Edison International (EIX) Q2 2008 Earnings Report, Transcript and Summary

Good morning and welcome to the Edison International's Conference Call. This call will be available for replay at the following numbers: domestically 877-693-4277; internationally, 402-220-0042. You will need to use the pin code 11701 which is the same pin used today to access your call. For your information; this call is being recorded. Also we want to advise you that Edison International is holding a simultaneous webcast of this conference call. This will be available on the company's website in a listen-only mode for interested parties. When the conference begins, you will be on listen-only and there will be a chance for questions and answers at the end. [Operator Instructions]. Thank you for your patience. At this time, I would like to introduce your host, Scott Cunningham, Vice President of Investor Relations with Edison International. Thank you and have a good conference. You may proceed, Mr. Cunningham.

Thanks Lenny and good morning everyone and thanks for joining our call. Our principal speakers today are Ted Craver, our Chairman and CEO, and Jim Scilacci, our Chief Financial Officer. After their remarks will be a Q&A period as usual. Also with us to participate in the Q&A are Al Fohrer, CEO of Southern California Edison, and Ron Litzinger, CEO Edison Mission Group. The presentation that accompanies Jim's financial review, together with the earnings press release and second quarter 10-Q filings are available on our website at www.edisoninvestor.com. During the call, we will make forward-looking statements about 2008 and longer-term financial results for Edison International and its subsidiaries, and about other future events. Actual results could differ materially from current expectations. Important factors that could cause differ in results are set forth in our 2007 Form 10-K and our other SEC filings, which we encourage you to read carefully. The presentation also includes additional information including certain guidance assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. With that, I'll turn the call over to Ted Craver Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: Thank you Scott and good morning everyone. Today is actually the end of my first week as CEO of Edison International and my first quarterly earnings call as CEO, although I have done a few of these before. So, since it is my first call from this chair, I wanted to take some additional time this morning to share some broad overview points and then we'll turn it over to Jim to talk about second quarter results. And in my opening remarks, I want to touch on three mains areas: our management team, the broad value proposition at EIX and our most important business priorities or focus points, if you will, over the foreseeable future. Last week marked the end of John's 18-year term... term as Chairman and CEO of Edison International. Also, marked the point where Tom McDaniel retired as CFO after 37 years with the company, and Lon Bouknight retired as General Counsel of EIX. Over the last few weeks we've had several opportunities here at the company. I thank the three of them for their many contributions and celebrate the long list of achievements. But I really wanted to start my comments this morning by publicly expressing one last time my gratitude for what they have done for the company and thank them for their contributions to setting the company on a path to future success. I also want to express my deep enthusiasm and excitement for the senior management team we have round this table this morning. Al Fohrer heads up our utility operation and is known to many of you. He's a very able veteran of both the utility and the competitive generation business but particularly skilled on utility side. Since becoming the CEO of Southern California Edison, six and a half years ago, he has pulled together a management team of seasoned executives who know well the complexities of this business and how to balance the needs of customers, communities, employees and shareholders. I truly couldn't be more excited to have Al and his leadership as part of this team. I asked Ron Litzinger to return to Edison Mission as CEO replacing me. Ron and I worked closely together during the restructuring of VME in 2003 and 2004. And Ron has strong experience and skills particularly in generation operations and in project development, two critical areas for us at EMG in the coming years. Like Al, he also has strong strategic instincts and abilities. You'll hear this from me many times here this morning and in future calls that our success is all about superb execution of our business and growth plan. Al and Ron and their management teams and employees are on the front lines of execution and have the primary responsibility for ensuring, we deliver on what we all believe is the enormous potential of this company. I asked Jim Scilacci to succeed Tom McDaniel as CFO of Edison International. Jim spent 20 years in Southern California Edison in various capacities but as CFO for the last five years of that time. And he then became the CFO of EMG for the last three and a half years. So he has deep knowledge of both sides of our business. He also has been involved in most of the major financings we have done at both companies over the last several years, and I'm very pleased to have Jim as our CFO with his steady solid confidence. I asked Bob Adler to succeed Lon Bouknight as the General Counsel at EIX. Bob came from Munger, Tolles & Olson, where he started more than 30 years ago and was most recently Co-Managing Partner. More to the point, Bob was the most important job partner and colleague with me on several projects over the last 10 years at Edison, including the gas plant sales at SCE which were required as part of California's de-regulation. The settlement agreement that we negotiated with CPUC to end the California energy crisis and the restructuring and international asset sale to put Edison Mission on the track to restore financial health. Bob has a terrific business sense and the highest integrity. I am so pleased to have him as our General Counsel. I've put this management team up against any in the industry, which is why I've spent so much time talking about it here this morning. This team is, in my opinion, a difference maker. Let me move on to what I see as the value proposition at Edison International. I believe it boils down to being able to realize our substantial growth potential. This requires outstanding execution. We must execute well to realize what is in front us. That is one of the reasons why I keep stressing the management team. It's doing hundreds of things right, the right way everyday. The big opportunities I see are in growth. At SCE, it is mostly the growth prospects on the wire side of the business, not just building more transmission and distribution, although that's the bulk of it, but also investments in smart meters and the smart grid. At EMG, the opportunities are mostly in developing renewables, primarily wind and solar and selectively gas-fired assets. We have the date favor as the value proposition of developing assets as opposed to acquiring individual assets. Of course, there were challenges we faced in realizing these opportunities. At SCE, the largest challenge is the sheer enormity of the growth opportunity. By this, I mean, managing the execution risk of such a huge capital investment program and the impacts that the pace of installation could have on customer rates, if fuel becomes [ph] a cost rise dramatically at the same time or political and regulatory conditions soar. At EMG, the challenges stem from the high concentration we have in merchant coal, it's about three quarters of our megawatts and the related environmental uncertainties associated with coal assets. So, however, we are going to realize what I believe and what this management team believes is one of the best opportunities sets in the industry. Given the inherent opportunities we have at EIX, superior execution is the critical success factor. Over the foreseeable future, there are five main focus points or business priorities involved in our execution. My intention for the remainder of my comments is simply to identify those for you without explaining them in great detail. The first is obtaining good regulatory decisions, particularly at the pending general rate case and the energy efficiency decisions. Approval of a fair and reasonable GRC is the foundation of our ability to provide reliable electric service to our customers. We, our customers, and the state are at great risk if we can't provide reliability. This is also the basis of our growth program at SCE. This is the huge focus point for us this year and we need a timely decision. We are struggling to get a timely decision on the energy efficiency earnings mechanism by the end of the year. And as you know, we have identified $0.08 for energy efficiency earnings in our guidance this year. And we do not want to slip into 2009. So there is some important work to do there with the commission. I also put our cross-border lease dispute with the IRS into this category as well. It has been over the last 18 months and will continue to be a significant focus point for us to find a reasonable path to resolve this dispute. Jim is going to cover the recent developments in our efforts with the IRS in his comments. Second focus point is managing well our large construction programs. Many parts of both SCE and EMG are engaged in some form of engineering, procurement, and construction management activity. This is not just a near-term issue but something what we will be dealing with for years to come. It is challenging as we compete with many other infrastructure and development needs in the country, but doing it well is how we actually deliver the growth we are all so excited about. Diversification is the third point. EIX has the integrated electric model that combines the scale and stability of our utility business with the flexibility of the competitive generation platform at EMG. But the diversification that I am talking about here is within EMG. The principal strategy at EMG for more than the last three years has been to diversify our concentration in core assets. The sale of the international assets in 2004, while raising a $3 billion in cash necessary to restructure the company, had the effect of making us coal heavy. That concentration has consistently generated little over a $1 billion of EBITDA for each of the last three years as the dark spread has expanded, which has in turn allowed us to equity fund much of our diversification strategy. But we have to deal with the environmental risk which is the major reason for focus on renewables as the principal means of diversification. We hope we could acquire some gas-fired assets to offset the coal risk as well, but we have bought at the valuations, which in our opinion, require unrealistic beliefs about capacity prices staying at replacement cost levels far into the future. But for better or worse, we've opted to maintain our discipline, pass on the asset options and focus on developing gas assets, such as the 500 megawatt Walnut Creek gas-fired project we recently announced. Ideally we would like to be roughly equally balanced between coal renewables and gas-fired assets. But in the near term we will continue to focus most heavily on developing our renewables pipeline. The fourth business priority is meeting the environmental challenge. Our greatest challenges are, of course, at EMG, where we have our major coal exposure. We want to meet the environmental challenge. We want to provide affordable reliable electric service and we want to create value for our shareholders. That's why we work with the state of Illinois to reach a comprehensive environmental settlement on mercury, NOx, and SO2. We continue to believe our deal with Illinois was forward thinking and ground-breaking. Our guiding principals in the settlement were, a) move to top tier emissions profiles for the fleet but in a reasonable timeframe that allows both us and the state to evaluate the environmental and reliability needs; b) take care of the most sensitive issues first, namely, mercury in the lakefront and in-city plants. And by the way we finished installing the mercury controls for Waukegan, Fisk and Crawford last month. C) stage the investments over time to build execution experience and get past the first industry bulge of retrofits, and d) build in a stage set of options roughly in the order of the degree of difficulty of the decisions, that allow us to evaluate the economics of the each retrofit, to determine that if it makes more sense to shut down the plant or put on the retrofits. We thought it was essential to try to reduce the large uncertainties with the environmental retrofit costs for our fleet. We thought it best to enter into a comprehensive settlement that created specific yearly emission standards and that gave us the ability to evaluate our environmental investments. And in fact, we gained some certainty with the Illinois settlement, but new source review, notice of violations from the USCPA and the Department of Justice, and most lately the Court's decision vacating CAIR rules, have put us back into an uncertain world. Evolving water quality rules and of course, very importantly, uncertainty of future carbon regulations further complicate the decision making around environmental retrofits. But the bottom line is we won't make retrofit investments unless they could be justified and have a reasonable prospect of investment recovery. This will continue to be a huge focus area for us. We will have some critical information in front of us towards the end of the year when we finalize the specific engineering and cost estimates for the SCRs and FGDs for the two Powerton units. These two units are our largest and the youngest of the fleet and will be the basis for the cost estimates for the rest of our units as well. And as I have said, we are focused on building up the renewables portfolio, which provides some portfolio offsets to our carbon footprint at EMG, which brings me to my final focus point, which is to deliver on our wind development pipeline. We have been quite focused on building out our wind portfolio. We made some decent progress since the end of the first quarter. In fact, we have increased our wind installed capacity by 34%. As of the end of July, we have 756 megawatts in service and 429 megawatts of projects under construction and our development pipeline, which is the feeder stock for potential projects suited over 5,000 megawatts at quarter end. We reported to you last quarter, the issues we have had with Suzlon turbines. We see these turbine supply challenges well along the way to being resolved now and we're pleased with the continued technical and financial update [ph] from Suzlon in this regard. We don't expect any meaningful earnings exposure from these problems, because of the contract protections we put in place at the time of the original purchases, which have been enhanced by some recently negotiated provisions as well. We believe turbine supply conditions are becoming more favorable as we look ahead. We see no further delays in moving projects into construction from our development pipeline. We are in negotiations with a supplier for turbines available for 2009 delivery that will essentially offset the turbines we've recently cancelled from Suzlon. And we've already started to secure turbines for 2010 delivery with 300 megawatt order placed with General Electric in the second quarter. In summary, because our growth prospects across the company are so strong, our primary focus is executing well on these five major areas to realize our full potential. And at this point, I would like to turn it over to Jim to take us through the second quarter. Jim?

Thank you Ted, and good morning everyone. At this time please turn to page 2 of our presentation. This page summarizes some of the key points for the quarter, which I will cover in my remarks. Going to page 3, we show our quarterly earnings on a GAAP and core basis. For the second quarter of 2008 core earnings, which exclude income from discontinued operations and other non-core items, were $0.79 per share, up 8% compared to last year. Reported earnings for the second quarter of 2008 were much higher than last year, primarily because of the $0.45 early debt extinguishment charge at EMG. Moving to page 4, I will review the performance drivers in more detail. SCE core earnings per share were $0.04 per share higher than a year ago. The utilities results benefited from lower income taxes, primarily arising from higher deductions from our capitalized software and infrastructure replacement programs and favorable net interest expense, primarily from lower amounts owed in our regulatory balancing accounts. These benefits were partially offset by lower operating income which largely reflects timing differences between operating expenses and revenue recognition established through rate design. As discussed previously, SCE's operating expenses are recognized more evenly throughout the year while revenues are more weighted to the third quarter. For the second quarter, EMG's core earnings were also up $0.04 over the prior year. You can see in the presentation Midwest Generation had a solid quarter, as margins benefited from higher generation, higher realized energy prices, and capacity revenues. However, this performance was mostly offset by results at Homer City, which had lower generation driven largely by forced or extended outages during the quarter. In the balance of the generation portfolio, which is reported in the corporate expense and other line item in the presentation, we saw a good growth from our wind portfolio, contributing roughly $0.04 per share. As expected the Big 4 project earnings were approximately $0.03 per share lower than last year. This reduction is less than we originally anticipated in our guidance, primarily because of higher margins than we expected. Our Watson and Sycamore projects are now operating under extensions of their old SCE contracts, with revised pricing approved by the CPUC. We also continue to see higher G&A related to our growth platform that Ted talked about. EMMT, our trading operation, had a good quarter with trading revenues of $51 million compared to $36 million for the quarter before. As you are aware, our trading activities are largely focused in regions where we have developed strong market knowledge, primarily supporting our assets. Edison Capital had a strong quarter, primarily from $0.07 per share benefit from an early buyout of its lease in the Beaver Valley nuclear plant. As we have mentioned before, we are not making any new investments through Edison Capital. Excluding the Beaver Valley gain, ongoing results were down slightly compared to last year, consistent with the roll-off of its investment portfolio. Included in the Midwest Generation and Homer City results are FAS 133 adjustments, which reduced earnings by about $0.02 per share compared to last year. These primarily relate to the ineffective portion of our hedges. As of June 30th, we had recorded $54 million of FAS 133 pre-tax unrealized losses for our coal fleet. These losses do not affect cash flow and we will recognize true earnings over the next three years as our hedge transactions close out. To finish up the drivers, EIX corporate costs were in line with our full year trend assumptions and discontinued operations were not a factor in the quarter. Turnings of operating performance on page 5, Midwest Generation's performance shows generally improving trends in generation, availability, load factors and average realized prices, which mirror the improved earnings. Moving to page 6, higher forced outages meaningfully reduced Homer City's operating and financial performance. Both the quarterly and first half FP4 rates exceed 10% which is at the upper boundary of our target rate. There were three main causes for the forced outages. One of our tube leaks was the leading cause of recurring forced outages in our coal fleet and we are observing an upward trend at Homer City. EMG is implementing that F3 boiler tube failure analysis program and we are targeting a 50% reduction in boiler tube leaks over the next several years, which should significantly contribute to returning our forced outage rates back to about 5%, which is in the lower boundary of our target FP4 range. Secondly, a major fan motor failure at Unit 3 caused a 150 megawatt derating for nearly six weeks. This fan motor added as part of the FGD installation in 2003, failed well before its expected life and we did not have a spare in inventory. As a result of this incident, we have expanded our critical spare part review to include all critical electrical components, such as transformers and large electrical motors. We will consider purchasing additional spares where economically justified. And finally, our planned maintenance outage at Unit 1 ran over schedule. EMG has absorbed several scheduled outage extensions in the past two years, and has launched an initiative to improve our outage planning, execution, and quality control practices, and procedure. One additional factor was that we intentionally removed Unit 3 from service for nine days in late May and early June to make numerous preventative tube replacements in a section experiencing high erosion rates. Moving on now, realized prices at Homer City were about the same as last year, although market prices rose substantially during the quarter. This was primarily due to hedge contracts entered into prior to the increase in market prices and the impact of the wider basis between PJM West Hub where we hedged our power, and Homer City busbars where we sell our power. Finally, the previously mentioned forced outages also limited our ability to capture higher pricing with our unhedged position. As we have said before, we typically hedge only two of the three units at Homer City. You can find year-to-date results on pages 7 and 8 of the presentation. Turning to page 9 on the presentation, you will notice that Midwest Generation and Homer City added 11 million megawatt hours to their hedge positions for 2009 and 2010. You will note that we've updated our Homer City disclosures to reflect the fact that we've previously entered into option agreements to purchase 1.7 million tons of coal for 2009 and 1.2 million tons of coal for 2010. Since we have not exercised these options as of yet, they are not included in the amount shown on the charts. These additional hedges, together with our coal position, will reduce earnings volatility over the next two calendar years. Given the volatility and uncertainty associated with power markets, we reduced earnings at risks by employing a rolling 24 to 36 month hedge program. This means hedging a higher percentage of the dark spread in the current year as we've done in 2008, with lesser amounts two years out, that would be 2009 and 2010. Generally for the prompt year we would like to be in what we call a hedge neutral position where we have hedged about 50% of the total kilowatt hours that we expect to produce. We believe this is a good balance between reducing earnings volatility and a trade-off between potentially higher collateral requirements and preserving upside should market prices improve. Turning to page 10, this shows our capacity hedge position. We updated this chart to show capacity sales for the 2011-2012 RPM planning years at a price of the $110 per megawatt a day. The next topic I would like to discuss is the current status of our cross-border leases or so called LILO, SILO investments. During the second quarter, three court cases addressed income taxation of cross-border leverage leases. After careful review of these cases and assessment of our specific facts associated with the leases, we concluded that no change in our accounting treatment of our leases should be recorded. Had we been unable to reach this conclusion, we believe the maximum earnings exposure related to the leases alone, measured as of June 30, would have been approximately $1.25 billion after taxes. As previously disclosed, we have been engaged in settlement negotiations with the IRS for some time. These negotiations seek to resolve on a global basis, the lease issues, and all other tax disputes for the years 1994 through 2002, including certain affirmative plans for unrecognized tax benefits. Edison International and the IRS have reached non-binding preliminary understandings on material principles for resolving all these disputes. Final resolution, however, is subject to reaching definitive agreements, agreement on calculations and a review by the staff of the Joint Committee on Taxation, a committee of the United States Congress. Edison Capital has executed term sheets with the counterparties to its SILO and LILO transactions, which contemplate termination of the leases. Our current understandings anticipate this happening before the entire IRS settlement is completed. Upon termination of the leases, the less fees would make termination payments from certain collateral deposits associated with the leases and we will have an immediate earnings charge of at least $650 million after taxes which could occur this year. We would expect, however, that when the dust settles and we complete the entire settlement of the disputed leases and affirmative claims, our ultimate net after-tax earnings charge will be less than half of our maximum $1.25 billion after tax exposure mentioned previously. Where all settlements completed in a manner consistent with the preliminary understandings, the net cash impact upon Edison International as a whole with these settlements and lease terminations, would be positive over time. It is not anticipated that borrowings would be required in connection with implementation of the settlements. Finally, we still have much to do to finalize our settlement and there could be no assurance that we will, in fact, complete the settlement. There is additional information regarding this topic included in EIX's 10-Q, our Q was filed this morning. Lastly let's turn to page 11 of the presentation. This morning we reaffirmed our full year core guidance range of $3.61 to $4.01 per share and we still see guidance around the higher end of the range. We also updated where we stand on some of the key guidance elements we discussed in our original guidance as you can see in the presentation. Let me highlight a few of them. In updating in our guidance, we have used forward market prices at July 31st, 2008 and reflected the actual results through June 30th. You will note that the substantial move downward in forward gas prices and power prices during the month of July. This produced EMG's potential upside but it also brings helpful relief for our SCE customers. Last week, we've included $92 million in EMMT's year-to-date pretax trading income compared to $75 million previously. We also noted that our guidance assumptions exclude an expected impairment related to the $48 million in annual NOx emission allowances. These allowances were purchased by Midwest Gen in anticipation of the CAIR rules that have now been overturned. The actual note that is impaired will be determined in the third quarter. With that, operator we'll now take the questions. Question And Answer

Certainly. [Operator Instructions]. Our first question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.

Good morning guys. Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: Hi, Paul.

When I was on the first quarter conference call, I think I asked about the Beaver Valley lease buyout. And I believe that was not in guidance. And if I read and listen to the presentation correctly, I think it sounds like it now is in guidance. Is that the case and if it is the case, what was the offsetting thing that offsets that?

You are correct. We've now in updated. There are... besides Beaver Valley there are number of puts and takes that go on during any course of the past year and what we see going forward. When you think about looking back over the first half of the year, you can see that Midwest Gen performed well, Homer City was off, EMMT performed well. And so just generally I am giving the highlights, there are a number of puts and takes. So, we've tried to reflect those in our guidance as we see for the full year.

Okay, there is not a specific item. In other words, it's just a mix of things in general. Just as you look forward, I guess there is not a particular item that sticks out that all offset the $0.07.

As I went back, I think there are some a lot of puts and takes.

Okay.

And clearly the thing we watch to, for the most is what's happening with the forward curve.

Okay. Then the capitalized software tax benefits, was that about $0.04? Did I read that correctly?

Let me have Tom Noonan from utility answer that.

Yes. The $0.04 was the entire benefit for that period of time. The software benefit was slightly larger than the $0.04 and it was related to a implementation of an ERP SAP program that we went live with in the second quarter.

But it's kind of unusual item. We shouldn't expect that to recur, is that correct?

It will recur a little over the next two years because we are still implementing a little bit more of the ERP program. We've just put in the finance portion. We still have a customer service portion and the work management portion. So, we'll still get a little bit of benefit over the next couple of years.

Okay, but of the similar size you think or just...

No, no not a similar size.

Okay. And then the impact of emission allowances just financially speaking for the year, what has that been and how does CAIR affect that let's say in 2009, if the current market holds up like this? Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: Now, I think that's a tough question. We said that we've bought the annual NOx emission allowances in anticipation of meeting our requirements in 2009. So to the extent that there is an impairment charge there would be lower cost than what we would have expected in 2009, had we used those credits.

Okay, so in other words, since you guys are in the business of buying emission credits, it sounds like you guys might actually benefit from the effect of the CAIR rule, is that correct?

There is a possibility and you have to sit here and expect that maybe certain stage would respond in time, I don't know if there is enough time. But there is a concern about that but there is a potential for some benefit especially at Homer City where the SDRs... certain costs associated with running those emission credits that may not be there now.

Okay. And then the NOV at Homer City, just any exposure there that you can quantify. I know that you guys have, I guess an indemnification agreement, I believe, with the sellers of the plant, I forget who they were but - I can't... I don't know why, I forgot but I've forgotten, who did you actually buy it from, I forgot?

Well what I am going to do is to have Ron Litzinger address that.

Yes, we are getting ready to have our initial discussions with the EPA similar to the discussions we've been having on the Midwest Gen, NOV and we will see how those proceed. We did put in an indemnity claim with the original owners at Homer City which are GPU and Nisec [ph].

Okay great. Thank you.

Thanks Paul.

Thank you Mr. Patterson. Our next question comes from the line of Hugh Wynne with Sanford Bernstein. Please proceed.

Good morning. Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: Good morning.

I have got a couple of sort of detail questions around the earnings at Southern California Edison. I was hoping you could help me with. You mentioned that the improvement there is attributable in large part to the lower income tax expense. The first clarification that I wanted to ask about was whether that would be something that ultimately would be caught back by regulators in the future adjustments to your revenues or is that the way you keep? Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: These benefits occurred in 2008, which is not a rate case year, so these benefits would be kept by the company.

Great, thanks. You point out that the operating income is down, as indeed it raised by about $60 million, but mentioned that operating income is back loaded to the second half of the year. What is the relevance of that when we are comparing Q2 '08 to Q2 '07? I didn't understand the explanation. Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: Right really what we were trying to explain there was that during the year, our revenues, first of all, are not collected evenly throughout each quarter. Most of our base revenues which go through operating the company are collected more heavily weighted in the third quarter. What happened during 2008 was our expenses were slightly higher in the first and second quarters due to costs at our nuclear plant at San Onofre and also at Palo Verde. So we were just trying to explain that our expenses have occurred more evenly this year than they did last year. But again the revenues are collected unevenly during the year. This will wash itself out or even itself out over the entire year.

And that's because those San Onofre and Palo Verde costs are ultimately recoverable? Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: What it is this we will have lower San Onofre and Palo Verde costs than we've had in the first two quarters because of outages recurred in those units.

Got it, okay. And then the last question I know this is large decline in minority interest about $40 million, you haven't talked about that as an explanation for the results of the utility. Could you explain to me what that reflects?

Yes, what that reflects is an accounting requirement that we reflect our Big 4 is not owned Southern California Edison but there is a share that is owned by EMG. What we have to do is because of the accounting rules we have to reflect that the Big 4 in our financial statements. And then what we do is we wash them out. So, from an accounting standpoint really this has no impact on our income statement, it's an accounting requirement that put Big 4 in and then we take it out in... we put it in minority interest and then its taken out in other line items within the income statement.

Right that is why you have not added up, got it. Thank you very much.

Thank you Hugh.

Thank you Mr. Wynne. Our next question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Thank you. I am not disputing the need for Edison Mission Group to diversify its fleet, but focus on wind presents its own challenges, one of which is the interdependency of the wind itself. That also then could produce some very interesting opportunities in the gas side of the equation. Is your comprehensive plan to go from wind to gas, kind of joint developed projects while you are doing one versus the other?

We will have Ron Litzinger answer that.

Yes as we look at our wind program going forward, one of the areas that we are focused on is looking at it more broadly as a business rather than a project by project by project opportunity. And we are evaluating what are the things we can do in other fronts that add more value to the grid.

Will you even contemplate doing independent transmission projects?

It's one of the things that we may consider.

And on the lease negotiations with the IRS, did I understand correctly that you're pursuing cancellations of these leases which would result in a cancellation payment on the lessees back to Edison International?

That's correct. It would first go to Edison Capital, yes. And then we use as proceeds that could be used to make a payment to the IRS.

So the net cash impact could be close to zero.

What we said in the statement was the net cash impact over time because it's going to... this won't occur... everything won't occur at once. So, terminate the leases, we will go through review of the settlement through the joint committee on taxation and when that's all resolved, when it's all said and done, we said it would be cash flow positive to Edition International.

Even after the payment to the IRS.

Yes, and an additional aspect on that. There are the leases and we just want to emphasize there are two pieces of it, the leasers themselves and the affirmative claims that we have pending as part of this global discussion with the IRS.

Great and you said the potential earnings impact would be around $600 million.

That's...there's different things going on here. What we said, if we write off and close out the leases, there could be a charge up to $650 million after taxes. Over time as the settlement is reviewed, there is a potential for some of that to get reversed. However, what we're saying for guidance purposes overall that we are seeing that the maximum exposure as we sit now is past the $1.25 billion that we stated as our maximum exposure.

Fantastic, thank you.

Okay, thank you.

Thank you Mr. Johong. Our next question comes from the line of Paul Fremont with Jefferies & Co. Please proceed. Paul Fremont - Jefferies & Co: Yes, I just want to sort of just understand one thing. The $650 million charge associated with the leases is not incremental to the charge that you would ultimately take which would be $625 million or is it incremental to that?

It is not incremental. What we are trying to guide you to the management judgment with a maximum exposure here would be half the 1.25 when it's all said and done. Paul Fremont - Jefferies & Co: Okay, so the maximum income statement charge would be $625 million?

Yes, that's if you go half, that's right. Paul Fremont - Jefferies & Co: Okay. The other question that I have is really one of pricing, which I guess is both Midwest Gen and Homer City. But if I just take the second quarter realized prices and divide by the average gas price, it looks to me as if there is a significant decline in sort of the implied market heat rate relationship from... it's close to like 1500 or 2000 implied market heat rate decline, which I think is sort of being experienced not just by you but in a lot of regions. Can you help us... I would think it has nothing to do with the basis differential between Homer City and PJM West because it looks like it's happening sort of universally across the board. Can you help us understand what's driving that and is it your expectation that that will improve over time or does it remain at these much lower levels?

I am going to have Ron Litzinger address that.

Yes, the NI [Northern Illinois] Hub heat rates are... implied heat rates are down as you noted. We don't see any fundamental change out in the marketplace. And our view currently is just less liquidity at NI Hub as opposed to liquidity in the gas market. Paul Fremont - Jefferies & Co: So, you would... on a going forward basis, we should be looking at these relationships to stay where they are now even though gas prices have dropped considerably over the past months?

We think they are at the bottom and we're just going to continue to watch it. Paul Fremont - Jefferies & Co: So you, at this point, don't have an opinion as to whether this reverses or whether it stays where it is and you just need to sort of watch it and in trying to figure out directionally which way it goes?

I think we said Paul, was that the fundamentals in our mind don't match with what we're seeing now in the forward markets. And we are also concerned in talking with our traders that the liquidity we see at NI Hub is pretty small. And so we are concerned about the integrity and... there is good integrity but it is clear that there is not a lot of trading going on, so don't draw too many conclusions. So we'll just have to see how it goes forward. Paul Fremont - Jefferies & Co: And the last question sort of housekeeping, the $92 million in guidance at EMMT is what you have already done so far in the first half, you are assuming zero EMMT contribution for the second half?

That'swhat the guidance shows. Of course, we expect EMMT, the assumption is in the guidance elements. We would expect it to be beyond that level but for conservatism, we typically don't peg a level of expected earnings from the EMMT. Paul Fremont - Jefferies & Co: Thank you.

All right.

Thank you, Mr. Fremont. Our next question comes from the line of Asher Khan with SAC Capital. Please proceed.

Good morning. Jim, I wanted to understand if the settlement goes through as you have talked about, what would be the impact to earnings in 2009, if all leases are written off and everything? Is it a negative impact to earnings going forward on an ongoing basis and could you quantify that?

Okay, well, we tried to guide in our disclosures and my statements. What we said the maximum exposure on an earnings basis is about half the maximum exposure number we mentioned, that's the $1.25 billion. From a cash flow perspective and I am going to separate it, we see that being positive.

Correct.

And now I just want clarify too, it may occur over a two year period and we may have to like to take the charge for the leases in 2008, and then there will be a gain that will occur in 2009. So we're trying to put it all together to give you an essence for what could occur. But from where we sit today it may occur over a two year period, but then we are trying to guide you to what the net, net, net of all of these might be.

Yes, but don't the leases contribute some operating earnings like... I don't know just to kind of give you an example of what a peggy shot was that their operating earnings would decline for the first four years and then they would reverse themselves in the remaining I guess, 5 or 7 years. Once you have taken these write-offs cleared, is there similar impact to your earnings where... because they were contributing on an ongoing basis, they go out and then they reverse themselves or I am trying to see if... on an ongoing basis what is the impact to earnings apart from these charges from the current contributions?

Yes. It's a good question Asher, what we are seeing is given the state of the leases and the cash flows associated with them, there is a minor earnings impact from terminated leases. As you recall Ed Capital's earnings were going down already. We've been guiding people to that fact over the years and there would be is just some minor amount of earnings associated with these leases going forward.

Okay. So, there will be just a minor, minor meaning $0.01 or $0.02 or something in that?

In that range.

In that range. So, they just go out okay. So, that's a very minimal impact going forward. Okay.

Yes.

Thank you very much sir.

You are welcome.

Thank you Mr. Khan. Our next question comes from the line of Jonathan Arnold with Merrill Lynch. Please proceed.

Hi, good morning guys.

Good morning.

Quick question on the new hedges that you added, can you give us any color as to whether those were mainly peak pricing or more weighted around the clock and just how we should think about them as we look forward?

Are you referring to the power hedges or the coal hedges?

Well, maybe if you could answer them both, that will be great.

Typicallywhat we tend to do is when we hedge out in the future years, we try to lock in some of the peak hedging pricing. And then we'll add as we get closer in time to the... if necessary for the off-peak. For the coal hedges that we mentioned for Homer City, what I can clearly say is that those hedges are or those option agreements are in the money.

Okay, but when you say you typically do the peak first and then vis-à-vis additional hedges. So would you put this in the category so that it's still part of the initial hedging of 9 and 10 for the blend or more of the filling in?

I think it is fair to assume that.

Okay, and then I know it's just the basis differential on Homer City, obviously it widened out. Do you see that as, as you're kind of going through the third quarter here. Is that a reasonable assumption to keep it wide or any reason to see that coming back in?

I think it's fair when you look at the basis. On a percentage basis it wasn't different. It goes up as prices... power prices go up, you see basis go up and as prices come down you typically see basis come down. And of course it's seasonal too. But I don't... I wouldn't forecast it being any much different than what we have seen already.

So, you do it on a percentage by return of it.

I think that's a fairer way of looking at it.

Okay. And then, just on the wind portfolio, I believe you had a while back a target of getting to, I think it was 2000 megawatts in service by '09 and they had the comments about the new contracting you are doing and hoping to get this pipeline back on target. Is that still a reasonable target or are you off that target? Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer: This is Ted. Yes, I think generally that target is still in the right neighborhood by the time we get to the end of 2009, we should be fairly close to that. But frankly I think it's in our mind a lot less what the exact timing is when these things come in but more a matter that we've got now little over 5000 megawatts of stuff in the pipeline now. And not all that of course is going to get built out but that's really our feeder stock for future projects and this is a major area of emphasis for us, as I indicated in my remarks.

Okay, thank you. Maybe just if I may just one other thing, you made the statement around the leases that wouldn't require financing. Is that a statement on you wouldn't have to issue any long term debt. I know you really ought to manage this under the short term, financing arrangements or can I just get a bit more clarity on what you mean by that?

I think there is cash within the system that we would have the collateral deposits and deposits we've previously made with the Internal Revenue Service and the affirmative claims that have sufficient cash to cover all the requirements that would be needed.

Okay, and on that whole subject, with this announcement from the IRS a couple days ago that they had issued these kind of ultimatums to 45 companies. Is it reasonable to assume you are not one of those companies because you are in this kind of a broader settlement discussion?

Well, I think it's reasonable to assume that we are in negotiating a global settlement with the Internal Revenue Service that covers a broad set of issues including our leases.

Okay, thanks a lot.

You are welcome.

Thank you Mr. Arnold. Our next question comes from the line of Dan Eggers with Credit Suisse. Please proceed.

Good morning. Just a follow up, just a clarity perspective, the CAIR decision right now that does not necessarily change your environmental spend obligations in Illinois given the fact the settlement was in the state level?

We are reviewing that right now, but if you look at the rules that Illinois put forth with regards to their state implementation plan on CAIR, the retrofit versus shut down portion of those rules were separate and that's the way we are currently assuming it'll be.

So plans are going ahead with environmental upgrades then?

At this point, yes.

Okay, were there any liquidity issues or any challenges at Ed Mission Group in the quarter given some of your hedge positions in the both holding commodity prices were... how was that [indiscernible] during the quarter?

This is Jim Scilacci. I will take it. I was there for most of the quarter before I switched over. There was higher levels of deposits we made with CAIR inquiries but what we have done and have worked on over the last couple of years, to switch our hedges. As you recall, we've talked about it before, Midwest Gen we put in place a lean duct [ph] structure under our revolver. And so if we enter into transactions with our financial institutions in the revolver we don't have to post collateral. So that's benefited us during the course of the quarter. So we didn't see a significant surge, there was some, but it was muted by the fact of the financing program we put in.

And I guess just turning to the utility roughly, because there has been growing talk of California pursuing the 33% in renewable portfolio standard by 2020. Any thoughts as far as, I guess number one where you guys will be from 2010 or thereabouts deliveries first hitting 20% target and kind of the investment of the challenges to 33% fuel territory?

We're going have Al Fohrer address that question.

Let's take it in two pieces; the 20% by 2010, we have said that on a deliberate basis we will not make that number. The state... there is a flexible compliance we can include contracts signed. The key there is that there needs to be adequate transmission. And as you know, we are building in to hedge the renewable transmission line that's key to getting additional renewables for not only us but for the other utilities. In terms of 33% today there is a preference, it is not a law. And the IRS is indicated to make 33%... it needs to be substantial additional transmission beyond what is planned today to get that. I think what they have said is there has to be an additional 500 KV transmission lines. So, it is just a preference today, not a loss and there is a lot of discussion going on.

Will most of those lines, I assume that kind of the next phase is going to be more solar intense probably just given where you have been using resources? I mean that a lot of those lines are going to be... the opportunity for SCE to build them?

I think it's fair to assume that solar has got to be a major part going forward and the primary sources are obviously the Mojave Desert which is in our service territory.

Okay.Thank you.

Thank you Dan.

Thank you Mr. Eggers. Our next question comes from the line of Michael Goldenberg with Lumachelle [ph]. Please proceed.

Can you hear me?

Yes. We can.

Okay. Just wanted to ask a couple of questions, first of all on these leases, I am still trying to understand. It seems various companies in our universe have taken different approaches to treating the leases. Is there any fundamental difference that I believe if you can think of between your leases and maybe kind that of Southern's, PSE&G's, Pepco's or are they all generally the same.?

What we would like to do is to have Bob Adler our General Counsel address that.

Thank you, Jim. If you look at the cases in this area, there is a heavy emphasis upon the particular facts and circumstance of each lease. We've done that analysis, we think every situation is different. And based upon that analysis we continue to believe in our facts and the likelihood of a successful outcome.

Okay, but let's say, picking one company specifically, I don't know how much how much you know about PSE&G's leases, but it seems like there should be some since you were involved in transactions with them. Do you know of significant differences at least on the big ones?

Each company is going to have to analyze their own. I assume that PSE&G did theirs. All I can say is that we've looked at ours and believe that our facts support the conclusions that we reached for accounting purposes.

Okay, and on the IRS letter, did you get a letter or if you did would you disclose that?

To my knowledge we have not received a letter.

Okay, understandable. Finally just two other partially housekeeping items; one on your Midwest Gen portfolio and you have alluded that the drop in commodity prices has somewhat diminished profitability of those in Q3. Is that purely from pricing standpoint or is there capacity factor changes as well? Since I know that at times they are the load falling units, has there been changes in capacity factors for those units?

What I said was the potential for earnings and it was price driven.

Okay, so did you know it's still operating in the kind of 60% plus, 70% capacity factor?

Yes, I'm going to go back, it was price driven.

Okay. All right, I think that's about it. Thank you, very much.

Thank you, Michael.

Thank you Mr. Goldenberg. Ladies and gentlemen, that was our final question at this time I would like to pass the conference back over to your host Scott Cunningham.

Thanks very much everyone participating, feel free to contact to us if you have any follow up questions. Have a great day. Bye, bye.