San Onofre outage, looming EME bankruptcy hurt Edison

The Edison International (NYSE: EIX) quarterly earnings call on Nov. 1 focused on the ongoing outage at its California nuclear complex and the chance that its competitive generator, Edison Mission Energy (EME), could file for Chapter 11 protection soon.

The parent company has been acutely aware that the competitive generation sector has been deeply challenged for some time by cyclically low margins and capacity values, said Edison International Chairman and CEO Ted Craver. For the past few years, EME has tried to buy time for a recovery in power markets.

“But despite great efforts and many successes by EME, the adverse power market trends have persisted, and EME’s operating losses this year have increased significantly, and are expected to continue,” Craver said. “At the same time, EME has a capital structure and financial leverage created in better times that is no longer workable under current and foreseeable conditions.”

Under current projections, EME will not be able to repay the June 2013 bond maturity of $500m. There is also no assurance that EME will pay the $97m interest due on its bonds on Nov. 15 or during the 30-day grace period that follows, the CEO said.

EME earnings would be included in Edison International’s earnings up until a bankruptcy filing, together with any charges related to deconsolidation.

San Onofre faces NRC review, CPUC investigation

Southern California Edison (SCE) efforts to resume operation of at least one of the two San Onofre Nuclear Generating Station (SONGS) units mark the other large item on the Edison agenda.

During the quarter, SCE formally submitted its response to the Nuclear Regulatory Commission confirmatory action letter (CAL) and requested NRC approval to restart Unit 2 at reduced power for several months.

Both 1,000-MW-plus units have been offline since January when a radiation leak occurred and unusual tube wear was discovered at relatively new steam generators.

SCE wants to run San Onofre 2 at 70% power for five months with a follow-up outage and inspection to check on the tubes. There is no assurance that NRC will approve the restart and NRC has indicated its review could take months.

“Unit 2 did not experience anything near the level of tube‐to‐tube wear found in Unit 3, even though it operated twice as long as Unit 3, and consequently is in a condition that it can be restarted earlier,” Craver said.

“It’s not clear at this time if the units can be repaired,” Craver said, adding that complete replacement could take years.

Unit 3 will not restart this year. The California Public Utilities Commission (CPUC) has decided to conduct a formal investigation into the SONGS outage and requested rate recovery.

SCE is on track to spend $5bn in capital expenditure in 2012 compared to $3.9bn in 2011. SCE will make a San Onofre-related filing with CPUC on Nov. 24.

In October, SONGS filed separate “proofs of loss” for Unit 2 and Unit 3 with its insurer, Nuclear Electric Insurance Limited, under NEIL outage policy.

Edison reported third quarter 2012 basic earnings of $0.58 per share, compared to basic earnings of $1.31 per share in the same quarter last year. Third quarter 2012 core earnings were $0.72 per share, compared to core earnings of $1.26 per share in the third quarter of 2011.

The decrease in earnings was primarily related to losses at Edison Mission Group (EMG) and to a delay in the CPUC final decision on SCE’s 2012 General Rate Case.

“SCE’s third quarter results reflect the delay in receiving a final rate case decision from California regulators, as well as severance and continued inspection and repair costs related to the San Onofre Nuclear Generating Station,” said Craver.

Issues reflected in earnings numbers

SCE’s third quarter 2012 basic and core earnings were $1.11 per share compared to $1.25 per share in the third quarter of 2011. The core earnings decrease was primarily due to a delay in the 2012 General Rate Case decision as higher depreciation and interest expenses are not being recovered in currently authorized revenue, and to higher costs at SONGS.

These include $(0.09) per share of incremental steam generator inspection and repair costs and $(0.06) per share in severance costs, which are both included in core earnings. These costs were partially offset by other operating and maintenance cost reductions. The General Rate Case revenue requirement ultimately adopted by the CPUC will be retroactive to Jan. 1, 2012.

EMG’s third quarter 2012 basic losses were $(0.42) per share compared to earnings of $0.10 per share in the third quarter of 2011.

Third quarter losses increased primarily due to lower average realized energy and capacity prices, reduced generation, and higher fuel prices partially offset by lower planned maintenance costs and depreciation at Midwest Generation, decreased earnings from natural gas-fired projects, and lower income tax benefits. Non-core items for both quarters included the results for Homer City, which were classified as discontinued operations beginning in the third quarter of 2012. Homer City losses from discontinued operations during the third quarter of 2012 were $(0.24) per share, including an impairment charge of $(0.21) per share, compared to earnings of $0.05 per share in the prior-year period.

Edison Mission Energy gets 59% of its generation from coal, 17% from natural gas, and 22% from wind.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.