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Gas Prices, Carbon Constraints Hurt Edison Mission

Depressed wholesale natural gas and power prices, along with the prospects for curbing emissions to meet anticipated future carbon constraints, combined to drive down earnings in the fourth quarter for Edison International's independent energy unit, Edison Mission Group (EMG), the parent company reported Monday as part of a conference call on its year-end 2008 earnings, which were up 4% over the previous year. Prospects for EMG this year are not much better, according to Edison CEO Ted Craver, speaking to analysts.

"Gas prices have, indeed, fallen sharply and EMG was affected by several other commodity prices as well," Craver said. "The current volatility in commodities makes the job of predicting market sensitivities even more difficult."

In looking at 2009, coal-fired generation plants, which comprise the largest component of EMG earnings, face lower expected earnings. It can be explained in the context of lower natural gas and power prices, along with increased in environmental compliance costs, collectively reducing the margins of the coal plants, Craver said. "Additionally, we have a decline in earnings from the Big Four projects as long-term contracts with Exelon expire."

As a result, even without any formal earnings guidance yet for this year, Craver said EMG earnings are predicted to be a fraction of what they have been the past two years (in the 50-90 cents/share range in 2009, compared with $1.72/share for the past two years).

"It might be an oversimplification, but the drop in expected earnings per share is commensurate with the move in natural gas prices from a total of about $8.55 [per Mcf] to the current price of about $4," Craver said. "It is clearly the most important variable in explaining the lower earnings from EMG."

Since it was restructured during the last downturn (2002-2003), EMG has become much more sensitive to downturns in the commodity price cycle because it no longer has its international power projects and the expiration of the transition contracts it had with Exelon for Midwestern (mostly coal) generation plants that it bought from the Chicago-based utility. It is more of a coal-fired generation operator, which the Edison unit is working to diversify away from in the years ahead.

"We're concentrating broadly on developing more renewable projects and selectively on some gas-fired plants," Craver said. "Earnings from the coal portfolio were increasing significantly as margins expanded with the commodity prices, but earnings are decreasing now as long-term contracts expire and are recontracted at much lower prices."

Craver said the energy unit's trading operations and its expanding portfolio of new wind projects "have more than offset the losses from coal."

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