-----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, Q0vg7mmjVYG+vXZDDXrtImSRckOboVKhsa+wadIPj4a+afzVvU56FxqRU/70uIym +mVg9wZRpE68wuM2Qvrnlw== 0001017062-98-001115.txt : 19980518 0001017062-98-001115.hdr.sgml : 19980518 ACCESSION NUMBER: 0001017062-98-001115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98621760 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 FORM 10-Q DATED MARCH 31, 1998 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 March 31, 1998 -------------- 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 May 15, 1998: 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) Three Months Ended March 31, --------------------- 1998 1997 -------- -------- Operating Revenues Electric revenues $198,797 $236,077 Equity in income from energy projects 17,567 23,325 Equity in income from oil and gas 5,465 16,735 Operation and maintenance services 10,077 8,873 -------- -------- Total operating revenues 231,906 285,010 -------- -------- Operating Expenses Fuel 48,637 55,617 Plant operations 29,598 34,708 Operation and maintenance services 7,391 6,253 Depreciation and amortization 22,782 30,034 Administrative and general 24,172 24,793 -------- -------- Total operating expenses 132,580 151,405 -------- -------- Income from operations 99,326 133,605 -------- -------- Other Income (Expense) Interest and other income 14,584 5,794 Interest expense (45,725) (52,894) Dividends on preferred securities (3,297) (3,263) Minority interest (808) (27,973) -------- -------- Total other income (expense) (35,246) (78,336) Income before income taxes -------- -------- Provision for income taxes 64,080 55,269 26,380 22,685 -------- -------- Net Income $ 37,700 $ 32,584 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 1 EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
(Unaudited) Three Months Ended March 31, ------------------ 1998 1997 -------- -------- Net Income $37,700 $ 32,584 Other comprehensive income (expense), net of tax: Foreign currency translation adjustments net of income tax (expense) benefit of $(1,099) in 1998 and $3,341 in 1997 8,315 (26,901) ------- -------- Comprehensive Income $46,015 $ 5,683 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 2 EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) March 31, December 31, 1998 1997 ---------- ----------- Assets Current Assets Cash and cash equivalents $ 672,711 $ 585,883 Accounts receivable--trade 61,578 76,935 Accounts receivable--affiliates 26,245 18,139 Prepaid expenses and other 22,302 13,630 ---------- ---------- Total current assets 782,836 694,587 ---------- ---------- Investments Energy projects 854,350 852,688 Oil and gas 74,750 67,101 ---------- ---------- Total investments 929,100 919,789 ---------- ---------- Property, Plant and Equipment 3,207,850 3,142,551 Less accumulated depreciation and amortization 220,956 201,564 ---------- ---------- Net property, plant and equipment 2,986,894 2,940,987 ---------- ---------- Other Assets Long-term receivables 26,906 25,957 Goodwill 316,925 312,606 Restricted cash and other 59,636 91,219 ---------- ---------- Total other assets 403,467 429,782 ---------- ---------- Total Assets $5,102,297 $4,985,145 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 3 EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) March 31, December 31, 1998 1997 ---------- ----------- Liabilities and Shareholder's Equity Current Liabilities Accounts payable--affiliates $ 6,460 $ 13,381 Accounts payable and accrued liabilities 222,116 208,411 Interest payable 40,321 42,627 Current maturities of long-term obligations 74,615 75,383 ---------- ---------- Total current liabilities 343,512 339,802 ---------- ---------- Long-Term Obligations, Net of Current Maturities 2,560,230 2,532,121 ---------- ---------- Long-Term Deferred Liabilities Deferred taxes and tax credits 548,813 517,391 Deferred revenue 540,445 541,176 Other 75,534 68,951 ---------- ---------- Total long-term deferred liabilities 1,164,792 1,127,518 ---------- ---------- Total liabilities 4,068,534 3,999,441 ---------- ---------- Minority Interests 11,340 9,102 ---------- ---------- Company - Obligated Mandatorily Redeemable Security of Partnership Holding Solely Parent Debentures 150,000 150,000 ---------- ---------- Commitments and Contingencies (Note 3) 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 629,406 629,406 Retained earnings 140,126 102,620 Cumulative translation adjustments 38,761 30,446 ---------- ---------- Total shareholder's equity 872,423 826,602 ---------- ---------- Total Liabilities and Shareholder's Equity $5,102,297 $4,985,145 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 EDISON MISSION ENERGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
(Unaudited) Three Months Ended March 31, ------------------ 1998 1997 -------- -------- Cash Flows From Operating Activities Net income $ 37,700 $ 32,584 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income from energy projects (17,567) (23,325) Equity in income from oil and gas (5,465) (16,735) Distributions from energy projects 37,264 20,552 Dividends from oil and gas 275 -- Depreciation and amortization 22,782 30,034 Deferred taxes and tax credits 24,904 6,247 Decrease (increase) in accounts receivable 7,251 (10,254) Decrease in prepaid expenses and other 2,958 2,209 Decrease in interest payable (2,306) (9,202) Increase in accounts payable and accrued liabilities 15,390 26,139 Other, net (19,823) (4,341) -------- -------- Net cash provided by operating activities 103,363 53,908 -------- -------- Cash Flows From Financing Activities Borrowings on long-term obligations 20,133 5,677 Payments on long-term obligations (22,832) (45,087) -------- -------- Net cash used in financing activities (2,699) (39,410) -------- -------- Cash Flows From Investing Activities Investments in energy projects (227) (23,988) Loans to energy projects (15,400) (10,333) Purchase of common stock of acquired companies (4,109) -- Capital expenditures (28,209) (5,276) Decrease (increase) in restricted cash 32,956 (498) Other, net (1,478) (10,150) -------- -------- Net cash used in investing activities (16,467) (50,245) -------- -------- Effect of exchange rate changes on cash 2,631 (8,691) -------- -------- Net increase (decrease) in cash and cash equivalents 86,828 (44,438) Cash and cash equivalents at beginning of period 585,883 383,634 -------- -------- Cash and cash equivalents at end of period $672,711 $339,196 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 EDISON MISSION ENERGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 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 three months ended March 31, 1998, 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, 1997 and 1996, included in its 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1998. 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) Three Months Ended March 31, ------------------ 1998 1997 -------- -------- Energy Projects Operating Revenues $343,057 $377,194 Income from Operations 59,931 76,196 Net Income 36,321 56,375 Oil and Gas Operating Revenues $ 57,465 $ 97,419 Income from Operations 15,688 39,182 Net Income 12,480 31,284
6 NOTE 3. COMMITMENTS AND CONTINGENCIES Firm Commitments to Contribute Project Equity
Projects Local Currency U.S. ($ in millions) -------- -------------- -------------------- Paiton (i) 121 ISAB (ii) 244 billion Italian Lira 134 Doga (iii) 16
(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 the first half of 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 1999. 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) -------- -------------------- Paiton (i) 141 Doga (i) 19 All Other 25
(i) 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 March 31, 1998, if payment were required, would be $262 million. 7 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. 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. In 1997, the Brooklyn Navy Yard project partnership completed a $407 million permanent, non-recourse financing for the project. In February 1997, the construction contractor asserted general monetary claims under the turnkey agreement against Brooklyn Navy Yard Cogeneration Partners, L.P. (BNY) for damages in the amount of $136.8 million. BNY has asserted general monetary claims against the contractor. In connection with the 1997 refinancing, the Company agreed to indemnify BNY and its partner from all claims and costs arising from or in connection with the contractor litigation, which indemnity has been assigned to the lenders. The Company believes that the outcome of this litigation will not have a material adverse effect on its financial position or results of operations. The Company's projected construction expenditures that will be funded utilizing non-recourse project financing are $59 million at March 31, 1998. 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 March 31, 1998. 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. 8 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. Through its subsidiaries, the Company is engaged in the business of developing, acquiring, owning and operating electric power generation facilities worldwide. The Company's investments include 51 projects totaling 9,285 megawatts (MW) of generation capacity, of which 7,363 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 EMEA 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. 9 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 statement of income for the three months ended March 31, 1998 reflects the operations under the new contracts and the elimination of the minority interest of the acquired business. RESULTS OF OPERATIONS - --------------------- OPERATING REVENUES Operating revenues decreased $53.1 million for the first quarter of 1998, compared with the first quarter of 1997, resulting primarily from decreases in electric revenues. Electric revenues were lower in the first quarter of 1998 primarily due to Loy Yang B's new series of power sales-related contracts associated with the 49% acquisition in May 1997. Revenues from the First Hydro project increased $12.8 million, attributable to higher energy revenues as a result of higher energy prices and increased utilization, partially offset by lower capacity prices in 1998. Equity in income from energy projects decreased $5.8 million during the first quarter of 1998, compared with the same prior year period. The decrease was principally due to lower electric and steam revenues for several cogeneration projects due to lower oil and gas prices upon which the revenues are based. Equity in income from oil and gas investments decreased $11.3 million during the first quarter of 1998, compared with the same prior year period. The decrease was primarily due to lower oil and gas prices. OPERATING EXPENSES Operating expenses decreased $18.8 million for the first quarter of 1998, compared with the first quarter of 1997. The decrease was principally due to lower fuel, plant operations and depreciation and amortization expenses. The decrease in fuel expense was primarily due to the new fuel supply agreement entered into by Loy Yang B related to the 49% acquisition in May 1997, partially offset by higher fuel expense for First Hydro as a result of higher prices and increased generation. The decrease in plant operations expense was primarily due to Loy Yang B and Lakeland's lower operating and maintenance costs and from First Hydro's lower transmission costs caused by reduced rates. The decrease in depreciation and amortization resulted from an extension in the useful life of Loy Yang B's plant and equipment from approximately 30 years, the term of the previous power purchase agreement, to 50 years (the projected economic life of the plant). OTHER INCOME (EXPENSE) Interest and other income increased $8.8 million in the first quarter of 1998, compared with the first quarter of 1997. The increase was primarily due to interest earned on higher cash balances. Interest expense, net of capitalized interest, decreased $7.2 million in the first quarter of 1998, compared with the corresponding period in 1997. The decrease was primarily due to Loy Yang B's lower interest rate due to the refinancing in May 1997 in connection with the 49% acquisition. 10 Minority interest expense decreased $27.2 million for the first quarter of 1998, compared with the corresponding period in 1997. 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 41% for the three-month period ended March 31, 1998 and 1997. LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 1998, net cash provided by operating activities increased to $103.4 million from $53.9 million for the three months ended March 31, 1997. The 1998 improvement primarily reflects higher net income, higher distributions from energy projects and a decrease in working capital requirements principally due to higher accounts receivable collections from First Hydro. Net cash used in financing activities totaled $2.7 million during the first three months of 1998, compared to $39.4 million in 1997. The 1998 decline is primarily due to lower debt payments and an increase in borrowings related to the Doga project which commenced construction in April 1997. The lower debt payments principally relate to Kwinana's construction loan repayment made in January 1997. Net cash used in investing activities decreased to $16.5 million for the three months ended March 31, 1998 from $50.2 million for the three months ended March 31, 1997. The decrease resulted from a reduction in the amount of contributions made to energy projects under construction and from a reduction in restricted cash balances required for debt payments. An increase in capital expenditures in 1998, principally related to the Doga project, partially offset the decrease. At March 31, 1998, the Company had cash and cash equivalents of $672.7 million and had available $409 million of borrowing capacity under a $500 million revolving credit facility that expires in 2001. This borrowing capacity under the revolving credit facility may be reduced by borrowings for firm commitments to contribute project equity and to fund capital expenditures and construction costs of its project facilities. Firm Commitments to Contribute Project Equity
Projects Local Currency U.S. ($ in millions) -------- -------------- -------------------- Paiton (i) 121 ISAB (ii) 244 billion Italian Lira 134 Doga (iii) 16
(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 the first half of 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. 11 (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 1999. 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) -------- -------------------- Paiton (i) 141 Doga (i) 19 All Other 25
(i) 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 March 31, 1998, if payment were required, would be $262 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. 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. In 1997, the Brooklyn Navy Yard project partnership completed a $407 million permanent, non-recourse financing for the project. In February 1997, the construction contractor asserted general monetary claims under the turnkey agreement against Brooklyn Navy Yard Cogeneration Partners, L.P. (BNY) for damages in the amount of $136.8 million. BNY has asserted general monetary claims against the contractor. In connection with the 1997 refinancing, the Company agreed to indemnify BNY and its partner from all claims and costs arising from or in connection with the contractor litigation, which indemnity has been assigned to the lenders. The Company believes that the outcome of this litigation will not have a material adverse effect on its financial position or results of operations. The Company's projected construction expenditures that will be funded utilizing non-recourse project financing are $59 million at March 31, 1998. 12 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 and (3) funds available from the Company's revolving credit facility. CHANGES IN INTEREST RATES, CHANGES IN ELECTRICITY POOL PRICING, FOREIGN CURRENCY FLUCTUATIONS AND OTHER CONTRACTUAL OBLIGATIONS Changes in interest rates, changes in electricity pool pricing and fluctuations in foreign currency exchange rates can have a significant impact on 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 $6.1 million and $2.6 million for the three months ended March 31, 1998 and 1997, respectively, as a result of interest rate swap and collar agreements. The Company has entered into several interest rate swap and collar agreements whereby the maturity date of the swaps and collar 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 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 pool price for the element of power under contract. These contracts can be sold in two structures: one-way contracts, 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 $30.2 million for the three- month period ended March 31, 1998, compared to a $15.2 million increase for the corresponding period in 1997, as a result of electricity rate swap agreements. Loy Yang B sells their electrical energy through a centralized electricity pool (the National Electricity Market) which provides for a system of generator bidding, central dispatch and a settlements system based on a clearing market for each half-hour of every day. The Victorian Power Exchange, operator and administrator of the pool, determines a system marginal price each half hour. To mitigate 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" 13 with the remainder of the plant capacity hedged under the "State Hedge" described below. 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. These contracts are accounted for as electricity rate swap agreements. The State Hedge is a long-term contractual arrangement based upon a fixed price commencing May 8, 1997 and terminating October 31, 2016. The State guarantees SECV's obligations under the State Hedge. Loy Yang B's electric revenues were increased by $20.5 million for the three- month period ended March 31, 1998 as a result of hedging contract arrangements. The State Hedge and Vesting Contracts were entered into in connection with the 49% acquisition of Loy Yang B in May 1997, and therefore electric revenues were not impacted prior to May 1997. 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. Construction on the two-unit Paiton project is approximately 91% completed, and commercial operation is expected in the first half of 1999. The tariff is higher in the early years and steps down over time, and the tariff for the Paiton project includes infrastructure to be used in common by other units at the Paiton complex. The plant's output is fully contracted with the state-owned electricity company, PT Perusahaan Listrik Negara (PLN), for payment in U.S. dollars. The projected rate of growth of the Indonesian economy and the exchange rate of Indonesian Rupiah into U.S. dollars have deteriorated significantly since the Paiton project was contracted, approved and financed. The project received substantial finance and insurance support from the Export- Import Bank of the United States, The Export-Import Bank of Japan, the U.S. Overseas Private Investment Corporation and the Ministry of International Trade and Industry of Japan. The Paiton project's senior debt ratings have been reduced from investment grade to speculative grade based on the rating agencies' perceived increased risk that PLN might not be able to honor the electricity sales contract with Paiton. A Presidential decree has deemed some power plants, but not including the Paiton project, subject to review, postponement or cancellation. 14 The electric power generated by the Company's domestic operating projects is generally sold to electric utilities pursuant to long-term (typically, 15 to 30- year) power sales contracts and is expected to result in consistent cash flow under a wide range of economic and operating circumstances. To accomplish this, the Company structured its power sales contracts so that fluctuations in fuel costs would produce similar fluctuations in electric and/or steam revenues and entered 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 March 31, 1998. 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 No reports on Form 8-K were filed during the quarter ended March 31, 1998. 15 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: May 14, 1998 /s/ JAMES V. IACO, JR. - ------------------ ------------------------- JAMES V. IACO, JR., Senior Vice President and Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
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 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 672,711 0 61,578 0 0 782,836 3,207,850 220,956 5,102,297 343,512 2,560,230 150,000 0 64,130 808,293 5,102,297 0 208,874 0 85,626 0 0 49,022 64,080 26,380 0 0 0 0 37,700 0 0
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