愛迪生國際 (EIX) 2011 Q1 法說會逐字稿

Good morning. My name is Candy and I will be your conference operator today. At this time I would like to welcome everyone to the Edison International first-quarter 2011 financial teleconference.

All lines have been placed on mute to prevent any 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 and good morning, everyone. Our principle 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 and our 10-Q filings are available on our website at www.EdisonInvestor.com. This afternoon we will be posting on our website our quarterly business update presentation and we use these slights in the regular order for our ongoing investor discussions.

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 SEC filings. We encourage you to read these carefully.

The presentation includes certain outlook assumptions as well as reconciliations of non-GAAP measures to the nearest GAAP measures. 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 will turn the call over to Ted Craver.

Thank you, Scott, and good morning, everyone. Our first-quarter results are fully consistent with our 2011 outlook. Core earnings were $0.62 per share compared to $0.82 per share last year due to the expected loss at Edison Mission Group. Southern California Edison delivered a 10% increase in earnings to $0.68 per share, reflecting continued growth in rate base as SCE implements its multibillion-dollar capital program.

We are also reaffirming our core earnings guidance for 2011 of $2.60 to $2.90 per share with a midpoint of $2.75 per share. Jim will provide some additional detail on our financial results in his remarks.

I would like to review a few key developments that have occurred thus far this year, starting with SCE's 2012 to 2014 general rate case. In early March the CPUC approved the timeline for the rate case, which still calls for a commission decision by year-end. As with our last rate case, should the case carry over into the next year, we have received CPUC approval to make any rate case decision retroactive to January 1, 2012.

We will shortly be moving into a phase in the case involving intervenor testimony and responses along with public hearings. Last week SCE made an important procedural filing to reduce its revenue request, primarily to reflect last year's tax law change on bonus depreciation.

Tragic events in Japan have increased the public's focus on nuclear power generation, including at our San Onofre Nuclear Generating Station. SONGS continues to operate normally and safely. We are assessing events in Japan and beginning a thorough process of evaluating the causes of the nuclear part of the disaster. We, and the entire US nuclear industry, are working to glean every inside we can from the Japanese experience and then make any necessary improvements to equipment, procedures, and emergency preparedness planning.

The SONGS design basis, including seismic and tsunami events, is conservative and, of course, meets all NRC requirements. San Onofre's reactor cores are housed in 4- to 8-foot thick reinforced concrete and steel-lined containment structures. Similarly, the spent fuel storage pools are housed in seismically-designed concrete structures.

In an emergency, regardless of the cause, it's critical that the plant can shutdown safely, contain any radiological release, and keep the nuclear fuel cool. To accomplish this, the plant has multiple redundant backup systems that can operate even in the event of a loss of electric power for an extended period of time. Additionally, multiple emergency measures have been introduced over the years, especially after 9/11.

Seismic analyses, updated in 1995 and again in 2009, have reconfirmed the design basis of the plant. This research also determined that the maximum credible tsunami at San Onofre is 23 feet. Our tsunami wall is 30-feet high.

However, not wanting to leave any stone unturned, on April 15 SCE filed a previously planned request with the CPUC to authorize funding for additional seismic research using the latest two-dimensional and three-dimensional technologies. This work will also provide support to any future capital required at SONGS for its continued safe operation and any request we may seek in the future for license renewal beyond 2022. We continue to recover through-rates, all of our investment in SONGS, such as the previously completed steam generator replacements, based on the current expiration of the license in 2022.

While on the subject of license renewal, it's worth noting that on April 21 the NRC approved the license renewal for the Palo Verde nuclear station where we have a 16% or 621 megawatt ownership interest.

I would also like to comment on California's recently enacted legislation targeting 33% renewable energy by 2020. We believe this should be an achievable goal, but one that will be challenging and comparatively expensive. Meeting this goal requires policies that support the integration of these new technologies into the electric grid, recognizing the realities of intermittency of renewables, resource location, and the need for increasing transmission in a timely manner.

Transmission remains SCE's key investment priority in meeting the 33% renewables requirement, because the vast majority of untapped renewable resources are in its service territory and transmission remains a bottleneck to delivering 33% renewables power. Planning for implementation will be complicated by California's once-through cooling water policy, which is more stringent than the recently proposed US EPA rules.

By 2020 California's rules may affect up to 7,000 megawatts of IPP-owned gas-fired generation, important for managing renewables intermittency in SCE's territory. Maintaining grid reliability will probably require repowering some of these sites or siting new generation.

Turning to Edison Mission Group, we continue to work hard to unlock the equity value we see in this business. Our priorities remain enhancing liquidity and financial flexibility, addressing the challenges of the coal fleet, and diversifying the portfolio through our renewables development platform. Although EMG reported a $0.05 loss in the quarter, it continues to generate positive cash flow and EBITDA. Adjusted EBITDA was $106 million in the first quarter.

EMG continues to make decisions that maintain a solid liquidity position as it increased cash and investments over the quarter to almost $1.2 billion. We continue to fine-tune EMG's capital spending program, including optimizing capital spending for emissions controls at Midwest Generation to meet all commitments to the Illinois EPA in the time frames agreed. Our wind construction program actually netted positive cash proceeds in the quarter as projects utilized the US Treasury grant program.

A major event in the quarter was the release of US EPA's draft Hazardous Air Pollutant rule or the so-called HAPS MACT rule. The section covering mercury emissions proposed the same emission limits as contained in our 2006 Illinois Combined Pollutant Standards Agreement for Midwest Generation, 0.008 pounds per gigawatt hour. We installed the necessary equipment back in 2009 and are already achieving these limits.

US EPA's rule contained other draft provisions covering acid gases and non-mercury metals, which we can meet by installing the pollution control equipment we have been planning to use at Midwest Gen to meet our SO2 emissions commitments to the Illinois EPA.

Finally, EMG continues to make good progress building out its renewables platform. In April, EMG commenced construction of a 55 megawatt wind generation project in West Virginia called the Pinnacle project. This marks EMG's 30th project and now has nearly 2,000 megawatts of wind generation in operation or construction in 11 states. EMG intends to remain active in developing new projects as we look to partner with one or more financial institutions to fund additional good-quality projects while leveraging our 3,700 megawatt pipeline and strong development team.

With that I will turn the call over to Jim Scilacci.

Thanks, Ted, and good morning, everyone. Page 2 of the presentation summarizes first-quarter GAAP and core earnings. Ted has already summarized the core results. Both periods had minor non-core impacts from EMG's discontinued operation and last year's first quarter included a $0.12 per share charge at SCE related to healthcare reform.

Page 3 reflects SCE's first-quarter financial performance, which is consistent with our guidance that rate-based growth will drive higher earnings at the utility. This $0.06 per share increase came largely from higher authorized CPUC and FERC revenues.

The CPUC revenue increase is the attrition mechanism which increases 2011 authorized revenues by 4.35% and other approved investments, such as the Edison SmartConnect and SONGS steam generator replacement. The FERC revenue increase is mainly due to the implementation of the 2010 general rate case decision and construction work in process, or CWIP, return on transmission investment.

I would also like to touch briefly on SCE's 2012 general rate case. Last week SCE updated its GRC application to incorporate specific changes, including the impact of the 100% bonus depreciation, for years 2012, 2013, and 2014.

In investor materials we provided for our fourth-quarter 2010 earnings call, we included the estimated impact of SCE's rate base of 100% bonus depreciation. Based on recently issued IRS guidelines for 100% bonus, we are now confirming that our previous rate base forecast is consistent with these regulations.

As part of the SCE's updated filing, the utility also removed the seismic study costs for SONGS to separate -- to a separate proceeding. Together these changes lowered SCE's requested increase by $38 million in 2012, $133 million in 2013, and $145 million in 2014. Page 28 of the investor deck has all the updated GRC information.

Turning to page 4, first-quarter EMG results were consistent with our full-year outlook. Core earnings declined $0.27 per share. There were four major factors at play here.

First, as expected, EMG experienced lower realized energy prices, largely due to exploration of hedge contracts at Midwest Gen and Homer City. The merchant coal fleet also had lower generation due to the outage at Homer City Units 1 and 2, as we discussed in our year-end call, and the shutdown of Will County Units 1 and 2 pursuant to EMG's agreement with Illinois EPA.

EMG also received project distributions during the first quarter of last year from Doga and March Point that did not recur this quarter. Lastly, trading income was lower. We did see improvement from renewable portfolio increasing $0.03 per share although.

EMG's coal fleet operating performance, excluding the Homer City outage, was generally comparable year over year. We have included our normal summary of operating statistics and average realized prices on pages 40 and 41 of the presentation. Regarding Homer City, repairs to Unit 1 were completed and the unit returned to service on April 5. We expect Unit 2 to return to service later this quarter.

Although generation for Homer City was down a terawatt hour, their results were consistent with our 2011 earnings guidance assumptions.

Turning to page 5, EMG added modestly to its coal fleet hedge position. We continue to believe that we can add value to the enterprise by being less hedged compared to our normal strategy of hedging 50% of the gross margin at risk for the prompt year and lesser percentages in the out years.

Midwest Generation added 2 terawatt hours of hedges in 2012 and 1 terawatt hour in 2013. At Homer City we made very minor changes in coal and energy positions compared to last quarter.

Page 6 shows the continued progress of EMG's renewable energy portfolio, which Ted has already commented on. One area that EMG continues to work on is wind financing opportunities. Most recently EMG refinanced its Viento Project financing an increased the overall financing by $85 million and netted $77 million of incremental cash after transaction costs.

EMG is continuing to look for opportunities to project finance the 920 megawatts of unlevered projects and for a third-party capital to continue development of new projects.

As the chart on page 7 shows, wind sources of cash exceed uses primarily from the expected receipt of Treasury cash grants from projects completed during the first quarter of 2011. Overall wind capital expenditures are coming in at or below planned costs.

Page 8 shows EMG's updated capital spending forecast. The primary change from year-end numbers is that we lowered our NOx compliance capital cost by $25 million.

For SO2 compliance we have not changed our overall estimate of up to $1.2 billion in capital costs if the entire Midwest Gen fleet were to be retrofitted. We did, however, shift some 2011 expenditures into 2012 and 2013 while some expenditures for particulate upgrades were shifted forward into 2013 from later periods.

Once the final HAPS MACT rule is released, we will update our compliance capital cost estimate. Meanwhile, EMG continues to look for opportunities to optimize, schedule, and reduce capital costs.

Although EMG's capital forecast does not reflect it, EMG is continued to develop work on a 479 million -- 479 megawatt natural gas fired project; I have referred to it as Walnut Creek. We estimate the project's cost between $500 million and $600 million, and it has a 10-year contract with Southern California Edison.

There are a number of critical development milestones still needed to be accomplished. The project could possibly commence construction before July 1 of this year. EMG is also actively pursuing the project financing for Walnut Creek.

This project has been stalled for some time pending a resolution of the priority reserve issue, which relates to the requirement that projects own emission credits as a condition of obtaining a construction permit from local air quality authorities.

EMG continues to exclude from its capital forecast any environmental retrofit capital spending for Homer City to meet the expected Clean Air Transport Rule requirements. EMG is discussing with the principal owner the appropriate environmental equipment and how such equipment will be financed.

Page 9 provides key financial covenant ratios for EME, Midwest Generation, and Homer City. The unplanned outages of Homer City Units 1 and 2 and the continuation of low power prices have impacted Homer City's liquidity. In order to have sufficient working capital available for operating expenses and to pay the equity portion of Homer City's rent payment that was due on April 1 to the owner/lessors, Homer City took a number of actions including drawing $12 million from an equity reserve account, accelerating payments on EMMT for future energy deliveries, and adjusting payments of operating expenses. These actions were discussed in more detail in our 10-Q.

To further enhance Homer City's liquidity, effective April 1 EMMT assigned to Homer City the benefit of an arrangement that allows EMMT to deliver power to the New York ISO from Homer City. These revenues were recorded as part of the Homer City revenues in lieu of prior classification as EMMT trading revenues. EMMT trading revenues of $28 million -- EMMT realized trading revenues of $28 million under this arrangement in 2010.

I will finish up with a few comments on 2011 earnings guidance. Please turn to page 10.

As Ted mentioned, we have reaffirmed our 2011 core earnings guidance of $2.60 to $2.90 per share. We have updated our GAAP guidance to reflect $0.01 of EMG first-quarter non-core items. This guidance reflects our principal operating assumptions, including updated EMG forward hedge positions and prices as of March 31. We also reaffirmed EMG's adjusted EBITDA guidance of $465 million.

We have lowered our guidance for EMMT trading revenues by $25 million this year. This reflects the assignment of revenues I just discussed. This does not impact expected EMG results as the offset will be recorded in additional Homer City revenues.

That concludes my comments. I will now turn the call over to the operator for Q&A.

(Operator Instructions) Paul Patterson, Glenrock Associates.

Good morning. Just a few quick ones. With the cooling water issue that you guys mentioned on page 33 of the 10-Q, could you just give us a little bit more feeling for what the Midwest Gen exposure might be?

What I will do, I will turn that over to Pedro Pizarro.

Yes, hi, Paul. Our initial analysis indicates that the proposed rules themselves should not have a material impact on the Midwest Gen coal fleet. And by the way, Homer City already has cooling towers.

EPA has stated that it expects what are called modified traveling screens to meet impingement rules for holding and releasing fish that are impinged by intake structures. And so we are updating our cost estimates for these modifications, but they are not material.

They also have something called entrainment standards and those could require cooling towers. But with those the agency has proposed some site-specific flexibility and factors to consider that we think indicate that units like ours should not be required to install cooling towers.

And the factors they will consider include things such as particulate emissions from cooling towers, availability of land to build towers, cost benefit, impact on overall water body, and projected useful life of a plant. However, Illinois, it's evaluating some more stringent water quality rules related to thermal discharge limits that could impact some operations.

Okay. And then on the -- on another topic, the wind portfolio. Another company has increased its life expectancy associated with what it sees for its wind turbines. I was wondering if you tell us, A), what the expected life for the newer turbines that you have been procuring is and whether or not you see any potential change in the life expectancy of wind turbines.

I will let Maria Rigatti, the CFO of Edison Mission, answer that.

We don't expect to increase the depreciable lives of our units at this time. We use a 20-year depreciable life and, thus far, we think that that is an appropriate timeline.

Okay, thank you.

Okay, Paul.

Hugh Wynne, Sanford Bernstein.

Hi, just a quick question on your SCE rate base forecast. The forecast that you presented in the fourth quarter and I guess repeated in the first quarter incorporates the extension of the bonus depreciation. It's somewhat higher, the range you provide is somewhat higher than the old forecast that you presented in the third quarter and I just wondered why that was.

It really goes back to what we said in the year-end call. There were a number of things that occurred as part of the update process. There were dollars that were shifted. We actually dropped out some expenditures associated with the solar rooftop program and there were some timing-related issues -- it shifted from one year to the next.

And I will stop and ask Linda Sullivan if there is any more there that we should comment on.

Hugh, what we did was we trued it up to our general rate case filing. We adjusted it downward for the solar rooftop filing as well as the bonus depreciation.

So what drove it up?

The true-up to the CPUC general rate case filing as well as moving the timing of some issues around.

What do you mean by true-up?

We ended up putting into our rate case filing or into the rate base what we included in our rate base filings, so it's at the full request.

Okay. So basically you have added some projects, you have shifted some projects on time, you brought out (multiple speakers) --

We stripped some out.

-- and you brought out the bonus depreciation?

Right.

Okay. A quick one on Homer City. I mean you say that you are still trying to figure out how to finance the necessary SO2 scrubber installation, I guess at Units 1 and 2. Pretty much running out of time to get those scrubbers online by 2014 when the Clean Air Transport Rule would come into effect. What are the implications for the availability of that plant in the 2014/2015 capacity market?

Well, we will actively participate in the auction. As you know, it's coming up soon. And related to that question is that there is ongoing an active discussion with the owner/lessors on what equipment we are going to utilize and how we are going to finance that. We understand the timeframe is relatively short so we are thinking hard about that and doing preliminary engineering work, as you would expect, so we can move along as quickly as we can.

So the strategy, in other words, would be to have the plant scrubbed by the time the summer of 2014 rolled around?

Exactly.

Yes. Okay, thank you very much.

Ali Agha, SunTrust.

Thank you. Could you give us a sense of what reaction or feedback you have gotten from the regulators now that the 33% renewable mandate has been approved? Any implications on how they are looking at the utilities in general, cost of capital, the risk profile? Any sense of how they are viewing that, especially as loss of capital discussions start to come up next year for you and others?

Ali, it's Jim Scilacci. I will start then hand it over to Ron Litzinger.

As you probably know, our cost of capital is going to be in place through the end of next year. We have the trigger mechanism in place now and we don't anticipate that it would result in any changes. Clearly that was something that will be focused on as you go into the first part of next year. The procedural schedule would be that we would file for whatever we are going to do in May of next year and then we would probably litigate it through the balance of the year with a decision probably in December before it would be reset.

So we haven't come to any conclusion yet on what mechanism we would likely propose, but as you would expect, and it's obvious with lower interest rates, there may be some pressure on the return on common equity. But the real important timeframe will be in the fourth quarter of next year when they really get down to thinking about what the appropriate rate of return would be.

Ron, would you add anything?

Our discussions at the PUC with the commission, we have been discussing at a very high level, and this is while the legislation was still in place, the potential upward pressure on rates and recognizing the impact that has with our need for reliability and investments as well. And generally at that high of a level in our discussions.

Okay. Jim, if I heard you correctly, are you saying the lower interest environment likely puts downward pressure on ROE? When you balance that against the need for more renewables, etc., are you budgeting assuming a lower ROE on a going forward basis? Did I hear that correctly?

Yes, I didn't say that. What I said was that with the current lower interest rate environment that potentially could put some downward pressure on return expectations if you were to get a decision now. But the critical timeframe, which I am saying is going to be next year and especially in the fourth quarter of next year when the commissioners will be deliberating on the appropriate return on common equity.

Understood. One question, quick one. As you look at your CapEx numbers as they start to get summed up for the next three years, could you just remind us again where you stand with regards to potential need for additional equity for EIX?

A critical piece of that is what is going to happen in the 2012 GRC, because that will set the expectation of capital spending, and the timing of the transmission expenditures, which obviously blows through a lot of procedural steps, and ultimately ending up at FERC. We have no plans for equity. As you know, the bonus depreciation this year and next has the ability to enhance our cash flow such that we just don't have any plans currently for equity.

Thank you.

Michael Lapides, Goldman Sachs.

Ted, your commentary at the beginning of the call on the RPS standard -- and I am going to mess up the quote here, but it also almost made it sound like you view it as a challenging standard and an expensive standard for the state to meet. In most states we have seen or in many states we have seen a movement to where the utility, meaning in-rate base, is taking a little bit larger of a role in adding renewables. It seems you are going the other direction.

I want to make sure we understand why and whether you think the RPS is achievable, if SoCal Ed is actually not a big builder of renewables and rate base.

Yes, the quote was challenging and comparatively expensive and I think that is how we view the 33% renewables. There aren't other states that have gotten to this aspirational level.

I think the other element is a lot of things have to come together and work together in order to achieve the 33%. I highlighted one of those policy responses, which was the once-through cooling. If we end up taking out a number of megawatts of gas-fired generation it makes the integration of a much higher renewables level all the more difficult.

And that is the part that we really need to make sure that policy makers and the public fully understand is this is an integrated engineered system. It's not simply a one-dimensional system. We need to be able to ensure the reliability of the grid and that is going to be a fairly complex undertaking. That is the challenging part.

If you were taking out fossil-fired generation and replacing it with renewables generation, at least the current technologies, then that is more expensive. So that is the comparatively expensive part.

The final point I guess I would make here is we see the transmission as being one of the key bottlenecks at this point to actually delivering the higher level of renewables to where the load is. And since we believe we are uniquely positioned to design and build transmission, and very importantly get it permitted so that you can build it, that is really where our focus point it.

So there are plenty of people that can do the renewables development, the actual generation projects, and we feel that is a pretty robust, competitive market. That is how we really get the best prices for our customers is to have good, solid competition, and there are plenty of people who are interested in doing that. It's the transmission that is the more cumbersome and difficult bottleneck and that is where we are uniquely positioned to add value.

Got it. Jim, one question; I missed something. The reason for leaving Walnut Creek out of the CapEx forecast?

It's a good question that is why we highlighted it. There are a number of critical development milestones that we need to get through and we are just not sure if we are going to be able to do all those things. So we are flagging it as a potential. If we are going to do something, it would be before July 1 because the rules -- the environmental rules change after July 1.

So we are flagging it and we will let you know as we go down the path there what happens.

What does SCE do if Walnut Creek doesn't get built?

Yes, that is a tough question. They go through an annual review or they have an long-term procurement process they go through that they are in the process of right now. And so that is -- they will determine what their total need would be and it would come out at that process if there is additional requirement for new generation, Michael.

Got it, thank you.

Steve Fleishman, Bank of America.

Good afternoon or good morning, a couple questions. First, when you guys are talking to public policy makers about the 33% standard, what kind of communication do you give them about how much rates could potentially go up to meet that?

This as Ted. It was part of the overall discussion in the legislative sessions. This has been going on for three years or so, and so I think it's understood that -- at least amongst the policy makers it's understood that there is going to be additional cost associated with this conversion.

The PUC a couple of years back commissioned a study that suggested to get to 33% was going to cost, if I remember the number right, around $112 billion which included both transmission and generation. So it's -- I think it's understood that it's -- I would use the same phrase, comparatively expensive proposition to get there.

Beyond that I don't think anyone has tried to specifically cover all of the elements. In part, because we are talking about something that is going to take us out to 2020 so that hasn't really been baked into the rate cases that ultimately will be required to get us there. But I think they generally know it's going to be comparatively expensive.

Okay. One other question, kind of switching topics, on Edison Mission. Ted, you have said a number of times that you see the potential for equity value. I am just wondering, over the last few months, particularly the financing market has gotten -- continued to get better, tax equity financing partnerships. We saw Energy Future get an extension of their maturities.

What are you -- what is your level of conviction today versus, let's say, 3, 6, 9 months ago on the potential to kind of get through the tough times?

I will just give a couple of general comments. I think we looked at this very hard over many, many months and looked, as you know, at all of the alternatives that we had for Edison Mission Group. After that review we concluded that the best course of action for shareholder value was to continue to hold EMG and work the issues as aggressively as we can.

In this business, of course, so much rises and falls on what happens with commodity prices. We believe it's still a cyclical commodity market and that we will experience some level of recovery, but of course nobody can guarantee that element. But there are a host of other issues that we can work and that we are continuing to work, and so far I would say those issues have been moving in the right direction from our perspective.

We have gotten a little improvement on commodity prices, both on the coal and the power side, which helped things at this point. But again it's cyclical and those things go up and down. So net-net I would say we feel every bit as much conviction to continuing to work the issues as aggressively as we can, focus on those things that we can control, and try to manage this as effectively and as deftly as we can.

Great, thank you.

Jonathan Arnold, Deutsche Bank.

Yes, good morning. Just one question I had was are you still anticipating proceeds from insurance to cover some of the Homer City outage costs? I think you mentioned on the last quarter; we didn't see anything in the Q and wondered if the timing is -- how that will sit with where you need to keep that credit metric and just maybe some context on that.

Yes, on that I don't think -- we are certainly focused on getting insurance recoveries. We will have to discuss that with the insurers in terms of what qualifies and what doesn't, but I don't think the dollar amount here is going to be sufficient enough to really change the metrics all that much.

Commodity prices, as you know, Jonathan, swamp all this, so that is the key.

So it's not a -- it wouldn't be a big recovery in any event?

It is not a big number.

Okay. And then could I also ask on the coal transportation contract expiry in I guess the Midwest Gen? Is there -- does having the HAPS rule out and your comments around either you are anticipating you would be able to comply with it, is that enough of a catalyst to get to a point where we could see some movement on the clarification there? Or is that more likely later in the year?

Yes, I think it's more likely later in the year and we will report it when we get through it.

And if I could just ask one on the utility. Obviously they have had some changes at the commission and -- which can you comment on whether having -- with new commissioners in place it sort of makes it any more or less likely you might be able to settle at least some of the issues in the case? I know that with the last case there was a push to move in that direction; didn't really come about. But how should we think around the possibilities there?

I will have Ron Litzinger address that.

The commission is entirely in place now. We have reached out and had initial conversations with all of the new commissioners, including face-to-face meetings. We will continue to work with the commission on all of the tough issues we face, like we always have.

All right. Thanks a lot, guys.

Leslie Rich, JPMorgan Asset Management.

Thank you, just a quick clarification on the EMMT trading margin. You -- what was your previous expectation for the 2011 trading margin out of EMMT?

What we did -- in the guidance chart you can see we shifted $25 million out of each side of the range, implying that it has gone over to the Homer City side and will appear through the books there.

So it used to be $75 million to $125 million and now it's $50 million to $100 million?

Correct, Leslie.

Okay. And also I am no bond analyst, but on page 9 it shows the debt covenant status for Homer City getting sort of close there. Is that a function of the outages that were going on or do you foresee that there is some sort of covenant breach situation?

Yes, this was a tough issue during the quarter. With the outages at Units 1 and 2 and with the lower prices it put some real stress on this metric. And in my prepared remarks there was a number of things that we did in order to achieve the metric and so we will continue to watch that very carefully.

We have annual rent payments that occur. The next one it's April 1, 2012. What helps this metric the most is recovery of power prices in operation -- continued operation of plants.

Okay, so that is perhaps part of the reason why you shifted around the EMMT revenues?

Exactly, it was.

Okay. Okay, thank you.

Brian Chin, Citigroup.

Hi, good morning. I noticed on slide 8 for Midwest Gen you have got a little bit of changes on environmental expenditures. You say that the HAPS MACT [tee] did not affect the overall estimates, but the timing of Midwest Gen expenditures to meet earlier compliance deadlines has shifted around. So we see that some of the spending in 2011 has been pushed out a little bit, some of the spending after 2013 apparently has been pulled up.

Can you just give a little bit more color on what is going on there and what changed versus your expectations?

The one thing we mentioned specifically was the NOx expenditures dropped by $25 million. The project came in under what we had anticipated so we removed that from the capital forecasts.

And we shifted some expenditures -- part of the strategy we have been working on is trying to optimize expenditures of coal and timeframe, and all these things -- we continue to move these things around to make sure that we can comply with the rate requirement but minimize costs to the extent possible.

I did mention too that we shifted forward some particulate expenditures from that were outside of 2013 into 2013. As we are looking at the rate levels and what was included in HAPS MACT, it required some additional expenditures in 2013.

So this is all live radio. We are continuing to evaluate this and I think what is going to happen, and it's going to be at the end of the year when you get a final rule, we will reevaluate the total figure again to see if it's appropriate given whatever ultimately is decided.

Great, thank you.

Jay Dobson, Wunderlich Securities.

Hey, good morning. Hey, Jim, wanted to go back to the rail contract. Could you just give us an idea of sort of where those negotiations stand and then maybe remind us what sort of competitive dynamic you have to exert between UP and Burlington Northern in the negotiations?

That is a tough one to get into here on the phone or even in private. Just assume that we are in discussions and we are trying to create as much leverage as we can. Then we will announce an ultimate contract later on in the year. Sorry I can't be more helpful.

Got you. But I assume one option is to just simply go to an uncontracted status and pay some market and test sort of how things go there. Not that I know that is probably the one you would like, but that is an option.

Well, it would be a challenging one. So we will just have to see how it works its way through.

Okay, perfect. And then just separately, but in the same region, was hoping you could give us a little idea of what you or maybe Pedro is seeing in sort of Midwest power prices. I appreciate your comments really haven't changed and you have wanted to be more open as you look out into the 2012 and 2013 timeframe for Midwest and haven't really changed very much the hedging status.

But just sort of what you are seeing and, with HAPS MACT already out there, just have you gotten more confident in your fundamental view and what is out there to support it?

Yes, I just -- there is not a lot to add here from a sense that we opened up our hedge position that has worked well to date, which as good, and we will just see where the dynamics will go. We have been anticipating all along that power prices would recover. It's always hard to predict the actual timeframe and that is why we took the position we did to open up our hedge position.

And I will look over at Pedro and see, do you have anything else to add?

I guess the only thing I would add, Jim, is that [we have a] focus on energy prices we also watch what happens in the capacity market and we will get more insights as we get to the upcoming 2014/2015 capacity auction.

Got you. That is fair. Pedro, I mean what you are seeing in forwards is sort of consistent. They haven't moved around as much, certainly it's not as much as we have seen in other markets around the country as far as a recovery goes. And that is sort of consistent with your view of being more open?

Yes, I think we are all looking at the same forwards. We continue, as Jim said, to look favorably on staying open. As Ted mentioned, we have seen a little bit of a recovery since the end of the year, but stay tuned.

Okay, great. Thanks very much.

Ivana Ergovic, Jefferies.

Hi, good morning. I was wondering if you could maybe tell us what is your experience, whether you think you will be able to use trona or limestone instead of scrubbers for compliance in Homer City?

Yes, I think we have -- Ivana, this is Jim Scilacci. We have done some testing of trona at Homer City and, frankly, what we found that it didn't -- was not nearly as effective as we are seeing in Midwest Gen, and probably the sulfur content has a lot to do with that. And so there are some limited applications with trona at -- potentially at Homer City, but I think what we are going to do is ultimately the technology we are looking at for the two units at Homer would be to scrub those units.

Okay. And are you going to include the environmental costs in your PJM RPM auction bid -- in this upcoming bid?

What I will do here is just I think for right now what we would like to say that -- we don't want to get into the public domain what our actual process is going to be around the bid. There is -- it's obviously sensitive and we will just defer that.

Okay, and just another quick question. Are your hedges mostly on-peak or is it off-peak? I don't know if you can comment on that.

All I will say is we haven't -- we have added slightly to our hedge position in 2012; you can see it at Midwest Gen. What we like to do when there are opportunities to hedge in the off-peak hours it's really to make sure in those shoulder months that we are not -- we are avoiding operating at a negative margin. So that is when we will pop in some off-peak hedges.

We traditionally have hedged more on the on-peak hours just because that is where our gross margin is located.

So basically it's a mix of both, right? But the new hedges are more off-peak?

It's weighted towards the on-peak with selected hedging off-peak in the shoulder months.

Okay, thank you.

Brian Taddeo, Gleacher & Company.

Good morning. A couple -- first on Homer City. I was wondering if you could comment with the switching or changing the contracts from EMMT to Homer City do you think that will keep you in compliance with the ratio throughout the rest of the year?

Yes, it's hard to answer that question. Really what keeps us in compliance fully is the power prices and so -- and capacity prices for that matter. And so it was one of the tools in our bag of tricks that we could utilize, but ultimately we are going to need power prices to recover to more appropriate levels.

And I was going to say, if you hadn't switched the contract over in the quarter would you have not been in compliance?

I don't want to get into talking about what could or should have happened. Let's just say that we did a number of things, it's fully spelled out in our disclosures, and we will just have to see where it goes going forward.

Got you. Also on Homer City, it looks like you actually pulled some or you also mentioned as well you pulled some of the payments forward from EMMT. Now is that -- how much capacity do you have to do that? I mean is there still quite a bit of cash you can actually pull forward from them?

Yes, again I am going to stick to our disclosures in terms of what we have said there and not get into discussion about the capacity or what other options we might have. So I am limited to what I can say here, Brian.

Okay. And then one other one on tax and bonus depreciation. Do you have an updated view as will EME have to make any payments to SCE tied to bonus depreciation over the next couple years?

We haven't said publicly what the impact is in all years from bonus depreciation. What we have said was that we will likely be in an NOL position on a federal basis in 2011 and it depends on what happens in 2012 of whether we will be there. It's a possibility.

So I really can't answer your question at this point in time what might happen with EME.

Okay, thank you.

Ashar Khan, Visium Asset Management.

My questions have been answered. Thank you so much.

Terran Miller, Knight Capital.

Good morning. Just a quick question, Jim. In terms of the insurance that you hoped or have talked about previously at Homer City, do you think that would be sufficient to refinance or refund the equity reserve fund? Is it in that order of magnitude or do you think that has to be funded from other gas [flows]?

Yes, I don't want to get into the exact numbers here, Terran. We have said that it's -- the insurance is what I would consider not to be material.

Okay, thank you.

Jeff Cramer, UBS.

Good morning. Just a few follow ups. At Homer City just on Unit 2 bringing that back online, is -- I guess was this longer than you expected? Is there anything causing that or any additional work you are doing there?

What we are doing at Homer City, we are continuing to work on the piping situation there that was troublesome for both units. And I don't have a fixed date in terms of when we expect that we will come back. We will just -- when we finish all the work we will ultimately get it back on line and, unfortunately, I just can't give you a date.

Okay. And then the -- was it a contract that was assigned from EMMT to Homer City? And if so, [what was the tenure] of that or does that affect the capacity payments available to Homer City?

It does not affect capacity payments in anyway. It's just the transfer right that Homer City utilizes to send power to either PJM or the New York ISO.

Okay. And just Midwest Gen, the accelerated CapEx spend there, was that largely due to these [add baghouses] across the fleet sooner than expected or were there certain plants that were added into the mix?

You are really fading out on the question; I think you are asking about Midwest Gen.

Sorry, just the additional spend there that got accelerated, was that specific to additional plants being included in the estimate or was that in regard -- you mentioned particulates, does that have to do with baghouses being excluded now at a sooner date?

It really had to do with particulate removal, so we haven't been specific what technology is shifting. So we are just vaguely saying that it's particulate removal.

Okay, just lastly on Walnut Creek. If that does move forward, is $150 million the right ballpark for the equity contribution?

I think just a rule of thumb we will probably look for project financing of about 75% of the project and the balance then would be equity.

Thank you.

Ray Leung, Goldman Sachs.

Great, thanks, guys. Just to follow on that last question first, just on the timing of the equity, would that be front-end loaded or backend loaded? And then if you could talk about sort of your bank facilities and where you stand with that. Any particular update there and what you are thinking about the 2013 maturity? Thanks.

The equity would probably be front-end loaded. Normally it would go in first, then you would draw on your project financing. The bank line in the [13s] are tied together and I don't really have anything to provide you an additional update, Ray. We are working and focused on those; we understand next year they are coming due so we need to resolve the two issues together. And we don't have an answer at this point in time.

Okay, thank you.

Thank you. The Q&A portion of today's call has ended. I will now turn the call back over to Mr. Cunningham.

Thanks very much, everyone, for participating today and please don't hesitate to call if you have any follow-up questions. Thank you.