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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 September 30, 2003

or

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
(State or other jurisdiction of incorporation
or organization)		   95-4031807
(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 November 14, 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
 
23

Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
72

Item 4.
 
Controls and Procedures
 
72

 
 
PART II—Other Information
 
 

Item 6.
 
Exhibits and Reports on Form 8-K
 
73

 
 
Signatures
 
74

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, Unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2003
   2002
   2003
   2002
  
Operating Revenues                          
  Electric revenues   $ 991,356   $ 940,376   $ 2,358,213   $ 2,107,353  
  Net gains from price risk management and energy trading     11,232     4,676     22,194     29,283  
  Operation and maintenance services     11,071     9,316     32,025     27,097  
   
 
 
 
 
    Total operating revenues     1,013,659     954,368     2,412,432     2,163,733  
   
 
 
 
 
Operating Expenses                          
  Fuel     317,190     295,706     837,205     729,829  
  Plant operations and transmission costs     224,238     169,355     674,522     561,300  
  Plant operating leases     51,199     50,350     154,276     153,645  
  Operation and maintenance services     7,433     6,235     21,182     19,250  
  Depreciation and amortization     68,969     63,412     212,824     181,557  
  Asset impairment and other charges     —     85,924     251,240     85,924  
  Administrative and general     41,360     31,764     121,608     120,165  
   
 
 
 
 
    Total operating expenses     710,389     702,746     2,272,857     1,851,670  
   
 
 
 
 
  Operating income     303,270     251,622     139,575     312,063  
   
 
 
 
 
Other Income (Expense)                          
  Equity in income from unconsolidated affiliates     156,994     119,664     288,471     228,484  
  Interest and other income (expense)     1,712     (657 )   8,142     10,011  
  Interest expense     (129,582 )   (112,367 )   (365,222 )   (339,285 )
  Dividends on preferred securities (Note 14)     —     (5,324 )   (11,318 )   (15,762 )
   
 
 
 
 
    Total other income (expense)     29,124     1,316     (79,927 )   (116,552 )
   
 
 
 
 
  Income from continuing operations before income taxes and minority interest     332,394     252,938     59,648     195,511  
  Provision for income taxes     114,619     88,961     718     62,741  
  Minority interest     (17,347 )   (7,550 )   (31,249 )   (23,655 )
   
 
 
 
 
Income From Continuing Operations     200,428     156,427     27,681     109,115  
  Income (loss) from operations of discontinued foreign subsidiaries, net of tax (Note 7)     (245 )   6,341     (2,487 )   21,048  
   
 
 
 
 
Income Before Accounting Change     200,183     162,768     25,194     130,163  
  Cumulative effect of change in accounting, net of tax (Notes 4 and 14)     —     —     (8,571 )   (13,986 )
   
 
 
 
 
Net Income   $ 200,183   $ 162,768   $ 16,623   $ 116,177  
   
 
 
 
 

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

1


EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, Unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2003
   2002
   2003
   2002
  
Net Income   $ 200,183   $ 162,768   $ 16,623   $ 116,177  

Other comprehensive income (expense), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Foreign currency translation adjustments:                          
    Foreign currency translation adjustments, net of income tax expense of $260 and $20 for the three months and $1,564 and $2,131 for the nine months ended September 30, 2003 and 2002, respectively     6,107     (8,366 )   69,525     70,889  
    Minimum pension liability adjustment     (61 )   —     (347 )   —  
    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 nine months ended September 30, 2002     —     —     —     6,357  
      Other unrealized holding gains (losses) arising during period, net of income tax expense (benefit) of $21,498 and $(16,087) for the three months and $24,431 and $(1,158) for the nine months ended September 30, 2003 and 2002, respectively     51,766     (67,482 )   73,578     (52,401 )
      Reclassification adjustments included in net income (loss), net of income tax benefit of $1,963 and $1,048 for the three months and $5,447 and $87 for the nine months ended September 30, 2003 and 2002, respectively     1,145     2,201     (4,799 )   5,495  
   
 
 
 
 

Other comprehensive income (expense)
 
 
58,957
 
 
(73,647
)
 
137,957
 
 
30,340
 
   
 
 
 
 

Comprehensive Income
 
$
259,140
 
$
89,121
 
$
154,580
 
$
146,517
 
   
 
 
 
 

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

2


EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, Unaudited)

 
   September 30,
2003
   December 31,
2002
Assets            
Current Assets            
  Cash and cash equivalents   $ 815,538   $ 647,164
  Accounts receivable—trade, net of allowance of $5,667 and $13,113 in 2003 and 2002, respectively     371,564     296,193
  Accounts receivable—affiliates     31,651     39,456
  Assets under price risk management and energy trading     90,114     33,742
  Inventory     160,822     176,437
  Prepaid expenses and other     120,004     169,262
   
 
    Total current assets     1,589,693     1,362,254
   
 

Investments in Unconsolidated Affiliates
 
 
1,683,868
 
 
1,645,253
   
 

Property, Plant and Equipment
 
 
8,174,872
 
 
7,649,791
  Less accumulated depreciation and amortization     1,130,638     888,060
   
 
    Net property, plant and equipment     7,044,234     6,761,731
   
 

Other Assets
 
 
 
 
 
 
  Goodwill     787,380     659,837
  Deferred financing costs     48,380     55,553
  Long-term assets under price risk management and energy trading     118,673     112,571
  Restricted cash     239,513     262,125
  Rent payments in excess of levelized rent expense under plant operating leases     213,726     117,413
  Other long-term assets     150,415     105,312
   
 
    Total other assets     1,558,087     1,312,811
   
 

Assets of Discontinued Operations
 
 
2,566
 
 
10,273
   
 

Total Assets
 
$
11,878,448
 
$
11,092,322
   
 

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

3


EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, Unaudited)

 
   September 30,
2003
   December 31,
2002
  
Liabilities and Shareholder's Equity              
Current Liabilities              
  Accounts payable—affiliates   $ —   $ 12,244  
  Accounts payable and accrued liabilities     446,712     456,518  
  Liabilities under price risk management and energy trading     124,354     44,538  
  Interest payable     96,031     91,789  
  Short-term obligations     —     77,551  
  Current maturities of long-term obligations     1,241,843     1,089,918  
   
 
 
    Total current liabilities     1,908,940     1,772,558  
   
 
 

Long-Term Obligations Net of Current Maturities
 
 
5,131,793
 
 
4,872,012
 
   
 
 

Long-Term Deferred Liabilities
 
 
 
 
 
 
 
  Deferred taxes and tax credits     1,335,580     1,180,523  
  Deferred revenue     531,088     454,438  
  Long-term incentive compensation     29,270     29,486  
  Long-term liabilities under price risk management and energy trading     112,415     162,484  
  Company-obligated mandatorily redeemable security of partnership holding solely parent debentures (Notes 8 and 14)     150,000        
  Preferred securities subject to mandatory redemption (Notes 8 and 14)     147,550        
  Other     201,941     219,703  
   
 
 
    Total long-term deferred liabilities     2,507,844     2,046,634  
   
 
 

Liabilities of Discontinued Operations
 
 
1,753
 
 
3,024
 
   
 
 

Total Liabilities
 
 
9,550,330
 
 
8,694,228
 
   
 
 

Minority Interest
 
 
478,720
 
 
423,844
 
   
 
 

Preferred Securities of Subsidiaries (Notes 8 and 14)
 
 
 
 
 
 
 
  Company-obligated mandatorily redeemable security of partnership holding solely parent debentures           150,000  
  Subject to mandatory redemption           131,225  
         
 
    Total preferred securities of subsidiaries           281,225  
         
 

Commitments and Contingencies (Note 9)
 
 
 
 
 
 
 

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     2,634,856     2,632,886  
  Retained deficit     (775,324 )   (791,770 )
  Accumulated other comprehensive loss     (74,264 )   (212,221 )
   
 
 

Total Shareholder's Equity
 
 
1,849,398
 
 
1,693,025
 
   
 
 

Total Liabilities and Shareholder's Equity
 
$
11,878,448
 
$
11,092,322
 
   
 
 

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

4


EDISON MISSION ENERGY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

 
   Nine Months Ended
September 30,
  
 
   2003
   2002
  
Cash Flows From Operating Activities              
  Income from continuing operations, after accounting change, net   $ 19,110   $ 95,129  
  Adjustments to reconcile income to net cash provided by operating activities:              
    Equity in income from unconsolidated affiliates     (288,471 )   (228,484 )
    Distributions from unconsolidated affiliates     315,217     261,689  
    Depreciation and amortization     212,824     181,557  
    Deferred taxes and tax credits     (41,102 )   25,539  
    Asset impairment charges     251,240     85,924  
    Cumulative effect of change in accounting, net of tax     8,571     13,986  
  Changes in operating assets and liabilities:              
    Decrease (increase) in accounts receivable     (32,278 )   166,852  
    Decrease in inventory     17,777     5,266  
    Decrease (increase) in prepaid expenses and other     53,546     (8,674 )
    Increase in rent payments in excess of levelized rent expense     (96,313 )   (95,234 )
    Increase in accounts payable and accrued liabilities     31,027     55,658  
    Increase (decrease) in interest payable     858     (3,446 )
    Increase (decrease) in long-term incentive compensation     3,410     (757 )
    Decrease (increase) in net assets under risk management     19,021     (35,768 )
  Other operating, net     15,197     37,128  
   
 
 
      489,634     556,365  
  Operating cash flows from discontinued operations     (653 )   61,015  
   
 
 
    Net cash provided by operating activities     488,981     617,380  
   
 
 
Cash Flows From Financing Activities              
  Borrowings on long-term debt and lease swap agreements     226,797     351,775  
  Payments on long-term debt agreements     (134,598 )   (514,267 )
  Short-term financing and lease swap agreements, net     5,217     (28,983 )
  Cash dividends to minority shareholders     (10,353 )   (13,013 )
  Financing costs     (2,531 )   —  
   
 
 
      84,532     (204,488 )
  Financing cash flows from discontinued operations     —     (13,598 )
   
 
 
    Net cash provided by (used in) financing activities     84,532     (218,086 )
   
 
 
Cash Flows From Investing Activities              
  Investments in and loans to energy projects     (61,564 )   (17,331 )
  Purchase of common stock of acquired companies     (274,813 )   —  
  Purchase of power sales agreement     —     (80,084 )
  Capital expenditures     (104,700 )   (516,058 )
  Proceeds from return of capital and loan repayments     13,553     87,855  
  Proceeds from sale of assets     —     43,986  
  Decrease in restricted cash     20,674     110,539  
  Investments in other assets     (9,924 )   249,206  
   
 
 
      (416,774 )   (121,887 )
  Investing cash flows from discontinued operations     4,656     1,254  
   
 
 
    Net cash used in investing activities     (412,118 )   (120,633 )
   
 
 
Effect of exchange rate changes on cash     7,033     14,766  
   
 
 
Net increase in cash and cash equivalents     168,428     293,427  
Cash and cash equivalents at beginning of period     647,240     434,249  
   
 
 
Cash and cash equivalents at end of period     815,668     727,676  
Cash and cash equivalents classified as part of discontinued operations     (130 )   (35,487 )
   
 
 
Cash and cash equivalents of continuing operations   $ 815,538   $ 692,189  
   
 
 

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

5


EDISON MISSION ENERGY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 nine months ended September 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 have reached agreements to extend existing bank credit facilities and at least three merchant generators have filed for Chapter 11 protection under the United States Bankruptcy Code.

        On October 28, 2003, Standard & Poor's Ratings Service downgraded EME's senior unsecured credit rating to B from BB-. Standard & Poor's also lowered the credit ratings of EME's wholly owned indirect subsidiaries, Edison Mission Midwest Holdings (syndicated loan facility to B from BB-) and Edison Mission Marketing & Trading (corporate credit rating to B from BB-). Standard & Poor's placed the ratings of all these entities on CreditWatch with negative implications. These ratings actions did not trigger any defaults under EME's credit facilities or those of the other affected entities.

        As a result of the October 28, 2003 Standard & Poor's downgrade of Edison Mission Midwest Holdings to B from BB-, the cash on deposit in the cash flow recapture account ($246 million) related to Edison Mission Midwest Holdings' indebtedness was required to be used to prepay that indebtedness, with the amount of such prepayment applied ratably to the $911 million and $808 million tranches thereof. Therefore, on October 29, 2003, $130 million from the cash flow recapture account was applied to the $911 million tranche, and $116 million to the $808 million tranche, thereby reducing Edison Mission Midwest Holdings' debt obligations to $781 million and $692 million, respectively. In the future, so long as Edison Mission Midwest Holdings' ratings remain at the current level or lower, amounts of excess cash flow deposited in the cash flow recapture account at the end of each calendar quarter will be used upon deposit to prepay, pro rata, amounts then outstanding under these bank

6


facilities. The Edison Mission Midwest Holdings $781 million of debt maturing on December 11, 2003 will need to be repaid, extended or refinanced. Edison Mission Midwest Holdings does not have sufficient cash to repay this indebtedness when due.

        On November 13, 2003, EME's subsidiary, Mission Energy Holdings International, Inc. received a commitment letter from Citigroup, Credit Suisse First Boston, JPMorganChaseBank and Lehman Brothers Inc. to provide a three-year, $700 million secured loan intended to provide bridge financing to asset sales, including the sale of some or all of its international operations, depending upon, among other things, market prices. Subject to completion, the net proceeds from this financing will be used to make an equity contribution of approximately $550 million in Edison Mission Midwest Holdings which, together with cash on hand, will be used to repay Edison Mission Midwest Holdings' $781 million indebtedness due on December 11, 2003. The remaining net proceeds from this financing will be used to repay indebtedness of a foreign subsidiary under the Coal and CapEx facility guaranteed by EME. Mission Energy Holdings International owns substantially all of EME's international operations, through its subsidiary, MEC International B.V. The commitment letter provides that collateral for this financing includes a pledge of:

        In addition to the pledges of collateral, the commitment letter provides for guarantees of the loan by a number of EME domestic subsidiaries, including a guarantee by Edison Mission Finance Co., which will pledge its receivable from EME Homer City Generation L.P. under a revolving loan agreement (under which $499 million was outstanding at September 30, 2003) as security for such guarantee. The commitment letter also provides for: