愛迪生國際 (EIX) 2005 Q1 法說會逐字稿

Welcome to Edison International's 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 to use the PIN code, 10301 to access the call. For your information, this call is being recorded. Also, we'd like to advise you that Edison International is holding a simultaneous webcast for today's conference. This will be available on the company's web site in a listen-only mode for interested parties. [Operator Instructions.] There will be a question and answer session at the end. In addition, if at any time during the conference you are in need of assistance, please press star followed by zero for a coordinator. Thank, again, you for your patience and this conference will be beginning shortly. And at this time I would like to introduce your host, John Bryson, Chairman and CEO of Edison Edison International. Thank you and go ahead Mr. Bryson.

Good morning and we thank all of you for joining us on the phone today. Let's start with the usual forward-looking statement advisory. I'll ask Barbara Mathews, our Vice President and Associate General Counsel, to do that.

During this call, we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries and about other future events. Additional forward-looking information may be available on our web site at www.edisoninvestor.com. We believe these statements and this information to be reasonable and well founded, however, actual results could differ materially from current expectations. We have set forth important factors that could cause different results in Edison International's 2004 Form 10-K, and in its first quarter 2005 form 10-Q filed today. We encourage you to read those reports carefully.

Most of you on the phone will have already seen the materials we released earlier this morning. I want to say, simply, that we're pleased in the first quarter that we have continued to build on the progress, the considerable progress of the prior year in our performance.

Each is segment of of the company, each subsidiary of the company had improved results on an accounting basis in the first quarter. We'll ask Tom McDaniel to go in detail through this. I wanted to throw particular highlight on only one area of performance and that is at our Mission Energy Holding Company, our independent power business, the performance in the first quarter marked a considerable contrast to the performance a year ago and that's what we've worked so hard on over the past couple of years. As you know, we sold the international assets in our independent power business. That business is now a U.S., only U.S. focused business. The sale proceeds were able to bring down debt and we positioned the company, we think, to do well and certainly the first quarter was a strong quarter.

Let me pick out the elements of first quarter earnings and compare them with a year ago. Mission Energy Holding Company, the holding company that houses our independent power business, first quarter earnings from continuing operations were $25 million this year compared to a loss of $39 million same period last year. The first quarter 2005 earnings from continuing operations include a $50 million after-tax charge that related to early extinguishment of debt in the first quarter, so we're getting down the debt and there was a charge associated with that, and that compares with first quarter 2004 where last year we had a $27 million after-tax net gain from the sale of our Four Star Oil & Gas and Brooklyn Navy Yard projects. So if you exclude those items to get down to what we call our core earnings, and we've given guidance on the basis of our core earnings as most of you who follow us know, the core earnings in the first quarter this year were $40 million as compared to a loss of $66 million in the same period last year. So on a core basis, and Tom will go into greater detail on this, but on a core basis our earnings in the independent power business improved $106 million in the quarter on a year-over-year basis.

As I indicated, we had good performance elsewhere in the company as well. I won't go into those details and I'll ask Tom McDaniel then to go in greater detail on the first quarter earnings.

Okay. Thanks, John. Good morning everybody. As John mentioned, first quarter consolidated earnings were $0.61 per share, a $0.31 increase over the first quarter 2004. Each of our reporting entities contributed to this increase. SCE was up $0.09, MEHC was up $0.08, Edison Capital up $0.13 cents and the holding company up $0.01. Now, I'll go through on a company by company basis these results. SC's first quarter 2005 earnings were $0.40 per share, $0.09 above the same period last year.

Virtually all of this increase is due to higher authorized revenue in 2005 from the implementation of the 2003 general rate case decision. SCE received the 2003 rate decision last July, therefore, first quarter 2004 earnings do not include the impacts from this decision, or did not include the impacts from this decision. Now, let me clarify this, because it did result -- that rate case decision and the timing of it will result in quarter-to-quarter comparison differences. Now, the other three general rate case decisions, although delayed until July 2004, provided higher authorized revenue for the full year of 2004 and for a portion of 2003. The 2003 portion is reported as a non-core item in the third quarter of last year and did not affect SCE's core earnings. Therefore, we can expect to see core earnings comparisons to the prior year varied throughout the first three-quarters of the year. In the first and second quarters of 2005, we expect SCE's core earnings to be higher than the first two quarters of last year, as 2004 did not include the impacts from the decision.

In the third quarter, we would expect SCE's core earnings to be lower than 2004, as SCE recorded a year to date catch-up adjustment relative to the rate case decision implementation. When we compare the full year of 2005 to last year, it is not expected to reflect a year-over-year core earnings difference as a result of the decision.

Turning to Edison Capital, first quarter earnings were $0.16 per share, up $0.13 over the same period in 2004. This increase is primarily due to Edison Capital's share of income from its investment in the emerging Europe infrastructure fund. This fund accounts for most of its investments at fair value, with changes in the fair value recorded through income quarterly. Our share of the fund's income was 43 million last quarter, primarily due to market-to-market gains and valuations from several telecommunication investments that the fund holds in eastern Europe.

Moving to MEHC, first quarter earnings were $0.10 per share, up $0.08 cents from the prior year. Now, first let me discuss MEHC's non-core items for the quarter before I get to the core. There are three components of the non-core items. First, discontinued operations which separate out the operating results and sale impacts or international assets that were sold late last year and during the first quarter of this year. Also includes costs from the early extinguishment of debt, and a net gain from the sale of two domestic projects, which occurred in 2004. These non-core items resulted in a loss of $0.03 per share for the first quarter 2005, and earnings of $0.22 per share in the first quarter of 2004. Taking each of these components individually, MEHC's results from discontinued operations were $0.02 per share in the first quarter compared to $0.14 last year. The earnings in 2005 include the impact of EME's sale of the CBK and Tri-Energy project. Both sold during the first quarter of this year. Earnings from discontinued operations in the first quarter of last year were $0.14 per share and reflect the operating results of the international projects that were held for sale.

MEHC had a $0.05 charge related to the early extinguishment of debt in the first quarter. That's the take-out of the MEHC term loan, 285 million, and the EME monthly income Preferred Stock at 150 million. In the first quarter of 2005, 2004 EME recorded a net gain of $0.08 from the sale of the Four Star Oil & Gas and Brooklyn Navy Yard projects. Excluding these items, MEHC's core earnings were $0.13 per share for the first quarter of 2005 compared to a loss of $0.20 for the same period in 2004. Almost half of this increase, $0.15, was due to higher generation and higher energy prices at Midwest Generation. Midwest Generation is now 100% merchant as the last of its contracts with Exxon (ph) rolled off at the end of last year.

Also contributing to the increase were higher results from our Homer City plant, $0.04. It suffered from an unplanned outage in the first quarter of last year so its generation levels were higher this year. Higher trading income at EMMP, our marketing and trading arm, of $0.04; higher energy prices related to our big four projects in California, $0.02; tax benefits of $0.02; and net lower corporate interest costs resulting from the BV sale at the end of last year, also contributing $0.02. Lastly, with regard to the holding company, it was up $0.0,1 primarily from lower interest expense which was partially offset by higher taxes.

Now, let me now turn to an update of the tool kit information we have been providing quarterly with respect to our merchant generation. This information is provided to assist users in understanding potential earnings volatility related to energy price changes only, and does not include many other factors that can affect our earnings. Other factors are discussed in detail in our 10-K and 10-Q, and this information is provided as an aid and is not intended to be or to be used as earnings guidance. We do not plan to update this information any more frequently than quarterly. Now, we have this -- this should be on your web site, so what we have done is provided really as a basis the hedge volumes and unhedged volumes reflected in our 2005 earnings guidance and then we have updated that for our actual quarterly performance in the first quarter and then balance of year. So, first, at Midwest Generation, we generated 8.4 terawatt hours during the first quarter of this year. Our average realized price per megawatt hour was $38.94. For the remainder of 2005 we have hedged 12.6 terawatt hours, that's 49% of the remaining balance of the volumes to be -- expected to be generated.

The Illinois hub flat price for the hedge volumes is $35.22 a megawatt hour. And the flat price for the unhedged volumes at March 31, 2005 is $40.70 per megawatt hour. In terms of sensitivity, as we look at it today going forward, for every $1 per megawatt hour move in price, our earnings are impacted by $8 million.

For Homer City, we generated three and a half terawatt hours during the first quarter. Of this amount, -- for the first quarter of this year, our average realized price per megawatt hour was $43.78. For the remainder of 2005, we have hedged 6.8 terawatt hours, that's 65% of our expected balance of the year volumes. PJM west flat price at 331 for the hedge volumes, 45.28 per megawatt hour, and west hub flat price for the unhedged volumes for the remainder of the year is 51.93 per Megawatt hour. In terms of sensitivity, for every $1 per megawatt move in price, the earnings could be impacted by $2 million.

Let me also now provide an update on MEHC's cash position. At March 31, 2005, MEHC had on a consolidated basis, cash and cash equivalence of just under $2 billion. Of the consolidated cash, EME had corporate cash and cash equivalence of $1.6 billion. The difference between the two is roughly the cash that is held down in the Midwest Gen and at Homer City. In addition to the cash we have on hand, to support liquidity, we currently have in total 600 million lines of credit available to support our working capital requirements, 100 million of that is at the EME level and 500 million is at the Midwest Generation level.

Subsequent to the end of the quarter, EME paid down $300 million of the Midwest Gen term loan. And we've reduced that balance now to $343 million. Now turning to 2005 earnings guidance, last October the Company provided earnings guidance for 2005 of $2.20 per share. This guidance is no longer current because of some specific events that I will cover in more detail in a moment. We will not update our guidance until after the important summer generating season, however, we can say that the outlook for 2005 is higher than our previous guidance.

First, with regard to the specific items. At MEHC, the bulk of its earnings come from our merchant coal fleet, and although we have sold forward a little over half of our expected annual production for Midwest Generation and Homer City, that still leaves about 16 terawatt hours subject to short-term price changes. As you you will remember, when we provided our earnings guidance last October, we used the September 30, 2004 forwards for the 2005 calendar strip as the basis for our outlook. Since prices are change continuously, and are now higher, and given the large amount of unhedged merchant position, it makes any earnings guidance for MEHC out of date pretty quickly. As we have done in the half past, we will keep you informed of our hedge megawatts on a quarterly basis, and, of course, on any other significant developments. And there are two that I'd like to report on.

One, in the first quarter, we reached a settlement of the Lakeland termination claim, which was the subject of an AK filed in early April. The settlement will produce a one-time earnings and cash benefit for the Company. We expect the Lakeland settlement will reduce -- will result in gain of about $90 million overall. That's $0.28 per share, with about 25 million, or $0.08 per share of that gain recorded during the second quarter. The timing of the remaining amount depends on obtaining a final determination of taxes from the UK tax authority, which could occur later this year or in 2006.

Next with regard to Edison Capital, valuations of its investment in the emerging Europe infrastructure fund have increased significantly since last October, as reflected in the first quarter earnings. We record our share of income from our investment infrastructure funds on a quarterly basis and income will vary, based on the fair value of the funds investments as they are refreshed. During the second quarter, we expect Edison Capital will record a gain of about $0.06, again from the emerging infrastructure fund. As a result of Votaphone's agreement to purchase an eastern European wireless company, in which the fund holds an interest. These changes, and a change regarding the capitalization of Edison Capital, will represent about a $0.21 increase in EPS above the $0.08 projected in the October guidance.

However, let me caution you due to the changes, potential changes in the fair value of the global infrastructure funds as they are valued quarterly, this number may vary. So in closing, our overall outlook for Edison International, on a consolidated basis, is positive in relation to our October guidance and, again, we'll provide specific guidance sometime after the summer. With that we're ready to take questions.

Ladies and gentlemen, we'll be taking questions at this time. [Operator Instructions.] Our first question is from Ryan Watson with Stanfield Capital. Go ahead, please.

Hi, I just wanted to get a little bit of clarification on the supplementary materials. Just take Midwest Gen, the 2005 earnings guidance, unhedged, or hedged, was 4.7 terawatt hours. Then you say the balance of the year you're going to have 12.6 terawatt hours hedged. What is going on? Can you explain that a little bit to me? Why the hedged amount for the balance of the year is so much higher than what your earnings guidance was? Am I reading that correctly?

Well, because we continued to hedge our forward sales, post the period of time that we gave the guidance

So the guidance wasn't that you're only going to hedge 4.7 terawatt hours the whole year?

No, that was what we had hedged at that point in time.

Okay. And in terms of the first quarter, what was open and what was unhedged? What was hedged and what was open during Q1 of the 8.4?

Yeah, I think it's pretty similar.

Okay. And same thing with Homer City, then?

Yes.

And the Lakeland, what is the cash benefit on that, please?

It's about $100 million in total.

Okay. And who does that -- whose coffers does that go to? Does that go to EME's?

It goes to EME

Okay. And is there any cash being held at MEHC?

No.

Okay. Thank you.

Our next question is from Paul Segal with Luminous Management. Go ahead, please.

Morning.

Good morning.

I have a question about what you're seeing in the Midwest market, specifically are you seeing this change in pricing between the end of last year and today primarily driven by changes in gas prices, and are you seeing your plants run any more off peak and are gas prices, on the margin, progressively more off peak in that market, or are you seeing that essentially as status quo?

Well, we are seeing higher off peak prices in the market. Could be a function this is a period of time in the year where many plants are out for maintenance prior to the summer season, so that can change the mix as to what types of plants are on the margin off peak. Also, our really higher costs, SO2 emission costs can be driving off-peak prices. So we are -- I mean, we're pleased to see that, for sure, and we hope that that would continue forward through the year and certainly the forward prices off-peak seem to be staying very firm for us.

Is that changing the capacity factor on your plants at all?

Yeah, they're up a little bit. The load factors are pretty strong. Again, these shoulder months where you have many units off for the pre-summer outage season makes it difficult to kind of derive any conclusions just from a single month.

Sure. Well, thanks, guys. Good quarter.

Thank you.

Our next question is from Kit con know way from Morgan Stanley. Go ahead, please.

Good morning.

Good morning, Kent.

So let me try and drill down a little more on the hedging and unhedging. First of all, given that prices for the unhedged are substantially above the hedged, I guess, you know, not to be overly simplistic about it, but why don't you just hedge them?

Well,

Am I reading this right? Unhedged 40, hedged 35, so the reason I wouldn't want to take the 40 was?

Well, really, there are two factors: One, if you take a look at the amount that we've hedged at Homer City, when we get to the 65% level, that is, you know, essentially at our hedge target.

Okay.

We need to keep units available to deal with outages and our ability to cover our position in the marketplace.

So in both regions, 65% is -- plus or minus -- is your maximum targeted hedge level?

Kent, we out to jump in and say we really have a policy of not commenting prospectively on our intentions to hedge, so we've had very general statements about preferring to hedge a portion of the forward position so that there is less volatility, and I think we probably ought to leave it there.

Does that mean the 65% is off the table now?

Well, I just say, let us stand on the statements we've made in the past. We think it's important, as a proprietary matter, that we not say a lot more specifically about what we are doing or may do in the market with respect to hedging.

Okay. So, but -- which obviously makes it very difficult for us to get a clear view of where you might end up by the end of the year.

What Tom indicated is we'll give you an update at the end of each quarter on the hedging done in that quarter, and we've generally set out our position as one in which we will look to hedge in order to reduce earnings volatility and we I think that's probably about as far as we ought to go.

Well, let me -- hopefully this won't be -- this is another direction not going further, but when prices in the open market rise significantly, as they've been doing, does that --

we'll say that's good for the business.

That's good for the business, but does that tempt you to hedge more? It seems to me a lot of people will say, well, you know, as it gets higher, you know, our point of view on upside/downside from that price would suggest to us that we want to lock in more as the prices rise

We're just going to get into, you know, deeper water if we try to give you any specifics around that. We have a general strategy, as expressed, of being, call it on the conservative side, and hedging where we appropriately can. As Tom underscored, we don't hedge everything because we don't want to be in a position where there's any possibility that if any of our generation were down, we'd have to cover positions beyond what our plants can physically deliver and we really ought to stop there.

Fair enough. Well, let me ask one other hedging question, but this may be more philosophical, or whatever. How about -- I think that you have indicated in the past or -- but this is, you know, just me from memory, that you basically hedge no more than kind of rolling 12 months forward. Is that an accurate perception or not?

I think that's generally accurate at this point in time, and we are looking at 2006 right now and we will report on that position at the end of the second quarter.

Great. Okay. Thank you.

Kent, this is Jim Scilacci. Just as an additional piece on that, hedging is a function of liquidity, and one step we took during the quarter that we disclosed in our financials today, that we augmented our liquidity facilities at Midwest Gen. We added an additional line of credit there, and so I think Tom mentioned that we have $600 million liquidity available to us, among the companies, to allow additional hedging; and support the hedging

Great. Okay, thank you.

Our next question is from Brian Tadaya (ph) with Bank of New York. Go ahead, please

Good morning. Just a couple quick things. First, can you just give us an update with regard to the amount of cash and, within MEHC, what the plans for that are at this point? Any additional color with regard to debt buy backs or anything of that nature?

Well, what we said previously is that, you know, as we look at the most effective utilization of our cash position, there are three areas that we are continuing to evaluate. One, is further debt reductions. Two, is the collateral required to support longer term contracting, and then, three, would be potential new generation investment, and so we are continuing to evaluate the options surrounding those three areas.

Now, the option number two that you just talked about having a lot of LC capacity to take care of those, are you leaning towards one or three in any greater proportion at this point?

I really can't comment on that.

Okay. Second, can you give us an update with regard to what's going on with the fuel situation, the coal fuel situation at Homer City? I believe there's some issues with coal supply there.

Yeah, let me have Ted Craver cover that.

Hi, Brian, how are you?

Good, how are you doing?

Good. We've mentioned this actually back in October when we were in in New York. We have some, as they referred to it, geological challenges with a couple of our mines and that's still a situation we're continuing to work through. So we do have some constraint on the amount of coal deliveries from one of our contracts, in particular.

Have those been backfilled with new contracts for the remainder of this year and do you have an idea what additional costs that might be?

Yeah, it's something that we're actually still right in the middle of discussions with the owners of the mines so, at this point , I really don't have a lot more I can report on it, but -- and there's some increased production coming from some other contracts. There's some spot market purchases, but at this point we really don't have the situation resolved.

Okay. And finally, just one question on the Midwest asset. It seems, obviously, revenues went up quite a bit, but it seems like the fuel costs went down I was just curious given the higher price of coal that we've seen, what was the driver of the lower fuel costs year-over-year?

I can take that. A year ago, we still had the Collins Station and ran the Collins Station in Q1 of 2004 and since then it's been decommissioned.

Okay. Thank you very much.

There are no further questions waiting at this time.

Okay. All right. Well, we thank you all of you for your interests and we invite you to call our investor relations team in the event you do have further questions. Thanks very much.