Blaming high fuel costs affecting coal-fired facilities and depressed energy capacity prices, Edison International's (EIX) power generation arm, Edison Mission Energy (EME), has filed for Chapter 11 bankruptcy protection, reporting $5.13 billion in assets against $5.1 billion in debt.
Or, more specifically, Edison blames the cost of complying with environmental regulations in combination with pending debt maturities.
But the main point here is that coal can't compete on the new energy market.
Chicago's Midwest Generation, a subsidiary of Edison, was also included in the bankruptcy filing.
For the Chicago subsidiary, it's all about coal. In September, the company closed down two coal-fired plants under pressure from environmental concerns. But it was in trouble before then. The first three quarters of 2012 saw Midwest Generation operate at a $160 million loss (this is after it managed $91 in income in the same period for 2011). Its four other coal-fired plants will continue to operate-for now.
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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, according to a Fitch statement.
Edison Mission is late on a $97 million interest payment on bonds, which were due in November. After filing for bankruptcy, the company hopes to restructure itself separate from Edison International. According to Fitch, "EME has been in discussions with creditors for much of 2012 in an effort to restructure an unsustainable, highly leveraged capital structure."
But will it be able to reduce debt and improve liquidity in an energy market that is increasingly dominated by cheap natural gas and a growing penchant for renewables?
Overall, Fitch's 7 December report on utilities for 2013 says the outlook for competitive generators is negative.
New ownership of the Chicago coal plants may not end up being their saving grace. It will be hard to turn a profit at plants that require a total of $628 million in investment just to implement new sulfur dioxide controls under new pollution control upgrades. Who will finance it?
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Betting on coal, as it turns out, wasn't smart. Cheap natural gas and energy efficiency progress are rendering the plants expensive dinosaurs. EME owes its bondholders $3.7 billion in unsecured debt. Of that, $1.2 billion in debt is attributable to Chicago's Midwest Generation and the Homer City, Pennsylvania plant.
The larger picture indeed looks bleak for coal-fired plants. Another major player, Dominion, is shutting down or trying to sell all its plants in the Midwest. They can't compete with renewable energy, nuclear energy and natural gas in the wholesale power market.
On the renewable side of the Edison equation, things are looking a bit better. The bankruptcy filing does not apply to EME's wind farm projects, as they are stand-alone business entities with long-term power purchase agreements. Unlike the coal-fired plants, these wind farms cover their costs. Edison Mission is one of the largest US wind developers and operations and boasts wind projects in 10 states. Eight of these projects are fully operational, and two in Nebraska will be operational soon.
By Charles Kennedy for Oilprice.com
Charles is a writer for Oilprice.com More
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