Plant Operator to Power Back Down to Utility?

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Twenty-five years ago, Rosemead-based Southern California Edison launched an ambitious effort to turn itself into a global energy player to take advantage of deregulated energy markets. It formed parent company Edison International and a host of subsidiaries to operate electric power plants across the United States and overseas.

Today, that effort has largely been abandoned and Edison could soon return completely to its roots as an electric utility. All that remains is a single subsidiary, Santa Ana-based Edison Mission Group, and that unit is barely hanging on in the face of depressed power prices that have turned many of its coal-fueled power plants into money-losers.

Late last month, Edison announced more than $1 billion in write-downs as it shut down two Chicago-area coal plants and backed out of its investment in a Pennsylvania coal plant.

In an earnings conference call with analysts, Edison Chairman-Chief Executive Theodore Craver hinted at the prospect of more divestitures and possible capital restructuring if power prices didn’t recover soon.

He also reiterated a pledge not to invest further in Edison Mission Group until financial conditions improved.

One analyst on the call said he believes the end appears near for Edison Mission Group.

“While we cannot yet declare the extinction of EMG, the transition to Edison becoming a fully regulated utility appears to be almost unavoidable,” said Hugh Wynne, senior analyst with Bernstein Research in New York, in a report. After the next round of power price auctions in mid-May in the upper Midwest and Mid-Atlantic regions, “the process of winding down EMG should begin in earnest.”

He said that turning Edison back into a completely regulated business will ultimately benefit investors.

“It is one of the fastest-growing and best-regulated utilities in the country,” said Wynne, who rates Edison stock as “market outperform.”

After news of the write-offs broke Feb. 29, Edison shares rose from about $42 to nearly $43 and traded at about that level last week.

But Craver told analysts on the Feb. 29 conference call that an unregulated subsidiary that generates and sells power outside Southern California remains part of Edison’s strategy.

Also, Edison announced that EMG had entered a joint venture with Anchorage, Alaska-based Cook Inlet Region Inc. and retirement fund TIAA-CREF that would fund and develop wind-power projects across North America. This announcement would seem to suggest that an immediate winding down of EMG is not in the cards.

With every passing month, the financial pressure on EMG increases. The chief reason: depressed natural gas prices.

When EMG purchased six coal-fired power plants in Illinois from Chicago-based Commonwealth Edison in 1999 and another coal-fired power plant in Homer City, Pa., power market deregulation was in full swing across the country and generation companies were racing to snap up power plants that they hoped would yield profits for decades to come. Coal-fired power plants were in particular demand because natural gas prices had reached record highs.

Then came the shale oil and gas boom, which injected huge amounts of natural gas into the market and pushed gas prices to 30- and 40-year lows. Power plants running on natural gas became much cheaper to operate and power prices started falling. Then in late 2008, overall energy demand plunged as the economy contracted, pushing power prices down even further. EMG’s coal-fired plants, with their fixed maintenance and coal delivery costs, went into the red.

“What no one could have anticipated is the sustained downturn in power prices over the past three years,” EMG spokesman Douglas McFarlan said.

In addition, state and federal regulators began cracking down on older coal-fired power plants, requiring ever more extensive retrofits and upgrades to reduce pollution.

McFarlan said that, because of depressed power prices, one EMG plant in Waukegan, Ill., likely won’t be able to meet a 2014 deadline for the work.

Also, when he took office last year, Chicago Mayor Rahm Emanuel ordered talks on the shutdown of EMG’s two coal-fired plants in Chicago. EMG’s operating unit, Midwest Generation, agreed last month to close these two plants over the next two years.

As a result of these developments, Edison announced Feb. 29 that it was taking an impairment charge of $386 million after taxes on these three plants, essentially writing off the value of the plants.

In Homer City, the EMG coal plant faces up to $750 million in environmental retrofit costs. EMG had sought outside investment to help pay for the upgrades, but no investors emerged. EMG announced it was transferring the plant to the owner, GE Capital, when it could no longer carry the operation costs. That move resulted in a write-off of $632 million after taxes.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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