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 September 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 November 8, 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	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	63
Item 4.	Controls and Procedures	63
PART II—Other Information
Item 6.	Exhibits	64
	Signatures	65

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,
			2004			2003			2004			2003
Operating Revenues
	Electric revenues		$	507,023		$	581,446		$	1,210,038		$	1,264,777
	Net gains (losses) from price risk management and energy trading			(3,723	)		12,683			(1,182	)		39,059
	Operation and maintenance services			5,935			8,039			19,133			21,679

		Total operating revenues		509,235			602,168			1,227,989			1,325,515

Operating Expenses
	Fuel			162,525			170,786			460,444			454,967
	Plant operations			89,560			97,790			314,153			324,136
	Plant operating leases			43,978			51,199			141,452			154,276
	Operation and maintenance services			4,564			5,681			16,581			15,888
	Depreciation and amortization			38,894			35,948			108,750			113,125
	Loss on lease termination, asset impairment and other charges			35,200			—			989,456			251,240
	Administrative and general			38,955			32,701			100,123			96,022

		Total operating expenses		413,676			394,105			2,130,959			1,409,654

	Operating income (loss)			95,559			208,063			(902,970	)		(84,139	)

Other Income (Expense)
	Equity in income from unconsolidated affiliates			107,084			117,590			179,634			205,999
	Interest and other income (expense)			(1,356	)		(611	)		1,649			4,658
	Gain on sale of assets			—			—			43,489			—
	Interest expense			(78,193	)		(76,626	)		(209,708	)		(214,319	)
	Dividends on preferred securities			—			—			—			(7,085	)

		Total other income (expense)		27,535			40,353			15,064			(10,747	)

	Income (loss) from continuing operations before income taxes			123,094			248,416			(887,906	)		(94,886	)
	Provision (benefit) for income taxes			37,908			87,440			(340,162	)		(54,199	)

Income (Loss) From Continuing Operations				85,186			160,976			(547,744	)		(40,687	)
	Income from operations of discontinued foreign subsidiaries, net of tax (Note 2)			499,668			39,207			578,809			65,881

Income Before Accounting Change				584,854			200,183			31,065			25,194
	Cumulative effect of change in accounting, net of tax (Note 13)			—			—			—			(8,571	)

Net Income			$	584,854		$	200,183		$	31,065		$	16,623

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 September 30,						Nine Months Ended September 30,
			2004			2003			2004			2003
Net Income			$	584,854		$	200,183		$	31,065		$	16,623
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustments:
		Foreign currency translation adjustments, net of income tax expense (benefit) of $(105) and $260 for the three months and $1,068 and $1,564 for the nine months ended September 30, 2004 and 2003, respectively		33,165			6,107			26,272			69,525
		Reclassification adjustments for sale of investment in a foreign subsidiary		(134,014	)		—			(134,014	)		—
	Minimum pension liability adjustment			22			(61	)		(155	)		(347	)
	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 $4,808 and $21,498 for the three months and $(46,068) and $24,431 for the nine months ended September 30, 2004 and 2003, respectively		(2,933	)		51,766			(53,466	)		73,578
		Reclassification adjustments included in net income (loss), net of income tax benefit of $19,214 and $1,963 for the three months and $50,701 and $5,447 for the nine months ended September 30, 2004 and 2003, respectively		26,841			1,145			69,817			(4,799	)

Other comprehensive income (loss)				(76,919	)		58,957			(91,546	)		137,957

Comprehensive Income (Loss)			$	507,935		$	259,140		$	(60,481	)	$	154,580

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

EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, Unaudited)

			September 30, 2004		December 31, 2003
Assets
Current Assets
	Cash and cash equivalents		$	1,155,847	$	285,720
	Accounts receivable—trade			189,889		133,627
	Accounts receivable—affiliates			173,462		29,418
	Assets under price risk management and energy trading			15,089		21,624
	Inventory			112,130		120,425
	Prepaid expenses and other			86,700		90,438

		Total current assets		1,733,117		681,252

Investments in Unconsolidated Affiliates				502,685		526,832

Property, Plant and Equipment				3,474,199		3,435,489
	Less accumulated depreciation and amortization			676,029		535,609

		Net property, plant and equipment		2,798,170		2,899,880

Other Assets
	Deferred financing costs			64,636		41,446
	Long-term assets under price risk management and energy trading			94,442		96,340
	Restricted cash			129,602		185,940
	Rent payments in excess of levelized rent expense under plant operating leases			276,924		213,686
	Other long-term assets			17,200		1,869

		Total other assets		582,804		539,281

Assets of Discontinued Operations				4,501,518		7,430,273

Total Assets			$	10,118,294	$	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)

			September 30, 2004			December 31, 2003
Liabilities and Shareholder's Equity
Current Liabilities
	Accounts payable—affiliates		$	16,021		$	3,068
	Accounts payable and accrued liabilities			256,055			250,453
	Liabilities under price risk management and energy trading			65,746			31,083
	Interest payable			94,473			41,920
	Current maturities of long-term obligations			656,500			774,120

		Total current liabilities		1,088,795			1,100,644

Long-Term Obligations Net of Current Maturities				3,735,194			2,691,521

Long-Term Deferred Liabilities
	Deferred taxes and tax credits			249,524			684,015
	Junior subordinated debentures			154,639			154,639
	Other			335,870			317,429

		Total long-term deferred liabilities		740,033			1,156,083

Liabilities of Discontinued Operations				2,783,197			4,711,516

Total Liabilities				8,347,219			9,659,764

Minority Interest of Discontinued Operations				1,033			514,978

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			2,579,819			2,632,954
	Retained deficit			(760,450	)		(772,397	)
	Accumulated other comprehensive loss			(113,457	)		(21,911	)

Total Shareholder's Equity				1,770,042			1,902,776

Total Liabilities and Shareholder's Equity			$	10,118,294		$	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)

			Nine Months Ended September 30,
			2004			2003
Cash Flows From Operating Activities
	Loss from continuing operations, after accounting change, net		$	(547,744	)	$	(49,258	)
	Adjustments to reconcile loss to net cash provided by (used in) operating activities:
		Equity in income from unconsolidated affiliates		(179,634	)		(205,999	)
		Distributions from unconsolidated affiliates		129,129			306,286
		Depreciation and amortization		108,750			113,125
		Deferred taxes and tax credits		(330,309	)		(52,013	)
		Asset impairment charges		35,200			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		(56,100	)		(42,254	)
		Increase in accounts receivable—affiliates		(152,046	)		9,976
		Decrease in inventory		5,595			17,775
		Decrease in prepaid expenses and other		9,067			44,291
		Increase in rent payments in excess of levelized rent expense		(58,545	)		(96,313	)
		Increase in accounts payable and accrued liabilities		26,049			38,864
		Increase in interest payable		52,613			860
		Decrease (increase) in net assets under risk management		10,159			19,021
	Other operating, net			18,568			(17,411	)

		Net cash provided by (used in) operating activities		(972,737	)		346,761

Cash Flows From Financing Activities
	Borrowings on long-term debt and lease swap agreements			1,795,000			—
	Payments on long-term debt agreements			(846,513	)		(47,256	)
	Cash dividends to parent			(69,000	)		—
	Financing costs			(35,739	)		—

		Net cash provided by (used in) financing activities		843,748			(47,256	)

Cash Flows From Investing Activities
	Investments in and loans to energy projects			—			(23,758	)
	Capital expenditures			(39,032	)		(71,191	)
	Proceeds from sale of interest in projects			857,488			—
	Decrease in restricted cash			55,643			34,509
	Investments in other assets			(345	)		21,719

		Net cash provided by (used in) investing activities		873,754			(38,721	)

Net changes in cash of discontinued operations				43,545			(92,486	)

Net increase in cash and cash equivalents				788,310			168,298
Cash and cash equivalents at beginning of period				504,093			647,240

Cash and cash equivalents at end of period				1,292,403			815,538
Cash and cash equivalents classified as part of discontinued operations				(136,556	)		(131,192	)

Cash and cash equivalents of continuing operations			$	1,155,847		$	684,346

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

EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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 14). 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.

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 7—Refinancing.

Interim Financial Presentation

Beginning in this third quarter report on Form 10-Q, the consolidated financial statements for all periods presented reflect the reclassification of the results of EME's international power generation portfolio as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). Refer to Note 2—Discontinued Operations, which presents detailed information regarding the discontinued international operations. Certain other reclassifications have been made to prior year amounts to conform to current year classifications.

Furthermore, as a result of the reclassification of the results of EME's international operations as discontinued operations, certain footnotes presented in EME's second quarter report on Form 10-Q for the quarter ended June 30, 2004 are no longer required to be presented. Goodwill that had been presented in the second quarter report on Form 10-Q is primarily related to the acquisitions of Contact Energy Limited (Contact Energy) and First Hydro. In addition, intangible assets subject to amortization are primarily related to customer contracts at Contact Energy. Accordingly, activity relating to goodwill and intangible assets described above is now reflected as part of discontinued operations.

EME continues to operate predominantly in one line of business, electric power generation, with all of its continuing operations located in the United States. As a result of the sale of Contact Energy and announced plans to sell the remainder of its portfolio of international assets (which made up the

reportable segments in Asia Pacific and Europe), EME does not meet the criteria for segment reporting and, therefore, this footnote has been removed.

Except as indicated, amounts reflected in the notes to the consolidated financial statements relate to continuing operations of EME.

Note 2. Discontinued Operations

Contact Energy

On September 30, 2004, EME completed the sale of its 51.2% interest in Contact Energy to Origin Energy New Zealand Limited. Consideration for the sale was NZ$1,101.4 million (approximately US$739 million) in cash and NZ$535 million (approximately US$359 million) of debt assumed by the purchaser. The after-tax gain on the sale of Contact Energy was $141 million. On October 5, 2004, EME repaid $600 million of the $800 million secured loan at Mission Energy Holdings International, Inc. with the majority of the proceeds received from the sale of Contact Energy. The remaining proceeds will be retained for general corporate purposes.

MEC International B.V.

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 B.V., to a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%) (the BV transaction). 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. If certain project level approvals and consents are not obtained, one or more projects may be excluded from the sale transaction and the purchase price may be adjusted accordingly. The sale is expected to close in the fourth quarter of 2004. EME's estimate of the after-tax gain on the sale of its international projects is approximately $120 million. Net proceeds from the sale will be used to repay the remaining $200 million due from the $800 million secured loan at Mission Energy Holdings International, Inc., other indebtedness and for general corporate purposes. EME will retain its ownership of the subsidiaries associated with the Lakeland project and some inactive subsidiaries.

Lakeland Project

In 2001, EME ceased consolidating the activities of Lakeland Power Ltd. when an administrative receiver was appointed following a default by Norweb Energi Ltd, the counterparty to a long-term power sales agreement. The consolidated financial statements have been restated to conform to discontinued operations treatment for all historical periods presented. In 2003, a third party completed the purchase of the Lakeland power plant from the administrative receiver for £24 million. The proceeds from the sale and existing cash were used to fund partial repayment of the outstanding debt owed to secured creditors of the project. Lakeland Power Ltd.'s administrative receiver has filed a claim against Norweb Energi Ltd. for termination of the power purchase agreement. To the extent that Lakeland Power Ltd. receives payment under its claim, such amounts will first be used to repay amounts due to creditors. In October 2004, EME purchased the secured creditors' debt from Lakeland Power Ltd. for approximately £6 million. The purchase of the outstanding bank debt was completed to enhance EME's overall position to maximize recovery from the ultimate proceeds received from the claim against Norweb Energi. EME's subsidiary that owns the outstanding shares of Lakeland

Power Ltd. will be entitled to receive any residual amount of the proceeds from the claim after creditors' claims are resolved.

Ferrybridge and Fiddler's Ferry Plants

On December 21, 2001, EME completed the sale of the Ferrybridge and Fiddler's Ferry coal-fired power plants located in the United Kingdom to two wholly owned subsidiaries of American Electric Power. In addition, as part of the transactions, the purchasers acquired other assets and assumed specified liabilities associated with the plants. The sale was the result of a competitive bidding process. EME acquired the plants in 1999 from PowerGen UK plc for £1.3 billion. In accordance with SFAS No. 144, the results of Ferrybridge and Fiddler's Ferry have been reflected as discontinued operations in EME's consolidated financial statements.

Summarized Financial Information for Discontinued Operations

Summarized results of discontinued operations are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Total operating revenues	$	354		$	412		$	1,132		$	1,087
Income before income taxes and minority interest		60			83			222			153
Provision (benefit) for income taxes		(317	)		27			(266	)		56
Minority interest		(18	)		(17	)		(50	)		(31	)
Income from operations of discontinued foreign subsidiaries		359			39			438			66