-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M2BDHpPtOZAaSsg77X1GlKef+iUJny01eT3H3crrVGh1gniCNKU7vB3NkC7ILXM2 fRt0j7VOnKvxqrtc51xQ9g== 0000930835-97-000038.txt : 19971117 0000930835-97-000038.hdr.sgml : 19971117 ACCESSION NUMBER: 0000930835-97-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDISON MISSION ENERGY CENTRAL INDEX KEY: 0000930835 STANDARD INDUSTRIAL CLASSIFICATION: COGENERATION SERVICES & SMALL POWER PRODUCERS [4991] IRS NUMBER: 954031807 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24890 FILM NUMBER: 97719599 BUSINESS ADDRESS: STREET 1: 18101 VON KARMAN AVE STREET 2: STE 1700 CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 7147525588 MAIL ADDRESS: STREET 1: 18101 VON KARMAN AVE STREET 2: STE 1700 CITY: IRVINE STATE: CA ZIP: 92715 FORMER COMPANY: FORMER CONFORMED NAME: MISSION ENERGY CO DATE OF NAME CHANGE: 19941003 10-Q 1 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, 1997 ------------------------- 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: (714) 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 14, 1997: 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 ..............................................9 PART II - OTHER INFORMATION 6.Exhibits and Reports on Form 8-K....................................15 PART III Signatures..........................................................16
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
(Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- OPERATING REVENUES Electric revenues $143,919 $137,933 $546,262 $428,462 Equity in income from energy projects 73,857 60,506 135,038 117,102 Equity in income from oil and gas 6,244 4,958 28,970 14,050 Operation and maintenance services 10,525 8,587 30,766 27,355 --------- --------- --------- --------- Total operating revenues 234,545 211,984 741,036 586,969 --------- --------- --------- --------- OPERATING EXPENSES Fuel 39,797 28,822 143,552 93,148 Plant operations 31,892 31,374 98,139 91,030 Operation and maintenance services 8,137 6,268 22,578 19,866 Depreciation and amortization 24,027 19,327 80,200 57,723 Administrative and general 39,524 18,740 85,169 59,229 --------- --------- --------- --------- Total operating expenses 143,377 104,531 429,638 320,996 --------- --------- --------- --------- Income from operations 91,168 107,453 311,398 265,973 --------- --------- --------- --------- OTHER INCOME (EXPENSE) Interest and other income 9,826 3,444 23,010 15,859 Gain on sale of assets - - 26,642 19,986 Interest expense (53,737) (32,445) (159,614) (98,144) Dividends on preferred securities (3,304) (3,282) (9,864) (9,830) Minority interest (789) (12,821) (38,494) (40,707) --------- --------- --------- --------- Total other income (expense) (48,004) (45,104) (158,320) (112,836) --------- --------- --------- --------- Income before income taxes 43,164 62,349 153,078 153,137 Provision (credit) for income taxes (2,937) 31,320 41,812 69,103 --------- --------- --------- --------- INCOME BEFORE EXTRAORDINARY LOSS $46,101 $31,029 $111,266 $84,034 Extraordinary loss on early extinguishment of debt, net of income tax benefit - - (13,126) - --------- --------- --------- -------- NET INCOME $46,101 $31,029 $98,140 $84,034 ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(Unaudited) September 30, December 31, 1997 1996 -------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $441,257 $383,634 Accounts receivable - trade 55,607 71,046 Accounts receivable - affiliates 12,225 10,798 Prepaid expenses and other 13,353 13,747 ---------- ---------- Total current assets 522,442 479,225 ---------- ---------- INVESTMENTS Energy projects 943,457 794,646 Oil and gas 69,392 121,237 ---------- ---------- Total investments 1,012,849 915,883 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT 3,320,399 3,401,006 Less accumulated depreciation and amortization 199,592 152,458 ---------- ---------- Net property, plant and equipment 3,120,807 3,248,548 ---------- ---------- OTHER ASSETS Long-term receivables 90,506 91,567 Goodwill 308,738 334,481 Deferred financing costs and other 59,872 82,768 ---------- ---------- Total other assets 459,116 508,816 ---------- ---------- TOTAL ASSETS $5,115,214 $5,152,472 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(Unaudited) September 30, December 31, 1997 1996 ------------- ------------ LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable - affiliates $ 54,284 $ 35,996 Accounts payable and accrued liabilities 172,066 118,824 Interest payable 23,275 35,076 Current maturities of long-term obligation 63,557 80,994 ---------- ---------- Total current liabilities 313,182 270,890 ---------- ---------- LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 2,598,633 2,419,890 ---------- ---------- LONG-TERM DEFERRED LIABILITIES Deferred taxes and tax credits 519,326 545,449 Deferred revenue 596,777 - Other 48,141 39,049 ---------- ---------- Total long-term deferred liabilities 1,164,244 584,498 ---------- ---------- Total liabilities 4,076,059 3,275,278 ---------- ---------- MINORITY INTERESTS 7,545 707,289 ---------- ---------- COMPANY - OBLIGATED MANDATORILY REDEEMABLE SECURITY OF PARTNERSHIP HOLDING SOLELY PARENT DEBENTURES 150,000 150,000 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDER'S EQUITY Common stock, no par value; 10,000 shares authorized; 100 shares issued and outstanding 64,130 64,130 Additional paid-in capital 629,406 629,289 Retained earnings 160,734 262,594 Cumulative translation adjustments 27,340 63,892 ---------- ---------- Total shareholder's equity 881,610 1,019,905 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $5,115,214 $5,152,472 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(Unaudited) Nine Months Ended September 30, --------------------- 1997 1996 ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 98,140 $ 84,034 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income from energy projects (135,038) (117,102) Equity in income from oil and gas (28,970) (14,050) Distributions from energy projects 88,203 86,685 Dividends from oil and gas 38,078 21,340 Depreciation and amortization 80,200 57,723 Deferred taxes and tax credits (41,859) (20,514) Gain on sale of assets (26,642) (19,986) Extraordinary loss on early extinguishment of debt, net of tax 13,126 - Decrease in accounts receivable 10,570 60,314 Decrease in prepaid expenses and other 2,079 4,674 Increase (decrease) in interest payable (11,495) 7,995 Increase in accounts payable and accrued liabilities 70,589 18,849 Other, net (2,758) 23,388 ---------- ---------- Net cash provided by operating activities 154,223 193,350 ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on long-term obligations 1,033,946 181,991 Payments on long-term obligations (809,472) (683,351) Issuance of guaranteed secured bonds - 603,840 Cash dividend to parent (122,000) - ---------- ---------- Net cash provided by financing activities 102,474 102,480 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Investments in energy projects (51,514) (52,668) Loans to energy projects (42,984) (45,517) Purchase of common stock of acquired companies (68,557) (34,640) Proceeds from sale of assets 71,166 70,000 Capital expenditures (65,233) (115,639) Other, net (24,841) 3,075 ---------- ---------- Net cash used in investing activities (181,963) (175,389) ---------- ---------- Effect of exchange rate changes on cash (17,111) 464 ---------- ---------- Net increase in cash and cash equivalents 57,623 120,905 Cash and cash equivalents at beginning of period 383,634 137,540 ---------- ---------- Cash and cash equivalents at end of period $441,257 $258,445 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
EDISON MISSION ENERGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 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, 1997, are not necessarily indicative of the operating results for the full year. Edison Mission Energy's (the "Company") significant accounting policies are described in Note 2 to the Company's Consolidated Financial Statements as of December 31, 1996 and 1995, included in its 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1997. The Company follows the same accounting policies for interim reporting purposes. 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. INVESTMENTS The following table presents summarized financial information with respect to the energy projects and oil and gas investments, accounted for by the equity method:
(In thousands) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------- ---------------------- 1997 1996 1997 1996 ------ ------- ------- ------- ENERGY PROJECTS Operating Revenues $447,228 $418,068 $1,184,932 $1,032,145 Income from Operations 177,366 154,251 352,244 329,842 Net Income 146,502 132,139 270,605 267,740 OIL AND GAS Operating Revenues $ 64,940 $ 71,589 $ 225,215 $ 211,230 Income from Operations 16,700 17,239 78,748 52,462 Net Income 14,286 10,655 58,253 34,517
NOTE 3. ACQUISITION In May 1997, Mission Energy Development Australia Pty Ltd, a subsidiary of the Company, completed a transaction with the State Government of Victoria (State) acquiring the State's 49% interest in the 1,000 megawatt (MW) Loy Yang B Power Station (Loy Yang B). Edison Mission Energy Australia Limited (EMEA), a subsidiary of the Company (together with other wholly owned affiliates of the Company), acquired 51% of Loy Yang B from the State in December 1992. In connection with the 1992 acquisition, the State Electricity Commission of Victoria (SECV) entered into a 30-year power purchase agreement with the Company to purchase its share of the plant output. Loy Yang B's principal assets consist of two 500-MW units fired by brown coal located near Melbourne, Australia. Consideration for the State's 49% interest consisted of (1) a cash payment of approximately $64 million (84 million Australian dollars), (2) termination of the existing power purchase agreement and other related agreements and (3) entering into a new series of power sales-related contracts with the State resulting in a total transaction value of approximately $686 million (900 million Australian dollars) based on a preliminary valuation using discounted cash flows. The acquisition has been accounted for utilizing the purchase method. The excess of the purchase price, including tax effects, over the carrying value of the net assets acquired was allocated to property, plant and equipment. The value associated with the termination of the existing power purchase agreement and other related agreements is reflected as deferred revenue in the accompanying consolidated balance sheet and is being amortized to income utilizing the unit-of-production method over the life of the new power sales contracts of 20 years. The consolidated statements of income for the three and nine months ended September 30, 1997 reflect the operations under the new contracts and the elimination of the minority interest of the acquired business beginning on May 9, 1997. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition of the 49% interest in Loy Yang B had occurred at the beginning of the periods presented, after giving effect to certain adjustments, including electric revenues and fuel expense based on restructuring of agreements, decreased depreciation expense as a result of the extended useful life partially offset by a step-up in the basis of fixed assets, lower interest expense due to the financing and related income tax adjustments. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of 1997 or 1996 or of the results which may occur in the future.
(In thousands) (Unaudited) Nine Months Ended September 30, ---------------------- 1997 1996 ------ ------ Operating Revenue $697,998 $520,329 Income before Extraordinary Loss 123,356 83,694 Net Income 110,230 83,694
NOTE 4. FINANCIAL INSTRUMENTS In May 1997, the Company closed financing of $964 million (1.265 billion Australian dollars), the proceeds of which were used to repay Loy Yang B's existing debt facilities of $713 million (935.5 million Australian dollars) with the balance used to finance the acquisition and to return funds to various affiliates of the Company. The financing consists of (1) a $373 million (490 million Australian dollars) 15-year interest only term facility, (2) a $583 million (765 million Australian dollars) 20-year amortizing term facility with principal and interest payments scheduled quarterly commencing September 30, 1998 and (3) an $8 million (10 million Australian dollars) working capital facility with a term equal to that of the 20-year amortizing term facility. The financing was structured on a non-recourse basis. Lenders look solely to the cash proceeds of Loy Yang B to repay the debt and have taken a security interest in the Loy Yang B project assets. At September 30, 1997, Loy Yang B had 13 interest rate swap agreements having notional amounts of 50 million Australian dollars to 100 million Australian dollars each and a total notional amount of $870 million (1.2 billion Australian dollars). The interest rate swap agreements convert the floating-rate debt into debt with fixed rates ranging from 7.51% to 7.93%. The floating-rate at September 30, 1997 was 4.8%. Maturity dates for the interest rate swaps currently range from five to ten years. The early repayment of Loy Yang B's existing debt facilities of $713 million resulted in an extraordinary loss of $13.1 million (net of income tax benefit of $8.6 million) attributable to the write-off of unamortized debt issue costs. NOTE 5. COMMITMENTS AND CONTINGENCIES FIRM COMMITMENTS TO CONTRIBUTE PROJECT EQUITY
PROJECTS LOCAL CURRENCY U.S. ($ IN MILLIONS) - -------- -------------- -------------------- Paiton (i) 154 ISAB (ii) 244 billion Italian Lira 141 Doga (iii) 25
(i) Paiton is a 1,230-MW coal-fired power plant under construction in East Java, Indonesia. A wholly owned subsidiary of the Company owns a 40% interest. Equity contributions are currently being made and will continue until commercial operation, which is currently scheduled for early 1999. (ii) ISAB is a 512-MW integrated gasification combined cycle power plant under construction near Siracusa in Sicily, Italy. A wholly owned subsidiary of the Company owns a 49% interest. Equity will be contributed at commercial operation, which is currently scheduled for late 1999. (iii) Doga is a 180-MW gas-fired power plant under construction near Istanbul, Turkey. A wholly owned subsidiary of the Company owns an 80% interest. Equity contributions are currently being made and will continue until commercial operation, which is currently scheduled for late 1998. 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
PROJECTS U.S. ($ IN MILLIONS) - -------- -------------------- Brooklyn Navy Yard (i) 294 Paiton (ii) 141 Doga (ii) 19 All Other 25
(i) Brooklyn Navy Yard is a 286-MW gas-fired cogeneration power plant in Brooklyn, New York. A wholly owned subsidiary of the Company owns 50% of the project, funded all of the required equity during construction and will be required to fund the remaining costs of the project facility until the close of non-recourse financing. Estimated total cost is $492 million of which $457 million has been spent through September 30, 1997. In December 1995, a tax- exempt bond financing for the project in the amount of $254 million was obtained through the New York City Industrial Development Agency (NYCIDA). The Company has guaranteed the obligations of the project pursuant to the financing and indemnified NYCIDA for environmental liability up to $40 million. In February 1997, the 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 against BNY. BNY has asserted general monetary claims against the contractor. The Company believes that the outcome of this litigation will not have a material adverse effect on its consolidated financial position or results of operations. (ii) Contingent obligations to contribute additional project equity to the project would be based on events principally related to capital cost overruns during plant construction. Management has no reason to believe that these contingent obligations or any other contingent obligations to contribute project equity will be required. OTHER COMMITMENTS AND CONTINGENCIES Certain of the Company'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, 1997, if payment were required, would be $257 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. The Company's projected construction expenditures that will be funded utilizing non-recourse project financing are $98 million at September 30, 1997, related to the Doga project. LITIGATION The Company 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 the Company's financial position or results of operations. ENVIRONMENTAL MATTERS The Company 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. The Company 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. The Company completed a review of some of its sites in 1995 and does not believe that a material liability exists as of September 30, 1997. The implementation of Clean Air Act Amendments is expected to result in increased operating expenses; however, these increased operating expenses are not expected to have a material impact on the Company's financial position or results of operations. NOTE 6. DIVIDEND In June 1997, the Company made a cash dividend of $122 million and a noncash dividend of $78 million to its parent company, The Mission Group, a wholly owned non-utility subsidiary of Edison International. The noncash dividend is in the form of a long-term note payable for $78 million due on June 30, 2007 with interest payments due on a quarterly basis. 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 - ------- The Company is one of the leading global producers of electricity worldwide. Through its subsidiaries, the Company is engaged in the business of developing, acquiring, owning and operating independent electric power generation facilities. The Company's investments include 54 projects totaling 9,340 megawatts (MW) of generation capacity, of which 7,418 are in operation and 1,922 are under construction. The Company'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 five international entities. Equity in income from energy projects primarily relates to the Company's ownership interest of 50% or less in projects. The equity method of accounting is generally used to account for the operating results of entities over which the company has a significant influence but in which it does not have a controlling interest. With respect to entities accounted for under the equity method, the Company recognizes its proportional share of the income or loss of such entities. ACQUISITION - ----------- In May 1997, Mission Energy Development Australia Pty Ltd, a subsidiary of the Company, completed a transaction with the State Government of Victoria (State) acquiring the State's 49% interest in the 1,000-MW Loy Yang B Power Station (Loy Yang B). Edison Mission Energy Australia Limited (EMEA), a subsidiary of the Company (together with other wholly owned affiliates of the Company), acquired 51% of Loy Yang B from the State in December 1992. In connection with the 1992 acquisition, the State Electricity Commission of Victoria (SECV) entered into a 30-year power purchase agreement with the Company to purchase its share of the plant output. Loy Yang B's principal assets consist of two 500-MW units fired by brown coal located near Melbourne, Australia. Consideration for the State's 49% interest consisted of (1) a cash payment of approximately $64 million (84 million Australian dollars), (2) termination of the existing power purchase agreement and other related agreements and (3) entering into a new series of power sales-related contracts with the State resulting in a total transaction value of approximately $686 million (900 million Australian dollars) based on a preliminary valuation using discounted cash flows. The acquisition has been accounted for utilizing the purchase method. The excess of the purchase price, including tax effects, over the carrying value of the net assets acquired was allocated to property, plant and equipment. The value associated with the termination of the existing power purchase agreement and other related agreements is reflected as deferred revenue in the accompanying consolidated balance sheet and is being amortized to income utilizing the unit-of-production method over the life of the new power sales contracts of 20 years. The consolidated statements of income for the three and nine months ended September 30, 1997 reflect the operations under the new contracts and the elimination of the minority interest of the acquired business beginning on May 9, 1997. RESULTS OF OPERATIONS - --------------------- OPERATING REVENUES Operating revenues increased $22.6 million and $154.1 million for the third quarter and nine months ended September 30, 1997, respectively, compared with the corresponding periods of 1996. The third quarter increase is primarily the result of increases in equity in income from energy projects due to an $11 million (pre-tax) write-down of the Company's investment in a geothermal project in 1996. The increase for the nine months ended September 30, 1997 is primarily the result of increases in electric revenues primarily due to the start of commercial operation of Loy Yang B Unit 2 and the Kwinana project in the fourth quarter of 1996, and as a result there were no comparable electric revenues during the first nine months of 1996. A significant number of the Company's domestic energy projects are located on the West Coast. These projects generally have power sales contracts that provide for higher payments during the summer months. Accordingly, the Company's third quarter revenues from energy projects are materially higher than other quarters of the year. Equity in income from oil and gas investments increased $14.9 million during the first nine months of 1997, compared with the same prior year period. The significant increase was principally due to higher gas prices. OPERATING EXPENSES Operating expenses increased $38.8 million and $108.6 million for the third quarter and nine months ended September 30, 1997, respectively, compared with the corresponding periods of 1996. The increases for both periods were principally due to higher fuel, depreciation and amortization and administrative and general expenses. The increase in fuel expense was primarily due to commencement of commercial operations of the Kwinana project in the fourth quarter of 1996 and First Hydro increases of $4.1 million and $17 million for each period, respectively, resulting from increased generation and higher prices. The nine month increase in fuel expense for the Loy Yang B project as a result of commencement of commercial operations of Unit 2 in the fourth quarter of 1996 was partially reduced as a result of entering into a new fuel supply agreement associated with the 49% acquisition. The increase in depreciation and amortization resulted from commencement of commercial operations of Loy Yang B Unit 2 and the Kwinana project in the fourth quarter of 1996. Loy Yang B's depreciation expense was partially reduced in connection with the acquisition based on the extended useful lives of Loy Yang B's plant and equipment from approximately 30 years based on the previous power purchase agreement to 50 years based on the projected economic life of the plant. The administrative and general expense increases for the third quarter and nine months ended September 30, 1997, were primarily related to an increase in compensation expense as a result of charges associated with the Company's phantom stock plan. OTHER INCOME (EXPENSE) In April 1997, the Company completed a sale of its ownership interest in B.C. Star Partners (B.C. Star) to Remington Energy Ltd. for total cash proceeds of $71.2 million. The Company recorded an after-tax gain of approximately $14 million on the sale in April 1997. The Company expects a minimal impact on its future revenues based on management's evaluation of forecasted Canadian gas prices. During the second quarter of 1996, CalEnergy Company, Inc., the Company's partner in four operating geothermal projects in California, purchased all of the stock of four wholly owned subsidiaries of the Company, which held interests in these projects. The purchase price of $70 million resulted in an after-tax gain of $15.5 million. There was no impact on the Company's future revenues as the Company discontinued recognizing earnings from these projects during 1993. Interest and other income increased $6.4 million and $7.2 million for the third quarter and nine months ended September 30, 1997, respectively, compared with the corresponding periods of 1996, resulting primarily from interest earned on higher international cash balances. Interest expense, net of capitalized interest, increased $21.3 million in the third quarter of 1997, compared with the corresponding period in 1996. For the nine months ended September 30, 1997, interest expense, net of capitalized interest, increased $61.5 million compared with the same prior year period. The increases for both periods were due primarily to decreases in capitalized interest of $14.6 million and $41.6 million for each period, respectively. Capitalized interest decreased in 1997 due to the completion of construction and resultant commercial operation of Loy Yang B Unit 2 in October 1996 at which time the Company discontinued recording capitalized interest related to this project. Higher interest expense in 1997 was also associated with the inclusion of interest on $450 million of securities issued by Edison Mission Energy Funding Corp., partially offset by the repayment of a 200 million Australian dollar loan, both occurring in December 1996. Minority interest expense decreased $12 million for the third quarter ended September 30, 1997, compared with the corresponding period in 1996. The decrease resulted from the acquisition of the remaining 49% ownership interest in Loy Yang B in May 1997. PROVISION FOR INCOME TAXES The Company recorded an effective tax provision rate of 27% for the nine months ended September 30, 1997, compared with a 45% rate for the same prior year period. The decrease in the 1997 effective tax rate was primarily due to a reduction in corporate income tax rates in the United Kingdom (U.K.). In August 1997, the U.K. government decreased the corporate tax rate from 33% to 31%, effective as of April 1, 1997. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", this reduction in U.K. income tax rates results in a one-time reduction in income tax expense of approximately $20 million to adjust the U.K. deferred income tax liability (primarily First Hydro) to the new lower tax rate. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1997, net cash provided by operating activities decreased to $154.2 million from $193.4 million for the nine months ended September 30, 1996. The decline primarily reflects an increase in working capital requirements, partially offset by higher distributions from energy projects and higher dividends from oil and gas investments. Net cash provided by financing activities totaled $102.5 million during the first nine months of 1997 and 1996. The Loy Yang B financing proceeds of $964 million (1.265 billion Australian dollars), were primarily used to repay Loy Yang B's existing debt facilities of $713 million (935.5 million Australian dollars) in May 1997 and a cash dividend was paid to Edison International of $122 million in June 1997. In January 1996, the Company repaid the 400 million pounds sterling (U.S. $603.8 million) credit facility entered into by First Hydro Finance Plc in December 1995 with the net proceeds received from the issuance of 400 million pounds sterling 9% Guaranteed Secured Bonds in 1996. The Loy Yang B financing consists of (1) a $373 million (490 million Australian dollars) 15-year interest only term facility, (2) a $583 million (765 million Australian dollars) 20-year amortizing term facility with principal and interest payments scheduled quarterly commencing September 30, 1998 and (3) an $8 million (10 million Australian dollars) working capital facility with a term equal to that of the 20-year amortizing term facility. The financing was structured on a non-recourse basis. Lenders look solely to the cash proceeds of Loy Yang B to repay the debt and have taken a security interest in the Loy Yang B project assets. At September 30, 1997, Loy Yang B had 13 interest rate swap agreements having notional amounts of 50 million Australian dollars to 100 million Australian dollars each and a total notional amount of $870 million (1.2 billion Australian dollars). The interest rate swap agreements convert the floating-rate debt into debt with fixed rates ranging from 7.51% to 7.93%. The floating-rate at September 30, 1997 was 4.8%. Maturity dates for the interest rate swaps currently range from five to ten years. Net cash used in investing activities increased $6.6 million for the first nine months of 1997 compared with the same prior year period, primarily due to the purchase of common stock of acquired companies related to the acquisition of the remaining 49% ownership interest in Loy Yang B in May 1997, offset by a reduction in capital expenditures in 1997, principally related to the completion of construction of Loy Yang B Unit 2 and the Kwinana project in the fourth quarter of 1996. In 1997, the Company invested $65.2 million in new plant and equipment, principally related to the Doga project which commenced construction in April 1997. The purchase of common stock of acquired companies in 1996 primarily related to the acquisition of the remaining equity stake in Iberian Hy-Power. The proceeds of $71.2 million received from the sale of the Company's ownership interest in B.C. Star in April 1997 is comparable to the proceeds of $70 million received from the sale of four of the Company's operating geothermal facilities in April 1996. At September 30, 1997, the Company had cash and cash equivalents of $441.3 million and had available $386.4 million of borrowing capacity under a $500 million revolving credit facility that expires in 2001. This borrowing capacity under the revolving credit facility will be reduced by borrowings for firm commitments to contribute project equity and to fund capital expenditures and construction costs of its project facilities. FIRM COMMITMENTS TO CONTRIBUTE PROJECT EQUITY
PROJECTS LOCAL CURRENCY U.S. ($ IN MILLIONS) - -------- -------------- -------------------- Paiton (i) 154 ISAB (ii) 244 billion Italian Lira 141 Doga (iii) 25
(i) Paiton is a 1,230-MW coal-fired power plant under construction in East Java, Indonesia. A wholly owned subsidiary of the Company owns a 40% interest. Equity contributions are currently being made and will continue until commercial operation, which is currently scheduled for early 1999. (ii) ISAB is a 512-MW integrated gasification combined cycle power plant under construction near Siracusa in Sicily, Italy. A wholly owned subsidiary of the Company owns a 49% interest. Equity will be contributed at commercial operation, which is currently scheduled for late 1999. (iii) Doga is a 180-MW gas-fired power plant under construction near Istanbul, Turkey. A wholly owned subsidiary of the Company owns an 80% interest. Equity contributions are currently being made and will continue until commercial operation, which is currently scheduled for late 1998. 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
PROJECTS U.S. ($ IN MILLIONS) - -------- -------------------- Brooklyn Navy Yard (i) 294 Paiton (ii) 141 Doga (ii) 19 All Other 25
(i) Brooklyn Navy Yard is a 286-MW gas-fired cogeneration power plant in Brooklyn, New York. A wholly owned subsidiary of the Company owns 50% of the project, funded all of the required equity during construction and will be required to fund the remaining costs of the project facility until the close of non-recourse financing. Estimated total cost is $492 million of which $457 million has been spent through September 30, 1997. In December 1995, a tax- exempt bond financing for the project in the amount of $254 million was obtained through the New York City Industrial Development Agency (NYCIDA). The Company has guaranteed the obligations of the project pursuant to the financing and indemnified NYCIDA for environmental liability up to $40 million. In February 1997, the 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 against BNY. BNY has asserted general monetary claims against the contractor. The Company believes that the outcome of this litigation will not have a material adverse effect on its consolidated financial position or results of operations. (ii) Contingent obligations to contribute additional project equity to the project would be based on events principally related to capital cost overruns during plant construction. Management has no reason to believe that these contingent obligations or any other contingent obligations to contribute project equity will be required. OTHER COMMITMENTS AND CONTINGENCIES Certain of the Company'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, 1997, if payment were required, would be $257 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. The Company's projected construction expenditures that will be funded utilizing non-recourse project financing are $98 million at September 30, 1997, related to the Doga project. The Company and its subsidiaries may incur additional obligations to make equity and other contributions to projects in the future. The Company 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 repayment of loans to energy projects, (3) funds available from the Company's revolving credit facility and (4) additional corporate borrowings. 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 in the U.K. and Australia and fluctuations in foreign currency exchange rates can have a significant impact on the Company's results of operations. Interest rate changes affect the cost of capital needed to construct and finance projects. The Company has mitigated the risk of interest rate fluctuations by arranging for fixed rate financing or variable rate financing with interest rate swaps or other hedging mechanisms for the majority of its project financings. Interest expense included $9.1 million and $5.6 million for the nine months ended September 30, 1997 and 1996, respectively, as a result of interest rate swap agreements. The Company has entered into several interest rate swap agreements whereby the maturity date of the swaps occurs prior to the final maturity of the underlying debt. The Company does not believe that interest rate fluctuations will have a materially adverse effect on its financial position or results of operations. Projects in the U.K. sell their electrical energy and capacity through a centralized electricity pool, which establishes a half-hourly clearing price (also referred to as the "pool price") for electrical energy. The half-hourly pool price is extremely volatile and can vary by as much as a factor of 10 or more over the course of a few hours, due to the large differentials in demand according to the time of day. First Hydro mitigates 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 half-hourly pool clearing price for the element of power under contract. These contracts can be sold in two structures: one-way contracts, the most commonly used by First Hydro, where a specified monthly amount is received in advance and difference payments are made when the pool price is above the price specified in the contract, and two- way contracts, where the counter party pays First Hydro when the pool price is below that in the contract instead of a specified monthly amount. These contracts act as a means of stabilizing production revenues or purchasing costs by removing an element of First Hydro's net exposure to pool price volatility. First Hydro electric revenues were increased by $27.2 million for the nine-month period ended September 30, 1997, compared to a decrease of $4 million for the corresponding period in 1996, as a result of electricity rate swap agreements. Loy Yang B sells their electrical energy through a centralized electricity pool (Victorian Wholesale Electricity Market, which will be integrated into 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 the 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". Vesting Contracts were put into place by the 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 can be sold as one-way or two-way contracts which are structured similar to the electricity rate swap agreements described above. 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. These contracts are accounted for as electricity rate swap agreements whereby the related price differentials to be paid or received are recorded as adjustments to electric revenues. Loy Yang B's electric revenues were increased by $43.1 million for the nine month period ended September 30, 1997 as a result of hedging contract arrangements. Fluctuations in foreign currency exchange rates can affect, on a U.S. dollar equivalent basis, the amount of the Company's equity contributions to, and distributions from, its foreign projects. As the Company continues to expand into foreign markets, fluctuations in foreign currency exchange rates can be expected to have a greater impact on the Company's results of operations in the future. At times, the Company 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, the Company 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. The electric power generated by the Company's other operating projects is generally sold to a limited number of 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, the Company structures its long-term contracts so that fluctuations in fuel costs will produce similar fluctuations in electric and/or steam revenues and by entering into long-term fuel supply and transportation agreements. ENVIRONMENTAL MATTERS The Company 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. The Company 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. The Company completed a review of some of its sites in 1995 and does not believe that a material liability exists as of September 30, 1997. The implementation of Clean Air Act Amendments is expected to result in increased operating expenses; however, these increased operating expenses are not expected to have a material impact on the Company's financial position or results of operations. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 27 Financial Data Schedule (B) REPORTS ON FORM 8-K The registrant filed the following report on Form 8-K during the quarter ended September 30, 1997. Date of Report Date Filed Item Reported -------------- ---------- ------------- March 31, 1997 July 22, 1997 7 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 13, 1997 JAMES V. IACO, JR. - ----------------------- --------------------- Senior Vice President and Chief Financial Officer EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EDISON MISSION ENERGY AND SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 441,257 0 55,607 0 0 522,442 3,320,399 199,592 5,115,214 313,182 2,598,633 64,130 150,000 0 817,480 5,115,214 0 577,028 0 264,269 0 0 169,478 153,078 41,812 111,266 0 (13,126) 0 98,140 0 0
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