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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, 2001

Commission File Number 000-24890

Edison Mission Energy

(Exact name of registrant as specified in its charter)

*

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 28, 2002: $0. Number of shares outstanding of the registrant's Common Stock as of March 28, 2002: 100 shares (all shares held by an affiliate of the registrant).

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

The Company

        We are an independent power producer engaged in the business of developing, acquiring, owning or leasing and operating electric power generation facilities worldwide. We also conduct energy trading and price risk management activities in power markets open to competition. Edison International is our ultimate parent company. Edison International also owns Southern California Edison Company, one of the largest electric utilities in the United States.

        We were formed in 1986 with two domestic operating projects. As of December 31, 2001, we owned interests in 31 domestic and 49 international operating power projects with an aggregate generating capacity of 23,967 Megawatts, or MW, of which our share was 19,019 MW. At that date, one domestic and six international projects, totaling 1,153 MW of generating capacity, of which our anticipated share will be approximately 668 MW, were under construction. At December 31, 2001, we had consolidated assets of $10.7 billion and total shareholder's equity of $1.6 billion.

        We are incorporated under the laws of the State of Delaware. Our headquarters and principal executive offices are located at 18101 Von Karman Avenue, Suite 1700, Irvine, California 92612, and our telephone number is (949) 752-5588. Unless indicated otherwise or the context otherwise requires, references in this Annual Report on Form 10-K are with respect to Edison Mission Energy and its consolidated subsidiaries and the partnerships or limited liability entities through which Edison Mission Energy and its partners own and manage their project investments.

Forward-Looking Statements

        This annual report includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events based upon our knowledge of facts as of the date of this annual report and our assumptions about future events. These forward-looking statements are subject to various risks and uncertainties that may be outside our control, including, among other things:

•

our ability to maintain an investment grade rating;



•

our ability to refinance short-term debt or raise additional financing for our future cash requirements;



•

supply, demand and price for electric capacity and energy in the markets served by our generating units;



•

general political, economic and business conditions in the countries in which we do business;



•

governmental, statutory, regulatory or administrative changes or initiatives affecting us or the electricity industry generally;



•

political and business risks of international projects, including uncertainties associated with currency exchange rates, currency repatriation, expropriation, political instability, privatization efforts and other issues;



•

competition from other power plants, including new plants and technologies that may be developed in the future;



•

operating risks, including equipment failure, dispatch levels, availability, heat rate and output; and



•

the cost, availability and pricing of fuel and fuel transportation services for our generating units.

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        We use words like "anticipate," "estimate," "project," "plan," "expect," "will," "believe" and similar expressions to help identify forward-looking statements in this annual report.

        For additional factors that could affect the validity of our forward-looking statements, and for other risk factors affecting our business and financial condition, you should read "Management's Discussion and Analysis of Results of Operations and Financial Condition—Risk Factors and -Critical Accounting Policies" contained in Part II, Item 7 and the "Notes to Consolidated Financial Statements" contained in Part II, Item 8. The information contained in this report is subject to change without notice. Readers should review future reports filed by us with the Securities and Exchange Commission. In light of these and other risks, uncertainties and assumptions, actual events or results may be very different from those expressed or implied in the forward-looking statements in this annual report or may not occur. We have no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Description of Business

Electric Power Industry

        Until the enactment of the Public Utility Regulatory Policies Act of 1978, utilities were the only producers of bulk electric power intended for sale to third parties in the United States. The Public Utility Regulatory Policies Act 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, under certain conditions. The passage of the Energy Policy Act of 1992 further encouraged the development of independent power by significantly expanding the options available to independent power producers with respect to their regulatory status and by liberalizing transmission access. As a result, a significant market for electric power produced by independent power producers, such as ourselves, has developed in the United States since the enactment of the Public Utility Regulatory Policies Act. 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. In deregulating markets, industry trends and regulatory initiatives have caused vertically integrated, price regulated utilities, to enter into markets in which generators complete with each other for their principal customers (wholesale power suppliers, distribution companies, and major end-users) on the basis of price, reliability and other factors. As a result of the recent energy crisis in California, some states have either discontinued or delayed implementation of initiatives involving retail deregulation. These developments have generally not affected the market structures in Illinois and Pennsylvania, where many of our of power plants are located.

        The movement toward privatization of existing power generation capacity in many foreign countries and the growing need for new capacity has also led to the development of significant new markets for independent power producers outside the United States. We have developed or acquired power plants in the Asia-Pacific region and in Europe and the Middle East regions as a result of these developments.

Competition

        We and our subsidiaries are subject to intense competition in the United States and overseas from energy marketers, utilities, industrial companies and other independent power producers. Over the past several years, the restructuring of energy markets has led to the sale of utility-owned assets to us and our competitors. More recently, in response to market conditions, we and other power generators have changed focus from acquisition and growth to concentrating on selective asset dispositions as well as postponing or canceling power plants under development. This trend is in response to credit concerns

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in the wake of the bankruptcy of Enron Corp., economic recession in the United States, and a potential oversupply of new generating capacity.

        In markets where we sell power from plants where the output is not committed to be sold under long-term contracts, commonly referred to as merchant plants, we are subject to substantial competition with independent power producers with power plants located in the same geographic region. We compete primarily based on price, reliability and other factors which are heavily influenced by electricity demand and supply, which is commonly referred to as capacity. Our customers include large electric utilities or regional distribution companies. In some cases, the electric utilities and distribution companies have their own generation capacity, including nuclear generation, that affects the amount of generation available to meet demand and may affect the price of electricity in a particular market.

        Amendments to the Public Utility Holding Company Act of 1935 made by the Energy Policy Act have increased the number of competitors in the domestic independent power industry by reducing restrictions applicable to projects that are not qualifying facilities under the Public Utility Regulatory Policies Act. Retail wheeling of power, which is the offering by utilities of unbundled retail distribution services, could also lead to increased competition in the independent power market. See "—Regulatory Matters—Retail Competition."

Segment Information

        We operate predominantly in one line of business, electric power generation, with reportable segments organized by geographic region: Americas, Asia-Pacific and Europe and Middle East. Our 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 "Edison Mission Energy and Subsidiaries Notes to Consolidated Financial Statements—Note 19. Business Segments."

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Regional Overview of Business Segments

        As of December 31, 2001, we had ownership or leasehold interests in the following domestic operating projects:

(1)

Operated by subsidiaries or affiliates of Edison Mission Energy; all other projects are operated by unaffiliated third parties.

(2)

Currently offered for sale.

(3)

Sold subsequent to December 31, 2001.

(4)

Electric purchaser abbreviations are as follows:

(5)

All the cogeneration projects are gas-fired facilities, except for the James River project, which we recently sold, which used coal. All the exempt wholesale generator (EWG) projects are gas-fired facilities, except for the Homer City facilities and six of the Illinois plants, which use coal.

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        As of December 31, 2001, we had ownership or leasehold interests in the following international operating projects:

(1)

Operated by subsidiaries or affiliates of Edison Mission Energy; all other projects are operated by unaffiliated third parties.

(2)

Electric purchaser abbreviations are as follows:

(3)

Sells to the pool with a long-term contract with SE.

(4)

Sells to the pool with a long-term contract with NORWEB.

(5)

Sells to the pool with a long-term contract with the State Electricity Commission of Victoria.

(6)

Minority interest in three projects.

(7)

Minority interest in one project.

Americas

        As of December 31, 2001, we had 31 operating projects in this region, all of which are presently located in the United States and its territories. Our Americas region is headquartered in Chicago,

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Illinois, with additional offices located in Irvine, California, and Boston, Massachusetts. A description of our power plants and major investments in energy projects in the Americas region is set forth below.

Illinois Plants

        On December 15, 1999, we completed a transaction with Commonwealth Edison, now a subsidiary of Exelon Corporation, to acquire Commonwealth Edison's fossil-fuel power generating plants located in Illinois, which are collectively referred to as the Illinois plants. These plants are located in the Mid-America Interconnected Network, which has transmission connections to the East Central Area Reliability Council and other regional markets. In connection with this transaction, we entered into three power purchase agreements with Commonwealth Edison with terms of up to five years expiring in 2004, pursuant to which Commonwealth Edison purchases capacity and has the right to purchase energy generated by the plants. Subsequently, Commonwealth Edison assigned its rights and obligations under these power purchase agreements to Exelon Generation Company, LLC. In each of 2003 and 2004, Exelon Generation is committed to purchase 1,696 MW of capacity from specific coal units, but has the option to terminate all or any remaining coal units and all of the natural gas and oil-fired units with prior notice as specified under each agreement. Our power purchase agreements with Exelon Generation accounted for 36% and 42% of our electric revenues for 2001 and 2000, respectively. See further discussion of the power purchase contracts with Exelon Generation under "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

        The Illinois plants are comprised of the following:

        As part of the purchase of the Illinois plants, we assigned our right to purchase the Collins Station to third-party entities and our subsidiary simultaneously entered into long-term lease of the Collins Station. We also completed sale-leaseback transactions with respect to our Illinois peaker units in July 2000 and our Powerton and Joliet power facilities in August 2000. We sold these assets and entered into long-term leases to provide capital to finance our acquisition or to repay corporate debt while maintaining control of the use of the power plants during the terms of the leases. See further

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discussion of these sale-leaseback transactions under "Management's Discussion and Analysis of Results of Operations and Financial Condition—Off-Balance Sheet Financing."

Homer City Facilities

        On March 18, 1999, we completed a transaction with GPU, Inc., New York State Electric & Gas Corporation and their respective affiliates to acquire the 1,884 MW Homer City Electric Generating Station. These facilities consist of three coal-fired steam turbine units, one coal preparation facility, an 1,800-acre site and associated support facilities in the mid-Atlantic region of the United States and have direct, high voltage interconnections to both the New York Independent System Operator, which controls the transmission grid and energy and capacity markets for New York State and is commonly known as the NYISO, and the Pennsylvania-New Jersey-Maryland Power Pool, which is commonly known as the PJM. For further discussion of the risks related to the sale of electricity from the Homer City facilities, see "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

        On December 7, 2001, our subsidiary completed a sale-leaseback of the Homer City facilities to third-party lessors. We sold the Homer City facilities and entered into long-term leases to provide capital to repay corporate debt while maintaining control of the use of the facilities during the terms of the leases. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Off-Balance Sheet Financing."

Major Investments in California Cogeneration Projects

        We own partnership investments in the Kern River Cogeneration Company, Midway Sunset Cogeneration Company, Sycamore Cogeneration Company and Watson Cogeneration Company, as described below. These projects have similar economic characteristics and have been used, collectively, to obtain bond financing by a special purpose entity, Edison Mission Energy Funding Corp., a special purpose entity that we include in our consolidated financial statements. Due to similar economic characteristics and the bond financing related to our equity investments, we view these projects collectively and refer to them as the Big 4 projects.

        Kern River Project—We own a 50% partnership interest in Kern River Cogeneration Company, which owns a 300 MW natural gas-fired cogeneration facility located near Bakersfield, California, which we refer to as the Kern River project. Kern River Cogeneration sells electricity to Southern California Edison Company under a power purchase agreement that expires in 2005 and sells steam to Texaco Exploration and Production Inc. under a steam supply agreement that also expires in 2005.

        Midway-Sunset Project—We own a 50% partnership interest in Midway Sunset Cogeneration Company, which owns a 225 MW natural gas-fired cogeneration facility located near Taft, California, which we refer to as the Midway-Sunset project. Midway-Sunset sells electricity to Southern California Edison, Aera Energy LLC and Pacific Gas & Electric Company under power purchase agreements that expire in 2009 and sells steam to Aera under a steam supply agreement that also expires in 2009.

        Sycamore Project—We own a 50% partnership interest in Sycamore Cogeneration Company, which owns and operates a 300 MW natural gas-fired cogeneration facility located near Bakersfield, California, which we refer to as the Sycamore project. Sycamore Cogeneration sells electricity to Southern California Edison under a power purchase agreement that expires in 2007 and sells steam to Texaco Exploration and Production Inc. under a steam supply agreement that also expires in 2007.

        Watson Project—We own a 49% partnership interest in Watson Cogeneration Company, which owns a 385 MW natural gas-fired cogeneration facility located in Carson, California, which we refer to as the Watson project. Watson Cogeneration sells electricity to Southern California Edison and to the adjacent British Petroleum refinery under power purchase agreements that expire in 2008 and sells steam to ARCO Products Company under a steam supply agreement that also expires in 2008.

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        We have a partnership interest in Sunrise Power Company that resulted from our efforts to add additional capacity in California in response to the California power crisis. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—The California Power Crisis."

        Sunrise Project—We own a 50% partnership interest in Sunrise Power Company, which owns a natural gas-fired facility currently under construction in Kern County, California, which we refer to as the Sunrise project. The Sunrise project consists of two phases. Phase I, a simple-cycle gas-fired facility (320 MW) was completed on June 27, 2001. Phase II, conversion to a combined-cycle gas-fired facility (560 MW), is currently scheduled to be completed in July 2003. Sunrise Power entered into a long-term power purchase agreement with the California Department of Water Resources on June 25, 2001. For further discussion related to this agreement, see "Legal Proceedings—Sunrise Regulatory Proceedings."

Other Small Investments in Energy Projects

        We also own 50% investments in seven other small energy projects (less than 100 MW of net electric capacity) that are located in the United States. Each project sells electricity under a long-term power purchase agreement with the local electric utility.

Americas Projects Offered For Sale

        Our remaining projects in the Americas region consist of our Brooklyn Navy Yard, Gordonsville and EcoEléctrica projects described below. We are currently offering all of our interests in these projects for sale.

        Brooklyn Navy Yard Project—We own a 50% partnership interest in Brooklyn Navy Yard Cogeneration Partners L.P., which owns a 286 MW natural gas and oil-fired cogeneration facility located near Brooklyn, New York, which we refer to as the Brooklyn Navy Yard project. Brooklyn Navy Yard sells electricity and steam to Consolidated Edison Company of New York, Inc. under a power purchase agreement that expires in 2039. See "Legal Proceedings—PMNC Litigation" for information regarding disputes related to the construction of this facility.

        Gordonsville Project—We own a 50% partnership interest in Gordonsville Energy, L.P., which owns a 240 MW natural gas-fired cogeneration facility located in Gordonsville, Virginia, which we refer to as the Gordonsville project. Gordonsville Cogeneration sells electricity to Virginia Electric & Power Company under a power purchase agreement that expires in 2024 and sells steam to Rapidan Service Authority under a steam supply agreement that also expires in 2024.

        EcoEléctrica Project—We own a 50% partnership interest in EcoEléctrica L.P., which owns a 540 MW power plant located Peñuelas, Puerto Rico, which we refer to as the EcoEléctrica project. EcoEléctrica sells electricity to Puerto Rico Electric Power Authority under a power purchase agreement that expires in 2018 and sells water to Puerto Rico Water & Sewer Authority under a water supply agreement that also expires in 2018.

Asset Sales

        During 2001, we decided to offer for sale some of our non-strategic investments in energy projects to reduce debt. At December 31, 2001, we had agreements to sell five of our projects. Subsequent to December 31, 2001, we completed the sales of our 50% interests in the Commonwealth Atlantic and James River projects and our 30% interest in the Harbor project. The sales of our interests in the EcoEléctrica and Gordonsville projects did not close, and in each case, the sales agreement has terminated and we have recommenced marketing efforts. On March 8, 2002, we filed a complaint against Mirant Corporation and two of its affiliates, alleging that Mirant wrongfully terminated the sale agreement for the purchase of the EcoEléctrica project. See "Management's Discussion and Analysis of Results of Operations and Financial Condition—Dispositions" for further details about our asset sales.

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Investment in Four Star Oil and Gas Company

        We own a 37.2% direct and indirect interest, with 36.05% voting stock, in Four Star Oil and Gas Company, with majority control held by affiliates of ChevronTexaco Corp. Four Star Oil and Gas owns oil and gas reserves in the San Juan Basin, the Hugoton Basin, the Permian Basin and offshore Gulf Coast and Alabama. Under a long-term service contract, the majority of Four Star Oil and Gas's properties are operated through Texaco Exploration & Production Inc. See "Edison Mission Energy and Subsidiaries Notes to Consolidated Financial Statements—Note 7. Investments" for financial information on our oil and gas investments.

Asia-Pacific

        As of December 31, 2001, we had 15 operating projects in this region that are located in Australia, Indonesia, Thailand and New Zealand. Our Asia-Pacific region is headquartered in Singapore, with additional offices located in Australia, Indonesia and the Philippines. A description of our power plants, investment in Contact Energy and investments in energy projects in the Asia-Pacific region is set forth below.

Australia

        Loy Yang B Project—We own a 1,000 MW coal-fired power station in located in Traragon, Victoria, Australia, which we refer to as the Loy Yang B project. The project sells electricity to a centralized electricity pool, 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 National Electricity Market Management Company, operator and administrator of the pool, determines a spot price each half-hour. We have entered into an agreement with the State Electricity Commission of Victoria, which agreement we refer to as the State Hedge, that provides through October 16, 2016 for the project to receive a fixed price for a portion of its electricity in exchange for payment to the State of the spot price applicable to such portion. For further discussion of risks related to the sale of electricity from the Loy Yang B project, see "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

        Valley Power Peaker Project—During 2001, we began construction of a 300 MW gas-fired peaker plant located at the Loy Yang B coal-fired power plant site, which we refer to as the Valley Power Peaker project. The peaker units will service peaking demand within the National Energy Market of Eastern Australia and, specifically, within the State of Victoria by selling the output of the peakers directly into the pool and by entering into financial contracts related to pool prices with other power generators and distribution businesses. We own a 60% interest in the Valley Power Peaker project, with the remaining interest held by our 51.2%-owned affiliate, Contact Energy.

        Kwinana Project—We own a 70% interest in a 116 MW gas-fired cogeneration plant in Perth, Australia, which we refer to as the Kwinana project. We sell electricity to Western Power under a power purchase agreement that expires in 2021 and sell steam to the British Petroleum Kwinana refinery under a steam supply agreement which also expires in 2021.

New Zealand

        Contact Energy—We own a 51.2% majority interest in Contact Energy Limited. The remaining shares of Contact Energy are publicly held and traded on the New Zealand stock exchange. Contact

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Energy is the largest wholesaler and retailer of natural gas in New Zealand and generates about one-quarter of New Zealand's electricity. Contact Energy owns the following power plants:

(1)

Located in Australia.

        Contact Energy also owns a 40% interest in the Valley Power Peaker project under construction in Australia with the remaining interest held by a wholly-owned subsidiary of ours.

Indonesia

        The Paiton Project—We own a 40% interest in PT Paiton Energy (Paiton Energy), which owns a 1,230 MW coal-fired power plant in operation in East Java, Indonesia, which we refer to as the Paiton project. Paiton Energy sells electricity to PT PLN, the state-owned electric utility company, under a power purchase agreement that expires in 2029. PT PLN and Paiton Energy signed a Binding Term Sheet on December 14, 2001 setting forth the commercial terms under which Paiton Energy is to be paid for capacity and energy charges, as well as a monthly "restructure settlement payment" covering arrears owed by PT PLN as well as settlement of other claims. In addition, the Binding Term Sheet provides for an extension of the terms of the power purchase agreement from 2029 to 2039. For a further discussion of the Paiton project, see "Management's Discussion and Analysis of Results of Operations and Financial Condition—Contingencies."

Philippines

        CBK Project—In February 2001, we purchased a 50% interest in CBK Power Co. Ltd. CBK Power has entered into a 25-year build-rehabilitate-operate-transfer (BROT) agreement with National Power Corporation related to the 728 MW Caliraya-Botocan-Kalayaan hydroelectric project located in the Philippines, which we refer to as the CBK project. CBK Power is paid capital recovery fees and operations and maintenance fees for generating electricity and providing other services under the BROT agreement. At December 31, 2001, 168 MW have been commissioned and are operational.

Thailand

        Tri Energy Project—We own a 25% interest in Tri Energy Company Limited, which owns a 700 MW gas-fired cogeneration plant located west of Bangkok, Thailand, which we refer to as the Tri Energy project. Tri Energy sells electricity to Electricity Generating Authority of Thailand, which is known as EGAT, under a power purchase agreement that expires in 2020.

Europe and Middle East

        As of December 31, 2001, we had 34 operating projects in this region that are located in the U.K., Turkey, Spain and Italy. Our Europe and Middle East region is headquartered in London, England, with additional offices located in Italy, Spain and Turkey. The London office was established in 1989. A description of our power plants and investments in energy projects in the Europe and Middle East region is set forth below.

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United Kingdom

        First Hydro Project—We own two pumped storage stations in North Wales at Dinorwig and Ffestiniog which have a combined capacity of 2,088 MW, which we refer to as the First Hydro project. Pump storage stations consume electricity when it is comparatively less expensive in order to pump water up for storage in an upper reservoir. Water is then allowed to flow back through turbines in order to generate electricity when its market value is higher. We sell electricity and ancillary services to regional electricity companies, other generators and into short-term markets. For further discussion of the risks related to the sale of electricity from the First Hydro project, see "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

        Lakeland Project—We own a 220 MW combined-cycle natural gas-fired power plant located in Barrow-in-Furness, Cumbria, United Kingdom, which we refer to as the Lakeland project. We sell electricity to North Western Electricity Board under a power purchase contract that expires in 2006.

        Derwent Project—We own a 33% interest in Derwent Cogeneration Limited, which owns a 214 MW gas-fired cogeneration plant in Derby, England, which we refer to as the Derwent project. Derwent sells electricity to Southern Electric plc under a power purchase agreement that expires in 2010 and sells steam to Courtaulds Chemicals (Holdings) Limited under a steam supply contract that also expires in 2010.

Italy

        ISAB Project—We own a 49% interest in ISAB Energy S.r.l. which owns a 512 MW integrated gasification combined cycle power plant in Sicily, Italy, which we refer to as the ISAB project. ISAB sells electricity to Gestore Rete Transmissione Nazionale, Italy's state transmission company, under a power purchase agreement that expires in 2020. The ISAB project is located at an oil refinery owned by ERG Petroli SpA.

        Italian Wind Project—In 2000, we purchased Edison Mission Wind Power Italy B.V., which owns a 50% interest in a series of power projects that are in operation or under development in Italy by UPC International Partnership CV II, which we collectively refer to as the Italian Wind project. The projects use wind to generate electricity from turbines, which is sold under fixed-price, long-term tariffs to Gestore Rete Transmissione Nazionale. At December 31, 2001, 230 MW have been commissioned and are operational. Assuming all the projects under construction at December 31, 2001 are completed, currently scheduled for 2002, the total capacity of these projects will be 283 MW.

Spain

        Spanish Hydro Project—We own 18 small, run-of-the-river hydroelectric plants regionally dispersed in Spain totaling 86 MW, which we refer to as the Spanish Hydro project. We sell electricity to Fuerzas Electricas de Cataluma, S.A. under concessions that have various expiration dates ranging from 2030 to 2065.

Turkey

        Doga Project—We own an 80% interest in Doga Enerji, which owns a 180 MW gas-fired cogeneration plant in Istanbul, Turkey, which we refer to as the Doga project. Doga Enerji sells electricity to Turkiye Elektrik Urehm, A.S., commonly known as TEAS, under a power purchase agreement that expires in 2018.

        In addition to the facilities and power plants that we own, we use the term "our" in regard to facilities and power plants that we operate under sale-leaseback arrangements.

Discontinued Operations

        As a result of the change in the prices of power in the U.K. and the anticipated negative impacts of such changes on earnings and cash flow, we offered for sale through a competitive bidding process

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the Ferrybridge and Fiddler's Ferry coal-fired power plants located in the United Kingdom. On December 21, 2001, we completed the sale of the power plants to two wholly-owned subsidiaries of American Electric Power. In addition, as part of the transactions, the purchasers acquired other assets and assumed specified liabilities associated with the plants. We acquired the plants in 1999 from PowerGen UK plc. In accordance with SFAS No. 144, the results of Ferrybridge and Fiddler's Ferry have been reflected as discontinued operations in our consolidated financial statements. See, "Edison Mission Energy and Subsidiaries Notes to Consolidated Financial Statements—Note 6. Discontinued Operations."

Trading and Risk Management Activities

        We have developed risk management policies and procedures, which, among other things, address credit risk. When making sales under negotiated bilateral contracts, it is our general policy to deal with investment grade counterparties or counterparties that have equivalent credit quality. Our risk management committees grant exceptions to the policy only after review and scrutiny. Most entities that have received exceptions are typically organized power pools and quasi-governmental agencies. We hedge a portion of the electric output of our merchant plants in order to provide more predictable earnings and cash flow. When appropriate, we manage the spread between electric prices and fuel prices, and use forward contracts, swaps, futures, or options contracts to achieve those objectives.

        Our domestic power marketing and trading organization, Edison Mission Marketing & Trading, Inc., markets and trades electric power and energy related to commodity products, including forwards, futures, options and swaps. It also provides services and price risk management capabilities to the electric power industry. We segregate our activities into two categories:

•

Marketing and Fuel Management—Edison Mission Marketing & Trading engages in the sale of electricity and purchase of fuels through intercompany contracts with our subsidiaries that own or lease the Illinois plants and the Homer City facilities. The objective of these activities is to sell the output of the power plants on a forward basis, thereby increasing the predictability of earnings and cash flows. Edison Mission Marketing & Trading also conducts risk management activities to manage the price risk associated with the purchase of fuels, including natural gas and fuel oil. Transactions entered into related to marketing and fuel management activities are designated separately from Edison Mission Marketing & Trading's trading activities and recorded in what Edison Mission Marketing & Trading calls its hedge book (we record these transactions on an accrual basis unless fair value accounting is required).

•

Trading—In conducting our trading activities, we seek to generate profit from price volatility of electricity and fuels by buying and selling these commodities in wholesale markets. Edison Mission Marketing & Trading generally balances forward sales and purchases contracts and manages its exposure through a value at risk analysis, as described further below. Edison Mission Marketing & Trading also conducts price risk management activities for third parties including restructuring of power sales and power supply agreements. Collectively, Edison Mission Marketing & Trading refers to these as its trading activities and records these transactions in what it calls its proprietary book.

        Edison Mission Marketing & Trading is divided into front-, middle-, and back-office segments, with specified duties segregated for control purposes. The personnel of Edison Mission Marketing & Trading have a high level of knowledge of utility operations, fuel procurement, energy marketing and futures and options trading. Edison Mission Marketing & Trading has systems in place which monitor real time spot and forward pricing and perform option valuations. Edison Mission Marketing & Trading also has a wholesale power scheduling group that operates on a 24-hour basis.

        Internationally, we also conduct price risk management activities through subsidiaries that are primarily focused on marketing and fuel management activities in the same manner described above.

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        Energy trading and price risk management activities give rise to commodity price risk, which represents the potential loss that can be caused by a change in the market value of a particular commodity. Commodity price risks are actively monitored to ensure compliance with our risk management policies. Policies are in place which limit the amount of total net exposure we may enter into at any point in time. Procedures exist which allow for monitoring of all commitments and positions with daily reporting to senior management. We perform a "value at risk" analysis in our daily business to measure, monitor and control our overall market risk exposure. The use of value at risk allows management to aggregate overall risk, compare risk on a consistent basis and identify the drivers of the risk. Value at risk measures the worst expected loss over a given time interval, under normal market conditions, at a given confidence level. Given the inherent limitations of value at risk and relying on a single risk measurement tool, we supplement this approach with stress testing and worst-case scenario analysis, as well as stop limits and counterparty credit exposure limits.

Seasonality

        Due to warmer weather during the summer months, electric revenues generated from the Homer City facilities and the Illinois plants are usually higher during the third quarter of each year. In addition, our third quarter revenues from energy projects are materially higher than other quarters of the year due to a significant number of our domestic energy projects located on the West Coast of the United States, which generally have power sales contracts that provide for higher payments during the summer months. The First Hydro plants and the Iberian Hy-Power plants provide for higher electric revenues during the winter months.

Regulatory Matters

General

        Our operations are subject to extensive regulation by governmental agencies in each of the countries in which we conduct operations. Our domestic operating 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, and use of electric energy, capacity and related products, including ancillary services from our projects. Federal laws and regulations govern, among other things, transactions by and with purchasers of power, including utility companies, the operations of a project and the ownership of a project. Under limited circumstances where exclusive federal jurisdiction is not applicable or specific exemptions or waivers from state or federal laws or regulations are otherwise unavailable, federal and/or 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 these permits and approvals. While we believe the requisite approvals for our existing projects have been obtained and that our business is operated in substantial compliance with applicable laws, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce. 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.

        Furthermore, each of our international projects is subject to the energy and environmental laws and regulations of the foreign country in which this project is located. The degree of regulation varies according to each country and may be materially different from the regulatory regime in the United States.

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U.S. Federal Energy Regulation

        The Federal Energy Regulatory Commission has ratemaking jurisdiction and other authority with respect to interstate sales and transmission of electric energy under the Federal Power Act and with respect to certain interstate sales, transportation and storage of natural gas under the Natural Gas Act of 1938. The Securities and Exchange Commission has regulatory powers with respect to upstream owners of electric and natural gas utilities under the Public Utility Holding Company Act of 1935. The enactment of the Public Utility Regulatory Policies Act of 1978 and the adoption of regulations thereunder by the Federal Energy Regulatory Commission provided incentives for the development of cogeneration facilities and small power production facilities using alternative or renewable fuels by establishing certain exemptions from the Federal Power Act and the Public Utility Holding Company Act for the owners of qualifying facilities. The passage of the Energy Policy Act in 1992 further encouraged independent power production by providing additional exemptions from the Public Utility Holding Company Act for exempt wholesale generators and foreign utility companies.

        A "qualifying facility" under the Public Utility Regulatory Policies Act is a cogeneration facility or a small power production facility that satisfies criteria adopted by the Federal Energy Regulatory Commission. In order to be a qualifying facility, a cogeneration facility must (i) sequentially produce both useful thermal energy, such as steam, and electric energy, (ii) meet specified 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 one or more electric utilities (where "electric utility" is interpreted with reference to the Public Utility Holding Company Act definition of an "electric utility company"), electric utility holding companies (defined by reference to the Public Utility Holding Company Act definitions of "electric utility company" and "holding company") or affiliates of such entities. A small power production facility seeking to be a qualifying facility must produce power from renewable energy sources, such as geothermal energy, waste sources of fuel, such as waste coal, or any combination thereof and must meet the ownership restrictions discussed above. Before 1990, a small power production facility seeking to be a qualifying facility was subject to 30 MW or 80 MW size limits, depending upon its fuel source. In 1990, these limits were lifted for solar, wind, waste, and geothermal qualifying facilities, provided that applications for or notices of qualifying facility status were filed with the Federal Energy Regulatory Commission for these facilities on or before December 31, 1994, and provided, in the case of new facilities, the construction of these facilities commenced on or before December 31, 1999.

        An "exempt wholesale generator" under the Public Utility Holding Company Act is an entity determined by the Federal Energy Regulatory Commission to be exclusively engaged, directly or indirectly, in the business of owning and/or operating specified eligible facilities and selling electric energy at wholesale or, if located in a foreign country, at wholesale or retail.

        A "foreign utility company" under the Public Utility Holding Company Act 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 that derives none of its income, directly or indirectly, from such activities within the United States.

        Federal Power Act—The Federal Power Act grants the Federal Energy Regulatory Commission exclusive ratemaking jurisdiction over wholesale sales of electricity in interstate commerce, including ongoing, as well as initial, rate jurisdiction. This jurisdiction allows the Federal Energy Regulatory Commission to revoke or modify previously approved rates. These rates may be based on a cost-of-service approach or, in geographic and product markets determined by Federal Energy Regulatory Commission to be workably competitive, may be market-based. As noted, most qualifying facilities are exempt from the ratemaking and several other provisions of the Federal Power Act. Exempt wholesale generators and other non-qualifying facility independent power projects are subject to the Federal Power Act and to the ratemaking jurisdiction of the Federal Energy Regulatory Commission thereunder, but the Federal Energy Regulatory Commission typically grants exempt

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wholesale generators the authority to charge market-based rates as long as the absence of market power is shown. In addition, the Federal Power Act grants the Federal Energy Regulatory Commission jurisdiction over the sale or transfer of jurisdictional facilities, including wholesale power sales contracts, and in some cases, jurisdiction over the issuance of securities or the assumption of specified liabilities and some interlocking directorates. In granting authority to make sales at market-based rates, the Federal Energy Regulatory Commission typically also grants blanket approval for the issuance of securities and partial waiver of th