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Ameren Corporation (NYSE:AEE)

Q3 FY08 Earnings Call

November 4, 2008, 10:00 AM ET

Executives

Douglas Fischer - Director of IR

Gary L. Rainwater - President, Chairman, and CEO

Warner L. Baxter - EVP and CFO

Charles Naslund - Chairman, President and CEO of AmerenEnergy Resources and Chairman and President of AmerenEnergy Generating Company

Analysts

Greg Gordon - Citigroup

Yiktak Fung - Zimmer Lucas Capital

Paul Ridzon - KeyBanc Capital Markets

Daniele Seitz - Seitz Research

Michael Lapides - Goldman Sachs

Ben Sung - Luminous Management

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Ameren Corporation 2008 Third Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. This conference is being recorded today Tuesday, November 04, 2008. I would now like to turn the conference over to Doug Fischer. Please go ahead, sir.

Douglas Fischer - Director of Investor Relations

Thank you and good morning. I'm Doug Fischer, Director of Investor Relations for Ameren Corporation. On the call with me today is our Chairman, President, and Chief Executive Officer, Gary Rainwater; our Executive Vice President and Chief Financial Officer, Warner Baxter; our Senior Vice President and Chief Accounting Officer, Marty Lyons; our Vice President and Treasurer, Jerre Birdsong and other members of the Ameren Management Team.

Before we begin, let me cover a few administrative details. This call will be available by telephone for one week to anyone who wishes to hear it by dialing a playback number. The announcement you received in our news release carrying instructions on replaying the call by telephone. This call is also being broadcast live on the Internet and the webcast will be available for one year on our website www.ameren.com. This call contains time sensitive data that is accurate only as of the date of today's live broadcast. Redistribution of this broadcast is prohibited.

I also need to let you know that comments made on this conference call may contain statements that are commonly referred to as forward-looking statements. Such statements include those about future expectations, beliefs, plans, strategies, objectives, and financial performance. We caution you that various factors could cause actual results to differ materially from those anticipated in the forward-looking statements. For additional information concerning these statements we ask you to read the forward-looking statements section in the news release we issued today and the forward-looking statements and risk factors sections in our periodic filings with the SEC.

To assist in our call this morning we have posted presentation slides on our website that we will refer to during this call. To access this presentation you may look in the investors' section of our website under presentation or follow the links for the webcast.

Gary will begin this call with an overview of key third quarter 2008 operations and regulatory developments as well as comments on the current volatility in the financial markets and our strategies to address this issue. Warner will follow with the discussion of our third quarter 2008 financial results and revised 2008 earnings guidance as well as provide some more detailed comments on our available liquidity and other issues related to the current financial markets. We will then open the call for questions. Here is Gary.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Thanks Doug. Good morning and thank you for joining us. This morning we reported non-GAAP or core earnings per share of $1.17 per share for the third quarter of 2008 down from $1.33 we earned in the same period in 2007. The fact that earnings declined from the year ago quarter was not a surprise given last year's very hot summer weather which drove higher electric margins in the 2007 period.

In addition, as we previously discussed with you in 2008, we expected rising costs for, among other things, fuel and enhancements to distribution system reliability. However, the magnitude of the decline was somewhat greater than expected because of weaker than expected power prices and milder that normal weather this quarter. As you all know, we've seen tremendous volatility in power prices this year and most recently meaningful downward pressure on these prices.

Lower power prices and the mild third quarter weather are the primary reasons we narrowed our core earnings guidance range for 2008 to $2.80 to $3 per share, which is in the lower half of our previous guidance range of $2.80 to $3.20 per share. Warner will go through these items in more details in his remarks.

Turning now to some key regulatory developments, in September, we received a rate order in Illinois. Specifically on September 24th, the Illinois Commerce Commission or ICC authorized increases in rates for AmerenCIPS, AmerenCILCO, and AmerenIP totaling approximately $161 million based on a lot of returns on equity of 10.65% for electric delivery service and 10.68% for gas delivery service; and common equity range ratios ranging from approximately 47% to 52%. These increases were about 78% of our updated 2007... $207 million request.

Across the Ameren Illinois Utilities pledged to limit overall residential electric bill increases to 10% in the first year of new rates. AmerenIP's electric rates will be approximately $10 million lower than the authorized level until October 1, 2009. The ICC also approved an increase in the supply cost adjustment or SCA factors which is expected to increase electric revenues by another $10 million per year. The SCA is a change applied only to bills of customers who take power supply from the Ameren Illinois Utilities and it covers the increased cost of administering power supply responsibilities. While the ICC did not accept our gas revenue decoupling proposal, it did approve an increase in the monthly charge for gas, residential customers to 80% of fixed delivery service cost versus the prior 53%. This will make our gas utility earnings less sensitive to volume metric swings.

The new Illinois rates went into effect on October 1st. These increased rates will improve the earnings and cash flows of the Ameren Illinois Utilities from their depressed levels. However, we continue to expect that these rates will not keep pace with the level of cost we're currently experiencing. Consequently we are evaluating the timing of our next rate case filings in Illinois.

As we've said in the past, we expect to file rate cases more frequently in the future to minimize regulatory lag as well as to make bill increases more manageable for customers. Importantly, we do consider this rate order a positive side of the progress that we're making in Illinois to restore financial stability and help to the Ameren Illinois Utilities. Two of the credit rating agencies concurred with this assessment as Standard & Poor's and Fitch, recently raised their ratings for our Illinois Utilities. Moody's has our Illinois Utilities ratings on positive outlook as well.

Turning now to Missouri, AmerenUE has requested an annual electric revenue increase of approximately $251 million due to the higher costs across its business, including fuel and reliability costs as well as higher infrastructure investments. Critical aspect of this case is AmerenUE's request to implement a fuel and purchase power cost recovery mechanism. On August 28th, the Missouri Public Service Commission staff and also the public council and interveners filed their initial recommendations in the case. The staff recommended a $51 million increase based on a 9.5% return on equity and the 51% equity ratio. Further the Missouri Commission staff did not support our request for a fuel and purchase power cost recovery mechanisms.

While each utilities situation differs, its worth noting that the Missouri Public Service Commission authorized a 10.8% return on equity for Empire District Electric in late 2008 close to the 10.9% return we've requested in our case. In addition, the Missouri Commission has approved fuel and purchase power cost recovery mechanisms for Aquila and the Empire District Electric in the recent past. For us each case stands on its own merit. However, we believe we presented a strong case to the Missouri Public Service Commission on these issues.

As you know, the need for utilities to have strong cash flows and good credit ratings, solid overall returns on their investments, and the ability to access the credit markets on a timely basis has never been more apparent than it is right now, as we try to navigate our business through very challenging financial markets. The bottom line is that achieving a constructive outcome in the AmerenUE rate case is critical to our ability to continue to invest in our Missouri infrastructure. So, that we'll be able to meet our customer's expectations for safe and reliable service, access to credit markets to finance our operations, as well as provide solid returns to our shareholders. Hearings run from mid November through early December and an order is expected from the Missouri Commission in late January or early February 2009 with new rates effective March 1st.

Moving on, I am very pleased to say that we have good news to report on the operations front. In October, our Callaway nuclear plant completed its first ever record breaker run. This means the plant operated from one refueling to the next, without ever being out of service. Callaway was online for 520 days. The plant is one of only 26 in the nations 104 nuclear units to achieve a record run of more than 500 days. We are very proud of Callaway's achievements. The unit is now undergoing its scheduled refueling and maintenance outage, the outage is expected to take approximately 25 to 30 days and we expect the unit to be online later this week.

We also have good news on the coal fired plant generation front. Our non rate regulated coal fired units turned in solid performance this quarter with equivalent availability rising about 5% to approximately 89%, compared to the third quarter of 2007.

Now I'd like to discuss with you our perspectives on the capital and credit markets, as well as the current economic environment we're experiencing and the related impacts on our business. As you know, the global financial markets have experienced extreme volatility and disruption in 2008 and in particular since early September. This disruption has led to major financial institution coming under financial duress, significant strains in the capital and credit markets, deteriorating global economic conditions, and steep declines in stock prices. The United States government and governments around the world have established programs aimed at strengthening the global financial system. We are encouraged by these efforts and we believe that in time, these efforts will benefit the financial markets.

However, in the interim these events have impacted our company and we believe they will continue to impact us throughout 2009 and perhaps longer. In terms of the economy, we believe the disruption in the capital and credit markets, will further weaken economic conditions as the more limited access to credit and the higher costs of capital to business will reduce spending, resulting in job losses and pressuring economic growth. This weak economic conditions could lead lower sales and higher bad debt expenses for us among things.

In terms of sales growth, we have historically targeted a modest overall electric growth rate of 1.25% annually. For the nine months ending September, our weather sensitive residential and commercial electric sales were down 5% and 3% respectively compared to the year ago period. However, these decreases were driven by the milder summer weather this quarter compared to our very hot summer last year. After adjusting for weather, our combined residential and commercial electric sales increased approximately 1% for the first nine months of 2008 compared to the year ago period.

Separately, our industrial sales were down about 4% for the first nine months of 2008 compared to the year ago period reflecting the soft economy. While these lower sales have had minimal impact on our operation so far in 2008, it is a situation that we will continue to closely monitor. With regard to the extreme disruption in the capital and credit markets, we believe this has made our ability to access the capital in credit markets to support our operations and refinance short-term debt more challenging.

To navigate through these markets, we are proactively managing our finances while remaining sharply focused on continuing to provide our customers with safe and reliable electric service as well as comply with Federal and State environmental reliability and other regulations. On October 31, 2008, our available liquidity which represents our cash on hand and amounts available other our credit facilities, stood at approximately $1.45 billion, that's up about $550 million from the same time last year.

Despite the solid available liquidity, we have identified opportunities and are developing contingency plans that would defer or reduce planned capital spending and operating expenses to reduce our financing needs in these uncertain markets. Specifically, we are reducing expected 2009 operating and capital expenditures and our non rate regulated generation business segment by a total of $400 million to $500 million. Other meaningful cost deferral and reduction opportunities have been identified throughout the rest of our business that we will execute in the event that capital and credit markets continue to be disrupted.

In our regulated businesses and administrative support functions, we've identified approximately $400 million to $500 million of planned 2009 expenditures which maybe deferred into future periods. These expenditures are primarily capital, primarily generation related and are discretionary. Separately, because the Federal Clean Air Interstate and Mercury rules were vacated by the courts. We are seeking a variance from the Illinois Pollution Control Board through an environmental requirement in Illinois for our non rate regulated generation business.

In preparing this request, we worked with the Illinois EPA and agreed to some additional emission rate reductions, make the variants proposal environmentally neutral. As a result, the agency has indicated they will not oppose the variance. These variance would allow us to defer approximately $500 million of environmental capital expenditures that were scheduled in the 2009 to 2012 timeframe.

Warner will go into some more detail on these matters in a moment. However, the important point is that we are proactively taking prudent actions to modify our short-term plans to address the current economic and financial market uncertainties. It's important to note that any expenditure control initiatives would be balanced against our continued long-term commitment to invest in our energy infrastructure to provide safe, reliable service to our customers to meet Federal and State environmental reliability and other regulations and the need to maintain a solid overall liquidity and credit profile to meet our operating capital and financing needs.

To wrap up, our management team remains very focused on successfully navigating our company through the current challenging market and economic conditions and executing our long-term strategic plan for the benefit of our customers as well as to enhanced shareholder value above current depressed levels, which I believe do not reflect the strong underlying value of our company. I'll now turn it over to Warner to discuss in more detail our third quarter results as well as our current available liquidity position and future plans.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Thanks Gary. I would now like to refer you to the slide presentation on our website that Doug mentioned, as I provide a more detailed discussion of our third quarter 2008 earnings.

Turning first to page 3 of our slide presentation. Today we announced third quarter 2008 net income in accordance with generally accepted accounting principles of $204 million or $0.97 per share compared to third quarter 2007 GAAP net income of $244 million or $1.18 per share. Excluding certain items in each year, Ameren recorded third quarter 2008 core or non-GAAP income of $246 million or $1.17 per share compared to third quarter 2007 core net income of $277 million or $1.33 per share.

We recorded several significant items in the third quarter of 2008 that we have excluded from our core earnings. Net unrealized mark-to-market losses from non-qualifying hedges produced third quarter 2008 net income at $0.17 per share as compared to net unrealized gains of $0.03 per share in the third quarter of 2007. These unrealized mark-to-market losses in the third quarter were primarily driven by a decline in the value of heating oil option contracts as well as the decline in the cash surrender value of company owned life insurance policies offset in part by unrealized mark-to-market gains related to power sales contracts. As you know, we're utilizing heating oil option contracts to hedge the volatility of diesel fuel price adjustments embedded in coal transportation contracts for the period 2008 through 2012. The value of these non-qualifying hedges will vary overtime based on then current prices. You may recall we had significant gains earlier in the year. Of course in the long run, a decline in diesel fuel prices is beneficial for our company.

Continuing with non-core items, Red Cross associated with the Illinois comprehensive electric rate relief and customer system settlement agreement reached in 2007, reduced GAAP earnings by $0.03per share in the third quarter 2008 and $0.18 per share in the third quarter 2007. As Gary said earlier, our core earnings per share in the third quarter 2008 were lower than core earnings per share in the same period in 2007. The negative impacts of milder summer weather, higher fuel prices, and increased spending on utility distribution system reliability among other things more than offset the positive impacts of higher electric margins from our non rate regulative generation operations and the timing benefit of seasonally redesigned electric rates in Illinois.

Continuing with slide 3 of the presentation and focusing only on some of the more significant items. The effect of seasonally redesigned rates in Illinois raised earnings by $0.11 per share compared to the prior year period. We have recalled that in late 2007, the Illinois Commerce Commission authorized redesigned electric rates, reduced seasonal fluctuations for residential customers, use electricity to heat their homes. Over the course of the full year, this rate redesign is not expected to have any net impact on earnings.

Other electric and gas margins increased $0.16 per share in the third quarter of 2008 compared to the prior period primarily as a result of higher realized electric margins. Higher margins were primarily driven by the solid performance of our non rate regulated generating units where their equivalent of availability rose to 89% up 5% from last year third quarter. Mild summer weather had a significant impact on the third quarter reducing earnings by an estimated $0.18 per share compared to the prior year period.

Cooling degree days in the third quarter of 2008 were 27% below those in the third quarter of 2007 and 6% below normal. We also continue to experience higher costs for fuel and related transportation which reduced third quarter 2008 earnings by $0.08 per share compared to the prior year period. Distribution system reliability expenditures reduced earnings by $0.06 per share in the third quarter of 2008 compared to the year ago period and continued to make significant incremental investments to improve reliability and customer satisfaction. Net debt, depreciation and amortization, financing, and other expenses also increased year-over-year in the quarter.

Before I move on to an update of full year 2008 earnings guidance, I'd like to remind you of a few factors that will impact fourth quarter results. As we discussed earlier, our Callaway Nuclear is in the midst of a refueling and maintenance outage. We estimate that the cost of this outage will reduce fourth quarter 2008 earnings by approximately $0.10 per share versus the fourth quarter of 2007. In addition, as we have previously disclosed, seasonally we design electric rates in Illinois are expected to reduce fourth quarter 2008 earnings by $0.05 per share versus the prior year quarter. Of course, power prices remain volatile. However, our exposure to changing market prices for the rest of the year is mitigated in part by the fact that we have hedged all but approximately $2.5 million megawatt hours, our company wide expected fourth quarter generation.

Moving onto our 2008 guidance on slide 4, as we stated in our news release this morning, we now expect our core earnings to be in the range of $2.80 to $3 per share which represents a narrowing of our guidance range. Revised guidance takes in to account the mild summer weather and lower than expected power prices in the second half of the year. Our prior guidance range was $2.80 to $3.20 per share.

On our second quarter earnings conference call, we stated that the then recent significant declines in power prices if they persist could have meaningful impacts on our financial results for 2008 and beyond. We would expect to see a modest strengthening in power prices as we move through the summer, cooling and tropical storm seasons. This expected strengthening in 2008 power prices has not materialized due in part to generally mild summer weather and the impact of the economic slow down from commodity prices including the price of natural gas which impacts power prices.

We also adjusted our expectations for 2008 GAAP earnings in the range of $2.80 to $3 per share versus our previous estimate of $2.80 to $3.20 per share. Our GAAP earnings guidance includes the estimated $0.12 per share negative impact for the Illinois comprehensive electric rate relief and customer assistance settlement agreement, the $0.08 per share benefit from the coal contract settlement related to expected 2009 costs, and the $0.04 per share positive impact for the Missouri storm accounting order. Any net unrealized mark-to-market gains or losses will impact GAAP earnings, but are excluded from our GAAP and core earnings guidance as the company is unable to reasonably estimate the impact of any gains or losses due to the volatility of markets.

On page 5 of our slide presentation, we've also updated our core earnings guidance by segment. Ameren's consolidated end segment guidance for 2008 assumes normal weather and is subject to among other things regulatory decisions and legislative actions, plant operations, energy and capital market conditions, severe storms, unusual or otherwise unexpected gains or losses, and other risks and uncertainties outlined or referred to in the forward-looking statement section of our news release.

Next, I would like to continue our discussion of the current capital and credit markets as well as the weak economic environment, related implications for our business, and our plan to address these issues. Gary discussed earlier the impacts that economic conditions had on our customer sales. Another area, we are closely monitoring is bad debt expense. This year, we have seen bad debt expenses rise most notably in our Illinois regulated operations. While it's too early to predict how the weakened economy will impact our future bad expenses, we continue to proactively work with our customers and local agencies to help develop payment plans for our customers who are in need of assistance.

In addition as you well know, the deteriorating global economic conditions have had a severe impact on financial markets worldwide. This has resulted in sharp decreases in the value of the investment portfolios, of many pension and post-retirement benefit plans. We continue to assess the impact of these poor investment returns, as well changing discount rates could have on our future benefits expenses and funding requirements. However, it is important to note that we currently have a pension and post-retirement benefit plan tracking mechanism in Missouri that would mitigate any potential increases and expenses. Further, we expect our pension and post-retirement benefit funding levels in 2009 to be consistent with our expenses through our regulated operations. However, we do not anticipate any meaningful minimum required funding in accordance with the rest of 2009.

Next and turning to slide 6 of our presentation, I'd like to discuss our current available liquidity position. In October 31, 2008, our available liquidity under our existing credit facilities coupled with cash on hand approximated a solid $1.45 billion. As Gary noted earlier, our available liquidity position has improved meaningfully since this time last year. This is consistent with our plan to enhance financial flexibility during these challenging markets. In addition, our available liquidity improved from September 30th. We will be able to access the long term debt markets in October and completed a $400 million senior secured financing for AmerenIP.

Of the interest rate we will pay for this debt is certainly higher that what we have seen for sometime. Key point is that we were prepared and able to access the credit markets to reduce our short-term borrowings and finance our operations. One of our key strategies going forward is to have the necessary regulatory approvals and financing documents, prepared well in advance to planned financing, maximize our flexibility to access these choppy markets. Importantly, we continue to believe that we will be able to access the capital markets especially for our regulated utility operations.

As we look ahead to the end of 2008, we now expect our full year negative free cash flow amount to approximate $1 billion meaningful improvement from the estimates we provided you earlier this year. This improvement in our cash flows is being driven by lower than expected capital expenditures of approximately $150 million as well as increased funds from operations. The expected higher fund from operations is due to several factors, including the coal contract settlement payment we received earlier this year related to 2009 expenditures, preferred tax benefits, and other working capital improvements. Consequently, we expect our available liquidity to remain solid through year end and throughout 2009 as we strategically access the capital markets and execute the plans that Gary laid out a bit earlier.

On slide 7, we list our 2008 and 2009 debt maturities. It is important to note that we have rather modest debt maturities through the end of 2009. Regarding our existing credit facilities, $1 billion does not expire until January 2010, the $1.15 billion does not expire until July 2010. As noted on the previous slide, the size of our facilities was effectively reduced by $121 million due to the Lehman bankruptcy filing. In total, 18 banks, including Lehman subsidiary participated in these facilities with no one institution providing over 11% of the total credit under these facilities. As you would expect we're actively developing plans and strategies, to renew these facilities prior to their expiration dates.

While we are proactively managing our financing plans and strategies, we have also taken a hard look to what we can do to manage our capital and operating expenditures to address the significant levels of uncertainties in the capital and credit markets. As Gary mentioned earlier, we're already executing on plans to reduce our 2009 operating and capital expenditures in our non rate regulated generation business by a total of $400 million to $500 million. Our plan in 2009, operating and capital expenditures are now expected to be $300 million to $400 million below 2008 levels for this business.

We need these expenditure reductions resulting from the changes in planned outage schedules which we expect to result in approximately 3 million megawatt hours of additional generation from the estimate we provided to you earlier this year. We expect that this additional generation will provide an incremental $60 million to $70 million of electric margins in 2009 visiting today's market prices. Importantly, we do not expect that these expenditure reductions will impact our ability to meet the Illinois environmental regulations.

We have also already taken steps that could allow us to defer $500 million capital expenditures in our non-regulated generation business that was scheduled in the 2009 to 2012 time period and periods beyond 2012. In addition, we have identified further meaningful expenditure reductions throughout the rest of our business. As Gary mention, we have identified $400 million to $500 million of primarily discretionary capital expenditures in our regulated businesses and administrative support functions that were originally scheduled for 2009, which maybe deferred to future periods. These capital expenditure reductions will also be $400 million to $500 million below 2008 levels. These reduction initiatives were primarily generation related, include projects such as the scrubbers at our Sioux power plant.

In addition, we are reviewing information systems related projects among other things. We expect to take action on many of these initiatives in anticipation that the turbulent capital market conditions will persist through 2009. We will finalize our plans for these areas later this year or early next year. As a result, we believe we have the ability to execute on plans across our company that will reduce our expected operating and capital expenditures by approximately $1 billion in 2009 in the event the capital and credit markets continue to be disrupted. Of significance, we believe these steps are simply prudent actions made during these uncertain and volatile capital market conditions.

Importantly and as Gary said earlier, we will carefully balance any expenditure control initiatives against our continued long-term commitment to invest our energy infrastructure, to provide safe, liable, electric and gas delivery service to our customers, meet Federal and State environmental liability and other regulations, and the need to maintain a solid overall liquidity and credit ratings profile to meet our operating, capital, and financing needs.

In closing, we believe that capital and credit market conditions are likely to improve gradually overtime. But we expect that these markets will remain challenging throughout 2009 and potentially longer. We have plans to strategically access the capital markets through 2009 come out of our borrowings under our credit facilities. With system funding our capital expenditures, these scheduled maturities and maintain solid available liquidity levels. We are executing on plans that we believe will materially reduce cash outflows for operating and capital expenditures in our non-rate generation business. We have identified opportunities across the rest of our business which we believe will result in further meaningful expenditure reductions in 2009.

The bottom line is that we are going to proactively manage all aspects for our business in a prudent fashion during these unprecedented times for the benefit of all of our stakeholders including our customers, employees, and shareholders. We look forward to meeting with you all at the EEI financial conference in Phoenix, Arizona from November 9th through 11th. This completes my prepared remarks. We will now be happy to take your questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. Our first question comes from the line of Greg Gordon with Citi. Please go ahead.

Greg Gordon - Citigroup

Thanks. Good morning gentlemen.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Good morning Greg, how are you?

Greg Gordon - Citigroup

I'm good. Not to beat a dead horse because I know you reiterated it a couple of times, but you've already identified 4 to $500 million of capital and O&M cost at these non-regulated business, correct?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

That's correct.

Greg Gordon - Citigroup

I was hopping back and forth to another call, did you breakout how much of that is capital versus how much of that is O&M?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

I have not, but I'll give that to you now. In terms of the unregulated generation business, and again this is related to 2009 expected spend that of the $400 million to $500 million, we estimate that the O&M piece of that is $50 million to $100 million and that the capital piece ranges from $350 million to $400 million.

Greg Gordon - Citigroup

Thanks. And are these deferments necessary expenditures or you have some flexibility on timing or are these expenditures that you have sort of be permanently shelved if economic conditions don't improve?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

We know certainly that the majorities are deferments that we have some flexibility in terms of timing, but as we calibrate our plans; and certainly some of these expenditures could be reduced for some period of time. That piece is still under review, but its deferment as well as the potential reduction in future spending.

Greg Gordon - Citigroup

And what's the total targeted megawatt hour production in deregulated business for 2009 with the $3 million... with the 3 million megawatt hours added, how much total are you expecting now?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yeah, I think in general, as we went into the beginning of the year Greg, we expected their generation levels will be around 30 million or so. With this additional 3, we expected it to be 33 million to 34 million megawatt hours.

Greg Gordon - Citigroup

Thank you. And then, the $400 million to $500 million that you're contemplating potentially deferring or cutting at the regulated businesses, should I assume that there's a similar sort of percentage breakdown of operating versus capital cost as you identified on the Genco?.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

No, in terms of those numbers Greg, that we mentioned, those are primarily capital versus the other had a more meaningful opponent and components. But the numbers I gave was primarily capital for under regulated businesses.

Greg Gordon - Citigroup

Thank you. And then, you said on the pension that Missouri has a tracker. I would presume that Missouri is the vast majority, and may be it's a wrong presumption, but it is a vast majority of your pension expenses, what percentage of pension is in Missouri versus in other areas, whether there will be some lagging effect, because you have regulatory lagging in Illinois, where you'd have to manage it because it is a Genco?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Sure. In Missouri, I would ask about half, little more flattish roughly is the pension and post retirement benefits in that regulated business.

Greg Gordon - Citigroup

And then how much in Illinois versus how much at Genco?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yes, with regard to that specific breakdown, I'm not quite sure maybe about 25% would be my estimate in terms of the Illinois regulated operations with Genco being the other 25%. But on that one, we will have to get back to you more specifically on that Greg.

Greg Gordon - Citigroup

I'll talk to you about it. Final question, then you may not be able to answer this on the call, but if I think about your analyst presentation you gave in January and the earnings aspiration that you laid out to them, power prices were higher in Powder River Basin, coal prices were lower at least based on fuller curves. So, as we look at generation market pricing today and we look at Powder River Basin coal prices today, would you still be able to endorse the sort of $4 earning power guidance you gave for... I think it was 2011 today if you were looking the current order curves and reassessing that guidance?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Greg, I think you have answered a little bit of your own question at the outset. As we said here today, its probably difficult to say how all of those factors sort of weigh in because now when you look at the changes in the power prices but as well as the coal commodity prices, but obviously we are modifying some of our short-term spending plans that we laid out in January. And so, a lot of things have changed and so we are in the process of recalibrating all of our plans across our entire enterprise and we will be able to give you a better look at all of these things when we come out and talk about our future guidance in early next year.

Greg Gordon - Citigroup

Alright. I do have one more question, I apologize. The... if the CapEx cuts and the O&M cuts here are meaningful and from my perspective necessary, the stock is trading frankly at the yield its trading because of investor concern over whether in a long run a company who is evolved from being a regulated company... primarily a regulated to a company that's got a significant portion of its earnings now coming from lot of the cyclical business and I think there was an implicit question as to whether the current dividend policy is the correct policy, given your... the capital intensity of the business, the volatility of the cash flows. Can you comment on how you guys are thinking about that, obviously the CapEx and O&M because you have identified, created a lot of head room in the short run, but how are you thinking about dividend policy in the long run?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Sure. I guess I'll answer that in a couple of ways. Number one, as we laid out in January and as we still sit here today, we see that primary growth from our business is really going still come from our regulated business. That's where we are allocating the majority of our capital and that's where we expect to see our growth from what are currently depressed levels up to, to more appropriate levels in the future. And so, our level of cash flows that have come from across our businesses are going to become more regulated compared to where they are today, at least this is what our expectations are.

Secondly, with regard to how that then implies... impact the dividends as we discussed in January, we believe that with greater contribution from the regulated businesses, from an earnings perspective as well as from a cash flow perspective, that obviously gives greater comfort in terms of our overall dividend levels. And of course as you point out with our current stock levels the yield is obviously very high, but the bottom line is as you said, we have created meaningful head room in terms of the capital expenditure reductions that we are making as well as O&M. We were mindful of our dividend payout and as we recalibrate those plans, we will continue to be mindful and focused on maintaining a strong dividend for our shareholders.

So really beyond that, I think that as we discussed in the past, our policy is to remain focused on that and we will continue to be and of course we can't guarantee any future dividend levels, but as you know that's an important aspect of our investment profile and we will continue to be mindful of that.

Greg Gordon - Citigroup

Thank you Warner.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Of course.

Operator

Thank you. Our next question comes from the line of Hashar Kin [ph] with SAP Capital Management. Please go ahead.

Unidentified Analyst

Good morning. Warner if... could you just... if I look back to what guidance was provided earlier this year and what's the changes nearly all of the shortfall is coming from the Illinois regulated area and could you just go over why there is like a $0.20 drag from what you contemplated in the beginning to present, I just wanted to get a sense of as to why the Illinois regulated operations fell apart?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yes, and thanks Hashar [ph]. Yes and I think that's a good point. I would point to really three areas; one, we've talked a little bit about this quarter, certainly weather has a had a negative impact on the Illinois operations. Two, as we look over the entire year, bad debt expenses are higher than we had originally anticipated they will be and then thirdly, recall at the beginning of the year our Illinois regulated operations held at auction rate debt securities and we went in and refinance those when those markets became very destructive. So if you look at those three pieces and you look at the change in the Illinois earnings profile, those are impacting that. So as we look ahead while we're here with suggestion and experience from regulatory lag in terms of bad debt expenses as well as higher financing cost as we continue growing with more frequent rate cases in Illinois. We believe that those increased expenditures will ultimately have the opportunity to recover in the regulatory framework.

Unidentified Analyst

Let me ask you, in case of the rate case decision that you got recently, is there higher cost of debt and the bad debt expense recovery factored into it, or it was too late to include it into this rate case that got just decided?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Hashar, it is clearly the latter, they were not factored into the rate case of higher cost of capital with the refinancing or the increased bad debt expense that we have incurred this year.

Unidentified Analyst

Okay. And Warner, just wanted to, I think so I got a little bit missed these numbers. What is the free cash flow of short fall for 2008, it was like 1.455 in the Jan, I guess January presentation. What is it expected to be in '08?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

We expect it now to be at the end of the year approximately $1 billion.

Unidentified Analyst

$1 billion. And that's what you expect in '09 as well?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

I've not given the specifics for '09 at this point in time. Of course, our free cash flow, I gave you some of the numbers in terms of how they compared to 2008 spending levels and clearly if we execute all those plans, our level of spending in both the O&M and capital stand point will be meaningfully below 2008 levels.

Unidentified Analyst

Okay. And then, could you just remind us how much of this billion is being funded with the grip 401 equity and debt?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yeah in general, about --

Unidentified Analyst

In '08

Warner L. Baxter - Executive Vice President and Chief Financial Officer

About a $100 million a year Hashar, comes from our grip program.

Unidentified Analyst

And the remaining 900 is coming from the debt?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yes. It is principally debt re-financing is correct. Even through the credit facilities are terminated out long term.

Unidentified Analyst

Is it fair to say that the debt costs are running above 200 to 250 basis points higher than what was planned, if you look at it what you just, did some bond offerings recently?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Certainly, when you look at the most recent offering, those debt costs were probably 2 to 300 basis points what we had seen historically. And whether there'll be prospect remains to be seen, but certainly, we'd expect that as we said earlier, that the capital markets will continue to be disrupted and consequently we expect higher cost of capital still, as we go into 2009.

Unidentified Analyst

Okay. Thanks.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Thank you. Our next question comes from the line of Yiktak Fung with Zimmer Lucas. Please go ahead.

Yiktak Fung - Zimmer Lucas Capital

Good morning.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Good morning.

Yiktak Fung - Zimmer Lucas Capital

With regards to the $50 million to $100 million decrease in... generation, are these... is that one time kind on MR, should we expect it to carry forward into 2010 and 2011?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

I think with regard to the O&M, I wouldn't characterize it as necessarily one time O&M. As I said before, we're recalibrating all of our plans and so if you look at the plans that we laid out again in January, and see how they affect the plans that we'd originally expected to take place in '09, '10, '11, and '12 how that O&M ultimately rolls through those other years, frankly remains to be seen as we finished our work.

Yiktak Fung - Zimmer Lucas Capital

Okay. And the $350 million to $400 million other reduction and expenditures that's related to capital expenditures, how much of that is related to environmental?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Well, we haven't finalized those plans, we haven't turned to the specificity. We certainly pointed out that the most significant environmental project that is going on in the regulated business relates to our new scrubber project. And that's obviously, a meaningful expenditure that we have there, if you're talking about the regulated businesses. Was that your question?

Yiktak Fung - Zimmer Lucas Capital

No, I was actually talking about the unregulated, but that was kind of my next question.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Excuse me.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Warner obviously anticipated that one.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

I think the other one with regard to the scrubber projects in our Illinois operations, we're gong to continue to move forward on those to meet the environmental regulations. Now, we maybe moving some of those capital expenditures in terms of what we're spending specifically in '09 and '10 a little bit, but the bottom line, we're going to meet those environmental requirements in Illinois.

Yiktak Fung - Zimmer Lucas Capital

Okay. There might be just one to two year slowdown on that, in the implementation of those scrubbers?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Right. I think that those numbers in general, when you look at what we have moved out, its probably$50 million to $100 million in terms of those scrubber projects. Now, keep in mind too, the other thing that we pointed out is that we're seeking a variance of an incremental $500 million that we were seeking to move outside of the 2009-2012 time frame, largely incremental with the numbers I just gave you. And we are awaiting to... we'll seek approval of that. So, that could be... while, that may not effect 2009, but could have a meaningful effect on '09 through '12.

Yiktak Fung - Zimmer Lucas Capital

With regards to Sioux scrubbers, it seems that the bulk of that $400 million to $500 million CapEx cuts related businesses is really just that scrubber right?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Well, I wouldn't characterize necessarily as the $400 million to $500 million or the bulk of that project in itself, it's a big piece certainly and in terms of environmental project, it was private, clearly the single biggest environmental project that we're doing on the regulated business.

Yiktak Fung - Zimmer Lucas Capital

And with that, I guess deferred the need for another rate case?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Well in terms of rate case, as you know again, we are in the middle of our existing rate case in Missouri and so I wouldn't necessarily say that these expenditures will impact our future rate case plans. As we said before, we expect to file more frequent rate cases in all of our jurisdictions and so it's too premature to certainly say that.

Yiktak Fung - Zimmer Lucas Capital

Does it cause anything to... do you have any like contracts or rate lined up to build these scrubber projects and does it cause anything to cancel these contracts that you have them?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Was your question do we have contracts to...

Yiktak Fung - Zimmer Lucas Capital

Do you have contracts to raise up to build these scrubbers and does it require you to I guess break these contracts in order to move these scrubbers project past 2009?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Well on the Coffeen and Duck Creek scrubbers, we are moving forward on those who were not affecting the contracts. On the Sioux contracts, we do have flexibility in the contract to delay the project. Our plan is to stop construction; complete the engineering of the project, and then when the engineering is a 100% completed at some point come back and complete the project. We haven't determined exactly when that will be.

Yiktak Fung - Zimmer Lucas Capital

And just one last question, you said that there were still some power unhedged for 2008, for fourth quarter, how much was that?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

We've said that for 2008 well we have not hedged for the remainder of the years, its 2.5 megawatt hours of our generation across the enterprise.

Yiktak Fung - Zimmer Lucas Capital

Okay. Thank you very much.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Welcome.

Operator

Thank you. Our next question comes from the line of Paul Ridzon with KeyBanc Capital Markets. Please go ahead.

Paul Ridzon - KeyBanc Capital Markets

Good morning Warren.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Good morning Paul, how are you?

Paul Ridzon - KeyBanc Capital Markets

When are you going to file in Illinois? I'm sorry if I missed that.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Paul we have not stated when we are going to file in Illinois at this point in time. We said that we are evaluating when we're going to file the next rate case in Illinois. As you know we just wrapped our last one up just about a month or so ago. So we are evaluating that and we'll take a look at are capital on O&M expenditures and make a decision on that here sometime in the near future.

Paul Ridzon - KeyBanc Capital Markets

And you gave a lot of opportunities to reduce CapEx, have you finalized an '09 CapEx number or range yet?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

No. Paul we have not. I think in terms of the unregulated generation piece of the business, we certainly were clear in terms of the plans that we were moving forward and executing there. We identified several meaningful opportunities in the regulated business. Those plans will be finalized later this year or early next and then we'll be able to give that to you when we come out later.

Paul Ridzon - KeyBanc Capital Markets

But over about 750 to 900 less than your previous subject to change?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yes. I mean I think when you do that math what I just gave you, that's right, below 2008 levels throughout this, right.

Paul Ridzon - KeyBanc Capital Markets

And then I understand that some resurrection of care seems to be somewhat high legislative priority in Washington, what are you hearing on that front?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Gary, I know you've been closest to that, you want to touch on that one.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

I have not heard anything on care. I think the focus today is on the economy and the election and environmental issues have kind of taken a backseat and I would not expect any new environmental legislation any time in the near future.

Paul Ridzon - KeyBanc Capital Markets

Okay. Thank you.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Welcome.

Operator

Thank you. Our next question comes from the line of Daniele Seitz with Seitz Research. Please go ahead.

Daniele Seitz - Seitz Research

I just want to ring regarding possibly due next filing in Illinois. Would you ask for an automatic rider on bad debts or is it something that you feel is temporary?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yeah, Daniele. With regards to the bad debt rider, that's something that we've explored in the past and that's something we continue to look at in terms of future rate case filings. So, I wouldn't necessarily say that there's a lot of bad debt expense here, sort of one-time, it's too early to say at this point in time. Certainly, you've seen a meaningful increase and certainly a rider maybe a appropriate in those circumstances but we've not made a decision on that.

Daniele Seitz - Seitz Research

You don't anticipate to have some sort of a tally at the end of the year to start the year fresh, can you carry those bad debts for a while?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

I guess, Daniele, in terms of carrying the bad debts I'm not quite sure I understand.

Daniele Seitz - Seitz Research

Of the expense dramatically as they come along, are you deferring some of them?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

No, I mean in terms of the bad debt expenses we're certainly recognizing those as incurred and those are reflected in our financial results and so they are not being deferred. Of course in the next rate case we would seek recovery of these incremental revenues.

Daniele Seitz - Seitz Research

I understand. And just on the point of financing, do you anticipate that you may have to at the end of the year, you may have to issue equity, or is it something that you think the grip will be sufficient? So the 1 billion financing you were talking about?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yes. That's right. In terms of the overall financing plan, as we said in the past and as we said early today, we are taking aggressive actions to do several things. One is certainly to reduce levels of spending to limit the need for incremental financings or to reduce the level of financings that we have to make across our enterprise during these choppy and turbulent markets. And so, we think those plans certainly go a long way in terms of what plans we may have to do in terms of equity, or really frankly debt financings. So, as we said earlier in the year, we had no plans for the rest of 2008 to issue equity. And as we sit right there, the answer to your question is we have no plans to issue any additional equity in 2008.

Daniele Seitz - Seitz Research

Thank you.

Operator

Thank you and our next question comes from the line of Michael Lapides with Goldman Sachs. Please go ahead.

Michael Lapides - Goldman Sachs

Hey, guys. I apologize if this is rehashing stuff. I just want to make sure, I understand a handful of things, first of all, what are the major projects you're deferring in 2009, if you're going forward with Duck Creek and Coffeen?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Primarily, their plant maintenance projects that would have been done in 2009 are slipping in to 2010 and then we would expect projects that would have been done in 2010 to slip a year in to 2011 kind of just moving out the planned maintenance that we have on all of our large co-units. And then on the regulated business side, in addition the Sioux plant, because Care was vacated, we no longer had a requirement to complete that project, so we are going to defer the Sioux plant scrubber project for sometime.

Michael Lapides - Goldman Sachs

Okay. I want to make sure you are saying roughly $400 million of lower CapEx at the non-regulated business, how much lower at the regulated?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Yes Michael, what we had said was that the $400 million to $500 million that we quoted earlier that was primarily all capital expenditures.

Michael Lapides - Goldman Sachs

Right.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

And so with that,... to answer your question its 400 to $500 million for the regulated business and then $350 million or $400 million of capital in the unregulated generation business.

Michael Lapides - Goldman Sachs

Right. But the $400 million to $500 million at the regulated is capital enough, but in the number you just quoted on the non-regulated is also capital?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

That's correct.

Michael Lapides - Goldman Sachs

Okay. So,...

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Remember on the O&M side, we also had quoted $50 million to $100 million on the unregulated generation business as well.

Michael Lapides - Goldman Sachs

Okay. So, it's a net cut of over $750 million of capital for next year?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Well, two things; number one, we are executing on the plans for the unregulated generation business. Two, we expect to make meaningful reductions in the regulated business. Those plans will be finalized. And three, when you sum it all, when you look at both capital O&M as well as when you look at the incremental revenues that we make, the plan looks in excess of or close to $1 billion.

Michael Lapides - Goldman Sachs

Okay. One last item, can you repeat what the expected output, megawatt output for '09 and beyond is likely to be at the non-regulated coal units?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

At this time for 2009 O&M, we expect it to be around 33 million to 34 million megawatt hours.

Michael Lapides - Goldman Sachs

Got it. Okay. Thanks.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

We have not updated that beyond that.

Michael Lapides - Goldman Sachs

Okay. Thank you, guys. Much appreciate it Warner.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Thank you. Ladies and gentlemen, if you queued off, we ask that you limit yourself to one question. Thank you. And our next question comes from the line of Greg Koral [ph] with [indiscernible] Capital, please go ahead.

Unidentified Analyst

Thanks very much.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Good morning Greg.

Unidentified Analyst

Good morning. I was wondering if... back on the care issue, if the delays and spending you're seeking on various product, how would they... how would that impacted if the core were to reinstate care?

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Yes, Greg in Illinois we're subject to a multi pollutant standard legislated by the state. However, we're seeking to defer some of the requirements of that. And as I said, we've gotten the support of the Illinois EPA, the Illinois EPA will not oppose the deferral. It's up to the pollution control board but we believe we have a fair chance of getting that requirements slipped.

Unidentified Analyst

Okay, and maybe if I could just ask one another. Its... as you went through the positive and negative drivers incremental on the call what I heard were on the positive side, additional megawatt hours of generation as well as some cost cuts, and on the negative side potential pension increases in Illinois and at the unregulated business and weakness in the economy, is it your intention to sort of be up guiding down on the EBITDA level on this call?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

In this particular call, the message simply is to give you some of the key plans that we're moving forward with into 2009 to address the issues in the financial markets. Obviously, there are a lot of moving pieces as you just described including what we hope to use to obviously not just reduce some of the capital spend to give us greater financial flexibility in the markets. But beyond that with regard to 2009, what we've said is that we expect to come out in early 2009 after we... after trying in early February to provide you a more thorough outlook for 2009 and give you the specifics on EBITDA, earnings, and the like.

So, we're here to give you some of the meaningful pieces, some of the things that we're working on, and some of the proactive things we are doing in our business to address these conditions.

Unidentified Analyst

Thanks Warner.

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Sure. I think we have time for one more question because we're running over time and others trying to be moving on to other calls, so if there is one more question we can take it otherwise we'll close out.

Operator

Okay and our next question comes from the line of Ben Sung, Luminous Management.

Ben Sung - Luminous Management

Hi, on the environmental CapEx reduction or deferral that you guys talked about, you said that you'd be taking other steps to make sure that you're admission is neutral, is that correct and if it is then what are the actions that you guys are taking to do that?

Warner L. Baxter - Executive Vice President and Chief Financial Officer

Hi, Ben. This is Warner Baxter. We have Chuck Naslund who is our President and CEO of Unregulated Generations. He will probably give you little more insight in terms of those specifics that we are talking about.

Charles Naslund - Chairman, President and Chief Executive Officer of AmerenEnergy Resources and Chairman and President of AmerenEnergy Generating Company

Yes, as far as keeping emissions neutral, the Illinois EPA is looking at a time frame of 2010 through 2020, so it's a long time horizon. Basically, we adjusted our plan so over that long time period we kept our SO2 nox emissions again neutral ton wise and that was actually not too difficult to do by tightening up on some of the facilities that were installing and getting better reduction out of them

Ben Sung - Luminous Management

Got it, thank you.

Operator

Thank you and I'll turn the call back over to management at this time.

Gary L. Rainwater - President, Chairman, and Chief Executive Officer

Great. We want to thank you all for participating in this call this morning. Let me remind you again that this call is available through November 11th on playback for one year on our website. Announcement carries instructions on listening to the playback. You can also call the contacts listed on our news release.

One final matter, as we announced on our second quarter call, Doug Fischer is now heading up our Investor Relations group and Bruce Steinke is focusing on his control responsibilities. And hence analyst inquiries should be directed to Doug rather than to Bruce. Media should call Susan Gallagher. Contact numbers are on the news release please. Again thanks for dialing in and we look forward to seeing you down at DEI later this week and early next.

Operator

Thank you ladies and gentlemen. This concludes the Ameren Corporation 2008 third quarter earnings conference call. The phone numbers for the replay are 303-590-3000 or 1-800-405-2236 followed by pass code 11121637 followed by "#". AEE would like to thank you for your participation, you may now disconnect. .

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