Nov 2, 2007
Executives
Marianne Paulsen - Director of Investor Relations David McClanahan - President and Chief Executive Officer Gary Whitlock - Executive Vice President and Chief FinancialOfficer
Analysts
Daniele Seitz - Dahlman Rose Lasan Johong - RBC Capital Markets Carl Kirst - Credit Suisse Debra Bromberg - Jefferies & Company Charlie Spencer - Morgan Stanley Faisel Khan - Citigroup Patrick Forkin - Tejas Securities Steve Gambuzza - Longbow Capital David Grumhaus - Copia Capital Josh Silverstein - Highbridge Capital Management Charlie Spencer - Morgan Stanley
Operator
Good morning and welcome to CenterPoint Energy's ThirdQuarter 2007 Earnings Conference Call with senior management. During thecompany'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'll now turn the call over to Marianne Paulsen, Director ofInvestor Relations. Miss Paulsen?
Marianne Paulsen
Thank you very much Luan. Good morning everyone.
This isMarianne Paulsen, Director of Investor Relations for CenterPoint Energy. Iwould like to welcome you to our third quarter 2007 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 thirdquarter 2007 results and we'll also provide highlights on other key activities.In addition to Mr. McClanahan and Mr.
Whitlock, we have other members ofmanagement with us who may assist in answering questions following preparedremarks. Our earnings press release and Form 10-Q filed earlier todayare posted on our website, which is www.centerpointenergy.com under theinvestor's section.
I would like to remind you that any projections orforward-looking statements made during this call are subject to the cautionarystatements on forward-looking information in the company's filings with theSEC. Before Mr.
McClanahan begins, I would like to mention that areplay of this call will be available until 6:00 p.m. central time throughFriday, November 9th, 2007.
To access the replay, please call 1800-642-1687 or706-645-9291 and enter the conference ID number 19320755. You can also listento an online replay of the call through the website that I just mentioned.
Wewill archive the call on CenterPoint Energy's website for at least one year. And with that I will now turn the call over to DavidMcClanahan.
David McClanahan
Thank you, Marianne. Good morning, ladies and gentlemen.Thank you for joining us today and thank you for your interest in CenterPointEnergy.
This morning we reported our third quarter earnings. We had a goodquarter.
Our performance is consistent with our expectations for thisyear and I'm pleased with our overall results. Net income was $91 million forthe third quarter of 2007 or $0.27 per diluted share.
This compares to net incomeof $83 million or $0.26 per diluted share for the same period last year. Operating income was $287 million for the third quarter of2007 compared to $284 million for the same quarter of 2006.
The increase inoperating income for the quarter was driven by strong performances in ourinterstate pipeline and field services businesses and continued improvement inour natural gas distribution utility, partially offset by the effect of ourelectric rate settlement that was implemented in October of last year. Houston Electric reported operating income of $166 millionfor the third quarter of 2007, compared to $187 million last year.
Excludingincome from the CTC of $11 million this year and $14 million last year, ourcore regulated electric utility earned $155 million, compared to $173 millionfor the same period of 2006. While Houston Electric continues to enjoy the benefits ofstrong customer growth in our service territory, adding more than 47,000customers since last September, the rate settlement implemented last Octoberreduced this quarter's operating income by $25 million.
Considering the impact of the rate settlement, HoustonElectric's financial results were as expected and it continued its solidoperational performance. Our Natural Gas Distribution segment reported anoperating loss of $8 million for the quarter compared to a loss of $11 millionfor the same period last year.
We continue to experience positive results from ourproductivity improvement efforts and from strong customer growth, adding nearly48,000 customers since September of last year. However, this is a seasonalbusiness and the third quarter is typically the weakest of the year.
I'm pleased that we were able to settle the Arkansas ratecase. We worked diligently with the commission staff to find common ground, andthus avoided extended litigation.
The final order issued by the commissionapproved a base rate increase of $20 million, which went into affect yesterday. In addition, the commission approved a decoupling mechanismthat will help stabilize revenues and earnings and will be consistent with theArkansas commission's initiative, as well as our desire to promote energyefficiency.
Overall, I am very pleased with the progress we continue tomake in pursuing rate strategies and operational efficiencies in order toimprove the financial performance of our Gas LDC businesses. Our competitiveNatural Gas Sales and Services segment reported operating income of $4 millioncompared to $11 million for the third quarter of 2006.
The decline is primarily related to a reduction inlocational and seasonal natural gas price differentials, which in turn reducesthe opportunity to create value from optimizing our pipeline and storageassets. In addition, we recorded a $2 million gain frommarked-to-market accounting for derivatives used to lock in margins, comparedto $21 million marked-to-market gain last year.
We also recorded a $5 millionwrite-down of natural gas inventory to lower of cost or market in the thirdquarter of this year, compared to $26 million inventory write-down last year. Year-to-date, we have recorded operating income of $56million compared to $44 million last year.
Some of the income recorded in theearly part of 2007 related to transactions that originated in the more volatilemarkets in the aftermath of hurricanes Katrina and Rita. Market conditionsduring most of 2007 have been less volatile and more like historical norms.
As a result, we have not had as many opportunities for assetoptimization this year. Nevertheless, our base commercial and industrial salesbusiness continues to do well and we remain well positioned to take advantageof future market opportunities, should they arise.
Our Interstate Pipelinessegment recorded strong results this quarter, reporting $70 million ofoperating income, compared to $48 million in 2006. The main contributor to this increase was the completion ofthe first two phases of our new 172-mile pipeline between Carthage, Texas andour Perryville hub in northeast Louisiana.
Phase I with almost 1 billion cubicfeet per day of capacity went into service on May 1st. Phase II, which addedabout 250 million cubic feet per day went into service on August 1st.
Ultimately, we plan to expand this project to a total of 1.5billion cubic feet per day by adding additional compression and increasingoperating pressure. All approvals have been received and we expect the thirdphase to be in service in the first quarter of 2008.
A second major project, the Southeast Supply Header, orSESH, a joint venture with Spectra, continues to make progress. A solid groupof shippers has subscribed to approximately 95% of the 1 Bcf per day capacity.We received FERC authorization to build the new pipeline in September andconstruction is underway.
We anticipate that it will be in service in themiddle of next year. Earlier this year, we executed contracts with SouthwesternElectric Power, a subsidiary of AEP, to construct pipeline and compressionfacilities to serve a new power plant with up to 480 megawatts of capacity.
Ourfacilities will be built in two phases. The first phase was quite into servicea few months ago and the second phase is expected to be in service in thesecond quarter of 2009 following FERC approval.
Our Field Services segment also reported solid results withoperating income of $26 million compared to $21 million in 2006. The corebusiness continues to benefit from strong drilling activity in the midcontinentarea and higher demand for ancillary services.
This year we expect to invest over $100 million in newfacilities. Natural gas development near our existing assets remains veryactive and additional facilities will be needed to get natural gas reserves tomarket.
We are very active in pursuing these projects. Overall, we are pleased with the continued growthopportunities and the financial results of this segment and we expect tocontinue to grow this business.
Now let me provide you an update on some otherimportant initiatives. Houston Electric continues to actively pursue advancedmetering, using broadband over power line technology and multifunctional smartmeters and ultimately the implementation of an intelligent distribution grid.
As part of our assessment of the advanced metering system,we have installed approximately 10,000 smart meters to evaluate any issuesrelating to system-wide implementation. Results so far have been encouragingand we continue to take a very disciplined approach to ensure the technologycan be scaled up efficiently to serve our entire system.
An advanced metering rule pertaining to technicalrequirements for installing these type of systems and a valuation model for anadvanced metering surcharge have been approved by the Texas Public UtilityCommission. We expect to file a deployment plan and a request forsurcharge before the end of this year.
This plan would entail the rollout ofadvanced meters over a five-year period at a cost of approximately $150 millionper year. Any decision to move forward with this plan will depend on theresults of the limited deployment program and an appropriate PUC order.
I know that you are interested in the status of our true-upappeal. Unfortunately, there is nothing new to report.
As you recall, we'veappealed decisions by the Texas PUC that, in the aggregate, total $1.3 billion.Interveners have also appealed various aspects of the PUC's final order. Ourtrue-up appeal remains at the Third Court of Appeals, where oral arguments wereheld in January.
There's no statutory time frame under which the court has torender a decision on the appeal, but a decision could come at any time. Ofcourse, regardless of the outcome, we expect parties to appeal the decision tothe Texas Supreme Court.
In closing, I would like to remind you of the $0.17 pershare quarterly dividend declared by our Board of Directors on October 25th.And we believe our dividend actions continue to demonstrate a strong commitmentto our shareholders and the confidence the Board of Directors has in ourability to deliver sustainable earnings and cash flow. Now I'll turn the callover to Gary.
Gary Whitlock
Thank you, David, and good morning to everyone. I would liketo discuss a few items with you this morning.
Over the last several months, wehave taken a number of steps to continue to strengthen our liquidity. As I mentioned during our last call, in June we amended ourthree bank credit facilities, which now total $2.45 billion and extended theirmaturities to 2012.
Over the last four years, we have steadily andsignificantly strengthened our liquidity and enhanced our financial flexibilitythrough the improvement in size, price, and tenor of our working capitalfacilities. Last week we closed on the sale of $500 million of CERCnotes split between two series, $250 million of 10-year notes bearing a couponof 6.125% and $250 million of 30-year notes having a coupon of 6.625%.Proceedsfrom these notes will be used to retire $300 million of CERC debt that matureson February 1, 2008, and to pay down short-term debt at CERC.
Even though the $300 million of CERC debt is not due tomature for about three months, we wanted to lock in the rate at today'srelatively attractive rates, particularly given the volatility in the debtcapital markets that we have seen this year. We believe this step to be consistent with our conservativefinancial policy.
We are also working to securitize the balance of our true-upcosts that we are currently recovering through a competition transition chargeor CTC. As we have previously discussed, last spring the Texas legislatureamended the law relating to securitization.
The change permits us to securitizethe balance of our CTC. In September the PUC issued a financing order, authorizingus to issue approximately $500 million of additional transition bonds.
We hopeto be able to complete that process before the end of the year. In addition, ifwe are successful in our true-up appeals, we plan to request a financing orderto securitize any amount, which ultimately results from these appeals.
Thisleads to my next topic. Among the issues raised in our true-up appeal is the PUC'sreduction of stranded cost recovery by approximately $146 million for thepresent value of certain deferred tax benefits associated with our formerelectric generation asset.
We believe that the PUC based this reduction in large parton proposed normalization regulations issued by the Internal Revenue Service inMarch of 2003, which were withdrawn after the PUC issued its true-up order. In August of this year, we received a private letter rulingin which the IRS concluded that such reductions would cause normalizationviolations.
We do not believe the PUC intended that its action in the true-upproceedings should have the consequence of depriving us or our customers of thedeferred tax benefits. In September, the PUC requested the court to remand thenormalization issue in light of the position taken by the IRS in the PLR.
We cannot predict whether the court will remand the issue tothe PUC or the ultimate outcome of this matter, but we hope that in light ofthe private letter ruling, all parties will see the benefit of permitting us torecover the disallowed amount plus interest. Let me also discuss our financial strategy as we continue tofocus on improving and growing the profitability of our businesses.
Weincreased our dividends in each of the past two years while funding asignificant number of excellent growth opportunities, as well as our ongoingcapital requirements. We accomplished this largely through internally generatedcash flow and true-up proceeds with a minimal increase in debt.
Future growthopportunities will be funded through internally generated cash flow anyadditional true-up proceeds and the optimum mix of debt and equity. We remain committed to taking steps necessary to maintainand enhance the credit metrics and credit ratings of both the parent companyand our utility subsidiaries.
Finally, I would like to discuss our earnings guidance. Thismorning in our earnings release, we announced that we expect our 2007 earningsto be at the high end of our previously provided guidance range of $1.02 to$1.12 per diluted share.
In making our earnings estimate for the year, we haveassumed normal weather for the balance of the year and we have made certaineconomic and operational assumptions, including the timing and outcome ofvarious regulatory and legal proceedings. Now let me thank you for your interest in the Company andI'll turn the call back to Marianne.
Marianne Paulsen
Thank you very much, Gary. With that we'd now like to takeyour questions.
And in the interest of time, I would ask you to please limityourselves to one question and a follow-up. So, LuAnn, would you please givethe instructions on how to ask a question?
Operator
(Operator Instructions) Your first question comes fromDaniele Seitz with Dahlman Rose.
Daniele Seitz - Dahlman Rose
Hi. I just was wondering the advance metering, have you hasalready been in principal allowed by the commission and when do you anticipatethis to go into place?
David McClanahan
Daniele, we'll be filing, like I said, our plan in December.They have 150 days to make a decision, so we would anticipate a decision byApril or May of next year. And assuming that we get an appropriate order out ofthe commission that gives us some assurances we're going to get full recoveryof our investment here, because it's a large investment, we'd start deployingmeters in the second half of next year and really get in probably the realswing of things in early 2009.
Daniele Seitz - Dahlman Rose
And will you ask for some sort of rider or is it going to bethe kind of thing that you will have to file for on a regular basis?
David McClanahan
No. The PUC has provided a special tariff.
It's an advancedmetering tariff, which we would start immediately employing. The way we havebeen and expect to propose it is that we would apply this tariff to allcustomers from the get-go, so we would have some pre-funding, so to speak, aswe went through this, but we don't have to go in and ask for a rate case,change our rates, this will be a separate tariff that is a rider onto ourexisting tariff.
Daniele Seitz - Dahlman Rose
Great. Thank you.
Operator
Your next question comes from Lasan Johong with RBC CapitalMarkets.
Lasan Johong - RBC Capital Markets
Good morning. Nice quarter.
I wanted to ask you kind of moreof a strategic question, pulling back from some of the micro details. Longerterm, say five years out, how do you project earnings growth rate to look likefor CenterPoint?
David McClanahan
Well, Lasan, I guess it depends on a number of things, butcertainly every aspect of our business we intend to grow. We've had somewonderful opportunities in our pipeline business, in our field servicesbusinesses and, to be very frank, we're in a very good spot right now.
Strategically, the areas in the United States where there'slots of drilling, it's right in our footprint. That gas has to be gathered,some of it has to be processed and certainly it's ultimately going to have toget to market.
So, I think it creates a lot of opportunities there.Clearly, storage and other opportunities of that sort are clearly on our mindas well. So we expect our pipeline and field services business to continue togrow.
Now, our regulated utility business, as you know, basicallygrows as fast as our service territory and our investments to serve these newcustomers, but we serve very nice, fast-growing areas of the country,Minneapolis, Houston, and we've had a growth rate of better than 2% there forthe last ten years. So we don't expect any slowdown.
There'll be dips along theway. The softness that other areas of the country are seeing in housing, we seea little of that in Houston, not a lot, to be very honest.
So we expect thosepieces of our business will grow slower, but we still believe there's going tobe nice, rate-based growth, which is going to provide for growth in earningsthere as well.
Lasan Johong - RBC Capital Markets
That's great. One quick follow-up question, to Daniele'squestion, any chance that you guys might do a metering question in Minnegasco?
David McClanahan
This is an electric initiative, so the gas side, though,will be implemented in Houston, because it will piggyback on the electric meterand really we already have automated metering deployed in Minnegasco to behonest. We have Hertz on every meter and so we don't send out meter readers aswe do here in Houston.
So, but if Xcel or others in Minneapolis and Minnesota woulddeploy something like this, we would look to see if there would be a better wayto read the gas meters. But we've already done a lot of that in Minnesota, Iguess what I'm saying.
Lasan Johong - RBC Capital Markets
Thank you.
Operator
Your next question comes from Carl Kirst with Credit Suisse.
Carl Kirst - Credit Suisse
Good morning, everybody.
David McClanahan
Good morning.
Carl Kirst - Credit Suisse
Nice quarter as well. Could you refresh us on where we are,just looking at the legacy true-up costs, the stranded costs?
If we take the1.3 and the $146 million that's included in that, what are those numbersinclusive of interest expense right now?
David McClanahan
I can tell you what the $146 million, which is thenormalization issue that Gary spoke of is probably with interest $250 milliontoday. Maybe a little bit more than that.
I honestly haven't run the numbers onthe $1.3 billion. Obviously, it's going to be a number a lot bigger than that.
Have we run any numbers on the 650 that, let us, thedistrict court overturned the commission on two issues that amounted to about$650 million and I think with interest today, that would be on the order of --it's north of $1 billion.
Gary Whitlock
North of $1 billion.
David McClanahan
Yeah.
Carl Kirst - Credit Suisse
North of $1 billion from the lower court's decision?
David McClanahan
Correct.
Carl Kirst - Credit Suisse
Okay. That's very helpful.
And then just one other questionon the securitization, hopefully that come by year-end. Has it been sort offormally declared what use of proceeds will be for that?
David McClanahan
Well, we have to, under the law, we have to either pay downdebt or pay down equity and what we'd expect to do would be to dividend thatmoney out of Houston Electric to the parent company.
Carl Kirst - Credit Suisse
Right. But from there…
David McClanahan
We have lots of -- Gary, you might want to speak to, thisbut we have lots of growth projects on the table and they'd go towards thesegrowth projects.
Gary Whitlock
Carl, the way you look at it, if you look at our debt thisyear, we started the year with about 6.75 of corporate debt. It's about 7.4now.
In other words, $657 million up. This would effectively go to pay downdebt.
The ultimate use, the course as David described, has been tofund our capital projects. So, it effectively will pay down the debt andcontinue to fund the capital projects.
Carl Kirst - Credit Suisse
Great. Thanks, guys.
Operator
Your next question comes from Debra Bromberg with Jefferiesand Company.
Debra Bromberg - Jefferies & Company
Hi. Good morning.
David McClanahan
Good morning.
Debra Bromberg - Jefferies & Company
What was the amount of the settlement of the state taxissues at Pipelines? And also, could you provide a little more color aroundresidential electric sales in the quarter?
David McClanahan
The settlement was $4 million around the taxes, Debra.Weather was basically normal for the quarter. We had a real mild July andAugust and we caught up in September.
We continue to see a little bit ofweakness in usage. We don't really know if our models can't determine how muchis weather and how much is usage, but we're watching that pretty closely.
Electric rates have continued to stay pretty high in Texasand we think there's probably some conservation impact there. It's not a hugeamount.
And certainly the growth that we're seeing more than outstrips anyweather usage decline, but I think it's worth watching to make sure it's not abig pattern here.
Debra Bromberg - Jefferies & Company
Thank you.
Operator
Your next question comes from Charlie Spencer with MorganStanley.
Charlie Spencer - Morgan Stanley
Good quarter, guys. In Texas, the Houston zone is becomingone of the more congested areas and I was wondering if that's going to upfurther transmission CapEx opportunities for you, potentially going up(inaudible) connecting towards the north…
David McClanahan
It is. North into Houston is congested and I think ERCOT islooking at some new transmission that would need to be built in order toalleviate that congestion.
And yeah, I think it would open up someopportunities for Houston Electric to build it. It would be in part of the areathat we typically build transmission.
So, we work with ERCOT very closely on that and we put, I'dexpect we're going to put some dollars in our future capital budgets to reflectsome of that in the next three to four years, if not sooner.
Charlie Spencer - Morgan Stanley
Do you have any idea just the general dollar amount?Obviously, it's early days at this point, but just any sort of general range asto how much money that might take to help alleviate some of that congestion.
David McClanahan
Well, last year, we had $400 million worth of transmissionin our five-year capital budget, and that was without any of these largecongestions being resolved. I would imagine it's going to be north of 4,probably north of $500 million.
We haven't got all those numbers, but they'reincreasing just because of this congestion issue you noted.
Charlie Spencer - Morgan Stanley
Thank you.
Operator
Your next question comes from Faisel Khan with Citigroup.
Faisel Khan - Citigroup
Good afternoon.
David McClanahan
Good afternoon.
Faisel Khan - Citigroup
With the recent sale of TXU to private holders, there's apossibility that a piece of their delivery business could come up for sale. Howstrategic are those assets?
Would they make sense to operate those assetstogether with yours or how much you guys thinking about something like apotential opportunity like that?
David McClanahan
Well, Faisel, I think we've said in the past, we'reinterested in T&D businesses, we like the business, we would like to ownmore of the business. We clearly believe there would be a fair amount ofsynergies between our business and a business like Encore.
So, and if in fact that business goes on the market, we'dabsolutely take a look at it. But we do think there would be a lot of synergiesin operating them together.
There's no question about it in our mind. Wehaven't done any detailed work on that, but just general business knowledge, webelieve it would be pretty strong.
Faisel Khan - Citigroup
Okay. And on the appeals case, is there any precedence for acase taking this long to be decided?
Have cases in the past taken this long tobe decided?
David McClanahan
Let me ask Scott Rozzell to address that.
Faisel Khan - Citigroup
Thank you.
Scott Rozzell
Faisel, yes, it's not uncommon for appeals to last thislong. In fact, we have another appeal before that same court that's actuallybeen pending for an additional two months longer than this.
And there are othercases on the docket that are longer. I would say, as we've said before, that a good benchmark forevery level of the appellate process is about a year from filing todisposition.
And this one is getting closer to two years now. So I think thisis a much longer time than is normal, but it's certainly not longer than wehave seen in the past for complicated matters.
Faisel Khan - Citigroup
Okay, great. Thanks for the time.
Operator
Your next question comes from Patrick Forkin with TejasSecurities.
Patrick Forkin - Tejas Securities
Good morning. Just wanted to clarify, the total investmentopportunity for the smart metering project is $750 million over five years?
David McClanahan
That would be $750 is probably a little over five years. Itwould be five or a little over five years.
And that's just the advancedmetering on the electric side. We do have some additional dollars that we'dspend for the intelligent grid.
Those aren't going to be spent nearly as quick, but there'sprobably another $150 million or so that over a seven, ten-year period thatwould be spent there. But metering is about $750 over a little over five yearsbased on the plan we're going to propose.
Now the PUC is going to weigh in on this too, I'm sure, butI think they're going to like our plan, because I think we've got a good, solidplan. And I expect we're going to be the first one in the state to file it.
Patrick Forkin - Tejas Securities
Okay. And then assuming you do make that filing in December,does that indicate that you're happy with the technology that you've tested in,and subject to approval from your commission, that you're going to moveforward?
David McClanahan
Yeah. We've been testing lots of pieces of this.
The Itronmeter, the OpenWay meter. We've been testing our BPL technology and we've alsobeen testing a lot of prototype models where you have to gather all themetering data and give reps access to it.
All along the way, we've been very pleased with how thistechnology has come together. We haven't identified any deal breakers,obviously.
They've been making improvements as we went along, but at this pointin time, we're pretty pleased with what we've seen so far. We think we've gone-- we're pretty much to the end of that pilot phase.
Patrick Forkin - Tejas Securities
Okay, very good. Thank you.
Operator
Your next question comes from Steve Gambuzza with LongbowCapital.
Steve Gambuzza - Longbow Capital
Good afternoon.
David McClanahan
Hello.
Steve Gambuzza - Longbow Capital
Hi. I'm sorry if you covered this already, but is there anyexpected timing on the appellate court decision?
David McClanahan
You know, there's really not. Scott Rozzell, our GeneralCounsel addressed this.
We really expected it to have happened by now, but itcan be anytime. But we just haven't heard anything yet.
Steve Gambuzza - Longbow Capital
Okay. So really there's no kind of when you look at thecalendar of the court, are there any particular windows where you would expectthere not to be a decision?
So for example, if you were not to get a decisionby December 15th, would that automatically push it through to past the NewYear, or any color on that in terms of the court calendar?
Scott Rozzell
Well, there's nothing this is Scott Rozzell, there isnothing really that would indicate that the court doesn't issue decisions atany particular point in time. I think just as a matter of human experience, weknow that things slow down during the holidays, but that's about as much as Icould offer on that.
I think this is, as David mentioned, a decision that couldcome at any time.
Steve Gambuzza, Longbow Capital
So the process has completely run its course and the nextstep is the court will issue its decision, which it could happen tomorrow or itcould happen three months from now?
Scott Rozzell
That's right. There's no statutory deadline that the courthas to abide by and they will issue this decision when they've completed theirdeliberations and the process of drafting and having that opinion reviewed.
Steve Gambuzza - Longbow Capital
Okay. And then finally, the 750 over five years for the AMI,that's just for the meters and then $150 million for additional smart gridtechnology over a longer period; is that correct?
David McClanahan
Yeah. The 750 obviously is much more than meters.
There'slots of BPL technology. There's lots of computer programs and architecture thatgoes along with that.
But that is the 750 is the way we've couched this wholeadvanced metering project, just a lot of components of it. The additional amount is unrelated to the metering.
It'sjust how you manage the grid, putting sensors on the grid, being able tooperate the grid digitally, monitoring performance of the grid and that wouldroll out over a fairly lengthy time. But at this stage, we're thinking $150million or so is an appropriate number to be thinking about.
Steve Gambuzza - Longbow Capital
Great. Thank you very much.
Operator
Your next question comes from David Grumhaus with CopiaCapital.
David Grumhaus - Copia Capital
Good morning, guys.
David McClanahan
Good morning.
David Grumhaus - Copia Capital
Two quick questions for you. One, on the court case, thenormalization with the Texas attorney general coming back to the court, is thatslowing the process at all, or does that not have any affect on the renderingof the decision?
Scott Rozzell
I don't think that that will this is Scott Rozzell again. Idon't believe that that will have an impact on the pace of the overall appeal.What the attorney general did was to ask the court to remand the normalizationissue back to the commission in light of this private letter ruling that we'vereceived.
And the commission could choose to do that remand as a partof its I'm sorry, the court could choose to do that remand as a part of itsdecision on the overall appeal, or it could choose to sever that issue andremand it earlier. But either way, I don't think it slows down the resolutionof the remaining issues.
David Grumhaus - Copia Capital
Okay, that's helpful. Then field services, another solidquarter, are you still seeing good growth opportunities there is?
I know youlike your positioning -- is your view you can continue just to keep growing thatbusiness at the rate for '08 you've been able to do so in the last couple ofyears?
David McClanahan
We continue to see a tremendous amount of activity. We'llconnect 400 wells again this year.
We have each of the last four years,including this one. That's from an historical level of 220 a year, soactivity's way up, but we're seeing a lot of activity around the shale playswhich are right near.
Where we have facilities and some other new developmentareas. So we really think that we're in the right spot when it comes to fieldservices and there's going to be lots of opportunities.
We clearly have tocapture them and we so it's up to us to get out there and do that, but we'vegot a lot in front of us that we can work with.
David Grumhaus - Copia Capital
Okay that's helpful. Look forward to seeing you at the EI.Take care.
David McClanahan
Great.
Operator
Your next question comes from Carl Kirst with Credit Suisse.
Carl Kirst - Credit Suisse
Sorry, guys. Just two quick follow-ups.
The first is aactually, want to clarify the smart meter spend one more time. The $750 was alittle bit higher than we were expecting.
Is that just electric or does thatinclude the $100 million of gas?
David McClanahan
No, that's just electric.
Carl Kirst - Credit Suisse
So, I don't know if you can say before you actually file,but have you decided against, then, spending on the gas or is that going to beaddressed as a separate issue?
David McClanahan
No. We wouldn't file that in the electric case, but to bevery honest, we jointly read meters in Houston now, gas and electric, and so wewould expect that it's just a follow-on on this technology and I think anywherefrom $80 million to $90 million, $100 million over a five or six-year period onthe gas side is what we'd see there.
But we would expect to deploy that at thesame time.
Carl Kirst - Credit Suisse
Okay.
David McClanahan
But it wouldn't about be part of this of the proceeding atthe commission.
Carl Kirst - Credit Suisse
Very helpful. And then just lastly on the gas side,Minnesota, as far as the potential for rate relief next year, has there beenany update in thinking or magnitude?
David McClanahan
No, not at this stage. They passed a law last earlier thisyear, I guess, that what I wanted to do some piloting on decoupling.
Certainly,we're interested in decoupling, especially in Minnesota and we're trying todecide now exactly how to manage that and what that means to us. And whether it means we have to go in for a rate case to doit or we can do it some other way.
But we're not ready to announce anything,because it's still under consideration.
Carl Kirst - Credit Suisse
Fair enough. Thanks, guys.
Operator
Your next question comes from Daniele Seitz with DahlmanRose.
Daniele Seitz - Dahlman Rose
Just I was wondering if there were any other projects alongthe pipeline area aside from the next one that you have been talking about fora while?
David McClanahan
We continue to look at a number of projects there, Daniele,but we have nothing to announce. There's clearly a lot of gas in the shalereserves and in the mid-continent area that are going to have to get to market.
And our assessment is you're going to need some morepipelines to do it, but we haven't got anything to announce there.
Daniele Seitz - Dahlman Rose
Okay, great. And as far as the rate-making regardingtransmission, is it are there incentive returns, etcetera and riders forspecific projects, or is it just going into a base like any other incrementalcapital expansion?
David McClanahan
Well, in Texas, we have something called TCOST, transmissioncost of service where you can get an update to your tariff for transmissionwithout going in for a full rate case and then you reconcile it when you do goin for a rate case. And we can go in 2008 as part of our overall ratesettlement.
We agreed to not go in and ask for an increase in our transmissionrates before then, but we might very well, we've spent a fair amount of moneyand I think we're looking at whether or not we need to go in toward the end ofnext year for a TCOST revision.
Daniele Seitz - Dahlman Rose
Okay. Thank you.
Operator
Your next question comes from Josh Silverstein withHighbridge.
Josh Silverstein - Highbridge CapitalManagement
Hey, guys. Just had a similar question to Daniele.
Was justwondering given the increase in cost for services, steel, transmission lines,given that you guys are operating under a rate freeze right now, would thatkind of pressure earnings growth there until you come out of the rate freeze,or can you actually go in or are there savings that you guys are finding on theOEM side right now?
David McClanahan
We can't go in and file until '010. So we are under afreeze.
We do have a very attractive service territory that continues to growat a very nice clip and clearly the growth there can offset expense increases. Just like any other company, we continue to see some laborincreases, where we have a lot of and the biggest part of our cost is labor,other than capital.
But we constantly are looking for ways to be moreefficient. We know we're in a rate freeze.
We know we have to be moreefficient, and we have folks looking at that every day. And if you look at ourtrack record over the last three, four years, I think we've been verysuccessful in being able to hold down cost and find efficiencies and wecontinue to look for those.
Josh Silverstein - Highbridge CapitalManagement
Got it. Great.
Thanks.
Operator
Your next question comes from Lasan Johong with RBC CapitalMarkets.
Lasan Johong - RBC Capital Markets
Yeah, David, I just wanted to ask you quickly aboutpreparations or how preparations are going for the transition towards nodalmarket within maybe about a year and change?
David McClanahan
I'm not sure I'm the best one to answer this. It is movingforward.
It's a very expensive proposition. ERCOT is dealing with it,obviously, as well as the PUC, but they're still moving forward with a 2009expected implementation, but there's lots of work to be done between now andthen.
But it's still moving forward, Lasan.
Lasan Johong - RBC Capital Markets
How much do you think it's going to end up costing you andwill you get rate recovery or rate relief from it, for it?
David McClanahan
I think ERCOT is going to spend something like $250 plusmillion and really they'll recover that through an increased fee they chargeand it really won't be us. We don't have a lot of costs that will be and thatwill incur as a result of this, but certainly the market and ERCOT are havingto redevelop their systems and we may have some minor cost increases just tointerface with them.
But this isn't really a ticket for us, it's for others thatare dealing with that.
Lasan Johong - RBC Capital Markets
Perfect, thank you.
Operator
(Operator Instructions) Your next question comes from CharlieSpencer with Morgan Stanley.
Charlie Spencer - Morgan Stanley
Hi. Just one follow-up on someone else's earlier question.In terms of potential other P&D opportunities, in terms of investingoutside of your territory, would you be interested in like minority stakes?
I understand the synergies on buying entire businesses, butfrom a minority stake, is that something that interests you or is that I mean?
David McClanahan
I think, Charlie, it really depends on where we think theinvestment would take us. If we think it positions us for a bigger stake andmaybe a stake to own the whole thing, we might very well be interested.
If it's simply a minority stake that you never could get thekind of efficiencies and synergies if you own the whole thing, than we probablywouldn't be as interested in that.
Charlie Spencer - Morgan Stanley
Thank you.
Operator
There are no further questions at this time.
Marianne Paulsen
Okay. Great.
Thank you very much, everybody, for participatingin our call. We appreciate your interest and support as always.
Thank you andhave a great afternoon.
Operator
This concludes CenterPoint Energy's third quarter 2007earnings conference call. Thank you for your participation.