愛迪生國際 (EIX) 2011 Q3 法說會逐字稿

Good morning. My name is Elan and I will be your conference operator today. At this time, I would like to welcome everyone to the Edison International third-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 and 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.

Thanks, Elan, 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 comments 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 that will use these and other slides 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 those carefully.

The presentation 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. Today Edison International reported third-quarter earnings of $1.31 per share. Core earnings for the quarter were down $0.15 from a year ago due to lower earnings from EMG. Earnings at Southern California Edison increased 16%. Year-to-date earnings were $2.46 per share. Core earnings were down $0.43 per share compared to a year ago again on lower EMG results. SCE core earnings increased 5%.

While we work to uncover the option value for EMG, we believe a good proxy for the investment thesis in our stock is core earnings at SCE net of corporate costs.

Our third-quarter financial results are consistent with the high-end of our earnings guidance range for 2011 and have given us even greater confidence in an improved outlook across the Company, at SCE, EMG, and the parent. Therefore, we are raising our 2011 core earnings guidance to a range of $2.90 to $3.00 per share. Jim will provide more information on our higher earnings outlook in his remarks.

I would like to focus my comments today in two areas, reaffirming the growth opportunity for SCE and the path to unlocking the potential option value in EMG.

Southern California Edison continues to implement its capital investment program, which is expected to result in 8% to 11% average annual rate-based growth through 2014. This growth is largely driven by California policy mandates such as transmission investments needed to meet California's 33% renewable requirement.

SCE continues to work through permitting and scheduling critical path items for its major transmission projects. SCE is seeing cost pressures associated with the Tehachapi transmission project regarding engineering, design, and scope changes, environmental mitigation work, and permitting delays.

Last month for example, SCE filed with the CPUC to comply with FAA-requested project modifications such as marketing transmission lines and lighting certain transmission structures as part of the Tehachapi project. The PUC instructed SCE to defer construction on these structures, which have recommended aviation safety improvements until after the PUC review was complete.

The Tehachapi project is experiencing some community opposition and an impacted city recently filed another request for a rehearing on the segment passing through their community with the PUC. These issues and delays provide evidence of why we say it takes seven to 10 years to design, site, and build new large-scale transmission projects in California.

SCE will be working to minimize the overall impact of any cost increases on individual projects and on its overall capital spending program while still meeting the state's policy goals for renewable power and meeting commitments with renewable generators who have invested based on state policies.

In terms of SCE's other major capital spending programs, the Edison Connect Smart Meter Program remains on plan for completion next year. SCE is about two-thirds of the way through the installations, over 3.2 million of the 5 million meters in total. Total project costs are unchanged at $1.6 billion, of which $1.25 billion is capital.

SCE' 2012 general rate case is moving into its final stages. The last major procedural filings were made last month and the record is now basically complete. The assigned administrative law judge must now draft a proposed decision. SCE in its testimony has continued to highlight the critical importance of prudent levels of reliability and public safety investment.

Importantly, we will ultimately manage the business within the dollars authorized as we seek to balance these key policy and system reliability objectives with reasonable customer rates. The current schedule envisions a final GRC decision this year. To the extent a final decision is delayed, the commission has already ruled that it will be retroactive to January 1, 2012.

I would now like to turn to discuss the efforts to realize option value at EMG. For some time now we have stated that there are several potential scenarios that can produce real value at EMG. The size of that potential value seems large enough to us to warrant pursuing and the structural separateness of EMG from the rest of the EIX coupled with the fact that Edison International plans no new equity investment in EMG, made pursuing the prize practical.

However, we also recognize that there is not unlimited time to work the many scenarios. We are approaching the time when scenarios will give way to decisions and we believe many of these will be made over the next six to 12 months.

The final US EPA HAPs MACT rule, now scheduled to be issued in December, is a key regulatory decision needing to confirm Midwest Generation's environmental compliance program for several air pollutants. Once issued and analyzed, this will allow EMG to start making investment decisions on individual plant retrofits. Retrofit decisions will involve a number of considerations in addition to HAPs MACT such as market and regulatory conditions and other potential EPA pronouncements in the water and greenhouse gas areas.

As many of you know, Homer City was the first to challenge EPA's Cross-State Air Pollution Rule or CSAPR. There have been 45 petitions for a review of the rule filed, 16 of which request full or partial stays of the rule and all are now consolidated under EME Homer City versus EPA.

Homer City's concern centers on the interim Phase I period of 2012 and 2013, where it sees real harm in how emission allowances were reallocated. While we can't handicap the legal outcome, it is clear that the rule has generated lots of controversy.

Beyond the major EPA rulemakings just discussed, there are some other elements that will be critical to realizing potential value at EMG. First, we must satisfy ourselves there is sufficient energy margin, EBITDA and liquidity over the next few critical years in the face of challenges such as reduced capacity revenues and expected cost increases. An important milestone will be the prices realized in next May's PJM capacity auction for the 2015/2016 planning year.

One would think that the shutdown decisions by other generators since the last auction should lead to a further improvement in capacity prices, but this needs to be confirmed. Capacity prices in PJM are a critical indicator of future value for our fleet.

An example of cost pressures will be a new rail contract for Midwest Generation, which should be completed before year-end.

Liquidity remains a major focus for EMG over the next few years. Project divestitures remain an option if necessary to meet EMG's liquidity needs.

Second, the ability to obtain third-party financing of the Homer City scrubber retrofits with no equity investments from Edison Mission Group needs to be determined. Pending finalization of the financing program for retrofits, Homer City continues to work on critical path items including permit applications with the state of Pennsylvania and final scrubber technology selection. At the same time, EMG continues to formulate how to optimize operations for Homer City's compliance with Phase I CSAPR rules in 2012 and 2013, taking into account PJM rules, existing capacity sales, and allowance price and availability.

The third element is to make the appropriate environmental retrofit decisions for Midwest generation consistent with the parameters we have discussed for some time, namely EMG will retrofit only where it can see sustainable value for making those investments. EMG continues to fine tune the construction timeline such that it can meet all of its submission reduction obligations and yet minimize major capital spending well into 2012 while complying with construction permits issued for Waukegan and Powerton units.

The fourth element is to establish a more sustainable capital structure for EMG with the appropriate credit metrics. We see this requiring a meaningful reduction of about $1 billion of EMG's $3.7 billion in unsecured debt over the next few years.

We continue to pursue opportunities that provide for long-term growth at EMG including targeted actions to further our renewables development program. Most recently we moved two wind projects from the development pipeline into construction in Nebraska, the Broken Bow and Crofton Bluffs projects. These total 120 megawatts and importantly utilize the last remaining inventory of wind turbines. Both of these projects will be completed next year.

We now have 31 wind projects in service or under construction totaling almost 2000 megawatts. We also have a 3800 megawatt wind development pipeline which we continue to manage as we look to transition our growth program to third-party wind equity financing.

The wind portfolio represents a source of liquidity both in terms of additional project financing capacity and asset monetization.

The rundown I just gave you is why I say the next six to 12 months are likely to be definitive for EMG. In this timeframe, we want to be in a position to describe to investors the rationale for the critical decisions and the major assumptions being made about EMG so that the market has adequate information to evaluate the equity value of EMG to EIX.

Much has been accomplished particularly in those areas where we have some control of the outcome such as finding the lowest-cost retrofit solutions and much more will continue to be done. The continuing worldwide economic uncertainties and increasing supplies of cheap natural gas are prolonging the recovery and power prices, one of the critical factors in EMG's option value. EMG will have to find ways to counteract some of the commodity price pressure.

That completes the major topics I wanted to cover, so now I will turn the call over to Jim Scilacci.

Thank you, Ted. Good morning, everyone. Page 2 of the presentation summarizes the quarterly earnings comparisons that Ted has already touched on. You'll note we did not have any non-core items in the quarter, while last or we had net favorable non-core impacts from the global tax settlement that totaled $0.10 per share.

Edison International Holding Company costs returned to a more normal trend this quarter at $0.04 per share. Last year we reported core earnings at the Holding Company of $0.01 per share due to consolidated income tax benefits related to state income taxes.

Turning to page 3, SCE's second-quarter core earnings increased to $1.25 per share, up $0.17 from last year. These results are consistent with the regulatory earnings model for SCE. This model is based on authorized returns on investments and capital structures approved by the CPUC as well as FERC.

Higher earnings in the quarter were driven by rate-based growth and lower taxes. Income taxes benefited earnings this quarter due to increase of property-related deductions and lower interest accruals on tax reserves.

Page 4 is the updated chart that depicts SCE's cost of capital mechanism. As many of you are aware, the trigger mechanism is tied to the Moody's Baa utility bond index. For the 12-month period ended September 30, the index fell within the deadband and therefore did not trigger a change in SCE's authorized return on common equity. Therefore SCE's allowed return on common equity for CPUC jurisdictional rate base will remain at 11.5% throughout the end of 2012.

In April 2012, SCE will submit an application for its 2013 cost of capital. This application will also address the utilities capital structure and embedded cost of debt and preferred stock.

In our 10-Q, we have also updated the utilities 2012 general rate case to reflect the required updates for known changes from governmental actions, escalation, and the shift of refueling outages at [Senofry] into 2012. We also updated the outlook for the FERC return on common equity to 11.1% from the preliminary estimate of 10.85% we shared on our earnings call last quarter. This increase reflects a more thorough review of the underlying mix of capital spending and timing of projects moving in to rate base. This is really an issue of mix which allowed returns vary based on how capital is spent during the year on projects earning different incentives.

Turning to page 5, EMG earned $0.10 per share on a core basis compared to $0.37 per share last year. Merchant coal fleet results were impacted by lower capacity revenues and realized energy prices. In addition, total merchant coal generation was 10% lower than a year ago related to the retirements of Will County units 1 and 2 at year-end 2010 as well as higher forced outage rate at Midwest Generation.

I will also note that Midwest Gen's comparisons were impacted by the $0.04 per share core earnings benefit from the sale of a Lehman Brothers bankruptcy claim in the third quarter of 2010 which did not recur this year. Detailed operating metrics for the coal fleet are included in the presentation.

Earnings associated with EMG's renewable platforms fell $0.03 from lower capacity factors, 24% in the third quarter versus 28% a year ago, driven mainly by lower wind conditions. Pretax trading income was $11 million in the quarter compared to $27 million a year ago or a $0.03 decline on an after-tax basis.

The reduction in trading revenue was from two factors, lower proprietary trading results and the transfer of revenue from the EMMT to Homer City for energy sales to the New York ISO. Beginning April 1, 2011, these revenues are now included in Homer City's results.

Net interest for Q3 2012 was higher than last year from an increase in the total amount of project finance debt and a reduction in capitalized interest.

I do want to add a few comments on EME's cash position, which increased to $1.235 billion or $402 million increase over the last quarter. The bulk of the increase was from the net receipt of $253 million in U.S. Treasury grants from completed wind projects and $182 million of tax sharing payments.

Overall, liquidity positions are summarized on page 19 of the presentation.

As of September 30, EME had recorded $340 million of deferred tax benefits. As many of you are aware, EIX is in a net operating loss position for federal income tax purposes. So EME is unable to monetize tax credits like PTCs or bonus or other depreciation for its wind investments. EME will be able to monetize its accrued tax benefits once EIX returns to taxpaying status and after SCE has fully monetized its tax claims.

I won't go into the year-to-date results in the interest of time. These results are summarized on pages 6 through 8 of the presentation and they are consistent with our ongoing message that rate-based growth will increase SCE's earnings while lower gross margins for the merchant coal fleet have and will adversely impact EMG's earnings.

Turning now to page 9, Midwest Generation added very modestly to its hedge positions including 558 gigawatt hours in 2011 and 408 gigawatt hours in 2012. We have also reflected the additional coal commitments made in July that we discussed on our second-quarter call.

Page 10 summarizes the status of the current renewable and gas-fired growth portfolio that Ted has already discussed. All three wind projects under construction are expected to qualify for the 30% U.S. Treasury grants which remain available through the end of next year and we will determine based on liquidity needs at that time whether to apply for these grants or instead utilize PTCs.

We have just over 1000 megawatts of wind projects that have not been financed. We continue to seek new nonrecourse debt financings for our contracted projects. As many of you are aware, the project finance market has tightened with the ongoing European banking situation and we are exploring the private placement market as an alternative to the project finance market.

Page 11 provides sources and uses for our development projects. You will notice that we simplify the chart and added additional information through 2013, which is when the last development project is completed.

EMG's updated capital spending outlook for 2013 is shown on page 12. Compared to last quarter's forecast, there are a few changes including an increase in renewable energy spending to complete two new wind projects located in Nebraska and a decrease in spending on Walnut Creek gas-fired project.

The capital spending forecast continues to include modest expenditures for early-stage work on the Midwest Generation's program for SO2 emissions reductions through 2013 which initially focuses on Waukegan unit 7 and the Powerton units. Final decisions to install full environmental controls will likely be made next year.

I will conclude with some more details on our increased 2011 earnings guidance. Please turn to page 13. Our key assumptions for the year have not changed other than using forward prices as at September 30. Our increased core earnings guidance does not include the potential of up to $0.05 per share of energy efficiency incentive earnings if a PUC decision is reached during the fourth quarter of this year.

Using the midpoint of our $2.95 per share core earnings guidance, SCE's guidance has increased $0.07 primarily from lower net interest costs and taxes; EME's guidance improved by $0.09, based largely on higher gross margins at our merchant coal fleet. Loss at the Holding Company improved $0.04 due to lower income taxes. Consistent with EMG's updated earnings guidance, we are also increasing EMG's EBITDA guidance to $529 million from $465 million.

Page 39 provides supporting information. Looking ahead to 2012 guidance, we would not expect to provide new guidance until we receive a final SCE general rate case decision. Lastly, we tentatively plan to report fourth-quarter results on February 29.

That concludes my comments. Operator, let's move to Q&A.

(Operator Instructions) Daniel Eggers, Credit Suisse.

Good morning, guys. I'm just wondering if you could maybe elaborate even more on the six to 12-month timeline when you're talking about emission. Is that a thought process this will come kind of piecemeal as far as decisions with a Homer decision and then a broader decision on the business or how should we think about kind of layering data points from here?

Yes, thanks for the question, Dan. I think what I was trying to do in the script is give you a sense of those kind of major events, all of which seem to kind of line up over the next roughly speaking six to 12 months. So for instance on the liquidity side, we've got a revolver that's coming due and obviously we are getting closer to the 2013 maturity of the $500 million.

Secondly, we have got Homer City decisions that need to be made in order to comply with the upcoming CSAPR rules, particularly the retrofit decision there. So we are actively out seeking third-party financing for those retrofits. We have got important decisions on retrofits to make with Midwest Gen that are really pretty much in that same kind of general timeframe.

So again, I won't repeat it all, but just ticking through it, I think you can see some of the major decisions are lining up such that we will really need to make those decisions in the next six to 12 months. I think that will be pretty definitive as to what the overall earnings and liquidity picture looks like for EMG.

And Ted, when you go through that process, you guys have long talked about the option value of the business and the attractiveness because of the option without the downside, with the ring fencing. But does the six to 12 month process involve the possibility that if there's not substantial equity value as you guys get through kind of these data points that the whole business could be reevaluated from an Edison International perspective?

Certainly. Always that potential exists. I think the main thing we're trying to signal here is a number of external factors will clarify over the next half a year to a year. We will end up making some important decisions as a result of that on retrofits and the like. All of those things will I think provide us as well as investors a lot better clarity on really how the option value looks for EMG.

I don't want to speculate too much beyond that but I think we will have much greater clarity around what that picture looks like.

Okay, thank you.

Michael Lapides, Goldman Sachs.

Just questioning, Ted, in your remarks you talked a little bit about some of the cost pressure related to Chino Hills and Tehachapi. Can you talk about when you are likely to have an update on what the final cost estimate for Tehachapi would be? Do you expect any regulatory push back in terms of being able to fully recover any incremental costs on the project?

I think what I want to do is pass that over two Ron Litzinger to give you a little bit of an update on that.

Michael, we owe the California Public Utility Commission a revised estimate once our final engineering is complete. We are working to get that complete and will likely provide that estimate probably early next year given some of the development -- recent developments.

How does this impact -- how do you guys think about what the worst-case scenario is in terms of the timing for when the project goes in service?

We are continuing construction on these segments that are not impacted by some of the recent events. We are trying to hold our construction schedule so that deliverability of the renewable generators out there can be met and I believe the PUC is sensitive to those scheduled requirements as well.

Got it. Okay, thank you.

Steve Fleishman, Bank of America Merrill Lynch.

Good morning. I guess two questions. I will be brief on those. Just to follow-up on a question on the EME analysis, we will get more data over time to know the value. I guess is there a risk that the more that you know the value, the more you've actually lost option value, that by waiting this long to get answers we are losing the people that might have been more optimistic to put option value on this? I don't know if that makes sense, but just --

I'm not sure exactly all the things that are on your mind on that, Steve, but --

It's just that -- as someone who might've been more bullish in their views, the more we get data points, they could be ones that are negative. So I guess the real question is have you been evaluating the value of this yourselves and externally all along and is by continuing this forward potentially losing value so to speak?

Steve, to put us both out of our misery here, I think as difficult as your question is to phrase, I have the same difficulty given the sensitivities answering it. I think the fundamental point is, and we've said this to investors before, going back, it's getting close to I guess we started the process a couple of years ago -- we analyzed what you would -- I think everyone would consider the basic generic options for EMG. Selling it, some version of spinning it off, restructuring, and continuing as we termed it -- continuing to work the issues. Hold the assets and work the issues.

At that time we didn't see a heck of a lot of value in the first three options beyond what the tax shield is, so that left us looking at the potential for realizing significant value by continuing to hold the assets and working through the issues. It looked pretty asymmetric to us and I kind of alluded to that in the script that we are -- we saw some pretty significant potential there, wide variation between the downside cases and the upside cases but the downside cases didn't really -- weren't really that relevant from the EIX perspective. So that encouraged us to continue to hold the assets and work the issues.

If at the end of all of that to go to your point we don't see a lot of value, or issues crop up that make some of those more downside cases the reality, then I think it just puts us back to where we were at the beginning. So I think from our perspective, this was a prize worth working for and we still believe that there are some significant value in EMG.

It would be nice if we could get a little help on the commodity price side but that's one of the things that's out of our control. By the same token, there have been some things that have helped on the capacity value side. So we're just going to continue to work through it. I think things are going to clarify quite a bit more in the next half a year to a year and I think that's going to really be definitive for us and we will be able to discuss that pretty openly with investors once we have that information.

That's helpful color. You actually answered the question even though I didn't ask it well. Just is there any settlement talks still going on?

I'm sorry?

Is there any settlement talks still going on on the GRC or are those over?

I'm going to let Jim take this one.

Okay, we won't comment on any discussions that may or may not be occurring with the commission.

That's why I gave it to Jim.

Thanks.

Gregg Orrill, Barclays Capital.

Thanks. I was wondering if you could talk about your flexibility to respond on the cost spending in the event that you would get what you believe is a negative outcome from the GRC?

This is Jim Scilacci. I will start it and pass it over to Ron or Linda for further clarification or enhancement. Whatever the commission decision ultimately provides the utility, we will set our spending in both capital and O&M to meet what the commission has authorized. It's just a basic fundamental view that we have, so if they cut deeply in areas, then we will need to adjust our spending accordingly so we can have a reasonable opportunity to earn our authorized return on common equity.

We have done this historically. We go back -- many of us in the room have been through many GRCs and this is the normal reaction to any kind of decisions you will get. You will adjust your spending and you will adjust what goes on in the organization to reflect that. I will stop there and look over at Ron or Linda to see if you have anything else to add. They are shaking their heads.

That's good, Jim. Thanks.

Thank you.

Jonathan Arnold, Deutsche Bank.

Good morning, guys. A couple of questions. When you -- you've talked about likely resolving a rail contract at Midwest Generation by year-end. Is it reasonable to expect that you would also have -- be locking down some of the rail aspects of your Trona compliance plan simultaneously?

Jonathan, this is Jim. I will start and pass it over to Pedro. You've got different timeframes here. The usage of Trona is a little further out in the planning horizon than when the rail contract expires for the commodity coal. So it doesn't line up exactly.

So as you would expect that as we start using Trona, which is more in the 2013 timeframe, we will look to lock in the necessary transportation. So that's more of a next year type of thing. Pedro, anything else to add?

Jim, that's right. The only thing I would add is that we would also expect to be looking at much smaller volumes for Trona than we would for coal.

Okay, then I noticed on the slide where you talk about dividend policy. You used to say modest annual increases and you've added this -- [while] SCE implements major CapEx program sort of second-half statement and obviously your CapEx is forecast to peak in '12 and then step down quite materially.

Is -- are you suggesting that you might be more open to something above a modest increase once we get through that CapEx peak?

Jonathan, that's something we'll have to talk about with the Board but I think the modest annual increases is still our preferred course because even though we are coming off a peak, we have gone up very rapidly and we will need to adjust accordingly. Our goal ultimately -- because our payout is obviously going down and we would like to adjust over some period of time back up to a more normal payout ratio somewhere between the 45% and 55% target payout ratio that we've talked to you about.

It may be depending upon what happens with the GRC, what happens with tax policy and whatnot that we will ultimately move to a higher growth rate but in the near future, I think we are going to stay with the more modest increases.

Thank you.

Ali Agha, SunTrust

Thank you, good morning. In the slides, you all indicated with regards to SCE's cost of capital filing, you filed that in April and I guess if I recall from prior memory, the process takes you through maybe September-October. I was just wondering once the ERC is behind you, is there a way for you to accelerate the decision-making for the cost of capital and just have that issue resolved perhaps in the first half of next year?

It's a possibility, Ali, but I think what's going to happen here if we are by ourselves, if it was just Southern California Edison, it might be feasible but we would have to include the way it works here in California. It's a joint proceeding with the [Sempera Companies] and PG&E. And so we would have to all get together and decide if we wanted to do something. And I think that's a possibility and I think the other utilities have liked the trigger mechanism that's been designed, so we look to maybe potentially retain that structure, but I would anticipate you should probably plan on a decision in late -- in the fourth quarter of 2012 realistically.

Okay, second question going back to EMG, as you look at your portfolio going forward and you've updated the pricing curves, etc. as well, realistically given how you're seeing this market, when would you expect to EMG to return back to profitability overall? Is that three to four years down the road or do you think you could do it sooner than that?

I think it's important to look at ultimately the EBITDA generation capability for the Company. And clearly from the capacity values and the forward curves, we are going to struggle for the next couple of years. It's just the math. You can do the mathematics on the open position and where prices are right now. So beyond that as we flip to an assumption of rising capacity values and a tightening in the marketplace, we come out of the trough and work our way ahead.

Now it's anyone's guess if that ultimately turns out the way the forward curves and our view of capacity values actually go that direction. We believe that's going to be the case and then we will get back to where would like to see the business. But it's going to take a couple years.

Thank you.

Hugh Wynne, Sanford Bernstein.

I also had a question regarding the upcoming cost of capital proceeding. You have a helpful chart here on page 4 of the slide deck that shows the moving average of the Moody's Baa utility index remaining within the deadband, implying no change in ROE in '12. But similarly, the index has now been for several months at or below the bottom of the deadband, which might lead the commission and the proceeding to think that a significant downward adjustment of the benchmark and the ROE would be appropriate.

I think also you recently disclosed that the ROE set by FERC in your transmission rate case have been reduced to something like 10.85, if I have it correct. So I just wanted to kind of get your sense of what our appropriate expectations for the outcome of the cost of capital proceeding? Do you think the commission will move directly to reflect these lower interest rates in ROEs. Or do you think they will take a longer term view and allow you as you have in the past to continue to earn a relative robust allowed ROE?

You, this is Jim. I will start out and leave it for Linda or Ron to fill in. Just a point of clarification. In my script, we said 10.85% was the FERC return on common equity. Initially we revised that to 11.1% and it really has to do with the mix of projects that have incentives within the rate base. So as we build more to Tehachapi, which has a higher level of incentives, the weighted average gets you closer to 11.1%.

But you are correct. The FERC did establish the-based ROE and with incentives you are getting up to these higher levels. So clearly they are reflecting lower interest rate environment and the overall returns.

Potentially, we will have to go through the discussions with the commission. Historically they've recognized with our large capital programs and the impact of debt equivalents on our balance sheet from all the PPAs we have entered into over the years and continuing to enter into various impacts beyond what the metrics without the debt equivalent stand-alone would indicate.

I don't have any great insight with low interest rates. There will be obviously pressure on the return on common equity but ultimately it's going to be dependent upon where we are at the end of the year.

All right, thank you very much.

Jay Dobson, Wunderlich Securities.

Good morning. Ted, you used the word we when you were discussing the efforts to raise external capital for Homer City. So I was wondering if you could just give us an update on sort of where that stands and sort of how you are feeling about those efforts as we close in towards year-end?

I will just give an overarching comment and then let Jim pick it up from there. The we refers to obviously Homer City is going out and doing that, but doing it in cooperation with the leasehold to equity, so primarily GE. So there are regular conversations going on there. We are trying to really present a coordinated approach to the capital markets as we look at financing. But Jim, do you want to provide anything more?

We would include -- we have engaged a financial advisor to help us in that process and we are in the midst of it and we don't have anything to add because we are right in the middle of it right now.

Got you. But that's something I assume you would have by year-end or sort of shortly thereafter. If that's true, how would you expect to disseminate that?

Again, our goal is to move as quickly as possible here because working backwards from the 2014 timeframe would we want to be able to comply with Phase 2 of CSAPR, so you have to have the equivalent installed for the two FGDs early in 2014 and just working back from the construction schedule that that would imply. We are going to need to move this along quickly.

And then the second phase then would look to finance the $300 million of additional leasehold bonds swaps to fully finance the scrubber construction and so all this has got to be done on an accelerated basis. So we are moving as quickly as possible and so Homer City is a separate registrant and if there is material news there we may have to do something separately for Homer City. So I can't tell you exactly when all this is going to unfold.

Okay, perfect. As a follow-up to that but more broadly, Ted, you indicated you are currently analyzing your sort of operational considerations for Phase 1 under CSAPR for both -- I assume both Homer City and for the Midwest Gen understanding that that still work in progress. Could you give us sort of how you are feeling about that and what sort of the current work process might suggest as far as operations in '12 and '13 for those assets?

Let me have Pedro Pizarro give you a little run down on some of the considerations there.

Sure, for Midwest Gen, as I think we've disclosed prior, we don't see a major impact from the Cross-State Air Pollution Rule and believe that current plans for operations in Midwest Gen are compatible with that rule.

You saw or you will see in the disclosures from this morning, there was a write up there on the impacts at Homer City and for the Phase 1, the 2012-2013 period as you probably know, the current rule leaves Homer City fairly short in terms of allowances. The allocation is round numbers around 26,000 tons of SO2 allowances compared to the 113,000 tons of historical emissions in 2010.

So Homer City right now is going through the process of two tracks. One is Homer City has made legal filings looking for a motion for stay on the Phase 1 piece of the CSAPR rule. And then in addition to the extent that that rule is in place once generally first 2012 rolls in, Homer City is looking at a number of options for how it would have to modify its operations or reach out to purchase allowances in the market.

A lot of variables are at play here that really won't become clear until January 1 of 2012 including at what price are allowances available in the market and to what extent are they available? Or power prices and what's the -- how do power prices respond to those allowance -- as to allowance prices? Then we will be looking at options, are looking at options at Homer City including are there differences in how the project gets dispatched or how it handles its fuel?

And this time (inaudible) units 1 and 2, right, Pedro? Has three scrubbed?

Yes, 1 and 2 since 3 is scrubbed.

Okay, great. Thanks so much.

Terran Miller, Cantor.

Good morning. Jim, I was wondering if you could give us a sense of what you think the project finance capability is remaining of the wind portfolio?

Terran, we've got over 1000 megawatts that we have not financed. Some of those are merchant projects, so there is 240 megawatts for our Big Sky project. Goat Mountain is 120 megawatts and there's another smaller project. Potentially you could finance that but traditionally that's been a tough thing to do without a PPA. So that -- if you take those out, the balance are obviously contracted and there are different stages in the first 10 years of their PTCs.

So there is some amount. It will depend upon the robustness of the market. I can't give you a number off the top of my head here if you were to ask me to give you one, but there's potential. Our job here is to look to see if we can finance the maximum extent possible or find PPAs for those merchant projects and then flip them into potential project financings. So that's the order of march here.

Okay, and do you have any optionality to do anything on the tax equity side or because of the need up top, there really doesn't pay for you?

It is certainly an option and we are considering it for a group of projects right now. But those -- (inaudible) we have not done one as of yet, we have only utilized -- since we have fit in taxable historically, we've utilized the PTC at EIX. So we are looking at that now and we will have to see how viable it is as we go down the road.

And, Ted, just a point of clarification. I've listened to many of these conference calls. I didn't get a sense that your answer to either Dan Akers' question or Steve's follow-up question was really anything different than the answer you've given in the past. Did I miss anything?

No.

Okay, thank you.

Greg Gordon, ISI Group.

Thanks, so would the $3.15 midpoint earnings estimate for SCE, just on its face appears to be an ROE modestly in excess of the 11.5. But I do understand that that includes probably includes quip and that corporate allocations also move around. So can you comment on what the sort of all the moving pieces are that get you to that number as your midpoint?

Okay, this is Jim Scilacci, and I will start there and hand it over to Linda if there is sentimental information. Generally we target to earn our authorized return on common equity and there are things that can cause us to earn slightly above or slightly below. If you look back historically, we have come in at a fairly narrow range.

The things that we see that can affect the return on the positive side for the last couple of years, been a couple of key areas and the primary one have been tax benefits. We have been the beneficiary of a lot of cash that's deferred the need to finance as much as we originally forecasted. That's comes with the cash, so you have lower borrowings. We have lower interest expense, so you have a benefit in your embedded cost of debt and preferred.

Those are the areas -- that's the principal areas that we have seen that's given us a benefit that's caused the outperformance. There's some areas we overspend. We put more O&M into our (inaudible) station over the last couple of years, but net-net-net, this has washed out and the tax benefits really stand alone as the thing that has driven it above.

I will stop there and look at Linda. Anything else you'd like to add?

The tax benefits as well as interest-related benefits from the capital spending, the timing of our capital spending program.

Okay, so you are -- when you give the rate base numbers in the appendix, do those numbers include or exclude quip?

What we do, just for clarification, we go back and give you a rate-based model and that includes just simply our rate base times our authorized return on common equity times the 48% common equity ratio. And what we have said that there are quip earnings but there are portions of our business that we don't get cost recovery for. So if you make corporate contributions, there are certain executive benefits. Our short-term incentive programs aren't fully funded.

So it tends -- we like to say that those benefits from quip are offset by those that we don't get cost recovery for. So we just guide you back to the simple rate-based methodology. So we can't (multiple speakers)

So quip offsets the nonrecoverables and you've been doing modestly better on the financing side because of the tax benefits?

You said it better than me, yes.

Thank you, guys.

Ivana Ergovic, Jefferies.

Good morning. Just a quick question about Homer City. Are you able to actually burn a different coal such as PRB and in order to comply with requirements of CSAPR in the first phase?

Pedro?

Ivana, let me just answer it by saying that we have looked at a whole range of options in terms of compliance coal without giving a whole lot detail since I don't think we've disclosed (inaudible) specifics and you get into a questions about availability and price and so that's all that's getting factored into the equation.

But we have looked at other options that include different types. There are options that include how you treat or manage the coal that you do have and are continuing to pursue changes. But I think some of those could require permit changes and so that also would factor into the equation.

Okay, thanks, and another thing. Should we assume that going forward I guess beyond 2012, could ROE for transmission would be 11.1 or does this go down? Or up? I guess you said it depends on Tehachapi which has the better incentives.

We said it depends on the mix but we said for 2012 the return would be 11.1% percent and that's going to go up or down depending upon the mix of actual construction expenditure that we end up incurring.

But going forward, is it more towards upside or going down from 11.1?

I don't really --

Beyond '12.

I can't tell you right now. We haven't put anything out there in the public domain. It's going to be in the general ballpark and it has a small impact, Ivana, because when you look at the total rate base, FERC is 15% of our total rate base, so it's going to be small impacts if it's changing 5 or 10 basis points.

Okay, thanks.

Thank you and that is all the time we have for questions today. I will now turn the call back to Mr. Cunningham.

Thanks very much, everyone. Please do follow up with Investor Relations if you have any other questions and we look forward to seeing a lot of you at the EEI Financial Conference next week. Thank you.

Thank you and this concludes today's conference. You may disconnect at this time.