Variable Interest Entities

A variable interest entity (VIE) is defined as a legal entity whose equity owners do not have sufficient equity at risk, or as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision making rights, the obligation to absorb losses, or the right to receive the residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE unless specific exceptions or exclusions are met. Commercial and operating activities are generally the factors that most significantly impact the economic performance of VIEs in which EME has a variable interest. Commercial and operating activities include construction, operation and maintenance, fuel procurement, dispatch and compliance with regulatory and contractual requirements. EME uses VIEs to conduct its business as described below.

Description of Use of VIEs

EME and its subsidiaries and affiliates have used variable interest entities as part of joint development agreements and constructing or acquiring full or partial interests in power generation facilities and ancillary facilities, referred to by EME as a project. EME's subsidiaries and affiliates have financed the development and construction or acquisition of its projects by capital contributions from EME and the incurrence of debt or lease obligations by its subsidiaries and affiliates owning the operating facilities. These project level debt or lease obligations are generally secured by project specific assets and structured as non-recourse to EME, with several exceptions, including EME's guarantee of the Powerton and Joliet leases as part of a refinancing of indebtedness incurred by its project subsidiary to purchase the Midwest Generation plants.

Categories of VIEs

Projects or Entities that are Consolidated

At December 31, 2011 and 2010, EME consolidated 13 and 14 projects, respectively, with a total generating capacity of 570 MW and 580 MW, respectively, that have minority interests held by others. In April 2011, EME sold its 75% ownership interest in a Minnesota wind project. 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 VIEs.

The following table presents summarized financial information of the projects that were consolidated by EME:



	December 31,
(in millions)	2011		2010
Current assets	$	36	$	26
Net property, plant and equipment	675		739
Other long-term assets	5		6
Total assets	$	716	$	771
Current liabilities	$	28	$	25
Long-term debt net of current portion	57		71
Deferred revenues	69		71
Other long-term liabilities	22		21
Total liabilities	$	176	$	188
Noncontrolling interests	$	2	$	4

Assets serving as collateral for the debt obligations had a carrying value of $136 million and $163 million at December 31, 2011 and 2010, respectively, and primarily consist of property, plant and equipment. The consolidated statements of operations and cash flows for the years ended December 31, 2011 and 2010 includes $22 million and $13 million of pre-tax losses, respectively, and $40 million and $54 million of operating cash flows, respectively, related to VIEs that are consolidated. Effective January 1, 2010, EME adopted new accounting guidance issued by the FASB related to the consolidation of VIEs. As a result of this guidance, EME prospectively consolidated the Ambit project (a 50% interest in American Bituminous Power Partners, L.P.) and deconsolidated the Elkhorn Ridge and San Juan Mesa wind projects. The impact of adopting this guidance resulted in a cumulative effect adjustment that increased retained earnings by $10 million.

During 2011, EME purchased the remaining interests in Pinnacle Wind Force, LLC and Broken Bow I, LLC and all assets of the Crofton Bluffs project. During 2010, EME purchased a noncontrolling interest in Laredo Ridge. All these projects are now 100% owned by EME. The purchases of the noncontrolling interest were accounted for as equity transactions between controlling and noncontrolling interest holders.

Capistrano Wind Equity Capital-2012

As part of its plan to obtain third-party equity capital to finance the development of a portion of EME's wind portfolio, on February 13, 2012, Edison Mission Wind sold its indirect equity interests in the Cedro Hill wind project (150 MW in Texas), the Mountain Wind Power I project (61 MW in Wyoming) and the Mountain Wind Power II project (80 MW in Wyoming) to a new venture, Capistrano Wind Partners. Outside investors provided $238 million of the funding. Capistrano Wind Partners also agreed to acquire the Broken Bow I wind project (80 MW in Nebraska) and the Crofton Bluffs wind project (40 MW in Nebraska) for consideration expected to include $141 million from the same outside investors upon the satisfaction of specified conditions, including commencement of commercial operation and completion of project debt financing. The proceeds from outside investors net of costs on the projects to be completed are expected to be distributed to EME and available for general corporate purposes.

An indirect subsidiary of EME, Edison Mission Wind, and EME's parent company, Mission Energy Holding 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 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 a $4 million preferred investment made by MEHC, and retains responsibilities for managing the operations of Capistrano Wind Holdings and its projects, and accordingly, EME will continue to consolidate these projects. The amount contributed by the third-party interests will be reflected as a noncontrolling interest in EME's consolidated financial statements. Edison Mission Wind plans to distribute to EME the amounts received from the sale of the projects, net of costs on the projects to be completed, which will then be available to EME for general corporate purposes.

Projects that are not Consolidated

EME accounts for the majority of its investments in domestic gas and wind energy projects in which it has less than a 100% ownership interest, and does not have both the right to direct the commercial and operating activities and the obligation to absorb losses or receive benefits from the VIEs, under the equity method. As of December 31, 2011 and 2010, EME had significant variable interests in five natural gas projects that are not consolidated, consisting of the Big 4 projects (Kern River, Midway-Sunset, Sycamore and Watson) and the Sunrise project. A subsidiary of EME operates three of the four Big 4 projects and the Sunrise project and EME's partner provides the fuel management services for the Big 4 projects. In addition, the executive director of these gas projects is provided by EME's partner. Commercial and operating activities of these gas projects are jointly controlled by a management committee of each VIE. Accordingly, EME accounts for its variable interests in these projects under the equity method.

At December 31, 2011, EME accounted for its interest in the Community Wind North wind project, which achieved commercial operation on May 28, 2011, under the equity method. The commercial and operating activities of this entity are jointly directed by representatives of each partner. Thus EME is not the primary beneficiary of this project.

The following table presents the carrying amount of EME's investments in unconsolidated VIEs and the maximum exposure to loss for each investment:



	December 31, 2011
(in millions)	Investment		Maximum Exposure
Natural gas-fired projects	$	315	$	315
Wind projects	208		208

EME's exposure to loss in its VIEs accounted for under the equity method is generally limited to its investment in these entities. At December 31, 2011 and 2010, outstanding debt for projects that are not consolidated consisted of long-term debt that was secured by a pledge of project entity assets, but does not provide for recourse to EME. At December 31, 2011, such outstanding indebtedness was $62 million, of which $16 million was proportionate to EME's ownership in the project. At December 31, 2010, such outstanding indebtedness was $116 million, of which $41 million was proportionate to EME's ownership interest in the projects.

The following table presents summarized financial information of the investments in unconsolidated affiliates accounted for by the equity method:



	Years Ended December 31,
(in millions)	2011		2010		2009
Revenues	$	769	$	828	$	936
Expenses	601		653		734
Net income	$	168	$	175	$	202



	December 31,
(in millions)	2011		2010
Current assets	$	289	$	296
Noncurrent assets	758		850
Total assets	$	1,047	$	1,146
Current liabilities	$	103	$	157
Noncurrent liabilities	88		74
Equity	856		915
Total liabilities and equity	$	1,047	$	1,146

The difference between the carrying value of these equity investments and the underlying equity in the net assets was $10 million at December 31, 2011. The difference is being amortized over the life of the projects. The majority of noncurrent liabilities are composed of project financing arrangements that are nonrecourse to EME. The undistributed earnings of equity method investments were $19 million and $28 million at December 31, 2011 and 2010, respectively.

The following table presents, as of December 31, 2011, the investments in unconsolidated affiliates accounted for by the equity method that represent at least 5% of EME's loss before tax, excluding asset impairment charges, or in which EME has an investment balance greater than $50 million:



Unconsolidated Affiliates	Location	Investment at December 31, 2011 (in millions)		Ownership Interest at December 31, 2011	Operating Status
San Juan Mesa	Elida, NM	$	84	75%	Operating wind-powered facility
Elkhorn Ridge	Bloomfield, NE	81		67%	Operating wind-powered facility
Sunrise	Fellows, CA	173		50%	Operating gas-fired facility
Sycamore	Bakersfield, CA	34		50%	Operating cogeneration facility
Kern River	Bakersfield, CA	21		50%	Operating cogeneration facility
Watson	Carson, CA	42		49%	Operating cogeneration facility

The following table presents summarized financial information of the investments in unconsolidated affiliates:



	December 31,
(in millions)	2011		2010
Investments in Unconsolidated Affiliates
Equity investments	$	515	$	548
Cost investments	8		9
Total	$	523	$	557

At December 31, 2011 and 2010, EME had a 38% ownership interest in a small biomass project that it accounted for under the cost method of accounting as it does not have a significant influence over the project's operating and financial activities.

At December 31, 2011 and 2010, EME accounted for its ownership in the Doga project on the cost method as accumulated distributions exceeded accumulated earnings. EME has not estimated the fair value of cost method investments as quoted market prices are not available and the determination of fair value is highly subjective and cannot be readily ascertained.