Fitch: EIX Won't Suffer in EME Bankruptcy
NEW YORK -- December 18, 2012
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.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
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Applicable Criteria and Related Research:
2013 Outlook: Utilities, Power, and Gas
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