愛迪生國際 (EIX) 2010 Q4 法說會逐字稿

Good morning. My name is Holly and I will be your conference operator today. At this time, I'd like to welcome everyone to the Edison International fourth quarter 2010 financial teleconference. All lines have been placed on a mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). This call is being recorded.

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

Thanks, Holly, 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.

The presentation that accompanies Jim's financial review, together with the earnings press release, our 2010 10-K filings, and supplemental information on EMG's 2011 EBITDA outlook, are available on our website at www.edisoninvestor.com. This afternoon we will be posting our regular business update presentation. This will add our usual business strategy and key initiative information.

During this call, we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries, and about other future events. Other actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our 10-K and other SEC filings. We encourage you to read those carefully.

The presentation and supplemental information on our website includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure. When we get to Q&A, please limit yourself to one question and one follow-up. If you have further questions, please return to the queue.

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

Thank you, Scott, and good morning, everyone. Jim Scilacci will cover the fourth-quarter results in detail, so I will focus on full-year 2010 results and the major events that impact our outlook for 2011.

Full-year core earnings were $3.48 per share, an increase of 7% from 2009. These results were above the earnings guidance range we established at the beginning of the year, and consistent with guidance we updated last fall. Both Southern California Edison and Edison Mission Group delivered solid results. SCE is our primary engine of growth and, once again, increased rate base and earnings last year.

When Jim reviews the investor slide deck during his comments, you will see that over the past five years, SCE's rate base has experienced a 10% compound annual growth rate, and earnings have had an 11% compound annual growth rate. This is consistent with our current investment thesis in which SCE is the near-term value driver for our stock, while EMG represents upside with the recovery and competitive power markets and additions to its renewable generation portfolio. Specifically to that point, EMG continues to grow its wind portfolio, as demonstrated by a 40% increase in megawatts brought into operation over the course of last year in this month.

Liquidity and cash flow improved in 2010, in part due to tax-related outcomes. Specifically, we completed the last steps in the global tax settlement by finalizing the arrangement with California tax authorities, and there were federal tax law changes that accelerated depreciation benefits. EMG's cash position also improved as a result of a 30% federal cash grant program for renewable energy projects, which provided needed cash to reinvest in the business.

In December, we announced a seventh consecutive dividend increase to an annual rate of $1.28 per share. We continue to target modest annual dividend increases, reflecting the significant capital required to support SCE's growth.

We announced earlier this morning that we are providing guidance for 2011 core earnings per share in the range of $2.60 to $2.90. The midpoint of this estimated range for consolidated Edison International is $2.75 per share, made up of $3.08 per SCE, less $0.19 for EMG; less $0.14 for parent company expenses. SCE's earnings in 2011 are anticipated to be $0.07 higher than the strong performance last year in this final year of SCE's 2009 to 2011 rate case. Obviously, the big change is that EMG, which I will discuss shortly, after I make a few comments about SCE.

As I have indicated already, successfully executing SCE's capital investment program is a critical part of the value proposition for our customers, our communities, and our shareholders. Overall, SCE's capital spending in 2010 was a record $3.8 billion, and I want to highlight three of the more important accomplishments.

Number one, earlier this month, SCE completed the steam generator replacement program at the San Onofre nuclear power plant, as Unit 3 was synced to the grid. Together with the Unit 2 steam generator replacement completed in the spring of 2010, this $600 million investment program extends the life of our nuclear plant so that it can continue to provide low-cost, clean electric power to California.

Number two, we have now installed over 2 million Edison SmartConnect advanced meters, and are well along with the development of the online tools to enable customers to receive enhanced usage and pricing information.

And number three, we continue to make important progress in obtaining regulatory approvals required for our transmission projects. In December, the CPUC approved the $483 million Eldorado-Ivanpah Transmission Project. This is the third major transmission line accessing renewable resources for which we have received state approval -- all or part of the infrastructure needed to support California's renewables mandates. We are targeting final federal site approvals by mid-2011 for this project and the Devers-Colorado River project.

We received Federal Energy Regulatory Commission approval of SCE's 2010 FERC rate case settlement. This case provides a total FERC retail-based revenue requirement of $490 million. We continue to move forward with SCE's 2012 General Rate Case before the California Public Utilities Commission, which was filed on schedule in November. We look forward to working with assigned Commissioner Simon and the various parties on a timely and balanced outcome by the end of the year.

We have taken an important step with regard to SCE's large-scale Rooftop Solar Program. Earlier this month, SCE asked the California Public Utilities Commission to replace 125 megawatts of utility-owned generation, with additional third-party projects supported by SCE long-term power purchase agreements. SCE met its original objective to stimulate demand and cost improvement on large-scale solar systems, and we now believe the competitive market can make up the other 125 megawatts at a lower cost for customers. Meeting public policy requirements at the lowest possible cost to customers is a key priority, and we think this is a constructive step towards that objective.

Let me now turn to EMG. In our third quarter investor call, I mentioned the likelihood of declining earnings at EMG, in large part due to the favorable hedges maturing, leaving energy margins exposed to depressed power prices. I also mentioned that even in the face of significant declines in power prices, EMG would still produce positive cash. EMG's peers provide EBITDA estimates alongside their earnings, whereas we have only provided EBITDA on a historical basis.

For 2011, to give investors a metric for the cash generation capability of EMG, we are providing what we call Adjusted EBITDA, which is traditional EBITDA plus an adjustment for the production tax credits associated with our wind generation projects. The current outlook for negative $0.19 in earnings per share at EMG is equivalent to positive $465 million in Adjusted EBITDA, as I just defined it. However, in addition to meeting annual earnings and EBITDA goals, EMG's larger objective is to create flexibility and optionality -- from how it sequences and finances environmental retrofits on its coal fleet, to how it negotiates coal supplies and rail contracts, to how it manages its upcoming credit facility and debt maturities.

EMG continues to make important progress in creating that flexibility. We believe the environmental compliance strategy developed for Midwest Generation provides the currently-required emissions reductions in mercury, NOX, and SO2, in a much more cost-effective way than traditional approaches. As you know, we have already installed mercury controls and the NOX Compliance Program is on schedule for completion at the end of this year. In fact, it looks as though our SNCR program for NOX removal will come in approximately $20 million under the original $158 million estimate.

We continue to receive timely approvals from the Illinois EPA on construction permits for the Trona-based S02 Compliance Program. Earlier this month, EMG received its second set of construction permits covering units five and six at Powerton, the largest Midwest Generation plant. We are encouraged by these developments, but because, amongst other things, we still need to see what the US EPA rule-makings will require, we have not made final decisions on individual unit retrofits to comply with our Illinois EPA agreement.

As I mentioned earlier, EMG's renewables portfolio continues to expand. The 150-megawatt Cedro Hill in Texas was placed in service in December. And this month, the 80-megawatt Laredo Ridge project in Nebraska, along with the 240-megawatt Big Sky Project in Illinois began operation. EMG is exploring third-party financing arrangements with several parties, to allow the continued development of its 3,600-megawatt pipeline utilizing its project development expertise, while minimizing EMG's need to supply additional capital during the next years, when capital is scarce.

I'd like to conclude with a few general comments. We announced back in December several management changes. We announced that Ron Litzinger has been named President of SCE effective January 1, as Al Fohrer and John Fielder have retired. We also announced that Pedro Pizarro was being named President of EMG, replacing Ron. Both are with us on this call today, and as you have the chance to meet them and get to know them, you will learn why we have so much confidence in their ability to perform.

Finally, 2011 is a special year for our Company. Edison International is celebrating its 125th anniversary, which began in 1886 with three predecessor companies in Visalia, Santa Barbara and Redlands. While throughout the year we will celebrate our Company's rich heritage of many firsts in the electric industry and of inspiring innovations, our focus is squarely on the future.

We continue to respond to changing customer and business requirements with new technologies and innovative solutions. While we are proud of what we have accomplished, we know we always need to do more. Our core operating principles of superior execution, financial discipline, and innovative solutions, are as relevant today in meeting our responsibilities and creating value for our shareholders, as they were in the first days of the Company's existence.

I would now like to turn the call over to Jim Scilacci.

Thanks, Ted, and good morning, everyone. Today, I will discuss the following items -- 2010 financial performance; capital spending plans, including a discussion of the potential impact of bonus depreciation; EMG's merchant coal plant performance; and 2011 earnings guidance.

Please turn to page two of the deck. EIX fourth-quarter core earnings were $0.58 per share, down $0.01 from last year. SCE's earnings growth was more than offset by lower results at EMG and the parent company. The $0.03 per share increase in parent company cost was primarily the result of the change in the apportionment of state income taxes.

EIX has operation in many states, and there are complicated rules governing how resource revenues and how these revenues are ultimately taxed. Periodically, we adjust our state apportionment factors to reflect our experience. The impact of this adjustment was recorded at the Holding Company in the fourth.

On page three, you'll see the fourth-quarter SCE core earnings were $0.56 per share, $0.05 above last year. In the fourth quarter, higher authorized revenues from rate-based growth and escalation were the principal earnings drivers, partially offset by higher operating and depreciation costs. Included in SCE's fourth-quarter earnings was $0.04 from the Final Energy Efficiency Incentive payment associated with the CPUC's 2006 through 2008 program.

Turning to page four, you'll see EMG's fourth-quarter core earnings were $0.10 per share, down $0.03 from last year. Reported results also include a non-core charge of $24 million after-tax or $0.07 per share. In the fourth quarter, we wrote off capitalized costs associated with detailed engineering and design work for a spray dryer at Midwest Generation's Powerton station. The receipt of construction permits from Illinois EPA for Waukegan 7 and Powerton 5 and 6, set us on a path of using dry scrubbing technology using Trona. To be clear, we have not made final decisions to install environmental controls at either Powerton or Waukegan stations. Investment decisions will be made over time, as we consider ongoing environmental and market developments, among other factors.

Looking at the core earnings comparison, coal fleet results were flat, as higher earnings at Midwest Gen were offset by lower Homer City results. Core results also impacted by a $15 million after-tax or $0.05 per share cost related to the recapture of the Section 199 manufacturing tax deductions. The recapture was triggered by a carryback of net operating losses to 2008, which was primarily due to bonus depreciation. I'll cover the broader topic of bonus depreciation in a few minutes.

Let me turn now to our full-year results, which are summarized on page five.

As Ted said, EIX consolidated 2010 core earnings were $3.48 per share or $0.23 above 2009. You will recall that last October, we revised upward our core earnings guidance to a range of $3.45 to $3.60. At that time, we had not forecasted the recapture of the Section 199 Manufacturing Tax deductions triggered by the 100% bonus depreciation. As I just mentioned, this lowered our earnings by $0.05. SCE earnings were up $0.33 on a year-over-year basis. This was due to higher operating income and capitalized financing costs, or AFUDC, both driven by higher rate-based growth and lower income taxes.

EMG performed well, considering tough market conditions, as we benefited from hedges placed when prices were considerably higher. On a year-over-year basis, EMG's earnings were lower by $0.09, primarily from higher merchant coal plant maintenance costs in 2010; unrealized losses related to hedge accounting in 2010, compared to unrealized gains in 2009; a higher income tax expense, which all partially offset by higher trading revenues and from the sale of the Lehman bankruptcy claim.

Unrealized hedge accounting losses were $0.06 per share in 2010 versus unrealized gains of $0.11 in 2009. Additionally, EMG's 2010 Adjusted EBITDA was $798 million, and a breakdown is included in the Appendix in the investor deck. For 2010, Holding Company costs were $0.12 per share.

The non-core activity in both years is primarily associated with the global tax settlement with the IRS and California Franchise Tax Board. Details of full-year results are also included in the Appendix. On page six is a historical perspective of SCE's rate base and earnings growth. As Ted has already mentioned, SCE has delivered steady and consistent rate base and earnings growth of at least 10% compounded annually over the last five years.

I'd like to turn now to SCE's capital expenditure program shown on page seven. This new capital forecast is updated for some shifting in capital expenditures; the reduced spending for the Solar Rooftop Program that Ted mentioned; and various other true-ups for capitalized overheads. Net-net-net, the new forecast is very similar to the prior one, with capital spending ranging between $4 billion to $4.4 billion on an average annual basis.

For each of the four years, we are using a forecast range of 10.5%. This range was simply determined by taking actual capital expenditures compared to our forecast capital expenditures over the last two years. Last year, we used a slightly larger range for transmission projects, primarily the TRTP Project, are now firming up, causing us to narrow our forecast range.

Page eight summarizes the key provisions of bonus depreciation law changes and the current interpretation of what qualifies for 50% or 100% depreciation. The key elements extend 50% depreciation for qualifying property through 2012, and created 100% depreciation for qualifying property placed in service between September 9, 2010 and December 31, 2011. Since the IRS guidelines have not been issued, at this time we are providing preliminary estimates of the impact for 2011 only.

Page nine provides a summary of how bonus depreciation impacts our Company. We expect Edison International, being a federal tax net operating loss position, or NOL, for tax years 2010 and 2011. Bonus depreciation creates deferred taxes, which is an offset to SCE's rate base. Once the IRS releases its final regulations, we will update our 2012 General Rate Case filing to reflect reductions in our requested revenue requirement for 2012 through 2014.

In 2011, we expect cash flow benefit of about $550 million, substantially all at SCE. EMG will not see cash flow benefit from bonus depreciation in 2011, even though it has qualifying capital expenditures. Given EIX's overall tax position in 2011, EMG's benefit from its qualifying deductions will be deferred for several years. This does not change EMG's ability to monetize tax benefits through the Edison International tax sharing agreement, nor the overall level of those benefits, just the timing of the receipt of those benefits.

Lastly, the expected federal tax NOL position in 2011 will not allow SCE to utilize its Section 199 manufacturing tax deductions. This will lower earnings by $0.05 per share and the impact is incorporated in SCE's 2011 guidance.

Turning to page 10, we provide an updated four-year rate base forecast tied to the capital spending program I just discussed. In 2011, we forecast an average rate base of $18.2 billion. We will also see this number incorporated in SCE's 2011 guidance. The forecast has also been updated for bonus depreciation and the reduction of our Solar Rooftop Program, along with other miscellaneous changes. Our forecast yields 8% to 11% per year rate base growth. SCE will continue to fund its capital spending program from cash flow supplemented by issuance of long-term debt and preferred stock consistent with its authorized capital structure.

On page 11, you will see Midwest Gen's delivered strong performance in the fourth quarter with the forced outage rate to 4.5%. On page 12, you can see that Homer City also had a solid operating performance, with a forced outage rate of 3.8% in the fourth quarter. Through most of 2010, Homer City forced outage rate was higher than usual, primarily caused by opacity-related de-ratings. In the fourth quarter, we resolved this issue, and performance improved accordingly.

In early February of this year, Homer City experienced a failure of its six-inch steam pipe at Unit 1. Homer City has commenced a full root cause analysis, and Unit 1 is currently offline while we repair the faulty steam pipes. Because Unit 2 has a similar design, we took a precautionary action of shutting Unit 2 also. Unit 3 is not impacted because it has a different design. The outage impact of both units has been incorporated in EMG's 2011 earnings guidance.

Turning to page 13, we provide EMG's regular hedge status -- program status for the coal fleet. As we discussed in our third-quarter earnings call, EMG reduced its hedge position in 2011, including a reduction of 2.5 gigawatt hours of hedges at Midwest Gen, and 0.9 gigawatt hours at Homer City. We did add very modestly to our 2012 hedge position, including 0.6 gigawatt hours at Midwest Gen and 0.2 gigawatt hours at Homer City. We also fine-tuned our 2011 coal positions, adding 300,000 tons at Midwest Gen and 200,000 tons at Homer City. We remain fully contracted for rail at Midwest Gen through 2011.

On page 14, you'll see EMG's capital spending forecast through 2013. Other than wind commitments, most of EMG's capital expenditures are for its Environmental Compliance Program at Midwest Gen. In 2011, Midwest Gen has $109 million remaining for NOX upgrades. SO2 compliance expenditures are forecast to be $42 million in 2011 and $372 million over the three-year period.

Page 15 provides details of our continuing wind program build-out. Besides what Ted has already mentioned, we have updated the chart to reflect EMG has project or vendor finance of about 950 megawatts, leaving 860 megawatts of unlevered projects. The cost to complete the current work scope this year is about $280 million. As you can see on page 16, we are expecting slightly less than $400 million related to cash grants and available financing proceeds during 2011.

The final topic is our 2011 earnings guidance, which is summarized on page 17. For SCE, we assumed an average 2011 rate base of $18.2 billion. Based on our authorized capital structure, our allowed return on common equity, and constant share count, this generates an earnings outlook of $3.08 per share. We have not included any energy efficiency earnings in guidance, given the uncertainties with this program. We expect Holding Company costs of $0.14 per share, which is a slight increase over 2010, primarily from additional interest expense from the $400 million of notes issued last year.

The midpoint of our guidance reflects an EMG loss of $0.19 per share in 2011. Guidance is based on a forward prices as of January 31 of this year. We have also assumed the range of EMMT trading revenues of $75 million to $125 million, pre-tax. The midpoint of Edison International's 2011 earnings guidance is $2.75 per share, as Ted said, with a range of $2.60 to $2.90 per share.

We have also updated our disclosures to include a forecast of EMG's Adjusted EBITDA for 2011. We also estimate that a $1 per megawatt hour change in the around-the-clock price for our merchant coal fleet impacts EMG's earnings by $0.05 per share.

The last slide walks through the key moving parts of our 2011 guidance relative to the 2010 results, using the midpoint of our guidance. For SCE, the chart simply resets earnings to the simplified model of rate base, the $18.2 billion, times the 11.5% return on common equity, yielding $3.08. We also excluded energy efficiency earnings, as I previously mentioned. Keep in mind, this is the last year of our three-year rate case cycle, so we're targeting some important productivity and good cost management to meet our earnings guidance.

For EMG, we foresee an expected decline in both energy margin and lower capacity of revenues for the coal fleet. Within the overall generation portfolio, we do expect additional earnings and cash flow benefits from wind projects being placed in service during the year.

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

Jonathan Arnold, Deutsche Bank.

A couple of things. The first one, if I understand you right, Jim, the change in the range on the CapEx, you had a 16.5% cushion factor, I guess, before, and now it's 10.5%. And you mentioned transmission. Does that explain all of the difference? Or have you changed your confidence level on some of the other pieces too?

I think all along, most of our concern has been about the timing of transmission projects, Jonathan. And as Ted mentioned in his prepared script, a number of these projects are firming up. And I guess the only other piece I would mention is the Solar Rooftop Programs, because that had been slipping out in time as we were somewhat struggling with the program, and now that's what we filed with the Commission to alter it.

We fully expect to spend our distribution dollars, because that comes down to reliability of the system. So we didn't anticipate being much different from what we forecast versus what we actually spent.

So most of the change is basically in transmission and solar?

Yes.

And the 10.5, is that sort of an across-the-board assumption now? Or is that still skewed one way or another?

Yes, it's more or less pro-rated by year. And it's just -- it's simply taken; it's a simple average of what happened over the last two years applied forward.

Okay. And then if a may on one other thing -- can you give us some sense of what the impact of the second-quarter outage -- or I guess the first quarter outages for Homer City might be on the guidance?

Yes. No, it's relatively small. And what we've done essentially is shifted outages. We had one planned and we've shifted that planned outage forward. And we're anticipating that there will be some insurance proceeds and potentially business interruption insurance. So the overall impact is fairly small, and it's incorporated.

Okay. Thanks a lot.

Dan Eggers, Credit Suisse.

Just on the GRC with the bonus depreciation adjustments to rate base, when do you anticipate filing an amendment to the filing? And is there any risk this could delay the Commission's timing on getting these done, given the fact they always seem to miss their deadlines anyway?

Yes, I wish we could tell you a firm date. And I'll start off here and give it to Linda Sullivan if there's more to add. We have to wait for the service to release final regulations. And I keep asking our tax guy, when is that going to occur? And I keep getting responses back is, well, it could happen in March; it could happen in April; it could happen in May. So literally we'll have to wait. And then once we get that information -- and we've already been going through the process of trying to estimate it -- then we'll update our GRC filing.

Now, I think the core of your question, Dan, is could it delay the GRC? And we're not expecting that to be the case. The bulk of the adjustment is going to be for 2013 and 2014, as the amount of bonus depreciation catches up and flows into our rate base. So, bottom line, I don't think there's going to be a delay. And it's -- the improvement or the reduction of revenue requirement will build over the three-year period.

Okay. And I guess just on the generation business, for the piece of your generation that is not hedged at this point in time, in the current forward environment, are the plans particularly economic to run, given where you're buying coal relative to where you're selling? How are you guys thinking about 2012 hedging, given pretty depressed commodity prices?

I think because you can see we talk last quarter how we opened up our hedged position, to take advantage of any improvement that there might be in power markets. And I think we haven't come off that position. And the way we operate the plants is such that we'll look at adjusting things. There are certain things you can do in terms of minimum load levels and how you ramp the plans to take advantage of low-price environments. And we have, you'll recall, at Midwest Gen, put some off-peak hedges on in order to guard against low prices, especially in those shoulder months where the prices can become fairly low.

So there's a number of things we've done. And we'll adjust our hedge position once we see some improvement in the market position.

Okay. Just one last one. Without the ability to do the tax sharing back to EMG, how much cash reduction are you going to see over the next couple of years, relative to what we would have had in '09 and '10?

Well, we haven't put out a number in that. And you can see what the numbers have been historically and it all goes back to what's happening over all. And I think we'll just have to check that on an ongoing basis until -- and I'm struggling here, because we haven't put out a number in the public domain, so I really can't give you a firm set. But it will be meaningful for EMG over this period, because we're going to be in an NOL position for the next couple of years. But again, as that NOL clears through, then the tax benefits will pull back into EMG.

Okay. Thank you.

Michael Lapides, Goldman Sachs.

Hey, Jim, if I look at slide 14 on the capital spending, can you just talk about what specific projects are embedded in the environmental expenditures for '11 to '13 at EMG? I've read the footnote, but if there's a way to discuss it at the plant level -- just trying to understand what's in here. And also, when I read the footnote, it almost seems like this is still very much a tentative CapEx guidance on the environmental side, because you could always make the decision to pull back and just not do the work.

That's -- exactly. You've got it on the nose. We put an all-unit compliance assumption in here. And the basic breakdown is you've got NOX controls, the SNCR's that Ted referred to -- there's $109 million, and that's going on at virtually all the units. And then you have the SO2 controls. For 2011, we've got $42 million that is planned and that would be Waukegan 7, and potentially Powerton 5 and 6.

And again, I just want to stress, we haven't made those decisions yet about making the SO2 controls. There's some different things you can do that we're looking at potentially -- the way you burn, what coal you burn in the boiler, and the timing of these capital expenditures. So we will make those decisions at the last possible timeframe that we can do it.

Okay. So I want to make sure I follow -- the SNCR is $109 million. That's '11 only? Or spread out over the three years?

Oh, no, '11 only. '11 only. So that's the last of the SNCR expenditures. And so these plans will allow us to fully comply with the rates that are established in our requirement with Illinois EPA.

Okay. So then the CapEx line is for '12 and '13 -- the [$132 million] and the [$198 million], that's for Waukegan 7, and Powerton 5 and 6 only, assuming you do the work?

Yes, that's correct.

Okay. Does that complete the work on both of those plants required by the Illinois consent decree? Or would there be further spending on those into '14?

Here -- I think that it will cover the initial costs for Powerton. There are more things that will go on there. What this is going to do -- the amount of controls you put on that will ramp up over time, but the initial capital costs are pretty much set. So I'm going to stop there and say that that's something we'll provide additional information on. And let me look at Pedro Pizarro here, if there's anything further that we can add.

Jim, I think you hit it right on the nose and I'd probably leave it at that. In terms of the expenditures that I talked about there for Powerton and Waukegan as part of the all-unit compliance, if you tie it back to the CPS Illinois compact timelines.

Okay. Got it. Okay. I'm just trying to make sure whether this gets you into compliance for thinking about 2014 and beyond. Obviously, it steps down every year, compliance. I'll circle back offline.

Yes, I just want to reemphasize too that those expenditures will allow us to comply with the rate, the SO2 rate, as it steps down in each of those years.

Got it. Okay. Thank you, Jim. Much appreciated.

Ali Agha, SunTrust.

I wonder if I could get a read from you folks post-elections in California? A couple of changes on the Regulatory Commission. I guess one seat is still to be filled; new legislation, et cetera. Are you looking at the overall regulatory environment any different in California than you were pre-elections? Anything that has surprised you so far?

I'll let Ron Litzinger address that.

Yes, we're looking forward to working with the two new Commissioners -- Sandoval and Florio. Commissioner Florio has participated in our procurement review in the past and so we have a previous working relationship with him. And we'll work to establish that with Commissioner Sandoval as well. We really don't speculate on any major policy or political changes, but recognize that a change in the Commission may or may not lead to changes in the environment.

Okay. And a separate question -- Jim, as you look at your capital needs across the Company, particularly at the parent level going forward, given the impact of bonus depreciation and analysis, et cetera, that you were laying out, as far as meeting the parent company obligations are concerned, and perhaps the need for new equity -- has anything changed on your thinking on that front? And when do you think at the earliest you'd reach a decision point on whether to raise equity at the EIX level?

Yes, I think -- bonus depreciation, that's a good question, provides additional liquidity. And we're not anticipating additional borrowings at the Holding Company to meet the dividend requirements for the Company. And we, again, just to get to the core of the point here, we don't expect or have any, plan any needs for equity for the business.

For the foreseeable future?

Yes, for the foreseeable future. Clearly, we wouldn't tell you if we thought, but we don't foresee anything at this time.

Understood. Thank you.

J. Dobson, Wunderlich Securities.

Good morning, Ted, Jim. A question for you on the rail contracts. You mentioned that EPA was obviously going to be a decision point around what to do from a compliance perspective with EMG, but I'm just wondering how the rail contracts and the expiration of the same will play into that decision, since they're a little later in '11?

What I'll do, J., is start there and I'll kick it over to Pedro if I miss something there. And clearly, we'll take into consideration in our rail contract negotiations whatever we believe is going to happen with the units. And we'll adjust the tonnage accordingly. So, since we won't -- historically, we just said that we won't talk about if we're in negotiations or not, I'm just going to leave it at that. But we recognize that that's a sensitivity in terms of how much we ultimately secure.

Okay. And then separately on 2011 and 2012 hedging, Jim, notice that you brought it down, as you mentioned in your prepared comments, for '11, up in '12. And I think you were trying to get at this, but at least I didn't find it very clear -- how should we think about your desire to roll through '11? Is it about in the hedged position as current, unless power prices improve? And question for '12, how should we be thinking about this -- if we roll through '11 and don't see material improvements in the forward curve, should we anticipate this is about the hedging amount you'd like to have in place?

Well, let me go back and -- sometimes we're clear but vague on these issues. We opened up our position thinking that the risk was greater -- that there was little risk to the downside, the opportunity was greater to the upside. And our view was we'll wait and see, and we'll actually put some hedges on if we're able to capture some opportunities that we think are attractive. And we'll continue to do that.

We typically like to be in a hedge position going into a year that you're 50% hedged on your gross margin at risk. And we lock down the gross margin at risk more on the on-peak hours than your off-peak hours. So, expect us, if we see an improvement in prices, we will probably drop some additional hedges in to take some of the risk off the table. But if prices don't change appreciably, we probably won't change our position all that much.

Got you. Thanks. And just for clarity, the quarter didn't include any substantive benefit from taking off those hedges -- the average price didn't appear to change very much, in fact, dropped. So I would assume --.

No, there wasn't any.

Great. Thank you very much.

John Cohen, Morgan Stanley.

I just had a question about the rate base forecast. Maybe I missed something earlier, but explain how the rate base for 2012 looks to have -- or at least the midpoint looks to have gone up, given that CapEx for '10 and '11 and '12 is pretty much unchanged. And there's also, if I'm reading one of these slides correctly, $550 million of benefit -- or decrease from bonus depreciation.

Yes, there's a number of things that are going on there. The bonus depreciation and Solar Rooftop programs were two things we talked about, but that's more in '13 and '14. What I think is happening in '12, when I went back and looked at the numbers from last quarter, I think it's the change in the range had more to do with it than the other two items. And there were some other minor changes that occurred when we update for the GRC filing. But the bigger change, the most significant one, was the change in the range.

Last quarter, we were carrying, I think, it was a 16% range and now we're at 10.5%. So that was the most significant change that occurred for '12.

Okay. So you're using a higher point within the range? Or is it just the -- you're still using the midpoint of the range for your CapEx?

So, when we go -- when the numbers you see on the page there, it tries to give -- the top number of the forecast range is what we filed for. And the bottom end of the range is just the mathematical derivation of taking 10.5% off that number or if you went to last quarter, 16.5% off the forecast range. So what we've done now is narrowed that range a little bit, so mathematically, that's all that's changed.

Okay, thanks. And I just had a separate question on Midwest Gen. What is the practical drop-dead date for making some of these decisions, given the tensions between your obligations under the state CPS and also the potential federal regulations?

We're getting closer to that timeframe. And as you're aware, we received some permits, some construction permits for Waukegan and Powerton. And those permits have one-year timeframes. And there, you could go in and ask for an extension if you had a good reason. So, I can't give you a specific answer because we haven't identified one yet, but it's getting closer. And probably, in 2012, we'd probably be hitting right there.

Okay, thanks.

Michael Goldenberg, Luminus Management.

I just have two quick questions. One is, what does your EME guidance assume for equity in earnings line?

I don't think we specifically spell that out, Michael. Well, you can see in the Appendix there will be some additional information that starts at earnings and drops down to EBITDA to Adjusted EBITDA. So that goes -- ties back to the negative $0.19.

I understood, but there is no measure of equity in earnings. I was wondering if you could provide some color. I think you made $100 million last year? Or $106 million, even?

We haven't provided that for 2011. Sorry, just can't help you there.

Okay. Maybe you could just explain if there were any expected changes for your plants there? If there's any contracts that are beneficial contracts rolling off? Anything along those lines.

No. We provide -- I'm sorry, I'm struggling here because we're kind of limited to what we can tell you. We gave you the range within the changes that we're expecting from the generation portfolio. And there are a number of puts and takes. Ted mentioned the roll-off of the hedge contracts are affecting the open position, so the gross margin is going to go down. Capacity values will decline in 2011, just from what happened with the RPM auction. And those are the (technical difficulty) [principal drivers] really that are affecting the merchant coal margins.

My other question is on bonus depreciation and overall taxable position. (technical difficulty) makes so much in taxable income that you would still be able to utilize those tax credits. Could you just maybe help us explain why you won't be using tax at EME in 2011?

Well, what's -- really, it has to do with utility, given the large capital expenditure program at SCE and the sheer amount of things that can qualify for 100% depreciation. So when you think about the utility, there's not a lot of large projects that are going on. There's many, many, many small projects that go on the distribution side that qualify for 100% depreciation. So that affects EIX on a consolidated basis because it's going to put us into an overall NOL position.

And the way it works too, as you know, that we do taxes on a standalone basis. Really, SCE comes first. And then you consolidate everything. And given just the sheer size of the capital program, and it throws us into a net operating loss position for the Corporation.

So you'd be able to utilize that probably in 2012?

You still -- that's still -- it's hard to say. We expect it will be there for '10 and '11; '12 is a little harder to say. It depends on how ultimately they put out the regulations on bonus depreciation. And it also will be dependent upon what the capital levels will be -- the capital expenditure levels that are set in the GRC. So I think it's too early to call 2012 yet, but it could be.

Got it. Thank you very much.

Ashar Khan, Visium.

Jim, can I just understand this on slide -- SCE rate-based forecast on slide 10. So this has been adjusted, I just want to check again, for bonus depreciation in '13 and '14 -- is that correct?

Yes.

Okay. And so now if I'm right, you have this benefit, SCE has this benefit of like $500 million. And if I'm right, they might go through a procedure and set up a contract out. Does this, in your view, allow you to get to, as you go through the rate case process? Because this would be some benefit to the rate payers over this time period, that it gives the Commission the leeway to go towards the higher end in terms of your rate-based numbers? Because the consumers will have this benefits of $500 million? Am I thinking through this correctly, or no?

Yes, I don't know if I could draw the same linkage as you are there.

What I think what you need to understand is that we've incorporated bonus depreciation based on our interpretation, which still hasn't been finalized. And the Commission will go through the process, and later on, we'll be updating our rate case filing based on the reduction in revenue requirement that flows from bonus depreciation. That will happen later. And then the Commission separately, when they have all that information, will make their determination to decide what's appropriate for the enterprise. So it's really hard to put all those pieces together and say that they'll feel better about our rate case forecasts, based on bonus depreciation.

But am I correct -- this is about $500 million of customer refunds which are benefits, which would flow into the customers from bonus depreciation? Is that the correct way to look at it, or no?

Yes. So what we said in the script was there's cash flow benefits in 2011 of $550 million. That's not the rate base adjustments. What's going to happen here is that we file with the Commission later this year. We'll update for our rate base forecast incorporating the normalization of these tax benefits. That's what's required under law and that's what we typically do. The other utilities we'll be doing the same thing.

And so they'll incorporate that and look at the numbers, and come up with an appropriate decision. So the $550 million is a different number than what's going to happen with the rate case.

Okay. So is it close to what the customers get, or no, it's not?

Well, we haven't put that in the public domain in terms of -- you're trying to link back to what's the reduction in the revenue requirement associated with bonus depreciation?

That's correct. Is that close to that number overall?

Well, under the rules -- this is normalized, not flow-through. Flow-through you get it -- you give it all to them immediately. Normalization you pass it back over time.

(multiple speakers) Understood, but the three-year rate period, right?

No, no. No, they'll get that over a longer period of time. But the way the rules work is that we'll update it and they'll see a reduction in the revenue requirement, and the benefit will flow to the rate payer over the remaining life of our assets. So it's more like 20 years [don't] see that benefit.

Okay. And so how are you using that cash in your projections right now, can I ask you?

See, it just goes -- it's fungible here. It's going to help fund construction expenditures for SCE. So it may result in lower short-term debt balances at SCE. So it's -- and then we anticipate that the Holding Company, as a result of bonus, won't need to tap into the marketplace to fund potential dividends.

Okay. And if I can just end up -- why are you so uncertain about the Energy Efficiency Program? What are you thinking is what, it's going to just finish? And the next three years isn't going to go through? I just want to get some thoughts on that.

Well, I'll start out then I'll hand it off to Linda Sullivan to supplement the answer. We've been going through -- it seems like years of proceedings to come up with the incentive mechanism that's going to be used for the Energy Efficiency Program. And I think we finally got it nailed down for the 2006 to 2008 period. And they were going to adopt that for 2009 as an interim position, and further study it going forward for '10 and beyond. And so we just wanted to allow the situation with the Commission and the Energy Efficiency proceedings to get more certain before we include something there.

Right now we put in the disclosures, there's $27 million pre-tax of potential earnings for 2011 dating back to the 2009 program. It's there; it's in our disclosures. We haven't included it in guidance because of the -- it's still working its way through the rate-making process.

Linda, anything else you want to add?

Right. And with regard to the 2009 program, we currently do not have a schedule. We expect to file for those benefits, but it's uncertain whether we would get a final decision by the end of the year. And then we are also, on the '10 through '12 program, we are waiting for Commission action on that particular program.

Okay, Ashar?

Thank you.

Thank you. Our last question comes from Steve Fleishman with Bank of America Merrill Lynch. Your line is open.

I'm sorry, my question's been answered. Thanks, guys.

Thanks, Steve.

That was our easiest question. (laughter)

Yes.

You can show up any time. (laughter)

There are no further questions at this time. I'd now like to turn the call back over to Mr. Cunningham.

Great. Thanks, everyone, for participating on the call, and please don't hesitate to follow-up with any questions. Thank you. Bye bye.

Thank you. This does conclude today's conference. You may disconnect at this time. Have a great day.