Back to GetFilings.com

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

Form 10-Q

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

        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 units outstanding of the registrant's Membership Interests as of August 13, 2003: 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

STATEMENTS OF OPERATIONS

(In thousands, Unaudited)

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

1

MIDWEST GENERATION, LLC

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, Unaudited)

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

2

MIDWEST GENERATION, LLC

BALANCE SHEETS

(In thousands, Unaudited)

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

3

MIDWEST GENERATION, LLC

BALANCE SHEETS

(In thousands, Unaudited)

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

4

MIDWEST GENERATION, LLC

STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

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

5

MIDWEST GENERATION, LLC

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2003

(Dollars in thousands, Unaudited)

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 six months ended June 30, 2003 are not necessarily indicative of the operating results for the full year.

        Midwest Generation's significant accounting policies are described in Note 2 to its financial statements as of December 31, 2002 and 2001, included in its 2002 annual report on Form 10-K filed with the Securities and Exchange Commission, as amended by Amendment No. 1 on Form 10-K/A, which is referred to as Midwest Generation's 2002 annual report. Midwest Generation 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 Midwest Generation's 2002 annual report. Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications had no effect on net loss or member'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 Midwest Generation. These developments included lower prices and greater volatility in wholesale energy markets in the United States, 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.

        Midwest Generation's parent, Edison Mission Midwest Holdings Co., has $911 million of debt maturing on December 11, 2003, of which Midwest Generation is the guarantor, that will need to be repaid, extended or refinanced. Edison Mission Midwest Holdings is not expected to have sufficient cash flow to repay the $911 million debt due on December 11, 2003. During the second quarter, Edison Mission Midwest Holdings commenced discussions with its lenders regarding restructuring its indebtedness. There is no assurance that Edison Mission Midwest Holdings will be able to extend or refinance its debt obligation 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 its indirect parent, 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 Midwest Generation to file a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Midwest Generation's independent accountants' audit opinion for the year ended December 31, 2002 contains an explanatory paragraph that indicates the financial statements have been prepared on the basis that Midwest Generation 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 Midwest Generation's ability to continue as a going concern.

6

Accordingly, the financial statements do not include any adjustments that might result from the resolution of this uncertainty.

Note 2. Asset Impairment Charge

        During the second quarter of 2003, Midwest Generation recorded an asset impairment charge of $1.025 billion ($625 million after tax) that resulted from a revised long-term outlook for capacity revenues from the Collins Station and eight small 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 oversupply of generation in the MAIN region market. The book value of capitalized assets related to the Collins Station was written down from $858 million to an estimated fair market value of $78 million, and the book value of the eight small peaking plants was written down from $286 million to an estimated fair market value of $41 million. The estimated fair value was determined based on discounting estimated future cash flows using a 17.5% discount rate.

Note 3. Changes in Accounting

Adoption of New Accounting Pronouncements

        Statement of Financial Accounting Standards No. 143.    Effective January 1, 2003, Midwest Generation adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is increased to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The adoption of SFAS No. 143 did not have a material impact on Midwest Generation's financial statements ($74 thousand, after tax, decrease to net income as the cumulative effect of adoption of SFAS No. 143).

        Statement of Financial Accounting Standards No. 146.    Effective January 1, 2003, Midwest Generation adopted Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that liabilities for costs associated with exit or disposal activities initiated after December 31, 2002 be recognized when incurred, rather than at the date of a commitment to an exit or disposal plan. The adoption of this standard had no impact on Midwest Generation's financial statements.

        Statement of Financial Accounting Standards Interpretation No. 45.    In November 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation establishes reporting requirements to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this standard had no impact on Midwest Generation's financial statements.

        Statement of Financial Accounting Standards Interpretation No. 46.    In January 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by business enterprises of variable interest entities. The primary objective of the interpretation is to provide guidance on the

7

identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities. This interpretation applies to variable interest entities created after January 31, 2003, and applies to variable interest entities in which Midwest Generation holds a variable interest that it acquired before February 1, 2003. The adoption of this standard had no impact on Midwest Generation's financial statements.

Accounting Pronouncements Issued But Not Yet Adopted

        Statement of Financial Accounting Standards No. 149.    In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under SFAS No. 133. The amendment reflects decisions made by the FASB and the Derivatives Implementation Group (DIG) process in connection with issues raised about the application of SFAS No. 133. Generally, the provisions of SFAS No. 149 will be applied prospectively for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 provisions that resulted from the DIG process that became effective in fiscal quarters beginning before June 15, 2003 will continue to be applied based upon their original effective dates. Midwest Generation does not expect that this standard will have a material impact on its financial statements.

Note 4. Accumulated Other Comprehensive Income (Loss)

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

        Unrealized losses on cash flow hedges at June 30, 2003 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 Midwest Generation's contract prices. As Midwest Generation's hedged positions are realized, approximately $6.1 million, after tax, of the net unrealized losses on cash flow hedges will be reclassified into earnings during the next twelve months. Actual amounts ultimately reclassified to earnings over the next twelve months could vary materially from this estimated amount as a result of changes in market conditions. The maximum period over which a cash flow hedge is designated is through May 31, 2005.

        Under SFAS No. 133, the portion of a cash flow hedge that does not offset the change in value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. Midwest Generation recorded net gains of $5.8 million and $3.8 million during the second quarter and six months ended June 30, 2003, respectively, representing the amount of cash flow hedges' ineffectiveness, reflected in income (loss) from price risk management in the statement of operations.

8

Note 5. Commitments and Contingencies

Commercial Commitments

        The following table summarizes Midwest Generation's commercial commitments as of June 30, 2003.

Power Purchase Agreements

        Electric power generated at Midwest Generation's power generation plants has historically been sold under three power purchase agreements with Exelon Generation, in which Exelon Generation purchases capacity and has the right to purchase energy generated by the power generation plants. Midwest Generation initially entered into agreements with Commonwealth Edison on December 15, 1999, and they were subsequently assigned to Exelon Generation in January 2001. The power purchase agreements expire in December 2004 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 all, or a portion of, variable costs of production.

        Under each of the power purchase agreements, Exelon Generation, upon notice by given dates, has the option to terminate each agreement with respect to all or a portion of the units subject to it. As a result of notices given in 2002, effective January 1, 2003, Exelon Generation released 4,548 MW of Midwest Generation's generating capacity from the power purchase agreements, thus increasing Midwest Generation's reliance on sales into the wholesale markets. As a result, 4,739 MW of capacity remain subject to power purchase agreements with Exelon Generation in 2003.

        Exelon Generation notified Midwest Generation on June 25, 2003 of its exercise of its option to purchase 687 MW of capacity and energy (out of a possible total of 1,265 MW subject to the option) during 2004 from Midwest Generation's coal-fired units in accordance with the terms of the existing power purchase agreement related to Midwest Generation's coal-fired generation units. As a result, 578 MW of the capacity of these units will no longer be subject to the power purchase agreement beginning January 1, 2004. The notification received from Exelon Generation has no effect on its commitments to purchase capacity from these generating units for the balance of 2003. For 2004, Exelon Generation will have 2,383 MW of capacity related to its coal-fired generation units under contract with Midwest Generation.

        Under the power purchase agreements related to Midwest Generation's Collins Station and peaking units, 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 1,084 MW of capacity from the Collins Station, and 694 MW of capacity from the peaking units, that were retained for 2003.

        If Exelon Generation does not fully dispatch the power generation plants under contract, the power generation plants may sell, subject to specified conditions, the excess energy at market prices to neighboring utilities, municipal utilities, third-party electric retailers 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.

9

Fuel Supply Contracts

        In February 2003, Midwest Generation entered into an amendment to a fuel supply agreement with one of its coal suppliers and Commonwealth Edison, under an agency agreement that was part of the initial acquisition of the Illinois Plants. The amendment provides for fixed payments, in lieu of the prior fuel purchase obligations, of $7 million for 2003, $7 million for 2004, $7 million for 2005, $8 million for 2006, $8 million for 2007 and $40 million thereafter. Midwest Generation adjusted the liability recorded as part of the purchase of the Illinois Plants for this above market fuel supply contract to the net present value of the fixed payments and recorded a gain of $2 million during the first quarter of 2003.

        Midwest Generation has entered into additional fuel purchase agreements with several third-party suppliers during the first six months of 2003. Midwest Generation's aggregate fuel purchase commitments under these agreements are currently estimated to be $39 million for 2003, $105 million for 2004 and $107 million for 2005.

Environmental Matters

        Midwest Generation is subject to environmental regulation by federal, state and local authorities in the United States. Midwest Generation believes that 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 Midwest Generation conducts its business and could cause Midwest Generation to make substantial additional capital expenditures. There is no assurance that Midwest Generation 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.

        Typically, environmental laws require a lengthy and complex process for obtaining licenses, permits and approvals prior to construction and operation of a project. Meeting all the necessary requirements can delay or sometimes prevent the completion of a proposed project as well as require extensive modifications to existing projects, which may involve significant capital expenditures. If Midwest Generation fails to comply with applicable environmental laws, it may be subject to penalties and fines imposed by regulatory authorities.

Interconnection Agreements

        Midwest Generation has entered into interconnection agreements with Commonwealth Edison to provide interconnection services necessary to connect the Illinois Plants with its 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. Midwest Generation 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 the Illinois Plants.

Guarantees and Indemnities

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

        Midwest Generation has guaranteed Edison Mission Midwest Holdings' third-party debt in the amount of $1.7 billion at June 30, 2003. Midwest Generation's parent also pledged the membership

10

interests in Midwest Generation to the lenders in connection with the third-party debt arrangements. Midwest Generation has not recorded a liability related to this guarantee.

Tax Indemnity Agreement

        In connection with the sale-leaseback transactions related to the Collins Station and the Powerton and Joliet Stations, EME, Midwest Generation and another wholly owned subsidiary of EME entered into tax indemnity agreements. Under these tax indemnity agreements, these entities agreed to indemnify the lessors in the sale-leaseback transactions for specified adverse tax consequences that could result in certain situations set forth in each tax indemnity agreement, including specified defaults under the respective leases. The potential indemnity obligation under these tax indemnity agreements could be significant. Due to the nature of these obligations under these tax indemnity agreements, Midwest Generation cannot determine a maximum potential liability. The indemnities would be triggered by a valid claim from the lessors. Midwest Generation has not recorded a liability related to these indemnities.

Indemnity Provided as Part of the Acquisition from Commonwealth Edison

        Midwest Generation entered into a supplemental agreement with Commonwealth Edison on February 20, 2003 to resolve a dispute regarding interpretation of its reimbursement obligation for asbestos claims under the environmental indemnities set forth in the Asset Sale Agreement dated March 22, 1999. Under this supplemental agreement, Midwest Generation agreed to reimburse Commonwealth Edison 50% of specific existing asbestos claims less recovery of insurance costs, and agreed to a sharing arrangement for liabilities associated with future asbestos related claims as specified in the agreement. The obligations under this agreement are not subject to a maximum liability. The supplemental agreement has a five-year term with an automatic renewal provision (subject to the right to terminate). Payments are made under this indemnity by a valid claim provided from Commonwealth Edison. At June 30, 2003, Midwest Generation had $5.2 million recorded as a liability related to known claims provided by Commonwealth Edison.

Note 6. Supplemental Statements of Cash Flows Information

11

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

        The following discussion contains forward-looking statements. These statements are based on Midwest Generation, LLC's (Midwest Generation's) knowledge of present facts, current expectations about future events and assumptions about future developments. Forward-looking statements are not guarantees of performance; they are subject to risks, uncertainties and assumptions that could cause actual future activities and results of operations to be materially different from those set forth in this discussion. Important factors that could cause actual results to differ include risks set forth under "—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's annual report on Form 10-K for the year ended December 31, 2002. References in this quarterly report to Midwest Generation's annual report on Form 10-K for the year ended December 31, 2002 include the Amendment No. 1 on Form 10-K/A filed on May 6, 2003.

        The Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q discusses material changes in the results of operations, financial condition and other developments of Midwest Generation since December 31, 2002, and as compared to the second quarter and six months ended June 30, 2002. 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's annual report on Form 10-K for the year ended December 31, 2002.

General

        Midwest Generation is 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 it purchased from Commonwealth Edison, which are referred to as the Illinois Plants. Midwest Generation is a wholly owned subsidiary of Edison Mission Midwest Holdings Co., an indirect wholly owned subsidiary of Edison Mission Energy, which is referred to as EME. EME is a wholly owned subsidiary of Mission Energy Holding Company and is an indirect wholly owned subsidiary of Edison International.

        In connection with the acquisition of the Illinois Plants, Midwest Generation entered into three five-year power purchase agreements for the coal-fired stations, the Collins Station, and the peaker stations, with Commonwealth Edison, that expire in December 2004. Subsequently, Commonwealth Edison assigned its rights and obligations under these power purchase agreements to its affiliate, Exelon Generation. Midwest Generation has entered into a contract with a marketing affiliate to market energy that is to be sold into the wholesale market as permitted under the power purchase agreements, to engage in hedging activities and to provide scheduling and other services. The marketing affiliate also purchases fuel, other than coal, and enters into fuel hedging arrangements on Midwest Generation's behalf.

        Under the terms of the powe