EME Liquidity and Restructuring Activities

9 Months Ended

Sep. 30, 2012

Restructuring and Related Activities [Abstract]

EME Liquidity and Restructuring Activities

EME Liquidity and Restructuring Activities

At September 30, 2012, EME, and its subsidiaries without contractual dividend restrictions, had corporate cash and cash equivalents of $627 million, which includes Midwest Generation's cash and cash equivalents of $142 million. At September 30, 2012, EME had $3.7 billion of unsecured notes outstanding, $500 million of which mature in June 2013.

EME continues to experience operating losses due to low realized energy and capacity prices, high fuel costs and low generation at the Midwest Generation plants. Forward market prices indicate that these trends are expected to continue for a number of years. As a result, EME expects that it will incur further reductions in cash flow and losses in the current year and in subsequent years. A continuation of these adverse trends coupled with pending debt maturities and the need to retrofit its Midwest Generation plants to comply with governmental regulations will exhaust EME's liquidity. Consequently, EME has been considering all options available to it, including potential sales of assets, restructuring, reorganization of its capital structure, or conservation of cash that would be applied otherwise to the payment of obligations.

In June 2012, EME entered into non-disclosure and engagement agreements with advisors representing holders of a majority in principal amount of its unsecured bonds for the purpose of engaging in discussions with such advisors and Edison International regarding EME's financial condition. In October 2012, EME and Edison International entered into non-disclosure agreements with certain of the clients of such advisors to facilitate further discussions. Discussions with the bondholders' advisors have been ongoing. In addition, EME and Midwest Generation have entered into a non-disclosure agreement with an advisor representing a majority in principal amount of Midwest Generation's senior lease obligation bonds.

Based on current projections, EME is not expected to have sufficient liquidity to repay the $500 million debt obligation due in June 2013. On November 15, 2012, $97 million of interest payments are due on unsecured EME bonds maturing in 2017, 2019 and 2027, and there is no assurance payment will be made. EME's unsecured bonds generally provide for a 30-day grace period for interest payments. EME's failure to pay indebtedness under its unsecured bonds would likely result in EME's filing for protection under Chapter 11 of the U.S. Bankruptcy Code, which would trigger cross defaults under EME's guarantee of the lease obligations of Midwest Generation, as well as Midwest Generation's own obligations under the lease and under instruments governing the senior lease obligation bonds, and which could potentially give rise to counterparty rights and remedies under other documents.

Under the applicable accounting standards, Edison International would no longer consolidate EME for financial reporting purposes if it filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, as Edison International would no longer have a controlling financial interest for accounting purposes. In order to deconsolidate EME for financial reporting purposes, the carrying values of the assets and liabilities of EME would be removed from Edison International's consolidated balance sheets as of the bankruptcy filing date and the investment in EME would be recorded at its estimated fair value. Any loss would be recognized in an amount equal to the excess of the book value of Edison International's investment in EME over the fair value of such investment. At September 30, 2012, the book value of Edison International's investment in EME was $1.24 billion. Any amounts recorded as part of accumulated other comprehensive loss related to EME would be recognized as a loss upon deconsolidation. At September 30, 2012, the amount recorded as accumulated other comprehensive loss related to EME was $128 million. In addition, Edison International would record any liabilities due to EME and certain liabilities that are joint and several with EME, including liabilities for uncertain tax positions taken in consolidated or combined tax returns of Edison International that are otherwise not resolved through the tax-allocation agreement and certain retirement plans. Under current regulations, during bankruptcy, EME would continue to be consolidated with Edison International for federal income tax purposes until a change in ownership occurred.