愛迪生國際 (EIX) 2009 Q2 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Edison International second quarter 2009 financial teleconference. All lines have been placed on mute to prevent background noise. (Operator Instructions) Today's call is being recorded.

I'd like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations. Thank you, Mr. Cunningham. You may begin your conference.

Good morning, everyone. Our principal speakers today will be Ted Craver, Chairman and CEO; and Jim Scilacci, our Chief Financial Officer. Also with us to participate in the Q&A session are other members of the management team.

The presentation that accompanies Jim's financial review together with the earnings press release and our second quarter 10-Q filings are available on our website at www.edisoninvestor.com. During this call we will make forward-looking statements about the 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 fort in other second quarter 10-Q and other SEC filings. We encourage you to read these carefully. The presentation also includes additional information including certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP financial measure. With that, I'll turn call over to Ted Craver.

Thank you, Scott, and good morning, everyone. Due mainly to a consolidated after tax earnings charge of $0.81 per share associated with our global tax settlement with the IRS, we are reporting a second quarter loss of $0.05 per share. Core earnings were $0.78 per share a $0.01 less than last year's second quarter per share results. We are also reaffirming our core earnings guidance range for the year at $2.90 to $3.20 per share.

At the beginning of the year, we identified three major business imperatives to be successful. Financial discipline, superior execution, and developing innovative approaches. I'm going to review several items that we believe represent noteworthy progress on some important milestones under these priorities.

A key goal has been to ensure we have strong liquidity, finalizing the global tax settlement was critical in that it improved our cash position and removed a major uncertainty for investors. The settlement will be a significant positive cash event for EIX in total which was a primary objective for us. Liquidity was enhanced from the first quarter primarily due to the cash infusion from terminating the cross border leases as part of the global tax settlement particularly at SCE. Southern California Edison expects to use these funds to support its large capital investment plan to improve system reliability and customer service.

Another goal for this year was to reduce the near term cash outlays at EMG particularly with regard to its turbine commitments. We are in the process of converting nonbinding letter agreements into definitive agreements with two wind turbine manufacturers which will provide EMG with a form of financing. If executed, these agreements would significantly defer EMG's payments for wind turbines over the next three years. Obtaining project financing at EMG for part of its operating renewables projects was a key objective we identified for you during our last call. The non-re-recourse project financing market has been challenging since last year. But in a sign that that market is beginning to thaw in June, EME completed a $207 million project financing of its interests in the Wilderado, San Juan Mesa and Elk Horn Ridge wind projects. This is significant beyond the obvious immediate benefit to liquidity.

Over the last several years, we have taken the excess free cash flow created by the coal fleet and used it to 100% equity finance the development of EMG's renewables business. Some 25 projects. The project financing of three of those projects at EMGs wind fleet represents the first step to monetizing those assets. About two-thirds of the projects in the wind fleet are still 100% equity financed and therefore available for other project financings in the future. The proceeds from the financings are available for further renewables development.

At SCE we have been closely watching the index calculation under our current cost of capital arrangement. To remind everyone, in September of last year, the commission approved SCEs cost of capital filing which allows for potential annual adjustment in our rate of return if certain interest rate index thresholds are reached. This framework remains in place through 2010. We intend to file a petition to modify this mechanism next week. What we are proposing is that we forego an expected increase in our rate of return in 2010 under the annual adjustment provision, but extend the cost of capital framework for an additional two years to 2012. With the same index annual adjustment provision.

We believe there is value in extending the cost of capital mechanism for an additional two years which provides important stability and predictability for both our customers and for our investors. There was extraordinary interest rate volatility last year and early this year. However, that volatility has moderated dramatically in the last few months, making the index calculation under the cost of capital mechanism look more like an excursion and difficult to interpret. We believe that it is prudent to build in more time to determine the real underlying trend in the cost of capital and our rate of return.

In June 2009 the CPUC approved SCEs program to develop 250 megawatts of solar generating capacity on commercial and industrial rooftops across Southern California, using state of the art photovoltaic technology. The commission's decision also provided that SCE solicit power purchase agreements from independent power producers for an additional 250 megawatts. SCE has begun construction of its second installation of what will eventually be 150 sites. The commercial rooftop solar program with 1 to 2 megawatts per installation connected directly into the distribution system, fills the gap between the much smaller distributed residential rooftop installations and is very large megawatt installations requiring new transmission to be developed.

Regarding EMG's wind and solar programs, in July, we completed construction of the 100 megawatt High Lonesome project in New Mexico, bringing our total portfolio of actual operating wind projects to 1185 megawatts. EMGs development teams are pursuing power purchase agreements to enable the placement of the turbines under our existing turbine commitments. The buildout of our 5000 megawatt pipeline of projects, and future project financings. On the solar side, we continue to push forward the development activities we have underway at 30 potential solar sites in six different southwestern states.

The coal fleet at EMG represents our greatest challenge and the largest uncertainty for investors in EIX. We must develop innovative approaches to several environmental compliance challenges if we are to be successful. If we are to be successful it represents the greatest upside potential for the Company. The EMG team has been working hard to identify less costly more efficient approaches to meet our environmental requirements for NOX and SO2 emissions. Also we have been quite active in efforts to encourage adoption at the national level of fair and reasonable energy policy, particularly climate change and carbon policies which will have a great impact on both EMG and SCE.

Let me update you on the testing and analysis we have been performing at Midwest Generation during the second quarter. Although no decision has yet been made, our preliminary conclusions show that installation of selective non-catalytic NOX removal technologies in lieu of selective catalytic technologies hold promising possibilities to meet the NOX portion of our Illinois compliance requirements with significant cost savings. Testing of flew gas desulfurization equipment based on dry sodium sorbent injection technology has demonstrated significant reductions in SO2, but we want to conduct further analysis and evaluation before we finally decide on the best path to comply with SO2 emission requirements. We want to be sure that the technologies we embrace are sustainable and durable from an engineering, economic, and regulatory standpoint.

Regarding climate change, I want to reinforce that Edison International supports efforts to achieve responsible and fair legislation. It is critical for the country and the electric power industry to obtain certainty and predictability on how we are going to deal with this critical challenge. Huge investments need to be made in electric infrastructure to move the country to a more efficient, reliable, and sustainable electric system. We need greater certainly and predictability in order to make those massive investments and provide a reliable and affordable electric service to our customers. We believe the American Clean Energy and Security Act of 2009 also known as the Waxman Markey bill which passed the House can do this. In particular, we support the feature of the bill that provides emissions allocations to local distribution companies and merchant coal generators during a transition period so as to mitigate economic hardship for customers and businesses as the country moves towards a much reduced carbon emissions profile.

In sum, I believe so far this year that Edison International has made substantial progress on a number of fronts. At Southern California Edison we have a strong utility executing the largest capital investment program in its history while maintaining its leadership position in renewable programs, energy efficiency, electric transportation and smart grid technologies. At Edison Mission Group, we believe there's significant unrecognized opportunity to create value by adroitly managing the operating, environmental, and strategic challenges of the merchant coal fleet while continuing to develop its expanded renewables business. In short, I believe Edison International is positioned to achieve its growth potential and provide sustained value to its shareholders. With that, I'd like to turn it over to Jim Scilacci.

Thank you, Ted, and good morning, everyone. Today I will discuss the following items. Second quarter and year to date financial results, operating performance and hedge position of our merchant coal fleet. Earnings and expected cash impacts of our global settlement with the Internal Revenue Service and related termination of our cross border leases, our liquidity position, and updated earnings guidance.

The recording of the global tax settlement and termination of caps cross border leases adds a level of complexity to the financial statements. As a result, I think it would be helpful to step back and provide a high level overview. Last March when we provided initial 2009 guidance, we said that lower expected core earnings at Midwest, Gen, Edison Capital and the big four projects would offset earnings growth at SCE and cause EIS's earnings below 2008. As I will discuss in more detail later, the trend in earnings as set forth last March is occurring.

Now for the overview. SCE is realizing higher earnings from its growing rate base authorized in the 2009 general rate case. Utility is still ramping up spending to authorized levels, so we are seeing timing differences temporarily affect earnings. We would expect that spending will catch up with authorized levels as we progress through the year. Through June 30, capital expenditures are lower than our base case estimate, but we would also expect to catch up a significant portion of the underspend by year end 2009.

Final prices in the (inaudible) market are significantly below last year driven by a number of factors, including lower natural gas prices and reduced demand. In addition, our merchant coal fleet is experiencing higher environmental costs given new requirements this year for annual NOX allowances and mercury control. E&E has worked hard to improve unit availability at Midwest Gen to (inaudible) to capture gross margin as well as reduce spending and outage related costs to partially offset lower gross margins. Through June 30, EMMCs trading revenues are $27 million pretax compared to $92 million last year. Overall, we are seeing lower transmission congestion revenues driven by lower electrical loads and market prices. We are also seeing lower earnings at the big four projects, primarily from lower natural gas prices affecting electricity and steam revenues under their current contracts.

Lastly, Edison capital's earnings are lower from terminating the cross border leases, selling lease interest in the Midland cogeneration venture and the Beaver Valley nuclear plants and the continuing rolloff of remaining investments in the global infrastructure fund. With this overview, I will now turn to some of the more important details.

As shown on page two for the second quarter of 2009, EIX reported a GAAP loss of $0.05 per share compared to an earnings of $0.79 in the same period last year. Recognition of global tax settlement and related termination of the cross border leases at Ed Cap represent $0.81 of the earnings difference. Later in my presentation, I will take you through the earnings and cash impacts of the global settlement. Setting aside the global tax settlement, lease terminations, and other noncore items IEX's core earnings came in at $0.78 in the second quarter or $0.01 lower than second quarter of 2008. As shown on page three of the deck, SCE earned $0.61 per share during the second quarter of 2009 compared to $0.48 last year.

Earnings increase is primarily driven by higher operating income authorized from our 2009 general rate case decision included in the higher operating income is $0.06 of timing differences as SCE continues to ramp up O&M spending to CPUC authorized levels. EMG earned $0.19 during the second quarter 2009 compared to $0.34 last year. The primary changes are lower earnings at Midwest Gen, $0.07. EMMT, $0.06, Ed Cap, $0.06 and the big four projects, $0.03, which together more than offset the increase in earnings at Homer City, $0.11. On a quarter over quarter basis, FAS 133 unrealized gains are $0.06 per share from the non-qualifying hedge contracts and ineffective portion of cash flow hedges. During the second quarter 2009, Ed Cap also sold its lease interest in Midland cogeneration venture for a gain of $0.06. In the second quarter of 2008, Ed Cap also had a $0.07 gain from the sale of its lease interest in Beaver Valley. Both of these are included in core earnings.

With the termination of cross border leases, the Midland cogeneration venture, Ed Caps investment portfolio has substantially rolled off. At June 30, the book value of Ed Caps remaining gross investment in leveraged leases, global infrastructure funds and affordable housing is about $200 million. Parent company core losses are slightly lower than last year after adjusting for the impact of the global settlement. Historic for the year to date performance is similar to the second quarter.

Turning to the page for, you can see that Edison International reported GAAP earnings of $0.72 per share for the first six months ending June 30, compared to $1.70 per share for the same period last year. Excluding the impacts of the overall tax settlement and discontinued operations, core earnings for the first six months of 2009 were $1.58 per share compared to $1.72 in the same period in 2008.

Details for the year to date core earnings are shown on page five. At EIX's operating companies, SCE earned $1.25 or $0.31 ahead of last year. EMG earned $0.37 per share compared to $0.84 last year and the parent company core loss was $0.04 compared to $0.06 last year. The primary factors in these changes are similar to the quarterly explanations.

Pages six and seven provide key operating stats for Midwest Generation and Homer City. These statistics tell a story of improving fleet availability and lower forced outage rates. EMEs management has focused considerable time and funds to address elevated levels of boiler tube leaks and to improve performance of critical equipment by increasing spare part inventories and maintenance of critical equipment. These efforts are now showing in overall improved operating performance.

Turning now to page eight, you can see Midwest Generation's and Homer City's capacity hedges as of June 30th. We have updated the format of this page to better reflect the adjustments to net capacity positions that occur periodically. We also updated the chart to reflect the reflect the recent PJM capacity market auction for the 2012, 2013 period. The clearing price for the rest of market region where Midwest Generation is down substantially from last year primarily from the impacts of the demand site management resources. Homer City is located outside of market region and had a clearing price above the previous year.

On page nine, we provide Midwest Generation energy and coal hedges. Our hedge position changed very little during the quarter but subsequent to June 30, Midwest Generation entered into an agreement to purchase significant quantities of coal for deliveries in 2010, '11, and '12. These new contracts bring our total coal hedges at Midwest Generation to 17.1 million tons in 2010. And 9.8 million tons in 2011. And 9.8 million tons in 2012. And on page 10 provides a summary of the earnings and cash impact of the global tax settlement. Overall, the global settlement is very complex, covering over 100 disputes and issues and claims dating as far back as 1986. Last quarter we gave you expected earnings ranges from the global settlement and termination of the cross border leases and the second quarter financials we now show specific earnings and cash impacts for SCE, Edison Capital, and EIX holding company plus all other subsidiaries.

On a net, net, net basis, EIX recorded a consolidated aftertax charge of $274 million or $0.85 per share through the second quarter of 2009 for the global settlement. The majority of the charge was recorded in the second quarter but we did take an $11 million after tax charge during the first quarter for terminating two of Edison Capital's smaller cross border leases.

On page 10 is an overview of the non-core earnings impact by Company. At SCE we recorded a $300 million after tax benefit primarily related to estimated federal and state tax timing differences and related interest income on certain significant permanent claims. At Edison Capital, results include a $628 million after tax charge from terminating these cross border leases and impacts of the global settlement. As the parent company and other EIX affiliates results include a $54 million after tax benefit primarily from recording certain state tax benefits.

Moving to a lower portion of page 10, the estimated consolidated cash benefits from the global settlement and termination of the cross border leases is $380 million over time from a high level perspective termination of the Edison Capital cross border leases and receipt of the associated collateral provided $1.385 billion. These funds are the primary source of cash for paying EIX tax obligations under the global settlement. Because of affirmative claims at SCE and timing of tax years, Edison Capital flowed cash under the tax allocation premiums to EIX, a portion of the proceeds then were paid to the IRS and state tax authorities and significant amounts flowed to SCE based on its affirmative claims and timing of the tax payments. However, as we finalize open tax years, funds will flow from SCE and Edison Capital to EIX and ultimately the state tax authorities as shown on the chart.

The chart shows a net cash benefit of $640 million at SCE which will occur over the next few years. This cash arises from a couple of primary sources including refunds and associated interest income on income taxes paid to the IRS that were never included in customer rates, refunds and associated interest from long ago periods that are closed for rate making, and thirdly, return on prior tax deposits. We will use this cash to help fund SCEs construction program. The settlement also involves tax timing differences which will increase deferred taxes, lowering rate base and related revenues in future years. The lower rate bass is incorporated within the range of estimates as shown on page 17 of the investor materials.

The numbers booked for the global settlements reflect our best estimates. We are now in the process of addressing the impacts of the IRS settlement with state tax authorities, primarily the California Franchise Tax Board. Final determination of the interest due on the global settlement and state tax issues will take time. And if there are any adjustments to our estimates, they will flow through noncore earnings.

The global settlement affects cash and liquidity in our businesses. Page11 provides the overview of liquidity. As you can see during the second quarter, SCE substantially paid down its short term borrowings under its credit facility. EME and Midwest Generation continue to hold significant cash from previous draws under their lines. We have now broken out Edison Capital separately to show the impacts of the global settlement. As you are aware, EMEs credit ratings were recently downgraded by both Moody's and S&P. The rating agencies raised a number of concerns including duration of the current economic downturn, its impact on the overall market and natural gas prices and the coal fleet environmental capital and renewable growth programs. However, as Ted mentioned in his comments, we are making progress on some key issues that affect EMEs future commitments, liquidity and financial metrics.

As Ted went through first in the third quarter we expect to record significant deferrals in our reinterment commitments. Next, in June, we completed the first non recourse financing raising $207 million from a consortium of largely foreign banks to provide initial leverage for our wind fleet. Financing also supports the funds flow available for interest ratio which is reported quarterly to the unused banks as part of our required covenant calculations. As of June 30, the ratio was 2.22 compared to 1.59 last quarter.

Our cash flow and credit metrics may also will aided in future -- from future tax benefits for projects placed in service this year. EME has initially planned to use income tax credits or ITCs for it's High Lonesome project and Goat Wind project. This provides immediate cash benefits in the future while the earnings benefits are recorded over time under the deferral accounting method. We still have the option to pursue cash grants in lieu of credits as we evaluate the regulations that were recently released.

The final topic in our 2009 earnings guidance on page 12. This morning we updated our 2009 GAAP earnings guidance to reflect the year to date earnings impact of the Edison Capital lease termination and IRS global settlement. Together with year to date losses from discontinued operations. Included in noncore items is a $0.14 per share gain to reflect the transfer of SCEs Mountain View power plant effective July 1, 2009. Excluding non-core Excluding non-core items, we have reaffirmed our core earnings guidance at the prior range of $2.90 to $3.20 per share with a midpoint of $3.05. As a reminder the summer months are important from an earnings perspective for both EMG and SCE. We expect the $0.12 and year to date owning of timing differences at SCE to reverse during this period. That concludes the second quarter review. Operator, we'll now open it up for Q&A.

(Operator Instructions) Our first question comes from Hugh Wynne of Sanford Bernstein. Sir, your line is open.

Good morning. I just wanted to ask some operational questions regarding Midwest Generation. The marked improvement in availability at Homer City which had a big impact on earnings, how best to think about that in future? Have we reached a higher level of availability due to these higher spare parts inventories and preventive maintenance or is availability more likely at Homer City to fluctuate up and down as problems recur with the boiler tubes?

This is Jim Scilacci. I'll give you initial comments and then throw it over to Ron Litzinger for additional details. I would tell you that in 2008 the level of availability was down substantially. I think it's well below what we would expect from that plant going forward. And because we focused very keenly over the last couple years on reducing boiler tube leaks and that was the major part of the difference that we see now that the tube leaks are down and the focus on the critical spare parts is also helping. I'll stop there and throw it over to Ron if you want to add some further details.

Tube leaks were focused primarily on doing better inspections during our planned outages and doing preventive type replacements in advance. That's what we think is causing the uptick. There are some components within the boilers that still require replacement that we're scheduling in future years. We do try and maintain our forced outage rates within a range. We've gotten from the low end of the range to the upper end of the range. And our intent with our current improvement efforts is to try to keep it in the upper end of the range.

Great. Thank you. I also wanted to ask about the load factor at Midwest Generation. It seems like you had a modest improvement going from the winter to the spring months which one might not have expected given that you've looped into a slower period of the year. Is that reflective of any discernible improvement trend or improvement in demand or just a coincidence?

I'll let Ron handle that.

In the second quarter, we saw nuclear being the market clearing price during the off-peak hours. It goes down initially in the first part of the second quarter. It did come back towards the end of the quarter but that was the primary driver.

Of the higher load factor?

The load factor came up in the second quarter because we were not -- we were having less--.

You were competing less--?

We had less off peak hours at negative margins.

And last thing, the environmental technologies that you guys are exploring, is it possible to provide three or four more sentences there in terms of what those technologies are and what the prospects seem to be?

On the NOX side we're focused primarily on the NCR, the non-catalytic reduction as opposed to the more expensive catalytic reduction. We think that we can comply with all of the rates using that technology across the fleet and the other thing that we've done is combustion tuning on our units to make that possible. And then on the SO2 side we're using sodium solvent as a injection technology to remove the SO2. It's a technology that has been around for 30 or 40 years sort of fell by the wayside but has come into much more focus recently, especially for folks that operate units with low sulfur coal. It seems to be a better economic solution for those types of units.

Thanks very much for the detailed answers. I appreciate that.

Thank you.

Your next question comes from Kit Konolige, Soleil, your line is open.

Hi, guys.

Good morning, Kit.

Can you give us a little insight into, I know broadly speaking at least when I speak broadly to people that I think know even less than me, I say that EMMT is affected by congestion. And we've heard from a number of companies that congestion in that region is way down. And I assume I think I've been told that that congestion is correlated with economic activity. With the amount of electricity going there obviously. So is -- can you give us some sense of not just congestion in EMMT but EMMT overall and where you're running certainly at the low end of what so far but the third quarter is big of what you had indicated? Can you give us some sense of how EMMT is approaching things? And what, maybe not only this year, but next year might look?

This is Jim Scilacci. In the trading business, we like to think about EMMT being a niche business and its principal products are capacity congestion. The way this typically works in these auctions for the ISOs that we participate in mostly in the east is that they have quarterly or annual auctions. So a lot of the auctions that occurred occurred when prices were much higher. When you bought the original congestion contracts. And you pay a fixed amount of money and you get the right to receive the congestion revenues over time. And to the extent that you participate in those auctions last year when prices were higher, you paid more for those contracts and prices have now declined, so you're not making as much money as you historically have done.

Now you go back and reset the bar for the congestion contracts, our FTRs your CRs, whatever that is and now you pay a lot less for them and hopefully, you'll make money going forward and that remains to be seen. We typically do these auctions in the late spring of the year, and for now they have been reset. To be able to predict going forward, it actually has happened, I think it's a tough thing to do. There are a lot of factors that go into that. But the most important part is that what you pay for congestion is a lot less than you did a year ago. So I'll stop there and throw it over to Ron and see if he wants to add anything further.

Not really much more to add. As we went into this year, we expected lower congestion, given the economic recession. And lower demand produces the volume of congestion and then lower power prices depending on what fuel is clearing the markets at the various hubs can decrease the spreads between the hubs and as Jim mentioned, that reduced the earnings we had on, congestion rights that we had bought in previous auctions, the annual auctions within PJM, occurred at the late end of the second quarter and we will see how our results are going forward now that we have purchased those rights with these economics taken into account.

This is Ted Craver. I want to just add one other piece. This whole reason for having EMMT and that activity is fundamentally to manage our merchant coal exposures. And that's why we acquired Citizens Power some years ago. And that really remains its fundamental job. Secondarily, as we manage that merchant exposure, we from time to time see opportunity for additional profit through proprietary trading, but that is very much a secondary objective for that group. Again, its primary purchase is to manage the merchant exposures from the assets.

Well, I understand that. But it does get reported as earnings. So obviously, people pay attention to it that way. How about the, if there's less congestion and less crowding on the wires so you're losing money compared to a more robust marketplace, would be providing, does that also affect but hopefully in a more positive way your basis to the (inaudible?

Our basis at Homer City that the Homer City units experienced is down in comparison to the Homer City to the PJM West hub is reduced.

Okay, great. Okay. Thank you.

Thank you, Kit.

Your next question comes from Greg Gordon of Morgan Stanley. Sir, your line is open.

Just to review what you explained on the tax settlement. Did you say the $640 million of cash flows back to SCE over the next two years or did you say over the next few years? It wasn't clear.

Okay. Right now if you go to the chart on page 10, on the SCE column, the money flows into California Edison, so we're at the 875 level as of June 30, and over the next few years, money will flow out, the 235 as additional tax payments are made to the taxing authorities and will end up at $640 million.

So you said a few, not two. I just wasn't clear on that.

Over the next few years is what I said.

And then you indicated that this cash is related to prior rate making years that have been closed for rate making purposes or tax items that were not in, essentially in customer bills in the first place, correct?

Correct. And refunds.

Great. At Edison Capital you said that the money flows out over the next few years. Over what time frame is that $765 million flowing out?

It's principally, the same time frame.

Same time frame. Okay. Now I looked at your rate base forecast and your CapEx forecast and today's presentation versus your business outlook indication for March and the rate base numbers are lower as you go out through time. Even though CapEx is modestly higher. I'm assuming that's a function of taking into account the deferred tax impact of the settlement?

There are some other minor changes that go on. There's both plus and minus what goes up we've now reflected the solar panel program, so rooftop program at the 250 megawatt level based on the proposed decision as we last talked. And we've also adjusted downward for DDB2 because what's happened with DDB2, we dropped off the Arizona portion of it. And that had an impact and I think there was also a timing change associated with DDB2.

But I'm trying to get out to 2013, the numbers are substantively the same but they're lower in the early years by in '11 by about $700 million of high case, correct?

You've seen a shifting out in time of some of the transmission related activities.

Shifting to the ITC commentary. You said there were two wind projects where you would be taking ITC treatment. You would not book the earnings associated with bringing in that upfront cash, rather I guess your accountants have told you you can book that earnings over time?

Go ahead. Finish your question. I'm sorry.

Other companies that are in the wind power business have indicated they'd be taking those earnings up front. Can you differentiate the accounting treatments you're intending to use versus the ones we've heard other people use?

Just so I'm clear on what we have done so far so we can clarify. What we've done is initially through end of the second quarter, elected the ITC for the two projects that completed construction. We still have the option to elect a cash grant. We did not elect a cash grant initially because we didn't know what the rules were going to be. It's likely that we will move to the cash ramp but we're still looking at that. There are two accounting methods that you can use, a flow through or a deferral. We have elected for the ITC and we will likely use it if we go to a cash grant a deferral method because the Company has consistently used that approach. It's an accounting policy choice and we think for consistency it's best to use the deferral method for our Company.

Basically flow through equals book to the earnings as the cash comes in and deferral means book the earnings over time as you generate megawatt hours?

From a cash perspective, no difference. From an earnings perspective flow through has a little higher upfront earnings.

I understand. Are you now basically implying that you'll be at the low end of guidance range for EMMT? You've only earned $27 million for the first half?

You can see we're actually riding at the actual earnings at the lower end. I think we've updated the guidance chart in our deck so we've lowered the range from I think we initially had--?

$150 million and we've updated 50 million to 100 million.

So that's 50 million to 100 million. So we did drop the top.

And if I can add, Greg, we also updated to reflect also the benefit from the MPV sale in EMG which is not in our original guidance.

Okay, thank you, guys.

Your next question comes from Michael Lapides from Goldman Sachs. Your line is open.

Hey, guys, on the hedging that you've done and the procurement of coal that you've done at Midwest Generation. Can you talk about the matching of power and coal procurement or your gas hedging and coal procurement?

Generally, we do like to keep our hedges to the extend the input so that's coal, coal transportation, emissions, linked up with forward sales. We've had a view consistently over the last couple of quarters that we didn't want to lock in our coal position because we felt prices were going to come down. You can see that we've stepped up now, filled in the significant position for the next three years. We haven't changed as of now our position in terms of hedging forward. We're watching the market and constantly evaluating what our position should be based on the current prices.

Got it. And by hedging the coal but not hedging the power you are effectively making a quasi dark spread bet here?

To a certain extent we've had that view for some quarters now because we felt strongly that coal was going to come down. That's occurred. We're focused heavily now on watching the forward market in terms of where it might go. And we haven't made any decisions yet in terms of hedging forward.

And did you match -- with this coal, did you match it with rail as well? And are those new rail contracts? Or were those existing rail contracts that got extended?

It's the latter, it's existing. We have our rail transportation is locked for Powder River Basin or Midwest Gen through the end of 2011.

You haven't extended that out?

We have not gone beyond 2011.

Your next question comes from Brian Chin of Citigroup. Your line is open.

Piggybacking on Mike's question on the gas forward futures contracts. Just to be clear, you guys sold forward gas? Is that right? For '09 and '10.

We sold forward gas in the second quarter of '09 his year and then sold some gas forward as well in 2010 though we intend to convert that over to power.

Right so when I think about EMMT and the core EPS variance last year versus this year, and it was negative year-over-year, what I read from that is you guys probably made some money mark to market on selling core gas in the second quarter but it was more than offset by FTRs and CRRs that you were referencing earlier in Kit's question? Is that right?

Go ahead. (Inaudible).

Those transactions took place within the books of the assets. So those were hedges within the asset but not proprietary trade.

Okay. And then I'm sorry were you about to say something?

I just wanted to reemphasize. EMMT, the numbers that we talked about, the $27 million through the year to date period only reflects the proprietary trading that went on which is principally the FTR activity that we do. The actual hedging, the gas hedging we talked about or the power hedging coal flows through either Midwest Gen or Homer City books, so we don't mix that up.

Got it, got it. If you are selling forward gas to maintain a heat wave upside position am I right in thinking that you believe that the current queue of wind fire power products in the Midwest is already adequately reflected in forward heat rates in the Midwest? Is that right?

This is Jim Scilacci again, Brian. Our view has been we haven't seen significant wind penetration in our market in PJM and it will be sometime before I think there's much of an impact. And our hedges that we're talking about here are really for 2009 and (inaudible) for 2010 and I just don't think that's significant enough to affect that position.

Thanks very much.

Your next question can from Clark Orsky of State Street Global.

Just wanted to ask about the agreements to defer wind turbines. Do you still have a cancellation right where you can just cancel them outright in the future?

This is Jim Scilacci. Each contract is different depending upon where they're assigned. There are escalation charges that go into these contracts. We do have the ability on one of the tranches to cancel our position. But we would forego our deposit which is a significant amount of money. It goes in the overall calculus and how we're thinking about how we treat these turbines.

Let me back up on that. There are three separate tranches of wind turbines, so I don't confuse you on this, and we are evaluating each of those tranches differently. And in our disclosures that we have and as Ted mentioned, in two of the tranches, we've entered into preliminary agreements and working to turn in the final to defer payments over time. We are still working with a third vendor on what we're going to do and we haven't reached a conclusion on that yet.

Okay. That's helpful. I guess the other question I had was on the environmental work you're doing. Is there a time frame when you have to decide what you're going to do? And can you also quantify at some level what kind of savings you think you could realize versus a more traditional retrofit?

Clark, the way we think about this we're still going through a process of testing the alternative compliance approach. The time frames that are important that we are focused on is there are dates out in the future when we need to meet first NOX to at the end of 2011, 2012. And then I think it's January 2012 and SOX the following year. And if the SOX starts at a level then steps down over time. So we're most focused right now on solving the NOX issue and trying to determine what to do with SO2. And part of the decision we're going through and it's going to take some time, we're trying to work and test all these different approaches and how they work with our different boilers at Midwest Gen, and we're also to a certain degree trading off capital expenditures for potentially higher O&M expenditures because you're using chemicals to get the NOX and SOX and remove it from the footprint. So it's a calculation and an engineering study that's really being done. And it's going to take some time. I think we're going to need to work through it over a longer period of time, at least through this year, and we'll be updating it quarterly as we go along.

Okay. Any number you can put on it as to what -- assuming you're successful with these approaches what you might save?

What I tried to give you the all the elements that go into it. We're not prepared to really suggest numbers. Let us finish the testing and we will update numbers later.

Okay. I guess just the last question on -- your still have the revolvers drawn. Just wondering what the thinking is there. The capital markets have kind of opened up and you guys seem very cautious. Just wondering what the thought is there?

I think it's been at Midwest Gen and EME because we've been in the a cash conservation mode that we've retained our drawings. It's always an option for us to pay it down. And for us too, when we were downgraded it raised the cost to a certain degree for both EME and Midwest Gen. Our comfort level is higher by retaining the cash.

So for the foreseeable future you're going to maintain that position?

We could reevaluate it. I don't know about foreseeable future. We're comfortable now where we are having that cash in the balance sheet.

Okay. Thanks a lot.

You're welcome.

Your final question comes from Lasan Johong of RBC Capital Markets. Your line is open.

Thank you. Is there a way to quantify the positive benefits of large quantities of wind coming online for EMG and EMMT? I'm assuming your capacity payments will go through the roof, ancillary services payments will also go up. Volatility of power prices will also go up. And I'm assuming the decreased heat rates from wind coming online would be partially offset with actually increasing rates during on peak hours as you have to set aside a bunch of backup generation to cover the wind intermittency. Is there anyway to quantify all of that?

That's a good question. Southern California Edison spends an enormous amount of time thinking about what the impacts are of going from a 20% renewable penetration to the Legislature is currently thinking about 33%. By adding all that intermittent resources on the system, clearly it's going to add a need for backup supplies. Fast start, gas generation, upgrades to the transmission system and a host of other issues.

We are working on that now with the independent system operators here in California to try to get our minds around what those costs might be. Clearly, you're going to see some hours, especially in the spring months and the off-peak hours where the prices could get pretty low and potentially negative as you have an abundance of renewable power and you have to shut everything down in order to keep the system in balance. At this point in time I think it's not to the point where we have numbers. And there's still many studies being conducted to try to get your arms around what the potential impacts would be. I think from an internal (inaudible) perspective we're just not there yet in terms of the penetration of renewable power. To give you a good sense on what that might be. Clearly, if you have more renewable power it could drive down off peak prices. But Midwest Gen is a numeric system and we make our money by being available on peak. That's why availability is so key for this fleet.

Exactly. So what you're telling me is that it's still not discernible what the impact will be?

That's correct. It's going to take quite a bit of time and study to come up with better numbers.

Any chance you guys can give us a price at which you locked in the coal?

I'm sorry. We don't provide that.

I didn't think so. I had to try.

Good question.

Just one other question on the guidance. Just from my perspective, it seems like the top end of the guidance is a little low. So I'm kind of wondering what it would take to bust the 320? From my perspective it doesn't seem like it will take very much.

I think we're comfortable with what we've set today. We've reaffirmed the guidance. I think I'll just keep it right there. I'm assuming there's a number of factors that could go on, but I don't want to speculate beyond what we've already said.

Okay. Thank you very much.

You're welcome. Thank you. Operator?

Thank you. At this time I'll turn it back to Mr. Cunningham for any additional or closing remarks.

Thanks everyone, for participating in the call. If you have any follow-up questions, please don't hesitate to call us. Thanks, bye, bye.

Thank you, that does conclude today's conference. Thank you for participating. You may disconnect at this time.