Back to GetFilings.com

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

Form 10-Q

Commission file number 333-59348

MIDWEST GENERATION, LLC
(Exact name of registrant as specified in its charter)

        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 November 8, 2004: 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
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, Unaudited)

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

1

MIDWEST GENERATION, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, Unaudited)

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

2

MIDWEST GENERATION, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, Unaudited)

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

3

MIDWEST GENERATION, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, Unaudited)

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

4

MIDWEST GENERATION, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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 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.

        Midwest Generation, LLC's (Midwest Generation's) significant accounting policies are described in Note 2 to its financial statements as of December 31, 2003 and 2002, included in its annual report on Form 10-K for the year ended December 31, 2003. 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 annual report on Form 10-K for the year ended December 31, 2003.

        Midwest Finance Corp., formed as a Delaware corporation on April 22, 2004, is Midwest Generation's wholly owned subsidiary. Therefore, Midwest Generation now reports on a consolidated basis. Midwest Finance has no material assets, operations or revenues. Midwest Finance was formed in April 2004 solely to serve as a co-issuer of Midwest Generation's second priority senior secured notes in order to facilitate the offering of these notes. For further discussion, see Note 5—Refinancing.

        On June 8, 2004, PricewaterhouseCoopers LLP, independent registered public accounting firm, reissued via a current report on Form 8-K, dated June 8, 2004, its original Report of Independent Registered Public Accounting Firm that was included in Part II, Item 8 of the annual report on Form 10-K of Midwest Generation, LLC for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission on March 15, 2004. The original report of PricewaterhouseCoopers LLP dated March 10, 2004 contained an explanatory paragraph indicating that the financial statements included in Midwest Generation's 2003 annual report on Form 10-K were prepared on the basis that Midwest Generation would continue as a going concern and that the uncertainty about Edison Mission Midwest Holdings' ability to repay or refinance $693 million of debt that was to mature in December 2004 raised substantial doubt about Midwest Generation's ability to continue as a going concern. In April 2004, the $693 million of debt was repaid in full through new financings obtained by Midwest Generation. For further discussion, see Note 5—Refinancing. Accordingly, the going concern explanatory paragraph referred to above has been removed.

Note 2. Loss on Lease Termination, Asset Impairment and Other Charges

        Loss on lease termination, asset impairment and other charges was $41.0 million and $104.7 million for the third quarter and nine months ended September 30, 2004, respectively. On April 27, 2004, Midwest Generation terminated the Collins Station lease through a negotiated transaction with the lease equity investor. Midwest Generation made a lease termination payment of approximately $960 million. This amount represented the $774 million of lease debt outstanding, plus accrued interest, and the amount owed to the lease equity investor for early termination of the lease. Midwest Generation received title to the Collins Station as part of the transaction. Midwest Generation recorded a pre-tax loss of approximately $64 million (approximately $39 million after tax) during the

5

quarter ended June 30, 2004, due to termination of the lease and the planned decommissioning of the asset. Included in the pre-tax loss is a $2.7 million inventory reserve for excess spare parts at the Collins Station.

        Following the termination of the Collins Station lease, Midwest Generation announced plans to permanently cease operations at the Collins Station by December 31, 2004 and decommission the plant. On July 30, 2004, PJM Interconnection, LLC (PJM) accepted Midwest Generation's request to cease operations at the Collins Station. PJM found that the decommissioning of the plant would not affect the operation or reliability of the PJM markets. During the third quarter of 2004, Midwest Generation reached an agreement with Exelon Generation to terminate the power purchase agreement effective September 30, 2004 for the two units at the Collins Station that remained under contract. As a result of the termination of the power purchase agreement, Midwest Generation revised the estimated useful life of the remaining plant assets to end on September 30, 2004 instead of December 31, 2004. Accordingly, Midwest Generation recorded a pre-tax impairment charge of $10.3 million during the third quarter of 2004. During the quarter ended September 30, 2004, Midwest Generation recorded a pre-tax loss of $1.9 million for fuel oil inventory at the Collins Station. In October 2004, Midwest Generation finalized plans to reduce the workforce in Illinois and expects to recognize a $4 million pre-tax charge for exit costs during the fourth quarter of 2004.

        In September 2004, management completed an analysis of future competitiveness in the expanded PJM marketplace of its eight small peaking units in Illinois. Based on this analysis, management decided to decommission six of the eight small peaking units, subject to regulatory review and approval. As a result of this decision, projected future cash flows associated with the Illinois peaking units were less than the book value of the units resulting in an impairment under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or the Disposal of Long-Lived Assets." During the third quarter of 2004, Midwest Generation recorded a pre-tax impairment charge of $28.8 million (approximately $17.7 million after tax).

        Asset impairment charges for the nine months ended September 30, 2003 consisted of a $1.025 billion ($625 million after tax) impairment charge that resulted from a revised long-term outlook for capacity revenues from the Collins Station and eight small peaking units. 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.

Note 3. Accumulated Other Comprehensive Income (Loss)

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

        Unrealized losses on cash flow hedges at September 30, 2004 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 $10.2 million, after tax, of the net unrealized losses on cash flow hedges will be reclassified into earnings during the next twelve months. Management expects that reclassification of net unrealized losses will offset energy

6

revenue recognized at market prices. 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 December 31, 2006.

        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 losses of $4.6 million and $4.8 million during the third quarters of 2004 and 2003, respectively, and $0.2 million and $0.9 million during the nine months ended September 30, 2004 and 2003, respectively, representing the amount of cash flow hedges' ineffectiveness, reflected in income (loss) from price risk management in the consolidated statement of operations.

Note 4. Employee Benefit Plans

Pension Plan

        Midwest Generation previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $9.1 million to its pension plan in 2004. As of September 30, 2004, $7.6 million in contributions have been made. Midwest Generation anticipates that its original expectation will be met by year-end 2004.

        Components of pension expense are:

Postretirement Benefits Other Than Pensions

        Midwest Generation previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $90 thousand to its postretirement benefits other than its pension plan in 2004. Midwest Generation expects to make these contributions in the fourth quarter of 2004.

        Components of postretirement benefits expense are:

7

Note 5. Refinancing

Midwest Generation Financing Developments

        On April 27, 2004, Midwest Generation completed a private offering of $1 billion aggregate principal amount of its 8.75% second priority senior secured notes due 2034. The notes were co-issued by a newly formed wholly owned subsidiary, Midwest Finance Corp. Holders of the notes may require Midwest Generation to repurchase, or Midwest Generation may elect to repay, the notes on May 1, 2014 and on each one-year anniversary thereafter at 100% of their principal amount, plus accrued and unpaid interest. Concurrent with the issuance of the notes, Midwest Generation borrowed $700 million under a new first priority senior secured term loan facility. The term loan has a final maturity of April 27, 2011 and bears interest at LIBOR plus 3.25% per annum. Midwest Generation has agreed to repay $1,750,000 of the term loan on each quarterly payment date. Midwest Generation also entered into a new five-year $200 million working capital facility that replaced a prior facility. The new working capital facility also provides for the issuance of letters of credit. As of September 30, 2004, Midwest Generation had no borrowings outstanding under the working capital facility and had reimbursement obligations under a letter of credit for $2.6 million that expires in 2005. Midwest Generation used the proceeds of the notes issuance and the term loan to refinance $693 million of indebtedness (plus accrued interest and fees) owed by its direct parent, Edison Mission Midwest Holdings Co., which had been guaranteed by Midwest Generation and was due in December 2004, and to make the termination payment under the Collins Station lease in the amount of approximately $960 million.

        Midwest Generation is permitted to use the new working capital facility and cash on hand to provide credit support (either through loans or letters of credit) for forward contracts with third-party counterparties entered into by Edison Mission Marketing & Trading on its behalf for capacity and energy generated by Midwest Generation. Utilization of this credit facility in support of such forward contracts provides additional liquidity support for implementation of Midwest Generation's contracting strategy for the Illinois Plants. See "—Loan Agreement with Edison Mission Marketing & Trading."

        The term loan and working capital facility share a first priority lien and the senior secured notes have a second priority lien in a collateral package which consists of, among other things, substantially all the coal-fired generating plants owned by Midwest Generation and the assets relating to those plants, as well as the equity interests of Midwest Generation and its parent company and the intercompany notes entered into by EME and Midwest Generation in connection with the Powerton-Joliet sale-leaseback transaction.

        Simultaneously with the closing of the above financing, Edison Mission Midwest Holdings made an equity contribution to Midwest Generation of approximately $2.2 billion, which was used to settle the outstanding balance due under the subordinated revolving loan. As a result of the settlement and termination of this loan, Midwest Generation will no longer incur intercompany interest costs related to this debt.

Loan Agreement with Edison Mission Marketing & Trading

        Midwest Generation entered into a revolving credit agreement with Edison Mission Marketing & Trading, dated as of April 27, 2004, pursuant to which Midwest Generation will, from time to time, make revolving loans to, and have letters of credit issued on behalf of, Edison Mission Marketing & Trading. The loans and letters of credit provide credit support for forward contracts entered into by Edison Mission Marketing & Trading related to the Illinois Plants. As of September 30, 2004, Midwest Generation has provided Edison Mission Marketing & Trading $1.8 million, which Edison Mission Marketing & Trading has used to provide credit support for forward contracts. Loans provided under

8

this revolving credit agreement are repaid by Edison Mission Marketing & Trading upon the return of the funds under the terms of the related forward contract. The amount repaid includes interest earned, if any, under margining agreements supporting such contracts. The maximum amount of available credit under the agreement is $200 million.

Note 6.