<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-----------------
or
[_] 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 1-13434
Edison Mission Energy
(Exact name of registrant as specified in its charter)
California 95-4031807
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18101 Von Karman Avenue
Irvine, California 92612
(Address of principal executive offices) (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 X NO
--- ---
Number of shares outstanding of the registrant's Common Stock as of August
11, 2000: 100 shares (all shares held by an affiliate of the registrant).
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TABLE OF CONTENTS
Item Page
---- ----
PART I - Financial Information
1. Financial Statements.................................................... 1
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 17
PART II - Other Information
6. Exhibits and Reports on Form 8-K........................................ 35
PART III
Signatures.............................................................. 36
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Electric revenues $ 687,476 $ 218,672 $1,378,790 $ 415,525
Equity in income from energy projects 47,100 35,254 76,403 95,999
Equity in income from oil and gas 10,761 6,118 18,557 9,760
Operation and maintenance services 9,931 9,328 20,190 17,844
--------- --------- ---------- ---------
Total operating revenues 755,268 269,372 1,493,940 539,128
--------- --------- ---------- ---------
Operating Expenses
Fuel 236,476 73,572 512,775 127,647
Plant operations 214,419 47,018 402,381 81,389
Operation and maintenance services 7,700 7,543 15,681 14,013
Depreciation and amortization 99,500 35,597 202,495 59,743
Administrative and general 39,726 32,567 73,849 69,064
--------- --------- ---------- ---------
Total operating expenses 597,821 196,297 1,207,181 351,856
--------- --------- ---------- ---------
Operating income 157,447 73,075 286,759 187,272
--------- --------- ---------- ---------
Other Income (Expense)
Interest and other income (expense) (16,113) 12,792 (9,699) 20,584
Gain on sale of assets 16,990 - 16,990 -
Interest expense (181,176) (78,873) (354,147) (123,392)
Dividends on preferred securities (8,253) (4,145) (16,360) (7,378)
--------- --------- ---------- ---------
Total other income (expense) (188,552) (70,226) (363,216) (110,186)
--------- --------- ---------- ---------
Income (loss) before income taxes (31,105) 2,849 (76,457) 77,086
Provision (benefit) for income taxes (12,581) (2,626) (27,772) 13,675
--------- --------- ---------- ---------
Income (loss) before change in accounting
principle $ (18,524) $ 5,475 $ (48,685) $ 63,411
Cumulative effect on prior years of
change in accounting for major maintenance
costs, net of tax - - 17,690 -
Cumulative effect on prior years of change
in accounting for start-up costs, net of tax - - - (13,840)
--------- --------- ---------- ---------
Net Income (Loss) $ (18,524) $ 5,475 $ (30,995) $ 49,571
========= ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
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EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (18,524) $ 5,475 $ (30,995) $ 49,571
Other comprehensive expense, net of tax:
Foreign currency translation
adjustments, net of income tax
benefit of $2,620 and $1,416 for the
three months and $3,427 and $2,794
for the six months ended June 30, 2000
and 1999, respectively (94,738) (29,032) (138,271) (41,657)
--------- -------- --------- --------
Comprehensive Income (Loss) $(113,262) $(23,557) $(169,266) $ 7,914
========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 650,775 $ 398,695
Accounts receivable - trade, net of allowance:
2000 and 1999, $1,126 374,497 254,538
Accounts receivable - affiliates 6,587 9,597
Inventory 324,407 258,864
Prepaid expenses and other 30,627 35,665
----------- -----------
Total current assets 1,386,893 957,359
----------- -----------
Investments
Energy projects 1,984,284 1,891,703
Oil and gas 52,416 49,173
----------- -----------
Total investments 2,036,700 1,940,876
----------- -----------
Property, Plant and Equipment 12,196,003 12,533,413
Less accumulated depreciation and amortization 569,905 411,079
----------- -----------
Net property, plant and equipment 11,626,098 12,122,334
----------- -----------
Other Assets
Goodwill 268,860 290,695
Deferred financing costs 127,307 133,948
Restricted cash and other 85,968 89,009
----------- -----------
Total other assets 482,135 513,652
----------- -----------
Total Assets $15,531,826 $15,534,221
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Liabilities and Shareholder's Equity
Current Liabilities
Accounts payable - affiliates $ 71,743 $ 7,772
Accounts payable and accrued liabilities 453,425 328,057
Interest payable 111,572 89,272
Short-term obligations 1,233,779 1,122,067
Current maturities of long-term obligations 686,371 225,679
----------- -----------
Total current liabilities 2,556,890 1,772,847
----------- -----------
Long-Term Obligations - Affiliates 304,950 78,000
----------- -----------
Long-Term Obligations Net of Current Maturities 6,942,519 7,361,308
----------- -----------
Long-Term Deferred Liabilities
Deferred taxes and tax credits 1,382,016 1,520,490
Deferred revenue 487,915 534,531
Accrued incentive compensation 206,173 253,513
Other 340,812 468,161
----------- -----------
Total long-term deferred liabilities 2,416,916 2,776,695
----------- -----------
Total Liabilities 12,221,275 11,988,850
----------- -----------
Preferred Securities of Subsidiaries
Company-obligated mandatorily redeemable
security of partnership holding solely
parent debentures 150,000 150,000
Subject to mandatory redemption 187,480 208,840
Not subject to mandatory redemption 118,054 118,054
----------- -----------
Total preferred securities of subsidiaries 455,534 476,894
----------- -----------
Commitments and Contingencies (Note 5)
Shareholder's Equity
Common stock, no par value; 10,000 shares
authorized; 100 shares issued and outstanding 64,130 64,130
Additional paid-in capital 2,629,406 2,629,406
Retained earnings 289,245 364,434
Accumulated other comprehensive income (loss) (127,764) 10,507
----------- -----------
Total Shareholder's Equity 2,855,017 3,068,477
----------- -----------
Total Liabilities and Shareholder's Equity $15,531,826 $15,534,221
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (30,995) $ 49,571
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Equity in income from energy projects (76,403) (95,999)
Equity in income from oil and gas (18,557) (9,760)
Distributions from energy projects 53,158 55,861
Dividends from oil and gas 12,530 400
Depreciation and amortization 202,495 59,743
Amortization of discount on short-term obligations 38,117 5,524
Deferred taxes and tax credits (71,213) 16,937
Gain on sale of assets (16,990) -
Cumulative effect on prior years of change in accounting (17,690) 13,840
Increase in accounts receivable (117,909) (40,189)
Increase in inventory (62,633) (4,815)
Decrease in prepaid expenses and other 6,703 5,208
Increase in accounts payable and accrued liabilities 188,298 6,287
Increase in interest payable 32,027 51,961
Increase (decrease) in accrued incentive compensation (47,340) 19,200
Other, net (5,232) (35,484)
----------- -----------
Net cash provided by operating activities 68,366 98,285
----------- -----------
Cash Flows From Financing Activities
Borrowings on long-term obligations 2,351,066 1,810,518
Payments on long-term obligations (1,858,207) (154,658)
Short-term financing, net 75,713 703,499
Capital contribution from parent - 300,000
Dividends to parent (44,000) -
Issuance of preferred securities - 202,212
----------- -----------
Net cash provided by financing activities 524,572 2,861,571
----------- -----------
Cash Flows From Investing Activities
Investments in and loans to energy projects (98,841) (46,254)
Purchase of generating station - (1,800,355)
Purchase of acquired companies (28,448) (648,246)
Capital expenditures (178,504) (70,113)
Proceeds from sale of interest in project 22,000 -
(Increase) decrease in restricted cash 3,571 (6,163)
Other, net (27,359) (30,254)
----------- -----------
Net cash used in investing activities (307,581) (2,601,385)
----------- -----------
Effect of exchange rate changes on cash (33,277) (9,369)
----------- -----------
Net increase in cash and cash equivalents 252,080 349,102
Cash and cash equivalents at beginning of period 398,695 459,178
----------- -----------
Cash and cash equivalents at end of period $ 650,775 $ 808,280
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1. GENERAL
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, 2000, are not necessarily indicative of the
operating results for the full year.
Our significant accounting policies are described in Note 2 to our
Consolidated Financial Statements as of December 31, 1999 and 1998, included in
our 1999 Annual Report on Form 10-K/A filed with the Securities and Exchange
Commission effective March 30, 2000. We follow the same accounting policies for
interim reporting purposes, with the exception of the change in accounting for
major maintenance costs (see Note 2). This quarterly report should be read in
connection with such financial statements.
Certain prior period amounts have been reclassified to conform to the current
period financial statement presentation.
NOTE 2. CHANGES IN ACCOUNTING
Through December 31, 1999 we have accrued for major maintenance costs during
the period between turnarounds (referred to as "accrue in advance" accounting
method). Such accounting policy has been widely used by independent power
producers as well as several other industries. In March 2000, the U.S.
Securities and Exchange Commission (SEC) issued a letter to the Accounting
Standards Executive Committee, stating its position that the SEC Staff does not
believe it is appropriate to use an "accrue in advance" method for major
maintenance costs. The Accounting Standards Executive Committee agreed to add
accounting for major maintenance costs as part of an existing project and to
issue authoritative guidance by August 2001. Due to the position taken by the
SEC Staff, we decided voluntarily to change our accounting policy so as to
record major maintenance costs as an expense as incurred. Such change in
accounting policy is considered preferable based on the recent guidance provided
by the SEC. In accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes", we have recorded $17.7 million, after tax, as a cumulative
change in the accounting for major maintenance costs during the quarter ended
March 31, 2000. Pro forma data has not been provided for prior periods, as the
impact would not be material.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities", which became effective in January 1999. The Statement requires
that certain costs related to start-up activities be expensed as incurred and
that certain previously capitalized costs be
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expensed and reported as a cumulative change in accounting principle. The impact
of adopting SOP 98-5 on our net income in 1999 was an expense of $13.8 million,
after-tax.
NOTE 3. INVENTORY
Inventory is stated at the lower of weighted average cost or market.
Inventory at June 30, 2000 and December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
(In millions)
(Unaudited)
June 30, December 31,
2000 1999
------ ------
<S> <C> <C>
Coal and fuel oil $253.0 $190.1
Spare parts, materials and supplies 71.4 68.8
------ ------
Total $324.4 $258.9
====== ======
</TABLE>
NOTE 4. ACQUISITION AND DISPOSITIONS
On March 15, 2000, we completed a transaction with UPC International
Partnership CV II to acquire Edison Mission Wind Power Italy B.V., formerly
known as Italian Vento Power Corporation Energy 5 B.V., which owns a 50%
interest in a series of power projects that are in operation or under
development in Italy. All of the projects use wind to generate electricity from
turbines which is sold under fixed-price, long-term tariffs. Assuming all of
the projects under development are completed, currently scheduled for 2002, the
total capacity of these projects will be 283 megawatts (MWs). The purchase
price is approximately $45 million (90 billion Italian Lira), with equity
contribution obligations of up to $16 million (33 billion Italian Lira),
depending on the number of projects that are ultimately developed. As of June
2000, payments included $27 million towards the purchase price and $13 million
in equity contributions.
On June 30, 2000, we completed the sale of our 50% interest in the Auburndale
project to the existing partner. Proceeds from the sale were $22 million. We
recorded a gain on the sale of $17.0 million ($10.5 million after tax).
Subsequent to the end of the second quarter, one of our subsidiaries entered
into a sale-leaseback of certain equipment, primarily Illinois peaker power
units, to a third party lessor for $300 million. Under the terms of the 5-year
lease, we have a fixed price purchase option at the end of five years of $300
million. We guaranteed the monthly payments under the lease. In connection with
the sale-leaseback, we purchased the $240 million of notes issued by the lessor
which accrue interest at LIBOR plus 0.65 to 0.95 depending on the investment
rating. The notes are due and payable in five years. No gain or loss will be
recorded on the sale of the equipment.
7
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NOTE 5. COMMITMENTS AND CONTINGENCIES
Firm Commitment for Asset Purchase
Project Local Currency U.S. ($ in millions)
------- -------------- --------------------
Italian Wind Projects (i) 36 billion Italian Lira $ 18
(i) Italian Wind Projects are a series of power projects that are in operation
or under development in Italy. A wholly owned subsidiary of Edison Mission
Energy owns a 50% interest. Purchase payments will continue through 2002,
depending on the number of projects that are ultimately developed.
In May 2000, we entered into a purchase and sale agreement with P&L Coal
Holdings Corporation and Gold Fields Mining Corporation (Peabody) to acquire the
trading operations of Citizens Power LLC and a minority interest in certain
structured transaction investments. The purchase price is based on the sum of:
(a) fair market value of the trading portfolio and the structured transaction
investments, and (b) $25 million. Upon completion of this acquisition, we plan
to merge Citizens' trading operations into our own trading operations, and to
conduct future trading out of Boston, MA. We expect the closing of the
acquisition, which is subject to a number of conditions, including consent of
third parties, to be completed during the third quarter of 2000.
Firm Commitments to Contribute Project Equity
Projects Local Currency U.S. ($ in millions)
-------- -------------- --------------------
ISAB (i) 244 billion Italian Lira $ 121
Tri Energy (ii) 25
Italian Wind Projects (iii) 6 billion Italian Lira 3
(i) ISAB is a 512-MW integrated gasification combined cycle power plant near
Siracusa in Sicily, Italy. A wholly owned subsidiary of Edison Mission
Energy owns a 49% interest. Commercial operations commenced in April 2000.
Equity is scheduled to be contributed in August 2000.
(ii) Tri Energy is a 700-MW gas-fired power plant under construction in
Ratchaburi Province, Thailand. A wholly owned subsidiary of Edison Mission
Energy owns a 25% interest. Commercial operations commenced in July 2000.
Equity was contributed in July 2000.
(iii) Italian Wind Projects are a series of power projects that are in operation
or under development in Italy. A wholly owned subsidiary of Edison Mission
Energy owns a 50% interest. Equity will be contributed depending on the
number of projects that are ultimately developed.
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Firm commitments to contribute project equity could be accelerated due to
certain events of default as defined in the non-recourse project financing
facilities. Management does not believe that these events of default will occur
to require acceleration of the firm commitments.
Contingent Obligations to Contribute Project Equity
Projects U.S. ($ in millions)
-------- --------------------
Paiton (i) $ 62
Tri Energy (ii) 20
All Other 30
(i) Contingent obligations to contribute additional project equity will be
based on events principally related to insufficient cash flow to cover
interest on project debt and operating expenses, project cost overruns
during the plant construction, specified partner obligations or events of
default. Our obligation to contribute contingent equity will not exceed
$141 million, of which $79 million has been contributed as of June 30,
2000.
As more fully described below under the caption "Other Commitments and
Contingencies," PT PLN (Persero) (PLN), formerly referred to as PT
Perusahaan Listrik Negara, the main source of revenue for the project, has
failed to pay the project in respect of its invoices through February 2000
(with the exception of a partial payment made in June 1999). In February
2000, Paiton Energy entered into an Interim Agreement with PLN which
called for a termination of all legal actions by both parties, interim
monthly payments through the end of 2000 (total payments US $115 million),
dispatch of the facility at partial load and, in addition to the fixed
monthly payments, payment for energy actually delivered. To date, PLN has
made all fixed monthly payments (March through July) on time and in full,
and has paid all invoices for energy delivered. Paiton Energy will
continue to invoice PLN for capacity payments at the rate determined under
the power purchase agreement. These invoices (minus the fixed monthly
payments received under the Interim Agreement) will accrue and will be
dealt with under the overall tariff restructuring negotiations.
In October 1999, in response to PLN's failure to pay, Paiton Energy
entered into an interim agreement with its lenders (the Lender Interim
Agreement) which modified the contingent equity provisions of the Paiton
debt documents related to the authorized usage of the monies during the
agreed interim period, which extends from October 15, 1999 through July
31, 2000. In July, the Lenders voted to extend the term of the Lender
Interim Agreement through December 31, 2000 to coincide with the US-EXIM
take-out date and the time period of the Interim Agreement with PLN. The
Lender Interim Agreement provides, among other things, that contingent
equity from us and the other Paiton Energy shareholders shall be
contributed from time to time as needed to enable Paiton Energy to pay
interim project costs. Interim project costs include interest on project
debt and operating costs which become due and payable during the term of
the Lender Interim Agreement and other costs related to
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the construction of the project, provided that in the latter case no more
than an aggregate of $30 million of contingent equity can be used for this
purpose. The Lender Interim Agreement provides that a portion of the
contingent equity (originally $206 million, of which our current unfunded
share is $42 million), will become due and payable by the shareholders in
the event that certain events of default, other than those specifically
waived under the Lender Interim Agreement, occur. The Lender Interim
Agreement further provides that all unfunded contingent equity (originally
$300 million, of which our current unfunded share is $62 million), will
become due and payable by the shareholders in the event that Paiton Energy
fails to make any interest payment during the pendency of the Lender
Interim Agreement. As of June 30, 2000, Paiton Energy's shareholders have
contributed to Paiton $169 million of contingent equity, of which our
share was $79 million.
The contractor for the Paiton project and Paiton Energy reached a global
settlement in principal. The global settlement deals with all claims,
including contractor claims for retention, costs relating to a dispute
involving a slope adjacent to the Paiton site and other cost overruns
related to delays in the completion of the construction of the project and
Paiton Energy's claims under the construction contract. Terms and
conditions of this settlement will require the approval of Paiton Energy's
lenders. Paiton Energy is presently discussing this settlement agreement
with its lenders and contractor, and expects that an accommodation of
lender requirements can be achieved, and therefore that the required
lender approval can be obtained. As noted, the shareholders' obligation to
contribute contingent equity to Paiton Energy to enable it to pay the
contractor for the finally agreed amount is limited to $30 million. Paiton
Energy's obligations to the contractor exceed this amount. The shortfall
will be met through funds that may be made available to the project and
ultimately will be paid out of revenues received as a result of the
renegotiation of the power purchase agreement and the project's debt
agreements, as more fully discussed under the caption, "Other Commitments
and Contingencies." Paiton Energy is presently seeking Lender approval of
the global settlement agreement with the Contractor.
Our contingent equity obligations for the Paiton project are to be
cancelled, if unused, as of the date of term financing by the Export-
Import Bank of the United States. Term financing by the Export-Import Bank
of the United States is the subject of a comprehensive set of conditions.
The obligation of the Export-Import Bank of the United States to provide
term financing was initially scheduled to terminate on October 15, 1999.
The Export-Import Bank of the United States agreed to extend the term
financing commitment through December 31, 2000 and has determined that the
project will need to meet additional terms and conditions for take-out of
the construction lenders.
(ii) Contingent obligations to contribute additional equity to the project
relate specifically to an agreement between us and Banpu Public Company
(a project shareholder) to provide certain back-up equity assurances to
the project's lenders should Banpu be unable to fund the full portion of
its equity when due. At present, we do not anticipate a requirement to
fund this additional equity.
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Other than as noted above, we are not aware, at this time, of any other
contingent obligations or obligations to contribute project equity.
Other Commitments and Contingencies
Subsidiary Indemnification Agreements
Some of our subsidiaries have entered into indemnification agreements, under
which the subsidiaries agreed to repay capacity payments to the projects' power
purchasers in the event the projects unilaterally terminate their performance or
reduce their electric power producing capability during the term of the power
contracts. Obligations under these indemnification agreements as of June 30,
2000, if payment were required, would be $269 million. We do not believe that
the projects will either terminate their performance or reduce their electric
power producing capability during the term of the power contracts.
Paiton
Paiton is a 1,230-MW coal-fired power plant in operation in East Java,
Indonesia. A wholly owned subsidiary of Edison Mission Energy owns a 40%
interest and has a $467 million investment at June 30, 2000. The project's
tariff is higher in the early years and steps down over time. The tariff for
the Paiton project includes infrastructure to be used in common by other units
at the Paiton complex. The plant's output is fully contracted with the state-
owned electricity company, PLN. Payments are in Indonesian Rupiah, with the
portion of such payments intended to cover non-Rupiah project costs, including
returns to investors, indexed to the Indonesian Rupiah/U.S. dollar exchange rate
established at the time of the power purchase agreement in February 1994. The
project received substantial finance and insurance support from the Export-
Import Bank of the United States, the Japan Bank of International Cooperation
(formerly known as The Export-Import Bank of Japan), the U.S. Overseas Private
Investment Corporation and the Ministry of International Trade and Industry of
Japan. PLN's payment obligations are supported by the Government of Indonesia.
The projected rate of growth of the Indonesian economy and the exchange rate of
Indonesian Rupiah into U.S. dollars have deteriorated significantly since the
Paiton project was contracted, approved and financed. The Paiton project's
senior debt ratings have been reduced from investment grade to speculative grade
based on the rating agencies' determination that there is increased risk that
PLN might not be able to honor the electricity sales contract with Paiton
Energy. The Government of Indonesia has arranged to reschedule sovereign debt
owed to foreign governments and has entered into discussions about rescheduling
sovereign debt owed to private lenders. Specified events, including those
discussed in the paragraph below, which, with the passage of time or upon
notice, may mature into defaults of the project's debt agreements have occurred.
On October 15, 1999, the project entered into an interim agreement with its
lenders pursuant to which the lenders waived such defaults until July 31, 2000.
In July, the Lenders voted to extend the term of the Lender Interim Agreement
through December 31, 2000 to coincide with the US-EXIM take-out date and the
time
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period of the Interim Agreement with PLN. However, this waiver may expire on an
earlier date if additional defaults, other than those specifically waived, or
other specified events occur.
In May 1999, Paiton Energy notified PLN that Unit 7 of the Paiton project
achieved commercial operation under terms of the power purchase agreement and,
in July 1999, that Unit 8 of the Paiton project had similarly achieved such
commercial operation. Because of the economic downturn, PLN is experiencing low
electricity demand and PLN had, through February of this year, been dispatching
the Paiton plant to zero; however, under the terms of the power purchase
agreement, PLN is required to continue to pay for capacity and fixed operating
costs once each unit and the plant achieve commercial operation. PLN has not
paid invoices amounting to $561 million for capacity charges and fixed operating
costs under the power purchase agreement. In addition, PLN filed a lawsuit
contesting the validity of its agreement to purchase electricity from the
project. The lawsuit was withdrawn by PLN on January 20, 2000.
On February 21, 2000, Paiton Energy and PLN executed an Interim Agreement
pursuant to which the power purchase agreement will be administered pending a
long-term restructure of the power purchase agreement. Among other things, the
Interim Agreement provides for dispatch of the project, fixed monthly capacity
payments to Paiton Energy by PLN, and the standstill of any further legal
proceedings by either party during the term of the Interim Agreement, which runs
through December 31, 2000 and may be extended by mutual agreement. To date, PLN
has made timely payments of the fixed capacity totaling $45 million. Invoicing
under the power purchase agreement will continue to accrue (minus the fixed
monthly capacity payments under the Interim Agreement) and will be dealt with
under the overall tariff restructuring negotiations. PLN and Paiton Energy
entered into negotiations on a long-term restructuring of the tariff, but no
final agreement has been reached to date. Any material modifications of the
power purchase agreement could also require a renegotiation of the Paiton
project's debt agreements. The impact of any such renegotiations with PLN, the
Government of Indonesia or the project's creditors on our expected return on our
investment in Paiton Energy is uncertain at this time; however, we believe that
we will ultimately recover our investment in the project.
Brooklyn Navy Yard
Brooklyn Navy Yard is a 286-MW gas-fired cogeneration power plant in Brooklyn,
New York. Our wholly owned subsidiary owns 50% of the project. In February
1997, the construction contractor asserted general monetary claims under the
turnkey agreement against Brooklyn Navy Yard Cogeneration Partners, L.P. for
damages in the amount of $136.8 million. Brooklyn Navy Yard Cogeneration
Partners has asserted general monetary claims against the contractor. In
connection with a $407 million non-recourse project refinancing in 1997, we
agreed to indemnify Brooklyn Navy Yard Cogeneration Partners and its partner
from all claims and costs arising from or in connection with the contractor
litigation, which indemnity has been assigned to Brooklyn Navy Yard Cogeneration
Partners' lenders. At the present time, we cannot reasonably estimate the
12
<PAGE>
amount that would be due, if any, related to this litigation. Additional
amounts, if any, which would be due to the contractor with respect to completion
of construction of the power plant would be accounted for as an additional part
of its power plant investment. Furthermore, our partner has executed a
reimbursement agreement with us that provides recovery of up to $10 million over
an initial amount, including legal fees, payable from its management and royalty
fees. At June 30, 2000, no accrual has been recorded in connection with this
litigation. We believe that the outcome of this litigation will not have a
material adverse effect on our consolidated financial position or results of
operations.
Litigation
We are routinely involved in litigation arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, we, based on advice of counsel, do not believe that the final outcome
of any pending litigation will have a material adverse effect on our financial
position or results of operations.
Other
In support of the businesses of our subsidiaries, we have made, from time to
time, guarantees, and have entered into indemnity agreements with respect to our
subsidiaries' obligations like those for debt service, fuel supply or the
delivery of power, and have entered into reimbursement agreements with respect
to letters of credit issued to third parties to support our subsidiaries'
obligations.
We may incur additional guaranty, indemnification, and reimbursement
obligations, as well as obligations to make equity and other contributions to
projects in the future. We believe that we will have sufficient liquidity on
both a short- and long-term basis to fund pre-financing project development
costs, make equity contributions to project subsidiaries, pay our debt
obligations and pay other administrative and general expenses as they are
incurred from (1) distributions from energy projects and dividends from
investments in oil and gas, (2) proceeds from the repayment of loans made by us
to our project subsidiaries, and (3) funds available from our revolving credit
facility.
Environmental Matters or Regulations
We are subject to environmental regulation by federal, state, and local
authorities in the United States and foreign regulatory authorities with
jurisdiction over projects located outside the United States. We believe that
as of the filing date of this report, we are in substantial compliance with
environmental regulatory requirements and that maintaining compliance with
current requirements will not materially affect our financial position or
results of operations.
We expect that the implementation of Clean Air Act Amendments will result in
increased capital expenditures and operating expenses. For example, we expect
to spend approximately $65 million for the remainder of 2000 and $42 million in
2001 to install
13
<PAGE>
upgrades to the environmental controls at the Homer City plant to control sulfur
dioxide and nitrogen oxide emissions. Similarly, we anticipate upgrades to the
environmental controls at the Illinois Plants to control nitrogen oxide
emissions to result in expenditures of approximately $39 million for the
remainder of 2000 and $56 million, $126 million and $16 million for 2001, 2002
and 2003, respectively. In addition, at the Ferrybridge and Fiddler's Ferry
plants, we are committed to incur environmental costs arising from plant
modification, totaling approximately $40 million for the remainder of 2000 and
$262 million for the 2001-2004 period. We do not expect these increased capital
expenditures and operating expenses to have a material effect on our financial
position or results of operation.
NOTE 6. BUSINESS SEGMENTS
We operate predominately in one line of business, electric power generation,
with reportable segments organized by geographic region: United States, Asia
Pacific and Europe, Central Asia, Middle East and Africa. Our plants are
located in different geographic areas, which tends to mitigate the effects of
regional markets, economic downturns or unusual weather conditions.
<TABLE>
<CAPTION>
(In millions) Europe,
(Unaudited) Central Asia,
Three Months Ended Asia Middle East Corporate/
June 30, 2000 Americas Pacific and Africa Other/(i)/ Total
------------------ -------- -------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 451.8 $ 42.5 $ 261.0 $ -- $ 755.3
Net income (loss) 5.5 (11.7) 22.3 (34.6) (18.5)
Total assets $7,867.4 $2,798.7 $4,865.7 $ -- $15,531.8
June 30, 1999
------------------
Operating revenues $ 122.6 $ 56.1 $ 90.7 $ -- $ 269.4
Net income (loss) 21.0 (4.4) 1.7 (12.8) 5.5
Total assets $3,504.6 $2,486.8 $2,166.8 $ -- $ 8,158.2
(In millions) Europe,
(Unaudited) Central Asia,
Six Months Ended Asia Middle East Corporate/
June 30, 2000 Americas Pacific and Africa Other/(i)/ Total
------------------ -------- -------- ------------- ---------- ---------
Operating revenues $ 731.4 $ 97.5 $ 665.0 $ -- $ 1,493.9
Net income (loss) (27.1) (17.0) 81.0 (67.9) (31.0)
Total assets $7,867.4 $2,798.7 $4,865.7 $ -- $15,531.8
June 30, 1999
------------------
Operating revenues $ 207.2 $ 106.3 $ 225.6 $ -- $ 539.1
Net income (loss) 51.0 (14.4) 28.9 (15.9) 49.6
Total assets $3,504.6 $2,486.8 $2,166.8 $ -- $ 8,158.2
</TABLE>
(i) Includes corporate net interest expense
14
<PAGE>
NOTE 7. INVESTMENTS
The following table presents summarized financial information of the
significant subsidiary investments in energy projects accounted for by the
equity method. The significant subsidiary investments include the Cogeneration
Group. The Cogeneration Group consists of Kern River Cogeneration Company,
Sycamore Cogeneration Company and Watson Cogeneration Company, of which we own
50 percent, 50 percent and 49 percent interests in, respectively.
<TABLE>
<CAPTION>
(In millions)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues $177,255 $128,702 $293,806 $262,441
Income from Operations 52,658 46,203 88,717 100,459
Net Income 59,962 45,925 95,647 100,743
</TABLE>
NOTE 8. LONG-TERM INCENTIVE PLAN
As disclosed in our Annual Report on Form 10-K/A for the year ended December
31, 1999 and our Quarterly Report on Form 10-Q for the first quarter of 2000,
Edison International and Edison Mission Energy considered an exchange offer of
cash and stock equivalent units, relating to Edison International Common Stock,
for outstanding Edison Mission Energy phantom stock options. Such an exchange
offer was reviewed and approved by the Edison International Board of Directors
at its meetings in January and February 2000, subject to final approval by the
Edison International Compensation and Executive Personnel Committee of the offer
terms and documentation. The Compensation and Executive Personnel Committee and
the Edison International Board of Directors subsequently concluded that, in view
of unexpected events adversely impacting the earnings from merchant plants in
the United Kingdom and the price of Edison International stock, it was not
advisable to make an exchange offer to the holders of Edison Mission Energy's
phantom stock options at that time. During June 2000, the Compensation and
Executive Personnel Committee and the Board of Directors considered the
advisability of a revised exchange offer and on July 3, 2000, a revised exchange
offer was made to holders of Edison Mission Energy phantom stock options. 100%
of the holders of Edison Mission Energy phantom stock options accepted the
revised exchange offer and on August 8, 2000 all conditions for completion of
the exchange offer were satisfied and the exchange offer was completed. The
exchange offer is principally for cash with a portion exchanged for stock
equivalent units relating to Edison International Common Stock. The vested cash
payment will occur on March 13, 2001 and will accrue interest from August 8,
2000. The number of stock equivalent units was determined on the basis of a
price of $20.50 per share, and the stock equivalent units will receive dividend
equivalents. Participants may elect to cash their vested stock
15
<PAGE>
equivalent units on either the first or third anniversary of the exchange offer
date (August 8, 2000) for an amount equal to the daily average of EIX common
stock on the New York Stock Exchange for the twenty trading days preceding the
elected payment date. Some of the affiliate option holders have elected to defer
payments of the cash and stock equivalent units, and the payment schedules for
them will be different from that described above. Since all of the outstanding
affiliate options have been terminated through the exchange offer, there will be
no future exercises of the affiliate options. Due to the lower valuation of the
revised exchange offer compared to the values previously considered, EME will
reduce (in the third quarter) the liability for accrued incentive compensation
by approximately $55 million to $60 million.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that reflect
Edison Mission Energy's current expectations and projections about future events
based on our knowledge of present facts and circumstances and our assumptions
about future events. In this discussion, the words "expects," "believes,"
"anticipates," "estimates," "intends," "plans" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements necessarily involve risks and uncertainties that could cause actual
results to differ materially from those anticipated. Factors that could cause
different results may include actions by state and federal regulatory bodies
implementing the restructuring of the electric utility industry; the effects of
new laws and regulations or new interpretations of existing laws and regulation;
the effects of increased competition in energy-related businesses; changes in
prices of electricity and fuel costs; changes in financial market conditions;
risks of doing business in foreign countries, such as political changes and
currency devaluations; power plant construction and operation risks; new or
increased environmental liabilities; weather conditions and other unforeseen
events. The information contained in this discussion is subject to change
without notice. Unless otherwise indicated, the information presented in this
section is with respect to Edison Mission Energy and its consolidated
subsidiaries.
General
-------
We are an independent power producer engaged in the business of developing,
acquiring, owning and operating electric power generation facilities worldwide.
Our current investments include 76 projects totaling 28,682 megawatts (MW) of
generation capacity, of which 28,399 MW are in operation and our share is 22,955
MW. 283 MW are under construction of which our share is 142 MW.
Our operating revenues are derived primarily from electric revenues and equity
in income from energy projects. Consolidated operating revenues also include
equity in income from oil and gas investments and revenues attributable to
operation and maintenance services.
Electric revenues are derived from our majority owned domestic and
international entities. Equity in income from energy projects relates to energy
projects where our ownership interest is 50% or less in the projects. The
equity method of accounting is generally used to account for the operating
results of entities over which we have a significant influence but in which we
do not have a controlling interest. With respect to entities accounted for
under the equity method, we recognize our proportional share of the income or
loss of such entities.
Acquisition and Dispositions
----------------------------
On March 15, 2000, we completed a transaction with UPC International
Partnership CV II to acquire Edison Mission Wind Power Italy B.V., formerly
known as Italian
17
<PAGE>
Vento Power Corporation Energy 5 B.V., which owns a 50% interest in a series of
power projects that are in operation or under development in Italy. All of the
projects use wind to generate electricity from turbines which is sold under
fixed-price long-term tariffs. Assuming all of the projects under development
are completed, currently scheduled for 2002, the total capacity of these
projects will be 283 megawatts (MWs). The purchase price is approximately $45
million (90 billion Italian Lira) with equity contribution obligations of up to
$16 million (33 billion Italian Lira), depending on the number of projects that
are ultimately developed. As of June 2000, payments included $27 million towards
the purchase price and $13 million in equity contributions.
On June 30, 2000, we completed the sale of our 50% interest in the Auburndale
project to the existing partner. Proceeds from the sale were $22 million. We
recorded a gain on the sale of $17.0 million ($10.5 million after tax).
Subsequent to the end of the second quarter, one of our subsidiaries entered
into a sale-leaseback of certain equipment, primarily Illinois peaker power
units, to a third party lessor for $300 million. Under the terms of the 5-year
lease, we have a fixed price purchase option at the end of five years of $300
million. We guaranteed the monthly payments under the lease. In connection with
the sale-leaseback, we purchased the $240 million of notes issued by the lessor
which accrue interest at LIBOR plus 0.65 to 0.95 depending on the investment
rating. The notes are due and payable in five years. No gain or loss will be
recorded on the sale of the equipment.
Results of Operations
---------------------
Operating Revenues
Electric revenues increased $468.8 million and $963.3 million for the second
quarter and six months ended June 30, 2000, compared with the corresponding
periods of 1999. The increase in electric revenues was primarily due to
acquisitions of the Ferrybridge and Fiddler's Ferry plants (July 1999), the
Illinois Plants (December 1999), the Homer City plant (March 1999) and the start
of commercial operation of the Doga project in May 1999. Equity in income from
energy projects increased $11.8 million during the second quarter of 2000 and
decreased $19.6 million during the six months ended June 30, 2000, compared with
the corresponding periods of 1999. The increase for the second quarter of 2000
was primarily the result of higher revenues from cogeneration projects due to
higher energy pricing. The decrease for the six months ended June 30, 2000 was
primarily due to higher revenues during the first quarter of 1999 as a result of
a final settlement on energy prices tied to short-term avoided costs with
applicable public utilities and, second, from one cogeneration project as a
result of a gain on termination of a power sales agreement. Equity income from
oil and gas projects increased $4.6 million and $8.8 millions for the second
quarter and six months ended June 30, 2000, compared with the corresponding
periods of 1999 as a result of higher oil and gas prices.
Due to warmer weather during the summer months, electric revenues generated
from the Homer City plant is usually higher during the third quarter of each
year. In addition,
18
<PAGE>
our third quarter revenues from energy projects are materially higher than other
quarters of the year due to a significant number of our domestic energy projects
located on the West Coast and the Illinois Plants, which have power sales
contracts that provide for higher payments during the summer months. The First
Hydro plant and Ferrybridge and Fiddler's Ferry plants provide for higher
electric revenues during the winter months.
Operating Expenses
Operating expenses increased $401.5 million and $855.3 million for the second
quarter and six months ended June 30, 2000, compared with the corresponding
periods of the prior year. The increase was due primarily to higher fuel, plant
operations and depreciation and amortization expenses as a result of there being
no comparable second quarter and six month prior year expenses for the
Ferrybridge and Fiddler's Ferry plants and the Illinois Plants (both acquired in
the second half of 1999) and to a lessor extent the Homer City plant (acquired
in March 1999) and the Doga project, which commenced commercial operation in May
1999.
Operating Income
Operating income increased $84.4 million and $99.5 million for the second
quarter and six months ended June 30, 2000, compared with the corresponding
period of prior year. The increase during the second quarter from the prior
year was primarily due to operating income from the Illinois Plants and Homer
City and equity in income from energy and oil and gas projects discussed above.
The increase in the six month period June 30, 2000 from the prior year was
primarily due to Ferrybridge and Fiddler's Ferry plants and the Homer City plant
partially offset by losses from the Illinois Plants and lower equity in income
from energy projects discussed above. The operating income from Ferrybridge and
Fiddler's Ferry, which is expected to be higher during the winter months, was
adversely affected by lower energy prices during the first quarter in 2000 due
to warmer than average weather and regulatory uncertainty regarding planned
changes in the electricity trading arrangements. Operating losses from the
Illinois Plants during the first quarter were due primarily to lower non-summer
electricity prices under the power purchase agreement with Commonwealth Edison
and lower non-summer generation.
During May 2000, we experienced a major outage due to extensive damage to the
generator at one of our two 500 MW Units at the Loy Yang B power plant complex
in Australia. We expect the repairs to be completed and the Unit restored to
operation by September 2000. Under our insurance program we are obligated for
the property damage insurance deductible of $2 million and for loss of profits
during the first 15 days following the insurable event. The repair costs in
excess of the deductible amount together with the loss of profits after the
first 15 days and until the unit is back in operation are expected to be
recovered from insurance. During the second quarter of 2000, we recorded after-
tax losses of $5.3 million related to this outage.
19
<PAGE>
Other Income (Expense)
Interest and other income (expense) decreased $28.9 million and $30.3 million
for the second quarter and six months ended June 30, 2000, compared with the
corresponding periods of the prior year. The decrease was primarily due to an
unrealized mark to market loss of $34.4 million on a gas swap entered into as an
economic hedge of a portion of our gas price risk related to our share of gas
production in Four Star (an oil and gas company which we have a minority
interest and account for under the equity method). Although we believe the gas
swap hedges our gas price risk, hedge accounting is not permitted for
transactions of our equity method investments. Accordingly, to the extent that
gas prices are greater than the gas swap hedge, our share of future earnings
from this investment will be higher.
On June 30, 2000, we completed the sale of our 50% interest in the Auburndale
project to the existing partner. Proceeds from the sale were $22 million. We
recorded a gain on the sale of $17.0 million ($10.5 million after tax).
Interest expense increased $102.3 million and $230.8 million for the second
quarter and six months ended June 30, 2000, compared with the corresponding
period of the prior year. The increase was primarily the result of additional
debt financing associated with the acquisition of the Illinois Plants, the
Ferrybridge and Fiddler's Ferry plants and the Homer City plant.
Provision (Benefit) for Income Taxes
During the six months ended June 30, 2000, we recorded an income tax benefit
based on projected income for the year and benefits under the tax sharing
agreement. The annual effective tax rate for the six months ended June 30, 1999
was 18%. The annual effective tax rate in 1999 was below the Federal statutory
rate of 35% due to lower foreign income taxes that result from the permanent
reinvestment of earnings from foreign affiliates located in different tax
jurisdictions. The annual effective tax rate for the six months ended June 30,
2000 was 38%. The annual effective tax rate is expected to increase from the
prior year due to lower foreign income tax benefits from 1999 and higher state
income taxes due to the Homer City plant and Illinois Plants.
We are, and may in the future be, under examination by tax authorities in
varying tax jurisdictions with respect to positions we take in connection with
the filing of our tax returns. Matters raised upon audit may involve
substantial amounts, which, if resolved unfavorably, an event not currently
anticipated, could possibly be material. However, in our opinion, it is
unlikely that the resolution of any such matters will have a material adverse
effect upon our financial condition or results of operations.
20
<PAGE>
Cumulative Effect of Change in Accounting Principle
Through December 31, 1999 we have accrued for major maintenance costs during
the period between turnarounds (referred to as "accrue in advance" accounting
method). Such accounting policy has been widely used by independent power
producers as well as several other industries. In March 2000, the U.S.
Securities and Exchange Commission ("SEC") issued a letter to the Accounting
Standards Executive Committee, stating its position that the SEC Staff does not
believe it is appropriate to use an "accrue in advance" method for major
maintenance costs. The Accounting Standards Executive Committee agreed to add
accounting for major maintenance costs as part of an existing project and to
issue authoritative guidance by August 2001. Due to the position taken by the
SEC Staff, we decided voluntarily to change our accounting policy so as to
record major maintenance costs as an expense as incurred. Such change in
accounting policy is considered preferable based on the recent guidance provided
by the SEC. In accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes", we have recorded $17.7 million, after tax, as a cumulative
change in the accounting for major maintenance costs during the quarter ended
March 31, 2000.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities", which became effective in January 1999. The Statement requires
that certain costs related to start-up activities be expensed as incurred and
that certain previously capitalized costs be expensed and reported as a
cumulative change in accounting principle. The impact of adopting SOP 98-5 on
our net income in 1999 was an expense of $13.8 million, after-tax.
Recent Developments
As disclosed in our Annual Report on Form 10-K/A for the year ended December
31, 1999 and our Quarterly Report on Form 10-Q for the first quarter of 2000,
Edison International and Edison Mission Energy considered an exchange offer of
cash and stock equivalent units, relating to Edison International Common Stock,
for outstanding Edison Mission Energy phantom stock options. Such an exchange
offer was reviewed and approved by the Edison International Board of Directors
at its meetings in January and February 2000, subject to final approval by the
Edison International Compensation and Executive Personnel Committee of the offer
terms and documentation. The Compensation and Executive Personnel Committee
and the Edison International Board of Directors subsequently concluded that, in
view of unexpected events adversely impacting the earnings from merchant plants
in the United Kingdom and the price of Edison International stock, it was not
advisable to make an exchange offer to the holders of Edison Mission Energy's
phantom stock options at that time. During June 2000, the Compensation and
Executive Personnel Committee and the Board of Directors considered the
advisability of a revised exchange offer and on July 3, 2000, a revised exchange
offer was made to holders of Edison Mission Energy phantom stock options. 100%
of the holders of Edison Mission Energy phantom stock options accepted the
revised exchange offer and on August 8, 2000 all conditions for completion of
the exchange offer were satisfied and the exchange offer was completed. The
exchange offer
21
<PAGE>
is principally for cash with a portion exchanged for stock equivalent units
relating to Edison International Common Stock. The vested cash payment will
occur on March 13, 2001 and will accrue interest from August 8, 2000. The number
of stock equivalent units was determined on the basis of a price of $20.50 per
share, and the stock equivalent units will receive dividend equivalents.
Participants may elect to cash their vested stock equivalent units on either the
first or third anniversary of the exchange offer date (August 8, 2000) for an
amount equal to the daily average of EIX common stock on the New York Stock
Exchange for the twenty trading days preceding the elected payment date. Some of
the affiliate option holders have elected to defer payments of the cash and
stock equivalent units, and the payment schedules for them will be different
from that described above. Since all of the outstanding affiliate options have
been terminated through the exchange offer, there will be no future exercises of
the affiliate options. Due to the lower valuation of the revised exchange offer
compared to the values previously considered, EME will reduce (in the third
quarter) the liability for accrued incentive compensation by approximately $55
million to $60 million.
In July 2000, we have undertaken a series of actions designed to reduce
administrative and general operating costs, including reductions in management
and administrative personnel. As a result of these actions, we expect to record
a charge of approximately $7 million against third quarter earnings for
severance and other related costs.
Liquidity and Capital Resources
-------------------------------
For the six months ended June 30, 2000, net cash provided by operating
activities decreased to $68.4 million from $98.3 million for the same period in
1999. The 2000 decrease primarily reflects higher working capital requirements
including payments of accrued incentive compensation.
Net cash provided by financing activities totaled $524.6 million during the
six months ended June 30, 2000, compared to $2,861.6 million for the
corresponding period of the prior year. The decrease is primarily due to the
1999 Edison Mission Energy Holding Co., parent company of Homer City, borrowing
of $830 million, our financing of $700 million, and borrowing on the corporate
revolver of $220 million, the proceeds of which were used to purchase the Homer
City plant. In connection with the 1999 acquisition of our interest in Contact
Energy, we entered into a $214 million credit facility and issued $120 million
of Flexible Money Market Cumulative Preferred Stock and $84 million Class A
Redeemable Preferred Shares. In addition, we also received $300 million in
equity contributions from Edison International, our parent company. In February
2000, Edison Mission Midwest Holdings Co. issued $1.7 billion of commercial
paper under its credit facility and repaid a similar amount of outstanding bank
borrowings for the Illinois Plants. In January 2000, one of our foreign
subsidiaries borrowed $242.7 million from Edison Capital, an indirect affiliate.
During the six month period ended June 30, 2000, we paid dividends of $44
million to Edison International. As of June 30, 2000, we had recourse debt of
$2.9 billion, with an additional $6.3 billion of non-recourse debt (debt which
is recourse to specific assets or subsidiaries) on our consolidated balance
sheet.
22
<PAGE>
Net cash used in investing activities decreased to $307.6 million for the six
months ended June 30, 2000 from $2,601.4 million for the six months ended June
30, 1999. The decrease is primarily due to the $1.8 billion purchase of Homer
City in March 1999 and $648 million purchase of our interest in Contact Energy
in May 1999. Through June 2000, $27 million was paid towards the purchase price
and $13 million in equity contributions for the Italian Wind Projects. In
addition, $33.5 million was made in equity contributions for the EcoElectrica
project in June 2000. We invested $178.5 million and $70.1 million during the
six-month period ended June 30, 2000 and 1999, respectively, in new plant
equipment principally related to the Homer City plant and Illinois Plants in
2000 and the Doga project in 1999.
Capital expenditures, including environmental expenditures disclosed under the
caption "Environmental Matters or Regulation," in 2000 are expected to
approximate $416 million. In addition, we have entered into a reservation
agreement with a turbine equipment manufacturer to obtain the right to purchase
nine turbines at specified delivery dates in 2002 and 2003. We plan to use this
equipment in connection with expansion of our gas-fired generation projects in
the United States.
At June 30, 2000, we had cash and cash equivalents of $650.8 million and had
available $265 million of borrowing capacity under a $500 million revolving
credit facility that expires in 2001 and a $300 million senior credit facility
that expires in 2001. The $300 million senior credit facility was entered into
in May 2000 to fund for general corporate purposes. The borrowing capacity under
our credit facilities may be reduced by borrowings for firm commitments to
contribute project equity. We also had $15 million of borrowing capacity under
a $700 million commercial paper facility that expires in 2001.
Firm Commitment for Asset Purchase
<TABLE>
<CAPTION>
Project Local Currency U.S. ($ in millions)
------- -------------- --------------------
<S> <C> <C>
Italian Wind Projects (i) 36 billion Italian Lira $ 18
</TABLE>
(i) Italian Wind Projects are a series of power projects that are in operation
or under development in Italy. A wholly owned subsidiary of Edison Mission
Energy owns a 50% interest. Purchase payments will continue through 2002,
depending on the number of projects that are ultimately developed.
In May 2000, we entered into a purchase and sale agreement with P&L Coal
Holdings Corporation and Gold Fields Mining Corporation (Peabody) to acquire the
trading operations of Citizens Power LLC and a minority interest in certain
structured transaction investments. The purchase price is based on the sum of:
(a) fair market value of the trading portfolio and the structured transaction
investments, and (b) $25 million. Upon completion of this acquisition, we plan
to merge Citizens' trading operations into our own trading operations, and to
conduct future trading out of Boston, MA. We expect
23
<PAGE>
the closing of the acquisition, which is subject to a number of conditions,
including consent of third parties, to be completed during the third quarter of
2000.
Firm Commitments to Contribute Project Equity
<TABLE>
<CAPTION>
Projects Local Currency U.S. ($ in millions)
-------- -------------- --------------------
<S> <C> <C>
ISAB (i) 244 billion Italian Lira $ 121
Tri Energy (ii) 25
Italian Wind Projects (iii) 6 billion Italian Lira 3
</TABLE>
(i) ISAB is a 512-MW integrated gasification combined cycle power plant near
Siracusa in Sicily, Italy. A wholly owned subsidiary of Edison Mission
Energy owns a 49% interest. Commercial operations commenced in April 2000.
Equity is scheduled to be contributed in August 2000.
(ii) Tri Energy is a 700-MW gas-fired power plant under construction in
Ratchaburi Province, Thailand. A wholly owned subsidiary of Edison Mission
Energy owns a 25% interest. Commercial operations commenced in July 2000.
Equity was contributed in July 2000.
(iii) Italian Wind Projects are a series of power projects that are in operation
or under development in Italy. A wholly owned subsidiary of Edison Mission
Energy owns a 50% interest. Equity will be contributed depending on the
number of projects that are ultimately developed.
Firm commitments to contribute project equity could be accelerated due to
certain events of default as defined in the non-recourse project financing
facilities. Management has no reason to believe that these events of default
will occur to require acceleration of the firm commitments.
Contingent Obligations to Contribute Project Equity
<TABLE>
<CAPTION>
Projects U.S. ($ in millions)
-------- --------------------
<S> <C>
Paiton (i) $ 62
Tri Energy (ii) 20
All Other 30
</TABLE>
(i) Contingent obligations to contribute additional project equity will be
based on events principally related to insufficient cash flow to cover
interest on project debt and operating expenses, project cost overruns
during the plant construction, specified partner obligations or events of
default. Our obligation to contribute contingent equity will not exceed
$141 million, of which $79 million has been contributed as of June 30,
2000.
As more fully described below under the caption "Other Commitments and
Contingencies," PT PLN (Persero) (PLN), formerly referred to as PT
Perusahaan Listrik Negara, the main source of revenue for the project, has
failed to pay the
24
<PAGE>
project in respect of its invoices through February 2000 (with the
exception of a partial payment made in June 1999). In February 2000, Paiton
Energy entered into an Interim Agreement with PLN which called for a
termination of all legal actions by both parties, interim monthly payments
through the end of 2000 (total payments US $115 million), dispatch of the
facility at partial load and, in addition to the fixed monthly payments,
payment for energy actually delivered. To date, PLN has made all fixed
monthly payments (March through July) on time and in full, and has paid all
invoices for energy delivered. Paiton Energy will continue to invoice PLN
for capacity payments at the rate determined under the power purchase
agreement. These invoices (minus the fixed monthly payments received under
the Interim Agreement) will accrue and will be dealt with under the overall
tariff restructuring negotiations.
In October 1999, in response to PLN's failure to pay, Paiton Energy entered
into an interim agreement with its lenders (the Lender Interim Agreement)
which modified the contingent equity provisions of the Paiton Energy debt
documents related to the authorized usage of the monies during the agreed
interim period, which extends from October 15, 1999 through July 31, 2000.
In July, the Lenders voted to extend the term of the Lender Interim
Agreement through December 31, 2000 to coincide with the US-EXIM take-out
date and the time period of the Interim Agreement with PLN. The Lender
Interim Agreement provides, among other things, that contingent equity from
us and the other Paiton Energy shareholders shall be contributed from time
to time as needed to enable Paiton Energy to pay interim project costs.
Interim project costs include interest on project debt and operating costs
which become due and payable during the term of the Lender Interim
Agreement and other costs related to the construction of the project,
provided that in the latter case no more than an aggregate of $30 million
of contingent equity can be used for this purpose. The Lender Interim
Agreement provides that a portion of the contingent equity (originally $206
million, of which our current unfunded share is $42 million), will become
due and payable by the shareholders in the event that certain events of
default, other than those specifically waived under the Lender Interim
Agreement, occur. The Lender Interim Agreement further provides that all
unfunded contingent equity (originally $300 million, of which our current
unfunded share is $62 million), will become due and payable by the
shareholders in the event that Paiton Energy fails to make any interest
payment during the pendency of the Lender Interim Agreement. As of June 30,
2000, Paiton Energy's shareholders have contributed to Paiton $169 million
of contingent equity, of which our share was $79 million.
The contractor for the Paiton project and Paiton Energy reached a global
settlement in principal. The global settlement deals with all claims,
including contractor claims for retention, costs relating to a dispute
involving a slope adjacent to the Paiton site and other cost overruns
related to delays in the completion of the construction of the project and
Paiton Energy's claims under the construction contract. Terms and
conditions of this settlement will require the approval of Paiton Energy's
lenders. Paiton Energy is presently discussing this settlement agreement
with its lenders and contractor, and expects that an accommodation of
lender requirements can be achieved, and therefore that the required lender
approval can be obtained. As noted,
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the shareholders' obligation to contribute contingent equity to Paiton
Energy to enable it to pay the contractor for the finally agreed amount is
limited to $30 million. Paiton Energy's obligations to the contractor
exceed this amount. The shortfall will be met through funds that may be
made available to the project and ultimately will be paid out of revenues
received as a result of the renegotiation of the power purchase agreement
and the project's debt agreements, as more fully discussed under the
caption, "Other Commitments and Contingencies." Paiton Energy is presently
seeking Lender approval of the global settlement agreement with the
Contractor.
Our contingent equity obligations for the Paiton project are to be
cancelled, if unused, as of the date of term financing by the Export-Import
Bank of the United States. Term financing by the Export-Import Bank of the
United States is the subject of a comprehensive set of conditions. The
obligation of the Export-Import Bank of the United States to provide term
financing was initially scheduled to terminate on October 15, 1999. The
Export-Import Bank of the United States agreed to extend the term financing
commitment through December 31, 2000 and has determined that the project
will need to meet additional terms and conditions for take-out of the
construction lenders.
(ii) Contingent obligations to contribute additional equity to the project
relate specifically to an agreement between us and Banpu Public Company (a
project shareholder) to provide certain back-up equity assurances to the
project's lenders should Banpu be unable to fund the full portion of its
equity when due. At present, we do not anticipate a requirement to fund
this additional equity.
Other than as noted above, we are not aware, at this time, of any other
contingent obligations or obligations to contribute project equity.
Other Commitments and Contingencies
Subsidiary Indemnification Agreements
Some of our subsidiaries have entered into indemnification agreements, under
which the subsidiaries agreed to repay capacity payments to the projects' power
purchasers in the event the projects unilaterally terminate their performance or
reduce their electric power producing capability during the term of the power
contracts. Obligations under these indemnification agreements as of June 30,
2000, if payment were required, would be $269 million. We have no reason to
believe that the projects will either terminate their performance or reduce
their electric power producing capability during the term of the power
contracts.
Paiton
Paiton is a 1,230-MW coal-fired power plant in operation in East Java,
Indonesia. A wholly owned subsidiary of Edison Mission Energy owns a 40%
interest and has a $467 million investment at June 30, 2000. The project's
tariff is higher in the early years and steps down over time. The tariff for
the Paiton project includes infrastructure to be used
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in common by other units at the Paiton complex. The plant's output is fully
contracted with the state-owned electricity company, PLN. Payments are in
Indonesian Rupiah, with the portion of such payments intended to cover non-
Rupiah project costs, including returns to investors, indexed to the Indonesian
Rupiah/U.S. dollar exchange rate established at the time of the power purchase
agreement in February 1994. The project received substantial finance and
insurance support from the Export-Import Bank of the United States, the Japan
Bank of International Cooperation (formerly known as The Export-Import Bank of
Japan), the U.S. Overseas Private Investment Corporation and the Ministry of
International Trade and Industry of Japan. PLN's payment obligations are
supported by the Government of Indonesia. The projected rate of growth of the
Indonesian economy and the exchange rate of Indonesian Rupiah into U.S. dollars
have deteriorated significantly since the Paiton project was contracted,
approved and financed. The Paiton project's senior debt ratings have been
reduced from investment grade to speculative grade based on the rating agencies'
determination that there is increased risk that PLN might not be able to honor
the electricity sales contract with Paiton Energy. The Government of Indonesia
has arranged to reschedule sovereign debt owed to foreign governments and has
entered into discussions about rescheduling sovereign debt owed to private
lenders. Specified events, including those discussed in the paragraph below,
which, with the passage of time or upon notice, may mature into defaults of the
project's debt agreements have occurred. On October 15, 1999, the project
entered into an interim agreement with its lenders pursuant to which the lenders
waived such defaults until July 31, 2000. In July, the Lenders voted to extend
the term of the Lender Interim Agreement through December 31, 2000 to coincide
with the US-EXIM take-out date and the time period of the Interim Agreement with
PLN. However, this waiver may expire on an earlier date if additional defaults,
other than those specifically waived, or other specified events occur.
In May 1999, Paiton Energy notified PLN that Unit 7 of the Paiton project
achieved commercial operation under terms of the power purchase agreement and,
in July 1999, that Unit 8 of the Paiton project had similarly achieved such
commercial operation. Because of the economic downturn, PLN is experiencing low
electricity demand and PLN had, through February of this year, been dispatching
the Paiton plant to zero; however, under the terms of the power purchase
agreement, PLN is required to continue to pay for capacity and fixed operating
costs once each unit and the plant achieve commercial operation. PLN has not
paid invoices amounting to $561 million for capacity charges and fixed operating
costs under the power purchase agreement. In addition, PLN filed a lawsuit
contesting the validity of its agreement to purchase electricity from the
project. The lawsuit was withdrawn by PLN on January 20, 2000.
On February 21, 2000, Paiton Energy and PLN executed an Interim Agreement
pursuant to which the power purchase agreement will be administered pending a
long-term restructure of the power purchase agreement. Among other things, the
Interim Agreement provides for dispatch of the project, fixed monthly capacity
payments to Paiton Energy by PLN, and the standstill of any further legal
proceedings by either party during the term of the Interim Agreement, which runs
through December 31, 2000 and may be extended by mutual agreement. To date, PLN
has made timely payments of the
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fixed capacity totaling $45 million. Invoicing under the power purchase
agreement will continue to accrue (minus the fixed monthly capacity payments
under the Interim Agreement) and will be dealt with under the overall tariff
restructuring negotiations. PLN and Paiton Energy have entered into negotiations
on a long-term restructuring of the tariff, but no final agreement has been
reached to date. Any material modifications of the power purchase agreement
could also require a renegotiation of the Paiton project's debt agreements. The
impact of any such renegotiations with PLN, the Government of Indonesia or the
project's creditors on our expected return on our investment in Paiton Energy is
uncertain at this time; however, we believe that we will ultimately recover our
investment in the project.
Brooklyn Navy Yard
Brooklyn Navy Yard is a 286-MW gas-fired cogeneration power plant in Brooklyn,
New York. Our wholly owned subsidiary owns 50% of the project. In February
1997, the construction contractor asserted general monetary claims under the
turnkey agreement against Brooklyn Navy Yard Cogeneration Partners, L.P. for
damages in the amount of $136.8 million. Brooklyn Navy Yard Cogeneration
Partners has asserted general monetary claims against the contractor. In
connection with a $407 million non-recourse project refinancing in 1997, we
agreed to indemnify Brooklyn Navy Yard Cogeneration Partners and its partner
from all claims and costs arising from or in connection with the contractor
litigation, which indemnity has been assigned to Brooklyn Navy Yard Cogeneration
Partners' lenders. At the present time, we cannot reasonably estimate the
amount that would be due, if any, related to this litigation. Additional
amounts, if any, which would be due to the contractor with respect to completion
of construction of the power plant would be accounted for as an additional part
of its power plant investment. Furthermore, our partner has executed a
reimbursement agreement with us that provides recovery of up to $10 million over
an initial amount, including legal fees, payable from its management and royalty
fees. At June 30, 2000, no accrual has been recorded in connection with this
litigation. We believe that the outcome of this litigation will not have a
material adverse effect on our consolidated financial position or results of
operations.
Litigation
We are routinely involved in litigation arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, we, based on advice of counsel, do not believe that the final outcome
of any pending litigation will have a material adverse effect on our financial
position or results of operations.
Other
In support of the businesses of our subsidiaries, we have made, from time to
time, guarantees, and have entered into indemnity agreements with respect to our
subsidiaries' obligations like those for debt service, fuel supply or the
delivery of power, and have
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entered into reimbursement agreements with respect to letters of credit issued
to third parties to support our subsidiaries' obligations.
We may incur additional guaranty, indemnification, and reimbursement
obligations, as well as obligations to make equity and other contributions to
projects in the future. We believe that we will have sufficient liquidity on
both a short- and long-term basis to fund pre-financing project development
costs, make equity contributions to project subsidiaries, pay our debt
obligations and pay other administrative and general expenses as they are
incurred from (1) distributions from energy projects and dividends from
investments in oil and gas, (2) proceeds from the repayment of loans made by us
to our project subsidiaries, and (3) funds available from our revolving credit
facility.
MARKET RISK EXPOSURES
---------------------
Edison Mission Energy's primary market risk exposures arise from changes in
interest rates, changes in oil and gas prices and electricity pool pricing and
fluctuations in foreign currency exchange rates. We manage these risks by using
derivative financial instruments in accordance with established policies and
procedures.
Interest Rate Risk
Interest rate changes affect the cost of capital needed to finance the
construction and operation of our projects. We have mitigated the risk of
interest rate fluctuations by arranging for fixed rate financing or variable
rate financing with interest rate swaps or other hedging mechanisms for a number
of our project financings. Interest expense included $9.6 million and $12.5
million of additional interest expense for the six months ended June 30, 2000
and 1999, respectively, as a result of interest rate hedging mechanisms. We
have entered into several interest rate swap agreements under which the maturity
date of the swaps occurs prior to the final maturity of the underlying debt.
Commodity Price Risk
Electric power generated at our uncontracted plants is generally sold under
bilateral arrangements with utilities and power marketers under short-term
contracts with terms of two years or less, or in the case of the Homer City
plant, to the Pennsylvania-New Jersey-Maryland power market (PJM) or the New
York independent system operator (NYISO). We hedge a portion of the electric
output of our merchant plants, whose output is not committed to be sold under
long term contracts, in order to lock in desirable outcomes. When appropriate,
we manage the "spark spread" or margin, which is the spread between electric
prices and fuel prices, and use forward contracts, swaps, futures, or options
contracts to achieve those objectives.
Our plants in the United Kingdom (UK) sell their electrical energy and
capacity through a centralized electricity pool, which establishes a half-hourly
clearing price, also referred to as the pool price, for electrical energy. The
pool price is extremely volatile and can vary by as much as a factor of ten or
more over the course of a few hours, due to
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the large differentials in demand according to the time of day. The First Hydro
and Ferrybridge and Fiddler's Ferry plants mitigate a portion of the market risk
of the pool by entering into contracts for differences, which are electricity
rate swap agreements, related to either the selling or purchasing price of
power. These contracts specify a price at which the electricity will be traded,
and the parties to the agreement make payments calculated based on the
difference between the price in the contract and the pool price for the element
of power under contract. These contracts are sold in various structures and act
to stabilize revenues or purchasing costs by removing an element of their net
exposure to pool price volatility.
In July 1998, the UK Director General of Electricity Supply proposed to the
Minister for Science, Energy and Industry that the current structure of
contracts for differences and compulsory trading via the pool at half-hourly
clearing prices bid a day ahead be abolished. The UK Government accepted the
proposals in October 1998 subject to certain reservations. Following this,
further proposals were published by the Regulator in July and October 1999. The
proposals include, among other things, the establishment of voluntary long-term
forwards and futures markets, organized by independent market operators and
evolving in response to demand; voluntary short-term power exchanges operating
from 24 to 4-hours before a trading period; a balancing mechanism to enable the
system operator to balance generation and demand and resolve any transmission
constraints; a mandatory settlement process for recovering imbalances between
contracted and metered volumes with stronger incentives for being in balance;
and a Balancing and Settlement Code Panel to oversee governance of the balancing
mechanism. The Minister for Science, Energy and Industry has recommended that
the proposal be implemented by November 21, 2000. It is difficult at this stage
to evaluate the future impact of the proposals. However, a key feature of the
new trading arrangements is to move to firm physical delivery which means that a
generator must deliver, and a consumer take delivery, against their contracted
positions or face the uncertain consequences of the system operator buying or
selling in the balancing market, on their behalf, and passing the costs back to
them. A consequence of this will be to increase greatly the motivation of
parties to contract in advance. Recent experience has been that this has placed
a significant downward pressure on forward contract prices. Legislation in the
form of a Utilities Bill, which was approved July 28, 2000, allows for the
implementation of new trading arrangements and the necessary amendments to
generators' licenses.
A warmer than average winter, the entry of new operations into the generation
market, the introduction of the new electricity trading arrangements coupled
with uncertainties surrounding the new Utilities Bill and a proposed "good
behavior" clause, discussed below, contributed to a drop in electricity market
prices during the first six months of 2000 and have depressed forward prices for
winter 2000/2001. As a result of these events, we expect lower than anticipated
revenue from our Ferrybridge and Fiddler's Ferry plants.
The core of the Utilities Bill is a fair deal for consumers through the
provision of proper incentives to innovate and improve efficiency, growth of
competition, protection
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for consumers and contribution of the utilities of a better environment. While
the UK Government recognizes the need to strike a balance between consumer and
shareholder interest, the proposals have far reaching implications for the
utilities sector.
In December 1999, the UK Director General of Electricity Supply gave notice of
an intention to introduce a new condition into the licenses of a number of
generators to curb the perceived exercise of market power in the determination
of wholesale electricity prices. The majority of the major generators have
accepted the new clauses, including Edison Mission Energy, which has sought and
received specific assurances from the Regulator on the definition of market
abuse and the way the clauses will be interpreted in the future.
Electric power generated at the Homer City plant is sold under bilateral
arrangements with domestic utilities and power marketers under short-term
contracts with terms of two years or less, or to the PJM or the NYISO. These
pools have short-term markets, which establish an hourly clearing price. The
Homer City plant is situated in the PJM control area and is physically connected
to high-voltage transmission lines serving both the PJM and NYISO markets. The
Homer City plant can also transmit power to the Midwestern United States.
Electric power generated at the Illinois Plants is sold under power purchase
agreements with Commonwealth Edison, in which Commonwealth Edison will purchase
capacity and have the right to purchase energy generated by the Illinois Plants.
The agreements, which began on December 15, 1999, and have a term of up to five
years, provide for capacity and energy payments. Commonwealth Edison will be
obligated to make a capacity payment for the plants under contract and an energy
payment for the electricity produced by these plants and taken by Commonwealth
Edison. The capacity payment will provide the Illinois Plants revenue for fixed
charges, and the energy payment will compensate the Illinois Plants for variable
costs of production. If Commonwealth Edison does not fully dispatch the plants
under contract, the Illinois Plants may sell, subject to specified conditions,
the excess energy at market prices to neighboring utilities, municipalities,
third party electric retailers, large consumers and power marketers on a spot
basis. A bilateral trading infrastructure already exists with access to the
Mid-America Interconnected Network and the East Central Area Reliability
Council.
The Loy Yang B plant sells its electrical energy through a centralized
electricity pool, which provides for a system of generator bidding, central
dispatch and a settlements system based on a clearing market for each half-hour
of every day. The National Electricity Market Management Company, operator and
administrator of the pool, determines a system marginal price each half-hour.
To mitigate exposure to price volatility of the electricity traded into the
pool, the Loy Yang B plant has entered into a number of financial hedges. From
May 8, 1997 to December 31, 2000, approximately 53% to 64% of the plant output
sold is hedged under vesting contracts with the remainder of the plant capacity
hedged under the State Hedge described below. Vesting contracts were put into
place by the State Government of Victoria, Australia, between each
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generator and each distributor, prior to the privatization of electric power
distributors in order to provide more predictable pricing for those electricity
customers that were unable to choose their electricity retailer. Vesting
contracts set base strike prices at which the electricity will be traded. The
parties to the vesting contracts make payments, which are calculated based on
the difference between the price in the contract and the half-hourly pool
clearing price for the element of power under contract. Vesting contracts are
sold in various structures and are accounted for as electricity rate swap
agreements. In addition, the Loy Yang B plant has entered into a State Hedge
agreement with the State Electricity Commission of Victoria. The State Hedge is
a long-term contractual arrangement based upon a fixed price commencing May 8,
1997 and terminating October 31, 2016. The State Government of Victoria,
Australia guarantees the State Electricity Commission of Victoria's obligations
under the State Hedge.
Our electric revenues were increased by $38.8 million and $20.1 million for
the six months ended June 30, 2000 and 1999, respectively as a result of
electricity rate swap agreements and other hedging mechanisms. An electricity
rate swap agreement is an exchange of a fixed price of electricity for a
floating price. As a seller of power, we receive the fixed price in exchange
for a floating price, like the index price associated with electricity pools.
Foreign Exchange Rate Risk
Fluctuations in foreign currency exchange rates can affect, on a United States
dollar equivalent basis, the amount of our equity contributions to, and
distributions from, our international projects. As we continue to expand into
foreign markets, fluctuations in foreign currency exchange rates can be expected
to have a greater impact on our results of operations in the future. At times,
we have hedged a portion of our current exposure to fluctuations in foreign
exchange rates through financial derivatives, offsetting obligations denominated
in foreign currencies, and indexing underlying project agreements to United
States dollars or other indices reasonably expected to correlate with foreign
exchange movements. In addition, we have used statistical forecasting
techniques to help assess foreign exchange risk and the probabilities of various
outcomes. There can be no assurance, however, that fluctuations in exchange
rates will be fully offset by hedges or that currency movements and the
relationship between certain macro economic variables will behave in a manner
that is consistent with historical or forecasted relationships. Foreign
exchange considerations for three major international projects, other than
Paiton which was discussed earlier, are discussed below.
The First Hydro and Ferrybridge and Fiddler's Ferry plants in the United
Kingdom and the Loy Yang B plant in Australia have been financed in their local
currency, pound sterling and Australian dollars, respectively, thus hedging the
majority of their acquisition costs against foreign exchange fluctuations.
Furthermore, we have evaluated the return on the remaining equity portion of
these investments with regard to the likelihood of various foreign exchange
scenarios. These analyses use market derived volatilities, statistical
correlations between specified variables, and long-term forecasts to predict
ranges of expected returns. Based upon these analyses, we believe that the
investment
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returns for the First Hydro, Ferrybridge and Fiddler's Ferry, and Loy Yang B
plants are adequately insulated from a broad range of foreign exchange scenarios
at this time.
We will continue to monitor our foreign exchange exposure and analyze the
effectiveness and efficiency of hedging strategies in the future.
Other
The electric power generated by some of our domestic operating projects,
excluding the Homer City plant and the Illinois Plants, is sold to electric
utilities under long-term (typically with terms of 15 to 30-years) power
purchase agreements and is expected to result in consistent cash flow under a
wide range of economic and operating circumstances. To accomplish this, we
structure our long-term contracts so that fluctuations in fuel costs will
produce similar fluctuations in electric and/or steam revenues and enter into
long-term fuel supply and transportation agreements. The degree of linkage
between these revenues and expenses varies from project to project, but
generally permits the projects to operate profitably under a wide array of
potential price fluctuation scenarios.
ENVIRONMENTAL MATTERS OR REGULATIONS
------------------------------------
We are subject to environmental regulation by federal, state, and local
authorities in the United States and foreign regulatory authorities with
jurisdiction over projects located outside the United States. We believe that
as of the filing date of this report, we are in substantial compliance with
environmental regulatory requirements and that maintaining compliance with
current requirements will not materially affect our financial position or
results of operations.
We expect that the implementation of Clean Air Act Amendments will result in
increased capital expenditures and operating expenses. For example, we expect
to spend approximately $65 million for the remainder of 2000 and $42 million in
2001 to install upgrades to the environmental controls at the Homer City plant
to control sulfur dioxide and nitrogen oxide emissions. Similarly, we
anticipate upgrades to the environmental controls at the Illinois Plants to
control nitrogen oxide emissions to result in expenditures of approximately $39
million for the remainder of 2000 and $56 million, $126 million and $16 million
for 2001, 2002 and 2003, respectively. In addition, at the Ferrybridge and
Fiddler's Ferry plants, we are committed to incur environmental costs arising
from plant modifications, totaling approximately $40 million for the remainder
of 2000 and $262 million for the 2001-2004 period. We do not expect these
increased capital expenditures and operating expenses to have a material effect
on our financial position or results of operation.
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STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 and NO. 138
---------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
This statement addresses a limited number of issues causing implementation
difficulties for entities applying SFAS No. 133. If certain conditions are met,
a derivative may be specifically designated as (i) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (ii) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (iii) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company is currently evaluating the effects of this
Statement.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.81 Edison International 2000 Equity Plan, incorporated by
reference to Exhibit 10.1 to Edison International's Form 10-Q
for the quarter ended June 30, 2000. (File No. 1-9936).
10.82 Form of Agreement for 2000 Employee Awards under the 2000
Equity Plan, incorporated by reference to Exhibit 10.2 to
Edison International's Form 10-Q for the quarter ended June 30,
2000. (File No. 1-9936).
10.83 Amendment No.1 to the Edison International Equity Compensation
Plan (as restated January 1, 1998), incorporated by reference
to Exhibit 10.4 to Edison International's Form 10-Q for the
quarter ended June 30, 2000. (File No. 1-9936).
10.84 Credit Agreement dated May 30, 2000, among Edison Mission
Energy, Certain Commercial Lending Institutions and Bank of
America, N.A.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Edison Mission Energy
---------------------
(Registrant)
Date: August 11, 2000 /s/ KEVIN M. SMITH
--------------------- -------------------------
KEVIN M. SMITH
Senior Vice President and
Chief Financial Officer
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