Feb 26, 2010
Executives
Marianne Paulsen - Director of IR David McClanahan - President & CEO Gary Whitlock - EVP & CFO
Analysts
Carl Kirst - BMO Capital Faisel Khan - Citigroup Ali Agha - SunTrust Robinson Steven Gambuzza - Longbow Capital Daniele Seitz - Dudack Research Vedula Murti - CDP Lasan Johong - RBC Capital markets Raymond Leung - Goldman Sachs Debra Bromberg - Jefferies and Company
Operator
Good morning and welcome to CenterPoint Energy's fourth quarter 2009 earnings conference call with senior management. During the company's prepared remarks all participants will be in a listen only mode.
There will be a question-and-answer session after management's remarks. (Operator Instructions).
I will now turn the call over to Marianne Paulsen, Director of Investor Relations. Ms.
Paulsen.
Marianne Paulsen
Thank you very much Tina. Good morning everyone, this is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy.
I would like to welcome you to the fourth quarter and full year 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 fourth quarter and full year 2009 results and will also provide highlights on other key activity. In addition to Mr.
McClanahan and Mr. Whitlock we have other members of management with us who may assist in answering questions following their prepared remarks.
Our earnings press release and Form 10-K filed earlier today are posted on our website which is www.centerpointenergy.com under the investors section. This quarter we have created supplemental materials which are also posted under the investor section of our website.
These materials are for informational purposes and we will not be referring to them during prepared remarks. 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 Friday, March 5, 2010. To access the replay please call 1800-642-1687 or 706-645-9291 and enter the conference id number 498-30541.
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 will now turn the call over to David McClanahan.
David McClanahan
Thank you, Marianne. Good morning ladies and gentlemen, thanks for joining us today and thank you for your interest in CenterPoint Energy.
In view of the weak economy and some very challenging energy markets I believe our company performed pretty well in 2009. That took hard work and dedication on the part of our employees and I would like to begin by acknowledging their accomplishments.
We improved the efficiency and the effectiveness of our operations, strengthen business relationships, capture new business opportunities and continue to strengthen our balance sheet, improving our overall financial flexibility and strength. As a result of these collective efforts, I believe the company is well positioned to face the uncertainties in the economy and the energy markets and emerged even stronger.
This morning I will discuss our 2009 financial results as well as the described plans and prospects for each our business units as we head in 2010. Let me begin with an overview of our fourth quarter 2009 results.
This morning we reported net income of $105 million for the fourth quarter or $0.27 per diluted share, this compares to net income of $87 million or $0.25 per diluted share for the same period of 2008. Operating income from the fourth quarter of 2009 was $299 million compared to $303 million for the same period of 2008.
Our regulated electric and Natural Gas Distribution utilities achieved solid results this quarter. Houston Electric's operating income increased $6 million primarily due to customer growth, higher transmission related revenues and earnings related to our advanced metering investment partially offset by reduced energy demand and higher labor cost.
Our Natural Gas Distribution segment reported the $3 million increase in operating income primarily from rate increases and lower bad debt expense partially offset by an $11 million increase in pension expense. The energy markets had a greater effect on our other business units our Interstate Pipeline and Field Services segment were each down $4 million, our pipelines were impacted by reduced ancillary revenues primarily as a result of lower offsets in sales.
Field Services revenues were down as natural gas and liquids prices we received dropped from 2008 levels. Due to reduced basis differentials, operating income and our energy services business declined by $5 million.
Overall, however, this was a solid quarter which again demonstrates the benefit of our balanced portfolio. Let me now turn to our full year 2009 performance.
Our reported net income for 2009 was $372 million or $1.01 per diluted share compared to $446 million or $1.30 per diluted share for 2008. Operating income was $1,124 million in 2009 compared to 1,273 million in 2008.
While operating and net income were down from what was a banner year in 2008 I believe that there is much about 2009 to make us optimistic about the future. Let me give you a little more detail regarding the full year performance of each of our business segments.
Our regulated transmission and distribution utility Houston Electric reported operating income of $414 million compared to $407 million for 2008, this increase was primarily the result of higher transmission related revenue customer growth and income from our investment in advanced metering system offset in part by reduced energy demand and higher operating expenses. Operating income for 2008 was negatively impacted about $7 million as a result of hurricane Ike but included a gain of $9 million for a land sale and $5 million from a state franchise tax refund.
If 2008 were adjusted for these items, and 2009 operating income would have been up $14 million or approximately 3.5% it is worth noting that even in a weak economy we added over 29000 customers in 2009, a growth rate of almost 1.5%. As we have discussed in the past Houston Electric is progressing well and implementing our advanced metering system.
During 2009 we installed over 150,000 smart meters along with the supporting communications equipment and information system. We are currently in negotiations with the Department of Energy for $200 million in federal stimulus funds composed of $150 million to accelerate the implementation of our advanced metering system and $50 million to support our intelligent grid initiative.
Assuming that the project is funded in accordance with our application we will accelerate our AMS deployment to substantially complete the project in 2012 rather than 2014 as originally planned. Because the DOE requires matching expenditures there will be some acceleration of company funding but we don't expect it to be material to either cash flow or earnings.
Finally in our stranded cost true-up appeal, the Texas Supreme Court heard oral arguments last October. All briefs have been submitted and we are now awaiting the court's decision.
There is no statutory deadline for the court to act but we anticipate a decision sometime this year. Now let me turn to our Natural Gas Distribution business.
This unit reported operating income of $204 million compared to $215 million in 2008. Operating income benefited from rate increases totaling $36 million and lower bad debt expense of $15 million.
Offsetting these benefits were increased pension expense of $37 million, higher operating expenses primarily employee related cost and higher depreciation in taxes. This business unit has worked diligently on reducing customer delinquencies and bad debt expense.
And I am pleased to say that we saw the benefit of that effort in 2009. Unfortunately, unlike our electric utility our natural gas utilities cannot defer pension expense increases had it not been for these increases this business unit would have had an outstanding year.
Over the last several years, our natural gas utilities have been focused on obtaining necessary rate increases and improving rate design. Last July, we filed two gas rate cases.
In our Houston service territory which now covers 30 cities serving nearly 1 million metered customers, we requested a revenue increase of a little over $20 million. Earlier this week, the Texas Railroad Commission authorized a $5 million base rate increase, recovery over three years of $2.6 million of Hurricane Ike related cost and lower depreciation rates than requested.
We are disappointed in a number of aspects of this decision, and we will have to evaluate when another case will be necessary. In Mississippi, we filed a $6.2 million rate increase request.
We subsequently reached an agreement with the commission that allows us to retain the benefits from an asset management agreement and we are able to withdraw this request for rate relief. In our Minnesota rate case which we filed with the Minnesota Public Utilities Commission in November 2008, we asked to increase rates by $60 million and to decouple revenues from the volume of gas sold.
In January of 2009, we implemented a $51 million interim rate increase. In January of this year, the Minnesota Commission approved a $41 million increase in a three year decoupling pilot.
With this decision, we now have decoupled cost recovery from the volume of gas consumed for approximately one half of our 3.2 million customers. Our competitive natural gas sales and services business reported operating income of $21 million for 2009, compared to $62 million for 2008.
We recorded mark-to-market charges of $23 million in 2009, compared to gains of $13 million in 2008. As you know these mark-to-market impacts are associated with derivatives we used to lock in economic gains.
In addition, in 2009 we recorded a $6 million write down of inventory to lower our average cost on market, compared to a $30 million inventory write down in 2008. Excluding these items, our energy services business would have reported $50 million for 2009, compared to $79 million for 2008.
This decline was principally the result of reduced wholesale opportunities, because of significantly tighter locational price differentials and an absence of summer storage spreads. However, our retail sales were stable in 2009 and we added nearly 1,400 customers to our total customer base.
Now let me turn to our Interstate Pipelines unit. Interstate Pipelines recorded operating income of $256 million for 2009, compared to $293 million for 2008.
2008 included a net gain of $11 million, associated with the sale of two stores development projects, offset by a write down of pipeline assets removed from service. Adjusting for these two items, operating income decreased approximately $26 million.
Our core business continues to perform well; building on its strong fee based foundation, with increased margins from our Carthage to Perryville pipeline, as well as increased revenues related to two new firms or to several new firm contracts to serve power generation facilities on our system. Our fee based margin grew by 9%, but this growth was more then offset by reduced ancillary services as well as incremental operating cost associated with new facilities and increased pension expense.
Our equity income from ongoing operations from the Southeast Supply Header or SESH, our joint venture with Spectra, was $23 million for the year. However, this income was partially offset by $16 million non-cash charge to reflect SESH's discontinued use of regulatory accounting.
In 2008, equity income was $36 million, primarily from allowance for funds used during construction. Last March, our Interstate Pipelines group signed an agreement with Chesapeake to take 80% of the capacity on the phase 4 expansion of our Carthage to Perryville pipeline.
We completed these facilities and began the contract to service at the beginning of this month, two months ahead of schedule. Last November, we signed a joint development agreement with a subsidiary of FPL Group to explore constructing a new pipe in North Louisiana, primarily focused on moving natural gas from the Haynesville Shale area.
We are currently in discussions with possible shippers to assess the size, timing and scope of a potential new pipeline. Now let me turn to our Field Services segment, we reported operating income of 94 million for 2009, compared to a 147 million for 2008.
Operating income for 2008 include gains of 17 million associated with the sale of non-strategic assets and the settlement of a contractual dispute. The remaining 36 million decrease in operating income, was primarily the result of significantly lower natural gas and natural gas liquids prices in 2009.
Field Services achieved a 23% increase in core gathering margins, primarily associated with the Haynesville, Fayetteville and Woodford Shales. These new volumes more than offset the reduced gathering in our traditional natural gas basins, resulting from the significant decline in drilling activity in those basins.
In addition to operating income, we also recorded equity income of $8 million from our jointly owned natural gas processing facilities, compared to $15 million for the previous year. Again the decline was primarily due to lower liquids prices.
Last September we signed long term agreements with subsidiaries of Shell and EnCana to provide gathering and creating services for their growing Haynesville shale natural gas production. We acquired facilities that are gathering and creating production of over 100 million cubic feet per day and are expanding need facilities to gather and treat up to 700 million cubic feet per day we are well under way having completed several significant milestones.
Overall investment in this project is expected to be around $325 million. In 2009 we invested more than a $175 million in acquiring and expanding the facilities and expect to spend approximately $80 million this year.
The agreements with Sale and EnCana have minimum volume commitments and provide us exclusive rights to gather and create their natural gas production in designated Haynesville acreage. As part of the agreement EnCana & Shell can commit to additional volumes and if they do we will further expand the facilities together and treat up to an additional 1 billion cubic feet per day at a capital cost of up to an additional $300 million.
This expansion can be requested in increments by 100 million cubic feet per day to coincide with increases in their Haynesville production. Most of our contracts in the Shell production areas include acreage dedications, volume commitments and our guaranteed written contracts.
We are also beginning to see a resumption of drilling activity in our traditional gathering footprint although drilling levels there remain well below 2008 levels. Taking into account the performance of all of our business units under demanding conditions I believe the company had a very solid year.
Moreover I believe we are well positioned as the economy improves and energy markets rebound and that our overall financial results continue to demonstrate the benefits of our balanced portfolio of electric and natural gas assets. Now let me turn to our outlook for 2010.
We believe that the combination of the stability provided by regulated electric and natural gas utilities and the high level of activity in a number of producing areas served by our pipeline and Field Services segments should allow us to achieve solid performance across our various business units in 2010. We expect Houston Electric to continue to perform well, however operating income will be reduced by $24 million to account for the effect of differed taxes associated with Hurricane Ike.
This differed tax effect will decline each year, but will last for the 13 year duration of the storm cost recovery bonds. We anticipate that our customer base will grow at a pace comparable to the level experienced in 2009.
In addition, we expect to file a transmission rate case this fall to reflect increased transmission investments and recover the remaining $20 million of Hurricane Ike related restoration costs associated with our transmission system. Under the terms of a 2006 settlement, at close [ph] rates through June of this year, we are required to file a rate case unless the PUC staff and interveners suspend such requirement based on an earnings monitoring report we will file with the PUC next week.
We are currently assessing whether or not we will file a rate case even if we are not required to do so. Capital requirements for our electric business are budgeted at $560 million, including approximately $167 million related to our advanced meter deployment.
Our Natural Gas Distribution utility should continue to see the benefits from rate increases and rate decoupling as well as ongoing expense control measures. We expect to see residential customer growth similar to the levels we experienced in 2009 and some additional benefits associated with the asset managements agreement entered into this past year.
Our capital plan for 2010 are $210 million reflecting an increase in capital spending from 2009 levels primarily persistent in public improvements. Our Interstate Pipeline will realize the benefits of the Carthage to Perryville Phase IV pipeline expansion project which went into service in February.
We believe we are well positioned to capture ancillary revenues when market dynamics and commodity prices rebound. We are pleased with the additional fee based contracts added in 2009 which will provide further stability to earnings.
We continue to see a very high level of drilling in the shale areas particularly the Haynesville, Woodford and Fayetteville Shales. This is driving opportunities for both our pipelines and field services.
Increased gathering volumes from the Haynesville and Fayetteville Shale areas are expected in 2010 and as a result of the contracts entered into in late 2008 and in 2009; we expect our Field Services results to improve this year. Current natural gas and natural gas liquid's prices are also running at or above prior to as we experienced in 2009.
Our pipelines capital budget will be approximately $171 million or about the same as 2009. Our capital budget for Field Services is $226 million for 2010.
We spend about $350 million in 2009, which was a record for this business unit, and reflected significant investments in the Shale areas. Gary will provide our overall earnings guidance for 2010 in his remarks.
In closing I would like to remind you of the $0.195 [ph] per share quarterly dividend declared by our board of directors on January 21. This is a 2.6% increase over the dividend we paid in 2009 and the fifth consecutive years that we have raised our dividend.
We believe our actions continue to demonstrate a strong commitment to our share holders and the confidence the board of directors have 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'd like to discuss a few items with you.
As David mentioned 2009 was a very challenging year for the overall economy and for energy markets in particular. In addition to these challenges, we began the year with a number of significant concerns about the overall strengths of the capital and bank markets following a very difficult second half of 2008.
Despite of these challenges our businesses perform well which again highlights the benefits of our balance portfolio and delivering stable earnings and cash flow. We are also pleased with the steps we took during the year to significantly improve our balance sheet, enhanced our credit metrics and expand our available liquidity in order to ensure that we maintain the financial flexibility to effectively execute our business plan.
Let me discuss some specific improvements excluding securitization debt we reduced our corporate debt from $8.1 billion at year end 2008, $7 billion at year end 2009 while funding a capital program of approximately $1.1 billion. Our debt to total capitalization improved from approximately 80% to approximately 73% at year end 2009.
We ended the year with net debt of $6.4 billion a reduction of over $1.6 billion from 2008 which includes $589 million of available cash. Subsequent to year-end, we continue to pay down debt to reduce the negative carry associated with our significant cash balance.
We redeemed approximately $45 million of 6% convertible subordinated debentures due in 2012. In addition, we've repurchased three series of (inaudible) secured pollution control bonds totaling $290 million of 101% of their principle amount.
Let me point out that we have ability to remarket these pollution control bonds in future is beneficial. We also executed a number of financing as well as operational improvements to enhance our strong liquidity position.
As you know we have had and will continue to have a relatively large capital budget which includes franchise required capital in our regulated operations combined with a number of very attractive projects particularly in our Field Services segment where producer activity remains strong especially in the shale production areas. To ensure that we maintain the financial flexibility to effectively execute our business plan, we raised approximately 504 million of additional equity due to sale of approximately 46 million shares of common stock last year, of this amount $280 million came from an underwritten equity offering in conjunction with the announcement of our Field Services business signing excellent long-term agreement within EnCana and Shell to expand gathering and treating facilities in the Hayneville shale.
The remaining equity was raised to the sale of stock and continuous offering program and the issuance for stock your saving plan and dividend reinvestment plan. In November, Houston Electric recovered its distribution related storm calls associated with hurricane Ike to the issuance of approximately $665 million and storm restoration bonds.
These bonds were issued at very favorable interest rates and we will provide significant savings to consumers over the next 13 years compared to traditional cost recovery methods. Just as important the legislation of authorized these bonds also gave the PUC ongoing authority to allow utilities to recover costs associated with future hurricanes and other natural disasters through securitization financing.
In August, SESH secured permanent financing through the issuance of $375 million of senior notes with CERC receiving a construction loan repayment of $186 million. In addition to the sources of cash from financing, we continue to manage our working capital requirements very efficiently.
Our Natural Gas Distribution business entered into a number of asset management agreements that reduced our working capital requirements and optimized the operations of our transportation and storage capacity. These agreements benefit our customers through regulatory approved sharing arrangement.
We also benefited from the continuation of bonus depreciation in 2009 and our hopeful legislation will be enacted to continue it in 2010. With the improvements we have put in place in 2009 the absolute level of our working capital needs has decreased.
Now let me touch on liquidity. In October, CERC extended its receivables facilities for another year for the size of the facility ranging from $150 million to $375 million consistent with the seasonal changes and receivables balances.
In February of this year we amended the financial covenant at our $1.2 billion bank credit facility to permit approximately $800 million of additional debt in the event we were to have another storm in our service territory with acquiring us to incur a significant cost to restore power to our customers. This is similar to the amendment that we obtained after hurricane Ike struck our service territory but instead of having to wait to see covenant relief after the fact we now have an agreement with our banks that the covenant will automatically adjust should another major storm strike our service territory.
We were very pleased to have had the support of 100% of our bank group on this amendment. We ended 2009 with $589 million of available cash and no significant borrowing under any of our credit facilities.
Our improved liquidity significantly lower leverage and improved cash flow metrics better position us to continue the effective execution of our business plan in 2010. Now let me turn to my final topic our 2010 earnings guidance.
This morning in our earnings release we announced 2010 earnings guidance in the range of $1.2 to a $1.12 for diluted shares. However, as you compare our 2010 earnings guidance to our prior result I would like to highlight a few items.
First, our business unit's financial performance will improve as the combination of the earnings stability provided by a regulated operation and the high level of activity in a number of gas producing areas where our pipeline and Field Services businesses have made significant and capital investments will allow us to achieve improved operating income in 2010. Second, we expect to benefit in 2010 from reduced net interest expense.
Third, we expect our tax rate return to a more normal level in 2010 of approximately 37.5% compared to 2009 tax rate of 32%. And then fourth, as I mentioned earlier, we raised equity last year to support our value growth initiatives and we ended 2009 with approximately 392 million shares outstanding.
Finally, as you know in providing guidance we have routinely excluded the effects of mark-to-market and inventory accounting as they are timing related and we do not try to predict the potential impact to income from our pending True-Up appeal, the change in the value of Time Warner stocks and the related ZENS securities or any mandated accounting changes that may occur during the year. As the year progresses we will keep you updated on our earnings expectations.
Now I'd like to turn the call back to Marianne.
Marianne Paulsen
Thank you, Gary. With that we will now open the call for 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.
Operator
Thank you. At this time we will begin taking questions.
(Operator Instructions). Our first question will come from the line of Carl Kirst with BMO Capital.
Carl Kirst - BMO Capital
If I could actually start on the pipeline side, I just wonder to get a little bit better since of the drivers behind the lower all system sales, as that was a reflection of bases. Trying to get a sense of what was behind that and then in general for 2009, what was coming from ancillary services and parking loan and how do you expect that to contrast in 2010?
David McClanahan
Yeah, Carl. Let me give you on the first point offset in sales driven by two factors one was basis was much tighter across the year than in '08 and that was a big piece of it, but we are also running our pipeline at a much higher capacity factor not a lot of excess capacity that we can sell on a daily firm or an interruptible basis and that clearly have its impact as well.
So I think those two items are the biggest driver for offsets in sales. The other piece in ancillary services we have PAL [ph] service, we have system balancing, we have system management, we have processing all of those kind of move around depending on really the some is on the behavior of our customers and then some is just on where gas is moving in from, but I would say processing because of the drop in liquids was a fairly significant piece of the drop in 2009 compared to 2008.
Carl Kirst - BMO Capital
And then just with respect to outlook in 2010, as far as how you expect those buckets to be moving around. Have we very much based out on those dynamics?
Are we looking at obviously higher commodity prices, but I guess to the extent that basis differentials are probably going to remain tight here and you guys are running at high utilization, that may be an element that doesn't come back?
David McClanahan
Yeah I think that's right it's hard to estimate ancillary services as you know because it's really based on market dynamics. We saw a very steep decline from '08 to '09 for the reasons that I think we are all aware of what happen in the energy market.
I think the steepest decline is behind us, but we can still see some movement both up and down. I think off system sales, because gist of the formats of our pipeline it'll be a little hard to see a rebound there, but we could see a little bit more of the other services than we saw in '09 it's just really hard to predict.
The good news is our core business, our feed based business which is as you know demand based and not volume based its solid and it'll be even increasing over 2009 levels with the phase 4 of Carthage to Perryville and some other projects that we put in service. So, I think the overall business is very well positioned, ancillary services will drive whether or not you get a big increase over '09
Carl Kirst - BMO Capital
Great and just a very quick follow-up. David, you mentioned you're still assessing whether or not you guys might be filing a rate case on HL&P in 2010?
Does that mean we should assume the expectation of the ROE for HL&P this year is basically in that 10% range?
David McClanahan
You know we had a pretty good year at Houston Electric, HL&P is an old term there, Carl, but we did get on a unadjusted basis we are probably at pretty close to 11% ROE on a weather adjusted basis we are probably close to 10% ROE and then depending on what where your capitalization is we believe, we are ahead of about 45% equity level in the business and not a 40% equity level, but we are pretty close to earning our authorized rate of return on a weather adjusted basis, but there are some things that we are not recovering for example, we are deferring these pension costs, they are very significant even if we don't get an earnings uplift, we certainly would get the cash flow and start covering this pension expansion rates. So lots of things we have to think about there before we make that decision.
BC [ph] staff and the interveners can require us to go in and file in June of this year, based on December 31, 2009 test year, we filed that report on Monday and so that'll take a few weeks I am sure to look at it and than we'll start talking with them but we are earning pretty close may be a little bit less than we think the real return is. I mean I think the commissions looking at 10.5% ROE in that range and I think on a weather adjusted basis we are earning less than that.
Operator
Our next question will comes from the line of Faisel Khan with Citigroup.
Faisel Khan - Citigroup
You had a lot of headwinds in 2009, $37 million of pension headwind in the gas utilities, you've got $55 million on the commodities side, the field Services business and as Carl was pointing out, the $32 million ancillary sort of a headwinds you had and $29 million in lower cost to market and kind of mark-to-market adjustments in '09. I'm just trying to figure out, for your 2010 guidance, what do you assume about any of these things kind of coming back or if at all turning the other way?
David McClanahan
Let's take commodity prices we went from $1.50 on liquids to $0.80 and in '09. We went from probably $7 in '08 to half of that in '09.
Prices today are running ahead of those, but you know it's hard to predict exactly where that's going to go we know that it's going to depend in part on demand for gas and how fast this economy comes back, but certainly gas prices today are in that $5 range, so they are a little above '09. We are not predicting big increases in commodity prices in our forecast, we have some slight increases especially on liquids prices, but I'll also probably need to remind you that in '09 we did fix some natural gas prices in advance of the year, so we got some gas sold at $5 give or take a few pennies, which is about where the price is today, so we are predicting a little uptick in liquids prices may be a little bit in natural gas but not much.
In terms of ancillary services I think we address that and when I talk to Carl we could see some bounce back, but we are not counting on a lot of bounce back there in our earnings guidance and there is just not anything we can do with this pension increase until we get our gas rates to fully refract these increases and I don't yet we do have a little bit in the Minnesota rates and I don't think that the recent decision we got for Houston really reflects the level of expense we are incurring there they use some averaging that really didn't reflect the actual expense we are incurring.
Faisel Khan - Citigroup
And the level of earnings for the competitive natural gas business for 2010, are you expecting that to roughly be the same for '09?
David McClanahan
I think that '09 was a little unusual if you adjust all those figures out where you know it is probably in the $40 to $50 million level on a normalized basis if you take out mark-to-market and inventory write downs. It's really a wholesale issue; our retail business I think is really doing well.
We had strong results in '09 in the phase of a weak economy where we were able to maintain our retail sales there I don't know margins there. But basis, differentials and storage spreads are weak and it's all going to depend on where they go, we have assumed a little bit of rebound, but not a huge rebound.
Faisel Khan - Citigroup
Okay, fair enough and then on the commodity price side is it fair to say that you have got a fairly alluded expectation for NGL prices for this year pretty similar to last year to some degree?
David McClanahan
That's exactly what we are doing Faisel. It may be a few pennies above what we realize but we are not projecting a big increase there?
Operator
Our next question will come from the line of Ali Agha with SunTrust Robinson.
Ali Agha - SunTrust Robinson
Wanted to check and David just be clear on when you are talking about the ROEs at Houston Electric, where you saying those numbers based on a 40% equity ratio or the 45% that you think is appropriate?
David McClanahan
That's based on actual capital structure, that's what we have to file on at when we file this earnings March during report which it's probably closer to 45 than it is 40.
Ali Agha - SunTrust Robinson
Okay and is the authorization at 40?
David McClanahan
The rates that we have in place today were based on a 40% equity, 60% debt with an 11.25% ROE, let me back up a minute I think I am mistaken the ROEs that I noted were based on a 40% equity level.
Ali Agha - SunTrust Robinson
They were all 40% okay.
David McClanahan
I want to double check that because I had recalled that differently but.
Ali Agha - SunTrust Robinson
Okay, and then one other question, David. As you were pointing out, your results in the segment should be improving '10 over '09, but if you look at the businesses right now in terms of the capital you've invested and the returns you are getting, how would you rank them in terms of the returns being commensurate with the capital invested?
David McClanahan
Which businesses Ali?
Ali Agha - SunTrust Robinson
Well I'm just thinking across the four or five segments you operate in and I'm just looking across-the-board.
David McClanahan
Let me kind of take each one of them I think if you look at the results of our regulated utilities Houston Electric is doing just fine, we've made lots of improvements in our gas LDCs but we are still not earning in a double level, it's a hard single digit and we continue to improve that certainly from what it was a few years ago. So I would say that that one still work in progress, but much better than it was in the past.
Our field services investments we feel very good about and very attractive and we believe in fact we are getting a compensatory return and we are creating substantial shareholder value there. Our pipelines is pretty much a regulated, solid regulated return in the pipeline side, you are talking about 12% - 13% ROEs and I think we have been achieving that except for one exception which is SESH and this cost a lot more then we thought.
Operator
Our next question will come from the line of Steven Gambuzza with Longbow Capital.
Steven Gambuzza - Longbow Capital
It wasn't clear from the comments earlier whether you were assuming increased GAAP pension expense in 2010 earnings guidance versus the realized amount in 2009.
David McClanahan
No, it’s going to be about the same level it could be a tad lower just because our pension assets are a little better than we had experienced at the end of '08. So I think, we are going to see a little bit improvement in pension expense there.
Steven Gambuzza - Longbow Capital
Okay, and I guess the point is that you are still not recovering this amount in your rates, so there is some upside in '011 to the extent you can recover this level of cost in your rates?
David McClanahan
Steven Gambuzza - Longbow Capital
Okay, and then, I appreciate -- you commented on this already, but I just want to make sure I understand. With respect to Field Services and the pipeline segments, maybe we could address each separately.
When you think about the commodity headwinds that impacted your realized margins in 2009 versus 2008, it sounds like you are expecting a small improvement in both those sequentially in '10 versus '09. Is that correct?
David McClanahan
You know I think we'll have a little, I mean we are not predicting a big increase related to commodity price uptick, there'll a little bit and I think, I think you can think of 2009 more of a base year. 2008 was just a year where energy prices were much higher than we've experienced in a long, long time.
We were fortunate. We took advantage of it.
Our shareholders got the benefit of it but that's not something we predict that's going to occur each and every year, so when we think about these businesses we think of '09 as kind of the base year in the way the base year thinking and we think there could be some upside there if energy prices firm up, but we are not predicating a huge amount and I would say that on the pipeline side they are a little bit sensitive to price, but it’s more sensitive to basis and things of that nature and not just price.
Steven Gambuzza - Longbow Capital
So, if prices for NGLs and gas and base differentials were to kind of stay around where they are, at least relative to where the forward curves are now, if that were just to kind of stay relatively constant throughout the year, is it fair to say you would not be experiencing negative year-over-year comparisons on your margin lines as we roll through the quarters?
David McClanahan
I think that's fair. It doesn't quite translate the same way in the pipeline certainly in field services, but I think that's a fair generalization.
Operator
Our next question will comes from the line of Daniele Seitz with Dudack Research.
Daniele Seitz - Dudack Research
Thank you. I was wondering is there a way of isolating the earnings that you are getting from the smart meters investment since I believe it is the rider.
Or is it not possible?
David McClanahan
Let me kind of give you a it’s in kind of $10 to $12 million range, that's the revenues less expenses. You know this is kind of a -- we true this up and we don't earn more than our authorized return, so it is in that level what drops to them, to the operating income line.
Daniele Seitz - Dudack Research
Okay, great. And in terms of the back to those pipeline and Field Services areas, you do have an expansion of the base in the pipeline areas, so that is a reason for upside, correct?
David McClanahan
Yes we do have Phase 4 of Carthage to Perryville that went into service at the beginning of this month and so we'll get the benefit of that and we had some contracts that weren't in effect the full year of '09, so we'll get the benefit of that in 2010 as well. And of course we continue to look for other opportunities but most of those if they are [ph] significant, they will take a few months to get in place.
The other thing Danielle is we have the Shell EnCana projects. Certainly, we are investing a lot of money, we expect those volumes to ramp up kind of throughout the year '10 and we also had some projects in the Fayetteville and Woodford area and we think we are going to see some ramp up in those areas.
As drilling picks back up they were -- in the Fayetteville area we saw some slight reduction in drilling in the fourth quarter really related to pipeline capacity coming out of that area, there was some shut in pipes and some rigs left the area, we expect those to come back and we -- and as they do, we expect volumes to pick up form those areas as well.
Daniele Seitz - Dudack Research
Do you have a sense, I mean just a hint as to what type of increase you're looking at, something sizable?
David McClanahan
We feel pretty good about where field service is headed, I'd be hesitant to predict exactly. We had an increase of 23% in core margins in '09 over '08 and I think we can see a double digit increase there, can't really say exactly how much but yeah we think that we ought to get some good increases in field services if the drilling continues.
Operator
Our next question will come from the line of Vedula Murti with CDP.
Vedula Murti - CDP
Okay, I'm wondering, in terms of we take a look forward here in '10 in particular given the large equity issuances that you had during the year of '09 aside from maybe dividend reinvestment, fairly modest level. Should we really be expecting anymore incremental equity or are there some projects that you are looking at similar to EnCana Shell that might be possible that would require some funding.
Gary Whitlock
No, in terms of -- last year we raised a significant amount of the equity. This year, we are going to continue our benefit programs and that’s what you look in terms of a share account increase at about the same level as last year on these benefit programs.
In terms of any additional equity, it would really only be related if we had these very -- had the good fortune of having a very significant, very accretive project and maybe I'll just make a point about this. Our cash flow from operations in 2010, plus if you recall, I mentioned we had a significant amounting cash on hand plus this fairly minimal equity we raised sort of routinely through our benefit programs will certainly fund our CapEx program, our dividends and including this maturing debt, the $200 million maturing debt.
So we feel really good about our financial position in 2010 to execute our business plan.
Vedula Murti - CDP
Okay. And probably a follow-up on Faisel's question.
There were other several items you mentioned, but can you kind of just frame it in aggregate right now kind of what you think is the earnings opportunity from fixing pensions and some of the other issues that the gas LDCs, et cetera, what type of a potential net income delta that we have and opportunity to work up over a period of time?
David McClanahan
Well, it’s kind of hard to just look at expense numbers, if you look at where we are earning at the gas LDCs, I’d say that, let’s just call it 9% or so. We've got a rate base of well over $2 billion or about $2 billion.
And assuming about -- in most cases we have 45%, 50% equity levels, you can back in to how -- what it takes to get to full rate of return whether it’s10.5 or whatever you are assuming. So there is some nice upside there and then you have -- and part of that, the reason we are not earning our rate of return is because of the pension, it's a big part.
If would have been earning or recovering our pension expense, my expectation is we'd have earned our regulated rate of return. So that's an upside down the road.
It takes time to get those in. We talked about Houston Electric and we've got some sizable investments ahead of us in Field Services but we spent $350 million, 80% of which was for growth projects, if not more.
So those projects are going to pay off for us in the long run. Over the next 10 years, we are going to get the benefit of all those investment, and we will continue to make investments.
We have got $225 million or so capital budget for Field Services this year and there could be more if Shell EnCana decides to exercise their option to expand our facilities to get more production out.
Vedula Murti - CDP
So it sounds like to me that if we think about 2010 versus 2009 and then kind of going forward a little bit that in terms of the earnings per share improvement over time that we may have a chance to see maybe something more above trend line in the next couple years as you make up some of these shortfalls as well as the incremental capital investment. So would that be fair to think that after 2010, assuming that we have a somewhat reasonable economy, that for a short period of time you can be above trendline as these things work?
David McClanahan
Yeah I don't think that's an unreasonable assumption. it’s hard to know what the trend line is and it takes time for, to get all our rates right in our regulated utilities, but I am very optimistic on our Field Services side, I think we have some opportunities to improve earnings on our regulated utility and we are not earning our full return today in some of those utilities, so I think there is some upside there, yes.
Operator
Our next question will come from the line of Lasan Johong with RBC Capital Markets.
Lasan Johong - RBC Capital markets
For some reason I got cut off after a while, so I might have missed a couple things. But I was wondering if you could tell me what's involved in the asset management business for Minnesota.
David McClanahan
We didn't do any asset management agreements in Minnesota. We've done these really in Arkansas, Mississippi, Oklahoma and Louisiana.
This is where we basically, somebody else manages the storage and pipeline capacity, basically provides us gas. And to the extent they are able to optimize those assets above what the regulated utility would do, because that's not in the business that we are in, we share in their profits.
So it's that kind of arrangement. It's becoming more and more common across all gas LDCs and we've done it for a number of our jurisdictions but not all of them.
Lasan Johong - RBC Capital markets
I see. Do you see acceleration in drilling in areas where there's more liquids, or is it just straight across-the-board liquids or no liquids?
Do you see a lot more drilling everywhere or just confined to liquids rich areas?
David McClanahan
No, I would say that if you looked at '09, it was in the shale areas, shale areas that Haynesville, Fayetteville, Woodford, they don't have a lot of liquids so it’s not a liquids play there. Our traditional basins, yes, there's lots of liquids but we saw drilling really fall off in '09.
Now we have seen an uptick in drilling in our traditional basins and that could bode well for us but the majority of the wells that are being drilled are in the shale areas and you don't have a lot of liquids out of those.
Lasan Johong - RBC Capital markets
And are you seeing a lot of competition for Field Services and pipes or gathering business in the Haynesville?
David McClanahan
Yes, there is plenty of people that are involved in that area and are competing along with us for the same opportunities we see there, so yes there is lots of competition there.
Lasan Johong - RBC Capital Markets
And do you see any opportunities in the Eagleford?
David McClanahan
We haven't been involved in the Eagleford with out Field Services business. We own capacity, whole capacity on both NGPL and Kinder Morgan and we certainly are involved in talking with players in that areas, but we haven't been involved from a gathering or treating standpoint.
Lasan Johong - RBC Capital Markets
Do you plan to, or do you want to?
David McClanahan
Well I think it is a very attractive area. We haven't been in that area before.
I think if we went to that area, we would go with a long-term customer that we had, that wanted us to do it and we would love to get involved in it but we just haven't operated in South Texas that is not where we have been focused.
Operator
Our next question will come from the line of Raymond Leung with Goldman Sachs.
Raymond Leung - Goldman Sachs
Thanks for taking my question, but just to clarify with respect to your spending and capital needs, do you guys anticipate the need for external debt financing for 2010. And if you could provide us some color on that?
Gary Whitlock
No as I mentioned, Ray we don't expect to, we have a maturing debt at the parent company we will pay that all in terms of our cash flow from operations we will still be strong. And again I'd point you to the cash on hand at the end of the year although we paid some debt down as well since then but we will fully fund our CapEx program, fund our dividend and so We are issuing as I mentioned through our benefit programs more on a routine basis, some equity we think is a walk away through that but we are fine in terms of the finance and equity.
Marianne Paulsen
We are over time actually and we have got, I think we will take one more question.
Operator
Our final question will come from the line of Debra Bromberg with Jefferies and Company.
Debra Bromberg - Jefferies and Company
Could you explain the projected rate base level is for the electric company in 2010?
David McClanahan
It's between about $3.5 billion I think give or take.
Debra Bromberg - Jefferies and Company
That's an average for the year roughly?
David McClanahan
I am thinking that's kind of the end of '09. We have got a substantial capital budget there but you have to setup aside the amount of AMS because we already kind of dealing with that under our separate case so and we are just going to spend about $400 million on top of the advance metering.
So, we are going to build rate base may be a $100 million in '010. So, I would say that may be average for the year would be between 355 and 36 billion.
Debra Bromberg - Jefferies and Company
And also my understanding was that at Encore's rate proceedings two months ago. Chairman Smitherman had commented that he might be open to potentially higher authorized common equity ratios at the T&D companies from the traditional 40% that they've been going with the last few years.
Are you aware of any further comments from either any of the commissioners or staff regarding the common equity ratio since then?
David McClanahan
I am not aware of any other comments, I am aware of what he said on the record and I think that's exactly what he said is that he would be open and may be thought that it was appropriate to have a little thicker equity ratio. Encore hadn't requested it.
So, we don't know what the other two commissioners were thinking. But I do think that there is an opening there.
Marianne Paulsen
Thank you very much to everyone. I would like to thank you for participation on the call today and we appreciate your support.
Have a great day
Operator
Ladies and gentlemen this concludes CenterPoint Energy's fourth quarter 2009 earnings conference call. Thank you all for your participation you may now disconnect.