can get the legislation passed and the regulatory process takes, but we believe by mid-year next year is the good target that we're targeting, and that's what we're trying to push for.

Debra Bromberg - Jefferies & Co.

So if I... I think with Entergy and Hurricane Rita, if I'm not mistaken, it took well over a year, so that's why that timeframe sounds a little aggressive to me. But what are your thoughts on the timeframe for the regulatory process at the PUC?

David M. McClanahan - President and Chief Executive Officer

You know, I think it's probably three or four months, I would say. We've talked to the commission; I understand we want to have a quick but thorough review of all these costs. I think they believe that securitization is the right way to go. But you have to get all across the end, you have to get them all reviewed and audited and documented. So that's going to take time and be very honest, that's probably one of the steps that determines when we can actually file because it does take a while to get some of these costs in. We still have contractors from out of state doing work on our system today.

We believe by the middle of this month, all those contractors will be back where they came from, but then they have to get all their costs bill to us, we have to audit them. So that's going to take sometime and it'll be well into early next year to get that done. Then we can... and simultaneously we'll be working with the legislature trying to get some legislations passed and hopefully those two things will coincide and we can get something filed in the first quarter of next year and then keep that process moving.

Debra Bromberg - Jefferies & Co.

Well, thank you.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

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

Marianne Paulsen - Director of Investor Relations

Danielle?

Danielle Seitz - Seitz Research

To pension funding, could you advice that?

David M. McClanahan - President and Chief Executive Officer

Yes, our pension assets have been impacted just like I guess every other pension assets across the country and we've had substantial under performance against I assume return, we assume these assets will earn at 8.5%. So, there could be substantial change in our asset base and if that happens at the end of the year, we're going to see higher pension cost, there is no doubt about that. I think we have to kind of let this play out, but it's... that's an issue that could impact us next year. Yes.

Danielle Seitz - Seitz Research

Okay. And you'll have more color I guess when at the end of the year?

David M. McClanahan - President and Chief Executive Officer

I'm sorry, would you ask that again?

Danielle Seitz - Seitz Research

You'll really have more details at the... toward the end of the year?

David M. McClanahan - President and Chief Executive Officer

Yeah absolutely, you have to get to the end of the year, see where your assets are, run your actuarial studies to get what your pension costs are. And certainly when we discuss guidance in the first quarter of next year, we'll give full disclosure on that... or full discussion on it.

Danielle Seitz - Seitz Research

And just a more general question. What's... given the fact that your earnings are getting more diversified, what type of payout ratio would do you feel comfortable with over the longer term?

Marianne Paulsen - Director of Investor Relations

Payout.

David M. McClanahan - President and Chief Executive Officer

Payout ratio?

Danielle Seitz - Seitz Research

Yes, please.

David M. McClanahan - President and Chief Executive Officer

We've talked about that we want to payout between 50 and 75% of our earnings in dividends. And I believe that's still a good range to be using. So, that's what guides us. We clearly know that our investors look at us as a dividend yield play, and they want growth. But they want growth that is based on a clearly low risk kind of growth so... but we look at growing our dividend and hopefully we can do that in the future.

Danielle Seitz - Seitz Research

Thank you.

Marianne Paulsen - Director of Investor Relations

Okay. Tina?

Operator

Yes, ma'am.

Marianne Paulsen - Director of Investor Relations

We are running a little bit over, but I think we'll take one more question.

Operator

Thank you. Our final question will come from the line of Leon Debow [ph] with Catapult Capital Management.

Unidentified Analyst

Good morning.

David M. McClanahan - President and Chief Executive Officer

Good morning.

Unidentified Analyst

Just wanted to check on this, Minnesota rate hikes that you guys are going to put in interim rates for, do you get to book all of those as earnings, or is it just cash until you get the final order?

David M. McClanahan - President and Chief Executive Officer

You get the cash, and we'll make an estimate and a fairly conservative estimate of how much we think we'll get to ultimately keep, and we'll... so we will not book them all as revenues. We will make some type of estimate of what we think will ultimately happen in the rate case.

Unidentified Analyst

Okay. And also, you guys had a franchise tax refund, how big was that?

David M. McClanahan - President and Chief Executive Officer

It was a little less than $5 million.

Unidentified Analyst

Okay. And one final question. You had a... you said, you're not really seeing many gas players pulling back in your regions, what price level do you think is sort of the breakeven point for a lot of the drillers there, where, I guess gas continues to slide I guess, where do you think will we see an impact?

David M. McClanahan - President and Chief Executive Officer

I wish I knew the answer to that. I will say, a number of the producers we work with, they hedge their gas forward for a year-to-time. So, it probably will not impact next year nearly as much as it might impact the following years. But, I would say, in the 5 and $6 range, the shale play still look attractive. If you get down much below that, I think people will start slowing down, but that's purely an educated guess on my part, and I wouldn't put a lot of weight on that.

Unidentified Analyst

Okay. Thank you very much.

David M. McClanahan - President and Chief Executive Officer

You bet.

Marianne Paulsen - Director of Investor Relations

Okay. Thank you very much, Tina. I would like to thank everyone for participating in our call today. We appreciate your support very much. Have a great day.

Operator

Ladies and gentlemen, this concludes CenterPoint Energy's third quarter 2008 earnings conference call. Thank you for your participation. You may now disconnect. .

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