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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, 1998
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: (949) 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 New York Stock Exchange
Income Preferred Securities, Series B * -----------------------
--------------------------------------- (name of each exchange on
(Title of Class) 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 26, 1999: $0. Number of shares outstanding of the
registrant's Common Stock as of March 26, 1999: 100 shares (all shares held by
an affiliate of the registrant).
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business............................................................. 1
2. Properties........................................................... 24
3. Legal Proceedings.................................................... 25
4. Submission of Matters to a Vote of Security Holders.................. 25
PART II
5. Market for Registrant's Common Equity and Related Shareholder
Matters............................................................. 26
6. Selected Financial Data.............................................. 27
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 29
8. Financial Statements and Supplementary Data.......................... 40
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 40
PART III
10. Directors and Executive Officers of the Registrant................... 74
11. Executive Compensation............................................... 76
12. Security Ownership of Certain Beneficial Owners and Management....... 83
13. Certain Relationships and Related Transactions....................... 84
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 85
Signatures........................................................... 91
PART I
ITEM 1. BUSINESS
The Company
- -----------
Edison Mission Energy (EME) is a leading global power producer. Through its
subsidiaries, EME 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 (TMG), 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 24 domestic and 24 international operating electrical power
generation facilities with an aggregate generating capacity of 9,237 megawatts
(MW), of which EME's share is approximately 7,032 MW. One domestic and one
international operating project totaling 12,326 MW of generating capacity (of
which EME's anticipated share is approximately 10,793 MW) are currently pending
acquisition. One domestic and four international projects totaling 3,162 MW of
generating capacity (of which EME's anticipated share is approximately 1,332 MW)
are currently in the construction stage. At December 31, 1998, EME had
consolidated assets of $5.2 billion and total shareholder's equity of $958
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 (949)
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 predominately in one line of business, electric power
generation, with reportable segments organized by geographic region: Americas,
Asia Pacific and Europe, Central Asia, Middle East and Africa. EME's plants are
located in different geographic areas, which mitigate the effects of regional
markets, economic downturns or unusual weather conditions. These regions take
advantage of the increasing globalization of the independent power market. See
"-- Notes to Consolidated Financial Statements, Note 15. Business Segments".
Description of Business
- -----------------------
General Overview
EME is a leading global power producer. 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 24 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
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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. In
1998, utility deregulation in several states led utilities to divest generating
assets, which has created new opportunities for growth of independent power in
the United States.
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 goal is to be one of the leading owners and operators of
electric generating assets in the world. EME will 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, with its experienced personnel,
that its projects are well-planned, structured and managed, thereby maximizing
value creation. EME has separate strategies for developed and developing
countries.
In developed countries, long-term contracts are likely to be the exception
rather than the rule. EME's strategy focuses primarily on three areas with
respect to uncontracted plants: valuation, trading and regulation. First, EME
continuously improves its valuation tools enabling EME to bid more effectively
and competitively on assets that will be sold over the next five years in the
United States, the United Kingdom, Spain, Italy, Australia and other developed
countries. Second, EME strives to develop its trading skills to enhance the
returns of its generating assets. Third, EME's principal customers continue to
be regulated utilities; therefore, understanding the regulatory and economic
environment in which these utilities operate allows EME to better react to what
they will do.
In developing countries, EME's strategy focuses on investing with good
partners, securing non-recourse financing based upon long-term contracts with
state-owned utilities, and more government support such as the Export-Import
Bank of the United States, the U.S. Overseas Private Investment Corporation and
The Export-Import Bank of Japan.
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.
2
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 headquartered in Irvine, California with additional
offices located in Fairfax, Virginia and Washington, D.C. The strategy for the
Americas division 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 24
operating projects in this region, all of which are presently located in the
United States.
In March 1999, an indirect, wholly owned subsidiary of EME acquired 100% of
the 1,884-MW Homer City Generating Station for approximately $1.8 billion. EME
financed the acquisition with a combination of debt secured by the project,
corporate debt and cash. This facility is one of the largest coal-fired plants
in the mid-Atlantic region of the United States and has the rights to direct,
high voltage interconnections to both the New York Power Pool and the
Pennsylvania-New Jersey-Maryland Power Pool. EME will operate the plant, which
is one of the lowest-cost generation facilities in the region. EME will invest
additional capital to upgrade the plant's environmental controls. These
upgrades will include the addition of a scrubber on one unit to control sulfur
dioxide and selective catalytic reduction controls at each of the three units to
control nitrogen oxide emissions. Following these upgrades, Homer City will
have the lowest nitrogen oxide emission rate of any large coal plant in the
eastern United States.
In December 1998, EME del Caribe, an indirect, wholly owned subsidiary of
EME, acquired 50% of the 540-MW EcoElectrica liquefied natural gas (LNG)
combined-cycle cogeneration facility under construction in Penuelas, Puerto Rico
for approximately $243 million. The project also includes a desalination plant
and LNG storage and vaporization facilities and is expected to commence
commercial operation by late 1999.
In March 1999, EME entered into agreements to acquire 100% of the fossil-fuel
generating assets of Commonwealth Edison Co., totaling 9,772 MW. EME will
operate the plants, which are located in the Midwest. The closing of the
transaction is subject to various state and federal regulatory approvals and is
expected to be completed by year end 1999. EME plans to finance the
approximately $5 billion acquisition with a combination of debt secured by the
project, corporate debt, cash and funding from Edison International.
3
For further information regarding EME's 24 domestic operating 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
historically experienced the fastest electric demand growth. Beginning in mid
1997, these economies experienced an economic downturn that is continuing, and
has resulted in a decline in the growth of demand for electric power. Current
forecasts indicate a return to economic health in 1999/2000, and as a result,
electricity demand is expected to recover in most countries, with 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 1,000-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. 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 nearing completion with
commercial operation expected in 1999. The tariff is higher in the early years
and steps down over time. 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). Payments are in Indonesian Rupiah, with the
portion of such payments intended to cover non-Rupiah project costs (including
returns to investors) indexed to the Indonesian Rupiah/U.S. dollar exchange rate
established at the time of the Power Purchase Agreement in February 1994. PLN's
payment obligations are supported by the Government of Indonesia. The projected
rate of growth of the Indonesian economy and the exchange rate of Indonesian
Rupiah into U.S. dollars have deteriorated significantly since the Paiton
project was contracted, approved and financed. The project received substantial
finance and insurance support from the Export-Import Bank of the United States,
The Export-Import Bank of Japan, the U.S. Overseas Private Investment
Corporation and the Ministry of International Trade and Industry of Japan. The
Paiton project's senior debt ratings have been reduced from investment grade to
speculative grade based on the rating agencies' perceived increased risk that
PLN might not be able to honor the electricity sales contract with Paiton. The
Government of Indonesia has arranged to reschedule sovereign debt owed to
foreign governments and has entered into discussions
4
about rescheduling sovereign debt owed to private lenders. PLN has recently
announced its intentions to commence discussions with independent power
producers to renegotiate the power supply contracts, however it is not yet known
what form the negotiation may take. Any material modifications of the contract
could also require a renegotiation of the Paiton project's debt agreement. The
impact of any such renegotiations with PLN, Government of Indonesia or the
project's creditors on EME's expected return on its investment in Paiton is
uncertain at this time, however, management believes that it will ultimately
recover its investment in the project.
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 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 Bo Nok in Thailand. Financial closing
and commencement of construction are anticipated in 1999 with commercial
operation expected to begin in 2002.
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 the first quarter of
1999 with commercial operation expected to begin in 2001.
In July 1998, EME, though an indirect, wholly owned subsidiary, purchased a
25% interest in Tri Energy, a 700-MW gas-fired power plant under construction in
the Ratchaburi Province, Thailand. Commercial operation is expected in mid
2000.
In March 1999, EME entered into agreements to acquire 40% of Contact Energy
Ltd. (Contact), currently owned by the government of New Zealand. Contact owns
and operates hydroelectric, geothermal and natural gas-fired power generating
plants in New Zealand with a total generating capacity of 2,371 MW. Contact
also supplies gas and electricity to customers in New Zealand and has minority
interests in two power projects in Australia. The acquisition is conditional on
the New Zealand government completing an initial public offering of the
remaining 60% of Contact, planned for mid April 1999. EME plans to finance the
approximately $625 million acquisition with debt secured by the project,
corporate debt and cash.
Europe, Central Asia, Middle East and Africa
The Europe, Central Asia, Middle East and Africa division 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
5
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 in 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 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 near completion 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. In April 1997, EME completed financing and commenced construction of
the Doga project. The 180-MW combined cycle gas-fired cogeneration facility is
near completion with commercial operation expected in April 1999.
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, managing construction and, in
some cases, obtaining power 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
6
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. Current market conditions for independent power, particularly in the
United States, have become increasingly characterized by shorter-term power
sales agreements or spot sales arrangements. This requires EME to consider
market or "merchant" risk.
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.
EME has interests in operating projects that employ 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 marketplace, EME expects that the majority of its future projects will
generate power without selling steam to industrial users.
EME also has interests in projects that use renewable resources such as
hydroelectric 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 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 has domestic and international interests in operating projects 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 and acquired coal and waste coal-fired
projects that employ traditional pulverized coal and circulating fluidized bed
technology.
Power and Steam Sales Contracts
Electric power and steam generated by EME's operating projects in the U.S.,
other than Homer City, is sold primarily to domestic electric utilities and
industrial steam users pursuant to long-term (typically, 15 to 30-year)
contracts. Excluding projects in 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
7
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.
Electric power generated at Homer City will be sold under bilateral
arrangements with domestic utilities and power marketers under short-term
contracts (two years or less) or to the Pennsylvania-New Jersey-Maryland Power
Pool (PJM) or the New York Power Pool (NYPP). These pools have short-term
markets, which establish an hourly clearing price. Homer City is situated in
the PJM Control Area and is physically connected to high-voltage transmission
lines serving both the PJM and NYPP markets. Power can also be transmitted to
the Midwestern U.S. EME has developed risk management policies and procedures
which, among other matters, address credit risk. It is EME's policy to sell to
investment grade counterparties. EME intends on hedging a portion of the
electric output of the plant in order to lock-in desirable outcomes. It plans
to manage the "spark spread" or margin, that is the spread between electric
prices and fuel prices when deemed appropriate. It plans to use forward
contracts, swaps, futures, or options contracts to achieve those objectives.
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 are sold in various structures. 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.
On July 29, 1998, the Director General of Electricity Supply proposed to the
Minister for Science, Energy and Industry that the current structure of
contracts-for-differences and compulsory trading via the pool at half-hourly
clearing prices bid a day ahead be
8
abolished. He proposed in its place, among other things, the establishment of
voluntary forwards and futures markets, organized by independent market
operators and evolving in response to demand; a short-term bilateral market
operating from 24 to 4-hours before a trading period; a balancing market to
enable the system operator to balance generation and demand and resolve any
transmission constraints; a settlement process for recovering imbalances between
contracted and metered volumes with stronger incentives for being in balance;
and a Balancing and Settlement Code Panel to oversee governance of the short-
term bilateral and balancing markets. The Minister for Science, Energy and
Industry has recommended that the proposal be implemented by April 2000. Further
definition of the proposal will be required before the effects of the changes
can be evaluated. Implementation of the proposal may also require legislation.
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 are sold in various structures. 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 costs for producing such steam and/or partially
indexed steam payments to other indices including certain oil prices.
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.
9
Project Financing
Each power generation project developed by EME requires a substantial capital
investment. The permanent project financing is often arranged immediately prior
to the construction of the project. With limited exceptions, such debt
financing is for approximately 50 to 80% of each project's costs and is expected
to be structured on a basis that is non-recourse 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 project financing and the cost of such financing are
dependent upon numerous factors, including general economic and capital market
conditions, credit attributes of such project, 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.
EME's financial exposure in any project is generally limited by contractual
arrangement to its equity commitment, which is usually about 20 to 50% of EME's
share of the aggregate project cost. In certain cases, EME provides additional
credit support to projects in the form of debt service reserves, contingent
equity, revenue shortfall support or other arrangements designed to provide
limited support. In addition, the project loan agreements are generally
structured so that 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".
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, 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. An executive director
generally manages the day-to-day operation of each project. Management
10
committees comprised of the project's 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,
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 agreements, 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. With the exception of the
Paiton project, EME does not anticipate any material impact to its financial
position or results of operations as a result of counterparty nonperformance.
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, although 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. 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
non-recourse to EME, contain certain representations, warranties, covenants and
other agreements that, if not met, could lead to a default under such
financings. After a default under a project financing for any reason, project
lenders may exercise certain rights and
11
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 economic crisis in Indonesia has raised
concerns over the ability of the state owned utility to meet its obligations
under the current power sales contract with EME's Paiton project as discussed
previously in "-- Strategy -- Asia Pacific". 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.
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.
Operation and Maintenance Services
Certain EME subsidiaries provide specialized operating, maintenance, testing
and start-up services for EME-owned projects. At December 31, 1998, Edison
Mission O&M or other subsidiaries had a total of 885 employees and operated 35
of EME's projects totaling 5,121 MW of capacity.
The projects that EME operates have achieved an average 97% availability
during 1998. 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 24 domestic operating projects in nine
states. These operating projects consist of 13 natural gas cogeneration
projects, one coal cogeneration project, one coal-fired EWG (as defined herein)
project, one waste coal project, two geothermal projects and six gas-fired EWG
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 5,513 MW, of which
EME's net ownership share is 3,499 MW.
Each of EME's projects, other than Homer City, 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. Homer City will sell electricity under bilateral arrangements with
domestic utilities and power marketers under short-term contracts (two years or
less) or to the Pennsylvania-New Jersey-Maryland Power Pool (PJM) or the New
York Power Pool (NYPP). The primary power sales contracts for five of EME's
operating projects are with SCE. EME's share of revenues from these projects
accounted for 12% of EME's consolidated revenues in 1998 and 1997.
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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.
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 has been no
negative impact on EME's 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 has been no negative impact on EME's revenues as
EME discontinued recognizing earnings from this project in 1993.
In September 1998, the CPUC issued an order which approved an agreement
entered into between an operating cogeneration project in which EME has a 30%
partnership interest and SCE to terminate a power sales agreement. The
termination agreement became effective in February 1999. This will result in a
slight negative impact on EME's future revenues.
13
Description of Domestic Operating Projects
EME has ownership interests in the following domestic operating projects:
Electric Operation/
Capacity Primary Electric Ownership Acquisition
Project Location (in MW) Purchaser(3) Type of 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 Cogeneration/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/EWG 50% 1996
Coalinga(2) Coalinga, California 38 PG&E Cogeneration 50% 1991
Commonwealth
Atlantic Chesapeake, Virginia 340 VEPCO EWG 50% 1992
Gordonsville(2) Gordonsville, Virginia 240 VEPCO Cogeneration/EWG 50% 1994
Harbor(2) Wilmington, California 80 Pool EWG 30% 1989
Homer City Pittsburgh, Pennsylvania 1,884 Pool EWG 100% 1999
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
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, Inc.
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
Pool Regional electricity trading market
(4) All of the cogeneration projects are gas-fired facilities, except for
the James River project, which uses coal.
14
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.
15
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, 1998, EME owned 50.09% 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, 1998 totaled 190.5 billion cubic feet of natural gas and 21.2
million barrels of oil.
During 1996, EME purchased additional shares of stock of Four Star,
increasing its ownership by 4.38%. During 1998, EME purchased additional shares
of stock of Four Star, increasing its ownership by 3.24% to 50.09% and its
voting ownership to 48.97%.
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 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 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
generated by EME and used in the Edison International consolidated tax return
are recognized by EME without regard to separate company limitations.
16
Employees and Offices
At February 28, 1999, EME employed 1,186 people, all of whom were full-time
employees and approximately 169 and 140 of whom were covered by collective
bargaining agreements in Wales 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
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
17
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
commences 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, 20 projects have been certified as QFs by the FERC, seven
projects have been certified as EWGs and 16 projects are FUCOs. Most of the
projects currently in the planning or development stage are expected to be
FUCOs. To the extent that any of EME's projects in the development stage will
not be 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 different than the utility's avoided costs.
While public utilities are not explicitly required by PURPA to enter into long-
term contracts, it has been
18
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 have resulted 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 were 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 additional state regulation. Loss of QF status on a
retroactive basis could lead to, among other things, fines 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
19
by expanding its ability to own and operate facilities that do not qualify for
QF status, but 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 or proposing to acquire
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.
Natural Gas Act
Nineteen 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 prohibition against
pipelines engaging in sales of gas, (iii) 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, (iv) 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 (v) the
opportunity for pipelines to recover 100% of their prudently incurred costs
(transition costs) associated with implementing the restructuring mandated by
the rule.
20
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. In addition, as noted above, EWGs may be 100%
owned by EME.
Currently, five of EME's operating projects, Homer City, Nevada Sun-Peak,
Brooklyn Navy Yard, Commonwealth Atlantic and Harbor, 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 and regulate the retail rates
charged by 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 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 regulations. 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 and Virginia, have also instituted QF monitoring
programs.
21
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
Generally, 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 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 issued orders or passed legislation requiring
utilities to offer unbundled retail distribution service (retail wheeling)
beginning in 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.
22
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 partial review of its sites in 1995 and
does not believe that a material liability exists as of December 31, 1998.
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 $5.7 million ($2.9 million EME's share) during 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.
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.
23
ITEM 2. PROPERTIES
EME leases its principal office in Irvine, California. This lease is
approximately 119,500 square feet contained on seven floors. The term of the
lease for approximately 65,500 square feet expires on December 31, 2004 with two
five-year options to extend. The term of the lease for the balance of
approximately 54,000 square feet expires on December 31, 2004 with no options to
extend. EME also leases office space in Fairfax, Virginia and Washington, D.C.,
which are not material. Subsidiaries of EME in the Asia Pacific region lease
office space in Manila, Philippines; Melbourne, Australia; Jakarta, Indonesia;
and Singapore. Subsidiaries of EME in the Europe, Central Asia, Middle East and
Africa region lease office space in Barcelona, Spain; Esenyurt, Turkey; London,
England; and Rome, Italy. These subsidiary leases are immaterial.
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.
Description of Properties
Business Interest
Plant or Project Segment Location In Land Plant Description
- ---------------- -------- -------- -------- -----------------
Brooklyn Navy Yard U.S. Brooklyn, New York Leased Natural gas-turbine cogeneration
facility
EcoElectrica U.S. Penuelas, Puerto Rico Owned LNG cogeneration facility under
construction
First Hydro Europe Dinorwig, Wales Owned Pumped-storage electric power
facility
First Hydro Europe Ffestiniog, Wales Owned Pumped-storage electric power
facility
Homer City U.S. Pittsburgh, Owned Coal-fired generation facility
Pennsylvania
Kern River U.S. Oildale, California Leased Natural gas-turbine cogeneration
facility
Loy Yang B Asia Victoria, Australia Owned Coal-fired power facility
Pacific
March Point 1&2 U.S. Anacortes, Washington Leased Natural gas-turbine cogeneration
facility
Midway-Sunset U.S. Fellows, California Leased Natural gas-turbine cogeneration
facility
Paiton Asia East Java, Indonesia Leased Coal-fired power facility under
Pacific construction
Roosecote Europe Barrow-in-Furness, Owned Combined cycle generation
Cumbria, UK technology
Sycamore U.S. Oildale, California Leased Natural gas-turbine cogeneration
facility
Watson U.S. Carson, California Leased Natural gas-turbine cogeneration
facility
24
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 $136.8 million. 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 million under the Construction Turnkey Agreement. On March 26, 1998, the
Superior Court in the California action granted PMNC's motion for attachment in
the amount of $43 million against Brooklyn Navy Yard and attached a Brooklyn
Navy Yard bank account in the amount of $0.5 million. Brooklyn Navy Yard is
appealing the attachment order. On the same day, the court stayed all
proceedings in the California action pending an order by the New York Appellate
Court of the appeal by PMNC of a denial of its motion to dismiss the New York
action. That appeal was denied following a hearing on September 29, 1998. 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.
25
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.
26
ITEM 6. SELECTED FINANCIAL DATA
(in millions) Years Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Operating revenues $893.8 $975.0 $843.6 $467.3 $380.6
Operating expenses 543.3 581.1 476.5 264.0 199.9
------ ------ ------ ------ ------
Income from operations 350.5 393.9 367.1 203.3 180.7
Interest expense (196.1) (223.5) (164.2) (93.1) (89.0)
Interest and other income 50.9 53.9 40.7 33.1 38.8
Minority interest (2.8) (38.8) (69.5) (48.3) (46.1)
------- ------ ------ ------ ------
Income before income taxes 202.5 185.5 174.1 95.0 84.4
Provision for income taxes 70.4 57.4 82.0 31.0 29.4
------- ------ ------ ------ ------
Income before extraordinary loss 132.1 128.1 92.1 64.0 55.0
Extraordinary loss on early extinguishment of debt,
net of income tax benefit -- (13.1) -- -- --
------ ------ ------ ------ ------
Net income $132.1 $115.0 $ 92.1 $ 64.0 $ 55.0
====== ====== ====== ====== ======
December 31,
(in millions) ------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA
Assets $5,158.1 $4,985.1 $5,152.5 $4,374.0 $2,842.9
Current liabilities 501.3 339.8 270.9 199.8 170.9
Long-term obligations 2,366.4 2,532.1 2,419.9 1,839.0 1,159.0
Shareholder's equity 957.6 826.6 1,019.9 1,028.5 622.2
(in millions) Years Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ------
PROPORTIONATE DATA (Unaudited) (i)
Operating revenues $1,449.6 $ 1,502.2 $1,261.8 $ 865.4 $ 733.0
Operating expenses 1,066.8 1,107.1 912.4 650.3 552.5
-------- --------- --------- --------- --------
Income from operations 382.8 395.1 349.4 215.1 180.5
Interest expense (239.9) (269.2) (212.8) (160.9) (138.5)
Interest and other income 58.4 69.2 44.2 42.1 45.7
-------- --------- -------- -------- --------
Income before income taxes 201.3 195.1 180.8 96.3 87.7
Provision for income taxes 69.2 67.0 88.7 32.3 32.7
-------- --------- -------- -------- --------
Income before extraordinary loss 132.1 128.1 92.1 64.0 55.0
Extraordinary loss on early extinguishment of debt,
net of income tax benefit -- (13.1) -- -- --
------- --------- -------- -------- --------
Net income $ 132.1 $ 115.0 $ 92.1 $ 64.0 $ 55.0
======== ========= ========= ========= =========
Operating cash flow (ii) $ 539.7 $ 559.3 $ 493.7 $ 326.5 $ 264.9
======== ========= ========= ========= =========
(i) Because Edison Mission Energy does not consolidate significant investments
in which it holds a 50% or less ownership interest, management believes
that the discussion set forth below of certain proportionate data
facilitates an understanding and assessment of its results of operations.
The preceding table sets forth components of Edison Mission Energy's net
income and operating cash flow for each of the last five fiscal years.
Proportionate accounting reflects Edison Mission Energy's pro rata
ownership interest in its energy projects and oil and gas investments.
27
Except for certain industries, proportionate accounting is not in
accordance with generally accepted accounting principles.
Operating revenues decreased in 1998 compared to an increase in 1997. The
1998 decrease was primarily due to Loy Yang B's new series of power sales-
related contracts associated with Edison Mission Energy's acquisition in
May 1997 of the remaining 49% interest in Loy Yang B (see Management's
Discussion and Analysis - Acquisitions) and lower Australian currency
exchange rates, partially offset by higher energy revenues from First Hydro
as a result of higher energy prices. The 1997 increase resulted primarily
from increases in electric revenues attributable to (1) the start of
commercial operations of Loy Yang B Unit 2 in October 1996 and the Kwinana
project in December 1996 and (2) 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.
Operating expenses decreased in 1998 compared to an increase in 1997. The
1998 decrease was principally due to a decrease in fuel and depreciation
and amortization expense. The decrease in fuel expense in 1998 is primarily
due to the new fuel supply agreement entered into by Loy Yang B related to
the 49% acquisition in May 1997, partially offset by higher fuel expense at
First Hydro as a result of higher prices and increased generation. The 1998
decrease in depreciation and amortization is the result of a full year's
impact of the 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,
as a result of the May 1997 acquisition combined with lower Australian
currency exchange rates. The 1997 increase in operating expenses was due
mainly to an increase in fuel, plant operations and depreciation and
amortization expense. 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.
Interest expense decreased in 1998 due to lower Australian currency
exchange rates and higher capitalized interest as a result of higher
accumulated construction expenditures. Interest expense increased in 1997,
principally as a result of higher project debt levels. Interest and other
income decreased in 1998 compared to an increase in 1997. The 1998 decrease
is the result of lower gains on sale of assets, partially offset by
interest earned on higher cash balances. The 1997 increase resulted from
interest earned on higher cash balances.
(ii) Income from operations plus depreciation, amortization and other non-cash
charges.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This Annual Report 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 a leading global power producer. 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 12,399 megawatts (MW) of generation
capacity, of which 9,237 MW are in operation and 3,162 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 74%, 76%
and 77% of total operating revenues during 1998, 1997 and 1996, respectively.
Operating revenues also include equity in income from oil and gas investments
and revenues 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 March 1999, an indirect, wholly owned subsidiary of EME acquired 100% of
the 1,884-MW Homer City Generating Station for approximately $1.8 billion. This
facility is one of the largest coal-fired plants in the mid-Atlantic region of
the United States. EME financed the acquisition with a combination of debt
secured by the project, corporate debt and cash.
In December 1998, EME del Caribe, an indirect, wholly owned subsidiary of EME,
acquired 50% of the 540-MW EcoElectrica liquefied natural gas (LNG) combined-
cycle cogeneration facility under construction in Penuelas, Puerto Rico for
approximately $243 million. The project also includes a desalination plant and
LNG storage and vaporization facilities and is expected to commence commercial
operation by late 1999.
In 1992, Edison Mission Energy Australia, an indirect, wholly owned 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 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 brown-coal-fired units located near Melbourne,
Australia.
In May 1997, a wholly owned subsidiary of EME acquired the State's 49%
interest in Loy Yang B. 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
29
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 January 1996, an indirect, wholly owned subsidiary of 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. The consolidated statements of
income, balance sheets and cash flows do not reflect the Homer City Generating
Station acquired in March 1999. 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.
Results of Operations
- ---------------------
Operating Revenues
Operating revenues decreased in 1998 compared to an increase in 1997 over
1996. The 1998 decrease was primarily due to Loy Yang B's new series of power
sales-related contracts associated with the 49% acquisition in May 1997 and
lower Australian currency exchange rates, partially offset by higher energy
revenues from First Hydro as a result of higher energy prices. The 1997
increase resulted primarily from increases in electric revenues attributable to
the start of commercial operations 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.
Equity in income from energy projects rose 14% in 1998 over 1997, and 17% in
1997 over 1996. The 1998 increase is primarily due to earnings from a
geothermal project which were previously deferred and lower fuel gas prices at
various cogeneration projects, partially offset by lower electric and steam
revenues, which are based on fuel prices. The 1997 increase is mainly
attributable to higher electric and steam revenues for several cogeneration
projects due to higher fuel gas prices. Equity in income from oil and gas
investments decreased substantially in 1998 compared with an increase in 1997.
The 1998 decrease was primarily due to lower oil and gas prices, while the 1997
increase was due to higher gas prices.
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.
Operating Expenses
Total operating expenses decreased $37.8 million in 1998, compared to an
increase of $104.6 million in 1997 over 1996. The 1998 decrease is primarily
due to lower fuel and depreciation and amortization expense. Fuel expense
decreased $15.4 million and depreciation and amortization decreased $15.5
million in 1998. The increase in 1997 was principally due to higher fuel
expense, plant operations, depreciation and amortization and administrative and
general expenses. Fuel and plant
30
operations expense increased $62.8 million, depreciation and amortization
expense increased $12.9 million and administrative and general expenses
increased $27.6 million in 1997.
The 1998 decrease in fuel expense is primarily due to the new fuel supply
agreement entered into by Loy Yang B related to the 49% acquisition in May 1997,
partially offset by higher fuel expense at First Hydro as a result of higher
prices and increased generation in 1998. 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 1998 decrease in depreciation and amortization is the result of a full
year's impact of the 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, as a result of
the May 1997 acquisition combined with lower Australian currency exchange rates.
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 the extension in the useful life of Loy Yang B's plant and
equipment.
Administrative and general expenses decreased slightly in 1998 as a result of
lower compensation expense for charges related to EME's phantom stock plan,
which is part of the Edison International Equity Compensation Plan, partially
offset by higher project development costs. The 1997 increase in administrative
and general expenses is attributable to an increase of approximately $54 million
in compensation expense as a result of charges related to EME's phantom stock
plan. The 1997 increase in compensation expense was partially offset by lower
project development costs.
Other Income (Expense)
Interest and other income increased $22.5 million in 1998 over 1997 and $6.5
million in 1997 over 1996. The 1998 and 1997 increases resulted primarily from
interest earned on higher cash balances.
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.
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 expense decreased $27.4 million in 1998 from 1997, compared to a
$59.2 million increase in 1997 over 1996. The decrease in 1998 was due to lower
Australian currency exchange rates and higher capitalized interest as a result
of higher accumulated construction expenditures. Capitalized interest decreased
$51.9 million in 1997 from 1996, due to the completion of construction and
resultant commercial operations of Loy Yang B Unit 2 and the Kwinana project in
the fourth quarter of 1996 at which time EME discontinued recording capitalized
interest related to these projects.
Minority interest expense decreased $36.1 million in 1998 from 1997 and $30.7
million in 1997 from 1996. The decreases resulted from the acquisition of the
remaining 49% ownership interest in Loy Yang B in May 1997.
31
Provision for Income Taxes
EME had effective tax provision rates of 34.8%, 30.9% and 47.1% in 1998, 1997
and 1996, respectively. The 1998 and 1997 tax provisions reflect a benefit from
reductions in the U.K. corporate tax rate from 33% to 31%, effective April 1997
and from 31% to 30%, effective April 1999. 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 reductions in income tax
expense of approximately $11 million and $20 million in 1998 and 1997,
respectively, to adjust the U.K. deferred income tax liability (primarily
related to First Hydro) to the new lower tax rate.
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, 1998, net cash provided by operating activities
increased $7.1 million over 1997, compared with a decrease of $35 million in
1997 from 1996. The 1998 improvement is primarily due to lower income taxes
paid and higher distributions from energy projects, partially offset by lower
dividends from investments in oil and gas and an increase in working capital
requirements. The 1997 decline primarily reflects an increase in working
capital requirements principally due to lower accounts receivable collections
from First Hydro.
Net cash provided by financing activities decreased $43.2 million in 1998 from
1997 and $123.7 million in 1997 from 1996. The decreases were principally due
to a reduction in financing activities. 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. (EME 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. In 1997 dividends paid to Edison International were $47
million higher than 1996.
The Loy Yang B financing in 1997 consisted 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 senior notes and bonds issued by EME Funding Corp. in 1996 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 EME
Funding Corp. and (iii) a guarantee issued by the four EME
32
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 EME 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 increased $311.1 million in 1998 over
1997, compared to a decrease of $149.2 million in 1997 from 1996. The 1998
increase is principally due to the investments and loans totaling $242.8 million
for the purchase of EME's ownership interest in EcoElectrica and lower proceeds
from loan repayments. The 1997 decrease 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. Proceeds of $71.2
million were received from the sale of EME's ownership interest in B.C. Star in
1997. EME invested $73.4 million, $87.7 million and $119.4 million in 1998,
1997 and 1996, respectively, in new plant and equipment principally related to
the Doga project in 1998 and 1997 and the Loy Yang B Unit 2 and Kwinana projects
in 1996.
At December 31, 1998, EME had cash and cash equivalents of $459.2 million and
had available $441.8 million of borrowing capacity under a $500 million
revolving credit facility that expires in 2001. The credit facility provides
credit available in the form of cash advances or letters of credit, and bears
interest on advances under the London Interbank Offered Rate plus the applicable
margin as determined by EME's long-term debt ratings (0.175% margin at December
31, 1998), the Base Rate (substantially similar to what is commonly known as the
"prime" rate, which was 7.75% at December 31, 1998), or on a competitive auction
basis. In addition to the interest component described above, EME pays a
facility fee as determined by EME's long-term debt ratings (0.075% at December
31, 1998) on the entire credit facility independent of the level of borrowings.
This borrowing capacity under the revolving credit facility may be reduced by
borrowings for firm commitments to contribute project equity and to fund capital
expenditures and construction costs of its project facilities.
Firm Commitments to Contribute Project Equity
Projects Local Currency U.S. ($ in millions)
- --------- -------------- --------------------
ISAB (i) 244 billion Italian Lira $ 148
Paiton (ii) 52
EcoElectrica (iii) 34
Tri Energy (iv) 25
Doga (v) 7
(i) 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.
33
(ii) 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 1999.
(iii) EcoElectrica is a 540-MW liquefied natural gas combined-cycle cogeneration
facility under construction in Penuelas, Puerto Rico. A wholly owned
subsidiary of EME owns a 50% interest. Equity will be contributed at
commercial operation, which is currently scheduled for late 1999.
(iv) Tri Energy is a 700-MW gas-fired power plant under construction in the
Ratchaburi Province, Thailand. A wholly owned subsidiary of EME owns a 25%
interest. Equity will be contributed at commercial operation, which is
currently scheduled for mid 2000.
(v) 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 April 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. ($ in millions)
- -------- --------------------
Paiton (i) $ 141
Tri Energy (ii) 20
Doga (ii) 15
All Other 28
(i) Contingent obligations to contribute additional project equity (Contingent
Equity) would be based on events principally related to capital cost
overruns during the plant construction, certain partner obligations or
events of default. These contingent obligations are to be cancelled (if
unused) as of the date of term financing by the Export-Import Bank of the
United States. Term financing by the Export-Import Bank of the United
States is the subject of a comprehensive set of conditions and is
scheduled to be achieved by October 1999. A dispute involving a slope
adjacent to the Paiton site will require Contingent Equity to be
contributed for amounts not otherwise covered by insurance. EME's share of
the total costs related to the slope failure are currently estimated to be
between $16 and $44 million.
(ii) 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, certain partner obligations or
events of default.
Other than as noted above, management is not aware, at this time, of any other
contingent obligations or obligations to contribute project equity.
34
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,
1998, if payment were required, would be $268 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. 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 a $407
million non-recourse project refinancing in 1997, 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.
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 and has a $336
million investment at December 31, 1998. Construction on the two-unit Paiton
project is nearing completion. The tariff is higher in the early years and
steps down over time. 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). Payments are in Indonesian Rupiah, with the portion of such
payments intended to cover non-Rupiah project costs (including returns to
investors) indexed to the Indonesian Rupiah/U.S. dollar exchange rate
established at the time of the Power Purchase Agreement in February 1994. PLN's
payment obligations are supported by the Government of Indonesia. The projected
rate of growth of the Indonesian economy and the exchange rate of Indonesian
Rupiah into U.S. dollars have deteriorated significantly since the Paiton
project was contracted, approved and financed. The project received substantial
finance and insurance support from the Export-Import Bank of the United States,
The Export-Import Bank of Japan, the U.S. Overseas Private Investment
Corporation and the Ministry of International Trade and Industry of Japan. The
Paiton project's senior debt ratings have been reduced from investment grade to
speculative grade based on the rating agencies' perceived increased risk that
PLN might not be able to honor the electricity sales contract with Paiton. The
Government of Indonesia has arranged to reschedule sovereign debt owed to
foreign governments and has entered into discussions about rescheduling
sovereign debt owed to private lenders. PLN has recently announced its
intentions to commence discussions with independent power producers to
renegotiate the power supply contracts, however it is not yet known what form
the renegotiation may take. Any material modifications of the contract could
also require a renegotiation of the Paiton project's debt agreement. The impact
of any such renegotiations with PLN, Government of Indonesia or the project's
creditors on EME's expected return on its investment in Paiton is uncertain at
this time, however, management believes that it will ultimately recover its
investment in the project.
EME's projected construction expenditures that will be funded utilizing non-
recourse project financing are $25 million at December 31, 1998.
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
35
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 finance the
construction and operation of its 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 financings. Interest expense included $22.8 million,
$20.5 million and $6.2 million for the years 1998, 1997 and 1996, 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 are sold in various structures. 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.
On July 29, 1998, the Director General of Electricity Supply proposed to the
Minister for Science, Energy and Industry that the current structure of
contracts-for-differences and compulsory trading via the pool at half-hourly
clearing prices bid a day ahead be abolished. He proposed in its place, among
other things, the establishment of voluntary forwards and futures markets,
organized by independent market operators and evolving in response to demand; a
short-term bilateral market operating from 24 to 4-hours before a trading
period; a balancing market to enable the system operator to balance generation
and demand and resolve any transmission constraints; a settlement process for
recovering imbalances between contracted and metered volumes with stronger
incentives for being in balance; and a Balancing and Settlement Code Panel to
oversee governance of the short-term bilateral and balancing markets. The
Minister for Science, Energy and Industry has recommended that the proposal be
implemented by April 2000. Further definition of the proposal will be required
before the effects of the changes can be evaluated. Implementation of the
proposal may also require legislation.
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
36
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 are sold in various
structures. 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. 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.
EME's electric revenues were increased by $108.4 million and $95.5 million in
1998 and 1997, respectively, compared to a decrease of $4.5 million in 1996, as
a result of electricity rate swap agreements.
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 two major international
projects, other than Paiton which was discussed earlier, 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
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. 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.
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
37
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 partial review of its sites in 1995 and does not believe that
a material liability exists as of December 31, 1998. The implementation of
Clean Air Act Amendments is expected to result in increased operating expenses;
however, these increased operating expenses are not expected to have a material
impact on EME's financial position or results of operations.
YEAR 2000 ISSUE EME has a comprehensive program in place to remediate potential
Year 2000 impacts from critical systems. EME divides its Year 2000 Issue
activities into five phases: inventory, impact assessment, remediation,
documentation and certification. EME's plan is for critical systems to be
complete by July 1999. A critical system is defined as those applications and
systems, including embedded processor technology, which if not appropriately
remediated may have a significant impact on customers, the revenue stream,
regulatory compliance, or the health and safety of personnel. EME has
essentially completed all phases of the project and is going through the final
review and approval process.
Assurances from third party operated plants have been received indicating
aggressive Year 2000 remediation programs. Monitoring of these efforts is
ongoing. Plants under construction have obtained assurances from new
construction and development contractors, who have been requested to ensure this
is part of their goals. General warranty of plants would likely include any
equipment issues that may arise regarding Year 2000 in the current year.
The other essential component of the EME Year 2000 readiness program is to
identify and assess vendor products and business partners for Year 2000
readiness. EME has a process in place to identify and contact vendors and
business partners to determine their Year 2000 status, and is evaluating the
responses. EME's general policy requires that all newly purchased products be
Year 2000 ready or otherwise designed to allow EME to determine whether such
products present Year 2000 issues.
Plant contingency plans are being developed and are under review for any
significant issues and to schedule appropriate testing and/or training. Such
contingency plans include developing strategies for dealing with Year 2000-
related processing failures or malfunctions due to EME's internal systems or
from external parties. EME's contingency plans evaluate reasonably likely worst
case scenarios or conditions. EME does not expect the Year 2000 issue to have a
material adverse effect on its results of operations or financial position.
However, if not effectively remediated, negative effects from Year 2000 issues,
including those related to external systems, vendors, business partners, the
independent system operator, the power exchange or customers, could cause
results to differ.
STATEMENT OF POSITION 98-5 In April 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-Up Activities", which will be effective in January 1999. The
Statement requires that certain costs related to start-up activities be expensed
as incurred and that certain previously capitalized costs be expensed and
reported as a cumulative change in accounting principle. The impact of adopting
SOP 98-5 on EME's net income will be approximately $14 million, after-tax.
38
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
will be effective in January 2000. The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. A
derivative's gains and losses for qualifying hedges offset related results on
the hedged item in the income statement and a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The impact of adopting Statement 133 on EME's financial statements
has not been quantified at this time.
RECENT DEVELOPMENTS In March 1999, EME entered into agreements to acquire 100%
of the fossil-fuel generating assets of Commonwealth Edison Co. (ComEd),
totaling 9,772 MW. EME will operate the plants, which are located in the
Midwest. The closing of the transaction is subject to various state and federal
regulatory approvals and is expected to be completed by year end 1999. EME
plans to finance the approximately $5 billion acquisition with a combination of
debt secured by the project, corporate debt, cash and funding from Edison
International. The acquisition is expected to have an immaterial effect on
earnings in 1999, 2000 and 2001 as a result of transition contracts whereby
ComEd will retain power purchase agreements with EME, enabling ComEd access to
certain amounts of plant output for the next five years to serve its customers.
In March 1999, EME entered into agreements to acquire 40% of Contact Energy
Ltd. (Contact), currently owned by the government of New Zealand. Contact owns
and operates hydroelectric, geothermal and natural gas-fired power generating
plants in New Zealand with a total generating capacity of 2,371 MW. Contact
also supplies gas and electricity to customers in New Zealand and has minority
interests in two power projects in Australia. The acquisition is conditional on
the New Zealand government completing an initial public offering of the
remaining 60% of Contact, planned for mid April 1999. EME plans to finance the
approximately $625 million acquisition with debt secured by the project,
corporate debt and cash. The acquisition is expected to have an immaterial
effect on earnings through 2001.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Report of Independent Public Accountants.
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996.
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Shareholder's Equity for the years ended December
31, 1998, 1997
and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
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, 1998 and
1997, 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,
1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Orange County, California
March 15, 1999
41
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Operating Revenues
Electric revenues $ 664,055 $ 744,675 $ 650,838
Equity in income from energy projects 171,819 151,306 128,823
Equity in income from oil and gas investments 17,613 38,079 25,090
Operation and maintenance services 40,293 40,931 38,867
------------- ------------- -------------
Total operation revenues 893,780 974,991 843,618
------------- ------------- -------------
Operating Expenses
Fuel 176,954 192,325 137,151
Plant operations 127,711 132,079 124,451
Operation and maintenance services 28,386 29,314 28,065
Depreciation and amortization 87,339 102,794 89,853
Administrative and general 122,925 124,576 96,954
------------- ------------- -------------
Total operating expenses 543,315 581,088 476,474
------------- ------------- -------------
Income from operations 350,465 393,903 367,144
------------- ------------- -------------
Other Income (Expense)
Interest and other income 49,785 27,306 20,766
Gain on sale of assets 1,148 26,642 19,986
Interest expense (182,901) (210,311) (151,139)
Dividends on preferred securities (13,149) (13,167) (13,100)
Minority interest (2,769) (38,858) (69,547)
------------- ------------- -------------
Total other income (expense) (147,886) (208,388) (193,034)
------------- ------------- -------------
Income before income taxes 202,579 185,515 174,110
Provision for income taxes 70,445 57,363 82,045
------------- ------------- -------------
Income Before Extraordinary Loss $ 132,134 $ 128,152 $ 92,065
------------- ------------- -------------
Extraordinary loss on early extinguishment
of debt, net of income tax benefit -- (13,126) --
------------- ------------- -------------
Net Income $ 132,134 $ 115,026 $ 92,065
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
42
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
--------------------------------
1998 1997
---------- ----------
Assets
Current Assets
Cash and cash equivalents $ 459,178 $ 585,883
Accounts receivable - trade 74,403 76,935
Accounts receivable - affiliates 13,871 18,139
Prepaid expenses and other 59,864 13,630
---------- ----------
Total current assets 607,316 694,587
---------- ----------
Investments
Energy projects 1,163,597 852,688
Oil and gas 62,949 67,101
---------- ----------
Total investments 1,226,546 919,789
---------- ----------
Property, Plant and Equipment 3,125,747 3,142,551
Less accumulated depreciation and amortization 250,934 201,564
---------- ----------
Net property, plant and equipment 2,874,813 2,940,987
---------- ----------
Other Assets
Long-term receivables 6,862 25,957
Goodwill 308,051 312,606
Restricted cash and other 134,528 91,219
---------- ----------
Total other assets 449,441 429,782
---------- ----------
Total Assets $5,158,116 $4,985,145
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
43
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
-----------------------------------------
1998 1997
------------- -----------
Liabilities and Shareholder's Equity
Current Liabilities
Accounts payable - affiliates $ 8,339 $ 13,381
Accounts payable and accrued liabilities 99,062 134,411
Accrued incentive compensation 112,652 74,000
Interest payable 56,708 42,627
Current maturities of long-term obligations 224,516 75,383
------------ ----------
Total current liabilities 501,277 339,802
------------ ----------
Long-Term Obligations Net of Current Maturities 2,366,430 2,532,121
------------ ----------
Long-Term Deferred Liabilities
Deferred taxes and tax credits 613,009 517,391
Deferred revenue 490,471 541,176
Other 63,811 68,951
------------ ----------
Total long-term deferred liabilities 1,167,291 1,127,518
------------ ----------
Total Liabilities 4,034,998 3,999,441
------------ ----------
Minority Interests 15,558 9,102
------------ ----------
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 629,406 629,406
Retained earnings 234,345 102,620
Accumulated other comprehensive income 29,679 30,446
------------ ----------
Total Shareholder's Equity 957,560 826,602
------------ ----------
Total Liabilities and Shareholder's Equity $5,158,116 $4,985,145
============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
44
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Comprehensive Shareholder's
Stock Capital Earnings Income Income Equity
-------- ---------- ---------- ---------------- -------------- --------------
Balance at December 31, 1995 $64,130 $629,289 $ 320,529 $ 14,589 $1,028,537
Comprehensive income
Net income 92,065 $ 92,065 92,065
Other comprehensive income
Foreign currency
translation adjustment
net of income tax
provision of $5,040 49,303 49,303 49,303
--------
Total Comprehensive income 141,368
Cash dividends (150,000) (150,000)
-------- ---------- --------- -------- ----------
Balance at December 31, 1996 64,130 629,289 262,594 63,892 1,019,905
Comprehensive income
Net income 115,026 115,026 115,026
Other comprehensive income
Foreign currency
translation adjustment
net of income tax
benefit of $3,933 (33,446) (33,446) (33,446)
--------
Total Comprehensive income 81,580
Cash dividends (197,000) (197,000)
Non-cash dividend (78,000) (78,000)
Non-cash contribution 117 117
-------- ---------- --------- -------- ----------
Balance at December 31, 1997 64,130 629,406 102,620 30,446 826,602
Comprehensive income
Net income 132,134 132,134 132,134
Other comprehensive income
Foreign currency
translation adjustment
net of income tax
provision of $52 (767) (767) (767)
--------
Total Comprehensive income $131,367
Stock option price appreciation
on options exercised (409) (409)
-------- ---------- --------- -------- ----------
Balance at December 31, 1998 $64,130 $629,406 $ 234,345 $ 29,679 $ 957,560
======== ========== ========= ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
45
EDISON MISSION ENERGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ----------- ----------
Cash Flows From Operating Activities
Net income $ 132,134 $ 115,026 $ 92,065
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in income from energy projects (171,819) (151,306) (128,823)
Equity in income from oil and gas (17,613) (38,079) (25,090)
Distributions from energy projects 165,206 133,643 125,717
Dividends from oil and gas 19,812 47,849 50,576
Depreciation and amortization 87,339 102,794 89,853
Deferred taxes and tax credits 85,138 (7,994) 3,378
Gain on sale of assets (1,148) (26,642) (19,986)
Extraordinary loss on early extinguishment of debt, net of tax -- 13,126 --
Decrease (increase) in accounts receivable 6,800 (20,259) 31,356
Decrease (increase) in prepaid expenses and other (32,848) 1,752 4,193
Increase in interest payable 14,081 7,857 18,635
Increase (decrease) in accounts payable and accrued liabilities (8,648) 66,031 10,869
Other, net (11,846) 15,679 41,723
--------- ---------- ---------
Net cash provided by operating activities 266,588 259,477 294,466
--------- ---------- ---------
Cash Flows From Financing Activities
Borrowing on long-term obligations 102,450 1,140,588 188,482
Payments on long-term obligations (84,502) (882,446) (871,734)
Issuance of Guaranteed Secured Bonds -- -- 603,840
Issuance of debt securities -- -- 414,275
Cash dividends to parent -- (197,000) (150,000)
--------- ---------- ---------
Net cash provided by financing activities 17,948 61,142 184,863
--------- ---------- ---------
Cash Flows From Investing Activities
Investments in energy projects (9,997) (62,034) (78,575)
Loans to energy projects (107,219) (63,406) (106,443)
Payments for common stock of acquired companies (221,985) (63,983) (34,640)
Capital expenditures (73,393) (87,706) (119,407)
Proceeds from loan repayments 12,790 160,797 32,067
Proceeds from sale of assets 4,100 71,166 70,000
Decrease (increase) in restricted cash (12,507) (46,275) 17,137
Other, net (32) (5,690) (26,458)
--------- ---------- ---------
Net cash used in investing activities (408,243) (97,131) (246,319)
--------- ---------- ---------
Effect of exchange rate changes on cash (2,998) (21,239) 13,084
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents (126,705) 202,249 246,094
Cash and cash equivalents at beginning of period 585,883 383,634 137,540
--------- ---------- ---------
Cash and cash equivalents at end of period $ 459,178 $ 585,883 $ 383,634
========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
46
EDISON MISSION ENERGY AND SUBSIDIARIES
NOTES TO 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 $288.4
million at December 31, 1998, with maturities of three months or less. All
investments are classified as available-for-sale.
Investments in energy projects and oil and gas with 50% or less voting stock
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, 1998.
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.
47
Useful lives for property, plant and equipment are as follows:
Furniture and office equipment 2 - 10 years
Building, plant and equipment 25 - 50 years
Civil works 50 - 80 years
Capitalized leased equipment 25 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 $25.8 million and $17.2
million at December 31, 1998 and 1997, 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
(undiscounted and without interest charges), then an impairment loss is
recognized in accordance with 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." The adoption of this statement in 1996 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,
--------------------------------
1998 1997 1996
------ ------ ------
Interest incurred $209.2 $225.3 $215.5
Interest capitalized (26.3) (15.0) (64.4)
------ ------ ------
$182.9 $210.3 $151.1
====== ====== ======
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
generated by EME and used in the Edison International consolidated tax return
are recognized by EME without regard to separate company limitations.
48
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 $3.7 million in 1998 and $1.7
million in 1997.
Deferred Revenue
Certain revenues on power sales contracts are deferred and amortized to income
utilizing the unit-of-production method under the contracts.
Revenue Recognition
EME records revenue and related costs as electricity is generated or services
are provided, subject to revenue levelization and amortization of deferred
revenue. Revenues are adjusted for price differentials resulting from its
electricity rate swap agreements in the U.K. and Australia. These rate swap
agreements are discussed further in Note 6.
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. These instruments are discussed further in Note 6.
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 $(1.2) million, $(2.9) million and $0.6 million for 1998, 1997 and 1996,
respectively. Gains or losses from translation of foreign currency financial
statements are included in comprehensive income in shareholder's equity.
49
Stock-based Compensation
EME measures compensation expense relative to stock-based compensation by the
intrinsic-value method.
Note 3. Acquisitions
- ---------------------
In December 1998, EME del Caribe, an indirect, wholly owned subsidiary of EME,
acquired 50% of the 540-MW EcoElectrica liquefied natural gas (LNG) combined-
cycle cogeneration facility under construction in Penuelas, Puerto Rico for
approximately $243 million. The project also includes a desalination plant and
LNG storage and vaporization facilities and is expected to commence commercial
operation by late 1999.
In 1992, Edison Mission Energy Australia, an indirect, wholly owned 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 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 brown-coal-fired units located near Melbourne,
Australia.
In May 1997, a wholly owned subsidiary of EME acquired the State's 49%
interest in Loy Yang B. 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).
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. 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 the 49% interest
in Loy Yang B had occurred at the beginning of 1997 and 1996. 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 or 1996, or of the results which may occur in
the future.
(Unaudited)
Years Ended December 31,
------------------------
1997 1996
---- ----
Operating revenues $939.9 $731.2
Income before extraordinary loss 143.9 88.4
Net income 130.8 88.4
50
The table below summarizes additional acquisitions by EME or its wholly owned
subsidiaries from 1996 through 1998.
Percentage Purchase
Date Acquired By Acquisition Acquired Price
- ---- ----------- ----------- ---------- --------
Energy Projects
July 10, 1998 EME Tri Gen B.V. Tri Energy Company Limited 25.0% $ 1.5
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
Oil and Gas
January 1, 1998 Edison Mission Energy Oil Four Star Oil & Gas Company 3.2% 4.1
& Gas (EMEO&G) (Four Star)
August 1, 1996 EMEO&G Four Star 4.4% 4.9
Note 4. Investments
- --------------------
Investments in Energy Projects
Investments in energy projects, generally 50% or less owned partnerships and
corporations, are accounted for by the equity method. The difference between
the carrying value of energy project investments and the underlying equity in
the net assets amounted to $238.4 million at December 31, 1998. The differences
are being amortized over the life of the projects. The following table presents
summarized financial information of the investments in energy projects:
December 31,
------------------------
1998 1997
-------- --------
Domestic energy projects
Equity investment $ 398.8 $ 411.5
Notes receivable 135.2 145.3
-------- -------
Subtotal 534.0 556.8
International energy projects
Equity investment 452.6 230.2
Notes receivable 177.0 65.7
-------- -------
Subtotal 629.6 295.9
Total $1,163.6 $ 852.7
======== =======
EME's subsidiaries have provided loans or advances related to certain
projects. Domestic loans at December 31, 1998 consist of the following: a
$94.5 million, 10% interest loan; a $26.3 million, 5% interest promissory note,
payable semiannually, due April 2008; and two 8.05% interest loans totaling
$14.4 million. International loans at December 31, 1998 consist of the
following: a $126 million, non-interest bearing loan; a $26 million, LIBOR +
2.25% interest loan (8.0% at December 31, 1998); and a $25 million, 12% interest
loan.
The undistributed earnings of investments accounted for by the equity method
were $176.4 million in 1998 and $163.4 million in 1997.
51
The following table presents summarized financial information of the
investments in energy projects accounted for by the equity method:
Years Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
Revenues $1,585.7 $1,593.4 $1,383.3
Expenses 1,255.6 1,294.7 1,083.1
-------- -------- --------
Net income $ 330.1 $ 298.7 $ 300.2
======== ======== ========
December 31,
----------------------------
1998 1997
---------- ---------
Current assets $ 520.6 $ 507.7
Noncurrent assets 5,315.0 4,523.7
-------- --------
Total assets $5,835.6 $5,031.4
======== ========
Current liabilities $1,028.6 $ 750.9
Noncurrent liabilities 3,540.8 2,986.2
Equity 1,266.2 1,294.3
-------- --------
Total liabilities and equity $5,835.6 $5,031.4
======== ========
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, 1998, 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 $335.7 Coal-fired facility under
construction
EcoElectrica Penuelas, Puerto Rico 244.2 Liquefied natural gas facility
under construction
Watson Carson, CA 115.0 Operating cogeneration facility
Brooklyn Navy Yard Brooklyn, NY 89.6 Operating cogeneration facility
Sycamore Bakersfield, CA 70.7 Operating cogeneration facility
Midway-Sunset Fellows, CA 49.2 Operating cogeneration facility
Kern River Bakersfield, CA 48.2 Operating cogeneration facility
March Point Anacortes, WA 15.2 Operating cogeneration facility
Investments in Oil and Gas
At December 31, 1998, EME had one 50.09% owned (with 48.97% voting stock) and
one 50% owned investment 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
$39.3 million at December 31, 1998. The difference is being amortized on a unit
of production basis over the life of the reserves. The following table presents
summarized financial information of the investments in oil and gas:
52
Years Ended December 31,
-------------------------------------
1998 1997 1996
------ ------ ------
Operating revenues $211.3 $304.7 $313.7
Operating expenses 164.1 197.4 222.3
------ ------ ------
Operating income 47.2 107.3 91.4
Provision (credit) for income taxes (2.3) 18.5 17.2
------ ------ ------
Net income (before non-operating items) 49.5 88.8 74.2
Non-operating expense, net (13.5) (12.8) (12.0)
------ ------ ------
Net income $ 36.0 $ 76.0 $ 62.2
====== ====== ======
December 31,
--------------------------
1998 1997
------- -------
Current assets $ 81.5 $ 94.3
Noncurrent assets 384.7 417.6
------ ------
Total assets $466.2 $511.9
====== ======
Current liabilities $111.4 $ 49.5
Noncurrent liabilities 226.9 309.4
Deferred income taxes and other liabilities 42.0 64.5
Equity 85.9 88.5
------ ------
Total liabilities and equity $466.2 $511.9
====== ======
Long-Term Receivables
At December 31, 1997, long-term receivables included 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, which has been reclassified to current
assets at December 31, 1998. These notes are secured by a surety bond.
Interest on these notes is payable quarterly at LIBOR plus 2% (7.07% at December
31, 1998), with the remaining principal due in November 1999.
Note 5. Property, Plant and Equipment
- --------------------------------------
Property, plant and equipment consist of the following:
December 31,
-----------------------------
1998 1997
--------- ----------
Buildings, plant and equipment $1,756.5 $1,857.8
Civil works 1,009.2 1,002.2
Construction in progress 164.0 83.8
Capitalized leased equipment 196.0 198.8
-------- --------
3,125.7 3,142.6
Less accumulated depreciation and amortization 250.9 201.6
-------- --------
Net property, plant and equipment $2,874.8 $2,941.0
======== ========
53
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,
-----------------------------
1998 1997
--------- ----------
EME (parent only)
Senior Notes, net
due 1999 (7.75%) $ 99.9 $ 99.8
due 2002 (8.125%) 99.4 99.3
Edison Mission Energy Funding Corp.
Series A Notes, net
due 1997-2003 (6.77%) 198.8 231.5
Series B Bonds, net
due 2004-2008 (7.33%) 188.9 188.7
First Hydro project
First Hydro Finance Plc Guaranteed
Secured Bonds due 2021 (9%) 665.1 657.1
Iberian Hy-Power project
Term Loan
due 2012 (MIBOR + 0.75%)
(3.989% at 12/31/98) 79.3 78.1
Fuerzas Electricas de Cataluna, S.A.
due 2003 (9.408%) 25.1 26.5
Compagnie Generale Des Eaux
due 2003 (non-interest bearing) 22.7 21.8
Loy Yang B project
Energy Capital Partnership Credit Agreement
due 2012-2017 (BBR + 0.4 to 1.1%)
(5.33% to 6.03% at 12/31/98) 766.8 823.6
Roosecote project
Capital lease obligation (see Note 12) 48.4 68.2
Term Loan and Guarantee Facility
due 2005 (sterling LIBOR + 0.6%)
(6.858% at 12/31/98) 92.2 83.1
54
Kwinana project
Syndicated Project Facility Agreement
due 2012 (BER + 1.2%)
(6.025% at 12/31/98) 60.6 67.2
Doga project
Overseas Private Investment Corporation
Credit Facility
due 2010 (U.S. Treasury Note + 3.95%)
(8.598% at 12/31/98) 81.2 43.3
Nederlandsche Credietverzekering Maatschappij N.V.
due 2010 (LIBOR + 1.25%)
(6.316% at 12/31/98) 29.9 16.0
Other long-term obligations 132.6 103.3
-------- --------
Subtotal 2,590.9 2,607.5
Current maturities of long-term obligations (224.5) (75.4)
-------- --------
Total $2,366.4 $2,532.1
======== ========
At December 31, 1998, EME had available $441.8 million of borrowing capacity
and approximately $58.2 million in letters of credit issued under a $500 million
revolving credit facility that expires in 2001.
In May 1997, EME closed financing of $964 million (1.265 billion Australian
dollars) in connection with the acquisition of the remaining 49% interest in the
Loy Yang B project. 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 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, 1998, for the next five
years, excluding capital leases (see Note 12) are summarized as follows: 1999 -
$201.8 million; 2000 - $87.5 million; 2001 - $87.9 million; 2002 - $196.2
million; 2003 - $135.3 million. The current portion of Roosecote debt is
included in long-term debt, as proceeds from future borrowings will exceed the
current portion under terms of the Term Loan and Guarantee Facility.
Certain cash balances are restricted primarily to pay amounts required for
debt payments and letter of credit expenses. The total restricted cash was
$72.1 million at December 31, 1998 and $59.5 million at December 31, 1997.
Debt service reserves classified in Other Assets (including reserves for
interest on annual lease payments) were $66.2 million at December 31, 1998 and
$44.7 million at December 31, 1997.
55
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. 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 are sold in various structures. 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.
On July 29, 1998, the Director General of Electricity Supply proposed to the
Minister for Science, Energy and Industry that the current structure of
contracts-for-differences and compulsory trading via the pool at half-hourly
clearing prices bid a day ahead be abolished. He proposed in its place, among
other things, the establishment of voluntary forwards and futures markets,
organized by independent market operators and evolving in response to demand; a
short-term bilateral market operating from 24 to 4-hours before a trading
period; a balancing market to enable the system operator to balance generation
and demand and resolve any transmission constraints; a settlement process for
recovering imbalances between contracted and metered volumes with stronger
incentives for being in balance; and a Balancing and Settlement Code Panel to
oversee governance of the short-term bilateral and balancing markets. The
Minister for Science, Energy and Industry has recommended that the proposal be
implemented by April 2000. Further definition of the proposal will be required
before the effects of the changes can be evaluated. Implementation of the
proposal may also require legislation.
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 are sold in various structures. 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 fluctuation in
56
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.
EME had the following derivative financial instruments at December 31, 1998
and 1997, except where noted:
Category Contract Amount/Terms Purpose
- --------- --------------------- -------
Interest rate swaps
EME (parent only) $200 million expiring in 1999 ($100 Convert fixed-rate debt of 7.75%
million) and 2002 ($100 million) and 8.125% to a floating rate,
such floating rate capped at 9.0%
$45 million expiring in 1999, Convert fixed-rate debt of
corresponding preferred securities due 9.875% to a floating rate
2024
Kwinana project 39.4 million Australian dollars Change floating-rate debt to a
(12/31/98) (U.S. $24 million); 40.8 fixed rate of 10.98%
million Australian dollars (12/31/97)
(U.S. $27 million); expiring in 2007
Loy Yang B project 1.4 billion Australian dollars (U.S. $855 Change floating-rate debt to
million) expiring 2002-2008; 1.2 billion fixed rates ranging from 6.05%
Australian dollars (U.S. $781 million) to 7.93%
expiring 2002-2007
Interest rate collar
Iberian Hy-Power project 11.7 billion Spanish pesetas Change interest rate exposure to
(U.S. $82 million) expiring in 1999 float within range from 4.5%
minimum to 7.5% maximum
Electricity rate swaps
First Hydro project Approximately 2,095 MW related to winter Change the variable market
months (October through March) and 1,691 electricity sales rates to fixed
MW related to summer months (April rates
through September) of electrical
generation under selling pricing
contracts (12/31/98); 1,685 MW related to
winter months and 759 MW related to
summer months (12/31/97); expiring at
various dates through 2000
Approximately 1,120 MW related to winter Change the variable market
months and 860 MW related to summer electricity sales rates to fixed
months of electricity under purchasing rates
pricing contracts (12/31/98);
57
410 MW related to winter months and 200
MW related to summer months (12/31/97);
expiring at various dates through 2000
Loy Yang B project Approximately 920 MW of electrical Change the variable market
generation under selling pricing electricity sales rates to fixed
contracts (12/31/98 and 12/31/97) rates
expiring at various dates through 2016
Fair values of financial instruments were:
December 31,
---------------------------------------------------
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
Instruments Amount Value Amount Value
- ----------- -------- ----- -------- -----
Long-term receivables $ 6.9 $ 6.8 $ 26.0 $27.6
Electricity rate swap agreements -- 19.2 -- 77.1
Long-term obligations 2,366.4 2,293.2 2,532.1 2,715.6
Interest rate swap/collar agreements -- (83.1) -- (68.1)
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. $76 million). As of December 31, 1998, the fair value of this
swap was a negative $9.5 million dollars which has been reflected in the table
above.
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. The currency crisis in Indonesia has raised
concerns over the ability of the state owned utility
58
to meet its obligations under the current power sales contract with EME's Paiton
project as discussed further in Note 11. In addition, EME enters into contracts
whereby the structure of the contracts minimizes its credit exposure.
Accordingly, EME, with the exception of the Paiton project, 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:
December 31,
-----------------------------
1998 1997
--------- ----------
Deferred tax assets
Reserves and other items not currently deductible $109.4 $ 92.0
Loss carryforwards 41.5 8.9
Deferred income 187.9 191.6
Dividends in excess of equity earnings 22.4 22.4
Other 10.1 17.1
------ ------
Total 371.3 332.0
------ ------
59
Deferred tax liabilities
Basis differences 963.4 820.0
Tax credits, net 20.6 29.0
Other 0.3 0.4
------ ------
Total 984.3 849.4
------ ------
Deferred taxes and tax credits, net $613.0 $517.4
====== ======
Loss carryforwards, primarily Australian, total $135 million and $45 million
at December 31, 1998 and 1997, respectively, with no expiration date.
The components of income before income taxes are as follows:
Years Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
U.S. $ 32.8 $ 39.0 $ 40.6
Foreign 169.8 146.5 133.5
------ ------ ------
Total $202.6 $185.5 $174.1
====== ====== ======
United States income tax has not been provided on unrepatriated foreign
earnings in the amounts of $255 million and $170 million at December 31, 1998
and 1997, respectively.
The provision for income taxes is comprised of the following:
Years Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
Current
Federal $(10.5) $ (2.4) $ 33.1
State (19.0) (10.2) 6.7
Foreign 14.8 78.3 38.8
------ ------ ------
Total current (14.7) 65.7 78.6
------ ------ ------
Deferred
Federal 28.1 14.3 (17.9)
State 25.3 9.0 0.4
Foreign 31.7 (31.6) 20.9
------ ------ ------
Total deferred 85.1 (8.3) 3.4
------ ------ ------
Provision for income taxes $ 70.4 $ 57.4 $ 82.0
====== ====== ======
60
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,
----------------------------------------
1998 1997 1996
-------- -------- --------
Basis differences $116.5 $ 102.6 $ 55.3
Loss carryforwards (32.6) 121.0 (41.2)
Deferred income 3.7 (197.9) --
State tax deduction 4.3 (0.2) (2.9)
Reserves and other items not currently deductible (17.4) (27.6) 8.7
Elimination of book income 6.9 (7.0) (10.0)
Dividends in excess of equity earnings -- 0.2 (9.2)
Other 3.7 0.6 2.7
------ ------- ------
Total deferred provision (credit) $ 85.1 $ (8.3) $ 3.4
====== ======= ======
Variations from the 35% federal statutory rate are as follows:
Years Ended December 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
Expected provision for federal income taxes $ 70.9 $ 64.9 $ 60.9
Increase (decrease) in the provision for taxes
resulting from
State tax - net of federal deduction 4.1 (0.8) 4.4
Dividends received deduction (4.0) (8.2) (7.9)
Amortization of tax credits (6.5) (1.7) (8.6)
Benefit due to foreign tax rate reduction (11.0) (20.0) --
Taxes payable under anti-deferral regimes 6.7 7.0 --
Taxes on foreign operations at different rates 8.4 12.8 17.3
Book and tax basis differences 2.3 3.5 15.4
Other (0.5) (0.1) 0.5
------ ------ -----
Total provision for income taxes $ 70.4 $ 57.4 $82.0
====== ====== =====
Effective tax rate 34.8% 30.9% 47.1%
====== ====== =====
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
Noncontributory, defined benefit pension plans cover employees who fulfill
minimum service requirements. Prior service costs from pension plan amendments
are funded 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.
61
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.
In 1998, EME adopted a new accounting standard that revises the disclosure
requirements for pension plans. Prior periods have been restated.
Information on plan assets and benefit obligations is shown below:
December 31,
----------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
U.S. Plan Non U.S. Plans
------------------- --------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $20.5 $14.7 $ 30.1 $ 26.1
Service cost 2.4 1.8 1.8 1.5
Interest cost 1.4 1.1 1.9 1.9
Actuarial gain 2.0 3.0 3.3 0.8
Plan participants' contribution -- -- 0.6 0.5
Benefits paid (0.2) (0.1) (1.0) (0.7)
----- ----- -------- ---------
Benefit obligation at end of year $26.1 $20.5 $ 36.7 $ 30.1
===== ===== ======== =========
Change in Plan Assets
Fair value of plan assets at beginning of year $16.6 $11.7 $ 28.3 $ 24.1
Actual return on plan assets 2.3 2.7 3.4 1.9
Employer contributions 2.2 2.3 3.7 2.5
Plan participants' contribution -- -- 0.2 0.3
Benefits paid (0.2) (0.1) (0.8) (0.5)
----- ----- -------- ---------
Fair value of plan assets at end of year $20.9 $16.6 $ 34.8 $ 28.3
----- ----- -------- ---------
Funded Status $(5.2) $(3.9) $ (1.9) $ (1.8)
Unrecognized net gain -- (0.8) 2.4 0.7
Unrecognized net obligation (17-year amortization) 1.4 1.4 -- --
Unrecognized prior service cost 0.5 0.5 -- --
----- ----- -------- ---------
Pension asset (liability) $(3.3) $(2.8) $ 0.5 $ (1.1)
===== ===== ======== =========
Discount rate 6.75% 7.0% 4.5-5.5% 5.0-6.75%
Rate of compensation increase 5.0% 5.0% 3.0% 3.5-4.75%
Expected return on plan assets 7.5% 8.0% 6.0-8.0% 7.0%-9.0%
62
Components of pension expense were:
Years Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
U.S. Plan Non U.S. Plans
-------------------------------------- -------------------------------------
Service cost $ 2.4 $ 1.8 $ 2.0 $ 1.8 $ 1.5 $ 1.2
Interest cost obligation 1.4 1.1 1.5 1.9 1.9 1.7
Expected return on plan assets (1.3) (1.1) (1.7) (3.4) (2.9) (1.5)
Net amortization and deferral 0.2 0.2 0.9 1.3 0.9 (0.1)
----- ----- ----- ----- ----- -----
Pension expense 2.7 2.0 2.7 1.6 1.4 1.3
Special termination benefits -- -- 0.9 -- -- --
----- ----- ----- ----- ----- -----
Net pension expense $ 2.7 $ 2.0 $ 3.6 $ 1.6 $ 1.4 $ 1.3
===== ===== ===== ===== ===== =====
Postretirement Benefits Other Than Pensions
U.S. employees retiring at or after age 55 with at least 10 years of service
are eligible for postretirement health care, dental, life insurance and other
benefits. In 1996, EME recorded special termination expenses from a special
voluntary early retirement program.
In 1998, EME adopted a new accounting standard that revises the disclosure
requirements for postretirement benefit plans. Prior periods have been
restated.
Information on plan assets and benefit obligations is shown below:
1998 1997
------ ------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 11.7 $ 11.4
Service cost 1.4 1.2
Interest cost 0.7 0.7
Actuarial loss (gain) 1.3 (1.3)
Benefits paid (0.2) (0.3)
------ ------
Benefit obligation at end of year $ 14.9 $ 11.7
------ ------
Change in Plan Assets
Fair value of plant assets at beginning of year $ -- $ --
Employer contributions 0.2 0.3
Benefits paid (0.2) (0.3)
------ ------
Fair value of plan assets at end of year $ -- $ --
------ ------
Funded Status $(14.9) $(11.7)
Unrecognized net loss 2.5 1.1
Unrecognized transition obligation (20-year amortization) 2.0 2.0
------ ------
Recorded liability $(10.4) $ (8.6)
------ ------
Discount rate 6.75% 7.0%
63
The components of postretirement benefits other than pensions expense were:
Years Ended December 31,
-------------------------------------
1998 1997 1996
----- ----- -----
Service cost $ 1.4 $ 1.2 $ 1.2
Interest cost 0.7 0.7 0.7
Amortization of transition obligation 0.2 0.1 0.2
----- ----- -----
Net expense 2.3 2.0 2.1
Special termination expense -- -- 0.5
----- ----- -----
Total expense $ 2.3 $ 2.0 $ 2.6
===== ===== =====
The assumed rate of future increases in the per-capita cost of health care
benefits is 8.25% for 1999, gradually decreasing to 5.0% for 2009 and beyond.
Increasing the health care cost trend rate by one percentage point would
increase the accumulated obligation as of December 31, 1998, by $3.4 million and
annual aggregate service and interest costs by $0.7 million. Decreasing the
health care cost trend rate by one percentage point would decrease the
accumulated obligation as of December 31, 1998, by $2.6 million and annual
aggregate service and interest costs by $0.5 million.
Employee Stock Plans
- --------------------
A 401(k) plan is maintained to supplement eligible U.S. employees' retirement
income. The plan received EME contributions of $0.8 million in 1998 and $0.7
million in 1997 and 1996.
In addition to the defined benefit plans described above, certain Australian
and U.K. subsidiaries of EME sponsor a defined contribution plan. Annual
contributions are based on 8 to 13.5 percent of covered employees' salaries.
Contribution expense for the subsidiaries totaled approximately $0.5 million,
$0.3 million and $0.2 million in 1998, 1997 and 1996, respectively.
Note 10. Stock Compensation Plans
- ----------------------------------
Under the Edison International Equity Compensation Plan (ECP), 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 of EME, options on
352,372 shares of Edison International Common Stock of which 83,000, 61,300 and
57,900 were granted in 1998, 1997 and 1996, respectively. Options on Edison
International stock include a dividend equivalent feature.
Compensation expense recorded under the stock compensation program was $0.5
million for 1998 and 1997 and $0.7 million for 1996.
The weighted-average fair value of options granted during 1998, 1997 and 1996
was $6.33 per share option, $7.62 per share option and $6.27 per share option,
respectively. The weighted-average remaining life of options outstanding as of
December 31, 1998, 1997 and 1996 was seven years.
64
The fair value for each option granted during 1998, 1997 and 1996, 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:
1998 1997 1996
-------- -------- --------
Expected life 7 years 7 years 7 years
Risk-free interest rate 5.6% 6.5% 5.5%
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 pro forma earnings of $132.3 million,
$112.3 million and $92.1 million in 1998, 1997 and 1996, respectively.
Phantom Stock Options
EME, as a part of the ECP, 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 9%. 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, for all awards prior to 1998.
Beginning in 1998, one-fourth of the 1998 and future option awards will vest in
each of the first four years of the award term. Compensation expense recorded
with respect to phantom stock options was $39 million, $70 million and $16.1
million in 1998, 1997 and 1996, respectively.
Note 11. Commitments and Contingencies
- ---------------------------------------
Firm Commitments for Asset Purchase
Project U.S. Currency
- ------- -------------
Homer City (i) $ 1,801
(i) Homer City is a 1,884-MW coal-fired generating plant in the mid-Atlantic
region of the United States. A wholly owned subsidiary of EME executed an
Asset Purchase Agreement to purchase 100% of the Homer City Electric
Generating Station, which is currently scheduled to close during the first
quarter of 1999. EME plans to finance the acquisition with a combination of
debt secured by the project, corporate debt and cash.
Firm Commitments to Contribute Project Equity
Projects Local Currency U.S. Currency
- -------- -------------- -------------
ISAB (i) 244 billion Italian Lira $148
Paiton (ii) 52
EcoElectrica (iii) 34
Tri Energy (iv) 25
Doga (v) 7
65
(i) 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.
(ii) 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 1999.
(iii) EcoElectrica is a 540-MW liquefied natural gas combined-cycle cogeneration
facility under construction in Penuelas, Puerto Rico. A wholly owned
subsidiary of EME owns a 50% interest. Equity will be contributed at
commercial operation, which is currently scheduled for late 1999.
(iv) Tri Energy is a 700-MW gas-fired power plant under construction in the
Ratchaburi Province, Thailand. A wholly owned subsidiary of EME owns a 25%
interest. Equity will be contributed at commercial operation, which is
currently scheduled for mid 2000.
(v) 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 April 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
Tri Energy (ii) 20
Doga (ii) 15
All Other 28
(i) Contingent obligations to contribute additional project equity (Contingent
Equity) would be based on events principally related to capital cost
overruns during the plant construction, certain partner obligations or
events of default. These contingent obligations are to be cancelled (if
unused) as of the date of term financing by the Export-Import Bank of the
United States. Term financing by the Export-Import Bank of the United
States is the subject of a comprehensive set of conditions and is
scheduled to be achieved by October 1999. A dispute involving a slope
adjacent to the Paiton site will require Contingent Equity to be
contributed for amounts not otherwise covered by insurance. EME's share of
the total costs related to the slope failure are currently estimated to be
between $16 million and $44 million.
(ii) 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, certain partner obligations or
events of default.
Other than as noted above, management is not aware, at this time, of any
other contingent obligations or obligations to contribute project equity.
66
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,
1998, if payment were required, would be $268 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. 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 a $407
million non-recourse project refinancing in 1997, 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.
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 and has a $336
million investment at December 31, 1998. Construction on the two-unit Paiton
project is nearing completion. The tariff is higher in the early years and
steps down over time. 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). Payments are in Indonesian Rupiah, with the portion of such
payments intended to cover non-Rupiah project costs (including returns to
investors) indexed to the Indonesian Rupiah/U.S. dollar exchange rate
established at the time of the Power Purchase Agreement in February 1994. PLN's
payment obligations are supported by the Government of Indonesia. The projected
rate of growth of the Indonesian economy and the exchange rate of Indonesian
Rupiah into U.S. dollars have deteriorated significantly since the Paiton
project was contracted, approved and financed. The project received substantial
finance and insurance support from the Export-Import Bank of the United States,
The Export-Import Bank of Japan, the U.S. Overseas Private Investment
Corporation and the Ministry of International Trade and Industry of Japan. The
Paiton project's senior debt ratings have been reduced from investment grade to
speculative grade based on the rating agencies' perceived increased risk that
PLN might not be able to honor the electricity sales contract with Paiton. The
Government of Indonesia has arranged to reschedule sovereign debt owed to
foreign governments and has entered into discussions about rescheduling
sovereign debt owed to private lenders. PLN has recently announced its
intentions to commence discussions with independent power producers to
renegotiate the power supply contracts, however it is not yet known what form
the renegotiation may take. Any material modifications of the contract could
also require a renegotiation of the Paiton project's debt agreement. The impact
of any such renegotiations with PLN, Government of Indonesia or the project's
creditors on EME's expected return on its investment in Paiton is uncertain at
this time, however, management believes that it will ultimately recover its
investment in the project.
EME's projected construction expenditures that will be funded utilizing non-
recourse project financing are $25 million at December 31, 1998.
67
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 partial review of its sites in 1995 and does not believe that
a material liability exists as of December 31, 1998. The implementation of
Clean Air Act Amendments is expected to result in increased operating expenses;
however, these increased operating expenses are not expected to have a material
impact on 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 primary capital lease
obligation is 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 $190.8 million in a guarantee to the lessor and in loans to the
project. As of December 31, 1998, the loan obligation stands at $92.2 million,
which is secured by the plant assets of $18.4 million owned by the project and a
debt service reserve of $4.6 million.
Future minimum payments for operating and capital leases at December 31, 1998,
are:
Years Ending December 31, Operating Capital
Leases Leases
--------- -------
1999 $ 9.1 $27.4
2000 7.3 27.4
2001 6.1 0.2
2002 5.0 0.2
2003 4.6 0.2
Thereafter 22.7 0.3
----- -----
Total future commitments $54.8 55.7
=====
Amount representing interest (9.65%) 7.3
-----
Net Commitments $48.4
=====
Operating lease expense amounted to $6.9 million, $6.7 million and $6.3
million in 1998, 1997 and 1996, respectively.
68
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 $29.7 million, $23.4 million and $18.3
million in 1998, 1997 and 1996, 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 tax benefits of $29.5 million for
1998 and $12.6 million for 1997 and a tax liability of $39.8 million for 1996
(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 $534.8 million, $579.6 million and $517.1 million
in 1998, 1997 and 1996, respectively.
Note 14. Supplemental Statements of Cash Flows Information
- -----------------------------------------------------------
Years Ended December 31,
----------------------------------------
1998 1997 1996
------- ------ ------
Cash paid
Interest (net of amount capitalized) $171.5 $218.1 $131.5
Income taxes $ 8.8 $ 62.3 $ 45.9
Years Ended December 31,
----------------------------------------
1998 1997 1996
------ ------ ------
Details of companies acquired
Fair value of assets acquired $248.4 $667.1 $152.7
Liabilities assumed -- 603.1 118.1
------ ------ ------
Net cash paid for acquisitions $248.4 $ 64.0 $ 34.6
====== ====== ======
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 $32.7 million in 1996.
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% (5.77% at December 31, 1998) paid on a quarterly basis and principal
is due on June 30, 2007.
69
Note 15. Business Segments
- ---------------------------
EME operates predominately in one line of business, electric power generation,
with reportable segments organized by geographic region: United States, Asia
Pacific and Europe, Central Asia, Middle East and Africa. EME's plants are
located in different geographic areas, which mitigate the effects of regional
markets, economic downturns or unusual weather conditions. These regions take
advantage of the increasing globalization of the independent power market.
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. Intercompany transactions have been eliminated in the following
segment information.
Europe,
Central Asia,
Asia Middle East Corporate/
U.S. Pacific and Africa Other(i) Total
-------------- ------------ ------------- --------------- ------------
1998
- ----
Electric & operating revenues $ 29.9 $ 205.1 $ 469.4 $ -- $ 704.4
Equity in income from investments 184.6 1.3 3.5 -- 189.4
-------- -------- -------- -------------- --------
Total operating revenues $ 214.5 $ 206.4 $ 472.9 $ -- $ 893.8
======== ======== ======== ============== ========
Interest and other income $ -- $ 4.3 $ 26.3 $ 19.2 $ 49.8
Interest expense $ -- $ 71.0 $ 77.3 $ 34.6 $ 182.9
Net income (loss) $ 63.5 $ 28.0 $ 58.0 $ (17.4) $ 132.1
======== ======== ======== ============== ========
Identifiable assets $ 358.0 $1,334.3 $2,239.6 $ (0.3) $3,931.6
Equity investments and advances 841.2 361.2 23.8 0.3 1,226.5
-------- -------- -------- -------------- --------
Total assets $1,199.2 $1,695.5 $2,263.4 $ -- $5,158.1
======== ======== ======== ============== ========
1997
- ----
Electric & operating revenues $ 31.3 $ 302.0 $ 452.3 $ -- $ 785.6
Equity in income from investments 182.7 3.5 0.2 3.0 189.4
-------- -------- -------- -------------- --------
Total operating revenues $ 214.0 $ 305.5 $ 452.5 $ 3.0 $ 975.0
======== ======== ======== ============== ========
Interest and other income $ -- $ 2.9 $ 10.5 $ 13.9 $ 27.3
Interest expense $ -- $ 82.2 $ 84.8 $ 43.3 $ 210.3
Net income (loss) $ 72.8 $ 11.1 $ 47.8 $ (16.7) $ 115.0
======== ======== ======== ============== ========
Identifiable assets $ 306.8 $1,468.0 $ 2,288.9 $ 1.6 $4,065.3
Equity investments and advances 623.9 252.7 42.9 0.3 919.8
-------- -------- --------- ------------- --------
Total assets $ 930.7 $1,720.7 $ 2,331.8 $ 1.9 $4,985.1
======== ======== ========= ============= ========
70
1996
- ----
Electric & operating revenues $ 31.6 $ 239.7 $ 418.4 $ -- $ 689.7
Equity in income (loss) from investments 153.3 3.0 2.0 (4.4) 153.9
-------- -------- -------- ------------- --------
Total operating revenues $ 184.9 $ 242.7 $ 420.4 $ (4.4) $ 843.6
======== ======== ======== ============= ========
Interest and other income $ -- $ 0.8 $ 12.0 $ 8.0 $ 20.8
Interest expense $ -- $ 37.1 $ 87.3 $ 26.7 $ 151.1
Net income (loss) $ 68.2 $ 22.5 $ 28.8 $ (27.4) $ 92.1
======== ======== ======== ============= ========
Identifiable assets $ 239.5 $1,865.6 $2,044.2 $ 87.3 $4,236.6
Equity investments and advances 709.2 141.3 30.8 34.6 915.9
-------- -------- -------- ------------- --------
Total assets $ 948.7 $2,006.9 $2,075.0 $ 121.9 $5,152.5
======== ======== ======== ============= ========
(i) Includes corporate net interest expense and Mexico and Canada investments.
Geographic Information
Foreign operating revenues and assets by country included in the table above
are shown below.
Years Ended December 31,
----------------------------------------
1998 1997 1996
------ ------ ------
Operating revenues
Australia $199.3 $295.9 $235.9
Other Asia Pacific 7.1 9.6 6.8
------ ------ ------
Total Asia Pacific $206.4 $305.5 $242.7
====== ====== ======
U.K. $448.8 $427.7 $392.7
Spain 24.1 24.8 27.7
------ ------ ------
Total Europe, Central Asia, Middle East and Africa $472.9 $452.5 $420.4
====== ====== ======
Years Ended December 31,
----------------------------------------
1998 1997 1996
------ ------ ------
Assets
Australia $1,326.2 $1,460.7 $1,852.1
Other Asia Pacific 369.3 260.0 154.8
-------- -------- --------
Total Asia Pacific $1,695.5 $1,720.7 $2,006.9
======== ======== ========
U.K. $1,787.1 $1,759.5 $1,831.5
Other Europe, Central Asia, Middle East and Africa 476.3 572.3 243.5
-------- -------- --------
Total Europe, Central Asia, Middle East and Africa $2,263.4 $2,331.8 $2,075.0
======== ======== ========
71
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.
EME's proportionate interest in net quantities of proved reserves at December
31, 1998, 1997 and 1996, and results of operations for the years then ended
related to equity method investees are shown in the following tables:
U.S. Canada Total
---- ------ -----
Costs incurred in oil and 1998 $ 11.8 $ -- $ 11.8
gas property acquisition 1997 18.9 -- 18.9
exploration, and 1996 13.4 4.2 17.6
development activities
Aggregate amounts of 1998 $191.9 $ -- $191.9
capitalized costs 1997 194.9 -- 194.9
(including construction in 1996 206.6 42.4 249.0
progress) for proved and
unproved properties
Results of operations 1998 $ 23.7 $ -- $ 23.7
1997 39.2 -- 39.2
1996 39.2 (2.6) 36.6
Standardized measure of 1998 $175.8 $ -- $175.8
discounted future net cash 1997 249.2 -- 249.2
flows 1996 435.8 63.6 499.4
Oil Natural
Million Barrels Billion Cubic Feet
--------------- ------------------
U.S. Canada Total U.S. Canada Total
---- ------ ----- ---- ------ -----
Proved developed and 1998 21.9 -- 21.9 191.3 -- 191.3
undeveloped reserves 1997 21.6 -- 21.6 189.3 -- 189.3
1996 23.7 1.8 25.5 182.0 105.5 287.5
In 1997, EME completed a sale of its ownersip interest in B.C. Star Partners
which operated eleven producing properties in British Columbia, Canada.
72
Note 17. Quarterly Financial Data (unaudited)
- ----------------------------------------------
1998 First(i) Second Third(i) Fourth(i) Total
-------- ------ -------- --------- -----
Operating revenues $ 231.9 $ 207.3 $ 227.5 $ 227.1 $ 893.8
Income from operations 99.3 71.1 103.4 76.7 350.5
Net income 37.7 18.6 44.8 31.0 132.1
1997 First(i) Second Third(i) Fourth(i) Total
-------- ------ -------- --------- -----
Operating revenues $285.0 $ 221.5(ii) $ 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(iii)(iv) 46.1 16.9 115.0
(i) 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.
(ii) Decline in revenues as a result of restructuring agreements associated
with the 49% acquisition of Loy Yang B in May 1997.
(iii) Includes a $14 million gain on sale of ownership interest in an oil and
gas investment.
(iv) Includes a $13.1 million extraordinary loss on early extinguishment of
debt.
Events Subsequent to Date of Auditors Report (Unaudited)
- --------------------------------------------------------
In March 1999, EME entered into agreements to acquire 100% of the fossil-fuel
generating assets of Commonwealth Edison Co., totaling 9,772 MW. EME will
operate the plants, which are located in the Midwest. The closing of the
transaction is subject to various state and federal regulatory approvals and is
expected to be completed by year end 1999. EME plans to finance the
approximately $5 billion acquisition with a combination of debt secured by the
project, corporate debt, cash and funding from Edison International.
In March 1999, EME entered into agreements to acquire 40% of Contact Energy
Ltd. (Contact), currently owned by the government of New Zealand. Contact owns
and operates hydroelectric, geothermal and natural gas-fired power generating
plants in New Zealand with a total generating capacity of 2,371 MW. Contact
also supplies gas and electricity to customers in New Zealand and has minority
interests in two power projects in Australia. The acquisition is conditional on
the New Zealand government completing an initial public offering of the
remaining 60% of Contact, planned for mid April 1999. EME plans to finance the
approximately $625 million acquisition with debt secured by the project,
corporate debt and cash.
73
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, 1999.
Director Position Held
Continuously Term Continuously Term
Name, Position and Age Since Expires Since Expires
- ---------------------- ------------ ------- ------------- -------
Alan J. Fohrer, 48............................................. 1992 1999 -- --
Chairman of the Board
Bryant C. Danner, 61........................................... 1993 1999 -- --
Director
Robert M. Edgell, 52........................................... 1993 1999 1988 1999
Director, Executive Vice President and
Division President of EME, Asia Pacific
Edward R. Muller, 46........................................... 1993 1999 1993 1999
Director, President and Chief Executive Officer
S. Linn Williams, 52........................................... -- -- 1994 1999
Senior Vice President and Division President of EME, Europe,
Central Asia, Middle East and Africa
James V. Iaco, Jr., 54......................................... -- -- 1994 1999
Senior Vice President and Chief Financial Officer
Division President of EME, Americas
Georgia R. Nelson, 49.......................................... -- -- 1996 1999
Senior Vice President, Worldwide Operations
Raymond W. Vickers, 56......................................... -- -- 1999 1999
Senior Vice President and General Counsel
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.
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.
74
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 and Global Marine, Inc.
Mr. Williams has been Senior Vice President of EME since November 1994. Mr.
Williams was named Division President of EME's Europe, Central Asia, Middle East
and Africa region in November 1998. Mr. Williams served as General Counsel of
EME from November 1994 until being named as Division President. 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. 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 June 1993 until May 1995. From 1992 to 1993, Ms. Nelson served as a
Special Assistant to the Chairman of Edison International.
Mr. Vickers has been Senior Vice President and General Counsel of EME since
March 1, 1999. Prior to joining EME, Mr. Vickers was a partner with the law
firm Skadden, Arps, Slate, Meagher & Flom concentrating on international
business transactions, particularly cross-border capital markets and investment
transactions, project implementation and finance. Mr. Vickers originally joined
Skadden, Arps, Slate Meagher & Flom in 1989 as resident partner in the Hong Kong
office.
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 1998:
Name Date Elected
---- ------------
Gareth Brett, Vice President July 6, 1998
75
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 1998, 1997 and 1996 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 (#)(1) ($)(2)
- --------------------------- ---- --- --- --- -------------- ------
Edward R. Muller 1998 432,000 390,000 2,624 21,160 40,172
President and Chief 1997 400,000 456,000 3,478 33,300 28,587
Executive Officer 1996 370,000 444,000 2,621 41,000 23,148
Robert M. Edgell 1998 362,000 265,000 -- 14,760 56,474(3)
Executive Vice President 1997 317,000 325,000 -- 23,300 33,600(3)
1996 292,000 275,000 133 25,700 88,071(3)
S. Linn Williams 1998 325,000 186,000 2,197 9,520 25,841
Senior Vice President 1997 300,000 240,000 1,643 15,400 18,568
1996 275,000 220,000 734 20,100 13,148
Georgia R. Nelson 1998 310,000 170,000 3,125 8,580 29,233
Senior Vice President, 1997 290,000 206,000 7,125 15,400 17,829
Worldwide Operations 1996 270,000 190,000 1,337 23,700 14,446
James V. Iaco, Jr. 1998 300,000 180,000 5,167 8,830 17,648
Senior Vice President and 1997 280,000 224,000 4,913 15,400 14,962
Chief Financial Officer 1996 250,000 200,000 2,906 19,800 10,416
(1) No Stock Appreciation Rights (SARs) were granted. Amounts shown are
comprised of Edison International nonqualified stock options and EME
"phantom stock" options. For 1998, Mr. Muller, Mr. Edgell, Mr. Williams, Ms.
Nelson and Mr. Iaco received 13,300; 8,700; 6,300; 5,400; and 5,900 Edison
International stock options, respectively; and 7,860; 6,060; 3,220; 3,180;
and 2,930 EME phantom stock options, respectively. 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. Each Edison
International nonqualified stock option gives the named 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 1998 Option Grant Table below.
76
(2) 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 1998, Mr. Muller, $26,373;
Mr. Edgell $14,550; Mr. Williams, $16,796; Ms. Nelson, $15,461; and Mr.
Iaco, $15,701. 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.
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
1998, Mr. Muller, $13,520; Mr. Edgell $1,116; Mr. Williams, $9,005; Ms.
Nelson, $7,812; and Mr. Iaco, $1,902. 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.
(3) Includes an overseas service allowance of $33,693, $20,142 and $75,832 in
1998, 1997 and 1996, respectively. For each employee serving in an overseas
site, the allowance calculation depends on base pay, family size and
location.
Executive Stock Options
The following table sets forth certain information concerning Edison
International stock options and EME phantom stock options granted pursuant to
the Edison International Equity Compensation Plan (ECP) to the executive
officers named in the Summary Compensation Table above during 1998.
OPTION GRANTS IN 1998(1)
Individual Grants
----------------------------------------------------------
Exercise
Options Percent of Total or Base Grant Date
Granted Options Granted to Price Expiration Present
Name (#) Employees in 1998 ($/Sh) Date Value ($)
- ---------------------- ------- ------------------ -------- ---------- ----------
(2)(3) (4)(5) (6)
Edward R. Muller
Edison International 13,300 1% 27.25 01/02/2008 84,189
EME 7,860 9% 264.13 01/02/2008 259,459
Robert M. Edgell
Edison International 8,700 1% 27.25 01/02/2008 55,071
EME 6,060 7% 264.13 01/02/2008 200,041
S. Linn Williams
Edison International 6,300 less than 1% 27.25 01/02/2008 39,879
EME 3,220 4% 264.13 01/02/2008 106,292
Georgia R. Nelson
Edison International 5,400 less than 1% 27.25 01/02/2008 34,182
EME 3,180 4% 264.13 01/02/2008 104,972
James V. Iaco, Jr.
Edison International 5,900 less than 1% 27.25 01/02/2008 37,347
EME 2,930 3% 264.13 01/02/2008 96,719
77
(1) No SARs were granted. This table reflects all awards made under the ECP
("ECP Options") during 1998. 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 NPV Management and
Calculation 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 (9% 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 ECP Options become exercisable in four 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 ECP Options were amended to allow
certain senior officers to transfer ECP Options to a spouse, child or
grandchild. If an executive retires, dies, or is permanently and totally
disabled during the four-year vesting period, the unvested ECP Options will
vest and be exercisable to the extent of 1/48 of the grant for each full
month of service during the vesting period. Unvested ECP 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 ECP 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, ECP Options which had vested as of the prior
anniversary date of the grant are forfeited unless exercised within 180 days
of the 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 ECP Options are forfeited on the date of termination.
78
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 ECP Options then
outstanding will become vested and be exercisable unless provisions are made
as part of the transaction to continue the ECP 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 ECP 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 ECP 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 ECP 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 ECP 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 $3.08
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
5.63%, the historic average dividend yield was assumed to be 5.89% and the
stock price and exercise price were $27.25.
The dividend equivalent value of each Edison International stock option
granted in 1998 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 1998.
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 $33.01 using the Black-
Scholes stock option pricing model assuming an average exercise period of
seven years, a volatility rate of 18.75%, a risk-free rate of return of
5.81%, a dividend yield of 0% and an exercise price of $482.84. These
assumptions are based on average values of a group of peer companies
adjusted for differences in capital structure.
The actual value that an executive may realize will depend on various
factors on the date the option is exercised, so there is no assurance the
value realized by an executive will be at or near the grant date value
estimated by the Black-Scholes model. The estimated values under that model
are based on certain assumptions and are not a prediction as to future stock
price.
79
The following table sets forth certain information with respect to the
exercise during 1998 by the executive officers named in the Summary Compensation
Table above of options to purchase shares of common stock of Edison
International and exercise hypothetical shares of stock of EME and option values
as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
Number of Value of Unexercised
Unexercised Options in-the-Money Options
at Fiscal Year-End (#) at Fiscal Year-End ($)(1)
---------------------- -------------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
---- --------------- ------------------ ------------- -------------
Edward R. Muller
Edison International -- -- 54,400/23,700 408,406/100,038
EME -- -- 89,144/33,326 10,820,845/2,261,844
Robert M. Edgell
Edison International -- -- 48,150/15,900 381,490/68,613
EME -- -- 54,791/22,959 6,608,602/1,483,801
S. Linn Williams
Edison International -- -- 9,934/11,766 111,708/52,174
EME -- -- 32,990/14,720 4,008,594/1,031,546
Georgia R. Nelson
Edison International 20,434 269,795 (2) 0/12,066 0/63,911
EME 3,800 424,581 9,300/14,680 912,422/1,031,546
James V. Iaco, Jr.
Edison International 4,800 55,724(3) 0/11,266 0/50,899
EME 7,040 856,467 29,010/14,430 3,474,007/1,031,546
(1) Edison International options are treated as "in-the-money" if the fair
market value of the underlying shares at December 31, 1998, 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 1998 and (ii) the exercise prices of those
options. The aggregate value at year-end 1998 of all accrued dividend
equivalents, exercisable and unexercisable, for Mr. Muller, Mr. Edgell, Mr.
Williams, Ms. Nelson and Mr. Iaco was $219,930/$0, $306,917/$0, $18,135/$0,
$0/$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 1997, the most recent data
available.
(2) Includes $66,588 of value realized from dividend equivalents.
(3) Includes $4,444 of value realized from dividend equivalents.
80
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
81
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, 1998, Mr. Muller had completed 5 years of service; Mr.
Edgell, 28 years; Mr. Williams, 4 years; Ms. Nelson, 28 years; Mr. Iaco, 4
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 23% 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 $138,000. 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.
82
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.
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
-------------- ------------------- -------------------- ----------
Common Stock, no par value The Mission Group 100 shares held directly and 100%
18101 Von Karman with exclusive voting and
Avenue, Suite 1700 investment power
Irvine, California
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 as of December 31, 1998. The
table includes shares that can be acquired through March 1, 1999; through the
exercise of stock options. Unless otherwise indicated, each named person has
sole voting and investment power.
Amount and Nature of
Company and Beneficial Ownership as of
Name Class of Stock December 31, 1998(a)
---- -------------- ----------------------
John E. Bryson(n) Edison International Common Stock 610,540(b)
Alan J. Fohrer Edison International Common Stock 179,612(c)
Bryant C. Danner Edison International Common Stock 176,282(d)
Robert M. Edgell Edison International Common Stock 71,393(e)
Edward R. Muller Edison International Common Stock Mission 66,425(f)
Capital Preferred Securities 2,478(g)
S. Linn Williams Edison International Common Stock 15,232(h)
Georgia R. Nelson Edison International Common Stock 10,442(i)
James V. Iaco, Jr. Edison International Common Stock Mission 5,008(j)
Capital Preferred Securities 1,950(k)
All directors and executive Edison International Common Stock 1,134,934(l)
officers as a group Mission Capital Preferred Securities 4,428(m)
(a) No named person or group owns more than 1% of the outstanding shares of the
class.
(b) Includes 6,000 shares held as trustee with shared voting and sole investment
power, 6,000 shares held as co-trustee and co-beneficiary of trust with
shared voting and investment power, 200 shares held by spouse with shared
voting and investment power, 14,805 shares credited under the SSPP and
583,534 shares that can be acquired through the exercise of options. SSPP
shares for which instructions are not received from any plan participant may
be voted by the SSPP Trustee in its discretion.
(c) Includes 12,703 shares credited under the SSPP and 166,409 shares that can
be acquired through the exercise of options.
(d) Includes 2,173 shares credited under the SSPP and 172,109 shares that can be
acquired through the exercise of options.
83
(e) Includes 16,368 shares credited under the SSPP and 55,025 shares that can be
acquired through the exercise of options.
(f) Includes 64,625 shares that can be acquired through the exercise of options.
(g) Includes 280 shares held by spouse with shared voting and investment power,
and 8 shares held as co-trustee and co-beneficiary with shared voting and
investment power.
(h) Includes 90 shares credited under the SSPP and 15,142 shares that can be
acquired through the exercise of options.
(i) Includes 4,259 shares credited under the SSPP and 6,183 shares that can be
acquired through the exercise of options.
(j) Includes 5,008 shares that can be acquired through the exercise of options.
(k) Includes 750 shares held by spouse with shared voting and investment power.
(l) Includes 6,000 shares held as trustee with shared voting and sole investment
power, 6,000 shares held as co-trustee and co-beneficiary of trust with
shared voting and investment power, 200 shares held by spouse with shared
voting and investment power, 50,398 shares credited under the SSPP and
1,068,035 shares that can be acquired through the exercise of options. SSPP
shares for which instructions are not received from any plan participant may
be voted by the SSPP Trustee in its discretion.
(m) Includes 1,030 shares held by spouse with shared voting and investment
power, and 8 shares held as co-trustee and co-beneficiary with shared voting
and investment power.
(n) Mr. Bryson retired as Chairman of EME's Board effective January 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
84
Form 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) List of Financial Statements
See Index to Consolidated Financial Statements at Item 8 of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
(c) Exhibits
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.
2.3 Stock Purchase and Assignment Agreement dated December 23, 1998 between KES
Puerto Rico, L.P., KENETECH Energy Systems, Inc., KES Bermuda, Inc. and EME del
Caribe for the (i) sale and purchase of KES Puerto Rico, L.P.'s shares in
EcoElectrica Holdings Ltd.; (ii) assignment of KENETECH Energy Systems' rights
and interests in that certain Project Note from the Partnership; and (iii)
assignment of KES Bermuda, Inc.'s rights and interests in that certain
Administrative Services Agreement dated October 31, 1997. *
2.4 Asset Purchase Agreement, dated August 1, 1998 between
Pennsylvania Electric Compnay, NGE Generation, Inc., New York
State Electric & Gas Corporation and Mission Energy Westside,
Inc.*
2.5 Asset Sale Agreement, dated March 22, 1999 between Commonwealth
Edison Company and Edison Mission Energy as to the Fossil
Generating Assets.*
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.
4.2 Conformed copy of the Indenture dated as of November 30, 1994 between EME and
The First National Bank of Chicago, as trustee.
85
Exhibit No. Description
- ---------- -----------
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 Contact 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 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.
86
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
87
Exhibit No. Description
- ---------- -----------
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 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
88
Exhibit No. Description
- ---------- -----------
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.
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, incorporated
by reference to Exhibit 10.45 to EME's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.46 Power Purchase Agreement between Gulf Power Generation Co., LTD., and
Electricity Generating Authority of Thailand, dated December 22, 1997,
incorporated by reference to Exhibit 10.46 to EME's Annual Report on Form 10-K
for the year ended December 31, 1997.
10.47 Guarantee by EME dated June 30, 1998 in favor of Tri Energy Company Limited and
the Sanwa Bank, Limited to guarantee payment of 25% of Tri Energy Company
Limited's aggregate capital contributions under the Equity Bridge Loan,
incorporated by reference to Exhibit 10.47 to EME's Form 10-Q for the quarter
ended September 30, 1998.
89
10.48 Guarantee by EME dated June 30, 1998 in favor of Tri Energy Company Limited and
the Sanwa Bank, Limited to guarantee payment of 37.5% of Tri Energy Company
Limited's aggregate capital contributions attributable to Banpu Gas and BANPU,
incorporated by reference to Exhibit 10.48 to EME's Form 10-Q for the quarter
ended September 30, 1998.
10.49 Equity Support Guarantee by EME dated December 23, 1998, in favor of ABN AMRO
Bank N.V., and the Chase Manhattan Bank to guarantee certain equity funding
obligations of EcoElectrica Ltd. and EcoElectrica Holdings Ltd. pursuant to
EcoElectrica Ltd.'s Credit Agreement dated as of October 31, 1997.*
10.50 Master Guarantee and Support Instrument by EME dated December 23, 1998, in favor
of ABN AMRO Bank N.V., and the Chase Manhattan Bank to guarantee the
availability of funds to purchase fuel for the EcoElectrica project pursuant to
EcoElectrica Ltd.'s Credit Agreement dated as of October 31, 1997 and
Intercreditor Agreement dated as of October 31, 1997.*
10.51 Guarantee Assumption Agreement from EME, dated December 23, 1998, under EME
assumed all of the obligations of KENETECH Energy Systems, Inc. to Union Carbide
Caribe Inc., under the certain Guaranty dated November 25, 1997.*
10.52 Transition Power Purchase Agreement, dated August 1, 1998 between
New York State Electric & Gas Corporation and Mission Energy
Westside, Inc.*
10.53 Transition Power Purchase Agreement, dated August 1, 1998 between
Pennsylvania Electric Company and Mission Energy Westside, Inc.*
10.54 Guarantee, dated August 1, 1998 between Edison Mission Energy,
Pennsylvania Electric Company, NGE Generation, Inc. and New York
State Electric & Gas Corporation.*
21 List of Subsidiaries.*
27 Financial Data Schedule.*
*Filed herewith
(d) Financial Statement Schedules
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.
90
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, 1999
----------------------------------------------------------------------------------------------
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:
Edward R. Muller President and Chief Executive Officer March 30, 1999
Controller or Principal Accounting Officer:
Thomas E. Legro Vice President and Controller March 30, 1999
Majority of Board of Directors:
Alan J. Fohrer Chairman of the Board March 30, 1999
Robert M. Edgell Director March 30, 1999
Bryant C. Danner Director March 30, 1999
91