Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

For the transition period from                              to                             

Commission file number 333-59348

MIDWEST GENERATION, LLC
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (312) 583-6000

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

        Number of units outstanding of the registrant's Membership Interests as of November 11, 2002: 100 units (all units held by an affiliate of the registrant).

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MIDWEST GENERATION, LLC

BALANCE SHEETS

(In thousands)

The accompanying notes are an integral part of these financial statements.

1

MIDWEST GENERATION, LLC

BALANCE SHEETS

(In thousands)

The accompanying notes are an integral part of these financial statements.

2

MIDWEST GENERATION, LLC

STATEMENTS OF OPERATIONS

(In thousands)

The accompanying notes are an integral part of these financial statements.

3

MIDWEST GENERATION, LLC

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

The accompanying notes are an integral part of these financial statements.

4

MIDWEST GENERATION, LLC

STATEMENTS OF CASH FLOWS

(In thousands)

The accompanying notes are an integral part of these financial statements.

5

MIDWEST GENERATION, LLC

NOTES TO FINANCIAL STATEMENTS

Note 1. General

        In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to present fairly the financial position and results of operations for the periods covered by this report. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the operating results for the full year.

        Our significant accounting policies are described in Note 2 to our financial statements as of December 31, 2001, included in our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission. We follow the same accounting policies for interim reporting purposes. This quarterly report should be read in connection with such financial statements.

        Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had no effect on net income or member's equity.

Income Taxes

        We are included in the consolidated federal and state income tax returns of Edison International and are party to a tax-allocation agreement with our parent Edison Mission Midwest Holdings. In accordance with the agreement and the tax-allocation procedures that have been in effect since our formation, our current tax liability or benefit is generally determined on a separate return basis, except for calculating consolidated state income taxes, for which we use the long-term state tax apportionment factors of the Edison International group. Also, while we are generally subject to separate return limitations for net losses, under the tax-allocation agreement we are permitted to transfer to Edison Mission Midwest Holdings, or its subsidiaries, net operating loss benefits which would not yet be realized in a separate return in exchange for a reduction in our intercompany account balances (including subordinated loans). Thus, during the fourth quarter of 2002, we expect to realize a portion of the tax receivable on our books through a reduction in amounts owed under our subordinated loan agreement with Edison Mission Overseas Co.

        We account for income taxes using the asset-and-liability method, wherein deferred tax assets and liabilities are recognized for future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using enacted rates.

Current Developments

        A number of significant developments have adversely affected independent power producers and subsidiaries of major integrated energy companies who sell a sizable portion of their generation into the wholesale energy market (sometimes referred to as merchant generators). These developments include depressed market prices in U.S. wholesale energy markets, significant declines in the credit ratings of most major market participants and the decline of liquidity in the energy markets as a result of tightening credit and increasing concern about the ability of counterparties to perform their obligations. In addition, many merchant generators and power trading firms have announced plans to improve their financial position through asset sales, cancellation or deferral of substantial new development, significant reductions and elimination of trading activities, decreases in capital expenditures, including cancellations of orders for new turbines, and reductions in operating costs.

Our Situation

        Our plants have been largely unaffected by these developments because Exelon Generation is under contract with us to buy substantially all of the capacity of our units for the balance of 2002. However, as permitted by the power purchase agreements, Exelon Generation has advised us that it

6

will not purchase 2,684 MW of the capacity from our coal-fired units and 1,864 MW of capacity from our Collins Station and small peaking units for 2003 and 2004, and Exelon Generation has the further right to release an additional 3,043 MW for 2004. As a result, beginning in 2003, the portion of our generation to be sold into the wholesale markets will significantly increase, thereby increasing our merchant risk. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

        As a result of these and other factors, Moody's downgraded our credit rating and the credit ratings of our parent, Edison Mission Midwest Holdings, and our indirect parent, Edison Mission Energy on October 1, 2002 as shown in the following table:

        In addition, Standard & Poor's has placed the credit rating of Edison Mission Midwest Holdings on CreditWatch with negative implications. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Credit Ratings."

        Against this background, we have undertaken actions to reduce our commitments and expenditures, thereby improving our cash flow. These actions include:

•

a reduction in our capital expenditure program by $310 million for the years 2003-2005 due to suspension of work on two selective catalytic reduction systems (commonly referred to as SCRs) for our Powerton Station; and



•

suspension, beginning in January 2003, of operations at Units 1 and 2 of our Will County plant and Units 4 and 5 of our Collins Station in order to reduce operating costs.

        For a discussion of our current financial condition, see "Management's Discussion and Analysis of Results of Operations and Financial Condition—Liquidity and Capital Resources."

Note 2. Accumulated Other Comprehensive Income (Loss)

        Accumulated other comprehensive income (loss) consisted of the following (in thousands):

        Unrealized losses on cash flow hedges at September 30, 2002 include forward energy sales contracts that did not meet the normal sales and purchases exception under SFAS No. 133. These losses arise because current forecasts of future electricity prices are higher than our contract prices. As our hedged positions are realized, approximately $1.1 million, after tax, of the net unrealized losses on cash flow hedges will be reclassified into earnings during the next twelve months. The maximum period over which a cash flow hedge is designated is through December 31, 2003.

7

Note 3. Commitments and Contingencies

Commercial Commitments

        The following table summarizes our commercial commitments as of September 30, 2002.

Capital Expenditures

        The Company's capital program has been reduced by $310 million as a result of the suspension of work related to two Powerton Station SCRs. As a result of the decision to suspend work on this project, the Company recorded a pre-tax impairment charge of $25.4 million during the third quarter ended September 30, 2002, due to the write-off of capitalized costs associated with these environmental improvements. This decision to reduce capital expenditures was made in light of current market conditions. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures" and "Management's Discussion and Analysis of Results of Operations and Financial Condition—Environmental Matters and Regulations."

        On August 9, 2002, the Company exercised its option to purchase the Illinois peaker power units that were subject to a lease with a third-party lessor. As disclosed in "Management's Discussion and Analysis of Results of Operations and Financial Condition—Off-Balance Sheet Transactions" in the Company's 2001 Annual Report on Form 10-K, this operating lease was structured to maintain a minimum amount of equity (3% of the acquisition price) for the duration of the lease term in accordance with existing guidance for leases involving special purpose entities (sometimes referred to as synthetic leases). In order to fund the purchase, the Company received full payment of principal, interest and fees on its $300 million note receivable from Edison Mission Energy, and then paid $300 million plus outstanding lease obligations to the owner-lessor. These peaker units were recorded as assets and are being depreciated over their estimated useful lives of 15 years.

Power Purchase Agreements

        Electric power generated at the Company's power generation plants is sold under three power purchase agreements with Exelon Generation, under which Exelon Generation purchases capacity and has the right to purchase energy generated by the power generation plants. The Company initially entered into agreements with Commonwealth Edison on December 15, 1999 which were assigned to Exelon Generation in January 2001. The power purchase agreements have a term of up to five years and provide for capacity and energy payments. Exelon Generation is obligated to make capacity payments for the power generation plants under contract and energy payments for the electricity produced by these plants and taken by Exelon Generation. The capacity payments provide the power generation plants revenue for fixed charges, and the energy payments compensate the power generation plants for variable costs of production.

        In July 2002, under the power purchase agreement related to the Company's coal-fired generation units, Exelon Generation notified the Company of its exercise of its option to purchase 1,265 MW of capacity and energy during 2003 (of a possible total of 3,949 MW subject to option) from the option coal units. As a result, 2,684 MW of capacity of the Will County 1 and 2, Joliet 6 and 7, and Powerton 5 and 6 units will no longer be subject to the power purchase agreement after January 1, 2003. The notification received from Exelon Generation has no effect on its commitments to purchase capacity from these units for the balance of 2002. Exelon Generation continues to have a similar option, exercisable not later than 180 days prior to January 1, 2004, to retain or release for 2004 all or a

8

portion of the option coal units retained for 2003. It remains committed to purchase the capacity of certain committed units having 1,696 MW of capacity for both 2003 and 2004.

        In October 2002, under the power purchase agreements related to the Company's Collins Station and peaking units, Exelon Generation notified the Company of its exercise of its option to terminate the existing power purchase agreements during 2003 with respect to (a) 1,614 MW of capacity and energy (of a possible total of 2,698 MW subject to the option to terminate) from the Collins Station, a natural gas and oil-fired electric generating station, and (b) 113 MW of capacity and energy (of a possible total of 807 MW subject to the option to terminate) from the natural gas and oil-fired peaking units, in accordance with the terms of each applicable power purchase agreement. As a result, 1,614 MW of capacity from the Collins Units 2, 4 and 5, and 113 MW of capacity from the Lombard 33 and Calumet 33 and 34 peaking units, will no longer be subject to a power purchase agreement after January 1, 2003. The notification received from Exelon Generation has no effect on its commitments to purchase capacity from these generating units for the balance of 2002. Exelon Generation continues to have a similar option to terminate, exercisable not later than 90 days prior to January 1, 2004, the power purchase agreements for 2004 with respect to all or a portion of the generating units not previously terminated for 2003 (1,084 MW from the Collins Station and 694 MW from the peaking units).

        If Exelon Generation does not fully dispatch the power generation plants under contract, the Company may sell, subject to specified conditions, the excess energy at market prices to neighboring utilities, municipalities, third-party electric retailers, large consumers and power marketers on a spot basis. A bilateral trading infrastructure already exists with access to the Mid-America Interconnected Network and the East Central Area Reliability Council.

Chicago In-City Obligation

        Pursuant to the acquisition documents for the purchase of generating assets from Commonwealth Edison, the Company committed to install one or more gas-fired electric generating units having an additional gross dependable capacity of 500 MW at or adjacent to an existing power plant site in Chicago (referred to as the In-City Obligation). The acquisition documents require that commercial operation of this project commence by December 15, 2003. Due to additional capacity for new gas-fired generation in the Mid-America Interconnected Network, generally referred to as the MAIN Region, and the improved reliability of power generation in the Chicago area, the Company is in discussions with Commonwealth Edison and the City of Chicago regarding alternatives to construction of 500 MW of capacity, which the Company does not believe is needed at this time. There can be no assurance that these discussions will result in an agreement to terminate the In-City Obligation. If the Company were to install this additional capacity, the Company estimates that the cost could be as much as $320 million.

Environmental Matters

        The Company is subject to environmental regulation by federal, state and local authorities in the United States. The Company believes that, as of the date of this report, it is in substantial compliance with environmental regulatory requirements and that maintaining compliance with current requirements will not materially affect its financial position or results of operations. However, possible future developments, such as the promulgation of more stringent environmental laws and regulations, and future proceedings which may be taken by environmental authorities, could affect the costs and the manner in which the Company conducts its business and could cause the Company to make substantial additional capital expenditures. There is no assurance that the Company would be able to recover these increased costs from its customers or that its financial position and results of operations would not be materially adversely affected.

9

Interconnection Agreements

        The Company has entered into interconnection agreements with Commonwealth Edison to provide interconnection services necessary to connect its Illinois Plants with their transmission systems. Unless terminated earlier in accordance with the terms thereof, the interconnection agreements will terminate on a date mutually agreed to by both parties. This date may not exceed the retirement date of the Illinois Plants. The Company is required to compensate Commonwealth Edison for all reasonable costs associated with any modifications, additions or replacements made to the interconnection facilities or transmission systems in connection with any modification, addition or upgrade to its Illinois Plants.

Guaranty of Debt of Edison Mission Midwest Holdings and Pledge of Ownership Interests

        The Company has guaranteed Edison Mission Midwest Holdings' (its parent) third-party debt in the amount of $1.7 billion at September 30, 2002. The Company's parent also pledged the membership interests in the Company to the lenders in connection with the third-party debt arrangements.

Note 4. Supplemental Statements of Cash Flows Information

Note 5. Subsequent Events

        The Company had a retirement health care and other benefits plan related to its union-represented employees that expired on June 15, 2002. In October 2002, the Company reached an agreement with its union-represented employees on a new retirement health care and other benefits plan which extends from January 1, 2003 through June 30, 2005. The Company will continue to provide benefits at the same level as those in the expired agreement until December 31, 2002.

        As described in the Company's 2001 Annual Report on Form 10-K, it has been accounting for postretirement benefits obligations on the basis of a substantive plan under Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." A substantive plan means that the Company assumed for accounting purposes that it would provide for postretirement benefits to union-represented employees following conclusion of negotiations to replace the current benefits agreement, even though it had no legal obligation to do so. Under the new agreement, postretirement benefits will not be provided. Accordingly, the Company will treat this as a plan termination under SFAS No. 106 and will record a pre-tax gain of $70.7 million during the fourth quarter of 2002.

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

        The following discussion contains forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties which could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause differences in our results of operations are set forth under "—Credit Ratings" and "—Market Risk Exposures" below, and under "—Risk Factors" in the Management's Discussion and Analysis of Results of Operations and Financial Condition included in Item 7 of Midwest Generation, LLC's Annual Report on Form 10-K for the year ended December 31, 2001.

        The Management's Discussion and Analysis of Results of Operations and Financial Condition of this Form 10-Q discusses material changes in the results of operations, financial condition and other developments of Midwest Generation, LLC since December 31, 2001, and as compared to the third quarter and nine months ended September 30, 2001. This discussion presumes that the reader has read or has access to the Management's Discussion and Analysis of Results of Operations and Financial Condition included in Item 7 of Midwest Generation, LLC's Annual Report on Form 10-K for the year ended December 31, 2001.

        Unless otherwise indicated, the information presented in this section is with respect to Midwest Generation, LLC.

General

        We are a special-purpose Delaware limited liability company formed on July 12, 1999 for the purpose of owning or leasing, making improvements to and operating the power generation assets we purchased from Commonwealth Edison. We are a wholly-owned subsidiary of Edison Mission Midwest Holdings Co., an indirect wholly-owned subsidiary of Edison Mission Energy and an indirect wholly-owned subsidiary of Edison International.

        In connection with the acquisition of the power generation assets, we entered into three five-year power purchase agreements for the coal-fired stations, the Collins Station, and the peaker stations, with Commonwealth Edison. Subsequently, Commonwealth Edison, which we refer to as ComEd, assigned its rights and obligations under these power purchase agreements to Exelon Generation. We currently derive virtually all of our energy and capacity revenues from Exelon Generation under these power purchase agreements. For more information on these power purchase agreements, including committed capacity and energy purchases by Exelon Generation for 2003, see "—Market Risk Exposures."

        We have entered into a contract with a marketing affiliate for scheduling and related services and to market energy that has not been committed to be sold under the power purchase agreements with Exelon Generation and to engage in hedging activities. The marketing affiliate also purchases fuel, other than coal, and enters into fuel hedging arrangements on our behalf.

        Under the terms of the power purchase agreements with Exelon Generation, we receive significantly higher capacity payments during June through September, the summer months. Accordingly, our operating results are substantially higher during these months and lower, including expected losses, during non-summer months.

Current Developments

        A number of significant developments have adversely affected independent power producers and subsidiaries of major integrated energy companies who sell a sizable portion of their generation into the wholesale energy market (sometimes referred to as merchant generators). These developments include depressed market prices in U.S. wholesale energy markets, significant declines in the credit ratings of most major market participants and the decline of liquidity in the energy markets as a result

11

of tightening credit and increasing concern about the ability of counterparties to perform their obligations. In addition, many merchant generators and power trading firms have announced plans to improve their financial position through asset sales, cancellation or deferral of substantial new development, significant reductions and elimination of trading activities, decreases in capital expenditures, including cancellations of orders for new turbines, and reductions in operating costs.

Our Situation

        Our plants have been largely unaffected by these developments because Exelon Generation is under contract with us to buy substantially all of the capacity of our units for the balance of 2002. However, as permitted by the power purchase agreements, Exelon Generation has advised us that it will not purchase 2,684 MW of the capacity from our coal-fired units and 1,864 MW of capacity from our Collins Station and small peaking units for 2003 and 2004, and Exelon Generation has the further right to release an additional 3,043 MW for 2004. As a result, beginning in 2003, the portion of our generation to be sold into the wholesale markets will significantly increase, thereby increasing our merchant risk. See "—Market Risk Exposures."

        As a result of these and other factors, Moody's downgraded our credit rating and the credit ratings of our parent, Edison Mission Midwest Holdings, and our indirect parent, Edison Mission Energy on October 1, 2002 as shown in the following table: