Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report 34 135K
2: EX-10.64 Coal and Capex Facility Agreement 83 201K
3: EX-10.65 Guarantee Dated July 16, 1999 22 80K
4: EX-27 Financial Data Schedule 2 7K
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 September 30, 1999
------------------
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
November 11, 1999: 100 shares (all shares held by an affiliate of the
registrant).
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............................................. 18
PART II - Other Information
1. Legal Proceedings................................................. 30
6. Exhibits and Reports on Form 8-K.................................. 31
PART III
Signatures........................................................ 32
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
[Enlarge/Download Table]
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- ----------------------------------------
1999 1998 1999 1998
----------------- ------------------ ------------------- ------------------
Operating Revenues
Electric revenues $ 434,534 $ 132,398 $ 850,059 $ 475,597
Equity in income from energy projects 82,672 81,174 178,671 146,966
Equity in income from oil and gas 9,486 3,155 19,246 13,582
Operation and maintenance services 10,416 10,755 28,260 30,557
--------- --------- ---------- ---------
Total operating revenues 537,108 227,482 1,076,236 666,702
--------- --------- ---------- ---------
Operating Expenses
Fuel 116,700 36,817 244,347 126,529
Plant operations 94,201 30,855 175,590 93,324
Operation and maintenance services 7,102 7,725 21,115 22,004
Depreciation and amortization 58,338 20,773 118,081 65,933
Administrative and general 38,059 27,928 107,123 85,090
--------- --------- ---------- ---------
Total operating expenses 314,400 124,098 666,256 392,880
--------- --------- ---------- ---------
Income from operations 222,708 103,384 409,980 273,822
--------- --------- ---------- ---------
Other Income (Expense)
Interest and other income (expense) (2,290) 9,483 18,294 32,254
Interest expense (107,472) (46,930) (230,864) (137,815)
Dividends on preferred securities (7,010) (3,304) (14,388) (9,905)
--------- --------- ---------- ---------
Total other income (expense) (116,772) (40,751) (226,958) (115,466)
--------- --------- ---------- ---------
Income before income taxes 105,936 62,633 183,022 158,356
Provision for income taxes 19,331 17,855 33,006 57,290
--------- --------- ---------- ---------
Income before change in accounting
principle $ 86,605 $ 44,778 $ 150,016 $ 101,066
Cumulative effect on prior years of
change in accounting for start-up costs - - (13,840) -
--------- --------- ---------- ---------
Net Income $ 86,605 $ 44,778 $ 136,176 $ 101,066
========= ========= ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
1
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
[Enlarge/Download Table]
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
--------- -------- --------- ---------
Net Income $ 86,605 $44,778 $136,176 $101,066
Other comprehensive income, net of tax:
Foreign currency translation
adjustments, net of income tax
benefit (expense) of $(2,171) and
$(272) for the three months and $623
and $(1,172) for the nine months
ended September 30, 1999 and 1998,
respectively 47,311 6,895 5,654 7,633
-------- ------- -------- --------
Comprehensive Income $133,916 $51,673 $141,830 $108,699
======== ======= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
2
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
[Download Table]
(Unaudited)
September 30, December 31,
1999 1998
---------------- ---------------
Assets
Current Assets
Cash and cash equivalents $ 450,777 $ 459,178
Accounts receivable - trade 153,810 74,403
Accounts receivable - affiliates 25,994 13,871
Inventory 182,052 13,000
Prepaid expenses and other 67,960 46,864
----------- ----------
Total current assets 880,593 607,316
----------- ----------
Investments
Energy projects 1,903,208 1,163,597
Oil and gas 69,851 62,949
----------- ----------
Total investments 1,973,059 1,226,546
----------- ----------
Property, Plant and Equipment 8,279,324 3,125,747
Less accumulated depreciation and amortization 366,721 250,934
----------- ----------
Net property, plant and equipment 7,912,603 2,874,813
----------- ----------
Other Assets
Goodwill 298,662 308,051
Restricted cash and other 124,167 141,390
----------- ----------
Total other assets 422,829 449,441
----------- ----------
Total Assets $11,189,084 $5,158,116
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
3
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
[Enlarge/Download Table]
(Unaudited)
September 30, December 31,
1999 1998
-------------------- --------------------
Liabilities and Shareholder's Equity
Current Liabilities
Accounts payable - affiliates $ 14,124 $ 8,339
Accounts payable and accrued liabilities 296,673 99,062
Accrued incentive compensation 142,800 112,652
Interest payable 94,045 56,708
Short-term obligations 489,474 -
Current maturities of long-term obligations 255,891 194,586
----------- ----------
Total current liabilities 1,293,007 471,347
----------- ----------
Long-Term Obligations Net of Current Maturities 5,104,988 2,396,360
----------- ----------
Long-Term Deferred Liabilities
Deferred taxes and tax credits 1,491,091 613,009
Deferred revenue 531,330 490,471
Other 177,822 79,369
----------- ----------
Total long-term deferred liabilities 2,200,243 1,182,849
----------- ----------
Total Liabilities 8,598,238 4,050,556
----------- ----------
Preferred Securities of Subsidiaries:
Company-obligated mandatorily redeemable security of
partnership holding solely parent debentures 150,000 150,000
----------- ----------
Subject to mandatory redemption 157,536 -
----------- ----------
Not subject to mandatory redemption 118,054 -
----------- ----------
Commitments and Contingencies (Note 6)
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 1,695,406 629,406
Retained earnings 370,387 234,345
Accumulated other comprehensive income 35,333 29,679
----------- ----------
Total Shareholder's Equity 2,165,256 957,560
----------- ----------
Total Liabilities and Shareholder's Equity $11,189,084 $5,158,116
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
[Enlarge/Download Table]
(Unaudited)
Nine Months Ended
September 30,
--------------------------------------
1999 1998
------------------ -----------------
Cash Flows From Operating Activities
Net income $ 136,176 $ 101,066
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in income from energy projects (178,671) (146,966)
Equity in income from oil and gas (19,246) (13,582)
Distributions from energy projects 108,363 97,452
Distributions from oil and gas 7,613 19,537
Depreciation and amortization 118,081 65,933
Deferred taxes and tax credits 13,596 44,447
Cumulative effect on prior years of change in accounting for
start-up costs 13,840 -
(Increase) decrease in accounts receivable (91,960) 33,838
(Increase) decrease in inventory (35,212) 193
Increase in prepaid expenses and other (691) (182)
Increase (decrease) in accounts payable and accrued liabilities 232,509 (7,039)
Increase (decrease) in interest payable 37,337 (11,320)
Other, net 27,232 (10,885)
---------- ---------
Net cash provided by operating activities 368,967 172,492
---------- ---------
Cash Flows From Financing Activities
Borrowings on long-term obligations 2,831,975 66,016
Payments on long-term obligations (181,447) (72,224)
Short-term financing, net 485,045 -
Capital contribution from parent 1,066,000 -
Issuance of preferred securities 277,632 -
---------- ---------
Net cash provided by (used in) financing activities 4,479,205 (6,208)
---------- ---------
Cash Flows From Investing Activities
Investments in energy projects (32,789) (9,450)
Loans to energy projects (44,442) (42,289)
Purchase of generating stations (3,959,011) -
Purchase of common stock of acquired companies (635,301) (4,109)
Capital expenditures (196,388) (62,725)
Decrease in restricted cash 30,654 34,169
Other, net (22,376) 1,527
---------- ---------
Net cash used in investing activities (4,859,653) (82,877)
---------- ---------
Effect of exchange rate changes on cash 3,080 (716)
---------- ---------
Net increase (decrease) in cash and cash equivalents (8,401) 82,691
Cash and cash equivalents at beginning of period 459,178 585,883
---------- ---------
Cash and cash equivalents at end of period $ 450,777 $ 668,574
========== =========
The accompanying notes are an integral part of
these consolidated financial statements.
5
EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 nine months ended September 30, 1999, are not necessarily indicative of the
operating results for the full year.
Edison Mission Energy's (EME) significant accounting policies are described
in Note 2 to EME's Consolidated Financial Statements as of December 31, 1998 and
1997, included in its 1998 Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1999. EME follows the same accounting
policies for interim reporting purposes, with the exception of the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities", which became effective in
January 1999. SOP 98-5 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. 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. INVENTORY
Inventory is stated at the lower of weighted average cost or market.
Inventory at September 30, 1999 and December 31, 1998 consisted of the
following:
[Download Table]
(In thousands)
1999 1998
-------- -------
Coal and fuel oil $126,007 $ --
Spare parts, materials and supplies 56,045 13,000
-------- -------
Total $182,052 $13,000
======== =======
6
NOTE 3. INVESTMENTS
The following table presents summarized financial information of the
investments in energy projects and oil and gas accounted for by the equity
method:
[Download Table]
(In thousands)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
--------- ---------- ---------- ---------
Energy Projects
Operating Revenues $743,765 $478,516 $1,506,356 $1,200,618
Income from Operations 243,649 188,294 485,750 343,069
Net Income 180,482 162,535 378,985 265,549
Oil and Gas
Operating Revenues $108,232 $ 49,232 $ 201,769 $ 155,180
Income from Operations 29,807 8,430 53,094 37,112
Net Income 18,920 6,664 38,164 27,770
NOTE 4. ACQUISITIONS
On March 18, 1999, EME Homer City Generation L.P. (EME Homer City), an
indirect, wholly owned affiliate of EME, completed a transaction with GPU,
Inc., New York State Electric & Gas Corporation and their respective affiliates
to acquire the 1,884-megawatt (MW) Homer City Electric Generating Station and
certain facilities and other assets associated therewith (collectively, Homer
City).
Consideration for Homer City consisted of a cash payment of approximately $1.8
billion, which was partially financed by $1.5 billion of new loans, combined
with corporate revolver borrowings and cash (see Note 5).
On May 14, 1999, Edison Mission Energy Taupo Ltd. (EME Taupo), an indirect,
wholly owned affiliate of EME, completed a transaction with the New Zealand
government to acquire 40% of the shares of Contact Energy Ltd. (Contact). The
remaining 60% of Contact Energy's shares were sold in a public offering
resulting in widespread ownership among the citizens of New Zealand and offshore
investors. These shares are publicly traded on stock exchanges in New Zealand
and Australia. Contact owns and operates hydroelectric, geothermal and natural
gas-fired power generating plants primarily in New Zealand with a total current
generating capacity of 1,930 MW.
Consideration for Contact consisted of a cash payment of approximately $635
million (1.2 billion New Zealand dollars), which was financed by $120 million of
preferred stock issued by Edison Mission Energy Global Management, Inc., an
indirect, wholly owned affiliate of EME, a $214 million (400 million New
Zealand dollars) credit facility issued
7
by EME Taupo, a $300 million equity contribution from Edison International and
cash (see Note 5).
On July 19, 1999, Edison First Power Limited (EFPL), an indirect, wholly
owned affiliate of EME, completed a transaction with PowerGen UK plc, to acquire
the Ferrybridge and Fiddler's Ferry coal-fired electric generating plants
(Ferrybridge and Fiddler's Ferry) located in the United Kingdom. Ferrybridge,
located in West Yorkshire, and Fiddler's Ferry, located in Warrington, each have
a generating capacity of approximately 2,000 megawatts. In connection with the
acquisition, EFPL has committed to certain construction costs arising from plant
modification totaling $142 million and has executed a multi-year coal supply
agreement.
Consideration for the acquisition of Ferrybridge and Fiddler's Ferry
consisted of approximately $2.0 billion (1.3 billion pounds Sterling) for the
two plants. The purchase price may be increased up to additional $33.8 million
in the event that the environmental authority in the United Kingdom allows for
an increase in emissions from the plants. The acquisition was funded primarily
with a combination of net proceeds from the Edison First Power Limited
Guaranteed Secured Variable Rate Bonds (Edison First Power Bonds) issued on July
19, 1999 and due 2019, cash and a $500 million equity contribution from Edison
International. The Edison First Power Bonds were issued to a special purpose
entity formed by Merrill Lynch International (MLI SPE). MLI SPE sold the
variable rate coupons portion of the bonds to a special purpose entity that
borrowed $1.3 billion (830 million pounds Sterling) under a Term Loan Facility
to finance the purchase (see Note 5).
These acquisitions were accounted for utilizing the purchase method. EME's
consolidated statement of income for the three and nine months ended September
30, 1999 reflects the operations of Homer City beginning March 18, 1999, Contact
beginning May 1, 1999, and Ferrybridge and Fiddler's Ferry beginning July 19,
1999.
NOTE 5. FINANCIAL INSTRUMENTS AND EQUITY CONTRIBUTIONS
EME Financings and Edison International Equity Contributions
In March 1999, EME entered into a $700 million, 364-day interest only
revolving credit facility, structured on a recourse, unsecured basis.
In May 1999, Edison Mission Energy Global Management, Inc. (EME Global) issued
$120 million of Flexible Money Market Cumulative Preferred Stock. The stock
issuance consists of (1) 600 Series A Shares and (2) 600 Series B Shares, both
with liquidation preference of $100,000 per share and a dividend rate of 5.74%
until May 2004.
EME entered into a Support Agreement that requires EME to make capital
contributions to EME Global in order for it to maintain a positive net worth and
to provide sufficient funds for payment of declared dividends on preferred stock
and any
8
redemption price in respect of the preferred stock. EME's maximum obligation
would be limited to either (1) an amount equal to twice the sum of (a) the
liquidation preference of the preferred stock (currently approximately $240
million) and (b) the liquidation preference on all outstanding preferred stock
of EME Global without any precedence over the preferred stock (currently zero)
or (2) the amount that EME could lawfully distribute to Edison International
under the General Corporation Law of the State of California.
In June 1999, EME issued $600 million, 7.73% Senior Notes due 2009. The
Notes are senior unsecured obligations of EME, which will be used for general
corporate purposes.
For the year ended September 30, 1999, EME has received $1.1 billion in
equity contributions from Edison International. The contributions were used to
finance acquisitions and to pay down EME's short-term obligations.
Financing of Homer City
In March 1999, Edison Mission Holdings Co. (EM Holdings), parent company of
EME Homer City, closed a $1.1 billion financing. The EM Holdings financing
consists of (1) an $800 million, 364-day interest only term loan, (2) a $250
million, five-year interest only construction term loan and (3) a $50 million,
five-year interest only revolving loan. These loans are structured on a limited-
recourse basis, in which the lenders look primarily to the cash generated by EM
Holdings and its subsidiaries to repay the debt and have taken a security
interest in the assets of EM Holdings and its subsidiaries. The proceeds of EM
Holdings' $800 million loan and EME's $700 million loan (described above),
combined with cash and corporate revolver borrowings totaling approximately $300
million were used to finance the acquisition of Homer City.
In May 1999, EM Holdings completed an $830 million bond financing. The
financing consists of (1) $300 million, 8.137% Senior Secured Bonds due 2019 and
(2) $530 million, 8.734% Senior Secured Bonds due 2026. These bonds are non-
recourse to EME apart from the Credit Support Guarantee and Debt Service Reserve
Guarantee entered into by EME. The Credit Support Guarantee requires EME to
guarantee the payment and performance of the obligations of EM Holdings to the
bond holders, banks and other secured parties which financed the acquisition of
Homer City in an aggregate amount not to exceed approximately $42 million. This
guarantee is to remain in place until December 31, 2001. In addition, to satisfy
the requirements under the EM Holdings financing to have a Debt Service Reserve
Requirement in an amount equal to six months' debt service projected to be due
following the payment of a distribution, EME agreed to guarantee the payment and
performance of the obligations of EM Holdings in the amount of approximately $35
million pursuant to the Debt Service Reserve Guarantee. The proceeds of the $830
million bonds were used primarily to repay EM Holdings' $800 million, 364-day
interest only term loan.
9
Financing of Contact Energy
The acquisition of Contact was financed by borrowings under the $214
million (400 million New Zealand dollars) credit facility, issuance of $120
million of EME Global preferred stock (described above), cash and a $300 million
equity contribution from Edison International.
From June through September 30, 1999, EME Taupo issued $158 million (305
million New Zealand dollars) of Retail Redeemable Preference Shares, the
proceeds of which were used to repay a portion of the EME Taupo $214 million
credit facility. EME entered into two Deeds of Covenant comprised of a Facility
Agreement and a Subscription Agreement. The Facility Agreement requires EME to
provide funds to EME Taupo (1) of up to $13 million New Zealand dollars annually
in order for EME Taupo to meet its interest and dividend payment obligations to
Credit Suisse First Boston and (2) to ensure that EME satisfies certain
financial ratios. The Subscription Agreement requires EME to provide funds to
the Preferred Stock Subscriber to compensate for any shortfall in attaching tax
imputation credits to the dividends on the preferred stock.
Financing of Ferrybridge and Fiddler's Ferry
In July 1999, Edison First Power Limited issued Edison First Power Bonds
due 2019. The bonds are guaranteed by Maplekey UK Limited, a wholly-owned
subsidiary of EME. The Edison First Power Bonds were issued to a special purpose
entity formed by Merrill Lynch International (MLI SPE). MLI SPE sold the
variable rate coupons portion of the bonds to a special purpose entity that
borrowed $1.3 billion (830 million pounds Sterling) under a Term Loan Facility
to finance the purchase. The Term Loan Facility accrues interest at LIBOR plus
1.50 to 1.90 and is repaid in semi-annual installments over a 12 year period
beginning December 1999. EME has consolidated the Term Loan Facility under
Emerging Issues Task Force D-14, "Transactions Involving Special Purpose
Entities".
EME has entered into various undertakings to support financial commitments
of its affiliates related to the acquisition of Ferrybridge and Fiddler's Ferry,
including (1) a guaranty of EFPL's Purchase Price Adjustment obligation of up to
$33.8 million in the event that the environmental authority in the United
Kingdom allows for an increase in emissions from the plants; (2) a guaranty of a
letter of credit facility of $228.8 million entered into by EME Finance UK
Limited (EME Finance), an indirect, wholly-owned affiliate of EME, to support
EFPL's commitments: (a) to make certain construction costs arising from plant
modifications, and (b) under a multi-year coal supply agreement; and (3)
issuance of a $85.4 million letter of credit under its corporate revolving
credit line to serve as a debt service reserve account to support debt service
payments under the Guaranteed Secured Variable Rate Bonds due 2019.
10
NOTE 6. COMMITMENTS AND CONTINGENCIES
Firm Commitments for Asset Purchases
[Download Table]
Projects U.S. ($ in millions)
-------- --------------------
Commonwealth Edison Co. (i) $ 5,000
(i) A wholly owned subsidiary of EME executed an Asset Sale Agreement to
purchase the fossil-fuel generating assets of Commonwealth Edison Co.,
totaling 9,510 MW located in the midwestern United States. The closing of
the transaction is subject to receipt of various state and federal
regulatory approvals and is expected to be completed by year end 1999.
Firm Commitments to Contribute Project Equity
[Download Table]
Projects Local Currency U.S. ($ in millions)
--------- -------------- --------------------
ISAB (i) 244 billion Italian Lira $ 135
EcoElectrica (ii) 34
Tri Energy (iii) 25
(i) ISAB is a 512-MW integrated gasification combined cycle power plant under
construction near Siracusa in Sicily, Italy. A wholly owned subsidiary of
EME owns a 49% interest. Equity will be contributed at commercial
operation, which is currently scheduled for late 1999.
(ii) EcoElectrica is a 540-MW liquefied natural gas combined-cycle
cogeneration facility under construction in Penuelas, Puerto Rico. A
wholly owned subsidiary of EME owns a 50% interest. Equity will be
contributed at commercial operation, which is currently scheduled for
late 1999.
(iii) Tri Energy is a 700-MW gas-fired power plant under construction in the
Ratchaburi Province, Thailand. A wholly owned subsidiary of EME owns a
25% interest. Equity will be contributed at commercial operation, which
is currently scheduled for mid-2000.
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.
11
Contingent Obligations to Contribute Project Equity
[Download Table]
Projects U.S. ($ in millions)
-------- --------------------
Paiton (i) $ 141
Tri Energy (ii) 20
Doga (ii) 7
All Other 17
(i) Contingent obligations to contribute additional project equity (Contingent
Equity) would 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, certain partner obligations or
events of default. In any and all circumstances, EME's obligation to
contribute Contingent Equity will not exceed $141 million.
As more fully described below under the caption "Other Commitments and
Contingencies", PT Persahaan Listrik Negara (PLN), the main source of
revenue for the project, has failed to pay the project in respect of its
last five invoices and paid only a portion of another invoice. In addition,
as more fully described below under the caption "Litigation", PLN has filed
a lawsuit, which is currently suspended, contesting the validity of its
agreement to purchase electricity from the project.
In response to PLN's failure to pay, Paiton entered into an interim
agreement (the "Interim Agreement") with its lenders which modified the
Contingent Equity provisions of the Paiton debt documents during the agreed
interim period, which extends from October 15, 1999 through July 31, 2000.
The Interim Agreement provides, among other things, that Contingent Equity
from EME and the other Paiton shareholders shall be contributed from time
to time as needed to enable Paiton 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 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 Interim Agreement provides that a portion
of unfunded Contingent Equity in the original amount of $206 million (of
which EME's current unfunded share is $85 million) will become due and
payable by the shareholders in the event that certain events of default
(other than those specifically waived pursuant to the Interim Agreement)
occur. The Interim Agreement further provides that all unfunded Contingent
Equity in the original amount of $300 million (of which EME's current
unfunded share is $124 million) will become due and payable by the
shareholders in the event that Paiton fails to make any interest payment
during the pendency of the Interim Agreement. To date, Paiton's
shareholders have contributed to Paiton $36 million of Contingent Equity
(of which EME's share is $17 million).
The Contractor and Paiton continue to discuss the final amount to be paid
the Contractor. Items claimed by the Contractor include retention, costs
relating to a dispute involving a slope adjacent to the Paiton site and
other cost overruns related to
12
delays in the completion of the construction of the project. Paiton has
counterclaims against Contractor for deficiencies which would be offset
against the amount owing the Contractor. As these discussions continue, it
is not possible to say with certainty the final amount which will be owing
the Contractor by Paiton. As noted above, however, the shareholders'
obligation to contribute Contingent Equity to Paiton to enable it to pay
Contractor for the finally agreed amount is limited to $30 million.
Paiton's obligations to the Contractor may exceed this amount. The
shortfall, if any, will be considered as part of the renegotiation of the
PPA and the Project's debt agreements, as more fully discussed under the
caption, "Other Commitments and Contingencies."
EME's Contingent Equity obligations for the Paiton project are to be
cancelled (if unused) as of the later of the date of term financing by the
Export-Import Bank of the United States and August 1, 2000. 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 conditions to the term financing were
not satisfied by such date and the Export-Import Bank of the United States
agreed to extend the term financing commitment until December 15, 1999.
Based on present projections, the Project does not expect to complete the
conditions by December 15, 1999, and is seeking a further extension of the
time to achieve term completion. As of the date hereof, the Project does
not have any commitment from the Lenders as to such further extension.
(ii) Contingent obligations to contribute additional equity to the project would
be based on events principally related to capital cost overruns during
plant construction, certain EME or partner obligations or events of
default.
Other than as noted above, management is not aware, at this time, of any
other contingent obligations or obligations to contribute project equity.
Other Commitments and Contingencies
Certain of EME's subsidiaries entered into indemnification agreements whereby
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
contract. Obligations under these indemnification agreements as of September
30, 1999, if payment were required, would be $233 million. Management has 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 is a 1,230-MW coal-fired power plant in operation in East Java,
Indonesia. A wholly owned subsidiary of EME owns a 40% interest and has a $388
million investment at September 30, 1999. The 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
13
units at the Paiton complex. The plant's output is fully contracted with the
state-owned electricity company, PT Perusahaan Listrik Negara (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 (PPA) in February 1994. The project received substantial
finance and insurance support from the Export-Import Bank of the United States,
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' perceived increased risk that PLN might not be able to
honor the electricity sales contract with Paiton. 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. Certain 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. However, such waiver may expire on an
earlier date if additional defaults (other than those specifically waived) or
certain other specified events occur.
In May 1999, Paiton notified PLN that Unit 7 of Paiton achieved Commercial
Operation under terms of the PPA and that Unit 8 of Paiton achieved Commercial
Operation under the terms of the PPA in July 1999. Because of the economic
downturn, PLN is experiencing low electricity demand and PLN has therefore
dispatched the Paiton plant to zero; however, under the terms of the PPA, PLN
is required to continue to pay for capacity and fixed operating costs once each
unit and the Plant achieve Commercial Operation. An invoice for these charges
for May in the amount of $7.8 million was submitted to PLN. The project and PLN
met to review the invoice and a partial payment of $2.5 million was subsequently
received. The primary reason for the payment shortage was the use of an
arbitrary Indonesian Rupiah/U.S. dollar exchange rate of 2,450 Indonesian Rupiah
to one U.S. dollar by PLN. The use of this exchange rate is not in agreement
with the Power Purchase Agreement, but is the exchange rate on which PLN
payments to other independent power producers in Indonesia have been based.
Invoices for capacity charges and fixed operating costs for June, July, August
and September in an aggregate amount of $164.1 million were later submitted to
PLN. PLN has yet to make any payments in respect of such latter invoices. In
addition, as more fully described below under the caption "Litigation", PLN has
filed a lawsuit contesting the validity of its agreement to purchase electricity
from the Project. The lawsuit is currently suspended and the Project and PLN
have commenced discussions to renegotiate the PPA, however, it is not yet known
what form the renegotiation may take. Any material modifications of the PPA
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 EME's expected return on its investment in Paiton is
uncertain at
14
this time, however, management believes that it will ultimately recover its
investment in the project.
Brooklyn Navy Yard is a 286-MW gas-fired cogeneration power plant in
Brooklyn, New York. A wholly owned subsidiary of EME 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. (BNY) for damages in the amount of $136.8 million. BNY has asserted
general monetary claims against the contractor. In connection with a $407
million non-recourse project refinancing in 1997, EME agreed to indemnify BNY
and its partner from all claims and costs arising from or in connection with the
contractor litigation, which indemnity has been assigned to the lenders. EME
believes that the outcome of this litigation will not have a material adverse
effect on its financial position or results of operations.
Litigation
On October 7, 1999, PLN announced that it had filed a lawsuit in the Central
Jakarta District Court against the Paiton project company seeking to annul the
PPA, notwithstanding that the Paiton project company continued to seek a
negotiated basis on which to operate the plant for an interim period during
which the parties could discuss longer term remedies for the effect on the
project of the current financial crisis affecting Indonesia. The terms of the
PPA provide that any disputes with respect thereto must be submitted to
arbitration in Stockholm, Sweden and cannot be brought in the courts of any
country. Accordingly, immediately following the filing of PLN's lawsuit, the
Paiton project company commenced an arbitration in accordance with the terms of
the PPA in order to confirm the validity of the agreement and to protect the
interests of the Paiton project company shareholders, lenders and other credit
support providers. In accordance with Indonesian procedures applicable to PLN's
lawsuit, the Paiton project company was served with PLN's complaint on October
22, 1999. In its complaint, PLN has generally alleged that the PPA was the
result of corruption, cronyism and nepotism and is "one-sided and against the
public interest". The first court hearing was held on October 25, at which
procedural matters were discussed, including the possibility of the court
granting a stay of up to thirty days to give the parties time to reach an out of
court settlement. On November 1, a second hearing was held at which the court
granted a fourteen day suspension of the proceedings until November 15, 1999, to
allow the parties to pursue a negotiated settlement. The Paiton project company
agreed to suspend any proceedings in the arbitration initiated by the Paiton
project company for an equivalent period. The Paiton project company intends to
contest the jurisdiction of the Indonesian courts, based on the PPA's provision
for binding arbitration, and otherwise will vigorously contest the allegations
made in PLN's complaint.
EME is routinely involved in litigation arising in the normal course of
business. While the results of such litigation cannot be predicted with
certainty, management, based on advice of counsel, does not believe that the
final outcome of any pending litigation will have a material adverse effect on
EME's financial position or results of operations.
15
Environmental Matters
EME is subject to environmental regulation by federal, state and local
authorities in the U.S. and foreign regulatory authorities with jurisdiction
over projects located outside the U.S. EME believes that it is in substantial
compliance with environmental regulatory requirements and that maintaining
compliance with current requirements will not materially affect its financial
position or results of operations.
EME completed a partial review of its sites in 1995 and does not believe that
a material liability exists as of September 30, 1999. The implementation of
Clean Air Act Amendments is expected to result in increased operating expenses;
however, these expenses are not expected to have a material impact on EME's
financial position or results of operations.
NOTE 7. BUSINESS SEGMENTS
EME operates predominately in one line of business, electric power
generation, with reportable segments organized by geographic region: Americas,
Asia Pacific, and Europe, Central Asia, Middle East and Africa. EME's plants
are located in different geographic areas, which mitigates the effects of
regional markets, economic downturns or unusual weather conditions. These
regions take advantage of the increasing globalization of the independent power
market. Intercompany transactions have been eliminated in the following segment
information.
16
[Enlarge/Download Table]
Europe,
(In millions) Central Asia,
Three Months Ended Asia Middle East Corporate/
September 30, 1999 Americas Pacific and Africa Other(i) Total
------------------ ------------- --------------- ---------------- ---------------- -------------
Operating revenues $ 253.8 $ 57.7 $ 225.6 $ -- $ 537.1
Net income (loss) 75.2 (2.6) 31.3 (17.3) 86.6
Total assets 3,318.5 3,289.7 4,580.9 -- 11,189.1
September 30, 1998
------------------
Operating revenues $ 92.5 $ 50.8 $ 84.2 $ -- $ 227.5
Net income (loss) 27.4 2.2 20.4 (5.2) 44.8
Total assets 950.7 1,625.1 2,459.0 -- 5,034.8
Europe,
(In millions) Central Asia,
Nine Months Ended Asia Middle East Corporate/
September 30, 1999 Americas Pacific and Africa Other(i) Total
------------------ ------------- -------------- ---------------- --------------- -------------
Operating revenues $ 461.0 $ 164.0 $ 451.2 $ -- $ 1,076.2
Net income (loss) 121.9 (15.3) 62.8 (33.2) 136.2
Total assets 3,318.5 3,289.7 4,580.9 -- 11,189.1
September 30, 1998
------------------
Operating revenues $ 180.8 $ 158.1 $ 327.8 $ -- $ 666.7
Net income (loss) 59.9 (1.6) 59.4 (16.6) 101.1
Total assets 950.7 1,625.1 2,459.0 -- 5,034.8
(i) Includes corporate net interest expense.
NOTE 8. SUBSEQUENT EVENTS
During October 1999, EME completed the acquisition of the remaining 20
percent of the 220 MW natural gas-fired Roosecote project located in England.
Consideration for the remaining 20% consisted of a cash payment of approximately
$16.0 million (9.6 million pounds Sterling). The acquisition was funded with
existing cash.
On November 1, 1999, EME completed the sale of a portion of its interest in
Four Star Oil & Gas Company (Four Star) to a company that it holds a 50%
interest. Net proceeds from the sale of a portion of this investment were $20.5
million. EME expects to record a pre-tax gain on sale of its investment of
approximately six million dollars. EME's net ownership interest in Four Star was
reduced from 50% to 34% as a result of the transaction.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes certain forward-looking
statements, the realization of which may be affected by certain important
factors discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" thereunder and elsewhere herein.
GENERAL
-------
Edison Mission Energy (EME) is a leading global power producer. Through its
subsidiaries, EME is engaged in the business of developing, acquiring, owning
and operating electric power generation facilities worldwide. EME's current
investments include 64 projects totaling 18,936 megawatts (MW) of generation
capacity, of which 16,443 are in operation and 2,493 are under construction. In
addition, 12 operating projects totaling 9,510 MW of generating capacity are
pending acquisition.
EME's operating revenues are derived primarily from electric revenues and
equity in income from energy projects. Operating revenues also include equity
in income from oil and gas investments and revenue attributable to operation and
maintenance services.
Electric revenues are derived from consolidated results of operations of
one domestic and several international entities. Equity in income from energy
projects relates to EME's ownership interest of 50% or less voting stock in
projects. The equity method of accounting is generally used to account for the
operating results of entities over which EME has a significant influence but in
which it does not have a controlling interest. With respect to entities
accounted for under the equity method, EME recognizes its proportional share of
the income or loss of such entities.
ACQUISITIONS
------------
On March 18, 1999, EME Homer City Generation L.P. (EME Homer City), an
indirect, wholly owned affiliate of EME, completed a transaction with GPU,
Inc., New York State Electric & Gas Corporation and their respective affiliates
to acquire the 1,884-MW Homer City Electric Generating Station and certain
facilities and other assets associated therewith (collectively, Homer City).
Consideration for Homer City consisted of a cash payment of approximately
$1.8 billion, which was partially financed by $1.5 billion of new loans,
combined with corporate revolver borrowings and cash.
On May 14, 1999, Edison Mission Energy Taupo Ltd. (EME Taupo), an indirect,
wholly owned affiliate of EME, completed a transaction with the New Zealand
government to acquire 40% of the shares of Contact Energy Ltd. (Contact). The
remaining 60% of Contact Energy's shares were sold in a public offering
resulting in widespread ownership among the citizens of New Zealand and offshore
investors. These
18
shares are publicly traded on stock exchanges in New Zealand and Australia.
Contact owns and operates hydroelectric, geothermal and natural gas-fired power
generating plants primarily in New Zealand with a total current generating
capacity of 1,930 MW.
Consideration for Contact consisted of a cash payment of approximately $635
million (1.2 billion New Zealand dollars), which was financed by $120 million of
preferred stock issued by Edison Mission Energy Global Management, Inc., a $214
million (400 million New Zealand dollars) credit facility issued by EME Taupo, a
$300 million equity contribution from Edison International and cash.
On July 19, 1999, Edison First Power Limited (EFPL), an indirect, wholly
owned subsidiary of EME, completed a transaction with PowerGen UK plc, to
acquire the Ferrybridge and Fiddler's Ferry coal-fired electric generating
plants (Ferrybridge and Fiddler's Ferry) located in the United Kingdom.
Ferrybridge, located in West Yorkshire, and Fiddler's Ferry, located in
Warrington, each have a generating capacity of approximately 2,000 megawatts. In
connection with the acquisition, EFPL has committed to certain construction
costs arising from plant modification totaling $142 million and has executed a
multi-year coal supply agreement.
Consideration for Ferrybridge and Fiddler's Ferry consisted of
approximately $2.0 billion (1.3 billion pounds Sterling) for the two plants. The
purchase price may be increased up to additional $33.8 million in the event that
the environmental authority in the United Kingdom allows for an increase in
emissions from the plants. The acquisition was funded primarily with a
combination of net proceeds from the Edison First Power Limited Guaranteed
Secured Variable Rate Bonds (Edison First Power Bonds) issued on July 19, 1999
and due 2019, cash and a $500 million equity contribution from Edison
International. The Edison First Power Bonds were issued to a special purpose
entity formed by Merrill Lynch International (MLI SPE). MLI SPE sold the
variable rate coupons portion of the bonds to a special purpose entity that
borrowed $1.3 billion (830 million pounds Sterling) under a Term Loan Facility
to finance the purchase.
These acquisitions were accounted for utilizing the purchase method. EME's
consolidated statement of income for the three and nine months ended September
30, 1999 reflects the operations of Homer City beginning March 18, 1999, Contact
beginning May 1, 1999, and Ferrybridge and Fiddler's Ferry beginning July 19,
1999.
RESULTS OF OPERATIONS
---------------------
OPERATING REVENUES Operating revenues increased $309.6 million and $409.5
million for the third quarter and nine months ended September 30, 1999,
respectively, compared with the corresponding periods of 1998, resulting
primarily from increases in electric revenues and equity in income from energy
projects. Electric revenues increased $302.1 million and $374.5 million for the
third quarter and nine months ended September 30, 1999, respectively, compared
with the corresponding periods of 1998, primarily due to revenues from Homer
City acquired in March 1999 and Ferrybridge and Fiddler's Ferry acquired in July
1999. Equity in income from energy projects increased $31.7
19
million during the nine months ended September 30, 1999, compared with the
corresponding period of 1998. The increase for the nine month period was
primarily the result of higher revenues from several cogeneration projects due
to a final settlement on energy pricing for prior years and a gain on sale of a
power sales agreement.
Due to warmer weather during the summer months, electric revenues generated
from Homer City is principally higher during the third quarter of each year. In
addition, EME's third quarter revenues from energy projects are materially
higher than other quarters of the year due to a significant number of EME's
domestic energy projects located on the West Coast which generally have power
sales contracts that provide for higher payments during summer months.
OPERATING EXPENSE Operating expenses increased $190.3 million and $273.4 million
for the third quarter and nine months ended September 30, 1999, respectively,
compared with the same prior year periods. These increases are due to higher
fuel, plant operations, depreciation and amortization and administrative and
general expenses. The increases in fuel expense, plant operations and
depreciation and amortization are primarily the result of expenses at Homer City
acquired in March 1999 and Ferrybridge and Fiddler's Ferry acquired in July
1999. The administrative and general expense increase is primarily related to
increased project development/acquisition costs.
OTHER INCOME (EXPENSE) Interest expense increased $60.5 million and $93 million
for the third quarter and nine months ended September 30, 1999, respectively,
compared with the same prior year periods. The increase was primarily the
result of additional debt financing of the Homer City and Ferrybridge and
Fiddler's Ferry acquisitions.
PROVISION FOR INCOME TAXES EME recorded an effective tax provision rate of 18%
for the nine months ended September 30, 1999, compared with a 36% rate for the
same prior year period. The decrease in the 1999 effective tax rate was
primarily due to lower foreign income taxes that result from the permanent
reinvestment of earnings from foreign affiliates located in different foreign
tax jurisdictions.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 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 EME's net income was $13.8 million, after-tax.
LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1999,
net cash provided by operating activities increased to $369 million from $172.5
million for the same period in 1998. The increase in working capital was
primarily due to increased accounts payable and accrued liabilities related to
the Company's acquisitions of Ferrybridge and Fiddler's Ferry and Homer City and
commercial operations of Doga.
20
Net working capital at September 30, 1999 was ($412.4) million compared to $136
million at December 31, 1998. Net working capital decreased primarily as a
result of utilizing short-term capacity under a commercial paper facility to
finance a portion of the Homer City project. The Company expects to re-finance
the short-term borrowings during the next year with a combination of new or
extended short-term borrowings and issuance of long-term EME debt.
At September 30, 1999, EME had cash and cash equivalents of $450.8 million
and had available $353 million of borrowing capacity under a $500 million
revolving credit facility that expires in 2001 and $266 million of borrowing
capacity under a $700 million commercial paper facility that expires in 2000.
This borrowing capacity under the revolving credit facility may be reduced by
borrowings for firm commitments to contribute project equity and to fund capital
expenditures and construction costs of its project facilities.
Net cash provided by financing activities totaled $4,479.2 million during
the first nine months of 1999, compared to $6.2 million used in 1998 for the
same prior year period. The 1999 increase is primarily due to financing of $1.3
billion (830 million pounds Sterling) related to the Ferrybridge and Fiddler's
Ferry project, the Edison Mission Holding Co., parent company of EME Homer City,
$830 million senior secured bonds, EME financing of $700 million, EME Senior
Notes of $600 million, borrowings of $59 million under Edison Mission Energy
Taupo Limited (EME Taupo) credit facility, Edison International $1,066 million
equity contribution, Edison Mission Energy Global Management, Inc. $120 million
Flexible Money Market Cumulative Preferred Stock and EME Taupo $158 million
Retail Redeemable Preference Shares.
Net cash used in investing activities increased to $4,859.7 million for the
nine months ended September 30, 1999 from $82.9 million for the nine months
ended September 30, 1998. The increase is primarily due to the purchase of
Ferrybridge and Fiddler's Ferry, Homer City and Contact.
Firm Commitments for Asset Purchases
[Download Table]
Projects U.S. ($ in millions)
-------- --------------------
Commonwealth Edison Co. (i) $ 5,000
(i) A wholly owned subsidiary of EME executed an Asset Sale Agreement to
purchase the fossil-fuel generating assets of Commonwealth Edison Co.,
totaling 9,510 MW located in the midwestern United States. The closing of
the transaction is subject to receipt of various state and federal
regulatory approvals and is expected to be completed by year end 1999.
21
Firm Commitments to Contribute Project Equity
[Download Table]
Projects Local Currency U.S. ($ in millions)
-------- -------------- --------------------
ISAB (i) 244 billion Italian Lira $135
EcoElectrica (ii) 34
Tri Energy (iii) 25
(i) ISAB is a 512-MW integrated gasification combined cycle power plant under
construction near Siracusa in Sicily, Italy. A wholly owned subsidiary of
EME owns a 49% interest. Equity will be contributed at commercial
operation, which is currently scheduled for late 1999.
(ii) EcoElectrica is a 540-MW liquefied natural gas combined-cycle cogeneration
facility under construction in Penuelas, Puerto Rico. A wholly owned
subsidiary of EME owns a 50% interest. Equity will be contributed at
commercial operation, which is currently scheduled for late 1999.
(iii) Tri Energy is a 700-MW gas-fired power plant under construction in the
Ratchaburi Province, Thailand. A wholly owned subsidiary of EME owns a 25%
interest. Equity will be contributed at commercial operation, which is
currently scheduled for mid-2000.
Firm commitments to contribute project equity could be accelerated due to
certain events of default as defined in the non-recourse project financing
facilities. Management has no reason to believe that these events of default
will occur to require acceleration of the firm commitments.
Contingent Obligations to Contribute Project Equity
[Download Table]
Projects U.S. ($ in millions)
------------------ --------------------
Paiton (i) $141
Tri Energy (ii) 20
Doga (ii) 7
All Other 17
(i) Contingent obligations to contribute additional project equity (Contingent
Equity) would 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, certain partner obligations or
events of default. In any and all circumstances, EME's obligation to
contribute Contingent Equity will not exceed $141 million.
As more fully described below under the caption "Other Commitments and
Contingencies", PT Persahaan Listrik Negara (PLN), the main source of
revenue for the project, has failed to pay the project in respect of its
last five invoices and paid only a portion of another invoice. In addition,
22
PLN has filed a lawsuit, which is currently suspended, contesting the
validity of its agreement to purchase electricity from the project.
In response to PLN's failure to pay, Paiton entered into an interim
agreement (the "Interim Agreement") with its lenders which modified the
Contingent Equity provisions of the Paiton debt documents during the agreed
interim period, which extends from October 15, 1999 through July 31, 2000.
The Interim Agreement provides, among other things, that Contingent Equity
from EME and the other Paiton shareholders shall be contributed from time
to time as needed to enable Paiton 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 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 Interim Agreement provides that a portion
of unfunded Contingent Equity in the original amount of $206 million (of
which EME's current unfunded share is $85 million) will become due and
payable by the shareholders in the event that certain events of default
(other than those specifically waived pursuant to the Interim Agreement)
occur. The Interim Agreement further provides that all unfunded Contingent
Equity in the original amount of $300 million (of which EME's current
unfunded share is $124 million) will become due and payable by the
shareholders in the event that Paiton fails to make any interest payment
during the pendency of the Interim Agreement. To date, Paiton's
shareholders have contributed to Paiton $36 million of Contingent Equity
(of which EME's share is $17 million).
The Contractor and Paiton continue to discuss the final amount to be paid
the Contractor. Items claimed by the Contractor include 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. Paiton has counterclaims against Contractor for
deficiencies which would be offset against the amount owing the Contractor.
As these discussions continue, it is not possible to say with certainty the
final amount which will be owing the Contractor by Paiton. As noted above,
however, the shareholders' obligation to contribute Contingent Equity to
Paiton to enable it to pay Contractor for the finally agreed amount is
limited to $30 million. Paiton's obligations to the Contractor may exceed
this amount. The shortfall, if any, will be considered as part of the
renegotiation of the PPA and the Project's debt agreements, as more fully
discussed under the caption, "Other Commitments and Contingencies."
EME's Contingent Equity obligations for the Paiton project are to be
cancelled (if unused) as of the later of the date of term financing by the
Export-Import Bank of the United States and August 1, 2000. 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 conditions to the term financing were
not satisfied by such date and the Export-Import Bank of the United States
agreed to extend the term financing commitment until December 15, 1999.
Based on
23
present projections, the Project does not expect to complete the conditions
by December 15, 1999, and is seeking a further extension of the time to
achieve term completion. As of the date hereof, the Project does not have
any commitment from the Lenders as to such further extension.
(ii) Contingent obligations to contribute additional equity to the project would
be based on events principally related to capital cost overruns during
plant construction, certain EME or partner obligations or events of
default.
Other than as noted above, management is not aware, at this time, of any
other contingent obligations or obligations to contribute project equity.
Other Commitments and Contingencies
Certain of EME's subsidiaries entered into indemnification agreements
whereby 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 contract. Obligations under these indemnification agreements as of
September 30, 1999, if payment were required, would be $233 million. Management
has 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 is a 1,230-MW coal-fired power plant in operation in East Java,
Indonesia. A wholly owned subsidiary of EME owns a 40% interest and has a $388
million investment at September 30, 1999. The 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, PT
Perusahaan Listrik Negara (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 (PPA) in February 1994.
The project received substantial finance and insurance support from the Export-
Import Bank of the United States, 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' perceived increased risk that
PLN might not be able to honor the electricity sales contract with Paiton. 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. Certain 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
24
agreement with its lenders pursuant to which the Lenders waived such defaults
until July 31, 2000. However, such waiver may expire on an earlier date if
additional defaults (other than those specifically waived) or certain other
specified events occur.
In May 1999, Paiton notified PLN that Unit 7 of Paiton achieved Commercial
Operation under terms of the PPA and that Unit 8 of Paiton achieved Commercial
Operation under the terms of the PPA in July 1999. Because of the economic
downturn, PLN is experiencing low electricity demand and PLN has therefore
dispatched the Paiton plant to zero; however, under the terms of the PPA, PLN
is required to continue to pay for capacity and fixed operating costs once each
unit and the Plant achieve Commercial Operation. An invoice for these charges
for May in the amount of $7.8 million was submitted to PLN. The project and PLN
met to review the invoice and a partial payment of $2.5 million was subsequently
received. The primary reason for the payment shortage was the use of an
arbitrary Indonesian Rupiah/U.S. dollar exchange rate of 2,450 Indonesian Rupiah
to one U.S. dollar by PLN. The use of this exchange rate is not in agreement
with the Power Purchase Agreement, but is the exchange rate on which PLN
payments to other independent power producers in Indonesia have been based.
Invoices for capacity charges and fixed operating costs for June, July, August
and September in an aggregate amount of $164.1 million were later submitted to
PLN. PLN has yet to make any payments in respect of such latter invoices. In
addition, PLN has filed a lawsuit contesting the validity of its agreement to
purchase electricity from the Project. The lawsuit is currently suspended and
the Project and PLN have commenced discussions to renegotiate the PPA, however,
it is not yet known what form the renegotiation may take. any material
modifications of the PPA 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 EME's expected return on
its investment in Paiton is uncertain at this time, however, management believes
that it will ultimately recover its investment in the project.
Brooklyn Navy Yard is a 286-MW gas-fired cogeneration power plant in
Brooklyn, New York. A wholly owned subsidiary of EME 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. (BNY) for damages in the amount of $136.8 million. BNY has asserted general
monetary claims against the contractor. In connection with a $407 million non-
recourse project refinancing in 1997, EME agreed to indemnify BNY and its
partner from all claims and costs arising from or in connection with the
contractor litigation, which indemnity has been assigned to the lenders. EME
believes that the outcome of this litigation will not have a material adverse
effect on its financial position or results of operations.
EME and its subsidiaries may incur additional obligations to make equity
and other contributions to projects in the future. EME believes that it will
have sufficient liquidity on both a short- and long-term basis to fund pre-
financing project development costs, make equity contributions to partnerships,
pay corporate 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
25
repayment of loans to energy projects and (3) funds available from EME's
revolving credit facility.
CHANGES IN INTEREST RATES, CHANGES IN ELECTRICITY POOL PRICING, FOREIGN CURRENCY
FLUCTUATIONS AND OTHER CONTRACTUAL OBLIGATIONS Changes in interest rates,
changes in electricity pool pricing and fluctuations in foreign currency
exchange rates can have a significant impact on EME's results of operations.
Interest rate changes affect the cost of capital needed to construct and finance
projects. EME has mitigated a portion of 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 the majority of its project
financing. Interest expense included $19.1 million and $15.6 million for the
nine months ended September 30, 1999, and 1998, respectively, as a result of
interest rate swap and collar agreements. EME has entered into several interest
rate swap and collar agreements whereby the maturity date of the swaps and
collars occurs prior to the final maturity of the underlying debt. EME does not
believe that interest rate fluctuations will have a material adverse effect on
its financial position or results of operations.
Projects in the U.K. sell their electric energy and capacity through a
centralized electricity pool, which establishes a half-hourly clearing price
(also referred to as the "pool price") for electric 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 the large differentials in demand according to the
time of day. First Hydro and Ferrybridge and Fiddler's Ferry mitigate a portion
of the market risk of the pool by entering into contracts for differences
(electricity rate swap agreements), related to either the selling or purchasing
price of power, whereby a contract specifies 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. These contracts act as a means of stabilizing production revenues
or purchasing costs by removing an element of their net exposure to pool price
volatility. On July 29, 1998, the 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. He proposed in its
place, among other things, the establishment of voluntary forwards and futures
markets, organized by independent market operators and evolving in response to
demand; a short-term bilateral market operating from 24 to 4-hours before a
trading period; a balancing market to enable the system operator to balance
generation and demand and resolve any transmission constraints; a 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 short-term bilateral and balancing markets.
The Minister for Science, Energy and Industry has recommended that the proposal
be implemented by April 2000. Further definition of the proposal will be
required before the effects of the changes can be evaluated. Implementation of
the proposal may also require legislation.
26
Electric power generated at Homer City is sold under bilateral
arrangements with domestic utilities and power marketers under short-term
contracts (two years or less) or to the Pennsylvania-New Jersey-Maryland Power
Interconnection (PJM) or the New York Power Pool (NYPP). The PJM pool has a
market which establishes an hourly clearing price. Homer City is situated in
the PJM Control Area and is physically connected to high-voltage transmission
lines serving both the PJM and NYPP markets. Power can also be transmitted to
the midwestern United States. EME has developed risk management policies and
procedures which, among other matters, address credit risk. It is EME's policy
to sell to investment grade counterparties or counterparties that have an
investment grade guarantor. EME intends on hedging a portion of the electric
output of the plant in order to lock in desirable outcomes. It plans to manage
the "spark spread" or margin, that is the spread between electric prices and
fuel prices when deemed appropriate. It plans to use forward contracts, swaps,
futures, or options contracts to achieve those objectives.
Loy Yang B sells its electric energy through a centralized electricity pool
(the National Electricity Market) 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 Victorian Power Exchange, 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, Loy Yang B 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 (State), between each 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, and the parties to
the agreement make payments, 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. These contracts are sold in various structures. These
contracts are accounted for as electricity rate swap agreements. 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 guarantees SECV's
obligations under the State Hedge.
EME's electric revenues were decreased by $3.4 million for the nine months
ended September 30, 1999, compared to an increase of $87.6 million for the nine-
month period ended September 30, 1998, as a result of electricity rate swap
agreements and other hedging activities.
The electric power generated by EME's domestic operating projects,
excluding Homer City, is generally sold to electric utilities pursuant to long-
term (typically, 15 to 30-year) power sales contracts and is expected to result
in consistent cash flow under a wide range of economic and operating
circumstances. To accomplish this, EME structured its power sales contracts so
that fluctuations in fuel costs would produce
27
similar fluctuations in electric and/or steam revenues and entered into long-
term fuel supply and transportation agreements.
Fluctuations in foreign currency exchange rates can affect, on a U.S.
dollar equivalent basis, the amount of EME's equity contributions to, and
distributions from, its foreign projects. As EME continues to expand into
foreign markets, fluctuations in foreign currency exchange rates can be expected
to have a greater impact on EME's results of operations in the future. At times,
EME has hedged a portion of its current exposure to fluctuations in foreign
exchange rates where it deems appropriate through financial derivatives,
offsetting obligations denominated in foreign currencies and indexing underlying
project agreements to U.S. dollars or other indices reasonably expected to
correlate with foreign exchange movements. In addition, EME has 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 consistent with historical or forecasted relationships.
ENVIRONMENTAL MATTERS EME is subject to environmental regulation by federal,
state and local authorities in the U.S. and foreign regulatory authorities with
jurisdiction over projects located outside the U.S. EME believes that it is in
substantial compliance with environmental regulatory requirements and that
maintaining compliance with current requirements will not materially affect its
financial position or results of operations.
EME completed a partial review of its sites in 1995 and does not believe
that a material liability exists as of September 30, 1999. The implementation of
Clean Air Act Amendments is expected to result in increased operating expenses;
however, these expenses are not expected to have a material impact on EME's
financial position or results of operations.
YEAR 2000 ISSUE EME has a comprehensive program in place to remediate potential
Year 2000 impacts from critical systems. EME divided its Year 2000 Issue
activities into five phases: inventory, impact assessment, remediation,
documentation and certification. A critical system was defined as those
applications and systems, including embedded processor technology, which if not
appropriately remediated might have had a significant impact on customers, the
revenue stream, regulatory compliance, or the health and safety of personnel.
With respect to critical systems, EME has achieved Year 2000 readiness as of
July 1999.
Assurances from third party operated plants have been received indicating
aggressive Year 2000 remediation programs. Monitoring of these efforts is
ongoing. Plants under construction have obtained assurances from new
construction and development contractors, who have been requested to ensure this
is part of their goals. General warranty of plants would likely include any
equipment issues that may arise regarding Year 2000 in the current year.
28
The other essential component of the EME Year 2000 readiness program was to
identify and assess vendor products and business partners for Year 2000
readiness. EME put a process in place to identify and contact vendors and
business partners to determine their Year 2000 status, and has evaluated the
responses. EME's general policy requires that all newly purchased products be
Year 2000 ready or otherwise designed to allow EME to determine whether such
products present Year 2000 issues.
Plant contingency plans have been developed and reviewed for any
significant issues and to schedule appropriate testing and/or training. Such
contingency plans include developing strategies for dealing with Year 2000-
related processing failures or malfunctions due to EME's internal systems or
from external parties. EME's contingency plans evaluate reasonably likely worst
case scenarios or conditions. EME does not expect the Year 2000 issue to have a
material adverse effect on its results of operations or financial position.
However, if not effectively remediated, negative effects from Year 2000 issues,
including those related to external systems, vendors, business partners, the
independent system operator, the power exchange or customers, could cause
results to differ.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which,
as amended, will be effective in January 2001. 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. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. A derivative's gains and losses for qualifying hedges offset related
results on the hedged item in the income statement and a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The impact of adopting Statement 133 on EME's financial
statements has not been quantified at this time.
ACQUISITIONS PENDING In March 1999, EME entered into agreements to acquire the
fossil-fuel generating assets of Commonwealth Edison Co. (ComEd), totaling 9,510
MW. EME will operate the plants, which are located in the midwestern United
States. The closing of the transaction is subject to various state and federal
regulatory approvals and is expected to be completed by year end 1999. EME
plans to finance the approximately $5 billion acquisition with a combination of
debt secured by the project, corporate debt, cash and funding from Edison
International. In connection with the acquisition, it is expected that a
subsidiary of EME will enter into transaction contracts with ComEd, whereby
ComEd will retain power purchase agreements with EME, enabling ComEd access to
certain amounts of plant output for the next five years to serve its customers.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
P. T. Perusahaan Listrik Negara - One of EME's subsidiaries, MEC Indonesia,
-------------------------------
B.V. (MEC Indonesia), owns a 40% interest in P. T. Paiton Energy, (formerly
known as Paiton Energy Company), an Indonesian limited liability company ("PE").
PE constructed a 1,230 MW coal-fired power project in East Java, Indonesia (the
"Paiton Project"). The Paiton Project has achieved commercial operation. In
1994, PE entered into a Power Purchase Agreement ("PPA") with Indonesia's state-
owned electricity company, P. T. Perusahaan Listrik Negara ("PLN"), pursuant to
which PLN is obligated to purchase the capacity and energy of the Paiton
Project.
On October 7, 1999, PLN announced that it had filed a lawsuit in the
Central Jakarta District Court against PE seeking to annul the PPA,
notwithstanding that PE continued to seek a negotiated basis on which to operate
the plant for an interim period during which the parties could discuss longer
term remedies for the effect on the project of the current financial crisis
affecting Indonesia. The terms of the PPA provide that any disputes with respect
thereto must be submitted to arbitration in Stockholm, Sweden and cannot be
brought in the courts of any country. Accordingly, immediately following the
filing of PLN's lawsuit, PE commenced an arbitration in accordance with the
terms of the PPA in order to confirm the validity of the agreement and to
protect the interests of PE's shareholders, lenders and other credit support
providers. In accordance with Indonesian procedures applicable to PLN's lawsuit,
PE was served with PLN's complaint on October 22, 1999. In its complaint, PLN
has generally alleged that the PPA was the result of corruption, cronyism and
nepotism and is "one-sided and against the public interest". The first court
hearing was held on October 25, at which procedural matters were discussed,
including the possibility of the court granting a stay of up to thirty days to
give the parties time to reach an out of court settlement. On November 1, a
second hearing was held at which the court granted a fourteen day suspension of
the proceedings until November 15, 1999, to allow the parties to pursue a
negotiated settlement. PE agreed to suspend any proceedings in the arbitration
initiated by PE for an equivalent period. PE intends to contest the jurisdiction
of the Indonesian courts, based on the PPA's provision for binding arbitration,
and otherwise will vigorously contest the allegations made in PLN's complaint.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
[Download Table]
Exhibit No. Description
----------- -----------
10.64 Coal and Capex Facility Agreement, dated July 16, 1999 between
EME Finance UK Limited; Barclays Capital and Credit Suisse
First Boston; The Financial Institutions named as Banks; and
Barclays Bank PLC as Facility Agent.
10.65 Guarantee by EME dated July 16, 1999 supporting the Coal and
Capex Facility Agreement (Facility Agreement) issued by
Barclays Bank PLC to secure EME Finance UK Limited obligations
pursuant to the Facility Agreement.
27 Financial Data Schedule
(b) Reports on Form 8-K
The registrant filed the following reports on Form 8-K during the quarter
ended September 30, 1999.
[Download Table]
Date of Report Date Filed Item Reported
-------------- ---------- -------------
July 19, 1999 August 2, 1999 2
July 19, 1999 September 30, 1999 7
31
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: November 11, 1999 /s/ KEVIN M. SMITH
----------------------- -------------------------
KEVIN M. SMITH
Senior Vice President and
Chief Financial Officer
32
Dates Referenced Herein and Documents Incorporated by Reference
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