愛迪生國際 (EIX) 2008 Q4 法說會逐字稿

Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everybody to the Edison International fourth quarter 2008 financial teleconference. (Operator Instructions) Thank you, and Mr. Cunningham, you may begin your conference.

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

The presentation of the Company's [GEM's] 2008 financial review together with the earnings press release and our 2008 form 10-K filings are available on our website at www.edisoninvestor.com. During this call, we will make forward-looking statements about the financial outlook of 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 10-K and other SEC filings which we encourage you to read carefully.

Additional information including outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measures. Please note that core earnings refers to earnings to basic share or GAAP earnings excluding non-core item and discontinued operations. Prior period core earnings and reconciliations to GAAP earnings referred to in this discussion are contained in the press releases archived on our website.

With that I'll turn the call over the Ted Craver.

Thank you Scott and Good morning, everyone. Edison International had a good year in 2008. Reported earnings increased 11% to $3.69 per share while core earnings which exclude certain non-core items and discontinued operations increased 4% to $3.84 per share.

As you know, we mostly focus on core earnings when we talk to investors. Given some of the recent announcements on dividends from other companies, it is worth noting that last December we increased our common stock dividend for the fifth consecutive year to an annual rate of $1.24 per share. Our long-standing dividend policy has been to look solely to Southern California Edison to support the dividend and currently targets a payout of 45% to 55% of SCE's earnings. EMG's earnings in cash are retained at EMG to support its capital requirements and growth. Future dividend increases at Edison International will be balanced with our capital needs to support growth.

Jim Scilacci will shortly cover the components of our record earnings at Edison International and its two principal subsidiaries last year. I want to concentrate the remainder of my remarks on the outlook for 2009 and how we view the major trends in our business.

Last year was difficult for investors and while our stock prices declined in line with the major market indexes, it underperformed relative to the utilities sector. This same basic trend appears to be continuing thus far this year. Presumably, a major reason for this is the natural exposure our competitive generation company, EMG, has to energy commodities during this down cycle period. The collapse in natural gas prices has been stunning, both in its extent and speed. While it has been helpful to SCE and its customers, it has hurt EMG's earnings.

We are unable to provide formal earnings guidance for Edison International at this time. We intend to provide 2009 guidance once we have the general rate decided by the California Public Utilities Commission. The General Rate Case, or GRC as we call it, is critical in many ways. So with it still before the Public Utilities Commission to decide, we can't develop a firm view of SCE earnings or finalize our Edison International outlook for 2009.

Before I move on, I want to make just a few comments on the GRC and the process at the Public Utilities Commission. The original PUC schedule called for a decision on our General Rate Case by the end of December. We thought we were finally going to receive a decision at the recent February 20th PUC meeting, but it was postponed. We hope to receive a final decision from the CPUC at their next meeting on March 12th. The commissioners have under consideration both an administrative law judge proposed decision and an alternate decision proposed by the presiding commissioner of the case, President Peevey. These two options would have very different impacts on customer reliability, safety, Southern California jobs, and the economy of the region in which we serve. The commissioners have heard from all sides and are hopefully far down the path in their decision process.

In light of the pending commission decision, the timing of this investor call is quite awkward. It would be unwise and disrespectful for us to comment on the GRC any more on this call either in terms of the content or its impact on SCE. Therefore, we cannot take any questions on it during the Q&A session of this call. We know you understand this and appreciate your cooperation.

It seems as though the market has recently been focusing on the lower prices for natural gas and the impact of that on EMG earnings. Gas prices have indeed fallen sharply and EMG's margin is affected by several other commodity prices as well. The current volatility in commodities makes the job of predicting margins and sensitivities even more difficult than usual.

All that said, based on recent prices and estimates of volumes for our generation assets, we believe EMG's earnings for 2009 are likely to be in the range of $0.50 to $0.90 per share. This is, of course, lower than the $1.72 per share we earned in each of years 2007 and 2008 and a wider range than usual due to the increased volatility of commodity prices. It might be an oversimplification,but interestingly enough, the change from $1.72 to the $0.50 to $0.90 range is commensurate with the move of natural gas prices from the average for last year of around $8.85 in MMBTU to the current price of about $4.00 in MMBTU. It is clearly the most important variable in explaining the lower earnings contribution from EMG.

Since the restructuring of EMG as a result of the 2002, 2003 down cycle, there have been several larger trends affecting its earnings that are important for you to have in mind. The sale of the international assets as part of the restructuring and the expiration of the transition contracts with Exelon made EMG largely a domestic merchant coal generate with exposure to the natural gas commodity price cycle. In response, the strategy has been to diversify the concentration in the merchant coal portfolio by focusing broadly on developing renewables projects and more selectively on contracted gas-fired assets.

Earnings from the coal portfolio have increased significantly as margins expanded with the commodities cycle. Earnings have been declining from the Big Four projects as the long-term contracts expire and are re-contracted at much lower capacity prices and also from Edison Capital as its portfolio of leases and global infrastructure projects run off.

New sources of earnings from EMMT's training activity and the expanding wind portfolio have more than offset the losses and earnings from the Big Four and Edison Capital. Overall, the pluses have offset the declines such that core earnings have increased from negative $0.08 per share in 2004 the year we completed the restructuring to the $1.72 EPS in '07 and '08.

When we look at the expected reduction in EMG's earnings for this year, it can be explained in the same context. The drop in natural gas and electricity prices along with increased environmental compliance costs from operating the mercury control equipment and purchasing new annual notch credits are reducing the margins of the coal generation fleet, the largest component of our earnings. Additionally, we have declines in earnings at the Big Four projects with the last of the legacy contracts expiring at Midway Sunset and at Edison Capital as the last of its portfolio of leases and global infrastructure funds run off.

EMG reinvests all its cash flow into the business and does not pay dividends to Edison International. The significant cash produced by the coal generation portfolio and from EMMT has been used to develop our sizable wind business and the beginnings of a solar business. With the expected decline in cash from the coal generation fleet during this part of the cycle, EMG has been in a capital conservation mode. On our last earnings call, we told you EMG's wind development focus remains on projects that will utilize the 942 megawatts of turbines we have in inventory or will take delivery on through next year.

Availability of project financing continues to be an important factor in committing to new construction projects beyond those currently planned. We intend to monitor the cash situation carefully to ensure that EMG does not get out over its [skews] in the development effort during this down period in the commodity cycle and constrained availability of reasonable financing.

The other major consideration for us at EMG is compliance with Illinois and federal regulations on NOx and SO2 and potentially carbon. Current conditions make major major investments in control equipment difficult if not impossible. We have been looking at several alternatives for reaching the emissions reductions commitments at Midwest Gen for NOx starting in 2012 and faced through to the end of 2018 and phased in for SO2 from the start of 2013 through to the end of 2018 The emissions requirements have been detailed in our disclosures for some time.

In our 10-K released today, you will find additional information on updated costs for NOx and SO2 control equipment at the Powerton station based on a recently completed detailed engineering and costing study. The bottom line - - installing two SCRs at Powerton and an SNCR at another station as the means for meeting the 2012 required NOx rate is estimated to cost $513 million in 2008-dollars or a 14% increase over the 2006 estimate. The estimated cost per kW for installing FGDs to meet SO2 requirements has been updated to $650 per kW in 2008-dollars or an 8% increase over the original estimate of $600 per kW in 2006-dollars. Capital costs for compliance at Powerton could be lowered significantly if we could reverse the order called for in the Illinois agreement and install the SO2 controls first and then the NOx controls.

I want to underscore an important point. We have not yet decided on any specific course to meet the NOx and SO2 emissions requirements, nor have we committed to any specific capital investments. We continue to look at various innovative technologies we might employ. We are also evaluating several interim and alternative compliance solutions, including combinations of retrofits and specific unit shutdowns.

The current conditions require us to exercise caution and discipline. We remind ourselves these conditions won't prevail forever, so the key is to manage through this period carefully and make sure we're in a position to capture the opportunities that are inevitably there. We remain focused on the fundamental value drivers for Edison International. We have exceptional opportunities for growth at both SCE and EMG.

We have one of the best positions in the industry to deliver on the rapidly expanding and publicly supported opportunities in renewables, particularly wind and solar, transmission, new smart grid technologies such as smart meters, and electric transportation. Also, we have worked hard in the last few years to build a solid financial base and intend to do everything to keep it strong during this period. This management team has experienced severe cyclical swings before and is approaching the challenges of this one with its eyes wide open but confident that the long-term value proposition of Edison International is strong and sound. I can assure you we are highly focused on addressing the issues aggressively in creating value for shareholders.

Let me now turn it over to Jim Scilacci.

Thank you, Ted. And good morning, everyone. Looking back over 2008 the year now seems like a roller coaster with the rising natural gas prices during the first half of the year, then a rapid fall during the second half. The dramatic change in commodity prices affects our two primary businesses differently. Obviously, EME benefits during rising commodity prices and widening [dark spread] while SCE faces rising fuel and purchase power expense that must be passed along to its customers. With the dramatic fall in natural gas prices, SCE no longer needs to seek rate recovery for increased fuel and purchase power while earnings at EMG are diminished.

Moving on to the Investor deck on page two, the presentation summarizes full-year results as Ted already mentioned. Moving to page three, SCE's core earnings increased $0.18 per share over the last year This reflects the higher operating income consistent with rate based growth from our 2006 rate case and also includes the first energy efficiency reward of $0.05 for the program years 2006 and 2007 under the CPUC's incentive program. The remaining opportunity for the 2006 through 2008 program is subject to a CPUC proceeding and any additional earnings will be recorded in 2009 and 2010.

Lastly, for (inaudible ) favorable tax and net interest comparisons also contributed to SCE's 2008 performance. EMG's 2008 earnings were the same as last year's record core earnings of $1.72 per share. Positive drivers included favorable price margin and operating performance comparison at Midwest Generation together with our wind portfolio and our EMMT trading business which had a pretax trading margin of $164 million. The balance of the Generation portfolio including Homer City and the natural gas projects delivered lower results. Homer City was impacted by higher outages in 2008 as compared to 2007 along with higher operating costs.

Natural gals projects were lowered due to repricing of long-term contracts at two Big Four projects, Watson and Sycamore. FAS 133 mark-to-market impacts year-over-year were a favorable cents $0.10 per share despite for the coal fleet despite a $0.04 per share charge in the third quarter related to the terminated hedge with Lehman Brothers. EMG's interest income declined due to lower interest rates and lower cash balances as we have invested in wind turbines and new projects.

We also took a $0.04 per share write-off from canceling a natural gas turbine order for our planned Walnut Creek, California, project. This project is one of several gas fired projects being developed by various IPPs in Southern California and impacted by uncertainties regarding the availability of emissions offset credits. Given this uncertainty and our increased focus on cash preservation, we elected to terminate our order. We remain committed to this project and deliveries under the PPA don't start until 2013. Our strategy was to construct the project early and run it as a merchant plant until 2013 as a hedge against rapidly escalating construction costs. Under current circumstances,early construction is no longer necessary. We will make firm commitments once the emission offset situation is clarified.

Looking to Edison Capital, earnings down $0.03 per share for the year as the gain in the buyout of the Beaver Valley lease interest was more than offset by a reduction in income from the global infrastructure funds and higher year-over-year income taxes.

Let me turn now to the fourth quarter results on page four. EIX's core earnings were $0.66 per share compared to $0.65 last year.

Moving to page five, SCE's fourth quarter core earnings were $0.43 per share or $0.06 higher than a year ago largely from energy efficiency program rewards. EMG earned $0.25 per share, down $0.05 per share from the prior year. The write-off in the natural gas turbine deposit was the primary driver during the quarter.

On page six you'll see overall Midwest Gen coal fleet performance for the full-year and the fourth quarter. The numbers indicate an improved level of performance at Midwest Gen with higher availability, capacity factors, total generation, and lower forced outages compared to last year. During the fourth quarter of 2007, we had an extended unplanned outage at Powerton station which caused an unusually forced outage rate. Average prices increased 7% while our average realized margin was up about 4%. With fourth quarter, prices increased 2% while average margin per megawatt hour fell 3%.

On page seven, we saw lower operating performance from Homer City during the fourth quarter and full-year basis. Homer City generation was impacted by both lower availability and lower dispatch or load factor. Homer City availability fell to 81% from 89% last year. And load factor fell to 85% from 92%. The loss of dispatch occurred primarily during the off peak hours when margins are lower. Home City continues to focus on boiler tube leak reduction and procurement of critical [spheres] to address availability issues.

For the full-year we saw 7% higher prices and an average realized margin per megawatt hour increased 8%. This reversed in the fourth quarter as energy prices significantly decreased. Fourth quarter prices declined 1% while an average margin per megawatt hour fell 4%.

Page eight shows us our regular hedging profile for the coal fleet. We did not enter into any new energy hedges during the fourth quarter. We did secure 4.9 million tons of [pure-B] coal for delivery in 2009 at Midwest Generation. Also options to purchase 1.2 million tons of coal in 2010 and 11 in Homer City are the subject of a supplier dispute.

We continue to believe that eastern coal prices should decline given current natural gas prices and slowing coal demand both here and abroad. We have also been reluctant to enter into forward sales of energy given the depressed level of (inaudible) prices. Although we would like to limit our gross margin risk, we are also mindful of liquidy requirements of locking in prices at these lower levels.

I'd like to come back now to the outlook for 2009. As Ted said, we do intend to provide 2009 earnings guidance and a description of key drivers and assumptions once we have a final rate case decision There are a few items we think are are important to address now. Ted has already mentioned the substantial impact that the change in natural gas prices will have on EMG's earnings.

Second, on the positive side, capacity revenues at Midwest Gen and Homer City are scheduled to increase based on the previous results from the PJM RPM auction. The numbers are provided in the appendix to the investor presentation.

Next, our coal fleet faces increasing emission control costs in 2009. At Midwest Generation, the increased cost are for annual NOx requirements and the higher operating expenses for mercury removal. Under Midwest Generation's agreement with the Illinois EPA ,we installed activated carbon injection units at Fisk, Crawford, and Waukegan in 2008 and we are now installing similar units are Powerton, Juliette, and Will County. Overall, emissions costs at Midwest Generation are expected to be 90 to $105 million higher pretax in 2009. We will see continued impacts of repricing the Big Four contracts to market. The last contract at Midway-Sunset expiring the second quarter of 2009.

In addition, we expect lower projected energy prices and power and steam volumes at some of the Big Four projects. This will reduce 2009 earnings by 45 to $55 million pretax. Completing the IRS global settlement will eliminate earnings from the LILO, SILO leases. Overall, we don't expect much in the way of Edison Capital earnings this year and going forward as the portfolio runs off.

There are other moving parts, but we think these are the most important to highlight today in explaining EMG's $0.50 to $0.90 per share range. Of course, this excludes any non-core charges including charges related to termination of SILO, LILO leases or impacts from discontinued operations. One final point, we expect a Holding Company expenditure will be comparable to 2008 .

With that, I will turn over the call to the operator for

(Operator Instructions) Our first question comes from the line of Greg Gordon with [Citi]. Your line is open.

Thank you. When is the next opportunity for the California PUC to rule on the rate case?

March 12th.

Thank you. When you gave your earnings guidance for EME, what power curve vintage are you using?

It was based on January 31st.

Thanks. And are you making any underlying assumptions about the structure of and your participation in any upcoming procurement auctions like in Illinois?

They're not included in our projections.

So you're not assuming - - you're basically assuming you sell power at the curve. You're not making assumptions about winning or not winning any load serving obligations.

That's correct.

Okay. The contribution assumed from EMMT?

We haven't made any assumptions. And when we come out with guidance, we'll provide additional information then.

So, right now the zero assumed contribution from EMMT in that $0.50 to $0.90 range?

No, there is an assumed level. We'll provide additional detail.

Okay. So, you just don't want to disclose it at this time?

That's exactly the case.

Okay. That's fair. You said you assumed - - what's the delta in contribution coming from Edison Capital year-over-year? Your gave us a cost delta and then a Big 4 delta, but I wasn't clear what the delta year-over-year was at Edison Capital.

We'll provide additional clarification on that when we come up with guidance. What we said was that we don't see mean meaningful contributions at [net cap] going forward.

Was there a contribution in '08?

Yes, there was. And we will provide additional detail later.

Okay. Final question. Can your refresh my memory on - - back at the bottom of the last cycle. You guys we went through a lot of effort to financially ring fence EMG from the parent. Has there been any change to modification of, removal of any of those (inaudible) ring fencing aspects of that that would make it less ring fence today. Can you talk about that? And the obligation to the parent may or may not have to support EMG?

Greg. This is Ted. One thing to remember is a lot of that was created through the MEHC financing which, of course, has now been removed. But I don't think that's particularly an issue for us. I might ask Bob Adler here to provide a little additional - -.

Alright. The ring fencing specific techniques that were adopted back at the bottom of the last cycle are no longer in effect.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Lasan Johong of RBC Capital Markets. Your line is open.

Good morning, thank you. It looks like on a total basis, EMG is about half unhedged in '09 and third unhedged, I'm sorry, third hedged in 2010 or two-thirds unhedged. Can you go over your thoughts on how you're going to balance the risk reward of hedging versus nonhedging going forward on the rest of the EMG?

I'll take that first and then I'll hand it off to Ron for additional detail. The philosophy has been going forward we'd like to be 50% hedged going into a particular year. That gives us flexibility to take possessions both higher than that or lower depending upon our view on prices

Given the current lower level of power prices and I think I added that in my comments in the script, we've been somewhat reluctant to want to stretch hedges out at these current lower levels of prices. And more importantly are our sensitivity around that to, if you were to lock in prices today, with the expectation prices could go higher. Then you're going to be stressed in terms of potential collateral requirements on your hedges.

Our view has been to keep fairly short on our hedges currently. We will strategically add hedges both for energy and we will add some coal hedges going forward as we see opportunities that do so. And we'll try to balance those things so we try to roughly maintain energy and coal and emissions positions hedged in same proportions. Ron?

I would just add that we focus our power hedges primarily on peak. And then for the prompt year because of delivery constraints, we do hedge a larger fraction of coal in 2009.

Then that means it sounds like you have a view on gas prices being higher going forward than it is today?

I think it's fair to say that at these levels, it's just not attractive to try to lock in hedges. And so our view would be that we would expect, at least, and we have said this publicly that coal prices we would expect to come down and then they would give us a greater spread.

Regardless of gas prices you expect coal prices to come down and that will create the spread?

Yes.

The 4.9 million tons of pure-B coal, what was the price that you hedged that at? Or is that not disclosable?

We don't disclose the coal prices.

I didn't think so. Quickly, on the Obama administration seems to be pretty keen on going out of their way to get a cap-and-trade system in place with CO2. I'm assuming that's not exactly what you would call a positive event for EMG or am I mischaracterizing that?

This is Ted. I think at this point it's a little hard to say how it's going to look. I think those particulars of how any type of cap-and-trade, assuming that's the approach that will be taken, is structured will make a big difference for us. What happens on allowances, if any, whether it's going to be 100% auctioned or some smaller portion. All of those make it pretty much impossible to do a lot of speculating on what the impact could be if a program is in fact put in place.

But I mean right now you're on the margin maybe 50% of the time, or 60% of the time on coal to balances gas. Correct?

It really depends on the market that we're in. But Midwest and for Midwest and most of on peak is really driven by gas. Most of the off peak is driven by nuclear and coal.

Okay. Do you have a view on natural gas prices going forwarded?

I think we just answered that before. At this point we're not really focused on locking in a lot of hedges. Given the current levels.

How about longer term like five years out?

I wish someone could come down and tell me what that number would be. That would help us a lot.

Got it. Thank you very much.

At this point we don't really try to speculate that far out. Thank you.

Our next question comes from the line of Michael Lapides, your line is open, with Goldman Sachs.

Question for you. When you look out to all of the environmental CapEx in Illinois, are the dollar per kW ranges that you've given for power and good proxies for the rest of the fleet?

They're a decent approximation.

If I think about it, it's the 650 a kW for the scrubber and around 335, 340 kW or so for the SCRs. Is that directionally there meaning for all the NSCRs and the one SNCR?.

Yes, I haven't run the math on what just an SCR was. But that is a blended number for the one NSNCR.

When will you make the decision. I guess when we think about lead time, how far in advance do you have to make the decision of a go or o go in terms you're going to put the control on or you're going to shut the unit down?

The first rate we have to make is December 31st of 2011. And SCR construction does take some time but we have a lot of flexibility as to how we meet that rate. And we're looking at alternate strategies.

Got it, okay. Thank you.

Thank you. Our next question comes from the line of John Kiani from Deutsche Bank. Your line is open.

Good morning. Thanks for the environmental update on Powerton. I was trying to understand that in the context of slide 22 in one of your November 7th presentation where you gave the capital spending estimate for the entire fleet for the emissions control requirements. I guess, in part, that you agreed to in Illinois where it was estimated that it was $450 million for NOX phase two and then phase three was SO2 for a total portfolio cost of $2.2 to $2.9 billion. Can you help us better understand what those figures look like for the whole portfolio relative to the revision you've given - - the upward revision you've given for just the Powerton station.

Well, the 450 is now 513. That's a direct comparison. And the 650-kilowatt you can multiple out with the exception of the shutdowns. Waukegan six, Will County one and two. And compare that to the 2.9.

Got it. Okay. So it would be somewhere a couple hundred million dollars higher than that then. Okay. Got it. And then as far as EMG is concerned in 2009 based on the $0.50 to $0.90 that you provided from a potential expectations range, how show e think about your willingness to contribute additional capital additional capital down into EME if it's running free cash flow negative for periods of time based on the current commodity price environment.

This is Ted. I think we tried to be fairly clear about that in the opening remarks. EMG really does not pay a dividend to EIX and it retains all of its earnings in cash to support its capital requirements and its growth. In this down cycle period, we want to major sure that we're being very careful about how we're managing the cash so that we don't find ourselves sitting with a lot of commitments that we wouldn't have the internal cash generation or financing to meet. So it really remains the same approach that we've always had with EMG. It needs to stand on its own two feet and it needs to get the job done and we look to manage it carefully to ensure that we don't find ourselves caught short on cash.

Okay. Thanks, that's helpful.

I think one point to add there too is we have no debt maturities in the near term and we're sitting on a fair amount of cash we had pulled down on our lines of credit, in fact, back when the banks were having their difficulties. We do have a fair amount of liquidity at this point.

Okay. Thank you.

Thank you. Our next question comes from the line of Dan Eggers with Credit Suisse. Your line is open.

Good morning. Just to clarify a couple of things on EMG. The emissions cost is $90 to $100 million of higher expense. Given the kind of policy NOX and mercury today, we should assume that those are recurring expenses, correct?

Yes.

And then the 45 to 55 lower at Four Corners, et cetera, that is, with the roll off of contracts, that is probably a good baseline expectation as far as reoccurrings is concerned also?.

You didn't mean Four Corners, you meant the Big 4. right?

Yes, Big 4, I'm Sorry.

No problem. We agree.

Those are both going to be ongoing. How are you guys thinking about the timing of the wind, the CapEx plans? I know you have the backlog of turbine commitments. Given the cash generation outlook for EMG, should we assume that instead of happening this year and into next year, that it could take maybe three years on longer to get the wind built as planned.

It's a good question. We have about 940 megawatts of wind turbines on order. And we've been working with the wind turbine manufacturer on the scheduling of those machines.. So we put out some information that showed based on our current expectation of our capital expenditures what those expenditures will be for 2009 and 2010.

One of the big projects we are looking at right now is what we call our Big Sky project in Illinois. And that is one of the projects that we're currently have in the queue and we are trying to decide on the appropriate turbine that we're going to install at that project. The other key consideration too, we want to focus again, and I think Ted mentioned it, is the project financing. A key to developing these project is having a clear view that you can finance these out the back end. It's a combination of all these things.

Are you seeing access to the project finance market right now or does that create another impediment even for you guys?

The market is available but obviously terms and conditions are tougher then they would have been probably six months ago.

If I could jump in for a second, one avenue that we are cautiously optimistic that could open to us is the financing under the new stimulus program where the government is going to step in and depending on how you look at the numbers, the loan program could get up into the hundreds of million dollars of loan guarantees. So that is something we are basically trying to get ourselves in the queue on.

One last question on the environmental CapEx plans. Can you shed a little more light onto where the cost inflation is coming from between commodities and labor and just the fact that we've had a couple more years to get closer to actually going into construction. Are you see further or have room for further relief on the commodities side given this seeming continued falling in the steel, etc. Ron Litzinger will handle that.

Yes, some of the increase is just '06 to '08, normal escalation. Since we give those in real dollars at the time we make the estimate. There was a tremendous runup in steel prices as we were doing the estimates. And steel prices have subsequently run down. That accounts probably for a third or so of the costs. And the labor markets, at least in Illinois, we haven't seen any downward pressure on what you need to pay for craft labor to attract them to you sites at this point.

Very good. Thank you.

You're welcome.

Our next question comes from the line of Hugh Wynne of Sanford Bernstein. Your line is open.

Hi. Question about Homer City. You all had a fairly disappointing quarter there in terms of capacity factor and output and indeed a pretty disappointing year with sales down 2.3 million megawatt hours. Given the gross margin of that plant is maybe $75 million of foregone gross margin. What are you all expecting for 2009 in terms of power output at Homer City. Are these operating issues likely to be put behind you, or do you see continued trouble?

We are trying to return to the lower end of the forced outage range for Homer City. That is our target and goal which is more in the 6% force outage range. We have procured some critical spares for electrical equipment as a result of our issues last year. And we continue to focus on reducing boiler tube leaks.

And the other issue that affected us last year was dispatch as well. And we continue to focus on improving our dispatch. But that is primarily off peak where the margins are low. But we still continue to look at it.

If I were to try to translate that into an expected capacity factor for 2009, should I be thinking once again in terms of 80% or something along the 2007 level or materially below that?

I think you should probably assume load factors which is capacity factor over your variability factor being roughly the same.

Same as 2008?

Yes.

So 85% load factor. Okay. Thank you.

Thank you, Hugh.

Our next question comes from the line of Jonathan Arnold with Merrill Lynch. Your line is open.

Good morning. I apologize I missed part of the call. But one issue I was hoping to ask about in terms of - - how should we think about cash flow and the Mission Group generally. Are you assuming you've upstreaming cash from Mission to the parent? Or are we continuing to work under the revolver at the parent level as you're looking at ways to maintain that equity ratio in the utility. Just trying to think about how these two pieces balance together given what you've told us today.

Jonathan, you missed my big speech.

I'm sorry. I'm sorry. If I've asked something that's in the transcript, just tell me. Just tell me.

This give me an opportunity to repeat an important part. What we said in the opening is that it would be - - -we have never really relied on Edison Mission Group to provide cash to EIX for dividends. It does not pay a regular dividend to EIX. Our dividend at EIX is only really solely supported by Southern California Edison and we currently are targeting 45 to 55% pay out ratio there .

That's really how we manage the cash between the two subsidiaries within the holding company. Within EMG, we have really for the last several years since the restructuring of EMG, been taking the cash that's produced from the coal fleet and the trading activity and using that to fund the buildout in the wind business and the beginnings of our solar business and other capital requirements. It's really the cash flow from operations mostly driven by the coal fleet and trading that go right back into the business. So that's a recirculating pump within

How should we think about the funding of the capital spending at the utility that if we are not to assume that you're upstreaming any cash from Mission.

Well, the utility has been able to really work in pretty much the same way. Its cash generation from operations is being plowed back into building out the infrastructure for reliability and safety within SCE.

So we shouldn't be thinking of any equity financing of the parent in the current as you see things today?

If that ends up being a requirement. But at least as we see it for the foreseeable future, we would be able to cover the build-out in infrastructure with the cash from operations at SCE not requiring equity.

Thank you very much.

Our next question comes from the line of Michael Goldenburg with [Almos] Management.

I wanted to understand this cash flow issue between EMG and the parent a little more. You obviously have a lot of cash at Mission. So the fact that you've chosen to keep it there as opposed to upstream it, is that a managerial choice because based on covenants, as of December 31st, there's plenty of room or do you believe if you were to upstream (inaudible) there would be a covenant issue. Which one is it?

You can call it a managerial I call it a financial or capital stewardship point. We see opportunities within EMG to invest the capital and earn an adequate return based on our cost to capital. As long as that condition exists, then we would expect to continue to reinvest in the business and grow the business at EMG.

If those opportunities cease to exist, would you be able to upstream and still satisfy the covenant?

If those opportunities cease to exists, there's nothing that precludes us from paying dividends from EMG to EIX.

Just as a reminder, we do have substantial capital expenditures planned for 2009. So we have to have cash available planned for 2009 at EMG. So we have to have cash available to meet the requirements for wind turbines that are coming due for this year and 2010 and to the extent that we build out wind parks going forward.

Okay. Understood. Thank you.

All right.

Thank you. Our next question is from the line of Paul Patterson with Glenrock Associates. Your line is open.

Good morning, guys.

Hey, Paul.

Just a follow-up on the CapEx and EME. When you look at the 10-K on page 38, the number seems to be around $416 million for 2010, which obviously doesn't have the environmental stuff for Illinois. I guess what I'm wondering is how should we think about that number and I mean obviously there's some questions what you're going to go there with and what have you. Just for a ballpark idea, is the 416 number we should think about or should we think of a number greater than that? What kind of flavor can you give us for that number?

Paul, think if you look in the footnotes, we tried to provide additional disclosure around the potential capital expenditures. There's footnote A in the disclosures that talks about the numbers John just detailed. If we elect to go ahead and make the environmental upgrades, what the SGRs would cost and what [FGDs] would cost. Again, we want to emphasize we haven't made those decisions. And we're looking at alternative compliance approaches to either minimize or defer a potential large expenditure at Powerton.

I did see the disclosure. I guess what I wasn't clear on was when they would actually take place. In other words, I think I saw the disclosure, I haven't been able to read the whole 10-K obviously. I guess what I'm thinking, when we look at these numbers, how do we think about - - how would the timing go, I guess? Maybe I'm missing the actual disclosure.

We haven't made a decision whether to proceed with the Powerton retrofits or not. And if we were, they would have a two year construction time to meet the NOX deadlines. And they would require about a three year construction time for the FGDs and you can think of it along those lines. But we have not made that decision and we are looking at lower cost alternatives.

Okay. You also mentioned, and I don't know if I completely understood it, and it was Dan Eggers question with respect to steel costs I think it was. About one third - - it sounded to me like the cost might be lower. Could you just elaborate on that?

As you continue to update construction costs, depending on what's happening in the steel market and the labor market, the estimates will move. The third was to give you deterioration of how many the steel impact and the how many the labor impact is.

When was the steel price? Has steel gone down considerably since the estimate? I wasn't clear from the answer, I apologize, I just wasn't clear.

The estimate was done as steel price was finalized as steel prices was falling.

Okay. On FAS 133, I think the impact was $0.10 for 2008.

That's correct.

Now does that reverse out?

There were gains - - there were losses that occurred in 2007. And now those losses have been reversed with this gain so, in effect, they have gone full trip.

Okay, great. Any expectation for 2009 with respect to as the FAS 133?

There are, as we previously disclosed, the Lehman Brother hedge rolls out in 2009 and 2010.

Okay. And how much is that again? How much was that?

$24 million pretax. And that incurs over a two year period.

And that's a positive or a negative?

That's a positive as the loss then is recognized and reverses out.

Okay. And that's in 2009 and 2010?

Correct. And the disclosures show the amount for each year.

Okay. Thanks a lot guys.

Thank you so much and our last question for today comes from the line of Charles [Sharrit] from Credit Suisse. Your line is open.

Very quick question, going back to EMG. Should we think about if you look at the potential 60% reduction in EPS in 2009, should we think of that as an EBITDA number as well? Do you think EBITDA will be down 60% year-over-year?

EBITDA should track earnings but there may be - - when you think about depreciation as you do some of these large wind projects and with the accelerated deprecation associated with them, you may see a little bit disproportionate impact.

Got you. Thank you very much.

You're welcome. And one last question, I think Greg Gordon asked about the earnings from Edison Capital for 2008. Just wanted to provide the numbers here. We've been able to pull them out. They were $0.18 per share during 2008 versus $0.22 in 2007. I think that closed - we didn't have the numbers in front of us and I wanted to pass that along.

Thank you, there are no further questions at this time. I will now turn the call back to Mr. Cunningham for any closing remarks.

Thanks everyone for participating in our conference call today. Please don't hesitate to call us if you have any follow-up questions. Have a good day.

This concludes today's conference call. You may now disconnect.