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CenterPoint Energy Inc. (NYSE:CNP)

Q1 2009 Earnings Call

April 29, 2009; 11:30 am ET

Executives

David McClanahan - President & Chief Executive Officer

Gary Whitlock - Executive Vice President & Chief Financial Officer

Marianne Paulsen - Director of Investor Relations

Analysts

Danielle Seitz - Seitz Research Group

Lasan Johong - RBC Capital Markets

Carl Kirst - BMO Capital

Scott Sanjac - Decade

Scott Engstrom - Blenheim Capital

Faisel Khan - Citi

Steve Gambuzza - Longbow Capital

Debra Bromberg - Jefferies

Mark Rogers - Gagnon Securities

Amit Sakiar - Deutsche Bank

Paul Patterson - Glenrock Associates

Operator

Good morning and welcome to CenterPoint Energy’s first quarter 2009 earnings conference call with Senior Management. During the companies 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 would now like to turn the call over to Marianne Paulsen, Director of Investor Relations. Ms. Paulson.

Marianne Paulsen

Thank you very much, Tina. Good morning everyone, this Marianne Paulsen Director of Investor Relations for CenterPoint Energy. I’d like to welcome you to our first quarter 2009 earnings conference call.

Thank you for joining us today. David McClanahan, President and CEO, and Gary Whitlock, Executive Vice President and Chief Financial Officer, will discuss our first quarter 2009 results and will also provide highlights on other key activities.

In addition to David McClanahan and Gary 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 investor section.

I would like to remind you 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. Mc Clannahan begins I’d like to mention that a replay of this call will be available until 6:00 p.m. Central Time through Wednesday, May 6, 2009. To access the replay please call 1-800-642-1687 or 706-645-9291 and enter the conference ID number 94424104.

You can also listen to the online replay of the call through the website that I just mentioned. We will archive the call on CenterPoint Energy’s website for at least one year and with that I will now turn the call over to David McClanahan.

David McClanahan

Thank you, Marianne. Good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. This morning we reported net income of $67 million for the first quarter or $0.19 per diluted share. This compares to net income of $122 million or $0.36 per diluted share for the same period of 2008.

Operating income for the first quarter of 2009 was $285 million, compared to $336 million for the same period of 2008. While on its face this may look like a disappointing quarter, I believe we had better operating performance than the reported numbers would indicate. Included in our earnings are mark-to-market charges and natural gas inventory write-downs of almost $25 million. These charges are primarily a matter of timing and are expected to turnaround as the year progresses.

We also incurred a charge of almost $12 million related to our ZENS securities as a result of the change in the value of the Time Warner stock being greater than the associated derivative liability. Without the impact from these items, our earnings would have been approximately $0.26 per diluted share, more inline with the first quarter expectations. Let me give you a little more detail regarding the performance of each of our business segments, beginning with Houston Electric.

Our regulated transmission and distribution utility, Houston Electric reported operating income of $37 million compared to $54 million in 2008. The decline in operating income was the result of two primary factors. The largest impact was from reduced throughput, which had a negative impact of $18 million. This was partially due to mild weather and partially due to conservation.

While I think it’s too early to draw any longer term conclusion, it appears that our customers were more energy conscience in this first quarter. The second factor was the increased pension expense of $5 million. Partially offsetting these two factors was an increase in customers of nearly 35,000, since the first quarter of last year and increased transmission revenues, primarily from a tariff change implemented last fall.

Beyond this quarter, we do not expect pension expense to impact earnings at Houston Electric as we will be able to defer any increase for consideration in Houston Electrics next general rate case.

Under Texas law, an electric utility may elect to defer changes in pension expense over a base year which in our case was 2007. We made this election in the first quarter of this year and will defer approximately $29 million in pension expense this year. As many of you may be aware, Houston Electric is in the process of installing an advanced metering system as the result of a settlement agreement approved by the Texas PUC in December.

We’ve installed 10,000 smart meters in the first two months of the program and are on target to deploy approximately 145,000 smart meters by the end of the year. Over the next five years, we will deploy approximately 2.4 million smart meters across our service territory at a capital cost of approximately $640 million.

We are recovering the cost through a surcharge that went into effect in February. Because of the structure of this 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, I’ll turn to our natural gas distribution business. This unit reported operating income of $118 million, a slight decline from the $121 million we reported for the first quarter of 2008.

Benefits from rate changes and miscellaneous revenues totaling approximately $13 million were more than offset by increased pension expense of $9 million and reduced customer usage which had a $6 million negative impact. Unlike our electric utility, we are not able to defer the increases in our pension expense at our gas utilities.

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

As we mentioned on our last call, we filed a request with the Minnesota Public Utilities Commission last November to increase our Minnesota rates by approximately $60 million and implemented a $51 million interim rate increase in January, which is subject to refund.

As part of the filing, we asked to decouple revenues from the volume of gas sold. We do not expect final action on our request until early next year. Our competitive natural gas sales and services segment reported operating income of $2 million for the first quarter of 2009 compared to $6 million for 2008. The decline in income was primarily a result of $6 million in write-downs of natural gas inventory to the lower of average cost or market.

In addition, we regarded mark-to-market charges of $19 million compared to charges of $22 million last year, associated with derivatives we use to lock in economic gains. Excluding these charges, our energy services business was essentially unchanged from last year and consistent with our expectations for the quarter.

Now I’ll discuss our interstate pipeline unit. Interstate pipelines recorded operating income of $69 million for the first quarter of this year compared to $71 million for 2008. Phase III of our Carthage to Perryville pipeline was put into service last April, resulting in higher operating income this quarter.

In addition, we had greater off system sales and incremental firm revenues related to new power generation facilities on our system. These benefits were more than offset by increased expenses in part due to higher pension expense and reduced ancillary service revenues.

In early March, we announced that we had executed a definitive agreement with Chesapeake Energy Marketing to transport their growing Haynesville Shale natural gas production through our Carthage to Perryville pipeline. There are two aspects to this agreement.

The first part which began earlier this month provides for a 27 month backhaul agreement of up to 500 million cubic feet per day. The second part is long terms forward haul agreements, which provides for 230 million cubic feet per day of firm transportation capacity or over 80% of the total capacity of the Carthage to Perryville Phase IV expansion, which is projected to be in service in April of 2010. This agreement is an example of our strategy of emphasizing firm, fee-based transportation revenues on our system.

This year, we expect 90% of our interstate pipelines margin to come from fee-based firm transportation services. The other 10% will come from ancillary services such as park and loan service, treating and processing and balancing services. As you know, these ancillary services are driven by market dynamics, natural gas prices and natural gas liquids prices and provide upside beyond the more predictable and consistent fee-based revenue.

The Southeast Supply Header or SESH, our joint venture with Spectra, was placed in commercial operation last September and began flowing gas primarily to the Florida markets. While SESH has contracted for all but 80 million cubic feet of the 1 billion cubic feet per day of capacity, some of that capacity commitments phase in over the first three years. We had expected that most of the remaining available capacity would be sold on an interruptible basis, but market conditions limited such sales.

Now let me discuss our field services segment. We reported operating income of $26 million for the first quarter of 2009 compared to $45 million last year. Last year’s operating income benefited by $17 million from the sale of non-strategic assets and the settlement of a contractual dispute. Excluding these prior year gains, operating income for field services was essentially on par with last year.

Increased fee-based revenues from new wells added to our gathering system since last year offset the revenue declines we experienced from reduced natural gas and natural gas liquids prices. We are projecting that fee-based revenues will account for approximately 75% of this year’s margin. The remaining portion is sensitive to commodity volumes and prices. We have locked in prices for a substantial amount of the projected volumes that are sensitive to natural gas prices.

In addition to operating income, we also recorded equity income of $2 million from our jointly owned natural gas processing facilities compared to $4 million the previous year. The decline was primarily due to lower liquids prices, which are about one half of last year’s price levels.

While drilling activity in the conventional basins is down over 50% year-over-year, activity in the unconventional Shale areas, particularly the Haynesville, Woodford and Fayetteville Shale has been minimally affected with producer activity remaining steady. Most of our growth projects for this year are concentrated in these shale areas.

In closing, I’d like to remind you of the $0.19 per share quarterly dividend declared by our Board of Directors on April 23. We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence that the Board of Directors has in our ability to deliver sustainable earnings and cash flow.

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

Gary Whitlock

Thank you, David and good morning to everyone. Today, I would like to discuss a couple of items to review, beginning with the process of recovering our costs related to Hurricane Ike.

Earlier this month, a bill was passed by the Texas legislature and signed by Governor Perry that provides a legal basis for us to issue non-recourse storm cost recovery securitization bonds, similar to the three series of transition bonds we issued to recover stranded costs.

Storm costs recovery securitization bonds have the dual benefit of allowing us to recover our hurricane costs in a timely fashion and lowering the ultimate cost to consumers. The legislation which also covers any future storms authorizes the Texas Public Utility Commission to review storm restoration cost and issue an appropriate financing order.

On April 17, we filed an application with the PUC detailing our storm restoration costs. We requested recovery of $678 million which is composed of $608 million in system restoration cost and $70 million in regulatory expenses, certain debt issuance cost and carrying cost.

In the next two weeks, we expect to file an application for a financing order with the PUC to request permission to issue bonds to recover distribution system portion, estimated to be approximately $657 million. We hope to complete the regulatory process and issue bonds late this summer.

We would recover the transmission portion, an estimated $21 million through our next transmission rate case. This leads me to my second topic, our 2009 earnings guidance. This morning in our earnings release, we announced that we reaffirmed our 2009 earnings guidance range of $1.05 to $1.15 per diluted share.

In providing our guidance, we considered various economic operational regulatory assumptions including recovery of 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 effects of mark-to-market or inventory accounting on the earnings of our competitive natural gas sales and services businesses. These effects are timing related and ultimately do not effect the economics of our underlying transactions.

In addition, we have excluded any impact to income from the change in value of Time Warner stock and the related ZENS securities and we have assumed an effective tax rate of 39% for the full year. At the year unfolds, we will continue to update you on these items as well as our earnings expectation.

Now I’d like to thank you for your interest in our company and I’ll 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. Tina, would you please give the instructions on how to ask a question?

Questions and Answers Session

Operator

(Operator Instructions) Thank you and our first question will come from the line of Danielle Seitz with Seitz Research Group.

Danielle Seitz - Seitz Research Group

Thank you. I was wondering if you are looking at cost productions in some of your businesses or should we look at the trend of operating cost as normal for the year?

David McClanahan

Good morning, Danielle. I think I would necessarily try to take the first quarter and use that as a trend. As you know, there’s always noise in looking at just one quarter. We are trying to hold the line on expenses. As you also know I’m sure, about 60% of our costs are labor and benefits and we don’t have any significant changes planned there, but we absolutely are trying to control expenses where we can, delay expenditures that aren’t absolutely necessary at this time, so we’ve got our eye on that ball.

Danielle Seitz - Seitz Research Group

Great, thanks.

Operator

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

Lasan Johong - RBC Capital Markets

Hi. Could you give us an understanding of how much this conservation issue is bearing down on your numbers? Is it most of the difference; is it a very small portion and how do you know that this is actually happening?

David McClanahan

Good question Lasan; we’re obviously focused on it. As I said, about $18 million of revenues were lost from reduced usage. Probably about $3 million or $4 million of that is related to our commercial and industrial class. We’ve seen along the ship channel some cutback by our big industrial users and we have demand ratchets and overtime that ratchets down a little.

The other side, $13 million, $14 million is in fact in the residential class and we can explain part of that with weather, but not all of it with weather. This winter, we had fewer HDD days, heating degree days, but we can’t say they were of a different quality because it was a very dry winter and we had lots of kind of space between cold days and we tend to not have as much heating load as a result of that; but I would say that at least half of it is conservation related and it could be a little bit more.

The first quarter is not a good time to be trying to draw any conclusions on the electric side, because that’s not our largest load time as you know. Beginning late in the second quarter and then the third quarter are the times that we have our biggest electric sales and that’s what we’re really focused on.

Our estimate for last year, 2008, was we saw about a 2% conservation impact in the residential area and we had continued and thought we’d see some of that trend continue, but this was beyond our expectations. So we’re watching it closely. I think it’s too early to predict it to trend, but I think customers are conserving more than they had been.

Lasan Johong - RBC Capital Markets

Okay. Just quickly on the continuous equity program, can you tell us why you want to do this as opposed to being one shot?

Gary Whitlock

Hi, Lasan. Good morning, this is Gary. Just to remind you on the continuous offering program which is $150 million; as I said in last quarter’s earnings call we think this is a tool that we’ve put in our tool box. We’ve not issued to-date, but I want to remind you that we’ve raised approximately $30 million in the first quarter in equity around our savings plan, our investor choice plan that we let you guys know about last year.

Lasan, I think our rationale remains the same in terms of a capital raise. We think in terms of permanent financing, it’s important to have the appropriate mix of debt and equity in our capital structure to execute our business plan. We have a $1.1 billion capital plan reflecting we think some excellent projects with very solid returns and our financing plans for the accretive products include equity.

I think the question then is, does a continuous offering program versus the marketed program, we just think we reserve the right to do either, but certainly I think a continuous operating program is a tool in our tool box.

Lasan Johong - RBC Capital Markets

So, it’s just a tool, but you aren’t necessarily 100% committed to it?

Gary Whitlock

What we’re committed to is a capital structure that allows us to execute a business plan. That’s what we’re really committed to.

Lasan Johong - RBC Capital Markets

Okay, thank you very much.

Operator

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

Carl Kirst - BMO Capital

Good morning everybody. If I could start maybe just back on the conservation issue, lower usage per meter on both the LDC front and the electric front seems to be about 10%, a little bit more than I think we had expected as well. It’s obviously too early to build that in; the summer is going to be the peak for the electric, but can I ask you with respect to what you’re using in your guidance range, what your expectations are for the rest of this year?

David McClanahan

Let’s take each one of them separately. There’s at least half of the electric residential conservation that we hadn’t predicted for the first quarter, but we’ve taken that into account in reaffirming our guidance, but we’re assuming that there’ll be a little conservation and weather will be normal, but we’re not counting on 5% or 10% conservation; I’ll assure you of that.

On the gas side, we expected a continuation of the trend that we had seen in the past, which is about 2% a year reduction in residential usage. I think the first quarter was a little bit more than that when you normalized it for weather, but not a huge amount different. We’re really kind of right on I think our plan for the LDC, so as long as we continue to see this level I think we’ll be all right there.

Carl Kirst - BMO Capital

Okay, appreciate the color there and then just kind of clarification here and understand there is a lot that goes into the guidance range as far as pluses and minuses, but just to make sure I’m on the same page. When the pension deferral was noted, that $29 million, is that relative to the $88 million that was talked about earlier in the year or had the $88 million already sort of excluded the $29 million that was going to be deferred?

David McClanahan

No, the $88 million didn’t. You’d have to take the $29 million off the $88 million.

Carl Kirst - BMO Capital

Okay, fair enough. I’ll jump back in queue. Thank you.

Operator

Our next question will come from the line of Scott Sanjac [ph] with Decade.

Scott Sanjac - Decade

Hi, actually my question was about the pension, but just another thing I kind was to ask through it, but can you just explain the precedence in the state for filing for pension deferral again?

David McClanahan

Yes, back in 2005, there was a change to the Public Utility Regulatory Act, which provided that utilities may set up a reserve for changes in pension expense from their last rate case or if it wasn’t specified in the rate case, then the first year after a rate case. We had our last rate case in 2006. It was a settled case, so we had no details and therefore 2007 was the base year that we work-off of. So any changes from the base year, you can set up a reserve for and ask for a request.

In ‘08 it was actually less than the amount in ‘07. Obviously with this change, it’s a big change and we decided, “Let’s go back and just catch up for ‘08” and we did that in the first quarter of ‘09 and now we’re deferring all of these dollars going forward, until the next general rate case.

Scott Sanjac - Decade

Okay. Great. Thank you very much.

Operator

Our next question will come from the line of Leon Duval with Catapult.

Leon Duval - Catapult

My questions have been answered. Thank you.

Operator

Thank you. Our next question will come from the line of Scott Engstrom with Blenheim Capital.

Scott Engstrom - Blenheim Capital

Question, the tax rate looked a little high to me in the quarter. I wondered, if that was due to the ZENS write down or if you could just discuss if that’s, if you’ve changed your expectation for tax rate on the year, and then also maybe just a little reminder on some of the ZEN accounting issues with that, will the index security catch up with the write-down on the common or could you just talk about that for a second?

Gary Whitlock

Okay, this is Gary. In terms of the tax rate, we’ve previously indicated 37% to 38% rate for the full year. Really the changes have been based on more knowledge around the Unitary Tax allocations. Of course when you get through the previous tax year, you’re able to understand those tax allocations or Unitary Tax allocations in the states that we do business.

So, in this quarter we actually had $4 million catch up related to the Unitary Tax allocation and the Texas margins tax as well. Based on that, we looked at the rate going forward and in terms of providing guidance to you, we think 39% is more in line to use this year and it’s really driven by the allocations related to Unitary Tax.

In terms of ZENS, the real driver there and again to remind you of the ZENS security, this is our lowest cost debt in our capital structure, it will be with us until 2029. The accounting for it is really related to the Time Warner shares and the evaluation of this derivative. So, I wouldn’t describe them as timing, but they move based on at least the mark-to-market if you will and the Time Warner shares will depend on the value of the Time Warner stocks. There are two of those stocks now and maybe three if they spin-off AOL at some point.

So, I think you need to exclude those, they’re non-operational. They will move and certainly could come back and frankly be favorable for the year, but I think it’s best to exclude them. They don’t really impact the economic, when you look at ZENS from an economic perspective at least.

David McClanahan

I think if you go back and look at the history, some years there’s a small loss, some years there’s a small gain. I think Time Warner stock has been under a lot of pressure, it got pretty low and it got a little bit disconnected to the opposite direction where the derivative was going. Hopefully, this will get back in line in the future, but I think it’s really hard to tell around just what’s going to happen to these Time Warner stocks.

Scott Engstrom - Blenheim Capital

You’re saying based on history, there’s a decent chance that they will move back, but there’s nothing that is guarantees that they would moved back more in line?

David McClanahan

That’s correct.

Scott Engstrom - Blenheim Capital

You’re saying the tax rate on this quarter, there is a $4 million catch up from ‘08, is that what you were saying?

Gary Whitlock

There’s a $4 million, as you know as you go through the determination of Unitary Tax, you really need to know the revenue in each of those jurisdictions, and yes there’s a $4 million, I guess you could call it a catch up, but an adjustment to insure that we have those allocations correct.

Therefore going forward, that’s why I’ve guided you to for this year, using a 39% tax rate. Look, certainly we’re going to try and improve upon that as we do the best tax management we possibly can of course, but that’s where we are at the moment.

Scott Engstrom - Blenheim Capital

And then just a last follow-up on that; so all other things being equal then, you would expect the tax rate to be lower in ‘10 versus ‘09 based on this unitary tax catch up?

Gary Whitlock

I would hope, yes. I think the short answer is yes, because you would expect to come back inline with a normalized rate which is to remind you of your corporate income tax rate, plus the tax rate in the various states in which we do business and of course Scott as you know that’s subject to change, depending on the amount of business we do in each state.

Scott Engstrom - Blenheim Capital

Right. Thanks very much guys. Appreciate it.

Operator

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

Faisel Khan - Citi

Good morning guys. On the Carthage to Perryville expansion, the Phase IV, 80% is signed up with Chesapeake. Given that’s the expansion, do you just roll those volumes until your current rates and then what would that mean for the return on capital on that project?

David McClanahan

What we do is those are negotiated contracts, so it’s really whatever the market will bear more than anything. I think our max rate on our system is $0.25, but these are negotiated rates and the cost of that Phase IV expansion is about $80 million. We spent a little bit in ‘08. I think we’re going to spend a little less than $60 million this year, but it’s a good solid project to get almost $275 million of additional capacity.

Faisel Khan - Citi

Is it fair to say that the return on expansion will be better than the initial build out of the pipeline?

David McClanahan

Yes, I think that’s right. I’d have to double check, but instinctively I feel like that’s right.

Faisel Khan - Citi

Okay. From your comments on the electric side of the equation, on the T&D business, is it fair to say given that most of your demand is in the summer, that during the summer the demand is fairly in-elastic to cooling degree days versus in the winter where it’s more of a heating degree day driven phenomenon which is a little bit more flexible, the demand?

David McClanahan

Once it reaches a given temperature and a given humidity, I think you’re right. It doesn’t matter what the cooling degrees days are. Once it’s 95% and 95% humidity, I think the air conditioners stay on. Kind of line in the wintertime in Minnesota, once it gets cold, heaters don’t go off that much, but there is some demand elasticity.

Last summer, when electric rates spiked because natural gas prices were up so high, they were $0.15 to $0.17 a kilowatt hour, we thought we detected some conservation on the part of our customers which was truly a response from these higher electric rates. Electric rates have since gone down significantly. Today they are probably more $0.12 range, so you can see they’ve declined a lot and I think that will also have some impact this coming summer.

Faisel Khan - Citi

Okay. Understood, thanks for the time.

Operator

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

Steve Gambuzza - Longbow Capital

Good morning. The operating profit that you generated in field services quarter, would you expect that to be a reasonable quarterly run rate for the year or do you expect performance to deviate substantially one way or the other?

David McClanahan

Field services is pretty consistent from quarter-to-quarter, unless you have significant changes in liquid prices or commodity prices. I don’t think it’s a bad run rate, I don’t think necessarily we use that as a guide, but it’s not a bad rate. It’s pretty consistent quarter-to-quarter.

Steve Gambuzza - Longbow Capital

At least the fee-based portion of your business should be running at around that quarterly run rate? There’s no kind of sharp acceleration or fall off in the back half of the year?

David McClanahan

No. We continue to add volumes to our system and as we add volumes, you have some increase in your fee-based revenues. We have certainly seen increases in fee-based revenues since last year and it’s kind of gradual over the year as these wells come on. So, I expect we will continue to see some increase in fee-based revenues this year, because we’ve got a lot of new projects we’re working on.

Steve Gambuzza - Longbow Capital

What was the capital spending in fuel services in the quarter?

Gary Whitlock

Just a second, we’ll get it.

Steve Gambuzza - Longbow Capital

Perhaps while you’re looking for that, just any comments, I think you said last call or in the end of ‘08 that you expect 2009 would shape up to be a very strong year in field services, but there was a tremendous amount of uncertainty around 2010. I’m just curious if you’ve gotten anymore color as to your view of the market and how that might develop in 2010?

David McClanahan

Okay, the CapEx was about $38 million in the first quarter. 2009, we’ve got four or five very large projects. We have the largest capital program that we’ve had since I’ve been around here, almost $270 million in field services, really related to these big projects in the shale areas.

Those are very attractive projects for us and we stay in very, very close contact as you’d expect with producers, because we’re basically following the producers. When they have wells that are ready to go to market, we got to be there with them, but if they slowdown, we slowdown. So far, we think we’re going to spend on the order of that $270 million. It could be a little less if some of the well drilling slows down.

As we look out to 2010, it’s a little bit harder, but we see a lot of activity in these shale areas and that’s where we think we’ll continue to get new projects. I think we’ve got something like $140 million of projected capital expenditures in ‘10. So you can see we’re a lot less than we were in ‘09 and it’s because we’re completing some of these larger projects.

Steve Gambuzza - Longbow Capital

Okay. Thank you. The SESH results for the quarter, if you strip out the charge, the profit was around $3 million. Is that kind of the run rate we should expect for SESH?

David McClanahan

Well, I hope not. We don’t think so. That rate, as you know there’s probably 20% of that Bcf a day capacity that’s not giving a demand capacity payment for this year, because it phases in over the first one or two years, three years.

We had expected that we are going to be able to sell quite a bit of that on an interruptible basis or a short term firm, but the Florida markets demand is down over there and there’s lots of gas coming into that area, so, I think that the basis has been really squeezed and we just don’t see as much activity there yet.

If you have a good, hot summer, things could change a lot. I don’t think I would guide you to using the first quarter as a trend line. We’ll just have to wait and see how this year unfolds.

Steve Gambuzza - Longbow Capital

So I guess, can we say that at a minimum it should be that and if you were able to market some excess capacity you’ll do better?

David McClanahan

I would hope that a minimum, it’s at least that and yes.

Steve Gambuzza - Longbow Capital

Okay. When the project finance or the SESH financing that you discussed in the past, can you talk about the status of that?

David McClanahan

Yes. Gary is going to take that.

Gary Whitlock

If you look at that, obviously this project’s fairly new in to service and we’re working with Spectra Steve, at the moment. As you know, those markets have been a bit choppy. I’ll call it the project finance markets although stabilizing a bit. So, we’re still in the process of evaluating that, both the need to do the financing and when to do it and what the rates would look like and really sitting down with our partner and talking that through, so no news at the moment on that one.

Steve Gambuzza - Longbow Capital

Okay, and finally the deferral of pension expense for Houston Electric, was that part of your original guidance or is that something you’ve elected to do subsequent to issuing guidance?

Gary Whitlock

Well, I think when we say its part of our original guidance and again that we had a range, we were certainly at the time looking into what we could defer, so we had some expectations, but there are moving parts in that guidance. I would say a portion of it certainly was in the guidance, but perhaps not all of it.

Steve Gambuzza - Longbow Capital

But the way to think about it is you identified when you reported Q4 what you expected the total pension expense to be the increase and now the total increase hasn’t changed. It’s just that there’s some portion of that you can defer?

Gary Whitlock

No, that’s exactly right. If you recall, what we said at the time and by the way we’re still working hard on our gas jurisdictions in terms of deferral there as well. What we said is we wanted to be conservative, so we gave you the outward number 88. I believe the $88 million is now $59 million based on the amount we’re able to defer and we’re going to continue to work on the gas side of this as well. So we want to be conservative when we gave you that guidance.

Steve Gambuzza - Longbow Capital

The equity increase in the quarter was around $30 million?

Gary Whitlock

Around $30 million, that’s correct, mainly driven by our savings plan.

Steve Gambuzza - Longbow Capital

My understanding was your total equity plan for the year was $150 million, should we think of that as going towards that amount or would this be incremental to the $150 million that you intended to achieve through a drip issuance?

Gary Whitlock

We said really two things in terms of not to repeat myself on our overall objectives for our capital structure to support our business plan, but they were additive to each other. In other words, obviously you could do a marketed transaction, we could do the continuous offering in our tool box, but its additive in terms of our benefit programs, but you don’t take the $30 million and extrapolate that each quarter, because it depends on how those plans are funded at certain times. This was mainly the savings plan in this quarter.

Steve Gambuzza - Longbow Capital

I guess I was taking it as you put out a CapEx forecast for ‘09 and based on that CapEx forecast, you had a certain external financing requirement and that external financing requirement included around $150 million of equity.

Gary Whitlock

It includes $150 million of equity and it includes also the equity we raised normally through our benefit plans.

Steve Gambuzza - Longbow Capital

Okay, thank you very much for your time.

Operator

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

Debra Bromberg – Jefferies

Hi, good morning. The O&M at the electric company, looks like it increased about $20 million in the quarter, but I think you said that pension was about $5 million of that, so I was just wondering what the key drivers were for the other $15 million.

Then also just as a follow-up on the pension, I think last quarter I had asked about how much of the $88 million of higher pension expense was expected at the electric company and you had estimated about $41 million. It sounds like that amount is lower now or if you take the $29 million deferral and the $5 million that you booked in the quarter, it looks like it’s closer to $34 million. So I just want to make sure I’m not missing something on that.

David McClanahan

The numbers you quoted are correct. The latest numbers are I think a refinement of the earlier numbers, because now we’re expecting to do $29 million and we expensed $5 million, but as you know we had a catch up from ‘08 when we made this election, so that’s the difference between the $41 million and the $35 million.

There’s a whole bunch of nickels and dimes, but I think transmission costs are the biggest. It’s almost $9 million of that and that’s a big part of the increase besides the pension. There’s a bunch of just small things and nothing else jumps out off the page at you.

Debra Bromberg – Jefferies

Is the higher transmission cost within expectations, because I know you recover some of that rate.

David McClanahan

It’s pretty close. We have to estimate what the key cost matrix is for the year, which gives us how much others will bill to us and so it’s close. It’s a little bit higher than we thought, but its pretty close.

Debra Bromberg – Jefferies

Okay. Thank you.

Operator

Our next question will come from the line of Mark Rogers with Gagnon Securities.

Mark Rogers – Gagnon Securities

Thank you. My question is regarding your smart meter rollout. I was just wondering how you have modified your schedule, either decelerated or accelerated the schedule since you’ve decided to go with smart meters and then I have a follow-up.

David McClanahan

The schedule we’re on today is the schedule we got agreement with all of the parties to our case last fall and it’s the one the PUC approved, so it’s not any different. We’re going to roll this thing out over five years. This year it will be 145,000 and then kind of ratably after that. So, I think that we’re really on schedule with what we said we’re going to do.

Mark Rogers – Gagnon Securities

Okay, and then as uncertainty seems to loom over this space regarding technology standards and communication protocols, I was wondering if the arguments with the standards committee evolves into deciding one technology or platform is simply better or is worthy of stimulus dollars over another. What is the flexibility that you have in going back to your vendors, asking them if they have a compliant technology platform and if they don’t, canceling that contract?

David McClanahan

Well, there’s probably a lot in there that I can’t answer, but we’ve pushed for open architecture of all these systems, so we can have interchangeable vendors and we’re using the communication protocols that lots of other folks are looking at and using. So, there is a lot of discussion around trying to standardize more around this. We know that and we’re following it closely and we’re part of those discussions, but I don’t think there’s anything there that is going to impact our rollout that we’ve seen anyway.

Mark Rogers - Gagnon Securities

Okay, and then if I may just one quick follow-up. If you could define some of your major use cases that you’re hoping the initial 10,000 or if you will 140,000 by year end smart meters have proven out, what would those be? In other words, what are your smart meters trying to achieve?

David McClanahan

They are going to be fully two-way communicable. We’re going to automatically read all these 145,000. We’re going to take 15 minute interval readings and those readings are going to be available through a portal, through retail energy providers, so they can provide time of day rates and we can start seeing exactly how customers will respond.

We’re going to provide small little devices in homes that can be communicated with by the meter that can keep track of usage and part of the home area network, so there’s lot of things on that front; we’re facilitating all of this. There is going to be other parties that have to participate as well. As you know, we don’t sell electricity, we deliver electricity. Somebody else is going to have to provide the time of use rates, but we’re going to make all of the data available so they can do it and customers can take advantage of it.

Mark Rogers - Gagnon Securities

Great, thank you.

Operator

Our next question will come from the line of Amit Sarkar with Deutsche Bank.

Amit Sakiar - Deutsche Bank

My questions have been asked and answered. Thank you.

Operator

Thank you. Our next question will come from Carl Kirst with BMO Capital.

Carl Kirst - BMO Capital

Appreciate the time guys, just two very quick ones on SESH. Gary, just wasn’t sure if you were going this way or not, but just on the project financing side. Without the short term capacity being sold just yet, is the project financing really more a matter of what the bond market rates are doing or is it really more kind of getting that capacity sold?

Gary Whitlock

No. I think it’s really both Carl. I think clearly the market although a bit better, I think is really the optimum financing sector and we have to make that determination. So, I think it’s a combination of the two.

Clearly, if we’re going to sell bonds, we need to have probably a bit more clarity as to what the profitability will be, both in the near term and more importantly the longer term depending on the tender of the bonds, so I think that’s certainly a variable. I think certainly the market is improving in our ability to go to market. I think they’re connected to each other and that’s the work we’re doing now with our partner at Spectra.

Carl Kirst - BMO Capital

That’s fair enough and then just a quick clarification. The equity earnings that are reported and discussed, are those pre-tax is that after-tax; just trying to figure out where that is?

Gary Whitlock

That’s pre-tax.

Carl Kirst - BMO Capital

Great. Thanks guys.

Operator

(Operator Instructions) Our final question will come from the line of Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

We just want to revisit the pension. You deferred $29 million, is that correct?

David McClanahan

No, not yet. We expect as we go throughout this year, that’s what would have been expensed and now we will be able to defer it and ask for recovery in a future rate case.

Paul Patterson - Glenrock Associates

Okay, you said you might do this on the natural gas side as well?

David McClanahan

Well, we’re working hard with our regulators and with other legislators to see if we can get something going on this front. We have a little bit of that already when we have automatic cost adjustment clauses, where if we have an increase in pension in a given year, we get to increase or reflect that in our rates the following year, but in our biggest jurisdictions which are in Texas and Minnesota, we don’t have those kind of features, so we’re looking to try to work something on that front and see if we can get a similar treatment.

It would appear to me if the electric utilities in Texas can do it, why can’t the gas utilities and that‘s what we’re talking to regulators about and I think in Minnesota, we’re right in the middle of a rate case and we’re going to be able to make sure they are fully aware of the increased costs there and hopefully get those reflected in our base rates, once the new rates are set.

Paul Patterson - Glenrock Associates

Okay. Thank you very much.

David McClanahan

Okay. Thank you very much Paul.

Marianne Paulsen

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

Operator

Ladies and gentlemen, this concludes CentralPoint Energy’s first quarter 2009 earnings conference call. Thank you for your participation.

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Source: CenterPoint Energy Inc. Q1 2009 Earnings Call Transcript
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