Subject: Wall Street's Opinions on Transmission Deal in CA
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked]
Date: Tue, 27 Feb 2001 00:21:00 -0800 (PST)

I am forwarding some Wall Street comments from Kathryn Corbally related to 
the Transmission buyout.  

Looks like they view it as very favorable - not a major hit against EPS tied 
to full recovery of remaining undercollection.  

Not sure yet if they incorporate the going forward - maybe SCE doesn't want 
any merchant obligations?

Jim

----- Forwarded by James D Steffes/NA/Enron on 02/27/2001 08:18 AM -----

	Kathryn Corbally
	02/26/2001 04:47 PM
		 
		 To: James D Steffes/NA/Enron@Enron
		 cc: 
		 Subject: CaliforniA

Jim, Have sent you three notes that show some level of support to activity in 
California  
- its probably a little bias since there are a few reports out there that say 
quote the 'devil is in the details' and quote 
'the odds of bankruptcty remain in the 50% range.' 

Note1
09:42am EST 26-Feb-01 ABN AMRO Inc. (Ford,Daniel F. 212/258-1548) CPN DYN EIX 
One Down Two to Go

One Down Two to Go
ABN AMRO -- Research Notes
Subject: Power
Companies Mentioned: CPN, DYN#, EIX, PCG, SRE

Analyst:  Daniel F. Ford, CFA  212/258-1548
          Po Cheng, CFA  212/258-1709
==============================================================================
=
Date:     February 26, 2001
------------------------------------------------------------------------------
-
Highlights:
-  On Friday (2/23), Governor Davis triumphantly announced that the State of 
   California and Edison International had reached an agreement in principle 
   for the sale of its electric transmission system as part of a financial 
   recovery package. He also commented that "good progress" was made with 
   Sempra Energy and "some progress" with PG&E Corp.
-  The preliminary terms of the agreement call for the State to buy Edison's 
   transmission system for approximately $2.76 billion (2.3x estimated book 
   value) and allow for the securitization of "a substantial portion of its 
   undercollection".
-  In exchange, Edison would: 1) make payments of approximately $420 million 
   to its utility subsidiary, Southern California Edison; 2) commit the 
entire 
   output of an Edison Mission project at cost-based rates for 10 years; 3) 
   provide cost-based rates from native generation for another 10 years; 4) 
   give conservation easements on 20,000 acreas of watershed lands for 99 
   years; and 5) drop a pending lawsuit against the California Public 
   Utilities Commission.
-  We view this agreement as a positive development. Based on the 2.3x 
   purchase price, the EPS hit from the loss of the transmission lines would 
   be approximately $0.10 lower than our worst case estimate (at 1.5x) of 
   $1.90 . The agreement, however, is not final and additional details need 
to 
   be worked out before being submitted to the legislature.
-  Events to watch over the next couple of weeks include: 1) a definitive 
   agreement with Edison; 2) deals with PG&E Corp. and Sempra Energy; 3) a 
   package that the legislature can accept (which could include concessions 
   from generators); and 4) terms that are acceptable by the FERC.
-  In our opinion, the proposed deal is reasonable for EIX shareholders and 
   renews the hope for a resolution to the crisis. While our optimism is 
   tempered by the shortening timeframe, we are encouraged by the governor's 
   recent statements, which have been more positive than negative. As such, 
we 
   maintain our Buy ratings on Edison International and PG&E Corp as well as 
   on the generation companies: Calpine and Dynegy.

Other News:
In other related news, on Friday (2/23) Edison announced that all of its banks
have agreed to extend their forbearance until March 14.

Note 2 

05:16pm EST 26-Feb-01 Goldman Sachs (NEWYORK) EIX PCG ACTION 
EIX agrees to deal in principle with Gov Davis.PCG still negotiating.Buy 
EIX...

                 Goldman, Sachs & Co. Investment Research

EIX agrees to deal in principle with Gov Davis.PCG still negotiating.Buy EI

    

*  On February 23, EIX and Governor Davis reached an agreement in principal
   in which the state would agree to buy the transmission grid and allow
   for recovery of a 'substantial portion' of unrecovered cost in return
   for EIX refunding money from its parent to the utility and dropping
   pending litigation.  This settlement appears to be a  reasonable 'shared
   pain' scenario and is consistent with the 'buyout vs. bailout'
   structure we have been anticipating. To be enacted the deal needs to be
   finalized and approved by the EIX board and the California Legislature.
   FERC also must approve the asset sale.
*  EIX agreed to sell a portion of its electric transmission system to the
   state of California for $2.76 billion and transfer $420 million cash to
   its utility subsidiary from the parent.  In return, the state would
   allow EIX to recover a substantial portion of its under-collected power
   costs and drop pending litigation in which the company is pursuing rate
   hikes.  If approved by the EIX board and California legislature this
   agreement, in concert with passage of ABX1-1, would eliminate the
   overhang that has depressed EIX shares.
*  Although dependent on several factors, we believe the net impact on
   earnings from the settlement will not be as high as the current EIX
   stock price implies.  We believe post-settlement EPS in 2002 will likely
   total at least $2.00/share, which supports a conservative valuation of
   $20 share (10X '02 EPS, a 20% valuation discount to the peer group).
*  Also late last week, PCG issued a press release indicating they had met
   with the Governor, had submitted proposals, and discussions were
   ongoing.  With the framework already established for EIX, we expect a
   PCG settlement could be announced in the near future. PCG's negotiating
   flexibility is limited relative to EIX because their generation rates
   are lower, their under-recovered balance is higher, and the potential
   cash 'refund' from parent to subsidiary being requested by the
   government is probably larger.
*  PCG's transmission system has a book value of roughly $1.5 billion.  At
   2.3X book value, these assets could potentially be worth $3.5 billion.
   Assuming a parent company to utility cash transfer proportional to the
   one proposed for EIX, we estimate PCG would refund $780 million. PCG's
   stock price also reflects an earnings impact more punitive than implied
   by a settlement of this nature. We believe a deal like this would
   support post-settlement EPS of at least $2.50/share which supports a
   conservative valuation of $25/share (10X '02 eps, a 20% valuation
   discount to the peer group).
*  Because EIX has a 'deal in principle' the stock is trading at a premium
   to PCG despite having lower potential 2002 earnings power. Those
   investors who believe PCG will strike a deal that is similar in
   structure and proportional to EIX's settlement should purchase PCG over
   EIX at this juncture.

NOTE 3

09:17am EST 26-Feb-01 Merrill Lynch (S.Fleishman (1) 212 449-0926) EIX PCG 
UTILITIES-ELECTRIC:California: One Goes Forward, But Need All Three

    ML++ML++ML     Merrill Lynch Global Securities Research     ML++ML++ML
                             UTILITIES - ELECTRIC 
                California: One Goes Forward, But Need All Three
                      Steven I. Fleishman (1) 212 449-0926
Reason for Report:  Governor reaches preliminary agreement with Edison; PG&E 
up
in the air; Need all 3 utilities to move forward

Investment Highlights:
o    On Friday, Governor Davis announced a preliminary agreement with Edison
International (EIX; D-2-2-9; $14.69) on a financial resuscitation plan.  The
plan follows the basic framework previously outlined by the Governor.

o    The state will purchase Edison's transmission assets for $2.76B, or 2.3x
book value.  This would help pay off some of Edison's net $4.1B of
undercollections (a number agreed upon with the Gov.)  The remainder will be
recovered through a bond financing tied to a dedicated rate component to be
carved-out of Edison's rates.

o    In exchange, Edison will agree to: 1) Drop the lawsuit against the PUC, 
2)
Invest $420M back into the utility from the parent, representing tax
overcollections , and 3) Sell power from its hydro and nuclear assets at cost-
based rates for the next 10 years.  Edison also agreed to sell power from its
unregulated Sunrise plant, currently under construction, at cost-based rates
for 10 years.

o    A number of uncertainties remain in Edison's deal, and it is still
preliminary.  The exact terms and language will be very important, 
particularly
given the need to issue securitization bonds.  It is impossible to provide
exact earnings guidance based on this deal, but the only loss of earnings 
power
would appear to come from lost transmission earnings (-$0.20-$0.25/share) and
potentially lower generation earnings depending on the terms of cost-based
rates.

o    This is a significant step forward for Edison and the resolution of the 
CA
power credit crisis.  However, it could be for naught if the other utilities
cannot work out deals.  We believe Sempra Energy (SRE; B-2-1-7; $22.10) is
relatively close, but PG&E's (PCG; D-2-2-9, $13.70) talks were flailing last
week.  We continue to see little chance that this plan can move forward and
pass through the legislature unless all the utilities are on board.

o    We believe PG&E is willing to work a deal within this framework.  
However,
the simple problem is that PCG's undercollection numbers are much bigger.  At
YE 2000, PCG's net undercollection was more than $5B and we believe this may
have reached $7B by the end of January.  Selling the transmission for 2.3x 
book
would provide only $3.5B, leaving the other half to be recovered though the
dedicated rate component/securitization.  It may be that the only way the
numbers can work is with a rate increase.

Despite the significant hurdles that remain, we believe the momentum toward a
constructive outcome is improving.  To that end, we maintain our Accumulate
ratings on EIX and PCG for high rate accounts.