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, 2004
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 August 6, 2004: 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	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 4.	Controls and Procedures	69
PART II – Other Information
Item 6.	Exhibits and Reports on Form 8-K	70
	Signatures	71

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, Unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			2004			2003			2004			2003
Operating Revenues
	Electric revenues		$	696,522		$	685,924		$	1,469,586		$	1,366,857
	Net gains from price risk management and energy trading			5,788			17,792			7,307			10,962
	Operation and maintenance services			10,778			11,597			19,388			20,954

		Total operating revenues		713,088			715,313			1,496,281			1,398,773

Operating Expenses
	Fuel			216,345			243,128			510,154			520,015
	Plant operations and transmission costs			244,843			247,458			462,602			450,284
	Plant operating leases			46,523			51,609			97,474			103,077
	Operation and maintenance services			9,371			7,370			16,547			13,749
	Depreciation and amortization			74,760			72,024			148,764			143,855
	Loss on lease termination, asset impairment and other charges			954,256			251,240			954,256			251,240
	Administrative and general			46,595			42,201			91,106			80,248

		Total operating expenses		1,592,693			915,030			2,280,903			1,562,468

	Operating loss			(879,605	)		(199,717	)		(784,622	)		(163,695	)

Other Income (Expense)
	Equity in income from unconsolidated affiliates			96,017			67,640			160,847			131,477
	Interest and other income			5,038			(348	)		9,992			6,430
	Gain on sale of assets			—			—			43,489			—
	Interest expense			(143,436	)		(118,817	)		(278,984	)		(235,640	)
	Dividends on preferred securities			—			(5,724	)		—			(11,318	)

		Total other income (expense)		(42,381	)		(57,249	)		(64,656	)		(109,051	)

	Loss from continuing operations before income taxes and minority interest			(921,986	)		(256,966	)		(849,278	)		(272,746	)
	Benefit for income taxes			(357,039	)		(102,541	)		(327,971	)		(113,901	)
	Minority interest			(19,997	)		(9,841	)		(32,403	)		(13,902	)

Loss From Continuing Operations				(584,944	)		(164,266	)		(553,710	)		(172,747	)
	Loss from operations of discontinued foreign subsidiaries, net of tax (Note 7)			(117	)		(2,470	)		(79	)		(2,242	)

Loss Before Accounting Change				(585,061	)		(166,736	)		(553,789	)		(174,989	)
	Cumulative effect of change in accounting, net of tax (Note 15)			—			—			—			(8,571	)

Net Loss			$	(585,061	)	$	(166,736	)	$	(553,789	)	$	(183,560	)

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,
			2004			2003			2004			2003
Net Loss			$	(585,061	)	$	(166,736	)	$	(553,789	)	$	(183,560	)
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustments:
		Foreign currency translation adjustments, net of income tax expense (benefit) of $(344) and $2,269 for the three months and $1,173 and $1,304 for the six months ended June 30, 2004 and 2003, respectively		(29,199	)		42,130			(6,893	)		63,418
	Minimum pension liability adjustment			171			(487	)		(177	)		(286	)
	Unrealized gains (losses) on derivatives qualified as cash flow hedges:
		Other unrealized holding gains (losses) arising during period, net of income tax expense (benefit) of $(20,229) and $20,527 for the three months and $(50,876) and $2,933 for the six months ended June 30, 2004 and 2003, respectively		(3,853	)		24,959			(50,533	)		21,812
		Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $(15,736) and $447 for the three months and $(31,487) and $(3,484) for the six months ended June 30, 2004 and 2003, respectively		22,030			(4,675	)		42,976			(5,944	)

Other comprehensive income (loss)				(10,851	)		61,927			(14,627	)		79,000

Comprehensive Loss			$	(595,912	)	$	(104,809	)	$	(568,416	)	$	(104,560	)

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, 2004		December 31, 2003
Assets
Current Assets
	Cash and cash equivalents		$	467,757	$	503,910
	Accounts receivable—trade, net of allowance of $6,751 in 2004 and $6,470 in 2003			336,165		353,887
	Accounts receivable—affiliates			500,960		29,987
	Assets under price risk management and energy trading			30,877		48,355
	Inventory			158,810		165,531
	Prepaid expenses and other			158,045		203,704

		Total current assets		1,652,614		1,305,374

Investments in Unconsolidated Affiliates				1,632,677		1,607,226

Property, Plant and Equipment				8,313,379		8,684,811
	Less accumulated depreciation and amortization			1,319,588		1,262,660

		Net property, plant and equipment		6,993,791		7,422,151

Other Assets
	Goodwill			853,176		867,164
	Deferred financing costs			81,665		66,604
	Long-term assets under price risk management and energy trading			97,670		96,990
	Restricted cash			285,785		338,268
	Rent payments in excess of levelized rent expense under plant operating leases			272,244		213,686
	Other long-term assets			119,154		153,933

		Total other assets		1,709,694		1,736,645

Assets of Discontinued Operations				1,422		6,122

Total Assets			$	11,990,198	$	12,077,518

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, 2004			December 31, 2003
Liabilities and Shareholder's Equity
Current Liabilities
	Accounts payable—affiliates		$	31,934		$	3,068
	Accounts payable and accrued liabilities			382,709			479,958
	Liabilities under price risk management and energy trading			219,522			163,199
	Interest payable			109,923			101,169
	Short-term obligations			31,199			52,418
	Current maturities of long-term obligations			111,904			855,845

		Total current liabilities		887,191			1,655,657

Long-Term Obligations Net of Current Maturities				6,794,534			5,331,313

Long-Term Deferred Liabilities
	Deferred taxes and tax credits			1,272,196			1,290,059
	Deferred revenue			415,725			577,453
	Long-term incentive compensation			29,339			29,695
	Long-term liabilities under price risk management and energy trading			112,416			138,098
	Junior subordinated debentures			154,639			154,639
	Preferred securities subject to mandatory redemption			158,250			164,050
	Other			326,587			318,219

		Total long-term deferred liabilities		2,469,152			2,672,213

Liabilities of Discontinued Operations				84			581

Total Liabilities				10,150,961			9,659,764

Minority Interest				504,681			514,978

Commitments and Contingencies (Note 10)
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			2,634,864			2,632,954
	Retained deficit			(1,327,900	)		(772,397	)
	Accumulated other comprehensive loss			(36,538	)		(21,911	)

Total Shareholder's Equity				1,334,556			1,902,776

Total Liabilities and Shareholder's Equity			$	11,990,198		$	12,077,518

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,
			2004			2003
Cash Flows From Operating Activities
	Loss from continuing operations, after accounting change, net		$	(553,710	)	$	(181,318	)
	Adjustments to reconcile loss to net cash provided by (used in) operating activities:
		Equity in income from unconsolidated affiliates		(160,847	)		(131,477	)
		Distributions from unconsolidated affiliates		78,088			65,127
		Depreciation and amortization		148,764			143,855
		Minority interest		32,403			13,902
		Deferred taxes and tax credits		43,045			(140,065	)
		Asset impairment charges		—			251,240
		Gain on sale of assets		(43,489	)		—
		Cumulative effect of change in accounting, net of tax		—			8,571
	Changes in operating assets and liabilities:
		Increase in accounts receivable – trade		(5,778	)		(38,107	)
		Increase in accounts receivable – affiliates		(479,429	)		(1,817	)
		Decrease (increase) in inventory		(3,577	)		12,976
		Decrease (increase) in prepaid expenses and other		(7,424	)		94,272
		Increase in rent payments in excess of levelized rent expense		(53,865	)		(91,591	)
		Increase (decrease) in accounts payable and accrued liabilities		(31,995	)		31,113
		Increase in interest payable		11,915			2,983
		Decrease (increase) in net assets under risk management		(2,154	)		9,571
	Other operating, net			(30,317	)		(24,608	)

				(1,058,370	)		24,627
	Operating cash flows from discontinued operations			2,805			104

		Net cash provided by (used in) operating activities		(1,055,565	)		24,731

Cash Flows From Financing Activities
	Borrowings on long-term debt and lease swap agreements			1,764,572			226,797
	Payments on long-term debt agreements			(799,169	)		(40,461	)
	Short-term financing and lease swap agreements, net			(19,548	)		303,100
	Cash dividends to minority shareholders			(12,410	)		(9,485	)
	Financing costs			(34,950	)		(2,531	)

		Net cash provided by financing activities		898,495			477,420

Cash Flows From Investing Activities
	Investments in and loans to energy projects			7,535			(42,167	)
	Purchase of common stock of acquired companies			—			(274,813	)
	Capital expenditures			(47,050	)		(79,104	)
	Proceeds from return of capital and loan repayments			4,645			11,903
	Proceeds from sale of interest in projects			118,027			—
	Decrease in restricted cash			29,713			5,896
	Investments in other assets			32,897			9,119

				145,767			(369,166	)
	Investing cash flows from discontinued operations			1,345			4,908

		Net cash provided by (used in) investing activities		147,112			(364,258	)

Effect of exchange rate changes on cash				8,062			16,128
Effect on cash from deconsolidation of subsidiaries				(34,231	)		—

Net increase (decrease) in cash and cash equivalents				(36,127	)		154,021
Cash and cash equivalents at beginning of period				504,093			647,240

Cash and cash equivalents at end of period				467,966			801,261
Cash and cash equivalents classified as part of discontinued operations				(209	)		(131	)

Cash and cash equivalents of continuing operations			$	467,757		$	801,130

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

EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(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, 2004 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, 2003 and 2002, included in EME's annual report on Form 10-K for the year ended December 31, 2003. EME follows the same accounting policies for interim reporting purposes, with the exception of the change in accounting for variable interest entities (see Note 16). 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, 2003. 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.

EME's independent auditors' audit opinion for the year ended December 31, 2003 contains an explanatory paragraph that indicates the consolidated financial statements included in its 2003 annual report on Form 10-K 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 or refinance $693 million of debt that matures in December 2004 raises substantial doubt about EME's ability to continue as a going concern. In April 2004, all of the outstanding debt of Edison Mission Midwest Holdings was repaid in full through new financings obtained by Midwest Generation. For further discussion, see Note 9—Refinancing.

Note 2. Dispositions

Agreements to Sell International Projects

On July 20, 2004, EME entered into an agreement to sell its 51.2% interest in Contact Energy to Origin Energy Limited for total consideration of NZ$1,674.7 million (approximately $1.1 billion), which includes the assumption of NZ$535 million of debt. Completion of the sale, currently expected in the fourth quarter of 2004, is subject to closing conditions and action by the New Zealand Takeovers Panel. EME has entered into a foreign currency hedge in order to protect against a depreciation in the value of the New Zealand dollar (in which the sales price is denominated) versus the U.S. dollar.

On July 29, 2004, EME entered into an agreement to sell its remaining international power generation portfolio, owned by a wholly owned Dutch subsidiary, MEC International BV, to a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%). The purchase price is $2.3 billion, subject to certain purchase price adjustments prior to closing that are expected to result in a net purchase price of approximately $2.2 billion. Closing of the BV transaction is subject to

approval by International Power's shareholders and to a number of regulatory approvals and project level consents. The sale is expected to close in the fourth quarter of 2004.

Together, these two transactions represent the sale of all of EME's interests in its international projects. Net proceeds from these two transactions are expected to be approximately $2.5 billion to EME after taxes, transaction expenses and purchase price adjustments. EME's initial estimate of the after-tax gain on sale of its international projects is approximately $550 million. Net proceeds from the sale will be used to repay the $800 million secured loan at Mission Energy Holdings International, Inc. and other indebtedness. EME will retain its ownership of the subsidiaries associated with the Lakeland project (see Note 7—Discontinued Operations) and some inactive subsidiaries.

The following table presents the condensed financial position of MEC International BV at June 30, 2004.

		June 30, 2004
Cash		$	198
Property, plant and equipment			4,128
Other assets			2,392

	Total assets	$	6,718

Accounts payable		$	158
Debt			2,840
Deferred taxes			596
Other liabilities			914
Minority interest			733
Equity			1,477

	Total liabilities and equity	$	6,718

Beginning in the third quarter of 2004, EME will report its international operations as discontinued operations.

Sales of Domestic Projects

On March 31, 2004, EME completed the sale of its 50% partnership interest in Brooklyn Navy Yard Cogeneration Partners L.P. to a third party for a sales price of approximately $42 million. EME recorded an impairment charge of $53 million during the fourth quarter of 2003 related to the planned disposition of this investment and a pre-tax loss of approximately $4 million during the first quarter of 2004 due to changes in the terms of the sale.

On January 7, 2004, EME completed the sale of 100% of its stock of Edison Mission Energy Oil & Gas, which in turn held minority interests in Four Star Oil & Gas, to Medicine Bow Energy Corporation. Proceeds from the sale were approximately $100 million. EME recorded a pre-tax gain on the sale of a