EME 2013 Q2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
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(Mark one) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2013 |
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________ |
_______________________
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Commission File Number | Exact name of registrants as specified in their charters, addresses of principal executive offices, telephone numbers and states of incorporation | I.R.S. Employer Identification No. |
333-68630 | EDISON MISSION ENERGY | 95-4031807 |
| 3 MacArthur Place, Suite 100 Santa Ana, California 92707 714-513-8000 State of Incorporation: Delaware | |
333-59348 | MIDWEST GENERATION, LLC | 33-0868558 |
| 235 Remington Boulevard, Suite A Bolingbrook, Illinois 60440 630-771-7800 State of Incorporation: Delaware | |
_______________________
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.
Edison Mission Energy YES x NO o Midwest Generation, LLC YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Edison Mission Energy YES x NO o Midwest Generation, LLC YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Edison Mission Energy | Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer x | | Smaller reporting company o |
Midwest Generation, LLC | Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer x | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Edison Mission Energy YES o NO x Midwest Generation, LLC YES o NO x
Number of shares outstanding of Edison Mission Energy's Common Stock as of July 30, 2013: 100 shares (all shares held by an affiliate of Edison Mission Energy).
This combined Form 10-Q is filed separately by two registrants: Edison Mission Energy and Midwest Generation, LLC. Information contained herein relating to any individual registrant is filed by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the other registrant.
TABLE OF CONTENTS
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| Midwest Generation, LLC | |
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GLOSSARY
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
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2010 Tax Relief Act | Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 |
Adjusted EBITDA | adjusted earnings before interest, taxes, depreciation and amortization |
Ambit | American Bituminous Power Partners, L.P. or its waste coal facility |
AOCI | accumulated other comprehensive income (loss) |
ARO(s) | asset retirement obligation(s) |
BACT | best available control technology |
Bankruptcy Code | Chapter 11 of the United States Bankruptcy Code |
Bankruptcy Court | United States Bankruptcy Court for the Northern District of Illinois, Eastern Division |
bcf | billion cubic feet |
Big 4 Projects | Kern River, Midway-Sunset, Sycamore and Watson natural gas power projects |
Btu | British thermal units |
CAA | Clean Air Act |
CAIR | Clean Air Interstate Rule |
Certificate Holders | certain of the holders of the pass-through certificates of Midwest Generation's lessor debt |
Chapter 11 Cases | Initial Debtors' chapter 11 cases and the Homer City Debtors chapter 11 cases, collectively |
CO2 | carbon dioxide |
Commonwealth Edison | Commonwealth Edison Company |
CPS | Combined Pollutant Standard |
CPUC | California Public Utilities Commission |
CSAPR | Cross-State Air Pollution Rule |
Debtor Entities | collectively 19 debtors composed of the Initial Debtors and the Homer City Debtors |
EIX | Edison International |
EME | Edison Mission Energy |
EMMT | Edison Mission Marketing & Trading, Inc. |
ERCOT | Electric Reliability Council of Texas |
FASB | Financial Accounting Standards Board |
FERC | Federal Energy Regulatory Commission |
FPA | Federal Power Act |
GAAP | United States generally accepted accounting principles |
GECC | General Electric Capital Corporation |
GHG | greenhouse gas |
GWh | gigawatt-hours |
Homer City | EME Homer City Generation L.P. |
Homer City Debtors | three additional EME subsidiaries that filed during the second quarter 2013 |
Initial Debtors | EME and 16 of its wholly owned subsidiaries, including Midwest Generation |
ISO(s) | independent system operator(s) |
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Lehman Brothers | Lehman Brothers Commodity Services, Inc. and Lehman Brothers Holdings, Inc. |
LIBOR | London Interbank Offered Rate |
LSTC | liabilities subject to compromise |
MATS | Mercury and Air Toxics Standards |
Midwest Generation | Midwest Generation, LLC |
MISO | Midwest Independent Transmission System Operator |
MMBtu | million British thermal units |
Moody's | Moody's Investors Service, Inc. |
MW | megawatts |
MWh | megawatt-hours |
NAAQS | National Ambient Air Quality Standard(s) |
NERC | North American Electric Reliability Corporation |
NOX | nitrogen oxide |
NSR | New Source Review |
NYISO | New York Independent System Operator |
OCI | other comprehensive income (loss) |
PJM | PJM Interconnection, LLC |
Powerton and Joliet Sale Leaseback | a sale leaseback transaction for the Powerton Station and Units 7 and 8 of the Joliet Station with third-party lessors in August 2000 |
PRB | Powder River Basin |
PSD | Prevention of Significant Deterioration |
RPM | Reliability Pricing Model |
RTO(s) | regional transmission organization(s) |
S&P | Standard & Poor's Ratings Services |
SCE | Southern California Edison Company |
SIP(s) | state implementation plan(s) |
SO2 | sulfur dioxide |
Support Agreement | Transaction Support Agreement dated as of December 16, 2012 by and among EME, Edison International, and certain holders of EME's senior unsecured notes |
US EPA | United States Environmental Protection Agency |
US Treasury Grant(s) | Cash grants, under the American Recovery and Reinvestment Act of 2009 |
VIE(s) | variable interest entity(ies) |
EXPLANATORY NOTE
This quarterly report combines the quarterly reports on Form 10-Q for the three- and six-month periods ended June 30, 2013 of Edison Mission Energy (EME) and Midwest Generation, LLC (Midwest Generation).
EME, an indirect wholly owned subsidiary of Edison International (EIX), is a holding company whose subsidiaries and affiliates are engaged in the business of owning, leasing, operating and selling energy and capacity from independent power production facilities. Midwest Generation, an indirect wholly owned subsidiary of EME, operates and sells energy and capacity at four coal-fired generating stations and two oil-fired generating peakers in Illinois.
As of the date of this filing, EME and 19 of its wholly owned subsidiaries, including Midwest Generation, have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the Bankruptcy Court). EME and Midwest Generation remain in possession of their property and continue their business operations uninterrupted as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Information on the cases, including each item filed on the docket, is available at www.edisonmissionrestructuring.com. The information set forth on this web site shall not be deemed to be a part of, or incorporated by reference into, EME's and Midwest Generation's quarterly report on Form 10-Q.
The consolidated financial statements of EME reflect the accounts of EME and its subsidiaries, including Midwest Generation, and are labeled debtor-in-possession to reflect EME's status. Midwest Generation's consolidated financial statements include the accounts of Midwest Generation and its subsidiaries and are labeled debtor-in-possession to reflect Midwest Generation's status. All significant intercompany balances and transactions have been eliminated for each reporting entity. The discussion in this quarterly report and in the notes to the consolidated financial statements generally applies to both EME and Midwest Generation unless otherwise specified as indicated parenthetically next to each corresponding disclosure.
This quarterly report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for EME and Midwest Generation.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Operating Revenues | $ | 315 |
| | $ | 324 |
| | $ | 622 |
| | $ | 667 |
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Operating Expenses | | | | | | | |
Fuel | 141 |
| | 148 |
| | 282 |
| | 270 |
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Plant operations | 109 |
| | 147 |
| | 207 |
| | 285 |
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Plant operating leases | 19 |
| | 18 |
| | 37 |
| | 37 |
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Depreciation and amortization | 71 |
| | 67 |
| | 138 |
| | 135 |
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Loss on disposal and asset retirements | — |
| | 1 |
| | — |
| | 4 |
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Administrative and general | 38 |
| | 43 |
| | 68 |
| | 84 |
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Total operating expenses | 378 |
| | 424 |
| | 732 |
| | 815 |
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Operating loss | (63 | ) | | (100 | ) | | (110 | ) | | (148 | ) |
Other Income (Expense) | | | | | | | |
Equity in income from unconsolidated affiliates | 4 |
| | 18 |
| | 12 |
| | 17 |
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Dividend income | — |
| | 11 |
| | — |
| | 11 |
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Interest income | 1 |
| | — |
| | 1 |
| | — |
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Interest expense | (22 | ) | | (85 | ) | | (39 | ) | | (170 | ) |
Total other expense | (17 | ) | | (56 | ) | | (26 | ) | | (142 | ) |
Loss from continuing operations before reorganization items and income taxes | (80 | ) | | (156 | ) | | (136 | ) | | (290 | ) |
Reorganization items, net | 47 |
| | — |
| | 75 |
| | — |
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Benefit for income taxes | (25 | ) | | (81 | ) | | (28 | ) | | (157 | ) |
Loss From Continuing Operations | (102 | ) | | (75 | ) | | (183 | ) | | (133 | ) |
Income (Loss) from Operations of Discontinued Subsidiaries, net of tax (Note 13) | 18 |
| | (29 | ) | | 17 |
| | (53 | ) |
Net Loss | (84 | ) | | (104 | ) | | (166 | ) | | (186 | ) |
Net Income Attributable to Noncontrolling Interests (Note 3) | (7 | ) | | (5 | ) | | (14 | ) | | (7 | ) |
Net Loss Attributable to Edison Mission Energy Common Shareholder | $ | (91 | ) | | $ | (109 | ) | | $ | (180 | ) | | $ | (193 | ) |
Amounts Attributable to Edison Mission Energy Common Shareholder | | | | | | | |
Loss from continuing operations, net of tax | $ | (109 | ) | | $ | (80 | ) | | $ | (197 | ) | | $ | (140 | ) |
Income (loss) from discontinued operations, net of tax | 18 |
| | (29 | ) | | 17 |
| | (53 | ) |
Net Loss Attributable to Edison Mission Energy Common Shareholder | $ | (91 | ) | | $ | (109 | ) | | $ | (180 | ) | | $ | (193 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
3
EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, unaudited)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net Loss | $ | (84 | ) | | $ | (104 | ) | | $ | (166 | ) | | $ | (186 | ) |
Other comprehensive income (loss), net of tax |
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Valuation allowance on deferred tax asset | 2 |
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| — |
| | — |
| | — |
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Pension and postretirement benefits other than pensions: |
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Unamortized prior service cost on terminated plan, net of tax | (2 | ) |
| — |
| | (2 | ) | | — |
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Net gain adjustment, net of tax | 1 |
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| — |
| | — |
| | 1 |
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Amortization of net loss and prior service adjustment included in expense, net of tax | 1 |
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| — |
| | 2 |
| | 1 |
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Unrealized gains (losses) on derivatives qualified as cash flow hedges |
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Unrealized holding gains (losses) arising during the period, net of income tax expense (benefit) of $13 and $(19) for the three months and $14 and $(2) for the six months ended June 30, 2013 and 2012, respectively | 25 |
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| (28 | ) | | 27 |
| | (3 | ) |
Reclassification adjustments included in net loss, net of income tax expense (benefit) of $(2) and $6 for the three months and $(1) and $13 for the six months ended June 30, 2013 and 2012, respectively | 4 |
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| (9 | ) | | 2 |
| | (20 | ) |
Other comprehensive income (loss), net of tax | 31 |
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| (37 | ) | | 29 |
| | (21 | ) |
Comprehensive Loss | (53 | ) |
| (141 | ) | | (137 | ) | | (207 | ) |
Comprehensive Income Attributable to Noncontrolling Interests | (7 | ) |
| (5 | ) | | (14 | ) | | (7 | ) |
Comprehensive Loss Attributable to Edison Mission Energy Common Shareholder | $ | (60 | ) |
| $ | (146 | ) | | $ | (151 | ) | | $ | (214 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
4
EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(in millions, unaudited)
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| June 30, 2013 | | December 31, 2012 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 1,056 |
| | $ | 888 |
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Accounts receivable—trade | 92 |
| | 73 |
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Receivables from affiliates | 6 |
| | 8 |
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Inventory | 121 |
| | 175 |
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Derivative assets | 41 |
| | 53 |
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Restricted cash and cash equivalents | 14 |
| | 11 |
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Margin and collateral deposits | 89 |
| | 61 |
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Prepaid expenses and other | 48 |
| | 54 |
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Total current assets | 1,467 |
| | 1,323 |
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Investments in Unconsolidated Affiliates | 522 |
| | 534 |
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Property, Plant and Equipment, less accumulated depreciation of $1,566 and $1,431 at respective dates | 4,465 |
| | 4,516 |
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Other Assets | | | |
Deferred financing costs | 34 |
| | 44 |
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Long-term derivative assets | 22 |
| | 37 |
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Restricted deposits | 113 |
| | 102 |
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Rent payments in excess of levelized rent expense under plant operating leases | 806 |
| | 836 |
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Other long-term assets | 96 |
| | 128 |
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Total other assets | 1,071 |
| | 1,147 |
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Total Assets | $ | 7,525 |
| | $ | 7,520 |
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EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts, unaudited)
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| June 30, 2013 | | December 31, 2012 |
Liabilities and Shareholder's Equity | | | |
Current Liabilities | | | |
Accounts payable | $ | 20 |
| | $ | 29 |
|
Payables to affiliates | 32 |
| | 34 |
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Accrued liabilities and other | 115 |
| | 67 |
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Interest payable | 2 |
| | 1 |
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Current portion of long-term debt | 118 |
| | 307 |
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Short-term debt | — |
| | 382 |
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Total current liabilities | 287 |
| | 820 |
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Liabilities subject to compromise | 3,981 |
| | 3,959 |
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Long-term debt net of current portion | 1,404 |
| | 749 |
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Deferred taxes and tax credits, net (Note 7) | 82 |
| | 81 |
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Deferred revenues | 519 |
| | 533 |
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Long-term derivative liabilities | 68 |
| | 118 |
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Other long-term liabilities | 505 |
| | 528 |
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Total Liabilities | 6,846 |
| | 6,788 |
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Commitments and Contingencies (Notes 5, 6, 9 and 10) |
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Equity | | | |
Common stock, par value $0.01 per share (10,000 shares authorized; 100 shares issued and outstanding at each date) | 64 |
| | 64 |
|
Additional paid-in capital | 1,104 |
| | 1,095 |
|
Retained deficit | (770 | ) | | (577 | ) |
Accumulated other comprehensive loss | (109 | ) | | (138 | ) |
Total Edison Mission Energy common shareholder's equity | 289 |
| | 444 |
|
Noncontrolling Interests | 390 |
| | 288 |
|
Total Equity | 679 |
| | 732 |
|
Total Liabilities and Equity | $ | 7,525 |
| | $ | 7,520 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions, unaudited)
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| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Cash Flows From Operating Activities | | | |
Net loss | $ | (166 | ) | | $ | (186 | ) |
Adjustments to reconcile loss to net cash provided by (used in) operating activities: | | | |
Non-cash reorganization items | 48 |
| | — |
|
Equity in income from unconsolidated affiliates | (12 | ) | | (17 | ) |
Distributions from unconsolidated affiliates | 13 |
| | 6 |
|
Mark to market on interest rate swaps | (5 | ) | | — |
|
Depreciation and amortization | 151 |
| | 148 |
|
Deferred taxes and tax credits | (15 | ) | | (112 | ) |
Loss on disposal and asset impairments | — |
| | 26 |
|
Changes in operating assets and liabilities: | | | |
Increase in margin and collateral deposits | (28 | ) | | (18 | ) |
(Increase) decrease in receivables | (17 | ) | | 3 |
|
Decrease (increase) in inventory | 54 |
| | (2 | ) |
Decrease in prepaid expenses and other | 2 |
| | 3 |
|
Increase in restricted cash and cash equivalents | (2 | ) | | (4 | ) |
Decrease (increase) in rent payments in excess of levelized rent expense | 30 |
| | (38 | ) |
Increase (decrease) in payables, other current liabilities and liabilities subject to compromise | 50 |
| | (100 | ) |
Decrease (increase) in derivative assets and liabilities, net | 22 |
| | (15 | ) |
Decrease (increase) in other operating—assets | 1 |
| | (4 | ) |
Decrease in other operating—liabilities | (41 | ) | | (30 | ) |
Operating cash flows from continuing operations | 85 |
| | (340 | ) |
Operating cash flows from discontinued operations, net | (2 | ) | | (14 | ) |
Net cash provided by (used in) operating activities | 83 |
| | (354 | ) |
Cash Flows From Financing Activities | | | |
Cash contributions from noncontrolling interests | 94 |
| | 242 |
|
Payments on debt | (69 | ) | | (25 | ) |
Borrowings under short-term debt | — |
| | 9 |
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Borrowings under long-term debt | 149 |
| | 99 |
|
Cash contribution from EIX related to the tax-allocation agreements | 6 |
| | — |
|
Cash dividends to noncontrolling interests | (6 | ) | | (7 | ) |
Payments to affiliates related to stock-based awards | (13 | ) | | (12 | ) |
Excess tax benefits related to stock-based exercises | 2 |
| | 1 |
|
Financing costs | (1 | ) | | (7 | ) |
Net cash provided by financing activities from continuing operations | 162 |
| | 300 |
|
Cash Flows From Investing Activities | | | |
Capital expenditures | (85 | ) | | (153 | ) |
Proceeds from sale of assets | 8 |
| | 1 |
|
Proceeds from return of capital and loan repayments from unconsolidated affiliates | 6 |
| | 4 |
|
Proceeds from settlement of insurance claims | 2 |
| | 2 |
|
Cash settlement with turbine manufacturer | 5 |
| | — |
|
Investments in and loans to unconsolidated affiliates | (3 | ) | | — |
|
Increase in restricted deposits and restricted cash and cash equivalents | (12 | ) | | (69 | ) |
Investments in other assets | — |
| | (9 | ) |
Investing cash flows from continuing operations | (79 | ) | | (224 | ) |
Investing cash flows from discontinued operations, net | — |
| | (13 | ) |
Net cash used in investing activities | (79 | ) | | (237 | ) |
Net increase (decrease) in cash and cash equivalents from continuing operations | 168 |
| | (264 | ) |
Cash and cash equivalents at beginning of period from continuing operations | 888 |
| | 1,221 |
|
Cash and cash equivalents at end of period from continuing operations | 1,056 |
| | 957 |
|
Net decrease in cash and cash equivalents from discontinued operations | (2 | ) | | (27 | ) |
Cash and cash equivalents at beginning of period from discontinued operations | 2 |
| | 79 |
|
Cash and cash equivalents at end of period from discontinued operations | $ | — |
| | $ | 52 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Operating Revenues from Marketing Affiliate | $ | 203 |
| | $ | 213 |
| | $ | 382 |
| | $ | 446 |
|
Operating Expenses | | | | | | | |
Fuel | 133 |
| | 143 |
| | 267 |
| | 260 |
|
Plant operations | 74 |
| | 120 |
| | 141 |
| | 229 |
|
Depreciation and amortization | 30 |
| | 32 |
| | 63 |
| | 64 |
|
Loss on disposal and asset retirements | — |
| | 1 |
| | — |
| | 4 |
|
Administrative and general | 6 |
| | 5 |
| | 11 |
| | 10 |
|
Total operating expenses | 243 |
| | 301 |
| | 482 |
| | 567 |
|
Operating loss | (40 | ) | | (88 | ) | | (100 | ) | | (121 | ) |
Other Income (Expense) | | | | | | | |
Interest and other income | — |
| | 27 |
| | — |
| | 55 |
|
Interest expense | (7 | ) | | (8 | ) | | (13 | ) | | (17 | ) |
Total other income (expense) | (7 | ) | | 19 |
| | (13 | ) | | 38 |
|
Loss before reorganization items and income taxes | (47 | ) | | (69 | ) | | (113 | ) | | (83 | ) |
Reorganization items, net | 26 |
| | — |
| | 34 |
| | — |
|
Provision (benefit) for income taxes | 1 |
| | (27 | ) | | 1 |
| | (32 | ) |
Net Loss | $ | (74 | ) | | $ | (42 | ) | | $ | (148 | ) | | $ | (51 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
7
MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net Loss | $ | (74 | ) | | $ | (42 | ) | | $ | (148 | ) | | $ | (51 | ) |
Other comprehensive income (loss), net of tax | | | | | | | |
Valuation allowance on deferred tax asset | 4 |
| | — |
| | — |
| | — |
|
Pension and postretirement benefits other than pensions | | | | | | | |
Amortization of net loss and prior service adjustment included in expense, net of tax | — |
| | — |
| | 1 |
| | 1 |
|
Unrealized gains (losses) on derivatives qualified as cash flow hedges | | | | | | | |
Unrealized holding gains (losses) arising during the period, net of income tax expense (benefit) of $2 and $(4) for the three months and $(1) and $8 for the six months ended June 30, 2013 and 2012, respectively | 3 |
| | (6 | ) | | (2 | ) | | 12 |
|
Reclassification adjustments included in net loss, net of income tax expense (benefit) of $(1) and $6 for the three months and $0 and $12 for the six months ended June 30, 2013 and 2012, respectively | 3 |
| | (9 | ) | | 1 |
| | (19 | ) |
Other comprehensive income (loss), net of tax | 10 |
| | (15 | ) | | — |
| | (6 | ) |
Comprehensive Loss | $ | (64 | ) | | $ | (57 | ) | | $ | (148 | ) | | $ | (57 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
8
MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(in millions, except unit amounts, unaudited)
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 117 |
| | $ | 95 |
|
Due from affiliates, net (Note 1) | 46 |
| | 40 |
|
Inventory | 104 |
| | 165 |
|
Interest receivable from affiliate, net (Note 1) | — |
| | — |
|
Derivative assets | 1 |
| | 2 |
|
Other current assets | 22 |
| | 20 |
|
Total current assets | 290 |
| | 322 |
|
Property, Plant and Equipment, less accumulated depreciation of $1,322 and $1,260 at respective dates | 2,034 |
| | 2,078 |
|
Notes receivable from affiliate, net (Note 1) | — |
| | — |
|
Other long-term assets | 10 |
| | 28 |
|
Total Assets | $ | 2,334 |
| | $ | 2,428 |
|
Liabilities and Member's Equity | | | |
Current Liabilities | | | |
Accounts payable | $ | 10 |
| | $ | 10 |
|
Accrued liabilities | 42 |
| | 18 |
|
Due to affiliates | 11 |
| | 3 |
|
Interest payable | 12 |
| | 1 |
|
Derivative liabilities | 5 |
| | 3 |
|
Current portion of lease financings | — |
| | 6 |
|
Total current liabilities | 80 |
| | 41 |
|
Liabilities subject to compromise | 545 |
| | 529 |
|
Lease financings, net of current portion | — |
| | 2 |
|
Deferred taxes, net (Note 7) | — |
| | — |
|
Benefit plans and other long-term liabilities | 191 |
| | 190 |
|
Total Liabilities | 816 |
| | 762 |
|
Commitments and Contingencies (Notes 6, 9 and 10) |
|
| |
|
|
Member's Equity | | | |
Membership interests, no par value (100 units authorized, issued and outstanding at each date) | — |
| | — |
|
Additional paid-in capital | 3,405 |
| | 3,405 |
|
Accumulated deficit | (1,837 | ) | | (1,689 | ) |
Accumulated other comprehensive loss | (50 | ) | | (50 | ) |
Total Member's Equity | 1,518 |
| | 1,666 |
|
Total Liabilities and Member's Equity | $ | 2,334 |
| | $ | 2,428 |
|
The accompanying notes are an integral part of these consolidated financial statements.
9
MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
Cash Flows From Operating Activities | | | |
Net loss | $ | (148 | ) | | $ | (51 | ) |
Adjustments to reconcile loss to net cash provided by operating activities: | | | |
Non-cash reorganization items | 28 |
| | — |
|
Depreciation and amortization | 63 |
| | 64 |
|
Deferred taxes and tax credits | — |
| | (25 | ) |
Loss on disposal and asset impairments | — |
| | 4 |
|
Changes in operating assets and liabilities: | | | |
Decrease in due to/from affiliates, net | 2 |
| | 35 |
|
Decrease (increase) in inventory | 61 |
| | (4 | ) |
(Increase) decrease in other current assets | (5 | ) | | 9 |
|
Increase (decrease) in accounts payable, other current liabilities and liabilities subject to compromise | 22 |
| | (2 | ) |
Increase (decrease) in interest payable | 11 |
| | (3 | ) |
Decrease in derivative assets and liabilities, net | 1 |
| | 1 |
|
Increase in other operating - liabilities | 4 |
| | — |
|
Net cash provided by operating activities | 39 |
| | 28 |
|
Cash Flows From Financing Activities | | | |
Repayments of lease financing | (6 | ) | | (58 | ) |
Net cash used in financing activities | (6 | ) | | (58 | ) |
Cash Flows From Investing Activities | | | |
Capital expenditures | (12 | ) | | (16 | ) |
Proceeds from settlement of insurance claims | — |
| | 2 |
|
Decrease in restricted deposits and restricted cash and cash equivalents | 1 |
| | 2 |
|
Repayment of loan from affiliate | — |
| | 6 |
|
Net cash used in investing activities | (11 | ) | | (6 | ) |
Net increase (decrease) in cash and cash equivalents | 22 |
| | (36 | ) |
Cash and cash equivalents at beginning of period | 95 |
| | 213 |
|
Cash and cash equivalents at end of period | $ | 117 |
| | $ | 177 |
|
The accompanying notes are an integral part of these consolidated financial statements.
10
EDISON MISSION ENERGY AND SUBSIDIARIES
MIDWEST GENERATION, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (EME and Midwest Generation, except as noted)
Chapter 11 Cases
EME and Midwest Generation continue to experience operating losses due to low realized energy and capacity prices, high fuel costs, and low generation at the Midwest Generation plants. These operating losses are a continuation of trends initially experienced in the fourth quarter of 2011. These adverse trends coupled with pending interest payments and the need to retrofit the Midwest Generation plants to comply with governmental regulations were expected to exhaust EME's and Midwest Generation's liquidity. Consequently, on December 17, 2012, EME and 16 of its wholly owned subsidiaries, Camino Energy Company, Chestnut Ridge Energy Company, Edison Mission Energy Fuel Services, LLC, Edison Mission Fuel Resources, Inc., Edison Mission Fuel Transportation, Inc., Edison Mission Holdings Co., Edison Mission Midwest Holdings Co., Midwest Finance Corp., Midwest Generation EME, LLC, Midwest Generation, Midwest Generation Procurement Services, LLC, Midwest Peaker Holdings, Inc., Mission Energy Westside, Inc., San Joaquin Energy Company, Southern Sierra Energy Company, and Western Sierra Energy Company (the Initial Debtors) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. On May 2, 2013, 3 additional EME subsidiaries, EME Homer City Generation L.P. (Homer City), Homer City Property Holdings Inc., and Edison Mission Finance Company (collectively, the Homer City Debtors) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The Initial Debtors' chapter 11 cases and the Homer City Debtors' chapter 11 cases (collectively, the Chapter 11 Cases) are being jointly administered under case No. 12-49219 (JPC). The Initial Debtors and the Homer City Debtors are collectively referred to as the Debtor Entities.
The Debtor Entities remain in possession of their property and continue their business operations uninterrupted as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Other than the Debtor Entities, none of EME's other direct or indirect subsidiaries is a debtor in the Chapter 11 Cases. The filing of the Chapter 11 Cases automatically stayed most actions against the Debtor Entities, including actions to enforce the payment of EME's $3.7 billion of unsecured senior notes and Midwest Generation's obligations related to leases of the Powerton Station and Units 7 and 8 of the Joliet Station (the Powerton and Joliet Sale Leaseback). Absent an order from the Bankruptcy Court, substantially all of the Debtor Entities' pre-petition liabilities are subject to settlement under a reorganization plan.
The Bankruptcy Court established June 17, 2013 as the bar date for filing proofs of claim against the Initial Debtors estates. The bar date for the Homer City Debtors has not yet been established. The differences between amounts recorded by the Debtor Entities and the proofs of claims filed by creditors are investigated and resolved through the claims resolution process. This process may take considerable time to complete. The resolution of such claims could result in material adjustments to EME or Midwest Generation's financial statements. For further discussion, see Note 14—Restructuring Activities—Claims.
The filing of the Chapter 11 Cases constitutes an event of default under the Powerton and Joliet Sale Leaseback and under instruments governing the Senior Lease Obligation Bonds issued to finance these leases. EME, Midwest Generation, the owner-lessors, and certain of the holders of the pass-through certificates of Midwest Generation's lessor debt (the Certificate Holders) have been engaged in ongoing discussions regarding the ultimate disposition of the leases. In June 2013, EME and Midwest Generation agreed, among other things, to make monthly rental payments of $3.75 million beginning in July 2013 and to pay certain professional fees for the owner-lessors and Certificate Holders in exchange for an extension of the deadline to assume or reject the Powerton and Joliet leases and the agreement of the Certificate Holders to forbear and to direct the lease indenture trustee and pass-through trustee to forbear from seeking payment of any administrative claim for rent under the Powerton and Joliet leases (except the monthly partial rental payments of $3.75 million under the agreement) before the earlier of the effective date of a chapter 11 plan for Midwest Generation or a sale of substantially all of the assets of Midwest Generation. The parties filed a motion detailing the terms of this agreement and the Bankruptcy Court approved the extension of the statutory deadline by which the Debtor Entities must assume or reject the Powerton and Joliet leases until September 30, 2013.
The Chapter 11 Cases could also potentially give rise to counterparty rights and remedies under other documents. For further discussion, see Note 5—Debt and Credit Agreements and Note 9—Commitments and Contingencies—Lease Commitments—Powerton and Joliet Sale Leaseback.
The accompanying consolidated financial statements have been prepared assuming that EME and Midwest Generation will continue as going concerns. Financial statements prepared on this basis assume the realization of assets and the satisfaction of
liabilities in the normal course of business for the 12-month period following the date of the financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary if EME and Midwest Generation were unable to continue as going concerns. EME and Midwest Generation are currently developing a plan for their restructuring, but there is no assurance such a plan will be successfully implemented. EME's and Midwest Generation's ability to continue as going concerns is dependent on many factors, including the successful development of a confirmed plan of reorganization and an emergence from bankruptcy. Uncertainty as to the outcome of these factors raises substantial doubt about EME's and Midwest Generation's ability to continue as going concerns.
Basis of Presentation
There are no material updates to EME's and Midwest Generation's significant accounting policies since the filing of EME's and Midwest Generation's combined annual report on Form 10-K for the year ended December 31, 2012, with the exception of new accounting principles adopted as discussed below in "—New Accounting Guidance." This quarterly report should be read in conjunction with the financial statements and notes included in EME's and Midwest Generation's combined annual report on Form 10-K for the year ended December 31, 2012.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state the consolidated financial position and results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (GAAP) for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three- and six-month periods ended June 30, 2013 are not necessarily indicative of the operating results for the full year. Except as indicated, amounts reflected in the notes to the consolidated financial statements relate to continuing operations of EME and Midwest Generation. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation pertaining to discontinued operations.
Cash Equivalents
Cash equivalents included money market funds totaling $856 million and $615 million for EME and $99 million and $75 million for Midwest Generation at June 30, 2013 and December 31, 2012, respectively. The carrying value of cash equivalents equals the fair value as all investments have original maturities of less than three months.
Inventory
Inventory consisted of the following:
|
| | | | | | | | | | | | | | | |
| EME | | Midwest Generation |
(in millions) | June 30, 2013 | | December 31, 2012 | | June 30, 2013 | | December 31, 2012 |
Coal, fuel oil and other raw materials | $ | 62 |
| | $ | 123 |
| | $ | 59 |
| | $ | 119 |
|
Spare parts, materials and supplies | 59 |
| | 52 |
| | 45 |
| | 46 |
|
Total inventory | $ | 121 |
| | $ | 175 |
| | $ | 104 |
| | $ | 165 |
|
Notes Receivable from EME (Midwest Generation only)
Notes receivable from EME on Midwest Generation's consolidated balance sheets consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
(in millions) | Carrying Value | Valuation Allowance | Net | | Carrying Value | Valuation Allowance | Net |
Current portion of notes receivable from affiliate | $ | 19 |
| $ | (19 | ) | $ | — |
| | $ | 12 |
| $ | (12 | ) | $ | — |
|
Interest receivable from affiliate | 55 |
| (55 | ) | — |
| | 55 |
| (55 | ) | — |
|
Notes receivable from affiliate | 1,304 |
| (1,304 | ) | — |
| | 1,311 |
| (1,311 | ) | — |
|
Total | $ | 1,378 |
| $ | (1,378 | ) | $ | — |
| | $ | 1,378 |
| $ | (1,378 | ) | $ | — |
|
As a result of the Chapter 11 Cases, EME did not make the scheduled principal and interest payment of $61 million due to Midwest Generation on January 2, 2013 and Midwest Generation recorded a full valuation allowance against its intercompany loan with EME during the fourth quarter of 2012. At December 31, 2012, Midwest Generation ceased accruing
interest income associated with the intercompany loan as future payments, if any, made by EME under the loan will be dependent upon the overall resolution of the Chapter 11 Cases. Interest income from affiliates, included in interest and other income on Midwest Generation's consolidated statements of operations, was none and $27 million during the three months ended June 30, 2013 and 2012, respectively, and none and $55 million during the six months ended June 30, 2013 and 2012, respectively.
New Accounting Guidance
Accounting Guidance Adopted in 2013
Offsetting Assets and Liabilities
In December 2011 and December 2012, the Financial Accounting Standards Board (FASB) issued accounting standards updates modifying the disclosure requirements about the nature of an entity's rights of offsetting assets and liabilities in the consolidated balance sheet under master netting agreements and related arrangements associated with financial and derivative instruments. The guidance requires increased disclosure of the gross and net recognized assets and liabilities, collateral positions, and narrative descriptions of setoff rights. EME and Midwest Generation adopted this guidance effective January 1, 2013.
Presentation of Items Reclassified out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued an accounting standards update which requires disclosure related to items reclassified out of accumulated other comprehensive income (AOCI). The guidance requires entities to present separately, for each component of other comprehensive income (OCI), current period reclassifications and the remainder of the current-period OCI. In addition, for certain current period reclassifications, an entity is required to disclose the effect of the item reclassified out of AOCI on the respective line item of net income. EME adopted this guidance effective January 1, 2013.
Accounting Guidance Not Yet Adopted
Joint and Several Liabilities
In February 2013, the FASB issued an accounting standard update which modifies the requirements for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance requires companies to measure these obligations as the sum of the amount the company has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. This guidance is effective for fiscal years beginning after December 31, 2013. EME and Midwest Generation do not expect this guidance to have a material impact on results of operations.
Presentation of Unrecognized Tax Benefits
In July 2013, the FASB issued an accounting standard update which clarifies that a liability for an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement of the liability with the taxing authority results in the reduction of a net operating loss or tax credit carryforward. The requirement to record a non-cash settlement in a net manner does not affect EME and Midwest Generation's analysis of the realization of deferred tax assets. This guidance is effective for fiscal years beginning after December 31, 2013. EME and Midwest Generation do not expect this guidance to have a material impact on results of operations.
Note 2. Consolidated Statements of Changes in Equity (EME only)
EME's changes in equity for the six months ended June 30, 2013 consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Edison Mission Energy Shareholder's Equity | | | | |
(in millions) | Common Stock | | Additional Paid-in Capital | | Retained Deficit | | AOCI | | Non- controlling Interests | | Total Equity |
Balance at December 31, 2012 | $ | 64 |
| | $ | 1,095 |
| | $ | (577 | ) | | $ | (138 | ) | | $ | 288 |
| | $ | 732 |
|
Net income (loss) | — |
| | — |
| | (180 | ) | | — |
| | 14 |
| | (166 | ) |
OCI, net of tax | — |
| | — |
| | — |
| | 29 |
| | — |
| | 29 |
|
Payments to EIX for stock purchases related to stock-based compensation | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
Cash contribution from EIX1 | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Excess tax benefits related to stock option exercises | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Other stock transactions, net | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Contributions from noncontrolling interests2 | — |
| | — |
| | — |
| | — |
| | 94 |
| | 94 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
Balance at June 30, 2013 | $ | 64 |
| | $ | 1,104 |
| | $ | (770 | ) | | $ | (109 | ) | | $ | 390 |
| | $ | 679 |
|
| |
1 | During the first quarter of 2013, EME received a cash contribution from EIX related to the tax-allocation agreements. For further information, see Note 7—Income Taxes—EME—Effective Tax Rate. |
| |
2 | Funds contributed by third-party investors to Capistrano Wind Partners. For further information, see Note 3—Variable Interest Entities—Projects or Entities that are Consolidated—Capistrano Wind Partners. |
EME's changes in equity for the six months ended June 30, 2012 consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Edison Mission Energy Shareholder's Equity | | | | |
(in millions) | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | AOCI | | Non- controlling Interests | | Total Equity |
Balance at December 31, 2011 | $ | 64 |
| | $ | 1,327 |
| | $ | 365 |
| | $ | (94 | ) | | $ | 2 |
| | $ | 1,664 |
|
Net income (loss) | — |
| | — |
| | (193 | ) | | — |
| | 7 |
| | (186 | ) |
OCI, net of tax | — |
| | — |
| | — |
| | (21 | ) | | — |
| | (21 | ) |
Payments to EIX for stock purchases related to stock-based compensation | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
Excess tax benefits related to stock option exercises | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Other stock transactions, net | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Contributions from noncontrolling interests1 | — |
| | — |
| | — |
| | — |
| | 242 |
| | 242 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Transfers of assets to Capistrano Wind Partners2 | — |
| | (21 | ) | | — |
| | — |
| | — |
| | (21 | ) |
Balance at June 30, 2012 | $ | 64 |
| | $ | 1,309 |
| | $ | 160 |
| | $ | (115 | ) | | $ | 244 |
| | $ | 1,662 |
|
| |
1 | Funds contributed by third-party investors to Capistrano Wind Partners. For further information, see Note 3—Variable Interest Entities—Projects or Entities that are Consolidated—Capistrano Wind Partners. |
| |
2 | Additional paid in capital was reduced by $21 million due to a new tax basis in the assets transferred to Capistrano Wind Partners. |
Note 3. Variable Interest Entities (EME only)
Projects or Entities that are Consolidated
At June 30, 2013 and December 31, 2012, EME consolidated 16 and 15 projects, respectively, that have noncontrolling interests held by others. These projects have a total generating capacity of 958 megawatts (MW) and 878 MW, respectively. Projects consolidated at June 30, 2013 increased from December 31, 2012 due to the sale of Edison Mission Wind Inc.'s (Edison Mission Wind) indirect equity interest in the Broken Bow I wind project (80 MW in Nebraska) to Capistrano Wind Partners for $112 million. Edison Mission Wind is a wholly owned subsidiary of EME. Outside investors provided
$94 million of the funding. In determining that EME was the primary beneficiary of the projects that are consolidated, key factors considered were EME's ability to direct commercial and operating activities and EME's obligation to absorb losses of the variable interest entities.
EME's summarized financial information for consolidated projects consisted of the following:
|
| | | | | | | |
(in millions) | June 30, 2013 | | December 31, 2012 |
Current assets | $ | 91 |
| | $ | 74 |
|
Net property, plant and equipment | 1,225 |
| | 1,117 |
|
Other long-term assets | 99 |
| | 90 |
|
Total assets | $ | 1,415 |
| | $ | 1,281 |
|
Current liabilities | $ | 38 |
| | $ | 50 |
|
Long-term debt net of current portion | 229 |
| | 186 |
|
Deferred revenues | 154 |
| | 156 |
|
Long-term derivative liabilities | 15 |
| | 23 |
|
Other long-term liabilities | 46 |
| | 40 |
|
Total liabilities | $ | 482 |
| | $ | 455 |
|
Noncontrolling interests | $ | 390 |
| | $ | 288 |
|
Assets serving as collateral for the debt obligations had a carrying value of $636 million and $497 million at June 30, 2013 and December 31, 2012, respectively, and primarily consist of property, plant and equipment. The debt obligations are nonrecourse to EME. For further discussion, see Note 5—Debt and Credit Agreements.
Capistrano Wind Partners
In addition to the Broken Bow I transaction discussed above, in February 2012, Edison Mission Wind sold its indirect equity interests in the Cedro Hill wind project (150 MW in Texas), the Mountain Wind Power I wind project (61 MW in Wyoming), and the Mountain Wind Power II wind project (80 MW in Wyoming) to Capistrano Wind Partners for $346 million. Outside investors provided $238 million of the funding and Mission Energy Holding Company (MEHC) made a $4 million preferred investment. In December 2012, Edison Mission Wind sold its indirect equity interest in the Crofton Bluffs wind project (40 MW in Nebraska) to Capistrano Wind Partners for $58 million. Outside investors provided $46 million of the funding.
Through their ownership of Capistrano Wind Holdings, an indirect subsidiary of EME, Edison Mission Wind and EME's parent company, MEHC, own 100% of the Class A equity interests in Capistrano Wind Partners, and the Class B preferred equity interests are held by outside investors. Under the terms of the formation documents, preferred equity interests receive 100% of the cash available for distribution up to a scheduled amount to target a certain return and thereafter cash distributions are shared. Cash available for distribution includes 90% of the tax benefits realized by MEHC and contributed to Capistrano Wind Partners.
Edison Mission Wind retains indirect beneficial ownership of the common equity in the projects, net of MEHC's preferred investment, and retains responsibilities for managing the operations of Capistrano Wind Holdings and its projects. Accordingly, EME will continue to consolidate these projects. The $378 million contributed by the third-party investors and the $4 million preferred investment made by MEHC are reflected in noncontrolling interests on EME's consolidated balance sheet at June 30, 2013. The transactions between Edison Mission Wind and Capistrano Wind Partners were accounted for as a transfer among entities under common control and, therefore, resulted in no change in the book basis of the transferred assets. However, the transaction did trigger a taxable gain and new tax basis in the assets with a corresponding adjustment to deferred taxes and a reduction to equity.
Note 4. Fair Value Measurements (EME, Midwest Generation)
Recurring Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price"). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including assumptions about
nonperformance risk, which was not material as of June 30, 2013 and December 31, 2012 for both EME and Midwest Generation.
Valuation Techniques Used to Determine Fair Value
Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value of transfers in and out of each level is determined at the end of each reporting period.
Level 1
The fair value of Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded derivatives and money market funds.
Level 2
The fair value of Level 2 assets and liabilities is determined using the income approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. This level includes over-the-counter derivatives and interest rate swaps.
Over-the-counter derivative contracts are valued using standard pricing models to determine the net present value of estimated future cash flows. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges, or comparison to executed trades are used to validate and corroborate the primary price source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity.
Level 3
The fair value of Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes over-the-counter options and derivative contracts that trade infrequently, such as congestion revenue rights and long-term power agreements.
Assumptions are made in order to value derivative contracts in which observable inputs are not available. Changes in fair value are based on changes to forward market prices, including extrapolation of short-term observable inputs into forecasted prices for illiquid forward periods. In circumstances where fair value cannot be verified with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. Modeling methodologies, inputs, and techniques are reviewed and assessed as markets continue to develop and more pricing information becomes available. The fair value is adjusted when it is concluded that a change in inputs or techniques would result in a new valuation that better reflects the fair value of those derivative contracts.
EME
The following table sets forth EME's assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Netting and Collateral1 | | Total |
Assets at Fair Value | | | | | | | | | |
Money market funds2 | $ | 856 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 856 |
|
Derivative contracts | | | | | | | | | |
Electricity | — |
| | 41 |
| | 32 |
| | (10 | ) | | 63 |
|
Natural gas | 1 |
| | — |
| | — |
| | (1 | ) | | — |
|
Total assets | $ | 857 |
| | $ | 41 |
| | $ | 32 |
| | $ | (11 | ) | | $ | 919 |
|
Liabilities at Fair Value | | | | | | | | | |
Derivative contracts | | | | | | | | | |
Electricity | $ | — |
| | $ | 5 |
| | $ | 6 |
| | $ | (11 | ) | | $ | — |
|
Interest rate | — |
| | 68 |
| | — |
| | — |
| | 68 |
|
Total liabilities | $ | — |
| | $ | 73 |
| | $ | 6 |
| | $ | (11 | ) | | $ | 68 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
(in millions) | Level 1 | | Level 2 | | Level 3 | | Netting and Collateral1 | | Total |
Assets at Fair Value | | | | | | | | | |
Money market funds2 | $ | 615 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 615 |
|
Derivative contracts | | | | | | | | | |
Electricity | — |
| | 41 |
| | 52 |
| | (3 | ) | | 90 |
|
Total assets | $ | 615 |
| | $ | 41 |
| | $ | 52 |
| | $ | (3 | ) | | $ | 705 |
|
Liabilities at Fair Value | | | | | | | | | |
Derivative contracts | | | | | | | | | |
Electricity | $ | — |
| | $ | 6 |
| | $ | 1 |
| | $ | (7 | ) | | $ | — |
|
Natural gas | 3 |
| | — |
| | — |
| | (3 | ) | | — |
|
Interest rate | — |
| | 118 |
| | — |
| | — |
| | 118 |
|
Total liabilities | $ | 3 |
| | $ | 124 |
| | $ | 1 |
| | $ | (10 | ) | | $ | 118 |
|
| |
1 | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
| |
2 | Money market funds are included in cash and cash equivalents on EME's consolidated balance sheets. |
Level 3 Valuation Process
The process of determining fair value of commodity derivative contracts is the responsibility of the risk department, which reports to the chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges, and internal valuation techniques and uses both standard and proprietary models to determine fair value. Each reporting period, the risk and key finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs are validated for reasonableness by comparison against prior prices, other broker quotes, and volatility fluctuation thresholds. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness. The following table sets forth the valuation techniques and significant unobservable inputs used to determine fair value for EME's Level 3 assets and liabilities:
|
| | | | | | | | | | | | | | |
| June 30, 2013 |
| Fair Value (in millions) | | Valuation Techniques | | Significant Unobservable Input | | Range | Weighted Average |
| Assets | | Liabilities |
Electricity | | | | | | | | |
Congestion contracts | $ | 50 |
| | $ | 18 |
| | Latest auction pricing | | Congestion prices | | $(8.94) - $13.88 | $0.11 |
Power contracts | 14 |
| | 20 |
| | Discounted cash flows | | Power prices | | $34.24 - $73.00 | $41.79 |
Netting | (32 | ) | | (32 | ) | | | | | | | |
Total | $ | 32 |
| | $ | 6 |
| | | | | | | |
|
| | | | | | | | | | | | | | |
| December 31, 2012 |
| Fair Value (in millions) | | Valuation Techniques | | Significant Unobservable Input | | Range | Weighted Average |
| Assets | | Liabilities |
Electricity | | | | | | | | |
Congestion contracts | $ | 71 |
| | $ | 20 |
| | Latest auction pricing | | Congestion prices | | $(8.93) - $18.03 | $0.19 |
Power contracts | 2 |
| | 2 |
| | Discounted cash flows | | Power prices | | $22.54 - $48.85 | $39.62 |
Netting | (21 | ) | | (21 | ) | | | | | | | |
Total | $ | 52 |
| | $ | 1 |
| | | | | | | |
Level 3 Fair Value Sensitivity
For congestion contracts, generally, an increase (decrease) in congestion prices in the last auction relative to the contract price will increase (decrease) fair value. For power contracts, generally, an increase (decrease) in long-term forward power prices at illiquid locations relative to the contract price will increase (decrease) fair value.
The following table sets forth a summary of changes in the fair value of EME's Level 3 net derivative assets and liabilities:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | 2013 | | 2012 | | 2013 | | 2012 |
Fair value of net assets at beginning of period | $ | 41 |
| | $ | 24 |
| | $ | 51 |
| | $ | 83 |
|
Total realized/unrealized gains (losses) | | | | | | | |
Included in earnings1 | (25 | ) | | 23 |
| | (19 | ) | | 8 |
|
Included in AOCI2 | — |
| | — |
| | — |
| | 2 |
|
Purchases | 10 |
| | 13 |
| | 19 |
| | 19 |
|
Settlements | — |
| | (19 | ) | | (25 | ) | | (20 | ) |
Transfers out of Level 3 | — |
| | — |
| | — |
| | (51 | ) |
Fair value of net assets at end of period | $ | 26 |
| | $ | 41 |
| | $ | 26 |
| | $ | 41 |
|
Change during the period in unrealized gains (losses) related to assets and liabilities held at end of period1 | $ | (11 | ) | | $ | 14 |
| | $ | (17 | ) | | $ | 8 |
|
| |
1 | Reported in operating revenues on EME's consolidated statements of operations. |
| |
2 | Included in reclassification adjustments in EME's consolidated statement of OCI. |
There were no transfers between levels during the six months ended June 30, 2013 and no transfers between Level 1 and Level 2 during the six months ended June 30, 2012. Significant transfers out of Level 3 into Level 2 occurred in the first quarter of 2012 due to significant observable inputs becoming available as the transactions neared maturity.
Fair Value of Long-term Debt
The carrying amounts and fair values of EME's long-term debt were as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
(in millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt, including current portion | $ | 1,522 |
| | $ | 1,517 |
| | $ | 1,056 |
| | $ | 1,057 |
|
In assessing the fair value of EME's long-term debt, EME primarily uses quoted market prices, except for floating-rate debt for which the carrying amounts were considered a reasonable estimate of fair value. The fair value of EME's long-term debt is classified as Level 2.
The carrying amount of short-term debt at December 31, 2012 approximates fair value.
Midwest Generation
The following table sets forth Midwest Generation's assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
|
| | | | | | | | | | | | | | | |
| June 30, 2013 |
(in millions) | Level 1 | | Level 2 | | Netting1 | | Total |
Assets at Fair Value | | | | | | | |
Money market funds2 | $ | 99 |
| | $ | — |
| | $ | — |
| | $ | 99 |
|
Derivative contracts | | | | | | | |
Electricity | — |
| | 1 |
| | — |
| | 1 |
|
Total assets | $ | 99 |
| | $ | 1 |
| | $ | — |
| | $ | 100 |
|
Liabilities at Fair Value | | | | | | | |
Derivative contracts | | | | | | | |
Electricity | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
|
Total liabilities | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
|
| December 31, 2012 |
(in millions) | Level 1 | | Level 2 | | Netting1 | | Total |
Assets at Fair Value | | | | | | | |
Money market funds2 | $ | 75 |
| | $ | — |
| | $ | — |
| | $ | 75 |
|
Derivative contracts | | | | | | | |
Electricity | — |
| | 2 |
| | — |
| | 2 |
|
Total assets | $ | 75 |
| | $ | 2 |
| | $ | — |
| | $ | 77 |
|
Liabilities at Fair Value | | | | | | | |
Derivative contracts | | | | | | |