愛迪生國際 (EIX) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Edison International 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 8901 to access today's call.

For your information, this call is being recorded. Also, we want to advise you Edison International is holding a simultaneous webcast of this conference call. This will be on the company's webcast in a listen only mode for interested parties. When the conference begins you will be on listen only. There will be chance for questions and answers at the end. If at any time during the conference you are in need of assistance, press star followed by zero for a California coordinator. Thank you for your patience. The conference will be beginning shortly. At this time, I would like to introduce your host, Mr. John Bryson chairman and Chief Executive Officer of Edison International.

Thank you. Good morning to everyone. Let me begin with our usual admonishment about forward-looking statements. We will make forward-looking statements about Edison International during this call. We believe the statements to be accurate and well-founded. However, actual results could differ materially from current expectations. We have set forth important factors that can cause different results to Edison International 2001 form 10K and subsequent 8 krks, we encourage you to read those reports carefully. One other introductory item.

We plan to use the usual format here, and will open with an introduction about one-half hour, maybe a little longer as we seek to anticipate questions and cover third quarter earnings in the outlook for the company. We'll then reserve something on the order of half an hour following that for questions. So we expect the call to go about a total of one hour. Reported earnings per share for this quarter, the third quarter, were $1.08 per share.

That reflects good operating performance from our three principle operating companies. The 1.08 cents in earnings pair share was substantially better than the performance of the third quarter last year. That's true on both a reported basis and the reported basis includes a number of -- generation related investments as well as loss from discontinued operations. It is also substantially better performance in comparison with third quarter last year on what we've consistently called the core earnings basis, which excludes those items. This year's third quarter results also incorporate a number of one time items, both positive and negative that we will take you through in some detail. An overarching comment can be made.

Relatively good operating performance combined with the benefit of some of the one time items allowed us this quarter to absorb the negative earnings impact from taking some necessary cash generating actions and still produce good third quarter results. We have reminded investors at various times that our earnings are quite season Pam the third quarter is typically our strongest quarter due to the summer peeking nature of Southern California Edison assets. The upcoming fourth quarter is likely to be generally flat, slightly negative, which now causes us to expect for year 2002 core earnings per share to be in a range between $1.80 and $1.90, and that range is up from 1.skwif to $1.75 range we provided last quarter. Importantly, there are some items, some one time items that could develop in the fourth quarter that could negatively impact this new outlook.

Ted Craver will take you through the revised outlook in more detail during this remarks. Over the past year and longer, we have consistently indicated to you a highest priority of each of our operating companies is generating cash, strengthening the balance sheet, and improving creditworthiness.

Virtually all of our corporate goals in the year 2002 have been associated with improving the financial health of Edison International and its operating companies. Progress has been made toward obtaining these goals. As evidenced by First Southern California, Edison has made some good headway on improving the balance sheet by repaying all its creditors, largely on the strength of the settlement agreement with the California Public Utilities Commission and secured bridge financing.

(inaudible) Southern California, Edison has made good progress on collecting the proact (ph) balance and some progress on getting reasonable procurement rules in place as evidenced by the signing into law of Assembly Bill 57, the procurement framework now under California law. The rating agencies have said collecting past procurement costs as well as establishing reasonable going-forward procurement rules, are essential to obtaining reasonable grade credit ratings.

Third, Edison Capital has fully retired its $150 million bank line and will pay off $140 million in other debt this year. And then finally, over the last 12 months, Edison Mission Energy has reduced corporate debt by nearly $800 million.

Investors should expect that improving the balance sheet and creditworthiness will continue to be our highest priority. We see two primary challenges to meeting our objectives and significantly improving the value of Edison International.

First, we need to deal with the recent 9th Circuit Court of Appeals decision in a way that allows us to validate our right to fully collect the PROACT balance, and thereby restore Southern California Edison to investment grade creditworthiness. This is essential for the company. It is also essential for the state of California and central for our customers.

Second, we need to deal with the debt maturities coming up in the year 2003 and 2004 within and at Edison Mission Energy, and we need to deal with that in the face of a depressed market for wholesale power generation for merchant plans. We would expect with success in meeting these two critical challenges will result in a significant improvement in the value of Edison International.

What I'll do now is have Ted Craver take you through some of the details of our earnings report, our revised 2002 earnings outlook, and a liquidity picture at each of our companies. Following Ted, Jim Salachi (ph), the Chief Financial Officer of Southern California Edison, will discuss our progress and PROACT recovery procurement rules and some other important items. Finally, Steve Pickett (ph), the General Counsel of Southern California Edison will update you on matters relating to the 9th Circuit Court of Appeals decision.

Thanks, John. Let me first cover some of the third quarter earnings items. As John said, we earned 351 million in the third quarter or $1.08 EPS on both a reported and on a core earnings basis. You'll remember that we usually talk more about core earnings than reported earnings in order to provide an apples-to-apples comparison of this year's results with last year's. Core earnings exclude procurement and generation-related adjustments at Southern California Edison, as well as discontinued operations at FFF and at EME and Edison Enterprises.

Comparing the third quarter of 2002 versus the third quarter of 2001, core EPS increased by 21 cents or $68 million. For the first nine months of 2002, or year-to-date 2002, reported earnings were 1.1 billion, while core earnings were 617 million or $1.90. The difference between the higher reported earnings and the core earnings was almost entirely due to generation-related adjustments associated with the utility retained generation decision of Southern California Edison.

From here on, let me really focus on the year-to-date comparisons on a year over year basis. Core earnings for EIX were 56 cents greater in year to date 2002 than last year. SCE had about 95% -- 95 cents increase year-over-year, while EME was 30 cents lower on a year-over-year basis.

Edison Capital was slightly higher on a year-over-year basis, and finally at Mission Energy Holding Company, the new intermediate holding company that holds debt, we had the cost of debt for nine months in 2002, whereas only one quarter in last year. So that contributed to 14 cents negative year-over-year comparison.

At Southern California Edison, the major contributors to the 95 cent improved year over year performance were - I'm just going to tic these off -- the adoption of ERAM (ph), 29 cents; the higher return on generation assets was responsible for 20 cents of that year-over-year improvement. Lower short-term debt balances, 18 cents. (inaudible) earnings were nine cents higher on a year-over-year basis. And finally we booked the effects of the resolution of the 1998 and 1999 PBR rewards. That was worth 7 cents on a year-over-year basis.

At Edison Capital there was a 3-cent improvement year-over-year. Frankly, there's a lot of puts and takes that largely net each other out there. But a general statement can be made that we've experienced lower revenues from a smaller portfolio and fewer gains from asset sales this year. But lower interest expense, higher interest income, and lower state income taxes more than offset those negatives.

At Edison Mission Energy, the year-to-date 2002 EPS declined about 30 cents from last year. 20 cents of that 30-cent difference came from one-time write-offs of capitalized costs that were taken in the third quarter. You may remember we foreshadowed this in our last call, and when we said we expected to take some one-time earnings hits as we sought to improve our cash position at Edison Mission Energy.

Specifically, we had write-offs associated with turbine cancellations that contributed 11 cents to that negative year-over-year. That freed up around 50 million in cash. We suspended the capital improvements at the Powerton (ph) plant in Illinois that contributed about five cents of that year-over-year difference, but that also had the effect of relieving us of around 300 million in cash expenditures over the next several months.

Finally, we wrote off the goodwill associated with the Boston Trading Group, which contributed about four cents to that year-over-year comparison.

On the operating side, lower energy prices negatively affected the year-over-year comparisons by about 20 cents at the big 4 plants in California. That was primarily due to lower gas prices. Similarly, lower gas prices contributed about 15 cents year-over-year decline at Four Star (ph), and finally, about 15 cents at Homer City (ph) declined due to lower power prices and outages.

Largely but not completely offsetting these 50 cents worth of year-over-year negatives were three items. Number one, at the Illinois plants, we had higher availability bonuses, lower O&M and interest costs, which allowed Midwest Gen to post a 20-cent year-over-year improvement. We've started recording income at Pithon (ph), as the restructuring process is beginning to come to fruition -- mind you, that restructuring is not completed yet. But that contributed about 9 cents on a year-over-year basis. And lower state income taxes contributed about 8 cents positive on a year-over-year basis.

Let me provide a few more details on the 2002 outlook that John mentioned in his comments. Last quarter, when we raised the guidance for the year to $1.65, $1.75, we gave the components as $2.10 from SCE; we're now going to boost that up about 10 cents to $2.20. The principle contributors to that increase are an additional PBR reward has been resolved. That's the 2000 PBR reward, Brke (ph) Plus 2002 rate case settlement, and some other odds and ends, so now the new outlook would be $2.20 at SCE.

At EME we gave last time a range of 5 cents to 15 cents. We now expect that to be somewhere around 3 cents -- that range to be around 3 cents higher, mostly due to stronger operations. We also have incorporated in that earnings outlook the in-city issue that we're still in the process of trying to resolve with Excelon (ph) and the city of Chicago. Under the assumption that that is resolved, that would result in some costs that would be recorded in 2002, and that's incorporated in that 8 to 18 cent range.

Edison Capital we're going to leave at 17 cents. Mission Energy Holding Company, leave at the negative 29 cents. And finally at Edison International, we gave negative 38 cents last time; we're going to improve that by about two cents to a negative 36 cents at Edison International due to reduced O&M expenses.

So essentially the 15 cents comes from -- additional 15 cents comes from 10 at SCE, 3 at EME, and two at EIX, leaving us at the $1.80 to $1.90 outlook.

We still see the potential for various one-time write-offs, as well as potential one-time benefits, most of which are incorporated in that new $1.80, $1.90. Obviously there's always some opportunities for some unforeseen positives and negatives. But there is one item that is not specifically included in the $1.80 to $1.90 but is a potential negative. This involves our Lakeland project in the United Kingdom.

Lakeland is a 222 megawatt plant. It has a 15-year PPA with Norweb Energy (ph), which is a subsidiary of TXU Europe. And that PPA expires in 2006. The contract is one that the TXU Europe has retained and is not part of the recent asset sales that they announced. Currently, contract payments are still being made, but obviously this is a fluid situation and not one that we can really predict the outcome.

A couple of other facts that will probably be important to you -- we have 138 million in plant and equipment on our books. 72 million of that is financed with non-recourse debt. We have a net investment of about $70 million, and additionally, there's about 32 million in cash held at the project.

Up to this point, we have not provided any guidance on 2003 earnings. Currently, we're planning on providing guidance a little bit before Thanksgiving, so we just want to give you kind of an early heads-up on that. Investors should expect that we'll probably provide a wider range of earnings expectation than the 10-cent range we have been using this year, reflecting a more uncertain business climate, particularly at EME.

Further, given the number of large one-time positives that we have experienced in our earnings this year, such as the 2001 ERAM (ph) catch-up that was booked into 2002 at Southern California Edison, some of the components of the URG (ph) division had one-time benefits, the resolution of 1998, '99, and 2000 PBR (ph) rewards at Southern California Edison, and lower state tax rates at Edison Mission Energy and Edison Capital.

These are just some of the positives that have benefited 2002 earnings that would probably not be repeated in 2003. As a result, investors certainly should anticipate that 2003 earnings guidance will be lower than the $1.80, $1.90 we now expect for 2002.

I'd like to turn finally to a number of items on the liquidity side. You may remember we gave you a blizzard of numbers in the last call. I wouldn't seek to repeat that, but rather just focus on the areas that have had some important change. All of this will be in the 10Q, which we would expect to release on or before November 14th, or in the case of the Sources and Uses forecast, cash forecast, we'll be updating our Web site with that information.

Let me pick off some items for Southern California Edison. First, PROACT, 2.7 billion has now been collected as of the end of the third quarter, leaving about 900 million left to collect. Jim's going to go through this in a lot more detail in his comments. Secondly, the cash balance at the end of the third quarter was 1.3 billion, and as of yesterday, was actually 1.5 billion.

We're raising our forecasted year-end 2003 cash balance by 200 million to now be 650 million. So that's year-end 2003 cash balance 650.

We did in fact retire 300 million of the term A loan early. We did that on August 14, and we also retired 200 million of first mortgage bonds on October. And finally, as of September 30, our debt to cap ratio on a financial basis was 52%, down from the 55% we reported for the second quarter.

At Edison Capital, the cash balance for September 30th, 2002 is now 270 million. We reported 227 last quarter.

The other thing to mention at Edison Capital is in the sources and uses, we now expect the year-end 2003 cash balance to still be around 500 million, be a little bit higher than that. That's the number we gave you last quarter. But importantly the year-end 2002 will be much higher, it will be around 430 million as opposed to 300 million we gave you last quarter. This is a timing shift due to different timing on the monetization (ph) of the tax benefits at Edison Capital. Edison Mission Energy, a lot's been going on there.

First, let me start with the ratings actions. There Moody's down graded Mission Energy Holding Company or MEH to BA2 to B3. Edison Mission Energy from B double-A 3 to BA 3 and Midwest Gen from B double-A2 to B a A2. S&P is also placed a number of energies including the ones I just mentioned on credit watch with negative implications. The impacts of the downgrades are really as we told you in the second quarter, about 68 1/2 million was the so-called primary impact or initial impact. This is cash for hedging contracts we had in place as well as the 48 1/2 million equity injection at CBK.

The secondary impacts we also still believe to be around this 200 million cash in collateral required for hedging our positions at Midwest Gen and Homer City and First Hydro. The downgrade at Midwest Gen did trigger the 100 percent cash lock up at Midwest Gen. Looking at the liquidity, as of the third end of the third quarter, at Edison Mission Energy, we see cash balance of 67 million, and available credit under the three-year and 364 day credit lines of 417 million for total liquidity of 484. We reported to you last time it was 713 million in available liquidity at 630. The difference really primarily being due to the cash lockup at Midwest Gen.

Turning to Midwest Gen, the cash balance, as of the end of third quarter, 292 million, available credit under the working capital line, 150 for total of 442 million in liquidity at Midwest Gen. So in a sense, there's just been a shift from Edison Mission Energy over to Midwest Gen. Updating you on the funds flow from operations, we used that as an interest coverage ratio, its relevance is really in terms of Edison mission's energy's to make dividend dividends up to MEH. That trend continues to improve. The interest coverage ratio is now at 2.04 times at the end of September, up from the 1.93 times that we showed at the end of June. The forecast for 2002 is still the same, at around this 2.3 to 2.35 times.

Leverage, at the end of September, leverage at Edison mission energy defined as recourse debt to recourse capital dropped to 60.3% from the 62.4% that we had at the end of the second quarter. And finally, in terms of the forecast for Edison Mission Energy of the cash sources and uses, year-end cash balances are now expected to be 48 million for year-end 2002 versus the 220 million we showed last quarter. 176 year-end cash balance for 2003 versus the 464 we showed last quarter. This is a reduction of about 2288 million by year-end 2003, most of that's due to the cash trap at Midwest Gen, that's about 186 of that 288. Again, remember the cash isn't lost, it's just trapped at Midwest Gen.

Various other things are responsible for the remaining 100 million difference, including higher equity requirement at Spanish hydro and Homer City, and cash held at the Lakeland project. To give you some sensitivities to the cash outlook at Edison Mission Energy in the last call, if you remember, we used the stress case of taking these year-end cash balances and what if the Midwest Gen were locked up,, of course, that's happened no rollover of the 532 million, 364 day revolver and no sunrise project financing, which we expect to bring around 126 million. We said, with no, sir stresses that the pinch point would be August 2003, where our available liquidity would be about 120 million. Then we compared that against the 100 to 200 million we feel we need in the way of cash and collateral for hedging merchant plant sales. Looking at that same stress test of course, Midwest Gen is locked up.

If we assume 275 million in 364 day line that we were able to secure last month, is not rolled over when it matures, and again, assume no sunrise project financing, we still end up with a low point in liquidity of about 120 million just moved out to September of '03. The pinch point under this stress test would be September and it would be 120 million. At Mission Energy Holding Company, the cash balance at the end of September was about 45 million. And we expect year-end cash December 2003 to be 164 million. That's really not much of a significant difference from what we gave last time. And to remind you, if the term B holders exercise their 100 million split in September -- I'm sorry, in July of '04, and if we assume no dividends from Edison Mission Energy, then we would be unable to fully meet the interest payments in July of '04.

In fact, we would expect to be around 73 million short of cash in July of '04. If the put is not exercised then that pinch point moves out by a year to July of '05. At Edison International the parent level cash balance at the end of September was 207 million versus the 135 million we showed at the end of June. And our outlook for the end of December 2003 would be 217 million versus the 151 million forecast we gave you last time so a modest improvement there at the parent company. With all the numbers, we'll give you a chance to relieve your writer's cramp and turn it to Jim Salatchi who will take I to some of the other items.

The first thing we'll turn to is PROACT and the various regulatory proceedings that underlie it. I'll try to summarize my comments here to leave more room for Q&A. Previously, SE has said it expects to fully recover PROACT by the end of 2003. We still believe this to be accurate, however, there are many important proceedings currently before 3 CPUC that could accelerate full PROACT recovery to possibly mid 2003. These major proceedings include the first one is the 2003 DWR revenue requirement proceeding. Based on our current estimate, we expect SCE's revenue requirement to increase approximately 7 $100 million over 2002.

In arriving at this number we assume SEC will be allocated 40% of DWR's procurement cost and 45% of DWR's bond charges. The commission is scheduled to decide this issue on December 17th. Another important proceeding is what we call the catch up surcharge. This is the .6 cent surcharge that was put in rates relative to the 3 cent increase that occurred in March 2001. We have been collecting these dollars. It was supposed to come off in June of this year and we expect and we have asked the commission to leave that surcharge in rates to offset partially the higher DWR revenue requirement. There are a number of aspects going on in the direct access area.

By way of background, you recall that energy service providers return their customers to bundled service during the height of the energy crisis. When DWR procured their long-term supplies they assumed these customers would remain under bundled utility service. To date about 14% of SCE's customers have left the utility for ESPs. The commission will determine how much to recover and over what time period from these K customers in these proceedings.

There is strong support for recovery of these costs from GA customers but some of the commissioners would like to cap the amount the DA customers would be charged. The proposed decision and various alternate decision would cap or levelalize (ph)charges between 2.7 cents and four cents. From a PROACT perspective a higher cap would accelerate PROACT recovery. A critical aspect of this case is that by capping the charges results in less than full cost recovery of DA costs. We have informed the commission SCE cannot finance these under collections. A decision on these issues is now set for November 7. There are many other issues that affect PROACT recovery, in our 10Q we'll be filing on before the 14th will detail more of those.

Turn your attention to procurement. Many of you realize that last week the commission issued its first procurement decision, where it would have the utilities the California utilities resume procurement of the residual short on behalf of its customers. Well, the decision has some very positive elements like balancing accounts and a trigger mechanism for costs under recoveries. There are a number of important issues that must be clarified by the commission in order to have a workable procurement framework. We'll be filing a petition for re-hearing of its decision. We will also seek further clarification from the commission in our November 12th update procurement filing.

The most important issue is reasonableness. Generally, the reasonableness language in the decision is vague and broad. It could expose the utility to after fact reasonable exposure. Moreover, there is no time frame for the commission to complete its review of procurement decisions. The commission needs to modify the reasonableness language and bring it into conformance with AB 57 which provides for the elimination of after the fact reasonableness reviews. While the decision adopts our procurement plan we submitted in May, it is not clear we have authority to procure under that plan. In some places the decision implies that no procurement actions are authorized until the updated plan is approved in late December.

This leaves relatively no time to meet our residual net short through any means other than realtime market and is inconsistent with the 60 day requirement of AB 57. We need the commission to address this soon. The decision expresses a view also that the IOUs should provide reserves for liability for the loads they serve. We believe this important issue should be addressed in our long-term procurement filing slated for April of next year.

Turning to the next regulatory item is the 2003 general rate case. Many of you are aware we are seeking a $286 million rate increase for higher distribution and generation costs. On October 19th the (inaudible) released a report on our general rate request. The (inaudible) believes that our revenue requirement should be reduced by $172 million, which is a $445 million difference from our request level. The basic difference between our view an Orrays is they think we should have a much lower level of capital expenditures and depreciation level should be lower. Although their adjustments are large we have put forth a very large amount of evidence supporting our claim.

Hearings are going to be set forth at the commission in November through the end of the year. We expect the commission will render a final decision in 8-excuse me, August of 2003. The last item I have is our 2003 cost of capital proceeding. We received an ALJ proposed decision in this case recently. The ALJ is recommending 11.7% return on common equity. We are currently authorized 11.6. Alternative proposed decision by Commissioner Lynch would set that rate at 11.6. A final decision is set for November 7th. That's all the regulatory update I have now. I'm going to turn it over now to Steve picket.

Thank you, Jim. In the interest of time I'm going to be brief here. You'll recall the subject is the appeal to the 9th circuit court of appeals by the intervene or group turn challenge the district court judgment approving our PROACT settlement with the PUC. At the last conference call with you, right after the 9th circuit order came out, we indicated that ruling ruled in our favor in all of the federal issues it chose to decide, and certified three questions to the California Supreme Court, state law questions and that we were evaluating our options of going forward. The two principle ones of which are -- were the further appeal immediately in the federal courts or going ahead to the California Supreme Court. We have chosen the latter course of action.

We believe that's the fastest route to a resolution. It's the best forum for us for a good decision. It is the only reasonable path we now see to reaching finality and certainty on this issue. I'd like to do three things here. One briefly describe the paths we see depending on Wayne or loss at the Supreme Court and then subsequent appeals. Briefly discuss the timing and in a sentence or two on the merits of the claims or the state law claims. If we win at the California Supreme Court for all indents tenths and purposes the case is over and favorably decided for us. If we lose at the California Supreme Court on one or more of the state issues, the matter would go back to the 9th circuit. The 9th circuit would then enter judgment and we would have the ability to pursue a further appeal on the 9th circuit.

The principle one of which is to ask the tourist to grapple with the critical federal issue they sidestepped in the initial order and that is the preemption of state law by the filed right doctrine. That was the critical issue, as we've described to you a number of times in the underlying absolute lawsuit. If we lose on the appeal or if the -- we are unable to have that issue heard by the 9th circuit, we would be back to trying our filed rate doctrine lawsuit in the district court. We are encouraged, if we get to that point, by the recent ruling in the PG and E case, which is exactly parallel to ours, on the filed rate doctrine. Their judge walker in the Northern District of California found that the filed rate doctrine does apply in these circumstances. It clearly applies with market based rates as well as cost based rates, that the state cannot avoid its application by an accounting or rate making scheme, that the utilities must be allowed to recover their wholesale power costs incurred pursuant to FI FERC filed tear Riffs.

He specifically found the rate scheme of ABA 90 is inconsistent with the FERC mandated regime for wholesale presides. All very favorable rulings for us if we are forced back to filing the rate doctrine case. We believe clearly a model for resolving that case in our favor. On timing, we should know before the end of this year whether the California Supreme Court is going to hear the case. It is discretionary. We have already filed a brief with the California Supreme Court asking them to take the case and to expedite it. We understand that the PUC, the California governor, the California Attorney General and other groups are going to file in favor of the court taking the case and we hope also asking them to expedite it. If the California Supreme Court takes the case and expedites it, we would expect a decision on the merits of the state law issues sometime in the second quarter of next year, at the earliest.

If they take the case and elect not to expedite it, the timing would be entirely dependent on the Court's discretion when they set oral argument. We would expect a decision in the ordinary course of timing at the California Supreme Court sometime late next year in that event. At the ordinary course of timing. If we lose at the California Supreme Court, are back to asking the 9th circuit for re-hearing, about the fastest we could expect resolution of that issue to take place would be in the three to four month time frame from the time the case arrives back from the 9th circuit. If we must go ahead and try the state lawsuit that would take about a year from the time of the litigation of the lawsuit resumes.

Very quickly, on the state law issues, there are three issues, two of which I would characterize as procedural. We believe we have strong arguments on those. These are the state meeting law act and the specific requirements for adopting a rate making decision. In addition to our having strong arguments, we believe both of those alleged defects are curable. The CPUC has indicated to us they're thinking about taking steps that would cure these alleged defects. The important issue state law issue is the allegation that it -- our settlement possibly violates AB 1890. There are two key points on that. First of all we believe that the PUC misconstrued AB 1890 in its initial decisions construing AB 1890 because it did so in a manner that's inconsistent with the filed rate doctrine, and I've already indicated how the federal courts view the filed rate doctrine. There's a basic legal principle new law needs to be read in harmony with existing law. There is an easy way and straight forward way for the courts to do that.

If they allow the filed rate doctrine to operate and the procurement costs to be carried forward for collection after the rate freeze period. More fundamentally though is a second argument, and that is that when the legislature adopted AB circumstance X in January of 2001 prohibiting the further sale of utility power plants and requiring utility generation be dedicated to customers, that effectively eliminated the stranded costs right there regime because by definition in a cost basis rate making environment you do not have stranded costs. There being no stranded costs, section 368 of the public utilities code, the section at issue in this appeal, is simply not apoliticable (ph).

In fact, the PUC has adopted cost based rate making in the URG decision that Ted and Jim talked about a few minutes ago and the FERC also mandated that the power plants be subjected to cost based rate making. So we think on either of those two arguments we should prevail on the violation of AB 1890 issue. And we intend to move expeditiously if the Supreme Court and have them decide it as quickly as possible.

All right. This is John Bryson. That concludes the material we've provided in anticipation of the questions. I know there's a lot there. We're ready to have your questions and we'll try to either go further into the questions that we've addressed or respond to any other questions you may have, so please go ahead.

Ladies and gentlemen, at this time, we will be taking your questions. If you would like to ask a question, touch star, followed by one. If you'd like to remove that same question, touch star followed by two. At this time, we have a question from Paul Fremont of Jeffries. Go ahead, Mr. Fremont.

Thank you very much. My question I guess pertains to the guidance on Edison Mission Energy. The 8 to 18 cents I assume would exclude the 20 cent one time or nonrecurring charges in the third quarter and then you're also suggesting that that number would exclude additional nonrestructuring (ph) charges that you would anticipate taking in the fourth quarter, right. Not recurring.

When you say exclude, I guess I think of it the other way around. All of the third quarter items including those one time items are of course, recorded. Then essentially what we're looking for is the earnings that Edison Mission Energy in the fourth quarter, including some additional potential positive and negative one time items, to end up with a negative fourth quarter. Said a little differently, the year-to-date number that we have for Edison Mission Energy is a positive 35 cents as of the end of the third quarter, and we're expecting for the full year, that number to be somewhere in the eight to 18 cent range. As you remember, we also have a -- the fourth quarter's typically a negative quarter for Edison Mission Energy. It's highly -- earnings are highly seasonal there. The third quarter is really the big quarter. The fourth quarter is usually negative.

I guess what I'm trying to do I'm trying to get a sense from you, if we start with 35 cents through the 9 months, if we add back the 20 cents of nonrecurring charges that would get us to 55 cents. Could you give us a full year number excluding one time or nonrecurring charges?

No. Because we consider, while they're one time they're part of operating earnings, part of what we describe as core earnings. It's all included in there.

Thank you very much.

Okay.

Our next question is from Kevin Ing (ph) of Opoloosa Management (ph). Go ahead.

Kevin Ing (ph): Hi. I was wondering if you could disclose for us the EBITDA in the quarter for the California energy.

For Southern California Edison?

Kevin Ing (ph): Edison. I'm sorry. Utility.

Yeah.

Kevin Ing (ph): How much of that's core versus a function of your collecting the under collected.

We don't actually have the number right here, Kevin, but we will provide that. It will be, you know, certainly part of the Q information as well.

Kevin Ing (ph): Do you have any other details on capex or any of those other numbers?

No.

Kevin Ing (ph): Okay. Secondarily, -

We didn't think anybody needed any more numbers than what we've already given here this morning.

Kevin Ing (ph): Okay. Secondarily, can you just for clarification, can you verify the amount of -- you had given a recourse, it was called a leverage debt to recourse capital. Can you just verify for us what at -- , you know, how much you consider recourse debt at Edison Mission Energy, what the dollar amount is for my reference, please?

Yeah. We'll take a quick look into it. This can get pretty detailed. Let me have Kevin Smith give you the basic components then if you have follow-up guess questions on it Kevin we'll take care of it after the call.

The debt number consistent with leverage was $3.3 billion. That's corporate recourse debt.

Kevin Ing (ph): Okay. And secondarily, can you just go back and help me understand one issue, which is the procurement of power, and the state's desire for you to continue procuring power, how are you able to do that and not violate, you know, FERC rules unless you have an (inaudible) rating?

This is Jim. The rules regarding the tar Riff are that either you post collateral or you have a certain investment grade credit rating. So we're not going to have that credit rating, so we would plan on in working with the ISO to post the necessary collateral to begin the process to resume the procurement function.

Kevin Ing (ph): The ISO, would you go basically using the ISO's balance sheet?

No, we're using cash from our balance sheet.

Kevin Ing (ph): How much cash will that require?

That will fluctuate depending how much activity we'll have at any particular time. We would estimate through the filings we made through the commission obviously depends on power prices, but in an expected environment and really depending upon how much is going to the imbalance market it can fluctuate anywhere from zero to as much as 100 to 2 $100 million.

Kevin Ing (ph): Zero and 100 to 200 million.

Yes.

Maybe we better move on there. Kevin, if you have further questions.

Kevin Ing (ph): Can you just make a commentary, just one last question. Can you make a commentary on prices in your power regions, specifically in the Midwest?

They're unchanged from what we gave in the second quarter. So we said in our cash forecast we assumed that Midwest Gen would have a flat price in other words, seven by 24 price of $22.15 in terms of Homer City, it was $28.18, if I remember it.

They're flat from third quarter.

No change on those assumptions. In fact over the last quarter that's more-or-less the way the actual calendar strip '03s have been trading in those two markets.

Kevin Ing (ph): Thank you.

Our next question is from Zack (inaudible) of (inaudible) capital. Go ahead.

Zach Schreiber (ph): It's Zack Schreiber (ph) from (inaudible) capital management. Can you hear me?

Yes.

Zach Schreiber (ph): Following up on the whole procurement proceeding, just wondering if you can talk us to about the sensitivity and the collateral you'd have to post to power prices, what kind of power prices are you assuming behind that 100 to 2 $100 million of collateral and what percentage of your overall load obligation do you assume to be the RNS or residual net short position?

This is Jim Salatchi again.

Zach Schreiber (ph): Hi, Jim.

We looked at a pg range of power prices and gas prices on oil and gas prices. We took a look at standard deviations one and two beyond what we call our reference case. So therefore the numbers I gave you which are still subject to alot of change expect that the market would be based on a forward curve that we developed which I can't talk to you about right now.

That number would obviously go up or down so I should go back and clarify, too, in Kevin's question, if we transact only through the ISO and our purchases fall to the imbalanced (ph) market, we could expect to have the cash on collateral with the IRS -- excuse me, ISO. If we do transact for additional power supplies, the amount of collateral would switch then from the ISO, to whatever kind of arrangements we would have with counter parties. As you're aware, we're in the market right now soliciting for power supplies for from counter parties upwards of approximately 2,000 mega what. We'll be filing those with the commission hopefully within the next month.

Zach Schreiber (ph): How about the hypoleticly (ph) power prices go to $65 per mega watt hour. It gets really cold in California with the 10,000 marginal heat rate for the state?

Fortunately, just to put in perspective. The collateral requirements are not that large and won't go up that much because the way DWR procured we are very long and many hours especially as we go through the second-half of 2003 and we become even longer in 2004. So this overall problem is much different than where we were back in the height of the energy crisis.

Zach Schreiber (ph): Sure.

Because we were so short. Now the problem is we are very long in many hours. We are shorter in the first part of the year of 2003 because songs is down for scheduled review English outdamage. Then we go much longer as you get through the second-half of 2003, because the (inaudible) contract starts to lever more in another an additional DWR contract comes on-line. When I talk about this range, it can't be from 0 to 1002 $100million it is really capped in the amount of net short.

In the amount of net short you assume you'll be responsible for is 5 to 6% of your load, 7%.

It can be. It can be larger or less. You're talking about on an average snrnchts (ph) yeah, annual basis.

It is close to that, but.

7%.

It gets less as you go -- obviously it's more during the first part of the year and becomes significantly less during the second-half of the year as you go in 2004, it's even less.

Zach Schreiber (ph): Great, following up on the whole 9th district issue at the Supreme Court, why would a California state court, you know not accept a case on when a federal court is putting before them issues of state law and has a California Supreme Court ever sort of, in any analogous situation, said, no, we don't want to rule on state legal issues, we defer to a federal court? It sort of seems unique to me.

This is John Bryson. It is entirely likely the California Supreme Court will accept the certification.

But as Steve picket underscored. It's discretionary.

Zach Schreiber (ph): Thank you so much.

Our next question is from Gary Garcia of Wachovia Securities. Go ahead.

Thank you. Good morning. I have two questions. One relates to the obligation of 500 mega watts in Chicago. If you buy out that contract or actually end up building the 500 mega watts will that cash flow come from EME or the Midwest Gen themselves?

Let me ask Kevin Smith talk a little bit about that.

I think Gary, probably the important point as Ted mentioned earlier, we're in discussions in regard to the city of Chicago regarding alternatives. We don't believe 500 mega watts capacity is needed at this time. We would anticipate resolution of this. That's really I think the key item here.

You assume a resolution will require any pay out?

We assume there are costs associated with a resolution.

My question was whether that would come from the available liquidity at EME or down at the project level?

Gary, actually, I'm not sure we have that exactly resolved at this point.

Okay.

So rather than give you a bum answer, I'm going to pass on it for the moment.

My second question, I believe you said there were lower earnings at big four from last year. Due to lower gas prices, is that correct?

Yes. The way those contracts are set up, on the big four is really based off of gas at the California border. Gas prices end up influencing where the power prices come in.

Could you give us kind of a gas price from third quarter last year versus third quarter this year so we can get kind of parameters of how that moves?

I don't have it here but I'm sure we can dig it up if it's help portfolio. Obvious rates lower that's what contributed to the 20 cent reduction year-over-year.

Our next question is from (inaudible) from (inaudible) management. Go ahead.

Good morning, Ted. Just want to ask you a couple of quick questions. In the event that you're not successful, you know, on this appeal, either at the state Supreme Court level or some other level, under what circumstances could turn prevent (inaudible) from upstreaming dividends? Are they supposed to bond? Could you talk about what circumstances it could prevent (inaudible).

This is John Bryson. I'll start down this track. If somehow, if for example the California Supreme Court reached conclusions that invalidated the settlement, then it is only under the settlement that there's a restrikz (ph) on payment of dividends from Southern California Edison. So if there came a point at which the settlement was invalued then the discretion to pay dividends would reverdict to traditional regulatory judgments and the only judgment there is Southern California Edison in compliance with the capital structure requirements set by the California public utilities commission, and I have a sense is there ample cash developing at Southern California Edison to meet capital structure requirements that would ultimately be a judgment for Southern California Edison.

The public utilities commission traditionally has determined the amount of equity as part of the total capital structure that is appropriate. The remainder if cash is retained in the utility simply earns only a debt level return and the right course for us is and always has been to retain the required amount of equity but not beyond that. So the question of dividends simply would revert to traditional law.

That would be the CPU's decision, John?

Well, it would be the company's decision. The only decision that PUC makes is what is the required amount of equity in the capital structure. That's determined in their cost of capital proceeding. That has already been determined for example, for next year. That amount of equity, slightly oversimplifying is approximately 48%.

Uh-huh. My last question is assuming the PROACT is paid down by mid '03, let's say, assuming that. Assuming that there's no other legal impediments to paying dividends out of So call. At what point in time would you resume paying stock dividends.

Dividends to current shareholders of Edison International? We have set a goal. We don't have a forecast on that. There's too many variables. We've set a goal. We have repeated the goal a number of times that is that we have all these matters by 2003 so by early 2004, we could pay our common stock shareholders a dividend. We also indicated we thought that dividend level in the first instance would that be as high as it traditionally was.

Great. Thank you very much.

Our next question from (inaudible) of Merrill Lynch. Go ahead, sir.

My question is regarding First Hydro I was wondering considering the downgrade what credit you had to do for that entity. My second question is giving the increased volatility of that market is that project benefiting from that volatility and based on that, do you believe you'll be able to exceed the required coverage to, you know, source the dividend out of that project.

Kevin Smith will cover that.

First, hydro benefited everybody who had a 12 month coverage ratio of only 109 at the end of June. We mentioned last time we expect to see that coverage ratio probably at 1-5 or higher this year, so it is performing at a higher level. We have provided collateral it to assist it in its hedging ability, and right now, that's the form of a $17 million sterling letter of credit facility that's cash backed. That seems to be more than adequate. We have seen increased volatility recently in the marketplace which is helpful to First Hydro, but it's only recently. It's hard to say how long or what the complete benefit will be from that but, you know, recent signs are -- have been positive, but that's again, it's hasn't continued very long.

I was going to say is the (inaudible) being provided by EME?

It's a letter of credit that's cash backed. It was cash that EME had that in fused.

Okay.

Into the project, into an entity that's providing it.

Thank you.

We've gone beyond our one hour time frame here. Let me take -- let's just take two additional questions and we'll have to close it out. If there's questions beyond that please handle them in calls directly to us. I would remind you that we do intend to cover each of the items that have been raised here and many others in detail in our quarterly 10Q that will come out in November, not later than November 14.

Our next question is from Michael Lucas (ph) of Apploosa Management (ph). Go ahead,, Mr. Lucas. One of the questions is in terms of the dividend and the right sizing of the capital structure, what is it typically now you're forecasting the end of 2003 you'd be able to give a dividend back up to the parent the right sizes of Southern CIA Capital Struck tush IE (ph) have an equity ratio of 48, debt of 52?

Mike, I'm not crystal clear I understand the question.

State the question again.

Michael Lucas (ph): The PUC authorizes a specific capital structure, correct. 48% equity, 52% debt?

There's some preferred element in it, yeah, that's close enough.

Michael Lucas (ph): Prior to this call, it was my understanding that there would be a higher level of equity that would be forecasted for 2003, therefore that you'd either have to dividend money out or raise additional debt and send the money up or, you know, something of that nature to right size the capital structure.

That's right. We -- the nature of the settlement agreement contemplated building cash at Southern California Edison until PROACT recovery is complete. Then at the end of that period right sizing the capital structure.

Michael Lucas (ph): I guess I'm looking for the magnitude of the size of the right sizing. What you forecast it to be.

There are just so many variables there we don't have a number on that.

Michael Lucas (ph): Is it above 400 million dollars?

We're just not prepared to -- at this point to provide a number. We just -- any number we gave out would just have so many variations, things like trying to forecast exactly when the PROACT recovery would be complete. We just can't do that, as we've indicated many times. Many variables.

Michael Lucas (ph): How is the negotiations going with the banks at Midwest Gen Holdings (ph) with where the two bank agreements are in '03 and '04.

I don't think it would be fair too characterize it. We're in negotiations with the bangs. We're obviously in contact with them and we provide them information as a normal matter of course but we're not in any kind of negotiation with the banks.

Michael Lucas (ph): Okay. Just one other thing. The city of Corona, do you see this as holding anything up? I understand it's a small city in California the fact they would effectuate empower themselves to take over your (inaudible)?

No. This shouldn't impact anything.

Michael Lucas (ph): Okay. Thank you.

Our next question is from William Matthews (ph) of Kenon Capital (ph). Go ahead, Mr. Matthews.

William Matthews (ph): I was wondering if you can give me an idea when you go through your liquidity analysis a shortfall from Mission Energy holdings going forward, what if any restrictions are there for example issuing stock at Edison International and then down streaming that money to these subsidiaries where you see a shortfall. In the past you've talked about wanting each of your entities to stand on its own but I just want to know is that purely a management decision or are there any regulatory and/or other restrictions?

As we understand our responsibility to shareholders, we must, in order to make further capital infusions into any of our subsidiary companies, be able to reach the judgment that that capital infusion is in the interest of the shareholders and that's a fresh determination as we indicated in the last one of these calls and repeatedly since. It's a fresh question when it comes to investing further in MEHC or Edison Mission Energy or Midwest Generation. So it's not matter of any highly specific covenants, it's a matter of our general fe Deutscheairy (ph) obligation to our shareholders, we take that seriously.

William Matthews (ph): So for example if you felt, as I understand it, Mission Energy holdings debt is collaterallized by the stock of EME. If you felt a $75 million gain '04, if that was plugged would preserve that equity for the benefit of Edison International it would make sense by that line of thinking to issue equity and dividend it down.

There are all kinds of conceivable concrete cases here. The general standard is we will make investments only if we're able to conclude they serve the interests of our shareholders.

William Matthews (ph): Okay. Thank you.

All right. Why don't we stop there. We thank you all very much for your interest. If there are other questions, please don't hesitate to call us as I indicated, we will provide substantial detail in the 10Q.