愛迪生國際 (EIX) 2002 Q1 法說會逐字稿

Good morning. Welcome to the Edison International earnings release conference call. This call will be available for replay at the following numbers: 877-693-4277. Also, 402-220-0042. You will need to use the PIN code 8601 to access today's call. For your information, this call is being recorded. And we want to advise you that as an International is holding a simultaneous webcast of this conference call this will be on the company's website in listen-only mode for interested parties. When the conference begins, you will be on listen only and there will be a chance for questions and answers at the end. And in addition, if at any time during the conference you need assistance, press star 0 for a conference coordinator to assist you. Thank you again for your patience. The conference will be beginning shortly.

At this time, I would like to introduce you to your leader Mr. John Bryson, Chairman and Chief Executive Officer of Edison International. Thank you and go ahead, Mr. Bryson.

Thank you, good morning. Many thanks to all of you for taking an interest in tuning into this call. The call is to discuss our first quarter earnings. I'm pleased to report that we are off to a good start for the year. We earned $84 million across Edison International in the first quarter. That is 26 cents per share. And for comparison with first quarter earnings one year ago, that is 16 cents higher than our core earnings in the first quarter of last year. I what has set the stage by talking a little more broadly about how these first quarter earnings fit into what we described to our Investors last year as our objectives for the year and give a brief picture of where we are now. Then I'll ask Ted Craver, our Chief Financial Officer to go into more detail in the first quarter earnings. Late last year, we told -- [ interruption ]Late last year, we told all of you that followed us closely that 2002 for us was going to be a rebuilding year as you know, the power crisis in California and related effects had a very harsh impact on our company. And that impact wasn't focused just on our utility business. It also impacted the entire company. So that for 2002, our focus is very clear. It is on rebuilding and strengthening both our balance sheet and our creditworthiness. And it also focuses on rebuilding and strengthening our customer relationships. During the first quarter, we feel we have made important progressed to strengthening the balance sheet and our creditworthiness. We would under score we still have significant work to do on these fronts. First, at Southern California Edison, I think now that our credit ratings have moved up from triple C to double B. That's on the strength. settlement agreement reached with the PUC and then in significantly related PUC implementing decisions reached during this past quarter. We remain junk bond rated at Southern California Edison. But the upgrades have allowed us to secure bridge financing which in turn allowed us to pay off all of our past undisputed debts. Further, we have seen increasing evidence that the California Public Utilities Commission is serious about restoring the utility to investment grade status so that we can take back the procurement responsibilities from the state. Decisions reached in the past quarter including particularly the utility retained in a decision at the Public utility Commission and the performance-based rate making extension decisions were significant in this respect. Strong first quarter earnings at the utility are helping to improve our equity and, hence, they contribute to our improving credit picture. Similarly, our cash position is steadily improving and providing for recovery of the proact balance. All of you know, I think, that the proact is the account at the Public Utilities Commission which we have recovered the wholesale power costs are the amounts that we were required to write off last year. By the end of this March, so, by the end of the first quarter, we had recovered $1.5 billion of the proact balance, leaving us about $2.1 billion yet to collect as of the end of the first quarter. We also made good progress this last quarter in strengthening our cash position at Edison Mission Energy and Edison Capital. So our focus is not just on restoring the utility but on restoring the credit and financial strength of all of our companies and during that first quarter, we were able to pay off all of our outstanding bank debt under the corporate revolvers at both companies. All of these actions under score our determination and our progress to strengthen our balance sheet and restore our creditworthiness. Now, before I say anything about the forward outlook, let me just do what we did as a matter of prudence to do. I'm going to the statement that we usually make. During the call we will make forward-looking statements about Edison International and its subsidiaries. We believe these statements to be accurate and well-founded. However, actual results could differ materially from current expectations. We have set forth some of the factors that could cause different results in our year-end 2001 annual report to shareholders and in our form 10-K and we encourage to you read these reports carefully. Alright. As we look to the remaining three quarters of the year, we see further possible improvements to both of our original earnings forecast and to our credit. But at this time, we are constraining our enthusiasm a bit until we see the outcome of some important events, most of which will occur over the next two or three months. Major events we have our eye on that affect our earnings outlook include power prices over the summer months, which are critical earning months for Edison Mission Energy. The outage at our San Onofre unit number 2 and related inspections in that outage is expected to begin on May 20th of this month. And additional upcoming events that will affect our credit and were significant include the outcome of the consumer group turn appeal of the federal court order that implemented the settlement we achieved with the PUC at -- that has been argued and is before the U.S. Court of Appeals for the Ninth Circuit at this time. The decision is possible at any time. And finally, and of great importance, anticipated California Public Utility Commission decisions on rules governing procurement of power by Southern California Edison. We filed our proposed framework for that decision yesterday. That decision is anticipated sometime likely in the early fall. Alright. With that framework, let me turn this over to Ted Craver to take you through some of the particulars of our first quarter earnings and our earnings outlook.

Thanks, John. As John mentioned, we are at 84 million or 26 cents a share for the first quarter. That represents a 16-cent increase over what we referred of to as core earnings for the first quarter of last year. Probably worth reminding you of what we mean when we say core earnings. Last year, in the first quarter, we had a reported loss of $1.89 per share. There were a number of adjustments that we make to that to get to core earnings. Those adjustments being about $2.03 for procurement-related losses at Southern California Edison. A two-cent loss from discontinued operations at Edison Enterprises, and we also take out six cents of profit from the discontinued operations at our triple F investment in the UK. So you start with a reported $1.89 loss, take out these adjustments, and you end up with core earnings of 10 cents. So the 26 cents a share for the first quarter of 2002 comparing against core earnings of 10 cents for the first quarter of 2001 or 16 cent increase. Now, let me take you through some of the company specifics. At Southern California Edison, we had a very good first quarter. 45 cents for the quarter versus 19 cents core earnings first quarter last year or a 26 cent improvement. The principal contributor to that improvement is that last year our Songs Unit 3 was out the entire quarter. This year, all of the units have been running. And that contributed about 17 cents to that improvement. We also had a number of components that contribute to net interest expense such that our net interest expense in the first quarter of this year was about 11 cents better than last year. And offsetting those two significant improvements were about 2 cents of higher net operating expenses. I need to emphasize that our first quarter results do not include any of the effects of the PBR and URG decisions which will reflect themselves in the second quarter so none of those decisions impacted our first quarter results. At Edison Mission Energy, we had a reported loss of 11 cents versus 3 cents last year. That's about 8 cents worse on a year-over-year basis. The 3 cents loss last year is after taking out the effect of earnings from triple F and that's what gets you to that 3 cents loss core earnings. Remind you that most of our assets at Edison Mission Energy are summer peaking, which means that we really make the bulk of our money in June, July, August, September. And as a result, we tend to have losses in the first and fourth quarters at Edison Mission Energy on a seasonal basis. The major contributors to the weaker year-over-year performance were lower prices in Homer City, plus we had an outage in one of our units in Homer City which is about -- worth about six cents change. We had lower prices at the big 4 projects which also was around another -- worth another six cents change. Mark-to-market gains on gas swaps in year 2001 that were not repeated in year 2002 was worth about 7 cents of that change. Offsetting some of those weaker components were partially higher year-over-year performance at the Illinois plants, about 4 cents. And important to note we have started booking income in the first quarter for Python. The income from Python that as you'll remember was not in our original earnings guidance. We had that really plugged in at zero. But based on the executed binding term sheet that we have with [INAUDIBLE] and the fact that we have received payments in the first quarter, the accounting really requires us to reflect that as earnings and so we are showing that in the first quarter for Edison Mission Energy. Edison Capital, we have 6 cents versus 4 cents last year. We did have a loss in revenue on a year-over-year basis as a result of the smaller portfolio. But that was more than offset by lower operating expenses and interest expense. Mission Energy Holding Company, that's the new financing entity that we put in place last summer, that did not exist the previous year. So 7 cents loss in the first quarter really reflects interest expense and we didn't have any of that in the results last year. Finally, EIX parent primarily, that's made up of debt and a little bit of overhead corporate expense. The 7 cents loss for this year versus 10 cents last year really represents lower debt balances primarily because those were shifted to MEH. And slightly lower corporation overhead expenses. What I'd like to do now is provide a little more detail on the earnings outlook. California Public Utilities Commission decision on utility retained generation, or URG decision, was really consistent with what we had in our original forecast that we gave you last November so the decision really eliminated any earnings risk that we had in our forecast but did not add anything to the core earnings. There will be an effect in the second quarter from writing up some of our generation assets that had previously been written off. But that would be a one-time and non-cash event. As many of you have figured out, the impact of the PUC decision on the performance-based ratemaking extension, or PBR extension, and this ERAM mechanism in particular was an add to our earnings outlook. It represents in rough numbers about 100 million, or 30 cents, versus what we had in our original earnings outlook. Frankly, aside from the earnings impact, we really welcomed that decision as another step towards improving our credit outlook, which is our primary focus. At Edison Mission Energy we have experienced a sharp decline in power prices from where we were in November when we put the forecast out to you. And while prices have recovered somewhat, we still have a gap. Consequently, we now feel that the low end of the range that we gave you last November for Edison Mission Energy, that's the 110 million, or the 34 cents a share, is now probably most likely the high-end of the range for us at Edison Mission Energy. Given the volatility that we have seen in the last four or five months, we would say there's probably that same 35 million range or perhaps even slightly larger to Edison Mission Energy's earnings. At Edison Capital, MEH and EIX parent, those are all pretty much on track and don't really expect any changes there. We gave you our earnings guidance for the total company in 2002 of around $1.50, $1.60. Based on the first quarter performance and some recent events, we have good confidence that we will at least meet the high-end of the earnings range we gave you previously. So the $1.60 should really represent the floor of expectations for the year. We do expect that there is a good opportunity to exceed that $1.60. Exactly how much is more of the difficulty. And as John indicated, we're taking a fairly conservative or cautious approach here with our eye on a couple of key events coming forward. The Songs Unit 2 outage and related inspections also, since our assets in Edison Mission Energy are summer-peaking, is really how those power prices perform this summer that has the greatest impact on how Edison Mission Energy comes out. We will be more definitive on the earnings outlook in July when we release our second quarter earnings. As we know, the outcome of these principal events, for now we are going to go with $1.60 as the floor of our earnings expectations. What we would like to do now is open it up for questions. Operator, we would be happy to answer questions at this time.

Ladies and gentlemen, if you would like to ask a question, touch star followed by 1. If you would like to remove that same question, touch star followed by 2. At this time, we have a question from Michael Lucas of Appaloosa Management. Go ahead, please.

Yeah, I'm sorry, Ted. I hopped on a little late. When do you guys think that you'll be back to investment grade and be able to buy power at Southern California Edison?

Yeah. Well, those are two separate but somewhat related pieces. Let me just take the first one. It would be difficult for us to really predict when we're going to become investment grade. We have been in as you might expect pretty constant contact with the rating agencies on really our credit and improving credit picture. I think the principal issues that they have told us, they have their eye on, are really PUC actions. Some of the recent decisions I think are fairly instructive as to the importance that the PUC puts towards us becoming creditworthy. And I think all parties are interested in having Southern California Edison be in a financial position to resume the procurement function. In terms of trying to predict exactly when that happens, exactly what will happen on the procurement side, that's really a proceeding that as John indicated is before the Commission now.

Anything about talks with the contracts out west?

Yeah. For EME, [INAUDIBLE]west?

Uhm...Really, the decision is on their side at this point. They are required to tell us by the end of June which of the coal contracts they are going to take and by the end of September, where they are with the Collins and oil and gas [INAUDIBLE].So, at this point we don't have any announcement from them on which ones they're going to take. We'll provide that clarity fairly shortly.

One last thing real quick. Just on your outlook for '02, the $1.50, $1.60, I would have thought it would be higher with the 2 [INAUDIBLE] the PUC just had. Is there a reason for that? It's still in that range?

Maybe you hopped on after we gave that part. I think we feel confident that $1.60 is the floor to our earnings outlook at this point. But if a couple of key events occur over the next two or three months that will allow us to be more definitive on what the expectation will be [INAUDIBLE].

Alright. Thanks a lot, Ted.

You're welcome.

Next question is from Vladimir Jelisavcic of Long Acre Management. Go ahead, please.

Good morning, Ted. I just wanted to check in with you to see what the status is of any, you know, discussions you're having with rating agencies about, you know, potential ratings upgrades. You know, in any of your capital structures at any particular subsidiary and you know how that relates to developments with the proact account balance.

Yeah. Vladimir, I think really the accurate as well as the prudent response is we're really in constant contact with the rating agencies. There are a lot of developments and particularly at Southern California Edison, but we're not really in a position to predict exactly what their actions would be. I would imagine a -- you know, a key event will be the outcome of the turn appeal that's before the Ninth Circuit Court of Appeals. You know, this is just going to be a continuing process. And... how the PUC, what types of decisions the PUC makes will be probably one of the most critical elements.

Right. Just going to the proact balance, Ted, you know, do you have any kind of change in your outlook as to when, you know, the balance will be paid down to enable you to begin up streaming dividends from utility to the holding company?

We have the same outlook which is sometime at the end of 2003, we expect to have the proact balance recovered. There are a lot of moving parts in that. There is certainly volatility around that outlook. But currently, we still believe it's end of the year, end of 2003.

Right. And then with respect to the power exchange and the ISO, I believe several months ago, you funded your obligation to the ISO when you had your big bang, you know, paydowns of all your past due debt. You had given the FERC refund proceedings, is there any chance you get some of that cash back? And if so, can you quantify it both as to amount and timing?

Uhm, no. I don't think there is really a good way to predict that. Those schedules tend to slide around. The schedule of the hearings alone has changed a number of times. So I don't really think there is a good way for us to predict that. You know, as far as we looked at it, our obligation was really to the ISO and to the PX. We satisfied that obligation, from our narrow perspective. It's kind of case closed.

Understood. And just with respect to your coal fuel plants, have you been inventorying, you know, coal to take advantage of lower prices recently, or have you used any other types of, you know, hedging activities to take advantage of these low coal prices currently?

We have a number of contracts at our principal coal facilities. All different maturities, different circumstances around them. So we really have taken more of an approach of not relying on spot market for sourcing our coal but really more long term contracting both on the coal itself and transportation.

Understood. Thanks a lot, Ted.

You're welcome.

Next question is from John Riley of Fairlawn. Go ahead, please.

Hey, Ted. Quick question. On Pyton, you mentioned you actually got cash from it. I was just curious as to what the amount of cash was and if you expect to ever see any of it again.

Well, uhm, I think the short answer is yes. We have a binding term sheet and we have been receiving payments monthly payments in line with that binding term sheet. There are some important events going forward that have to be accomplished, as well. We are in discussions with the bank groups. And other lenders. You'll remember, we don't own 100% of the plant.

Yeah.

So the owners group is in discussion with the bank group and this involves a number of governmental agencies in Japan and the U.S. and Indonesia, as well. We have been actively involved also getting the binding term sheet converted into amendments to the PBA and there are a couple of other items of lesser magnitude than those two that also need to get sorted out. But things seem to be progressing. There seems to be an interest on all of the parties' side to get this done. And again, as the accounting works on this, we do have the binding term sheet as executed by both sides and there is cash flowing which really puts us in a position of recording that income.

And I'm sorry, how much cash is it right -- how much cash did you receive in the first quarter?

I don't have the exact number here. But the -- there are a couple of different components to the payments. So they aren't steady every month. But there is a restructuring payment, there is a capacity payment, and then there is an energy payment which more varies with volume.

Okay. And then lastly, what's the -- at the end of March, what was the revolver balance on Edison Mission Energy?

End of March, we had no out standings against it. We did have about 50 million in letters of credit.

Okay. Thanks a lot.

You're welcome.

Our next question is from Paul Fremont of Jeffries. Go ahead, please.

Two different fronts. One, on Pyton, does Pyton fill in the remaining difference of the numbers that you discussed for Edison Mission so was it about a 7 sent contribution for the quarter? And should we annualize that number or what should we assume for a full year contribution?

You should not annualize it. There were some larger components in the first quarter. Probably something in the $30 million category would be about right. That's pre-tax.

30 million pre-tax on annual basis?

For this year.

Right.

In terms of any other component for Pyton, I think that's really -- should recognize as I said that there is a higher load in the first quarter and so you really can't just take these first quarter numbers an annualize them.

Okay. The the other question that I have is with respect to sort of this expectation of lower prices, I had thought that the biggest concern for Mission was the renegotiation of the midwest generation contract or whatever Excelon ends up taking under the option. Is that less of a concern now or is that still making up at least part of the uncertainty with respect to the earnings guidance on the year?

No, I don't think there's really any impact from Excelon's choices in terms of the option contracts. Those all affect next year's earnings, not 2002 earnings.

Then the last question that I have is if I look at ERAM, PBR, and I look at ISEP, can you tell me for each of those what the maturity dates of the -- whatever -- the decisions go out to, uhm, until what date?

I'm not sure I follow your question.

I think I know what he means.

In other words, your ability to collect ISEP, ERAM and PBR go to -- is there an end date to that under the decisions that have taken place?

Paul, this is Jim Scilacci. Let me take each with you. ERAM on the decision we just got will stay in place until the 2003 GRC takes effect and we will be filing that today. And in the GRC, part of the mechanism is we propose a continuation of ERAM. So if that's adopted, it would go over the full three-year period. So we would currently, from a point of view, we would have it through at least the end of 2005 if adopted by the PUC.And on ICHIP Songs, we have two more years, 2002 and 2003, and then on 2004, ICHIP would end and we go back to cost of service ratemaking and that is embodied in the general rate case filing that we are making today.

Going back to cost of service, do you base, then, the value of Songs on a market price valuation? Isn't it fully depreciated?

No. There is a regulatory asset that will be established -- remember, that's the URG decision. Once that decision was adopted, we'll go back and respectively create a new asset for all our generation assets, including Songs of Palos Verdes. So effectively there is a rate base and we'll earn an authorized return on that rate base going forward.

And do we know what that is?

For Songs, it's the current -- when the -- when we went to the accelerated recovery, Paul, the Commission lowered the rate of return on Songs to approximately 7.5%. And Songs will stay at that level through the end of the ICHIP period. All the other URG assets will go to the currently authorized distribution return on common equity, which is 11-6. And that is subject to and that will be in place through at least the end of 2002, and next week we will be filing our 2003 cost of Capital for proceeding to the 2003.

PBR has been modified very slightly. It will stay in effect until GRC is adopted. We are in the GRC application for filing. We are taking some of the major elements of the existing PBR mechanisms safety and reliability and customer satisfaction. Targets. And including them, but for all intents and purposes after the GRC is adopted, we will not have a PBR mechanism and we'll go more towards a cost of service basis.

Thank you.

Next question is from Jonathan Inchesle of Trust Company of the West. Go ahead.

Hi, thanks. I apologize did I miss a specifics SoCal Edison guidance as were you working your way through the company? Could you repeat it?

We didn't give a specific Southern California Edison guidance. Last year, we gave $505 million. We did provide some elaboration here on the effect of the performance-based ratemaking steps, particularly the ERAM mechanism with the -- would be in the neighborhood of around $100 million.

Thanks very much.

Welcome.

I think it's important to underscore Southern California Edison that you can't just add those two numbers without fairly taking into account the uncertainties that I identified going forward at Southern California Edison which include the effect of the San Onofre number unit 2 outage that's upcoming. Any potential effects of the ongoing procurement framework proceeding at the Public Utilities Commission and those are probably the most important outstanding variables. There is always the question of exactly what happens with U.S. Court of Appeals for the Ninth Circuit decision that is anticipated on the turn appeal. And will probably be reached sometime in the next couple of months, presumably.

Our next question is David Frank of Zimmer Lucas Partners. Go ahead, please.

Yeah, hi, good morning. I apologize if you answered this earlier. I tuned in a couple of minutes late. Could you tell us what the proact balance was at the beginning and the end of the first quarter?

This is John Bryson. The end of the first quarter, the balance is 2.1 billion. That means that up to that point, we had recovered a total of about $1.5 billion at the beginning of the -- of the first quarter, the outstanding amount was $2.4 billion. So at the end of the -- at the beginning of the first quarter, 2.4. At the end of the first quarter, $2.1 million.

So roughly $-- $300 million guess of available headroom is used to amortize that asset?

Yes.

Okay. And just to turn back for a moment to the utility, when I -- I look at the rate base of the utility, I think as around $9 billion. And if I assume that the utility earns its authorized return of an 11-6 now, that gets me to about $1.55 of contribution excluding the ICHIP. I realize Songs is going to be down for an outage. But... Assuming a normal outage length at Songs, I think you have had outages previously while under the ICHIP and it's contributed somewhere in the neighborhood of 30 to 40 cents. So maybe if you could just kind of go through again the pieces for this year of what you're projecting by at least the other parts of the business capital, the new range for EME, the MEH interest drag, and, uhm, I guess a parent drag for all of '02.

John, I think we have really given I think what we're -- what we think is a prudent and available to give at this point. For the total company as I said, we expect the high-end of our range that we gave previously to now be the floor. The principal components that we have outlined really relate to the fact that SCE will be higher than we originally anticipated, primarily because of some of these regulatory decisions which are aimed at improving our credit. And secondly, that the significant drop in power prices that affect us in our merchant assets in particular at Edison Mission Energy have probably made what we gave as the bottom end of our range last November, now really becomes more the high-end of the range. The other components, Edison Capital, MEH, EIX, they are really as we described last November.

Okay. So that hasn't changed.

Those three haven't changed, no.

Okay. And then my last question, on the procurement decision, pending procurement decision, would the expense requirement related to any potential contracts come out of your ROE Revenue, or would it come out of the available headroom you have now to amortize your proact balance? So, if you had to take on expensive contracts for some reason to lock in power for the next several years, would it -- I don't understand -- would it hurt your ROE, or would it just slow down the recovery of the set?

This is John Bryson. We do not expect nor could we take on in the sense of assuming the state contracts. The contracts from the State Department of Water Resources contracts are their responsibility. And they put the ongoing costs of those contracts into our customer rates. But all of that is independent of our results and we don't expect that to impact our results. The state is in the course of renegotiating those contracts. Most of the effect of that renegotiation substantially all that at least done to date is in out years. So we don't expect any significant impacts in the near term associated with that at all. But the important principle here is that we don't take in our results, not in our return in equity, not in our earnings, and not on our balance sheet. The effect of those contracts.

Okay. Well, thank you very much.

Our next question is from Scott Pearl of CSSB. Go ahead, sir.

Just wanted to clarify on the first quarter, none of the benefit for the benefits for the URG, I guess which you had previously talked about the in the sense of 18 cents full year or the PBR, 30 cents full year, neither of those are in the first quarter?

The decisions on both of those will show their impact in the second quarter, not the first quarter.

So I guess there will be some type of catch-up relative to the first quarter?

Right.

The 30 cents for the PBR, does that include the catch-up from mid-june of 2001?

Yes. And all of that, the catch-up will be, you know, recorded in the second quarter plus the actual second quarter impact of the new ERAM mechanism. And then each quarter thereafter it will be the regular impact. So you'll have a bit of a catch-up that will recorded in the second quarter related to what's effectively three quarters of catch-up.

On the Songs, the historical rules of thumb that you have given out thinking about the outage upcoming, are those still valid, you know, increase in capacity factor in numbers related to income? You put out in your materials?

Yes. What you're trying to get at is, if for every month that a unit is out, what the the impact is, yes, that's the same.

I guess just to follow up on I think it was David's point, the related to, you know, anything that you any power that you would ever have to procure and related to this Commission procurement, uhm, proceeding, the current settlement agreement is structured does cover [INAUDIBLE ] or any power that needs to be procured on behalf of customers.

Well, maybe not 100% -- maybe I'm not 100% clear on the question. This is John Bryson. Under the settlement, after the initial setting, of the allocation of responsibility utility by utility for the EWR contracts, which is done, if those power contracts somehow or the state procurement resulted in a need for higher payments, through the state for power generation, there would need to be a rate increase and it would be the obligation of the California Public Utilities Commission to put that rate increase in place. Now, it doesn't look like that's required. But as I said before, changes in revenue requirements associated with those contracts or state procurement are not the responsibility of Southern California Edison. It would not impact our earnings or our balance sheet. Now, we filed yesterday with the California Public Utilities Commission a proposed framework and approach to power procurement into the future. And that filing takes a number of important points that we have raised that we have insisted on and the financial community and lenders have insisted upon with us and puts them before the Commission. And I can outline that if that would be helpful. The core of it is that we cannot effectively take up multi-year procurement on behalf of our customers and take it way from the state's responsibility unless or until we are investment grade credit. And the only way we can do it on a sound and durable continuing basis to avoid the problems of the years 2000 and 2001 is under a comprehensive framework set by our state regulators that allow full and timely recovery of reasonably incurred procurement costs. And that further allow us to source power on a multi-year basis with a reasonable portfolio of shorter and longer-term contracts particularly capacity contracts that will be needed. We need an approach in which the state regulators approve a utility specific procurement plan and where necessary, where a particular edging contract or contract that Southern California Edison might enter into is unclear in the way it fits in the framework. There needs to be a mechanism for prior approval and finally there needs to be a mechanism in the event that costs under those contracts, which will go into proposed balancing accounts, in the event those costs exceed current revenues, such that a defined amount of obligation is built up but not reimbursed. There needs to be a trigger mechanism to make an adjustment in rates to recover that case on a prompt and timely basis. So, this is a current matter before the Public Utilities Commission, yesterday's filings I think were significant. We propose to seek to work with the State Department of Water Resources so long as it has that responsibility. And we would be prepared to be at the table with the State Department of Water Resources as it goes forth as we believe it should. To procure power over the years 2003, 2004, and 2005, to complement what's in the current state contracts and to fill out a reasonable portfolio of what we believe will be needed in those years but we cannot take ourselves credit responsibility or liability for those contracts until we're in position in which we're investment grade. But with respect to those contracts, that portfolio, it might be entered over the next several months for the years 2003, '04 and '05, we would be prepared to assume responsibility for those contracts under the terms we have set out when we're put in a position in which we're investment grade credit and when the state has an acceptable full term comprehensive procurement framework in place.

Excellent, and so what you're talking about is really working out the execution of what is drafted in that settlement agreement related to how costs outside of the surplus are handled?

Well, that's not exactly right. The procurement -- I mean, the settlement agreement pertains to recovery of past costs. And that includes treatment of how the past state contracts to buy power are handled with respect to customer rates. And the most important thing to under score is those are not the responsibility of Southern California Edison, will not be the responsibility of Southern California Edison. What I was seeking to address which I thought was part of your question is what happens on a going-forward basis with regard to procurement of power. And we cannot take responsibility for that until we're investment grade. But it is our objective and it's the state's objective to take the state out of that procurement function. So we filed yesterday outlining a transition proposal and further outlining how we would propose that the state manage the regulation of utility procurement of power when we can return to that function.

I understand, understand. Ted, one more quick point. The 25 cents of loss you had from triple F for the first three quarters of 2001 and I guess if you add that to the six cents benefit year in the first quarter, now that we know that you had from the first quarter of 2001, I guess that's 31 cents that you lost between the second and third quarter when we're looking at EMEs numbers from last year. Can you give us a rough approximation to that breaks out between the two quarters?

I don't have it here. But remember, all that is in the discontinued operations component. So -- that's how we get to apples-to-apples comparison.

Right. No, I'm just thinking about last quarter's -- last year's reported numbers.

I don't have that at my fingertip. I don't know if Kevin or Mark has it. But we can get it to you off line if we don't have it here.

Thank you very much.

You're welcome.

Our next question is from Byron Lem of Investment Advisors. Go ahead, sir.

Thank you. My understanding is about maybe a third of the power that you purchase is sort of in the merchant market. And [INAUDIBLE] for the SoCalEd. And if the prices on that side run up while you're selling it to a regulated part of the business, so, how are you being protected against the in terms of the liquidity aspects of that situation? What's your liquidity position?

Let me if I might, let me just kind of get you oriented better there. We do not have the responsibility for that so-called net short or that third that you referred to that is being purchased in the open market. That responsibility currently resides with the California Department of Water Resources as a result of the financial crisis that we found ourselves in. So the CDWR actually picks up that component of power purchases for the customers of PG&E, ourselves and San Diego Gas and Electric. A lot of the comments John was referring to before regarding procurement and how those rules would be going forward but that all relates to when we regain our financial health. That has become investment grade rated. Then we would be in a position to take back that function. And in that case it's important to note that he long term contracts that the California Department of Water Resources entered into last year have significantly reduced the size of that net short. They have gone out and forward purchased quite a bit of power that covers really the vast majority of that net short. That being said, if those contracts don't exactly meet the day-to-day, hour to hour shape of the load, and that involves a very complicated procurement function and one that also requires credit and that's the really what all these procurement rules that we are seeking clarification on will address.

Okay, but part of the electricity you supply to the customers is from -- through those contracts from the water department. Part of it is from your own generation.

Correct.

And isn't a third of it from blue chip producers better in the market?

In very rough numbers, a third comes from our own generation -- to serve our customer load, a third of the power comes from our own generation. A third comes from contract that is we have with so-called qualifying facilities, our QFs, and then the third in today's environment comes from the California Department of Water Resources purchases and contracts.

And the contracts that you have with the QF are fixed in the price that you're paying for the power.

About half of those are fixed in contracts, 5-year contracts that we have. And half are so-called Gas CoGens and in that case, we have hedged all the 2002 and 2003 exposure. Exposure to gas prices.

Okay, great. Thank you.

You're welcome.

Our next question is from Jason West of Deutsch Banc. Go ahead, sir.

Yeah. Uhm, I just wanted to get clarification on how headroom was treated. in the earnings. I know you guys didn't seem to have any type of non-recurring items in the 26 cents according to the press release.

Correct.

I just wanted to clarify how the headroom falls into that number.

It is correct we have no non-recurring items either at Southern California Edison or the other pieces. In terms of the headroom component, that really is part of this proact recovery mechanism and does not really run through the income side. So I want to make sure that you're understanding that part. That's a -- I think there was an earlier question where John responded about the proact balance was 2.4 billion at the beginning of the quarter and 2.1 at the end of the quarter. That's really all in the proact recovery mechanism which is outside of the earnings impact.

Okay. But does it show up on the financial statements like is that the provision for regulatory adjustments? Where that shows up?

What I can do maybe is have Tom Noonan our Controller, take you through some of the specifics here.

Where that would show up is in the income statement under provision for regulatory adjustment clauses so for the quarter you'll see a reduction in our -- in the balance sheet of the proact balance. The difference I think you have is the PG&E does report this as earnings. Edison reports this as an amortization of our regulatory balancing account. So it is not included in earnings.

Right, that makes sense. I guess the other question -- the number in the income statement is $697 million. Why is that so much bigger than the 300 you guys actually amortized on the proact? Is there some other adjustments in there?

Yeah. That one I'll have to check with you and maybe get back to Joe Goddard on.

Okay. and then one other thing, just thinking about the earnings guidance. And you guys said that EME now looks like, more likely to be at the low end of the 34 to 44 cents?

Yeah. Actually, what I said was that the low end of that previous range, the 34 cents, is really most likely now that the high-end of the outlook for Edison Mission Energy for the year.

Right. So that's not a floor, then?

34 is a ceiling, if you want to term it that way.

Right. And I mean, is there any way that EME could be, uhm, you know, weak enough to offset, you know, the benefits you are getting of the, uhm, I mean, I know you guys don't want to get into too much detail here but I mean, you know, could it get a lot worse than that?

Well, there are -- I think the best way to think of it is when we gave our earnings guidance before, we gave about a 10-cent range or about $35 million. And what I said in my remarks was that that range of $35 million or perhaps slightly larger would still be what we would expect as kind of the range. So the 34 becomes the upper end of the range.

Right. Right.

34 cents becomes the upper end of the range.

Right.

And again, you have to understand, we really make the bulk of our money in June, July, August and seattle. The other months are, you know, break even or loss months. Just given the way our system is set up. It's a summer peaking system. Most of our assets fall into that category. We are entering that summer period and I think we'll have considerably more clarity as we get to reporting our second quarter earnings. By that time, we'll have had a few of the summer months under our belt. We'll know where -- much more where we are there.

Right. And just one more quick one. The foreign exchange gain that you guys had from capital, do you know what the size of that was on the EPS basis?

Really relatively small. We are talking about like a penny, that type of stuff.

Okay. Great. Thanks a lot.

Operator, I think we'll take one more question and then we'll need to wrap it up and any additional questions we can take later.

Our last question is from Tom O'Neil of Lehman Brothers. Go ahead, sir.

Good morning.

Just under the wire, Tom.

Good luck. The first question I had was on the 2003 impact of the PBR extension. I guess either assuming that no new '03 GRC rates are in effect until early '04 or the ERAM is adopted. Would that number still be in the 30 cents per share range or would it be something slightly lower?

The 30 cents includes some of the catch-up in '01. We are still trying to get, you know, exactly sorted out. Once we go through the GRC, that resets your sales expectations and then really the principal impact of the ERAM is that allows to you avoid any volatility around that expected sales number. So really what we are talking about here principally the impact for 2001 and 2002.

Okay. And the catch-up piece was roughly $42 million or 7, 8 cents?

Yeah. I'm sorry, it was just getting a note here. I'm sorry, could you repeat it, Tom?

Just curious on the catch-up portion that would fall out of '03. That's about $42 million or 7 or 8 cents?

Well, for -- it would be about 8 cents for last year for the 2001 component. And then, you know, you have the quarterly component for the 2002. So the catch-up if you're referring to the 2001, yes, it's around 8 cents.

Okay. And then, couple questions on EME. Just curious if you could provide an update on the hedged level at Homer City. You -- in '02 and if you would, any pricing assumptions that you have baked into the unhedged portion versus today's forward curves.

Tom, I'll talk generally about it. I'd rather not be highly specific because the hedging is something we are regularly doing. But we have in the past told that you we had one unit hedged and two units unhedged. The last several weeks we have done a significant amount of hedging relating to that second unit in -- and our policy is to not have more than two of the three units hedged. But we made significant progress on hedging that second unit. -- at Homer City for this year. I think that's probably about as far as I really ought to go on that. But... We have increased the amount of hedge in Homer City.

Okay. And the unhedged portion reflects today's forward curves, I would take it?

Yes. When we do our re-forecasting, we use, you know, the last few days of March and the first few days of April in this case, and take that average for the forward curve and just apply that to the unhedged part.

Okay. Then two other quick items. Just an update on the first hydroexperience year to date versus prior expectations original Edison Mission Energy guidance.

We didn't really provide any guidance as it related to first hydro. We provided guidance on Illinois, the Big 4, and Homer City. But first hydro has had a tough year so far. Power prices in the UK have been very weak. And that's one of the reasons why we have said now that our 34 cents is probably more likely to be the ceiling. That's one of the components of that.

Okay. And then just finally, any update on asset sales with regard to Equal Electrica, Gordon Fill or Brooklyn Navy?

No updates.

Thank you very much.

We do actually have one clarification from one of the earlier questions that came in on the proact balance.

This is Jim Scilacci. I wanted to clarify, we gave you a balance for the proact as of January 31st instead of the end of December. There was more proact amortized during the quarter than what we originally indicated. We apologize for that so there is approximately $500 million of proact amortized during the course of the first quarter. We indicated the proact balance was approximately 2.1 billion. It started out at the beginning of the year a little over 2.6 billion. And there was 50 million amortized. Sorry for the confusion.

Okay. Thank you very much. Appreciate everybody's attention.