Nov 7, 2008
Executives
Scott Cunningham - VP, IR Theodore (Ted) F. Craver Jr.
- Chairman, President and CEO Jim Scilacci - EVP, CFO and Treasurer Ronald Litzinger - Chairman, President and CEO of Edison Mission Group Al Fohrer - Chairman and CEO of Southern California Edison
Analysts
Hugh Wynne - Sanford C. Bernstein Leslie Rich - Columbia Management Daniel Eggers - Credit Suisse Lasan Johong - RBC Capital Markets Michael Lapides - Goldman Sachs Jonathan Arnold - Merrill Lynch John Kiani - Deutsche Bank Paul Patterson - Glenrock Associates
Operator
Good morning and welcome to the Third Quarter Earnings Release for Edison International 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 11801 to access today's 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 on the company's website in a listen-only mode for interested parties.
When the conference begins, you will be in listen-only, and there will be chance of questions and answers at the end. [Operator Instructions].
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.
Scott Cunningham - Vice President, Investor Relations
Thanks Lenny and welcome everyone. Our principal speakers this morning will be Ted Craver, our Chairman and CEO, and Jim Scilacci, our Chief Financial Officer.
After their remarks, there will be a Q&A period. Also with us for the Q&A are other members of the Edison International management team.
The presentation that accompanies Jim's financial review, together with the earnings press release and our third 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 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 2007 Form 10-K and 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. I'm sure most of the calls you have been listening to this quarter have focused on the recent turmoil and financial markets, and I will spend most of my remarks on this subject as well.
Let me start with a quick comment on our 2008 earnings outlook. At the beginning of the year, we provided guidance of core earnings of $3.61 to $4.01 and have reaffirmed that 2008 guidance each quarter.
Despite the weakening economy and the financial crisis, we are, again, in this quarter reaffirming that guidance range of $3.61 to $4.01. Within that range, we expect earnings to be near the middle rather than at the high end of the end range.
The principal reasons for the additional caution are the significant pullback during the summer in natural gas prices and a third quarter loss involving a hedge contract with bankrupt Lehman Brothers, that Jim Scillaci will discuss in his comments. Let me turn to the recent economic and financial stresses and our responses to them.
Recent events have reinforced our natural inclination to manage financial risks on the conservative side. Admittedly the lessons many of us in this room learned during the California power crisis undoubtedly have and will continue to shape our responses to the current economic challenges.
We have no significant long-term debt maturities until 2013. We maintain the largest credit lines for companies of our size in this industry at $5.1 billion overall.
And we are willing to use it quickly one events unfold. We view the Lehman Brothers' bankruptcy as a sign of just how fragile the financial system was and saw a real possibility that liquidity could freeze up for an extended period.
As a result, we drew down from our EIX, SCE, EME and Midwest Gen credit facilities, even though we had no immediate need. Our total draws from all four facilities totaled $2.1 billion by the end of September.
We don't plan to repay these draws until we are convinced the banking market has returned to a more normal operating environment. The cash has been invested in highly liquid securities such as treasuries.
In mid-October, Southern California Edison was one of the first investment grade companies to access the capital markets to further build our liquidity position. We saw a good market reception for our $500 million SCE first mortgage bond debt offering at a relatively attractive 5.75% coupon.
We ended the third quarter with a strong liquidity position in excess of $5.3 billion, somewhat higher than where we ended the second quarter. We are encouraged that the capital markets are currently open for Southern California Edison.
But we also recognize that borrowing costs are significantly higher in the current environment. We will carefully manage our Southern California Edison capital spending program to make sure we don't get ahead of our long-term financing needs.
At EME and its subsidiaries, we will continue to implement our key business strategies, consistent with our strong BB credit rating targets. Over the last few years, we've purposely built our cash position, starting with the sale of our international assets and then with some highly favorable opportunistic refinancings.
That cash was first dedicated to strengthening our balance sheet, and more recently, to our growth and asset diversification strategy. Significant cash will be deployed through next summer to complete wind power projects under construction.
Our principal Edison Mission Group financing needs near term are for project financing debt to develop our renewable energy business. But debt market access is uncertain in the current environment.
So while we are continuing to follow our disciplined approach to growth, for now we are operating under a capital conservation mode. That means we only intend to commit to new construction projects beyond those currently planned and committed to, if we can be assured of financing.
This will allow continued development of our 5,000 megawatt wind project pipeline, but focus on building our projects that will deploy our existing turbine commitments. We will also continue to advance our solar program.
In fact, EMG recently entered into a strategic development agreement with First Solar to support this effort in the Southwest U.S. Also, our EMG team may find some good development opportunities in renewables or gas fired generation as others with less financial flexibility may seek to unload partially developed projects or assets.
However, we will commit new dollars only as financing is in place, and that terms and conditions that achieve our return goals. I'd like to finish up by stepping back for a minute.
We, like others, are focused on the realities of the near-term challenges. But I also want to reiterate the important growth drivers that will allow us to serve our current retail and utility customers well, meet public policy objectives, and attract new customers.
We see continued public policy support in California for a reliable electric power infrastructure and for increased investment in renewable energy. Meeting these public policy objectives is the foundation of the general rate case Southern California Edison has currently pending before the California Public Utilities Commission.
And these are the key drivers of SCE's long-term growth potential. At the same time, support for increased renewable energy is a strong Edison Mission Group growth opportunity through new wind and solar investments on behalf of utilities in many states.
In this period of economic uncertainty, the difficulty of getting more capacity build is only intensifying, making incumbent generation assets more valuable and the future need for building new generation more urgent. We have the ability to invest in generation projects without the need for special tax-oriented strategies, which may limit some of our competitors' ability to develop projects until tax oriented equity, again, becomes readily available.
And as financial markets reopen, we expect sponsorship from strong market participants such as EMG will be a real plus. With that, let me turn the call over to James Scilacci.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Ted and good morning everyone. At this time, please turn your page two in our presentation.
This page summarizes some of the key points for the quarter which I will cover in my remarks. Going to page three, we show our quarterly earnings on a GAAP and core basis.
For the third quarter of 2008, core earnings were $1.46 per share, up $0.05 per share from last year. Core earnings exclude discontinued operations and a $0.15 per share charge associated with the CPUC decision regarding SCE's customer satisfaction and employee safety incentive programs.
Reported earnings for the third quarter were $1.33 per share, $0.07 lower than last year. Moving to page four, SCE's core earnings per share were $0.07 higher than a year ago, reflecting higher operating income and lower financing costs.
As is typical in SCE's rate design, most of the expected earnings increase, due to higher rate base, shows up in the third quarter. Turning to EMG, core earnings were flat at $0.64 per share.
Homer City earnings were higher in the third quarter and Midwest Generation's earnings were flat, including the unrealized loss related to a Lehman Brothers power hedge I will discuss shortly. Overall, coal fleet performance benefited from higher energy prices and capacity payments while planned operating costs were higher.
Coal costs at Midwest Generation were also higher due largely to contract cost escalation and a contract rollover. Coal fleet availability in the third quarter was comparable to the third quarter of last year in the mid 90% range at Homer City and 87% range at Midwest Generation.
Earnings from the Big 4 projects were also lower as expected from lower contract prices. Third quarter results include $26 million or $0.05 per share unrealized loss from the Lehman Brothers' bankruptcy, largely related to a power hedge for 2009 and 2010.
This unrealized loss will be fully reversed by the end of 2010. Excluding the unrealized loss related to Lehman Brothers' trade, our third quarter results include FAS 133 unrealized gains of $31 million, compared to $8 million of unrealized losses in the third quarter of 2007.
This quarter, most of those gains arose from changes in the ineffective portion of our hedge contracts. Turning to our trading operation, EMMT, trading income was a penny a share higher on revenues of $46 million, compared to $41 million last year.
Our EMMT proprietary trading remains narrowly focused in markets where we are active, as a result of our power generation business, especially in PJM, Midwest ISO and in New York. Our principal activities are congestion contracts, which include financial transition rights and short-term power arbitrage positions.
Turning to EdCap, results reflected the expected decline relative to last year's strong performance. Earnings were down $0.03 per share in the third quarter, as the portfolio continues to roll on.
The nine month year-to-date financial performance summary is included on pages 5 and 6. Moving on to page 7, our review of Midwest Gen's coal fleet performance trends start on page 7, where you will see favorable third quarter pricing comparison and flat generation year-over-year.
On page 8, Homer City Generation and load factors were lower due to lower dispatch at PJM [ph]. Lower dispatch has been primarily in the low margin off-peak hours when eastern coal often sets the price at the margin.
Page 9 shows our regular hedging profile for the fleet. We added about 400 megawatts of hedges in 2011 at Midwest Generation.
Please note the overall hedge position is adjusted down by 2.9 terawatt hours for the Lehman hedge contract that was terminated. We also added modestly to our coal position.
We contracted for an additional 1.1 million tons in 2009 from Midwest Gen, and 200,000 tons at Homer City in 2011. We continue to take the view at Homer City that coal market prices are not yet at levels warning forward commitments.
We expect further price softening. Let us now turn to the updated 2008 core earnings guidance on page 10.
As Ted has already highlighted, GAAP guidance has been updated to include the year-to-date non-core items and results from discontinued operations. Again, we are reaffirming our core guidance range.
These changes in our core guidance assumptions during the quarter include the updated September 30 forward market assumptions. We also reflected our EMMT trading revenues of $138 million through September 30 though we do expect some fourth quarter contribution from EMMT.
We have also updated our estimates for 2008 SCE energy efficiency earnings from $0.08 to $0.07. This week an ALJ proposed and alternate decisions were issued.
The ALJ proposed decision would defer any energy efficiency earnings into next year while the alternative decisions would authorize approximately $35 million pre-tax for SCE's 2006 and 2007 first interim earnings claim. We see the alternative decision as constructive, and it represents 50% of the total earnings contribution we expect from the 2006 and 2007 periods.
These decisions are expected to be considered by the CPUC in December. The remaining 50% is subject to final CPUC audit, and if approved, will be earned as previously scheduled in 2010.
We continue to exclude from guidance, any impact from the ongoing IRS global settlement and from the outcome of the CAIR proceeding in the DC Circuit Court which could impair purchased annual NOx allowances. I'd like to turn back to the financial markets that Ted has discussed.
The financial market crisis has and will impact our businesses. We thought it would be helpful to address some of the key questions that might be on investors' minds.
First, I am going to ask some questions here and try to answer them. Will the lower expected economic activity reduce SCE's power sales and earnings?
In the short term, the simple answer is no. California's regulatory model decouples changes in sales and fuel and purchase power from earnings.
Differences in sales, fuel and purchase power relative to levels approved by the CPUC are fully adjusted through balancing accounts with no impact on earnings. These changes can't affect cash flow although.
If the economy is slow to recover from the financial crisis, lower sales could affect earnings. However, this would arise from the lower level of investment activity.
Second, is SCE experiencing higher level of bad debts? The simple answer is yes.
But in aggregate, bad debt expense is still tracking within authorized CPUC rates. Next, will SCE's pension plan require higher contributions and expense recognition, given the market indices are down sharply this year?
Could this affect SCE's earnings? The global market conditions have impacted the performance of the trust established to fund SCE's future long-term pension, other post retirement benefits and nuclear decommissions obligations.
This will likely result in increased future expense and higher funding models. However, SCE recovers these costs through customer rates.
So any increase is not expected to impact earnings but may impact the timing of cash flows. Next question, how solid is EIX liquidity position?
Page 11 shows the liquidity position for each of our major companies and a change since the second quarter. Overall, liquidity remains strong at $5.3 billion across the company as of September 30th.
We're fortunate to have long-term committed lines with a group... current group of 28 lenders.
Page 12 shows the principal banks across our four facilities. EIX and SCE credit lines mature in 2013 and EME and Midwest Gen lines mature in 2012.
The terms and conditions for the various lines are favorable, containing no material adverse change clauses and they have low cost pricing relative to facilities that are being originated today. Our bank commitments include $260 million of lines provided by Lehman Brothers.
None of our credit lines were part of the Barclays acquisition of certain of Lehman's assets and we don't expect these lines to be available going forward. It is our intention to pay down the bank lines once we see clear evidence that the financial crisis is abating.
It's encouraging to see LIBOR rates falling, but volatility remains very high and dictates holding cash for the time being. To further augment its cash position, as Ted has already mentioned, to buffer for the extensive capital plans, SCE issued $500 million of five year first mortgage bonds in October with a 5.75 coupon.
The other topic related to the financial market is counterparty exposure. On pages 13 and 14, we summarize our hedging counterparty exposure for SCE and EME.
Keep in mind that SCE's hedging strategies are authorized as part of our rate making process for the benefit of customers to reduce rate volatility and don't impact to earnings. For EME, you'll see that our overall exposure net of collateral is $380 million.
Approximately 95% is with investment grade rated counterparties. About half this exposure rises from amounts owed for delivered power.
In our 10-Q, we also provided updated information on collateral deposits at SCE. As of September 30th, collateral deposits are $265 million and that's with counterparties.
The updated disclosure now include potential collateral deposits should SCE suffer a downgrade below investment grade. Given SCE's cash position and available credit lines, there's more than adequate liquidity to meet our current and potential requirements.
The disclosures also provide a stressed scenario. Last question.
Finally, are you planning to reduce capital expenditures in light of the economic conditions? At SCE, there are no specific plans to reduce capital expenditures.
I will note that our 2008 capital expenditures are running behind budget, primarily because of delays in obtaining regulatory approvals for the transmission projects. Lastly, SCE is expecting a proposed decision in its 2009 general rate case very soon.
This proceeding will affect about two-thirds of SCE's capital spending for the next three years beginning in 2009. Turning to EME, pending recovery of the capital markets EME intends to preserve capital, as Ted has already mentioned, by focusing on more selected growth strategy.
This would involve completing the 330 megawatts of projects under construction and the 240 megawatt Big Sky project in Illinois and developing projects to deploy the remaining 942 megawatts of current turbine commitments. As you'll see on page14, our EME capital commitments for 2009 are slightly over $1 billion reflecting approved projects.
I'll finish with a brief update on the continued progress we're making towards the global tax settlement with the IRS, which remains on track and consistent with what we have discussed in the second quarter call. Our preliminary non-binding agreement has advanced to the point where we are targeting submittal to the Joint Committee on Taxation before year-end.
We do not know how long the joint committee will take for its review though. We also continue to make progress on the termination agreements with the LILO/SILO counterparties.
At this point, it is uncertain when we will actually terminate the leases. The lease termination issue is part of an ongoing continuing dialogue with the IRS.
We see no change in our prior assessment that the settlement, if completed consistent with the current terms, will be overall cash positive with a total non-core earnings consistent with what we had last indicated in the second quarter. And now, I'd like to turn over the call to the operator to moderate the Q&A.
Operator? Question And Answer
Operator
Certainly. We will now have the question-and-answer session.
[Operator Instructions]. Our first question comes from the line of Hugh Wynne with Sanford C.
Bernstein. You may proceed.
Hugh Wynne - Sanford C. Bernstein
I would just like to clarify the company's position on terms of CapEx at Edison Mission Group. If I understood you correctly, you were kind of cutback capital expenditures there to a level that's consistent with the implementation of the construction of the 940 megawatts of turbine commitments that you've already bound yourself to.
And otherwise, you're going to be in a capital conservation mode. The question regards the opportunities created by the credit market disruption, and in particular, the lesser availability of tax equity for you to acquire other turbines, other sites, other developers even.
Is that an opportunity that you intend to exploit at all, or do you feel it's simply too risky to pursue acquisitions in that sector?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Let me turn that over to Ron Litzinger
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
We do see opportunities out there and our capital preservation strategy has that in mind so that we take advantage should they occur. What we would be interested in would be development portfolios that would assist us in deploying our existing turbines first and then we would consider other opportunities, as Ted mentioned, if there was a definite path of financing available.
Hugh Wynne - Sanford C. Bernstein
Okay and then if I could just a follow on question regarding coal. I don't know if you could comment on the prices at which you've been able to procure coal in this quarter or failing that the prices at which you expected to be able procure coal in future and what those prices imply for the longer term earnings power of the existing coal-fired fleet at Edison Mission Group?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
Here this is Jim Scilacci. I'll start and ask Ron to fill in.
We won't comment on what we're pricing our coal at. Ultimately you'll be able to see that flow through our coal expense in Midwestern and Homer City's financials.
We did comment that we believe that eastern coal prices especially around Homer City facility, the prices have been slowed to fall relative to natural gas and power, and it's our view that, that will catch up over time. But it does cause a squeeze in the gross margin associated with what we're currently seeing in Homer City and up to a less extent in Midwest Gen and we'll just follow that market carefully and we'll jump in as we see opportunities present themselves.
Ron, would you like to add anything?
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
Yeah in 2009 at Homer City, most of the coal price pressure is in the east, we had pretty much locked in most of our coal requirements in earlier times when the prices were more favorable. We are focused now out in 2010 and 11 where we're currently hedged consistent with our power positions which is our strategy and as Jim mentioned, we expect the prices to soften out [ph].
Hugh Wynne - Sanford C. Bernstein
Are there any major implications to you other than the write-off of the SO2 allowances of the CAIR vacature [ph]. Do you see that as possibly resulting in more stringent regulation and higher CapEx in the future?
Or do you think that we'll be able to go through the next few years with no major change in your CapEx plans, environmental CapEx plans?
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
Yeah first, the potential write-off would be on annual NOx as opposed to SO2. One thing on the CAIR vacature, that we would be concerned about, our agreement with the Illinois EPA was done separately from CIAR.
That is still binding to us. Our concern would be that something more stringent replaces the existing CAIR rule and that we would have to revisit that.
Hugh Wynne - Sanford C. Bernstein
Great, thank you very much.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Hugh just to clarify and it's in our disclosure. We talked about in the second quarter there.
EME has $48 million of NOx credits that is holding and we have taken no action at this time on those credits.
Hugh Wynne - Sanford C. Bernstein
Right.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Thank you.
Operator
Thank you Mr. Wynne.
Our next question comes from the line of Leslie Rich with Columbia Management. You may proceed.
Leslie Rich - Columbia Management
Hi, Wynne... you know Hugh asked my question.
And I am done.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Thank you Leslie.
Operator
Thank you Ms. Rich.
Our next question comes from the line of Dan Eggers with Credit Suisse. You may proceed.
Daniel Eggers - Credit Suisse
Hi good morning.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Good morning Dan.
Daniel Eggers - Credit Suisse
Looking at the Homer City utilization year-to-date in comparing to last year, I mean it looks like this year's run rate is more consistent than what we saw in '06. Should we think about this is reflecting kind of more of a normal weather environment from a baseline utilization for those assets in that maybe last year was a little bit [ph] of more of aberrational events?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
This is Jim. And I'll start and hand it over to Ron.
It's a good question. We expect, if we had the information we could probably provide more clarity to that, because we bid in the units and we do see some lower level of off-peak generation of the units being taken in the off-peak hours and that could do...
there is a lot of mention [ph], we just don't have. It usually has to do with how people are bidding in units.
So I'll stop there and ask Ron if he has any further to add to that.
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
Jim hit nail on the head, our load factors are down. It is primarily in the off-peak hours.
As Jim mentioned, with the current situation with eastern coal prices, you're probably getting a variety of bidding between historical costs and replacement costs. And we think that's affecting our dispatch.
The important thing is we make most of our money on-peak, and Homer had a good forced outage quarter and we captured it.
Daniel Eggers - Credit Suisse
Great, thank you. And I guess, if you guys can talk a little bit about kind of resource planning in California was slowed, with an economic slowdown.
At what point in time, do you guys reassess how it should be... the GRC gives you visibility for three years, but can you remind us the review process to evaluate future needs?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
I will have the Al Fohrer address that the question Dan.
Al Fohrer - Chairman and Chief Executive Officer of Southern California Edison
Well, in terms of the resources, there is a number of proceedings that go on. One is the biennial long term recourse planning process which state takes a look at what the overall leads are in terms of generation capacity.
We've been through that. And I don't expect that there will be any changes to what we want outward at least at the current time, most of the resources were several years out.
In terms of the utility load growth, what we... we filed an amendment for our general rate case that reduced the new meter growth.
We have not seen material changes in what we call load growth or load on the circuit. So it did not materially change the capital investments that we've requested in the 2009 rate case.
Most of those were driven by what we call infrastructure replacement, which is replacing a system that is largely built in the 50s and 60s, and load growth on the circuit that comes from existing usage.
Daniel Eggers - Credit Suisse
Okay. Thank you.
And I guess did you... ECG yesterday talked about a decent amount of expense associated with...
trying to contest Proposition 7, is there any of that expense embedded in this quarter's numbers for you guys since we expect anything in the fourth quarter?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
There was some expense from our side of the equation. We haven't disclosed what that number was, and it's incorporated in our numbers that we showed today.
Daniel Eggers - Credit Suisse
Okay, thank you.
Operator
Thank you Mr. Eggers.
Our next question comes from the line of Lasan Johong with RBC Capital Markets. You may proceed.
Lasan Johong - RBC Capital Markets
Thank you. It sounds like you're planning to continue investing in renewables regardless of the financial market today, did I kind of interpret that correctly?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Well, I'll let Ron Litzinger address that.
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
We are going to complete the projects we have under construction. We are going to continue to develop projects, so that we can deploy our existing turbine commitments.
And in those cases, or any other newer opportunities, we would like... we would only proceed if there was a path of financing open.
And so we are relying on the project debt markets to be open and available to us at reasonable terms.
Lasan Johong - RBC Capital Markets
I see. And speaking of the turbines, how much, if any of the 942 megawatts of turbine commitments, are from Suzlon.
And is there any update you can give us on the repairs and replacements going on there?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
I think it's... I remember, it's about 150 turbines.
So it'd be about 300 megawatts of those are Suzlon given the cancellation we had done last quarter. And important thing to remember is the future Suzlon commitments are the different version of the machine which thus far is operating satisfactorily in Australia, for almost a year now.
They... Suzlon has progressed well on the root cost [ph] during our analysis and our remediation plan and they will be submitting that to us for our review and approval shortly.
Lasan Johong - RBC Capital Markets
Great. And just on the Lehman hedge loss, I'm guessing since Lehman's bankruptcy you rejected the contract because it was underwater to them which means that to replace them you'd have to take a market price to the hedges that you're replacing so I'm not sure how you reverse you losses through the end of 2010 if the new contracts are below margin relative to the older contracts.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
This is Jim Scillacci. What happens there on the accounting, so these were cash flow hedges that we recorded and once Lehman filed for bankruptcy we had to de-designate those hedges in the process...
the accounting process that tracks that, it comes out of other comprehensive income you have to take a hit for the mark-to-market. And so that's why it's recorded as a non-realized loss.
And as you go forward in times so these hedges were referred [ph] 2009 and 2010 and what we said during the script was it ultimately works its way out during the two-year period. But as you think about it you don't want to get confused by the accounting, you have to think about what the economic impact would be.
Lasan Johong - RBC Capital Markets
Right.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
I mean that's hard to tell because now we have generation that would have been dedicated under that financial hedges, so Lehman which is now available to resell and the question is what will the prices be in 2009 and 2010 relative to what you would have realized had Lehman not gone bankrupt. So it's an opportunity loss...
with the way I look at it now it's an opportunity loss until we actually realize what occurs.
Lasan Johong - RBC Capital Markets
So those hedges are still open and are on accounted for in terms of other financial contracts?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
It falls in terms of percentage, yes. And then...
Lasan Johong - RBC Capital Markets
Okay.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
And this will roll forward in time and so each year as we go... each month we'll report a slight pickup or gain as we unwind.
And I think in our disclosure we show what the amount will be for 2009 and 2010 as that unfolds.
Lasan Johong - RBC Capital Markets
Got it. I'm a little confused why are we talking at all about the possibility of Southern equal Edison being downgraded in non-investment grade, that seems little nonsensical at this point, isn't it?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
We try to extend our disclosures given the concern around other companies to show what the adequacy of our liquidity is relative to what our deposits or collateral positions are. So you go from what we are now, well into the investment grade categories, and a multiple amount of reduction to a lower level to a non-investment grade, and the whole point was to demonstrate the adequacy of our liquidity.
Lasan Johong - RBC Capital Markets
And so, you are talking about consolation then?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
That would be something that we could say.
Lasan Johong - RBC Capital Markets
I got you, I got you. And just one other question, California economy was obviously kicking a hit with everybody else.
Is this going to have any kind of bearing on your rate case going forward?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
I'll stop here and let Al Forer address that.
Al Fohrer - Chairman and Chief Executive Officer of Southern California Edison
As I indicated before, we did make an adjustment in our numbers, about a month or two ago, that reduced the revenue requirement for a lower level of new meter growth. But we won't speculate on what the outcome would be.
You get two things going on in the market, one is our rate case, if they gave us everything we asked for with a 6% rate increase, what we have seen is the natural gas prices. And as you'll recall California is heavily dependent on natural gas, have come off quite a bit, taking some of the total grade [ph] away.
Lasan Johong - RBC Capital Markets
Actually I do have one other question. The California DWR just recently announced being on a curtail order to municipalities and others to a very, very low level.
Is this impacting you at all, and if this continues is this going to be a problem for Southern California Edison?
Unidentified Company Representative
No.
Unidentified Company Representative
No.
Lasan Johong - RBC Capital Markets
Great. Thank you very much.
Operator
Thank you Mr. Johong.
Our next question comes from the line of Michael Lapides with Goldman Sachs. You may proceed.
Michael Lapides - Goldman Sachs
Hi guys, thank you. My question's asked and answered.
I much appreciate it.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Thank you, Mike.
Operator
Thank you Mr. Lapides.
Our next question comes from the line of Jonathan Arnold with Merrill Lynch. You may proceed.
Jonathan Arnold - Merrill Lynch
Good mooring guys.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Good morning, Jonathan.
Jonathan Arnold - Merrill Lynch
My question relates to, you talking about curtailing your capital spending at mission. When I look at the actual CapEx forecast in the 10-Q versus what it was at the June stage over the course of 9 and 10, it seems to be up about $300 million, a couple of hundred from under the turbine commitments, and 100 or so, about 130, at the upper lines between the two years.
Any, could you give some sense as to what's reflected there, or why the actual number is on the way up?
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
The turbine commitments are reflect as sliding turbine commitments from '08 into '09 primarily, as we renegotiate... or entered into our new agreement with Suzlon.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
And just as an additional piece, we cancelled the 300 megawatts, 350 megawatts of Suzlon machines too, so that's an interim period number that's come out of the capital budget too.
Jonathan Arnold - Merrill Lynch
Where did it come out is it --
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
It would have been for 2009. Those were the 2009 orders that we had with Suzlon that were canceled.
Jonathan Arnold - Merrill Lynch
But '09 turbine commitments are now $800 million versus 550.
Unidentified Company Representative
That's correct.
Jonathan Arnold - Merrill Lynch
So that's the net of the cancellation and the things that slipped out of '08?
Unidentified Company Representative
That's correct
Jonathan Arnold - Merrill Lynch
Okay.
Unidentified Company Representative
And we have more wind projects in construction than we previously had as well.
Jonathan Arnold - Merrill Lynch
Okay. And as we think about the actual capital implications of the pipeline of building it out.
I think the difference between in construction and pipeline is or the turbine commitment is about 600 megawatts. Am I right that...
that could cost the non-turbine costs are not in the capital forecast what would be a good rule of thumb for working out that number?
Unidentified Company Representative
Wind turbines are generally in the 1800 to 2300 a kilowatt range and they generally represent about two-thirds of the total project costs.
Jonathan Arnold - Merrill Lynch
So that would be additional spend that you would need to do if you were going to sort of fulfill the turbine.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
That is correct. Our table is reflective of the existing commitments.
Jonathan Arnold - Merrill Lynch
And you have... it was mentioned in the 10 Q of some issues will Clipper blades, I think it is...
is that the same issue that was in the second quarter Q or is it... you said that it was recently discovered.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
These are blade issues that are new to previous issues or with the gear box those have been resolved. And we are working with Clipper right now both commercially and on a technical basis.
Jonathan Arnold - Merrill Lynch
Okay, and then one other thing on... is Suzlon.
Do you have some commercial settlements with $uzlon have embedded in the numbers from this quarter and how much of those, and were they cash or accruals?
Unidentified Company Representative
Suzlon makes liquidated damage payments to us quarterly based on our new agreement and those are reflected the quarterly results.
Jonathan Arnold - Merrill Lynch
Okay and then just one final thing on the CapEx front. I saw that the Illinois environmental spend moved up for '09 by about $40 million.
What's going on in that number and can we get an update on your thoughts around timing and when you might talk about the broader update of that project costs?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
We're on track to make our product update of the total costs and the timing of those cost at the end of the year. We will have detailed engineering estimates for the power thing [ph], NOx controls and SO2 controls that will be much more meaningful to everyone and all you are seeing in '09 is the acceleration in engineering of...
that is necessary to be prepared to do the power thing work consistent with the agreement.
Jonathan Arnold - Merrill Lynch
Okay, thanks a lot.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Thank you, Jonathan.
Operator
Thank you Mr. Arnold.
Our next question comes from line of John Kiani with Deutsche Bank. You may proceed.
John Kiani - Deutsche Bank
Good morning.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Good morning John.
John Kiani - Deutsche Bank
Can you give us a little bit of color around whether some of the wind projects that are under construction are in Texas and how much of the pipeline... wind pipeline in Texas as well, please?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
The only project under construction is the second phase of our existing Goat Mountain project in Texas and that is our only project in Texas at the moment.
John Kiani - Deutsche Bank
And then what about the pipeline?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
It's not heavily weighted in Texas.
John Kiani - Deutsche Bank
And far as that project that's under construction right now have you all talked about what types of returns on capital you expect to see for something like that in Texas? And we're seeing off-peak power prices very low, almost clearing actually negative in some of the hours especially on the west and the north zone.
Can you talk a little about what types of returns on capital you expect for that type of project right now?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
We're monitoring the situation in Texas with our existing plant based on the things you know, indicate why I said earlier our pipeline is not heavily focused in Texas. And overall on our in our wind portfolio we are looking for utility type returns on these projects.
John Kiani - Deutsche Bank
And as far as the existing piece of the portfolio that's already up in running that's... that is in Texas, how have you hedged that, what types of hedges have you been using and what are the durations of those hedges?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
That's one of our merchant projects.
John Kiani - Deutsche Bank
So your wind projects in Texas are totally... are 100% open?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Our one wind project in Texas is... is operated on a merchant basis, that's correct.
John Kiani - Deutsche Bank
Okay. And thank you.
Unidentified Company Representative
And I'll...
John Kiani - Deutsche Bank
Yes.
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
We'll define some color on Texas. On page 18 of the deck you will be able to see what the megawatt in operation and number of megawatts in construction in the pipeline.
John Kiani - Deutsche Bank
Yeah, okay I see, so under operation in Texas, it looks like there's 241 megawatts then with another 70 being built, so it looks like the total 311 megawatts in Texas and then the pipeline for Texas is 400 megawatts, is that the correct data?
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
Yeah, the other thing you have to remember is of the projects that are in operation in Texas only 100 megawatts of that are in our cost of balance, our other projects that's actually in SPP are not seeing the market issues that you mentioned earlier.
John Kiani - Deutsche Bank
Okay. Thanks that's helpful.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
It's over the rate of project... that Ron was referring to, it's one of our larger and better performing projects.
John Kiani - Deutsche Bank
And one last question from a hedging perspective, how should we think about the remainder of your existing wind megawatts that are in operation and also of the assets that are under active construction, the hedge profile there. I mean I know you have a number of projects that obviously have long term PPAs.
But can you give us a sense for how much of the rest of the portfolio is either merchant or under shorter term hedges please?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
It's mostly contracted the balance of the fleet. We started looking at doing some projects merchant when we were in a high capital escalation period and PTC uncertainty.
And with the intense contract later in that environment.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
Yes that's I'm going to follow up on that John.
John Kiani - Deutsche Bank
Yeah.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
The difficulty we're having is when you walk it down on a PPA and prices were escalating rapidly, finally you have to go back and renegotiate the PPA to make it work on your return threshold. And I'm sure Alfore [ph] and the people of SCE can comment of their side of the equation because I'm sure they've seen it from utility, as the flipside of EME.
So we've taken a position of view... I'd kind of look at it, it's not a merchant project, more of a delayed contracting approach.
So once you are able to get things locked down, and we know your costs are going to be, then you enter in a period of active negotiation with counterparties with reasonable cost estimates and...
John Kiani - Deutsche Bank
So you'll... so the way to think about it, is that you'll start the development process, start to spend the capital, get the capital and the costs locked down.
And then, go after the hedge of the contract as more of the step 2.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
That's correct. And we're not going to proceed on projects that don't have acceptable returns or path of financing.
Going forward, I think we should stick with that.
John Kiani - Deutsche Bank
Okay, thank you. That's helpful.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Okay John.
Operator
Thank you Mr. Kiani.
Our next question comes from the line of Rudi Celiphioni [ph] with Morgan Stanley. You may proceed.
Unidentified Analyst
Hi, just kind of along the lines with John's question earlier. Have you noticed any change in the counterparty behavior, with regard to wind contracting since this financial crisis hit or is this still fairly healthy?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
I think there is two sides to that question. Let me kick it over to Ron first, and ask Al if he'd like to add anything.
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
No. Generally, we don't comment on current PPA negotiations.
Well, I certainly haven't heard anything from my developers that there's been a shift. Utilities still have renewable portfolio standards.
To me those have not been relaxed. And, things are progressing about the same as they have been before.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Al?
Al Fohrer - Chairman and Chief Executive Officer of Southern California Edison
This is Al. From the utility perspective, Ron got it right, we've got a 20% RPS that we've got to meet by 2010.
This stage has a stated preference for 33. So I don't see any changes come out right now in any of renewable.
Unidentified Analyst
Okay. Thank you very much.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
You're welcome.
Operator
Thank you Mr. [indiscernible].
Our next question comes from the line of Clark Ostie [ph] with Stage Street Global. And this is our final question.
You may proceed.
Unidentified Analyst
All right, thanks. Just with regard to the 2009 CapEx plan, how much of the turbine commitments are cancelable, and would you consider doing that given kind of the cash conservation load you are operating in?
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
Cancellation fees. We could cancel, and the cancellation fees would be pretty substantial at this point in time.
Our intent is to deploy the turbines. But we continue to reassess all of it.
Unidentified Analyst
Okay. And of the...
I think you said you had 900 of turbine commitments. Can you talk about financing commitments you have, with regard to projects in the pipeline?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Let me have John Fintering [ph] catch you up on our financing efforts.
Unidentified Company Representative
We're going to embark in the first quarter on the portfolio of financing for a group of assets that we currently have under contract with PPAs. It wouldn't be wise to currently try to finance those.
But we feel it's a very strong portfolio, and we've approached a number of banks. And all indications are that in the first quarter, we should be able to successfully finance that group of assets.
Unidentified Analyst
Can you say much you... you think you might try to raise from that or?
Unidentified Company Representative
That is substantial.
Unidentified Analyst
Okay.
Unidentified Company Representative
And just as reminder none of our existing wind portfolio has any financing on it or actually is a very small amount of money. So this is...
we've done it on our balance sheet thus far and we're getting to the point of time now we're looking to put together wind financing and we're resolving the Suzlon issues too and that was another key consideration why we have to finance today. And then we'll have a series of project financing as these projects move down the line and into construction.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
And the first... what John mentioned, the first move into market is the non-Suzlon portion of the portfolio.
Unidentified Analyst
Okay. Thanks.
That's helpful.
Operator
Thank you Mr. Orski and I apologize we do have time for one more question and that question comes from the line of Paul Patterson with Glenrock Associates.
You may proceed.
Paul Patterson - Glenrock Associates
Actually almost all my questions have been asked on the CapEx, but I guess just to clarify the increase in CapEx in your projects, has grown commitments project... financing commitments associated with that, correct and --?
Ronald Litzinger - Chairman, President and Chief Executive Officer of Edison Mission Group
It's primarily reflective of projects that are currently under construction in our existing total commitments and the shifting you've seen period-to-period has is that puts and takes from the cancellations and deliveries being deferred into '09 and 9 to 10 and the like.
Paul Patterson - Glenrock Associates
Okay. And then the pension funding, I noticed there was a decrease of about 22%, I think in the last nine months, and I know you guys have regulatory recovering mechanism at SCE.
And just what should we think about in terms of pension expenses, pension cost going forward, do you have any elaboration on that?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
That's a good question. It really is going to depend on ultimately where the plant comes out at the end of the year and the discount rate that you use and assessing the liabilities and it's premature I can clearly tell you it's going to go up.
How much that's yet to be figured out completely but again the way the rate making mechanism has worked here in the state, we should be able to set a balancing any how. And we'd have a higher expense level and that was in my comment what we said we have higher expense we need to fund that expansion from a cash perspective and we would seek to recover the dollars in the future period.
Unidentified Analyst
Okay. But Edison is there any impact there from...
I am sorry Edison Mission, is there any impact there from the pension thing that we should think about?
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
It's anonymous.
Paul Patterson - Glenrock Associates
Okay. Just I want to make sure.
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Edison Mission is less than 2% of the total.
Paul Patterson - Glenrock Associates
That's very helpful. Thank you
Theodore (Ted) F. Craver Jr. - Chairman, President and Chief Executive Officer
Okay Paul, thanks.
Operator
Thank you Mr. Patterson, at this time I'd like to pass the conference back over to Scott Cunningham.
Jim Scilacci - Executive Vice President, Chief Financial Officer and Treasurer
Thanks very much everyone for participating. Feel free to call to Investor Relations, if you haven't called today.
Thank you. Bye, bye.
.