Further deteriorating power prices fueled by record low natural gas charges, combined with stiffer air quality rules, have put Edison International’s (EI) already shaky independent power business, Edison Mission Group (EMG), on the brink of sell-offs, divestitures or a restructuring, EI CEO Ted Craver told an earnings conference call Wednesday in which he reported heavy red ink at EMG.

Despite EI’s principal subsidiary, Southern California Edison Co. (SCE), reporting strong earnings growth for 4Q2011 and the full year, the Rosemead, CA-based parent company reported net losses for both periods (a loss of $839 million, or minus $2.57/share, in the quarter, and a loss of $37 million, or minus 11 cents/share, for all of 2011). In contrast, SCE’s results for the two respective periods were profits of $247 million and $1.09 billion.

The losses stem primarily from impairment charges EI had to take for EMG coal-fired generation in Pennsylvania (Homer City) and three other plants in its Midwest Generation unit. All of the red ink was driven by what Craver called “lower energy prices, capacity prices and generation.”

Even though he made it clear EMG and many of its assets face an uncertain future, Craver nevertheless said EI still believes it needs a “platform of regulated and competitive businesses” as the best way to position the holding company for “the transformative change we believe will sweep across the electric power industry.”

While EI has been trying through various measures to better position EMG to take advantage of a recovering power market, power prices have not only stubbornly resisted improvement, they have “deteriorated markedly” just in the last few months, said Craver, further raising the risks for EMG, particularly its large, baseload coal-fired units that face economic decisions on whether to invest in hundreds of millions of dollars of emissions control equipment.

Categorizing EMG’s overall condition as “stressed,” Craver said efforts to stabilize the once profitable EI independent generation unit continue, concentrating on cost-effectively meeting the stricter environmental requirements, reducing its unsecured debt, and diversifying its generation portfolio with additional natural gas-fired and renewable generation.

The key driver is depressed energy prices. If they stay down or increase only minutely, it is unlikely that some of the EMG plants can generate enough cash flow to stay in business and economically add the emissions control equipment needed to meet stiffer future air quality standards, Craver said.

“Current conditions [low gas and power prices], coupled with continuing debt maturities and retrofit investments, will strain EMG’s liquidity such that it may need to divest assets, and restructure or reorganize it capital structure to get through this period and determine that an option value is indeed there,” said Craver, while reiterating what he has been saying for a number of earnings calls, namely, that Edison International will not invest any more in EMG without a “clear and compelling path to a return of (and on) any investment.”

He acknowledged that EMG’s financial condition was deteriorating and it had to on its own “maintain financial discipline.” In Wednesday’s year-end 2011 earnings report, EMG reported 4Q2011 losses for impairment at Homer City and the three Midwest Generation plants of slightly more than $1 billion and contributed to the full-year 2011 loss for the parent company even with SCE showing more than $1 billion in profits.

The $623 million impairment charge for Homer City was reflective of the fact that it was not able to attract the financing it needed to complete the emissions control retrofits it needs, so EMG is turning the plant back to its owner/lessors, subject to their discussions with their bondholders, Craver said. And that is also the situation with at least two of the three Midwest plants for which EI took a $386 million impairment charge in 4Q2011, so one of the plants will cease operations the end of this year and another at the end of 2014 based on current economic analyses. The third plant, Waukegan, is still being assessed as to whether it can be retrofitted, Craver said.

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