EDISON MISSION ENERGY - 10-Q Quarterly Report

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

Form 10-Q

(Mark one)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number 000-24890

EDISON MISSION ENERGY
(Exact name of registrant as specified in its charter)

Delaware		95-4031807
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
18101 Von Karman Avenue Irvine, California (Address of principal executive offices)		92612 (Zip Code)

Registrant's telephone number, including area code: (949) 752-5588

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

Number of shares outstanding of the registrant's Common Stock as of August 13, 2003: 100 shares (all shares held by an affiliate of the registrant).

TABLE OF CONTENTS

		Page
	PART I—Financial Information
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 4.	Controls and Procedures	68
	PART II—Other Information
Item 1.	Legal Proceedings	69
Item 6.	Exhibits and Reports on Form 8-K	69
	Signatures	70

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, Unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			2003			2002			2003			2002
Operating Revenues
	Electric revenues		$	685,924		$	661,160		$	1,366,857		$	1,166,977
	Net gains from price risk management and energy trading			17,792			3,241			10,962			24,607
	Operation and maintenance services			11,597			8,247			20,954			17,781

		Total operating revenues		715,313			672,648			1,398,773			1,209,365

Operating Expenses
	Fuel			243,128			229,551			520,015			434,123
	Plant operations and transmission costs			247,458			208,793			450,284			391,945
	Plant operating leases			51,609			51,266			103,077			103,295
	Operation and maintenance services			7,370			5,913			13,749			13,015
	Depreciation and amortization			72,024			60,706			143,855			118,145
	Asset impairment charges			251,240			—			251,240			—
	Administrative and general			42,201			43,329			80,248			88,401

		Total operating expenses		915,030			599,558			1,562,468			1,148,924

	Operating income (loss)			(199,717	)		73,090			(163,695	)		60,441

Other Income (Expense)
	Equity in income from unconsolidated affiliates			67,640			56,246			131,477			108,820
	Interest and other income			(348	)		408			6,430			10,668
	Interest expense			(118,817	)		(113,788	)		(235,640	)		(226,918	)
	Dividends on preferred securities			(5,724	)		(5,302	)		(11,318	)		(10,438	)

		Total other income (expense)		(57,249	)		(62,436	)		(109,051	)		(117,868	)

	Income (loss) from continuing operations before income taxes and minority interest			(256,966	)		10,654			(272,746	)		(57,427	)
	Provision (benefit) for income taxes			(102,541	)		6,059			(113,901	)		(26,220	)
	Minority interest			(9,841	)		(10,739	)		(13,902	)		(16,105	)

Loss From Continuing Operations				(164,266	)		(6,144	)		(172,747	)		(47,312	)
	Income (loss) from operations of discontinued foreign subsidiaries, net of tax (Note 7)			(2,470	)		9,378			(2,242	)		14,707

Income (Loss) Before Accounting Change				(166,736	)		3,234			(174,989	)		(32,605	)
	Cumulative effect of change in accounting, net of tax (Notes 4 and 13)			—			—			(8,571	)		(13,986	)

Net Income (Loss)			$	(166,736	)	$	3,234		$	(183,560	)	$	(46,591	)

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

EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, Unaudited)

				Three Months Ended June 30,						Six Months Ended June 30,
				2003			2002			2003			2002
Net Income (Loss)				$	(166,736	)	$	3,234		$	(183,560	)	$	(46,591	)
Other comprehensive income (expense), net of tax:
	Foreign currency translation adjustments:
		Foreign currency translation adjustments, net of income tax expense of $2,269 and $2,978 for the three months and $1,304 and $2,111 for the six months ended June 30, 2003 and 2002, respectively			42,130			63,396			63,418			79,255
		Minimum pension liability adjustment			(487	)		—			(286	)		—
		Unrealized gains (losses) on derivatives qualified as cash flow hedges:
			Cumulative effect of change in accounting for derivatives, net of income tax expense of $5,562 for the three and six months ended June 30, 2002		—			6,357			—			6,357
			Other unrealized holding gains (losses) arising during period, net of income tax expense of $20,527 and $3,472 for the three months and $2,933 and $14,929 for the six months ended June 30, 2003 and 2002, respectively		24,959			(23,004	)		21,812			15,081
			Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $447 and $(1,389) for the three months and $(3,484) and $(961) for the six months ended June 30, 2003 and 2002, respectively		(4,675	)		2,588			(5,944	)		3,294

Other comprehensive income					61,927			49,337			79,000			103,987

Comprehensive Income (Loss)				$	(104,809	)	$	52,571		$	(104,560	)	$	57,396

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

EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, Unaudited)

			June 30, 2003		December 31, 2002
Assets
Current Assets
	Cash and cash equivalents		$	801,130	$	647,164
	Accounts receivable—trade, net of allowance of $14,134 and $13,113 in 2003 and 2002, respectively			390,574		296,193
	Accounts receivable—affiliates			18,375		39,456
	Assets under price risk management and energy trading			62,537		33,742
	Inventory			165,348		176,437
	Prepaid expenses and other			94,541		169,262

		Total current assets		1,532,505		1,362,254

Investments in Unconsolidated Affiliates				1,749,605		1,645,253

Property, Plant and Equipment				8,125,234		7,649,791
	Less accumulated depreciation and amortization			1,083,670		888,060

		Net property, plant and equipment		7,041,564		6,761,731

Other Assets
	Goodwill			774,941		659,837
	Deferred financing costs			49,521		55,553
	Long-term assets under price risk management and energy trading			118,504		112,571
	Restricted cash and other			638,471		484,850

		Total other assets		1,581,437		1,312,811

Assets of Discontinued Operations				4,826		10,273

Total Assets			$	11,909,937	$	11,092,322

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

			June 30, 2003			December 31, 2002
Liabilities and Shareholder's Equity
Current Liabilities
	Accounts payable—affiliates		$	78,662		$	12,244
	Accounts payable and accrued liabilities			450,710			456,518
	Liabilities under price risk management and energy trading			146,661			44,538
	Interest payable			98,426			91,789
	Short-term obligations			298,148			77,551
	Current maturities of long-term obligations			1,221,374			1,089,918

		Total current liabilities		2,293,981			1,772,558

Long-Term Obligations Net of Current Maturities				5,240,176			4,872,012

Long-Term Deferred Liabilities
	Deferred taxes and tax credits			1,146,846			1,180,523
	Deferred revenue			536,441			454,438
	Long-term incentive compensation			28,811			29,486
	Long-term liabilities under price risk management and energy trading			118,725			162,484
	Other			196,291			219,703

		Total long-term deferred liabilities		2,027,114			2,046,634

Liabilities of Discontinued Operations				4,210			3,024

Total Liabilities				9,565,481			8,694,228

Minority Interest				457,239			423,844

Preferred Securities of Subsidiaries
	Company-obligated mandatorily redeemable security of partnership holding solely parent debentures			150,000			150,000
	Subject to mandatory redemption			146,475			131,225

		Total preferred securities of subsidiaries		296,475			281,225

Commitments and Contingencies (Note 8)
Shareholder's Equity
	Common stock, par value $0.01 per share; 10,000 shares authorized; 100 shares issued and outstanding			64,130			64,130
	Additional paid-in capital			2,635,270			2,632,886
	Retained deficit			(975,437	)		(791,770	)
	Accumulated other comprehensive loss			(133,221	)		(212,221	)

Total Shareholder's Equity				1,590,742			1,693,025

Total Liabilities and Shareholder's Equity			$	11,909,937		$	11,092,322

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

EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

			Six Months Ended June 30,
			2003			2002
Cash Flows From Operating Activities
	Loss from continuing operations, after accounting change, net		$	(181,318	)	$	(61,298	)
	Adjustments to reconcile income to net cash provided by operating activities:
		Equity in income from unconsolidated affiliates		(131,477	)		(108,820	)
		Distributions from unconsolidated affiliates		65,127			176,890
		Depreciation and amortization		143,855			118,145
		Deferred taxes and tax credits		(140,065	)		(50,420	)
		Asset impairment charges		251,240			—
		Cumulative effect of change in accounting, net of tax		8,571			13,986
	Changes in operating assets and liabilities:
		Decrease (increase) in accounts receivable		(39,920	)		144,468
		Decrease (increase) in inventory		12,976			(19,905	)
		Decrease (increase) in prepaid expenses and other		94,272			(15,438	)
		Increase (decrease) in accounts payable and accrued liabilities		31,113			(70,539	)
		Increase in interest payable		2,983			2,891
		Increase in long-term incentive compensation		2,951			2,204
		Decrease (increase) in net assets under risk management		9,571			(27,755	)
	Other operating, net			(114,733	)		(75,114	)

				15,146			29,295
	Operating cash flows from discontinued operations			104			50,934

		Net cash provided by operating activities		15,250			80,229

Cash Flows From Financing Activities
	Borrowings on long-term debt and lease swap agreements			226,797			197,048
	Payments on long-term debt agreements			(40,461	)		(314,248	)
	Short-term financing and lease swap agreements, net			303,100			(29,661	)
	Financing costs			(2,531	)		—

				486,905			(146,861	)
	Financing cash flows from discontinued operations			—			(8,693	)

		Net cash provided by (used in) financing activities		486,905			(155,554	)

Cash Flows From Investing Activities
	Investments in and loans to energy projects			(42,167	)		(5,358	)
	Purchase of common stock of acquired companies			(274,813	)		—
	Purchase of power sales agreement			—			(80,084	)
	Capital expenditures			(79,104	)		(175,661	)
	Proceeds from return of capital and loan repayments			11,903			83,754
	Proceeds from sale of assets			—			43,986
	Decrease in restricted cash			5,896			108,297
	Investments in other assets			9,119			2,164
	Other, net			—			(14,282	)

				(369,166	)		(37,184	)
	Investing cash flows from discontinued operations			4,908			978

		Net cash used in investing activities		(364,258	)		(36,206	)

Effect of exchange rate changes on cash				16,124			27,308

Net increase (decrease) in cash and cash equivalents				154,021			(84,223	)
Cash and cash equivalents at beginning of period				647,240			434,249

Cash and cash equivalents at end of period				801,261			350,026
Cash and cash equivalents classified as part of discontinued operations				(131	)		(32,812	)

Cash and cash equivalents of continuing operations			$	801,130		$	317,214

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

EDISON MISSION ENERGY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(Dollars in millions, Unaudited)

Note 1. General

In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to present fairly the consolidated financial position and results of operations for the periods covered by this report. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the operating results for the full year.

Edison Mission Energy's (EME's) significant accounting policies are described in Note 2 to its Consolidated Financial Statements as of December 31, 2002 and 2001, included in EME's annual report on Form 10-K for the year ended December 31, 2002. EME follows the same accounting policies for interim reporting purposes. This quarterly report should be read in connection with such financial statements.

Terms used but not defined in this report are defined in EME's annual report on Form 10-K for the year ended December 31, 2002. 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 shareholder's equity.

Current Developments

A number of significant developments during late 2001 and 2002 adversely affected independent power producers and subsidiaries of major integrated energy companies that sell a sizable portion of their generation into the wholesale energy market (sometimes referred to as merchant generators), including several of EME's subsidiaries. These developments included lower prices and greater volatility in wholesale energy markets both in the United States and United Kingdom, significant declines in the credit ratings of most major market participants, decreased availability of debt financing or refinancing, and a resulting decline of liquidity in the energy markets due to growing concern about the ability of counterparties to perform their obligations. Since the beginning of 2003, several merchant generators reached agreements to extend existing bank credit facilities and at least three merchant generators have filed for Chapter 11 protection under the Bankruptcy Code.

EME's largest subsidiary, Edison Mission Midwest Holdings, has $911 million of debt maturing on December 11, 2003 which will need to be repaid, extended or refinanced. Edison Mission Midwest Holdings is not expected to have sufficient cash to repay the $911 million debt due on December 11, 2003. EME has $275 million of debt maturing on September 16, 2003, which will also need to be repaid, extended or refinanced. During the second quarter, EME and Edison Mission Midwest Holdings commenced discussions with their lenders regarding restructuring their respective indebtedness. There is no assurance that either EME or Edison Mission Midwest Holdings will be able to extend or refinance their respective debt obligations on similar terms and rates as the existing debt, on commercially reasonable terms, on the terms permitted under the financing documents entered into in July 2001 by EME's parent company, Mission Energy Holding Company, or at all. A failure to repay, extend, or refinance the Edison Mission Midwest Holdings or EME obligations is likely to result in, or in the case of EME would result in, a default under the MEHC senior secured notes and term loan. These events could make it necessary for MEHC or EME, or both, to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. EME's independent accountants' audit opinion for the year ended December 31, 2002 contains an explanatory paragraph that indicates the consolidated financial statements have been prepared on the basis that EME will

continue as a going concern and that the uncertainty about Edison Mission Midwest Holdings' ability to repay, extend or refinance this obligation raises substantial doubt about EME's ability to continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments that might result from the resolution of this uncertainty.

Note 2. Acquisitions and Dispositions

Acquisitions

On March 3, 2003, Contact Energy, EME's 51% owned subsidiary, completed a transaction with NGC Holdings Ltd. to acquire the Taranaki Combined Cycle power station and related interests. The Taranaki station is a 357 MW combined cycle, natural gas-fired plant located near Stratford, New Zealand. Consideration for the Taranaki station consisted of a cash payment of approximately $275 million, which was initially financed with bridge loan facilities. The bridge loan facilities were subsequently repaid with proceeds from the issuance of long-term U.S. dollar denominated notes.

Dispositions

In July 2003, EME agreed to sell its 50% interest in the Gordonsville project to a third party. Completion of the sale, currently expected during the fourth quarter of 2003, is subject to closing conditions, including obtaining regulatory approval. Net proceeds from the sale, including distribution of a debt service reserve fund, are expected to be approximately $32 million. EME recorded an impairment charge of $6 million during the second quarter of 2003 related to the planned disposition of this investment.

During the first quarter of 2002, EME completed the sales of its 50% interests in the Commonwealth Atlantic and James River projects and its 30% interest in the Harbor project. Proceeds received from the sales were $44 million. During 2001, EME recorded asset impairment charges of $32 million related to these projects based on the expected sales proceeds. No gain or loss was recorded from the sale of EME's interests in these projects during the first quarter of 2002.

Note 3. Asset Impairment Charge

During the second quarter of 2003, EME recorded an asset impairment charge of $245 million ($150 million after tax) related to eight small peaking plants owned by its indirect subsidiary, Midwest Generation, LLC (Midwest Generation), in Illinois. The impairment charge resulted from a revised long-term outlook for capacity revenues from the peaking plants. The lower capacity revenue outlook is the result of a number of factors, including higher long-term natural gas prices and the current generation overcapacity in the MAIN region market. The book value of these assets was written down from $286 million to an estimated fair market value of $41 million. The estimated fair market value was determined based on discounting estimated future cash flows using a 17.5% discount rate.

Note 4. Goodwill and Intangible Assets

Effective January 1, 2002, EME adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 establishes accounting and reporting standards requiring goodwill not to be amortized but rather tested for impairment at least annually at the reporting unit level. EME will perform its annual evaluation of goodwill on October 1, 2003, or sooner if indicators of impairment exist. During the third quarter of 2002, EME concluded that fair value of the goodwill related to the Citizens Power LLC acquisition was impaired by $14 million, net of $9 million of income tax benefit and, accordingly, reported this amount as a cumulative change in accounting. In accordance with SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," EME's financial statements for the first quarter of 2002 were restated to reflect the accounting change as of January 1, 2002.

Included in "Restricted cash and other assets" on EME's consolidated balance sheet are customer contracts with a gross carrying amount of $92 million and accumulated amortization of $8 million at June 30, 2003. The contracts have a weighted average amortization period of 20 years. For the three and six months ended June 30, 2003, the amortization expense was $1 million and $2 million, respectively. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for fiscal years 2004 through 2008 is approxi