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CenterPoint Energy, Inc. (NYSE:CNP)

Q4 2008 Earnings Call

February 25, 2009, 11:30 am ET

Executives

Marianne Paulsen - Director, IR

David McClanahan - President and CEO

Gary Whitlock - EVP and CFO

Analysts

Carl Kirst - BMO Capital Markets

Lasan Johong - RBC Capital Markets

Faisel Khan - Citigroup

Steve Gambuzza - Longbow Capital

Danielle Seitz - Seitz Research

Yiktat Fung - Zimmer Lucas Partners

Debra Bromberg - Jefferies & Company

Carl Seligson - Utility Financial

Operator

Good morning and welcome to CenterPoint Energy's Fourth Quarter and Full Year 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)

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

Marianne Paulsen

Thank you very much, Christie. Good morning, everyone. This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy. I would like to welcome you to our fourth quarter and full year 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 fourth quarter and full year 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-K 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, March 4, 2009. To access the replay, please call 1-800-642-1687 or 706-645-9291 and enter the conference ID number 81005183. 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 McClanahan

Thank you, Marianne. Good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. 2008 was a very good year for the company our electric and natural gas utilities had very solid performances. And our interstate pipelines and fuel services units turned in exceptional results.

Each year since our formation in 2002 we have improved upon a very solid foundation and 2008 was no different. Not only did we strength each of our business units we also improved the company's overall financial flexibility and strength.

As we face an economy in decline and uncertain energy markets, I believe that the company is well positioned to confront these challenges and emerge even stronger. This morning I will discuss our 2008 financial results as well as describe the plans and prospects for each business unit as we head into 2009.

Let me begin with an overview of our fourth quarter 2008 results. This morning we reported net income of $87 million for the fourth quarter or $0.25 per diluted share. This compares to net income of $108 million or $0.32 per share for the same period of 2007. The reduction in net income for the fourth quarter is in large part due to higher income taxes as the effective tax rate for the fourth quarter of 2007 was substantially lower than 2008.

Operating income of $303 million was unchanged from the fourth quarter of 2007. Our gas distribution business posted an increase in operating income of almost $7 million due to reduced expenses.

Our energy services business also reported a $7 million increase in operating income primarily a result of value captured from seasonal price differentials.

Despite continued solid customer growth at Houston Electric we recorded reduced operating income of $10 million stemming primarily from higher transmission costs billed to us by other transmission providers.

Our field services business contributed $2 million more as a result of increased throughput while our interstate pipeline's operating income was $5 million lower due to reduced ancillary services and higher operating expenses.

Let me now turn to our full-year 2008 performance. Overall 2008 was a very good year for us and we continue to make progress in achieving our business and financial objectives.

Net income for 2008 was $447 million, or $1.30 per diluted share, compared to $399 million, or $1.17 per diluted share, for 2007.

Operating income increased by almost $100 million to $1.273 billion in 2008. Let me give you a little bit more detail regarding the performance of each of our business segments beginning with Houston Electric.

Houston Electric reported operating income of $407 million compared to $400 million in 2007. Beginning in 2008, the Texas margin tax was classifieds as an income tax and thus did not impact operating income.

The 2007 operating income however was reduced by $19 million due to the previous state franchised tax with the margin tax replaced. On the other hand 2007 also included income of $17 million from the fuel reconciliation associated with our former integrated utility. So normalizing for these two items, 2008 was slightly better than 2007.

In 2008, we added nearly 31,000 customers to our Houston service territory. While this is still solid growth the rate of customer growth moderated in the second half of the year as a result of Hurricane Ike and the declining economic conditions. We did see increased customer usage in 2008 due in part to warmer weather.

Our operating expenses were up significantly in 2008 due primarily to an increase in transmission cost. While we did receive some increase in transmission revenues, the net impact reduced operating income by $22 million compared to 2007.

We intend to seek legislative or regulatory solutions that would provide for more timely recovery of this cost. I could not talk about 2008 without mentioning the significant role played by Hurricane Ike.

I would once again like to thank our employees and the thousands of mutual assistance workers from around the country who helped to rebuild our system after Ike devastated our service territory in September of last year. As result of their efforts, service was restored to most of our customers within two weeks and to essentially all of our customers in 18 days.

The estimated loss of revenue was limited to $17 million which was partially offset by $10 million in operation and maintenance cost that were postponed because of the storm. To-date, we have incurred approximately $600 million in restoration cost and have only a few invoices still outstanding. As a result we have lowered our estimate of the total storm restoration cost to between $600 million to $650 million.

These costs are being deferred for future recovery and therefore do not affect our earnings. Gary, will explain the recovery process and expected timing in his comments. Houston Electric is in the process of installing and advanced metering system as a result of the settlement agreement approved by the Texas PUC in December. And we continue to explore the implementation of an Intelligent Grid.

Beginning next month and continuing over the next five years we will deploy approximately $2.4 million advanced meters across our service territory.

Our capital cost estimate for the deployment is approximately $640 million. We are recurring the cost through a surcharge which went into effect earlier this month. The surcharge for each residential customer is $3.24 per month for the first two years and is expected to be reduced to $3.05 per month for the following 10 years. This new technology deployment is the first step in moving the electric grid into the digital age, because of the structure of the cost recovery tariff and the timing of deployment we expect the project will have a small negative impact on cash flow and a small positive impact on earnings in 2009.

Now let me turn to our natural gas distribution business. This unit reported operating income of $215 million a slight decline from the $218 million reported for 2007. Although, we added nearly 25,000 customers over the course of the year, the growth slowed market lay in the second half of the year as was the case in our electric utility. We also benefited from rate increases including a $20 million increase implemented in Arkansas in November 2007. Unfortunately, the benefits of customer growth and rate increases were substantially offset by reductions in customer usage.

We continue to pursue right mechanisms to decouple revenues from the volume of gas sold to help mitigate the trends of reduced customer usage. In our Texas Coast jurisdiction we recently gained approval for an annual cost of service adjustment mechanism to recognize changes and usage, operating cost and rate base.

For the last two winters, we have entered into weather hedges for our Minnesota and Texas jurisdiction, to mitigate weather related usage risk. Most of our other jurisdictions have some sort of weather normalization or other adjustment mechanisms.

This past November, we filed a request with the Minnesota Public Utilities Commission to increase our Minnesota rates by approximately $60 million. And as part of the filing, we ask to decouple revenues from the volume of gas sold.

We implemented a $51 million interim rate increase last month, subject to refund. We do not expect final action on our request until late this year or early 2010. I would also add that the recent decline in natural gas prices could reduce the amount of rate relief we need in Minnesota. If gas prices stay at current level or fall even further.

Our competitive natural gas sales and services segment reported operating income of $62 million for 2008, compared to $75 million for 2007. Operating income in 2007 reflected almost $24 million more in gains from sales of gas from inventory, while in 2008, our operating income increased by approximately $12 million, due primarily to favorable locational and seasonal price differentials.

In 2008, we also recorded $30 million in write-downs of natural gas inventory to a lower of average cost of market, compared to $11 million in the inventory write-downs in 2007. In addition, we recorded mark-to-market gains of $13 million associated with derivatives we used to lock-in economic gains compared to charges of $10 million in 2007. Overall, our Energy Services business had a pretty solid year.

Now let me turn to our interstate pipelines unit. Our interstate pipelines recorded operating income of $293 million for 2008 compared to $237 million for 2007. Higher income from our Carthage to Perryville pipeline and increased transportation and ancillary services more than offset higher operating expenses.

Operating income also benefited from an $18 million gain from the sale of two storage development projects offset by $7 million charge associated with pipeline assets that were removed from service.

In September, the Southeast Supply Header or SESH our joint venture with Spectra was placed in commercial operation and began 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.

In 2008, we recorded equity income of $36 million which included $33 million of allowance for funds used during construction for our interest in SESH. Depending on the timing and cost of permanent financing, we expect equity income from SESH to be somewhat less in 2009 than in 2008.

Now let me turn to our field services segment. We reported operating income of $147 million for 2008 compared to $99 million for 2007. This business unit benefited from strong drilling activity and increased production in the Mid-Continent area in 2008, when it connected a record 475 wells. Our field services business also benefited from the expansion of our jointly owned natural gas processing facilities.

We recorded equity incomes of $15 million from this joint venture driven by strong liquid prices compared to $10 million the previous year.

In addition, operating income for 2008 benefited by $17 million from the sale of non-strategic assets and the settlement of a contractual dispute, and by a gain of $7 million associated with system and balances.

Taking into account the performance of all of our business unit. I believe the company had a very solid year, and I believe our overall financial results continue to demonstrate the benefits of our balanced portfolio of electric and natural gas assets.

Now, let me turn to our outlook for 2009. We expect this year to be even more challenging in 2008, we also believe that the combination of the stability provided by our regulated electric and natural gas utilities and the high level of activity in a number of producing areas served by our pipeline and field services businesses should allow us to achieve solid performance across our various business units.

We expect Houston Electric to continue to perform well. We anticipate that our customer base will grow at a pace comparable to the level experienced in the second half of 2008, but below the rate for the full year. In addition, we expect to realize incremental $15 million from the full-year impact of a transmission rate increase implemented in November 2008.

Our capital expenditures are budgeted at $422 million including approximately $82 million related to our advance meter deployment.

In our natural gas distribution utility, we should see the benefits from rate increases including the interim rates in Minnesota as well as continue to expense control measures. We expect to see customer growth but levels below those we experienced in 2008 the real unknown is whether we will continue to see our customer usage decline at the same rate as 2008. We will maintain our focus on rate decoupling strategies and on operational efficiencies in order to mitigate the impact of reduced customer usage.

Our capital plans for 2009 of $155 million reflects a decline in capital spending of over 25% from 2008 levels. We expect our base commercial and industrial sales business to perform at a level similar to 2008, early in the year we had seen some positive pricing differentials particularly on seasonal spreads. Our focus is to continue to expand our commercial and industrial customer base while maintaining our low risk profile. The ability of our interstate pipelines and field services businesses to duplicate their 2008 performances will depend on market dynamics, natural gas prices and natural gas liquid prices.

Nearly 80% of these segments revenues are either [propose] repayment, our fee based providing a significant amount of stability. The remaining revenues are derived from our ancillary services, system management or gas processing, all of which are depended to some degree on commodity prices and market dynamics.

Based on the current commodity indices, we don’t expect these revenues to be as robust as they were in 2008. We continue to see a very high level of drilling in the unconventional shale areas, particularly the Haynesville, Woodford and Fayetteville shales. This is driving opportunities for both, our pipeline and field services.

In December of last year, we filed an application with the FERC, requesting authorization to increase the capacity of our Carthage to Perryville pipeline by approximately 274 million cubic feet per day through installing additional compression.

This expansion, which would increase Carthage to Perryville's capacity to almost 1.9 billion cubic feet per day, could be in service by the second quarter of 2010 pending FERC approval.

Our pipeline's capital budget will be approximately $200 million, down significantly with the completion of SESH, but otherwise comparable to 2008. Our capital budget for field services is $277 million for 2009, more than double our 2008 capital expenditures and reflects our success in securing new projects in the shale areas.

In summary, our core businesses provide a significant amount of profit stability and we continue to invest in new projects that are expected to provide for increased profitability in the future. We expect to invest almost $1.1 billion this year.

In closing, I would like to remind of the $0.19 per share quarterly dividend by our Board of Directors on January 22nd. This is more than a 4% increase over the dividend we paid in 2008, and the fourth consecutive year that we have raised our dividend.

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

With that I will not turn the call over to Gary.

Gary Whitlock

Thank you, David and good morning to everyone. I would like to discuss a few items with you this morning. First, let me describe the process we are pursuing to recover our cost related to Hurricane Ike.

The Texas legislature convened last month and we are seeking enabling legislation similar to that, which was passed in 2006 following Hurricane Rita. Such legislation would provide the legal basis for us to issue non-recourse storm cost recoveries securitization bonds similar to the three series of transition bonds the company has issued in connection with its stranded cost recovery.

The legislation would authorize the Texas Public Utility Commission to review our storm restoration cost and issue a financing order. Earlier this month, Governor Perry designated emergency items for the 2009 legislative session. And included in those items was legislation to assist entities in recovering from the 2008, Hurricane.

This emergency designation allows lawmakers to begin considering these issues early in the legislative session and bills addressing this issue have been filed in, both the Texas House and Senate. Storm cost recovery securitization bonds would have a dual benefit of allowing us to recover our Ike costs in a timely fashion, while lowering the ultimate cost to our customers.

We believe that this securitization method of recovery has the support of state and local officials, including the Public Utility Commission. And we expect to file with the PUC in March even if the legislation has not yet passed. We hope to be able to complete the regulatory process and issue bonds later this summer.

I would now like to address our liquidity. On our last earnings conference call in early November, I told you that in light of the continuing disruptions in the capital market and the incremental liquidity requirements imposed by Hurricane restoration work, we were taking additional steps to further strengthen our liquidity position.

First, I said we were in the process of amending our parent company credit facility to in effect exclude the storm cost from the financial covenant calculation by increasing the permitted ratio of consolidated debt-to-EBITDA to 5.5 times.

The ratio would revert to five times at December 31, 2009, or when we receive securitization proceeds. We successfully amended the facility in November. The amendment also makes clears that any non-recourse storm cost securitization bonds that are issued will not be treated as debt for purposes of the covenants.

Second, I said we were working with our banks to syndicate a new $450 million, 364-day revolving credit facility at Houston Electric. We successfully negotiated this new facility which was upsized to $600 million. We put this facility in place to provide additional liquidity if needed.

At this point, we do not anticipate the need to draw on this facility, but we think it is prudent to have it backstop facility in place for the next year as protection in this period of continued volatility and uncertain access to the capital markets.

In addition, to the revolving credit facility last month CenterPoint Energy, Houston Electric issued $500 million of general mortgage bonds due in 2014 with an interest rate of 7%.

I also explained on the call that SESH receivable facility expired on October 28. Due to the disruption from Hurricane Ike, the due diligence process necessary to implement a new facility was delayed for a few weeks. We successfully closed on our new receivable facility on November 28.

Availability under the new 364-day facility ranges from $128 million to $375 million, reflecting seasonal changes in receivable balances. These are among the steps we have taken to ensure that we remain in a very strong liquidity position.

As of February 24, CenterPoint Energy had unused capacity of over $2.5 billion under its various committed credit facilities. 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.

We also continue to work with our joint-venture partner, Spectra Energy on a permanent financing for the SESH project which was placed into service early last September. Once we can access the capital markets in an efficient and cost-effective manner, our intention is to do so.

In addition to the financing actions I just described, we continue to look internally for ways to enhance our liquidity position while improving and growing the profitability of our businesses.

Our business performance remains solid and generates significant operational cash flow and we are focused on efficiently managing our working capital. We will continue to prudently allocate capital to our regulated operations and to value-creating opportunities in our pipe lines and field services businesses.

As David mentioned, our capital budget for 2009 is approximately $1.1 billion. Permanent financing to find our capital program will consider the optimum mix of debt and equity consistent with maintaining and enhancing the credit metrics, and credit ratings of both, the parent company and our subsidiaries.

Consistent with this plan, today we filled with the SEC to offer us to $150 million in common stock to a continuous equity offering program, some times referred to as an at the market or equity dribble program.

The total amount of equity that we would issue under this program during 2009 could vary depending on market conditions and other factors. This equity is an addition to the amount of equity raised annually through our employee benefit plans, and our Investors Choice Dividend reinvestment plan, which was approximately $80 million in 2008.

We have chosen the continuous offering program to maximize our flexibility in these volatile markets, both in terms of how much we issue and over what timeframe.

Before I review our earnings guidance for 2009, I would like to discuss the expected impact of pension expense and potential funding requirements associated with our pension plan. We, like many other pension fund sponsors, have experienced a significant decline in the value of our plan assets in 2008.

As a result of decreased asset values, as well as changes in plan design and assumptions on the rate and discount rate, our non cash pretax expense increase for 2009 is estimated to be $88 million or $0.16 per diluted share. However, in terms of funding, we are not required to make a cash contribution to our pension plan in 2009.

This leads me to my final topic, our earnings guidance for 2009. This morning in our earnings release, we announced that we expect our 2009 earnings to be in the range of $1.05 to $1.15 per diluted share. This guidance range includes two significant items.

First, as I just mentioned, we will have a non-cash pension expense increase for 2009 of approximately $88 million, or $0.16 per diluted share. Second, we expect higher interest expense of at least $0.08 per diluted share from the amortization of fees related to Houston Electric's new $600 million credit facility and interest expense on Houston Electric's $500 million general mortgage bonds issued in January.

In addition our 2008 diluted earnings per share included approximately $0.07 of favorable non-recurring items in our intestate pipelines and field services businesses.

In providing our guidance we also considered various economic operational and regulatory assumptions including recovery or cost associated with Hurricane Ike. We have assumed normal weather in both the gas and electric utilities and we have not attempted to predict the timing effects of mark-to-market or inventory accounting on the earnings of our competitive natural gas sales and service 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 will turn the call back to Marianne.

Marianne Paulsen

Thank you Gary. With that we will now open the call to questions. And in the interest of time, I would ask you to please limit yourself to one question and a follow up. Christie, would you please give the instructions on how to ask a question?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Carl Kirst of BMO Capital.

Carl Kirst - BMO Capital Markets

Hey good morning everybody. Gary, can I just focus on the pension expense for a second is it possible to break that up as far as what you think would fall under possible regulatory allowances versus something that might be associated with say for instance the field services or something where it would just be up to the parent company, unfortunately we have to swallow?

Gary Whitlock

Okay, Karl, this is Gary. About 87% of that increase in the expense will go to gas and electric. So certainly during that, going forward certainly as we see great relief that, that will be considered in those filings.

Carl Kirst - BMO Capital Markets

Okay, and if you just hit sort of on the second question is this, with respect to looking at CenterPoint Electric, if I recollect correctly the next time you file use a 2009 test year does that the higher pension expense certainly just what we are generally seeing with the economy usage is that, I guess make for more accelerated filing in early 2010, can you help us out with what your thoughts are at this point?

Gary Whitlock

Karl, you know I think it we can file on a accelerated basis but I think it probably makes more certain that we would file. There is a provision that we would not have to go in and file that but if we see these kind of cost increases and we are not, and if we are not earning our return, we clearly will file as soon as we can in 2010.

Carl Kirst - BMO Capital Markets

Okay, and then just the second to kind of follow-up second question on the mid stream, I guess I just want to get a little bit more clarity to the extent that you can give it. What you are assuming your guidance with respect to volumes I guess I am trying to make sure I understand what your expectations are in organic basis versus what looks to be a fairly robust spend in 2009 relative to prior years?

David McClanahan

You are talking about throughput primarily --

Carl Kirst - BMO Capital Markets

Yes.

David McClanahan

Throughput we expect higher throughput and in '09 and we did in '08. What we are seeing now in the more traditional basin is a reduction in drilling. But we are seeing a very robust drilling in the shale areas which is going to more than offset kind of some of the declines we will see in more traditional basin. So we are assuming a higher throughput in '09 than we saw in '08.

Having said that Carl as you know field services does have some commodity exposure on two fronts, one in our typical gathering contracts we have some incentive provisions which if we can run our equipment efficiently we get to basically earn some gas that we sell and we do that every year. And then in our processing plans and our jointly owned plans that's we are exposed to natural gas liquids prices there.

We have made some assumptions in our plan that prices are going to be down fairly significantly for both natural gas and for liquids. We think there is still some downside there its we are not at, we did not assume the prices we are seeing today and we could see another $10 million or $12 million of potential downside pressure on field services if prices would fall further.

Carl Kirst - BMO Capital Markets

I am sorry, in your assumptions for 2009, you have assumed that prices could actually decline a little bit more from where they are today, did I understand that?

David McClanahan

No, if they do decline.

Carl Kirst - BMO Capital Markets

If they do.

David McClanahan

If they do, we made some certain assumptions about price decline, we were not as clear volume as we should been I guess and we did not hit it exactly right and gas prices and liquid prices that follow on a little bit further than we thought but we think if they stay where they are we will still make this plan but there is still some, there is some downside there, I would not want to say when.

Carl Kirst - BMO Capital Markets

Okay thank you.

Operator

So our next question comes from the line of Lasan Johong of RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Thank you. Gary, in your guidance of [$1.05 to $1.15] I'm assuming you guys – share count dilution in there from the $150 million equity issuance you plan to do, can you comment on that, let us know what that might be?

Gary Whitlock

Well I think you certainly the share price, we announced this morning as I said a $150 million and I also gave you another number which is the benefit plans in our dividend reimbursement plan last year we raised about $80 million of equity through those. So I think you could assume those to.

Lasan Johong - RBC Capital Markets

But you are not going to assume price loss. So we can think about the share count?

Gary Whitlock

No, I do not think so, I do not think that would be appropriate.

Lasan Johong - RBC Capital Markets

Okay fair enough. Also in the current economic conditions you had a lot of smaller projects that you could have executed on to kind of push the growth beyond say like the 4%, 5% range, are we going to see a slowdown in some of that activity going forward?

David McClanahan

Lasan, are you talking about in our field services and pipelines area?

Lasan Johong - RBC Capital Markets

Yes.

David McClanahan

We continue to see a lot of activity related to the shale areas. So I think we are pretty bullish on that and obviously gas prices have been falling and most of these producers have hedged for '09. So I think they are keeping their drilling programs up but. So far the shale areas we have not seen any diminution we have seen some in the traditional basins. But I think if you look at our capital budgets for both pipelines and field services and together it's $477 million. We see we have a fair amount of opportunities still in those businesses.

Lasan Johong - RBC Capital Markets

Right but what about beyond '09.

David McClanahan

Well, yeah we continue to plan beyond '09 and we do continue to see this ongoing level of activity but, it's going to depend a lot on gas prices. In the shale areas we know that producers are drilling because they spent a lot of money in to these leases and they have got to drill or they are going to loose them. But at some price may be they will not. But I think if the prices we see today they are still going forward with their drilling programs.

Lasan Johong - RBC Capital Markets

One last question, Gary do you expect continuing pension funding going forward or do you think this is it for a while?

Gary Whitlock

Well in terms of, let me break that, in terms of pension expense, we have given you those numbers as I mentioned in my prepared remarks there is no funding requirement for the company in 2009. I think at this point I do not want to predict 2010 it depends of course on the factors in 2009, the asset performance and other factors.

So I think we have to wait and see but certainly for 2009 no funding requirements and we like other companies are hopeful that the markets continue to improve, the equity markets and the markets in general. So hopefully that will happen, we will just to have to see towards the end of the year, but we will keep you absolutely informed to how that progresses.

Lasan Johong - RBC Capital Markets

Thanks a lot. Thank you very much.

Gary Whitlock

Welcome.

Operator

Your next question comes from the line of Barry Kline of Citigroup

Faisel Khan - Citigroup

Hi, guys. Actually I am Faisel from Citi.

Marianne Paulsen

Hey Faisel.

Faisel Khan - Citigroup

Just going back to the equity for a second. Besides giving us some flexibility, I mean do you have to do this equity, or is it related to any rating agency issues, or are you keeping the powder dry for maybe some opportunities in the asset side that you might see. I am trying to understand the rationale behind the equity.

David McClanahan

Well, I think the rationale behind any equity issuance or any debt issuance is the appropriate capital structure. And what we looked at and we just described to you this morning a $1.1 billion capital program. We think in terms of permanent financing, it's important to have the correct and the right mix of debt and equity and that's the driver for either our debt financing or our equity financing in this case.

So, I think it's not an issue around pressure from anyone other than to do what should be done in good corporate finances to have the right balance sheet that support these businesses. We have very good opportunities, we want to continue to execute those businesses against those opportunity. And certainly there is an equity component in terms of our financing plan.

Faisel Khan - Citigroup

On the cash tax side and the AMI rollout with the stimulus package, what kind of benefit on the cash side you guys are expecting with these sort of things, or is there a benefit from AMI rollout?

David McClanahan

Yes, there is really not. Faisel, I think there is a very deminimus amount of cash outlay something like $20 million, $25 million net in '09. That probably grows a little bit in out of year's when we get in the full swing of the deployment, but it's not going to have a significant cash drain on the company, because we are collecting a lot of dollars as we go along. But having said that as a result of that we are not going to have a big impact on earnings either because we are not going to have all of that much invested in this business to earn on.

Faisel Khan - Citigroup

Okay, and there is no, you guys had any announcement that central tax benefit, the stimulus package, bonus depreciation and sort of stuff?

David McClanahan

We haven’t and that would probably improve, it will obviously improve a little bit what I just talked about.

Faisel Khan - Citigroup

Well on the field services side you said $275 million in CapEx, is that right?

David McClanahan

Yes 277.

Faisel Khan - Citigroup

Okay. So that’s a big jump from what you guys did in '08 just in field services. What specifically are those projects related to, give us little more color on that.

David McClanahan

Yes, they are really related to the shale place and we have some very good relationship with very good customers in those shale plays. And they have asked us and we are very pleased to help them get that gas to market and those are really shale plays. We do have some compressor, optimization dollars in there, we are moving to some ownership of compressors rather than leasing them, there is probably 40 or so million dollar in there for that kind of program. It basically improves our ability to serve our customers better and control. But we have had some of that all along each of the last couple of years, but I think there is $40 million or $50 million of that kind of expenditure in '09 ass well.

Faisel Khan - Citigroup

Okay, great. Thanks for the time. I appreciate it.

David McClanahan

Okay.

Operator

Your next question comes from the line of Steve Gambuzza of Longbow Capital.

Steve Gambuzza - Longbow Capital

Good morning.

David McClanahan

Good morning.

Steve Gambuzza - Longbow Capital

I wanted to clarify one thing you said earlier about the amount of revenues that come from fee-based versus ancillary services, within field services and interstate pipeline. I know you said, roughly 80% of the combined revenues in the two segments are fee-based in nature and 20%, you have some elements commodity sensitivity, is that right?

David McClanahan

That’s right. That was the combination of pipes and field services, that’s right.

Steve Gambuzza - Longbow Capital

Okay.

David McClanahan

We have a little higher, not quite as high in field services.

Steve Gambuzza - Longbow Capital

I guess, there is roughly $700 million of revenue that you reported in 2008 between the two segments?

David McClanahan

More like $800 million.

Steve Gambuzza - Longbow Capital

$800 million, excuse me?

David McClanahan

Yes.

Steve Gambuzza - Longbow Capital

And so, historically, I think you talked about somewhere around $30 million of park and loan revenues in interstate pipelines and the field services business, I think has been historically described as being essentially all gathering days. I was just surprised, because 20% of the 800 is almost next about $150 million of revenue. I was wondering if you could provide some more color as to exactly what those revenue streams are, and you mentioned incentive fees for efficiency in field services and how much is that?

David McClanahan

Our contracts on the gathering side are fee-based. But inside of those fee-based contracts, you have incentive fees in there where it's really, where you some natural gas exposure. And it's all around the efficiency of running your compressors and to the extent we can run our compression more efficient then what the contract calls for. Then we get an upside in that. And we have worked very hard over the years on that, and we are continuing to enjoy the benefits of that kind of efficiency. So, that's part of it, these are fee-based contracts, but almost every gather has this kind of provision, this is not unusual for us.

Steve Gambuzza - Longbow Capital

Can you give some sense to how much incentives benefited '08?

David McClanahan

Probably on the order of $40 million probably that's not all that's kind of our natural gas exposure.

Steve Gambuzza - Longbow Capital

Within field services?

David McClanahan

Yes.

Steve Gambuzza - Longbow Capital

Exposure within field services. And then there will be like another kind of 30 to 40 of park and loan revenues at the pipes is that (inaudible).

David McClanahan

That has been a level that historically, that we are probably little less than that. We are not counting on that much pals going into '09.

Steve Gambuzza - Longbow Capital

Okay. Besides those two buckets, is there some other area of commodity sensitivity that would kind of take us to that 20% level that beside what you just talked about?

David McClanahan

Yes, there is a few things, there is system management, we have straddle plants on our pipeline where we treat gas before we put it into the pipeline system, so its pipeline quality gas. And as part of that treating process we keep some of the liquids that’s part of that.

Steve Gambuzza - Longbow Capital

Okay.

David McClanahan

Let me think if there is, it's probably some cross system fees that we included in there also.

Steve Gambuzza - Longbow Capital

Very helpful. Switching gears for a moment. The CapEx that you earmarked for 2009, it also looks like a fair amount of CapEx that you earmarked for 2010 in the 10-K relative to kind of historical spending levels. Do you have contracts on with shippers or the 277 that you have earmarked for 2009?

David McClanahan

Substantially all of it.

Steve Gambuzza - Longbow Capital

Okay.

David McClanahan

Yes, we do. Now there is some Greenfield in there what we call Greenfield, which are undesignated and we will get contracts as we go through the year. But a substantial part of that we have contracts four years.

Now we are working with our producers very closely to make sure there is not a change in their drilling schedule. So we are not going to put in a bunch of facilities early and have them sit idle for a while and not get any revenue from. But we feel pretty strongly that this level is the right level, but we are watching it very closely as you would expect.

Steve Gambuzza - Longbow Capital

And you said about like $50 million to the CapEx is going to the shale areas?

David McClanahan

No. There is some other system kind of maintenance capital and things like that. We have been drilling in these basins for a long-long time, and there is continue some maintenance capital in there. But all of the new growth capital I would say is in the shale areas almost all of it. I mean, we are going to still see some wells drilled in these traditional basis, but just not at the pace that we have seen in the last four year. We just connected over 400 wells a year but at least four year's and last year we connected 475 wells and a lot of those were in those traditional basins.

Steve Gambuzza - Longbow Capital

Okay.

David McClanahan

That’s going to cut back. We know that, we have seen it. What we are seeing though is, we are having a pickup in the shale areas and a well produces a lot more, per well in the shale areas than in these all traditional basins.

Steve Gambuzza - Longbow Capital

Okay. And finally, you had a very pie return on invested capital and field services for quite some time, and looks like your expanding your asset base by almost deferred with the capital plan you have going forward until '09.

It seems there are some puts and takes in terms of some of these incentive fees, which may fall off versus all this CapEx going in and volumes being up, do you have some sense as to where you think your returns on invested capital might be in 2009 relative to 2008?

Gary Whitlock

I would hesitate to say, I don't think we are going to see a significant decline, I mean there might be some, but we are not anticipating a significant decline in returns on this invested capital.

We are seeing producers want us to invest more now, a lot of producers used to do a lot of this gathering themselves, and I think they are looking to us more now to do some of the things that maybe their own internal operations would have done in the past. So that’s giving us a few more opportunities than we have had, but from a return standpoint, I don't think we are going to see significant decline in returns.

Steve Gambuzza - Longbow Capital

Thank you very much.

Gary Whitlock

Still very attractive projects in our mind anyway.

Steve Gambuzza - Longbow Capital

Thank you for your time.

Gary Whitlock

You bet.

Operator

Your next question comes from the line of Danielle Seitz of Seitz Research.

Danielle Seitz - Seitz Research

Hey, I was wondering if I could ask about how do you see your request for rate increase and do you anticipate to file for the recovery of the storms typically or do you visualize going forward a full fledge rate case based on the fact that you are expanding your equity etcetera?

David McClanahan

No, we expect to file in mid to late March with the PUC to recover our storm costs, and then following the legislation that Gary described, which would allow us to securitize those costs, we are going to ask the PUC to issue a financing order, and then we are going to go sale securitization bonds, and recover our money, and our hope is sometime this summer, or maybe late summer, but that's our plan as to get this money back this year.

Danielle Seitz - Seitz Research

And you don't anticipate to file for a rate case for the distribution patterns of the business?

David McClanahan

Not in connection with the storm. We are under a write-freeze now, and we cannot file until next year a test year based on the end of this year. We will be watching that, looking at it very closely as you would expect and to see when to file, but we have had some cost increases here with our pension, which we noted earlier and that would tend to make us go in earlier rather than later, but we are just going to have to write and get all the numbers and make sure it is worth filing.

Danielle Seitz - Seitz Research

Great. And at this point, what is your ROE on the electric side do you have the number?

Gary Whitlock

I'm sorry what was that?

Danielle Seitz - Seitz Research

ROE for electric operations?

Gary Whitlock

It's probably the ROE authorized is a little north of 10%. I think that was a settled case. There was no stated return in it, but my guess is that’s a fair number and so.

Danielle Seitz - Seitz Research

And you are not far from it based on 2009 estimate.

Gary Whitlock

We think that '08 produced ROE in the range of 10%.

Danielle Seitz - Seitz Research

Okay. Just one last quick question, own was pretty robust in '08, and do you see roughly the same type of increase in 2009, or are you feeling down?

Gary Whitlock

No, what happened in 2008? To a large extent as we had a large amount of transmission costs built to us from others. The reason that happened is, for two reasons. One is there was a fair amount of transmission built by the utilities, they raised their transmission cost factor. The second is that the way transmission works in Texas is that we bear a given portion of all of the transmission cost in the state.

In our portion, our percentage went up in '08 above '07, because the peak demand in our area was higher relative to the rest of the state than it was in the previous years. That will move around. Our guess and our hope is that it's going to back to down to more normal level, which is probably in the 23% to 24% level and it was above 25% in '08.

So our hope is that, we are not going to see those type of increases. We did file for a transmission increase of our own, based on these increases and factors others utilities are charging us. But the other part which we call the load ratio share, we can't file for that until we go in for a general rate increase.

So if that comes down, we would get a benefit. But our hope is that we are certainly not going to see another $22 million or so, which is what the increase was in '08 that was a biggest part of our own increase.

Danielle Seitz - Seitz Research

Great, thanks a lot. I appreciate.

Operator

Your next question comes from the line of Yiktat Fung of Zimmer Lucas Partners.

Yiktat Fung - Zimmer Lucas Partners

Hello.

David McClanahan

Yes.

Yiktat Fung - Zimmer Lucas Partners

Good morning. First of all, I have a question about the continuous equity issuance plan. Is there an exploration date on this filing?

Gary Whitlock

No, there is not. This is Gary.

Yiktat Fung - Zimmer Lucas Partners

So, it could basically extend if you don't finish within 2009 it could go to 2010 or even 2011?

Gary Whitlock

Look I am limited what I can actually talk about regarding the program. Your expectation is that would be 2009.

Yiktat Fung - Zimmer Lucas Partners

Okay. So, you expect to issue of all during 2009, is that correct or?

David McClanahan

I think Gary is right. We have the saying out there it doesn't have an end date on it, but we don't file it without the intention of someway executing against it whether we get it all done in '09 only time will tell, but I don't think we can give you much more color than that around it.

Yiktat Fung - Zimmer Lucas Partners

And you talked about before about targeting an appropriate balance sheet, are there certain credit metrics, or some sort of debt ratio that your company targets?

Gary Whitlock

Yeah, overall I think their Investment Grid business we are going to continue and we have done that over the last number of years to improve our credit metrics. FFO-to-total debt greater than 15%, and greater than three times interest coverage. So, we are strong in utilities, and overall we are going to continue to move those directionally to improve them.

And as I said earlier, this capital program as we look at permanent financing requires a portion of it to be equity and a portion of it to be debt. And we think this is good tool with a very valuable capital markets. We think that continues offering program is a good tool to having our toolbox to raise equity and of course we have as I mentioned dividend reinvestment plan as well as our benefit program, but we continuously raise equity with.

Yiktat Fung - Zimmer Lucas Partners

Okay, with regards to 2009 guidance is there some way that we could think about working out the earnings into the segments?

Gary Whitlock

We don't give segment guidance, we only give company guidance.

Yiktat Fung - Zimmer Lucas Partners

Or can you a little comment on that I guess directionally, I guess as the utilities earnings can't be higher, lower as.

Gary Whitlock

I tried to do that, maybe I didn't do a very job as I went through my prepared remarks taking about each of the segments and what we expected. I think probably, directionally if you just can't listen to those remarks, I think you would see where we are headed.

Yiktat Fung - Zimmer Lucas Partners

Alright. And finally, just to clarify one point, I guess the transmission concept, the higher cost don't get passed through directly to customer as you kind of defiled to get recovery of it?

David McClanahan

Well, we can change our transmission cost recovery factor twice a year, but that can only reflect higher cost to us from an increase in a factor or our own transmission cost. It does not reflect and cannot reflect an increase in the overall load ratio share of Houston Electric. That you do on a general rate case.

So like we filed for a transmission rate increase of, I think we got $17 million in November of last year and that was to reflect these increased costs that we are seeing. But it did not cover all of the increased cost.

Yiktat Fung - Zimmer Lucas Partners

I see. Thank you very much.

Gary Whitlock

Okay.

Operator

Your next question comes from the line of Debra Bromberg of Jefferies & Company.

Debra Bromberg - Jefferies & Company

Hi guys.

David McClanahan

Good morning.

Debra Bromberg - Jefferies & Company

Increased pension expense you are expecting in 2009, could you tell me roughly how much of that would be associated with the Electric Company?

Gary Whitlock

Let's see, I think we can do that.

Debra Bromberg - Jefferies & Company

And also the 10%, roughly 10% ROE the Electric Company earned in '08. What kind of common equity ratio is that based on?

Gary Whitlock

40% equity, 60% debt.

Debra Bromberg - Jefferies & Company

Was that actual or is that the hypothetical?

David McClanahan

No. That’s a hypothetical. It probably has just a tad higher than that, my guess. It's not much higher than that. But we try to keep those ratios pretty consistent with the ratios that rates are set on. But it maybe a tad above that.

Debra Bromberg - Jefferies & Company

And just one quick question on Hurricane Ike cost-recovery, if you get a PUC order by year end? Do you expect to both catch up carrying charges later in the year, and if so, was that included in guidance?

David McClanahan

We're going to ask, I think, for carrying cost as part of this filing which is consistent with what [Inter G] did in the 2007 or '06, and is consistent with what they received. But the way that will be realized in earnings is over the life of the bonds themselves. I do not think there is --

Gary Whitlock

There is debt component, equity component, but to answer your question, Debra, we do not have that in our guidance, we do not have any, because we do not know how that's going to play out as I said in the, in my comments there are certain factors that where we take into consideration and that's one we can not predict at this point.

Debra Bromberg - Jefferies & Company

Okay and just follow up on a pension question.

Gary Whitlock

About 47% of the total that I mentioned is in Electric.

Debra Bromberg - Jefferies & Company

Great thank you.

Operator

Your next question comes from the line of Carl Seligson of Utility Financial.

Carl Seligson - Utility Financial

Good morning.

David McClanahan

Good morning.

Carl Seligson - Utility Financial

Gary I was wondering in your discussion with the banks as you went for your new line was there any indication from any of the banks that have been in the prior line and particularly we believe that they were having problems relative to everything that we are hearing and reading about. Or are they just willing to write lines there regardless and hopefully accept your execution of the them when you need the money?

Gary Whitlock

Well I think it's a comment, a good question. Certainly when we started the syndication of that facility was $450 million and we upsized to $600 million which I think speaks volumes to the support we had from our bank group.

Carl Seligson - Utility Financial

Right.

Gary Whitlock

I think in aggregate, certainly each there was at that time significant angst the bank credit market, no doubt about it. Our banks that we have a long standing relationship with them they looked at this facility and understood two things one it's a secured facility at Houston Electric and the bank stepped up, understood that clearly it was priced appropriately for the market at that time.

And so we are pleased that it was upsized from $450 million to $600 million. But I would be less than candid to say otherwise in terms of there was a lot of discussion because the banks were going through their own issues at the time. But we are very gratified with the facility obviously.

Carl Seligson - Utility Financial

Okay so when you say priced appropriately I assume that means that higher levels in the way prior credits have been priced?

Gary Whitlock

That's correct, they would be at higher levels.

Carl Seligson - Utility Financial

Okay.

Gary Whitlock

This is all five you can take a look at it but it basically if drawn is 2.25 over LIBOR then it has a fee associated if you are drawing it, it's actually wretched up. But as I said, we don't expect to draw on the facilities of back stop credit facility from our perspective.

Carl Seligson - Utility Financial

No, I have just been hearing around the banking community of, you do not make any money in writing a line like this, you make it when has been therefore they are not happy with the prices that they charge at the first place?

Gary Whitlock

Well, it was more expenses than certainly traditional but our banks as I said we have long-term relationship. They understand our business. They serve these communities and so we were gratified that they stepped up.

Carl Seligson - Utility Financial

Sure, okay, thanks.

Gary Whitlock

Thank you.

Marianne Paulsen

Okay, we are at little bit over our time, but I think we will allow one more question.

Operator

Our final question comes from the line of Carl Kirst at BMO Capital.

Carl Kirst - BMO Capital Markets

Just very quickly, hopefully hear a good note. The CP expansion the phase for $274 million obviously Haynesville is exploring whether you have contracts or not but I would think capacity is going to utilized. But the question is that, do you have contracts for that 274 and can you give us a sense of what the cost of the edit compression is and presumably the rates you are going to get on that will be full tariff rates?

David McClanahan

We are closed to having a anchor shipper that will take a lot more than difficult anchor ship would take and the filing we made with the FERC was about $70 million capital spend on that. So we are very close on getting that contract.

Carl Kirst - BMO Capital Markets

Can you remind us what full tariff rates are?

David McClanahan

For CEGT, its well let see its what is our rate $0.25 is CEGT. And this is part of the CenterPoint Energy Gas Transmission system.

Carl Kirst - BMO Capital Markets

Okay. Thank you.

Marianne Paulsen

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

Operator

This concludes CenterPoint Energy's fourth quarter and full year 2008 earnings conference call. Thank you for your participation.

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Source: CenterPoint Energy, Inc., Q4 2008 Earnings Call Transcript
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