愛迪生國際 (EIX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Edison International conference call. This call will be available for replay at the following numbers 877-693-4277 and for those calling internationally 402-220-0042. You will need a pin code 10001 to access today's call. For your information, this call is being recorded. Also, everyone to advise you that Edison International is holding a simultaneous webcast of the conference call. This will on the Company's Web site in a 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. In addition, any time during the conference, if you are in need of assistance from our coordinator, please press star zero for our conference coordinator. And at this time, I would like to introduce your host John Bryson, CEO and Chairman of Edison International.

Good morning to all of you. Thank you very much for being with us. Let's open first with the advisory, I will ask Barbara Mathews, our Assistant General Counsel to do that.

During this call, we'll make forward-looking statements about the financial outlook for Edison International's subsidiaries and about other future events. Additional forward-looking information maybe available on our Web site at www.edisoninvestor.com. We believe these statements and this information to be reasonable and well sounded. However, actual results could differ materially from current expectations. We set forth important factors that could cause different results in Edison International's 2003 Form 10-K and subsequent 10-Q and 8-K report. We encourage you to read those reports carefully.

This is a big day for us. I'm surrounded in this room by a lot of people, many of them a little tired, all of them talented. We had initially noticed this as an earnings call and it will be an earnings call, but most of you no doubt now have seen that we also have announced in the middle of the night -- last night a major sale of our international assets at Edison Mission Energy and we'll describe that in the course of this call. Let me put all this in a little bit of context. You of course know that our focus over the last years has been speedy and fuller recovery from the effects of the California power prices, which devastated our Company, and also from the effects -- later of the collapse of wholesale generating markets that so affected the independent power industry. Our objective has been to recover as fast as we could to restore credit, to improve resiliency such that we can serve our customers well and our shareholders well. And two key steps in this past month have moved us way down the road in achieving that goal. I think all of you who follow us closely will know of the general rate decision for Southern California Edison reached on July 8. That's the decision we've worked on for years. The decision was presented as a $73m general rate case, rate increase, but it was much more than that. It covered comprehensively a large set of issues that affect the future of Southern California Edison.

I want to single out only one of those because it is so vitally important to our future. This is the first case, first general rate case that I'm aware of in which the commission not only adopted rates and resolved a number of issues, for what is called the test year that is for 2003, but it also accepted our proposal and accepted it fully, that our utility system needs a very substantially stepped up level of capital investment, particularly in the distribution system to provide a modern, reliable and fully efficient distribution system in capital base to serve our utility customers. So, without going into any other details, I want to call to your attention in that general straight the fact that there was a $73m rate increase for 2003. There was a new and important means provided to allow us to make the forward capital investments that we've previously indicated we felt were necessary for our customers and that new means is a host, hastier rate making , somewhat technical term to allow us to recover in 2004, $144m to recover the costs and returns on substantially stepped up capital investment and in 2005, $163m additionally for the same purpose.

So, an additional $300m plus to make effective the commitment that we now make and the commission is confirmed to invest further in assuring that Californians and our utility customers have a modern utility infrastructure and particularly a modern and strong utility distribution system. So, that's one thing one most of you know at least something about that. The other major focus for us over the past many months has been achieving the sale of our international power assets, our 14 generating facilities held by Edison Mission Energy outside the United States. These are superb generating plants, they are contracted plants, it's not that we love parting with the plants, but this was the best means available to us to accelerate our larger goal of restoring credit financial health, resiliency and strength to Edison Mission Energy, and you will see that overnight, last night we reached agreement with International Power and Mitsui, consortium of those two companies, a UK company and a Japanese company, to sell 13 of the 14 assets. We previously announced to sell the other 14 and to sell those four, an unadjusted price of $2.3b. We will go further into that in the course of our opening remarks.

Let me simply point out to you now that the total sale, the total international asset sale, that will be achieved through these sales of 14 plants in two separate steps will be $3b in gross proceeds to the Company and then when we take into account the total affects of the termination of a lease known as the Collins Lease that we undertook earlier, which in turn provides tax benefits for the transactions, the net proceeds for the Company will be approximately $2.8b. And $2.8b in turn will allow us to pay down debt, we will immediately pay down the $800m bridge loan we took on approximately six months ago, and then we will move in other ways to restore the credit of Edison Mission Energy. So, at Southern California Edison, major prospective capital investment, now substantially affirmed by the general rate case decision at Edison Mission Energy, rapid recovery of financial health and we believe strength in credit.

Those are the big announcements, let me simply say there is substantial work that lies ahead in the remaining months to convert the sales agreements today into closings. But to purchase here at our Edison Mission Energy, people are committed to getting that done. Tom McDaniel and Ted Craver are going to comment on the sales and their impact on EME recovery more fully in a few minutes. Let me go on, now briefly to the other elements of this call. First, our second quarter earnings for Edison International, those have been released earlier this morning. Reported earnings were a loss of $1.15 per share. That loss was due to a one-time, non-cash charge related to the terminations of the Collins Lease at Edison Mission Energy. So that charge, non-cash charge is $1.80, as I previously indicated. Terminating those leases was part of our overall Edison Mission Energy restructuring and the termination provided substantial tax benefits that effect a compliment to sales through large gains in the sales associated today so that we minimize total after-tax effects and recover the maximum out of cash to Edison Mission Energy. Going on year-to-date on the earnings, year-to-date if we exclude one-time and regulatory adjustments, our operating earnings year-to-date are $0.60 per share compared with $0.55 per share last year. That $0.05 increase primarily reflects favorable operating results that Edison Mission Energy, partially offset by lower earnings at Southern California Edison associated with the expiration of our San Onofre Nuclear Plant rate incentive mechanism that ended at the end of last calendar year.

With the resolution of the General Rate Case at Southern California Edison and the announced sales of the international portfolio, we are now in a position to provide an outlook for 2004 earnings. Before the effect of two one-time items that as the Edison Mission Energy, the Collins lease termination and the gain on sale of the Four Star Oil & Gas, so, excluding those two items, we forecast earnings for this 2004 year to be in the range of $2.10 to $2.20. The $0.10 range primarily intended to reflect some uncertainty around the earnings of Edison Mission Energy's uncontracted power plants here in the United States. It is worth noting however that Edison Mission Energy follows a rolling hedge program for these uncontracted plants and it has hedged 50% to 60% of their exposure, which will reduce that potential earnings volatility.

Again, with respect to earnings and earnings outlook, Southern California Edison is expected to contribute $2.16 per share for this year. The outlook for Southern California Edison is probably higher than some of you have expected and as in some previous years, the positive resolution of various regulatory items has contributed importantly to that outlook. In addition to the $2.16, there are some other one-time items in process that depending on their outcomes could provide further upside, perhaps in the 10% to 20% range to both Southern California Edison and Edison International's outlook for the year. These are things that are always difficult to predict. So at this point, we only indicate to you that there may be some upside. With that, let me ask Tom McDaniel, the CEO of Edison Mission Energy to take you through some of the specifics of our sale announcement then Tom in turn will turn the presentation over to Ted Craver, our Chief Financial Officer to finish up with prepared comments before we take your questions.

Okay. Thanks John. Let me remind everybody that we have posted on the Web site supplemental material that I will be referring to -- to my remarks and also Ted in his remarks. Today, as John mentioned is a very important day for Edison Mission Energy. It marks the culmination of a process initiated on February 1 of this year to sell all of our international assets in support of EME's restructuring plants. And by way of background, once again our international operations are comprised of 14 largely contracted projects located in ten separate countries, comprising 6500 megawatts of generating capacity. That really stacks up to contribute to a very complex transaction that we have been involved in. Let me also remind everyone that post the closing of these transactions that Edison Mission Energy going forward, its operations will be focused domestically on its 7500 megawatts of low cost coal-fired generation in Illinois and Pennsylvania and on the nearly 1100 megawatts of contracted gas-fire generation in California. The sales process over the past six months has been intensive and highly competitive and we were fortunate to have a well-qualified array of bidders involved in that process.

Now, to cover the highlights, the announcement last week of the sale of our interest in Contact Energy to Origin, of the unadjusted equity proceeds of approximately $750m combined with the announcement today of the sale of the remaining international projects to International Power and Mitsui, their joint venture for an unadjusted equity proceeds of $2.3b bring the combined proceeds to $3.05b and represent the complete divestiture of our international operations. When we started this process, we established two goals and we adhered to those goals in selecting the winning bidder or in this case bidders. First was to maximize the after-tax proceeds from the sale of our assets and then second to minimize the risk of closure. We believe that we have accomplished these goals with these highly professional and skilled counter parties in the form of Origin Energy, International Power and Mitsui and their joint venture.

This is a credit positive step for EME, as we'll explain later with the expected closing date for both transactions in the fourth quarter of this year. Let me summarize today's announcement, the joint venture of International Power has a 70% interest in that JV and Mitsui 30%, are buying 13 power projects in nine countries. These projects did well within the existing business activities of those companies and the going forward strategies of those companies. The sales price of $2.3b is subject to adjustments relating to distributions, overheads, and working capital at closing, expected to result in a net purchase price of approximately $2.2b. The transaction is subject to International Power's shareholder vote approval and to certain regulatory and project level consents. The outside date for closing this transaction is December 31 of this year. On the sale of Contact Energy to Origin is now into the closing process and the approval of the structure of the purchase by the New Zealand takeover's panel is on track. The outside date for closing this transaction is November 30 of this year.

We are very pleased with the value received for these two transactions. The aggregate pretax purchase price is 1.4 times book value and the estimated after-tax gain on the sales is expected to be approximately $550m. During this transaction, in terms of multiples to net income and to net cash distributions to E&A from our international operations also produces very attractive numbers, we believe. Using 2003 net income and net distributions, the multiples are 23 and 22 times respectively and 17 and 16 times using 2004 estimates. Let me turn it over to Ted now who will tell how these transactions fit into our overall restruction plan.

Thanks Tom. Good morning. Again referencing the first part of my comments to the material that's on the Website. Today's announcement really relates to our EME restructuring plan. This was the four-step restructuring plan announced last November and the completion of the sale is really the third step in that program. Just to review that, the first step was to obtain an $800m bridge financing which we did in December of last year. With that cash -- with that borrowing and cash on hand, we paid off over $1b of debt in Midwestgen and Edison Mission Energy. The second step was really completed in March and April of this year. That's where we re-financed about $1.7b worth of debt and lease termination payments. We also secured 300m in liquidity facilities in Midwestgen and Edison Mission Energy. And as part of that, we decided to terminate the lease on Collins and are undergoing a process of de-commissioning that plant all of which was designed to produce important cash tax benefits of roughly $370m. It also eliminated escalating lease rent payments to us and was significantly MPV positive. So this is the reason for terminating the Collins lease.

The third step is the one that really is the subject of the announcement today. The sale of the international assets for around $3b and then the fourth step which is left to be done is -- really would start when we receive the cash from the sale of the assets and that is using all those cash to repay the BB bridge loan and to address the remaining back leverage or double leverage that we have at EME and Mission Energy owning company. Really the primary goal of the Edison Mission Energy restructuring is to reduce leverage, really two ways in which we are doing that through this sale process. First is the debt that is removed from the balance sheet directly as a result of the sale and that's really in two or three forms. The debt that we have on EME's balance sheet related to the projects that we consolidate on to our balance sheet is about $2.4b that will be removed when the sales close. We also have our pro rata share, EME's pro rata share from the unconsolidated projects or if you will the off-balance sheet debt, which is about a $1.8b, and then of course with the international sale further credit agreement of the BV bridge loan, we will take out the $800m, bridge loan. So when you add up those pieces, the on-balance sheet, off-balance sheet and the bridge loan, we are looking at about $5.1b with the debt that will be removed as a direct result of the sale.

The second and perhaps more important one is the fact that net proceeds from the sale of the international assets will be available to further reduce debt at EME and Mission Energy holding company. In addition, the cash liquidity of approximately $370m, which is really associated with the tax benefit of the Collins decommissioning will further enhance the net after-tax cash that's available to us for removing debt. There's a table on one of the slides in the supplemental material on the web, that really show that the gross equity proceeds, the headline number if you will at $3.50b from that we subtract estimated taxes, purchase price adjustments, transaction expenses, all of these things, which amounts to about $585m leaving us with cash generated from the international sales of about $2.5b. When you take off the $800m for the repayment of the BV bridge loan, and add in the further, tax shield benefits, associated with the decommissioning of the Collins plant, will have about $2b of cash that's being generated from the step two and step three of the four point restructuring plant. And this will be available for addressing the back leverage. Of course, to accomplish all of this, generation of cash and removal of debt requires the sale transactions to close. If you want to check, count our chicken before they hatch, we have quite a bit of work to do over the next few months to get that accomplished. There's also a slide in the supplemental materials that just gives a pro forma debt structure for the remaining Edison Mission Energy, which really will show you, where the main components of the debt remain.

Let me turn to the second quarter earnings and provide a few additional points to the ones who joined me. As we said, we reported a second quarter loss of a $1.15 per share in 2004, which is really mostly driven by the one-time charge at Edison Mission Energy of a $1.80 relating to the termination of the Collins lease. On a year-over-year basis for the first half of the year, EIX reported a loss of $0.85. When we exclude the one-time items, more importantly the Collins fees and the regulatory adjustments, we end up with operating earnings of $0.60 a share versus $0.55 for the first half of last year. At Southern California, Edison for the second quarter earnings were $0.74, up about $0.06 over the second quarter of last year and actually when we look at the year-to-date, that's up a $1.05 or about $0.07 over the previous period and the explanations are really the same. $0.33 of that -- $0.33 on a quarter-over-quarter and half year-over-half year basis came from one-time regulatory items associated with the general rate case, that positive $0.33 difference was partially offset by about $0.16 in one-time regulatory items in 2003, that were not repeated in 2004, and about $0.14 of earnings associated with the iChip mechanism at San Onofre not being repeated in 2004, as well. So the plus 33, the minus 16, the minus 14, gives you the -- really explains most of the positive $0.06 variance for the quarter and pretty much the same numbers as they said explains the positive $0.07 variance for the first half year-to-date.

Turning to EME and Mission Energy holding company, it really began the second quarter, you will see that the presentation of our materials is a little different, as it really relates to our business segment reporting the results for Mission Energy holding company parent and EME will be presented on a consolidated basis, as Mission Energy holding company consolidated and this is really due primarily to the elimination of the ring-fencing provisions during the second quarter. MEH consolidated had a second quarter loss from continuing operations of $1.88 per share compared to the loss of $0.58 in 2003. The parent only results for the quarter and year-to-date were basically the same as last year, it's just the debt that is sitting there. EME, the operating level, EME operating second quarter loss from continuing operations was $585m compared to the loss of $165m in 2003. Excluding the one-time charge of $586m related to the termination of the lease, Collins and the 2003 charge of $150m related to the impairment of Midwest Generation's small peaking plants. Operational earnings increased $16m over the prior quarter, due to improved operating results at a number of the plants both domestically and overseas. EME had a year-to-date loss from continuing operations of 554 compared to the loss 173 for continuing operations in 2003.

Again if we exclude the one time item of Collins and the net impact from the Four Star sale operational earnings increased $48m over the prior year primarily due to-- again improved results -- in a number of the projects including the Illinois plants, Contact energy and First Hydro. Turning to Edison Capital the quarterly earnings were $0.04 per share unchanged from last year and year-to-date earnings were slightly lower than in 2003, due to the maturing portfolio at Edison Capital. At the parent Edison International a loss of $0.05 was reported, $0.02 better than the prior period due to the lower interest expense from the retirement of some of the $750m in five year notes, early retirement of those notes and higher interest income from a higher cash balance at the parent. Final piece that I would like to cover relates to our outlook, I will provide a little more detail and as John mentioned, we expect $2.10 to $2.20 for EIX as a total excluding some of the one-time charges. At Southern California, you had is $2.16 number that John mentioned for the year is really based on two components. The rate base component, the assumption there is $9,750b of a rate base 48% equity, return which gives you about $1.66 of the $2.16 and then the other components are primarily related to one-time impacts associated with the general rate case $0.33 that I discussed earlier been recorded in the second quarter. There will be about another $0.19 that will come through related to GRC effects in the third quarter. And then are couple of cents of various other one-time items that actually are would reduce that. So, it's pretty much that rate base of the $1.66 and one-time items associated with the general rate case that bring you to the $2.16.

As John mentioned that, there potentially would be additional up side as we have a number of items in front of the various regulatory bodies. Some of these just services, various historic PBR fillings that are still in the middle but all of these, if they are possibly resolved could result in an uplift of potentially 10% to 20% or so from that $2.16 number. Turning to Mission Energy holding Company and EME, the MEH parent, where debt is would be negative $0.30 for the year or the operating Company EME, we are expecting $0.33 to $0.43, and so the combined fees would be plus three to $0.13 for 2004. again this excludes $1.84 the Collins lease termination and $0.09 for the Four Star Oil and gas gain on sale. Just to give you a couple of pieces we traditionally done this at Midwest Gen, the primary assumptions there are about 30 terawatt hours of production a flat energy or 24 hour around the clock price of about $30 a mega watt hour and at Homer City 14 terawatt hours are assumed and about a $42 per mega watt hour flat energy price. At Edison Capital, we are expecting about $0.14 for the year. We are starting to invest again in Edison Capital. We assume that about $125m will be invested in 2004, but just the timing of those investments will have little impact on the earnings in 2004, but this does represent a restarting of investment and over time, these investments should offset what otherwise would be a reduction in earnings as the portfolio materials there.

At the Holding Company, we are expecting negative $0.23, the principal assumption there is that all of the five new notes that comes due in September will be retired and would not be replaced with new debt. One final comment I will make is, while we have a $1.71 combined effect from the Collins and the -- the negative Collins of the $1.80 and the positive sale Four Star of about $0.09 for a combined total of $1.71, which would represent an accounting debts against that 210 to 220. The gain on sale from the International asset sales that we have been talking about here today, is at this point a rough estimate, but we will expect it to be somewhere generally in the neighborhood of $550m and when we combine all of these pieces, the Collins lease termination, the Four Star sale, the International asset sales, all of those things look as although they're pretty much wash out. So, on a reported basis, as well as on an operating basis, it would be in this $2 to $2.20 range with potential upside. One final piece, we have anticipation that in 2005, I am sorry, later in this year and the fall of this year that we will be addressing our 2005 outlook that will be particularly important as it relates to Edison Mission Energy, trying to separate out the effects of the sale of International assets and all related overheads, tax-related impacts, and as well as the application of cash-to-debt is something that we will be addressing in our 2005 outlook later this fall. We really won't have a lot of material on that here today. And with that, I think we can go to questions.

Yes, we are ready for your questions.

Ladies and gentlemen, at this time we will taking your questions . If you would like to ask a question, please press star followed by one and to withdraw that question, press star followed by two. Our first question is from Mark of Smith Barney. Go ahead please.

Yes, it is actually Greg Gordon. Hi guys, how are you doing?

HI Greg.

I am sorry if you've answered this question, but I have been playing whack 'em over here hopping from conference call to conference call. You guys generated, obviously, a significant amount of cash in excess of the MEHC debt from the asset sale here, assuming that it will close. Did you say, correct me if I'm wrong, that you would expect to just further delever the Edison Mission Energy balance sheet with that cash, is that correct?

Yes, you are referring to the cash that we -- that I was describing before, where we have roughly about $2b after the payment of the $800m bridge loan, I assume.

Yes, at the Mission Energy level?

Right, that would -- with the asset sales and the additional tax benefits associated with the termination of the Collins lease, and after paying off the $800 bridge loan, which is required, we would have about $2b plus, it appears, sitting at Edison Mission Energy.

And what is the current debt pro forma after getting rid of all those other assets, is it just over $2b?

Well, just to go through, we would have about -- if you include the debt down in Midwest Gen and EME funding and so on, you would probably end up with about $3.6b after all of the pieces are removed from the international sale, I mentioned that earlier is well above $5.1b comes of.

The $1.6b that essentially a admission effort, this is after sale.

Yes, there is $1.6b of corporate debt at EME, that's the '08's, '09's, and 11s, and there is $800m of debt at MEH in the form of the 13.5% bonds as well as $285m of the Term B loan of that MEH, so those are all kind of the back leverage components of debt.

Any chance -- any of that cash finds its way up to the holding company, to the parent EIX.

I think that what we have really said on this up to this point is, we would really anticipate using the cash that is generated from the asset sales and the columns fees and so on to further delever Edison Machine Energy over time that the real goal is to largely eliminate the back leverage.

Thanks and one last question, you are also and again please forgive me if you have answered this, there is also a sizable amount of cash sitting at the EIX parent company on the balance sheet.

Yes.

Can you remind us how much that is, and have you given us specific guidance of how much the use of that cash might be?

We have to degree - let me give you a couple of numbers here. At the end of '03, it was a little over a $1b, about a $1b, we actually project that by the end of '04 that will be about $867m, that's after paying of all of the five year debt that comes due in September as well as dividends, after dividends to our common stockholders and so on. So, we will still have a substantial amount of cash at the holding company. We also have double leveraged debt at the holding company in the form of the , the other $825m, those two series actually become callable this year and we have an overall cash picture that we are looking at that, what I suggest would be really in a position to address, further address debt reduction at EIX, I think we are going to shape some of the answers to those questions for the fall when we start providing guidance around 2005, but fundamentally at the company we have got fairly substantial capital investment requirements at SEE and potential at add us some capital, we first got dividends and we have got double leverage debt as a holding company trying to balance the cash against those three main potential users as what we will be addressing in our call discussions.

But the year end cash balances are about approximately the amount of that debt, and have you told us whether or not you think EXI is self funding based on its current permittable capital budget or whether that cash might have to be used to be funded down to support the rate based additions?

Well, based on the pieces that have been currently identified with the periods over self funding and capable of paying dividends to EIX, of course all of the capital investments over the longer term are still in the process of being sorted out, and again I think we will address some of those issues in the fall when we talk about 2005.

Okay, thanks guys.

Welcome.

Our next question is from Ken Miller of UBS, go ahead please.

Good morning, actually good afternoon here. I was wondering if you can give some of your thought on terms of liability management specifically at EME, wanting to get it from, you will have huge cash balance when you close these. What you might you do in terms of negative carry are running through potentially entering or exercise in the May calls on some of the EME debt.

Yes, I think you probably understand we are going to be a bit circumspect. Also, we don't want to get too far ahead of ourselves. We want to make sure of course we get sale transactions closed. But I think we are, it is safe that - that we are going to everything we can to make the best choices, the most cost effective choices for continuing to reduce debt at EME and MEH. As you know well, the three series at EME as well as the 800m up at MEH is non-call debt. I am sure, as result of this announcement, it is not exactly the cheapest debt out there, but we will be looking at all of the opportunities available to us and in general I don't think we want to just sit with this cash on the balance sheet for a long period of time with, you know, earning 2% or something.

Okay, thank you.

Welcome.

Our next question is from Vladimir Jelisavcic with Longacre Management.

Congratulations, John and Ted, you guys did a superb job. Just one question regarding the international assets. Can you give us some idea of the net income that is going to travel with those assets?

Yes, again I think we're probably going to be a little bit circumspect on this part. There had been some numbers that, I think International Powers provided around 2003 for their component. There is also the Contact Energy component. The difficulty here is really in terms of what is the remaining or if you will the new Edison Mission Energy, which is domestically focused. What is its earning power going forward. That is the critical question, to be completely frank about it, we are in the process of trying to really work through all of the components that will be eliminated as a result of the sale and that's the direct cost, the direct revenues as well as some of the additional overhead costs that are elsewhere within EME and even to a certain extent allocated through from the holding company. So, getting all of that pulled a cart, also coming to some conclusions about what will be the most efficient application of the cash that has been generated, obviously assumptions about what we do with that will be very important and all of that is the stuff that I am referring to that we will be bringing to the table in the fall, and talking about the 2005 outlook for Edison Mission Energy or the new domestic-oriented Edison Mission Energy.

Understood, I can definitely appreciate that exercise. Can you tell us what is the gross additions to the SoCal rate base that you are planning for '04?

For '04?

Yes, for '04, the full year.

Somewhere I have Al Fohrer, the CEO of Southern California, Edison to answer that.

I would say it was close to a $1.2b.

Yeah, Tom Noonan is here with me. Our rate base for 2003 that was adopted was around 9.7 and for '04 should it be around 10.2.

Great, great. And I think over the past several months you had some discussions about transmission projects rather that you would add to your rate base, given the pushback from other parts of the country for new transmission. What is your outlook for how quickly you can actually bring these transmission assets online?

There are various projects out there. We did get approved by the commission just recently, the transmission project, the biggest project that we have on the horizon is Palo Verde 2, which runs between our system over to Palo Verde. That project isn't scheduled to be online till, in 2008 time frame, somewhere out there. That project will take quite a bit longer and that is currently being evaluated by the Independent System Operator in California, which has to opine on the need for transmission projects. So, some of the projects will take longer. We have a few in the pipeline such as that has now got approved. So, it just varies depending on the size and where the project is located.

Understood. Given the tightness of the California power markets, would EIX consolidate and consider making acquisitions, either physical plants or locking up contract capacity on the unregulated side of EIX if you thought that that can provide greater return to shareholders as opposed to try to put into rate basis like what was done?

This is John Bryson; I'll answer only in the most general way. We want to help California, that's important to our business; we want to help California only under circumstances in which it's good business for us. But those of you who are following the company closely may recall that during the power crisis we put all our resources, Southern California Edison, Edison Mission Energy to work and the EME team found a project in the Silver Valley in California called Sunrise, it had permitting, had a turbine, the turbine was en route to Long Beach, where it was to be shipped to South America, and the people at EME put that together in a project, and that is a good operating project, profitable project today, critically important in meeting the needs of the state. So, I would just say that at Southern California, Edison had its Mission Energy and across the Company, we will be alert to stay in business that can help meet the really quite large needs of the state, that's about as far as we can take it down.

Understood, and just, you know, lastly under EME Midwestern coal fleet, do you foresee any either unusual averages or a higher than average CapEx spending for environmental compliance in any of those assets?

Jeff, Tom again will address that.

No, no we don't, we have really been doing a good job of maintaining those plants, and have been experiencing good run rates and low forced outage, so we are pretty confident in our position going forward in terms of our CapEx.

What about the coal fuel for those assets, any kind of near-term contract roll-off that might make it susceptible to recontracting at a higher price?

Well in the Midwestgen-fleet we are using our Power River basin coal, and really the key component of that is transportation, we have transportation really covered over the next - through 2011, that represents about 60% of our delivery coal costs there.

Understood.

And Powder River basin coal is not really experiencing any of the near term price run-ups that we have seen in the East. At Homer City, we are covered completely for '04 and '05, we do have some run-off, we are in the process of layering in new contracts there, but we don't feel that's going to have a significant impact on our costs.

Understood. Thank you very much.

Let me get back to one point Al Fohrer wanted to....

You had asked for the rate base numbers, the rate base number for 2004 is about 9.75 and rate base number for 2005 is just about 10.4.

9.75 for '04 and..

What I gave in the earnings release, the 9 points -

And a $1.4b for 05'?

$10b, it is just under $10.4b for 2005.

$1.4b for '05?

Again $10.4b.

$10.4b and it's $9.75b for '04?

Correct.

Gentlemen thank you very much, superb job.

Thank you.

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

Yeah hi, good afternoon or god morning guys. Congratulations on finally consummating this transaction, was really quite wonderful.

Thank you.

Just a question to go back on the utility for a second, you mentioned at the beginning of the call about the rate increases associated with the GRC, about how not only was there a base rate increase for 2003 but there were adjustments for capital spending in '04 and '05.

Yes.

And I just wanted to double check the numbers that you gave, you gave 73 for '03 and 144 for '04, and 163 for '05. Now is that just that it increases from 73 to 144 and then the 163.

Or you actually -

But those are incremental additions.

So, the actual revenue increase that you have will go from $73m to approximately $210m in '04 to another $370 some million dollars in '05 in cumulative?

Yes.

And does that all flow through to the bottom line or do you have some major offsets for that in the income statement?

No, this is - as John indicated the PUC basically adopted for the first time, I know, a forward-looking estimate of capital expenditures rather than just an average in, given our increase in capital spending that was critical. So, offsetting those numbers, those to cover higher O&M was prior, what we used to call attrition year mechanisms covered. It covers, anticipated escalation in O&M, it covers the depreciation taxes, etc and returns that would be associated with capital spending. So basically it allows us an opportunity to burn our rate of return over this entire period with a rapid lay escalating rate base.

Okay. So I can -

Another way to put that point out and express it well is it was a step that allows us to avoid the deterioration, in returns that would otherwise take place between rate cases.

Okay, great and I just want to double check here your guidance obviously for this year 2004 that excludes any contribution from EME?

No, that is the aggregate number, the 210 to 220 was the additional, potential that we identified and Ted I think went through that. You want to add that, Ted?

Let me just one more time, real quick. 216 from SCE, minus 30 from MEH current where the debt is, plus 33 to 43 for EME. So the combination of the MEH current, EME is plus 3 to 13 and Edison capital plus 14, EIX holding company minus $0.23, the total of all that is 210 to 220.

Okay, I missed that. So, the balance of the piece is just kind of net out, so that -

Yes, because MEH current and EME are really combined in MEH consolidated and so you got the negative $0.30 current. MEH current from the debt and you've got positive 33 to 43 EME operating company, the net of that is plus three to 13.

Okay and year-to-date is EME performing and above your expectations or in line with what you had projected?

In line with what we had projected.

Okay, great. Well, congratulations again.

Thank you.

Our next question is from Ryan Watson of Stanfield Capital. Go ahead please.

Hi, you gave an estimate for the output for Hallmark city and I know it is slightly lower than your 2003 output, can you give a reason for that and then on Midwestgen, I don't know if you mentioned this number, are you having any trouble with transportation issues on the rails? Thank you.

Well, we have John whose the CFO for the America's?

The output at the it is really marginal difference and really I just have to related to a relatively coals of mine to offset. As far as the rail, it will be about no difficulty at all. So real transportation.

Okay, and when you expect to receive the cash proceeds, I guess from the Collins decommissioning and lease termination?

But, it's all part of the tax picture and also gets ultimately involved in our tax allocation fees, but it will be over the course of 2004 and 2005.

Okay, that's actually cash coming back into you or is that just the bend like it was the tax benefit?

Well like additional shield.

Okay, but that will - okay, and the closing of the sale of everything by contact, is that fourth quarter of this year?

The way we've been referring to these is the outside date in the contract for the sale of Contact to Origin is November 30, it could of course happen before that, but that's the outside date and likewise, the outside date in the IP Mitsui contract is December 31. So, we've been saying that we expect the international asset sales to close by the end of the year.

Okay, and will the cash reside at EME? All these assets you're selling and the benefits -- will all that cash, the benefit of that cash resided at the EME holding company level?

Yes. It will come to EME.

Not at MEH, it's actually at EME.

It will be at EME.

Okay. And once you take off the bonds and loans at MEH, then will you just collapse that structure so that obviously EIX and then directly to EME? And go directly to EME?

Yes. I'd say at longer-term, because we don't really have any prediction on timing of these things, but longer-term -- certainly by the time these things mature, we have no expectation of putting additional debt back in at MEH. So, the whole object of this exercise has been to get rid of the back leverage at MEH and at EME corporate.

Okay. Thank you.

You're welcome.

Our next question is from Michael Lucas with Appaloosa . Go ahead please.

Hi guys, congratulations this is the phenomenal job here.

Thank you.

I just wanted to know one thing, few things actually. What's the -- everything is sold, basically liabilities of California contracted assets. Is that correct? And like what's point of March -- I mean, much point volatile in California Power Group?

No, it is --.

Yes. That's correct, Michael.

Will ISAB also be there? Because I previously never seen this disclosed and you guys had put an amended 10-K that had a $178m of EBITDA coming into this facility?

ISAB is in estimate . That's an oversees project.

We'll be divesting all of our international assets, it's obvious in the international asset.

Okay. I did know that it was included in it in the --.

Yes, it is.

Okay, all right. Great, guys. Congratulations.

Thanks Mike.

Our next question is from Paula Dominick with Goldman Sachs. Go ahead please.

Hi, I just have couple of questions. The other questions have been answered, but I have a couple of questions on Edison Capital, you said you want to grow out, grow investments there $125m in '04. How much of that has been already invested? And what do you think about the capital structure there, additional leverage, and finally do you have any last comments on the LILO leases? The timing there of the two leases that are being looked at?

Let me just pick up a couple of pieces. The Edison Capital is actually one of the companies that is significantly under levered, that is significantly more equity than what you would typically find in our Company -- capital finance company. So, overtime we're looking to address that. Roughly speaking we would expect to target capital structure for Edison Capital somewhere in the neighborhood of 75% debt, 25% equity and we're significantly away from that at this point. In terms of couple of the other piece just one of the qualifications. The $125m of investment that I referred to, that's incremental investment, we do have some ongoing commitments associated some of the previous investments that we've been making. So, this $125m was really meant to signal new investment initiatives not part of ones that we have previous too.

Right, and how much of that has been invested really? Can you tell us?

This is actually Johnny, the President of Edison Capital, he'll respond to that.

Okay, hi.

Hi, about half of the $125m are in terms of firm commitments for new investments. The funding -- the timing of the funding of that half is somewhere in 2004, some of it might spill early into 2005.

Thank you, and any update on the leases, the LILO leases?

Let me have Tony Smith, our VP Tax Director --

There is really no update. We are still expecting a report from the IRS with respect to the RNO of 1997 through 1998 but they have not completed their audit as of yet.

Thank you.

Our next question is from Ali Agha with Wells Fargo Securities. Go ahead please.

Thank you. I just wanted to clarify a couple of points that you have made on the call. First off, with regards to your EME budget for the year, $0.33 to $0.43, does that include the international assets as well?

Yes.

If that's the case, my sense was if you excluded the non-recurring items from last year, EME's earnings were $0.65 last year. Could you comment on why that is being cut in half roughly this year?

Hang on just a second.

Hello?

Okay, just one second sorry.

Okay.

I think we find it is priced on the better if - we are not really prepared to give a decent answer on that. We are having some trouble even frankly connecting to the numbers that you are citing there.

Okay, I'll come back to that offline. Second question that would be when would you think at the earliest will EME be in a position to dividend cash up to the parent?

Well, I have to admit, we've been so focused on trying to make sure we have -- we are able to generate the cash from the restructuring activities to pay, to use to delever the company. We haven't gone to that additional step of trying to predict the timing when EME would be a dividend payer to EIX. In the past when we have addressed this, we've said we expected cash from the restructuring activities and cash from ongoing operations would for some extended period of time be used to delever Edison Mission Energy. The results of the efforts here on the sale probably have accelerated some of our thinking here, but we don't really have any specific date as to when that deleveraging job would be complete and when EME would be in a position to pay dividends to EIX. So, really I think we are still pretty much on the original program of the focus with the cash from restructuring and from earnings would be -- would continue to be recirculated within EME to pay off debt for the foreseeable future.

And also clarifying the outside date that you refer to for both the asset sales, what happens if the transactions are not closed by those dates?

Well, typically in those kind of circumstances, and we do have some provision for them even in this transaction, you could have some element of extension but if you end up not meeting all the closing conditions by the outside date typically the parties at that point have a decision to make as to whether the transaction falls apart and that's it or whether you relook at the terms of the contracts and move forward from there.

So, would that be like a break-up fee situation or what parties will be able to walk away?

There are -- I think probably the answer you were trying to get to -- I think that probably the cleanest way to respond to that would be really, or not break-up fees contemplated. There are certain provisions that we have in the contract with Origin that I think, given the circumstances here, not really going to be likely to be triggered and so I think really the basic point would be that parties would have to agree whether they want to amend the contracts and move forward on some new basis or whether they would walk away.

Okay, and last question. As you look at '05 and think about your planning there, what is conceptually you are thinking about the output at Midwest that no longer will be going to Exelon. How should we be thinking about the marketing of that output?

Yes. Ali, I think that when we start getting past '04, we really need to pull back. Yes, we have generally made comments in the past that of course, the Midwest Gen plans would be fully uncontracted by that time, remaining Exelon contracts would have rolled off. We are in the process of looking at new contracts with various counter parties that in fact have done some contracting, but I think we will really until we have our 2005 outlook later in the fall to be more specific about those things.

Fair enough. Thank you.

Maybe, let me add just one point to that. I think this will affirm what we have said in the past that one consequence of the international sale, which has been our objective at all times is that the sale will improve credit across Edison Mission Energy including Midwest Generation, and that in turn will put us in a stronger position to contract in sales of the outputs of these plants and under reasonable terms, we will be interested in reducing the volatility associated with the merchant positions by locking in fair and longer term contracts, and the collateral and improved credit that will follow from the sale will be an important part of that. So, that is an objective but we will be certain to be disappointed about that and take that in steps because we will not want to sell forward without getting share value.

Yes, thank you.

Our next --

Why don't we do -- well I noticed, we have past the one hour mark. We did two additional questions perhaps and then as in the past, when there are further questions please give directly a call to our Investor Relations group. So, why don't we connect two more out there in the queue?

Our next question is from Jeff with Capital. Go ahead please.

Good morning. How are you?

Fine.

I just wanted to go through one item in the guidance and that is the so called number of 216. I know you broke that out into a rate-based portion and then the other portion, which, I assume, doesn't relate to those step-ups that should be of the rate-based growth. I was wondering what that did include the, I think it was about, something like $0.50 or so, I think $0.33.

Yes, let me have Tom Noonan, our Controller for EIX in Southern California to soon pick that up.

Okay, that includes quite a few items. Actually in the rate case, during our PBR period, we had a dispute on how transmission costs were recorded in our PBR accounts. That was resolved in the general rate case and that was ascended to about $0.15 per share. We had a long-standing dispute with the Commission and the CPUC over 1997 and 1998 Generation related capital visions. That was also resolved successfully in the general rate case. That was an eleven-tenth benefit. We also have memorandum accounts for the general rate case that goes back to May of 2003. So, there is going to be a catch-up of revenues for the year 2003 and that's about $35m or about another $0.10 per share. And then there was several other issues within the general rate case dealt with our pension accruals during the PBR period and some deferred revenues. All others involved in the general rate case resulted in about a $0.12 benefit. So, when you add all those up, we've taken about $0.33 of those one-time items in the second quarter and we'll take about another $0.17 or so in the third quarter related to the memorandum account, which we will collect over the remainder of the year for 2003 revenues, and then the $0.11 benefit associated with this 1997 and 1998 capital additions.

Okay. Great. Is this actually cash coming in or are these just accounting adjustments?

The memorandum account will be a cash improvement of the $0.10. The other ones that I've mentioned are primarily accounting resolutions.

Great. Okay. Thank you very much for that.

One last question.

Our final question is from Paul Fremont from Jefferies.

Thank you. Ted, you talked about a around-the-clock price in Illinois of $30 and around-the-clock price in PJM of $32, and I assume some of that --

$42 Paul.

What?

$42 Paul.

If I look at the megawatt daily right now for Northern Illinois, for the calendar year '05, you're looking at about $48 on peak and even if adjusting for anti-clock peak differential, you would be substantially higher than the $30 that you mentioned. Should we look for an improvement based on where current market prices are year-over-year and I calculate roughly $0.05 for $1 based on 30m terawatt hours of generation, in terms of sensitivity?

Yes. I know they are sensitive -- I think those are somewhat based on the ones I have given a year or so go. Maybe just to -- you're right the 2005 forwards currently are above these flat price numbers that I gave. It looks like Midwest Gen the 2005 forwards, maybe $3 or so higher than the assumption we're using for 2004. And at Homer city, maybe $2 to $3 higher than the assumption we're using here in 2004, but to be -- frankly I know you're dying to get into 2005, Paul, but I'm going to have to pull back from really talking a lot about 2005 at this point.

Okay, but that in an of itself represents at least a potential for a year-over-year improvement that's all, if you're able to sort of tell at what are the current calendar forwards?

Certainly at Homer City, it would suggest that assuming again the volumes are equivalent, and at Midwest Gen, a little more complicated for the merchant part, remember we still have some remaining contracts with Exelon, but for the merchant part, yes it would suggest an uplift on the merchant side, but for the stuff that's coming off contract, we'll have much higher realized energy prices, but we won't have the capacity payments. So, it's a little bit more of a mixed or complicated analysis, all of which we will take you through in some detail when we provide the 2005 guidance.

And then just one another question going back to David Frank's questions on the change in revenues, if I look at sort of rate base additions, on an annual basis of let's say $750m that works out to maybe $40m a year, maybe in terms of net income. Should we assume that there are other offsets based on the fact that the revenue amounts look to be higher than the level of rate base additions that you're currently projecting?

At 56, maybe just one over all comment. I think the part that John and I were trying to clarify little bit earlier is -- again the fundamental earnings piece for the utilities is really driven off the rate base. When you start talking about revenues, you got to be a little careful because there are -- those revenues are covering expenses. So, really the fundamental growth engine for earnings in the utility is going to be based on that on a rate base calculation. Of course, the rate of return were allowed to earn on that is another component that's important to us. We look forward, about your first point about $700m to $750m increase in rate base resulting in about $40m increase in earnings, that right. That's the right calculation.

Thank you very much and congratulations. It was a beautifully executed transaction.

One of those that actually -- I think is a win-win all the way around.

Thank you very much. We appreciate your interest; please do call our Investor Relations Group if you want to follow on with additional questions. That will end the call.