Edison International and its financially recovering utility said last week that it expects even more of a heavy infusion of cash, and its hedges against future natural gas price volatility will permit the utility to pay off its $5.5 billion past-due debts by the end of the first quarter next year. A court settlement with state regulators is the lynch-pin that will allow Southern California Edison for the first time in a year to return to the debt market to supplement what it expects to be $4 billion in cash on hand by early next year.

Edison officials laid out their plans as part of a conference call with financial analysts last week, during which the parent company’s Senior Vice President and CFO, Ted Craver, said the utility recently completed all of its natural gas call options, so it has hedged utility gas prices for 2002 and 2003 at the California-Arizona Topock receiving point, which last winter was the site of wildly high wholesale gas prices that contributed to the state’s electricity crisis.

On top of net cash resources of about $2.75 billion now, Craver said, Edison expects to have an additional $1.25 billion in cash by early next year when it will begin putting together bridge financing and re-issuing about $550 million of pollution control bonds, all geared to pay off the $5.5 billion owed creditors and banks, including the merchant power producers. He said the bridge loan could be in the range of slightly less than $1 billion to $1.4 billion.

“We project generating significant cash over the next three years at Edison International,” Craver said. “Most of it will be used to pay our creditors, clear defaults, meet repayment obligations, and meet existing investment needs for Edison Capital financing. Apart from all of those needs, we expect to generate a little less than $2 billion in free cash flow over the next three years. That is cash from operations after all debt is paid and with no new corporate debt issued.”

The extra cash in future years would be used to retire expensive debt, of which there is a lot that Edison has had to take on in the past 12 months, and to fund new growth. Craver noted that this optimistic forecast is highly dependent on a number of state judicial and regulatory hurdles being cleared. Banks have extended their forbearance until March 29 next year on the assumption that “all creditors will be treated equally” and the payoffs will be completed before that deadline in March.

Craver said Edison still would like to reach settlements with many of the merchant power producers and deduct those settlements from the amounts now outstanding, thus, reducing the total of bridge financing that will be required.

Increasing stability in the wholesale gas and electricity markets will dampen earnings expected next year from Edison’s power plant developer/operator, Edison Mission Energy, but will also add to lower operating costs, and thus, greater cash flows from the utility operations, which are returning to more traditional cost-of-service, rate base regulation. The Edison utility rate base is about $9 billion, with an 11.6% authorized rate of return that remains in place through 2004 under the court settlement with the California Public Utilities Commission.

“In general, we have a more modest outlook in 2002 than we had in 2001 (for nonutility operations) based on lower expected gas and electricity costs,” Craver said. “In a lot of our markets, the price we will enjoy for electricity is really being set at the margin by natural gas. So we have gas prices coming down in 2002, compared to 2001 when they were quite high.”

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