Power producer Edison Mission nears bankruptcy filing

Edison Mission Energy, a debt-laden power producer running low on cash, is preparing to file for Chapter 11 bankruptcy protection in the coming days, people familiar with the matter said.

Edison Mission skipped a $97 million interest payment on bonds in mid-November, and a grace period for the company on the obligation ends on Monday. The company could seek bankruptcy protection as soon as Sunday night unless it reaches a deal with its creditors, the people said.

An Edison Mission spokesman didn't respond to requests for comment. The company said in a regulatory filing in November that failing to make the interest payments due Monday would "likely result in [the company's] filing for protection under Chapter 11 of the U.S. Bankruptcy Code."

Edison Mission owes bondholders $3.7 billion and could yet reach a deal with those creditors before next week in an attempt to stay out of bankruptcy. But the bonds are held by a wide array of investors, making it difficult to get enough creditors to sign off on a deal, the people familiar with the matter said.

The company, which produces and sells electricity in the wholesale markets, is distinct from its parent, California utility Edison International EIX +0.72%.

Edison International and Edison Mission's bondholders have discussed a deal that can be executed in bankruptcy court, some of the people said. Edison Mission's large bondholders include hedge funds Avenue Capital Group and York Capital Management, they said.

The deal would likely result in Edison International severing ties with Edison Mission, these people said. As part of the breakup, Edison International would make payments to Edison Mission as part of a complex tax arrangement for two years, assume certain pension and retiree liabilities and possibly make other payments related to a separate potential tax liability, the people said.

Edison International, the parent, offsets taxable income through operating losses at Edison Mission, the subsidiary. That results in the parent making payments to the subsidiary. The arrangement requires the parent company to own at least 80% of the subsidiary.

As a result, Edison Mission's bondholders can't swap their debt for big ownership stakes in the company, because that would threaten the parent's ability to continue taking advantage of the tax arrangement. That makes it difficult for a restructuring deal to be reached with creditors outside of bankruptcy.

In the deal discussed with bondholders, Edison Mission would likely remain in bankruptcy court for some time while the tax arrangement continues, with bondholders converting debt to equity later, people familiar with the situation said.

Edison Mission could at some point look for a buyer, one of the people said.

The power producer has been studying ways to rework its finances for some time. It continues to suffer financial losses amid low energy prices, high fuel costs and low power generation at coal-fired plants run by Midwest Generation, an Illinois-based subsidiary, the company has said. The company must also spend money to retrofit the Midwest Generation plants and probably needs to renegotiate a $1.5 billion lease there, people familiar with the matter said.

These types of issues will "exhaust" Edison Mission's cash, the company said in a securities filing in September.

The company has warned it doesn't expect to have enough cash to address $500 million of debt coming due in June.

Edison Mission has hired law firm Kirkland & Ellis LLP to work on the expected bankruptcy, the people said. Investment banks Moelis & Co. and Perella Weinberg Partners are also working on the matter, the people said.