愛迪生國際 (EIX) 2012 Q2 法說會逐字稿

Good afternoon. My name is Gabrielle, and I will be your conference operator today. At this time I would like to welcome everyone to the Edison International second-quarter 2012 financial teleconference.

All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Today's call is being recorded. If you have any objections you may disconnect at this time.

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, Gabrielle, and good afternoon everyone. Our principal speakers today will be Chairman and CEO Ted Craver, and Chief Financial Officer James Silacci. Also with us are other members of the management team.

The presentation that accompanies Jim's comments, the earnings press release and our 10-Q filings are available on our website at www.edisoninvestor.com. Tomorrow afternoon we will issue our regular 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 these 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 will turn the call over to Ted Craver.

Thank you, Scott, and good afternoon everyone. Today Edison International reported second-quarter GAAP earnings of $0.23 per share and core earnings of $0.32 per share. As expected, this was below last year's $0.54 per share in GAAP earnings and $0.56 per share in core earnings.

Second-quarter results reflect unrecovered costs at Southern California Edison due to the delayed General Rate Case decision. In addition, we have continued inspection and repair costs related to the outage at the San Onofre Nuclear Generating Station. SCE will look to recover these costs in the future.

We also saw additional losses at EMG this quarter, primarily reflecting low power prices. This further underscores the need to restructure and stabilize our competitive generation business, as I will talk about in a few minutes.

There are several important developments at Southern California Edison this quarter. I will spend most of my time on the San Onofre Nuclear Generating Station, or SONGS as we call it. Both units at SONGS remain safely shut down for inspections, analysis and testing following the January 31 Unit 3 steam generator tube bleed.

SCE has retained several outside industry experts, consultants and steam generator manufacturers, and in addition to heavy -- Mitsubishi Heavy Industries which designed and manufactured our steam generators, to analyze the causes of the unique tube-to-tube wear and potential remedial actions.

On July 19, the NRC released its detailed findings from its augmented inspection team. It summarized its findings by saying that faulty computer modeling inadequately predicted conditions in the steam generators, and manufacturing issues contributed to excessive wear of the components.

The report states that the excessive wear arose from tube-to-tube contact caused by vibration in the tubes in certain areas of the steam generators. The excessive vibration is due to a phenomenon called fluid elastic instability, which is discussed in detail in the report. The NRC has identified a number of outstanding issues that it still is reviewing.

To date the inspection and repair effort is focused on a substantial amount of technical analysis work and preventative plugging of tubes where appropriate, based on indications of prior or potential future wear, both in areas where there was tube-to-tube contact and tube-to-support contact.

Each of the four steam generators has over 9,700 heat transfer tubes and is designed to include sufficient tubes to accommodate a need to remove some from service for a variety of reasons. And the tubes that SCE has preventively removed from service are all well within this margin.

SONGS will not be restarted until SCE determines that it is safe to do so, and when startup has been approved by the NRC pursuant to the terms of a Confirmatory Action Letter.

Any remedial action that will permit restart of one or both of the units will need to ensure that the fluid elastic instability phenomenon does not reoccur.

Because Unit 2 experienced considerably less tube-to-tube wear it could restart months in advance of Unit 3. Any restart of Unit 2 would likely operate at reduced power levels and with midcycle scheduled outages to provide for additional inspection and testing to ensure safe operation.

Inasmuch as Unit 3 had more tube-to-tube than Unit 2 it is not clear at this time whether Unit 3 will be able to restart without extensive additional repairs.

SCE is also looking longer-term at what repairs, if any, could allow the steam generators to operate safely at full power as originally specified. At this time SCE has not determined what those repairs might be or whether the generators will need to be replaced for the units to operate at full output.

In the interim SCE is reviewing its O&M and capital expenditures at SONGS with a view to reducing expenditures to mitigate the added cost pressures from both units being out of service.

I would like to clear up some confusion that has arisen in the past regarding potential dates for submitting our response to the Confirmatory Action Letter. We have never released a specific date for our submittal. Under the California Independent System Operator rules we are required to post an estimated restart date on their website whenever we have a generating unit down for an outage, but these are only rough estimates and not formal forecast timelines.

We will not be forecasting specific timelines for a Confirmatory Action Letter submittal or potential startup dates. As we have said many times, there is no timeline for safety, and to forecast dates is inconsistent with prudent decision-making.

Turning to the regulatory review at the state level, there are several mechanisms in place for the California Public Utilities Commission to provide oversight and review the reasonableness of expenditures related to the outage.

First, the steam generator project costs remain subject to a CPUC reasonableness review once SCE submits final cost for the project. As of June 30, SCE has spent $593 million on the project compared to the inflation-adjusted authorized spend of $665 million for SCE's 78% ownership share.

Second, power purchased to replace SONGS generation is recoverable through the ERRA balancing account, which is also subject to an annual reasonableness review.

Third, the California Public Utilities code has rules governing outages. Once either of the units has been out of service for nine consecutive months, which would be November 2012 for Unit 3 and December 2012 for Unit 2, SCE is required to notify the CPUC.

Within 45 days the CPUC is required to initiate a review to determine whether to remove from customer rates all or part of the revenue requirement associated with what is out of service. Any rate adjustment is made after hearings conducted as part of future General Rate Cases.

In addition, CPUC's pending proposal to initiate an order instituting investigation regarding the impact of the extended outage is scheduled for consideration at their Thursday meeting. Jim will cover the financial impacts and recovery of costs incurred in his comments.

My remaining SCE comments will be brief. We still have no indication of the timeline for receiving a General Rate Case proposed decision, but are hopeful this could be concluded in the third quarter. We recognize the significant workload on the Commission and staff at this time, but remain hopeful that we can soon gain the clarity we need to run the utility efficiently.

Turning to Edison Mission Energy, we remain focused on developing clarity on the best approach for financially stabilizing EME. There has been continued progress this year across several self-help initiatives to improve liquidity and operating cash flow. One was to accelerate the closing of uneconomic plants and transferring Homer City to the owner-lessors.

Another has been to reduce operating and overhead costs to the extent possible, including another workforce reduction to be completed by the end of 2012.

A third is minimizing capital spending on environmental retrofits, while complying with all state and federal emissions laws. However, our greatest focus has been on the need to restructure the $3.7 billion of unsecured debt. This is because despite EME's efforts at managing liquidity our internal forecasts anticipate that EME's liquidity will rapidly decline in future quarters, and absent a restructuring of its obligations, EME will not have sufficient liquidity to repay the $500 million in unsecured debt due in June 2013.

For EME to be viable it must have a clear path to adequate liquidity, particularly over the near term when it will have the cash cost of retrofits and the tightest operating cash flows.

A successful restructuring will require at least two things. First, it will require a reduction of debt sufficient to obtain credit metrics that will enable EME to access capital markets to refinance the remaining debt well in advance of future maturities, based on a reasonable set of assumptions.

Second, it will require conserving cash wherever possible, especially over the next couple of years during the retrofit period and the severe trough in capacity payments to provide a margin of safety in a continuing uncertain market.

Given the fact that EME and Midwest Generation are intertwined, this may result in the need for revisions in Midwest Generation's Powerton and Joliet leveraged lease financing as well.

EME and Edison International are engaging on a confidential basis with advisers representing certain of EME's unsecured bondholders to discuss EME's financial condition. Should we be unsuccessful in negotiating a debt restructuring adequate to stabilize EME as part of Edison International, and in accordance with the requirements I just outlined, then EME would need to be reorganized under new ownership.

Our objectives remain the same -- eliminate the overhang of uncertainty about EME; restore EME to a healthy financial condition that would position it for future success; and act with a purpose and a sense of urgency.

While the exact path forward to success is not clear at this point, we are engaged with bondholders, and we plan on moving our discussions along as rapidly as we can.

Despite some of the challenges that I have touched on, when I step back the investment thesis in Edison International is very much intact. I'm optimistic that we can resolve some important issues this year. At SCE we continue to have a sustained need for capital investment and system reliability and meeting public policy mandates with the potential for sustained mid- to high-single-digit rate base growth.

Finally, as we move beyond SCE's 2012 capital spending peak and get the rate case and cost of capital decisions, we will seek to return our dividend in steps over the subsequent years to our target payout ratio range of 45% to 55% of SCE's earnings.

The earnings power at SCE, along with getting clarity on EME, provide the key value drivers for Edison International shareholders.

I will now turn the call over to Jim Scilacci.

Thanks, Ted. Good afternoon everyone. Please turn to page 2, which summarizes the quarter's results that Ted just touched on. I will not duplicate Ted's comments, but will add one note that EIX parent company costs were unchanged quarter-over-quarter.

Page 3 highlights the key drivers of SCE's earnings. As in the first quarter, CPUC revenues were largely based on 2011 authorized revenues. As a result, higher costs are not currently being recovered, including higher depreciation and new debt and preferred stock costs. This impact totaled $0.09 per share.

When SCE receives its final General Rate Case decision it will record the authorized revenues retroactively through January 1. During the second quarter inspection and repair costs related to the San Onofre outage reduced earnings by $0.05 per share. These costs were offset by timing differences and other cost savings, which amounted to $0.08 per share.

As many of you are aware, on June 15 the CPUC set the schedule and the approach for the 2013 cost of capital proceeding for SCE and the other major California utilities. The Commission has separated the case into two phases, the first addressing the allowed returns and capital structure, which will be decided in December, and a second phase to review the cost of capital trigger mechanism that has been in place since 2007.

SCE did not propose any changes to the existing trigger mechanism, except to reset the starting point of the index to the period ending September 2012. We would expect the Moody's PAA Utility Bond Index to continue to be the appropriate index for SCE based on its current credit ratings.

Please turn to page 4. I would like to pick up on Ted's discussion on SONGS with some more color on costs and our current investment. Year-to-date SCE's share of the pretax cost of SONGS-related inspection and repairs totaled $48 million. It was $20 million during Q1 and $28 million during Q2.

As a reminder, we continue to flow these costs through core earnings. You may recall that last quarter we estimated that SCE's share of the total incremental inspection and repair cost associated with returning both units to service was then projected to be in the range of $55 million to $65 million pretax.

We now believe that SCE's share of incremental cost to commence startup of just Unit 2 at the reduced power levels that Ted outlined previously, is expected to be approximately $25 million pretax. Of course, this estimate remains subject to NRC review and any new developments that result from further analysis and testing.

Based on additional knowledge gained regarding Unit 3 over the past three months, we have concluded it is premature to estimate the incremental repair costs associated with returning this unit to service. We are also evaluating the cost of returning both units to full capacity.

The market cost for substitute energy and capacity, net of avoided nuclear fuel, for SONGS are being recorded in the fuel and purchased power balancing account, with no impact on earnings. As of June 30 these costs, which are subject to CPUC reasonableness review, totaled $117 million. Because of the uncertainties associated with when and at what levels the units will or may return to service, total potential substitute power costs cannot be estimated at this time.

The slide on page 4 also summarizes key financial metrics related to SONGS. SCE requested annual revenue requirement of approximately $650 million in its 2012 General Rate Case to cover direct operation and maintenance costs, depreciation and return on its investment. SONGS' rate base at the end of the second quarter was $1.2 billion.

Please turn to page 5. As Ted indicated, at this time our focus remains on the technical analysis to return the units to service safely, although we are assessing all available remedies for cost recovery. The steam generators are warranted for an initial period of 20 years from acceptance. The manufacturer is contractually obligated to repair or replace defective items and to pay specified damages for certain repairs, with stated liability under the purchase agreement limited to $137 million. These limitations are subject to applicable exceptions.

There may also be potential recoveries under insurance issued by Nuclear Electric Insurance Limited, known as NEIL. And we have placed NEIL on notice of potential claims, although insurance recoveries remain uncertain.

I would like to come back to the rate case decision timing and the impacts on SCE's capital spending plan. Please turn to page 6. SCE has not changed its capital spending forecast pending a final rate case decision. However, the GRC delay will likely change the three-year forecast of actual spending which, depending upon the final timing, could bring 2012 capital spending at or below the low end of the forecast range. Actual capital spending will likely catch up with CPUC authorized spending in the later years of the three-year rate case cycle. This timing mismatch will primarily affect distribution and generation CapEx.

Please turn to page 7 which covers EMG's results. Keep in mind these results almost entirely reflect the activities of EME. We continue to wind down Edison's capital and its ongoing earnings are immaterial. As we told you last quarter, Homer City is reported in non-core earnings in both periods.

Midwest Generation continues to face weak power markets and higher delivered coal costs, resulting in a $0.08 per share higher loss. The EMMT's trading results were down $0.02 per share.

The results also reflect a $0.02 per share decrease related to certain wind projects that are consolidated in EMG's results. This relates largely to the Capistrano Wind Partners transaction completed in February. While the transaction provided an important source of liquidity to EME it effectively lowered EME's ownership interest and therefore its share of earnings.

Comparisons were also impacted by lower distributions from the DOAA project, which largely caused $0.03 per share reduction from the natural gas-fired fleet.

EMG's EBITDA was $9 million in the quarter and $50 million year-to-date. Our usual supplemental information on EMG's EBITDA, capital spending and operating hedge summaries, as well as year-to-date financial results, are included in the presentation appendix.

Please turn to page 8 and we will review liquidity. As of June 30, EME and its subsidiaries had slightly over $1 billion of cash and short-term investments. Cash and cash equivalents, not subject to contractual dividend restrictions, were $879 million, which includes $177 million of Midwest Gen cash. With a June 29 expiration of the Midwest Generation credit facility the contractual dividend restriction on movement of cash under this agreement is now eliminated.

As a side note, EME's environmental retrofit plan is essentially unchanged from last quarter, although EME continues to look for opportunities to optimize spending while remaining in compliance with applicable state and federal rules.

EME's deferred tax asset remains an important source of future liquidity under an intercompany tax allocation agreement. This tax asset increased modestly to $961 million as of June 30 from $908 million in the first quarter. Future payments under the tax allocation agreement are only available to EME if it remains part of the consolidated Edison International tax filing entity, which requires EIX ownership of at least 80% of EME.

A final point on liquidity is that SCE and EIX replaced their credit facilities during the second quarter. More details are included in our disclosures.

Page 9 is a summary of EME's financial status, which Ted has substantially addressed, and is included in EME and EIX disclosures.

Lastly, page 10 of the presentation highlights some of the key operating variables consistent with what we have introduced last quarter. As we have said previously, we will not provide earnings guidance until after we receive a final rate case decision.

With that I would like to turn it over to the operator to begin the Q&A portion of the call.

(Operator Instructions). Dan Eggers, Credit Suisse.

Ted, I was wondering if you could just share a little more thought on the EME situation. Clearly the case is being made for liquidity and survivability of the business, but how do you put this decision in context of you preserving equity value for shareholders demonstrate there is ongoing equity value, but just kind of going into your concern.

Yes, it is a great question. And I think at this point like most decisions of this sort it is going to be a matter of relative value.

Generically there are going to be two choices, either EME will make sense as a continuing part of the EIX family. And I have tried to be clearer over the last few earnings calls about the markers that we have in mind that would really provide us and our equity investors sufficient clarity around the viability of EME as part of EIX.

If we are unable to really gain that clarity or unable to really see a viable entity that ultimately can return to providing value to EIX, delivering on its underlying mission, then it really won't make sense to be part of Edison International and will need to be owned by others.

So at this point it is too early to tell really what is the art of the possible. We are -- as I mentioned, we are beginning the process of engaging with bondholders to determine that. And if we get sufficient clarity, get sufficient certainty, and we can really see a path for EME to be a value-adding part of EIX then that is the way we will go; if not, then it is not going to be part of EIX.

And I know your negotiations are starting now, but is there a timeline you guys have set as to how quickly you want to have this resolved or how long you think would take to get to clarity?

Yes, we chose the words carefully in my opening comments trying to indicate that the time is now. We need to engage. We need to get these conversations going. We are doing it with a sense of purpose and a sense of urgency, and we want to resolve this.

The uncertainty I don't think is doing anybody any good. I don't think it is doing EIX equity holders any good. I don't think it is doing EME any good. We have got important operations. We have safety that we have to have in mind. All of these things I think really say we need to reach a conclusion here with dispatch.

Okay, thank you.

Michael Lapides, Goldman Sachs.

A couple of questions, first on Mission. I know you've talked about not having liquidity to meet the $500 million maturity next year, but you have got some decent-sized bond payments coming towards the back-end of this year, I think, late in the fall.

I am just curious, are those bond payments kind of the trigger date we should think about, meaning that you kind of want to make a decision before those payment dates show up, or is it something that could go into next year?

It is Ted. The short answer is yes. I think those interest payments are very important, and even waiting out until November when those interest payments are due is in my mind not moving with dispatch.

Okay. And you have talked a number of times over the last 6 to 12 months about wanting EIX to have competitive generation, meaning, not wanting solely to be a regulated utility holding company.

I am just curious, if it comes to that, and that merchant generation company is not Edison Mission, how would you get it off the ground? How would you get started?

Maybe I'll -- sorry, this is Ted again -- maybe I will just reshape your words a little bit here. I think what we have stated in the past is we believe that it is important to have both a regulated and competitive business platform. Competitive generation in my mind is a subset of a competitive business platform. So just one clarification on that point.

I think in general we would have to admit that things like the potential for distributed generation or more retail-related services or even other competitive business activities that would be outside of our regulated footprint at Southern California Edison, but those are more futuristic.

We think there is some important opportunities that we want to continue to track and continue to focus some attention on. But it would be better, I think, to make use of some existing skills and an existing platform than to create those from scratch from whole cloth. But that is probably an advantage on the margin, and I don't think it is one that really drives our thinking at this point.

Got it. Okay. I will hop back in the queue. Thanks, Ted.

Jonathan Arnold, Deutsche Bank.

I had a quick question on -- for the $48 million that you incurred so far at SONGS. Can you give us an idea of how much of that was Unit 2 and how much was Unit 3 versus, I guess, the $25 million future spend that you have earmarked for getting Unit 2 back at reduced power?

No, I don't have a breakdown here, and we haven't disclosed the breakout between the two separate units.

Okay. Is there anything else you can do for us to try and frame what the terminology -- I think you used extensive as the possible additional repair work that might be needed on Unit 3 could mean. Is this actually multiples of Unit 2 or just moderately more? Anything you can -- any additional framing you can put on that?

This is Ted. Just a quick part on that. I think the main thing we are really trying to signal here is we probably can't address entirely the issue of keeping this phenomenon, this fluid elastic instability phenomenon, from reoccurring by simply operating at reduced power in the case of Unit 3. So what we are really trying to signal is it needs more than reduced power types of operations. So that is really what we are referring to.

We haven't gone far enough down the road at this point with Unit 3 to really come up with anything more definitive than that in terms of exactly what would be required to restore it.

Okay. Can I just try one other thing on this topic, Ted? Is there any -- when you analyze the scenarios around what is the best deal for customers, of the costs you're looking at, is there really any question that fixing it is the right option?

Well, I think at this stage you would expect us to have all the options on the table. At this juncture we're just trying to do this in the most disciplined, systematic kind of step-by-step approach.

And these are complex technical issues. It is a first of a kind type of issue that we are dealing with, meaning, this tube-to-tube wear. So we're just taking it one step at a time without trying to get too far ahead of ourselves.

But, yes, at this point of course all options are on the table. We are focused mostly on getting Unit 2 restored, if we believe we can do it safely. And as we said, it is pretty clear to us initially that would be at reduced power with a relatively short operating window so that we can take it down and go through reinspections. And all of that will help inform us in terms of our future actions as well.

Great, thank you.

Paul Fremont, Jefferies.

I guess two questions. One, you talk about a targeted payout of 45% to 55%. If Mission were no longer -- if Mission were to file for bankruptcy, should we assume that you would be targeting the same level of payout or would that potentially change?

It is Jim. We have based the dividend for EIX on the earnings of the utility. That is the way we've always done it, so I don't foresee that any action in and around EME would affect our payout policy.

Okay. And then the second question that I have is if EMG were to file could you give us a sense of how we should think about the $961 million of tax benefit that sits there? Is there any precedent in other filings as to what would happen? Would EIX be forced to repurchase that or how should we think about it?

This is Jim again. Well, I think that is a complicated issue, and it would be certainly embroiled in any kind of negotiation with bondholders or during a bankruptcy process. I don't think we could predict at this point in time what ultimately would occur.

It is clear that as long as EME is part of the consolidated family, and that might be during the period of a bankruptcy, and we would have to monetize tax benefits.

But ultimately where it plays out in the end, that is harder to say. So there would be a point in time when ultimately the clock could stop ticking and you would cut off ultimately the monetization of tax benefits. But that will take a lot to get resolved and it could take a period of time. I couldn't predict at this point in time how long.

And are there any precedents that we could look at in terms of other companies where this has been ruled on?

Yes, I think the only one that comes to mind from when we previously saw this, and it is going to be dated, so there was some discussion around the BG bankruptcy when their competitive generation business went into bankruptcy. But again, remember that was back in 2001, 2002, so I would be careful looking at that precedent given the passage of time.

Thanks.

Steve Fleishman, Bank of America Merrill Lynch.

A couple of just logistical question on the SONGS. Is there a way to break out the rate base between Unit 2 and Unit 3?

At this point in time it is not -- we haven't provided it. And so, again, in future filings we may have to do that, but at this point in time I think that is something for the future.

Okay. And then, also, on the comments you made on the rate base related to the GRC, and that for 2012 you will probably be at the low-end or below on your CapEx.

Yes, that is yes.

But then just to clarify, you will expect to make up for most of that in 2013, 2014, so does that imply that 2013, 2014 could be toward the upper or above the upper-end so that it is equal over the three years?

So that is exactly what would occur. We have had this pattern before when you get a late GRC that your actual capital expenditures will differ than authorized. And so actual capital expenditures will lag, then they will go above. But remember on the rate-making basis we get paid and our revenues are based on authorized. So we are just trying to draw attention to that phenomena.

okay. And I guess one last question on the Edison Mission situation. I think at times there has been talk about the potential that if you do -- if it does end up going under different ownership that there could be this worthless stock deduction. Could you just comment on whether that would be likely and at what point in time would that potentially be deducted, so to speak?

We haven't put in the public domain what, if any, worthless stock deduction there would be. And it is always taken at the conclusion of a bankruptcy process. And the fact that there is a worthless stock deduction could get dragged into the negotiations in some type of bankruptcy proceeding. So I couldn't even begin to tell you what the breadbasket is.

And there is a number that changes constantly each quarter based on the earnings or losses, and the monetization of tax benefits can change a worthless stock deduction. So it is constantly changing so we have been taking a position not to put it into the domain until we actually get further down the road.

Okay, thank you.

Ali Agha, SunTrust.

Ted, coming back to your thoughts on EMG and what you see as the viable entity -- stable entity going forward. Assuming it doesn't file for bankruptcy, and you get what you're looking for through this restructuring, how should we be thinking about the underlying earnings or positive earnings power of that entity?

Should we think that coming out of bankruptcy this is a profitable entity from an earnings perspective, or should we think that this is really driven by these capacity payments and forward curves, maybe profitability is a couple of years out? How should we think about that as far part of the equity value proposition if you do stick with EMG?

It is a great question; unfortunately, I don't have a great answer. Certainly it will depend on what power prices and capacity prices will be. We have got a little more clarity on the capacity price side than we do on the power price side as we go forward, but that is really going to be the determinant.

I would have to say based on current pricing and that type of stuff I don't know that we would expect to see anything close to robust earnings in the subsequent years. But frankly I am kind of throwing darts here at this point. It will depend on what comes out of any negotiation, and it will certainly depend heavily on what the actual prices are once you come out of the restructuring process.

And the second question, just coming back to SONGS again, just a bigger picture issue there. The first quarter when you guys laid out what is going on there, the expectation at least was that the cost that you were incurring, you are very confident you would basically recoup those either through warranty payment or regulatory process.

I just want to be clear, is that still your view right now? And how should we think about the point you make about the amounts that are in your current GRC, the rate base? And is that a scenario unfolding that the Commission takes out SONGS from rate base and from customer rates, and hence that could be they have negative earnings implications to think about from our end?

Again -- well, you are two for two, two great questions. And I am going to be two for two, not two great answers. I don't think we really know at this point. What we tried to do in the discussion here is outline what the proceedings were. What we can anticipate roughly in terms of the timing of those proceedings, and which costs or what costs will be part of those proceedings.

That is about as definitive as we can be at this point in time. Not the least of which we don't yet really know ourselves what the potential fixes or outcomes are for the two units. So I would say at this point there's more that we don't know than we do around what those specific numbers would look like.

Thank you.

Greg Gordon, ISI Group.

Two questions. One, just on -- Jim, on the comments you made relative to capital expenditures, relative to projected rate base growth. So presuming that you get a General Rate Case decision that validates the CapEx plan and the rate base growth profile that you project in these slides, what you're basically telling us is that you would book your revenue requirement as if you were spending on plan, but the cash flow profile would actually be slightly more middle to back-end loaded on the actual expenditures. So that on a GAAP basis to what I can see slightly higher earned ROE in the front and then it smoothes out towards the end. Is that right?

I think you hit it completely on -- nail on head.

Okay, great. Second question, am I correct that this is the first time that you talked with investors explicitly about making a NEIL filing for insurance recovery? And can we talk about the process there and what you think you're covered for?

It is the first time. We have always had insurance from NEIL. That is something that all nuclear facilities -- it is a mutual. And in terms of the process we haven't provided any additional information on what that will be. That will unfold over time and as we actually make the claims. And we will include it in future disclosures around San Onofre.

But are you expecting to file for outage insurance as well as for the cost of repair?

Just let me go back -- the way it works just for further clarification, for -- there is a period of time -- there is a deductible, and the disclosures get into more detail on this, and so you have to read it carefully.

There is a period of time when we cannot recover replacement power, then it kicks in. And there are certain limitations associated with it. And there are certain limitations on it if there are one or two units out. So read that carefully, and I think it is pretty clear.

And there are limits on the total amount of insurance that we could ultimately recover from an outage. And I'm going to go back and pause again and let you re-ask your question, because I wanted to fill in that gap piece.

Right. Well, it says here on page 5 of your deck that you have a 12-week adjustable period.

Yes.

And then after that you can file for outage from damage. And then you also have accidental property damage. I guess, my question is whether you going to file for accidental property damage, outage or both?

Yes, is the answer.

Okay, thank you.

Kit Konolige, BGC Financial.

Ted, a question back to your discussion of the dividend. I wrote down the notes here that we have some challenges, but we are optimistic. I guess, to the effect of after we resolve the challenges then we will look to grow the dividend again. Can you be more specific about what has to be overcome before the dividend starts to grow at this more robust rate?

More specific -- well, maybe just to reiterate what I said is we see 2012 as basically being around the peak of the capital spending at SCE. We have talked a little bit in some of the comments that Jim made, as well as the Q&A up to this point, that the exact shape of that is a little tricky to completely predict. But I still think the basic point stands that we are probably close to the peak in capital spending in 2012.

So while rate base will continue to grow in subsequent years, it is growing at a decreasing rate. And that phenomenon in utility rate-making causes kind of a -- I referred to it as a bow wave of cash that builds up. So I think that certainly starts to set up the conditions for being able to look at moving our dividend back into the targeted payout ratio range, which is based on SCE earnings entirely.

So we have fallen out the bottom of that range. And so in kind of a step-by-step manner we would expect to try to address that to move it back up towards the targeted payout ratio range.

We have indicated that we have some important regulatory decisions right in front of us here this year, namely a rate case and the cost of the capital decision. And both of those remain outstanding, so we certainly would need to get decisions on those two things to really know what we are looking at in the near-term around the dividend.

But I think the direction is the way we have stated it here the last several earnings calls that we see the day where we can start tuning up the dividend payout and move it back towards our payout target ratio.

And just to follow on that, are you at a stage now with SONGS where you would feel that that needs more clarity or some kind of resolution before the next stage of the dividend is addressed or would that just be taken in stride?

Well, I think it would be a consideration, but the types of things I'm talking about here are fairly long-term and directional, so it will be like other issues, it will be things that you certainly take into account when you're trying to set a responsible dividend and follow our financial disciplines. But I think it is -- take it in stride, I guess, is more in the neighborhood.

Thank you.

Hugh Wynne, Sanford Bernstein.

Ted, I know that you can't predict how the CPUC is going to respond to the SONGS outage, but I was hoping you might be able to reiterate the schedule on which the CPUC would make its determination, and perhaps give us a little bit of guidance as to the degree of discretion that they have in making their decision.

You had mentioned that after nine months of outage you have to notify them. Can you take us from there as to what the steps are on the regulatory calendar?

Yes, I am actually going to probably turn it over to the folks who are a little closer to all those specifics. But we have tried to identify the three main proceedings that will have some impact on cost recovery around San Onofre. But, Ron, you want to pick that up?

This is Ron. With regards to the PUC Section 455.5, when we have been out of service for nine months we would have to notify the Commission on Unit 3 in November. They have 45 days to respond. That will look at our revenue requirements and focus on the O&M costs.

The reasonableness review, if the Commission elects to do it on the steam generator replacement project, that would be initiated when we complete the project. We currently estimate that we will complete the disposal later this year of the units, and that would be the trigger for that. And then the ERRA proceeding, that will be April of next year.

Okay, so on the first proceeding, the Section 455.5, what is being reviewed there is simply the direct O&M or the recovery of depreciation and return on investment as well on the delayed unit?

The rate base, the depreciation and recovery -- it is basically a review of the rate base which would include your O&M and then your depreciation and return.

Right, so we're basically looking at possibly half of the $650 million that you estimate here as the annual revenue requirement?

They would review the whole revenue requirement based on the conditions that we have at the time.

Right, okay. Thank you very much.

Jay Dobson, Wunderlich Securities.

Maybe just finishing on that last one with Ron. If they do elect to start an OII this Thursday would that Section 455.5 proceeding be set into that or are these just -- it would be two separate proceedings?

I think the short answer is at this point we don't know. I think there is some benefit -- I am stating an opinion here. I think there would be some benefit to have some of these things consolidated instead of having multiple proceedings. But at any rate, presumably that is what the Commission will consider later this week. We really can't predict how all that would flow out at this point.

And just for clarification purposes, if you get into a 455.5 situation it is done on a unit by unit basis. So they are looking at the revenue requirement for each unit. So if SONGS 2 were to come back up, SONGS 3 stays down, then you could actually have a separate proceeding for Unit 3.

Got you. Okay, that is great. And then, Ted, maybe going back to EMG, and I will apologize in advance for doing this to you. I think I heard you respond in an earlier question that you sort of sounded like November was too late to respond.

And I think on earlier conference calls you had -- maybe the word committed is too strong, but suggested that an answer might or should be given by September, just using the clock, the 6- to 12-month clock you started a year ago in September.

Is September too aggressive to assume that we would have an answer by then, given the complexities of the situation and where we stand now on July 31?

Again, I really don't know. Now we are getting into fine cutting on the days, but from my perspective you can make these things drag on forever and ever and complicate the heck out of them. I think it is actually going to end up being reasonably straightforward about what will be sufficient to have a viable entity on a go forward basis. And if we can't reach that then we go to other options.

So from my standpoint sooner is better. I think the data is being made available. We ought to be able to sit down and work through this thing and figure out if we have got a good mutual approach that works for all parties.

Got you. So something like November is probably the right sort of timeframe to think about, understanding it is rough and sort of mirroring your response to an earlier question.

Well, since I will probably only get in trouble by trying to predict dates, I will just let you -- I will let you work with your dates. But we are focused on it right now.

Great, thanks for the clarity.

Angie Storozynski, Macquarie.

Two questions. First, when I look at your parent cost how much of the parent cost is being now covered by EMG? So in other words, if EMG were to cease to exist, how much of incremental expense and should I account for when I look at the parent and utility earnings?

That is an excellent question. We haven't put anything out in the public domain. There would certainly be some amount of cost that we allocate to that side that would not be potentially recoverable if it went down the road that way. But that would be -- we will incorporate it in some kind of future disclosures, but we don't have anything now.

But can you give us any sense? Is this $0.50 or is this a de minimis amount?

I think it is a relatively small amount. Because we said already that the holding company cost is about $0.01 a month is what we -- generally we have indicated it is about $0.12 a year. So it is not a large amount of money when it is all said and done.

Okay. And the second question is about the NEIL recovery. It seems like there are so many companies seeking recovery from NEIL, should we worry that NEIL is going to run out of capacity to actually provide insurance coverage?

I don't know if I can answer that. NEIL has been around for quite a long period of time. It is a mutual. There are quite a bit of reserves associated with it. There is mechanisms for them to go out and get additional funds should you exceed certain calls on their capital. So I think that is a question you can direct to NEIL, but I don't think there is a concern at this point in time.

Okay, thank you.

And we have reached the end of our questions-and-answers session. I will now turn the call back to Mr. Cunningham.

Thanks very much everyone for participating, and don't hesitate to call us at Investor Relations if you have any follow-ups. Thank you.

And that does conclude today's conference. Thank you very much for your participation. You may disconnect at this time.