10-Q 1 eme2013q1.htm 10-Q EME 2013 Q1

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_______________________

FORM 10-Q

(Mark one)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2013
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

_______________________
Commission File Number
Exact name of registrants as specified in their charters,
addresses of principal executive offices, telephone numbers and states of incorporation
I.R.S. Employer Identification No.
333-68630
EDISON MISSION ENERGY
95-4031807
 
3 MacArthur Place, Suite 100
Santa Ana, California 92707 714-513-8000
State of Incorporation: Delaware
 
333-59348
MIDWEST GENERATION, LLC
33-0868558
 
235 Remington Boulevard, Suite A
Bolingbrook, Illinois 60440 630-771-7800
State of Incorporation: Delaware
 

_______________________

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.
Edison Mission Energy YES x NO o Midwest Generation, LLC YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Edison Mission Energy YES x NO o Midwest Generation, LLC YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Edison Mission Energy
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
Midwest Generation, LLC
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Edison Mission Energy YES o NO x Midwest Generation, LLC YES o NO x
Number of shares outstanding of Edison Mission Energy's Common Stock as of May 2, 2013: 100 shares (all shares held by an affiliate of Edison Mission Energy).
This combined Form 10-Q is filed separately by two registrants: Edison Mission Energy and Midwest Generation, LLC. Information contained herein relating to any individual registrant is filed by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the other registrant.
 




TABLE OF CONTENTS

 
 
 
 
Edison Mission Energy
 
 
 
 
 
 
Midwest Generation, LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ii



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iv


GLOSSARY
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
2010 Tax Relief Act
Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010
Adjusted EBITDA
Adjusted earnings before interest, taxes, depreciation and amortization
Ambit
American Bituminous Power Partners, L.P. or its waste coal facility
AOCI
accumulated other comprehensive income (loss)
ARO(s)
asset retirement obligation(s)
BACT
best available control technology
Bankruptcy Code
Chapter 11 of the United States Bankruptcy Code
Bankruptcy Court
United States Bankruptcy Court for the Northern District of Illinois, Eastern Division
bcf
billion cubic feet
Big 4 Projects
Kern River, Midway-Sunset, Sycamore and Watson natural gas power projects
Btu
British thermal units
CAA
Clean Air Act
CAIR
Clean Air Interstate Rule
CO2
carbon dioxide
Commonwealth Edison
Commonwealth Edison Company
CPS
Combined Pollutant Standard
CPUC
California Public Utilities Commission
CSAPR
Cross-State Air Pollution Rule
Debtor Entities
EME and 16 of its wholly owned subsidiaries, including Midwest Generation
EIX
Edison International
EME
Edison Mission Energy
EMMT
Edison Mission Marketing & Trading, Inc.
ERCOT
Electric Reliability Council of Texas
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FPA
Federal Power Act
GAAP
United States generally accepted accounting principles
GECC
General Electric Capital Corporation
GHG
greenhouse gas
GWh
gigawatt-hours
Homer City
EME Homer City Generation L.P.
ISO(s)
independent system operator(s)
Lehman Brothers
Lehman Brothers Commodity Services, Inc. and Lehman Brothers Holdings, Inc.
LIBOR
London Interbank Offered Rate
LSTC
liabilities subject to compromise
MATS
Mercury and Air Toxics Standards
Midwest Generation
Midwest Generation, LLC
MISO
Midwest Independent Transmission System Operator

v


MMBtu
million British thermal units
Moody's
Moody's Investors Service, Inc.
MW
megawatts
MWh
megawatt-hours
NAAQS
National Ambient Air Quality Standard(s)
NERC
North American Electric Reliability Corporation
NOX
nitrogen oxide
NSR
New Source Review
NYISO
New York Independent System Operator
OCI
other comprehensive income (loss)
PJM
PJM Interconnection, LLC
Powerton and Joliet Sale Leaseback
a sale leaseback transaction for the Powerton Station and Units 7 and 8 of the Joliet Station with third-party lessors in August 2000
PRB
Powder River Basin
PSD
Prevention of Significant Deterioration
RPM
Reliability Pricing Model
RTO(s)
regional transmission organization(s)
S&P
Standard & Poor's Ratings Services
SCE
Southern California Edison Company
Settlement Transaction
A proposed settlement transaction with Edison International as contemplated in the Support Agreement
SIP(s)
state implementation plan(s)
SO2
sulfur dioxide
Support Agreement
Transaction Support Agreement dated as of December 16, 2012 by and among EME, Edison International, and certain holders of EME's senior unsecured notes
US EPA
United States Environmental Protection Agency
US Treasury Grant(s)
Cash grants, under the American Recovery and Reinvestment Act of 2009
VIE(s)
variable interest entity(ies)



vi


EXPLANATORY NOTE
This quarterly report combines the quarterly reports on Form 10-Q for the three months ended March 31, 2013 of Edison Mission Energy (EME) and Midwest Generation, LLC (Midwest Generation).
EME, an indirect wholly owned subsidiary of Edison International (EIX), is a holding company whose subsidiaries and affiliates are engaged in the business of owning, leasing, operating and selling energy and capacity from independent power production facilities. Midwest Generation, an indirect wholly owned subsidiary of EME, operates and sells energy and capacity at four coal-fired generating stations and two oil-fired generating peakers in Illinois.
On December 17, 2012, EME and 16 of its wholly owned subsidiaries, including Midwest Generation, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the Bankruptcy Court). EME and Midwest Generation remain in possession of their property and continue their business operations uninterrupted as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Information on the Chapter 11 Cases, including each item filed on the docket, is available www.edisonmissionrestructuring.com. The information set forth on this web site shall not be deemed to be a part of, or incorporated by reference into, EME's and Midwest Generation's quarterly report on Form 10-Q.
The consolidated financial statements of EME reflect the accounts of EME and its subsidiaries, including Midwest Generation, and are labeled debtor-in-possession to reflect EME's status. Midwest Generation's consolidated financial statements include the accounts of Midwest Generation and its subsidiaries and are labeled debtor-in-possession to reflect Midwest Generation's status. All significant intercompany balances and transactions have been eliminated for each reporting entity. The discussion in this quarterly report and in the notes to the consolidated financial statements generally applies to both EME and Midwest Generation unless otherwise specified as indicated parenthetically next to each corresponding disclosure.
This quarterly report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for EME and Midwest Generation.

1



















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2


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
Operating Revenues
$
307

 
$
343

Operating Expenses
 
 
 
Fuel
141

 
122

Plant operations
98

 
138

Plant operating leases
18

 
19

Depreciation and amortization
67

 
68

Loss on disposal and asset retirements

 
3

Administrative and general
30

 
41

Total operating expenses
354

 
391

Operating loss
(47
)
 
(48
)
Other Income (Expense)
 
 
 
Equity in income (loss) from unconsolidated affiliates
8

 
(1
)
Interest expense
(17
)
 
(85
)
Total other expense
(9
)
 
(86
)
Loss from continuing operations before reorganization items and income taxes
(56
)
 
(134
)
Reorganization items
28

 

Benefit for income taxes
(3
)
 
(76
)
Loss From Continuing Operations
(81
)
 
(58
)
Loss from Operations of Discontinued Subsidiaries, net of tax (Note 13)
(1
)
 
(24
)
Net Loss
(82
)
 
(82
)
Net Income Attributable to Noncontrolling Interests (Note 3)
(7
)
 
(2
)
Net Loss Attributable to Edison Mission Energy Common Shareholder
$
(89
)
 
$
(84
)
Amounts Attributable to Edison Mission Energy Common Shareholder
 
 
 
Loss from continuing operations, net of tax
$
(88
)
 
$
(60
)
Loss from discontinued operations, net of tax
(1
)
 
(24
)
Net Loss Attributable to Edison Mission Energy Common Shareholder
$
(89
)
 
$
(84
)

The accompanying notes are an integral part of these consolidated financial statements.
3


EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, unaudited)


Three Months Ended March 31,

2013

2012
Net Loss
$
(82
)

$
(82
)
Other comprehensive income (loss), net of tax



Valuation allowance on deferred tax asset
(2
)


Pension and postretirement benefits other than pensions:



Net gain (loss) adjustment, net of tax
(1
)

1

Amortization of net loss and prior service adjustment included in expense, net of tax
1


1

Unrealized gains on derivatives qualified as cash flow hedges



Unrealized holding gains arising during the period, net of income tax expense of $1 and $17 for the three months ended March 31, 2013 and 2012, respectively
2


25

Reclassification adjustments included in net loss, net of income tax expense of $1 and $8 for the three months ended March 31, 2013 and 2012, respectively
(2
)

(11
)
Other comprehensive income (loss), net of tax
(2
)

16

Comprehensive Loss
(84
)

(66
)
Comprehensive Income Attributable to Noncontrolling Interests
(7
)

(2
)
Comprehensive Loss Attributable to Edison Mission Energy Common Shareholder
$
(91
)

$
(68
)


The accompanying notes are an integral part of these consolidated financial statements.
4


EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED BALANCE SHEETS
(in millions, unaudited)

 
March 31,
2013
 
December 31,
2012
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,063

 
$
888

Accounts receivable—trade
78

 
73

Receivables from affiliates
4

 
8

Inventory
118

 
175

Derivative assets
46

 
53

Restricted cash and cash equivalents
15

 
11

Margin and collateral deposits
59

 
61

Prepaid expenses and other
41

 
54

Total current assets
1,424

 
1,323

Investments in Unconsolidated Affiliates
529

 
534

Property, Plant and Equipment, less accumulated depreciation of $1,498 and $1,431 at respective dates
4,494

 
4,516

Other Assets
 
 
 
Deferred financing costs
40

 
44

Long-term derivative assets
29

 
37

Restricted deposits
95

 
102

Rent payments in excess of levelized rent expense under plant operating leases
825

 
836

Other long-term assets
109

 
128

Total other assets
1,098

 
1,147

Total Assets
$
7,545

 
$
7,520


EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts, unaudited)

 
March 31, 2013
 
December 31, 2012
Liabilities and Shareholder's Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
19

 
$
29

Payables to affiliates
31

 
34

Accrued liabilities and other
88

 
67

Interest payable
6

 
1

Current portion of long-term debt
308

 
307

Short-term debt
420

 
382

Total current liabilities
872

 
820

Liabilities subject to compromise
3,955

 
3,959

Long-term debt net of current portion
741

 
749

Deferred taxes and tax credits, net (Note 7)
81

 
81

Deferred revenues
526

 
533

Long-term derivative liabilities
107

 
118

Other long-term liabilities
523

 
528

Total Liabilities
6,805

 
6,788

Commitments and Contingencies (Notes 5, 6, 9 and 10)


 


Equity
 
 
 
Common stock, par value $0.01 per share (10,000 shares authorized; 100 shares issued and outstanding at each date)
64

 
64

Additional paid-in capital
1,102

 
1,095

Retained deficit
(675
)
 
(577
)
Accumulated other comprehensive loss
(140
)
 
(138
)
Total Edison Mission Energy common shareholder's equity
351

 
444

Noncontrolling Interests
389

 
288

Total Equity
740

 
732

Total Liabilities and Equity
$
7,545

 
$
7,520




The accompanying notes are an integral part of these consolidated financial statements.
5


EDISON MISSION ENERGY AND SUBSIDIARIES
(Debtor-in-Possession)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions, unaudited)
 
Three Months Ended March 31,
 
2013
 
2012
Cash Flows From Operating Activities
 
 
 
Net loss
$
(82
)
 
$
(82
)
Adjustments to reconcile loss to net cash provided by (used in) operating activities:
 
 
 
Non-cash reorganization items
28

 

Equity in (income) loss from unconsolidated affiliates
(8
)
 
1

Distributions from unconsolidated affiliates
5

 

Depreciation and amortization
73

 
74

Deferred taxes and tax credits

 
(60
)
Loss on disposal and asset impairments

 
14

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in margin and collateral deposits
2

 
(36
)
(Increase) decrease in receivables
(1
)
 
27

Decrease (increase) in inventory
57

 
(9
)
Decrease in prepaid expenses and other
7

 
12

Increase in restricted cash and cash equivalents
(6
)
 
(7
)
Decrease (increase) in rent payments in excess of levelized rent expense
11

 
(57
)
Increase in payables, other current liabilities and liabilities subject to compromise
6

 
18

Decrease in derivative assets and liabilities
3

 
19

Decrease (increase) in other operating—assets
1

 
(4
)
Decrease in other operating—liabilities
(9
)
 
(18
)
Operating cash flows from continuing operations
87

 
(108
)
Operating cash flows from discontinued operations, net
(2
)
 
8

Net cash provided by (used in) operating activities
85

 
(100
)
Cash Flows From Financing Activities
 
 
 
Cash contributions from noncontrolling interests
94

 
242

Payments on debt
(9
)
 
(7
)
Borrowings under short-term debt
38

 

Borrowings under long-term debt

 
54

Cash contribution from EIX related to the tax-allocation agreements
6

 

Payments to affiliates related to stock-based awards
(9
)
 
(5
)
Financing costs
(1
)
 
(3
)
Net cash provided by financing activities from continuing operations
119

 
281

Cash Flows From Investing Activities
 
 
 
Capital expenditures
(48
)
 
(79
)
Proceeds from sale of assets
8

 

Proceeds from return of capital and loan repayments from unconsolidated affiliates
2

 
1

Proceeds from settlement of insurance claims
2

 

Investments in and loans to unconsolidated affiliates
(4
)
 

Decrease (increase) in restricted deposits and restricted cash and cash equivalents
9

 
(86
)
Investments in other assets

 
(3
)
Investing cash flows from continuing operations
(31
)
 
(167
)
Investing cash flows from discontinued operations, net

 
(7
)
Net cash used in investing activities
(31
)
 
(174
)
Net increase in cash and cash equivalents from continuing operations
175

 
6

Cash and cash equivalents at beginning of period from continuing operations
888

 
1,221

Cash and cash equivalents at end of period from continuing operations
1,063

 
1,227

Net (decrease) increase in cash and cash equivalents from discontinued operations
(2
)
 
1

Cash and cash equivalents at beginning of period from discontinued operations
2

 
79

Cash and cash equivalents at end of period from discontinued operations
$

 
$
80


The accompanying notes are an integral part of these consolidated financial statements.
6


MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
Operating Revenues from Marketing Affiliate
$
179

 
$
233

Operating Expenses
 
 
 
Fuel
134

 
117

Plant operations
67

 
109

Depreciation and amortization
33

 
32

Loss on disposal and asset retirements

 
3

Administrative and general
5

 
5

Total operating expenses
239

 
266

Operating loss
(60
)
 
(33
)
Other Income (Expense)
 
 
 
Interest and other income

 
28

Interest expense
(6
)
 
(9
)
Total other income (expense)
(6
)
 
19

Loss before reorganization items and income taxes
(66
)
 
(14
)
Reorganization items
8

 

Benefit for income taxes

 
(5
)
Net Loss
$
(74
)
 
$
(9
)



The accompanying notes are an integral part of these consolidated financial statements.
7


MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
Net Loss
$
(74
)
 
$
(9
)
Other comprehensive income (loss), net of tax
 
 
 
Valuation allowance on deferred tax asset
(4
)
 

Pension and postretirement benefits other than pensions:
 
 
 
Amortization of net loss and prior service adjustment included in expense, net of tax
1

 
1

Unrealized gains and losses on derivatives qualified as cash flow hedges:
 
 
 
Unrealized holding gains (losses) arising during period, net of income tax expense (benefit) of $(3) and $11 for the three months ended March 31, 2013 and 2012, respectively
(5
)
 
18

Reclassification adjustments included in net loss, net of income tax expense of $1 and $6 for the three months ended March 31, 2013 and 2012, respectively
(2
)
 
(10
)
Other comprehensive income (loss), net of tax
(10
)
 
9

Comprehensive Loss
$
(84
)
 
$



The accompanying notes are an integral part of these consolidated financial statements.
8


MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED BALANCE SHEETS
(in millions, except unit amounts, unaudited)
 
March 31, 2013
 
December 31, 2012
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
130

 
$
95

Due from affiliates, net (Note 1)
37

 
40

Inventory
107

 
165

Interest receivable from affiliate, net (Note 1)

 

Derivative assets
1

 
2

Other current assets
14

 
20

Total current assets
289

 
322

Property, Plant and Equipment, less accumulated depreciation of $1,292 and $1,260 at respective dates
2,065

 
2,078

Notes receivable from affiliate, net (Note 1)

 

Other long-term assets
10

 
28

Total Assets
$
2,364

 
$
2,428

Liabilities and Member's Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
10

 
$
10

Accrued liabilities
33

 
18

Due to affiliates
3

 
3

Interest payable
6

 
1

Derivative liabilities
13

 
3

Current portion of lease financings
1

 
6

Total current liabilities
66

 
41

Liabilities subject to compromise
525

 
529

Lease financings, net of current portion
1

 
2

Deferred taxes, net (Note 7)

 

Benefit plans and other long-term liabilities
190

 
190

Total Liabilities
782

 
762

Commitments and Contingencies (Notes 6, 9 and 10)


 


Member's Equity
 
 
 
Membership interests, no par value (100 units authorized, issued and outstanding at each date)

 

Additional paid-in capital
3,405

 
3,405

Accumulated deficit
(1,763
)
 
(1,689
)
Accumulated other comprehensive loss
(60
)
 
(50
)
Total Member's Equity
1,582

 
1,666

Total Liabilities and Member's Equity
$
2,364

 
$
2,428


The accompanying notes are an integral part of these consolidated financial statements.
9


MIDWEST GENERATION, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
 
Three Months Ended March 31,
 
2013
 
2012
Cash Flows From Operating Activities
 
 
 
Net loss
$
(74
)
 
$
(9
)
Adjustments to reconcile loss to net cash provided by operating activities:
 
 
 
Non-cash reorganization items
8

 

Depreciation and amortization
33

 
32

Loss on disposal and asset impairments

 
3

Changes in operating assets and liabilities:
 
 
 
Decrease in due from affiliates
3

 
72

Decrease (increase) in inventory
58

 
(9
)
Decrease in other current assets
3

 
3

Increase (decrease) in accounts payable, other current liabilities and liabilities subject to compromise
13

 
(1
)
Increase (decrease) in interest payable
5

 
(11
)
Decrease (increase) in derivative assets and liabilities
1

 
(6
)
Increase in other operating - liabilities

 
5

Net cash provided by operating activities
50

 
79

Cash Flows From Financing Activities
 
 
 
Repayments of lease financing
(6
)
 
(57
)
Net cash used in financing activities
(6
)
 
(57
)
Cash Flows From Investing Activities
 
 
 
Capital expenditures
(9
)
 
(10
)
Increase in restricted deposits and restricted cash and cash equivalents

 
(1
)
Repayment of loan from affiliate

 
6

Net cash used in investing activities
(9
)
 
(5
)
Net increase in cash and cash equivalents
35

 
17

Cash and cash equivalents at beginning of period
95

 
213

Cash and cash equivalents at end of period
$
130

 
$
230


The accompanying notes are an integral part of these consolidated financial statements.
10


EDISON MISSION ENERGY AND SUBSIDIARIES
MIDWEST GENERATION, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies (EME and Midwest Generation, except as noted)
Chapter 11 Cases
EME and Midwest Generation continue to experience operating losses due to low realized energy and capacity prices, high fuel costs, and low generation at the Midwest Generation plants. These operating losses are a continuation of trends initially experienced in the fourth quarter of 2011. These adverse trends coupled with pending debt maturities and the need to retrofit the Midwest Generation plants to comply with governmental regulations were expected to exhaust EME's and Midwest Generation's liquidity. Consequently, on December 17, 2012, EME and 16 of its wholly owned subsidiaries, Camino Energy Company, Chestnut Ridge Energy Company, Edison Mission Energy Fuel Services, LLC, Edison Mission Fuel Resources, Inc., Edison Mission Fuel Transportation, Inc., Edison Mission Holdings Co., Edison Mission Midwest Holdings Co., Midwest Finance Corp., Midwest Generation EME, LLC, Midwest Generation, Midwest Generation Procurement Services, LLC, Midwest Peaker Holdings, Inc., Mission Energy Westside, Inc., San Joaquin Energy Company, Southern Sierra Energy Company, and Western Sierra Energy Company (collectively, the Debtor Entities) filed voluntary petitions for relief under Chapter 11 (the Chapter 11 Cases) of the Bankruptcy Code.
The Debtor Entities remain in possession of their property and continue their business operations uninterrupted as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Other than the Debtor Entities, none of EME's other direct or indirect subsidiaries is a debtor in the Chapter 11 Cases.
The filing of the Chapter 11 Cases automatically stayed most actions against the Debtor Entities, including actions to enforce the payment of EME's $3.7 billion of unsecured senior notes and Midwest Generation's obligations related to leases of the Powerton Station and Units 7 and 8 of the Joliet Station (the Powerton and Joliet Sale Leaseback). Absent an order from the Bankruptcy Court, substantially all of the Debtor Entities' pre-petition liabilities are subject to settlement under a reorganization plan.
The filing of the Chapter 11 Cases constitutes an event of default under the Powerton and Joliet Sale Leaseback and under instruments governing the Senior Lease Obligation Bonds issued to finance these leases. The automatic stay provisions of the Bankruptcy Code prevent the owner-lessors from exercising rights or remedies against the Debtor Entities that may arise from these defaults. In addition, the lease documents prevent the certificate holders from foreclosing until 180 days from the date of default. EME and Midwest Generation must assume the Powerton and Joliet Sale Leaseback by July 1, 2013 or else it will be automatically rejected. EME and Midwest Generation are currently analyzing these options. The Chapter 11 Cases may also constitute events of default under the $191 million nonrecourse financing of the Wildorado, San Juan Mesa and Elkhorn Ridge wind projects (the Viento II Financing) and the $69 million nonrecourse financing of the High Lonesome wind project (High Lonesome Financing). The various lenders and EME subsidiary borrowers associated with the financings have executed short-term forbearance agreements which expire in July 2013. The Chapter 11 Cases could also potentially give rise to counterparty rights and remedies under other documents. For further discussion, see Note 5—Debt and Credit Agreements and Note 9—Commitments and Contingencies—Powerton and Joliet Sale Leaseback.
The accompanying consolidated financial statements have been prepared assuming that EME and Midwest Generation will continue as going concerns. Financial statements prepared on this basis assume the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of the financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary if EME and Midwest Generation were unable to continue as going concerns. EME and Midwest Generation are currently developing a plan for their restructuring, but there is no assurance such a plan will be successfully implemented. EME's and Midwest Generation's ability to continue as going concerns is dependent on many factors, including the successful development of a confirmed plan of reorganization and an emergence from bankruptcy. Uncertainty as to the outcome of these factors raises substantial doubt about EME's and Midwest Generation's ability to continue as going concerns.
Basis of Presentation
There are no material updates to EME's and Midwest Generation's significant accounting policies since the filing of EME's and Midwest Generation's combined annual report on Form 10-K for the year ended December 31, 2012, with the exception of new accounting principles adopted as discussed below in "—New Accounting Guidance." This quarterly report should be

11


read in conjunction with the financial statements and notes included in EME's and Midwest Generation's annual report on Form 10-K for the year ended December 31, 2012.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state the consolidated financial position and results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (GAAP) for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three-month period ended March 31, 2013 are not necessarily indicative of the operating results for the full year. Except as indicated, amounts reflected in the notes to the consolidated financial statements relate to continuing operations of EME and Midwest Generation. Certain prior period amounts have been reclassified to conform to the current year financial statement presentation pertaining to discontinued operations.
Cash Equivalents
Cash equivalents included money market funds totaling $862 million and $615 million for EME and $111 million and $75 million for Midwest Generation at March 31, 2013 and December 31, 2012, respectively. The carrying value of cash equivalents equals the fair value as all investments have original maturities of less than three months.
Inventory
Inventory consisted of the following:
 
EME
 
Midwest Generation
(in millions)
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
Coal, fuel oil and other raw materials
$
64

 
$
123

 
$
61

 
$
119

Spare parts, materials and supplies
54

 
52

 
46

 
46

Total inventory
$
118

 
$
175

 
$
107

 
$
165

Notes Receivable from EME (Midwest Generation only)
Notes receivable from EME on Midwest Generation's consolidated balance sheets consisted of the following:
 
March 31, 2013
 
December 31, 2012
(in millions)
Carrying Value
Valuation Allowance
Net
 
Carrying Value
Valuation Allowance
Net
Current portion of notes receivable from affiliate
$
19

$
(19
)
$

 
$
12

$
(12
)
$

Interest receivable from affiliate
55

(55
)

 
55

(55
)

Notes receivable from affiliate
1,304

(1,304
)

 
1,311

(1,311
)

Total
$
1,378

$
(1,378
)
$

 
$
1,378

$
(1,378
)
$

As a result of the Chapter 11 Cases, EME did not make the scheduled principal and interest payment of $61 million due to Midwest Generation on January 2, 2013 and Midwest Generation recorded a full valuation allowance against its intercompany loan with EME during the fourth quarter of 2012. At December 31, 2012, Midwest Generation ceased accruing interest income associated with the intercompany loan as future payments, if any, made by EME under the loan will be dependent upon the overall resolution of the Chapter 11 Cases. Interest income from affiliates, included in interest and other income on Midwest Generation's consolidated statements of operations, was none and $28 million during the three months ended March 31, 2013 and 2012, respectively.
New Accounting Guidance
Accounting Guidance Adopted in 2013
Offsetting Assets and Liabilities
In December 2011 and December 2012, the Financial Accounting Standards Board (FASB) issued accounting standards updates modifying the disclosure requirements about the nature of an entity's rights of offsetting assets and liabilities in the consolidated balance sheet under master netting agreements and related arrangements associated with financial and derivative instruments. The guidance requires increased disclosure of the gross and net recognized assets and liabilities, collateral

12


positions, and narrative descriptions of setoff rights. EME and Midwest Generation adopted this guidance effective January 1, 2013.
Presentation of Items Reclassified out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued an accounting standards update which requires disclosure related to items reclassified out of accumulated other comprehensive income (AOCI). The guidance requires entities to present separately, for each component of other comprehensive income (OCI), current period reclassifications and the remainder of the current-period OCI. In addition, for certain current period reclassifications, an entity is required to disclose the effect of the item reclassified out of AOCI on the respective line item of net income. EME adopted this guidance effective January 1, 2013.
Accounting Guidance Not Yet Adopted
Joint and Several Liabilities
In February 2013, the FASB issued an accounting standard update which modifies the requirements for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The guidance requires companies to measure these obligations as the sum of the amount the company has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of one or more co-obligors. This guidance is effective for fiscal years beginning after December 31, 2013. EME and Midwest Generation do not expect this guidance to have a material impact on results of operations.

Note 2. Consolidated Statements of Changes in Equity (EME only)
EME's changes in equity for the three months ended March 31, 2013 consisted of the following:
 
Edison Mission Energy Shareholder's Equity
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained Deficit
 
AOCI
 
Non-
controlling Interests
 
Total Equity
Balance at December 31, 2012
$
64

 
$
1,095

 
$
(577
)
 
$
(138
)
 
$
288

 
$
732

Net income (loss)

 

 
(89
)
 

 
7

 
(82
)
OCI, net of tax

 

 

 
(2
)
 

 
(2
)
Payments to EIX for stock purchases related to stock-based compensation

 

 
(9
)
 

 

 
(9
)
Cash contribution from EIX1

 
6

 

 

 

 
6

Other stock transactions, net

 
1

 

 

 

 
1

Contributions from noncontrolling interests2

 

 

 

 
94

 
94

Balance at March 31, 2013
$
64

 
$
1,102

 
$
(675
)
 
$
(140
)
 
$
389

 
$
740

1 
During the first quarter of 2013, EME received a cash contribution from EIX related to the tax-allocation agreements. For further information, see Note 7—Income Taxes—EME—Effective Tax Rate.
2 
Funds contributed by third-party investors to Capistrano Wind Partners. For further information, see Note 3—Variable Interest Entities—Projects or Entities that are Consolidated—Capistrano Wind Partners.
EME's changes in equity for the three months ended March 31, 2012 consisted of the following:
 
Edison Mission Energy Shareholder's Equity
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
AOCI
 
Non-
controlling Interests
 
Total Equity
Balance at December 31, 2011
$
64

 
$
1,327

 
$
365

 
$
(94
)
 
$
2

 
$
1,664

Net income (loss)

 

 
(84
)
 

 
2

 
(82
)
OCI, net of tax

 

 

 
16

 

 
16

Payments to EIX for stock purchases related to stock-based compensation

 

 
(5
)
 

 

 
(5
)
Other stock transactions, net

 
2

 

 

 

 
2

Contributions from noncontrolling interests1

 

 

 

 
242

 
242

Transfers of assets to Capistrano Wind Partners2

 
(50
)
 

 

 

 
(50
)
Balance at March 31, 2012
$
64

 
$
1,279

 
$
276

 
$
(78
)
 
$
246

 
$
1,787

1 
Funds contributed by third-party investors to Capistrano Wind Partners. For further information, see Note 3—Variable Interest Entities—Projects or Entities that are Consolidated—Capistrano Wind Partners.
2 
Additional paid in capital was reduced by $50 million due to a new tax basis in the assets transferred to Capistrano Wind Partners.

Note 3. Variable Interest Entities (EME only)
Projects or Entities that are Consolidated
At March 31, 2013 and December 31, 2012, EME consolidated 16 and 15 projects, respectively, with a total generating capacity of 958 megawatts (MW) and 878 MW, respectively, that have noncontrolling interests held by others. Projects consolidated at March 31, 2013 increased from December 31, 2012 due to the sale of Edison Mission Wind Inc.'s (Edison Mission Wind) indirect equity interest in the Broken Bow I wind project (80 MW in Nebraska) to Capistrano Wind Partners for $112 million. Edison Mission Wind is a wholly owned subsidiary of EME. Outside investors provided $94 million of the funding. In determining that EME was the primary beneficiary of the projects that are consolidated, key factors considered were EME's ability to direct commercial and operating activities and EME's obligation to absorb losses of the variable interest entities.
EME's summarized financial information for consolidated projects consisted of the following:
(in millions)
March 31, 2013
 
December 31, 2012
Current assets
$
81

 
$
74

Net property, plant and equipment
1,246

 
1,117

Other long-term assets
97

 
90

Total assets
$
1,424

 
$
1,281

Current liabilities
$
37

 
$
50

Long-term debt net of current portion
232

 
186

Deferred revenues
155

 
156

Long-term derivative liabilities
24

 
23

Other long-term liabilities
45

 
40

Total liabilities
$
493

 
$
455

Noncontrolling interests
$
389

 
$
288

Assets serving as collateral for the debt obligations had a carrying value of $639 million and $497 million at March 31, 2013 and December 31, 2012, respectively, and primarily consist of property, plant and equipment.

13


Capistrano Wind Partners
In addition to the Broken Bow I transaction discussed above, in February 2012, Edison Mission Wind sold its indirect equity interests in the Cedro Hill wind project (150 MW in Texas), the Mountain Wind Power I wind project (61 MW in Wyoming), and the Mountain Wind Power II wind project (80 MW in Wyoming) to Capistrano Wind Partners for $346 million. Outside investors provided $238 million of the funding and Mission Energy Holding Company (MEHC) made a $4 million preferred investment. In December 2012, Edison Mission Wind sold its indirect equity interest in the Crofton Bluffs wind project (40 MW in Nebraska) to Capistrano Wind Partners for $58 million. Outside investors provided $46 million of the funding.
Through their ownership of Capistrano Wind Holdings, an indirect subsidiary of EME, Edison Mission Wind and EME's parent company, MEHC, own 100% of the Class A equity interests in Capistrano Wind Partners, and the Class B preferred equity interests are held by outside investors. Under the terms of the formation documents, preferred equity interests receive 100% of the cash available for distribution up to a scheduled amount to target a certain return and thereafter cash distributions are shared. Cash available for distribution includes 90% of the tax benefits realized by MEHC and contributed to Capistrano Wind Partners.
Edison Mission Wind retains indirect beneficial ownership of the common equity in the projects, net of MEHC's preferred investment, and retains responsibilities for managing the operations of Capistrano Wind Holdings and its projects. Accordingly, EME will continue to consolidate these projects. The $378 million contributed by the third-party investors and the $4 million preferred investment made by MEHC are reflected in noncontrolling interests on EME's consolidated balance sheet at March 31, 2013. The transactions between Edison Mission Wind and Capistrano Wind Partners were accounted for as a transfer among entities under common control and, therefore, resulted in no change in the book basis of the transferred assets. However, the transaction did trigger a taxable gain and new tax basis in the assets with a corresponding adjustment to deferred taxes and a reduction to equity.

Note 4. Fair Value Measurements (EME, Midwest Generation)
Recurring Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price"). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk, which was not material as of March 31, 2013 and December 31, 2012 for both EME and Midwest Generation.
Valuation Techniques Used to Determine Fair Value
Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The fair value of transfers in and out of each level is determined at the end of each reporting period.
Level 1
The fair value of Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded derivatives and money market funds.
Level 2
The fair value of Level 2 assets and liabilities is determined using the income approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. This level includes over-the-counter derivatives and interest rate swaps.
Over-the-counter derivative contracts are valued using standard pricing models to determine the net present value of estimated future cash flows. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges, or comparison to executed trades are used to validate and corroborate the primary price source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity.

14


Level 3
The fair value of Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes over-the-counter options and derivative contracts that trade infrequently, such as congestion revenue rights and long-term power agreements.
Assumptions are made in order to value derivative contracts in which observable inputs are not available. Changes in fair value are based on changes to forward market prices, including extrapolation of short-term observable inputs into forecasted prices for illiquid forward periods. In circumstances where fair value cannot be verified with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. Modeling methodologies, inputs, and techniques are reviewed and assessed as markets continue to develop and more pricing information becomes available. The fair value is adjusted when it is concluded that a change in inputs or techniques would result in a new valuation that better reflects the fair value of those derivative contracts.
EME
The following table sets forth EME's assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
 
March 31, 2013
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds2
$
862

 
$

 
$

 
$

 
$
862

Derivative contracts
 
 
 
 
 
 
 
 
 
Electricity

 
38

 
42

 
(5
)
 
75

Total assets
$
862

 
$
38

 
$
42

 
$
(5
)
 
$
937

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts
 
 
 
 
 
 
 
 
 
Electricity
$

 
$
14

 
$
1

 
$
(15
)
 
$

Natural gas
2

 

 

 
(2
)
 

Interest rate

 
107

 

 

 
107

Total liabilities
$
2

 
$
121

 
$
1

 
$
(17
)
 
$
107



15


 
December 31, 2012
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds2
$
615

 
$

 
$

 
$

 
$
615

Derivative contracts
 
 
 
 
 
 
 
 
 
Electricity

 
41

 
52

 
(3
)
 
90

Total assets
$
615

 
$
41

 
$
52

 
$
(3
)
 
$
705

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts
 
 
 
 
 
 
 
 
 
Electricity
$

 
$
6

 
$
1

 
$
(7
)
 
$

Natural gas
3

 

 

 
(3
)
 

Interest rate

 
118

 

 

 
118

Total liabilities
$
3

 
$
124

 
$
1

 
$
(10
)
 
$
118

1 
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
2 
Money market funds are included in cash and cash equivalents on EME's consolidated balance sheets.
Level 3 Valuation Process
The process of determining fair value of commodity derivative contracts is the responsibility of the risk department, which reports to the chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges, and internal valuation techniques and uses both standard and proprietary models to determine fair value. Each reporting period, the risk and key finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs are validated for reasonableness by comparison against prior prices, other broker quotes, and volatility fluctuation thresholds. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness. The following table sets forth the valuation techniques and significant unobservable inputs used to determine fair value for EME's Level 3 assets and liabilities:
 
March 31, 2013
 
Fair Value
(in millions)
 
Valuation Techniques
 
Significant Unobservable Input
 
Range
Weighted Average
 
Assets
 
Liabilities
Electricity
 
 
 
 
 
 
 
 
Congestion contracts
$
54

 
$
15

 
Latest auction pricing
 
Congestion prices
 
$(8.94) - $19.04
$0.20
Power contracts
4

 
2

 
Discounted cash flows
 
Power prices
 
$23.01 - $117.72
$57.52
Netting
(16
)
 
(16
)
 
 
 
 
 
 
 
Total
$
42

 
$
1

 
 
 
 
 
 
 

16


 
December 31, 2012
 
Fair Value
(in millions)
 
Valuation Techniques
 
Significant Unobservable Input
 
Range
Weighted Average
 
Assets
 
Liabilities
Electricity
 
 
 
 
 
 
 
 
Congestion contracts
$
71

 
$
20

 
Latest auction pricing
 
Congestion prices
 
$(8.93) - $18.03
$0.19
Power contracts
2

 
2

 
Discounted cash flows
 
Power prices
 
$22.54 - $48.85
$39.62
Netting
(21
)
 
(21
)
 
 
 
 
 
 
 
Total
$
52

 
$
1

 
 
 
 
 
 
 
Level 3 Fair Value Sensitivity
For congestion contracts, generally, an increase (decrease) in congestion prices in the last auction relative to the contract price will increase (decrease) fair value. For power contracts, generally, an increase (decrease) in long-term forward power prices at illiquid locations relative to the contract price will increase (decrease) fair value.
The following table sets forth a summary of changes in the fair value of EME's Level 3 net derivative assets and liabilities:
 
Three Months Ended March 31,
(in millions)
2013
 
2012
Fair value of net assets at beginning of period
$
51

 
$
83

Total realized/unrealized gains (losses)
 
 
 
Included in earnings1
7

 
(15
)
Included in AOCI2

 
2

Purchases
8

 
6

Settlements
(25
)
 
(1
)
Transfers out of Level 3

 
(51
)
Fair value of net assets at end of period
$
41

 
$
24

Change during the period in unrealized gains (losses) related to assets and liabilities held at end of period1
$
6

 
$
(7
)
1 
Reported in operating revenues on EME's consolidated statements of operations.
2 
Included in reclassification adjustments in EME's consolidated statement of OCI.
There were no transfers between levels during the three months ended March 31, 2013 and no transfers between Level 1 and Level 2 during the three months ended March 31, 2012. Significant transfers out of Level 3 into Level 2 occurred in the first quarter of 2012 due to significant observable inputs becoming available as the transactions neared maturity.
Fair Value of Long-term Debt
The carrying amounts and fair values of EME's long-term debt were as follows:
 
March 31, 2013
 
December 31, 2012
(in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Long-term debt, including current portion
$
1,049

 
$
1,048

 
$
1,056

 
$
1,057

In assessing the fair value of EME's long-term debt, EME primarily uses quoted market prices, except for floating-rate debt for which the carrying amounts were considered a reasonable estimate of fair value. The fair value of EME's long-term debt is classified as Level 2.
The carrying amount of short-term debt approximates fair value.

17


Midwest Generation
The following table sets forth Midwest Generation's assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
 
March 31, 2013
(in millions)
Level 1
 
Level 2
 
Netting1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
Money market funds2
$
111

 
$

 
$

 
$
111

Derivative contracts
 
 
 
 
 
 
 
Electricity

 
1

 

 
1

Total assets
$
111

 
$
1

 
$

 
$
112

Liabilities at Fair Value
 
 
 
 
 
 
 
Derivative contracts
 
 
 
 
 
 
 
Electricity
$

 
$
13

 
$

 
$
13

Total liabilities
$

 
$
13

 
$

 
$
13

 
December 31, 2012
(in millions)
Level 1
 
Level 2
 
Netting1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
Money market funds2
$
75

 
$

 
$

 
$
75

Derivative contracts
 
 
 
 
 
 
 
Electricity

 
2

 

 
2

Total assets
$
75

 
$
2

 
$

 
$
77

Liabilities at Fair Value
 
 
 
 
 
 
 
Derivative contracts
 
 
 
 
 
 
 
Electricity
$

 
$
3

 
$

 
$
3

Total liabilities
$

 
$
3

 
$

 
$
3

1 
Represents the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
2 
Money market funds are included in cash and cash equivalents on Midwest Generation's consolidated balance sheets.
Midwest Generation does not have any Level 3 assets and liabilities. There were no transfers between levels during the three months ended March 31, 2013 and 2012.

Note 5. Debt and Credit Agreements (EME only)
Chapter 11 Cases
The filing of the Chapter 11 Cases constitutes an event of default under various financing documents. In addition to the instruments discussed below, the Chapter 11 Cases could also potentially give rise to counterparty rights and remedies under other documents.
Senior Notes
The filing of the Chapter 11 Cases may constitute an event of default under EME's senior notes and, as a result, the principal and interest due under these debt instruments are immediately due and payable. The creditors are stayed from taking any action as a result of the default under Section 362 of the Bankruptcy Code and the obligations related to the senior notes are recorded as part of liabilities subject to compromise (LSTC). For additional information, see Note 14—Restructuring Activities.

18


Viento II Financing
The filing of the Chapter 11 Cases may constitute an event of default under the Viento II Financing. A short-term forbearance agreement has been executed with the lenders and the EME subsidiary borrowers to these financing agreements and, as a result, the EME subsidiaries that have obligations pursuant to the Viento II Financing are currently not Debtor Entities in the Chapter 11 Cases. In March 2013, EME paid an approximately $1 million consent fee to extend the expiration date of the forbearance agreement to July 2013. Due to the short-term nature of the agreement, this financing was classified as short-term at March 31, 2013 and December 31, 2012. At March 31, 2013, there was $191 million outstanding under this loan and $23 million of outstanding letters of credit. For additional information, see Note 6—Derivative Instruments and Hedging-Interest Rate Risk Management.
High Lonesome Financing
The filing of the Chapter 11 Cases may constitute an event of default under the documents governing the issuance of the Series 2010A and 2010B Bonds. A short-term forbearance agreement has been executed with the lenders and the EME subsidiary borrower to these financing agreements and, as a result, the EME subsidiaries that have obligations pursuant to the High Lonesome Financing are currently not Debtor Entities in the Chapter 11 Cases. The forbearance agreement expires on July 31, 2013. Due to the short-term nature of the agreements, this financing was classified as short-term at March 31, 2013 and December 31, 2012. As of March 31, 2013, there were $44 million and $25 million outstanding under the Series 2010A and Series 2010B Bonds, respectively, and $11 million of outstanding letters of credit.
Credit Facilities and Letters of Credit
At March 31, 2013, letters of credit under EME's and its subsidiaries' credit facilities aggregated $158 million and were scheduled to expire as follows: $66 million in 2013, $21 million in 2014, $21 million in 2017, $19 million in 2018, $18 million in 2021, and $13 million in 2022. Standby letters of credit include $30 million issued in connection with the power purchase agreement with Southern California Edison Company (SCE), an affiliate of EME, under the Walnut Creek credit facility. At March 31, 2013, EME had $44 million of cash collateral supporting its standby letters of credit. Certain letters of credit are subject to automatic annual renewal provisions.
On February 20, 2013, the Bankruptcy Court approved an agreement between EME and DNB Bank, the lender pursuant to EME's secured letter of credit facility. Pursuant to this agreement, DNB Bank has agreed to forbear from sending notices of non-renewal to beneficiaries of outstanding letters of credit and to allow existing letters of credit to renew automatically in accordance with their terms. In exchange, EME consented to lift the automatic stay to permit DNB Bank to setoff any obligations due and owing under the applicable documents against EME's cash collateral.
In April 2013, Edison Mission Wind completed a $75 million letter of credit facility which expires on April 30, 2016. Letters of credit issued under this facility are secured by cash collateral and, to the extent issued on behalf of entities that are not subsidiaries of Edison Mission Wind, by reimbursement agreements between Edison Mission Wind and those entities.
EME may seek an additional financing while it is a debtor-in-possession (DIP Financing) which would be used to enhance liquidity and working capital, and which would be subject to Bankruptcy Court approval and other conditions. There is no assurance that EME will pursue, or if pursued, complete a DIP Financing.
Big Sky Turbine Financing
In October 2009, EME's subsidiary, Big Sky Wind, LLC (Big Sky), entered into turbine financing arrangements with the turbine manufacturer Suzlon Wind Energy Corporation (Suzlon) for wind turbine purchase obligations related to the 240 MW Big Sky wind project. The loan has a five-year final maturity. However, the satisfaction of certain criteria, including project performance and absence of serial defects, may trigger earlier repayment. In September 2012, Suzlon sued Big Sky in New York federal court seeking declaratory judgment that the early repayment triggers had been satisfied such that Big Sky would be obligated to make full early repayment of its loan in February 2013. Big Sky answered Suzlon's complaint and denied the allegations and counterclaimed, based upon Big Sky's belief and assertion that certain defects existing in the turbine equipment supplied by Suzlon as the turbine supplier would preclude the early repayment provisions. The litigation is pending in New York federal court. The Big Sky loan is secured by a leasehold mortgage on the project's real property assets, a pledge of all other collateral of the Big Sky wind project, as well as a cash reserve account into which one-third of distributable cash flow, if any, of the Big Sky wind project is to be deposited on a monthly basis. The loan is also secured by pledges of Big Sky's direct and indirect ownership interests in the project but is nonrecourse to EME. For further details regarding consolidated assets pledged as security for debt obligations, see Note 3—Variable Interest Entities.

19


As of March 31, 2013, $224 million was outstanding under the vendor financing loan at an effective interest rate of 4.14%. Big Sky will need to arrange alternative financing, if available, to repay the loan at maturity or reach agreement with the lender to extend the maturity date of the loan as EME does not plan to make an investment in the project and is under no obligation to do so. Subject to lender consent, EME may also choose to sell Big Sky at a loss or, if a restructuring of the loan or a sale effort is unsuccessful, the lender may foreclose on the project resulting in a write-off of the entire investment in the project. At March 31, 2013, EME's investment in the Big Sky wind project consisted of assets of $464 million and liabilities of $369 million.
Restricted Net Assets of Subsidiaries
EME's subsidiaries that are not Debtor Entities were in compliance with all of their debt covenants at March 31, 2013 except for the required reserve amount at American Bituminous Power Partners, L.P. (Ambit) and the defaults related to the Viento II Financing and the High Lonesome Financing. Accordingly, the net assets of these projects are considered restricted. Restricted net assets are those that cannot be transferred to EME in the form of loans, advances, or cash dividends without the consent of third parties, typically lenders or partners. In addition, EME also has partnership agreements which require the approval of unaffiliated partners' for distributions and financing agreements which require the minimum reserve or operating account funding levels. At March 31, 2013, the restricted net assets of EME's subsidiaries was $1.8 billion.

Note 6. Derivative Instruments and Hedging Activities (EME, Midwest Generation)
EME and Midwest Generation use derivative instruments to reduce their exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, transmission rights, and interest rates. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that EME and Midwest Generation do not use derivative instruments to hedge these market risks, the unhedged portions will be subject to the risks and benefits of spot market price movements.
Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on EME's and Midwest Generation's consolidated balance sheets as derivative assets or liabilities with offsetting changes recorded on the consolidated statements of operations. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on EME's and Midwest Generation's consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in AOCI until reclassified into earnings when the related forecasted transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.
Derivative instruments that are utilized by EME for trading purposes are measured at fair value and included on the consolidated balance sheets as derivative assets or liabilities, with offsetting changes recognized in operating revenues on the consolidated statements of operations.
Where EME's and Midwest Generation's derivative instruments are subject to a master netting agreement or contain collateral deposit requirements and the criteria of authoritative guidance are met, EME presents its derivative assets and liabilities on a net basis on its consolidated balance sheets. EME's and Midwest Generation's master netting agreements allow for the right of offset for contracts with physical settlement. They do not allow for cross commodity settlement unless all positions are liquidated.
Since EME's and Midwest Generation's credit ratings are below investment grade, EME and its subsidiaries have provided collateral in the form of cash and letters of credit for the benefit of derivative counterparties and brokers. The amount of margin and collateral deposits generally varies based on changes in fair value of the related positions. Future changes in power prices could expose EME and Midwest Generation to additional collateral postings.
EME's and Midwest Generation's approach to trading and risk management depends, in part, on the ability to use clearing brokers to enter into market transactions. As a result of their financial position, EME and Midwest Generation have limited access to enter into such transactions and have been subject to increased initial collateral and margin requirements. There is no assurance that EME and Midwest Generation will continue to be able to utilize clearing brokers. If EME and Midwest Generation become unable to utilize clearing brokers, they may seek to execute bilateral transactions with third parties which could be unavailable on commercially reasonable terms or at all.

20


Notional Volumes of Derivative Instruments
The following table summarizes notional volumes of derivatives used for hedging and trading activities:
 
 
 
 
March 31, 2013
 
 
 
 
Cash Flow Hedges
 
Economic Hedges
 
Trading Activities
 
Commodity
Instrument
Classification
Unit of
Measure
Midwest Generation
Other EME Sub- sidiaries
EME
 
Midwest Generation
Other EME Sub- sidiaries
EME
 
Other EME Sub- sidiaries
 
Electricity
Forwards/ Futures
Sales, net
GWh1
2,722


2,722

 
47

35

82

2 

 
Electricity
Forwards/ Futures
Purchases, net
GWh



 



 
310

 
Electricity
Capacity
Purchases, net
GW-Day1



 



 
24

3 
Electricity
Congestion
Purchases, net
GWh



 

206

206

4 
195,658

4 
Natural gas
Forwards/ Futures
Purchases, net
bcf1



 



 
5.6

 
Fuel oil
Forwards/Futures
Sales, net
barrels



 



 
15,000

 
 
 
 
 
December 31, 2012
 
 
 
 
Cash Flow Hedges
 
Economic Hedges
 
Trading Activities
 
Commodity
Instrument
Classification
Unit of
Measure
Midwest Generation
Other EME Sub- sidiaries
EME
 
Midwest Generation
Other EME Sub- sidiaries
EME
 
Other EME Sub- sidiaries
 
Electricity
Forwards/Futures
Sales, net
GWh
3,615


3,615

 
1

47

48

2 


 
Electricity
Forwards/Futures
Purchases, net
GWh



 



 
492

 
Electricity
Capacity
Purchases, net
GW-Day



 



 
60

3 
Electricity
Congestion
Purchases, net
GWh



 

263

263

4 

268,529

4 
Natural gas
Forwards/Futures
Sales, net
bcf



 



 
9.9

 
1 
gigawatt-hours (GWh); gigawatts-day (GW-Day); billion cubic feet (bcf).
2 
These positions adjust financial and physical positions, or day-ahead and real-time positions to reduce costs or increase gross margin. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.
3 
Hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM Interconnection, LLC Reliability Pricing Model (PJM RPM) auction is not accounted for as a derivative.
4 
Congestion contracts include financial transmission rights, transmission congestion contracts, or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.
EME
Interest Rate Risk Management
EME mitigates the risk of interest rate fluctuations for a number of its project financings by arranging for fixed rate financing or variable rate financing with interest rate swaps, interest rate options, or other hedging mechanisms.
As a result of the Chapter 11 Cases and the short-term forbearance agreements that have been executed with the lenders and the EME subsidiary borrowers, it is no longer probable that the future interest payments associated with the Viento II Financing will occur. Accordingly, the cash flow hedge associated with these interest rate swaps was prospectively discontinued. Because the underlying forecasted transactions remain at least reasonably possible, the fair value of the effective portion of these cash flow hedges remains in AOCI and will be reclassified to results of operations when the underlying transactions occur or become probable of not occurring. EME recorded unrealized gains of $1 million in the first quarter of 2013 in operating revenues on the consolidated statements of operations representing changes in the fair value of discontinued interest rate swaps.

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The following table summarizes EME's interest rate swaps:
 
 
 
 
Notional Value (in millions)
 
Effective Date
Expiration Date
Fixed Swap Rate Paid
March 31, 2013
December 31, 2012
Project Financing
 
 
 
 
 
Viento Funding II
June 2009
June 2016
3.18%
$
64

$
65

Viento Funding II
March 2011
December 2020
3.42%
108

108

Cedro Hill
December 2010
December 2025
4.29%
111

112

Laredo Ridge
March 2011
March 2026
3.46%
63

64

WCEP Holdings
July 2011
May 2013
0.79%
26

26

Walnut Creek Energy
November 2011
May 2013
0.81%
203

181

Tapestry
December 2011
December 2021
2.21%
186

189

Broken Bow 1
December 2012
December 2013
0.83%
47

47

Crofton Bluffs 1
December 2012
December 2013
0.78%
24

24

 
 
 
 
$
832

$
816

Forward Starting Swaps
 
 
 
 
 
Walnut Creek Energy
June 2013
May 2023
3.54%
$
398

$
398

WCEP Holdings
June 2013
May 2023
4.00%
48

48

Broken Bow
December 2013
December 2027
2.96%
45

45

Crofton Bluffs
December 2013
December 2027
2.75%
23

23

Tapestry
December 2021
December 2029
3.57%
60

60


 
 
 
$
574

$
574

Summary of Derivative Instruments
The following table summarizes EME's derivative instruments, including amounts offset by collateral and under master netting agreements:
 
March 31, 2013
 
Short Term
 
Long Term
 
 
(in millions)
Gross
Netting and Collateral
Subtotal
 
Gross
Netting and Collateral
Subtotal
 
Net
Assets
 
 
 
 
 
 
 
 
 
Electricity contracts
$
96

$
(50
)
$
46

 
$
42

$
(13
)
$
29

 
$
75

Natural gas contracts
22

(22
)