Apr 30, 2008
Executives
Scott Cunningham - VP of IR John E. Bryson - Chairman, President and CEO Thomas R.
McDaniel - EVP, CFO and Treasurer Theodore F. Craver, Jr.
- Chairman, President and CEO Edison Mission Group Jim Scilacci - Sr. VP and CFO, Edison Mission Group
Analysts
Paul Fremont - Jefferies & Co. Michael Lapides - Goldman Sachs Ashar Khan - SAC Capital Management John Kiani - Deutsche Bank Securities Daniel Eggers - Credit Suisse Steve Fleishman - Catapult Partners Jonathan Arnold - Merrill Lynch ClarkOrsky - KDP Investment Advisors
Operator
Good morning and welcome to the Edison International's Conference Call. At this time I would like to introduce you host Scott Cunningham, Vice President of Investor Relations at Edison International.
Thank you and have a great conference. Go ahead Mr.
Cunningham.
Scott Cunningham - Vice President of Investor Relations
Thanks very much Elise and good morning everyone. Our principal speakers today will be John Bryson, Chairman CEO and President and Tom McDaniel, Executive Vice President and Chief Financial Officer.
We also have several other members of the senior management team with us here today, including Ted Craver, CEO of Edison Mission and John Fielder, President of Southern California Edison. Presentation that accompanies Tom's financial review together with the earnings press release and our 2007 10-K documents which were filed this morning are available on our website at edisoninvestor.com.
During the call we will make forward-looking statements about 2008 and longer term 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 Form 10-Ks and our other SEC filings which we encourage you to read carefully. The presentation on our website also includes further information, including certain guidance assumptions as well as reconciliation of non-GAAP measures discussed in this call to the nearest GAAP measure.
With that, I will turn the call over to John Bryson
John E. Bryson - Chairman, President and Chief Executive Officer
Thank you Scott and good morning to all of you, we appreciate your being with us. We are going to follow our usual format this morning.
I'll take initial several minutes and provide a summary of the highlights of 2007 results and our progress certainly among the most important parts of 2007 and yet, and building a yet stronger foundation of growth for the next five years. Then Tom McDaniel will go into greater detail on the fourth quarter and full year earnings and will present the 2008 earnings guidance.
Let's just talk about 2007 first it was a very good year for the company. Very summery Southern California Edison completed what was a record level of infrastructure investment.
It also advanced a number of important largish initiatives that over the next five years will significantly strengthen the electric system, improve our customer service and help meet key state environmental objectives. At the Edison Mission Group we achieved excellent earnings while continuing to build a foundation for future growth the entire plan will be stronger, more diversified and greener.
So, first with the financial results for 2007, many of you will have seen the written materials. Our business has operated well, produced solid financial results.
Core earnings, which include..., which exclude discontinued operations and non-core items you know and have followed our core earnings for many years. Core earnings were $3.69 per share that is an increase of 20% over last year.
The reported earnings, the GAAP earnings were $3.33 per share, that difference between the core and the non-core set out in detail in our materials, but the key thing was that it largely reflected the cost of our very important second quarter Edison Mission Group debt refinancing. That $2.7 billion transaction strengthen considerably EMG's balance sheet, it locked in attractive interest rates at highly favorable terms.
And certainly with the benefit now of looking back at something that couldn't be achieved in today's credit markets. So a significant step forward for us.
So let me turn with a little greater focus now to accomplishments in Southern California Edison. Our team at Southern California Edison completed a record level of more than $2.2 billion in infrastructure investment.
Just a few examples, in the space of 11 months between the summer of 2006 and summer of 2007, we put in four new peaking generation plants starting from scratch. We significantly rehabilitated over the course of the year, our worst performing electricity distribution circuits in the SCE system.
We constructed a large number of new circuits to keep up with our customer growth and replaced miles of ageing underground cable and thousands of utility poles. That's consistent of with a plan we've described to you consistently over many years now, each year doing yet more to build the infrastructure base.
Few other things, in October our Southern California Edison engineers took what we think is a landmark advance in smart grid technology. They moved it out of the laboratory and on to our customer circuit serving on San Bernardino County, the most advanced distribution circuit in the nation, this and the DOE name for it as circuit of the future.
We'll make power outages fewer and shorter, as digital technology identifies analyses and isolates potential service disruptions in milliseconds before they can become significant power outages. Then to turn to a particularly significant item, the growth item, Southern California Edison, the work completed during 2007 increased our earning asset base in the utility to an all time high of about $11.7 billion.
If we execute our plan now moving forward, so adding another year on our forward outlook, if we execute our plan for approximately $19 billion in continued infrastructure investment by the years 2008 through 2012 and assuming we receive the necessary regulatory support, the Southern California Edison earnings base would nearly double by 2012. So it would go from $11.7 billion to approximately $23 billion.
So we projected in the past this 9... this 12% plus compounded annual growth rate in to the future.
Now we add another year and come off a higher base on that through 2012. So during 2007, Southern California Edison achieved the results you...the financial results you see now and also significantly move forward major multi-year projects that make up about three quarters of that $19 billion infrastructure investment plan.
Just a few of those we received regulatory approvals for the first phase of the Tehachapi renewal transmission project and began construction this January. As you may recall, that transmission line will connect the electric grid to one of the nation's richest areas for new renewable power generation.
And second our Edison SmartConnect advanced meter initiative, which in 2006 was a highly promising concept it became during 2007, a demonstrated commercial reality. It is operating on our system now.
The project team completed a successful field test. Selected the principle technology and telecommunications vendors with regulatory approval, 5.3 million of these meters will be installed over the next five years.
And then third, on this growth path replacement of steam generators that our San Onofre nuclear plant that is Southern California's largest power source. That progress, replacement of steam generators plan that all interim milestones and remains today on schedule and on budget.
And then finally, Southern California Edison last year filed it's 2009 to 2011 general rate case application with the PUC. The outcome of that case and we've underscored this in the past, we are largely determined the extent of our ability to continue the expansion and modernization that is underway and very important to our future of the Southern California Edison electric grid.
On that rate case, PUC is targeting a final decision before Thanksgiving of this year. All right, in addition to progress in growing our future utility earnings base through capital investments, there are additional means by which those future earnings were strengthened in 2007.
First, most of you know that California Public Utilities Commission adopted an innovative and I think nationally significant energy efficiency and incentive mechanism that will allow us to earn based on the achievements of our energy efficiency programs. Those of you who know us know those programs have been the largest in the country for I think over several decades, continue to be that, Southern California Edison expects to deliver $1.2 billion in customer savings over the initial period under this energy efficiency incentive plan of 2006 to 2008 and Tom will describe further, the earnings effects of that new incentive opportunity.
Then second, the PUC authorized towards the end of the year for Southern California Edison an 11.5% return on equity that is lower, but only slightly lower and 11.6% return on equity in 2007. We believe that is indicative of continued regulatory support for our very large capital investment program to strengthen the system.
Let me turn then to the Edison Mission Group. Our team there took steps in 2007 to grow our wind energy business, capture increasing margins and values from our generation fleets and strengthen the balance sheet.
You've seen the earnings, they were very good, couple of other items we ended the year with more than 1,000 megawatts of wind projects in service or under construction; and significantly our development pipeline nearly doubled during the year to more than 5,000 megawatts. I want to point out something that those of you who follow wind know and that is wind energy business has its challenges; competition is increasing; project costs are escalating and we're experiencing supply chain delivery and equipment issues that we are working with our suppliers to resolve.
Other steps taken in 2007 at EMG increased future revenue and revenue predictability reflecting tight projected power demand balance in Eastern and Midwest wholesale markets. EMG sold capacity forward from our Midwest Generation and Homer City power plants at substantially higher levels than in the recent past.
And finally, our trading business EMMT earned during 2007 net trading margin before taxes of $143 million. EMMT has been a consistent performer with trading margins now over the past three years exceeding $460 million with reasonable stability in those margins over these three years.
At EMMT, we undertake this business in a somewhat different way. Ours is a relatively narrowly focused business.
Fundamentally it is grounded in our everyday experience and selling and hedging power generated by our own power plants. So, just the briefest conclusion, it was a strong year at Edison International.
It produced good results in 2007 and more importantly, I think we further established a foundation for excellent growth over the next five years. Now I'll turn the call over to Tom.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Thank you John and good morning everybody. Today I will review the 2007 fourth quarter and full year results and update you on Edison Mission Group's operations on hedging programs.
And I will discuss our 2008 earnings guidance. And throughout this presentation, I will refer to the teleconference presentation that accompanies our earnings press release and if you could all turn to page 2, that's where I'll begin my comments.
We will start with the fourth quarter earnings summary, on the left we have portrayed our GAAP or reported earnings. On the right, our core earnings, these are earnings that exclude non-core and discontinued operations and are more reflective of the operating performance of the company.
So to begin with, the reported earnings were $0.64 per share in the fourth quarter of 2007, compared to $0.87 per share in the same period last year. 2006 was benefited from positive contributions from the resolution of tax issue non-core item and from discontinued operations.
Excluding those non-core items, core earnings were flat quarter-over-quarter at $0.65 per share. If you then turn to page 3, I'll go through the details on a company-by-company basis.
First beginning with SCE, its core earnings were $0.37 per share, compared to $0.32 per share last year. This increase reflects a 0.05 per share favorable settlement of the long standing tariff dispute with the Los Angeles Department of Water and Power otherwise the results for SCE for the quarter were consistent with our expectations.
EMG's core earnings were $0.30 per share, $0.06 per share lower than the fourth quarter of last year. In going through piece parts to those changes, the items that were higher during the quarter included Midwest Generation, which is up $0.06 per share.
This was driven largely by lower interest expense associated with the second quarter debt refinancing that John had mentioned together with higher realized energy margins for Midwest Generation. Partially offsetting these positive factors were higher maintenance cost, and $0.03 per share non-cash FAS 133 adjustments that's period-to-period, associated with mark-to-market of certain of our forward hedges.
During the fourth quarter, we also... I should mentioned we had unplanned outages at our Powerton station, which effected our forced outage rate for the quarter generation levels and maintenance costs.
Now to Homer City, operating performance was positive for the quarter, realized energy margins up on higher generation and realized prices. This good performance was largely offset again by $0.03 per share downward adjustment from a period-to-period comparison associated with FAS 133 adjustments.
And there was some slightly higher plan operating cost. All this together netted to a favorable increase of $0.01 per share.
EMMT had a good quarter with pre-tax trading margin of $40 million, compared to $21 million in 2006, an increase of about $0.03 per share, and as always, this compares and excludes G&A cost for our trading operation which were included as part of EME corporate expenses. EMG items that reduced quarter-over-quarter, earnings were twofold, first corporate expenses were $0.05 per share higher, primarily from higher project development cost and G&A expense related to step-up in our growth initiatives at EMG.
And second, Edison Capital was down $0.11 per share. Edison Capital earned $0.14 per share in the fourth quarter of 2006 that was an unusually strong quarter for us, as we had a number of favorable exits from our global infrastructure fund portfolios and some additional lease income.
The $0.03 per share that we recorded in the fourth quarter for Edison Capital is really more indicative of what we would consider to be a quarterly trend going forward. EIX parent company overhead added $0.01 per share positive benefit relative to last year due to lower taxes and expense.
Now, just focusing on the non-core items for the fourth quarter of 2007 lowered earnings by $0.01 per share, so that was not much of an impact. In 2006, as I mentioned, it was more predominant, non-core items contributed $0.22 per share to the reported 2006 fourth quarter earnings mainly due to the resolution of a state tax apportionment issue and gains from discontinued operations at EMG.
Now if we could next turn to chart number 4. I'll cover the full year earnings.
Again, our GAAP reported earnings on the left, our core operating earnings on the right hand side. Reported earnings for 2007 were $3.33 per share in 2007, compared to $3.58 per share last year.
Again both periods were impacted by non-core and discontinued operation items 2007 largely associated with the cost of the EMG refinancing that we had mentioned earlier, and 2006 due to the resolution of a number of regulatory and tax matters, all favorable to the bottom line. Core earnings increased 20% for the year, that's $3.69 per share and that's $0.10 per share above the high end of our 2000 guidance that we had established towards the end of last year at $3.59 per share.
Both SCE and EMG contributed very strong performance to these results. Turning to chart number 5, SCE's...
focusing on SCE, SCE's 10% increase in core earnings to $2.07 per share reflects higher operating margins, the benefits of lower taxes and again the tariff settlement that I had mentioned, that occurred in the fourth quarter. Partially offsetting these increases were higher net interest expense and the full year results from Southern California Edison match the high end of our 2007 guidance.
Now turning to EMG; very strong year, reporting core earnings of $1.72 per share above the high end of our guidance range of $1.65 and 32% above 2006. We saw earning...good earnings growth across our principal generation businesses, Midwest Generation and Homer City, with Midwest Generation up $0.39 per share on higher generation and realized prices, as well as lower interest cost.
It was partially offset by $0.11 per share period-to-period in FAS 133 adjustments and higher O&M costs. Homer City was at $0.14 per share, also on higher generation in realized prices, partially offset by $0.08 per share in FAS 133 impacts and higher O&M.
For Midwest Gen and Homer City combined, we ended the year with $38 million in pre-tax unrealized FAS 133 losses related to our hedge positions and this represents earnings that will flow through the income statement in future periods. Project earnings increased $0.07 per share in 2007 with good contributions from both our expanding wind business and from our gas fired fleet.
EMT was up $0.03 per share for the year and had strong year recording pre-tax trading margin of $143 million, compared to $130 million in 2006. And again this compares and excludes overhead costs.
EMG development and other expenses plus other items increased $0.15 per share for the full year, again reflecting the expansion of our business activity and Edison Capital recorded earnings of $0.21 per share which represent a decline of $0.06 per share relative to 2006, again due to the significant level of infrastructure gains that we had booked in 2006. You can see at the bottom of that chart that non-core items were significant factors in both years.
In 2007, net non-core charges of $0.36 per share were mainly the result of EMG debt restructuring. And non-core items in 2006 were a positive $0.51 per share comprised of the resolution of the several regulatory and tax matters that I had mentioned previously.
Now let's turn chart 6 and we'll cover the operational metrics for EMG. And first, with regard to Midwest Generation, generation was up 3.7% for the year it's to almost 30 kilowatt hours.
Capacity and load factors were both up for the year, but I should point out that availability and forced outage comparisons with 2006 performance levels did lag, mainly in part due to the fourth quarter outages at our Powerton station. Turn to the right side of the chart, there we are covering...
where our all in average realized prices were recorded for the fourth quarter and for the year and as you can see that those prices were up significantly quarter-over-quarter and year-over-year. At the same time our fuel and emission cost were relatively flat.
So these two factors combined for an increase in our average realized margins of 31% for the fourth quarter and 18% for the full year. Turning to chart number 7 and Homer City also very, very good performance, total generation was 13.6 terawatt hours with favorable operating metric comparisons really across the board.
Over the right side of the page, again the same story with regard to realized prices and our average fuel and emission cost, both contributing to expanding margins of 21% for the fourth quarter and 30% for the full year. On Chart 8, this is our regular update of our power hedged, power and coal hedging disclosure.
And our power hedges were essentially unchanged during the quarter. But we were active in the coal markets.
We contracted for an additional 2.9 million tons of coal for Midwest Generation for a total of 17.5 million tons under contract for 2008. We also added 1.3 million tons of coal at Homer City, for total of 5.7 million tons under contract.
This puts us essentially hedged for coal in 2008 and we are also roughly the same position for 2009. Thus, the recent increases in coal prices are not expected to have any significant impact on our fuel expense in those periods.
I should also mention that we are essentially hedged for emissions for the 2008 and 2009 period also. Page 9 updates our capacity sales to include the recent 2010-2011 PJM auction results.
And I would like to point out that you will note that Midwest Generation increased its auction participation as the previous Illinois auction contracts that we signed in 2006 had fully rolled off for this auction period. We've also reflected in the installed generation, a reduction there reflecting the planned closing of our Will County units one and two.
And at the bottom of that page you can see that we have been realizing progressively increasing capacity values for our fleet. Now let's turn to the last chart, chart 10 and I'll cover our earnings guidance.
You'll see the details on guidance which we are announcing today. The bottom line range is from $3.61 to $4.01 per share.
We've also provided ranges for SCE at $2.18 to $2.28 per share and for EMG from $1.57 to $1.87 per share. We've also provided the estimate for EIX cost, which is our normal practice.
I should mention this guidance is subject to a number of risk all of which we disclosed in our SCE filings... our SEC filings.
And also on the right side of this chart we've identified some of the key assumptions that underlie this guidance. So first of all, with respect to SCE, it does assume, as John mentioned, our 2008 authorized return on common equity is 11.5% together with our combined CPUC and FERC rate base of 12.7 billion for 2008 and we have also included in this guidance energy efficiency incentives of $0.08 per share.
Of course this program is subject to PUC approval at the end of this year. And here we have assumed 9% earnings rate on our savings that we have generated in 2006 and 2007.
For EMG, the key assumptions include our forward hedge positions and power prices as of January 31, 2008. Also reflected EMT pre-tax trading margin of $75 million, we now have...
this really represents the average contributions of our trading operations, since we have owned them. We've also have indicated that two of our four, big four projects rolled off of their contracts at the end of last year.
And so this does reflect, as we have disclosed in our filings, lower pre-tax earnings estimated between $80 million and $90 million for the Watson and Sycamore gas-fired projects. At Edison Capital, we've assumed, as I mentioned in the fourth quarter, kind of a normalized run rate in the mid to low teens for Edison Capital and we are also assuming there no changes in GAAP accounting.
And we do not include discontinued operations in this guidance. I would also like to point out that in our earnings through the year are normally weighted more into the third quarter reflecting rate design for SCE and the importance of the summer peaking season for EMG.
And with that, I'll close my comments and just in wrap up, very strong year for us in 2007 and we are quite positive about the start to 2008. I would now turn it over to the operator to moderate the Q&A.
Question And Answer
Operator
Certainly. [Operator Instructions].
Your first question comes from the line Paul Fremont, please proceed.
Unidentified Company Representative
Hi Paul.
Paul Fremont - Jefferies & Co.
The volume output level at Homer City and at Midwest Gen, would they be roughly in line with the volume levels that you achieved in '07 or are you looking for.
Scott Cunningham - Vice President of Investor Relations
Paul this is Scott. Can you speak up a little bit.
Paul Fremont - Jefferies & Co.
Yes, first question would be for 2008, what type of volumes are you expecting from Midwest Gen and from Homer City?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Well Paul we don't provide a forecast of volumes, because they can fluctuate quite a bit. I think what we have taken look at historic levels in the 30 terawatt hours for Midwest Gen and something close to what we produced last year at Homer City which was a good year for us, has been kind of rough indicators of where you might be through the course of the year.
Paul Fremont - Jefferies & Co.
And then I didn't quite hear you on Sycamore and Watson. You said something about $80 million or $90 million was the 07 contribution?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
It would be a reduction of $80 million to $90 million in our pre-tax earnings contribution from Watson and Sycamore roughly relative to 2007.
Paul Fremont - Jefferies & Co.
Got it. And can you tell us what that was in 2007?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Really... we really convey it in terms of the big four in general.
And we've got that disclosed in our K. I believe it was something in the order of $145 million, but we'll give you a number on that.
Paul Fremont - Jefferies & Co.
Thank you.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Next question.
Operator
Our next question comes from the line of Michael Lapides, please proceed.
Michael Lapides - Goldman Sachs
Hey guys, two question for you. One, thinking about the environmental CapEx not just at Midwest Gen but also at Homer City, can you talk a little bit about your views on longer term spending levels and whether there has been any changes at all to some of the guidance you've given about what specific environmental projects you're going to do?
And what the cost of those are?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
Michael, its Ted Craver. We haven't provided any specific outlook or guidance relative to additional environmental retrofits at the Homer City station.
But we'll continue to look hard at that and we do have some significant emissions, reductions requirements to comply with by 2015. So we just haven't come up with any specific announcement around what we would be doing to meet that.
Michael Lapides - Goldman Sachs
Okay. Can you also talk a little bit about the contract status for the work your are going to do at Midwest Gen, meaning is that work contracted to do the scrubber installations?
Or is that still something you are going to contract for in the future?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
Yes, it's Ted again, mostly it's about contracting forward in the future. We've been doing a quite a bit of work relative to the mercury retrofitting since the ACI installations and also quite a bit of work for the SCR installations to meet NOx requirements.
Little bit further down the road are the scrubber or FGD. Hence so, it's pretty...
kind of a three stage process, mercury first then NOx reductions through SCRs and then SO2 reductions through FGDs stretched out over what's basically a 10 year period. So that would be a kind of a constant sort of contracting and work done with outside vendors in order to put all that in.
So I don't think there will be big crescendo contracts, there is going to be a series of contracts that come in.
Michael Lapides - Goldman Sachs
Got it. Last question, didn't see a lot of hedging on the either the energy side or the coal side over the last few months.
Can you just comment on that and talk about what you are seeing in the market? And why you may be foregoing it layering on additional hedges right now?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
This is Ted again may I pick up on that one. We tried to really look forward in kind of a two to three occasionally four your type of timeframe for our coal requirements which notches up pretty much with the type of hedging we do on the revenue side on the sale of electricity.
We try to keep those in balance. For all intents and purposes we are fully hedged for 2008.
We're largely hedged in 2009 for Midwest Gen and Homer City as well. So we feel for the next couple of years we are pretty much where we want to be.
We always do a little bit of spot purchases as our overall layering or portfolio latter in approach to buying coal. But basically we are where we need to be for 2008 and 2009.
Michael Lapides - Goldman Sachs
Got it. Okay, thank you.
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
Welcome.
Operator
Thank you and our next question comes from the line Ashar Khan, please proceed.
Ashar Khan - SAC Capital Management
Good morning, Tom I just wanted to, how much did Edison Capital earn in 2007?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Edison Capital earned $69 million.
Ashar Khan - SAC Capital Management
Okay, so that's about nearly like $0.20 or so. Right?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Yes, I indicated $0.21 a share.
Ashar Khan - SAC Capital Management
And you are saying going forward we should use the 12% number you said take the $0.03 and multiply by 4. Is that what you are guiding towards?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
We said, mid to low teen, so within that range.
Ashar Khan - SAC Capital Management
Okay. And then if I can.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
We actually ...the results ahead of our global infrastructure funds were quite positive to us and we had been... as you know we're not making any new investments in Edison Capital and really been looking to let that portfolio run and its been doing quite nicely for us, but it will come down overtime.
Ashar Khan - SAC Capital Management
Okay. And then if I can just go over the factors.
You said the EMMT earned around $135 million in 07 and you're projecting 75 right for '08. So that's like a differential of about $60 million pre-tax.
Correct?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Yes, we recorded $143 million pre-tax in 07
Ashar Khan - SAC Capital Management
Okay.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
And as we've... historically its difficult for us to forecast or project what EMMT's performance is, but we now have a longer period of time in grade and we feel that really starting of the year, the guidance level of $75 million is appropriate.
Ashar Khan - SAC Capital Management
Okay. So I have a negative 70 on a year-on-year basis, and then you said nearly like $90 million less for the Sycamore and Watson, so that's $160 million.
And then if I'm right, you're picking up nearly like $110 million for capacity payments from 07 to 08. Is that a correct number based on your charts roughly?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
I don't have that number in front of me. But you can do the math right off of our chart.
Ashar Khan - SAC Capital Management
Okay. So would those be the major and I'm looking at and then of course you do expect based on the hedges that Midwest Gen and Homer City should perform better in 08 versus 07 on a realized margin basis.
Is that a fair assumption?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Well I think you have to take all of the factors into consideration. I don't want to build it right here.
That's why we provide a range Ashar, but we provide it... our forward hedging numbers and combined with what forward prices are, that's why we do provide a range there so we can accommodate changes that may impact this relative to factors that are beyond our control.
Ashar Khan - SAC Capital Management
Okay. But they are no other major variances apart from what listed right on the key factors and assumptions for EMG?
Jim Scilacci - Senior Vice President and Chief Financial Officer, Edison Mission Group
Ashar, its Jim Scilacci just want to add additional piece to that to round it out. If you look at net interest, so that's interest income, interest expense, those are two key factors.
As you can see with them carrying large cash balances over the last couple of years and now we are consuming the cash as we grow the business especially in the wind area. So the interest income would logically come down.
At the same time, we've had some refinancing that occurred last year as to the benefit of that will roll forward. But we'll also be adding wind financings in time.
So you have to take into consideration all three of those factors.
Ashar Khan - SAC Capital Management
Okay, I really appreciate it sir.
Unidentified Company Representative
Okay.
Unidentified Company Representative
Next question.
Operator
Thank you. Our next question comes from the line of John Kiani.
Please proceed.
John Kiani - Deutsche Bank Securities
Good morning.
Unidentified Company Representative
Hi John.
John Kiani - Deutsche Bank Securities
On slide 15 that describes you wind projects and pipeline, it looks like you pipeline increased pretty substantially. Am I looking at that correctly?
Or had you already disclosed an increase that I am ...just didn't see.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
It is an increase, I think as we started 2006 that pipeline was at around 2,600 megawatts
John Kiani - Deutsche Bank Securities
Right.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Over here we increased it up to 3,000 and so this expands that up to around 5,000 megawatts.
John Kiani - Deutsche Bank Securities
Can you give a little bit more color Tom around some of the opportunities you're seeing? And maybe the timeframe, at least generally speaking around when the incremental pipeline projects might be realized?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Talking about the pipeline, really what we've been looking to do is get a... really a platform in place to gave us good coverage across regions and from kind of a hub-and-spoke standpoint gave us good efficiencies in both the West, the South, the Southwest, the Midwest and then the East and Northeast.
Most of the expansion where the pipeline has been directed towards the Southwest where we clearly want to expand our presence. And ...
development pipeline can run anywhere where from one to three years depending upon kind of what the stage of the project is. So, we don't define any specific timeframe around this.
John Kiani - Deutsche Bank Securities
Sure.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
What we are trying to do is work diligently to transform these from pipeline into actively, active projects that are under construction and then in to operation.
John Kiani - Deutsche Bank Securities
Great, that's helpful Tom. And then another question, I was unclear, on the Midwest Gen environmental spending that you all announced in I think it was back in December of '06.
You gave some capital cost estimates of that time. I think Ted had mentioned that the contracts for portions of that spending will be signed in the future.
Can you talk a little bit about what those capital cost estimates look like today, versus when you originally provided them?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
John, I'll take another crack at here with you, basically we have not really refined the estimates from what we gave back in December of 2006, we'll be coming forward with several I think several of the contracts relating to some of the larger installations, particularly around Powerton over the course of this year. So, my anticipation is that later on in the year we will be able to be a lot more specific with updated costs and those will be a matter of contractual arrangements.
But at this point, we're still really operating with the estimates that we gave back in December of 06.
John Kiani - Deutsche Bank Securities
Okay, thanks Ted.
Operator
Thank you. Our next question comes from the line of Dan Eggers.
Please proceed.
Daniel Eggers - Credit Suisse
Good morning I thought I'd turn the tide and talk about utility for a minute. With the 2012 CapEx of $3.6 billion, it's kind of below what we're seeing over the nine to eleven period, should we be thinking about twelve as a good long term run rate or how should we think about that?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
That is the current forecast which reflects what we call consider kind of the ongoing requirements within the distribution infrastructure. What you see happening in the 2012 is the roll off of some of our transmission projects, the large scale transmission projects that were under construction and also the generation work that is being done at San Onofre.
We have not reflected ...and also ramping down of our SmartConnect meter program. So we have some very distinct project oriented CapEx that is rolling off in the 2012 period.
And of course that's the latter stage of our forecast. It does not include any incremental new generation or any incremental new transmission that might be contemplated going forward.
So that's our best forecast today based on what we know and is likely, as all forecasts are likely to change as we go forward.
Daniel Eggers - Credit Suisse
Okay. Looking at the kind of the rate based growth and thinking about doubling rate base effectively over this planning period.
Can you talk a little bit about what happens to customer rates, I know you have the DWR contracts rolling off a lot of variables there, but if you were to assume generation costs were flat on core generation, what kind of bill increases customers would see?
John E. Bryson - Chairman, President and Chief Executive Officer
Dan, it's John Bryson. I'll take it up and John Fielder will pitch in, we've talked about in the past, we think that over this period assuming all these investment were made there will be moderate increases in rates.
But the huge variable is natural gas prices. So the extent of natural gas price increases or decreases are a more significant driver than any one thing, you may remember the background here, is that although we will have more of this investment to strengthen the infrastructure coming into rates over the long lifetime of recovery or that kind of investment, we also have some significant components of our current rate costs rolling off.
The most important of those are the power contracts entered into by state during the power crisis. So, reasonably moderate increase to this are kind of baseline outlook and you can look to variables around those, the one I would look to are the most as I say is natural gas prices.
Done [ph].
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Next question.
Operator
Our next question comes from the line of Steve Fleishman, please proceed.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Hi Steve.
Steve Fleishman - Catapult Partners
Yes, hi Tom thanks. A couple of questions, first, I'm wondering if John or others could elaborate a little bit more on the commentaries on the challenges in the wind business.
And just how you're dealing with some of these issues? And then secondly, could you just talk a little bit about what's going on with O&M cost at a submission in 2008 both at the plants, but also this corporate cost that's continued to go up, the development costs?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Sure. Ted, comment on the wind program.
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
Hi Steve, its Ted.
Steve Fleishman - Catapult Partners
Hi Ted.
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
In terms of the wind piece really the main thing that we've done working on over the last few months here are supply chain constraints and pressures. The turbines of course are the largest component of these...
of the costs of these wind farms. We have about 1,160 turbines that are committed under contract that will be rolling off here in to...
coming forward in 2008, 2009 and a little bit in to 2010. Those...
some of the blades that we have gotten from couple of our vendors have experienced some blade cracking issues. We've disclosed this in our 10-K.
We have warranties for the turbines. So we expect the manufacturers to meet all their performance obligations and remediate these issues.
But I think this is somewhat indicative of the kind of growth that we have in this business. We're going to have strains and pressures in that supply chain.
So that's the thing that John was specifically referring to.
Steve Fleishman - Catapult Partners
Did you say which vendor has had that problem? Or is that a couple of them?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
In our disclosures we sighted its...we've had some blade cracking issues with Suzlon and some break cracking issues with Clipper.
Steve Fleishman - Catapult Partners
Okay. And then on the O&M cost?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Yes we had... at the plant level as I mentioned, we had significant outage at Powerton that was part of it was around a turbine and we advanced what we had planned to do a major turbine overhaul in future years now into last year, so that increased our cost on that front.
And of course we are also are running through the environmental settlement. So that's running through planned O&M also.
And we did a variety of other activities so a lot of this is really designed towards strengthening the plant and their operations going forward. On the ANG side, we are building the infrastructure that's required and you need to have in place to grow the business.
So, a lot of it is around the wind development and then the asset management activity surrounding that and the support that we need to be able to build the business.
Steve Fleishman - Catapult Partners
Okay. And then anything on the pricing of your call hedges over this period, 08-09 in particular we have a lot hedged.
Is it much higher than your 07 pricing? Or just modestly higher?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Yes we ... Steve we never provide any indication of that.
It's under contract. I think the best indicator is to take a look at the timeframe in which we incrementally put on hedges which we gave you, how much that was for the fourth quarter.
Steve Fleishman - Catapult Partners
Okay, I thought I would give it a shot, thanks.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Yes, next question.
Operator
Our next question comes from the line of Jonathan Arnold, please proceed.
Jonathan Arnold - Merrill Lynch
Hey good morning guys.
Unidentified Company Representative
Hey Jonathan.
Jonathan Arnold - Merrill Lynch
Just picking up a little more one the wind and pipeline, last year you had this explicit goal of wanting to get to 2,000 megawatts by 2009. Is...
with this big increase in the overall pipeline is that, and then some of the issues you're having on supply chain, is that still a reasonable goal up from the current numbers in service and under construction? Or is that looking like more of a stretch here?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
Hi Jonathan its Ted Craver. I think probably the issues around the turbine supply and making sure that we have good turbines will probably be the largest issue for us to work on to make sure that we can get the projects out of the pipeline and actually in commercial operation.
So the exact timing of that is probably a little bit under review at this point. In terms of where we ultimately try to get to is as the turbines are delivered, we want to make sure we have projects that are ready to absorb them.
So the pace of actually getting projects constructed and in commercial operation is really largely driven by the pace at which the turbines are delivered and ready to assemble. So, that's really our primary determinant.
Jonathan Arnold - Merrill Lynch
And are those two turbine models that you site in the 10-K, significant portion of the 1166?
Theodore F. Craver, Jr. - Chairman, President and Chief Executive Officer Edison Mission Group
Yes. Yes, they are mostly, the Suzlon.
Jonathan Arnold - Merrill Lynch
Okay. And then one other thing I had, this time last year you had a $0.40 range of earnings guidance and $0.30 of that at the mission, but you haven't included any assumptions around trading and till now you now have similar ranges, but you have put in some trading numbers and you're effectively hedged.
What are the big things that kind of push the potential range of EMG results by that still $0.30 margin?
John E. Bryson - Chairman, President and Chief Executive Officer
Yes really Jonathan we still have a significant unhedged piece of our business that is subject to our changes in pricing. So this is, we are in a similar situation to where we were last year.
And we think that the range is appropriate.
Jonathan Arnold - Merrill Lynch
Okay, thank you.
Operator
Thank you and our last question comes from the line of Raymond Leung [ph].
Unidentified Analyst
Hey guys. Couple of questions, can you talk a little bit about financing plans at the utility given CapEx.
And also any financing plans that EME, I think that Ted mentioned earlier some project financing to wind projects, can you elaborate a little bit more on that?
Unidentified Company Representative
Yes, first with regard to the utility. I mean its financing program is really designed to maintain its authorized capital structure.
And so we will be issuing debt to support that activity through the course of the year. And at EMG, we are looking to do our first financing around the portfolio of wind projects and we'd hope to have that completed this year.
Unidentified Analyst
Any concept of size at So Cal [ph]?
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
In terms of the financing... I think we are looking at something like $1.5 billion for this year of debt than preferred and we have already done $500 million of that.
Unidentified Analyst
Okay. And just another question on wind, I guess historically you guys indicated somewhere around 1,600 to 1,900 of KW to build, given the problems that you're seeing on sort of the supply chain, should we be thinking the higher end of that range?
Or something beyond that range, where I guess the industry is more or less around 2,000 KW. How should we sort of think about that given your target of 2001 fix up [ph]?
And your development backlog that I know you picked up.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Yes it really is very project and site specific. And so we think the range we've talked about in the past is still appropriate.
Unidentified Analyst
Okay. And one last question.
What is the run rate for EMG CapEx?
Unidentified Company Representative
Hold on.
Jim Scilacci - Senior Vice President and Chief Financial Officer, Edison Mission Group
This is Jim Scilacci, in the disclosure to shows for 2008 the CapEx number is just under $900 million, $860 million and then it drops a little bit in 2009 to $730 million and drops further in 2010. What you see there, the major component of the capital spending is for the wind projects and primarily the turbine commitments.
And what you're seeing the wind area it's ... we will increase the amount of capital expenditures for wind once we identify and approve commitments for new wind projects.
So you would expect as we will roll forward in time the 2009 number for projects under construction will increase.
Unidentified Analyst
Okay, great; thanks guys.
Unidentified Company Representative
Okay.
Unidentified Company Representative
Next, okay one more question.
Operator
Our next question comes from the line of Clark Orsky. Please proceed.
ClarkOrsky - KDP Investment Advisors
No thanks. My question was answered.
Thomas R. McDaniel - Executive Vice President, Chief Financial Officer and Treasurer
Okay.
John E. Bryson - Chairman, President and Chief Executive Officer
That's great. So thanks very much and thanks everyone for participating on the call today.
Please don't hesitate to call us if you have any follow-up questions. Have a great day, bye-bye.