愛迪生國際 (EIX) 2010 Q3 法說會逐字稿

Good morning, my name is Sarah, and I'll be your conference operator today. At this time in like to welcome everyone to the Edison International third quarter 2010 financial teleconference. All lines have been placed on mute to prevent background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions). Today's call is being recorded. I would now like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations, thank you. Mr. Cunningham, you may begin your conference.

Thank you, Sarah, and good morning everyone. Our principal speakers today will be Chairman and CEO Ted Craver and Chief Financial Officer Jim Scilacci. Also with us are other members of the management team. A presentation that accompanies Jim's financial review, together with the earnings press release and our third quarter 10-Q. filings are available on our website at www.EdisonInvestor.com.

During this call, we will make forward-looking statements about 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 our 10-Q and other SEC filings. We encourage you to read these carefully.

The 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 you please limit yourself to one question and one follow-up. If you have further questions, please return to the queue. We'd like to give as many of you as the possible the opportunity to ask a question. With that, I'll turn the call over to Ted Craver.

Thank you Scott, and good morning. Today, Edison International reported third quarter earnings of $1.56 per share, up 27%, while core earnings increased 34%, to $1.46 per share. Both of our businesses delivered solid earnings growth in the quarter and have performed well throughout 2010. We also increased our 2010 core earnings guidance this morning, to a range of $3.45 to $3.60 per share.

Our focus on our three primary operating principles of superior execution, financial discipline and innovative solutions contributed significantly to this strong performance, and to making important progress on a number of strategic business friends. I'd like to highlight a few key milestones reached over the last quarter, that will create value for our customers, the economies of our communities, and our shareholders.

A major event for our company is the upcoming general rate case at Southern California Edison. We are on schedule to file SCE's 2012 general rate case, or GRC as we call it, by the end of November. Consistent with normal practices, we are updating our application from our notice of intent filing to take account of current market conditions and recent developments, such as the additional year of bonus depreciation recently signed into law. Jim Scilacci will cover the bonus depreciation subject more in his remarks. We continue to target a CPUC decision on our GRC late in 2011, to be implemented effective January 1, 2012.

Next, we reached a significant permitting milestone on October 4 when the US Forest Service issued their final record of decision to allow Southern California Edison to hatch the renewable transmission project to traverse 42 miles of National Forest System lands. This is the last key policy decision made from the federal government to allow the final permits to be issued and the remaining stages of this project to proceed into construction.

Building the remaining sections of this project will require a $1.7 billion investment and will generate over 900 jobs directly. Additionally, independent developers of renewable energy products will be investing billions more, and creating more jobs, to connect thousands of megawatts of renewables to this transmission line. Our other major SCE construction programs remain on schedule. We've installed over 1.6 million Edison SmartConnect advanced meters, and the two replacement steam generators for unit three are now on site at our San Onofrio nuclear plant and ready for installation . The Unit Two steam generator replacements were completed earlier this year. This work will add 1000 temporary jobs to the region during this three to four month outage.

Two weeks ago, SCE began construction of the state's largest investor-owned utility photovoltaic power plant in Central California, as part of its 250-megawatt solar rooftop program. The 6.7 megawatt ground mounted project will create about 125 jobs in our service territory. These construction projects have the full support of California regulators and demonstrate both the environmental and economic benefits of constructive regulation.

Let me turn to the Edison Mission Group now. In addition to posting good earnings this quarter, EMG made progress on some other important milestones. EMG settled its Mitsubishi heavy industries turbine delegation on terms that allow EMG to continue to evolve its wind generation business. This quarter, EMG placed a new 30 megawatt project in Minnesota, called Community Wind North, into construction. Also, the recently executed a long-term contract for the 55 megawatt Pinnacle project in West Virginia. This will become EMG's 30th renewable energy project and will bring their total renewable energy projects to 1870 megawatts. We also retain a pipeline of 3700 megawatts.

Of course, EMG's main challenge is its merchant coal fleet, particularly how it manages its environmental retrofit requirements during a prolonged downcycle in commodity markets. EMG continues to implement the 2006 Illinois environmental compliance agreement for Midwest Generation, which has already yielded significant mercury emissions reductions, and will meet stringent limits for NOx and SO2 in the coming years. Consistent with what we told you at our earnings call last quarter, we have now applied to the Illinois EPA for our first Trona SO2 permit.

We continue to believe our four pronged technology approach for Midwest Generation, consisting of activated carbon injection for Mercury, selective non-catalytic reduction for NOx, dry scrubbing with Trona for SO2 in acid gases and particulate removal upgrades is an innovative, lower cost solution to meeting environmental requirements. For Homer City, our working assumption is that once the US EPA transport rule is finalized, flue gas desulfurization equipment will be required when the rule becomes effective.

EMG and other major competitive power generators in the PJM market, face a difficult set of market conditions as hedges roll off and capacity prices decline into 2011 in 2012. We and others, are facing the downside of the business cycle, coupled with an abundance of domestic natural gas supplies. These conditions will negatively affect EMG earnings until the next recovery begins, and demand shifts. We will continue to work through the coal fleet challenges, seeking creative and lower cost solutions, and working with system operators to assure grid reliability. One thing we know is that our coal fleet plays an important role in grid reliability in the PJM market.

EMG can generate positive cash flow, even during commodity price and earnings downcycles, which is why we are prepared to work the EMG issues hard to unlock value from a business that the market gives us no value for today. The strength of our Southern California Edison electric utility franchise provides the foundation for our current value. We see continued support in California for growth at SCE, including in our core transmission and distribution business, other Smart Grid investment and preparing for electric vehicle adoption in one of the auto industry's most important markets. We are proud of, and excited by, our leading position in many of these important growth areas.

Thank you, I would now like to turn the call over to Jim

Thanks, Ted, and good morning, everyone. In my opening remarks, I will discuss third-quarter and year-to-date financial results, Midwest Generation and Homer City's operating performance, Edison Mission Group's wind development program, and EIX's increased 2010 earnings guidance.

I will start with third quarter results on page two of the presentation. Third quarter GAAP in core earnings show improvement over last year. Core earnings are $1.46 per share, $0.37 per share higher than a year ago. Core earnings improved at both of our businesses in addition to a $0.03 improvement at the Holding Company costs due to consolidated income tax benefits related to state income tax items.

Before I cover core earnings of each of the companies, I'm going to cover two other related tax items for the quarter. First, we now have completed the global tax settlement for both federal and state tax authorities. This quarter, we resolved the determination of the interest associated with the California portion of the tax settlement. As a result, EIX recorded an $0.11 non-core benefit, which is comprised of $0.13 on SCE and a $0.02 loss at EMG. An updated summary of the global tax settlement is provided on page 16 of the presentation.

The second item is the expected cash flow benefits from the extension of the 50% bonus depreciation provision for 2010. This is expected to increase SCE's cash flows between $250 million to $300 million, and will defer a portion of the utility's planned financings. SCE's cash flow benefits will incurred largely in 2010. EME will also see cash flow benefits between $70 million to $100 million. Because of EIX' consolidated tax position, monetization of the tax benefits for EME is not expected to occur until 2011.

As many of you are aware, SCE is finalizing its 2012 general rate case application. The utility expects to file its application around Thanksgiving. For our year in 2010 disclosures, we will update the rate base forecast for any differences that are incorporated in the GRC application including the impact of the 2010 bonus depreciation extension I just discussed.

Now, getting into the details of core earnings improvement for each of the businesses starting with Southern California Edison on page three. SCE earned $1.21 per share on a GAAP basis and $1.08 per share on a core basis. SCE's core earnings reflect higher off price revenue to support rate base growth and higher allowance for funds used during construction or AFUDC. The increase in AFUDC is both our higher put balance and higher capitalization rate compared to last year.

Looking at EMG's financial results on page four, GAAP earnings were $0.34 per share during the quarter of 2010 compared to $0.19 per share last year. As I previously mentioned, the final determination of interest associated with the California tax settlement, this quarter negatively impacted EMG's results by $0.02 per share and there is $0.01 related to discontinued operations. Core earnings for the third quarter are $0.37 per share compared to $0.19 last year. Core earnings benefited from the improved merchant coal performance at Midwest Gen, higher trading income and higher earnings for the EMG's renewable generation portfolio.

Included in the coal fleet results is a $0.04 per share gain from the sale of an EMG bankruptcy claim against Lehman Brothers. You may recall that in the third quarter of 2008, EMG wrote off $0.05 per share associated with the power sale agreement with Lehman. This write off was included in core earnings results at the time, so the recovery is also reflected in core earnings. EMG's result also have a $0.03 per share adversely in unrealized gains and losses relating to hedging activities compared to last year's third quarter with a $0.02 per share losses this year compared to $0.01 gain last year.

I won't spend much time on year-to-date earnings on page five. EIX's core earnings are $2.90 per share, or $0.24 above the same period last year. GAAP earnings are $3.33 per share, or $1.39 more than 2009. The results in both years include the impact of recording the global tax settlement and other non-core adjustments.

On page six, you can see Midwest Generation's operating metrics for the quarter and year-to-date, and are generally consistent with last year. Turning to the next page, forced outage rates at Homer City are elevated, relative to last year primarily due to opacity related to ratings. In September, modifications were made to units one and two and now have significantly reduced opacities ratings of those units.

Focusing on average realized prices, gross margin, fuel and emissions cost for the quarter, Midwest Generation shows a substantial improvement over last year. This improvement is from a number of factors, including higher realized energy prices, particularly in the off-peak hours, relative to 2009, higher capacity revenues, lower fuel emissions costs. Generation volumes also increased as load factors improved with higher pricing. These items were partially offset by unrealized hedge related losses in 2010, compared to 2009. Homer City has a higher average realized price with a lower gross margin during the quarter due to primarily higher coal costs. Homer City generation volumes remained flat as forced outage rate offset higher load factors.

Page eight in the deck shows EMG's hedge program status as of September 30. Subsequent to the close of the quarter, EMG made the decision to reduce its 2011 energy hedge position by 2.4 terawatt hours at Midwest Gen and 2.2 terawatt hours at Homer City. This view is that current market prices are close to their lows, and we prefer a more open position to capture potential upside. We do not expect any gains or losses from removing these hedges. On that fuel side, we continue to add to our purchase position, including 3.9 million tons at Midwest Gen for 2011, and 400,000 tons at Homer City split evenly between 2011 and 2012.

Pages nine and 10 provide information on EMG's ongoing wind development program. Since the second quarter there are a number of positive developments during the quarter, including the closing of the Laredo bridge project financing, the beginning of construction of the Community Wind North project in Minnesota, the advancement of the Pinnacle project in West Virginia into preconstruction and a settlement of the wind turbine dispute with Mitsubishi Heavy Industries.

Page 10 has the source news picture for EMG's wind investments. After adjusting for the Mitsubishi settlement, incorporating the Community Wind North and Pinnacle projects, and year-to-date expenditures, on other committed projects, EMG has $511 million of construction expenditures and turbine commitments remaining. To taper these expenditures, EMG expects to receive $340 million of treasury grants and $250 million from project and vendor financings. EMG also continues to explore financing some of its existing projects.

I'll finish up with some detail on the increased earnings guidance. Our increased guidance reflects an improved earnings outlook at SCE and lower Holding Company costs, based on year-to-date performance. We continue to include $0.05 per share in SCE's earnings guidance for energy efficiency earnings. The increase in SCE's outlook is driven by higher AFUDC earnings and lower net interest costs and taxes.

We have left EMG's guidance unchanged at $0.62 per share, although we have increased EMMT's trading income outlook from $60 million to $110 million, to $110 million to $130 million. EMG's outlook has incorporated a September 30 forward curve. We have a lower EIX Holding Company from a negative $0.12 to a negative $0.09, consistent with the tax benefits that were recognized in the third quarter. Thank you and we'll move onto Q&A now.

Thank you. (Operator Instructions) One moment for the first question please. Your first question from Ashar Khan, Visium Asset Management, your line is open, sir.

Good morning and congratulations on good earnings.

Thank you, Ashar.

Jim, as we look at, I know you're not providing any '11 guidance, but is $3 at SCE a good base to apply rate base growth for next year? Or, because of certain issues we should be thinking of a slightly lower base, or is this a good base?

Well, while we haven't yet, as you indicated, provided guidance for 2011. What I suggest that you do Ashar, is you go to rate base forecast chart. We typically provide direction off our rate base. And you both have the higher and the lower numbers. And we know the 11.5% return times the 48%, times the number of shares -- divided by the number of shares outstanding will get you directionally where we're guiding people.

Okay. Quick, this $3 gets you what ROE for this year, can I ask you in another, I guess, reverse way, for this year?

I can't tell you off my head what the return would be. It -- Last year we were a little above the authorized return because of some of the tax benefits and it will be slightly above, probably in 2010. Given some additional earnings we're seeing.

Okay, okay. And then if I can just ask one more question,

Sure.

Ted, you said that even with the current forecast and commodity you don't see the generation business going negative. Is that correct?

I think the statement was, even with down cycle and commodity prices and earnings that we see positive cash flow.

Positive, that's what I meant. You see positive cash flow out of the generation business?

Yes.

Okay thank you, sir.

You're welcome.

Next question, from Michael Lapides, Goldman Sachs, your line is open.

Yes, can you just talk about at Mission and if the holding companies, plan for debt issuances, retirements, including things like any outstanding short-term debt facility?

Hi, Michael, it's Jim. At the holding company, we -- where we issued the $400 million of notes during the quarter. And we used that to repay short-term debt. And then we'll have potential needs, depending upon what the actual capital expenditures and cash flow requirements are at the utility.

The difficult thing for us to do and plan for is what the actual level of capital expenditures are going to be, and then that affects the amount of dividends coming up from the utility to the holding company. So, we have a large line of credit at the holding company to take care of the difference should there be any. And we're anticipating, given the growth of utility, that we may have to issue some additional short-term debt at the holding company to cover short -- expected shortfalls. But, we'll see. When you see the bonus depreciation come through, that offsets what we expected would be a need going forward.

At the Mission side, right now they're virtually, I think unborrowed on their lines. They have some letters of credits that are outstanding, but there's not much in the way of need. We've got cash sitting there and it's being applied to cover our construction expenditures for our wind projects. And we'll draw down on our cash and then we'll have to see what the needs are going forward. Based on our construction activities in 2011 and the environmental costs as they ramp up over time.

Okay. And can you, kind of refresh us, in terms of just the whole -- the corporate dividend policy, when does the Board generally revisit this? What's the policy for, in terms of how you like to tie the dividend? Whether it's to SoCalEd's earnings level or to the holding company's level, earnings level? Connect go from there.

Okay, Ted will cover that.

Michael, the dividend policy that we've been working with over the last several years, is the dividend is fully funded by dividends coming up from Southern California Edison. So, we tie the Edison International dividend to really the cash flow and the earnings of Southern California Edison. We've been targeting, historically 45% to 55% payout ratio of the utility, not of the total EIX. So, EMG really doesn't provide dividends to the holding company. And as we've said, several times here before, we don't expect to put any cash into EMG either. So EMG is self-contained and the dividend really is based on the earnings of power, of Southern California Edison.

The other thing that's important to note, and this has been operable for the last couple of years here, given the size of the capital investment program that we have at Southern California Edison, with all of the significant rate base growth, that we also consider the capital expenditure and the financing requirements associated with that, when we set our dividend policy.

Okay and when is the Board generally evaluate dividend level?

There's no set schedule and there's really no particular timeframe.

Got it. Okay, thank you.

You're welcome.

Next question from Hugh Wynne, Sanford Bernstein your line is open, sir.

Hi, congratulations on a great quarter. And what's hoping or promising to be a very good year.

Thank you, Hugh.

I'd like to just get a clear understanding of what's behind the increase, in the 2010 earnings guidance. I'm looking at slide 11. I think I've maybe, kind of got the picture, on the Midwest Generation side it looks like your hedge and price realization are better than you'd thought and your pretax trading margins better than you thought. But, I'm particularly confused on the SCE side. Some of the factors that you list there like rate base and capital structure, I can't imagine, have changed radically since the beginning of the year. Maybe you could give me a little more color, on what's driving these expected improvement in earnings?

Okay. I think the easiest way for me to take you through it, is when you look at the year-over-year experience because, I think that says much of what's happening here. When you break it down, we have higher earnings from rate base growth and higher operating revenues that come through the attrition mechanism where we're -- our revenue requirement escalated it's typically around 4%. So, what that equates to, is about year-over-year, about $0.38. And that money then is used to cover higher O&M and higher depreciation and the combination of those two. Higher O&M is about $0.23, depreciation is about $0.14. So, when you add all that all up, it's $0.37 and you have higher revenues of about $0.38. So, that nets out to a $0.01. So, when you back out all that and look at what's really driving the change in earnings overall is two principal issues, is-- and there's a lot of puts and takes, but the things that stand out to you, are higher AFUDC, and the change in accounting method for cost removal that we talked about in the prior quarter. Those are the two large items, they amount to over $0.20 alone for the two of them. And that's what we're calling out.

The change in accounting method for cost removal is a tax accounting issue, if I remember right, and it affects your effective tax rate, is that correct?

yes, it does.

It does not affect the GAAP accounting? For the cost of removal?

Yes, well I'm sitting year pausing for a second. There is an impact on GAAP, the way it flows through our earnings.

Right.

Now, but it is a tax accounting change that resulted in higher earnings and cash.

Got it, yes, okay. Alright, so higher AFUDC, and then this tax accounting change, is there anything you'd like to add on Edison Mission beyond the hedge prices and the trading?

We're right at $0.62, so what's happened obviously, the EMMT has been higher. And so, when you look forward and incorporate all the other things that are going on. So, the gas prices are a little lower, but we've been pretty successful at hedging both off-peak and peak periods to lock in the earnings. And of course, we had the $0.04 pickup from the sale of the Lehman claim this quarter, but we had incorporated in our overall thinking for the year. So, there's really not much when it's all give-and-take at EMMT, driving it. And I just wanted draw -- to make sure we can balance it out, there was $0.03 at the holding company. Because, we had a tax gain during the quarter, we have reflected that in through the overall guidance.

Okay. And then just a final question. You all mentioned that you're expecting to install flue gas desulfurization equipment at Homer City units one and two. Can you comment at all on the financing plan for that investment?

Okay. And now, we're looking at scrubbers, at Homer City one and two, the technology that we're considering is called NID, N-I-D. Ron can get into more specifics if you want that. The financing plan, it's key here, since it's a leased facility, we'll need to sit down with the lessor which is principally GE, and we'll have to talk to them, about how we're going to finance that. In the original swaps that were issued for Homer City, there is a provision that allows us to expand the financing for the -- the swaps up to $300 million. So,we would hope a combination of things would go on there, to cover the cost of the construction of the scrubbers.

All right, very good, thank you.

Alright, Hugh.

Next question from Leslie Rich, JPMC, your line is open.

Thank you. I'm sorry if you just answered this, but on the change in outlook for the EMMT, year-to-date you've earned $105 million.

Can you talk about what the drivers are for those very strong results?

Leslie, we went from -- we had a lower level of -- it was $60 million to $110 million. We bumped it up. And it's just if you, were -- expect typically in the fourth quarter of the year, you'd have more congestion trading activity and spread positions. And the other thing that's been a constant source of revenues is ability to -- the arbitrage we have to sell into New York or into PJM, so it's just our view, it will continue.

And, the Mitsubishi settlement, what was the dollar amount of that or how -- what were the terms of that settlement?

I'll have Ron Litzinger take care of that.

Yes, it's outlined in the -- in our disclosures. But, primarily we have our deposit for the 2009 turbines, applied to 23 of those turbines going forward, that we will purchase the remaining 60. We will consider using those in future projects, but our exposure is limited to $30 million should we elect not to deploy them. And we settled a multitude of issues, primarily steel escalation, for $40 million.

Leslie, this is Jim. In the investor deck, there's a page in the back, and I'm just looking for the number, Scott, will get it quickly, that spells out the cash implications of the settlement with Mitsubishi. So, you can see what the adjustment is to the total cash requirements as it flows through. And I'll get you a page here in a second, and tell you exactly where it is.

Okay. Is there any impact from bonus depreciation in 2011, you said some of that from for Midwest Gen would roll over. Anything at SoCalEd?

Yes, there's a big impact and 2010, --

'11.

I'll have Linda Sullivan give you the details of what that is. Linda.

The 2010 impact is expected to be in the range of $250 million to $300 million going into 20011 -- sorry, 2011 we would expect it to be small.

The big pick up is in 2010 and the benefit to EMG will occur in 2011, because of our tax position overall.

Okay great thank you.

Okay Leslie.

Next question from Lasan Johong, RBC Capital Markets, your line is open.

Thank you, great quarter. I'm glad that finally somebody's taking advantage of the prowess of the forward market and doing something rational. Which is very good, but I'm kind of wondering why there's no gains from unwinding these hedges that have a premium value to you.

Well Lasan, obviously there's -- when we set these hedges in, the prices haven't changed all that much relative to where they are now. So, the puts and takes net out so there's not much in the way of expected gains or losses.

I see. Longer term, you talked about environmental regulations hitting Homer City and Midwest GEN. But, kind of what are you exactly expecting are you expecting the EPA to come in and really just slam everybody with new standards? Or, do you expect a long phase-in? Or, do you expect something different? What are your parameters of what you think regulation or where regulation is headed?

So, Ron Litzinger is going to address that.

Yes, Lasan. We are closely monitoring all the rulemakings that are in place out there and those are well documented in the disclosures. But, we believe that our capital plan going forward, that Ted outlined, will meet all existing and our expectation of future regulations.

But what is the timing of the future regulation? What do you think is going to be the impact? Are you expecting something, very large impact, in the next two years? Or, are you expecting no impact in the next two years but maybe in year five there's a big jump up in regulatory standards? What kind of framework are you working with?

It varies by regulation. I would defer to the EPA's announcements of when they say they're coming out with the various rules, and it -- they have stated when they expect to come out. The NAAQS rules are expected in late 2011, the cooling water rules are expected in 2012, and the like.

And so, what's on for us, the CPS agreement that we have in Illinois is the pacing item. That's -- We have to meet our mercury, we have to meet our NOx, and that part of the SO2, and that's the pace that we are on the numbers that we have in our disclosures reflect that.

Understood. Last question demand changes in industrial consumption, do you have any thoughts on that, where have you seen it going, where do you think it's going?

Ron.

We've seen a very small uptick, and that's reflected through an off-peak pricing, but nothing dramatic at this point.

Okay thank you.

Okay, Lasan. Just Leslie Rich, you'd asked a question about the wind investments. I just want to point you to page 10 in the deck. It shows the adjustment for the Mitsubishi settlement. Next question, operator?

Thank you, and the next question from Paul Patterson with Glenrock Associates, your line is open.

Good morning

Hi, Paul.

Just really quick questions here. On the trading and marketing you guys have outperformed here quite a bit. And just looking at what you guys are expecting in 2009 and previously for this year. Going forward, is this sort of an unusual number that we should expect to come back to some sort of median of the sort of $50 million or $60 million to $100 million, 110 million? Or, have you seen like fundamental changes here with congestion or where you guys are looking? Just some more flavor for that?

This is Jim, Paul. I would suggest to you, it's an opportunistic business and we don't have a great view in terms of what's going to happen next year. We provide information that shows with the historical earnings have been, in the deck and I think the best way to do it is take average over a period time.

Okay. And then, with the demand response, for NOPR out there on full LNP in the energy markets, do you have -- ? I know you guys have probably looked at this quite a bit and probably done some modeling. Could you do me a sense as to what you guys think the impact could be if the FERC Nopr it is implemented as it was

We are working primarily through our trade associations, and we do not think the full LNP for demand response is appropriate. It provides an unfair subsidy when compared to generation, our position at a very high-level, is that demand response should be held to the same standards as generation.

Sure. I was just wondering if you guys, could give us a feeling if it is implemented though. I mean, there's been quite a bit of debate on it I know that. I sort of got a sense as to where I would assume you guys would be. But, I guess what I'm wondering is, is when you fix the modeling our quantification that you guys have done on, at Mission Energy, I guess, as to the potential impact. Do you guys have any sense that you guys could share with us, in respect to, the quantification if this is implemented as it was released by FERC?

We model multiple scenarios when we do our look forwards on capacity pricing. We look at it primarily as, when do you expect recovery in capacity pricing and certainly more demand response coming in at a subsidized rate would delay that recovery.

Any sense as to the energy market? I guess, or what you think might happen there with respect to this -- I mean, if you don't have an answer, that's okay. I'm just wondering if there's any sense as to how much we might see? Any sense that you have as to what the impact might be ?

The impacts on the energy market are pretty small, it's primarily a capacity market, in fact.

Okay and you can't quantify that right now for us?

No.

Okay,thanks.

Thanks.

Next question, from David Frank with Catapult, your line is open.

Yes,hi, good morning. Ted, a question for you. You're certainly no stranger to the power cycles and your decision to remove hedges at EME to me speaks of confidence. Do you think that despite most of the future unknown changes we might see in the Midwest power markets, environmental, economic, or otherwise that at the end of the day your plans are a viable and necessary part of the grid? And that there's likely to be a place for them in one form or another?

I think the short answer is yes. And made some of those comments in my opening remarks that we have a fleet between Midwest Gen and Homer City that provides power to the PJM marketplace. That's a lot of megawatts. And the one thing that I think, in these depressed commodity price periods, and with the low economic activity, not a heck of a lot of stuff is getting built and certainly not the types of things that provide grid reliability, grid stability. You need a big spending mass to do that, and that's what our plans provide. So, I think the---there's virtually nothing being added to the market, on the capacity side, that's really beneficial to grid reliability. That means the existing plants are necessary for grid stability.

I guess longer-term, these -- the near-term trough power prices that you have to muddle through now could reap exactly the opposite kind of upside eventually, and hopefully at some point down the road. There kind of like a boom bust, a bust boom, we should say?

Yes, lately You did mention we've seen one or two of these before, and that's exactly the pattern. The longer the recovery is prolonged, the further out if pushed by various economic and regulatory moves, the more the reaction when you finally have the recovery. So, it's -- it is a bit of a game of being able to wait it out. And that's why, going back a couple of years ago, we've instituted a number of cash conservation measures. That's part of our financial discipline, operating principle. And because, this is a game of meeting your obligations, doing it in the most efficient manner possible, conserving cash as best you can and really being judicious about your expenses.

Right. All right, well, thanks a lot guys.

Okay.

Next question from Ali Agha, SunTrust. Your line is open.

Thank you good morning.

Good morning.

Ted or Jim, you'd mentioned that you are -- you have applied for your first round of permits for -- with the Illinois EPA, on the Troma retrofits. When you expect to hear back from them? And is the understanding that, assuming they give you the go-ahead for these, is that pretty much gives you clarity on the remaining retrofits down the road, as well?

We'll follow these one at a time. We're expecting the initial one before the end of the year, and we're on that pace right now. So, we'll have to see as we go, what the initial reaction is, then we'll have to figure out then, ultimately how we proceed with the other units.

Again, to be clear if you do get approval on the first one, is that pretty much, can that pretty much be replicated, on the remaining units as well?

Well, we would hope so, Ali. What we had when we did the SMCRs, we followed the first one, and then it became more perfunctory after this. But,this is an important step for us and we'll have to see how it ultimately plays out here.

Okay. And Ted, going back to your point, and you made this a few times, that the market is not giving you value for your large annual portfolio. So, if I hear you correctly, is the plan to sort of hunker down and wait for the cycle to turn. Or, do you look at the Dynegy potential transaction. And is there something more proactive that you can do, understanding that it's in the trough part of the cycle, some other action to monetize or show value that the market seems to be missing today?

We've covered that in some previous conversations, as well. Basic approach is that we've taken here, we've looked at a number of different alternatives, that's something we always do. As we've gone through what I would call the strategic options that you have for trying to bring the value forward, and have it recognized. What we've concluded is, given that right now there's -- the market is assigning basically no value to these activities, that our best course is to continue to work the issues hard, continue to work them aggressively.

I don't think I'd like to quite characterize it as hunkering down, there's a huge amount of effort on the part of Ron Litzinger and his team to get a number of things accomplished. We've made commitments to improve the environmental footprint of the plants. That takes a lot of skilled work, and the folks are doing that. We have to do a lot of things to try to conserve cash, as I mentioned in my response to one of the earlier questions. So, that activity requires a lot of tough decision. But fundamentally, what we believe is by working this problem, we are able to keep the plants in good operating condition. Keep the plants providing their lower-cost power and also providing grid stability. And as we go through that period of time, eventually we'll see some recovery in the commodity cycle and that will be eventually recognized by the market.

And so, last question. The new capacity you're bringing on, renewable, primarily coming under long-term contracts. When you look at the EMG portfolios long-term down the road, do you still look at it as a mix of contracts and merchant, or do you see a scenario where EMG remains a critical part of EIX but is really a long-term contract oriented portfolio?

Well, strategically speaking, thats -- the seeds for reducing some of the concentration go back to probably 2004, 2005. We focused a lot on the area that really was growing in the generation side of the business, which was renewables. And, the renewable projects provided contract opportunities, they provided stability in cash flows, they had a short development cycle . So, you can start getting cash return from those projects quickly, and they had good tax incentives associated with them, which also accelerated the return of cash.

So, really for some number of years, we've been looking at reducing the risk of the total competitive generation subsidiary by building out the renewables, providing greater stability to cash flows, and also looking for opportunities on the merchant side to stabilize some of the revenues. At this point, the way the markets are set up, there really isn't much of an opportunity on the contracting side for merchant coal. So, I wouldn't expect that, that would change or that we would be interested in trying to lock in revenues at these levels. At these price levels. So I think a part of the business will remain merchant for some period of

Understood, thank you.

You're welcome.

Next question from Michael Goldenberg, Luminus Management, your line is open.

Yes, good morning, gentlemen. Can you hear me?

Yes we can, Michael.

I have a quick question just on SCE and the high income. Can you talk about the high guidance and that additional income and how that may translate into 2011 and '12? Whether these higher earnings are in any way can move onto future years?

Yes this is Jim Michael. I'll take a stab at it, and Linda Sullivan, the CFO of the utility, can fill in. When we give you guidance, we typically use the rate base forecast method. That gives you a simplified approach and obviously there's a whole bunch of other stuff that we don't get into a lot of details. And we're setting the expectations because we think the simplified approach covers the majority of what you need to have.

Of course, there's a whole bunch of other stuff that can cause earnings to go up or down. It can be AFUDC that we were talking earlier. We've also gotten some additional earnings in both 2009 and 2010 from embedded cost of debt where, with these tax benefits that have flowed through, it has pushed off financing, and that's incorporated in our revenues and our embedded cost. So, there's some benefits to flow through there, you don't see on a year-over-year basis because we had benefits last year that are not transparent to this year but those exist now.

So, as you get into the third year, the other important thing is the third year of a rate case cycle Because, they're escalating our revenues based on typically a 4% escalation factor, it typically is not fully commensurate with the cost of what you're doing, so as you get further from the test year, you're not doing as well. But you offset it by AFUDC or embedded cost or the other tax items that flow through. So, I think the best thing is the long answer, due to the simplified method, is easiest way that we can communicate it and then we'll guide you accordingly once we see it going different.

I understand about the guidance but as you just stand here today and say, hey, these benefits that occurred in 2010 are they likely to, at least until the next rate case in next year, you still don't have a new rate case, are these earnings likely or are these benefits likely to be carried over into next year? Is the answer yes?

The answer is some but not all. And it just depends on how ultimately things pan out. When you have some tax changes the flow through, those are the things that are more one offs and you won't see the magnitude of the change in 2011. The effective cost of debt you could continue to see benefits there because as you get tax benefits in, again that's pushing off financing that I said in my comments.

Got it. Thank you.

You're welcome.

Next question from Jason Adler, with MTR Securities, your line is open.

Hi, thanks for taking my call. I' m looking at slide 38, the EMG CapEx schedule. And it looks like you made some changes both to the amount and the timing specifically at Midwest Gen and Homer City. Can you just walk through what's driving those changes?

I have to stop for a second, I don't have here in front of me what we showed the last time Scott, do you know what it is?

This is Scott Cunningham. There are two major things going on in the business specific. We've updated for the wind profile that Jim talked about earlier, so, the renewable portfolio ties into the updated timing for the capital expenditures as well as for the remaining turbine commitments. And then the second thing, there's some minor adjustments in the timing of maintenance capital expenditures, largely in the coal fleet.

Specifically in Homer City assume that the CapEx will take place within the lease.

Okay.

That was the adjustment we made for Homer City.

And for the environmental CapEx at Midwest, is that schedule being pushed out a little later?

It's just reflective of some timing changes.

Okay, but no changes to any decisions on which facilities to retrofit or anything like that?

No.

Okay. Thank you very much.

Next question from Brian Schinderle of Balyasny Asset Management. Your line is open.

Hi guys. Most of my questions have been asked and answered. But was curious, if you could comment on the bank facility that you have, that comes up for renewal in 2012, 2013, and whether or not you have started negotiations or discussions with that group?

This is Jim Scilacci. What we'd like to say on that, I don't think we -- it's kind of like contracts, that you don't want to say anything until you actually finish it. So, we'll just say that we're in communication with our line banks and on a constant basis, that's the normal course and to the extent that we decide to extend or renew, we'll announce it when we get there. But we won't comment, in between.

Got it. Also, you've mentioned that you're contracted on rail through 2011, at EMG and some of your sites. Just curious, I was trying to do some quick math and figure out what might impact be when those roll off. I was wondering if you could make some comments or give some better direction on that.

Yes I'm sorry on that one. This is like the last one we will adjust our rail contract when it's appropriate, and then we'll announce it and incorporate it in guidance when that occurs, so I just can't help you there, I'm sorry.

Okay. Thank you very much.

Alright.

Next question from Michael Lapides, Goldman Sachs, your line is open.

Hi guys, my apologies, asked and answered.

Okay, thank you Michael.

There are no further questions at this time, I will now turn the call back to Mr. Cunningham.

Thanks very much, everyone, for participating. I know a lot of you on the call, we will be staying at the Edison Electric Institute Financial Conference next week. So I look forward to seeing you there. Thank you.

This concludes today's conference you may disconnect at this time, thank you for your participation.