愛迪生國際 (EIX) 2008 Q3 法說會逐字稿

Good morning and welcome to the third quarter earnings release for Edison International conference call. This call will be available for replay at the following numbers. Domestically (877)693-4277, internationally (402)220-0042. You will need to use the pin code 11801 to access today's call. For your information this call is being recorded. Also we want to advise 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 in listen-only and there will be a chance for questions and answers at the end. (Operator Instructions)

At this time, I would like to introduce your host, Scott Cunningham, Vice President of Investor Relations with Edison International. Thank you and have a good conference. You may proceed.

Thanks and welcome everyone. Our principal speakers this morning will be Ted Craver our Chairman and CEO; and Jim Scilacci, our Chief Financial Officer. After the remarks there will be a Q&A period. Also with us for the Q&A are other members of the Edison International management team.

The presentation that accompanies Jim's financial review together with the earnings press release and our third quarter 10-Q filings are available on our website at www.edisoninvestor.com. During this call we will make forward-looking statements about 2008 and the longer term financial outlook for Edison International and its subsidiaries and about other future events. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our 2007 Form 10-K and other SEC filings which we encourage you to read carefully. The presentation also includes additional information including certain guidance assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. With that, I'll turn the call over to Ted Craver.

Thank you, Scott, and good morning, everyone. I'm sure most of the calls you've been listening to this quarter have focused on the recent turmoil in the financial markets and I will spend most of my remarks on this subject as well. Let me start with a quick comment on our 2008 earnings outlook.

At the beginning of the year, we provided guidance for core earnings of $3.61 to $4.01 and have reaffirmed that 2008 guidance each quarter. Despite the weakening economy and the financial crisis we are again this quarter reaffirming that guidance range of $3.61 to $4.01. Within that range we expect earnings to be near the middle rather than at the high end of the range. The principal reasons for the additional caution are the significant pullback during the summer in natural gas prices and a third quarter loss involving a hedge contract with bankrupt Lehman Brothers that Jim Scilacci will discuss in his comments.

Let me turn to the recent economic and financial stresses and our responses to them. Recent events have reinforced our natural inclination to manage financial risks on the conservative side. Admittedly, the lessons many of us in this room learned during the California power crisis undoubtedly have and will continue to shape our responses to the current economic challenges. We have no significant long-term debt maturities until 2013. We maintain the largest credit lines for companies of our size in this industry at $5.1 billion over all and we are willing to use it quickly when events unfold.

We viewed the Lehman Brothers bankruptcy as a sign of just how fragile the financial system was and saw a real possibility that liquidity could freeze up for an extended period. As a result, we drew down from our EIX, SCE, EME, and Midwest Gen credit facilities even though we had no immediate need. Our total draws from all four facilities totaled $2.1 billion by the end of September. We don't plan to repay these draws until we are convinced the banking market has returned to a more normal operating environment. The cash has been invested in highly liquid securities such as treasuries.

In mid October, Southern California Edison was one of the first investment grade companies to access the capital markets to further build our liquidity position. We saw good market reception for our $500 million SCE first mortgage bond debt offering at a relatively attractive 5.75% coupon. We ended the third quarter with a strong liquidity position in excess of $5.3 billion, somewhat higher than where we ended the second quarter. We are encouraged that the capital markets are currently open to Southern California Edison, but we also recognize that borrowing costs are significantly higher in the current environment. We will carefully manage our Southern California Edison capital spending program to make sure we don't get ahead of our long-term financing needs.

At EME and its subsidiaries we will continue to implement our key business strategies consistent with our strong BB credit rating targets. Over the last few years we purposely built our cash position starting with the sale of our international assets and then with some highly favorable opportunistic refinancings. That cash was first dedicated to strengthening our balance sheet and more recently to our growth and asset diversification strategy. Significant cash will be deployed through next summer to complete wind power projects under construction.

Our principal Edison Mission Group financing needs near term are for project financing debt to develop our renewable energy business but debt market access is uncertain in the current environment. So while we are continuing to follow our disciplined approach to growth, for now we are operating under a capital conservation mode. That means we only intend to commit to new construction projects beyond those currently planned and committed to if we can be assured of financing. This will allow continued development of our 5,000-megawatt wind project pipeline, but focused on building out projects that will deploy our existing turbine commitments.

We will also continue to advance our solar program. In fact, EMG recently entered into a strategic development agreement with First Solar to support this effort in the southwest US. Also, our EMG team may find some good development opportunities in renewables or gas fired generation as others with less financial flexibility may seek to unload partially developed projects or assets. However, we will commit new dollars only as financing is in place and at terms and conditions that achieve our return goals. I would like to finish up by stepping back for a minute.

We, like others, are focused on the realities of the near term challenges. But I also want to reiterate the important growth drivers that will allow us to serve our current retail and utility customers well, meet public policy objectives, and attract new customers. We see continued public policy support in California for a reliable electric power infrastructure and for increased investment in renewable energy. Meeting these public policy objectives is the foundation of the general rate case Southern California Edison has currently pending before the California Public Utilities Commission. And these are the key drivers of SCE's long-term growth potential.

At the same time, support for increased renewable energy is a strong Edison Mission Group growth opportunity through new wind and solar investments on behalf of utilities in many states. In this period of economic uncertainty, the difficulty of getting more capacity built is only intensifying making incumbent generation assets more valuable and the future need for building new generation more urgent. We have the ability to invest in generation projects without the need for special tax oriented strategies which may limit some of our competitors ability to develop projects until tax oriented equity again becomes readily available. And as financial markets reopen, we expect sponsorship from a strong market participant such as EMG will be a real plus. With that, let me turn the call over to Jim Scilacci.

Thank you, Ted, and good morning, everyone. At this time please turn to page two in our presentation. This page summarizes some of the key points for the quarter which I will cover in my remarks. Going to page three, we show our quarterly earnings on a GAAP and core basis. For the third quarter of 2008, core earnings were $1.46 per share up $0.05 per share from last year. Core earnings exclude discontinued operations and a $0.15 per share charge associated with the CPUC decision regarding SCE's customer satisfaction and employee safety incentive programs. Reported earnings for the third quarter were $1.33 per share, $0.07 lower than last year.

Moving to page four, SCE's core earnings per share were $0.07 higher than a year ago, reflecting higher operating income and lower financing costs. As is typical in SCE's rate design, most of the expected earnings increase due to higher rate base shows up in the third quarter.

Turning to EMG, core earnings were flat at $0.64 per share. Homer City earnings were higher in the third quarter and Midwest Generation's earnings were flat including the unrealized loss related to a Lehman Brothers power hedge I will discuss shortly. Overall, coal fleet performance benefited from higher energy prices and capacity payments while plant operating costs were higher. Coal costs at Midwest Generation were also higher due largely to contract cost escalation and a contract rollover.

Coal fleet availability in the third quarter was comparable to the third quarter of last year in the mid-90% range at Homer City and 87% range at Midwest Generation. Earnings from the big four projects were also lower as expected from lower contract prices. Third quarter results include a $26 million or $0.05 per share unrealized loss from the Lehman Brothers bankruptcy largely related to our power hedge for 2009 and 2010. This unrealized loss will be fully reversed by the end of 2010. Excluding the unrealized loss related to the Lehman Brothers trade, our third quarter results include FAS 133 unrealized gains of $31 million compared to $8 million of unrealized losses in the third quarter of 2007. This quarter most of those gains arose from changes in the ineffective portion of our hedge contracts.

Turning to our trading operation, EMMT, trading income was $0.01 a share higher on revenues of $46 million compared to $41 million last year. Our EMMT proprietary trading remains narrowly focused in markets where we are active as a result of our power generation business especially in PJM, Midwest ISO and in New York. Our principal activities are congestion contracts which include financial transmission rights and short-term power arbitrage positions.

Turning to Ed Cap, results reflected the expected decline relative to last year's strong performance. Earnings were down $0.03 per share in the third quarter as the portfolio continues to roll off. The nine month year-to-date financial performance summary is included on pages five and six. Moving on to page seven, our review of Midwest Gen's 12-week performance trend starts on page seven, where you will see favorable third quarter pricing comparison and flat generation year-over-year.

On page eight, Homer City generation load factors were lower due to lower dispatch at -- by PJM. Lower dispatch has been primarily in the low margin off peak hours when Eastern coal often sets the price at the margin.

Page nine shows our regular hedging profile for the fleet. We added about 400-megawatts of hedges in 2011 at Midwest Generation. Please note the overall hedge position is adjusted down by 2.9 terawatt hours for the Lehman hedge contract that was terminated. We also added modestly to our coal position. We contracted for an additional 1.1 million tons in 2009 for Midwest Gen and 200,000 tons at Homer City in 2011. We continue to take the view at Homer City that coal market prices are not yet at levels warranting forward commitments. We expect further price softening.

Let us now turn to the updated 2008 core earnings guidance on page 10. As Ted has already highlighted, GAAP guidance has been updated to include the year-to-date non-core items and results from discontinued operations. Again we are reaffirming our core guidance range. Key changes in our core guidance assumptions during the quarter include the updated September 30 forward market assumptions. We also reflected our EMMT trading revenues of $138 million through September 30, though we do expect some fourth quarter contribution from EMMT. We have also updated our estimate for 2008 SCE energy efficiency earnings from $0.08 to $0.07.

This week an ALJ proposed and alternate decisions were issued. The ALJ proposed decision would defer any energy efficiency earnings into next year while the alternate decision would authorize approximately $35 million pre-tax for SCE's 2006 and 2007 first interim earnings claim. We see the alternate decision as constructed and it represents 50% of the total earnings contribution we expect from the 2006 and '07 periods. These decisions are expected to be considered by the CPUC in December. The remaining 50% is subject to final CPUC audit and if approved it will be earned as previously scheduled in 2010.

We continue to exclude from guidance any impact from the ongoing IRS global settlement and from the outcome of the CARE proceeding in the DC Circuit Court which could impair purchased annual NOx allowances. I would like to turn back to the financial markets that Ted had discussed. The financial market crisis has and will impact our businesses. We thought it would be helpful to address some of the key questions that might be on investor's minds.

First, I'm going to ask some questions here and try to answer them. Will the lower expected economic activity reduce SCE's power sales and earnings? In the short-term, the simple answer is no. California's regulatory model decouples changes in sales and fuel and purchase power from earnings. The differences in sales, fuel and purchase power relative to the levels approved by the CPUC are fully adjusted through balancing accounts with no impact on earnings. These changes can affect cash flow though.

If the economy is slow to recover from the financial crisis, lower sales could affect earnings. However this would arise from the lower level of investment activity.

Second, is SCE experiencing a higher level of bad debts? The simple answer is yes but in the aggregate, bad debt expense is still tracking within authorized CPUC rates.

Next, will SCE's pension plan require higher contributions and expense recognition given the market indices are down sharply this year. Could this affect SCE earnings?

The volatile market conditions have impacted the performance of the Trust established to fund SCE's future long term pension, other post-retirement benefits and nuclear decommissioning obligations. This will likely result in increased future expense and higher funding levels. However, SCE recovers these costs through customer rates so any increase is not expected to impact earnings but may impact the timing of cash flows.

The next question. How solid is EIX liquidity position? Page 11 shows the liquidity position for each of our major companies and the change since the second quarter. Overall, liquidity remains strong at $5.3 billion across the Company as of September 30. We are fortunate to have long-term committed lines with a group, current group of 28 lenders. Page 12 shows the principal banks across our four facilities. EIX and SCE credit lines mature in 2013 and the EME and Midwest Gen lines mature in 2012. The terms and conditions of the various lines are favorable, containing no material adverse change clauses and they have low cost pricing relative to facilities that are being originated today.

Our bank commitments include $260 million of lines provided by Lehman Brothers. None of our credit lines were part of the Barclays acquisition of certain of Lehman's assets and we don't expect these lines to be available going forward. It is our intention to pay down the bank lines once we see clear evidence that the financial crisis is abating. It's encouraging to see LIBOR rates falling but volatility remains very high and prudence dictates holding cash for the time being. To further augment its cash position as Ted has already mentioned, and to buffer for the extensive capital plans, SCE issued $500 million of five year first mortgage bonds in October with a 5.75 coupon.

The other topic related to the financial market is counterparty exposure. On pages 13 and 14 we summarize our hedging counterparty exposure for SCE and EME. Keep in mind that SCE's hedging strategies are authorized as part of our rate making process for the benefit of customers to reduce rate volatility and don't impact earnings. For EME you will see that our overall exposure net of collateral was $380 million. Approximately 95% is with investment grade rated counterparties. About half this exposure rises from amounts owed for delivered power.

In our 10-Q we also provided updated information on collateral deposits at SCE. As of September 30, collateral deposits are $265 million and that is with counterparties. The updated disclosure now include potential collateral deposit should SCE suffer a downgrade below investment grade.

Given SCE's cash position and available credit lines, there's more than adequate liquidity to meet our current and potential requirements. The disclosures also provide a stress scenario.

Last question. Finally, are you planning to reduce capital expenditures in light of the economic conditions? At SCE there are no specific plans to reduce capital expenditures. I will note that our 2008 capital expenditures are running behind budget primarily because of delays in obtaining regulatory approvals for transmission projects. Lastly SCE is expecting a proposed decision in its 2009 general rate case very soon. This proceeding will affect about two-thirds of SCE's capital spending for the next three years beginning in 2009.

Turning to EME. Pending recovery of the capital markets, EME intends to preserve capital, as Ted has already mentioned, by focusing on more selective growth strategy. This would involve completing the 330 megawatts of projects under construction and a 240-megawatt Big Sky project in Illinois and developing projects to deploy the remaining 942 megawatts of current turbine commitments. As you will see on page 14, our EME capital commitments for 2009 are slightly over $1 billion reflecting approved projects.

I'll finish with a brief update on the continued progress we are making towards the global tax settlement with the IRS which remains on track and consistent with what we have discussed in the second quarter call. Our preliminary nonbinding agreement has advanced to the point where we are targeting submittal to the joint committee on taxation before year end. We do not know how long the joint committee will take for its review, though. We also continue to make progress on the termination agreements with the LILO/SILO counterparties. At this point it is uncertain when we will actually terminate the leases. The lease termination issue is part of an ongoing continuing dialogue with the IRS. We see no change in our prior assessment that the settlement as completed consistent with the current terms will be overall cash positive with a total non-core earnings consistent with what we had last indicated in the second quarter. And now I'd like to turn over the call to the operator to moderate the Q&A. Operator?

Certainly. We will now have a question-and-answer session. (Operator Instructions) Our first question comes from the line of Hugh Wynne with Sanford C. Bernstein. You may proceed.

I would just like to clarify the Company's position in terms of CapEx at Edison Mission Group. If I understood you correctly, you were going to cut back capital expenditures there to a level that is consistent with the implementation of -- or the construction of the 940-megawatts of turbine commitments that you already bound yourself to. And otherwise you are going to be in a capital conservation mode. The question regards the opportunities created by the credit market disruption and the, in particular the lesser availability of tax equity for you to acquire other turbines, other sites, other developers even. Is that an opportunity that you intend to exploit at all or do you feel it's simply too risky to pursue acquisitions in that sector?

Let me turn that over to Ron Litzinger.

We do see opportunities out there, and our capital preservation strategy has that in mind so that we can take advantage should they occur. What we would be interested in would be development portfolios that would assist us in deploying our existing turbines first and then we would consider other opportunities, as Ted mentioned, if there was a definite path of financing available.

Okay. And if I could, just a follow-on question regarding coal. I don't know if you could comment on the prices at which you've been able to procure coal in this quarter or failing that, the prices at which you expect to be able to procure coal in the future and what those prices imply for the longer term earnings power of the existing coal fired fleet at Edison Mission Group?

This is Jim Scilacci. I'll start and ask Ron to fill in. We won't comment on what we are pricing our coal at. Ultimately you'll be able to see that flow through our coal expense in Midwest Gen and Homer City's financials. We did comment that we believe that Eastern coal prices especially around the Homer City facility, the prices have been slow to fall relative to natural gas and power and it is our view that that will catch up over time but it does cause a squeeze in the gross margin associated with what we are currently seeing in Homer City and up to a lesser extent at Midwest Gen and we will just follow that market carefully and we'll jump in as we see opportunities present themselves. Ron, would you like to add anything?

In 2009 at Homer City most of the coal price pressure is in the East. We had pretty much locked in most of our coal requirements in earlier times when the prices were more favorable. We are focused now out in 2010 and '11 where we are currently hedged consistent with our power positions which is our strategy, and as Jim mentioned, we expect the prices to soften there.

Are there any major implications to you other than the write-off of the SO2 allowances of the CARE vacatur? Do you see that as possibly resulting in more stringent regulation and higher CapEx in the future, or do you think that we'll be able to go through the next few years with no major change in your CapEx plans, environmental CapEx plans?

First, the potential write-off would be on annual NOx as opposed to SO2. One thing on the CARE vacatur that we would be concerned about our agreement with the Illinois EPA was done separately from CARE. That is still binding to us. Our concern would be that something more stringent replaces the existing CARE rule and that we would have to revisit that.

Great. Thank you very much.

Thank you. Just to clarify it is in our disclosure. We talked about it in the second quarter there. EME has $48 million of NOx credits that it's holding, and we have taken no action at this time on those credits.

Right.

Thank you.

Thank you, Mr. Wynne. Our next question comes from the line of Leslie Rich with Columbia Management.

Wouldn't you know it? Hugh asked my questions. I'm done.

Thank you, Leslie.

Thank you, Ms. Rich. Our next question comes from the line of Dan Eggers with Credit Suisse. You may proceed.

Hey, good morning.

Good morning, Dan.

Looking at the Homer City utilization year-to-date and comparing to last year, it looks like this year's run rate is more consistent with what we saw in '06. Should we think about this reflecting more of a normal weather environment from a baseline utilization for those assets and that maybe last year is a little bit more of an aberrational event?

This is Jim. I'll start then hand it over to Ron. It's a good question. To the extent that we had the information, we could probably provide more clarity to that because we bid in the units and we do see some lower level of off peak generation or the units being taken in the off peak hours and that could do -- there's a lot of information we just don't have. It usually has to do with how people are bidding in units. So I'll stop there and ask Ron if he has anything further to add to that.

Jim hit the nail on the head. Our load factors are down. It is primarily in the off peak hours. As Jim mentioned, with the current situation with Eastern coal prices, you are probably getting a variety of bidding between historical costs and replacement costs, and we think that is affecting our dispatch. The important thing is we make most of our money on peak and Homer had a good forced outage quarter and we captured it.

Okay, thank you. If you guys could talk a little bit about resource planning in California with the slow, with an economic slowdown, at what point in time do you guys reassess, obviously the GRC gives you visibility for three years, but can you remind us of the review process to evaluate future needs?

I'll have Al Fohrer address that question, Dan.

Well, in terms of resources there is a number of proceedings that go on. One is the biannual long term resource plan process where the state takes a look at what the overall leads are in terms of generation and capacity. We have been through that and I don't expect that there will be any changes to what we went out with, at least at the current time. Most of the resources were several years out. In terms of the utility load growth, what we -- we filed an amendment to our general rate case that reduced the new meter growth. We have not seen material changes in what we call load growth, load on the circuit. So it did not materially change the capital investments that we requested in the 2009 rate case. Most of those were driven by what we call infrastructure replacement which is replacing a system that was largely built in the '50s and '60s and load growth on the circuits that comes from existing usage.

Okay, thank you. PCG yesterday talked about a decent amount of expense associated with trying to contest Proposition 7. Is there any of that expense embedded in this quarter's numbers for you guys? Should we expect anything in the fourth quarter?

There was some expense from our side of the equation. We haven't disclosed what that number was, and it's incorporated in our numbers that we showed today.

Okay. Thank you.

Thank you, Mr. Eggers. Our next question comes from the line of Lasan Johong with RBC Capital Markets. You may proceed.

Thank you. It sounds like you are planning to continue investing in renewables regardless of the financial markets. Did I kind of interpret that correctly?

I'll let Ron Litzinger address that.

We are going to complete the projects we have under construction. We are going to continue to develop projects so that we can deploy our existing turbine commitments, and in those cases or any other newer opportunities, we would like, we would only proceed if there was a path of financing open and so we are relying on the project debt markets to be open and available to us at reasonable terms.

I see. And speaking of the turbines, how much if any of the 942-megawatts of turbine commitments are from Suzlon and is there any update that you can give us on the repairs and replacements going on there?

I think it's, I remember it's about 150 turbines so it would be about 300-megawatts of those are Suzlon given the cancellation we had done last quarter. An important thing to remember is the future Suzlon commitments are the different version of the machine which thus far is operating satisfactorily in Australia for almost a year now. Suzlon has progressed well on the root cause [failure] analysis and remediation plan, and they will be submitting that to us for our review and approval shortly.

Great. And just on the Lehman hedge loss, I'm guessing since Lehman's bankruptcy they rejected the contract because it was under water to them. Which means that to replace them you would have to take a market price for the hedges that you are replacing. So I'm not sure how you reverse your losses through the end of 2010 if the new contracts are below market relative to the older contracts?

This is Jim Scilacci. What happens there on the accounting, so these were cash flow hedges that we recorded, and once Lehman filed for bankruptcy, we had to de-designate those hedges and the accounting process that tracks that, it comes out of other comprehensive income. You have to take a hit for the mark-to-market. So that's why it's recorded as a nonrealized loss. And as you go forward in time, so these hedges were for 2009 and 2010, and what we said during the script was it ultimately works its way out during the two-year period. But as you think about it, if you don't want to get confused by the accounting, you have to think about what the economic impact and that's harder to tell because now we have generation that would have been dedicated under that financial hedge to Lehman which is now available to resell and the question is what will the prices be in 2009 and 2010 relative to what you would have realized had Lehman not gone bankrupt. So it's an opportunity loss. The way I look at it now it is an opportunity loss until we actually realize what occurs.

So those hedges are still open and unaccounted for in terms of the financial contracts?

For all intents and purposes, yes, and then it will roll forward in time. And so, each year as we go -- each month we'll report a slight pick-up or gain as they unwind, and I think in our disclosure we showed what the amount will be for 2009 and 2010 as it unfolds.

Got it. I'm a little confused. Why are we talking at all about the possibility of Southern Cal Edison being downgraded to non investment grade? It seems a little nonsensical at this point, doesn't it?

We tried to expand our disclosures given the concern around other companies to show what the adequacy of our liquidity is relative to what our deposits, our collateral positions are. So you go from where we are now well into the investment grade category and a multiple notch reduction to a lower level to a noninvestment grade and the whole point was to demonstrate the adequacy of our liquidity.

You are talking about consolation then?

That would be something that we could cite.

I got you. And then just one other question. The California economy is obviously taking a hit with everybody else. Is this going to have any kind of bearing on your rate case going forward?

I'll stop there and let Al Fohrer address that.

As I indicated before, we did make an adjustment in our numbers about a month or two ago that reduced the revenue requirement for a lower level of new meter growth, but we won't speculate on what the outcome would be. You get two things going on in the market. One is our rate case, if they gave us everything we asked for was a 6% rate increase. What we have seen is the natural gas prices, and as you recall California is heavily dependent on natural gas, have come off quite a bit, taking some of the total rate pressure away.

Actually, I do have one other question. [DuCaffrey and] DWR just recently announced they are going to curtail water to municipalities and others to a very, very low level. Is this impacting you at all and if this continues is this going to be a problem for Southern California Edison?

No.

Great. Thank you very much.

Thank you, Mr. Johong. Our next question comes from the line of Michael Lapides with Goldman Sachs. You may proceed.

Hey, guys. Thank you. My question has been asked and answered. Much appreciated.

Thank you, Mr. Lapides. Our next question comes from the line of Jonathan Arnold with Merrill Lynch.

My question relates to you talking about curtailing your capital spending at Mission. When I look at the actual CapEx forecast in the 10-Q versus what it was at the June stage over the course of '09 and '10 it seems to be off about $300 million, a couple of hundred under the turbine commitments and a hundred or so, about 130 on the other lines between the two years. Could you give some sense as to what's reflected there, why the actual number is on the way up?

The turbine commitments are -- reflect us sliding turbine commitments from '08 into '09 primarily as we renegotiated -- or we entered into our new agreement with Suzlon.

Just as an additional piece, we canceled 350-megawatts of Suzlon machines too so that is an inter-period number that has come out of the capital budget too.

Where did it come out?

It would have been for 2009. Those were the 2009 orders that we had with Suzlon that were canceled.

But the '09 turbine commitments and now 800 million versus 550?

That's correct.

So that's the net of the cancellation and the things that slipped out of '08?

That's correct. And we have more wind projects in construction than we previously had as well.

Okay. And as we think about the actual capital implications of these, the pipeline and building it out, I think the difference between in construction and the pipeline or the turbine commitments is about 600-megawatts. Am I right that that, the nonturbine costs are not in the capital forecast and what would be a good rule of thumb for working out that number?

Wind turbines are generally in the 1800 to 2300 a kilowatt range and they generally represent about two-thirds of the total project cost.

So that would be an additional spend that you would need to do if you were going to [fulfill] the turbine?

That is correct. Our table is reflective of existing commitments.

Okay. And you have -- you mentioned in the 10-Q some issues with Clipper blades I think it is. Is that the same issue that was in the second quarter Q or is it -- it said it was recently discovered?

These are blade issues that are new. The previous issues were with the gear box. Those have been resolved, and we are working with Clipper right now both commercially and on a technical basis.

Okay. One other thing on that. Do you have some commercial settlements with Suzlon here embedded in the numbers from this quarter and how much of those and were they cash or accruals?

Suzlon makes liquidated damage payments to us quarterly based on our new agreement and those are reflected in the quarterly results.

Okay, and just one final thing on the CapEx front. I saw that the Illinois environmental spend moved up for '09 by about $40 million. What's going on in that number, and could we get an update on your thoughts around timing and when you might talk about the broader update of that project cost?

We are on track to make our broader update of the total cost and the timing of those costs at the end of the year. We will have detailed engineering estimates for the Powerton NOx controls and SO2 controls that will be much more meaningful to everyone, and all you are seeing in '09 is the acceleration in engineering that is necessary to be prepared to do the Powerton work consistent with the agreement.

Okay, thanks a lot.

Thank you, Jonathan.

Thank you, Mr. Arnold. Our next question comes from the line of John Kiani with Deutsche Bank. You may proceed.

Good morning.

Good morning, John.

Can you give us a little bit of color around whether some of the wind projects that are under construction are in Texas and how much of the pipeline, wind pipeline is in Texas as well please?

The only project under construction is the second phase of our existing Goat Mountain project in Texas, and that is our only project in Texas at the moment.

And then what about the pipeline?

It's not heavily weighted in Texas.

And as far as that project that is under construction right now, have you all talked about what types of returns on capital you expect to see for something like that in Texas? We are seeing off peak power prices very low, clearing actually negative in some of the hours especially in the west and the north zone. Can you talk a little bit about what types of returns on capital you expect for that type of project right now?

We are monitoring the situation in Texas with our existing plan based on the things you note, indicates why I said earlier our pipeline is not heavily focused in Texas, and overall in our wind portfolio, we are looking for utility type returns on these projects.

As far as the existing piece of the portfolio that is already up and running that is in Texas, how have you hedged that, what types of hedges have you been using and what are the durations of those hedges?

That's one of our merchant projects.

So your wind projects in Texas are totally 100% open.

Our one wind project in Texas is being operated on a merchant basis. That's correct.

Okay. Thank you.

To help you find some color on that on Texas, on page 18 of the deck you'll be able to see what the megawatt in operation, the number of megawatts in construction in the pipeline.

Okay, I see. So under operation in Texas it looks like there's 241-megawatts, then with another 70 being built so it looks like the total is 311-megawatts in Texas and then the pipeline for Texas is 400-megawatts? Is that the correct data?

The other thing you have to remember is of the projects that are in operation in Texas, only 100-megawatts of that are in ERCOT. The balance, our other project is actually in [SPP] and not seeing the market issues that you mentioned earlier.

Okay. Thanks. That's helpful.

It's our Wildorado project that Ron was referring to. It is one of our larger and better performing projects.

One last question from a hedging perspective. How should we think about the remainder of your existing wind megawatts that are in operation and also of the assets that are under active construction, the hedge profile there? I know you have a number of projects that obviously have long term PPAs, but can you give us a sense for how much of the rest of the portfolio is either merchant or under shorter term hedges please?

It's mostly contracted. The balance of the fleet. We started looking at doing some projects merchant when we were in a high capital escalation period, and PTC uncertainty, and with the intent to contract later in that environment.

I am going to follow-up on that, John. The difficulty we are having is when you lock it down on a PPA and prices are escalating rapidly, we've found that you have to go back and renegotiate the PPA to make it work under your return thresholds and I'm sure Al Fohrer and the people at SCE can comment on their side of the equation because I'm sure they are seeing it from the utility. It's the flip side of EME. So we have taken the position of, I kind of look at it --- it's not a merchant project but more of a delayed contracting approach. So once you are able to get things locked down and we know what your costs are going to be then you enter in a period of active negotiations with counterparties with reasonable cost estimates then.

So the way to think about it is that you'll start the development process, start to spend the capital, get the capital and the costs locked down and then go after the hedge or the contract as more of a step two?

That's correct. And we are not going to proceed on projects that don't have acceptable returns or a path of financing going forward. I think we should restate that.

Okay. Thank you. That's helpful.

Okay, John.

Thank you, Mr. Kiani. Our next question comes from the line of Rudy Tolentino with Morgan Stanley. You may proceed.

Hi. Just kind of along the lines, of what John questioned earlier, have you noticed any change in counterparty behavior with regard to wind contracting since this financial crisis hit or is it still fairly healthy?

I think there are two sides to that question. Let me kick it over to Ron first then ask Al if he would like to add anything.

Generally we don't comment on current PPA negotiations. I certainly haven't heard anything from my developers that there's been a shift, utilities still have renewable portfolio standards to meet. Those have not been relaxed, and things are progressing about the same as they have been before.

Al?

This is Al. From the utility perspective, Ron hit it right. We have got a 20% RPS that we have got to meet by 2010. This state has a stated preference for 33. So I don't see any changes coming up right now on the renewables.

Okay. Thank you very much.

You're welcome.

Thank you, Mr. Tolentino. Our next question comes from the line of Clark Orsky with State Street Global, and this is our final question. You may proceed.

Thanks. Just with regard to the 2009 CapEx plan, how much of the turbine commitments are cancelable and would you consider doing that given kind of the cash conservation mode you are operating in?

Cancellation fees, we could cancel them. The cancellation fees would be pretty substantial. At this point in time our intent is to deploy the turbines, but we continue to reassess always.

Okay. And of the -- I think you said you have 900 of turbine commitments. Can you talk about financing commitments you have with regard to projects in the pipeline?

I'm going to have John Finneran catch you up on our financing efforts.

We are going to embark in the first quarter on the portfolio financing for a group of assets that we currently have under contract with PPAs. It wouldn't be wise to currently try to finance those but we feel it's a very strong portfolio and we've approached a number of banks, and all indications are that in the first quarter we should be able to successfully finance that group of assets.

Can you say how much you think you might try to raise from that?

I'd rather just leave it at substantial. Substantial.

Okay.

And just as a reminder, none of our existing wind portfolio has any financing on it. There actually is a very small amount of money. So this is a, we've done it on our balance sheet thus far, and we are getting to the point in time now where we are looking to put together a wind financing and we are resolving the Suzlon issues too and that was another key consideration why we haven't financed to date and then we will have a series of project financing as these projects move down the line and into construction.

And the first --- what John mentioned --- the first movement of the market is the non-Suzlon portion of the portfolio.

Thanks. That's helpful.

Thank you, Mr. Orsky. And I apologize, we do have time for one more question. That question comes from the line of Paul Patterson with Glenrock Associates. You may proceed.

Actually almost all my questions have been asked on the CapEx, but I guess just to clarify, the increase in CapEx for the new projects, has loan commitments, projects, financing commitments associated with that, correct?

It's primarily reflective of projects that are currently under construction in our existing turbine commitments and the shifting you have seen period to period has got puts and takes from the cancellations and deliveries being deferred into '09 and '09 to '10 and the like.

Okay. And then the pension funding, I notice there was a decrease of about 22% I think in the last nine months, and I know you guys have a regulatory recovery mechanism at SCE. Just what should we think about in terms of pension expense or pension cost going forward? Do you have any elaboration on that?

That's a good question. It really is going to depend on ultimately where the plan comes out at the end of the year and the discount rate that you use in assessing the liabilities and it's premature, I can clearly tell you it is going to go up. How much, that's yet to be figured out completely. But again the way the rate making mechanisms work here in the state we should be able to set up a balancing account and we would have a higher expense level, and that was -- in my comment where we said we'd have higher expense. We need to fund that expense from a cash perspective and we would seek to recover the dollars in future periods.

Okay, but Edison, is there any impact there from -- I'm sorry, Edison Mission, is there any impact there from the pension thing that we should think about?

It's de minimis.

Just want to make sure.

Edison Mission is less than 2% of the total.

That's very helpful. Thank you.

Okay, Paul, thanks.

Thank you, Mr. Patterson. At this time I'd like to pass the conference back over to Scott Cunningham.

Thanks very much everyone for participating. Feel free to call us at Investor Relations if you have any follow-up calls today. Thank you. Bye bye.