(Adds comments from chief executive, background and details, including earnings at the company's merchant-generation unit).
By Cassandra Sweet
Of DOW JONES NEWSWIRES
SAN FRANCISCO -(Dow Jones)- Edison International's (EIX) third-quarter profit fell a lower-than-expected 8.2%, pressured by lower earnings at the company's troubled Midwestern coal fleet amid lower prices, weak demand and higher pollution-reduction costs.
Third-quarter earnings at Edison's merchant-generation unit, which consists largely of Chicago-area coal-fired power plants but also a growing fleet of wind farms, fell 45 cents a share, or 70%, compared to a year ago due to weak demand caused by the recession and milder weather, and lower wholesale power prices, the company said.
Shares of Edison were recently trading 2.5% higher at $32.98.
Edison reported earnings of $403 million, or $1.23 a share, down from $439 million, or $1.33, a year earlier. Excluding regulatory impacts, earnings fell to $1.09 from $1.46.
Revenue dropped 15% to $3.66 billion.
Analysts polled by Thomson Reuters had forecast earnings of $1.04 per share on $3.76 billion in sales.
The company also narrowed its 2009 earnings forecast to $2.23 to $2.45 a share, from $2.18 to $2.48 a share earlier this year. Edison will issue earnings guidance for 2010 in March.
A lawsuit brought by federal and state agencies that could result in the need to install costly pollution-control equipment, as well as pending climate-change legislation, which would require U.S. power producers to cut their carbon-dioxide emissions over time, have thrown the future of Edison's coal fleet into question, said Edison Chief Executive Ted Craver. He added that the company hasn't yet decided what type of pollution-control equipment to install at the plants and that it has yet to make crucial decisions about the plants' future.
"Those kinds of investments are more difficult when you have uncertainty about the future of environmental regulations, including potentially carbon," Craver said, speaking by telephone with analysts. "We haven't come to a final, firm conclusion."
In August, the U.S. Department of Justice and the state of Illinois sued Edison, alleging that six of its Illinois coal-fired power plants are in violation of Clean Air Act rules. The agencies accused Edison unit Midwest Generation of illegally emitting "massive amounts" of pollutants including nitrogen oxides, sulfur dioxide and soot for years, particularly after the plants were modified in the 1990s by their previous owner, Exelon Corp. (EXC) unit Commonwealth Edison Co., without required pollution-control equipment.
With the lawsuit and with U.S. climate-change legislation looking increasingly likely, albeit slow-moving, the U.S. power market has taken a negative view of older coal-fired power plants like Edison's, Craver said.
"Heightened concerns about coal generation have depressed the value of Edison Mission Group," Craver said. "It seems no value, or negative value, is being assigned to this business in the market."
Edison's coal fleet stands in stark contrast to its southern California utility, which claims to use more renewable energy than any other U.S. utility. Southern California Edison plans to spend more than $800 million on a solar-rooftop program and is developing three transmission lines to ship renewable power to market. The utility is increasingly profitable, reporting a 5-cents-a-share boost in third-quarter profit, to 92 cents a share.
SoCal Edison, which enjoys a guaranteed return on investment, plans to spend $19.8 billion on capital expenditures between 2009 and 2013. Half the money will be spent on the utility's distribution system, with about a quarter on transmission projects, one of which is under construction, while the other two await regulatory approval. The utility also plans to spend $1.2 billion to install digital "smart" meters for all of its more than 5 million customers.
Pending state regulations require SoCal Edison and other California utilities to use renewable sources for a third of the power they sell by 2020. The requirement is part of the state's 2006 plan to combat climate change.
Meanwhile, Edison is working to green its merchant-generation unit with more wind power. The unit started construction this year on wind farms in Illinois and Texas, which will bring total wind-power capacity to more than 1,500 megawatts. The outlook for the wind business has improved since earlier this year, as more utilities are looking to sign contracts and banks are providing more financing, Craver said.
-By Cassandra Sweet, Dow Jones Newswires; 415-269-4446; cassandra.sweet@dowjones.com
(Nathan Becker in New York contributed to this article)