Dec 18 - Edison Mission Energy (EME) and 16 of its wholly owned subsidiaries
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on Dec. 17,
2012. Edison International (EIX) has managed EME on a stand-alone basis, and
Fitch does not expect any direct financial exposure to result from the
anticipated bankruptcy for the ultimate parent or its core electric operating
subsidiary, Southern California Edison Co.
EME has been in discussions with creditors for much of 2012 in an effort to
restructure an unsustainable, highly leveraged capital structure. The bankruptcy
filing includes an agreement with certain creditors that would result in the
termination of EIX's equity ownership of EME upon emergence from bankruptcy. In
addition, the agreement extends the tax allocation agreement between EIX and EME
through the earlier of the effective date of a plan of reorganization with
respect to EME or Dec. 31, 2014. Fitch believes that EIX is under no obligation
to utilize EME tax benefits and will do so as dictated by its tax shield
appetite. The agreement is subject to termination if the bankruptcy court does
not approve the proposed agreement by July 15, 2013.
EME and its wholly owned, predominantly coal-fired power generation subsidiary,
Midwest Generation, LLC (MWG), have seen profits evaporate and losses mount in
the face of low power prices, depressed by a surfeit of low natural gas prices,
robust reserve margins, and weak end-user demand.
EME's plants also compete in a region with an abundant supply of low-cost
nuclear power. Higher operating expenses and capital investment will be required
to meet more stringent environmental emissions requirements, although such
investment is not supported by current power prices.
Similarly, independent power companies and utility parent companies with
significant exposure to unregulated coal- and nuclear-fired generation will
likely continue to experience margin erosion as higher priced legacy hedge
positions continue to roll off. As articulated in Fitch's report "2013 Outlook:
Utilities, Power, and Gas," dated Dec. 7, 2012, the outlook for competitive
generators is negative.