EDISON MISSION ENERGY - 10-Q Quarterly Report

QuickLinks -- Click here to rapidly navigate through this document

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 March 31, 2005
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 May 9, 2005: 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	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4.	Controls and Procedures	53
PART II—Other Information
Item 1.	Legal Proceedings	55
Item 6.	Exhibits	55
	Signatures	56

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, Unaudited)

			Three Months Ended March 31,
			2005			2004
Operating Revenues
	Electric revenues		$	494		$	382
	Net gains from price risk management and energy trading			12			1
	Operation and maintenance services			5			6

		Total operating revenues		511			389

Operating Expenses
	Fuel			165			179
	Plant operations			106			104
	Plant operating leases			44			51
	Operation and maintenance services			5			5
	Depreciation and amortization			31			34
	Administrative and general			36			32

		Total operating expenses		387			405

	Operating income (loss)			124			(16	)

Other Income (Expense)
	Equity in income from unconsolidated affiliates			36			20
	Interest and other income			9			3
	Gain on sale of assets			—			43
	Loss on early extinguishment of debt			(4	)		—
	Interest expense			(76	)		(59	)

		Total other income (expense)		(35	)		7

	Income (loss) from continuing operations before income taxes and minority interest			89			(9	)
	Provision for income taxes			34			5
	Minority interest			—			(1	)

Income (Loss) From Continuing Operations				55			(15	)
	Income from operations of discontinued subsidiaries, net of tax (Note 4)			7			46

Net Income			$	62		$	31

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

EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions, Unaudited)

			Three Months Ended March 31,
			2005			2004
Net Income			$	62		$	31
Other comprehensive loss, net of tax:
	Foreign currency translation adjustments:
		Foreign currency translation adjustments, net of income tax provision $2 for the three months ended March 31, 2004		—			22
	Unrealized gains (losses) on derivatives qualified as cash flow hedges:
		Other unrealized holding losses arising during period, net of income tax benefit of $55 and $31 for the three months ended March 31, 2005 and 2004, respectively		(70	)		(47	)
		Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $3 and $(16) for the three months ended March 31, 2005 and 2004, respectively		(5	)		21

Other comprehensive loss				(75	)		(4	)

Comprehensive Income (Loss)			$	(13	)	$	27

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

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

			March 31, 2005		December 31, 2004
Assets
Current Assets
	Cash and cash equivalents		$	1,970	$	2,270
	Short-term investments			—		140
	Accounts receivable—trade			186		152
	Accounts receivable—affiliates			77		52
	Assets under price risk management and energy trading			35		41
	Inventory			114		107
	Prepaid expenses and other			198		130

		Total current assets		2,580		2,892

Investments in Unconsolidated Affiliates				458		454

Property, Plant and Equipment				3,506		3,493
	Less accumulated depreciation and amortization			739		709

		Net property, plant and equipment		2,767		2,784

Other Assets
	Deferred financing costs			41		47
	Long-term assets under price risk management and energy trading			89		90
	Restricted cash			97		155
	Rent payments in excess of levelized rent expense under plant operating leases			282		277
	Other long-term assets			14		18

		Total other assets		523		587

Assets of Discontinued Operations				3		111

Total Assets			$	6,331	$	6,828

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

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

			March 31, 2005			December 31, 2004
Liabilities and Shareholder's Equity
Current Liabilities
	Accounts payable—affiliates		$	5		$	26
	Accounts payable and accrued liabilities			246			316
	Dividends payable			—			305
	Liabilities under price risk management and energy trading			178			31
	Interest payable			89			55
	Current maturities of long-term obligations			53			211

		Total current liabilities		571			944

Long-term obligations net of current maturities				3,464			3,507
Deferred taxes and tax credits				182			198
Other long-term liabilities				500			492
Liabilities of discontinued operations				5			5

Total Liabilities				4,722			5,146

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			64
	Additional paid-in capital			2,191			2,251
	Retained deficit			(588	)		(650	)
	Accumulated other comprehensive income (loss)			(58	)		17

Total Shareholder's Equity				1,609			1,682

Total Liabilities and Shareholder's Equity			$	6,331		$	6,828

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

EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, Unaudited)

			Three Months Ended March 31,
			2005			2004
Cash Flows From Operating Activities
	Income (loss) from continuing operations, net		$	55		$	(15	)
	Adjustments to reconcile income (loss) to net cash used in operating activities:
		Equity in income from unconsolidated affiliates		(36	)		(20	)
		Distributions from unconsolidated affiliates		36			26
		Depreciation and amortization		31			34
		Minority interest		—			1
		Deferred taxes and tax credits		32			5
		Gain on sale of assets		—			(43	)
		Loss on early extinguishment of debt		4			—
	Changes in operating assets and liabilities:
		Decrease (increase) in accounts receivable		(53	)		4
		Decrease (increase) in inventory		(7	)		10
		Increase in prepaid expenses and other		(67	)		(17	)
		Increase in rent payments in excess of levelized rent expense		(5	)		—
		Decrease in accounts payable and accrued liabilities		(87	)		(33	)
		Increase in interest payable		34			10
		Decrease in net assets under risk management		5			4
		Other operating—assets		2			7
		Other operating—liabilities		9			(6	)

		Net cash used in operating activities		(47	)		(33	)

Cash Flows From Financing Activities
	Borrowings on long-term debt and lease swap agreements			—			20
	Payments on long-term debt agreements			(201	)		(56	)
	Cash dividends to parent			(360	)		—
	Payments for price appreciation on stock options exercised			(4	)		—

		Net cash used in financing activities		(565	)		(36	)

Cash Flows From Investing Activities
	Capital expenditures			(14	)		(14	)
	Proceeds from return of capital and loan repayments			5			—
	Proceeds from sale of interest in projects			—			118
	Proceeds from sale of discontinued operations			124			—
	Sale (purchase) of short-term investments, net			140			(40	)
	Decrease in restricted cash			52			45
	Proceeds from (investments in) other assets			3			(5	)

		Net cash provided by investing activities		310			104

Effect on cash from discontinued operations activities				2			8

Effect on cash from deconsolidation of subsidiary				—			(32	)

Net increase (decrease) in cash and cash equivalents				(300	)		11
Cash and cash equivalents at beginning of period				2,272			484

Cash and cash equivalents at end of period				1,972			495
Cash and cash equivalents classified as part of discontinued operations				(2	)		(195	)

Cash and cash equivalents of continuing operations			$	1,970		$	300

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

EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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 three months ended March 31, 2005 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, 2004 and 2003, included in EME's annual report on Form 10-K for the year ended December 31, 2004. 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, 2004.

Reclassifications

Certain prior year reclassifications have been made to conform to the current year financial statement presentation. Such reclassifications include the reclassification of income from continuing operations to discontinued operations for EME's international operations, except the Doga project. Refer to Note 4—Discontinued Operations. Except as indicated, amounts reflected in the notes to the consolidated financial statements relate to continuing operations of EME.

Note 2. Inventory

Inventory is stated at the lower of weighted average cost or market. Inventory at March 31, 2005 and December 31, 2004 consisted of the following:

	March 31, 2005		December 31, 2004
Coal and fuel oil	$	72	$	65
Spare parts, materials and supplies		42		42

Total	$	114	$	107

Note 3. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss), including discontinued operations, consisted of the following:

	Unrealized Gains (Losses) on Cash Flow Hedges			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2004	$	18		$	(1	)	$	17
Current period change		(75	)		—			(75	)

Balance at March 31, 2005	$	(57	)	$	(1	)	$	(58	)

Unrealized losses on cash flow hedges, net of tax, at March 31, 2005, include unrealized losses on commodity hedges primarily related to EME Homer City Generation L.P. (EME Homer City) and Midwest Generation forward electricity 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 in these markets are greater than contract prices. Partially offsetting these unrealized losses were unrealized gains on commodity hedges related to EME's share of fuel contracts at March Point.

As EME's hedged positions for continuing operations are realized, approximately $73 million, after tax, of the net unrealized losses on cash flow hedges at March 31, 2005 are expected to be reclassified into earnings during the next 12 months. Management expects that reclassification of net unrealized losses will offset energy revenue recognized at market prices. Actual amounts ultimately reclassified into earnings over the next 12 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. EME recorded net gains (losses) of approximately $(4) million and $4 million during the first quarters of 2005 and 2004, respectively, representing the amount of cash flow hedges' ineffectiveness for continuing operations, reflected in net gains from price risk management and energy trading in EME's consolidated income statement.

Note 4. Discontinued Operations

Tri Energy Project

On February 3, 2005, EME sold its 25% equity interest in the Tri Energy project pursuant to a Purchase Agreement, dated December 15, 2004, by and between EME and a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%), referred to as IPM, for approximately $20 million. EME recorded an impairment charge of approximately $5 million during the fourth quarter of 2004 related to the planned disposition of this investment. The sale of this investment had no significant effect on net income in the first quarter of 2005.

CBK Project

On January 10, 2005, EME sold its 50% equity interest in the CBK project pursuant to a Purchase Agreement, dated November 5, 2004, by and between EME and Corporacion IMPSA S.A. Proceeds from the sale were approximately $104 million. EME recorded a pre-tax gain on the sale of approximately $9 million during the first quarter of 2005.

MEC International B.V.

On December 16, 2004, EME sold the stock and related assets of MEC International B.V. (MECIBV) pursuant to a Purchase Agreement, dated July 29, 2004, by and between EME and IPM. The purchase agreement was entered into following a competitive bidding process. The sale of MECIBV included the sale of EME's interests in ten electric power generating projects or companies located in Europe, Asia, Australia, and Puerto Rico. Consideration from the sale of MECIBV and related assets was $2.0 billion.

Contact Energy

On September 30, 2004, EME sold its 51.2% interest in Contact Energy to Origin Energy New Zealand Limited pursuant to a Purchase Agreement dated July 20, 2004. The purchase agreement was entered into following a competitive bidding process. 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.

Lakeland Project

EME previously owned and operated a 220 MW combined cycle, natural gas-fired power plant located in the United Kingdom, known as the Lakeland project. The ownership of the project was held through EME's indirect subsidiary, Lakeland Power Ltd., which sold power generated from the plant pursuant to a power sales agreement with Norweb Energi Ltd., a subsidiary of TXU (UK) Holdings Limited (TXU UK) and an indirect subsidiary of TXU Europe Group plc (TXU Europe). EME ceased consolidating the activities of Lakeland Power Ltd. in 2002, when an administrative receiver was appointed following a default by Norweb Energi Ltd. under the power sales agreement. Accordingly, EME accounts for its ownership of Lakeland Power Ltd. on the cost method and earnings are recognized as cash is distributed from this entity.

As previously disclosed, the administrative receiver of Lakeland Power Ltd. filed a claim against Norweb Energi Ltd. for termination of the power sales agreement. On November 19, 2002, TXU UK and TXU Europe, together with a related entity, TXU Europe Energy Trading Limited (TXU Energy), entered into formal administration proceedings of their own in the United Kingdom (similar to bankruptcy proceedings in the United States). On March 31, 2005, Lakeland Power Ltd. received £112 million (approximately $210 million) from the TXU administrators, representing an interim payment of 97% of its accepted claim of £116 million (approximately $217 million). No income related to this payment was recognized during the quarter ended March 31, 2005.

From the amount received, Lakeland Power Ltd., now controlled by a liquidator in the United Kingdom, has made a payment of £20 million (approximately $38 million) to EME on April 7, 2005 comprised of £7 million (approximately $13 million) for a secured loan which EME purchased from Lakeland Power Ltd.'s secured creditors in 2004 and certain unsecured receivables from Lakeland Power Ltd., and £13 million (approximately $25 million) as a distribution to the EME subsidiary that owns the equity interest in Lakeland Power Ltd. This amount will be recognized in income during the quarter ended June 30, 2005. Additionally, Lakeland Power Ltd. will pay to EME's subsidiary that owns the equity interest in Lakeland Power Ltd. the amount remaining after resolution of any remaining secured and unsecured creditor claims and payment of or provision for tax liabilities and the fees and expenses associated with Lakeland Power Ltd.'s liquidation.

EME estimates that the net proceeds after tax (including taxes due in the United States) resulting from the above payments will be approximately $100 million and the increase in net income will be approximately $90 million (including the amounts discussed above during the second quarter of 2005). These proceeds may be received throughout 2005, and possibly 2006, as Lakeland Power Ltd.'s liquidation progresses. Because the amounts required to settle outstanding claims and UK taxes have not been finalized and cannot be estimated precisely in the context of the liquidation, the actual amount of net proceeds and increase in net income may vary materially from the above estimate.

Ferrybridge and Fiddler's Ferry Plants

On December 21, 2001, EME sold 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.

Summarized Financial Information for Discontinued Operations

In accordance with SFAS No. 144, all of the projects discussed above are classified as discontinued operations in the accompanying consolidated statements of income. Previously issued statements of operations have been restated to reflect discontinued operations reported subsequent to the original issuance date. Summarized results of discontinued operations are as follows:

	Three Months Ended March 31,
	2005			2004
Total operating revenues	$	—		$	394
Income before income taxes and minority interest		—			82
Provision (benefit) for income taxes		(2	)		24
Minority interest		—			12
Income from operations of discontinued foreign subsidiaries		2			46
Gain on sale before income taxes		9			—
Gain on sale after income taxes		5			—

The assets and liabilities associated with the discontinued operations are segregated on the consolidated balance sheets at March 31, 2005 and December 31, 2004. The carrying amount of major asset and liability classifications for EME's international operations recorded as discontinued operations are as follows:

		March 31, 2005		December 31, 2004
Cash and cash equivalents		$	2	$	2
Other current assets			1		2

	Total current assets		3		4

Investments in unconsolidated affiliates			—		107

Assets of discontinued operations		$	3	$	111

Accounts payable and accrued liabilities		$	1	$	1

	Total current liabilities		1		1

Deferred revenue			4		4

	Total long-term deferred liabilities		4		4

Liabilities of discontinued operations		$	5	$	5

Note 5. Restructuring Costs

During the first quarter of 2005, EME initiated a review of its domestic organization to better align its resources with its domestic business requirements. Management and organizational changes

have been implemented to streamline EME's reporting relationships and eliminate its regional management structure. As a result of these changes, EME recorded a charge of $7 million (pre-tax) in the quarter ended March 31, 2005 for severance and related costs of the changes implemented by that date, which were included in administrative and general expense on EME's consolidated statement of income. EME expects to record an additional charge of $4 million (pre-tax) during the quarter ended June 30, 2005 associated with completion of the restructuring steps after March 31, 2005.

Note 6. Employee Benefit Plans

Pension Plans

EME previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $12 million to its pension plans in 2005. As of March 31, 2005, $1 million in contributions have been made. EME anticipates that its original expectation will be met by year-end 2005.

Components of pension expense are:

	Three Months Ended March 31,
	2005			2004
Service cost	$	5		$	4
Interest cost		2			2
Expected return on plan assets		(1	)		(1	)

Total expense	$	6		$	5

Postretirement Benefits Other Than Pensions

EME previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $1 million to its postretirement benefits other than pensions in 2005. As of March 31, 2005, $0.2 million in contributions have been made. EME anticipates that its original expectation will be met by year-end 2005.

Components of postretirement benefits expense are:

	Three Months Ended March 31,
	2005		2004
Service cost	$	1	$	—
Interest cost		1