MIRANT MID ATLANTIC LLC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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: N/A
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MIRANT MID-ATLANTIC, LLC
(Exact name of registrant as specified in its charter)

DELAWARE 58-2574140
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)

1155 PERIMETER CENTER WEST, SUITE 100, 30338
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)

(678) 579-5000 WWW.MIRANT.COM
(Registrant's telephone number, including area (Web Page)
code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE

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. [X] Yes [ ] 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 the registrants' 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. [X] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

All of our outstanding membership interests are held by our parent, Mirant
Americas Generation, LLC, so we have no membership interests held by
non-affiliates.

We have not incorporated by reference any information into this Form 10-K
from any annual report to securities holders, proxy statement or registration
statement.
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TABLE OF CONTENTS

DEFINITIONS

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PART I

ITEM 1. BUSINESS

OVERVIEW

We are a direct wholly owned subsidiary of Mirant Americas Generation, LLC
("Mirant Americas Generation"), which is an indirect wholly owned subsidiary of
Mirant Corporation ("Mirant"). We were formed as a Delaware limited liability
company on July 12, 2000. We began operations on December 19, 2000 in
conjunction with Mirant's acquisition of certain generating assets and other
related assets from Potomac Electric Power Company ("PEPCO"). Mirant previously
assigned its rights and obligations under its acquisition agreement to us, our
subsidiaries and certain of our affiliates.

The Company is an independent power provider that produces and sells
electricity. We use derivative financial instruments, such as forwards, futures,
options and swaps, to manage our exposure to fluctuations in electric energy and
fuel commodity prices. These transactions are executed by Mirant Americas Energy
Marketing, L.P. ("Mirant Americas Energy Marketing").

We or our subsidiaries, along with two of our affiliates, Mirant Potomac
River, LLC ("Mirant Potomac River") and Mirant Peaker, LLC ("Mirant Peaker"),
own or lease approximately 5,256 MW of electric generation capacity in the
Washington, D.C. area, out of the 6,062 MW which we operate. These generating
facilities serve the PJM Interconnection Market ("PJM"). The PJM independent
system operator operates the largest centrally dispatched control area in the
United States, which covers all or parts of Pennsylvania, New Jersey, Maryland,
Delaware, Virginia and the District of Columbia.

Mirant has incurred substantial indebtedness on a consolidated basis to
finance its business. As of December 31, 2002, Mirant's total consolidated
indebtedness was $8.9 billion (approximately $4.4 billion of which was recourse
to Mirant Corporation). Mirant is working on a restructuring plan pursuant to
which Mirant will ask certain of its and its subsidiaries' creditors to defer
repayment of principal. We refer you to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Mirant Restructuring" and
"-- Factors That Could Affect Future Performance."

Also refer to our Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere in this report.

RECENT DEVELOPMENTS

Beginning August 1, 2001, we sold all of our capacity and energy pursuant
to a fixed rate energy and capacity sales agreement (the "ECSA") with Mirant
Americas Energy Marketing, also a subsidiary of Mirant (see "Revenues" under
Item 7 and Note 5 of "Notes to Consolidated Financial Statements" contained
elsewhere in this report) that provided us with payments for our committed
capacity and energy at prices that were not directly linked to market prices.
Over the term of the ECSA, PJM market prices have tended to be lower than the
prices received from Mirant Americas Energy Marketing under the ECSA.

Effective May 1, 2003, we agreed to terminate the ECSA and sell all of our
capacity and energy under a power sales, fuel supply and service agreement (the
"Power and Fuel Agreement") to Mirant Americas Energy Marketing at market
prices. Our subsidiary, Mirant Chalk Point, and our affiliates Mirant Peaker and
Mirant Potomac River also entered into power sales, fuel supply and services
agreements on substantially similar terms. Under this agreement Mirant Americas
Energy Marketing resells our energy products in the PJM spot and forward markets
and to other third parties. The Company is paid the amount received by Mirant
Americas Energy Marketing for such capacity and energy. As was true with the
ECSA, under the Power and Fuel Agreement, we have credit exposure to Mirant
Americas Energy Marketing for essentially all of our revenues. We expect to pay
Mirant Americas Energy Marketing a fee of $7 million per year for this service.

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Spot and forward power prices in the PJM market have risen since Mirant
Americas Energy Marketing renewed its commitment to purchase capacity and energy
under the ECSA. The termination of the ECSA and the sale of energy and capacity
under the Power and Fuel Agreement is expected to result in additional cash
flows to Mirant Mid-Atlantic in 2003 based on projected power prices in the PJM
Market. In addition, while a portion of the amounts received for the sale of
energy and capacity under the ECSA are accounted for as capital contributions,
all amounts received under the Power and Fuel Agreement will be accounted for as
revenues. Thus, such amounts will be included as revenues in the calculation of
the fixed charge coverage ratio under the pass through certificates, in contrast
to the capital contribution component of the amounts received under the ECSA
which is excluded from such calculation. As of March 31, 2003, the fixed charge
coverage ratio under the pass through certificates for the most recently ended
four fiscal quarters is estimated to be approximately 1.6 to 1.0, less than the
1.7 to 1.0 required to make distributions under the terms of the pass through
certificates. Management does not expect to meet the distribution test until
delivery of financial statements for the fiscal quarter ended September 30,
2003, based on current projections. At that time management expects that we will
be able to make distributions, although there can be no assurance that such
expectation will prove correct. If the ECSA had not been terminated, based on
current projections of fuel and power prices, the fixed charge coverage ratio
was expected to remain below 1.7 to 1.0 through 2003.

We expect the majority of our revenues to be derived from sales of capacity
and energy into the PJM market and from fees earned under the operations and
maintenance agreement with a non-affiliated company. Our revenues and results of
operations will depend upon prevailing market prices for energy and capacity in
the PJM and other competitive markets to the extent that we have not sold our
energy and capacity under fixed price agreements.

Our costs primarily consist of the ongoing maintenance and operation of the
generating facilities owned or leased by us, capital expenditures needed to
ensure their continued reliable, safe and environmentally compliant operation
and our obligation to make rental payments on leased facilities. Mirant Americas
Energy Marketing acts as our agent and procures fuel and emissions credits
necessary for the operation of the generating facilities owned or leased by us.
In addition, Mirant and Mirant Services provide us with certain administrative
services.

PASS THROUGH CERTIFICATES

In conjunction with our PEPCO acquisition, PEPCO sold undivided interests
in the Dickerson and Morgantown baseload generating facilities to third party
lessors. These owner lessors each own the undivided interests in these baseload
generating facilities. We have long-term leases for each of these undivided
interests. The subsidiaries of the institutional investors who hold the
membership interests in the owner lessors are called owner participants. Equity
funding by the owner participants plus transaction expenses paid by the owner
participants totaled $299 million. The issuance and sale of pass through
certificates raised the remaining $1.224 billion needed for the owner lessors to
acquire the undivided interests.

The pass through certificates are not our direct obligations. Each pass
through certificate represents a fractional undivided interest in one of three
pass through trusts formed pursuant to three separate pass through trust
agreements between us and State Street Bank and Trust Company of Connecticut,
National Association, as pass through trustee under each pass through trust
agreement. The property of the pass through trusts consists of lessor notes. The
lessor notes issued by an owner lessor are secured by that owner lessor's
undivided interest in the lease facilities and its rights under the related
lease and other financing documents.

Although neither the certificates nor the lessor notes are obligations of,
or guaranteed by, us, the amount unconditionally payable by us under our leases
of the leased facilities will be at least sufficient to pay in full when due all
payments of principal, premium, if any, and interest on the lessor notes. Our
lease obligations are not obligations of, or guaranteed by, our indirect parent,
Mirant, or any of its other affiliates.

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However, Mirant has arranged a letter of credit to provide for the rent payment
reserve required in connection with this lease transaction in the event that we
are unable to pay our lease payment obligations.

Our lease payment obligations are senior unsecured obligations and rank
equally in right of payment with all of our other existing and future senior
unsecured obligations. Under the terms of the lease, we are responsible for the
payment of rent to the indenture trustee, which in turn makes payments of
principal and interest to the pass through trust and any remaining balance to
the owner lessors for the benefit of the owner participants.

COMPETITION

We compete in the PJM market with a number of other major power generators
on the basis of price, operating characteristics of our generating facilities
and the availability of our generating facilities to supply capacity and energy
to the market as needed. A number of additional generating facilities are being
developed in the PJM market and these facilities will increase competition in
the PJM market over time. Additional generating facilities are also being
planned for the PJM market and could be developed in the future.

REGULATION

The United States electric industry is subject to comprehensive regulation
at the federal and state levels. Under the Federal Power Act ("FPA"), the
Federal Energy Regulatory Commission ("FERC") has the exclusive jurisdiction
over sales of electricity at wholesale and the transmission of electricity in
interstate commerce. Because we own generating facilities and sell electricity
at wholesale in the United States, we are subject to the FERC's jurisdiction
under the FPA and must file rates with the FERC with respect to our wholesale
sales. We are also subject to the FPA regulation relating to accounting and
reporting requirements, as well as oversight of mergers and acquisitions,
securities issuances and dispositions of facilities. We are not subject to the
Public Utility Holding Company Act of 1935 ("PUHCA"), as amended.

In granting authority to us to sell electricity at wholesale at
market-based rates, the FERC has reserved the right to revoke or limit that
market-based rate authority if the FERC subsequently determines that we possess
excessive market power. If the FERC were to revoke our market-based rate
authority, we would have to file, and obtain the FERC's approval of, cost-based
rate schedules for all or some of our sales of electricity at wholesale.

State or local authorities have historically overseen and regulated the
distribution and sale of retail electricity to the ultimate end user. They have
also had regulatory authority with respect to siting, permitting and the
construction of generating and transmission facilities. Where individual states
have allowed for retail access, state and local authorities will normally
establish the bidding rules for default service to customers who choose to
remain with their regulated utility suppliers. As a result, our existing
generation may be subject to a variety of state and local regulations regarding
maintenance and expansion of our facilities and financing capital additions
depending upon whether the law of the state in which such generation is located
provides for state public service commission regulation of such activities by
entities that produce electricity for sale at wholesale. The terms and
conditions of our wholesale power sales are subject exclusively to FERC
regulation under the FPA and to tariff requirements of PJM as authorized by the
FERC under the FPA.

Beginning in 1996 and continuing over the last several years, the FERC has
issued transmission initiatives that require electric transmission services to
be offered on an open-access basis unbundled from commodity sales. In December
1999, FERC issued Order No. 2000, which provided for the development of Regional
Transmission Organizations ("RTO") to control the transmission facilities within
a certain region. Compliance by transmission-owning utilities has been
inconsistent and the order has been met with significant political resistance on
the part of state public utility commissions and state governments in certain
regions of the country. For example, recently, the Virginia legislature passed a
law that bars

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American Electric Power ("AEP") or any other Virginia transmission owner, from
joining any regional grid until after June 2004.

In addition, in July 2002 FERC initiated its Standard Market Design ("SMD")
and Interconnection rule-making proceedings. FERC's intention under the SMD
proceedings is to eliminate discrimination in transmission service, to
standardize electricity market design nationally, and to strongly encourage the
creation of RTOs. While the SMD is viewed as a positive step in the evolution of
the wholesale electric market, there is significant opposition to SMD. We can
not predict at this time whether the SMD will be adopted as proposed or what
changes will be implemented prior to adoption.

While RTO participation by transmission-owning public utilities has been
and is expected to continue to be voluntary, the majority of such public
utilities have either joined or indicated that they will join the proposed RTO
for their region. Currently there are approximately nine proposed RTO's covering
the majority of the United States. In addition, large portions of the nation's
transmission system are currently operated by an independent entity.

We own assets and sell power in the Pennsylvania-New Jersey-Maryland
Interconnection, or PJM, market. PJM was certified by the FERC as an ISO in
1997, and as an RTO in December 2002. It is the nation's first fully functioning
RTO. PJM's stated objectives are to ensure reliability of the bulk power
transmission system and to facilitate an open, competitive wholesale electricity
market. To achieve these objectives, PJM manages the PJM Open Access
Transmission Tariff (the first power pool open access tariff approved by FERC),
which provides comparable pricing and access to the transmission system. PJM
operates the PJM Interchange Energy Market, which is the region's spot market
(power exchange) for wholesale electricity. PJM also provides ancillary services
for its transmission customers and performs transmission planning for the
region. To account for transmission congestion and losses, energy prices in PJM
are determined through a locational-based marginal pricing ("LMP") model and
dispatch is on a security constrained least cost basis. PJM has been expanding
its reach to the South and West and has entered into negotiations with the
Mid-West Independent Transmission System Operator ("MISO") to establish a common
and seamless market. This expansion was viewed favorably by the Company as it
would extend the scope and footprint of the PJM market which would increase the
market and liquidity of PJM. We can not predict when PJM will be able to
complete the expansion and improve the market in its region, or when or
precisely how such expansion will impact our operations. PJM protocols allow
energy demand to respond to price changes under locational marginal pricing.
Currently PJM has set a $1,000/MWh cap on prices for energy and a mitigation
process in designated transmission constrained areas that provide for revenues
that allow for recovery of incremental cost plus 10%. PJM's working groups and
market monitor are reviewing other energy price mitigation measures. We can not
predict what other modifications to protocols PJM may develop or precisely how
such protocols could impact our future operations.

In the Mid-Atlantic region, our Chalk Point power plant located in Prince
George's County Maryland and our Morgantown Power Plant located in Charles
County Maryland rely on an underground oil pipeline for delivery of number six
fuel oil supply. Recently, the Maryland Public Service Commission staff
considered, but did not act on, policies that could substantially restrict the
operations of the pipeline. We can not predict if such regulatory actions will
be reconsidered in the future. However, since the cycling units at Chalk Point
and the base load units at Morgantown are dual fuel capable, such a potential
regulatory action would not fully halt operations, although it could potentially
increase the cost of fuel oil delivery to operate the units.

FEDERAL AND STATE LEGISLATION

Congress is currently considering legislation to modify federal laws
affecting the electric industry. Certain provisions in the bills under
consideration could effect FERC jurisdiction over interstate transmission.
Additional provisions in the bills under consideration propose to repeal or
modify both PURPA and the PUHCA. As with other bills before the Congress, we can
not predict the outcome or the impact on our business.

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In addition, various states have either enacted or are considering
legislation designed to deregulate the production and sale of electricity in
order to provide for the further development of a competitive wholesale and/or
retail marketplace. Although the legislation and regulatory initiatives vary,
common themes include the availability of market pricing, retail customer
choice, recovery of stranded costs and separation of generation assets from
transmission, distribution and other assets. The impetus for enacting state
driven legislation to deregulate the sale of electricity within individual
states has slowed significantly over the last few years. Proposed reforms to
state-mandated deregulatory measures have also included the repeal of measures
implementing retail competition, although the state of California is the only
jurisdiction in which such a proposal is active. Reforms of this type would have
a negative impact on the competitive wholesale electricity market and could
adversely impact our operations.

Lease Transaction Filings and Approvals. We and the appropriate financial
participants in the lease transactions received all FERC approvals required for
the consummation of the lease transactions. In the event that the indenture
trustees exercise certain remedies under their respective indentures and the
collateral becomes the property of an indenture trustee, additional federal and
state approvals may be required from the Securities and Exchange Commission
("SEC"), the FERC or the State of Maryland (and other state or federal agencies
with respect to permits and other like entitlements) before the exercise of such
remedies may be consummated. The likelihood of obtaining such approvals, or any
associated terms and conditions, will depend on the law then in effect and on
the particular facts and circumstances presented by such proposed transfer.

ENVIRONMENTAL REGULATION

Our projects, facilities, and operations are subject to extensive federal,
state, and local laws and regulations relating to environmental protection and
human health, including air quality, water quality, waste management, and
natural resources protection. Our compliance with these environmental laws and
regulations necessitates significant capital and operating expenditures,
including costs associated with monitoring, pollution control equipment and
mitigation of other environmental impacts, emission fees, reporting, and
permitting at our various operating facilities. Our expenditures, while not
prohibitive in the past, are anticipated to increase in the future along with
the increase in stricter standards, greater regulation, and more extensive
permitting requirements. We cannot provide assurance that future compliance with
these environmental requirements will not have a material adverse effect on our
operations or financial condition.

Our most significant environmental requirements arise under the federal
Clean Air Act and similar state laws. Under the Clean Air Act, we are required
to comply with a broad range of requirements and restrictions concerning air
emissions, operating practices and pollution control equipment. Several of our
facilities are located in or near areas that are classified by the Environmental
Protection Agency ("EPA") as not achieving federal ambient air quality
standards. This regulatory classification of these areas subjects our operations
to more stringent air regulation requirements.

In the future, we anticipate increased regulation of our facilities under
the Clean Air Act and applicable state laws and regulations concerning air
quality. The EPA and states in which we operate are in the process of enacting
more stringent air quality regulatory requirements.

For example, the EPA recently promulgated new regulations (known as the
"Section 126 Rule" and "NOx SIP Call") which establish emission caps for
nitrogen oxide ("NOx") emissions from electric generating units in most of the
eastern states that will be implemented beginning May 2004. Under either rule, a
plant receives an allocation of NOx emission allowances, and if a plant exceeds
its allocated allowances, the plant must purchase additional, unused allowances
from other regulated plants or reduce emissions, which could require the
installation of emission controls. Our plants in Maryland are already subject to
a similar state and regional NOx emission cap program, which will become a part
of the EPA NOx cap program. Some of our plants are required to purchase
additional NOx allowances to cover their emissions and maintain compliance. The
cost of these allowances is expected to increase in future years and may result
in some of our plants choosing to reduce NOx emissions through the installation
of

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emission controls, the cost of which could be significant but would be offset in
part by the avoided cost of purchasing NOx allowances to operate the plant.

The EPA is also developing regulations to govern mercury emissions from
power plants, which are scheduled to be finalized in 2004 and go into effect in
2007. These mercury regulations are likely to require significant emission
reductions from coal fired power plants in particular. Also, during the course
of this decade, the EPA will be implementing new, more stringent ozone and
particulate matter ambient air quality standards and will address regional haze
visibility issues, which will result in new regulations that will likely require
more emission reductions from power plants, along with other emission sources
such as vehicles. These future regulations will increase compliance costs for
our operations and will likely require emission reductions from some of our
power plants, which could necessitate significant expenditures on emission
controls or have other impacts on our operations. However, these rulemakings are
at a preliminary stage, and we cannot opine at this time on specific impacts or
whether the regulations will have a material adverse effect on our financial
condition, results of operations or cash flows.

The States of Maryland and Virginia are expected to promulgate additional
air quality laws and regulations in future years. For example, the states may be
required to impose more stringent emission requirements on some sources, such as
power plants and vehicles, to address exceedances of federal ambient air quality
standards in the District of Columbia metropolitan area. If so, we may incur
additional compliance costs as a result of these additional state requirements,
which could include significant expenditures on emission controls or have other
impacts on our operations.

These are illustrative but not a complete discussion of the additional
federal and state air quality laws and regulations which we expect to become
applicable to our plants and operations in the coming years. We expect to
continue to evaluate these requirements and develop compliance plans that ensure
we appropriately manage the costs and impacts and provide for prudent capital
expenditures.

In 1999, the United States Department of Justice ("DOJ") commenced
litigation against seven electric utilities for alleged violations of the EPA's
new source review regulations promulgated under the Clean Air Act ("NSR") and
the EPA also issued an administrative order to the Tennessee Valley Authority
alleging similar violations at seven of its coal-fired power plants. Since then,
the EPA has added additional power generators to the litigation and has also
issued administrative notices of violation alleging similar violations at other
coal-fired power plants. These enforcement actions concern maintenance, repair
and replacement work at power plants that the EPA alleges violated permitting
and other requirements under the NSR law, which, among other things, could
require the installation of emission controls at a significant cost. The power
generation industry disagrees with the EPA's positions in the lawsuits. Trials
in some of the cases are scheduled to occur in 2003. To date, no lawsuits or
administrative actions alleging similar violations have been brought by the EPA
against us, our subsidiaries or any of our power plants, but the EPA has
requested information concerning certain of our Mid-Atlantic business unit
plants covering a time period that predates our ownership. For more information
about this matter, see Item 3, "Legal Proceedings." We cannot provide assurance
that lawsuits or other administrative actions against our power plants under NSR
will not be filed or taken in the future. If an action is filed against us or
our power plants and we are judged to not be in compliance, this could require
substantial expenditures to bring our power plants into compliance and could
have a material adverse effect on our financial condition, results of operations
or cash flows.

There are several other environmental laws, in addition to air quality
laws, which also affect our operations. For example, we are required under the
Clean Water Act to comply with effluent and intake requirements, technological
controls and operating practices. Our wastewater discharges are permitted under
the Clean Water Act, and our permits under the Clean Water Act are subject to
review every five years. As with air quality regulations, federal and state
water regulations are expected to increase and impose additional and more
stringent requirements or limitations in the future. For example, the EPA has
issued a new rule that imposes more stringent standards on the cooling water
intakes for new plants and has proposed a similar regulation for intakes on
existing plants. We expect to incur additional compliance

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costs if this proposed water regulation is adopted; however, based on the
currently proposed regulation, we do not expect these costs to be material.

Our facilities are also subject to several waste management laws and
regulations in the United States. The Resource Conservation and Recycling Act
sets forth very comprehensive requirements for the handling of solid and
hazardous wastes. The generation of electricity produces non-hazardous and
hazardous materials, and we incur substantial costs to store and dispose of
waste materials from our facilities. The EPA may develop new regulations that
impose additional requirements on facilities that store or dispose of fossil
fuel combustion materials, including types of coal ash. If so, we may be
required to change our current waste management practices at some of our
facilities and incur additional costs for increased waste management
requirements.

The Federal Comprehensive Environmental Response, Compensation and
Liability Act, known as the Superfund, establishes a framework for dealing with
the cleanup of contaminated sites. Many states have enacted state superfund
statutes. We do not expect any corrective actions to require significant
expenditures.

Over the past several years, federal, state and foreign governments and
international organizations have debated the issue of global climate change and
policies of whether to regulate greenhouse gases ("GHG"), one of which is carbon
dioxide emitted from the combustion of fossil fuels by sources such as vehicles
and power plants. Recently, the European Union and certain other developed
countries ratified the Kyoto Protocol, an international treaty regulating GHGs,
which makes the implementation of the treaty in certain countries more likely.
The current United States Administration is opposed to the treaty, and the
United States has not ratified and is not expected to ratify the treaty.
Therefore, the United States would not be bound by the treaty if it goes into
effect in the future in countries that have ratified it. However, we cannot
provide assurances that the United States or the States of Maryland or Virginia
will not enact a law or regulation governing GHG emissions from power plants in
the future that could materially impact our financial condition, results of
operations or cash flows.

We believe we are in compliance in all material respects with applicable
environmental laws. While we believe our operations and facilities comply with
applicable environmental laws and regulations, we cannot provide assurances that
additional costs will not be incurred as a result of new interpretations or
applications of existing laws and regulations.

EMPLOYEES

As of December 31, 2002, we employed, directly or through contracts with
Mirant Services, a direct subsidiary of Mirant, approximately 720 people, of
whom approximately 500 were employed at our power plants. In 2002, all employees
of Mirant Mid-Atlantic Services, LLC ("Mirant Mid-Atlantic Services") were
transferred to its holding company, Mirant Services, and are now employees of
Mirant Services.

LABOR SUBJECT TO COLLECTIVE BARGAINING AGREEMENTS

At the Company's facilities located in Washington D.C. and Maryland, the
Company has a labor contract with the International Brotherhood of Electrical
Workers that covers approximately 486 employees, or 66% of Mirant's Mid-Atlantic
facilities' total personnel. The term of the Agreement extends to May 31, 2003
and continues for succeeding periods of 12 calendar months each, unless either
party, prior to April 1, 2003, or April 1 of any year thereafter, serves written
notice of its desire to amend and/or terminate the Agreement as of the following
June 1. The Company is currently negotiating a new contract with this union.
However, there is a substantial risk that a new labor agreement will not be
reached without a strike or other form of adverse collective action. If a strike
were to occur, there is a risk that such action would significantly disrupt the
Company's ability to produce and/or distribute energy. To mitigate and reduce
the risk of disruption as described above, the Company has engaged in
contingency planning for continuation of the Company's generation and/or
distribution activities to the extent possible during an adverse collective
action by the union.

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ITEM 2. PROPERTIES

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(1) MW amounts reflect net dependable capacity.

(2) Assets owned or leased by affiliates (a total of 1,004 MW) that are subject
to capital contribution agreements between Mirant and us.

The Company also owns an oil pipeline, which is approximately 51.5 miles long
and serves the Chalk Point and Morgantown generating facilities.

ITEM 3. LEGAL PROCEEDINGS

ENVIRONMENTAL INFORMATION REQUEST

In January 2001, the EPA issued a request for information to Mirant
Mid-Atlantic concerning the air permitting and air emission control implications
under the EPA's new source review regulations promulgated under the Clean Air
Act ("NSR") of past repair and maintenance activities at its Chalk Point,
Dickerson and Morgantown plants in Maryland. The requested information concerns
the period of operations that predates Mirant Mid-Atlantic's ownership of the
plants. Mirant Mid-Atlantic has responded fully to this request. If a violation
is determined to have occurred at any of the plants, Mirant Mid-Atlantic may be
responsible for the cost of purchasing and installing emission control
equipment, the cost of which may be material. Under the sales agreement with
PEPCO for those plants, PEPCO is responsible for fines and penalties arising
from any violation associated with historical operations prior to the Company's
acquisition of the plants. If a violation is determined to have occurred after
Mirant Mid-Atlantic's acquisition of the plants or, if occurring prior to such
acquisition, is determined to constitute a continuing violation, Mirant
Mid-Atlantic would be subject to fines and penalties from the state or federal
governments for the period subsequent to its acquisition of the plants, the cost
of which may be material.

The Company cannot provide assurance that lawsuits or other administrative
actions against its power plants will not be filed or taken in the future. If an
action is filed against the Company or its power plants

9

and it is determined to not be in compliance, such a determination could require
substantial expenditures to bring the Company's power plants into compliance,
which could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.

ASBESTOS CASES

On December 19, 2000, Mirant Mid-Atlantic, together with affiliates Mirant
Potomac River and Mirant Peaker, and with lessors in a lease transaction,
purchased from PEPCO four electric generation facilities in the Washington D.C.
area. As a part of the purchase, Mirant Mid-Atlantic agreed to indemnify PEPCO
for certain liabilities arising in lawsuits related to the acquired assets filed
after December 19, 2000, even if they relate to incidents occurring prior to
that date, with certain qualifications. Since the acquisition, PEPCO has
notified Mirant Mid-Atlantic of approximately 50 asbestos cases, distributed
among three Maryland jurisdictions (Prince George's County, Baltimore City and
Baltimore County), as to which it claims a right of indemnity. In each of these
claims, the plaintiff's allegation of liability on the part of PEPCO is
primarily grounded on the theory that PEPCO owned premises at which the
plaintiff, who worked for a third party, was exposed to asbestos. Each plaintiff
seeks a multi-million dollar award. It is expected that additional such lawsuits
will be filed in the future; however, the number of such additional lawsuits
cannot now be determined. Two suits have been set for trial in 2003, while the
remainder have not yet been scheduled for trial. Mirant Mid-Atlantic believes
that substantial defenses to liability exist and that, even if found liable,
plaintiffs' damages claims are greatly exaggerated. Based on information and
relevant circumstances known at this time, Mirant Mid-Atlantic does not believe
these suits will have a material adverse effect on its financial position,
results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Mirant Mid-Atlantic is an indirect wholly owned subsidiary of Mirant.
Mirant Mid-Atlantic's membership interests are not publicly traded. In 2002 and
2001, we paid $312 million and $141 million, respectively, in dividends to our
parent companies. See "Liquidity and Capital Resources" in Item 7 and Note 5 to
our financial statements for a description of restrictions on our ability to pay
dividends. We have no equity compensation plans under which we issue our
membership interests.

ITEM 6. SELECTED FINANCIAL DATA

The information set forth below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical consolidated financial statements and the notes thereto. The
selected financial data has been derived from our consolidated financial
statements. Our consolidated financial statements for the year ended December
31, 2001 and for the period from July 12, 2000 to December 31, 2000 have been
restated. See Note 3 to our consolidated financial

10

statements. Prior to the acquisition of our facilities from PEPCO, which
occurred on December 19, 2000, we had no operating history.

SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, which are included
elsewhere in this report. The accompanying consolidated financial statements of
the Company have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As discussed below under "Mirant Restructuring," Mirant is
currently in discussions with certain of its lenders regarding the extension of
the maturities of a substantial portion of its indebtedness. If such
restructuring efforts are not successful, Mirant would likely be required to
seek bankruptcy court or other protection from its creditors, and if Mirant
seeks such protection, we believe it is likely that we would seek similar
protection. The Company's consolidated financial statements do not reflect
adjustments that might be required if the Company is unable to continue as a
going concern. See Note 1 to the Company's consolidated financial statements
included elsewhere in this report.

OVERVIEW AND BACKGROUND

We are an independent power provider and an indirect wholly owned
subsidiary of Mirant. We were formed as a Delaware limited liability company on
July 12, 2000. We, along with our subsidiaries, began operations on December 19,
2000 in conjunction with the acquisition of our facilities from PEPCO.

Prior to October 1, 2002, ninety-nine percent of our membership interests
were owned by Mirant Mid-Atlantic Investments, LLC and one percent of our
interests were owned by Mirant Mid-Atlantic Management, Inc., which were both
direct wholly owned subsidiaries of Mirant Americas Generation. Effective
October 1, 2002, all of our membership interests were transferred to Mirant
Americas Generation. Mirant Americas Generation is an indirect wholly owned
subsidiary of Mirant, our ultimate parent.

We and our subsidiaries, along with two of our affiliates, Mirant Potomac
River and Mirant Peaker, own or lease approximately 5,256 megawatts ("MW") of
electricity generating capacity in the Washington D.C. area. Beginning August 1,
2001, we sold all of our capacity and energy pursuant to the ECSA with Mirant
Americas Energy Marketing, also a subsidiary of Mirant (see Note 5 to our
financial statements contained elsewhere in this report) that provided us with
payments for our committed capacity and energy at prices that were not directly
linked to market prices. Effective May 1, 2003, we agreed to terminate the ECSA
and sell all of our capacity and energy under a Power and Fuel Agreement to
Mirant Americas Energy Marketing at market prices. Under this agreement, Mirant
Americas Energy Marketing resells our energy products in the PJM spot and
forward markets and to other third parties. The Company is paid the amount
received by Mirant Americas Energy Marketing for such capacity and energy. As
was true with the ECSA, under the Power and Fuel Agreement, we have credit
exposure to Mirant Americas Energy

11

Marketing for essentially all of our revenues. We also operate approximately 806
MW of electric generating capacity for a third party under an operations and
maintenance agreement.

Under the terms of the ECSA, the Company supplied all of the capacity and
energy of its facilities to Mirant Americas Energy Marketing. For the period
from August 1, 2001 to December 31, 2001, Mirant Americas Energy Marketing
contracted to purchase 100% of the output of the Company's facilities. For 2002
and 2003, Mirant Americas Energy Marketing exercised options under the ECSA to
purchase 100% of the total output of the Company's facilities.

Spot and forward power prices in the PJM market have risen since Mirant
Americas Energy Marketing exercised its option to purchase capacity and energy
under the ECSA for 2003. The termination of the ECSA and the sale of energy and
capacity under the Power and Fuel Agreement is expected to result in additional
cash flows to Mirant Mid-Atlantic in 2003 based on projected power prices in the
PJM Market. In addition, while a portion of the amounts received for the sale of
energy and capacity under the ECSA are accounted for as capital contributions,
all amounts received under the Power and Fuel Agreement will be accounted for as
revenues.

Prior to entering into the ECSA effective August 1, 2001, the Company sold
its power to Mirant Americas Energy Marketing pursuant to a master sales
agreement. Under this agreement, the price the Company received was based on the
market price for energy in the PJM market at the time the energy was delivered.
The Company also sold power to Mirant Americas Energy Marketing under short-term
fixed price contracts.

Our affiliated companies, Mirant Potomac River and Mirant Peaker, also
entered into fixed rate power purchase agreements with Mirant Americas Energy
Marketing in August 2001 on the same terms and effective over the same period as
the ECSA outlined above. These agreements were also terminated effective May 1,
2003. These affiliates have also entered into new power sales, fuel supply and
services agreements on the same terms and for the same period as the Company's
Power and Fuel Agreement with Mirant Americas Energy Marketing. Through a
capital contribution agreement between Mirant and us, any excess cash available
from the operations of these affiliated companies is paid as a dividend to
Mirant, which in turn makes a capital contribution to us for the same amount.

We and our subsidiaries have entered into a number of service agreements
with subsidiaries of Mirant for the procurement of fuel, labor and
administrative services essential to operating our business. These agreements
are primarily with Mirant, Mirant Americas Energy Marketing and Mirant Services.
See below under "ECSA with Mirant Americas Energy Marketing," "Power Sale, Fuel
Supply and Services Agreement" and Note 5 to our financial statements for a
description of these agreements.

MIRANT RESTRUCTURING

Mirant has incurred substantial indebtedness on a consolidated basis to
finance its business. As of December 31, 2002, Mirant's total consolidated
indebtedness was $8.9 billion (approximately $4.4 billion of which was recourse
to Mirant). Mirant does not expect that its cash flows from operations will
cover all of its capital expenditures, interest payments and debts as they
mature. Mirant is working on a restructuring plan pursuant to which it will ask
certain of its and its subsidiaries' creditors to defer repayments of principal.
Those creditors include holders of approximately $4.5 billion of bank facilities
and capital markets debt of Mirant and approximately $800 million of bank and
capital markets debt of Mirant Americas Generation. In connection with any such
refinancing or extension, Mirant expects to offer security interests in
substantially all of its and its subsidiaries' unencumbered assets. In addition,
the lenders under the Mirant bank facilities have waived compliance with certain
covenants of those facilities through May 29, 2003. The terms of the waiver
provide for an additional extension, to July 14, 2003, with the prior written
consent of lenders representing a majority of the committed amount under each
facility. Upon expiration or termination of the waiver, the lenders under the
respective bank facilities would be able to restrict the issuance of additional
letters of credit and/or declare an event of default and, after the respective
cure or grace period, accelerate the indebtedness under such bank facilities. An
acceleration of indebtedness under the Mirant bank facilities would cross
accelerate approximately $910 million of Mirant
12

capital markets and other indebtedness. In the event that Mirant is unable to
restructure a substantial portion of its indebtedness and/or there is an
acceleration of Mirant debt, Mirant would likely be required to seek bankruptcy
court or other protection from its creditors. In the event that Mirant seeks
such protection, we believe it is likely that we would seek similar protection.

RESTATEMENT OF FINANCIAL STATEMENTS

This report contains restated consolidated financial statements of the
Company as of December 31, 2001 and for the year ended December 31, 2001 and the
period from July 12, 2000 (inception) to December 31, 2000 to reflect certain
errors the Company identified in its previously issued financial statements. The
errors relate to accounting for derivative financial instruments designated as
hedging instruments which did not qualify for hedge accounting treatment and an
adjustment to the valuation of assets acquired and liabilities assumed by Mirant
Americas Energy Marketing when applying purchase accounting to the PEPCO
acquisition.

The nature of the errors and the adjustments that the Company has made to
its financial statements for year ended December 31, 2001 and the period from
July 12, 2000 to December 31, 2000 are set forth in Note 3 of Notes to
Consolidated Financial Statements in Item 8 of this report.

The net impact of the adjustments include the following:

- A $110 million increase to member's interest and a corresponding increase
in goodwill, other intangible assets, net and other asset accounts as of
December 31, 2000; and

- An $8 million reduction to net income in 2001.

INTERIM FINANCIAL INFORMATION

The Company is in the process of restating its interim financial
information for each of the quarterly periods in 2001 and 2002. Upon completion
of the quarterly financial information, the Company expects to prepare and file
amended Form 10-Q's for each of the first three quarters in 2002.

RESTRUCTURING CHARGES

In 2002, Mirant adopted a restructuring plan in response to constrained
access to capital and changes in market conditions. This plan was designed to
restructure its worldwide operations, including those of the Company, by selling
certain generating facilities, canceling or suspending planned power plant
developments, closing business development offices and severing employees. The
severance costs and other employee termination-related charges associated with
the restructuring at the Company's locations were paid by Mirant Services and
billed to Mirant Mid-Atlantic. We recorded $5 million of restructuring charges
primarily related to severance costs during the year ended December 31, 2002.
Management cannot determine at this time the extent to which additional
restructuring by Mirant will impact the Company.

REVENUES

The majority of our revenues were derived from sales to our affiliate,
Mirant Americas Energy Marketing, of capacity and energy from the generating
facilities owned or leased by us. Mirant Americas Energy Marketing in turn sells
the energy under fixed price agreements or markets the energy in the spot and
forward markets in the PJM or other nearby competitive power markets. The market
for wholesale electric energy in the PJM is largely deregulated. With the
termination of the ECSA, our revenues and results of our operations will depend
upon prevailing market prices for energy and capacity in the PJM and other
nearby competitive markets to the extent that Mirant Americas Energy Marketing
has not entered into fixed price agreements to sell our energy and capacity.
Under our new agreement with Mirant Americas Energy Marketing effective May 1,
2003, the revenues we receive are based on the amounts received by Mirant
Americas Energy Marketing for our capacity and energy.

13

ECSA WITH MIRANT AMERICAS ENERGY MARKETING

During 2002, our fixed price agreement, the ECSA, with Mirant Americas
Energy Marketing represented approximately 96% of our operating revenues. The
majority of the remainder of our revenues represented fees earned for operating
approximately 806 MW of electric generating capacity for a third party under an
operations and maintenance agreement.

At the inception date of the ECSA, the pricing under the ECSA was favorable
to us and our affiliates when compared to estimated market rates in the PJM for
power to be delivered over the initial term of the agreement. The estimated
market rates were based on quoted market prices in the PJM, as adjusted upwards
by approximately 12% for what the Company believed, at the time, to be temporary
anomalies in the quoted market prices based on projected demand growth and other
factors expected to affect demand and supply in the PJM market through 2002. The
market had experienced unusual fluctuations in market prices because of low
prices for natural gas, which is generally the fuel used to set prices in the
PJM. The Company did not believe that natural gas prices would remain depressed
through the end of 2002.

At inception of the ECSA, the aggregate amount attributable to the
favorable pricing variance was approximately $167 million. The amount related
specifically to our owned or leased facilities of $120 million was accounted for
as both an addition to member's interest and an offsetting capital contribution
receivable pursuant to the ECSA in our financial statements. When we entered
into the agreement, we assumed that in 2002 Mirant Americas Energy Marketing
would elect to take the contracted minimum 75% of the capacity and output of the
Company's facilities provided for in the ECSA. In January 2002, Mirant Americas
Energy Marketing exercised its option to increase the committed capacity to 100%
of the total output of the Company's facilities. As a result, the Company
recorded an additional equity contribution of $53 million in the first quarter
of 2002 attributable to the favorable pricing terms of this additional 25% of
the capacity and output. This adjustment is also reflected in our financial
statements as both an addition to member's interest and an offsetting capital
contribution receivable pursuant to the ECSA.

The contractual amounts payable under the ECSA in excess of the amount of
revenue recognized were $139 million in 2002 and $33 million for the period from
August 1, 2001 to December 31, 2001. These amounts are generally received in the
month following the month the related revenue is recognized and are recorded as
a reduction of the capital contribution receivable pursuant to the ECSA when
received. During the year ended December 31, 2002 and the period from August 1,
2001 to December 31, 2001, the Company received $129 million and $29 million,
respectively, under the ECSA that was applied as a reduction to the capital
contribution receivable pursuant to the ECSA. The capital contribution
receivable pursuant to the ECSA was $136 million at December 31, 2002, of which
$15 million represents amounts received subsequent to December 31, 2002 related
to the revenue recognized prior to that date and $121 million relates to 2003.

The revenues recognized under the ECSA were not adjusted for subsequent
changes in market prices after the options were exercised. As a result, amounts
recognized as revenue under the ECSA did not necessarily reflect market prices
at the time the energy was delivered. Amounts recognized as revenue for capacity
and energy delivered under the ECSA exceeded the amounts based on current market
prices by approximately $179 million and $79 million for the year ended December
31, 2002 and for the period from August 1, 2001 to December 31, 2001,
respectively.

In November 2002, Mirant Americas Energy Marketing exercised its option
under the ECSA to purchase 100% of the Company's capacity and energy in 2003 at
contracted rates in the ECSA. The pricing under the ECSA was favorable to us
when compared to estimated market rates in the PJM for power to be delivered in
2003. As a result, the Company recorded $121 million as an addition to member's
interest and an offsetting capital contribution receivable pursuant to the ECSA
in the fourth quarter of 2002 attributable to the favorable pricing terms for
2003.

Effective May 1, 2003, we agreed to terminate the ECSA and sell all of our
capacity and energy under a power sale, fuel supply and service agreement
("Power and Fuel Agreement") to Mirant

14

Americas Energy Marketing at market prices, the terms of which are described
below under "-- Power Sale, Fuel Supply and Services Agreement." Under this
agreement Mirant Americas Energy Marketing resells our energy products in the
PJM spot and forward markets and to other third parties. The Company is paid the
amount received by Mirant Americas Energy Marketing for such capacity and
energy.

Over the term of the ECSA, PJM market prices have tended to be lower than
the prices received from Mirant Americas Energy Marketing under the ECSA.
However, as a result of higher spot prices in the PJM in the first quarter of
2003, had we received market prices for our energy, we would have received
approximately $71 million more in cash flows than we received under the ECSA.
For the remainder of 2003 as a whole, the forward price curves at March 31, 2003
indicate that cash flows received under the Power and Fuel Agreement are
expected to exceed those under the ECSA. Following the termination of the ECSA
effective May 1, 2003, the Company will reverse the remaining capital
contribution receivable pursuant to the ECSA that is attributable to periods
after April 30, 2003.

POWER SALE, FUEL SUPPLY AND SERVICES AGREEMENT

Effective May 1, 2003, the Company entered into the Power and Fuel
Agreement with Mirant Americas Energy Marketing. Our subsidiary, Mirant Chalk
Point, and our affiliates Mirant Peaker and Mirant Potomac River also entered
into power sale, fuel supply and services agreements on substantially similar
terms. Our Power and Fuel Agreement replaces our master power sales agreement,
including the ECSA, and our services and risk management agreements with Mirant
Americas Energy Marketing.

The Power and Fuel Agreement provides that Mirant Americas Energy Marketing
purchases all of the energy and capacity of our facilities and pays us the
amount received by Mirant Americas Energy Marketing for the resale of such
products, services or capacity. Mirant Americas Energy Marketing is responsible
for scheduling the output of our generating facilities.

Mirant Americas Energy Marketing provides all requirements fuel supply,
including fuel oil, gas and coal, for our generating facilities, except for fuel
supplied by third parties for the Morgantown facility. We pay Mirant Americas
Energy Marketing the market price for natural gas, including transportation,
used at any of our facilities. We pay Mirant Americas Energy Marketing a price
based on an index price plus a transportation charge for fuel oil used at the
Chalk Point facility. For all other fuel oil, we pay Mirant Americas Energy's
actual cost. We reimburse Mirant Americas Energy Marketing for coal, including
transportation, at Mirant Americas Energy Marketing's cost.

Upon our request, Mirant Americas Energy Marketing procures all emissions
credits necessary for the operation of our generating facilities and sells
excess credits. Mirant Americas Energy Marketing charges its actual cost of
acquiring the credits and remits the proceeds of any emission credit sales to
us.

Upon our request, Mirant Americas Energy Marketing procures or advises us
to procure business interruption insurance and forced outage insurance. The cost
of insurance is charged to us.

Mirant Americas Energy Marketing enters into third party bilateral
contracts, forward sales, and financial products (including futures, swaps and
option contracts) for us. The costs, including third party broker costs,
transaction fees, and gains and losses related to the bilateral contracts,
forward sales and financial products are charged to or paid to us.

We will pay Mirant Americas Energy Marketing a monthly service fee. Mirant
Americas Energy Marketing is not entitled to any bonus payments under the Power
and Fuel Agreement. The Power and Fuel Agreement expires December 31, 2003.

SEASONALITY

Our revenues are generally affected by seasonal changes in weather
conditions. Peak demand for electricity typically occurs during the summer
months, caused by the increased use of air-conditioning. Cooler than normal
temperatures during months that are normally warm may lead to reduced use of
air-conditioners, which would reduce the short-term demand for energy and result
in a reduction in wholesale

15

prices. Although the fixed price we received under the ECSA reduced the impact
of seasonality on the price we received for our energy from August 1, 2001 to
April 30, 2003, our revenues subsequent to April 30, 2003 are expected to be
generally affected by seasonal changes now that our revenues are based on market
prices.

EXPENSES

Our costs primarily consist of the ongoing maintenance and operation of the
generating facilities owned or leased by us, capital expenditures needed to
ensure their continued reliable, safe and environmentally compliant operation
and our obligation to make rental payments on our leased facilities. A
significant portion of our operating expenses result from transactions with
related parties, primarily Mirant Americas Energy Marketing, Mirant Americas,
Inc. ("Mirant Americas"), Mirant Services and Mirant.

Cost of fuel and emission credits for our generating facilities are our
largest expenses representing over 50% of our operating expenses. Most of our
fuel cost results from transactions with Mirant Americas Energy Marketing under
our fuel supply agreements, the cost of which is charged to us based upon actual
costs incurred by them. In addition, we obtain fuel under a long-term supply
contract with a third party.

We have other related party agreements for labor, and general and
administrative services. These services are essential to the operations of our
business and represent less than 15% of our operating expenses. Management
believes these costs are reasonable and substantially similar to costs we would
incur on a stand-alone basis.

Our other operating expenses are primarily for operating leases,
maintenance costs, depreciation and amortization of our long-lived assets and
certain general and administrative expenses, such as audit and legal fees.

RESULTS OF OPERATIONS

Our operating revenues and expenses from affiliates and non-affiliates
aggregated by classification are as follows (in millions):

2002 VERSUS 2001

Operating revenues. Our operating revenues for the year ended December 31,
2002, were $815 million, compared to $1,024 million for the same period in 2001.
This decrease of $209 million, or 20%, occurred in spite of a 10% increase in
megawatt-hours generated, from 15.4 million in 2001 to 16.9 million in 2002. The
decrease is primarily due to the termination of certain short-term fixed price
contracts with Mirant Americas Energy Marketing during a period of declining
prices. During the first seven months of 2001, the Company sold all of its
generation to Mirant Americas Energy Marketing at PJM spot prices. In order to
reduce exposure to spot market prices, the Company entered into additional,
short-term fixed price contracts, under which it received a fixed price from
Mirant Americas Energy Marketing for a defined volume of electricity. As the
Company had committed to sell all of its generation at spot market prices to
Mirant Americas Energy Marketing, it was required to purchase volumes of
electricity to cover the short-term fixed price sales contracts. Purchases of
these matching volumes of electricity were made at a combination of fixed prices
and spot prices. As a result of these transactions, the Company received a
portion of its revenue at fixed prices rather than spot prices. In August 2001,
the Company terminated these short-term fixed price contracts with Mirant
Americas Energy Marketing. In addition, revenues from non-affiliates under
operations and maintenance services to the Benning and Buzzard Point generating
facilities increased by $5 million, or 20%, due to higher charges for an
increase in fuel burned at these facilities.

Operating expenses. Operating expenses for the year ended December 31,
2002 were $655 million, compared to $870 million in 2001. The following factors
were primarily responsible for the decrease of $215 million in operating
expenses.

- Cost of fuel, electricity and other products for the year ended December
31, 2002 was $346 million, compared to $535 million in 2001. This
decrease of $189 million, or 35%, was primarily attributable to the
termination in August 2001 of fixed price contracts with Mirant Americas
Energy Marketing, as described above. In addition, a reduction in the
proportion of generation by less efficient cycling units reduced fuel
costs per megawatt hour in the year ended December 31, 2002, as compared
to the same period in 2001. These decreases were partially offset by the
cost of the additional fuel usage arising from higher generation volumes
in the year ended December 31, 2002, as compared to the same period in
2001.

- Depreciation and amortization expenses for the year ended December 31,
2002 were $46 million, compared to $77 million in 2001. The decrease of
$31 million was primarily a result of the elimination of goodwill
amortization from the implementation of Statement of Financial Accounting

17

Standards No. 142, "Goodwill and Other Intangible Assets." In 2001,
goodwill and trading rights amortization was $34 million.

- Maintenance expenses for the year ended December 31, 2002 were $45
million, compared to $53 million in 2001. This decrease of $8 million was
primarily due to cost savings measures including a reduction in planned
overhauls and to efficiency savings.

- Other operating expenses for the year ended December 31, 2002 were $82
million, compared to $70 million in 2001. This increase of $12 million
was primarily due to increased property taxes and higher insurance costs.
Property taxes were higher in 2001 as a result of the full-year effect of
the increase in assessed values from July 1, 2001, following the
acquisition of assets from PEPCO. The higher insurance costs reflect the
current insurance climate for the power sector.

Other income, net. Other income, net for the year ended December 31, 2002,
was $26 million, compared to $15 million in 2001. This increase of $11 million
was primarily due to the conversion of the note payable to Mirant Americas
Generation into equity in January 2002, which eliminated the interest expense
associated with this note payable for 2002.

2001 VERSUS 2000

Prior to December 19, 2000 we had no operating history. Prior to the
acquisition of our facilities from PEPCO, our facilities were fully integrated
with PEPCO's utility operations and all results of operations were consolidated
into PEPCO's financial statements. Due to the regulated nature of PEPCO's
utility operations and the differences inherent in the manner in which we
operate our generating facilities in the PJM market, historical financial
results prior to December 19, 2000 are not meaningful or indicative of our
ability to operate our assets or to generate revenues. As a result, we have not
included a discussion of a comparison of our results for 2001 to prior periods.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Historically, we have obtained cash from our operations, issuances of debt,
capital contributions from Mirant, and capital contributions pursuant to the
ECSA. These funds have been used to finance operations, service debt
obligations, fund acquisitions, finance capital expenditures and meet other cash
and liquidity needs. The cash flows received from Mirant Americas Energy
Marketing as a capital contribution pursuant to the ECSA have been recorded in
the accompanying consolidated statements of cash flows as a financing activity.

Our cash flows related to revenues recognized from our affiliates and
non-affiliates, and the related capital contribution received pursuant to the
ECSA generally were received in the month following recognition in the income
statement. Our cash payments related to services rendered by our affiliates and
non-affiliates generally are paid in the month following the month the services
are recorded as an expense.

Net cash provided by operating activities totaled $204 million in 2002, as
compared to $119 million in 2001. This increase of $85 million was due to an
increase in net income of $17 million, a decrease of $25 million in the amount
of lease rent paid and the timing of payments for affiliate receivables and fuel
stock, which increased cash flow by $45 million and $78 million, respectively.
These increases in cash flow were partially offset by a decrease in non-cash
charges of $59 million.

Net cash used in investing activities totaled $17 million in 2002, as
compared to $109 million in 2001. During 2002, our investment activities were
attributable to capital expenditures of $46 million and the net repayment of
notes receivable from affiliates of $29 million. In 2001, our investment
activities were attributed primarily to capital expenditures of $47 million and
the net issuance of notes receivable from affiliates of $29 million.

Net cash used in financing activities totaled $144 million in 2002, as
compared to $32 million in 2001. This change was primarily due to an increase in
dividends paid from $141 million in 2001 to $312 million

18

in 2002 and partially offset by an increase in the capital contribution received
pursuant to the ECSA from $29 million in 2001 to $129 million in 2002. Capital
contributions from Mirant increased from $25 million in 2001 to $39 million in
2002. In addition, we issued notes payable to affiliates of $55 million in 2001.

Our cash position, projected cash flows from operations and projected
capital contributions related to Mirant Peaker and Mirant Potomac River (see
below and Note 5 of "Notes to Consolidated Financial Statements") are expected
to provide sufficient liquidity for our operations, working capital needs and
capital expenditures for the next 12 months. However, as discussed above under
"Mirant Restructuring," if Mirant is required to seek bankruptcy court or other
protection from its creditors, we believe it is likely that we would seek
similar protection.

NOTES RECEIVABLE FROM AFFILIATES

In December 2000, Mirant Potomac River and Mirant Peaker, both wholly owned
subsidiaries of Mirant, borrowed approximately $223 million from the Company to
finance their acquisition of generation facilities from PEPCO (see Note 5 of
"Notes to Consolidated Financial Statements"). The notes receivable are
unsecured and are due on December 30, 2028 with 10% per annum interest payable
semiannually, in arrears, on June 30 and December 30. Any amount not paid when
due bears interest thereafter at 12% per annum. Up to $8 million per year may be
prepaid at the election of the borrower. Interest earned by the Company from
Mirant Potomac River and Mirant Peaker was $23 million for each of the years
ended December 31, 2002 and 2001 and $1 million for the period from July 12,
2000 (inception) through December 31, 2000.

During 2002, the Company participated in a separate cash management
agreement with Mirant (see Note 5 of "Notes to Consolidated Financial
Statements"), whereby any excess cash was transferred to Mirant pursuant to a
note agreement which was payable upon demand. During the fourth quarter of 2002,
this cash management agreement was terminated and all outstanding advances were
repaid.

CAPITAL CONTRIBUTION AGREEMENT WITH MIRANT

Under a capital contribution agreement, Mirant Potomac River and Mirant
Peaker make distributions to Mirant at least once per quarter, if funds are
available. Distributions are equal to cash available after taking into account
projected cash requirements, including mandatory debt service, prepayments
permitted under the Mirant Potomac River and Mirant Peaker notes, and
maintenance reserves, as reasonably determined by Mirant. Mirant will contribute
or cause these amounts to be contributed to the Company. For the years ended
December 31, 2002 and 2001, total capital contributions received by us under
this agreement totaled $39 million and $25 million, respectively.

If, as a result of its inability to restructure a substantial portion of
its indebtedness or otherwise, Mirant seeks bankruptcy court or other protection
from its creditors, then Mirant's ability to make such contributions or cause
such contributions to be made could be adversely affected.

RESTRICTIONS ON ADDITIONAL INDEBTEDNESS AND PAYMENT OF DIVIDENDS

Pass through certificates in the aggregate principal amount of $1.224
billion were issued in December 2000 in connection with the acquisition by the
owner lessors of the Morgantown and Dickerson generating facilities. We have
entered into long-term leases for these facilities. The pass through
certificates are not our direct obligations. However, because the operating
lease payments made by us for the Morgantown and Dickerson generating facilities
support the ultimate lessor notes for the facilities, the pass through
certificates restrict our ability to incur further indebtedness in certain
circumstances. If the form or purpose of indebtedness is not specifically
permitted by the lease agreement, additional indebtedness cannot be incurred
unless each of Moody's Investors Service ("Moody's") and Standard & Poors
("S&P") confirms the then current rating for the pass through certificates;
provided, however, that if the certificates are rated by either agency as below
investment grade, the additional indebtedness may not be incurred unless Mirant
Mid-Atlantic meets certain coverage ratios. As of April 25, 2003, all ratings

19

of the pass through certificates by Moody's and S&P, as well as Fitch, Inc.
("Fitch"), were non-investment grade.

The pass through certificates also restrict Mirant Mid-Atlantic's ability
to make certain payments. Among the limitations is a prohibition on dividend
payments to our parent unless certain coverage ratios are met. Specifically, in
order to make a dividend distribution the fixed charge coverage ratio under the
pass through certificates must exceed 1.7 to 1.0 for the most recently ended
four fiscal quarter period as well as for each of the next two periods of four
fiscal quarters (a total of eight quarters).

Spot and forward power prices in the PJM market have risen since Mirant
Americas Energy Marketing exercised its option to purchase capacity and energy
under the ECSA for 2003. The termination of the ECSA and the sale of energy and
capacity under the Power and Fuel Agreement is expected to result in additional
cash flows to Mirant Mid-Atlantic in 2003 based on projected power prices in the
PJM. In addition, while a portion of the amounts received for the sale of energy
and capacity under the ECSA are accounted for as capital contributions, all
amounts received under the Power and Fuel Agreement will be accounted for as
revenues. Thus, such amounts will be included as revenues in the calculation of
the fixed charge coverage ratio under the pass through certificates, in contrast
to the capital contribution component of the amounts received under the ECSA
which is excluded from such calculation. As of March 31, 2003, the fixed charge
coverage ratio under the pass through certificates, for the most recently ended
four fiscal quarters, is estimated to be approximately 1.6 to 1.0, less than the
1.7 to 1.0 required to make distributions under the terms of the pass through
certificates. Management does not expect to meet the distribution test until
delivery of financial statements for the fiscal quarter ended September 30,
2003, based on current projections. At that time management expects that we will
be able to make distributions, although there can be no assurance that such
expectation will prove correct. If the ECSA had not been terminated, based on
current projections of fuel and power prices, the fixed charge coverage ratio
was expected to remain below 1.7 to 1.0 through year end 2003.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of December 31, 2002 the Company has lease obligations and fuel and
transportation purchase commitments as follows (in millions):

- ---------------

(1) Substantially all of these obligations relate to the Morgantown and
Dickerson facilities (see Note 10 of "Notes to Consolidated Financial
Statements"). Upon an event of default by Mirant Mid-Atlantic, the lessors
are entitled to a termination value payment as defined in the agreements,
which, in general, decreases over time. At December 31, 2002, the
termination value was approximately $1.5 billion. Upon expiration of the
original lease term, the termination value will be $300 million.

(2) This commitment relates to the minimum fuel purchase and transportation
commitments at the Morgantown facility, which became effective in July 2002.

MORGANTOWN AND DICKERSON LEASES

In connection with our acquisition of PEPCO's generating assets, several
owner lessors each own undivided interests in the Dickerson and Morgantown
baseload generating assets. We have entered into long-term leases for each of
these undivided interests. The leases were part of a leveraged lease that raised
approximately $1.5 billion, which was used by the owner lessors to acquire the
undivided interests in the lease facilities and to pay the lease transaction
expenses.

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The subsidiaries of the institutional investors who hold the membership
interests in the owner lessors are called owner participants. Equity funding by
the owner participants plus transaction expenses paid by the owner participants
totaled $299 million. The issuance and sale of pass through certificates raised
the remaining $1.224 billion.

Pass through certificates in the aggregate principal amount of $1.224
billion were issued on December 18, 2000. The pass through certificates are not
our direct obligations. Each pass through certificate represents a fractional
undivided interest in one of three pass through trusts formed pursuant to three
separate pass through trust agreements between State Street Bank and Trust
Company of Connecticut, National Association, as pass through trustee, and us.

The property of the pass through trusts consists of lessor notes. The
lessor notes were issued in connection with eleven separate leveraged lease
transactions with respect to each lessor's undivided interest in either (i) the
Dickerson electric generating baseload units 1, 2 and 3 and related assets or
(ii) the Morgantown electric generating baseload units 1 and 2 and related
assets. The lessor notes issued by an owner lessor are secured by that owner
lessor's undivided interest in the lease facilities and its rights under the
related lease and other financing documents.

The lessor notes issued by each owner lessor were issued in three series.
Each pass through trust purchased one series of the lessor notes issued by each
owner lessor so that all of the lessor notes held in each pass through trust
have an interest rate corresponding to the interest rate of the pass through
certificates, and a final maturity on or before the final expected distribution
date applicable to the certificates issued by that pass through trust. Principal
and interest paid on the lessor notes held in each pass through trust is
distributed by each pass through trust to its certificate holders on June 30 and
December 30 of each year.

Although neither the certificates nor the lessor notes are obligations of,
or guaranteed by us, the amount unconditionally payable by us under the leases
of the leased facilities will be at least sufficient to pay in full when due all
payments of principal, premium, if any, and interest on the lessor notes. Our
lease obligations are not obligations of, or guaranteed by, our indirect parent,
Mirant, or any of its other affiliates. However, Mirant has arranged a letter of
credit to provide for the rent payment reserve required in connection with this
lease transaction in the event we are unable to pay our lease payment
obligations.

NOX ALLOWANCES

Our generating facilities are subject to the northeast ozone transport
region NOx allowance cap and trade regulatory program. As part of that
regulatory program, the various state regulations allocate NOx emission
allowances to covered facilities, and if the allocated allowances are not
sufficient to cover actual NOx emissions, facilities must purchase NOx
allowances from other facilities. We presently purchase additional NOx
allowances in addition to our allocation to cover our emissions. Due to the NOx
SIP Call Rule promulgated by the EPA, we expect that the number of allowances
allocated to our plants will decrease in 2003 and that the market price may
increase in 2003 and in subsequent years for the NOx allowances we will need to
purchase. There can be no assurance that the additional cost we may incur will
be recoverable from the revenues we realize.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting policies described below are considered critical in
obtaining an understanding of Mirant Mid-Atlantic's consolidated financial
statements because their application requires significant estimates and
judgments by management in preparing these consolidated financial statements.
Management's estimates and judgments are inherently uncertain and may differ
significantly from actual results achieved. Management believes that the
following critical accounting policies and the underlying estimates and
judgments involve a higher degree of complexity than others. Management
discussed the development, selection and disclosure of these critical accounting
policies with the Company's Board of Managers.

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ACCOUNTING FOR DERIVATIVE INSTRUMENTS

Derivative financial instruments used for economic hedging and commodity
price risk management purposes that do not meet the hedge accounting criteria
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("SFAS No. 133"), are recorded at fair value as an
adjustment to revenue or cost of fuel, electricity and other products. The
commodity related derivatives we use are primarily valued through quoted market
prices and quantitative models. To the extent that quantitative models are used
to value the derivative instruments we are required to estimate future prices,
price correlation, interest rates and market volatility. In addition, these
estimates reflect the potential impact of liquidating our position in an orderly
manner over a reasonable period of time under present market conditions. The
amounts we report as revenue or cost of fuel, electricity and other products
change as these estimates are revised to reflect actual results, changes in
market conditions or other factors, many of which are beyond our control. As of
December 31, 2002, the fair value of our net derivative financial instrument
assets, which are marked to market, was approximately $20 million.

LONG-LIVED ASSETS

We evaluate our long-lived assets (property, plant and equipment) and
definite-lived intangibles for impairment whenever indicators of impairment
exist or when we commit to sell the asset. The accounting standards require that
if the sum of the undiscounted expected future cash flows from a long-lived
asset or definite-lived intangible is less than the carrying value of that
asset, an asset impairment charge must be recognized. The amount of the
impairment charge is calculated as the excess of the asset's carrying value over
its fair value, which generally represents the discounted future cash flows from
that asset or in the case of assets we expect to sell, at fair value less costs
to sell.

We believe that the accounting estimates related to the impairment testing
are critical accounting estimates because they are highly susceptible to change
from period to period because determining the forecasted future cash flows
related to the assets requires management to make assumptions about future
revenues, competition, operating costs and forward commodity prices over the
life of the assets. Our assumptions about future sales, costs and forward prices
require significant judgment because such factors have fluctuated in the past
and will continue to do so in the future.

In deriving our estimates of forecasted future cash flows, we use our
financial forecasts, which are developed based on forward price curves in the
near-term liquid period, up to 36 months, and long run marginal cost assumptions
for future periods in the plan.

GOODWILL AND INTANGIBLE ASSETS

In accordance with SFAS No. 142, we evaluate our goodwill and
indefinite-lived intangible assets for impairment at least annually and
periodically if indicators of impairment are present. SFAS No. 142 requires that
if the fair value of a reporting unit is less than its carrying value including
goodwill (Step I), an impairment charge for goodwill must be recognized. The
impairment charge is calculated as the difference between the implied fair value
of the reporting unit goodwill and its carrying value (Step II).

Upon adopting SFAS No. 142, Mirant Mid-Atlantic defined its reporting unit,
as required by the Statement, for purposes of testing goodwill for impairment.
Mirant Mid-Atlantic defined its reporting unit as the Company as a whole. The
reporting unit has specific management that is held responsible for
decision-making for a set of components representing the reporting unit. This
reporting unit reflects the way the Company manages its business.

Upon adoption of SFAS No. 142 on January 1, 2002 we reviewed our goodwill
for impairment at that date. We computed the fair value as the sum of the
discounted future cash flows applicable to our reportable segment's assets.
Based on that analysis, we determined that the fair value of our reportable
segment exceeded its carrying value including goodwill and accordingly concluded
that no impairment charge was required.

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In connection with our annual impairment assessment as of October 31, 2002,
we tested our reporting unit for impairment. The result of the impairment
analysis indicated that no impairment was necessary. At December 31, 2002 we had
$1.3 billion of goodwill on our consolidated balance sheet. We believe that the
accounting estimates related to determining the fair value of goodwill and any
resulting impairment are critical accounting estimates because they are highly
susceptible to change from period to period because determining the forecasted
future cash flows related to the assets requires management to make assumptions
about future revenues, operating costs and forward commodity prices over the
life of the assets. Our assumptions about future sales, costs and forward prices
require significant judgment because such factors have fluctuated in the past
and will continue to do so in the future. Due to the subjective nature of our
goodwill impairment analysis we have provided certain critical assumptions used
in our analysis for our reporting unit as follows:

- Forward prices of electricity and natural gas -- We used the forward
market curves that are used by Mirant for mark-to-market accounting and
that are regularly checked by Mirant's Risk Control group against broker
quotes and exchange closing prices. Typically, the liquidity of these
forward markets decreases significantly as maturity increases. Liquid
market data is generally available in the first 36-48 months for natural
gas prices and 24-36 months for power prices. Our forecast is a 10-year
estimate and for periods outside the liquid market we construct the
forward prices using data available from third parties and our market
knowledge. As such, our estimated future cash flows which contribute to
the determination of the fair value of our reporting unit are highly
sensitive to these price forecasts. For example, if our projected forward
gross margins were 8% lower over the forecasted period, the fair value of
our Step I analysis would have indicated that our reporting unit was less
than its carrying value including goodwill, indicating an impairment was
necessary.

- Asset sales -- Our financial plan assumes no asset sales.

- Terminal Value -- We assume a terminal value based on the ability to
continue plant operations and additional growth from plant expansion or
new construction after 2010. We employed a 4% terminal growth rate
assumption in the discounted cash flow analysis. This rate was determined
considering inflationary growth, historical and projected GDP growth,
electricity demand, and generation capacity growth. The sensitivity of
the fair value of our projected future cash flows is such that a 100
basis point change in the terminal value growth rate would adjust the
value of our projected future cash flows by approximately $580 million.

- Weighted average cost of capital -- The weighted average cost of capital
rate significantly impacts the fair value of our projected future cash
flows. We used a weighted average cost of capital of 9% in determining
the present value of our projected future cash flows. The rate was
determined based on a study of discount rates in the current market used
to value similar cash flow streams, specific capital fundamentals related
to Mirant Mid-Atlantic and comparable industry group data. The
sensitivity of the fair value of our projected future cash flows is such
that a 100 basis point move in the rate would adjust the fair value of
our projected future cash flows by approximately $860 million.

The combined subjectivity and sensitivity of our assumptions and estimates
used in our goodwill impairment analysis could result in a reasonable person
concluding differently on those critical assumptions and estimates resulting in
an impairment being indicated.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The information presented in this Form 10-K includes forward-looking
statements in addition to historical information. These statements involve known
and unknown risks and relate to future events, our future financial performance
or our projected business results. In some cases, you can identify forward-
looking statements by terminology such as "may," "will," "should," "expects,"
"plans," "anticipates,"

23

"believes," "estimates," "predicts," "targets," "potential" or "continue" or the
negative of these terms or other comparable terminology.

Forward-looking statements are only predictions. Actual events or results
may differ materially from any forward-looking statement as a result of various
factors, which include: (1) legislative and regulatory initiatives regarding
deregulation, regulation or restructuring of the electric utility industry; (2)
the failure of our assets to perform as expected or the extent and timing of the
entry of additional competition in the markets of our subsidiaries and
affiliates; (3) our pursuit of potential business strategies, including the
disposition of assets, termination of construction of certain projects or
internal restructuring; (4) changes in state, federal and other regulations
(including rate and other regulations); (5) changes in or application of
environmental and other laws and regulations to which we and our subsidiaries
and affiliates are subject; (6) political, legal and economic conditions and
developments; (7) changes in market conditions, including developments in energy
and commodity supply, demand, volume and pricing; (8) weather and other natural
phenomena; (9) war, terrorist activities or the occurrence of a catastrophic
loss; (10) deterioration in the financial condition of our counterparties and
the resulting failure to pay amounts owed to us or perform obligations or
services due to us; (11) financial market conditions and the results of Mirant's
financial restructuring efforts, including its inability to obtain long-term
debt or working capital on terms that are not prohibitive and the effects that
would result on our liquidity and business; (12) the direct or indirect effects
on our business of a lowering of our credit rating or that of Mirant, Mirant
Americas Generation or Mirant Americas Energy Marketing (or actions taken by us
or our affiliates in response to changing credit ratings criteria), including,
increased collateral requirements to execute our business plan, demands for
increased collateral by our current counterparties, curtailment of certain
business operations in order to reduce the amount of required collateral,
refusal by our current or potential counterparties or customers to enter into
transactions with us and our inability to obtain credit or capital in amounts
needed or on terms favorable to us; (13) the disposition of the pending
litigation described in this Form 10-K; (14) the direct or indirect effects of
the "going concern" explanatory paragraph contained in our independent auditors'
report and (15) other factors, including the risks discussed elsewhere in this
Form 10-K.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We expressly disclaim a duty to update
any of the forward-looking statements.

FACTORS THAT COULD AFFECT FUTURE PERFORMANCE

In addition to the discussion of certain risks in the Management's Analysis
of Results of Operations and Financial Condition and the notes to the Company's
consolidated financial statements, other factors that could affect the Company's
future performance (business, financial condition or results of operations) are
set forth below.

IF MIRANT IS UNABLE TO SUCCESSFULLY RESTRUCTURE ITS DEBT IT WOULD MATERIALLY
AND ADVERSELY AFFECT ITS FINANCIAL CONDITION AND WOULD LIKELY CAUSE MIRANT TO
SEEK BANKRUPTCY COURT OR OTHER PROTECTION FROM ITS CREDITORS. IF MIRANT SEEKS
SUCH PROTECTION, WE BELIEVE IT IS LIKELY THAT WE WOULD SEEK SIMILAR
PROTECTION.

Mirant has incurred substantial indebtedness on a consolidated basis to
finance its business. As of December 31, 2002, Mirant's total consolidated
indebtedness was $8.9 billion (approximately $4.4 billion of which was recourse
to Mirant). Mirant does not expect that its cash flows from operations will
cover all of its capital expenditures, interest payments and debts as they
mature. Mirant is working on a restructuring plan pursuant to which it will ask
certain of its and its subsidiaries' creditors to defer repayments of principal.
Those creditors include holders of approximately $4.5 billion of bank facilities
and capital markets debt of Mirant and approximately $800 million of bank and
capital markets debt of Mirant Americas Generation. In connection with any such
restructuring or extension, Mirant expects to offer security interests in
substantially all of its and its subsidiaries' unencumbered assets. In addition,
the lenders under the Mirant bank facilities have waived compliance with certain
covenants of those facilities through May 29, 2003. The terms of the waiver
provide for an additional extension, to July 14, 2003, with
24

the prior written consent of lenders representing a majority of the committed
amount under each of the facilities. Upon expiration or termination of the
waiver, the lenders under the respective bank facilities would be able to
restrict the issuance of additional letters of credit and/or declare an event of
default and, after the respective cure or grace period, accelerate the
indebtedness under such bank facilities. An acceleration of indebtedness under
the Mirant bank facilities would cross accelerate approximately $910 million of
Mirant capital markets and other indebtedness. In the event that Mirant is
unable to restructure a substantial portion of its indebtedness and/or there is
an acceleration of Mirant debt, Mirant would likely be required to seek
bankruptcy court or other protection from its creditors. In the event that
Mirant seeks such protection, we believe it is likely that we would seek similar
protection.

IF MIRANT IS UNABLE TO RESTRUCTURE A SUBSTANTIAL PORTION OF ITS INDEBTEDNESS
OR OTHERWISE SEEKS BANKRUPTCY PROTECTION, THEN ITS ABILITY TO CONTRIBUTE
CAPITAL TO US UNDER THE CAPITAL CONTRIBUTION AGREEMENTS MAY BE IMPAIRED, WHICH
WOULD ADVERSELY AFFECT US.

Under a capital contribution agreement, Mirant Potomac River and Mirant
Peaker make distributions to Mirant at least once per quarter, if funds are
available. Distributions are equal to cash available after taking into account
projected cash requirements, including mandatory debt service, prepayments
permitted under the Mirant Potomac River and Mirant Peaker notes, and
maintenance reserves, as reasonably determined by Mirant. Mirant will contribute
or cause these amounts to be contributed to the Company. For the years ended
December 31, 2002 and 2001, total capital contributions received by us under
this agreement totaled $39 million and $25 million, respectively.

If, as a result of its inability to restructure a substantial portion of
its indebtedness or otherwise, Mirant seeks bankruptcy court or other protection
from its creditors, then Mirant's ability to make such contributions or cause
such contributions to be made could be adversely affected which would adversely
impact us.

OUR REVENUES AND RESULTS OF OPERATIONS DEPEND IN PART ON MARKET AND
COMPETITIVE FORCES THAT ARE BEYOND OUR CONTROL.

The market for wholesale electric energy and energy services in the PJM
market is largely deregulated. We are not guaranteed any rate of return on our
capital investments through mandated rates. To the extent that we have not sold
our energy and capacity under fixed price agreements, our revenues and results
of operations are likely to depend, in large part, upon prevailing market prices
for energy and capacity in the PJM market and other competitive markets. These
market prices may fluctuate substantially over relatively short periods of time.
Among the factors that will influence these prices, all of which are beyond our
control, are:

- prevailing market prices for fuel oil, coal and natural gas;

- the extent of additional supplies of electric energy and energy services
from our current competitors or new market entrants, including the
development of new generating facilities that may be able to produce
electricity at a lower cost than our generating facilities;

- the extended operation of nuclear generating plants in the PJM market
beyond their presently expected dates of decommissioning;

- prevailing regulations that affect the PJM market and other competitive
markets and regulations governing the independent system operators that
oversee these markets, including any price limitations and other
mechanisms to address some of the volatility or illiquidity in these
markets;

- weather conditions; and

- changes in the rate of growth in electricity usage as a result of such
factors as regional economic conditions and implementation of
conservation programs.

25

In addition, the independent system operators that oversee these markets
may impose price limitations and other mechanisms to address some of the
volatility in these markets. All of these factors could have an adverse impact
on our revenues and results of operations.

CHANGES IN COMMODITY PRICES MAY INCREASE THE COST OF PRODUCING POWER AND
DECREASE THE AMOUNT WE RECEIVE FROM SELLING POWER, RESULTING IN FINANCIAL
PERFORMANCE BELOW OUR EXPECTATIONS.

Our generation business is subject to changes in power prices and fuel
costs that may impact our financial results and financial position by increasing
the cost of producing power and decreasing the amount we receive from the sale
of power. In addition, actual power prices and fuel costs may differ from our
expectations. As a result, our financial results may not meet our expectations.

WE ARE RESPONSIBLE FOR PRICE RISK MANAGEMENT ACTIVITIES CONDUCTED BY MIRANT
AMERICAS ENERGY MARKETING FOR OUR FACILITIES.

Mirant Americas Energy Marketing engages in price risk management
activities related to our sales of electricity and purchases of fuel and we
receive the income and incur the losses from these activities. Mirant Americas
Energy Marketing may use forward contracts and derivative financial instruments,
such as futures contracts and options, to manage market risks and exposure to
fluctuating electricity, coal, oil and natural gas prices, and we bear the gains
and losses from these activities. We cannot assure you that these strategies
will be successful in managing our pricing risks, or that they will not result
in net losses to us as a result of future volatility in electricity and fuel
markets.

Commodity price variability results from many factors, including:

- weather;

- illiquid markets;

- transmission or transportation inefficiencies;

- availability of competitively priced alternative energy sources;

- demand for energy commodities;

- natural gas, crude oil and coal production;

- natural disasters, wars, embargoes and other catastrophic events; and

- federal, state and foreign energy and environmental regulation and
legislation.

Furthermore, the risk management procedures we have in place may not always
be followed or may not always operate as planned. As a result of these and other
factors, we cannot predict with precision the impact that these risk management
decisions may have on our businesses, operating results or financial position.

OUR ASSETS HAVE NOT BEEN OPERATED HISTORICALLY ON A COMPETITIVE BASIS AND WE
HAVE ONLY A LIMITED HISTORY OF OWNING OR OPERATING OUR ASSETS.

Substantially all of our business consists of operating the Mirant
Mid-Atlantic assets and the leased facilities. Although these assets had a
significant operating history prior to the time of their acquisition by us and
the owner lessors, they had all been operated as an integrated part of a
regulated utility and not on a competitive basis. Therefore, prior to their
recent acquisition by us and the owner lessors, the energy generated by these
assets had been sold by PEPCO based upon rates set by regulatory authorities
rather than market prices. In addition, we have only a limited history of owning
or operating our assets. As a result, we cannot assure you:

- that we will be successful in operating these assets in a competitive
environment in which energy rates will be set by market forces, or

26

- that these assets will perform as expected or that the revenues generated
by them will support the costs of operating them, the capital
expenditures needed to maintain them, our obligation to make rental
payments under the leases, or our ability to pay the principal amount of
and interest on our indebtedness.

In addition, the only historical financial data available about us is for
the period beginning July 12, 2000, when we were formed, and the operating
results reflected in this historical financial data only date back to December
19, 2000, when the transaction assets were acquired from PEPCO. A decrease in
revenues generated by our facilities or an increase in the costs of operating
our facilities could decrease or eliminate funds available to us to make
payments on the leases or our other obligations.

TERRORIST ATTACKS, FUTURE WAR OR RISK OF WAR MAY ADVERSELY IMPACT OUR RESULTS
OF OPERATIONS, OUR ABILITY TO RAISE CAPITAL OR OUR FUTURE GROWTH.

Uncertainty surrounding terrorist acts, retaliatory military strikes or a
sustained military campaign may impact our operations in unpredictable ways,
including changes in insurance markets, disruptions of fuel supplies and
markets, particularly oil, and the possibility that infrastructure facilities,
including electric generation, transmission and distribution facilities, could
be direct targets of, or indirect casualties of, an act of terror. War or risk
of war may also have an adverse effect on the economy. The terrorist attacks on
September 11, 2001 and the changes in the insurance markets attributable to the
terrorist attacks have made it difficult for us to obtain certain types of
insurance coverage. As a result, we have chosen to self-insure some of our
plants and facilities for acts of terrorism. A lower level of economic activity
could also result in a decline in energy consumption, which could adversely
affect our revenues or restrict our future growth. Instability in the financial
markets as a result of terrorism or war could also affect our ability to raise
capital.

OPERATION OF THE GENERATING FACILITIES INVOLVES RISKS THAT COULD NEGATIVELY
AFFECT OUR ABILITY TO MAKE LEASE PAYMENTS TO THE OWNER LESSORS, WHICH, IN TURN,
COULD NEGATIVELY AFFECT THE PASS THROUGH TRUSTEE'S ABILITY TO MAKE PAYMENTS DUE
UNDER THE CERTIFICATES.

The operation of our generating facilities involves various operating
risks, including:

- the output and efficiency levels at which those generating facilities
perform;

- interruptions in fuel supply;

- disruptions in the delivery of electricity;

- breakdown or failure of equipment (whether due to age or otherwise) or
processes;

- violation of permit requirements;

- shortages of equipment or spare parts;

- labor disputes;

- operator error;

- curtailment of operations due to transmission constraints;

- restrictions on emissions; and

- catastrophic events such as fires, explosions, floods, earthquakes or
other similar occurrences affecting power generating facilities.

27

MIRANT MAY BE UNABLE TO RETAIN PERSONNEL CAPABLE OF SUCCESSFULLY EXECUTING OUR
BUSINESS PLAN GIVEN THE UNCERTAIN BUSINESS CLIMATE FOR OUR SECTOR AND OUR
COMPANY.

If Mirant's financial position does not improve or if its financial
restructuring is unsuccessful, there is a risk that personnel who are integral
to the success of our business model will leave Mirant or the Company,
disrupting our ability to successfully achieve our short-and long-term goals.

To reduce this risk, Mirant has in place an equity-based compensation plan
and has also put in place retention agreements with key employees. These
measures are designed to provide incentives to these key employees to remain
with Mirant and the Company throughout this critical period. There can be no
assurance that these measures will be effective.

OUR CREDIT RATINGS HAVE BEEN REDUCED BY MOODY'S, FITCH AND S&P TO
NON-INVESTMENT GRADE; FURTHER REDUCTIONS COULD MATERIALLY ADVERSELY AFFECT OUR
FINANCIAL CONDITION.

As of April 25, 2003, the pass through certificates, which were reflected
as the senior secured rating of Mirant Mid-Atlantic, were rated "B2" with
Negative Outlook by Moody's, "B" on CreditWatch with negative implications by
S&P, and "BB" with a Rating Watch Negative by Fitch. While the foregoing
indicates the ratings from the various rating agencies,