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CenterPoint Energy, Inc. (NYSE:CNP)

Q1 FY08 Earnings Call

April 30, 2008, 11:30 AM ET

Executives

Marianne Paulsen - Director of IR

David M. McClanahan - President and CEO

Gary L. Whitlock - EVP and CFO

Analysts

Lasan Johong - RBC Capital

Faisel Khan - Citigroup

Patrick Forkin - Tejas Securities

Nathan Judge - Atlantic Equities

Anthony Crowdelal - Jefferies

Operator

Good morning, and welcome to CenterPoint Energy's First quarter 2008 Earnings Conference Call with senior management. [Operator Instructions]. I'll now turn the call over to Marianne Paulsen, Director of Investor Relations. Ms. Paulsen?

Marianne Paulsen – Director of Investor Relations

Thank you very much, Tina. Good morning everyone. This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy. I'd like to welcome you to our first quarter 2008 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO; and Gary Whitlock, Executive Vice President and Chief Financial Officer, will discuss our first quarter 2008 results and will also provide highlights on other key activities. In addition to Mr. McClanahan and Mr. Whitlock, we have other members of management with us who may assist in answering questions following their prepared remarks. Our earnings press release and Form 10-Q filed earlier today are posted on our website, which is www.centerpointenergy.com under the investors section.

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

Before Mr. McClanahan begins, I would like to mention that a replay of this call will be available until 6 p.m. Central Time through Wednesday May 7th, 2008. To access the reply, please call 1-800-642-1687 or 706-645-9291 and enter the conference ID number 41272578. You can also listen to an online replay of the call through the website that I just mentioned. We will archive the call on CenterPoint Energy's website for at least one year.

And with that, I'll now turn the call over to David McClanahan.

David M. McClanahan - President and Chief Executive Officer

Thank you, Marianne. Good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. I'm pleased to summarize our performance of first quarter of 2008.This morning we reported net income of $123 million for the first quarter or a $0.36 per diluted share. This compares to net income of $130 million or $0.38 per diluted share for the same period last year. As I'll discuss in a few moments operating income was impacted this quarter by approximately $22 million from mark-to-market charges in our competitive natural gas sales and services business. These charges are principally timing related and without them first quarter earnings would have been $138 million or $0.41 per diluted share.

Operating income was $336 million for the first quarter of 2008 compared to $353 million for the first quarter of 2007. Over the last few years, we've made strategic investments particularly in our interstate pipeline and field services business units, which continue to contribute to our profitability. These two segments performed well this quarter helping to offset the effects of higher natural gas prices on our other businesses. Our financial results continue to demonstrate the benefits of our balanced portfolio of electric and natural gas assets.

Now let me review the performance of each of our business segments. Houston Electric had operating income of $54 million, excluding income from the competitive transition charge and the transition bond companies. The comparable income for 2007 was $62 million. We continue to benefit from growth in our Houston service territory in contrast to the slowdown in other parts of the country. Our customer base grew by over 52,000 customers since last March, partially offsetting the impact of reduced usage due to the mild weather and customer conservation. We also experienced some increase in operating expenses in the first quarter. Houston Electric continues to pursue Advanced Metering System and implementation of an intelligent Electric Distribution Grid.

We anticipate filing an initial Advance Metering deployment plan in May, which calls for installing up to 250,000 meters in related infrastructure, over the next three years at an estimated cost of approximately $250 million. The meters will be installed on homes and businesses as requested by area retail electric providers. During this initial deployment period, CenterPoint will implement a load research program to measure the impact on consumer's electricity usage from the information and capabilities made available from the Advanced Metering System. As part of our initial deployment plan, we will request recovery of our costs through a two-part charge, one an infrastructure charge to be paid over 8 years by all customers and the second a meter charge to be paid over five years by the customer once an Advanced Meter is installed. Because of the recovering mechanism associated with this initial deployment, the increase in Houston Electric’s rate base will not be significant. Assuming the success of our initial deployment plan, we expect to seek subsequent approval by the commission for full deployment across our system.

Now let me turn to our Natural Gas Distribution business. This unit reported operating income of $121 million compared to $129 million for the same period of 2007. We continue to benefit from solid customer growth adding nearly 36,000 customers since March of 2007. We also benefited from a rate increase implemented in our Arkansas last November. Higher natural gas prices however led to a decline in customer usage and an increase in bad debt expense. Weather had a very low impact on our earnings this quarter since we had put weather hedges in place for the winter season.

We are continuing to pursue right strategies that decouple our earnings from the volume of gas we sell. This is particularly important in the volatile and high natural gas price environment we are experiencing. Last year we were successful in implementing rate decoupling in Arkansas. We were also successful in implementing a weather normalization mechanism in Louisiana. Operationally we are building on the moment we gained last year from productivity improvements and an enhanced business model.

Operating income for our competitive natural gas sales and services segment for the first quarter of 2008 was $6 million compared to $56 million last year. We had anticipated a significant part of this decline. As you might recall, we realized about $28 million in gains from the sale of gas from inventory in the first quarter of last year. Most of this gas had been purchased in 2006 when seasonal spreads were much more attractive. And the value of this gas in storage had subsequently been written down as prices softened. We did not have the same gas storage opportunities this year as seasonal spreads have narrowed considerably. Further, the significant run up in the price of natural gas in the first quarter of 2008 resulted in mark-to-market losses for the derivatives we use to lock in the economic gains from the sale of gas by this business. While these derivatives are mark-to-market each quarter, the physical sales which are being hedged by the derivatives are accounted for on an accrual basis. This tends to create quarterly fluctuation in earnings. Upon settlement of both the physical sales and the derivatives, the locked-in economic margin will be realized and these losses will be offset.

Our core business of selling natural gas to commercial and industrial customers in the first quarter of 2008 was comparable to the first quarter of last year. We experienced some decline in our ability to optimize our pipeline in storage assets due to a decline in locational and seasonal price differentials. Our primary focus is to profitably grow this business by expanding our commercial and industrial customer base and secondly to capture asset optimization opportunities when available in the marketplace. Our Interstate Pipeline segment recorded strong earnings for the first quarter with operating income of $71 million compared to $44 million last year. This increase was driven primarily by the completion of the first two phases of our new 172-mile pipeline between Carthage, Texas and our Perryville hub in Northeast Louisiana. Phase I with almost 1 billion cubic feet per day capacity, went into service in May. In Phase II, which brought the capacity to 1.25 billion cubic feet per day went into service in August. We placed the Phase III in service earlier this month bringing the total capacity to 1.5 billion cubic feet per day by adding additional compression and increasing operating pressure. Phases I and II have been running at nearly 100% capacity since they went into service. We have not yet awarded contracts for all of the Phase III capacity but have received significant interest in the remaining capacity.

A second major project, the Southeast Supply Header or SESH, a joint venture with Spectra is currently under construction. SESH will have capacity of 1 billion cubic feet per day, of which 95% is already under contract with a solid group of shippers. There is also significant interest in the remaining capacity. We expect this pipeline to be in service in the second half of this year. Expansion of our core pipelines also remains a priority. We have built a number of new laterals of our existing pipelines to serve new customer facilities such as the new power plant in Arkansas. Producer drilling activity near our facilities remains high, particularly in the Woodford and Fayetteville Shale areas and we continue to work with producers on getting this new natural gas production to market. I'm also very pleased that we have extended our agreement with Laclede Gas Company in St. Louis for five years. Laclede is our largest customer on the Mississippi River transmission pipeline and has been and continues to be a very valued customer.

Now let me turn to our Field Services segment. We reported operating income of $45 million for the first quarter of 2008 compared to $22 million for 2007. This unit continues to benefit from strong drilling activity in the mid-continent area. In each of the last four years, we have added 400 wells to the system and we are on that same pace this year. In addition, result of this quarter benefited from $11 million associated with the settlement of a contractual dispute and $6 million from the sale of non-strategic assets. Our Field Services business also has a 50% ownership in natural gas processing facilities that continued to expand. The equity income that we recorded from this joint venture increased to $4 million compared to $2 million in the first quarter of 2007. We continued to pursue a number of projects to take advantage of natural gas development near our existing assets.

Now let me provide a brief update on our true-up appeal. I'm sure you are aware that the Third Court of Appeals issued an extremely disappointing decision on our stranded cost true-up appeal last December. The court recently denied all motions for rehearing. We will file our petition for review with the Texas Supreme Court on or before the June 2 deadline.

In closing, I'd like to remind you of the $0.1825 per share quarterly dividend declared by our Board of Directors last week. We believe our dividend actions continue to demonstrate a strong commitment to our shareholders and the confidence the Board of Directors has in our ability to deliver sustainable earnings and cash flow.

Now I'll turn the call over to Gary.

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

Thank you, David and good morning to everyone. I'd like to discuss a few items with you this morning. First, as I noted during our 2007 earnings call in February, in the first quarter of this year we closed on the sale of $488 million of non-recourse transition bonds. This was a very successful transaction particularly in light of what has been going on in the financial market. We monetized the amount that we had previously been recovering through a competition transition charged or CTC and electric customers in our service area will save over a $100 million over the life of the bond versus what would have been the case had the CTC continued.

Now let me address the recent credit rating agency action... excuse me. We were informed by S&P that they have confirmed the ratings on CenterPoint Energy, Houston Electric and CERC Securities and change the outlook to stable from positive. We continue to adhere to the financial discipline necessary to maintain and improve our credit metrics, while remaining focused on improving and growing the profitability of our businesses. There are a number of financing developments that I wanted to share with you this morning as well.

First, as David indicated, the SESH project is expected to be placed in service in the second half of the year. And we're working with our partners Spectra Energy to develop a permanent financing structure for the project. Both partners have been funding their respective shares of the construction cost so far. Second, on April 10th, we repurchased two series of high-coupon tax-exempt debt, totaling a $175 million at a 102% of the principal amount. One series had a coupon-rate of 7.75% and the other had a coupon rate of 8%. We intend to remarket these tax-exempt bonds later in the year. Temporary ownership for the bonds provides us with greater flexibility, with respect to the timing of remarketing and we did not want to remarket the bonds at a time when a number of other issuers were refinancing large amounts of tax-exempt debt. Incidentally CenterPoint Energy has no exposure to auction rate tax-exempt debt. All of our tax-exempt debt carries this rate.

The third financing development involves the refinancing of the company's convertible notes. In 2003, we issued $575 million, a 3.75% convertible senior notes due in 2023. These securities were callable by the company in May of this year and we've given notice of the call for redemption. As I mentioned in our last call, at the end of 2007, we began to see a number of holders convert these securities. By the date, we delivered our call notice, a $184 million of principal amount of these notes had been submitted for conversion. So, there are approximately $391 million of principal amount and notes that are subject to the call. Because the convertible securities are in the money, we expect holders of the notes to convert to securities prior to the redemption date. For substantially all of the previous conversions, we paid the principal amount in cash and elected to pay the excess value in common stock, which we will do with respect to the securities that are converted prior to the redemption date. Settlement will take place in mid-June.

Finally, I'd like to discuss our earnings guidance. This morning in our earnings release we reaffirmed our 2008 earnings to be in the range of $1.15 to $1.25 per diluted share. In providing our earnings estimate for the year, we have assumed normal weather in both the gas and electric utilities. In our guidance, we have not attempted to predict the timing effects of mark-to-market or the inventory accounting on the earnings of our competitive Natural Gas Sales and Services business. As David indicated, these effects are timing-related and ultimately do not impact the economics of the underlying transaction.

Finally, we have made certain economic and operational assumptions including the timing of assets in-service dates as well as the timing and outcome of certain regulatory proceedings. As the year unfolds, we will continue to update you on our earnings expectations.

Now let me thank you for the year interest in the company and I will turn the call back to Marianne.

Marianne Paulsen - Director of Investor Relations

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

Question and Answer

Operator

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

Lasan Johong - RBC Capital

Good morning. I wanted to ask you a couple of questions. First, on the open season on the Friendship and CERC pipelines, which are I think still ongoing in the results of the Bennington, Oklahoma pipeline. And then, the second question is, are customers really responding to high prices in I guess your mostly Minnegasco service area because it looks like customer growth was pretty decent yet and then the Heating degree days were pretty high relative to last year yet consumption actually went down especially to residential level. Could you address that as well? Thank you.

David M. McClanahan - President and Chief Executive Officer

You bet, Lasan, good morning.

Lasan Johong - RBC Capital

Good morning.

David M. McClanahan - President and Chief Executive Officer

One, the Bennington lateral open season ended, it’s been six weeks ago or so. The Friendship and CERC laterals open season are still ongoing and both of these open seasons are designed to test the market as to how we can get gas out of the Fayetteville and Woodford area on a competitive basis. We believe that additional capacity is needed in order to get this gas out and so we have lots of interest around those pipes. We continue to work with producers in creating additional capacity where we can move their gas. So I... just kind of have to wait and see how all this turns out. We are obviously not the only ones in that area trying to figure out a solution here. So, but we have good interest in all of these facilities. We'll see which one's ultimately work out. As to half prices we have seen half prices impact consumption. Weather was not an issue for us this year because as I've said we'd hedged it but our estimate is that consumption cost us a little less than $10 million in margin across all our gas businesses in the first quarter. So I think half prices are impacting consumers' behaviors together with everything else that's happening, high gasoline prices at the pumps and other things. I think people are starting to really watch their pocketbooks here and I think it's being we are seeing that in the gas consumption.

Lasan Johong - RBC Capital

I see. And do you think that the rebate checks that the government sending, is that going to have a material benefit to CenterPoint in any way?

David M. McClanahan - President and Chief Executive Officer

Lasan, I really don't know. I doubt it but it's hard... it's hard for me to judge whether that will have any impact or not.

Lasan Johong - RBC Capital

Okay. And just one quick question on the Intelligent Grid, are you still planning to use the BPL technology that you used in the commercial pilot project to use as the backbone for communication on the system?

David M. McClanahan - President and Chief Executive Officer

We are... the initial deployment we are probably going to use cell relay technology for most of it. Because this is going to be scattered around our systems because it's going to be driven by where retail energy providers want to have these meters put in and they won't be all clustered. I think ultimately our... ultimate deployment might very well use BPL but as you know this communication technology is advancing rapidly and who knows, what will be out there when we go to full deployment. If based on the technology today, we would use BPL for the full deployment but not for this initial deployment.

Lasan Johong - RBC Capital

I see, I see. And did I hear you correct that you said $8 million... sorry, over a year period, you're going to recover the infrastructure charge from everybody in your service territory but over a five-year period you don't even cover the cost of the meters for those who get it in their or who’ll get these installed meters. How it's going to work?

David M. McClanahan - President and Chief Executive Officer

Yes, that's exactly right. We have to build a fairly big office, lots of computer systems, lots of infrastructure and we have a much smaller charge that we are going to be requesting that would recover those dollars over an eight-year period. The meter itself and the installation cost of the meter and the communication part will be recovered only when we implement or install that meter and it would be a much shorter time frame. I think the commission rules calls for a five to seven-year amortization for the meter itself and that's what we are following.

Lasan Johong - RBC Capital

Excellent. Gary, on the converts real quick, how many shares do you expect to issue once you convert everything?

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

Well, if you assume, 15.50 share price it will be about 10 million additional shares.

Lasan Johong - RBC Capital

Thank you.

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

Yes.

Lasan Johong - RBC Capital

Thank you very much.

Operator

Our next question will come from the line of Annie Sal [ph] with Alliance Bernstein

Unidentified Analyst

Hi. Can you comment in terms of your bad debt or uncollectible by all the utilities in terms of each of the utilities, geographically?

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

Well, got you. I don't... and I don't have that geographical but bad debt expense is up in our gas sale basis a little bit. I think we had like $18 million of bad debt expense this quarter, up from a little less than $16 million last year. We put in some procedures and collection activities and really have been pretty aggressive on collections and we... while we are seeing some increase it's really fairly minor relative to where the commodity cost have gone. So it's not a huge deal but it's a... clearly it's affecting us some.

Unidentified Analyst

And my second question has to do with the supplying prices that you use, does it impact any way you do business and how do you monitor your counter party risk?

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

Well, it doesn't... it doesn't affect us that much. We do some over the counter business in derivatives but lot of those are standard NYMEX contracts so and we obviously do monitor to that pretty close. So I don't think that's impacted us at all. The only impact I think we've seen if any is in the commercial paper market because we were selling a fair amount of commercial paper before this happened, we aren't now because that market is not as robust for our credit. But generally the market has been open for energy companies and utility companies and I think we're not seeing a big impact there.

Unidentified Analyst

Thank you.

Operator

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

Faisel Khan - Citigroup

Thanks. On the deployment of the smart... smart meter system, the 250,000-customer deployment. Did you say that you’ll actually get a return on capital while that $250 million is being depreciated over the various life times --.

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

Yes. We will. We will get a return on the amount of dollars that we haven't recovered because of the short amortization period it doesn't stay unrecovered a long period of time, but yes, during interim periods we clearly will get a return on that.

Faisel Khan - Citigroup

Okay and then in terms of reading into the... these full deployment costs of the... this system. I would expect... this is for 250,000 customers to apply the... have a linear equation across to your 1.7 million or 1.8 million customers.

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

No. I don't think that's fair, because a lot of this is, infrastructure costs upfront... our initial estimates if we win across all our 2 million customers was something on the order of $1 billion. Just around numbers. Now that includes a fair amount of BPL infrastructure which I mentioned earlier may or may not happen. For the meter itself in installation, I imagine you can count on about $200 per installation. So that's $400 million and the rest is for infrastructure and operating costs in the interim and stuff like that. But I think $1 billion is probably a good round number to be thinking about.

Faisel Khan - Citigroup

Okay and then in terms of the first quarter, your earnings from the TDU, you talked about increases in transmission costs, other operating expenses, can you just elaborate a little bit more what's going on over there?

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

Well, we've, we get charged from others for increased transmission and we've seen a lot of our other utilities in the state investing and transmission and we officially have to pay for that. And there is a lag on when we can go in and recover it. And so we're feeling part of that lag. Second is the overall way transmission is allocated is on coincidental peaks in the summer time and we are getting a little bit more allocated to us on that basis as well. So we're talking probably $3 million, $4 million net increase in the first quarter over the previous quarter. The other cost increases, they are many of them, as you would expect but there is a fair number of related to information technology and the work we're doing in some of that areas that have increased. So... but there is just kind of one season, two season. There is not any real big hitter.

Faisel Khan - Citigroup

And quickly on the interstate pipeline business with mid-continent express signing up new shippers on some of the those mid-continent shale opportunity at the Woodford Fayetteville Shale. Any impact to your gas system, or your opportunities going forward on your pipelines.

David M. McClanahan - President and Chief Executive Officer

It doesn’t impact Carthage to Perryville at all. I think what's happening Faisal is, there is just so much gas that's now expected to be produced out of the Woodford to Fayetteville, the Barnett and now Haynesville Shale plays.

Fayetteville

Right.

David M. McClanahan - President and Chief Executive Officer

And our expectation is that we are going to need some more capacity besides all of the pipes that have already been built. And course everybody is trying to do an analysis of that but we think there is lots of gas that needs to get to market and that these pipes were absolutely needed as you know our CP I noted, it's been running at 100% since we put it in place.

Faisel Khan - Citigroup

Okay.

David M. McClanahan - President and Chief Executive Officer

And other pipes, I am sure, are experiencing very similar type of rates.

Faisel Khan - Citigroup

Great. Thanks for the time.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

[Operator Instructions]. Our next question will come from the line of Patrick Forkin with Tejas Securities.

David M. McClanahan - President and Chief Executive Officer

Patrick?

Patrick Forkin - Tejas Securities

Yes. Hello?

David M. McClanahan - President and Chief Executive Officer

Yes, you are up.

Patrick Forkin - Tejas Securities

Good morning. With respect to your comments on the Advanced Metering program, I know you said you are going to file in May. When would you anticipate actually that deployment of the 250,000 meters to start?

David M. McClanahan - President and Chief Executive Officer

Well, the commission has 150 days to act on our deployment plan. We are working with the parties to see if there is a way to accelerate the implementation of some of those meters and get them into this year because if you weighted till the end of the deployment plan, you'd really you'd have to wait till next year. So, we are looking and we've come up with some ways, and we will be asking the commission to approve some ways to get meters in early. But it.. we'll just have to wait and see how all that plays out. If you just go based on the regular deployment plan, it would be '09 before we really started deploying it. Probably, towards early.... late spring before we'd really get in full swing there.

Patrick Forkin - Tejas Securities

Okay. And then in your call at the end of February, I think with regards to this filing, you had talked about a total of 2 million meters and $750 million to $800 million. Could you give us any background on sort of what's transpired between then and now because it kind of looks like a pretty significant pullback?

David M. McClanahan - President and Chief Executive Officer

Well, it’s really not a pullback, Patrick. Although, we've changed our deployment thoughts, and the reason is that as I mentioned earlier, $1 billion is a lot of money to spend on metering. And you certainly can't deploy just based on the benefits that CenterPoint will get out of it. We'll clearly get benefits from meter reading and automated cut-ins and cutouts and stuff like that. But, it's really going to be driven by the benefits that consumers are going to realize by changing their energy consumption behavior. And so what we've decided is before we go to this full plan is that we put out $250,000 which is enough to demonstrate the benefits of this system. And we expect that they will be demonstrated and then we'll go to the full deployment. If the consumers don't respond the way we expect, then you might very well do something different than spending the full amount. So, I think it's a recognition that this is a system that's really the benefits have to be driven by the consumer and our load research program is designed to measure that and to make sure everybody understands what the benefits of this before we go through the full deployment.

Patrick Forkin - Tejas Securities

Okay. Thank you very much.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

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

Nathan Judge - Atlantic Equities

Just calling, I’d like to ask about the possible demand decline from this meter-reading test. There is, an indeed, a decline in consumption following the deployment of this metering. Do you think, your costs will be able to fall enough to offset that revenue sufficiently?

David M. McClanahan - President and Chief Executive Officer

When you… the meter rule says that you have to take into account savings at the same time that you take into account cost increases. So, I don't think that the meter charge itself would take care of that. But we're going to... my expectation is we're going to go to a decoupling tear-off in the electric side the next time we go in. Our rates are fixed until 2010. We'll file a rate case using a test year as of December 31, '09 followed by midyear '10. And my expectation is that, we would decouple our cost recoveries from the volume of electricity for the very reason you're talking about. So, and then energy efficiency, energy conservation doesn't impact us very much like what we're doing on the gas side. We're helping in promoting energy conservation where we can with our gas customers. But we need to decoupled rates there in order to make sure our shareholders’ and customers’ interests are aligned and I expect that same thing we will do on the electric side.

Nathan Judge - Atlantic Equities

With regard to the competitive natural gas sales and services business, how much does the implementation of the actual operations as such being put in place in operating now effect that business?

David M. McClanahan - President and Chief Executive Officer

It doesn't have a big impact, may be some minor impacts because you have seen a change in basis in some parts of the country as these new pipelines are put in place. And that has some impact but it's fairly minor, to be very honest, on our energy services business. But clearly as other pipes are put in service the way gas is... the price of gas at different locations is going to change and we have to anticipate that and make sure we have capacity on the right pipe so we can sell the best price gas to our customers. So it's really a matter of anticipating where you get your gas and what the cost of that gas is and Carthage to Perryville has had some impact but not as much impact as you think. I think I would call it fairly minor.

Nathan Judge - Atlantic Equities

With regard to just generally though given that new pipelines are coming on and potentially could remove or reduce the differential, spaces differentials between hubs, would it be reasonable to think that there is going to be increasing pressure on that business?

David M. McClanahan - President and Chief Executive Officer

I would say that our core business of selling gas to commercial and industrial customers will not be impacted very much, probably none. But we make a fair amount of money by optimizing around all the assets that we have, pipeline capacity and storage capacity, and yes that could be impacted. We've seen lots of opportunities in last few years but the majority of those were a result of Rita and Katrina just a few years ago that disrupted the market. It had a lot of dislocations and we clearly were able, because of the assets we held, we are able to make a fair amount of money. I think that business could be impacted more than our core retail business as a result of all these pipes coming in place.

Nathan Judge - Atlantic Equities

That's very helpful. Thank you.

David M. McClanahan - President and Chief Executive Officer

Okay.

Operator

Our next question will come from the line of Anthony Crowdell with Jefferies.

Anthony Crowdell - Jefferies

Hi. My question is have you guys quantified the impact from conservation? I think for the natural gas distribution the decrease is mainly attributable to conservation and also the outlook for the year if this level of conservation keeps up, you guys see a problem with guidance or anything like that?

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

Well, we’ve tried to factor that into our guidance. Certainly, the first quarter is the biggest impact. Second and third quarters, we don't expect because those are very low consumption months and we don't expect it to impact that. So it's really the fourth quarter, which is our second largest quarter, where there could be some impact. I have mentioned at our last call, we have built into our forecast $7 to $8 gas. Today, it's more like $10.5. So we'll see where gas is at the end of the year to really understand how much conservation may be driven based on price. But at this stage, we're fairly comfortable with our forecast. We clearly are watching customer conservation closely, not only on the gas side but on the electric side as well.

Anthony Crowdell - Jefferies

Have you quantified the impact of conservation for the quarter or you haven't broken it out?

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

Well, for the gas side it was a little less than $10 million, that's our estimate. I'll also say that’s a little bit of art and not all science in estimating how much weather impacts customers’ usage but we model it around heating degree days and things of that nature. But I think that we're fairly comfortable. We saw some conservation in the first quarter on the order of $10 million plus or minus a few million.

Anthony Crowdell - Jefferies

Okay. Thank you.

Operator

Our next question is a follow-up question from Lasan Johong with RBC Capital Markets.

Marianne Paulsen – Director of Investor Relations

Hi, Lasan.

Operator

Lasan, your line is open.

Lasan Johong - RBC Capital

Hello, sorry. Sorry about that. Longer term, David as you start rolling out the meters and your end objective is to help consumers conserve energy, are you looking to perhaps get the commission to kind of deviate decoupling revenue mechanism where conservation is rewarded at the utility level as well?

David M. McClanahan - President and Chief Executive Officer

Lasan, that's right. I mentioned that earlier. We expect some type of decoupling tariff to be requested the next time we go into the commission which would be…the earliest we could go in would be 2010.

Lasan Johong - RBC Capital

So we got to wait till that point, right?

David M. McClanahan - President and Chief Executive Officer

That's right. Other than transmission we can go in for a transmission increase by the end of September of this year and I expect that we're going to be doing that.

Lasan Johong - RBC Capital

Did you study the impact of what kind of... or how you might, what mechanism of the decoupling would look like and how much this all would… how much ultimately you would look to save in terms of costs for the consumers and what that would mean in terms of returns to shareholders? Have you done any preliminary studies or looked at that?

David M. McClanahan - President and Chief Executive Officer

No, we really haven't. I think we will... as we roll out these meters and we understand customer response, we will be doing a lot more around that and really identifying what opportunities there are for CenterPoint Energy to be involved in energy conservation and energy efficiency initiatives and other initiatives around this whole… in this whole environment that we find ourselves in. High energy prices, climate change concerns, carbon concerns all these are things that we clearly are studying and trying to understand what's our role in all this.

Lasan Johong - RBC Capital

That's great. I appreciate it all. Thank you.

Operator

And we have no further questions at this time. Ms. Paulsen, do you have any closing remarks?

Marianne Paulsen - Director of Investor Relations

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

Operator

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

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Source: CenterPoint Energy, Inc. Q1 2008 Earnings Call Transcript
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