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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
Securities registered pursuant to Section 12(b) of the Act:
9-7/8% CUMULATIVE MONTHLY
INCOME PREFERRED SECURITIES, SERIES A * NEW YORK STOCK EXCHANGE
- --------------------------------------- -----------------------
(Title of Class) (name of each exchange on
which registered)
8-1/2% CUMULATIVE MONTHLY
INCOME PREFERRED SECURITIES, SERIES B * NEW YORK STOCK EXCHANGE
- --------------------------------------- -------------------------
(Title of Class) (name of each exchange on
which registered)
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
* Issued by Mission Capital, L.P., a limited partnership in which Edison
Mission Energy is the sole general partner. The payments of distributions on the
preferred securities and payments on liquidation or redemption are guaranteed by
Edison Mission Energy.
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _____.
Aggregate market value of the registrant's Common Stock held by non-affiliates
of the registrant as of March 27, 1998: $0. Number of shares outstanding of the
registrant's Common Stock as of March 27, 1998: 100 shares (all shares held by
an affiliate of the registrant).
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business................................................................. 1
2. Properties............................................................... 22
3. Legal Proceedings........................................................ 23
4. Submission of Matters to a Vote of Security Holders...................... 23
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters.... 24
6. Selected Financial Data.................................................. 25
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 26
8. Financial Statements and Supplementary Data.............................. 36
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 36
PART III
10. Directors and Executive Officers of the Registrant....................... 69
11. Executive Compensation................................................... 71
12. Security Ownership of Certain Beneficial Owners and Management........... 78
13. Certain Relationships and Related Transactions........................... 80
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 80
Signatures............................................................... 99
PART I
ITEM 1. BUSINESS
THE COMPANY
- -----------
Edison Mission Energy (EME), through its subsidiaries, is engaged in the
business of developing, acquiring, owning and operating electric power
generation facilities worldwide. EME is a wholly owned subsidiary of The Mission
Group, which is a wholly owned, non-utility subsidiary of Edison International.
Edison International is also the parent holding company of Southern California
Edison Company (SCE), one of the largest electric utilities in the United
States.
EME was formed in 1986 with two domestic operating projects. Currently, EME
owns interests in 26 domestic and 24 international operating electrical power
generation facilities with an aggregate generating capacity of 7,403 megawatts
(MW), of which EME's share is approximately 5,173 MW. Three international
projects totaling 1,922 MW of generating capacity (of which EME's anticipated
share is approximately 887 MW) are currently in the construction stage. At
December 31, 1997, the Company had consolidated assets of $5 billion and total
shareholder's equity of $827 million.
EME is incorporated under the laws of the State of California. Its
headquarters and principal executive offices are located at 18101 Von Karman
Avenue, Suite 1700, Irvine, California 92612, and its telephone number is (714)
752-5588. Unless indicated otherwise or the context otherwise requires,
references in this Annual Report on Form 10-K to EME shall be deemed to include
EME, its subsidiaries and the partnerships or limited liability entities through
which EME and its partners own and manage their project investments.
SEGMENT INFORMATION
- -------------------
EME operates in only one industry segment: electric power generation.
DESCRIPTION OF BUSINESS
- -----------------------
GENERAL OVERVIEW
EME is one of the leading global producers of electricity. Through its
subsidiaries, EME is engaged in the business of developing, acquiring, owning
and operating electric power generation facilities worldwide. EME was formed in
1986 with two domestic operating projects. Currently, EME owns interests in 26
domestic and 24 international operating electrical power generation facilities.
Until the enactment of the Public Utility Regulatory Policies Act of 1978
(PURPA), utilities were the only producers of bulk electric power intended for
sale to third parties in the United States. PURPA encouraged the development of
independent power by removing regulatory constraints relating to the production
and sale of electric energy by certain non-utilities and requiring electric
utilities to buy electricity from certain types of non-utility power producers
(qualifying facilities or QFs) under certain conditions. The passage of the
Energy Policy Act of 1992 (the Energy Policy Act) further encouraged the
development of independent power by significantly expanding the options
available to independent power producers (IPPs) with respect to their regulatory
status and by liberalizing transmission access. As a result, a significant
market for electric power produced by IPPs, such as EME, has developed in the
United States since the enactment of PURPA.
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The movement toward privatization of existing power generation capacity in
many foreign countries and the growing need for new capacity in developing
countries have also led to the development of significant new markets for IPPs
outside the United States. EME believes that it is well-positioned to continue
to realize opportunities in these new foreign markets. See "--Strategy" below.
STRATEGY
EME's business strategy is to play an active role, as a long-term owner, in
all phases of power generation, from planning and development through
construction and commercial operation. EME believes that such involvement
allows EME to better ensure, through the use of its experienced personnel, that
its projects are well-planned, structured and managed.
In making investment decisions, EME evaluates potential project returns
against rate of return guidelines. EME establishes these guidelines by
identifying a base rate of return and adjusting the base rate by potential risk
factors, such as risks associated with project location and stage of project
development. EME endeavors to mitigate project development risk by (i)
selecting partners with complementary skills and local experience, (ii)
structuring investments through subsidiaries, (iii) managing up-front
development costs, (iv) utilizing limited recourse financing and (v) linking
revenue and expense components where appropriate. Many of EME's projects are
operated by its subsidiaries or affiliates (e.g., Edison Mission Operation and
Maintenance, Inc. - Edison Mission O&M), which seek to preserve and enhance the
value of EME's investments.
In response to increasing globalization of the independent power market, EME
has organized its operations and development activities into three geographic
divisions: (i) Americas, (ii) Asia Pacific and (iii) Europe, Central Asia,
Middle East and Africa. Each division is served by one or more teams consisting
of business development, operations, finance and legal personnel, and each team
is responsible for all the activities of EME within a particular geographic
region. Also, EME has mobilized personnel from outside a particular region when
needed in order to assist in the development of certain projects.
Set forth below is a brief discussion of the current strategy for each of the
three regions and a summary of certain of EME's projects that are currently in
the construction, advanced development, pre-finance or early operations stage in
each of the regions. While EME anticipates the successful completion of these
projects, no assurance can be given that any of these projects, or any other
projects currently in the construction stage, advanced development or pre-
finance stage, will be successfully completed or financed or that the expected
MW capacity (and EME's anticipated share thereof) will be achieved. See " --
Project Development -- Certain Considerations Associated with Project
Development, Finance and Operation".
Americas
The Americas division is comprised of the U.S./Canada and Central and Latin
America regions and is headquartered in Irvine, California. The strategy for the
U.S./Canada and Central and Latin America region is to (i) manage certain
operating independent power projects located throughout the United States, (ii)
pursue the acquisition of existing generating assets from utilities, industrial
companies and other IPPs and (iii) pursue the development of new power projects
throughout the region. EME has 26 operating projects in this region. For
further information regarding EME's 26 domestic operating
2
projects, see "--EME's Operating Power Generation Facilities-- Description of
Domestic Operating Projects."
Asia Pacific
The Asia Pacific division is headquartered in Singapore with additional
offices located in Australia, Indonesia and the Philippines. Among the three
geographic divisions, the countries covered by the Asia Pacific division have
experienced the fastest electric demand growth, and are expected to continue
strong growth in the medium term. Most governments in the region have committed
to privatization of the electric power industry, and are looking to the private
sector to finance and develop a significant portion of new generating capacity.
The strategy for this region is to (i) pursue projects in countries where
there exist strong political commitment and the structural framework necessary
for private power, (ii) seek opportunities to employ indigenous fuels and (iii)
seek strategic, complimentary alliances with partners who bring value to the
project by providing fuel, equipment and construction services.
EME's activity in the Asia Pacific region commenced in December 1992 with the
acquisition of a 51% interest of the 1000-MW Loy Yang B Power Station (Loy Yang
B) from the State Government of Victoria (State), Australia's first electric
privatization effort. In May 1997, a subsidiary of EME acquired the State's 49%
interest in Loy Yang B. The first of two 500-MW units at Loy Yang B began
commercial operations in October 1993. Unit 2 commenced commercial operations in
October 1996. An EME affiliate provides operation and maintenance services for
both units.
In April 1995, EME and its partners, Mitsui & Co. Ltd., General Electric
Corporation and P.T. Batu Hitam Perkasa, an Indonesian limited liability
company, commenced construction of the $2.5 billion Paiton project, a 1,230-MW
coal-fired power plant in East Java, Indonesia. The project will consist of two
units, each of which is expected to have a capacity of 615 MW. Construction of
the plant continues on schedule, with commercial operation expected in the first
half of 1999. In January 1996, EME purchased an additional 7.5% interest in the
Paiton project from a subsidiary of General Electric Corporation, thereby
increasing its ownership interest to 40%.
Construction on the two-unit Paiton project is approximately 85% complete.
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
with 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.
Kwinana is a $108 million 116-MW gas-fired cogeneration project located at
the British Petroleum Kwinana refinery near Perth, Australia. The project,
which is 100% owned by EME, began commercial operations in December 1996. The
project supplies electricity to Western Power (formerly the State
3
Electricity Commission of Western Australia) and electricity and steam to the
British Petroleum Kwinana refinery.
In December 1997, EME (40% ownership), along with its partners, Siam City
Cement (30% ownership) and Lanna Lignite (30% ownership), signed a twenty-five
year power purchase contract with the Electricity Generating Authority of
Thailand (EGAT) pursuant to which EGAT will purchase 734 MW of output from the
coal-fired power generation project at Kui Buri in Thailand. Financial closing
and commencement of construction are anticipated in late 1998 or early 1999 with
commercial operations expected to begin in 2001.
In September 1997, the San Pascual project, a consortium including EME (37.5%
ownership), Texaco Inc. (37.5% ownership) and Caltex (25% ownership), signed a
twenty-five year power purchase contract with the National Power Corporation
(NPC), Philippines' state-owned electric utility company, pursuant to which NPC
will purchase 304 MW of output from the San Pascual project. The low-sulfur
residual fuel oil cogeneration project is located in the Philippines. Financial
closing and commencement of construction are anticipated in 1998 with commercial
operations expected to begin in 2001.
Europe, Central Asia, Middle East and Africa
The European organization is headquartered in London, England with additional
offices located in Italy, Spain and Turkey. The London office was established
in 1989, concurrent with the privatization of the power industry in the United
Kingdom. The territorial scope of the region includes Europe, Africa, the Middle
East, India and Pakistan. The region is characterized by a blend of both mature
and less developed markets. The regional strategy is to pursue the development
and acquisition of medium to large scale power and cogeneration facilities with
diversified fuel sources and generation technology.
EME's operating projects in the region are the First Hydro project located in
North Wales, the Roosecote project in northwest England, the Derwent project
located in Derby, England and the Iberian Hy-Power projects (which consist of 18
small, hydroelectric facilities) in Spain.
EME acquired initial ownership interests of Iberian Hy-Power I and II in
December 1992 and August 1993, respectively. In January 1996, EME purchased the
remaining equity stake in Iberian Hy-Power Amsterdam B.V., increasing its
ownership percentage to approximately 100% (minority interests are owned in
three of the projects by third parties).
In December 1995, EME purchased all of the outstanding shares of First Hydro
Company (First Hydro) for approximately $1 billion (653 million pounds
sterling). First Hydro's principal assets are two pumped-storage electric power
stations located in North Wales at Dinorwig and Ffestiniog, which have a
combined capacity of 2,088 MW. The Dinorwig station, which was commissioned in
1983, is comprised of six units totaling 1,728 MW. The Ffestiniog station was
commissioned in 1963 and is comprised of four units totaling 360 MW. First
Hydro is an independent generating company with three main sources of revenues:
(i) selling power into the electricity trading market or "pool" in England and
Wales, (ii) providing system support services to The National Grid Company plc,
and (iii) selling its installed capacity forward by entering into "contracts for
differences" with large electricity suppliers.
In June 1995, EME (49% ownership) and its partner, ISAB S.p.A. (51%
ownership), signed a twenty-year power purchase contract with ENEL S.p.A.,
Italy's state electricity corporation, pursuant to which ENEL S.p.A. will
purchase 507 MW of output from the 512-MW ISAB power project, which is located
near Siracusa in Sicily, Italy. The project will employ gasification technology
to convert heavy
4
oil residues from the ISAB refinery in Priolo Gargallo into clean-burning syngas
that will be used to generate electricity in a combustion turbine. The
approximately 2 trillion lira ($1.3 billion) project financial closing was
completed in April 1996 with construction commencing in July 1996. The project
is more than 75% complete with commercial operation expected in late 1999.
In February 1995, EME (80% ownership) signed a shareholders' agreement to
develop the $180 million Doga Enerji A.S. project in Esenyurt, near Istanbul,
Turkey. The 180-MW combined cycle gas-fired cogeneration facility is
approximately 63% complete with commercial operations expected in 1999. In
April 1997, EME completed financing and commenced construction of the Doga
project.
PROJECT DEVELOPMENT
The development of power generation projects involves numerous elements,
including evaluating and selecting development opportunities, evaluating market
risk, designing and engineering the project, acquiring necessary land rights,
permits and fuel resources, obtaining financing and managing construction and,
in some cases obtaining power sales agreements and steam sales agreements.
EME initially evaluates and selects potential development projects based on a
variety of factors, including whether a project is based on a proven technology,
the strength of the potential partners in the project, the feasibility of the
project, the likelihood of obtaining a power sales agreement, the probability of
obtaining required licenses and permits and the projected economic return from
the project. During the development process, EME monitors the viability of the
project and makes business judgments concerning expenditures for both internal
and external development costs. Completion of the financing arrangements for a
project is generally an indication that business development activities are
substantially complete.
Although EME has in the past been successful in developing projects with
long-term contracts and arranging for necessary permits and approvals, there can
be no assurance that EME will continue to be successful in doing so in the
future. EME believes that future market conditions for independent power,
particularly in the United States, may become increasingly characterized by
shorter-term power sales agreements or spot sales arrangements. EME may be
required to consider market or "merchant" risk in the future.
Project Type
The selection of power generation technology for a particular project is
influenced by various factors, including regulatory requirements, availability
of fuel and anticipated economic advantages for a particular application. The
principal technology used in EME's operating projects has been gas-fired
combustion turbine technology, predominately through an application known as
"cogeneration". Cogeneration facilities sequentially produce two or more useful
forms of energy (e.g., electricity and steam) from a single primary source of
fuel (e.g., natural gas or coal). Many of EME's cogeneration projects are
located near large industrial steam users or in oil fields that inject steam
underground to enhance recovery of heavy oil. The regulatory advantages for
cogeneration facilities under PURPA have become less significant because of
expanded project options made available to IPPs under the Energy Policy Act.
Accordingly, although cogeneration may provide a competitive advantage in the
new market place, EME expects that the majority of its future projects will
generate power without selling steam to industrial users.
5
EME also has interests in projects that use renewable resources such as
hydroelectric and geothermal energy. EME's hydroelectric projects, excluding
First Hydro, use "run-of-the-river" technology to generate electricity. The
First Hydro project utilizes pumped-storage stations which consume electricity
when it is comparatively less expensive in order to pump water up for storage in
an upper reservoir. Water is then allowed to flow back through turbines in
order to generate electricity when its market value is higher. This type of
generation is characterized by its speed of response, its ability to work
efficiently at wide variations of load and the basic reliance of revenue on the
difference between the peak and trough prices of electricity during the day.
EME's geothermal projects use technologies that convert the heat from geothermal
fluids and underground steam into electricity.
EME has international interests in an operating project and projects under
construction and advanced development which are large scale, coal-fired projects
using pulverized coal in coal-fired generation technology. In the United
States, EME has developed coal and waste coal-fired projects that employ
traditional stoker and circulating fluidized bed technology.
Power and Steam Sales Contracts
Electric power and steam generated by EME's operating projects in the U.S. is
sold primarily to domestic electric utilities and industrial steam users
pursuant to long-term (typically, 15 to 30 year) contracts. Excluding the U.K.
and a project in Australia, electric power generated overseas is sold primarily
under long-term contracts to electric utilities located in the country where the
power is generated. A project's revenue from a power sales contract usually
consists of two components: energy payments and capacity payments. Energy
payments are generally based on actual deliveries of electric energy (e.g.,
kilowatt-hours) to the purchasing utility. Energy payment rates are usually
indexed to certain variable costs that the purchasing utility avoids by
purchasing such electric energy directly as opposed to operating its own power
plant(s) to produce the same amount of electric energy. The variable components
typically include the fuel cost and certain operation and maintenance expenses.
These costs may be indexed to the utility's cost of fuel and/or certain
inflation indices. Energy payments may also be time-differentiated to provide
relatively higher payments for electric energy delivered during periods of peak
electricity demand. Capacity payments are generally based on a project's proven
capability to deliver reliable electric energy, whether or not the plant is
called on to operate. Capacity payment rates are usually associated with certain
fixed costs that the purchasing utility avoids by having the independent power
producer build and maintain the availability of a power plant. To receive
capacity payments, there are typically minimum performance standards that must
be met and often there is a performance range that further influences the amount
of capacity payments.
EME's power sales contracts are typically negotiated during the planning
stage of a project. In negotiating the power sales contracts, EME attempts to
secure long-term contracts that are expected to result in consistent cash flow
under a wide range of economic and operating circumstances. To accomplish this,
EME structures the revenue provisions of the power sales contract so that
changes in the cost components of a facility (e.g., fuel costs) will correspond
to, as effectively as possible, similar changes in the revenue components of the
contract.
In addition to entering into a power sales agreement, EME must make
arrangements to interconnect its project to a local utility's electric system.
The arrangement is typically evidenced through an interconnection agreement that
sets forth the provisions for construction, payment and technical requirements
for the interconnection facilities. In some cases, the project will interconnect
with a utility system that is not the ultimate purchaser of electric power. In
such circumstances, the project must arrange for the local utility to transmit
or "wheel" its power to the ultimate purchaser.
6
Projects in the U.K. and a project in Australia 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"). The pool price is
extremely volatile and in the U.K. can vary by as much as a factor of ten 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 significant 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 counterparty 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. The Roosecote project has avoided the pool price volatility by
entering into a long-term power sales contract that provides for contract
pricing. The Roosecote project's power sales contract provides for the
escalation of capacity payments according to an inflation index for the U.K.
Loy Yang B has entered into a number of financial hedges to mitigate exposure
to price volatility of the electricity traded into the pool. 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" 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.
Steam produced from EME's cogeneration facilities is sold to industrial steam
users, such as petroleum refineries or companies involved in the enhanced
recovery of oil through steam flooding of oil fields, under long-term steam
sales contracts. Domestic steam sales contracts require the purchaser to take
at least the minimum amount of steam necessary for the project to retain its QF
status under PURPA.
Steam payments are generally based on formulas that reflect the cost of
water, fuel and capital. In some cases, EME has provided steam purchasers with
discounts from their previous cost for producing such steam and/or partially
indexed steam payments to other indices including certain oil prices.
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Fuel Supply Contracts
EME seeks to enter into long-term fuel supply and transportation agreements.
Market prices for oil, gas and coal historically have fluctuated significantly.
EME believes, however, that its financial condition will not be substantially
adversely affected by such fluctuations because its long-term contracts to sell
power and steam typically are structured so that fluctuations in fuel costs will
produce similar fluctuations in electric energy and/or steam revenues. The
degree of linkage between such revenues and expenses varies from project to
project, but generally permits the projects to operate profitably under a wide
array of potential price fluctuation scenarios.
Project Financing
Each power generation project developed by EME requires a substantial capital
investment. The permanent project financing for a project is often arranged
immediately prior to the construction of the project. With limited exceptions,
such debt financing is for approximately 60 to 80% of each project's costs and
is expected to be structured, on a basis that is nonrecourse to EME and its
other projects. In addition, the collateral security for each project's
financing generally has been limited to the physical assets, contracts and cash
flow of that project.
In general, each of EME's direct or indirect subsidiaries is organized as a
legal entity separate and apart from EME and its other subsidiaries. Any asset
of any such subsidiary may not be available to satisfy the obligations of EME or
any of its other such subsidiaries; provided, however, that unrestricted cash or
other assets which are available for distribution may, subject to applicable law
and the terms of financing arrangements of such parties, be advanced, loaned,
paid as dividends or otherwise distributed or contributed to EME or its
affiliates.
The ability to arrange for financing and the cost of such financing are
dependent upon numerous factors, including general economic and capital market
conditions, conditions in energy markets, regulatory developments, credit
availability from banks or other lenders, investor confidence in the industry,
EME and other project participants, the continued success of EME's current
projects, and provisions of tax and securities laws that are conducive to
raising capital.
To obtain project financing, EME and its partners are sometimes required to
provide certain guarantees and warranties to lenders, particularly with respect
to construction financing. However, because permanent financing is usually
arranged on a nonrecourse basis, EME's liability is generally substantially
reduced when construction has been completed and the project has passed all
acceptance tests. EME's financial exposure in any project is generally limited
by contractual arrangement to its equity commitment, which is usually about 20
to 40% of EME's share of the aggregate project cost. In addition, the project
loan agreements are generally structured so that a default under one project
loan agreement will have no effect on the loan agreements of other EME projects.
Permits and Approvals
Because the process for obtaining initial environmental, siting and other
governmental permits and approvals is complicated and lengthy (often taking a
year or longer), EME seeks to obtain all permits, licenses and other approvals
required for the construction and operation of the project, including siting,
construction and environmental permits, rights-of-way and planning approvals,
early in the development process. See "Certain Regulatory Matters-- General".
8
Construction and Implementation
In the project implementation stage, EME provides project and construction
management and start-up and testing services. The detailed engineering and
construction of the projects typically are done by outside contractors under
fixed-price, "turnkey" contracts. Under such contracts, the contractor
generally is required to pay liquidated damages to EME in the event of cost
overruns or schedule delays or if the facility fails to meet certain capacity,
efficiency and emission standards.
As a project goes into operation, operation and maintenance services are
provided to the project by one of EME's operation and maintenance subsidiaries
or another operation and maintenance contractor. The day-to-day operation of
each project is generally managed by an executive director. Management
committees comprised of the project partners generally meet monthly or quarterly
to review and manage the operating performance of each project.
Certain Considerations Associated with Project Development, Finance and
Operation
Independent power projects are necessarily subject to a variety of
commercial, financial and other risks, including those described below. By
managing, or participating in the management of each project in which it
invests, EME seeks to hedge, insure against or otherwise manage these risks.
EME attempts to minimize the financial risk in the development of a project
by securing a favorable long-term power sales agreement, obtaining all required
governmental permits and approvals and arranging adequate financing prior to the
commencement of construction. However, the development of a power project may
require EME to expend significant sums for preliminary engineering, permitting
and legal and other expenses before it can determine whether a project is
feasible, economically attractive or financeable. Power sales agreements often
enable the utility to terminate such agreement, or to retain security posted by
the developer as liquidated damages, in the event that a project fails to
achieve commercial operation or certain operating levels by specified dates or
fails to meet other significant contractual requirements. Furthermore, utility
regulators or other parties may attempt to abrogate or amend contracts under
which a project is entitled to receive material revenues or other benefits. If
such events were to occur, the default provisions in a financing agreement could
be triggered (rendering such project debt immediately due and payable) and, as a
result, EME could lose its interest in the project. Although contractual and
regulatory risks cannot be eliminated, EME believes that it has relevant
experience in developing contracts and mitigating regulatory concerns.
Certain geographic areas in which EME operates and is developing projects are
subject to frequent earthquakes of low intensity, and earthquakes of greater
intensity are possible. EME's existing power generation facilities are built to
withstand earthquakes of relatively significant intensity and EME believes it
maintains adequate insurance protection for such occurrences and other
catastrophic events.
The operation of a project involves many risks, including start-up problems,
the breakdown or failure of equipment or processes, performance below expected
levels of output and the inability to meet expected efficiency standards. EME
takes steps to mitigate these risks by obtaining equipment and plant warranties
and arranging for insurance that it believes is adequate. Nonetheless, these
measures may not be adequate to cover lost revenues or increased expenses and,
as a result, a project may be unable to fund principal and interest payments
under its financing obligations and may operate at a loss. A default under such
a financing obligation could result in EME losing its interest in such power
generation facility.
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EME believes, however, that it will continue to maintain a successful record of
plant performance and operation.
EME's operations are conducted through its subsidiaries and EME's cash flow
is dependent upon the operating revenues of its subsidiaries and the ability of
those subsidiaries to pay cash dividends or make distributions to EME. Financing
agreements for EME's subsidiaries and affiliates generally place certain
limitations on the ability of those subsidiaries and affiliates to pay
dividends, make distributions or otherwise transfer funds to EME. In addition,
financing agreements for EME's subsidiaries and affiliates, although generally
nonrecourse to EME, contain certain representations, warranties, covenants and
other agreements that, if not met, could lead to a default under such financing.
After a default under a project financing for any reason, project lenders may
exercise certain rights and remedies typically granted to secured parties,
including the ability to take control of the project's collateral assets.
The financing and development of international projects entail additional
political and financial risks including uncertainties associated with
privatization efforts, currency exchange rates, currency repatriation, political
instability and other issues that have the potential to cause delays or
impairment of value to the project being developed for which EME may not be
fully capable of insuring against. The uncertainty of the legal structure in
certain foreign countries in which EME may develop or acquire projects could
make it more difficult to enforce its rights under agreements relating to such
projects. In addition, the laws and regulations of certain countries may limit
the ability of EME to hold a majority interest in some of the projects that it
may develop or acquire. Although the risks of participation in international
markets are significant, EME targets relatively higher rates of return on its
international investments and mitigates risk by seeking complimentary alliances
with well-established partners and hedging foreign exchange exposure where it
deems appropriate.
OPERATION AND MAINTENANCE SERVICES
Certain EME subsidiaries provide specialized operating, maintenance, testing
and start-up services for EME-owned projects. At December 31, 1997, Edison
Mission O&M or other subsidiaries had a total of 877 employees and operated 37
of EME's projects totaling 5,161 MW of capacity.
The projects that EME operates have achieved an average 97% availability
during 1997. Availability is a measure of the weighted average number of hours
each generator is available for generation as a percentage of the total number
of hours in a year.
EME'S OPERATING POWER GENERATION FACILITIES
Domestic Overview
EME currently owns interests in 26 domestic operating projects in eight
states. These operating projects consist of 16 natural gas cogeneration
projects, one coal cogeneration project, one waste coal project, four geothermal
projects and four gas-fired EWG (as defined herein) projects. All of EME's
domestic cogeneration and geothermal projects, as well as the waste coal
project, are qualifying facilities under PURPA. EME's domestic operating
projects have total generating capacity of 3,679 MW, of which EME's net
ownership share is 1,640 MW.
Each of EME's projects generally relies on one power sales contract with a
single electric utility customer for the majority, and in some cases all, of its
power sales revenues over the life of the power sales contract. The primary
power sales contracts for seven of EME's operating projects are with SCE.
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EME's share of revenues from these projects accounted for 12% of EME's
consolidated revenues in 1997 and 1996. The failure of SCE to fulfill its
contractual obligations could have a negative impact on a source of EME's
revenues. Under the terms of an agreement between SCE and the Office of
Ratepayer Advocates (ORA), the consumer advocacy branch of the California Public
Utility Commission (CPUC), SCE is prohibited from entering into future power
sales contracts with EME or its affiliates without ORA and CPUC consent. The
terms of the agreement, however, do not affect the terms of the existing power
sales contracts between EME and SCE. Fuel supply for EME's projects generally is
arranged through third-party suppliers and transporters.
EME's geothermal projects have power sales agreements that provide for energy
payments that escalate at predetermined rates during the first 10 years of plant
operation. After the initial 10-year period, the energy payments will be based
on rates published monthly by the purchasing utility that reflect its cost for
natural gas and/or oil. Based on current forecasts of natural gas and oil
prices, EME expects the energy payment rate to drop substantially after the
initial 10-year period. Accordingly, cash distributions received from these
projects are recorded as reductions in the equity investments. Future cash
distributions are estimated to be sufficient to recover the remaining geothermal
investment balances. In April 1996, CalEnergy Company, Inc., EME's partner in
four operating geothermal projects in California, purchased all of the stock of
four wholly owned subsidiaries of EME, which held 50% interests in these
projects. The purchase price of $70 million resulted in a pre-tax gain of $20
million. There will be no impact on EME's future revenues as EME discontinued
recognizing earnings from these projects during 1993.
In January 1998, Oxbow Power of Beowawe, Inc., EME's partner in an operating
geothermal project in Nevada, purchased EME's 50% general partnership interest
in this project from a wholly owned subsidiary of EME. The purchase price of
$4.1 million resulted in an after tax gain of $1.1 million. There will be no
impact on EME's future revenues as EME discontinued recognizing earnings from
this project in 1996.
In February 1998, the CPUC issued an order which approved an agreement
entered into in August 1997 between an operating geothermal project in
California in which EME has a 50% partnership interest and SCE to terminate two
power sales agreements. There will be no negative impact on EME's future
revenues as EME discontinued recognizing earnings from this project during 1993.
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Description of Domestic Operating Projects
EME has ownership interests in the following domestic operating projects:
ELECTRIC PRIMARY OPERATION/
CAPACITY ELECTRIC TYPE OF OWNERSHIP ACQUISITION
PROJECT LOCATION (IN MW) PURCHASER(3) FACILITY(4) INTEREST DATE
- ------- -------- ------- ------------ ----------- -------- -----------
Aidlin(1) Cloverdale, California 20 PG&E Geothermal 5% 1990
American Bituminous(2) Grant Town, West Virginia 80 MPC Waste Coal 50% 1993
Auburndale(2) Polk County, Florida 150 FPC EWG 50% 1994
Bayonne Bayonne, New Jersey 165 JCP&L/PSE&G Cogeneration 0.38% 1989
Brooklyn Navy Yard Brooklyn, New York 286 CE Cogeneration 50% 1996
Coalinga(2) Coalinga, California 38 PG&E Cogeneration 50% 1991
Commonwealth Atlantic Chesapeake, Virginia 340 VEPCO EWG 50% 1992
GEO East Mesa(1,2) Holtville, California 40 SCE Geothermal 50% 1989
Gordonsville(2) Gordonsville, Virginia 240 VEPCO EWG 50% 1994
Harbor(2) Wilmington, California 80 SCE Cogeneration 30% 1989
Hopewell Hopewell, Virginia 356 VEPCO Cogeneration 25% 1990
James River Hopewell, Virginia 110 VEPCO Cogeneration 50% 1987
Kern River(2) Oildale, California 300 SCE Cogeneration 50% 1985
Lost Hills Lost Hills, California 10 PG&E Cogeneration 50.09% 1989
March Point 1 Anacortes, Washington 80 PSE Cogeneration 50% 1991
March Point 2 Anacortes, Washington 60 PSE Cogeneration 50% 1993
Mid-Set(2) Fellows, California 38 PG&E Cogeneration 50% 1989
Midway-Sunset(2) Fellows, California 225 SCE Cogeneration 50% 1989
Nevada Sun-Peak Las Vegas, Nevada 210 NVP EWG 50% 1991
Saguaro(2) Henderson, Nevada 90 NVP Cogeneration 50% 1991
Salinas River(2) San Ardo, California 38 PG&E Cogeneration 50% 1991
Sargent Canyon(2) San Ardo, California 38 PG&E Cogeneration 50% 1991
Sycamore(2) Oildale, California 300 SCE Cogeneration 50% 1988
Watson Carson, California 385 SCE Cogeneration 49% 1988
(1) Consists of two projects on the same site.
(2) Operated by EME.
(3) Electric purchaser abbreviations are as follows:
CE Consolidated Edison Company of New York, Inc. PG&E Pacific Gas & Electric Company
FPC Florida Power Corporation PSE Puget Sound Energy
JCP&L Jersey Central Power & Light Company PSE&G Public Service Electric & Gas Company
MPC Monongahela Power Company SCE Southern California Edison Company
NVP Nevada Power Company VEPCO Virginia Electric & Power Company
(4) All of the cogeneration projects are gas-fired facilities, except for the
James River project, which uses coal.
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International Overview
EME owns interests in 24 operating projects outside the United States. The
total generating capacity of such facilities is 3,724 MW, of which EME's net
ownership share is 3,533 MW.
Description of International Operating Projects
EME has ownership interests in the following international operating projects:
ELECTRIC OPERATION/
CAPACITY PRIMARY ELECTRIC OWNERSHIP ACQUISITION
PROJECT LOCATION (IN MW) PURCHASER(2) INTEREST DATE
- ------- -------- ------- ------------ --------- ----------
Alos(1) Spain 5 FECSA 100% 1993
Bocos(1) Spain 2 FECSA 100% 1993
Castellas(1) Spain 2 FECSA 100% 1993
Derwent(1) England 214 SE(3) 33% 1995
Dinorwig(1) Wales 1,728 Pool 100% 1995
Ffestiniog(1) Wales 360 Pool 100% 1995
Gelsa(1) Spain 7 FECSA 100% 1993
Kwinana(1) Australia 116 WP 100% 1996
La Flecha(1) Spain 3 FECSA 100% 1993
La Ribera(1) Spain 4 FECSA 100% 1993
Logrono(1) Spain 4 FECSA 100% 1993
Loy Yang B(1) Australia 1,000 Pool(4) 100% 1993, 1996,
1997
Mendavia(1) Spain 6 FECSA 100% 1993
Menuza(1) Spain 17 FECSA 91.3% 1992
Monasterio(1) Spain 2 FECSA 100% 1993
Olvera(1) Spain 2 FECSA 100% 1992
Quintana(1) Spain 1 FECSA 100% 1993
Roosecote England 220 NORWEB(5) 80% 1992
Sardon Bajo(1) Spain 2 FECSA 100% 1993
Sastago I(1) Spain 3 FECSA 91.3% 1992
Sastago II(1) Spain 17 FECSA 91.3% 1992
Sossis(1) Spain 4 FECSA 100% 1992
Toro(1) Spain 4 FECSA 100% 1993
Tudela(1) Spain 1 FECSA 100% 1993
(1) Operated by EME.
(2) Electric purchaser abbreviations are as follows:
FECSA Fuerzas Electricas de Cataluma, S.A. Pool Electricity trading market for England,
NORWEB North Western Electricity Board Wales and Australia
WP Western Power SE Southern Electric plc.
(3) Sells to the pool with a long-term contract with SE.
(4) Sells to the pool with a long-term contract with the State Electricity
Commission of Victoria.
(5) Sells to the pool with a long-term contract with NORWEB.
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OIL AND GAS INVESTMENTS
In 1988, EME formed a wholly owned subsidiary, Mission Energy Fuel Company,
to develop and invest in fuel interests. Since that time, EME has invested in a
number of oil and gas properties and a production company. Oil and gas produced
from the properties are generally sold at spot or short-term market prices.
Four Star
As of December 31, 1997, EME owned 46.85% of the stock of Four Star Oil & Gas
Company (Four Star), a subsidiary of Texaco Inc. The underlying value of Four
Star is attributable to production of oil and gas from nine producing
properties. EME's proportionate interest in net quantities of proved reserves
at December 31, 1997 totaled 189 billion cubic feet of natural gas and 21.6
million barrels of oil.
During 1995, EME and/or Four Star entered into a series of transactions which
resulted in a net increase in EME's ownership of Four Star by 2.47%. During
1996, EME purchased additional shares of stock of Four Star increasing its
ownership by 4.38%. In January 1998, EME purchased additional shares of stock
of Four Star for approximately $4 million increasing its ownership by 3.24% to
50.09% and its voting ownership to 48.97%.
B.C. Star
B.C. Star was formed in 1991 when a subsidiary of EME and a subsidiary of
Texaco Inc. each purchased a 50% partnership interest in certain proved
producing properties from Esso Resources Canada Limited. These properties are
geographically concentrated in the northeast region of British Columbia and
enjoy proximity and direct pipeline access to the Pacific Northwest and
California. Texaco Canada Petroleum Inc. operates the majority of B.C. Star's
properties.
During the second quarter of 1997, EME completed a sale of its ownership
interest in B.C. Star for approximately $71 million. EME recorded an after-tax
gain of approximately $14 million on the sale.
COMPETITION
EME competes with many other companies, including multinational development
groups, equipment suppliers and other IPPs (including affiliates of utilities),
in selling electric power and steam, and with electric utilities in obtaining
the right to install new generating capacity. Over the past decade, obtaining a
power sales contract with a utility has generally become a progressively more
difficult, expensive and competitive process. Many power sales contracts are now
awarded by competitive bidding, which both increases the costs of obtaining such
contracts and decreases the chances of obtaining such contracts. As a result of
competition, it may be difficult to obtain a power sales agreement for a
proposed project, and the prices offered in new power sales agreements for both
electric capacity and energy may be less than the prices in prior agreements.
EME evaluates each potential project in an effort to determine when the
probability of success is high enough to justify expenditures in developing a
proposal or bid for the project.
Amendments to the Public Utility Holding Company Act of 1935 (PUHCA) made by
the Energy Policy Act have increased the number of competitors in the domestic
independent power industry by
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reducing certain restrictions applicable to projects that are not QFs under
PURPA. "Retail wheeling" of power could also lead to increased competition in
the independent power market. See "Certain Regulatory Matters--Retail
Competition".
TAX SHARING AGREEMENTS
EME is included in the consolidated federal income tax and state franchise
tax returns of Edison International. EME calculates its current tax benefit
receivable on a separate company basis under a tax sharing agreement with The
Mission Group, which in turn has a tax sharing agreement with Edison
International. The Mission Group receives payment from Edison International for
tax benefits and pays Edison International for tax liabilities. The Mission
Group similarly pays EME for tax benefits and EME pays The Mission Group for tax
liabilities.
EMPLOYEES AND OFFICES
At February 27, 1998, EME employed 1,172 people, all of whom were full-time
employees and approximately 216, 26 and 144 of whom were covered by a collective
bargaining agreement in Wales, Spain and Australia, respectively. EME has never
experienced a work stoppage, strike or labor dispute. EME believes its relations
with its employees to be good.
EME leases its corporate headquarters in Irvine, California and its principal
regional offices in London, Melbourne and Singapore. It also leases other
smaller offices in the United States and certain foreign countries.
CERTAIN REGULATORY MATTERS
- --------------------------
GENERAL
EME's domestic projects are subject to energy, environmental and other
governmental laws and regulations at the federal, state and local levels in
connection with the development, ownership and operation of its projects.
Federal laws and regulations govern, among other things, transactions by and
with utility companies, the operations of a project and the ownership of a
project. Under certain circumstances where exclusive federal jurisdiction is not
applicable or specific exemptions are otherwise unavailable, state utility
regulatory commissions may have broad jurisdiction over non-utility owned
electric power plants. Energy-producing projects are also subject to federal,
state and local laws and regulations that govern the geographical location,
zoning, land use and operation of a project. Federal, state and local
environmental requirements generally require that a wide variety of permits and
other approvals be obtained before the commencement of construction or operation
of an energy-producing facility and that the facility then operate in compliance
with such permits and approvals. While EME believes the requisite approvals for
its existing projects have been obtained and that its business is operated in
substantial compliance with applicable laws, EME remains subject to a varied and
complex body of laws and regulations that both public officials and private
parties may seek to enforce. There can be no assurance that future developments
will not have a material adverse effect on EME's business or results of
operations, nor can there be any assurance that EME will be able to obtain and
comply with all necessary licenses, permits and approvals for proposed projects.
In addition, regulatory compliance for the construction of new facilities is a
costly and time consuming process. Intricate and changing environmental and
other regulatory requirements may necessitate substantial expenditures and may
15
create a significant risk of expensive delays or significant loss of value in a
project if the project is unable to function as planned due to changing
requirements or local opposition.
Each of EME's international projects will be (or, to the extent that such
projects are already in operation or under construction, currently are) subject
to the energy and environmental laws and regulations of the foreign jurisdiction
in which it is located. The degree of regulation will vary according to each
country and may be materially different from the regulatory regime in the United
States.
U.S. FEDERAL ENERGY REGULATION
The enactment of PURPA in 1978 and the adoption of regulations thereunder by
the Federal Energy Regulatory Commission (FERC) provided incentives for the
development of cogeneration facilities and small power production facilities
(those utilizing alternative or renewable fuels). The passage of the Energy
Policy Act in 1992 further encouraged independent power production by providing
certain exemptions from PUHCA (but not from the Federal Power Act (FPA) or state
regulation) for exempt wholesale generators (EWGs) and foreign utility companies
(FUCOs).
A domestic electricity generating project must be a QF under FERC regulations
in order to take advantage of certain rate and regulatory incentives provided by
PURPA. Subject to certain exceptions, PURPA exempts owners of QFs from PUHCA,
exempts QFs from most provisions of the FPA and, except under certain limited
circumstances, state laws concerning rate or financial regulation. In order to
be a QF, a cogeneration facility must (i) sequentially produce both useful
thermal (e.g., steam) and electric energy, (ii) meet certain operating standards
and energy efficiency standards when oil or natural gas is used as a fuel source
and (iii) not be controlled, or more than 50% owned by, an electric utility,
electric utility holding company or an affiliate thereof. A non-cogeneration
facility may also be a QF if it produces power from renewable energy (e.g.,
geothermal energy) or a waste source of fuel (e.g., waste coal). Before 1990,
non-cogeneration QFs were subject to 30-MW or 80-MW size limits, depending upon
their fuel source. In 1990, these limits were lifted for solar, wind, waste, and
geothermal QFs, provided that applications for or notices of QF status were
filed with FERC for such facilities on or before December 31, 1994, and
provided, in the case of new facilities, the construction of such facilities
commenced on or before December 31, 1999.
Amendments made to PUHCA by the Energy Policy Act provide that owners or
operators of EWGs and FUCOs will not be considered "electric utility companies"
under PUHCA. An EWG is an entity determined by the FERC to be exclusively
engaged, directly or indirectly, in the business of owning and/or operating
certain eligible facilities and selling electric energy at wholesale (or, if
located in a foreign country, at wholesale or retail). A FUCO is, in general, an
entity located outside the United States that owns or operates facilities used
for the generation, distribution or transmission of electric energy for sale or
the distribution at retail of natural or manufactured gas, but derives none of
its income, directly or indirectly, from such activities within the United
States.
The exemptions from federal and state regulation afforded to QFs, and the
exemptions from PUHCA afforded to EWGs and FUCOs, are important to EME and to
its competitors. Under present federal law, EME is not and will not be subject
to regulation as a holding company under PUHCA as long as the projects in which
it has an interest are QFs, EWGs or FUCOs (or are subject to another exemption
from regulation). Of the projects that EME currently owns, operates or has an
investment in, 22 projects have been certified as QFs by the FERC, four projects
have been certified as EWGs and 15 projects are FUCOs. Most of the U.S. projects
currently in the planning or development stage are expected to be QFs and the
international projects are expected to be FUCOs. To the extent that any of
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EME's projects in the development stage will not be QFs or FUCOs, EME expects to
qualify those projects as EWGs. See "PUHCA".
PURPA
PURPA provides two primary benefits to QFs. First, QFs are relieved of
compliance with extensive federal and state regulations that control the
development, financial structure and operation of an energy-producing project
and the prices and terms on which wholesale energy may be sold by the project.
Second, FERC regulations promulgated under PURPA require that electric utilities
purchase electricity generated by QFs at a price based on the purchasing
utility's "avoided cost," and that the utilities sell back-up power to the QF on
a non-discriminatory basis. The term "avoided cost" is defined by PURPA as the
"incremental cost to an electric utility of electric energy or capacity or both
which, but for the purchase from the qualifying facility or qualifying
facilities, such utility would generate itself or purchase from another source."
FERC regulations also permit QFs and utilities to negotiate agreements for
utility purchases of power at prices lower than the utility's avoided costs.
While public utilities are not explicitly required by PURPA to enter into long-
term contracts, it has been common for long-term contracts to be negotiated in
order, among other things, to facilitate project financing of independent power
facilities and to reflect the deferral by the utility of capital costs for new
plant additions. However, increasing competition and power brokering may result
in a trend toward shorter term power contracts that would place greater risk on
the project owner.
EME endeavors to develop its QF projects, monitor regulatory compliance by
such projects and choose its customers in a manner that minimizes the risks of
losing such projects' QF status. However, certain factors necessary to maintain
QF status are subject to the risk of events outside EME's control. For example,
loss of a thermal energy customer or failure of a thermal energy customer to
take required amounts of thermal energy from a cogeneration facility that is a
QF could cause the facility to fail requirements regarding the level of useful
thermal energy output. Upon the occurrence of such an event, EME would seek to
replace the thermal energy customer or find another use for the thermal energy
that meets PURPA's requirements, but no assurance can be given that this would
be possible.
If one of the projects in which EME has an interest was to lose its status as
a QF, the project would no longer be entitled to the QF-related exemptions from
regulation under PUHCA and the FPA. This could subject the project to rate
regulation as a public utility under the FPA and could result in EME
inadvertently becoming a public utility holding company by owning more than 10%
of the voting securities of, or controlling, a facility that would no longer be
exempt from PUHCA. Loss of QF status may also trigger defaults under covenants
to maintain QF status in the project's power sales agreements, steam sales
agreements and financing agreements and result in termination, penalties or
acceleration of indebtedness under such agreements. Such loss of QF status may
be on a retroactive or a prospective basis. If a power purchaser ceased taking
and paying for electricity or sought to obtain refunds of past amounts paid due
to the loss of QF status, there can be no assurance that the costs incurred in
connection with the project could be recovered through sales to other
purchasers. Moreover, EME's business and financial condition could be adversely
affected if regulations or legislation were modified or enacted that changed the
standards for achieving QF status or that eliminated or reduced the benefits
currently enjoyed by QFs. If a project were to lose its QF status, EME could
attempt to avoid holding company status on a prospective basis by qualifying the
project as an EWG. However, assuming this changed status would be permissible
under the terms of the applicable power sales agreement, rate approval from the
FERC would be required. In addition, the project would be required to cease
selling electricity to any retail customers (in order to qualify for EWG status)
and could become subject to state regulation of sales of thermal energy. Loss of
QF status on a retroactive basis could lead to, among other things, fines
17
and penalties being levied against EME and its subsidiaries, or claims by the
utility customer for refund of payments previously made. Loss of QF status by
one project could also, because of PURPA ownership restrictions, adversely
affect the QF status of other projects having one or more of the same partners.
In addition, pursuant to Section 26(b) of PUHCA, any project contracts that are
entered into in violation of PUHCA are subject to possible voidability by the
courts should a lawsuit to void the contract be filed.
The Energy Policy Act
The passage of the Energy Policy Act in 1992 significantly expanded the
options available to IPPs with respect to their regulatory status. The Energy
Policy Act created a new class of power producer, the EWG, that (like a QF) is
not considered an electric utility company under PUHCA. EWGs may own facilities
of any size, use any fuel source and may be owned by utilities or non-utilities.
Thus, in addition to QF status, an IPP now can also apply to the FERC to be
granted status as an EWG. EWGs, however, are not exempt from regulation by the
FERC or state public utility commissions. The effect of such amendments is to
enhance the development of non-QFs that do not have to meet the fuel, production
and ownership requirements of PURPA. EME believes that the amendments benefit
EME by expanding its ability to own and operate facilities that do not qualify
for QF status, but may also result in increased competition because utilities
and other companies (e.g., equipment suppliers) may now develop facilities that
are not subject to the constraints of PUHCA. The Energy Policy Act also expanded
FERC authority to order utilities to grant transmission access to QFs and EWGs
and lifted restrictions on ownership of foreign utilities by U.S. companies.
Pursuant to the Energy Policy Act, FUCOs are also considered not to be electric
utility companies under PUHCA.
PUHCA
Under PUHCA, any corporation, partnership or other entity or organized group
that owns, controls or holds with power to vote 10% or more of the outstanding
voting securities of a "public-utility company" or a company that is a "holding
company" of a public utility company, is subject to registration with the
Securities and Exchange Commission (SEC) and regulation under PUHCA, unless
eligible for an exemption or unless an appropriate application is filed with,
and an order is granted by, the SEC declaring it not to be a holding company. A
registered public utility holding company regulated under PUHCA is required to
limit its utility operations to a single integrated utility system and to divest
any other operations not functionally related to the operation of that utility
system. Approval by the SEC is required for major financial commitments and
other business dealings of the regulated holding company or its subsidiaries.
As noted above, however, regulations have been adopted under PURPA and the
Energy Policy Act providing that QFs, EWGs and FUCOs are not public utility
companies. Accordingly, EME is not regulated as a "holding company" under PUHCA
because the power generation facilities owned by EME or in which EME has
investments are either QFs, EWGs or FUCOs. All international projects and
certain U.S. projects that EME is currently developing will be non-QF
independent power projects. EME intends for each such project to qualify as an
EWG or as a FUCO. Loss of EWG or FUCO status (like loss of QF status, as
discussed above) could also result in EME becoming subject to registration and
regulation as a public utility holding company under PUHCA and could trigger
defaults under covenants in project agreements. Loss of EWG or FUCO status on a
retroactive basis could lead to, among other things, fines and penalties and
could cause certain project contracts to be voidable.
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Natural Gas Act
Twenty of the domestic operating facilities that EME owns, operates or has
investments in are fueled by natural gas. Pursuant to the Natural Gas Act, the
FERC has jurisdiction over the sale, transportation and storage of natural gas
in interstate commerce. With respect to most transactions that do not involve
the construction of pipeline facilities, regulatory authorization can be
obtained on a self-implementing basis. However, pipeline rates for such services
are subject to continuing FERC oversight. Order No. 636, issued by the FERC in
April 1992 (and affirmed in Orders 636A and 636B issued, respectively, in August
and November 1992), mandated the restructuring of interstate natural gas
pipeline sales and transportation services and changed the terms and conditions
under which interstate pipelines provide transportation services, as well as the
rates pipelines may charge for such services. The restructuring required by the
rule included (i) the separation (unbundling) of a pipeline's sales,
transportation and storage services, (ii) the implementation of a straight
fixed-variable rate design methodology under which all of a pipeline's fixed
costs are recovered through its reservation charge, (iii) the implementation of
a capacity releasing mechanism under which holders of firm transportation
capacity on pipelines can release that capacity for resale by the pipeline, and
(iv) the opportunity for pipelines to recover 100% of their prudently incurred
costs (transition costs) associated with implementing the restructuring mandated
by the rule.
FPA
The FPA grants the FERC exclusive ratemaking jurisdiction over wholesale
sales of electricity in interstate commerce, including ongoing as well as
initial rate jurisdiction, which enables the FERC to revoke or modify previously
approved rates. Such rates may be based on a cost-of-service approach or may, in
competitive markets, be market-based. While qualifying facilities under PURPA
generally are exempt from the ratemaking and certain other provisions of the
FPA, EWGs and other non-QF independent power projects are subject to the FPA and
to FERC ratemaking jurisdiction, which may limit their flexibility in
negotiations with power purchasers. However, since such projects would not be
bound by PURPA's thermal energy use requirement, they have greater latitude in
site selection and facility size.
Currently, only three of EME's operating projects, Nevada Sun-Peak, Brooklyn
Navy Yard and Commonwealth Atlantic, are subject to FERC rate-making regulation
under the FPA. EME's future domestic non-QF independent power projects will
also be subject to FERC jurisdiction on rates.
STATE ENERGY REGULATION
State public utility commissions (PUCs) have broad jurisdiction over non-QF
independent power projects (including EWGs), which are considered public
utilities in many states. Such jurisdiction often includes the issuance of
certificates of public convenience and necessity (CPCNs) to construct a facility
as well as regulation of organizational, accounting, financial and other
corporate matters on an ongoing basis. QFs may also be required to obtain CPCNs
in some states. Although the FERC generally has exclusive jurisdiction over the
rates charged by a non-QF independent power project to its wholesale customers,
PUCs have the ability, in practice, to influence the establishment of such rates
by asserting jurisdiction over the purchasing utility's ability to pass-through
the resulting cost of purchased power to its retail customers. PUCs also have
the authority to determine avoided cost for QFs. In addition, states may assert
jurisdiction over the siting and construction of independent power projects and,
among other things, the issuance of securities, related party transactions and
the sale or other transfer of assets by
19
these facilities. The actual scope of jurisdiction over independent power
projects by state PUCs varies from state to state.
In addition, state PUCs may seek to modify, suspend or terminate a QF's power
sales contract under certain circumstances. This could occur if the state PUC
determined that the pricing mechanism of the power sales contract is unfairly
high in light of the current prevailing market cost of power for the utility
purchasing the power. In such instance, the state PUC may attempt to alter the
terms of the power sales contract to reflect more accurately market conditions
for the prevailing cost of power. While EME believes that such attempts are not
common and that the state PUCs may not have any jurisdiction to modify the terms
of the wholesale power sales, there can be no assurance that the power sales
contracts of its projects will not be subject to adverse regulatory actions.
The CPUC has authorized the electric utilities in California to "monitor"
compliance by QFs with PURPA rules and regulation. However, the United States
Court of Appeals for the Ninth Circuit found in 1994 that a CPUC program was
preempted by PURPA insofar as it authorized utilities to determine that a QF was
not in compliance with PURPA rules and regulations, to then pay a reduced
avoided cost rate and to take other action contrary to a facility's status as a
QF. The court did, however, uphold reasonable monitoring of QF operating data.
Other states, such as New York, have also instituted QF monitoring programs.
EME buys and transports the natural gas used at its domestic facilities
through local distribution companies (LDCs). State PUCs have jurisdiction over
the transportation of natural gas by LDCs. Each state's regulatory laws are
somewhat different; however, all generally require the LDC to obtain approval
from the PUC for the construction of facilities and transportation services if
the LDC's generally applicable tariffs do not cover the proposed transaction.
LDC rates are usually subject to continuing PUC oversight.
TRANSMISSION OF WHOLESALE POWER
Projects that sell power to wholesale purchasers other than the local utility
to which the project is interconnected require the transmission of electricity
over power lines owned by others (wheeling). The prices and other terms and
conditions of transmission contracts are regulated by FERC, when the entity
providing the wheeling service is a jurisdictional public utility under the FPA.
Until 1992, FERC's ability to compel wheeling was very limited, and the
availability of voluntary wheeling service could be a significant factor in
determining whether a site was viable for project development.
FERC's authority under the FPA to require electric utilities to provide
transmission service on a case-by-case basis to QFs, EWGs, and other power
generators was expanded substantially by the Energy Policy Act. Furthermore, in
1996 FERC issued a rulemaking order, Order 888, in which FERC asserted the
power, under its authority to eliminate undue discrimination in transmission, to
compel all jurisdictional public utilities under the FPA to file open access
transmission tariffs consistent with a pro forma tariff drafted by FERC.
Although the pro forma tariff does not cover the pricing of transmission
service, Order 888 is expected to improve transmission access for independent
power producers such as EME.
RETAIL COMPETITION
In response to pressure from retail electric customers, particularly large
industrial users, the state commissions or state legislatures of most states are
considering, or have considered, whether to open the
20
retail electric power market to competition. Retail competition is possible when
a customer's local utility agrees, or is required, to "unbundle" its
distribution service (e.g., the delivery of electric power through its local
distribution lines) from its transmission and generation service (e.g., the
provision of electric power from the utility's generating facilities or
wholesale power purchases). A few state commissions and legislatures have
already issued orders or passed legislation requiring utilities to begin to
offer unbundled retail distribution service (retail wheeling) beginning as soon
as 1998. Other states are expected to move toward retail competition by 2000.
The competitive pricing environment that will result from retail competition
may cause utilities to experience revenue shortfalls and deteriorating
creditworthiness. However, EME expects that most, if not all, state plans will
insure that utilities receive sufficient revenues, through a distribution
surcharge if necessary, to pay their obligations under existing long-term power
purchase contracts with QFs and EWGs. On the other hand, QFs and EWGs may be
subject to pressure to lower their contract prices in an effort to reduce the
"stranded investment" costs of their utility customers.
EME believes that, as a predominately low cost producer of electricity, it
will ultimately benefit from any increased competition that may arise from the
opening of the retail market. Although EME's EWGs are forbidden under PUHCA
from selling electric power at retail, its QFs will be permitted to market power
directly to large industrial users that could not previously be served, because
of local franchise laws or the inability to obtain retail wheeling. EME also
believes it will be an attractive supplier to power marketers serving the newly-
open retail markets.
ENVIRONMENTAL REGULATION
The construction and operation of power projects are subject to environmental
regulation by federal, state and local authorities in the United States and
regulatory authorities with jurisdiction over the projects located outside the
United States. EME believes that it is in substantial compliance with
environmental regulatory requirements and that maintaining compliance with
current requirements will not materially affect its financial condition or
results of operations. EME conducted a review of some of its sites in 1995 and
does not believe that a material liability exists as of December 31, 1997.
However, possible future developments, such as more stringent environmental laws
and regulations, could affect the costs and the manner in which EME conducts its
business. There can be no assurance that in such event EME would be able to
recover such increased costs from its customers or that its financial position
and results of operations would not be materially adversely affected.
Typically, environmental laws require a lengthy and complex process for
obtaining licenses, permits and approvals prior to construction and operation of
a project. Meeting all of the necessary requirements can delay or sometimes
prevent the completion of a proposed project as well as require extensive
modifications to existing projects, which may involve significant capital
expenditures.
In 1990, Congress passed amendments (the 1990 Amendments) to the Clean Air
Act that greatly expand the scope of federal regulations in several significant
respects. An EME project is anticipated to make capital expenditures of
approximately $11.6 million ($5.8 million is EME's share) from 1998 through 1999
in order to comply with the 1990 Amendments. Provisions related to
nonattainment, air toxins, permitting, enforcement and "acid rain" may affect
EME's projects; however, final details of all these programs have not been
issued by the United States Environmental Protection Agency and state agencies.
21
The Comprehensive Environmental Response, Compensation, and Liability Act
(Superfund) requires the cleanup of sites from which there has been a release or
threatened release of hazardous substances. At the present time, EME is not
aware of any Superfund liability; however, there can be no assurance that EME
will not incur such liability in the future.
FOREIGN AND DOMESTIC OPERATIONS
- -------------------------------
A summary of EME's operations by geographic area including operating
revenues, net income (loss) and identifiable assets is incorporated herein by
reference from note 15 (Geographic Areas--Financial Data) of Notes to the
Consolidated Financial Statements.
ITEM 2. PROPERTIES
EME leases its principal office in Irvine, California. This lease is
approximately 92,600 square feet contained on six floors. The term of the lease
for approximately 65,500 square feet expires on December 31, 2002 with two five-
year options to extend. The term of the lease for the balance of approximately
27,100 square feet expires on December 31, 2002 with no options to extend. EME
also leases office space in Fairfax, Virginia and Washington, D.C. which is not
material. Subsidiaries of EME also lease office space in Barcelona, Spain;
Esenyurt, Turkey; Jakarta, Indonesia; London, England; Manila, Philippines;
Melbourne, Australia; Rome, Italy; and Singapore, none of which are material.
The following table shows the material properties owned or leased by EME, its
subsidiaries, or partnerships. Each property represents at least five percent of
EME's income before tax or is one in which EME has an investment balance greater
than $50 million. All of these properties are subject to mortgages or other
liens or encumbrances granted to the lenders providing financing for the plant
or project.
22
DESCRIPTION OF PROPERTIES
INTEREST
PLANT OR PROJECT LOCATION IN LAND PLANT DESCRIPTION
- ---------------- -------- ------- -----------------
Brooklyn Navy Yard Brooklyn, New York Leased Natural gas-turbine cogeneration facility
First Hydro Dinorwig, Wales Owned Pumped-storage electric power facility
First Hydro Ffestiniog, Wales Owned Pumped-storage electric power facility
Kern River Oildale, California Leased Natural gas-turbine cogeneration facility
Loy Yang B Victoria, Australia Owned Coal-fired power facility
Midway-Sunset Fellows, California Leased Natural gas-turbine cogeneration facility
Paiton East Java, Indonesia Leased Coal-fired power facility under construction
Roosecote Barrow-in-Furness,Cumbria, UK Owned Combined cycle generation technology
Sycamore Oildale, California Leased Natural gas-turbine cogeneration facility
Watson Carson, California Leased Natural gas-turbine cogeneration facility
ITEM 3. LEGAL PROCEEDINGS
PMNC Litigation -In February 1997, a civil action was commenced in the
---------------
Superior Court of the State of California, Orange County, entitled The Parsons
-----------
Corporation and PMNC v. Brooklyn Navy Yard Cogeneration Partners, L.P., Mission
- -------------------------------------------------------------------------------
Energy New York, Inc. and B-41 Associates. L.P., Case No. 774980, in which
- -----------------------------------------------
plaintiffs assert general monetary claims under the Construction Turnkey
Agreement in the amount of $136,800,000. Brooklyn Navy Yard has also filed an
------------------------------------
action entitled Brooklyn Navy Yard Cogeneration Partners, L.P. v. PMNC, Parsons
- -------------------------------------------------------------------------------
Main of New York, Inc., Nab Construction Corporation, L.K. Comstock & Co., Inc.
- -------------------------------------------------------------------------------
and The Parsons Corporation, in the Supreme Court of the State of New York,
- ---------------------------
Kings County, Index No. 5966/97 asserting general monetary claims in excess of
$13,000,000 under the Construction Turnkey Agreement. EME believes that the
outcome of this litigation will not have a material adverse effect on its
consolidated financial position or results of operations.
EME experiences other routine litigation in the normal course of its
business. None of such pending litigation is expected to have a material adverse
effect on the consolidated financial position or results of operations of EME.
See "Certain Regulatory Matters--Environmental Regulation".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the outstanding Common Stock of EME is, as of the date hereof, owned
by The Mission Group, which is a wholly owned subsidiary of Edison
International. There is no market for the Common Stock.
Dividends of the Common Stock will be paid when declared by the Board of
Directors of EME. EME made cash dividend payments to The Mission Group of $197
million and $150 million in 1997 and 1996, respectively. In 1997, a noncash
dividend of $78 million was also made to The Mission Group. At present, EME has
no plans to pay a dividend on the Common Stock.
In November 1994, Mission Capital, L.P. (Mission Capital), a limited
partnership of which EME is the sole general partner, issued 3.5 million 9-7/8%
Cumulative Monthly Income Preferred Securities, Series A (the Preferred
Securities) and EME issued $90,206,186 of 9-7/8% junior subordinated deferrable
interest debentures due 2024 (the Debentures) pursuant to a subordinated
indenture dated as of November 30, 1994 (the Subordinated Indenture) between EME
and The First National Bank of Chicago, as trustee. During August 1995, Mission
Capital issued 2.5 million 8-1/2% Cumulative Monthly Income Preferred
Securities, Series B (the Preferred Securities) and EME issued $64,432,990 of 8-
1/2% junior subordinated deferrable interest debentures due 2025 pursuant to the
Subordinated Indenture. EME issued a guarantee (the Guarantee) in favor of the
holders of the Preferred Securities, which guarantees the payments of
distributions declared on the Preferred Securities, payments upon a liquidation
of Mission Capital and payments on redemption with respect to any Preferred
Securities called for redemption by Mission Capital. So long as any Preferred
Securities remain outstanding, EME will not be able to declare or pay, directly
or indirectly, any dividend on, or purchase, acquire or make a distribution or
liquidation payment with respect to, any of its Common Stock if at such time (i)
EME shall be in default with respect to its payment obligations under the
Guarantee, (ii) there shall have occurred any event of default under the
Subordinated Indenture, or (iii) EME shall have given notice of its selection of
an extended interest payment period as provided in the Indenture and such
period, or any extension thereof, shall be continuing.
24
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS) YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Operating revenues $ 975.0 $ 843.6 $ 467.3 $ 380.6 $ 290.5
Operating expenses 581.1 476.5 264.0 199.9 258.7(a)
-------- -------- -------- -------- ----------
Income from operations 393.9 367.1 203.3 180.7 31.8
Interest expense (223.5) (164.2) (93.1) (89.0) (33.5)
Interest and other income 53.9 40.7 33.1 38.8 4.7
Minority interest (38.8) (69.5) (48.3) (46.1) (11.4)
-------- -------- -------- -------- --------
Income (loss) before income taxes 185.5 174.1 95.0 84.4 (8.4)
Provision (credit) for income taxes 57.4 82.0 31.0 29.4 (4.2)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and
cumulative effect of change in
accounting principle 128.1 92.1 64.0 55.0 (4.2)
Extraordinary loss on early extinguishingment
of debt, net of income tax benefit (13.1) -- -- -- --
Cumulative effect on prior periods of
change in accounting for income taxes -- -- -- -- 6.5
-------- -------- -------- -------- --------
Net income $ 115.0 $ 92.1 $ 64.0 $ 55.0 $ 2.3
======== ======== ======== ======== ========
DECEMBER 31,
(IN MILLIONS) ------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA
Assets $4,985.1 $5,152.5 $4,374.0 $2,842.9 $2,286.1
Current liabilities 339.8 270.9 199.8 170.9 116.3
Long-term obligations 2,532.1 2,419.9 1,839.0 1,159.0 962.6
Shareholder's equity 826.6 1,019.9 1,028.5 622.2 551.3
(IN MILLIONS) YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PROPORTIONATE DATA (UNAUDITED)(C)
Operating revenues $1,502.2 $1,261.8 $ 865.4 $ 733.0 $ 712.8
Operating expenses 1,107.1 912.4 650.3 552.5 667.5(a)
-------- -------- -------- -------- --------
Income from operations 395.1 349.4 215.1 180.5 45.3
Interest expense (269.2) (212.8) (160.9) (138.5) (69.8)
Interest and other income 69.2 44.2 42.1 45.7 16.1
-------- -------- -------- -------- --------
Income (loss) before income taxes 195.1 180.8 96.3 87.7 (8.4)
Provision (credit) for income taxes 67.0 88.7 32.3 32.7 (4.2)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and
cumulative effect of change in
accounting principle 128.1 92.1 64.0 55.0 (4.2)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit (13.1) -- -- -- --
Cumulative effect on prior periods of
change in accounting for income taxes -- -- -- -- 6.5
-------- -------- -------- -------- --------
Net income $ 115.0 $ 92.1 $ 64.0 $ 55.0 $ 2.3
======== ======== ======== ======== ========
Operating cash flow(b) $ 559.3 $ 493.7 $ 326.5 $ 264.9 $ 202.9
======== ======== ======== ======== ========
25
(a) For the year ended December 31, 1993, operating expenses include special
charges of $98.4 million. Special charges include (1) costs (unreimbursed
development expenses and capitalized interest) associated with the
termination of negotiations for the Carbon II project in Mexico of $28.0
million; (2) a reserve of $52.4 million, which reflects the reduced value
of investments in five geothermal power plants due to lower gas price
forecasts; and (3) a reserve of $18.0 million for project development and
other costs.
(b) Income from operations plus depreciation, amortization and other non-cash
charges.
(c) Reflects EME's pro rata ownership interest in its energy projects and oil
and gas investments. Because significant 50% or less owned investments of
EME are not consolidated, EME believes that the discussion set forth below
of certain proportionate data facilitates an understanding and assessment of
its results of operations. Except for certain industries, proportionate
accounting is not in accordance with generally accepted accounting
principles.
Operating revenues increased in 1997 and 1996. The 1997 increase resulted
primarily from increases in electric revenues attributable to the start of
commercial operation of Loy Yang B Unit 2 in October 1996 and the Kwinana
project in December 1996 and higher energy revenues from First Hydro as a
result of increased utilization and higher pool prices, partially offset by
lower capacity prices in 1997. There were no comparable electric revenues
for Loy Yang B Unit 2 for the first nine months of 1996 or Kwinana for the
first 11 months of 1996. The 1996 increase in electric revenues over 1995
was primarily due to the acquisition of First Hydro in December 1995,
combined with its strong operating performance since acquisition, the start
of commercial operation of Loy Yang B Unit 2 and the Kwinana project in the
fourth quarter of 1996, both of which were previously under construction,
and the increase in ownership of Iberian Hy-Power from 34% to 100% in
January 1996. The 1997 increase in fuel expense and plant operations was
primarily due to commencement of commercial operations of the Kwinana
project in the fourth quarter of 1996 and increased generation and higher
prices at First Hydro. The 1997 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. The 1996 increase
resulted from having no comparable expenses for First Hydro for the first 11
months of 1995 and no comparable expenses for Iberian Hy-Power, Loy Yang B
Unit 2 and Kwinana for fiscal year 1995.
Interest expense increased in 1997 and 1996, principally as a result of
higher project debt levels. Interest and other income increased in 1997 and
1996. The 1997 increase resulted from interest earned on higher cash
balances. The 1996 increase is primarily due to a pre-tax gain of $20
million on the sale of EME's interest in four operating geothermal projects.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Annual Report on Form 10-K includes certain forward-looking statements, the
realization of which may be affected by certain important factors discussed in
Management's Discussion and Analysis of Results of Operations and Financial
Condition thereunder and elsewhere herein.
GENERAL
- -------
Edison Mission Energy (EME) is one of the leading global producers of
electricity. Through its subsidiaries, EME is engaged in the business of
developing, acquiring, owning and operating electric power generation facilities
worldwide. EME's current investments include 53 projects totaling 9,325
megawatts (MW) of generation capacity, of which 7,403 MW are in operation and
1,922 MW are under construction.
EME's operating revenues are derived primarily from electric revenues and
equity in income from energy projects. Electric revenues accounted for 76%, 77%
and 64% of total operating revenues during
26
1997, 1996 and 1995, respectively. 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 EME'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 a 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, EME recognizes its proportional share of the income or loss of such
entities.
ACQUISITIONS
- ------------
In 1992, a subsidiary of EME (together with other wholly owned affiliates of
EME) acquired 51% of the 1,000-MW Loy Yang B Power Station (Loy Yang B) from the
State Government of Victoria (State). In May 1997, a subsidiary of EME acquired
the State's 49% interest in Loy Yang B. In connection with the 1992
acquisition, the State Electricity Commission of Victoria (SECV) entered into a
30-year power purchase agreement with EME to purchase its share of the plant
output. Loy Yang B's principal assets are 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).
In December 1995, an indirect subsidiary of EME purchased all of the
outstanding shares of First Hydro Company (First Hydro) for approximately $1
billion (653 million pounds sterling). First Hydro's principal assets are two
pumped-storage electric power stations located in North Wales at Dinorwig and
Ffestiniog, which have a combined capacity of 2,088 MW.
This acquisition was funded through a combination of (i) a $621 million (400
million pounds sterling) credit facility with a bank and (ii) a $455 million
(295.3 million pounds sterling) equity investment funded from a combination of a
$350 million capital contribution from Edison International (EME's parent
company) and from EME's working capital and credit lines. In January 1996, the
400 million pounds sterling credit facility was canceled upon repayment of all
outstanding principal and accrued interest with proceeds from the issuance of
400 million pounds sterling of 9% Guaranteed Secured Bonds due on July 31, 2021.
In January 1996, EME purchased the remaining 66% of Iberian Hy-Power
Amsterdam B.V. (Iberian Hy-Power) for approximately $20 million, increasing its
ownership to 100%. Iberian Hy-Power owns interests in 18 run-of-the-river
hydroelectric facilities in Spain totaling 86 MW.
Each of the acquisitions has been accounted for utilizing the purchase
method. The purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair market values, with the excess being
allocated to goodwill. The consolidated statement of income for 1995 includes
operating results of First Hydro beginning in December 1995 and the consolidated
statement of income for 1997 reflects the operations under the new contracts and
the elimination of the minority interest of Loy Yang B beginning on May 9, 1997.
27
RESULTS OF OPERATIONS
- ---------------------
Operating Revenues
Operating revenues increased significantly in 1997 and 1996. The 1997
increase resulted primarily from increases in electric revenues attributable to
the start of commercial operation of Loy Yang B Unit 2 in October 1996 and the
Kwinana project in December 1996 and higher energy revenues from First Hydro as
a result of increased utilization and higher pool prices, partially offset by
lower capacity prices in 1997. There were no comparable electric revenues for
Loy Yang B Unit 2 for the first nine months of 1996 and Kwinana for the first 11
months of 1996. The 1996 increase in electric revenues over 1995 was primarily
due to the acquisition of First Hydro in December 1995 combined with its strong
operating performance since acquisition, the start of commercial operation of
Loy Yang B Unit 2 and the Kwinana project in the fourth quarter of 1996, both of
which were previously under construction, and the increase in ownership of
Iberian Hy-Power from 34% to 100% in January 1996.
Electric revenues in the fourth quarter of 1997 were lower from fourth
quarter revenues in 1996 attributable to the Loy Yang B project due to the
restructuring of agreements associated with the 49% acquisition of Loy Yang B.
This also resulted in partially offsetting the higher electric revenues from the
Loy Yang B project in 1997.
Equity in income from energy projects rose 17% in 1997 over 1996, compared
with a 2% increase in 1996 over 1995. The 1997 increase is primarily
attributable to higher electric and steam revenue for several cogeneration
projects due to higher fuel gas prices upon which revenues are based. Equity in
income from oil and gas investments increased substantially in 1997 and 1996,
primarily due to higher gas prices in 1997 and higher oil and gas prices and
increased gas production in 1996.
A significant number of EME's domestic projects are located on the West
Coast. These projects generally have power sales contracts that provide for
higher payments during the summer months. Both First Hydro and Iberian Hy-Power
provide for higher electric revenues during the winter months. In addition,
First Hydro experienced higher energy sales in 1996 due to higher capacity
prices resulting from narrowing of the margin between the demand and available
generation forecast over the summer months and increased utilization. Unusual
weather conditions and unanticipated facility maintenance may have an effect on
future quarterly revenues.
Operating Expenses
Total operating expenses increased $104.6 million in 1997 and $212.4 million
in 1996. The increases for both periods were principally due to higher fuel
expense, plant operations, depreciation and amortization and administrative and
general expenses. Fuel and plant operations expense increased $62.8 million in
1997 and $140.4 million in 1996, depreciation and amortization expense increased
$12.9 million in 1997 and $44.3 million in 1996 and administrative and general
expenses increased $27.6 million in 1997 and $26.6 million in 1996.
The 1997 increase in fuel expense and plant operations was primarily due to
commencement of commercial operations of the Kwinana project in the fourth
quarter of 1996 and increased generation and higher prices at First Hydro.
28
The 1997 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 in 1997 was partially
reduced due to 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). The 1996
increase resulted from having no comparable expenses for First Hydro for the
first 11 months of 1995 and no comparable expenses for Iberian Hy-Power, Loy
Yang B Unit 2 and Kwinana for fiscal year 1995.
Both the 1997 and 1996 increase in administrative and general expenses is
attributable to an increase of approximately $54 million and $16 million,
respectively, in compensation expense as a result of charges related to EME's
phantom stock plan which is a part of Edison International Officer's Long-Term
Incentive Plan. The higher charges in 1997 were principally due to a substantial
appreciation in the value of EME's "phantom stock" over its exercise price. The
1997 increase in compensation expense was partially offset by lower project
development costs.
Other Income (Expense)
Interest and other income increased $6.5 million in 1997 over 1996, compared
with a decrease of $9.3 million in 1996 from 1995. The 1997 increase resulted
primarily from interest earned on higher cash balances. The 1996 decrease was
primarily due to income recognized in August 1995 for reimbursement of certain
1994 development expenses not previously recognized in settlement of EME's
remaining investment in Minera Carbonifera Rio Escondido.
During the second quarter of 1997, EME completed a sale of its ownership
interest in B.C. Star Partners (B.C. Star) for total cash proceeds of $71.2
million. EME recorded an after-tax gain of approximately $14 million on the
sale in April 1997. Based upon management's forecast of operating profits that
may have been realized from this operation, EME expects a minimal impact on its
future results of operations.
During the second quarter of 1996, CalEnergy Company, Inc., EME's partner in
four operating geothermal projects in California, purchased all of the stock of
four wholly owned subsidiaries of EME, 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 EME's future revenues as EME discontinued
recognizing earnings from these projects during 1993.
Interest incurred rose slightly in 1997 over 1996, compared to a $71.3
million increase in 1996 over 1995. The 1996 increase was due primarily to a
full year's inclusion of interest on the debt related to the First Hydro
acquisition and debt related to Iberian Hy-Power. Capitalized interest decreased
$51.9 million in 1997 from 1996, compared to an increase of $3.3 million in 1996
over 1995. The 1997 decrease is due to the completion of construction and
resultant commercial operation of Loy Yang B Unit 2 and the Kwinana project in
the fourth quarter of 1996 at which time the Company discontinued recording
capitalized interest related to these projects.
Dividends on preferred securities increased $3 million in 1996 over 1995.
The increase in 1996 was due to the inclusion of a full year of dividends on the
Series B preferred securities issued during the third quarter of 1995.
Minority interest expense decreased $30.7 million in 1997 from 1996, compared
with an increase of $21.2 million in 1996 over 1995. The 1997 decrease resulted
from the acquisition of the remaining 49%
29
ownership interest in Loy Yang B in May 1997. The acquisition also contributed
to significantly lower minority interest expense in the fourth quarter of 1997
from 1996. The 1996 increase is due to Loy Yang B Unit 2 commencing commercial
operation in October 1996.
Provision for Income Taxes
EME had an effective tax provision rate of 30.9%, 47.1% and 32.6% in 1997,
1996 and 1995, respectively. The decrease in the 1997 effective tax rate was
primarily due to a reduction in corporate income taxes in the United Kingdom
(U.K.). The U.K. government decreased the corporate tax rate from 33% to 31%,
effective April 1, 1997. In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," this reduction in the U.K.
income tax rate resulted in an one-time reduction in income tax expense of
approximately $20 million to adjust the U.K. deferred income tax liability
(primarily related to First Hydro) to the new lower tax rate. The increase in
the 1996 effective tax rate was primarily due to higher international earnings
taxed at higher tax rates and certain expenditures not deductible in foreign
jurisdictions.
Extraordinary Loss
The early repayment of Loy Yang B's existing debt facilities of $713 million
in connection with the acquisition of the remaining 49% interest in May 1997
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operating activities is derived primarily from distributions
from energy projects and dividends from investments in oil and gas. For the
year ended December 31, 1997, net cash provided by operating activities
decreased $35 million over 1996, compared with an increase of $144.6 million in
1996 from 1995. The 1997 decline primarily reflects an increase in working
capital requirements principally due to lower accounts receivable collections
from First Hydro. The 1996 improvement primarily reflects higher net income,
increased dividends from oil and gas investments and improved accounts
receivable collections principally attributable to First Hydro.
Dividends from investments in oil and gas increased $31.1 million in 1996
over 1995. The increase was principally due to increased dividends paid by Four
Star Oil & Gas Company as a result of higher earnings in 1996 over 1995.
Net cash provided by financing activities decreased $123.7 million during
1997 from 1996, compared with a substantial decrease during 1996 from 1995. The
1997 decrease was principally due to a reduction in financing activities and
higher cash dividends paid to Edison International. In 1997, the Loy Yang B
financing proceeds received in connection with the acquisition of the remaining
49% interest were primarily used to repay Loy Yang B's existing debt facilities.
In 1996, EME issued 400 million pounds sterling of 9% Guaranteed Secured Bonds
(U.S. $603.8 million), the proceeds of which were used to repay the 400 million
pounds sterling credit facility entered into in December 1995. In addition,
Edison Mission Energy Funding Corp., 99% owned by Broad Street Contract
Services, Inc. and 1% owned by EME, completed a sale of $450 million of senior
notes and bonds to institutional investors pursuant to the Rule 144A exemption
under the U.S. Securities Act of 1933 for non-public sales in December 1996. The
1996 decrease was primarily attributable to (1) a reduction in net borrowings
under
30
EME's $500 million revolving credit facility in 1996, (2) a dividend paid to
Edison International of $150 million in 1996 compared with a $350 million
capital contribution received from Edison International in 1995 (pursuant to the
acquisition of First Hydro) and (3) proceeds of $62.5 million received in 1995
from the issuance of Series B Preferred Securities.
The Loy Yang B financing in 1997 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 operating cash
proceeds of Loy Yang B to repay the debt and have taken a security interest in
the Loy Yang B project assets.
In December 1996, Edison Mission Energy Funding Corp., 99% owned by Broad
Street Contract Services, Inc. and 1% owned by EME, completed a sale of $450
million of senior notes and bonds to institutional investors pursuant to the
Rule 144A exemption under the U.S. Securities Act of 1933 for non-public sales.
The senior notes and bonds are secured by the pledge of (i) notes issued by four
EME subsidiaries that own interests in four California cogeneration projects,
(ii) 99% of the capital stock of Edison Mission Energy Funding Corp. and (iii) a
guarantee issued by the four EME subsidiaries. The financing structure was
designed to pool and cross-collateralize available cash flow to the four EME
subsidiaries from the four projects thus providing for repayment of the senior
notes and bonds with available cash flow from the four projects. The
obligations of the four EME subsidiaries are non-recourse to EME.
The $450 million of securities issued by Edison Mission Energy Funding Corp.
consist of $260 million of Series A Notes and $190 million of Series B Bonds
which mature in September 2003 and September 2008, respectively. The Series A
Notes and Series B Bonds bear an interest rate of 6.77% and 7.33%, respectively,
and were rated BBB by Standard & Poor's Corporation and Baa1 by Moody's
Investors Services, Inc. The principal and interest payments under the notes
issued by the four EME subsidiaries are identical in terms to the Series A Notes
and Series B Bonds. The net proceeds from the sale of securities were used by
EME to repay borrowings under its $500 million revolving credit facility, retire
EME's 200 million Australian dollar credit facility, defease other project debt
and for other general corporate purposes.
Net cash used in investing activities decreased $149.2 million in 1997 from
1996, and significantly decreased in 1996 from 1995. The 1997 decline is
primarily due to an increase in proceeds received from loan repayments related
to Brooklyn Navy Yard and the Carbon II project and fewer loans made to energy
projects. The decrease in 1996 was principally due to the purchase of First
Hydro for approximately $1 billion in December 1995. Proceeds of $70 million
received from the sale of four of EME's operating geothermal facilities in 1996
also contributed to the decline in 1996 and is comparable to the proceeds of
$71.2 million received from the sale of EME's ownership interest in B.C. Star in
1997. EME invested $87.7 million, $119.4 million and $192.8 million in 1997,
1996 and 1995, respectively, in new plant and equipment principally related to
the Doga project in 1997 and the Loy Yang B Unit 2 and Kwinana projects in 1996
and 1995.
At December 31, 1997, EME had cash and cash equivalents of $585.9 million and
had available $388.6 million of borrowing capacity under a $500 million
revolving credit facility that expires in 2001. The credit facility provides
credit available in the form of cash advances or letters of credit, and bears
interest on advances under the London Interbank Offered Rate plus the applicable
margin as determined
31
by EME's long-term debt ratings (0.175% margin at December 31, 1997), the Base
Rate (substantially similar to what is commonly known as the "prime" rate, which
was 8.5% at December 31, 1997), or on a competitive auction basis. 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. (DOLLARS IN MILLIONS)
- -------- -------------- --------------------------
Paiton (i) 136
ISAB (ii) 244 billion Italian Lira 138
Doga (iii) 21
(i) Paiton is a 1,230-MW coal-fired power plant under construction in East
Java, Indonesia. A wholly owned subsidiary of EME 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
EME 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 EME 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 requiring acceleration of the firm commitments.
CONTINGENT OBLIGATIONS TO CONTRIBUTE PROJECT EQUITY
PROJECTS U.S. (DOLLARS IN MILLIONS)
- -------- --------------------------
Paiton (i) 141
Doga (i) 19
All Other 21
(i) Contingent obligations to contribute additional project equity to the
project would be based on events principally related to capital cost
overruns during the 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 EME'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 December 31,
1997, if
32
payment were required, would be $260 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 EME owns 50% of the project.
On December 17, 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, EME
agreed to indemnify the partnership 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. EME believes that the outcome of this
litigation will not have a material adverse effect on its consolidated financial
position or results of operations.
EME's projected construction expenditures that will be funded utilizing non-
recourse project financing are $80 million at December 31, 1997.
EME and its subsidiaries may incur additional obligations to make equity and
other contributions to projects in the future. EME 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 EME'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 EME's results of operations.
Interest rate changes affect the cost of capital needed to construct and finance
projects. EME 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 financing. Interest
expense included $20.5 million, $6.2 million and $6.5 million for the years
1997, 1996 and 1995, respectively, as a result of interest rate hedging
mechanisms. EME 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. EME 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 ten 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 significant 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 counterparty pays First
33
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's electric revenues were
increased by $36.9 million and decreased by $4.5 million for the years ended
December 31, 1997 and 1996, respectively, and decreased by $29 million in
December 1995, as a result of electricity rate swap agreements.
Loy Yang B sells its 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 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" 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 $58.6 million for the year ended December 31, 1997 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 1997.
Fluctuations in foreign currency exchange rates can affect, on a U.S. dollar
equivalent basis, the amount of EME's equity contributions to, and distributions
from, its foreign projects. As EME continues to expand into foreign markets,
fluctuations in foreign currency exchange rates can be expected to have a
greater impact on EME's results of operations in the future. At times, EME 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, EME 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 that is consistent with historical or forecasted
relationships. Foreign exchange considerations for three major international
projects are discussed below.
The First Hydro project in the U.K. and the Loy Yang B project in Australia
have been financed in their local currency (pound sterling and Australian
dollar, respectively) thereby hedging the majority of their acquisition costs
against foreign exchange fluctuations. Furthermore, EME has evaluated the
return on the remaining equity portion of the investments with regard to the
likelihood of various foreign exchange scenarios. These analyses use market
derived volatilities, statistical correlations between certain variables, and
long-term forecasts to predict ranges of expected returns. Based upon these
34
analyses, management believes that the investment returns for First Hydro and
Loy Yang B are adequately insulated from a broad range of foreign exchange
scenarios at this time. In 1996, EME repaid a 200 million Australian dollar
loan that was originally structured to hedge a portion of the foreign exchange
risk associated with EME's equity investment in the Loy Yang B project in
Australia. The decision to repay the loan was based on management's view that
the cost of the hedge was high relative to the current and expected volatility
of the Australian dollar.
Construction on the two-unit Paiton project is approximately 85% 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
with 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.
EME will continue to monitor its foreign exchange exposure and analyze the
effectiveness and efficiency of hedging strategies in the future.
The electric power generated by EME's domestic 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, EME 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 OR REGULATIONS EME 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. EME
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.
EME completed a review of some of its sites in 1995 and does not believe that
a material liability exists as of December 31, 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 EME's financial position or results of operations.
YEAR 2000 ISSUE During 1997, EME completed the financial and informational
computer system review with no material costs incurred associated with resolving
the issue. The operational review will continue at all EME's power projects.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Report of Independent Public Accountants.
Consolidated Statements of Income for the years ended December 31, 1997, 1996
and 1995.
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Shareholder's Equity for the years ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
EDISON MISSION ENERGY AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Edison Mission Energy:
We have audited the accompanying consolidated balance sheets of Edison
Mission Energy (a California corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Edison
Mission Energy and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Orange County, California
March 16, 1998
37
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
Years Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
OPERATING REVENUES:
Electric revenues $ 744,675 $ 650,838 $ 297,200
Equity in income from energy projects 151,306 128,823 125,880
Equity in income from oil and gas 38,079 25,090 9,939
Operation and maintenance services 40,931 38,867 34,327
--------- --------- ---------
Total operating revenues 974,991 843,618 467,346
--------- --------- ---------
OPERATING EXPENSES:
Fuel 192,325 137,151 79,162
Plant operations 132,079 124,451 42,078
Operation and maintenance services 29,314 28,065 26,845
Depreciation and amortization 102,794 89,853 45,589
Administrative and general 124,576 96,954 70,354
--------- --------- ---------
Total operating expenses 581,088 476,474 264,028
--------- --------- ---------
Income from operations 393,903 367,144 203,318
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest and other income 27,306 20,766 30,034
Gain on sale of assets 26,642 19,986 3,144
Interest expense (210,311) (151,139) (83,050)
Dividends on preferred securities (13,167) (13,100) (10,095)
Minority interest (38,858) (69,547) (48,343)
--------- --------- ---------
Total other income (expense) (208,388) (193,034) (108,310)
--------- --------- ---------
Income before income taxes 185,515 174,110 95,008
Provision for income taxes 57,363 82,045 31,000
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS $ 128,152 $ 92,065 $ 64,008
--------- --------- ---------
Extraordinary loss on early extinguishment
of debt, net of income tax benefit (13,126) -- --
--------- --------- ---------
NET INCOME $ 115,026 $ 92,065 $ 64,008
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
38
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
--------------------------
1997 1996
---------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 585,883 $ 383,634
Accounts receivable - trade 76,935 71,046
Accounts receivable - affiliates 18,139 10,798
Prepaid expenses and other 13,630 13,747
---------- ----------
Total current assets 694,587 479,225
---------- ----------
INVESTMENTS
Energy projects 852,688 794,646
Oil and gas 67,101 121,237
---------- ----------
Total investments 919,789 915,883
---------- ----------
PROPERTY, PLANT AND EQUIPMENT 3,142,551 3,401,006
Less accumulated depreciation and amortization 201,564 152,458
---------- ----------
Net property, plant and equipment 2,940,987 3,248,548
---------- ----------
OTHER ASSETS
Long-term receivables 25,957 91,567
Goodwill 312,606 334,481
Deferred financing costs and other 91,219 82,768
---------- ----------
Total other assets 429,782 508,816
---------- ----------
TOTAL ASSETS $4,985,145 $5,152,472
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
39
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
-------------------------
1997 1996
------------ ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable - affiliates $ 13,381 $ 35,996
Accounts payable and accrued 208,411 118,824
liabilities
Interest payable 42,627 35,076
Current maturities of long-term 75,383 80,994
obligations ---------- ----------
Total current liabilities 339,802 270,890
---------- ----------
LONG-TERM OBLIGATIONS NET OF CURRENT 2,532,121 2,419,890
MATURITIES ---------- ----------
LONG-TERM DEFERRED LIABILITIES
Deferred taxes and tax credits 517,391 545,449
Deferred revenue 541,176 --
Other 68,951 39,049
---------- ----------
Total long-term deferred 1,127,518 584,498
liabilities ---------- ----------
Total liabilities 3,999,441 3,275,278
---------- ----------
MINORITY INTERESTS 9,102 707,289
---------- ----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
SECURITY OF PARTNERSHIP HOLDING
SOLELY PARENT DEBENTURES 150,000 150,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 6, 11 and 12)
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 102,620 262,594
Cumulative translation adjustments 30,446 63,892
---------- ----------
Total shareholder's equity 826,602 1,019,905
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S $4,985,145 $5,152,472
EQUITY ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
40
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
Additional Cumulative
Common Paid-in Retained Translation Shareholder's
Stock Capital Earnings Adjustments Equity
-------- ----------- ---------- ------------ --------------
BALANCE AT DECEMBER 31, 1994 $64,130 $285,789 $ 256,521 $ 15,807 $ 622,247
Net income -- -- 64,008 -- 64,008
Cash contributions -- 350,000 -- -- 350,000
Issuances of stock by a
subsidiary -- (6,500) -- -- (6,500)
Translation adjustments -- -- -- (1,218) (1,218)
------- -------- --------- -------- ----------
BALANCE AT DECEMBER 31, 1995 64,130 629,289 320,529 14,589 1,028,537
Net income -- -- 92,065 -- 92,065
Cash dividends -- -- (150,000) -- (150,000)
Translation adjustments -- -- -- 49,303 49,303
------- -------- --------- -------- ----------
BALANCE AT DECEMBER 31, 1996 64,130 629,289 262,594 63,892 1,019,905
Net income -- -- 115,026 -- 115,026
Cash dividends -- -- (197,000) -- (197,000)
Non-cash dividend -- -- (78,000) -- (78,000)
Non-cash contribution -- 117 -- -- 117
Translation adjustments -- -- -- (33,446) (33,446)
------- -------- --------- -------- ----------
BALANCE AT DECEMBER 31, 1997 $64,130 $629,406 $ 102,620 $ 30,446 $ 826,602
======= ======== ========= ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
41
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
--------------------------------------
1997 1996 1995
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 115,026 $ 92,065 $ 64,008
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in income from energy projects (151,306) (128,823) (125,880)
Equity in income from oil and gas (38,079) (25,090) (9,939)
Distributions from energy projects 133,643 125,717 158,226
Dividends from oil and gas 47,849 50,576 19,500
Depreciation and amortization 102,794 89,853 45,589
Deferred taxes and tax credits (7,994) 3,378 (4,559)
Gain on sale of assets (26,642) (19,986) (3,144)
Extraordinary loss on early extinguishment
of debt, net of tax 13,126 -- --
Decrease (increase) in accounts receivable (20,259) 31,356 (9,662)
Decrease in prepaid expenses and other 1,752 4,193 190
Increase in interest payable 7,857 18,635 3,293
Increase (decrease) in accounts 66,031 10,869 (10,692)
payable and accrued liabilities
Other, net 15,679 41,723 22,920
---------- --------- -----------
Net cash provided by operating activities 259,477 294,466 149,850
---------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on long-term obligations 1,140,588 188,482 770,320
Payments on long-term obligations (882,446) (871,734) (67,643)
Issuance of Guaranteed Secured Bonds -- 603,840 --
Issuance of debt securities -- 414,275 --
Issuance of preferred securities -- -- 62,500
Cash dividends to parent (197,000) (150,000) --
Capital contribution from parent -- -- 350,000
---------- --------- -----------
Net cash provided by financing 61,142 184,863 1,115,177
activities ---------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in energy projects (62,034) (78,575) (98,403)
Loans to energy projects (63,406) (106,443) (243,894)
Payments of common stock of acquired companies (63,983) (34,640) (1,042,591)
Capital expenditures (87,706) (119,407) (192,808)
Proceeds from loan repayments 160,797 32,067 375,330
Proceeds from sale of assets 71,166 70,000 12,457
Other, net (51,965) (9,321) (1,358)
---------- --------- -----------
Net cash used in investing (97,131) (246,319) (1,191,267)
activities ---------- --------- -----------
Effect of exchange rate changes on cash (21,239) 13,084 (365)
---------- --------- -----------
Net increase in cash and cash equivalents 202,249 246,094 73,395
Cash and cash equivalents at beginning
of period 383,634 137,540 64,145
---------- --------- -----------
Cash and cash equivalents at end of period $ 585,883 $ 383,634 $ 137,540
========== ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
42
EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
NOTE 1. ORGANIZATION
- ---------------------
Edison Mission Energy (EME) is a wholly owned subsidiary of The Mission Group
(TMG), a wholly owned, non-utility subsidiary of Edison International, the
parent holding company of Southern California Edison Company (Edison). Through
its subsidiaries, EME is engaged in the business of developing, acquiring,
owning and operating electric power generation facilities worldwide.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Consolidations
The consolidated financial statements include EME and its majority owned
subsidiaries, partnerships and a special purpose corporation. All significant
intercompany transactions have been eliminated. Certain prior year
reclassifications have been made to conform to the current year financial
statement presentation.
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Investments
Cash equivalents include time deposits and other investments totaling $218.9
million at December 31, 1997, with maturities of three months or less. All
investments are classified as available-for-sale.
Investments in energy projects and oil and gas that are 50% or less owned are
accounted for by the equity method. The majority of energy projects and all
investments in oil and gas are accounted for under the equity method at December
31, 1997.
Property, Plant and Equipment
Property, plant and equipment, including leasehold improvements and
construction in progress, are capitalized at cost and are principally comprised
of five energy entities' plants and related facilities. Depreciation and
amortization are computed by using the straight-line method over the useful life
of the property, plant and equipment and over the lease term for leasehold
improvements.
Useful lives for property, plant and equipment are as follows:
43
Furniture and office equipment 3 - 10 years
Building, plant and equipment 25 - 50 years
Civil works 50 - 80 years
Capitalized leased equipment 10 - 30 years
Leasehold improvements Life of lease
Goodwill
Goodwill represents the cost incurred in connection with the purchase of
First Hydro Company (First Hydro) in excess of the fair value of the net assets
acquired in December 1995. This amount is being amortized over 40 years on a
straight-line basis. Accumulated amortization was $17.2 million and $9.3
million at December 31, 1997 and 1996, respectively.
Impairment of Investments and Long-Lived Assets
EME periodically evaluates the potential impairment of its investments in
projects and other long-lived assets (including goodwill) based on a review of
estimated future cash flows expected to be generated. If the carrying amount of
the investment or asset exceeds the amount of the expected future cash flows, an
impairment loss is recognized accordingly. Effective January 1, 1996, EME
adopted Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires, among other things, that an impairment loss shall
only be recognized when the carrying amount of a long-lived asset exceeds the
expected future cash flows (undiscounted and without interest charges) and that,
when appropriate, the amount of loss to be recognized shall be measured as the
amount by which the carrying value exceeds the fair value of the asset. The
adoption of this statement did not have a material adverse effect on the
consolidated financial position or results of operations of EME.
Capitalized Interest
Interest incurred on funds borrowed by EME to finance project construction is
capitalized. Capitalization of interest is discontinued when the projects are
completed and deemed operational. Such capitalized interest is included in
investment in energy projects and property, plant and equipment.
Capitalized interest is amortized over the depreciation period of the major
plant and facilities for the respective project.
Years Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
Interest incurred $222.8 $215.5 $144.2
Interest capitalized (12.5) (64.4) (61.1)
------ ------ ------
$210.3 $151.1 $ 83.1
====== ====== ======
Income Taxes
EME is included in the consolidated federal income tax and combined state
franchise tax returns of Edison International. EME calculates its income tax
provision on a separate company basis under a tax sharing arrangement with TMG,
which in turn has an agreement with Edison International. Tax benefits
44
generated by EME and used in the Edison International consolidated tax return
are recognized by EME without regard to separate company limitations.
EME accounts for income taxes using the asset-and-liability method, wherein
deferred tax assets and liabilities are recognized for future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities using enacted rates. Investment and energy tax credits
are deferred and amortized over the term of the power-purchase agreement of the
respective project. Income tax accounting policies are discussed further in
Note 8.
Project Development Costs
EME capitalizes only the direct costs incurred in developing new projects.
These costs consist of professional fees, salaries, permits, bids and other
directly related development costs incurred by EME before a partnership or joint
venture is formed to develop the project. The capitalized costs are amortized
over the life of operational projects or charged to expense if management
determines the costs to be unrecoverable.
Deferred Financing Costs
Bank, legal and other direct costs incurred in connection with obtaining
financing are deferred and amortized as interest expense on a basis which
approximates the effective interest rate method over the term of the related
debt. Accumulated amortization amounted to $1.7 million in 1997 and $6.9
million in 1996.
Deferred Revenue
Certain revenues on power sales contracts are deferred and amortized to
income utilizing the unit-of-production method over the term of the contracts.
Financial Instruments
EME enters into interest rate swap, cap and collar agreements to manage its
interest rate exposure. The related net interest rate differentials to be paid
or received are recorded as adjustments to interest expense. In addition, EME
enters into electricity rate swap agreements to manage its exposure to the U.K.
and Australia market (pool) price volatilities. The related price differentials
to be paid or received are currently recorded as adjustments to electric
revenues or fuel expenses.
Translation of Foreign Financial Statements
Assets and liabilities of most foreign operations are translated at end of
period rates of exchange and the income statements are translated at the average
rates of exchange for the year. Gains or losses resulting from foreign currency
transactions are normally included in other income in the consolidated
statements of income. Foreign currency transaction gains and (losses) amounted
to $(2.9) million, $0.6 million and $(0.4) million, for 1997, 1996 and 1995,
respectively. Gains or losses from translation of foreign currency financial
statements are included in shareholder's equity.
45
Stock-based Compensation
EME measures compensation expense relative to stock-based compensation by the
intrinsic-value method.
NOTE 3. ACQUISITIONS
- ---------------------
In 1992, a subsidiary of EME (together with other wholly owned affiliates of
EME) acquired 51% of the 1,000-MW Loy Yang B Power Station (Loy Yang B) from the
State Government of Victoria (State). In May 1997, a subsidiary of EME acquired
the State's 49% interest in Loy Yang B. In connection with the 1992
acquisition, the State Electricity Commission of Victoria (SECV) entered into a
30-year power purchase agreement with EME to purchase its share of the plant
output. Loy Yang B's principal assets are 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).
In December 1995, an indirect subsidiary of EME purchased all of the
outstanding shares of First Hydro for approximately $1 billion (653 million
pounds sterling). First Hydro's principal assets are two pumped-storage
electric power stations located in North Wales at Dinorwig and Ffestiniog, which
have a combined capacity of 2,088 MW.
This acquisition was funded through a combination of (i) a $621 million (400
million pounds sterling) credit facility with a bank (see Note 6) and (ii) a
$455 million (295.3 million pounds sterling) equity investment funded from a
combination of a $350 million capital contribution from Edison International and
from EME's working capital and credit lines.
Each of the acquisitions has been accounted for utilizing the purchase
method. The purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair market values with the excess being
allocated to goodwill. The excess of the purchase price over the carrying value
of the net assets acquired relating to the Loy Yang B acquisition was allocated
to property, plant and equipment. The consolidated statement of income for 1995
includes operating results of First Hydro beginning in December 1995 and the
consolidated statement of income for 1997 reflects the operations under the new
contracts and the elimination of the minority interest of Loy Yang B beginning
on May 9, 1997.
The following unaudited pro forma data summarizes the consolidated results of
operations for the periods indicated as if the acquisition of First Hydro had
occurred at the beginning of 1995 and the acquisition of the 49% interest in Loy
Yang B had occurred at the beginning of 1996 and 1997. The pro forma data gives
effect to certain adjustments including electric revenues, fuel expense,
depreciation and amortization, interest expense 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 acquisitions
been made at the beginning of 1997, 1996 or 1995, or of the results which may
occur in the future.
46
(Unaudited)
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Operating revenues $939.9 $731.2 $690.4
Income before extraordinary loss 143.9 88.4 80.8
Net income 130.8 88.4 80.8
The table below summarizes additional stock acquisitions by EME or its wholly
owned subsidiaries during 1997, 1996 and 1995.
Percentage Purchase
Date Acquired By Acquisition Acquired Price
- ---- ----------- ----------- ---------- --------
Energy Projects
January 31, 1996 MEC Indonesia B.V. P.T. Paiton Energy Company 7.5% $10.2
January 23, 1996 MEC International B.V. Iberian Hy-Power Amsterdam B.V. 66.0% 19.5
August 8, 1995 MEC Indo Coal B.V. P.T. Adaro Indonesia 10.0% 19.0
Oil and Gas
August 1, 1996 Edison Mission Energy Oil Four Star Oil & Gas Company 4.4% 4.9
& Gas (EMEO&G) (Four Star)
January 1, 1995 EMEO&G Four Star 6.0% 8.8
NOTE 4. INVESTMENTS
- --------------------
Investments in Energy Projects
Investments in energy projects, generally 50% or less owned partnerships and
corporations, accounted for by the equity method are as follows:
December 31,
------------
1997 1996
---- ----
Domestic energy projects:
Equity investment $411.5 $419.6
Notes receivable 145.3 202.6
------ ------
Subtotal 556.8 622.2
International energy projects:
Equity investment and advances 295.9 172.4
------ ------
Total $852.7 $794.6
====== ======
EME's subsidiaries have provided loans or advances related to certain
projects. One loan totaled $96.2 million and bears interest at a 10% rate.
Another loan amounting to $26.3 million, comprising promissory notes bearing
interest at 5% payable semiannually, is due in April 2008. Loans to three other
domestic projects amounted to $22.8 million at December 31, 1997, and bear
interest at variable rates (8.5% to 12.5%).
47
The following table presents summarized financial information of the
investments in energy projects accounted for by the equity method:
Years Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
Revenue $1,593.4 $1,383.3 $1,128.9
Expenses 1,294.7 1,083.1 862.4
-------- -------- --------
Net income $ 298.7 $ 300.2 $ 266.5
======== ======== ========
December 31,
-------------------
1997 1996
-------- --------
Current assets $ 507.7 $ 480.0
Noncurrent assets 4,523.7 3,653.9
-------- --------
Total assets $5,031.4 $4,133.9
======== ========
Current liabilities $ 750.9 $ 614.0
Noncurrent liabilities 2,986.2 2,341.7
Equity 1,294.3 1,178.2
-------- --------
Total liabilities and equity $5,031.4 $4,133.9
======== ========
The majority of noncurrent liabilities are comprised of project financing
arrangements that are non-recourse to EME.
The following table presents, as of December 31, 1997, the energy projects
accounted for by the equity method that represent at least five percent (5%) of
EME's income before tax or in which EME has an investment balance greater than
$50 million.
Energy Project Location Investment Operating Status
- -------------- -------- ---------- ----------------
Paiton East Java, Indonesia $230.1 Coal-fired facility under construction
Watson Carson, CA 121.4 Operating cogeneration facility
Brooklyn Navy Yard Brooklyn, NY 98.5 Operating cogeneration facility
Sycamore Bakersfield, CA 69.2 Operating cogeneration facility
Kern River Bakersfield, CA 51.3 Operating cogeneration facility
Midway-Sunset Fellows, CA 40.8 Operating cogeneration facility
Investments in Oil and Gas
At December 31, 1997, EME had one 46.85% owned and one 50% owned investments
in oil and gas. These investments are accounted for utilizing the equity
method. The difference between the carrying value of one oil and gas investment
and the underlying equity in the net assets amounted to $42.9 million at
December 31, 1997. The difference is being amortized on a unit of production
basis
48
over the life of the reserves. The following table presents summarized
financial information of the investments in oil and gas:
Years Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Operating revenues $304.7 $313.7 $230.5
Operating expenses 197.4 222.3 187.5
------ ------ ------
Operating income 107.3 91.4 43.0
Provision for income taxes 18.5 17.2 2.9
------ ------ ------
Net income (before non-operating items) 88.8 74.2 40.1
Non-operating expense, net (12.8) (12.0) (12.5)
------ ------ ------
Net income $ 76.0 $ 62.2 $ 27.6
====== ====== ======
December 31,
------------
1997 1996
------ ------
Current assets $ 94.3 $109.1
Noncurrent assets 417.6 526.8
------ ------
Total assets $511.9 $635.9
====== ======
Current liabilities $ 49.5 $ 46.2
Noncurrent liabilities 309.4 336.2
Deferred income taxes and other liabilities 64.5 59.0
Equity 88.5 194.5
------ ------
Total liabilities and equity $511.9 $635.9
====== ======
The undistributed earnings of investments accounted for by the equity method
were $150.1 million in 1997 and $138.9 million in 1996.
Long-Term Receivables
Long-term receivables include notes receivable from EME's former partner in
the Carbon II power plant. In December 1997, EME's former partner made a
prepayment of $65 million reducing notes receivable to $21.2 million at December
31, 1997. These notes are secured by a surety bond. Interest on these notes is
payable quarterly at LIBOR plus 2% (7.8% at December 31, 1997), with the
remaining principal due in November 1999.
49
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
December 31,
--------------------
1997 1996
-------- --------
Buildings, plant and equipment $1,857.8 $2,198.9
Civil works 1,002.2 996.0
Construction in progress 83.8 0.6
Capitalized leased equipment 198.8 205.5
-------- --------
3,142.6 3,401.0
Less accumulated depreciation and
amortization 201.6 152.5
-------- --------
$2,941.0 $3,248.5
======== ========
NOTE 6. FINANCIAL INSTRUMENTS
- ------------------------------
Long-Term Obligations
Long-term obligations include both corporate debt and non-recourse project
debt, whereby lenders rely on specific project assets to repay such obligations.
Long-term obligations consist of the following:
December 31,
-------------------------
1997 1996
------------- ---------
EME (parent only):
Senior Notes, net:
due 1999 (7.75%) $ 99.8 $ 99.7
due 2002 (8.125%) 99.3 99.1
Edison Mission Energy Funding Corp.:
Series A Notes, net
due 1997-2003 (6.77%) 231.5 258.4
Series B Bonds, net
due 2004-2008 (7.33%) 188.7 188.7
First Hydro Finance Plc (First Hydro
Finance):
400 million pounds sterling
Guaranteed Secured Bonds
due 2021 (9%) 657.1 684.9
Iberian Hy-Power project:
Project credit facilities
due 2003 (MIBOR + 1.5 to 2%)
(7.836% to 8.336% at 12/31/96) -- 85.7
50
Term Loan
due 2012 (MIBOR + 0.75%)
(5.594% at 12/31/97) 78.1 --
Project Credit Facility
due 2003 (9.408%) 26.5 --
Loy Yang B project:
Latrobe Project Facilities Agreement
due 2008 (BER + 1.75 to 1.95%)
(7.737% to 7.937% at 12/31/96) -- 744.6
Energy Capital Partnership Credit Agreement
due 2012-2017 (BBR + 0.3 to 1.0%)
(5.398% to 6.098% at 12/31/97) 823.6 --
Roosecote project:
Capital lease obligation (see Note 12) 68.2 90.3
Term Loan and Guarantee Facility
due 2005 (sterling LIBOR + 0.6%)
(8.288% at 12/31/97) 83.1 58.0
Kwinana project:
Kwinana Bank Debt
due 2012 (BER + 1.2%)
(6.265% at 12/31/97) 67.2 104.2
Doga project:
Doga Bank Debt
due 2010 (LIBOR + 3.08%)
(8.889% at 12/31/97) 59.3 --
Other long-term obligations 125.1 87.3
-------- --------
Subtotal 2,607.5 2,500.9
Current maturities of long-term (75.4) (81.0)
obligations -------- --------
Total $2,532.1 $2,419.9
======== ========
At December 31, 1997, EME had available $388.6 million of borrowing capacity
and approximately $111.4 million in letters of credit issued under a $500
million revolving credit facility that expires in 2001.
On December 20, 1996, Edison Mission Energy Funding Corp., 99% owned by Broad
Street Contract Services, Inc. and 1% owned by EME, completed a sale of $450
million of senior notes and bonds to institutional investors pursuant to the
Rule 144A exemption under the U.S. Securities Act of 1933 for non-public sales.
The senior notes and bonds are secured by the pledge of (i) notes issued by four
EME subsidiaries that own interests in four California cogeneration projects,
(ii) 99% of the capital
51
stock of Edison Mission Energy Funding Corp. and (iii) a guarantee issued by the
four EME subsidiaries. The financing structure was designed to pool and cross-
collateralize available cash flow to the four EME subsidiaries from the four
projects thus providing for repayment of the senior notes and bonds with
available cash flow from the four projects. The obligations of the four EME
subsidiaries are non-recourse to EME.
The $450 million of securities issued by Edison Mission Energy Funding Corp.
consist of $260 million of Series A Notes and $190 million of Series B Bonds
which mature in September 2003 and September 2008, respectively. The Series A
Notes and Series B Bonds bear an interest rate of 6.77% and 7.33%, respectively.
The principal and interest payments under the notes issued by the four EME
subsidiaries are identical in terms to the Series A Notes and Series B Bonds.
The net proceeds from the sale of securities were used by EME to repay
borrowings under its $500 million revolving credit facility, retire EME's 200
million Australian dollar credit facility, defease other project debt and for
other general corporate purposes.
In January 1996, First Hydro Finance issued 400 million pounds sterling of 9%
Guaranteed Secured Bonds (Bonds) at par due on July 31, 2021. First Hydro
Finance will commence funding a redemption reserve for principal repayment
beginning in 2017 with interest payments due on a semi-annual basis beginning
July 1996. The Bonds are secured by the two pumped-storage electric power
stations located in North Wales. The net proceeds of $604 million (396 million
pounds sterling) received, along with other funds held by First Hydro Finance,
were used to repay the borrowings under the 400 million pounds sterling credit
facility entered into by First Hydro Finance in December 1995 in connection with
the First Hydro acquisition. EME has two letters of credit under its corporate
credit facility in the amount of $29.6 million (18 million pounds sterling) to
meet a requirement for six months of interest in a bond interest reserve account
and $19.7 million (12 million pounds sterling) revenue support letter of credit
due to expire in 1998.
In May 1997, EME closed financing of $964 million (1.265 billion Australian
dollars) in connection with the acquisition of the remaining 49% interest, the
proceeds received 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 Loy Yang B 49% acquisition and to return funds to various affiliates of EME.
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 operating cash proceeds of Loy Yang
B to repay the debt and have taken a security interest in the Loy Yang B project
assets. 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.
Annual maturities on long-term debt at December 31, 1997, for the next five
years, excluding capital leases (see Note 12) are summarized as follows: 1998 -
$54.9 million; 1999 - $183.2 million; 2000 - $82.2 million; 2001 - $81.3
million; 2002 - $189.7 million.
Certain cash balances are restricted from being used primarily to pay or
dividend to EME amounts required for debt payments, letter of credit expenses
and permitted project costs. The total restricted cash was $59.5 million at
December 31, 1997 and $17.8 million at December 31, 1996.
52
Debt service reserves classified in Other Assets (including reserves for
interest on annual lease payments) were $44.7 million at December 31, 1997 and
$13.2 million at December 31, 1996.
Each of EME's direct or indirect subsidiaries is organized as a legal entity
separate and apart from EME and its other subsidiaries. Any asset of any such
subsidiary may not be available to satisfy the obligations of EME or any of its
other such subsidiaries; provided, however, that unrestricted cash or other
assets which are available for distribution may, subject to applicable law and
the terms of financing arrangements of such parties, be advanced, loaned, paid
as dividends or otherwise distributed or contributed to EME or affiliates
thereof.
Other Financial Instruments
Projects in the U.K. and a project in Australia 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 in the U.K. 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
significant 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
counterparty 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. The Roosecote project has
avoided the pool price volatility by entering into a long-term power sales
contract that provides for contract pricing.
Loy Yang B has entered into a number of financial hedges to mitigate exposure
to price volatility of the electricity traded into the pool. 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" 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.
EME's risk management policy allows for the use of these contracts and other
derivative financial instruments to limit financial exposure on its investments
and to manage exposure to fluctuations in interest rates, foreign exchange rates
and energy prices but prohibits the use of these instruments for speculative
investment purposes. EME does not hold or issue financial instruments for
trading purposes.
53
EME had the following derivative financial instruments at December 31, 1997
and 1996, except where noted:
Category Contract Amount/Terms Purpose
- -------- --------------------- -------
INTEREST RATE SWAPS
EME (parent only): $200 million Convert fixed-rate
expiring in 1999 debt of 7.75% and
($100 million) and 8.125% to a floating
2002 ($100 million) rate, such floating
rate capped at 9.0%
$45 million Convert fixed-rate
expiring in 1999, debt of 9.875% to a
corresponding floating rate
preferred
securities due 2024
Iberian Hy-Power project: 10.9 billion Change floating-rate
Spanish pesetas debt to fixed rates
(12/31/96) (U.S. ranging from 8.4% to
$84 million) 11.38%
expired in November
1997
Roosecote project: 45 million pounds Change floating-rate
sterling (12/31/96) debt to a fixed rate
(U.S. $77 million) of 12.4%
expired in July 1997
Kwinana project: 40.8 million Change floating-rate
Australian dollars debt to a fixed rate
(12/31/97) (U.S. of 10.98%
$27 million); 41.9
million Australian
dollars (12/31/96)
(U.S. $33 million);
expiring in 2007
Loy Yang B project: 1.2 billion Change floating-rate
Australian dollars debt to fixed rates
(U.S. $781 million) ranging from 7.51% to
expiring 2002-2007 7.93%
INTEREST RATE COLLAR
Iberian Hy-Power project: 11.7 billion Change interest rate
Spanish pesetas exposure to float
(U.S. $77 million) within range from 4.5%
expiring in 1999 minimum to 7.5% maximum
ELECTRICITY RATE SWAPS
First Hydro project: Approximately 1,685 Change the variable
MW related to market electricity
winter months sales rates to fixed
(October through rates
March) and 759 MW
related to summer
months (April
through September)
of electrical
generation under
selling pricing
contracts
(12/31/97); 1,735
MW related to
winter months and
1,185 MW related to
summer months
(12/31/96) expiring
at various dates
through 2000
54
Approximately 410 Change the variable
MW related to market electricity
winter months and rates to fixed rates
200 MW related to
summer months of
electricity under
purchasing pricing
contracts
(12/31/97); 416 MW
related to both
winter and summer
months (12/31/96)
expiring at various
dates through 1999
Loy Yang B project: Approximately 920 Change the variable
MW of electrical market electricity
generation under sales rates to fixed
selling pricing rates
contracts
(12/31/97) expiring
at various dates
through 2016
Fair values of financial instruments were:
December 31,
--------------------------------------------
1997 1996
------------------ --------------------
Carrying Fair Carrying Fair
Instruments: Amount Value Amount Value
------ ----- ------ -----
Long-term receivables $ 26.0 $ 27.6 $ 91.6 $ 99.9
Electricity rate swap
agreements -- 77.1 -- 26.8
Long-term obligations 2,532.1 2,715.6 2,419.9 2,434.4
Interest rate swap/collar
agreements -- (68.1) -- (17.6)
The fair values for long-term receivables, interest rate swap agreements, the
interest rate collar agreement and long-term obligations are based primarily on
quoted market prices. The carrying amounts reported for cash equivalents
approximate fair value due to their short maturities.
The fair value of the electricity rate swap agreements entered into by First
Hydro and Loy Yang B has been estimated by discounting the future cash flows on
the difference between the average aggregate contract price per MW and a
forecasted market price per MW, multiplied by the amount of MW sales remaining
under contract.
In addition, Iberian Hy-Power has entered into a forward-starting interest
rate swap in order to fix the interest rate on a portion of the long-term debt
outstanding. The swap period commences on December 15, 1999 and matures on
December 15, 2007. The notional amount of the swap is based on an amortizing
loan profile. The notional amount at December 15, 1999 is 10.8 billion Spanish
pesetas (U.S. $71 million). As of December 31, 1997, the fair value of this
swap was a negative one million dollars which has been reflected in the table
above.
55
Credit Risk
EME's financial instruments and power sales contracts involve elements of
credit risk. Credit risk relates to the risk of loss that EME would incur as a
result of nonperformance by counterparties pursuant to the terms of their
contractual obligations. The counterparties to financial instruments and
contracts consist of a number of major financial institutions and domestic and
foreign utilities. EME attempts to mitigate this risk by entering into contracts
with counterparties that have a strong capacity to meet their contractual
obligations and by monitoring the credit quality of these financial institutions
and utilities. In addition, EME enters into contracts whereby the structure of
the contracts minimizes its credit exposure. Accordingly, EME does not
anticipate any material impact to its financial position or results of
operations as a result of counterparty nonperformance.
The electric power generated by EME's domestic operating projects that are
generally sold to a limited number of electric utilities pursuant to long-term
(typically, 15 to 30 year) power sales contracts (see Note 13) are expected to
result in consistent cash flows under a wide range of economic and operating
circumstances. To accomplish this, EME 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. In addition, EME has plants located in different
geographic areas in order to mitigate the effects of regional markets, economic
downturns or unusual weather conditions.
NOTE 7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITY OF PARTNERSHIP
- -------------------------------------------------------------------------
HOLDING SOLELY PARENT DEBENTURES
- --------------------------------
During November 1994, Mission Capital, L.P., a limited partnership in which
EME is the sole general partner and a wholly owned subsidiary of EME is the
limited partner, issued 3.5 million of 9-7/8% Cumulative Monthly Income
Preferred Securities, Series A, at a price of $25 per security. These
securities are redeemable at the option of Mission Capital, L.P., in whole or in
part, beginning November 1999 with mandatory redemption in 2024 at a redemption
price of $25 per security plus accrued and unpaid distributions.
During August 1995, Mission Capital, L.P., issued 2.5 million of 8-1/2%
Cumulative Monthly Income Preferred Securities, Series B, at a price of $25 per
security. These securities are redeemable at the option of Mission Capital,
L.P., in whole or in part, beginning August 2000 with mandatory redemption in
2025 at a redemption price of $25 per security plus accrued and unpaid
distributions.
NOTE 8. INCOME TAXES
- ---------------------
Current and Deferred Taxes
Income tax expense includes the current tax liability from operations and the
change in deferred income taxes during the year. The components of the net
accumulated deferred income tax liability were:
56
December 31,
-----------------
1997 1996
------- ------
Deferred tax assets:
Reserves and other items not currently deductible $ 92.0 $ 64.5
Loss carryforwards 8.9 129.9
Deferred income 191.6 --
Dividends in excess of equity earnings 22.4 22.6
Other 17.1 10.0
------ ------
Total 332.0 227.0
------ ------
Deferred tax liabilities:
Basis differences 820.0 741.3
Tax credits, net 29.0 30.7
Other 0.4 0.4
------ ------
Total 849.4 772.4
------ ------
Deferred taxes and tax credits, net $517.4 $545.4
====== ======
Loss carryforwards, primarily Australian, total $45 million at December 31,
1997, with no expiration date.
The components of income before income taxes are as follows:
Years Ended December 31,
---------------------------
1997 1996 1995
------ ------ ------
U.S. $ 39.0 $ 40.6 $ 50.6
Foreign 146.5 133.5 44.4
------ ------ ------
Total $185.5 $174.1 $ 95.0
====== ====== ======
The provision for income taxes is comprised of the following:
Years Ended December 31,
--------------------------------
1997 1996 1995
------ ------ ------
Current
Federal $ (2.4) $ 33.1 $ 23.9
State (10.2) 6.7 4.5
Foreign 78.3 38.8 7.2
------ ------ ------
Total current 65.7 78.6 35.6
------ ------ ------
Deferred
Federal 14.3 (17.9) (13.0)
State 9.0 0.4 (2.4)
Foreign (31.6) 20.9 10.8
------ ------ ------
Total deferred (8.3) 3.4 (4.6)
------ ------ ------
Provision for income taxes $ 57.4 $ 82.0 $ 31.0
====== ====== ======
57
The components of the deferred tax provision (credit), which arise from tax
credits and timing differences between financial and tax reporting, are
presented below:
Years Ended December 31,
---------------------------
1997 1996 1995
-------- ------- -------
Basis differences $ 102.6 $ 55.3 $ 47.1
Loss carryforwards 121.0 (41.2) (23.4)
Deferred income (197.9) -- --
State tax deduction (0.2) (2.9) 2.1
Reserves and other items not currently deductible (27.6) 8.7 (24.1)
Elimination of book income (7.0) (10.0) (6.8)
Dividends in excess of equity earnings 0.2 (9.2) (0.5)
Other 0.6 2.7 1.0
------- ------ ------
Total deferred provision (credit) $ (8.3) $ 3.4 $ (4.6)
======= ====== ======
Variations from the 35% federal statutory rate are as follows:
Years Ended December 31,
---------------------------
1997 1996 1995
-------- ------- -------
Expected provision for federal income taxes $ 64.9 $ 60.9 $ 33.2
Increase (decrease) in the provision for taxes
resulting from:
State tax - net of federal deduction (0.8) 4.4 1.4
Dividends received deduction (8.2) (7.9) (4.0)
Amortization of tax credits (1.7) (8.6) (1.6)
Production tax credits -- -- (1.0)
Taxes on foreign operations at 2.0 17.3 2.5
different rates
Book and tax basis differences 3.5 15.4 --
Other (2.3) 0.5 0.5
------- ------ ------
Total provision for income taxes $ 57.4 $ 82.0 $ 31.0
======= ====== ======
Effective tax rate 30.9% 47.1% 32.6%
======= ====== ======
NOTE 9. EMPLOYEE BENEFIT PLANS
- ------- ----------------------
U.S. employees of EME are eligible for various benefit plans of Edison
International. Certain EME Australian, U.K. and Spanish subsidiaries also
participate in their own respective defined benefit pension plans.
Pension Plans
The noncontributory, defined benefit pension plans, administered by trustees,
cover employees who fulfill minimum service requirements. Benefits are based on
years of credited service and average base salary. Annual contributions meet
the minimum legal funding requirements and do not exceed the maximum deductible
for income taxes. Prior service costs from pension plan amendments are funded
58
over 30 and 15 years for the U.S. plan and Australian plan, respectively. There
are no prior service costs included in the U.K. and Spanish plans. Plan assets
are primarily U.S., U.K. and Australian common stock, corporate and government
bonds and short-term investments.
In 1996, EME recorded special termination benefits in connection with its
special voluntary early retirement program. The special termination benefit was
paid directly from the employer's assets and plan assets.
Funded status of pension plans:
December 31,
-------------------------------------------------------
1997 1996 1997 1996
-------- ------- -------- --------
U.S. Plan Non U.S. Plans
-------------------- -------------------------
Actuarial present value of benefit obligations:
Vested benefits $10.3 $ 7.4 $26.8 $23.3
Nonvested benefits 3.5 1.7 1.1 0.8
----- ----- ----- -----
Accumulated benefit obligation 13.8 9.1 27.9 24.1
Value of projected future compensation levels 6.7 5.6 2.2 2.0
----- ----- ----- -----
Projected benefit obligation $20.5 $14.7 $30.1 $26.1
===== ===== ===== =====
Fair value of plan assets $16.6 $ 4.9 $28.3 $24.1
===== ===== ===== =====
Assets less than projected benefit obligations (3.9) (9.8) (1.8) (2.0)
Unrecognized net loss (gain) (0.8) 5.4 0.7 (0.2)
Unrecognized prior service cost 0.5 0.6 -- --
Unrecognized net obligation 1.4 1.5 -- --
----- ----- ----- -----
Pension liability $(2.8) $(2.3) $(1.1) $(2.2)
===== ===== ===== =====
Discount rate 7.0% 7.75% 5.0% - 6.75% 6.5% - 8.0%
Rate of increase in future compensation 5.0% 5.5% 3.5% - 4.75% 4.5% - 5.5%
Expected long-term rate of return on plan assets 8.0% 8.0% 5.0% - 9.0% 8.5% - 9.0%
Components of pension expense were:
Years Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------
U.S. Plan Non U.S. Plans
------------------------ -------------------------
Service cost for benefits earned $ 1.8 $ 2.0 $ 2.3 $ 3.5 $ 3.5 $ 0.5
Interest cost on projected benefit
obligation 1.1 1.5 1.1 1.9 1.7 0.1
Actual return on plan assets (1.1) (1.7) (0.8) (3.4) (1.5) (0.2)
Net amortization and deferral 0.2 0.9 0.1 (0.6) (2.4) 0.1
----- ----- ----- ----- ----- -----
Pension expense 2.0 2.7 2.7 1.4 1.3 0.5
Special termination benefits -- 0.9 -- -- -- --
----- ----- ----- ----- ----- -----
Net pension expense $ 2.0 $ 3.6 $ 2.7 $ 1.4 $ 1.3 $ 0.5
===== ===== ===== ===== ===== =====
59
In 1995, First Hydro employees were included as part of The National Grid
Company plc (NGC) defined benefit pension plan (Electricity Supply Pension
Scheme), administered by a trustee, which provides pension and other related
benefits. Effective April 1, 1996, First Hydro employees were transferred into
the First Hydro Group of the Electricity Supply Pension Scheme. An actuarial
valuation for the U.K. plan, separate from NGC, was first completed for 1996
and, therefore, comparative amounts for 1995 were not included in the table
above. Pension expense totaled $0.1 million for December 1995.
Postretirement Benefits Other Than Pensions
U.S. employees retiring at or after age 55 who have at least 10 years of
service, are eligible for postretirement health care, dental, life insurance and
other benefits. Health care benefits are subject to deductibles, copayment
provisions and other limitations.
The components of postretirement benefits other than pension expense were:
Years Ended December 31,
------------------------------
1997 1996 1995
----- ------ ------
Service costs for benefits earned $ 1.2 $ 1.2 $ 1.2
Interest cost on benefit obligation 0.7 0.7 0.6
Amortization of transition obligation 0.1 0.2 0.2
----- ----- -----
Net expense 2.0 2.1 2.0
Special termination benefits -- 0.5 --
----- ----- -----
Total expense $ 2.0 $ 2.6 $ 2.0
===== ===== =====
A reconciliation of the plan's funded status with the recorded liability is
presented below:
December 31,
---------------
1997 1996
------ ------
Accumulated benefit obligation $11.7 $11.4
===== =====
Fair value of plan assets $ -- $ --
===== =====
Accumulated benefit obligation in excess of
plan assets $11.7 $11.4
Unrecognized transition obligation (2.0) (2.2)
Unrecognized net loss (1.1) (4.1)
----- -----
Recorded liability $ 8.6 $ 5.1
===== =====
Discount rate 7.0% 7.75%
The assumed rate of future increases in the per capita cost of health care
benefits is 8.5% for 1998, gradually decreasing to 5.25% for 2004 and beyond.
Employee Stock Plans
- --------------------
A 401(k) plan is maintained to supplement eligible U.S. employees' retirement
income. The plan received EME contributions of $0.7 million in 1997, 1996 and
1995.
60
In addition to the defined benefit plans described above, certain U.K.
subsidiaries of EME sponsor a defined contribution plan. Annual contributions
are based on 8 to 8.6 percent of covered employees' salaries. Contribution
expense for the subsidiaries totaled approximately $0.3 million in 1997 and $0.2
million in 1996 and 1995.
NOTE 10. STOCK COMPENSATION PLANS
- ----------------------------------
Under Edison International Officer's Long-Term Incentive Compensation Plan
(LTIP), shares of Edison International common stock were reserved for potential
issuance to key EME employees in various forms, including the exercise of stock
options. Under these programs, there are currently outstanding to officers and
senior managers of EME, options on 320,590 shares of Edison International Common
Stock of which 61,300, 57,900 and 31,700 were granted in 1997, 1996 and 1995,
respectively. Options on Edison International stock include a dividend
equivalent feature.
Compensation expense recorded under the stock-compensation program was $0.5
million, $0.7 million and $0.3 million for 1997, 1996 and 1995, respectively.
The weighted-average fair value of options granted during 1997, 1996 and 1995
was $7.62 per share option, $6.27 per share option and $6.92 per share option,
respectively. The weighted-average remaining life of options outstanding as of
December 31, 1997, 1996 and 1995 was seven years.
The fair value for each option granted during 1997, 1996 and 1995, reflecting
the basis for the pro forma disclosures, was determined on the date of grant
using the Black-Scholes option-pricing model. The following assumptions were
used in determining fair value through the model:
1997 1996 1995
-------- -------- --------
Expected life 7 years 7 years 8 years
Risk-free interest rate 6.5% 5.5% 7.9%
Expected volatility 17% 17% 17%
The recognition of dividend equivalents results in no dividends assumed for
purposes of fair-value determination. Stock-based compensation expense under
the "fair-value" method of accounting prescribed by SFAS No. 123 "Stock-Based
Compensation" would have resulted in no material change to EME's reported net
income for 1997, 1996 and 1995, but is not necessarily indicative of future
income statement effects.
Phantom Stock Options
EME, as a part of the LTIP, issued "phantom stock" option performance awards
to key employees commencing in 1994. Each phantom stock option may be exercised
to realize any appreciation in the value of one hypothetical share of EME stock
over its exercise price. Exercise prices for EME phantom stock are escalated on
an annually-compounded basis over the grant price by 12%. The value of the
phantom stock is recalculated annually as determined by a formula linked to the
value of its portfolio of investments less general and administrative costs. The
options have a 10-year term with one-third of the total award vesting in each of
the first three years of the award term. Compensation expense recorded with
respect to phantom stock options was $70 million, $16.1 million and $0.8 million
in 1997, 1996 and 1995, respectively.
61
NOTE 11. COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Firm Commitments to Contribute Project Equity
Projects Local Currency U.S. Currency
- -------- -------------- -------------
Paiton (i) $136
ISAB (ii) 244 billion Italian Lira 138
Doga (iii) 21
(i) Paiton is a 1,230-MW coal-fired power plant under construction in East
Java, Indonesia. A wholly owned subsidiary of EME 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 EME
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 requiring acceleration of the firm commitments.
Contingent Obligations to Contribute Project Equity
Projects U.S. Currency
- -------- -------------
Paiton (i) $141
Doga (i) 19
All Other 21
(i) Contingent obligations to contribute additional project equity to the
project would be based on events principally related to capital cost
overruns during the 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 EME'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 December 31,
1997, if payment were required, would be $260 million. Management has no reason
to believe that the projects
62
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 EME owns 50% of the project.
On December 17, 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, EME
agreed to indemnify the partnership 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. EME believes that the outcome of this
litigation will not have a material adverse effect on its consolidated financial
position or results of operations.
EME's projected construction expenditures that will be funded utilizing non-
recourse project financing are $80 million at December 31, 1997.
Litigation
EME 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
EME's financial position or results of operations.
Environmental Matters or Regulations
EME 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. EME 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.
EME completed a review of some of its sites in 1995 and does not believe that
a material liability exists as of December 31, 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 EME's financial position or results of operations.
NOTE 12. LEASE COMMITMENTS
- ---------------------------
EME leases office space, property and equipment under noncancelable lease
agreements that expire in various years through 2063. The capital lease
obligation is primarily for a project located in the U.K. A group of banks
provides a guarantee on the performance of the capital lease obligation under a
term loan and guarantee facility agreement. The facility agreement provides for
an aggregate of $188.5 million in a guarantee to the lessor and in loans to the
project. As of December 31, 1997, the loan obligation stands at $83.1 million,
which is secured by the plant assets of $19 million owned by the project and a
debt service reserve of $5.5 million.
Future minimum payments for operating and capital leases at December 31, 1997,
are:
63
Year Ending December 31: Operating Capital
Leases Leases
--------- -------
1998 $ 6.7 $27.0
1999 5.4 27.1
2000 4.1 27.0
2001 3.9 0.2
2002 3.6 0.2
Thereafter 18.9 0.5
----- -----
Total future commitments $42.6 82.0
=====
Amount representing interest (9.65%) 13.8
-----
Net Commitments $68.2
=====
Operating lease expense amounted to $6.7 million in 1997, $6.3 million in 1996
and $3.9 million in 1995.
NOTE 13. RELATED PARTY TRANSACTIONS
- ------------------------------------
Certain administrative services such as payroll and employee benefit
programs, all performed by Edison International or Edison employees, are shared
among all affiliates of Edison International and the costs of these corporate
support services are allocated to all affiliates, including EME. Costs are
allocated based on one of the following formulas: percentage of time worked,
equity in investment and advances, number of employees, or multi-factor
(operating revenues, operating expenses, total assets and number of employees).
In addition, services of Edison International or Edison employees are sometimes
directly requested by EME and such services are performed for EME's benefit.
Labor and expenses of these directly requested services are specifically
identified and billed at cost. Management believes the allocation methodologies
utilized are reasonable. EME made reimbursements for the cost of these programs
and other services, which amounted to $23.4 million, $18.3 million and $15.9
million in 1997, 1996 and 1995, respectively.
EME records accruals for tax liabilities and/or tax benefits which are
settled quarterly according to a series of tax sharing agreements as described
in Note 2. Under these agreements, EME recognized a tax benefit of $12.6
million for 1997 and tax liabilities of $39.8 million and $28.4 million for 1996
and 1995, respectively (see Note 8).
Certain EME subsidiaries have ownership in partnerships that sell electricity
generated by their project facilities to Edison and others under the terms of
long-term power-purchase agreements. Sales by such partnerships to Edison under
these agreements amounted to $579.6 million in 1997, $517.1 million in 1996, and
$657.3 million in 1995.
64
NOTE 14. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
- -----------------------------------------------------------
Years Ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
Cash paid:
Interest (net of amount capitalized) $218.1 $131.5 $ 76.4
Income taxes $ 62.3 $ 45.9 $ 41.6
Years Ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
Details of companies acquired:
Fair value of assets acquired $667.1 $152.7 $1,761.1
Liabilities assumed 603.1 118.1 718.5
------ ------ --------
Net cash paid for acquisitions $ 64.0 $ 34.6 $1,042.6
====== ====== ========
Non-Cash Investing and Financing Activities
The amount of construction in progress financed by the minority owner in
the Loy Yang B joint venture was $0.1 million in 1997, $32.7 million in 1996 and
$77.4 million in 1995.
In June 1997, EME made a noncash dividend of $78 million to its parent
company, TMG, a wholly owned, non-utility subsidiary of Edison International.
The noncash dividend is in the form of a promissory note with interest at LIBOR
plus 0.275% (6.09% at December 31, 1997) paid on quarterly basis and principal
due on June 30, 2007.
NOTE 15. GEOGRAPHIC AREAS - FINANCIAL DATA
- -------------------------------------------
EME operates predominately in one industry segment: electric power
generation. Electric power and steam generated domestically is sold primarily
under long-term contracts to electric utilities and industrial steam users
located in the U.S. Excluding the U.K. and a project in Australia, electric
power generated overseas is sold primarily under long-term contracts to electric
utilities located in the country where the power is generated. Projects located
in the U.K. and a project in Australia sell their energy and capacity production
through a centralized electricity pool. These projects enter into short -
and/or long-term contracts to hedge against the volatility of price fluctuations
in the pool.
Asia Corporate/
U.S. Pacific Europe Other(1) Total
------ -------- --------- ----------- --------
1997
- ----
Electric & operating revenues $ 8.9 $ 312.8 $ 463.9 $ -- $ 785.6
Equity in income from investments 182.7 3.5 0.2 3.0 189.4
------ -------- -------- ------ --------
Total operating revenues $191.6 $ 316.3 $ 464.1 $ 3.0 $ 975.0
====== ======== ======== ====== ========
Net income (loss) $ 72.8 $ 11.1 $ 47.8 $(16.7) $ 115.0
====== ======== ======== ====== ========
65
Identifiable assets $301.8 $ 948.0 $2,813.9 $ 1.6 $4,065.3
Equity investments and advances 623.9 252.7 42.9 0.3 919.8
------ -------- -------- ------ --------
Total assets $925.7 $1,200.7 $2,856.8 $ 1.9 $4,985.1
====== ======== ======== ====== ========
1996
- ----
Electric & operating revenues $ 16.8 $ 245.1 $ 427.8 $ -- $ 689.7
Equity in income (loss) from
investments 153.3 3.0 2.0 (4.4) 153.9
------ -------- -------- ------ --------
Total operating revenues $170.1 $ 248.1 $ 429.8 $ (4.4) $ 843.6
====== ======== ======== ====== ========
Net income (loss) $ 68.2 $ 22.5 $ 28.8 $(27.4) $ 92.1
====== ======== ======== ====== ========
Identifiable assets $239.5 $1,512.7 $2,397.1 $ 87.3 $4,236.6
Equity investments and advances 709.2 141.3 30.8 34.6 915.9
------ -------- -------- ------ --------
Total assets $948.7 $1,654.0 $2,427.9 $121.9 $5,152.5
====== ======== ======== ====== ========
1995
- ----
Electric & operating revenues $ 13.9 $ 170.8 $ 146.8 $ -- $ 331.5
Equity in income (loss) from
investments 143.1 -- (2.7) (4.6) 135.8
------ -------- -------- ------ --------
Total operating revenues $157.0 $ 170.8 $ 144.1 $ (4.6) $ 467.3
====== ======== ======== ====== ========
Net income (loss) $ 57.0 $ 15.8 $ 7.9 $(16.7) $ 64.0
====== ======== ======== ====== ========
Identifiable assets $112.9 $1,302.7 $1,988.6 $ 89.0 $3,493.2
Equity investments and advances 729.4 69.0 31.8 50.6 880.8
------ -------- -------- ------ --------
Total assets $842.3 $1,371.7 $2,020.4 $139.6 $4,374.0
====== ======== ======== ====== ========
(1) Includes corporate net interest expense and Mexico and Canada investments.
NOTE 16. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS PRODUCING
- ----------------------------------------------------------------------
ACTIVITIES (UNAUDITED)
- ----------------------
This section provides information required by SFAS No. 69, "Disclosures about
Oil and Gas Producing Activities." All of EME's oil and gas operations are
carried on by investees accounted for by the equity method. These investees all
follow the successful efforts method of accounting.
66
EME's proportionate interest in net quantities of proved reserves at December
31, 1997, 1996 and 1995, and results of operations for the years then ended
related to equity method investees are shown in the following tables:
Oil Natural Gas
Million of Barrels Billion of Cubic Feet
------------------ ---------------------
U.S. Canada Total U.S. Canada Total
Proved developed and 1997 21.6 -- 21.6 189.3 -- 189.3
undeveloped reserves 1996 23.7 1.8 25.5 182.0 105.5 287.5
1995 23.1 2.0 25.1 180.6 118.5 299.1
U.S. Canada Total
Costs incurred in oil and 1997 $ 18.9 $ -- $ 18.9
gas property acquisition 1996 13.4 4.2 17.6
exploration, and 1995 37.2 6.5 43.7
development activities
Aggregate amounts of 1997 $194.9 $ -- $194.9
capitalized costs 1996 206.6 42.4 249.0
(including construction in 1995 202.1 46.6 248.7
progress) for proved and
unproved properties
Results of operations 1997 $ 39.2 $ -- $ 39.2
1996 39.2 (2.6) 36.6
1995 16.7 (2.5) 14.2
Standardized measure of 1997 $249.2 $ -- $249.2
discounted future net cash 1996 435.8 63.6 499.4
flows 1995 246.5 33.4 279.9
In 1997, EME completed a sale of its ownership interest in B.C. Star Partners
which operated eleven producing properties in British Columbia, Canada. The
increase in 1996 in U.S. results of operations and total standardized measure
resulted primarily from higher oil and gas prices in 1996.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
1997 First(d) Second Third(d) Fourth(d) Total
-------- ----------- -------- --------- -------
Operating revenues $285.0 $ 221.5/(c)/ $234.5 $234.0 $975.0
Income from operations 133.6 86.6 91.2 82.5 393.9
Net income 32.6 19.4/(a)//(b)/ 46.1 16.9 115.0
67
1996 First(d) Second Third(d) Fourth(d)(f) Total
------- ------ ------- ----------- -----
Operating revenues $190.7 $184.3 $212.0 $256.6 $843.6
Income from operations 85.2 73.3 107.5 101.1 367.1
Net income 22.0 31.0/(e)/ 31.0 8.1 92.1
(a) Includes a $14 million gain on sale of ownership interest in an oil and gas
investment.
(b) Includes a $13.1 million extraordinary loss on early extinguishment of
debt.
(c) Decline in revenues as a result of restructuring agreements associated with
the 49% acquisition of Loy Yang B in May 1997.
(d) Reflects EME's seasonal pattern, in which the majority of earnings from
domestic projects are recorded in the third quarter of each year and higher
electric revenues from certain international projects are recorded during
the winter months of each year.
(e) Includes a $15.5 million gain on the sale of four operating geothermal
facilities.
(f) Includes operating revenues and income for Loy Yang B Unit 2 and the
Kwinana project which both commenced operations in the fourth quarter of
1996.
68
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
POSITIONS WITH EME
The following table sets forth the names and ages of, the positions held with
EME by, and the terms of office of, the directors and executive officers of EME
as of March 1, 1998.
DIRECTOR POSITION HELD
CONTINUOUSLY TERM CONTINUOUSLY TERM
NAME, POSITION AND AGE SINCE EXPIRES SINCE EXPIRES
- ---------------------- ------------ ------- ------------- -------
Alan J. Fohrer, 47................................................................ 1992 1998 -- --
Chairman of the Board
Bryant C. Danner, 60.............................................................. 1993 1998 -- --
Director
Robert M. Edgell, 51.............................................................. 1993 1998 1988 1998
Director, Executive Vice President and
Division President of EME, Asia Pacific
Edward R. Muller, 45.............................................................. 1993 1998 1993 1998
Director, President and Chief Executive Officer
S. Linn Williams, 51.............................................................. -- -- 1994 1998
Senior Vice President and General Counsel
Terry V. Charlton, 51............................................................. -- -- 1997 1998
Senior Vice President and Division President of EME, Europe,
Central Asia, Middle East and Africa
James V. Iaco, Jr., 53............................................................ -- -- 1994 1998
Senior Vice President and Chief Financial Officer
Division President of EME, Americas
Georgia R. Nelson, 48............................................................. -- -- 1996 1998
Senior Vice President, Worldwide Operations
BUSINESS EXPERIENCE
Set forth below is a description of the principal business experience during
the past five years of each of the individuals named above and the name of each
public company in which any director named above is a director.
MR. FOHRER has been Chairman of the Board of EME since January 30, 1998. From
1993 to 1998, Mr. Fohrer served as Vice Chairman of the Board. Mr. Fohrer has
been Executive Vice President and Chief Financial Officer of Edison
International and SCE since June 1995. Effective February 1996 and June 1995,
Mr. Fohrer also served as Treasurer of SCE and Edison International,
respectively, until August 1996. Mr. Fohrer was Senior Vice President,
Treasurer and Chief Financial Officer of Edison International, and Senior Vice
President and Chief Financial Officer of SCE from January 1993 until May 1995.
Mr. Fohrer was interim Chief Executive Officer of EME between May 1993 and
August 1993. From 1991 until 1993, Mr. Fohrer was Vice President, Treasurer and
Chief Financial Officer of Edison International and SCE.
MR. DANNER has been Executive Vice President and General Counsel of Edison
International and SCE since June 1995. Mr. Danner was Senior Vice President and
General Counsel of Edison International and SCE from July 1992 until May 1995.
69
MR. EDGELL has been Executive Vice President of EME since april 1988. Mr.
Edgell was named Division President of EME'S Asia Pacific region in January
1995.
MR. MULLER has been President and Chief Executive Officer of EME since August
1993. Prior to joining EME, Mr. Muller served as vice president, chief
administrative officer, general counsel and secretary of Whittaker Corporation,
an aerospace firm, from 1988 until 1992 and as vice president, chief financial
officer, general counsel and secretary of Whittaker Corporation from 1992 until
1993. from 1991 until 1993, Mr. Muller also served as vice president, secretary
and general counsel of BioWhittaker, Inc., a biotechnology company. Mr. Muller
is a director of Whittaker Corporation, Oasis Residential, Inc. and Global
Marine Inc.
MR. WILLIAMS has been Senior Vice President and General Counsel of EME since
November 1994. From 1985 through 1989 and 1992-1993, Mr. Williams was a partner
with the law firm of Gibson, Dunn and Crutcher. From 1993-1994, Mr. Williams
was a partner with the law firm of Jones, Day, Reavis and Pogue.
MR. CHARLTON has been Senior Vice President and Division President, Europe,
Central Asia, Middle East and Africa since September 8, 1997. Prior to joining
EME, Mr. Charlton worked as a consultant for EME. Mr. Charlton served as Group
General Manager - Water, Oil and Gas Industries Group for Tubemakers of
Australia Limited from 1993 until 1996.
MR. IACO has been Senior Vice President and Chief Financial Officer of EME
since January 1994 and Division President of EME's Americas region since January
26, 1998. From September 1993 until December 1993, Mr. Iaco was self-employed
and provided consulting services, specializing in restructuring, finance, crisis
management and other management services. From October 1992 until September
1993, Mr. Iaco served as senior vice president and chief financial officer of
Phoenix Distributors, Inc., a distributor of industrial gas and welding
supplies.
MS. NELSON has been Senior Vice President, Worldwide Operations since January
1996. Ms. Nelson was Division President of EME's Americas region from January
1996 to January 26, 1998. Prior to joining EME, Ms. Nelson served as Senior
Vice President of SCE from June 1995 until December 1995 and Vice President of
SCE from March 1993 until June 1995. From 1992 to 1993, Ms. Nelson served as a
Special Assistant to the Chairman of Edison International. Ms. Nelson is a
director of CalMat Company.
70
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information concerning compensation paid by EME
to each of the named executive officers during the years 1997, 1996 and 1995 for
services rendered by such persons in all capacities to EME and its subsidiaries.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS (#)(2) ($)(3)
- ---------------------------------------- ---- ------- ------- ------------- -------------- ------------
Edward R. Muller 1997 400,000 456,000 3,478 33,300 28,587
President and Chief Executive Officer 1996 370,000 444,000 2,621 41,000 23,148
1995 335,000 331,700 2,646 53,190 17,521
Robert M. Edgell 1997 317,000 325,000 -- 23,300 33,600(4)
Executive Vice President 1996 292,000 275,000 133 25,700 88,071(4)
1995 252,000 250,000 700 30,770 8,492
S. Linn Williams 1997 300,000 240,000 1,643 15,400 18,568
Senior Vice President 1996 275,000 220,000 734 20,100 13,148
and General Counsel 1995 250,000 180,000 1,028 24,390 141
Georgia R. Nelson (1) 1997 290,000 206,000 7,125 15,400 17,829
Senior Vice President, Worldwide 1996 270,000 190,000 1,337 23,700 14,446
Operations
James V. Iaco, Jr. 1997 280,000 224,000 4,913 15,400 14,962
Senior Vice President and Chief 1996 250,000 200,000 2,906 19,800 10,416
Financial Officer 1995 190,000 140,000 2,223 19,710 0
(1) Ms. Nelson was appointed Senior Vice President, Operations and Division
President of EME, Americas in January 1996.
(2) No Stock Appreciation Rights (SARs) were granted. Amounts shown are
comprised of Edison International nonqualified stock options and EME
"phantom stock" options. For 1997, Mr. Muller, Mr. Edgell, Mr. Williams, Ms.
Nelson and Mr. Iaco received 10,500; 7,500; 5,500; 5,500 ; and 5,500 Edison
International stock options, respectively; and 22,800; 15,800; 9,900; 9,900;
and 9,900 EME phantom stock options, respectively. For 1996, Mr. Muller, Mr.
Edgell, Mr. Williams, Ms. Nelson and Mr. Iaco received 10,200; 6,600; 5,400;
9,000; and 5,100 Edison International stock options, respectively; and
30,800; 19,100; 14,700; 14,700; and 14,700 EME phantom stock options,
respectively. For 1995, Mr. Muller, Mr. Edgell, Mr. Williams and Mr. Iaco
received 10,000; 5,200; 4,500; and 3,800 Edison International stock options,
respectively; and 43,190; 25,570; 19,890; and 15,910 EME phantom stock
options, respectively. Each Edison International nonqualified stock option
gives the named
71
executive officer the right to purchase one share of Edison International
Common Stock, and each EME phantom stock option may be exercised to realize
any appreciation in the value of one hypothetical share of EME stock over
annually escalated exercise prices, on the terms described in the notes to
the Option Grants in the 1997 Option Grant Table below.
(3) Includes the following company contributions to a defined contribution plan,
Stock Savings Plus Plan (SSPP) and a supplemental plan for eligible
participants who are affected by SSPP participation limits imposed on
higher-paid individuals by federal tax law: For 1997, Mr. Muller, $25,305;
Mr. Edgell $13,000; Mr. Williams, $15,599; Ms. Nelson, $14,384; and Mr.
Iaco, $14,376. For 1996, Mr. Muller, $11,455; Mr. Edgell, $4,500; Mr.
Williams, $6,301; Ms. Nelson, $7,913; and Mr. Iaco, $6,077. For 1995, Mr.
Muller, $15,988; Mr. Edgell, $8,220; Mr. Williams, $0; and Mr. Iaco, $0.
Also includes the following amounts of interest accrued on deferred
compensation of the named individuals, which is considered under the rules
of the Securities and Exchange Commission to be at an above-market rate: For
1997, Mr. Muller, $3,283; Mr. Edgell, $458; Mr. Williams, $2,969; Ms.
Nelson, $3,445; and Mr. Iaco, $586. For 1996, Mr. Muller, $1,508; Mr.
Edgell, $239; Mr. Williams, $926; Ms. Nelson, $1,882; and Mr. Iaco, $139.
For 1995, Mr. Muller, $1,533; Mr. Edgell $272; Mr. Williams, $141; and Mr.
Iaco, $0.
(4) Includes an overseas service allowance of $20,142 and $75,832 in 1997 and
1996, respectively. For each employee serving in an overseas site, the
allowance calculation depends on base pay, family size and location.
EXECUTIVE STOCK OPTIONS
The following table sets forth certain information concerning Edison
International stock options and EME phantom stock options granted pursuant to
the Edison International Officer's Long-Term Incentive Compensation Plan (LTIP)
to the executive officers named in the Summary Compensation Table above during
1997.
OPTION GRANTS IN 1997(1)
Individual Grants
----------------------------------------------------------
Exercise
Options Percent of Total or Base Grant Date
Granted Options Granted to Price Expiration Present
Name (#) Employees in 1997 ($/Sh) Date Value ($)
---- ------- ------------------ -------- ---------- ---------
(2)(3) (4)(5) (6)
Edward R. Muller
Edison International 10,500 17% 19.75 01/02/2007 61,005
EME 22,800 10% 120.55 01/02/2007 230,964
Robert M. Edgell
Edison International 7,500 12% 19.75 01/02/2007 43,575
EME 15,800 7% 120.55 01/02/2007 160,054
S. Linn Williams
Edison International 5,500 9% 19.75 01/02/2007 31,955
EME 9,900 4% 120.55 01/02/2007 100,287
Georgia R. Nelson
Edison International 5,500 9% 19.75 01/02/2007 31,955
EME 9,900 4% 120.55 01/02/2007 100,287
James V. Iaco, Jr.
Edison International 5,500 9% 19.75 01/02/2007 31,955
EME 9,900 4% 120.55 01/02/2007 100,287
72
(1) No SARs were granted. This table reflects all awards made under the LTIP
("LTIP Options") during 1997. In addition to Edison International stock
options, it includes EME "phantom stock" options.
(2) Each Edison International nonqualified stock option represents the right to
purchase one share of common stock of Edison International. The Edison
International stock options include dividend equivalents equal to the
dividends that would have been paid on an equal number of shares of Edison
International Common Stock. Dividend equivalents will be credited following
the first three years of the option term if certain Edison International
performance criteria discussed below are met. Dividend equivalents
accumulate without interest. Once earned and vested, the dividend
equivalents are payable in cash (i) upon the request of the holder prior to
the final year of the option term, (ii) upon the exercise of the related
option, or (iii) at the end of the option term regardless of whether the
related option is exercised. After such payment, however, no additional
dividend equivalents will accrue on the related option.
The dividend equivalent performance criteria is measured by Edison
International Common Stock total shareholder return. If the average
quarterly percentile ranking is less than the 60th percentile of that of the
companies comprising the Dow Jones Electric Utilities Group Index, the
dividend equivalents are reduced; if the Edison International total
shareholder return ranking is less than the 25th percentile, the dividend
equivalents are canceled. For rankings between the 60th and 25th
percentiles, the dividend equivalents are prorated. The total shareholder
return is measured at the end of the initial three-year period and will set
the percentage payable for the entire term. If less than 100% of the
dividend equivalents are earned, the unearned portion may be restored later
in the option term if Edison International's cumulative total shareholder
return ranking for the option term attains at least the 60th percentile.
(3) Each EME phantom stock option represents a right to exercise an option to
realize any appreciation in the value of one hypothetical share of EME
stock. The value of the stock is determined by a formula linked to project
values, which are determined annually, and is based on 10 million total
shares. Project values are determined based on economic models whose
assumptions have been approved by Edison International Phantom Plan
Management and Valuation Committees. The valuation is consistent with the
bases on which EME invests, acquires, finances, refinances and otherwise
makes capital decisions for new investments and value-maximizing decisions
for existing investments. The exercise price is initially set equal to the
value of the stock on the date of grant escalated on a compound basis (12%
per year) thereafter by a factor reflecting the approximate cost of capital
during the year as determined by the Compensation and Executive Personnel
Committee (CEP Committee) of Edison International. The annual escalation
factor will be adjusted prospectively by the CEP Committee for significant
changes in the cost of capital. If the value of a share of EME stock
exceeds the exercise price for any subsequent year, the executive may
exercise his option right with respect to any portion of his vested units
during the 60-day exercise window in the second quarter of the following
year and be paid in cash the difference between the exercise price and the
value of the shares.
(4) The LTIP Options become exercisable in three equal installments beginning on
the first anniversary of their date of grant. Each option has a term of 10
years, subject to earlier expiration upon termination of employment as
described below. The options are not transferable except upon death.
Effective January 1, 1998, outstanding LTIP Options were amended to allow
certain senior officers to transfer LTIP Options to a spouse, child or
grandchild. If an executive retires, dies, or is permanently and totally
disabled during the three-year vesting period, the unvested LTIP Options
will vest and be exercisable to the extent of 1/36 of the grant for each
full month of service during the vesting period. Unvested LTIP Options of
any person who has served in the past on the Edison International or SCE
Management Committee will vest and be exercisable upon the member's
retirement, death, or permanent and total disability. None of the named
officers have served on either of the two committees. Upon retirement,
death or permanent and total disability, the vested LTIP Options may
continue to be exercised within their original term by the recipient or
beneficiary. If an executive is terminated other than by retirement, death
or permanent and total disability, LTIP Options which had vested as of the
prior anniversary date of the grant are forfeited unless exercised within
180 days of the
73
date of termination in the case of Edison International options, or during
the next 60-day exercise window in the case of EME phantom stock options.
All unvested LTIP Options are forfeited on the date of termination.
Appropriate and proportionate adjustments may be made by the Edison
International CEP Committee to outstanding Edison International stock
options to reflect any impact resulting from various corporate events such
as reorganizations, stock splits and so forth. If Edison International is
not the surviving corporation in such a reorganization, all LTIP Options
then outstanding will become vested and be exercisable unless provisions are
made as part of the transaction to continue the LTIP or to assume or
substitute stock options of the successor corporation with appropriate
adjustments as to the number and price of the options. The Edison
International CEP Committee administers the LTIP and has sole discretion to
determine all terms and conditions of any grant, subject to plan limits. It
may substitute cash equivalent in value to the LTIP Options and, with the
consent of the executive, may amend the terms of any award agreement,
including the price of any option, the post-termination term, and the
vesting schedule.
(5) The expiration date of the LTIP Options is January 2, 2007; however, the
final 60-day exercise period of EME phantom stock options will occur during
the second quarter of that year. The LTIP Options are subject to earlier
expiration upon termination of employment as described in footnote (4)
above.
(6) The grant date present value of each Edison International stock option was
calculated as the sum of (i) the option value and (ii) the dividend
equivalent value. The option value was calculated to be approximately $2.56
per option share using the Black-Scholes stock option pricing model. For
purposes of this calculation, it was assumed that options would be
outstanding for an average of seven years prior to exercise, the volatility
rate was assumed to be 17%, the risk-free rate of return was assumed to be
6.45%, the historic average dividend yield was assumed to be 5.89% and the
stock price and exercise price were $19.75.
The dividend equivalent value of each Edison International stock option
granted in 1997 was calculated to be $3.25. The grant date value of the
dividend equivalent rights included with respect to each Edison
International stock option was determined by (i) adding the dividends
(without reinvestment) that would be received on a number of shares of
Edison International common stock equal to the number of shares subject to
the option for a period of seven years from the date on which the option was
granted, based on the annual dividend rate at grant of $1.00 per share and
(ii) discounting that amount to its present value assuming a discount rate
of 11.6%, which was Edison's authorized return on common equity in 1997.
This calculation does not reflect any reduction in value for the risk that
Edison International performance measures may not be met.
The value of an EME option was calculated to be $10.13 using the Black-
Scholes stock option pricing model assuming an average exercise period of
seven years, a volatility rate of 19.22%, a risk-free rate of return of
6.37%, a dividend yield of 0% and an exercise price of $266.50. These
assumptions are based on average values of a group of peer companies
adjusted for differences in capital structure.
The actual value that an executive may realize will depend on various
factors on the date the option is exercised, so there is no assurance the
value realized by an executive will be at or near the grant date value
estimated by the Black-Scholes model. The estimated values under that model
are based on certain assumptions and are not a prediction as to future stock
price.
74
The following table sets forth certain information with respect to the
exercise during 1997 by the executive officers named in the Summary Compensation
Table above of options to purchase shares of common stock of Edison
International and exercise hypothetical shares of stock of EME and option values
as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
---------------------- -----------------------
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------------ ------------------ ------------- -------------
Edward R. Muller
Edison International -- -- 44,167/20,633 270,383/185,198
EME -- -- 56,880/57,730 2,688,213/1,487,610
Robert M. Edgell
Edison International -- -- 41,717/13,633 286,876/119,735
EME -- -- 34,634/37,056 1,630,303/900,457
S. Linn Williams
Edison International -- -- 4,800/10,600 55,088/94,269
EME -- -- 18,160/26,330 889,867/696,864
Georgia R. Nelson
Edison International 38,600 193,165(2) 4,800/22,300 21,975/234,631
EME -- -- 4,900/19,700 167,954/335,908
James V. Iaco, Jr.
Edison International 6,534 35,835(3) 0/10,166 0/89,402
EME -- -- 22,547/25,003 1,049,102/624,618
(1) Edison International options are treated as "in-the-money" if the fair
market value of the underlying shares at December 31, 1997, exceeded the
exercise price of the options. The dollar amounts shown for Edison
International options are the differences between (i) the fair market value
of the Edison International Common Stock underlying all unexercised "in-the-
money" options at year-end 1997 and (ii) the exercise prices of those
options. The aggregate value at year-end 1997 of all accrued dividend
equivalents, exercisable and unexercisable, for Mr. Muller, Mr. Edgell, Mr.
Williams, Ms. Nelson and Mr. Iaco was $144,572/$0, $248,882/$0, $0/$0,
$30,288/$0 and $0/$0, respectively.
EME phantom stock options are considered "in-the-money" if the value of EME
phantom stock, which is determined annually by a formula linked to project
values, exceeds prescribed exercise prices. The value at year-end is not
available until the second quarter of the following year. Therefore, amounts
shown reflect the value at fiscal year-end for 1996, the most recent data
available.
(2) Includes $27,790 of value realized from dividend equivalents.
(3) Includes $4,565 of value realized from dividend equivalents.
75
RETIREMENT BENEFITS
- -------------------
The following table sets forth estimated gross annual benefits payable upon
retirement at age 65 to the executive officers named in the Summary Compensation
Table above in the remuneration and years of service classifications indicated.
PENSION PLAN TABLE(1)
YEARS OF SERVICE
--------------------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35 40
- --------------- -------- -------- -------- -------- -------- -------- --------
$ 100,000 $ 25,000 $ 33,750 $ 42,500 $ 51,250 $ 60,000 $ 65,000 $ 70,000
150,000 37,500 50,625 63,750 76,875 90,000 97,500 105,000
200,000 50,000 67,500 85,000 102,500 120,000 130,000 140,000
250,000 62,500 84,375 106,250 128,125 150,000 162,500 175,000
300,000 75,000 101,250 127,500 153,750 180,000 195,000 210,000
350,000 87,500 118,125 148,750 179,375 210,000 227,500 245,000
400,000 100,000 135,000 170,000 205,000 240,000 260,000 280,000
450,000 112,500 151,875 191,250 230,625 270,000 292,500 315,000
500,000 125,000 168,750 212,500 256,250 300,000 325,000 350,000
550,000 137,500 185,625 233,750 281,875 330,000 357,500 385,000
600,000 150,000 202,500 255,000 307,500 360,000 390,000 420,000
(1) Estimates are based on the provisions of the retirement plan (the
"Retirement Plan"), a qualified defined benefit employee retirement plan,
currently covering EME's executive officers with the following assumptions:
(i) the present Retirement Plan will be maintained, (ii) optional forms of
payment that reduce benefit amounts have not been selected, and (iii) any
benefits in excess of limits contained in the Internal Revenue Code of 1986
(the "Code") and any incremental retirement benefits attributable to
consideration of the annual bonus or participation in EME's deferred
compensation plans will be paid out of the general assets of EME under a
nonqualified supplemental executive retirement plan (an "ERP"). Amounts in
the Pension Plan Table include neither the Income Continuation Plan nor the
Survivor Income/Retirement Income plans, which provide postretirement death
benefits and supplemental retirement income benefits. These plans are
discussed in "Other Retirement Benefits".
The Retirement Plan and ERP provide monthly benefits at normal retirement age
(65 years) based on a unit benefit for each year of service plus a benefit
determined by a percentage ("Service Percentage") of the executive's average
highest 36 consecutive months of regular salary and, in the case of the ERP, the
average highest three bonuses in the last five years prior to attaining age 65.
Compensation used to calculate combined benefits under the Retirement Plan and
ERP is based on base salary and bonus as reported in the Summary Compensation
Table. The Service Percentage is based on 1-3/4% per year for the first 30
years of service (52-1/2% upon completion of 30 years' service) and 1% for each
year in excess of 30. The actual benefit determined by the Service Percentage
would take into account the unit benefit and be offset by up to 40% of the
executive's primary Social Security benefits.
The normal form of benefit is a life annuity with a 50% survivor benefit
following the death of the participant. Retirement benefits are reduced for
retirement prior to age 61. The amounts shown in the
76
Pension Plan Table above do not reflect reductions in retirement benefits due to
the Social Security offset or early retirement.
Mr. Edgell has elected to retain coverage under a previous benefit program.
This program provided, among other benefits, the post-retirement benefits
discussed in the following section. The ERP benefits provided in the previous
program are less than the benefits shown in the Pension Plan Table. To determine
these reduced benefits, multiply the dollar amounts shown in each column by the
following factors: 10 years of service -- 70%, 15 years -- 78%, 20 years --
82%, 25 years -- 85%, 30 years -- 88%, 35 years -- 88%, and 40 years -- 89%.
At December 31, 1997, Mr. Muller had completed 4 years of service; Mr.
Edgell, 27 years; Mr. Williams, 3 years; Ms. Nelson, 27 years; Mr. Iaco, 3
years.
OTHER RETIREMENT BENEFITS
Additional post-retirement benefits are provided pursuant to the Survivor
Income Continuation Plan and the Survivor Income/Retirement Income Plan under
the Executive Supplemental Benefit Program.
The Survivor Income Continuation Plan provides a post-retirement survivor
benefit payable to the beneficiary of the executive officer following his or her
death. The benefit is approximately 24% of final compensation (salary at
retirement and the average of the three highest bonuses paid in the five years
prior to retirement) payable for ten years certain. If a named executive
officer's final annual compensation were $600,000 (the highest compensation
level in the Pension Plan Table above), the beneficiary's estimated annual
survivor benefit would be approximately $144,000. Mr. Edgell has elected
coverage under this program.
The Supplemental Survivor Income/Retirement Income Plan provides a post-
retirement survivor benefit payable to the beneficiary of the executive officer
following his or her death. The benefit is 25% of final compensation (salary at
retirement and the average of the three highest bonuses paid in the five years
prior to retirement) payable for ten years certain. At retirement, an executive
officer has the right to elect the retirement income benefit in lieu of the
survivor income benefit. The retirement income benefit is 10% of final
compensation (salary at retirement and the average of the three highest bonuses
paid in the five years prior to retirement) payable to the executive officer for
ten years certain immediately following retirement. If a named executive
officer's final annual compensation were $600,000 (the highest compensation
level in the Pension Plan Table above), the beneficiary's estimated annual
survivor benefit would be approximately $150,000. If a named executive officer
were to elect the retirement income benefit in lieu of survivor income and had
final annual compensation of approximately $600,000 (the highest compensation
level in the Pension Plan Table above), the named executive officer's estimated
annual benefit would be approximately $60,000. Mr. Edgell has elected coverage
under this program.
The 1985 Deferred Compensation Plan provides a post-retirement survivor
benefit. This plan allowed eligible participants in September 1985 to elect
voluntarily to defer until retirement a portion of annual salary and annual
bonuses otherwise earned and payable for the period October 1985 through January
1990. The post-retirement survivor benefit is 50% of the annual deferred
compensation payable from the participant's account. Survivor benefit payments
begin following completion of the participant's deferred compensation payments.
If the named beneficiary is the executive's spouse, then survivor benefits are
paid as a life annuity, five years certain; the benefit amount will be reduced
actuarially if the
77
spouse is more than five years younger than the executive at the time of the
executive's death. If the beneficiary is not the spouse, then benefits are paid
for five years only.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
- --------------------------
Set forth below is certain information regarding each person who is known
to EME to be the beneficial owner of more than five percent of EME's common
stock.
Title of Class Name and Amount and Percent of
-------------- Address of Nature of Class
Beneficial Beneficial ------------
Owner Ownership
---------- ----------
Common Stock, no par value The Mission 100 shares 100%
Group held directly
18101 Von and with
Karman Avenue, exclusive
Suite 1700 voting and
Irvine, investment
California power
92612
MANAGEMENT
- ----------
Set forth below is certain information about the beneficial ownership in
equity securities of Edison International by all directors of EME, the executive
owners of EME named in the Summary Compensation Table in Item 6 and all
directors and executive officers of EME as a group.
Amount and Nature of
Beneficial Ownership
as of
Company and December 31,
Name Class of Stock 1997(a)(b)(c)(d)(e)
- ----- --------------------- ------------------------------
John E. Bryson Edison International
Common Stock 504,128(f)
Alan J. Fohrer Edison International
Common Stock 143,239
Bryant C. Danner Edison International
Common Stock 140,030
Robert M. Edgell Edison International
Common Stock 62,877
Edward R. Muller Edison International
Common Stock 56,200
Mission Capital
Preferred Securities 2,198
S. Linn Williams Edison International
Common Stock 9,998
Georgia R. Nelson Edison International
Common Stock 35,187
James V. Iaco, Jr. Edison International
Common Stock 4,800
Mission Capital
Preferred Securities 1,700
All directors and Edison International
executive officers as Common Stock 956,459
a group Mission Capital
Preferred Securities 3,898
(a) Unless otherwise indicated, each named person has voting and investment
power over the listed shares and such voting and investment power is
exercised solely by the named person or shared with a spouse. No named
person or group owns more than 1% of the outstanding shares of the class.
(b) Includes the following number of Edison International shares owned under the
SSPP: Mr. Bryson, 14,127 shares; Mr. Fohrer, 12,238 shares; Mr. Danner,
1,829 shares; Mr. Edgell, 14,727 shares; Mr. Muller, 0 shares; Mr. Williams,
64 shares; Ms. Nelson, 14,753 shares; Mr. Iaco, 0 shares; and all directors
and executive officers as a group, 57,738 shares. Each such person and
group may be deemed to share voting power with the trustee appointed under
the SSPP.
(c) Includes the following number of Edison International shares with respect to
which the right exists to acquire beneficial ownership within 60 days
through the exercise of options granted under an employee benefit plan
78
known as the 1987 Long-Term Incentive Compensation Plan as amended and
restated by the Edison International Officer Long-Term Incentive
Compensation Plan effective April 16, 1992: Mr. Bryson, 477,801 shares; Mr.
Fohrer, 130,501 shares; Mr. Danner, 136,201 shares; Mr. Edgell, 48,150
shares; Mr. Muller, 54,400 shares; Mr. Williams, 9,934 shares; Ms. Nelson,
20,434 shares; Mr. Iaco, 4,800 shares; and all directors and executive
officers as a group, 882,221 shares.
(d) Includes Edison International shares held in own name by Mr. Fohrer, 500
shares; spouse's name by Mr Bryson, 200 shares; held with another person by
Mr. Bryson, 6,000 shares; held as trustee by Mr. Bryson, 6,000 shares; held
as custodian by Mr. Muller, 400 shares; and held in broker's name by Mr.
Danner, 2,000 shares, and Mr. Muller, 1,400 shares.
(e) Includes the following number of shares of Monthly Income Preferred
Securities of Mission Capital, a limited partnership of which EME is the
sole general partner: Mr. Muller, 280 shares held in spouse's name, 390
shares held in custodial names and 8 shares held as co-trustee of trust with
shared voting and investment power; Mr. Iaco, 750 shares held in spouse's
name; all directors and executive officers as a group, 1,030 shares held in
spouses' names and 390 shares held in custodial names.
(f) Mr. Bryson retired as Chairman of EME's Board effective January 30, 1998.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- --------------------------------------------------------
Pursuant to Item 405 of Regulation S-K, EME is required to disclose the
following recently elected officers who each had one delinquent Form 3 "Initial
Statement of Beneficial Ownership of Securities" filing which is required to be
filed within 10 days of being elected for fiscal year 1997:
NAME DATE ELECTED
---- ------------
Cynthia S. Dubin, Vice President July 15, 1997
Edward J. Kania, Vice President July 15, 1997
William P. von Blasingame, Vice President July 15, 1997
Stephen P. Barrett, Vice President July 15, 1997
Michael P. Childers, Vice President December 1, 1997
Steven R. Schuler, Vice President December 16, 1997
79
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1994, EME made a loan to S. Daniel Melita, Vice President of EME, in
the amount of $150,000 in exchange for a note executed by Mr. Melita and payable
to EME at seven percent (7%) annual interest. The entire note, together with
accrued interest, was paid in December 1996. The largest aggregate amount of
indebtedness outstanding under the loan during 1996 was $171,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements at Item 8 of this report.
(2) LIST OF FINANCIAL STATEMENT SCHEDULES
The following item is filed as a part of this report pursuant to Item 14(d) of
Form 10-K:
The Cogeneration Group Combined Financial Statements as of December 31, 1997,
1996 and 1995.
Schedules pursuant to Item 8 of Form 10-K are omitted because the required
information is either presented in the financial statements or notes thereto, or
is not applicable, required or material.
(3) LIST OF EXHIBITS
(a)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement for the sale and purchase of shares in First Hydro
Limited, dated December 21, 1995 between PSB Holding Limited and
First Hydro Finance Plc, incorporated by reference to Exhibit 2.1
to EME's Current Report on Form 8-K, No. 1-13434 dated January 4,
1996.
2.2 Transaction Implementation Agreement, dated March 29, 1997 between
The State Electricity Commission of Victoria, Edison Mission
Energy Australia Limited, Loy Yang B Power Station Pty Ltd, Loy
Yang Power Limited, The Honourable Alan Robert Stockdale, Leanne
Power Pty Ltd and EME, incorporated by reference to Exhibit 2.2 to
EME's Current Report on Form 8-K, No. 1-13434 dated May 22, 1997.
3.1 Amended and Restated Articles of Incorporation of EME incorporated
by reference to Exhibit 3.1 to EME's Current Report on Form 8-K,
No. 1-13434 dated January 30, 1996. Originally filed with EME's
Registration Statement on Form 10 to the Securities and Exchange
Commission on September 30, 1994 and amended by Amendment No. 1
thereto dated November 19, 1994 and Amendment No. 2 thereto dated
November 21, 1994 (as so amended, the "Form 10").
3.2 By-Laws of EME, incorporated by reference to Exhibit 3.2 to EME's
Form 10.
4.1 Copy of the Global Debenture representing EME's 9-7/8% Junior
Subordinated Deferrable Interest Debentures, Series A, Due 2024.
80
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.2 Conformed copy of the Indenture dated as of November 30, 1994
between EME and The First National Bank of Chicago, as trustee.
4.2.1 First Supplemental Indenture dated as of November 30, 1994 to
Indenture dated as of November 30, 1994 between EME and The First
National Bank of Chicago, as trustee.
10.2 Power Purchase Contract between Southern California Edison Company
and Champlin Petroleum Company, dated March 8, 1985, incorporated
by reference to Exhibit 10.2 to EME's Form 10.
10.2.1 Amendment to Power Purchase Contract between Southern California
Edison Company and Champlin Petroleum Company, dated July 29,
1985, incorporated by reference to Exhibit 10.2.1 to EME's Form
10.
10.2.2 Amendment No. 2 to Power Purchase Contract between Southern
California Edison Company and Champlin Petroleum Company, dated
October 29, 1985, incorporated by reference to Exhibit 10.2.2 to
EME's Form 10.
10.4 Power Purchase Contract between Southern California Edison Company
and Imperial Energy Company, dated February 22, 1984, incorporated
by reference to Exhibit 10.4 to EME's Form 10.
10.4.1 Amendment to Power Purchase Contract between Southern California
Edison Company and Imperial Energy Company, dated November 13,
1984, incorporated by reference to Exhibit 10.4.1 to EME's Form
10.
10.6 Power Purchase Contract between Southern California Edison Company
and Imperial Energy Company Niland No. 2, dated April 16, 1985,
incorporated by reference to Exhibit 10.6 to EME's Form 10.
10.7 Power Purchase Contract between Southern California Edison Company
and Chevron U.S.A. Inc., dated November 9, 1984, incorporated by
reference to Exhibit 10.7 to EME's Form 10.
10.7.1 Amendment No. 1 to Power Purchase Contract between Southern
California Edison Company and Chevron U.S.A. Inc., dated March 29,
1985, incorporated by reference to Exhibit 10.7.1 to EME's Form
10.
10.7.2 Amendment No. 2 to Power Purchase Contract between Southern
California Edison Company and Chevron U.S.A. Inc., dated November
21, 1985, incorporated by reference to Exhibit 10.7.2 to EME's
Form 10.
10.7.3 Amendment No. 3 to Power Purchase Contract between Southern
California Edison Company and Chevron U.S.A. Inc., dated November
21, 1985, incorporated by reference to Exhibit 10.7.3 to EME's
Form 10.
10.8 Power Purchase Contract between Southern California Edison Company
and Arco Petroleum Products Company (Watson Refinery),
incorporated by reference to Exhibit 10.8 to EME's Form 10.
10.9 Power Supply Agreement between State Electricity Commission of
Victoria, Loy Yang B Power Station Pty. Ltd. and the Company
Australia Pty. Ltd., as managing partner of the Latrobe Power
Partnership, dated December 31, 1992, incorporated by reference to
Exhibit 10.9 to EME's Form 10.
10.10 Power Purchase Agreement between P.T. Paiton Energy Company as
Seller and Perusahaan Umum Listrik Negara as Buyer, dated February
12, 1994, incorporated by reference to Exhibit 10.10 to EME's Form
10.
10.11 Amended and Restated Power Purchase Contract between Southern
California Energy Company and Midway-Sunset Cogeneration Company,
dated May 5, 1988, incorporated by reference to Exhibit 10.11 to
EME's Form 10.
81
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 Parallel Generation Agreement between Kern River Cogeneration
Company and Southern California Energy Company, dated January 6,
1984, incorporated by reference to Exhibit 10.12 to EME's Form 10.
10.13 Parallel Generation Agreement between Kern River Cogeneration
(Sycamore Project) Company and Southern California Energy Company,
dated December 18, 1984, incorporated by reference to Exhibit
10.13 to EME's Form 10.
10.14 Amendment No. 2 to Power Purchase Agreement between Southern
California Energy Company and Vulcan/BN Geothermal Power Company,
dated April 1, 1986, incorporated by reference to Exhibit 10.14 to
EME's Form 10.
10.15 U.S. $325 million Bank of Montreal Revolver, dated October 29,
1993, incorporated by reference to Exhibit 10.15 to EME's Form 10.
10.15.1 U.S. $400 million Bank of America National Trust and Savings
Association Credit Agreement, dated October 27, 1994, incorporated
by reference to Exhibit 10.15.1 to EME's Form 10.
10.15.2 Conformed copy of the Amended and Restated U.S. $400 million Bank
of America National Trust and Savings Association Credit
Agreement, dated as of November 17, 1994, incorporated by
reference to Exhibit 10.15.2 to EME's Annual Report on Form 10-K
for the year ended December 31, 1994.
10.15.3 Conformed copy of the Second Amended and Restated U.S. $400
million Bank of America National Trust and Savings Association
Credit Agreement, dated as of October 11, 1996, incorporated by
reference to Exhibit 10.15.3 to EME's Annual Report on Form 10-K
for the year ended December 31, 1996.
10.16 Amended and Restated Ground Lease Agreement between Texaco
Refining and Marketing Inc. and March Point Cogeneration Company,
dated August 21, 1992, incorporated by reference to Exhibit 10.16
to EME's Form 10.
10.16.1 Amendment No. 1 to Amended and Restated Ground Lease Agreement
between Texaco Refining and Marketing Inc. and March Point
Cogeneration Company, dated August 21, 1992, incorporated by
reference to Exhibit 10.16 to EME's Form 10.
10.17 Memorandum of Agreement between Atlantic Richfield Company and
Products Cogeneration Company, dated September 17, 1987,
incorporated by reference to Exhibit 10.17 to EME's Form 10.
10.18 Memorandum of Ground Lease between Texaco Producing Inc. and
Sycamore Cogeneration Company, dated January 19, 1987,
incorporated by reference to Exhibit 10.18 to EME's Form 10.
10.19 Amended and Restated Memorandum of Ground Lease between Getty Oil
Company and Kern River Cogeneration Company, dated November 14,
1984, incorporated by reference to Exhibit 10.19 to EME's Form 10.
10.20 Memorandum of Lease between Sun Operating Limited Partnership and
Midway-Sunset Cogeneration Company, incorporated by reference to
Exhibit 10.20 to EME's Form 10.
10.21 Executive Supplemental Benefit Program, incorporated by reference
to Exhibits to Forms 10-K filed by SCEcorp (File No. 1-2313).
10.22 1981 Deferred Compensation Agreement, incorporated by reference to
Exhibits to Forms 10-K filed by SCEcorp (File No. 1-2313).
10.23 1985 Deferred Compensation Agreement for Executives, incorporated
by reference to Exhibits to Forms 10-K filed by SCEcorp (File No.
1-2313).
10.24 1987 Deferred Compensation Plan for Executives, incorporated by
reference to Exhibits to Forms 10-K
82
EXHIBIT NO. DESCRIPTION
- ----------- -----------
filed by SCEcorp (File No. 1-2313).
10.25 1988 Deferred Compensation Plan for Executives, incorporated by
reference to Exhibits to Forms 10-K filed by SCEcorp (File No. 1-
2313).
10.26 1989 Deferred Compensation Plan for Executives, incorporated by
reference to Exhibits to Forms 10-K filed by SCEcorp (File No. 1-
9936).
10.27 1990 Deferred Compensation Plan for Executives, incorporated by
reference to Exhibits to Forms 10-K filed by SCEcorp (File No. 1-
9936).
10.28 Annual Deferred Compensation Plan for Executives, incorporated by
reference to Exhibits to Forms 10-K filed by SCEcorp (File No. 1-
9936).
10.29 Executive Retirement Plan for Executives, incorporated by
reference to Exhibits to Forms 10-K filed by SCEcorp (File No. 1-
2313).
10.30 Long-Term Incentive Plan for Executive Officers, incorporated by
reference to the Registration Statement (File No. 33-19541) under
which SCEcorp registered securities to be offered pursuant to the
Plan under the Securities Act of 1933.
10.31 Estate and Financial Planning Program for Executive Officers,
incorporated by reference to Exhibits to Forms 10-K filed by
SCEcorp (File No. 1-9936).
10.32 Letter Agreement with Edward R. Muller, incorporated by reference
to Exhibit 10.32 to EME's Form 10.
10.33 Agreement with James S. Pignatelli, incorporated by reference to
Exhibit 10.33 to EME's Form 10.
10.34 Conformed copy of the Guarantee Agreement dated as of November 30,
1994, incorporated by reference to Exhibit 10.34 to EME's Form 10.
10.35 Indenture of Lease between Brooklyn Navy Yard Development
Corporation and Cogeneration Technologies, Inc., dated as of
December 18, 1989, incorporated by reference to Exhibit 10.35 to
EME's Annual Report on Form 10-K for the year ended December 31,
1994.
10.35.1 First Amendment to Indenture of Lease between Brooklyn Navy Yard
Development Corporation and Cogeneration Technologies, Inc., dated
November 1, 1991, incorporated by reference to Exhibit 10.35.1 to
EME's Annual Report on Form 10-K for the year ended December 31,
1994.
10.35.2 Second Amendment to Indenture of Lease between Brooklyn Navy Yard
Development Corporation and Cogeneration Technologies, Inc., dated
June 3, 1994, incorporated by reference to Exhibit 10.35.2 to
EME's Annual Report on Form 10-K for the year ended December 31,
1994.
10.35.3 Third Amendment to Indenture of Lease between Brooklyn Navy Yard
Development Corporation and Cogeneration Technologies, Inc., dated
December 12, 1994, incorporated by reference to Exhibit 10.35.3 to
EME's Annual Report on Form 10-K for the year ended December 31,
1994.
10.36 Conformed copy of A$200 million Bank of America National Trust and
Savings Association Credit Agreement dated November 22, 1994,
incorporated by reference to Exhibit 10.36 to EME's Annual Report
on Form 10-K for the year ended December 31, 1994.
10.36.1 Conformed copy of the Amended and Restated A$200 million Bank of
America National Trust and Savings Associated Credit Agreement
dated December 12, 1994, incorporated by reference to Exhibit
10.36.1 to EME's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.36.2 Conformed copy of First Amendment to Amended and Restated A$200
million Bank of America National Trust and Savings Associated
Credit Agreement dated June 7, 1995, incorporated by reference to
Exhibit 10.36.2 to EME's Form 10-Q for the quarter ended September
30, 1995.
83
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.37 Amended and Restated Limited Partnership Agreement of Mission
Capital, L.P. dated as of November 30, 1994, incorporated by
reference to Exhibit 10.37 to EME's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.38 Action of General Partner of Mission Capital, L.P. creating the 9-
7/8% Cumulative Monthly Income Preferred Securities, Series A,
dated as of November 30, 1994, incorporated by reference to
Exhibit 10.38 to EME's Annual Report on Form 10-K for the year
ended December 31, 1994.
10.39 Action of General Partner of Mission Capital, L.P. creating the 8-
1/2% Cumulative Monthly Income Preferred Securities, Series B,
dated as of August 8, 1995, incorporated by reference to Exhibit
10.39 to EME's Form 10-Q for the quarter ended June 30, 1995.
10.40 Power Purchase Contract between ISAB Energy, S.r.l. as Seller and
Enel, S.p.A. as Buyer, dated June 9, 1995, incorporated by
reference to Exhibit 10.40 to EME's Form 10-Q for the quarter
ended June 30, 1995.
10.41 400 million sterling pounds Barclays Bank Plc Credit Agreement,
dated December 18, 1995, incorporated by reference to Exhibit
10.41 to EME's Current Report on Form 8-K, No. 1-13434.
10.42 Guarantee by EME dated December 1, 1995 supporting Letter of
Credit issued by Bank of America National Trust and Savings
Association to secure payment of bonds issued pursuant to the
Brooklyn Navy Yard project tax-exempt bond financing, incorporated
by reference to Exhibit 10.42 to EME's Annual Report on Form 10-K
for the year ended December 31, 1995.
10.43 Guarantee by EME dated December 1, 1995 supporting Letter of
Credit issued by Bank of America National Trust and Savings
Association to secure Brooklyn Navy Yard's indemnity to the New
York City Industrial Development Agency pursuant to the Brooklyn
Navy Yard project tax-exempt bond financing, incorporated by
reference to Exhibit 10.43 to EME's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.44 Guarantee by EME dated December 20, 1996 in favor of The Fuji
Bank, Limited, Los Angeles Agency, to secure Camino Energy
Company's payments pursuant to Camino Energy Company's Credit
Agreement and Defeasance Agreement, incorporated by reference to
Exhibit 10.44 to EME's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.45 Power Purchase Agreement between National Power Corporation and
San Pascual Cogeneration Company International B.V., dated
September 10, 1997.*
10.46 Power Purchase Agreement between Gulf Power Generation Co., LTD.,
and Electricity Generating Authority of Thailand, dated December
22, 1997.*
21 List of Subsidiaries.*
27 Financial Data Schedule.*
*Filed herewith
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
(c) EXHIBITS
84
The Exhibits filed with this report are listed in Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules filed with this report are listed in
Section 14(a)(2) above.
Financial information for the Cogeneration Group for the years ended
December 31, 1997, 1996 and 1995. The financial statements of the Cogeneration
Group present the combination of those entities that are 50% or less owned by
EME and that met the requirements of Rule 3-09 of Regulation S-X in 1995. There
were no entities which were 50% or less owned by EME that met the requirements
of Rule 3-09 of Regulation S-X in 1997 and 1996.
85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Edison Mission Energy:
We have audited the accompanying combined statements of income, partners'
equity and cash flows of Kern River Cogeneration Company (a general
partnership between Getty Energy Company and Southern Sierra Energy Company),
Sycamore Cogeneration Company (a general partnership between Texaco
Cogeneration Company and Western Sierra Energy Company) and Watson
Cogeneration Company (a general partnership between Camino Energy Company and
Products Cogeneration Company), (collectively the Cogeneration Group) for the
year ended December 31, 1995. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of the Cogeneration Group's
operations and cash flows for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 15, 1996
86
THE COGENERATION GROUP
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- -------- ---------
(Unaudited) (Unaudited)
OPERATING REVENUES
Sales of energy to SCE $402,839 $347,537 $318,964
Sales of energy to TEPI 11,715 9,406 8,405
Sales of energy to ARCO Products 26,423 23,631 19,249
Sales of steam to TEPI 89,682 72,038 64,150
Sales of steam to ARCO Products 48,216 43,121 35,018
-------- -------- --------
Total operating revenues 578,875 495,733 445,786
-------- -------- --------
OPERATING EXPENSES
Fuel 294,277 234,509 181,219
Plant operations 53,377 56,662 62,657
Depreciation and amortization 24,194 24,151 24,661
Administrative and general 8,014 5,733 6,824
-------- -------- --------
Total operating expenses 379,862 321,055 275,361
-------- -------- --------
Income from operations 199,013 174,678 170,425
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest and other income 5,041 2,031 2,706
Interest expense (4,197) (5,673) (9,454)
-------- -------- --------
Total other income (expense) 844 (3,642) (6,748)
-------- -------- --------
NET INCOME $199,857 $171,036 $163,677
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
87
THE COGENERATION GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31,
------------------------
1997 1996
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36,305 $ 48,334
Trade receivables - affiliates 62,800 57,051
Other receivables 603 825
Inventories 15,327 16,632
Prepaid expenses and other assets 2,963 3,009
-------- --------
Total current assets 117,998 125,851
-------- --------
PROPERTY, PLANT AND EQUIPMENT 672,082 652,534
Less accumulated depreciation and amortization 257,436 236,517
-------- --------
Net property, plant and equipment 414,646 416,017
-------- --------
OTHER ASSETS
Emission credits, net 17,488 19,584
Intangible assets, net 22,822 23,950
Other 168 890
-------- --------
Total other assets 40,478 44,424
-------- --------
TOTAL ASSETS $573,122 $586,292
======== ========
The accompanying notes are an integral part of these combined financial
statements.
88
THE COGENERATION GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable - affiliates $ 47,410 $ 46,680
Accounts payable and accrued liabilities 20,680 32,077
Current maturities of loans payable 13,404 13,404
-------- --------
Total current liabilities 81,494 92,161
-------- --------
LOANS PAYABLE, net of current maturities 55,966 69,370
-------- --------
MAINTENANCE ACCRUAL 10,505 9,160
-------- --------
Total liabilities 147,965 170,691
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' EQUITY 425,157 415,601
-------- --------
TOTAL LIABILITIES AND PARTNERS' EQUITY $573,122 $586,292
======== ========
The accompanying notes are an integral part of these combined financial
statements.
89
THE COGENERATION GROUP
COMBINED STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
EME Texaco ARCO Total
Affiliates Affiliates Affiliates Equity
---------- ----------- ---------- ------
Balances at December 31, 1994 $196,456 $ 94,129 $106,503 $ 397,088
Cash distributions (79,550) (42,800) (38,250) (160,600)
Net income 81,182 49,010 33,485 163,677
-------- -------- -------- ---------
Balances at December 31, 1995 198,088 100,339 101,738 400,165
Cash distributions (Unaudited) (77,060) (40,800) (37,740) (155,600)
Net income (Unaudited) 84,865 52,845 33,326 171,036
-------- -------- -------- ---------
Balances at December 31, 1996 (Unaudited) 205,893 112,384 97,324 415,601
Cash distributions (Unaudited) (94,326) (53,900) (42,075) (190,301)
Net Income (Unaudited) 99,139 60,466 40,252 199,857
-------- -------- -------- ---------
Balances at December 31, 1997 (Unaudited) $210,706 $118,950 $ 95,501 $ 425,157
======== ======== ======== =========
The accompanying notes are an integral part of these combined financial
statements.
90
THE COGENERATION GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 199,857 $ 171,036 $ 163,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,194 24,151 24,661
(Increase) decrease in receivables (5,527) (7,180) 5,595
Decrease (increase) in inventories 1,305 1,177 (1,519)
(Decrease) increase in payables (5,572) 27,800 (1,053)
(Decrease) increase in maintenance accrual (3,750) 3,673 5,456
Other, net 47 (1,630) (411)
--------- --------- ---------
Net cash provided by operating activities 210,554 219,027 196,406
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (19,548) (11,512) (7,386)
--------- --------- ---------
Net cash used in investing activities (19,548) (11,512) (7,386)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from escrow account 670 1,534 1,488
Loan repayments (13,404) (24,951) (25,100)
Distribution to partners (190,301) (155,600) (160,600)
--------- --------- ---------
Net cash used in financing activities (203,035) (179,017) (184,212)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,029) 28,498 4,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 48,334 19,836 15,028
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36,305 $ 48,334 $ 19,836
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 4,257 $ 5,997 $ 9,553
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES
Additions to property, plant and equipment
received in settlement of certain receivables $ -- $ -- $ 778
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
91
THE COGENERATION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (UNAUDITED), 1996 (UNAUDITED) AND 1995
NOTE 1. GENERAL
- ----------------
Principles of Combination
Edison Mission Energy (EME), a wholly owned subsidiary of The Mission Group, a
wholly owned non-utility subsidiary of Edison International, the parent holding
company of Southern California Edison Company (SCE), has a general partnership
interest in Kern River Cogeneration Company (Kern River), Sycamore Cogeneration
Company (Sycamore) and Watson Cogeneration Company (Watson) (jointly referred to
herein as the Group). SSEC, WSEC and CEC (as defined below) are separate legal
entities from EME. The accompanying combined financial statements have been
prepared for purposes of EME complying with certain requirements of the
Securities and Exchange Commission.
Kern River is a general partnership between Getty Energy Company (GEC), a
wholly owned subsidiary of Texaco Inc. (Texaco), and Southern Sierra Energy
Company (SSEC), a wholly owned subsidiary of EME. Kern River owns and operates
a 300-MW natural gas-fired cogeneration facility located near Bakersfield,
California, which sells electricity to SCE and which sells electricity and steam
to Texaco Exploration and Production Inc. (TEPI), a wholly owned subsidiary of
Texaco, for use in TEPI's enhanced oil recovery operations in the Kern River Oil
Field. Partnership income (loss) is allocated equally to the partners.
Sycamore is a general partnership between Texaco Cogeneration Company (TCC), a
wholly owned subsidiary of Texaco, and Western Sierra Energy Company (WSEC), a
wholly owned subsidiary of EME. Sycamore owns and operates a 300-MW natural
gas-fired cogeneration facility located near Bakersfield, California, which
sells electricity to SCE and which sells steam to TEPI for use in TEPI's
enhanced oil recovery operations in the Kern River Oil Field. Partnership
income (loss) is allocated equally to the partners.
Watson is a general partnership between Carson Cogeneration Company (CCC), a
wholly owned subsidiary of CH-Twenty, Inc., a majority owned subsidiary of
Atlantic Richfield Company (ARCO), Products Cogeneration Company (PCC), a wholly
owned subsidiary of ARCO and Camino Energy Company (CEC), a wholly owned
subsidiary of EME. CCC, PCC and CEC own 49 percent, 2 percent and 49 percent,
respectively. Watson owns and operates a 385-MW natural gas-fired cogeneration
facility located in Carson, California, which sells electricity to SCE and which
sells electricity and steam to ARCO Products Company (ARCO Products) for use at
ARCO Products' refinery. Partnership income (loss) is allocated based upon the
partners' respective ownership percentage.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the
92
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories
Inventories are comprised of materials and supplies, and are stated at their
lower of average cost or market.
Property, Plant and Equipment
All costs, including interest and field overhead expenses, incurred during
construction and the precommission phase of the facilities were capitalized as
part of the cost of the facilities. Revenue earned during the precommission
phase was offset against the costs of the facilities. The facilities and
related equipment are being depreciated on a straight-line basis over
approximately 30 years, which is the estimated useful lives of the facilities.
Emission Credits
Two of the Group's facilities were required to obtain assignments of emission
offset credits in order to be certified by the California Energy Commission.
These credits were required to meet the current environmental regulations as
they relate to the emissions being produced from the operation of these
facilities. The cost of these emission credits are stated net of accumulated
amortization of $23.2 million and $21.1 million at December 31, 1997 and 1996,
respectively (see Note 5). The emission credits are being amortized on a
straight-line basis over 21 years.
Intangible Assets
Intangible assets are stated net of accumulated amortization of $13 million
and $11.9 million at December 31, 1997 and 1996, respectively, and consist of
outside boundary limit facilities, refinery infrastructure, environment permits
and land use, as outlined in the various partnership agreements, contributed to
the Group. All of the intangible assets relate to the operations of the various
facilities, and as a result, are being amortized on a straight-line basis over
the estimated useful life of the facilities.
Statements of Cash Flows
For purposes of reporting cash flows, the Group considers short-term temporary
cash investments with an original maturity of three months or less to be cash
equivalents.
Maintenance Accruals
The Group performs scheduled inspections and major overhauls periodically over
the life of their combustion turbines. Generally, expenses for these events are
accrued for on a straight-line basis over the expected operating-hour interval
between each like maintenance event. Expenditures for minor maintenance,
repairs and renewals are charged to expense as incurred. Expenditures for
additions and improvements are capitalized.
The accruals for repair and maintenance events are based on management's
estimates of what these events will cost at the time the events occur. Due to
fluctuations in prices and changes in the timing of the scheduled events, the
estimated costs of these events can differ from actual costs incurred.
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Fair Value of Financial Instruments
The carrying amount of the short-term investments approximates fair value due
to the short maturities of such investments. The estimated fair value of loans
payable is discussed in Note 4.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Plant and equipment consist of the following:
(Unaudited)
December 31,
-----------------
1997 1996
------ ------
(in millions)
Plant and equipment
Power plant facilities $649.0 $644.8
Building, furniture and office equipment 23.0 7.7
------ ------
672.0 652.5
Less -- Accumulated depreciation and amortization 257.4 236.5
------ ------
$414.6 $416.0
====== ======
NOTE 4. LOANS PAYABLE
- ----------------------
(Unaudited)
December 31,
-----------------
1997 1996
------ ------
(in millions)
Watson project:
Note payable to ARCO (5% at 12/31/97)
(5% at 12/31/96) $ 27.4 $ 27.4
Note payable to CEC (5% at 12/31/97)
(5% at 12/31/96) 26.3 26.3
Sycamore project:
$165 million Loan and Credit
Agreement due 1999
(Eurodollar rate + 0.625%) (6.4% at 12/31/97)
(6.2% at 12/31/96) 15.7 29.1
------ ------
Subtotal 69.4 82.8
Current maturities of loans payable (13.4) (13.4)
------ ------
Total $ 56.0 $ 69.4
====== ======
The above agreement for the Sycamore project is secured by certain assets of
Sycamore, and places certain restrictions on capital distributions. In
addition, this agreement requires Sycamore to maintain escrow deposits based
upon outstanding loan amounts. Based upon borrowing rates currently available
to Sycamore for long-term debt with similar terms and maturity, the fair value
of the amount outstanding under this agreement approximates the carrying value.
94
The fair value of the two Watson project notes was approximately $53 million
at December 31, 1997 and 1996. In February 1996, the interest rates on the two
Waston project notes were reduced to 5% and the maturity dates extended to April
2008.
Annual maturities on the loans payable at December 31, 1997 are as follows
(dollars in millions):
YEAR
----
1998 $13.4
1999 2.2
2000 --
2001 --
2002 --
Thereafter 53.8
-----
Total $69.4
=====
NOTE 5. RELATED-PARTY TRANSACTIONS/CONTRACTUAL OBLIGATIONS
- -----------------------------------------------------------
Operating and Other Costs
The amounts incurred by EME, Texaco and their respective affiliates for
operating and other costs charged to the Group, which are not disclosed
elsewhere, were as follows:
(in millions)
1997 1996 1995
---- ---- ----
(unaudited) (unaudited)
Texaco and affiliates $ 4.4 $ 4.6 $ 4.5
EME and affiliates 1.2 2.4 2.8
Emission Credits
Certain affiliates of Texaco assigned their rights to certain emission offset
credits to certain of the Group for a period of 21 years. These emission offset
credits were earned by the Texaco affiliates by reducing specified emissions at
other of their operations. Such credits are used by the Group to allow certain
of the Group's facilities to operate under current environmental regulations.
The credits were required by those facilities in order to be certified by the
California Energy Commission and are required to be maintained throughout the
period of operations of those facilities. The credits were reflected as a
capital contribution by such entities at the fair market value of $40.8 million.
Fuels Management Agreement
Certain of the Group are party to agreements with Texaco Natural Gas, Inc.
(TNGI), whereby TNGI is to procure and manage all fuel-gas supplies and
transportation for two of the facilities (except fuel-gas supplies procured and
delivered under tariff-gas contracts, provided under an excepted contract or
otherwise excluded from these agreements by the mutual consent of the partners).
The original termination date of the agreements with TNGI was December 31,
1995. TNGI received a fixed service fee of $.0075 per MMBtu of fuel gas
supplied to certain of the Group, and a variable
95
incentive fee based on the utility fuel cost applicable to such Group. The
agreements include a minimum annual fee of $.015 per MMBtu of fuel gas utilized
if the total of the fixed service fee and variable incentive fee is less than
the minimum annual fee. The amounts incurred under these agreements were $118.5
million, which included fees earned by TNGI of $3.7 million, for the year ended
December 31, 1995.
As of January 1, 1996, the Amended and Restated Fuel Management Agreement,
terminating on October 1, 2002, was entered into such that TNGI will receive a
fixed service fee of $.0375 per MMBtu of fuel gas supplied to certain of the
Group. The amounts incurred under the amended agreements were $183.5 million
and $147.7 million which included fees earned by TNGI of $0.4 million and $2.6
million, for the two years ended December 31, 1997.
One of the Group has entered into a fuel (refinery gas and butane) purchase
agreement with a subsidiary of ARCO. Such Group's purchases under this
agreement amounted to $40.9 million, $38.4 million and $24.2 million for the
three years ended December 31, 1997, 1996 and 1995, respectively.
Operation and Maintenance Agreement
Two of the Group have agreements with Edison Mission Operation & Maintenance,
Inc. (EMOM), a wholly owned subsidiary of EME, whereby EMOM shall perform all
operation and maintenance activities necessary for the production of electricity
and steam by such Group facilities. The agreements will continue until
terminated by either party. EMOM is paid for all costs incurred in connection
with operating and maintaining the facility. EMOM may also earn incentive
compensation as set forth in the agreements. The amounts incurred by the Group
under these agreements were $6.3 million, $6 million and $6.2 million which
included incentive compensation earned by EMOM of $0.9 million for each of the
three years ended December 31, 1997, 1996 and 1995, respectively.
One of the Group has an agreement with a subsidiary of ARCO, whereby such
subsidiary shall perform all operation and maintenance activities necessary for
the production of electricity and steam by such Group's facility. The agreement
will continue until termination of the Power Purchase Agreement in April 2008.
The ARCO subsidiary is reimbursed for all costs incurred in connection with
operating and maintaining the facility. The amounts incurred under this
agreement were $5 million, $4.9 million and $5.4 million for the three years
ended December 31, 1997, 1996 and 1995, respectively. Additionally, ARCO
provides other ancillary services under a service contract for a fee. Total
service fees earned by ARCO were $1.4 million, $1.3 million and $1.3 million for
the three years ended December 31, 1997, 1996 and 1995, respectively.
Steam Purchase and Sale Agreements
Certain of the Group have agreements with TEPI for the sale of steam generated
by such Group's facilities. The agreements terminate 20 years from the date of
the first sale of steam thereunder. TEPI pays such Group a steam fuel charge
based upon the quantity and quality of steam delivered during the month, which
is priced at the lesser of the current Southern California Gas Company Border
Gas Price, or the weighted average posted price of Kern River Crude, less any
severance, excise or windfall profit taxes, and a processing charge per MMBtu as
defined in the agreements. The quantity of steam sold under this contract is
expected to be sufficient for such Group to maintain qualifying facility status.
Total sales of steam under these agreements amounted to approximately $89.7
million, $72 million and $64.2 million for the three years ended December 31,
1997, 1996 and 1995, respectively.
96
These agreements have been amended whereby such Group will reduce a portion of
steam prices beginning in 1999 and to a limited extent in 1997. The amount of
future reductions in annual revenues could total approximately $25 million.
Additionally, one of the Group has contracted to sell steam and power
generated by its facility to the ARCO subsidiary's Los Angeles refinery under
separate agreements. Total sales under these contracts amounted to approximately
$74.6 million, $66.8 million and $54.3 million for the three years ended
December 31, 1997, 1996 and 1995, respectively.
Power Purchase Agreements
One of the Group has an agreement with TEPI for the sale of contract capacity
and net energy. This agreement will remain in effect until August 8, 2005. The
amounts paid for the contract capacity and net energy are based on the same
terms as provided for in the agreements with SCE (discussed below). Total sales
of power under the agreement with TEPI amounted to approximately $11.7 million,
$9.4 million and $8.4 million for the three years ended December 31, 1997, 1996
and 1995, respectively.
The Group has agreements with SCE for the sale of contract capacity and net
energy generated by the facilities. These agreements will remain in effect 20
years from the Firm Operation Date of the relevant facility. SCE pays the Group
for energy based upon the price of SCE's Avoided Fuel Cost, the quantity of
kilowatts delivered, the contracted heat rate allocated to on-peak, mid-peak and
off-peak hours and a factor as defined in the agreements to account for system
line loss at the point of delivery. SCE also pays the Group for firm capacity
based upon a contracted amount per kilowatt year. Total sales of energy under
these agreements amounted to $402.8 million, $347.5 million and $319 million for
the three years ended December 31, 1997, 1996 and 1995, respectively.
As discussed above, the electric power generated by the Group is primarily
sold to SCE pursuant to long-term power sales contracts. When negotiating power
sales contracts, EME negotiates contracts which are expected to result in
consistent cash flow under a wide range of economic and operating circumstances.
To accomplish this end, EME structures its long-term contracts so that
fluctuations in fuel costs will produce similar fluctuations in electric
revenues and by entering into long-term fuel supply and transportation
agreements. In addition, the operation of the facilities involves many risks
including the breakdown or failure of equipment or processes, performance below
expected levels of output, interruptions in fuel supply, pipeline disruptions,
disruptions in the supply of electrical energy, violation of permit
requirements, operator error, the inability to meet expected efficiency
standards and catastrophic events. The occurrence of any of these events could
result in extended unavailability under the power sales contracts which may
entitle the purchaser thereunder to terminate the relevant power sales
contracts.
Natural Gas Supply and Transportation Agreements
The Group purchases gas on the spot market. As such, the Group may be
exposed, in the short-term, to fluctuations in the price of natural gas.
Fluctuations in the prices paid for gas are implicitly tied to the revenues
received for either power or steam under the agreements.
97
NOTE 6. INCOME TAXES
- ---------------------
Income taxes are not recorded by the Group because the net income or loss
allocated to the partners is included in their respective income tax returns.
NOTE 7. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Future Obligations
Pursuant to amendments made in 1990 to the Federal Clean Air Act and the
California Clean Air Act, the Group is required to reduce its nitrogen oxide
(NOx) emissions. To fulfill these requirements one of the Group retrofitted its
combustion turbines to employ a Dry-Lo NOx (DLN) technology. One of the Group
is scheduled to complete the retrofit of its combustion turbines to coincide
with maintenance overhauls scheduled through 1999. Such Group's management
estimates the future obligations of these DLN conversions will be $22.4 million.
The Group will capitalize $11.6 million of these costs related to the DLN
conversions. It is further anticipated that operating cash flows will be used
to fund the DLN conversions.
Ship-or-Pay
Pursuant to the Master Agreement, entered into as of December 1, 1994, certain
of the Group executed a Security of Supply Agreement with an affiliated
partnership of EME and Texaco. Such Group has agreed to accept and underwrite,
on a pro-rata basis, a portion of Texaco's commitment pursuant to the
transportation agreement (the Transportation Agreement) between Texaco, the
Mojave Pipeline Company (Mojave) and the El Paso Pipeline Company (El Paso),
dated February 15, 1989 and extending through March 31, 2008. The Company has
agreed that Mojave and El Paso shall be the exclusive means of delivery for
certain of the Group of the lesser of 75% of the annual total natural gas fuel
requirements for such Group and 52,012,500 MMBtu per year.
Except upon the occurrence of certain permissible events, two of the Group are
subject to certain terms and conditions, whereby failure to transport the
required quantity of natural gas on the Mojave Pipeline will result in the Group
paying $0.63 per deficit MMBtu. Such Group will share any ship-or-pay
liabilities on a pro-rata basis (as defined in the Transportation Agreement)
with the affiliated partnership.
For each of the years in the three-year period ended December 31, 1997, the
transportation quantities required under the Transportation Agreement were met.
It is the opinion of the relevant Group's management that these commitments will
continue to be met based upon current projections for the operations of such
Group's facilities.
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ James V. Iaco, Jr.
---------------------------------------------------------------------
JAMES V. IACO, JR., SENIOR VICE PRESIDENT and CHIEF FINANCIAL OFFICER
Date: March 30, 1998
--------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principle Executive Officer:
/s/ Edward R. Muller President and Chief Executive Officer March 30, 1998
Controller or Principal Accounting Officer:
/s/ Thomas E. Legro Vice President and Controller March 30, 1998
Majority of Board of Directors:
/s/ Alan J. Fohrer Chairman of the Board March 30, 1998
/s/ Robert M. Edgell Director March 30, 1998
/s/ Bryant C. Danner Director March 30, 1998
99