愛迪生國際 (EIX) 2006 Q3 法說會逐字稿

Welcome to the Edison International conference call. This call will be available for replay at the following numbers -- 877-693-4277 and 402-220-0042. You'll need to use the PIN code 11001 to access today's call. For your information, this call is being recorded.

Also, we want to advice you that Edison International is holding a simultaneous webcast of this conference call. This will be on the Company's website in a listen-only mode for interested parties. When the conference begins, you will be on listen-only, and there will be a chance for questions and answers at the end. (OPERATOR INSTRUCTIONS).

Thank you again for your patience. The conference will begin shortly. At this time, I would like to introduce your host, John Bryson, Chairman and CEO of Edison International. Thank you and go ahead, Mr. Bryson.

Good morning to all of you. We appreciate your joining us. Let's kick it off first with the forward-looking advisory statement. Barbara Mathews will present that.

During this call, we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries and about other future events. Additional forward-looking information may be available on our website at www.edisoninvestor.com.

We believe these statements and this information to be reasonable and well-founded. However, actual results could differ materially from current expectations. We've set forth important factors that could cause different results in Edison International's 2005 Form 10-K report and subsequent 10-Q reports, including its third-quarter 2006 Form 10-Q filed today. We encourage you to read those reports carefully.

As in the past, I will make some initial comments, summary comments, highlighting certain features of the past quarter, and then I will turn to Tom McDaniel, who will provide detail on our earnings for the quarter and year to date. And Tom will also provide updated earnings guidance for 2006 and 2007. Following those preliminary comments, Tom's detail, we will be pleased to have your questions.

Let me start with these initial comments. First, we had a solid quarter at Edison International, good results at both Southern California Edison and at Edison Mission Group. Reported earnings were $1.38 per share in the third quarter. Quarter earnings increased over the prior year's third quarter by $0.08 per share. Non-core earnings were down from the prior year by $0.11 per share, primarily due to a one-time tax benefit last year.

Then a little further -- let me start with Southern California Edison. The key thing at Southern California Edison is our focus and our continuing success in executing the big, big program we have -- the five-year, $2 billion capital investment program -- did I say two? My apologies. Five-year, $12 billion capital investment program to strengthen the infrastructure at Southern California Edison.

So that includes our electric distribution system expansion, the refurbishment program, as well as all major transmission and generation projects. And for us, the key news is those are all meeting their scheduled milestones. That keeps us on track in this year, 2006, to put in place an additional $2 billion in infrastructure improvements for 2007.

A few highlights in those investments. First, in light of the rapid continuing growth in our utility service territory, we have been concerned, the California Public Utilities Commission has been concerned, to see to it that we had additional generation to potentially meet high-peak loads next summer and beyond. The California Public Utilities Commission put out an order, and we have undertaken now and are at work to add 225 megawatts of peaker projects, which are scheduled to be operational by next summer. So this is a high-intensity, very rapid response effort.

The peaker projects are significant for us not only because they help meet peak power needs, but they provide support also to the reliability and strength of our transmission and distribution system. The key thing here is that these are fast-start units. That means they have the special capacity to start up very shortly -- something like 10 minutes -- to respond to immediate generation needs or immediate system needs.

So for example, if there are portions of the system under high pressure in the summer, where there are local overloads, we can support local reliability by reducing the overloads on local portions of the system. We expect to invest in this effort a total of approximately $250 million by next summer. Well, that is number one.

Number two, many of you have been interested in the advanced metering infrastructure program. You may recall that last quarter, we announced an accelerated schedule for that. We expect full deployment to begin in 2008. So that is one year ahead of the prior schedule, and the significance in the quarter of our work simply means that we continue to believe we will hit those benchmarks. So we are on track on that.

Another significant development in the quarter, on the regulatory front, the California Public Utilities Commission approved our request to extend our authority through 2007 to continue to earn a return on equity of 11.6%.

And then further on reliability at Southern California Edison, in addition to the direct investments we are making as a utility to support system reliability, we are also moving forward with a 2000 megawatt long-term power contract solicitation, so major solicitation and major requests for proposals. And the solicitation has three separate tracks for generation projects that would come online by the summers of 2007, 2010 and 2013. So continued substantial expansion through direct investment and through our contracting and meeting reliability needs over several years into the future for our utility.

And then let me turn to our Edison Mission Group, and once again, I think kind of the key in the last quarter -- two things, but let me start with the first, and that is simply meeting milestones in our investment and growth work.

And a key area of our growing renewable portfolio, Edison Mission Group, moved four wind energy projects from development to construction during the quarter. This includes two projects in Iowa, one each in Minnesota and Oklahoma. When completed, these projects will add 181 megawatts of generating capacity to our renewable portfolio. And put that in full context, with the projects that are currently in operation, those under construction in the portfolio now total 608 megawatts. So these four added during the quarter -- significant addition to our portfolio.

Next, most of you have followed the fact that Edison Mission Group was a participant in the Illinois power procurement auction that was conducted by ComEd in early September. Edison Mission Group, through its trading subsidiary, was one of 16 suppliers awarded contracts through the auction. The contracts are equivalent to approximately 16.5 terawatt-hours from 2007 to 2009 at an average price per megawatt-hour of about $64.

And let me take that a little further, because the second major feature of the quarter at Edison Mission Group with regard particularly to our merchant plants is substantially increased hedging. So with the contracts awarded in the Illinois option and additional energy hedges completed during the quarter, we increased our hedge position by nearly 31 terawatt-hours over a three-year period. The three-year period is 2007 to 2009.

Just to give you a sense of what 31 terawatt-hours means relative to our capacity to produce power in the merchant fleet, average production at Midwest Generation, on an annual basis, so just the annual basis, is about 28 to 29 terawatt-hours. So the additional hedging of 31 terawatt-hours over a three-year period is a very significant increase in our hedging that will meaningfully reduce our exposure to forward price volatility in our coal-fired merchant plant fleet.

And then one last thing to note -- we have been working hard, it's been part of our plan, as I think all of you know, to continue to strengthen our credit across the Company, and particularly at Edison Mission Group. And we are pleased that during the quarter, rating agencies have upgraded their ratings on several of our business lines.

So with that, let me stop providing the highlights and ask Tom to go into greater detail on our financial results and provide in detail an updated guidance.

Thank you, John. I'm going to begin by reviewing our quarterly and year-to-date financial performance compared to last year, followed by an update of our operations and hedging programs at Midwest Generation and Homer City. And then I will wrap up with an update of our 2006 and 2007 earnings guidance.

There are five supplemental charts at the end of our press release, which I will be referring to throughout my discussion. Charts one and two reconcile our core or operating earnings, which exclude discontinued operations and other non-core items to our reported GAAP earnings for the quarter and year-to-date period. Charts three and four include operating and hedging information for MEHC's merchant fleet. And finally, chart 5 covers our 2006/2007 earnings guidance. I also want to remind you that we filed our third-quarter 10-Qs this morning, and they are available for your review.

Looking at chart one, I will cover the quarter, beginning with core earnings, which were $1.32 per share for the third quarter compared to $1.24 per share for the same quarter last year, an $0.08 per share increase.

SCE's core earnings for the quarter of 2006 were $0.74 per share compared to $0.67 for the same period in 2005. This $0.07 increase primarily reflects the impact of recording higher net revenue of $0.12 per share from the implementation of the 2006 General Rate Case decision that was awarded to us in the second quarter. And as we noted in our second-quarter report, because of the way rates are designed, we would expect to see a higher contribution in the third quarter from the General Rate increase than what we experienced in the second quarter.

Also, SCE's Mountainview power plant, which became operational at the beginning of this year, added $0.02 per share. And these increases were partially offset by a higher effective tax rate in 2006, primarily due to the resolution of a number of tax issues in that year relative to open years under audit.

I want to direct your attention after this call, if you want to, to our Q. We do provide a reconciliation of the statutory tax rate to our effective tax rate in each quarter, and then, of course, in the 10-Q. It is a bit of a complex calculation.

Turning to EMG, core earnings were $0.62 per share during the third quarter compared to $0.60 for the same period last year, a $0.02 increase. As part of EMG, MEHC's core earnings were down $0.03 per share over the same period last year.

Let me talk about the positive first. First, with regard to Homer City and Midwest Generation, Midwest Generation was up $0.01. At Homer City, it was up $0.06, predominantly related to FAS 133 net gains and losses associated with its hedging program.

We also had lower net interest expense that contributed $0.02.

These gains were offset by lower trading income at EMMT of $0.09. You might recall in the third quarter of last year, we had the Katrina impact, so a lot of congestion. We had a very strong quarter at EMMT last year. We had a good quarter this year, but just not as good. We also had lower project income mainly from the Big Four projects and Doga of $0.04.

Edison Capital's core earnings were up $0.05 per share for the third quarter compared to the same period last year. This is due to our share of gains from the Emerging Europe Infrastructure Fund. That fund was quite successful last year, and this is, again, a positive contribution from that investment.

Turning to non-core items for the quarter, they were $0.06 per share higher, consisting mainly of a $0.07 positive impact for SCE related to a generator settlement. Quarter-over-quarter non-core items were $0.11 lower due to a number of adjustments received last year. I'm not going to go into those items. We reported those in prior periods.

In summary, the $0.08 per share growth in core earnings offset by an $0.11 decrease in non-core earnings netted us to reported consolidated EIX earnings of $1.38 per share for the third quarter compared to $1.41 for the same period last year, down $0.02. Year to date -- pardon me, down $0.03.

Year to date, we'll move to chart two and we will cover core earnings first. EIX's year-to-date core earnings were $2.43 per share compared to $2.42 per share recorded in the same period last year. SCE was up $0.03 per share, EMG was flat, and the parent was down $0.02.

SCE's core earnings for the nine months ended September 30 were $1.58 per share compared to $1.55 for the same period in 2005. This increase of $0.03 per share primarily reflects the impact from recording the higher net revenue of $0.09 from the implementation of the 2006 General Rate Case decision and Mountainview's contribution of $0.07 per share. Partially offsetting these gains was, again, the impact of the higher effective tax rate because of the tax benefits received in 2005 from a number of settlements.

EMG's core earnings as a whole were level at $0.95 per share for the nine months ended September 30. MEHC's increase -- let me focus on MEHC first -- MEHC's increase in core earnings of $0.09 per share was primarily due to lower net interest expense and higher income -- higher other income -- those two items contributed $0.10 per share; higher wholesale energy margins at Midwest Generation of $0.09 per share;And favorable results from FAS 133 adjustments for Homer City of $0.04 per share.

Our wind projects contributed another $0.02 per share.

These increases were partially offset by lower project income, again, mainly from the Big Four projects, and Doga, $0.06 per share, lower EMMT trading income of $0.06 per share and then lower tax benefits that were -- or tax benefits that were recognized in 2005 of $0.04 per share.

Also, as part of EMG, Edison Capital's decrease in core earnings of $0.09 per share was primarily due to the 2005 gains from its Emerging Europe Infrastructure Fund.

Let me move down to non-core items. Non-core items year to date through 2006 contributed a positive $0.28 per share compared to $0.22 per share last year, an increase of $0.06. Apart from the generator settlement that I talked about that we booked in the third quarter, the other items elements have been described in earlier quarters. So I am not going to go into them in detail.

In summary, EIX's consolidated reported earnings were $2.71 per share through September 2006 compared to $2.64 per share during the same period last year, an increase of $0.07 per share.

Now let's go to chart three. During the quarter of 2006, operating performance at our Midwest Generation plants improved as our generation availability and forced outage rates were better than the third quarter last year. For Homer City, generation was lower at Homer City for the quarter by comparison to last year, which was a very strong production quarter for us. The forced outage rate for this quarter was not as strong as we would have liked, but generally in line with our historic experience.

During the third quarter of 2006, the average cost of fuel, including emissions, increased at Midwest Generation and Homer City compared to the same quarter last year, primarily due to scheduled price increases and the impact of some contracts that expired last year. These increases were in line with our expectations and consistent with the numbers embedded in our guidance.

At Midwest Generation, the average energy price was $50.72 per megawatt-hour during the third quarter, down 5.8% from the third quarter of 2005. Our hedge program mitigated the overall decline in quarter-over-quarter market prices, as reflected by the 16% decrease in real-time flat energy price at the Northern Illinois hub.

At Homer City, our average energy price was $47.37 per megawatt-hour during the third quarter, which was up 4.2% compared to this third quarter of 2005. Again, our hedge program at Homer City also helped as real-time flat energy prices at the Homer City busbar dropped a little over 22% quarter over quarter. With the decline of power prices, the basis between PJM West and Homer City busbar also fell by 25% during the same quarter.

Let's move to chart four, and we will update our hedging activities. During the summer, we expanded our Midwest Generation hedge program, as John mentioned, by entering into additional hedge contracts for energy and by successfully participating in the Illinois auction. Compared to last quarter's position, we added 8.9 terawatt-hours of hedges for 2007, 13.8 terawatt-hours for 2008, and 3.8 terawatt-hours for 2009, for a total of 26.5 terawatt-hours. For Homer City, we added about 4.4 terawatt-hours during the quarter for 2008.

Also presented on chart four are the prices for our energy-only and our load requirement contracts. We are differentiating between typical energy-only contracts and the new Illinois contracts, which are known as load requirement services contracts.

In the Illinois auction, we were awarded a 17-month and a 29-month contract with ComEd beginning next year at an average price of about $64 per megawatt-hour. Under these contracts, the amount of power sold is a portion of ComEd's retail load, which can vary significantly.

The level of megawatt-hours hedged under these contracts had been estimated based on historical patterns and on assumptions regarding the factors that may affect retail loads in the future. The actual load will vary from these estimates. And so please note that the price received under a load requirement services contract represents the sale of energy capacity and ancillary services to a utility.

In addition, Midwest Generation will incurred charges from PJM as a load-serving entity. For these reasons, the average price per megawatt-hour under a load requirement services contract is not comparable to the sale of power under an energy-only contract.

Also during the quarter, we did not enter into any significant coal contracts -- additional coal contracts at either Midwest Generation or Homer City. And the details of our hedge position are set forth also on chart four.

Lastly, let me turn to guidance. That is on chart 5. And this is guidance for 2006 and 2007 as of today, November 3. On June 29, we provided earning guidance for 2006 and 2007. And at this time, we are confirming our June 29 core earnings guidance for 2006 of $2.91 per share. Total earnings guidance for 2006 is being increased from $3.13 to $3.19 per share. This is a $0.06 increase and it reflects the non-core earnings that we recorded in the third quarter related to the generator settlement.

Now let me focus on 2007 guidance. To reflect the impact of earnings variability from such factors as power prices and operations, as we update our 2007 guidance from the $3.35 that we put out in June, we are going to update it now to a range. The range is from $3.05 to $3.45, with a midpoint of $3.25. In aggregate, this represents a meaningful increase over 2006, about 12% at the midpoint, 5% at the low end, and just under 20% at the high end.

Southern California Edison has a range of $1.97 to $2.07 per share, with a midpoint of $2.02. By reference, our previous guidance for SCE was $2.02 -- no change.

The guidance for EMG is $1.21 to $1.51 per share, with a midpoint of $1.36. Previously, our guidance for EMG was $1.44. The updated 2007 guidance for EMG incorporates our current hedge positions, as well as forward market prices as of September 30, which have fallen relative to the June guidance. This guidance also reflects updated costs related to our renewable energy and thermal generation development programs and plant maintenance expense.

As before our updated guidance, we have not attempted to forecast earnings for EMMT. It is assumed to cover its costs in this guidance -- in other words, as we look at 2007 with this guidance, EMMT is in a neutral position. We've also included $0.15 in the guidance for Edison Capital for 2007.

2007 guidance for the holding company is a minus $0.13 per share, which gets us, again, back to the total range of $3.05 to $3.45 per share for 2007.

That wraps up my discussion. Now we will turn it over to you for questions.

Let me just say one thing, Tom, because we've had, I think, a little confusion about this in the past. This year in our guidance, as last year in the guidance, fundamentally we're not attempting to provide guidance with respect to what our trading results for the year might be. That is difficult to project, so all we do, as Tom indicated, is assume zero. We simply assume, for purposes of guidance, that the costs of doing the trading are offset, so that there is a neutral point there, as Tom describes. But there has been a little confusion about that in the past. As you know, over years' time, we have done fairly well with the trading. But we don't try to project that.

Okay. Let us go to questions.

(Operator Instructions). Terry Shu, JPMorgan.

If you could, on the sale -- the Illinois auction, help us a little bit in terms of what you think would be the net realized price. As you pointed out clearly that the prices are not comparable -- the energy-only and then the full service load. What would you net? How do we model it?

Terry, as we mentioned, there are a number of assumptions that vary through the course of a year relative to what the load and sales with regard to the load are actually going to be, and then what the costs associated with supporting that load are going to be. So we will be reporting -- and that is why we have broken out the full service requirements line separately. But we can't provide any further guidance to you right now in terms of how to go about assuming those -- the costs that (multiple speakers) our performance.

Clearly, the fact that you participated meant that you thought that it was worth your while, because there have been comments, I think, in the past that it wasn't very clear whether or not the premium was sufficient to pay for the additional costs or hedging costs or other risks that you may undertake. But the fact that you have won and participated mean that you see it worthwhile. And probably you should get a little bit of extra risk premium? Is that the way to look at it, that you--?

We bid into the auction at prices that we felt were attractive to us from a risk/return standpoint. And the fact that we captured a significant portion of the auction, we are very pleased with that.

And one should assume that you are making something extra -- should one assume that, versus energy-only?

Well, there is a premium for participating, for taking risk. We have experience in that we are -- that we can adequately measure and manage that risk and that this is a good bargain for us.

The other I think a little bit of confusion is that you have gone from a single-point guidance, single-point estimate guidance, to a range when you have actually hedged more of your output. So one would have thought that it would be better clarity rather than a wider range -- am I reading this wrong?

Well, when we put out -- we didn't put a single-point guidance out. What we did in June is we then provide sensitivities, because we said that we are exposed to volatility on our open position relative to power prices, changes in generation volumes -- a whole host of factors. And what we found was that that was being confused as a single-point estimate. We knew that there was a range that we were really going to be operating within based on volatility.

Right, yes, we had a discussion about that.

We have hedged more. But there is still volatility associated with our open position because we have not hedged as deeply at Homer City as we have now with Midwest Gen.

Your point is absolutely right, Terry.

There is some confusion.

Yes, had we used exactly the same methodology when we went out in June, the range would've had to be wider for the same level of prospective volatility than what it is now because of the hedging. It's just that we found that going out with a single-point guidance, coupled with drivers of performance that would vary over time, wasn't understood by everybody. So we thought that perhaps providing this range was simply clearer, that even when we narrow the range of prospective volatility, there remains some.

But you did point out fairly clearly, John, that for the entire period, you have just netted out trading and assumed zero contribution.

That's right.

That part we know.

And so we don't know how to provide you good guidance about trading results. The only thing you will probably do and should do is look at past results. And they've varied from year to year, and we would expect them to continue to vary in the future.

I am just trying to get better clarity, because when I model it and I stick in the current forwards, I can come up with numbers at the higher end of your range. But then there are so many moving parts -- who knows underlying costs and such? That is why I asked about the full service load -- what should we assume? Because when you model, you can only stick in certain numbers. But they're in fact much more complex than a couple of numbers.

That is true. What we have tried in previous guidance to underscore is there are several important variables in creating margins in the merchant fleet. And we have to manage to optimize those margins.

Our objective, substantially, is to be very focused on hedging, in parallel ways, those various drivers of performance. What we have typically done, as you know, is try to kind of tie down our costs and then leave some open opportunity and open positions to improve earnings in the event we see the opportunity to improve them. So the core has been tie down the costs to the extent we can, look for upside when we can find it.

Josh Levin, Citigroup.

I have two questions. My first is a follow-up on Terry's question. So she asked about the range, but let me say this -- why did the midpoint of your guidance decrease by about $0.10? Can you specifically point to what it was?

I pointed out three factors. One, we've got -- forward power prices have declined. Two, we have updated our expense to reflect the fact that we have stepped up the pace of development activity in our renewable program. And then we updated maintenance expense. And then we do have a $0.02 impact at the holding company associated with having to include some participating shares into our earnings calculation.

My second question is right before the call began, a series of headlines hit the wire about a possible FERC investigation into the Company's bidding practices. I am going to assume that has to do with Illinois, but can you elaborate on this?

Well, let me turn it over to Lon Bouknight, our General Counsel.

Well, that is a matter that we regard as something that could lead to litigation. And therefore, I think we're not going to say anymore about that but what is in the 10-Q.

Ashar Khan, SAC Capital Partners.

Tom, just going back -- I know you mentioned the negatives; could you also mention what the positives were? I guess hedging and the prices realized in Illinois were I guess positive versus -- were they positive versus what you had anticipated three months ago? I know you only went over your negatives. Could you mention -- were there any positives from last three months ago guidance versus where you are right now?

Yes, clearly, the prices that we received in the guidance relative to -- just in energy-only contract are higher. And again, we participated because we felt that at those prices, that that was a very good transaction for us. Again, we feel quite good about the results of the auction and what we were able to accomplish there.

And then can I just ask you on Homer City -- as you said, you did not do much hedging. Was this at your view on prices? I just wanted to understand why no hedging was done there in the last, I guess, 90 days.

The focus of our attention was on the Illinois auction. And then around Midwest Gen, we were able to, as we had mentioned in the last quarter, to lock down some forward energy-only hedging that didn't require collateral associated with it. At Homer City, we did -- I mentioned we did add 4.4 terawatt-hours of additional hedging.

Going out longer than that, we have to be very careful as to how we manage the basis risk and are able to hedge around the basis risk associated with longer-term hedging for Homer City.

Leslie Rich, Columbia Management.

With the incremental hedging, I am wondering if you could detail what your collateral requirements might be and just review your liquidity.

Let me have Jim Scilacci cover that for you, our CFO at EMG.

In the disclosures that we filed this morning, you will see that as of September 30, at EME, we had about $1.9 billion in cash. There was very little amount of liquidity or collateral outstanding at September 30; it was about $150 million in total.

And so it's a big contrast from prior quarters, when we had a lot more outstanding, and it really reflects the reductions in prices -- forward prices that has caused the liquidity to come back, and now it's reflected in our cash balances at the various companies.

But in conjunction with the new hedging that has been taking place in Illinois--?

Well, what we have done during the course of the quarter, as we said before, we upped our hedge position in Illinois, and we also entered into additional hedges, energy-only hedges, that don't require collateral. So there's a combination of things going on there.

And the way we manage our collateral, we want to make sure that we have sufficient liquidity, both cash and available lines of credit, at EME and Midwest Gen to cover that expected adverse outcome. So if prices surge, that we'd have sufficient liquidity at all the various companies to cover that. And so based on our lines of credit and our cash position, we believe we have adequate amounts.

And then can we assume that you have hedged your ancillary services and all the incremental costs on top of the energy-only piece, in conjunction with that Illinois price?

I think that is fair to assume. We can provide those services directly from our plants. That is the advantage that we have being located in that load center.

Steven Rountos, Talon Capital Management.

My first question was on the core contract side. You have obviously done a lot more hedging now at Midwest Gen, but are you holding off for a reason on the coal side?

I think you can expect that we are looking at our coal requirements very carefully. It is a competitive market, and so we don't like to discuss very fully what we might be doing in the market at any point in time. What we have said is that, in our overall positions, that we want to be matched. And you can expect us to get to that point in the near term.

Can you help us adjust out the '08 and '09 average energy prices for the energy-only contracts? Do they look more like the '07 number when you put them on an around-the-clock basis?

The energy-only contracts -- yes, that is an average and, in some cases, doesn't directly translate to an around-the-clock because we may be hedging more on peak at this stage than we have off peak. So this is our average. I think maybe what you might want to do is take a look at that as to where the forwards are right now.

Can you --

We don't break out what we have hedged on peak versus off peak.

But would you say that the mix is pretty consistent with where the forwards are today?

Well, I think if you take a look at these numbers, it would indicate that this is more heavily weighted towards on peak.

Obviously, '07 looks more like around-the-clock at $48. But is the $61 -- is it consistent with the forwards? Are you doing a little better than the forwards? It is hard to figure out what the $61 really means.

As I said, we haven't broken out what the allocation is between on peak and off peak. You can assume that this is more weighted towards on peak. And if you were to take a look at current on-peak forwards -- September 30 -- for example, they are at around $45 at NIHUB as of September 30, versus the -- let's take the '08 number we have here, which is $61. Relative to today's forwards, we have done well with our hedging from a timing standpoint.

In our disclosure, there is some additional information. If you go to the MEHC disclosure pages, we provide prices as of September 30. So you can see what the NIHUB and PJM West prices were as of that day for the 24-hour around-the-clock price -- the flat price.

I think Leslie or someone had asked the question about serving the full requirements contracts. Can you give us a percentage of those contracts that you could serve without having to contract forward peaking or load-saving generation?

We can satisfy all of our requirements through our own fleet.

Fantastic. So most of that margin -- that will drop down -- the ancillary services and the capacity and the load saving, you can do that all in-house?

Yes. With our fleet, we can cover the requirements both on peak and off peak, as well as the ancillaries.

Paul Patterson, Glenrock Associates.

The environmental CapEx budget -- has there been any change in that?

Let me turn that over to Ted Craver to comment on it.

In terms of 2007, which is what -- provided guidance on, there is really virtually no environmental expenditure involved in that.

What about your outlook for the years out ahead of that? Has that changed at all?

It is really pretty difficult to understand exactly what that is going to be. A lot of those rules are going to be spawned for us out of the [CAMR], which will deal with SO2 and NOx. And over the course of probably the rest of this decade, it doesn't look like there would be much in the way of expenditures around those things.

As we get into the next decade, that is where, based on the federal CARE rule, most of those types of expenditures would start to come in, mostly for SCRs and FGDs. But at this point, we don't have any of the emissions requirements or the rules really settled down to know what type of expenditure we would be looking at.

Yesterday, there was a ruling by the Illinois Pollution Control Board or something -- I don't know if I'm doing that really accurately, or whatever -- (indiscernible) or whatever. And I was wondering -- we have seen that Amren and Dynegy have come to settlements. I am wondering how the negotiation process is going there with the Illinois EPA and what have you with these [system] mercury issues.

It is the Pollution Control Board. That is the agency that voted out the rule on mercury, the so-called state implementation plan for Illinois, to deal with the federal CAMR or the mercury rule. That now has to go to a joint legislative committee for action, and then once it goes through that mill, it could either go back to PCB for changes or it could finish there and then go on to be filed with the federal EPA.

That is the process. In terms of where we are, the most I can say about it, we have been having conversations with the state of Illinois, the Illinois EPA, for some time. And those conversations have not terminated.

Stephen Huang, Citadel Investment Group.

I just wanted to double-check, I guess, with what you guys stated earlier -- the 2007 guidance has zero for trading, correct?

Yes. We said a neutral position, that we assume that it is just covering its costs. Its activities are covering its costs.

And then 2005 and the year to date, what were the numbers for trading?

On a pretax basis, 2005 was $195 million. And on a year-to-date basis, on a pretax again, it is $109 million. That is I'll call it a number without the G&A costs. So that is as it's reported [and you may see] in the Q.

And you were stating, I guess, that the coal contracts are getting close to be signed. How should we be thinking of fuel costs for your generating fleet next year and beyond? You had a big jump this year. How should we be thinking about that going forward?

Well, certainly one marker is to take a look at where the forward prices for Powder River Basin coal are, and also Northern Appalachian coal -- they have been dropping. And so that is really a marker of how successful we are to contract around those prices. It is an important factor to us.

When we extend the contracts and the level of success will be reflected as we go forward, as you can see that what we have under contract declines in '08 and in '09, and as we fill those buckets it would be more reflective of current market prices.

So when we think of let's say next year and with you guys signing more contracts, would it be fair to say, because of the decline in coal pricing today, that it will be more flat or low-single-digit increases?

This is Jim Scilacci. That is probably the case. You have to be careful with Midwest Gen because there is two pieces to the coal side. You've got the commodity itself, which really you look to PRB prices, and you have the transportation. The transportation is essentially hedged through 2011, and there are just minor escalations that are involved in that contract. So if you're going to try to plug it into your model, be careful on the two pieces.

And then Homer City's transports are in that?

No, we just bought it locally. So it is incorporated in the price, so it is probably better to look at the NAP price as your guide.

Great. And then just a last question here on your collateral -- it seems like you guys have, with all this cash now, you guys, if I recall correctly, increased your liquidity position in terms of your facilities, and you are using a lot of the collateral-less hedging. I am curious to know why you guys are not looking to redeploy some of that capital, or maybe you guys are thinking about that. Can you give us some clues as to why you need $2 billion of cash?

Well, really, John highlighted it in his opening remarks, that we're focusing on growth. As he mentioned, we've now placed another 181 megawatts of wind into construction. We have a very vibrant pipeline behind that. So our forward capital requirements for that could easily be in the $1 billion-plus range.

We are bidding two peaker projects into the SCE RFO. We are developing the Carson hydrogen gasification -- or [PETCO] gasification project. We want to take out the MEHC 13.5% debt when it matures in '08. We need reserve for extending our hedges out around collateral. We think we've got it pretty well wrapped up in terms of how to best utilize our cash position.

Paul Fremont, Jefferies Capital Management.

I was just hoping to get some clarification on the power plant leases. And I know in the past, you have talked about the fact that the lease expense is levelized for income statement purposes, that the cash amount, at least in early years, is significantly greater than that.

As I understand it, is the turning point where the cash and the income statement expense, where they would be equal -- would that be in the 2013, 2014 timeframe? And can you give us a sense of -- right now, it looks like the cash payments exceed the income statement expense by, I don't know, $160 million. Does that gradually decline until they are equal around 2013? And then does that asset essentially reverse itself out over the remaining life of the lease?

Well, Paul, I am going to turn this over to Mark Clarke to take a bite at this question. Mark is Controller at EMG. And we do have a fair amount of disclosure in our Qs on this. But Mark, do you want to --

Paul, I guess what I would refer you is that we break out the levelized lease expense in our income statement. So we set forth that amount pretty clearly. That relates to the Homer City and the [power] and Joliet leases. And then in our disclosures --

And that is in the $170 million range?

For the nine months, it was $132 million, and I can pull out the 12 months here in a second. With respect to the lease payments, those again are also set forth in our disclosure. You are right that those amounts are greater than our levelized lease. Included in the leases is debt that gets paid off. And as it gets paid off, that means the ultimate -- the lease payments we make get higher. That goes through about the 2014 period. Thereafter, our lease expense for books will be higher than the cash rents will be.

So it does reverse itself out over the remaining life of the lease?

That is correct.

And that debt that is being paid off is off-balance-sheet debt associated with the lease?

That's correct. And it was $177 million for 2005. That is the lease expense.

And that off-balance-sheet debt is part of that $2.1 billion or so of off-balance-sheet debt that you identify as being associated with these leases?

The number itself I would have to look up, Paul. We do disclose how much that is in our notes. And in the Midwest Gen and the Homer City separate 10-Qs and 10-Ks, there is further details for you on what that looks like.

John Kiani, Deutsche Bank.

Just to confirm, you said you used a 9/30 '06 curve date for the unhedged portion of the portfolio in '07 -- is that correct?

Yes.

So I guess the Cal '07 and '08 strips are up since then, and '07 is up at least $0.50 or so. And with Homer City hedged only 55%, is there an opportunity to hedge more of Homer City in '07 and capture upside in '07 above the 305 to 345 range?

We do have the capacity to hedge more at Homer City. And we are constantly reviewing our situation and the prices surrounding what we might do. Certainly one of the difficulties and one of the reasons that John mentioned that we are going with a range is because how fast these curves change. And a little bit of cold weather or warm weather can move them quite a bit. So John, we do have some open position left to fill, and we will make our judgments as to when best to cover that.

And then how much benefit, or do you include any benefit for RPM in your '07 guidance? And what about accretion from the wind investments in '07 guidance?

RPM, we have really just encompassing market prices.

Current market prices.

Current market prices as it relates to capacity.

So there is no uplift, necessarily, included in your guidance for '07 from RPM.

As of September 30. And we will see what RPM brings us, and we hope it brings us some positive results.

That's helpful. And then as far as wind development is concerned, obviously, as you mentioned or as John mentioned at the beginning of the call, you have signed now it sounds like 180 megawatts to hedge some of the new wind developments. It looks like some of that is at the Sleeping Bear project that you've sold forward to AEP. What kind of accretion are you including in the '07 guidance from your wind investments, or does that come on late?

Yes, we have incorporated that in our guidance. We don't break that out separately. Those projects go into service at various times through the course of the year.

So we don't get the full-year benefit of them in '07?

No, it really depends -- they're going to be going in throughout the year. So we would begin to see the full impact in 2008.

That's helpful. And then one more question.

Again, just to highlight once again that all of our wind projects have PPAs, and certainly one of the things we have been focusing on is adding additional contracted capacity to our fleet to be able to offset, to a degree, our merchant exposure.

That's helpful. And I guess one other question -- when we think about '08 and beyond, it sounds like you have the full-year benefit of wind in '08 that will be contracted. Then you have obviously hedged more of '08 now, looks like somewhere in the mid-50% range. When will you be in a better position to give an '08 guidance range?

Well, as we work our way into 2007, we will evaluate the situation. We are not going to make any predictions at this point as to when we might come out with '08 guidance. But what we try to do, certainly in our information, we have provided the key drivers around SCE as it relates to rate base and authorized returns. We do have a cost of capital decision that we need for 2008 that's not in hand yet. And then by providing our hedge positions and certainly megawatts that go into construction around the wind project, we think that we have provided substantial piece-parts and drivers for people to draw conclusions around 2008.

That's helpful. And just one last question -- as far as the advanced metering initiative is concerned, when can we -- if that project is successful, when can we expect to see that start flowing into rate base?

Really, 2009 is when we would start to see the full implementation begin to roll out. The AMI program would be handled through a separate rate filing outside of the General Rate Case. So we would get the benefit as those meters are placed into service through the course of the year for that to be able to then translate into rate base.

And what was the estimated CapEx on that for rate-based investments?

About -- what we have put out in our prior communications was around $1.3 billion that would begin in 2009 and extend for a three- to four-year period.

One more question and then we will wrap it up.

[Brian Ciddio], Bank of New York.

A couple of quick things. With the revised guidance for 2007, the new midpoints for EMG, is it fair to -- or does it imply from an EBITDA perspective about $1.2 billion for EMG? Is that about right?

We have not put out the EBITDA number for 2007.

You had it before as of your last guidance. That is why I was just kind of wondering, because I think it was 1270 or something like that -- is the roughly $1.2 billion still in the ballpark?

I don't think it would be a material change around that.

And then given the additional contracts at Midwest Gen, can you give us a new sensitivity number for 2007 for every dollar change in prices?

On the fly, you would have to take a look at what our open position is. What we have done in the past is -- and let's say that if we have roughly -- 2007, we've got 25 terawatt-hours hedged against what we said earlier, somewhere between a 28 to 29 terawatt-hour generation amount. And that difference -- whatever that open position is associated with the dollar change in power prices can get you that sensitivity.

On a completely unhedged basis, what was the sensitivity?

On an unhedged basis? It would be against the total 29 terawatt-hour exposure. So it would be on a pretax basis something like $29 or $30 million for every dollar change per megawatt-hour.

And then just one last thing -- have you guys changed your opinion at all with regards to the MEHC notes -- kind of waiting until 2008 to pay those off? Any desire now to pay those off earlier or refinance those any earlier?

No, no change in our position. We intend to take them out when they mature in 2008.

All right. Thank you all very much. That concludes the conference.