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Executives

Scott Cunningham - Interim Head of Corporate Communications and Vice President of Investor Relations

Theodore F. Craver - Chairman, Chief Executive Officer and President

W. James Scilacci - Chief Financial Officer, Executive Vice President and Treasurer

Ronald L. Litzinger - President of Southern California Edison Company

Analysts

Dan Eggers - Crédit Suisse AG, Research Division

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Jonathan P. Arnold - Deutsche Bank AG, Research Division

Paul B. Fremont - Jefferies & Company, Inc., Research Division

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Greg Gordon - ISI Group Inc., Research Division

Kit Konolige

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

James L. Dobson - Wunderlich Securities Inc., Research Division

Angie Storozynski - Macquarie Research

Edison International (EIX) Q2 2012 Earnings Call July 31, 2012 5:00 PM ET

Operator

Good afternoon. My name is Gabrielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Edison International Second Quarter 2012 Financial Teleconference. [Operator Instructions] Today's call is being recorded. [Operator Instructions] And I would now like to turn the call over to Mr. Scott Cunningham, Vice President of Investor Relations. Thank you. Mr. Cunningham, you may begin your conference.

Scott Cunningham

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

The presentation that accompanies Jim's comments, the earnings press release and our 10-Q filings are available on our website at www.edisoninvestor.com. Tomorrow afternoon, we'll issue our regular quarterly business update presentation that will use these and other slides for ongoing investor discussions.

During this call, we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries and about other future events. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. We encourage you to read these carefully.

The presentation includes certain outlook assumptions, as well as reconciliation of non-GAAP measures to the nearest GAAP measure. When we get to Q&A, please limit yourself to one question and one follow-up. If you have further questions, please return to the queue.

With that, I'll turn the call over to Ted Craver.

Theodore F. Craver

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

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

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

There are several important developments at Southern California Edison this quarter. I'll spend most of my time on the San Onofre Nuclear Generating Station or SONGS as we call it.

Both units at SONGS remained safely shut down for inspections, analysis and testing, following the January 31 Unit 3 steam generator tube leak.

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

On July 19, the NRC released its detailed findings from its augmented inspection team. It summarized its finding by saying that faulty computer modeling, inadequately predicted conditions in the steam generators and manufacturing issues contributed to excessive wear of the components. The report states that the excessive wear arose from tube-to-tube contact caused by vibration in the tubes in certain areas of the steam generators. The excessive vibration is due to a phenomenon called fluid elastic instability, which is discussed in detail in the report. The NRC has identified a number of outstanding issues that it still is reviewing.

To date, the inspection and repair effort is focused on a substantial amount of technical analysis work and preventative plugging of tubes where appropriate based on indications of prior or potential future wear, both in areas where there was tube-to-tube contact and tube-to-support contact. Each of the 4 steam generators has over 9,700 heat-transfer tubes and is designed to include sufficient tubes to accommodate a need to remove some from service for a variety of reasons, and the tubes at SCE has preventively removed from service are all well within this margin.

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

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

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

Inasmuch as Unit 3 had more tube-to-tube wear than Unit 2, it is not at this time whether Unit 3 will be able to restart without extensive additional repairs. SCE is also looking longer term at what repairs, if any, could allow the steam generators to operate safely at full power as originally specified. At this time, SCE has not determined what those repairs might be or whether the generators will need to be replaced for the units to operate at full output. In the interim, SCE is reviewing its O&M and capital expenditures at SONGS with a view to reducing expenditures to mitigate the added cost pressures from both units being out of service.

I'd like to clear up some confusion that has arisen in the past regarding potential dates for submitting our response to the Confirmatory Action Letter. We have never released a specific date for our submittal. Under the California Independent System Operator rules, we are required to post an estimated restart date on their website whenever we have a generating unit down for an outage. But these are only rough estimates and not formal forecast timelines. We will not be forecasting specific timelines for a Confirmatory Action Letter submittal or potential startup dates. As we have said many times, there is no timeline for safety. And to forecast dates is inconsistent with prudent decision-making.

Turning to the regulatory review at the state level, there are several mechanisms in place for the California Public Utilities Commission to provide oversight and review the reasonableness of expenditures related to the outage. First, the steam generator project cost remains subject to a CPUC reasonableness review once SCE submits final cost for the project. As of June 30, SCE has spent $593 million on the project compared to the inflation-adjusted authorized spend of $665 million, or SCE's 78% ownership share.

Second, our purchase to replace SONGS generation is recoverable through the ERRA, E-R-R-A, balancing account, which is also subject to an annual reasonableness review.

Third, the California Public Utilities Code has rules governing outages. Once either of the units has been out of service for 9 consecutive months, which should be November 2012 for Unit 3 and December 2012 for Unit 2, SCE is required to notify the CPUC. Within 45 days, the CPUC is required to initiate a review to determine whether to remove from customer rates all or part of the revenue requirement associated with what's out of service. Any rate adjustment is made after hearings conducted as part of future General Rate Cases.

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

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

Turning to Edison Mission Energy, we remain focused on developing clarity on the best approach for financially stabilizing EME. There has been continued progress this year across several self-help initiatives to improve liquidity and operating cash flow. One was to accelerate the closing of uneconomic plants and transferring Homer City to the owner-lessors. Another has been to reduce operating and overhead costs to the extent possible, including another workforce reduction to be completed by the end of 2012. A third is minimizing capital spending on environmental retrofits while complying with all state and federal emissions loss.

However, our greatest focus has been on the need to restructure the $3.7 billion of unsecured debt. This is because despite EME's efforts at managing liquidity, our internal forecast anticipate that EME's liquidity will rapidly decline in future quarters, and absent a restructuring of its obligations, EME will not have sufficient liquidity to repay the $500 million in unsecured debt due in June 2013.

For EME to be viable, it must have a clear path to adequate liquidity, particularly over the near-term when it will have the cash cost of retrofits and the tightest operating cash flows. A successful restructuring will require at least 2 things. First, it will require a reduction of debts sufficient to obtain credit metrics that will enable EME to access capital markets to refinance remaining debt well in advance of future maturities based on a reasonable set of assumptions.

Second, it will require conserving cash wherever possible, especially over the next couple of years during the retrofit period and the severe trough and capacity payments to provide a margin of safety in a continuing uncertain market. Given the fact that EME and Midwest Generation are intertwined, this may result in the need for revisions in Midwest generation's Powerton and Joliet leverage lease financings as well.

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

Our objectives remain the same: eliminate the overhang of uncertainty about EME, restore EME to a healthy financial condition that would position it for future success and act with a purpose and a sense of urgency. While the exact path forward to success is not clear at this point, we are engaged with bondholders and we plan on moving our discussions along as rapidly as we can.

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

Finally, as we move beyond SCE's 2012 capital spending peak and get the rate case and cost of capital decisions, we will seek to return our dividend in steps over the subsequent years to our target payout ratio range of 45% to 55% of SCE's earnings. The earnings power at SCE, along with gaining clarity on EME, provide the key value drivers for Edison International shareholders.

I'll now turn the call over to Jim Scilacci.

W. James Scilacci

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

Page 3 highlights the key drivers of SCE's earnings. As in the first quarter, CPUC revenues were largely based on 2011 authorized revenues. As a result, higher costs are now currently being recovered including higher depreciation and new debt and preferred stock costs. This impact totaled $0.09 per share.

When SCE receives its final General Rate Case decision, it will record the authorized revenues retroactively to January 1.

During the second quarter, inspection and repair costs related to the San Onofre outage reduced earnings by $0.05 per share. These costs were offset by timing differences and other cost savings, which amounted to $0.08 per share.

As many of you are aware, on June 15, the CPUC set the schedule and the approach for the 2013 cost of capital proceeding for SCE and the other major California utilities. The commission has separated the case into 2 phases, the first addressing the allowed returns and capital structure, which will be decided in December, and a second phase to review the cost of capital trigger mechanism that has been in place since 2007. SCE did not propose any changes to the existing trigger mechanism except to reset the starting point of the index to the period ending September 2012. We would expect the Moody's BAA Utility Bond Index to continue to be the appropriate index for SCE based on its current credit ratings.

Please turn to Page 4. I'd like to pick up on Ted's discussion on SONGS with some more color on cost in our current investment. Year-to-date, SCE's share of the pretax cost of SONGS-related inspection and repairs totaled $48 million. It was $20 million during Q1 and $28 million during Q2. As a reminder, we continue to flow these costs through core earnings. You may recall that last quarter, we estimated that SCE's share of the total incremental inspection and repair cost associated with returning both units to service was then projected to be in the range of $55 million to $65 million pretax, we now believe that SCE's share of incremental costs to commence startup of just Unit 2 at the reduced power levels that Ted outlined previously is expected to be approximately $25 million pretax. Of course, this estimate remains subject to NRC review and any new development that result from further analysis and testing.

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

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

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

Please turn to Page 5. As Ted indicated, at this time, our focus remains on the technical analysis to return the units to service safely although we are assessing all available remedies for cost recovery. Steam generators are warranted for an initial period of 20 years from acceptance. The manufacturer is contractually obligated to repair or replace defective items and to pay specified damages for certain repairs with stated liability under the purchase agreement limited to $137 million. These limitations are subject to applicable exceptions. There may also be potential recoveries under insurance issued by Nuclear Electric Insurance Limited, known as NEIL, and we have placed NEIL on notice of potential claims, although insurance recoveries remain uncertain.

I'd like to come back to the rate case decision timing and the impacts on SCE's capital spending plan. Please turn to Page 6. SCE has not changed its capital spending forecast pending a final rate case decision. However, the GRC delay will likely change the 3-year forecast of actual spending, which, depending upon the final timing, could bring 2012 capital spending at or below the low end of the forecast range. Actual capital spending will likely catch up with CPUC authorized spending in the later years of the 3-year rate case cycle. This timing mismatch will primarily affect distribution and generation CapEx.

Please turn to Page 7, which covers EMG's results. Keep in mind these results almost entirely reflect the activities of EME. We continue to wind down Edison Capital, and its ongoing earnings are immaterial. As we told you last quarter, Homer City is reported in non-core earnings in both periods. Midwest Generation continues to face weak power markets and higher delivered coal cost, resulting in $0.08 per share higher loss. EMMT's trading results were down $0.02 per share. Results also reflect a $0.02 per share decrease related to certain wind projects that are consolidated in EMG's results. This relates largely to the Capistrano Wind Partners transaction completed in February. While the transaction provided an important source of liquidity to EME, it effectively lowered EME's ownership interest and, therefore, share of earnings.

Comparisons were also impacted by lower distributions from the Doga project, which largely cost $0.03 per share reduction from the natural gas power fleet. EMG's EBITDA was $9 million in the quarter and $50 million year-to-date.

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

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

As a side note, EME's environmental retrofit plan is essentially unchanged from last quarter, although EME continues to look for opportunities to optimize spending while remaining in compliance with applicable state and federal rules. EME's deferred tax asset remains an important source of future liquidity under an intercompany tax allocation agreement. These tax assets increased modestly to $961 million as of June 30 from $908 million in the first quarter.

Future payments under the tax allocation agreement are only available to EME if it remains part of the consolidated Edison International tax filing entity, which requires EIX ownership of at least 80% of EME. A final point on liquidity is that SCE and EIX replaced their credit facilities during the second quarter. More details are included in our disclosures.

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

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

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question does come from Dan Eggers with Crédit Suisse.

Dan Eggers - Crédit Suisse AG, Research Division

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

Theodore F. Craver

Yes, it's a great question. And I think at this point, like most decisions of the sort, it's going to be a matter of relative value. Generically, there going to be 2 choices. Either EME will make sense as a continuing part of the EIX family, and I've tried to be clear over the last few earnings calls about kind of the markers that we have in mind that would really provide us and our equity investors sufficient clarity around the viability of EME as part of EIX. If we're unable to really gain that clarity or unable to really see a viable entity that ultimately can return to providing value to EIX, delivering on its underlying mission, then it really won't make sense to be part of Edison International and will need to be owned by others. So at this point, it's too early to tell really what's the art of the possible, where, as I mentioned, we're beginning the process of engaging with bondholders to determine that. And we get sufficient clarity, get sufficient certainty, and we can really see a path for EME to be a value-adding part of EIX, then that's the way we'll go. If not, then it's not going to be part of EIX.

Dan Eggers - Crédit Suisse AG, Research Division

And I know it's -- the negotiations are starting now, but is there a time line that you guys have set kind of as to how quickly you want to have this resolved or how long it will take to get to clarity?

Theodore F. Craver

Yes, I mean, we chose the words carefully in my opening comments, trying to indicate that the time is now. I mean, we need to engage, we need to get these conversations going. We're doing it with a sense of purpose and a sense of urgency, and we want to resolve this. The uncertainty I don't think is doing anybody any good. I don't think it's doing EIX equity holders any good, I don't think it's doing EME any good. We've got important operations. We have safety that we have to have in mind. All of these things, I think, really say we need to reach a conclusion here with dispatch.

Operator

And our next question does come from Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Yes, couple of questions. First on Mission, I know you've talked about not having liquidity to meet the $500 million maturity next year. But you've got some decent-sized bond payments coming toward the back end of this year, I think, late in the fall. Just curious, are those bond payments kind of the trigger date we should think about? Meaning, that you kind of want to make a decision before those payment date show up or is it something that could go into next year?

Theodore F. Craver

Mike, it's Ted. Short answer is yes. I think those interest payments are very important and even waiting out until November, when those interest payments are dues, in my mind, not moving with dispatch.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. And you've talked a number of times over the last 6 to 12 months about wanting EIX to have competitive generation, meaning not wanting solely to be a regulated utility holding company. Just curious, if it comes to that, how -- and that merchant generation company is not Edison Mission, how would you get it off the ground? How would you get started?

Theodore F. Craver

Yes, maybe I'll -- sorry, this is Ted again. Maybe, I'll just reshape your words a little bit here. I think what we've stated in the past is we believe that it's important to have both a regulated and competitive business platform. Competitive generation, in my mind, is a subset of a competitive business platform, so just one clarification on that point. I think in general, we'd have to admit that it seems like the potential for distributed generation or more retail-related services or even other competitive business activities that would be outside of our regulated footprint at Southern California Edison, but those are more futuristic. We think there's some important opportunities that we want to continue to track and continue to focus some attention on. But it would be better, I think, to make use of some existing skills and an existing platform than to create those from scratch, from whole cloth. But that's probably an advantage on the margin, and I don't think it's one that really drives our thinking at this point.

Operator

And our next question comes from Jonathan Arnold with Deutsche Bank.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

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

W. James Scilacci

No, I don't have a breakdown here. We haven't disclosed the breakout between the 2 separate units, Jonathan.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

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

Theodore F. Craver

Jonathan, this is Ted. Just a quick part on that. I think the main thing we're really trying to signal there is you -- we probably can't address entirely the issue of keeping this phenomena, this fluid elastic instability phenomenon from reocurring by simply operating at reduced power in the case of Unit 3. So what we're really trying to signal is it needs more than reduced power types of operations. So that's really what we're referring to. We haven't gone far enough down the road at this point with Unit 3 to really come up with anything more definitive than that in terms of exactly what would be required to restore it.

Jonathan P. Arnold - Deutsche Bank AG, Research Division

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

Theodore F. Craver

Well, I think at this stage, you'd expect us to have all the options on the table. At this juncture, we're just trying to do this in the most disciplined, systematic kind of step-by-step approach. And these are complex technical issues. It's a first-of-a-kind type of issue that we're dealing with, meaning this tube-to-tube wear. So we're just taking it one step at a time without trying to get too far ahead of ourselves. But yes, at this point, of course, all options are on the table. We're focused mostly on getting Unit 2 restored if we believe we can do it safely. And as we said, it's pretty clear to us initially that would be at reduced power with relatively short operating windows that we take it down and go through reinspections, and all of that will help inform us in terms of our future actions as well.

Operator

And our next question comes from Paul Fremont with Jefferies.

Paul B. Fremont - Jefferies & Company, Inc., Research Division

I guess, 2 questions. One, you talked about a targeted payout of 45% to 55% if Mission were no longer -- if Mission were to file for bankruptcy. Should we assume that you'd be targeting the same level of payout or would that potentially change?

W. James Scilacci

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

Paul B. Fremont - Jefferies & Company, Inc., Research Division

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

W. James Scilacci

I think -- this is Jim again, Paul. I think that's a complicated issue and it would be, certainly, embroiled in any kind of negotiation with bondholders or during the bankruptcy process. I don't think we can predict at this point in time what ultimately would occur. It's clear that as long as EME is part of a consolidated family, and that might be during the period of a bankruptcy, then we'd have to monetize tax benefits. But ultimately, where it plays out in the end, that's harder to say. So there would be a point in time when ultimately, the clock could stop ticking and you would cut off ultimately the monetization of tax benefits. But that will take a lot to get resolved, and it could take a period of time. I couldn't predict at this point in time how long.

Paul B. Fremont - Jefferies & Company, Inc., Research Division

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

W. James Scilacci

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

Operator

And our next question comes from Steve Fleishman with Bank of America Merrill Lynch.

Steven I. Fleishman - BofA Merrill Lynch, Research Division

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

W. James Scilacci

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

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Okay. And then also on the comments you made on the rate base related to the GRC and that -- for '12, you'll probably be at the low end or below on your CapEx.

W. James Scilacci

The CapEx, yes.

Steven I. Fleishman - BofA Merrill Lynch, Research Division

Yes. But then just to clarify, you expect to make up for most of that in '13, '14, so that imply that the '13, '14 could be toward the upper or above the upper end, so that it's kind of equal over the 3 years?

W. James Scilacci

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

Steven I. Fleishman - BofA Merrill Lynch, Research Division

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

W. James Scilacci

We haven't put in a public domain what if any worthless stock deduction there'd be. And it's always taken at the conclusion of a bankruptcy process. And the fact that there is a worthless stock deduction could get dragged into the negotiations in some type of bankruptcy proceeding. So I couldn't even begin to tell you what the bread basket is. And there's a number that changes constantly each quarter based on the earnings or losses and the monetization of tax benefits can change the worthless stock deduction. So it's constantly changing, so we've been taking a position not to put it into the domain until we actually get further down the road.

Operator

And our next question does come from Ali Agha with SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Ted, coming back to your thoughts on EMG and what you've seen as the viable entity, stable entity going forward. Assuming it doesn't file for bankruptcy and you get what you're looking for through this restructuring, how should we be thinking about the underlying earnings or positive earnings power of that entity? Should we think that coming out of bankruptcy, this is a profitable entity from an earnings perspective or should we think that this is really driven by these capacity payments and forward curves, maybe profitability is a couple of years out? How should we think about that as part of the equity value proposition if you do stick with EMG?

Theodore F. Craver

That's a good -- great question. Unfortunately, I don't have a great answer. Certainly, it will depend on what power prices and capacity prices will be. We've got a little more clarity on the capacity price side than we do on the power price side as we go forward. But that's really going to be the determinant. I would have to say based on kind of current pricing and that type of stuff, I don't know that we would expect to see anything close to robust earnings in the subsequent years. But frankly, kind of throwing darts here at this point, it will depend on what comes out of any negotiation and it'll certainly depend heavily on what the actual prices are once it come out of the restructuring process.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And second question, just coming back to SONGS again. Bigger picture issue there, I mean, the first quarter when you guys laid out your -- what is going on there, the expectation at least was that the cost that you were incurring, you were very confident you would basically recoup those either through warranty payments or regulatory process. And I just want to be clear, is that still your view right now and how should we think about the points you make about the amount that are in your current GRC, the rate base, I mean, is that a scenario unfolding that the commission takes out SONGS from rate base and from customer rates and has that could be bad negative earnings implications to think about from our end?

Theodore F. Craver

Again, 2 for 2, 2 great questions and I'm going to be 2 for 2, not 2 great answers. I don't think we really know at this point. What we try to do in the discussion here is outline what the proceedings were, what we can anticipate roughly in terms of the timing of those proceedings and what -- which costs or what cost will be part of those proceedings. That's about as definitive as we can be at this point in time. Not the least of which, we don't yet really know ourselves what the potential fixes or outcomes are for the 2 units. So I'd say at this point, there's more that we don't know than we do around what those specific numbers would look like.

Operator

And our next question comes from Greg Gordon with ISI Group.

Greg Gordon - ISI Group Inc., Research Division

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

W. James Scilacci

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

Greg Gordon - ISI Group Inc., Research Division

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

W. James Scilacci

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

Greg Gordon - ISI Group Inc., Research Division

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

W. James Scilacci

The -- just when I go back -- the way it works to just -- for further clarification, for -- there's a period of time, there's a deductible and the disclosures get into more detail on this. You have to read it carefully, Greg. There's a period of time when we cannot recover replacement power then it kicks in, and there are certain limitations associated with it. And there are certain limitations on it, there's 1 or 2 units out. So read that carefully, and I think it's pretty clear in there, limits on a total amount of insurance that we could ultimately recover from an outage. And I'm going to go back and pause again and let you reask your question because I wanted to fill in that GAAP piece.

Greg Gordon - ISI Group Inc., Research Division

Right. Well, just about here on Page 5 of your deck that you have the 12-week deductible period?

W. James Scilacci

Yes.

Greg Gordon - ISI Group Inc., Research Division

And then after that, you could file for outage from damage. So -- and then you also have accidental property damage. I guess my question is whether you're going to file for accidental property damage, outage or both?

W. James Scilacci

I could -- yes is the answer.

Operator

And our next question comes from Kit Konolige with BGC Financial.

Kit Konolige

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

Theodore F. Craver

More specific. Well, maybe just to reiterate what I said is we see 2012 as basically being around the peak of the capital spending at SCE. We've talked a little bit in some of the comments that Jim made, as well as the Q&A up to this point that the exact shape of that is a little tricky to completely predict. But I still think the basic point stands that we're probably close to the peak in capital spending in 2012. So while rate base will continue to grow in subsequent years, it's growing at a decreasing rate. And that phenomenon in utility rate-making causes a kind of a, kind of a -- I'd refer to it as a bow wave of cash that builds up. So I think that certainly starts to set up the conditions for being able to look at moving our dividend back into the targeted payout ratio range, which is based on SCE earnings entirely. So we've fallen out the bottom of that range. And so in a kind of a step-by-step manner, we would expect to try to address that to move it back up towards the targeted payout ratio range. We have indicated that we have some important regulatory decisions right in front of us here this year, namely a rate case and the cost to capital decision. I mean, both of those remain outstanding. So we certainly would need to get decisions on those 2 things to really know what we're looking at in the near term around the dividend. But I think the direction is the way we've stated it here in the last several earnings calls that we see the day where we can start tuning up the dividend payout and move it back towards our payout target ratio.

Kit Konolige

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

Theodore F. Craver

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

Operator

And our next question comes from Hugh Wynne with Sanford Bernstein.

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

I know that you can't predict how the CPUC is going to respond to the SONGS outage. But I was hoping you might be able to reiterate the schedule on which the CPUC would make its determination and perhaps give us a little bit of guidance as to the degree of discretion that they have in making their decisions. So you had mentioned that after 9 months of outage, you have to notify them. Can you take us from there as to what the steps are on the regulatory counter?

Theodore F. Craver

Yes, I'm actually going to probably turn it over to the folks who are a little closer to all those specifics, but we've tried to identify the 3 main proceedings that will have some impact on cost recovery around San Onofre. But Ron, you want to pick that up?

Ronald L. Litzinger

Yes. Hugh, this is Ron. With regards to PUC Section 455.5 when we've been out of service for 9 months, we would have to notify the commission on Unit 3 in November. They have 45 days to respond, that will look at our revenue requirements and focus on the O&M costs. The reasonableness review, if the commission elects to do it on the steam generator replacement project, that would be initiated when we complete the project. We currently estimate that we'll complete the disposal later this year of the units, and that would be the trigger for that. And then the ERRA proceeding, that will be April of next year.

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

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

Ronald L. Litzinger

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

Hugh Wynne - Sanford C. Bernstein & Co., LLC., Research Division

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

Ronald L. Litzinger

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

Operator

And our next question comes from Jay Dobson with Wunderlich Securities.

James L. Dobson - Wunderlich Securities Inc., Research Division

Maybe just finishing on that last one with Ron. If they do elect to start an OII this Thursday, would that section 455.5 proceeding be sort of set into that or are these just would be 2 separate proceedings?

Theodore F. Craver

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

W. James Scilacci

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

James L. Dobson - Wunderlich Securities Inc., Research Division

Got you, okay. No, that's great. And then Ted, maybe going back to EMG, and I apologize in advance for doing this to you, I think I heard you respond in a earlier question that you sort of sounded like November was too late to respond. And I think at earlier conference calls, you had, maybe the word committed is too strong, but suggested that an answer might or should be given by September. Just using the clock, the 6 to 12-months clock you started a year ago in September. Is September too aggressive to assume that we'd have an answer by then given the complexities of the situation and where we stand now on July 31?

Theodore F. Craver

Again, I really don't know. Now we're kind of getting into the fine cutting on the days. But from my perspective, you can make these things drag on forever and ever and complicate the heck out of them. I think it's actually, you're going to end up being reasonably straightforward about what will be sufficient to have a viable entity on a go-forward basis. And if we can't reach that, then we go to other options. So from my standpoint, sooner is better. I think the data is being made available. We ought to be able to sit down and work through the same, figure out if we've got a good mutual approach that works for all parties.

James L. Dobson - Wunderlich Securities Inc., Research Division

Got you. So something like November is probably the right sort of time frame to think about understanding it's rough, and sort of mirroring your response to another question.

Theodore F. Craver

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

Operator

And our next question comes from Angie Storozynski with Macquarie.

Angie Storozynski - Macquarie Research

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

W. James Scilacci

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

Angie Storozynski - Macquarie Research

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

W. James Scilacci

I think it's a relatively small amount. Because we've said already that the holding company cost is about a $0.01 a month or 12 -- we've as -- generally, we've indicated it's about $0.12 a year. So it's not a large amount of money when it's all said and done.

Angie Storozynski - Macquarie Research

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

W. James Scilacci

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

Operator

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

Scott Cunningham

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

Operator

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

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