By Jacqueline Palank 

CHICAGO--Edison Mission Energy won court approval of a plan to exit Chapter 11 protection via its $2.6 billion sale to NRG Energy Inc.

Judge Jacqueline Cox of the U.S. Bankruptcy Court in Chicago on Tuesday confirmed Edison Mission's Chapter 11 plan, which the company recently overhauled to incorporate a settlement with its parent company that will boost creditor recoveries.

Under the plan, Edison Mission's operations will be sold to NRG, which will pay $2.285 billion in cash and $350 million in stock. Sale proceeds will be used to pay Edison Mission's creditors, most of whom support the plan.

A prior plan would have also given unsecured creditors--such as unsecured bondholders owed $3.85 billion in principal, interest and fees--new equity in the Edison Mission unit that remains following the sale of its operations. Those creditors would have also received a stake in any proceeds of potential litigation against Edison Mission's publicly traded parent, Edison International.

But a recent settlement between Edison Mission and its parent drops the threat of litigation and allows Edison International to retain its equity in Edison Mission for tax purposes. Court papers show the deal boosts unsecured creditors' expected recovery to more than 80% of their claims from a prior estimate of about 58%.

Specifically, the settlement allows unsecured creditors and Edison International to split $1.2 billion in federal and California tax attributes, which mainly includes net operating losses and tax credits. The creditors would receive $225 million of this upon Edison Mission's exit from bankruptcy, while the remainder will be paid out over the next two years.

The settlement further calls for Edison International to take responsibility for $350 million of Edison Mission's debts, including tax and pension liabilities.

The settlement releases Edison International from the possible legal claims that Edison Mission and its unsecured creditors fought to bring against the parent company, whom they accused of draining Edison Mission of hundreds of millions of dollars ahead of its bankruptcy filing. Edison International disputed these claims.

Edison Mission, which operates about 40 coal, wind and gas facilities in 12 states, sought Chapter 11 protection in December 2012.

Write to Jacqueline Palank at jacqueline.palank@wsj.com

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