愛迪生國際 (EIX) 2010 Q2 法說會逐字稿

Good morning, my name is Barb and I will be your conference operator today. At this time, I would like to welcome everyone to the Edison International Second Quarter 2010 Financial Teleconference. (Operator Instructions)

I would now like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations

Thank you, good morning, everyone. Our principal speakers will be Chairman and CEO, Ted Craver, and Chief Financial Officer, Jim Scilacci. Also, with us 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 10Q 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 forth in 10Q and other SEC filings. We encourage you to read these carefully.

Presentation also include additional information including certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. When we get to the Q&A, please limit yourself to one question and one follow-up. If you have further question, please return to the queue. We would like to give as many of you as possible an opportunity to ask a question.

I'll turn the call over to Ted.

Thank you, Scott, and good morning, everyone. Today, Edison International reported second quarter earnings of $1.05 per share with core earnings of $0.62 per share. Primarily some timing-related events depressed earnings in the first half, particularly the second quarter that Edison mission grew.

We moved around several planned outages, in the coal-fleet concentrating them into the second quarter this year, meaning plants weren't selling electricity and had higher-than-normal maintenance expenses. Normalizing for these timing-related items. Our companies are performing well. In fact, they're performing in line or better than we anticipated.

We are reaffirming our core earnings guidance for the year $3.15 to $3.45 per share. And at this point, it looks more likely we will be toward the higher end of our range.

As we explained in the past, the summer is very important for our commodity-sensitive businesses so we'll reassess our earnings guidance range next quarter after the summer months are completed. I want to highlight several developments that should be important to our investors. An important milestone in the second quarter was the California state franchise tax board's acceptance of the tax positions from last year's global tax settlement with the IRS. Jim Scilacci will cover this more thoroughly in his remarks, but earnings, cash, and equity are positively affected by this development, which helps us more comfortably meet the capital requirements of our infrastructure investment program. Last month, Southern California Edison installed its one millionth smart meter, a key milestone in our Edison smart connect program.

By the end of 2012, we will have installed five million smart meters. We spent years researching technology, systems, and devices to ensure the smart meters would provide a full range of customer benefits before making our final investment decision. We look forward to providing all of our customers the valuable features smart meters provide, enabling customers to closely monitor and manage their electricity usage.

The $1.6 billion program is just one component in our focused strategy to expand and renew essential distribution and transmission grids throughout the Southern California Edison service territory. On July 19, Southern California Edison submitted notice of intent to file the utility's 2012-2014 general rate case application. The notice is essentially a draft of the general rate case application and supporting testimony expected to be filed in November of this year. And enables the commission staff to review the content in advance. In the general rate case proceeding, SEC seeks authorization to collect revenues for operations and maintenance expenses as well as capital expenditures representing approximately 40% of the total revenues it will need to service customers. The remaining 60% covers across power plant fuel and purchase power and is handled in other regulatory proceedings. The GRC regulatory process will likely conclude in late 2011 with a decision by the California public utilities commission that would be implemented and customer rates January 1, 2012.

We have summarized the key elements of the note of intent and expected timeline in the appendix to our presentation.

As you know, we have been engaged in an extensive analysis of the environmental retrofit decisions before us at Edison Mission Group. The challenge group has been to find a path that meets emissions compliance policies and provides enough flexibility to be commercially successful.

We have been evaluating several technologies and approaches while anticipating future regulatory scenarios. The three objects are, number one, meet the environmental requirements with the least amount of capital expenditure. Two, don't expend capital for environmental retrofits unless we are comfortable that we can recover the cost and have the liquidity to fund the expenditures. And three, ensure our compliance approach as regulatorily and legally durable. As a reminder, we have already installed activated carbon injection systems on all our Illinois coal units to achieve significant mercury reductions.

On our Knox reduction requirements, we have now received all required permits from the Illinois EPA to construct selective non-catalytic reduction equipment and are on track to complete this $158 million program next year.

During this quarter, work also continued on the possible use of blue gas desulfurization technology, using dry scrubbing with sodium-based sorbents, as a method to comply with SO2 Illinois combined pollutant standard agreement.

Using this approach would also likely involve Midwest generation spending money--to upgrade particular removal systems as well.

We haven't made any final decisions about which specific units may or may not be retrofitted and may not finalize those decisions for some time. However, we estimate if we were to use this method of SO2 removal and we were to retrofit all Illinois units, then the cost in 2010 dollars would be approximately $1.2 billion.

Some minor portion of these expenditures would start to be incurred late this year for preliminary engineering and permitting. The total expenditure would be spread out through 2018. Although we don't need to make final decisions at this time, we do plan to seek some initial construction permits later this year.

We have also compared the emissions rates we agreed with the Illinois EPA in our 2006 agreement with the clean air transport rule that the US EPA recently proposed.

Of course all of this is in the very early stages but if the EPA-preferred option is adopted, we believe it provides adequate allowance allocations based on projected emissions using the emissions rate required under our Illinois agreement. I must repeat this is preliminary work. EMG has worked on it environmental compliance methodology for some time and we believe it will provide a path forward, subject to permit review approval by the EPA. Our final retrofit decisions on individual units, and applicable market and other conditions.

Turning to Homer City, the timing for additional SO2 environmental controls has been uncertain for some time. The EPA transport rule may provide clarity if the allowance allocations are reduced per the proposed rule. As these requirements are clarified, EMG will assess possible future and environmental capital spending projects.

Our renewable program remains part of our long-term strategic focus to diversify EMG's generation portfolio. We remain focused on the developing win projects to utilize remaining [turbine] commitments. We've narrowed the development pipeline this quarter from around 4,000 megawatts to around 3400 megawatts. This is because several projects move from the pipeline into construction or into operation and some others have been determined to no longer be sufficiently probable and no new potential projects have been added to the pipeline.

There is significant value to be realize in developing our win portfolio. To realize that value, we will continue to balance the need for capital in our development activity with the need for capital in our environmental compliance program and EMG's overall liquidity picture. In the near term, as we implement our environmental compliance program, we expect to seek third-party project-level debt and equity financing for our renewables program. Edison International has as it's primary responsibility to provide safe, reliable, and affordable electric service to our customers. The better we do that, the more value we create for our shareholders. We think we have significant visible growth in our utility in Southern California Edison. Long-term success in this business has been determined by our ability to serve the public needs in a balanced way. Currently, public policy desires as well reliability requirements are driving our growth rate as we are called upon to introduce more technology into the system and add a high level of renewable resources.

We will continue to strive to meet those needs, balanced with the pace that allows us to successfully and safely execute the work and maintain acceptable, affordable customer rates. We have challenges at Edison Mission Group. We are working through them. We are prepared to commit the effort because from what we see, there are some significant opportunities to unlock the equity value from EMG that is currently not reflected in our Edison international stock. Indeed it looks like a strong upside option. I would like to turn the call over to Jim Scilacci.

Thank you, Ted. Good morning, everybody. Today I will discuss our second quarter and year-to-date financial results. The state of California's acceptance of the tax position finalizing last year's global tax settlement with the IRS, operating performance hedge position and capacity market status for the EMG's merchant coal fleet. Our wind, and overall capital spending program, and reaffirmed 2010 core earnings guidance.

Please turn to page two of the presentation. As Ted already said, EIX's core earnings were $0.62 per share compared to $0.78 last year. As you can see on page two, SCE's earnings are up consistent with our annual guidance. EMG's earnings are down, driven by increase planned maintenance activities at our emerging coal fleet.

There are significant non-core activities in both the second quarter of this year and last. Last year we recorded global tax settlement as Ted has already mentioned, which include certain assumptions regarding the state tax impacts. We have reflected the impact of the global settlement, which franchise tax--more on this later.

On page three of the presentation, you'll see that SCE's core earnings increased by $0.14 per share. There are two principal factors -- first, lower income taxes and second, higher authorized revenues to support rate-based growth.

The lower income taxes largely reflect $0.12 per share timing benefit to both earnings and cash from an IRS-approved method change for removal costs associated with SCE's infrastructure replacement program. Comparisons with last year's second quarter are also impacted by the timing of our general rate case decision in March of last year.

As we saw in the first quarter of 2010 results, our operating costs this year are in line with general rate case plan while last year we were ramping up our spending and following the March 2009 rate case decision.

We indicated in last year's call that this was a second-quarter timing benefit of $0.06 per share, which would not be repeated this year. Turning to page four, the principal driver of the second quarter core loss of $0.10 per share at EMG is $0.29 decline in coal fleet results. As Ted mentioned, our coal fleet performance was impacted by substantially completing all scheduled plant maintenance during the second quarter.

EMG also shifted four plant overhauls costing approximately $50 million or $0.10 per share from 2009 into 2010. With the significant planned maintenance, as one would expect, operating costs were up and generation revenues were down relative to last year.

During the second quarter, Midwest Gens results were also adversely impacted by the loss of the transmission lines that serve Powerton station. The lines were knocked out for three weeks after a tornado destroyed numerous towers. We estimate the lost earnings opportunity from the tornado damage was about $0.02 per share. Also, included in the coal fleet results is a net $0.07 per share impact from derivative unrealized gains and losses compared to last year's second quarter. Earnings from the renewable portfolio increased $0.02 per share, generation increased 38% and capacity factors averaged 38.5%.

Last year's capacity factors were impacted by the Suzlon turbines offline pending blade remediation. As previously reported, the remediation program was completed in the third quarter of 2009. We also added 100-megawatt High Lonesome project placed into service in July 2009. EMMT as our trading operation revenues increased $0.03 compared to last year. EMMT continues to focus on congestion and basis trading in our key operating regions. The balance of EMG's earnings components did as follows. Earnings from the natural gas projects fell by $0.01, largely due to last year's $0.02 per share benefit from the DOAA project distribution. This year, we received the annual DOAA distribution in the first quarter.

Edison Capital core earnings decreased by $0.05 per share as last year's second quarter included a $0.06 per share gain on the sale of a lease interest in the Midland Cogeneration Venture.

And corporate expenses fell by $0.01 from lower renewable development costs.

As I mentioned earlier, the primary non-core earnings driver was the global tax settlement. Page five provides updated information.

In the second quarter of 2009, we recorded the global tax settlement with the Internal Revenue Service. As a result, we terminated Edison capital cross border leases, receiving cash and recording loss on termination of the leases.

In addition, SCE recognized gains from settlement of affirmative claims. Net net net, EIX recognized consolidated loss of $254 million from the settlement in 2009 with a projected cash benefit over time of $400 million.

Since last year, we have worked with the California Franchise Tax Board to address the same issues for years 1986 through 2002.

In June, the Franchise Tax Board accepted our tax positions consistent with federal and global tax settlement. As a result, EIX recorded $0.43 per share non-core benefit in the second quarter. This include $0.17 at SCE. $0.18 at EMG, and $0.08 at the Holding Company.

We do not anticipate--we do anticipate a final interest adjustment to occur in the third quarter of this year.

Page six summarizes year-to-date results. GAAP earnings were $1.77 per share compared to $0.72 last year. On a core basis, excluding non-core items and discontinued operations, core earnings were $1.44 per share, down $0.14. Page seven provides key operating data on the EMG coal fleet.

Higher plan maintenance activity is evident, with total generation down 20% Midwest Gen and 24% at Homer city. Homer City continues to take D ratings to meet opacity limits. This directly affects its forced outage rate. Midwest generation availability was also impacted by the loss of power while the transmission lines were being repaired from tornado damage.

Turning now to page eight, during the quarter we added 4.4 terawatt hours at Midwest Generation for 2011 and 0.4 terawatt hours in 2012. We added a mostly--modestly at Homer city, increasing our 2011 forward sell position by 0.2 terra watt hours. We also made some modest cold purchases at Homer City for 2011. During the quarter and in July, we contracted for 3.9 million tons for midwest generation for 2011 delivery. We continue to follow our unaligned hedging strategy that targets hedging approximately half of our gross margin at risk on a rolling 12 month basis.

On page nine, we have updated our EMG capacity sales to reflect higher prices in the most recent RPM option based on the $28 per megawatt day rest-of-market pricing for Midwest and weighted average price of $221 per megawatt day for Homer City. Last quarter, we explained the financing strategy for our wind turbine commitments.

As you can see on page 10, In April we received the first $92 million in US Treasury grants. In July, we closed an $87 million construction and term loan financing for our Laredo project and a $53 million bridge loan supported by the expected recovery of the US Treasury grant for that project.

We have included an updated summary EMG's debt covenants in the appendix to this presentation.

On page 11 is EMG's updated capital spending outlook. We have included $156 million for the capital cost for the Midwest Generation's SO2 compliance program through 2012. This include $8 million this year, $70 million in 2011, and $78 million in 2012. These costs reflect proceeding with retrofits on early units dictated by emission rates and equipment requirements, as Ted mentioned, but final decisions have not yet been made and seeking permits does not represent a final decision. SCE's five-year capital spending and rate base forecast is unchanged as it is included in appendix to the presentation.

As Ted already mentioned, earnings guidance, is shown on page 12. As our reaffirmed guidance reflects EMG's forward hedge position and power and fuel prices as of June 30. Other guidance elements are unchanged from the first quarter.

That concludes my comments. Operator, I'll turn it back to you for Q&A.

And the first question comes from Lasan Johong with RBC Capital.

Good morning. Sorry. I was on mute. It sounds like, then, given where you have been in the first half, it sounds like the third quarter got off to a pretty damn good start. Is that a fair assessment?

We'll address the third quarter later in the year. I don't know what I can say since this is the second quarter report.

Okay. I just figured that the guidance being kept where it was. It just sounds like you got off to a good start in July due to weather. But, I accept your comment. Second--in the previous couple of calls you talked quite a bit about potentially doing Trona injection as a way to meet your obligations in Illinois, and now it sounds like you shift the strategy to going full force down the road of installing scrubbers. Am I missing something? Or, is the change in strategy or thinking? Can you give us clarifications on Trona versus scrubbers.

Well, we need to clarify that, Lasan. What I'll do, I'll have Ron Linsinger who is the CEO of EMT clarify.

Dry scrubbing with sodium sorbents is often referred to as Trona, the sodium sorbents.

Okay. So, basically it's not a change, just--I'm misunderstanding the technology behind the word.

Correct. That's correct.

Okay. That's fine. Given the maintenance schedule--I mean, it sounds like there was deliberate plan to focus a lot of the generation maintenance into the second quarter. A, is that correct? And B, does that mean going forward that now your maintenance schedule will be heavily focused in the second quarter?

Ron?

You'll recall in January and February there was a strong cold winter snap so it was intentional and we will shift our outage schedules according to our views on weather and price. And in addition to that Lasan. Clearly, we had shifted some outages from 2009 into 2010.

So, going forward you wouldn't expect to have that same kind of shift so that's why we try to identify specifically the amount shifted so ongoing that wouldn't typically change.

I see. So that means we're going to have some early maintenance schedules happening this year or next?

Again, we haven't planned the full schedule for 2011 and that would be incorporated whenever we say about 2011 guidance.

Right. I think with the deferral that Jim referred to from '09 to '010, backlog of deferrals is gone and it's also important to note there are no outages in the second half of 2010.

Got you. One last question--Do you have any concerns for your rate filing, given the California economy and gubernatorial elections?

We'll have John fielder, who is the President of the utility, address that. Hello, Lasan.

Hello.

We won't be filing the application until December of this year. It will be litigated throughout 2011 and as Ted mentioned we expect a decision in late 2011 for rates affecting January 2012. Obviously, things will change over that almost year and a half period so it's hard to tell exactly what will happen. But clearly, we'll focus on presenting a good case and we think we have a plan in place to do that.

So, no real concerns.

No. I don't think so.

Thank you, John. Thank you, everybody.

Our next question comes from Jonathan Arnold from Deutsche Bank.

Hi, good morning.

Good morning, Jonathan.

Can I first ask just about--in the California arena with the new bill I think some of the legislature try to codify 33% renewables, noticed there was a new draft of that posted last week or maybe even Monday. What probability do you assign to that currently if there are any aspects of it that you think would still be at risk of veto if it were to pass--update on that front?

I think--this is Ted. This is the legislativee process. As you know it has a lot of twists and turns. It's really not something we can adequately predict at this point, and we're actively engaged with the legislature on it, as are many parties and we'll have to see how it turns out.

Okay. And on another front--I noticed the average hedge price at Homer City had a fairly meaningful up tick, even though there's no incremental volumes hedged in 2012. Can you speak to what may have gone on there?

Yes, Jonathan. We had some small load serving contracts that we won in some competitive options and they were not large enough in our judgment to break out so the average volume and the price with the premium are built--blended into the energy hedges. Of course,there is some risk around the average volumes and that premium is subject to some additional costs, beyond our fuel costs, such as capacity and ampullary services.

So, did you close out around the clock hedges when you entered these -- is that why the volume didn't change?

We adjusted our hedge books accordingly after we won those auctions.

Okay, thank you.

Thank you, Jonathan.

Next is Greg Gordon from Morgan Stanley.

Thanks. Good morning. I have two questions. The first is with regard to the scrubbing with dried sorbent injection, otherwise known as Trona.

Do you believe that that technique will get you into full compliance under the Illinois compliance agreement timeline? I'm looking at slide 40. Does that get you to the 0.11 emissions rate and if not, how many years has it bought you -- what emissions rate do you think you can drive to using dry sorbent injection?

Ron?

Our testing indicates that we'll be able to meet the emission rate requirements of the CPS.

Still you can be in full compliance with this technology.

Yes.

That's great. The second question is -- with regard to the slide on the wind belt. When we look at the cash you've spent versus the cash you expect to get back in through your financing program, how much of that cash, which is on that far bottom right, has--are you expecting to get in? Has not been received? I guess is the question.

I think if we can--

$787 million of sources. How much of that is in-house versus not yet been raised?

I think what we can do -- to go through the numbers here -- if you go to the recent activities, what we're trying to do on that chart is directly above it. You can see the US treasury grants that have been received through April. And the financing that was just closed for Laredo--the $140 million. The $140 million is both the project financing and the--we took a bridge loan on the cash grant. So, adding those two up plus the $200 million for the big sky, I think will come close to what we've actually received and the difference is what you have to do.

Okay. Roughly $430 million so you've got $787 million expected so another $355 million pending.

Yes. And so if you look in footnote three, it's exactly to your point.

Okay, thank you very much.

Okay, Greg.

Next is Michael Goldenburg with Luminus Management

Good morning, gentlemen.

Good morning, Michael.

I wanted to continue with questions on CapEx spend Midwest gen. The $1.2 billion--can you give us a sense how many plants will actually get scrubbers and how many plants will be using exclusively trona? Is it all plants get scrubbers and all plants get sodium bicarbonate or two plants get scrubbers and the other plants don't need to get scrubbers, and they can just survive solely on TRONA? Can you give some disclosure?

We have been confusing folks. We want to be clear here. When we talk about the FGD using this scrubbing sorbent, that is Trona, one and the same. We're not separating those two out. It's Trona for all intents and purposes and Ron can give you some additional detail.

Go ahead.

Trona is the plan for all units and the figure we provided would be the maximum cost to retrofit all units.

So, no, no scrubbers, either dry or wet -- no expensive machinery will be installed at any of the plants.

Trona is a dry scrubbing technology.

Okay, but my--I thought that if you were just going to use Trona on all the plants and the cap cost would be small something like $60 a KW, which would work out to realistically -- even something way south of $1.2 billion.

$1.2 billion includes particulate removal upgrades that are required to get the higher removal levels with Trona so it include upgrades to our particulate removal systems.

Yes. And as far as if you were to decide and go ahead install that on all the units, what--over how many years--can you give us an idea what the timeline of the span would be?

The PPS gives us until the end of 2018 with specific rate milestones and certain units having equipment requirement over period 2013 to 2018.

Yes. So, would-- with that being said, is it -- does it make sense to divide over seven years? Would it be a littlemore front end loaded? Would it be a little more back end loaded because as I look at requirements, the first major step down is, like, 2017 when it goes 0.15 from 0.2. I guess I'm just trying to understand if it's front end and back end or equal weighted.

Michael, this is Jim. We have given you '10, '11, and '12. As we roll forward, we'll give some additional visibility and again haven't made decisions regarding the actual installation of the equipment. So, these numbers go up or down depending upon what we ultimately decide. So, we're trying to show $1.2 billion and again I want to emphasize, that's 2010 dollars and will be spread over a number of years and as we go forward in time to and get further clarity and get permits and actually make decisions, we'll provide the additional information.

Understood. Thank you, very much.

Okay, Michael.

And our next question comes from Michael Lapides from Goldman Sachs.

Hey, guys. Two questions unrelated to each other. One, coming back to the O&M in Homer City, can you tell us what's baked into your guidance for 2010 for combined mission O&M and whether you think on an annualized basis that's a normal number or whether something abnormal about it?

We haven't broken that out separately, Michael, but it's clear that we're trying to indicate because we shifted overhauls from '09 into '10. That $50 million piece was the unusual item for the year. So, that's what we're trying to guide people on an ongoing basis because we have not deferred any more overhauls. So, on a run-rate basis it would decline by $50 million.

But, if you deferred it, that's $50 million that would have been in '09 -- a little bit confused, so '09 was abnormally low '10 was an normally high.

You've got it.

Okay. Second and an update on Tehachapi

On the transmission line?

In terms of construction, permitting, citing, all that good stuff.

John Fielder.

Michael, we're making good progress. In the last week or so, we received a significant ruling from the US border services biological opinion, and we're expecting to move out on the schedule that we have been talking about, which would start construction some time on segments four through 11 in the September/October time frame.

Got it, thank you.

Okay, Michael.

Next is Hugh Wynne from Sanford Bernstein.

Thank you very much for the CapEx number on Midwest gen. That's helpful disclosure. But it also raises a number of questions I think--you haven't addressed yet. First question--why no number around Homer City where it appears that the transport rule would require scrubbers to comply with state emissions limits by 2014?

And then secondly, why no detail yet around the timing of these outlays and the source of the funds? These are large pieces of equipment that take maybe three years to build and a year to design. It would seem that we're going to be facing some pretty big funding decisions relatively quickly in the unit that's extremely constrained in terms of capital-raising capacity. So I wonder if you could add some color around those two points.

What I'll do, I'll take the Midwest Gen point on the outlays of the cash and ask Ron to pick up on the Homer City. The key here on Midwest Gen--and I don't think if you heard the answer I gave Greg Gordon, there's no change from that because we--there are time frames we need to meet and the Trona is basic construction activities. It's not long lead time. The longer lead time elements would be the particulate removal upgrades but that's not complicated technology, either.

And so, what we'll do as we go forward in time, we'll provide additional information, we'll go through the permitting process and we'll update you as we decide what to do with some of the units, and we've got time here before we need to disclose all that information. We understand your desire and need to want to have that. But we're trying to balance the things we're doing here in terms of how we work with our air regulator in Illinois, and the overall numbers that we need to make.

Can we assume no injection of capital from the parent (inaudible).

Yes, that's clear. And that wasn't clear from before--we'll reiterate it and clearly no change from the Edison International perspective that Edison International will not be putting money into EMG. EMG stands alone and needs to fund these things on its own resources. That's an important element that hasn't changed from before, and Ron, you want to comment on Homer City?

On Homer City, Hugh, we are taking a similar approach that we took with our Illinois plant and we are looking at other technology, given Homer City 1 and 2 burn a medium sulfur wash coal product . And so we think there are some addtional opportunities to reduce capital there. We're finalizing those plans and now that the proposed transport rule gives us a clear timeline --the shoot for will be wrapping

Is it possible to give us any additional information regarding the breakdown of the hedges that you have on unregulated generation across peak hours and off peak hours? Obviously, the hedge prices that you've disclosed have meaningfully different effects on earnings if they're hedging on or off peak sales. I don't know if there's any information you can share about that distribution.

We haven't said publicly exactly how we break out off-peak versus peak. But generally we try to--since we're hedging our gross margin at risk and the majority of the gross margin is coming through the peak hours, our hedging activity is focused on the peak hours. We did lay in some off peak hedges in the shoulder months to protect against those real low prices when you have slack demand. So, we didn't have -- units operating at negative margins. So I think we -- if you look through the disclosures, Hugh, we can take you offline and track you through the various quarters so you can see when we added hedges, when it was off peak versus on peak, and I think you can glean some information from that.

Great, thank you very much.

Okay, Hugh.

Next is Angie Storozynski from Macquarie.

Thank you. I'm going to go back to the CapEx questions. So, you haven't made decisions yet regarding Homer City and there seems like no clarity about Illinois plans. How should we think about your -- the upcoming capacity option -- upcoming in May of next year -- and also I'm a little bit confused with the timeline for the implementation of Trona. First is the transport rule and the mercury rule compliance. Wouldn't you actually have to install all of those emission control devices by '14 and '15 instead and wouldn't that be actually more important rule than the current Illinois regulations?

Okay, there's several questions there. Ron's going to address the Midwest gen issue on the environmental upgrades.

All right, we have broken out our expenditures for '10 and '11 'and that will meet the SO2 rate stepdowns and equipment requirements that are in the near-term.

We have already installed our mercury removal controls at Midwest Gen in compliance with the Illinois agreement. And again, now that we see some timing on Homer, we are in the process of finalizing our compliance plans there. As well.

Angie, you asked a question regarding the RPM auction. In terms of the timing -- some of these units the way you go about it, you believe you need to upgrade them for environmental upgrades, then you will reflect that in your bid price in the auction, and the most recent auction that occured in PJM. We did reflect one of our units the upgrades, the environmental upgrades. So, we were going to anticipate doing that going forward as those options go forward.

But you still plan to bid all your units into the upcoming auction. It's just a question of price at which you will do that, right?

That's correct.

Thank you.

Okay, Angie, thank you.

Next is Steve Fleishman from Bank of America Merrill Lynch.

Hello, guys.

Hello, Steve.

Couple questions, first--related--you continue to mention that the--I guess the one cost of the Trona strategy is it raise your operating cost. Do you have any more color on the impact on operating cost and/or capacity factors from the strategy you're pursuing?

Steve, we have not provided that as of yet. We only have guidance throughout 2010. We'll roll forward with 2011 later in the year. And so we just haven't gotten into discussing what the operating cost will be. We're looking at that issue and it's going to depend on a lot of factors including, you're going to have to rail it out from Wyoming and that's a significant cost to the overall veritable operating cost for the units and that -- needs to be determined. So, until we get further clarity around both pieces, we probably will keep our cards pretty close.

Okay, but still net lower economic costs than full scrubber, obviously.

Yes. And, I think importantly, it gives you more flexibility, too, because given the whole plan here is it's a liquidity issue for Midwest Gen too, and to spend all these large capital dollars without certainty of where the price is or what the regulations are going to be going forward, we think it's a much lower risk approach.

Got you.

Steve, this is Ted. One thing I want to make sure we clarify -- as we've said, we haven't made and don't need to make at this point final decisions on individual unit retrofits.

What we have done here is provide investors in 2010 dollars kind of that outside marker. So, if we were to put on this particular technology for SO2 removal and the Illinois plants on every one our units, this is the cost including particulate up grades and all of that. So, this is the outside marker.

If we end up on every unit, this is what it would cost in 2010 dollars. Things like what is the impact on operating costs, that depends, of course, on how many units you end up scrubbing. So, all we've really done here today is give people clarity that this is the chosen approach and this is the cost of the chosen approach if we were to install it on every one of the units.

Okay. But your disclosures do keep saying your operating costs will go up.

Right. But of course that depend on how many units you do it.

Okay. And then just one other clarifying question, separate topic--in the SCE quarter, you didn't include some tax gain that --$0.13 of income taxes and other, is that related to the tax solution or something else?

There are two separate tax issues going on here for clarity. One is core and the other is non-core. The larger of the two is the non-core item. When the franchise tax board has accepted the global tax settlement we entered into with the IRS last year. That's a very large item broken out. It's $0.43 cents for the quarter and there's a separate issue on a change and a tax accounting method that represents $0.12 to $0.13.

Okay, is that item something that will have ongoing benefit in the tax rate or is that just a one-time change?

It's a timing issue so we have left it in core and described it as such.

Okay. Just--on this tax resolution, just wanted to clarify--besides the book gain you got, it didn't appear to me you're getting additional cash flow than you had expected from this. It looked like from your slide, cash flow was roughly the same.

It is in cash. There was one item that I cryptically referred to, there is an interest adjustments that we are expecting will flow through in the third quarter.

How much would that be?

We haven't said in our disclosures. I'll wait until next quarter. I'm sorry, I'm stuttering there, Steve. We'll pick up some additional cash from that interest adjustment.

Okay, thank you.

Our next question comes from Ali Agha from SunTrust.

Thank you, good morning.

Good morning.

Just clarifying a bunch of points that have already been discussed. Ted, in your opening remarks, you mentioned one of your goals looking at technologies was something that is going to be accepted and approved by the relevant regulatory bodies. You've told us that Trona will meet the reduction amount, but has it been blessed by the Illinois EPA or regulatory body that would need to sign off on it?

That's what we refer to as need to go forward and will be going forward later this year to get some early construction permits. Those have to be obtained from the Illinois EPA. That will be done later this year.

I see. So, the permits--getting the permits will be, in effect, the sign off on the technology.

Yes. That would allow us to construct it.

Right, right. Also the '10, '11, '12 CapEx numbers you gave us, that is under the scenario that you are going to retrofit everything. Is that right?

Those are the numbers for those years for everything. Remember, the retrofits are staged in year-by-year starting January 1, 2013, to December 21, 2018. That capital cost in there relates to early work you would need to do to start put in the scrubbers for 2013 and '14.

Understood. Ted, also you mention in your remarks that, the market obviously doesn't seem to be recognizing the equity value in mission today. Having said that, is the assumption that eventually the market will figure it out and the equity value will come out? Or, is it anything I think proactively that EIX management can be doing to monetize or show that value to the investment community?

I think what it refers to--we have spent a lot of time on this. A lot of resources have been devoted to sorting through the optimal approach for not only meeting environmental requirements but also continuing to develop our renewables portfolio. And make sure that we can meet all of our continuing debt obligations, which starts to mature in 2013 on out so when we put all that together and look at what the probable outcomes are in terms of cash, in terms of margin, we see potential value there and it's --we've concluded there is enough opportunity for potential value there that we're going to continue to commit the resources and that's really what we're describing today.

We're trying to give more insights to investors as to the approaches we take, even though a key part of providing the equity value we think is there is in the optionality of being able to go different paths and make different decisions over the course of the next several years. So, we're trying to provide that information such as the [billion] to cost for the SO2 removal systems if we were to put it on all of the Illinois units. We haven't made a firm decision we're going to put it on all units but if we were, that would be the cost. Those are the types of things that we see fair amount of optionality, fair amount of flexibility, and we see--we can meet all of those obligations as well as continue to develop our renewables platform, hence we see value.

Understood. One last clarification also. When you talk about being more comfortable with the higher end of your range for the year, is that driven by potentially lower effective tax rate due to SCE tax settlement Jim referred to and if so, what's the effective tax rate we should think about from a core earnings perspective for this year?

I'll let Jim do better justice to this. But, he basic point is when we look at the factors effecting score earnings as we sit here today, it appears to us that we will be able to reaffirm that earnings guidance range $3.15 to $3.45 and probably towards the higher end. Go ahead.

I was saying on the tax side, Jim, what's the effective tax rate we should think about for the quarter earnings?

Yes, I'm not going to sit here--we don't forecast what the effective tax rate is. It's been difficult over the last couple of years because of the global tax settlement and some of the tax benefits flowed through the stimulus plan and now they changed in the tax accounting methodology so it's very hard to track and if you look at our schedules in our disclosures, you can see there's very, very large changes so I'm not going to attempt to forecast what that's going to be. You would expect over time that will normalize and get back to the statutory rates.

Okay. I'll take it offline. Is the lower tax part the higher end of the guidance range? That's what I was getting at.

Clearly, the tax benefits--and that's related to the lower tax. And the SE, the $0.12 that occurred in the course of the quarter is incorporated in our view and reflected in that effective tax rate, too.

Fair enough, yes. Thank you.

You're welcome.

Our next question comes from Jay Dobson from Wunderlich.

Good afternoon.

Hi, Jay.

Ted, maybe I'm beating a dead horse here and maybe apologies in advance --

You're not calling me a dead horse, are you?

Absolutely not. It seems in your prepared comments you're expressing some greater optimism about the long-term prospects for EME and I just want to confirm that is what you're trying to communicate here. It's a deliberative process, and I think you have emphasized that.

It seems as though when I look back at what you said the last couple of quarters relative to your comments today, there's a hint of optimism that wasn't there before. Am I forcing too many words.

I think you're on the right theme. Maybe a few more words to throw on top of it. The big one--investors pay us to do--is to sort through the business, really look at it in a fairly cold-hearted manner, looking for where the best opportunities and the best value is.

The market has presented us a situation where they're assigning that appears little to no value for EMG, depending how you do the sum of the parts. Some might assign it a negative value, which we can't compute how people get to that, depending on how others might view the sum of the parts, modest value. Whatever. It basically looks to us as though the fair value for the SCE portion pretty much represents all of the current price of our EIX stock.

That means EMG is sitting there producing today around 20% of our earnings and not receiving any value. So, that's the starting position. What do we do from here? As we look at it, we see opportunities with some pretty hard work on the part of the folks at EMG to come up with methods for meeting all of the environmental requirements that we must and doing it in a capital efficient manner.

We also see continuing opportunities in the renewables side, and very importantly, we have to be able to see how we can do all of those things and still make sure it all solves from a liquidity standpoint. Then, we can meet our maturities, which, as I said, start pretty much 2013 on the bond.

So, when we put that together and look at the various scenarios we see -- of course a lot of projections in there, you have to figure through what you think prices of commodities are going to be, which has a lot variability around but when you look at that, it looks to us like there's a potential for some significant upside optionality and that's the way we have been pursuing it.

If we didn't think it was there, frankly, we wouldn't waste our resources.

That's great. And the obvious question -- I know a difficult one is--so, with that optimism in your sort of best guesstimate right now, when would you be presenting us with your sort of solution to this daunting issue?

We think we provided a fairly important piece of the puzzle today. Again, this is something that will play out over an extended period of time. We look at it as when we can provide investors with additional clarity about the decisions then we will certainly try to do that.

But again, part of the value that we see in this is it has a lot of levers, a lot of optionality, a lot of potential decision that we can make over time and we recalibrate those as events unfold.

This is something that is going to play out pretty much--well, just on Illinois side. Based on the agreement we have with Illinois EPA. This plays out through 2019. So, we see optionality in the portfolio. We see opportunities to develop those. And if we're successful, we'll be bringing pretty significant value, we think, to investors. If it doesn't pan out, then we'll be at zero, which is where we are today.

That's great. I appreciate the comments, Ted. Jim, just one question on the O&M at EMG that you indicated of course that all the maintenance was done in the second quarter, but you also indicated you sort of pushed maintenance from '09 into '10 so if I start thinking about the second half of O&M at EMG in '10, it's going to look a lot like '09. It's not going to be actually declining because you did everything. You didn't have a lot of maintenance in the second half of '09 because you were pushing that into '10 so those dollars ought to be similar -'10 versus '09, the second half.

I think that's a fair, Jay. I think that's a fair conclusion.

That's great, thank you.

That concludes our questions for today. I will now turn the call back over to Mr. Cunningham for closing comments.

Thanks, everyone, for participating in our call today. Please do call if you have any follow-up questions. Have a great day. Bye-bye.

That concludes today's call. Please disconnect your lines at this time.