Cheap power may be good for businesses trying to cut costs, but it hasn’t been so good for Edison International.
The Rosemead energy company has been hit hard over the past year by cheap prices that utilities and other customers pay to its power generation subsidiary, Edison Mission Group. This drop in power revenue, due in large part to sliding natural gas prices, was a major factor in Edison’s weaker-than-expected year-end earnings and lower guidance for this year.
“Edison Mission Group faces weak power market fundamentals in the year ahead,” Edison Chief Executive Theodore Craver said when earnings were released late last month. “But we see positive value in the business as power market fundamentals improve.”
Edison Mission Group operates 40 power plants in 13 states, mostly in the Midwest, and lower energy costs were the biggest factor in the unexpectedly large 82 percent drop in EMG’s fourth quarter net income to 3 cents per share from 17 cents per share the year earlier.
Supplies of natural gas have increased dramatically over the last two or three years, driving down prices. Supplies rose as massive shale deposits have been tapped and the use of hydrofracking has spread. (In hydrofracking, pressurized water is injected into rock formations in order release gas.)
“The decline in natural gas prices was the major story of 2010,” James Dobson, analyst with Memphis-based Wunderlich Securities Inc., said in a utility industry overview. “Since wholesale power prices, which were already under pressure in early 2010, are driven at the margin by natural gas prices, wholesale power prices were pressured lower through 2010.”
Edison Mission Group was hit hard in the fourth quarter by the expiration of three-year contracts – known as hedges – that the subsidiary had signed with utility companies to provide power. Edison Mission spokesman Douglas McFarlan said some of those contracts were signed in 2007 when power prices were at a peak and no one expected they were coming down.
Utilities had locked in prices in anticipation of continued hikes, but that turned out to be a bad bet for them when prices went down. Edison Mission did well until the contracts began expiring and the new electricity sales yielded less money for Edison Mission.
It may get worse. McFarlan said the bulk of the contract expirations came at the end of 2010, which means that this year, replacement contracts will lead to even lower revenue for Edison Mission.
For reprint and licensing requests for this article, CLICK HERE.