MIDWEST GENERATION LLC - 10-K Annual Report

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

MIDWEST GENERATION, LLC
(Exact name of registrant as specified in its charter)

8.30% Series A Pass-Through Certificates due 2009
8.56% Series B Pass-Through Certificates due 2016
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES o NO ý

Aggregate market value of the registrant's common equity held by non-affiliates of the registrant as of June 28, 2002: $0. Number of units outstanding of the registrant's Membership Interests as of March 27, 2003: 100 units (all units held by an affiliate of the registrant).

		Page
PART I
Item 1.	Business	1
Item 2.	Properties	21
Item 3.	Legal Proceedings	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
PART II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	23
Item 6.	Selected Financial Data	24
Item 7.	Management's Discussion and Analysis of Results of Operations and Financial Condition	25
Item 7a.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 8.	Financial Statements and Supplementary Data	59
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	59
PART III
Item 10.	Managers and Executive Officers of the Registrant	92
Item 11.	Executive Compensation	93
Item 12.	Security Ownership of Certain Beneficial Owners and Management	93
Item 13.	Certain Relationships and Related Transactions	93
Item 14.	Controls and Procedures	93
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	95
	Signatures	104
	Certifications	105

Midwest Generation, LLC, which is referred to as Midwest Generation in this annual report, was formed on July 12, 1999 as a special-purpose Delaware limited liability company with Edison Mission Midwest Holdings Co. as the sole owner. Edison Mission Midwest Holdings is a wholly owned subsidiary of Midwest Generation EME, LLC, which is in turn a wholly owned subsidiary of Edison Mission Energy, which is referred to as EME in this annual report. EME is a wholly owned subsidiary of Mission Energy Holding Company, which is referred to as MEHC in this annual report, and is an indirect wholly owned subsidiary of Edison International. Midwest Generation was formed for the purpose of owning or leasing, making improvements to and operating the power generation assets it purchased from Commonwealth Edison, which are referred to as the Illinois Plants. Midwest Generation acquired these power generation assets on December 15, 1999 for a purchase price of approximately $4.9 billion, with adjustments for changes in the book value of inventories and pro-rations related to specific items, including but not limited to taxes, rents and fees. Prior to the acquisition of these power generation assets, Midwest Generation had no significant business activity.

Concurrent with the acquisition, Midwest Generation assigned its right to purchase the Collins Station, a 2,698 megawatt (MW) gas and oil-fired generating station located in Illinois, to four third-party entities. After this assignment, and the purchase of the facility by the third parties, an affiliate of Midwest Generation leased and Midwest Generation subleased the Collins Station. Each of the leases and subleases has an initial term of 33.75 years. These subleases have been accounted for as a lease financing for accounting purposes.

As of December 31, 2002, Midwest Generation had $5.6 billion of debt and lease financings, including $911 million of debt maturing in December 2003, as described in Notes 5 and 10 to the financial statements included in Part II to this annual report on Form 10-K. Midwest Generation's debt obligations to Edison Mission Overseas Co. are on terms matching those of a credit agreement between Edison Mission Midwest Holdings and commercial lenders. Midwest Generation is a guarantor of Edison Mission Midwest Holdings' obligations, which include $911 million of debt maturing in December 2003 that will need to be repaid, extended or refinanced. Edison Mission Midwest Holdings is not expected to have sufficient cash to repay the $911 million debt due in December 2003, and there is no assurance that it will be able to extend or refinance this debt obligation on similar terms and rates as the existing debt, on commercially reasonable terms, on the terms permitted under the financing documents entered into by MEHC in July 2001 or at all. Midwest Generation's independent accountants' audit opinion for the year ended December 31, 2002 contains an explanatory paragraph that indicates the financial statements included in Part II of this annual report have been prepared on the basis that Midwest Generation will continue as a going concern and that the uncertainty about Edison Mission Midwest Holdings' ability to repay, extend or refinance its obligation raises substantial doubt about Midwest Generation's ability to continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from the resolution of this uncertainty. See "—Liquidity and Capital Resources" and "—Risk Factors" in "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition."

Midwest Generation currently owns or leases approximately 9,287 MW as a result of the acquisition, consisting of the following:

In connection with the acquisition of these power generation assets, Midwest Generation entered into three five-year power purchase agreements for the coal-fired stations, the Collins Station and the peaker stations with Commonwealth Edison. Subsequently, Commonwealth Edison assigned its rights and obligations under these power purchase agreements to Exelon Generation. For the past three years, Midwest Generation derived the substantial majority of its revenue from the sale of energy and capacity to Exelon Generation under these power purchase agreements. As permitted by the power purchase agreements, Exelon Generation has released 4,548 MW of Midwest Generation's coal-fired, Collins and peaker stations from the power purchase agreements for 2003, thereby increasing the amount of Midwest Generation's energy and capacity to be sold into the wholesale market. Midwest Generation has entered into a contract with a marketing affiliate to market energy that is to be sold into the wholesale market, to engage in hedging activities, and to provide scheduling and other services. The marketing affiliate also purchases fuel, other than coal, and enters into fuel hedging arrangements on Midwest Generation's behalf.

In August 2000, Midwest Generation completed a sale-leaseback transaction with respect to the Powerton and Joliet power facilities to third-party lessors for an aggregate purchase price of $1.367 billion. In connection with this transaction, Midwest Generation facilitated the issuance of $333.5 million 8.30% Series A Pass-Through Certificates and $813.5 million 8.56% Series B Pass-Through Certificates through a private placement. In 2001, these certificates were subsequently exchanged for certificates that were registered with the Securities and Exchange Commission, and identical in all material respects to the privately held certificates, pursuant to an exchange offer.

EME, MEHC and Edison International are each registered with the Securities and Exchange Commission and have financial statements that are filed in accordance with rules enacted by the Securities and Exchange Commission. For more information regarding each of these companies, see their respective Form 10-K for the year ended December 31, 2002.

Midwest Generation's principal executive offices are located at One Financial Place, 440 South LaSalle Street, Suite 3500, Chicago, Illinois 60605, and its telephone number is (312) 583-6000.

This annual report on Form 10-K contains forward-looking statements that reflect Midwest Generation's current expectations and projections about future events based on Midwest Generation's knowledge of present facts and circumstances and assumptions about future events. Other information distributed by Midwest Generation that is incorporated in this annual report, or that refers to or incorporates this annual report, may also contain forward-looking statements. In this annual report and elsewhere, the words "expects," "believes," "anticipates," "estimates," "intends," "plans," "probable" and variations of such words and similar expressions are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ, or that otherwise could impact Midwest Generation, are:

Additional information about the risk factors listed above and other risks and uncertainties is contained throughout this annual report and in the Notes to Financial Statements and Management's Discussion and Analysis of Results of Operations and Financial Condition that appear in Part II of this annual report. Readers are urged to read this entire annual report and carefully consider the risks, uncertainties and other factors that affect Midwest Generation's business. The information contained in this annual report is subject to change without notice, and Midwest Generation is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by Midwest Generation with the Securities and Exchange Commission.

Until the enactment of the Public Utility Regulatory Policies Act of 1978, utilities and government-owned power agencies were the only producers of bulk electric power intended for sale to third parties in the United States. The Public Utility Regulatory Policies Act encouraged the development of independent power by removing regulatory constraints relating to the production and sale of electric energy by certain non-utilities and requiring electric utilities to buy electricity from certain types of non-utility power producers, known as qualifying facilities, under certain conditions. The passage of the Energy Policy Act of 1992 further encouraged the development of independent power by significantly expanding the options available to independent power producers with respect to their regulatory status and by liberalizing transmission access. As a result, a significant market for electric power produced by independent power producers, such as Midwest Generation, developed in the United States.

Beginning in the mid-1990s, industry restructuring and opening of retail markets to competition in several states led some utilities to divest generating assets, which created new opportunities for growth of independent power in the United States. In those jurisdictions that have deregulated retail markets, industry trends and regulatory initiatives resulted in a new set of market relationships in which independent generators and marketers compete with incumbent distribution utilities for sales to end-users on the basis of price, reliability and other factors. As a result of the 2000-2001 California power crisis and related volatility in wholesale markets, some states have either discontinued or delayed implementation of initiatives involving deregulation and some utilities have delayed or cancelled plans to divest their generating assets. These developments have generally not affected the progress of industry restructuring in Illinois, where Midwest Generation's power plants are located. However, as discussed further below, competition, regulatory uncertainty and lower energy prices have adversely affected independent power producers, including Midwest Generation. See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition—Current Developments."

The Collins Station is a 2,698 MW gas and oil-fired power plant located in Grundy County, near Morris, Illinois. The plant was built in 1977 and occupies approximately 3,723 acres, inclusive of a portion of Heideke Lake, the station's cooling lake. Collins Station contains five dual-fueled boilers originally fired using No. 6 fuel oil, but now capable of burning natural gas or oil. This dual fuel capacity gives Collins Station flexibility to switch between natural gas and fuel oil. Beginning in January 2003, operations at Units 4 and 5 were suspended until market conditions improve. See "Current Developments" and "Market Risk Exposures" in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" section for additional discussion of the market conditions leading up to the decision to suspend operations at Units 4 and 5.

Natural gas is procured in the monthly and daily spot markets, shipped at the seller's risk to Chicago, and then delivered to Collins Station by Nicor Gas Company under a delivery contract that runs through 2003. Nicor Gas Company manages storage inventory and purchases gas for Midwest Generation under an agency agreement that runs concurrently with the delivery contract.

The Crawford Station is a 542 MW coal-fired power plant located in Cook County, Illinois, and is within the city limits of Chicago. The original plant was built in 1925 and occupies approximately 72 acres, inclusive of the switchyard. The original generating units have been retired. Units 7 and 8 began operations in 1958 and 1961, respectively.

Southern Powder River Basin coal is loaded into barges at the Will County Station and delivered by barge via the Chicago Sanitary and Ship Canal to Crawford Station. Natural gas is used for ignition and combustion support and for full boiler operation, when desired and economical. Peoples Gas delivers natural gas under a delivery contract that includes balancing storage, which is also shared by Fisk Station.

The Fisk Station is a 326 MW coal-fired power plant located in Cook County, Illinois, and is within the city limits of Chicago. The plant is located on approximately 44 acres, inclusive of the switchyard. The operating unit is referred to as Unit 19 and began operations in 1959.

Southern Powder River Basin coal is loaded into barges at the Will County Station, delivered by barge on a "just-in-time" basis. There are no river locks and dams to prevent the timely delivery of coal. Natural gas is used for ignition and combustion support and for full boiler operation, when desired and economical. Peoples Gas delivers natural gas under a delivery contract that includes balancing storage, which is shared by the Crawford Station.

The Joliet Station is located in Joliet, Will County, Illinois, approximately 40 miles southwest of Chicago on a combined approximately 467 acre site on the Des Plaines River near Interstate 80. The operating generating units are referred to as Units 6, 7 and 8. Only Units 7 and 8 are subject to the leveraged lease transactions described in this annual report. The operation of Units 6, 7 and 8 began in 1959, 1965 and 1966, respectively. Joliet Unit 6 is a 314 MW coal-fired unit located adjacent to, but across the river from, Joliet Units 7 and 8. Joliet Units 7 and 8 are coal-fired and have a combined capacity of 1,044 MW.

The Joliet Station burns Southern Powder River Basin coal which is received by unit trains delivered by the Chicago, Central, and Pacific Railroad Company from interchange points with the Union Pacific or Burlington Northern Santa Fe Railroads. With the completion of a new rail spur, in early 2003, direct deliveries from the Union Pacific Railroad will commence. Natural gas is delivered for the boilers as a startup and stabilizing fuel by Nicor Gas Company under a delivery contract.

The Powerton Station is a 1,538 MW coal-fired station located in Pekin, Tazwell County, Illinois, approximately 16 miles southwest of Peoria or 166 miles from Chicago on an approximately 568 acre site on the Illinois River near Illinois Route 29. The site also includes an approximately 1,440 acre lake. The operating units are referred to as Units 5 and 6 and began operations in 1972 and 1975, respectively.

The Powerton Station currently burns Southern Powder River Basin coal which is received by unit trains delivered by the Illinois and Midland Railroad Company from interchange points with the Union Pacific Railroad.

The Waukegan Station is a 789 MW coal-fired power plant located in Waukegan, Lake County, Illinois, on Lake Michigan. The plant occupies approximately 194 acres, inclusive of the switchyard. The operating units are referred to as Units 6, 7 and 8 and began operations in 1952, 1958 and 1962, respectively.

Unit 6 utilizes oil for ignition and startup, while Unit 7 utilizes oil or natural gas and Unit 8 utilizes natural gas for ignition and startup. The station burns Southern Powder River Basin coal which is received by unit trains delivered by the Union Pacific Railroad.

The Will County Station is a 1,092 MW coal-fired power plant located in Romeoville, Will County, Illinois. The station is located on approximately 215 acres, inclusive of the switchyard and other coal-fired boilers. Units 1, 2, 3 and 4 began operations between 1955 and 1963. Beginning in January 2003, operations at Units 1 and 2 were suspended until market conditions improve. See "Current Developments" and "Market Risk Exposures" in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" section for additional discussion of the market conditions leading up to the decision to suspend operations at Units 1 and 2.

The Will County Station burns Southern Powder River Basin coal which is delivered in unit trains by the Elgin, Joliet & Eastern Railway Company from interchange points with the Union Pacific. Will County uses No. 2 fuel oil for ignition and combustion support, which is delivered by tanker truck to a 100,000 gallon storage tank. Will County has no natural gas service.

The on-site peaking units consist of four peaking facilities: Crawford, Fisk, Waukegan and Joliet. The on-site peaking units were commissioned in 1968, except for Joliet, which was commissioned in 1969.

The off-site peaking units consist of five peaking facilities: Calumet, Bloom, Electric Junction, Lombard and Sabrooke. The off-site peaking units were commissioned in 1969, except for Electric Junction, which was commissioned in 1970.

Both the on-site peaking units and the off-site peaking units burn either No. 2 fuel oil, No. 1 fuel oil (jet fuel) or natural gas. Natural gas is purchased in the monthly and daily spot markets and is shipped at the seller's risk to Chicago. Peoples Gas provides delivery services, including balancing storage, to the site under tariffs approved by the Illinois Commerce Commission.

Midwest Generation purchases No. 1 fuel oil and No. 2 fuel oil from bids taken annually. Shipments to the site are in tanker trucks and inventory is replenished as needed by the site. The oil price is tied to the Oil Price Information Service posted price (the market price) on the date of delivery. Truck delivery charges are at fixed agreed-upon prices.

For the past three years, Midwest Generation has derived substantially all of its revenue from the sale of energy and capacity to Exelon Generation under power purchase agreements. Midwest Generation's energy and capacity that are not purchased under power purchase agreements are generally sold at market prices to neighboring utilities, third-party electricity retailers and power marketers through a marketing affiliate.

While an independent system operator does not yet oversee operations of the Commonwealth Edison control area, a number of other utilities in the region participate in the Midwest Independent System Operator, a Regional Transmission Organization authorized pursuant to FERC Order No. 2000, and a bilateral market is already present. The regional market is supported by open access transmission under various utility company transmission tariffs, the Midwest Independent System Operator Tariff, as well as retail access electricity tariffs currently available to end use customers in many states, including Illinois and Ohio. Open access transmission tariffs and retail access tariffs allow companies which do not own transmission and distribution systems to utilize the transmission and distribution systems of others to sell power at wholesale and retail on a non-discriminatory basis relative to the system owners. Such tariffs are vital to allow companies, such as Midwest Generation, which own or control generation but not transmission and distribution systems, to compete in the deregulated electricity markets. These documents provide a uniform set of standards that have been approved by regulatory agencies and are publicly available. Both Commonwealth Edison and American Electric Power are seeking to have their control areas placed under the operation of PJM Interconnection, LLC, which is commonly known as PJM, and, if they are successful, will be subject to the PJM Tariff and Market Rules. PJM is a prominent independent system operator providing system operations and market settlement throughout the Mid-Atlantic States. Consequently, Midwest Generation's plant operations and future power sales may conform to future PJM requirements. Some of Midwest Generation's coal units may have a portion of their revenue derived from forward sales to regional utilities and power marketers. The remainder of the available coal-fired generation output, together with available output from the Collins Station and the peaking units, may be sold on a spot basis. See "—Regulatory Matters—Midwest Deregulation Status—Independent System Operator/Regional Transmission Organization" for further discussion on developing electricity markets.

During 2003, the primary markets available to Midwest Generation for wholesale sales of electricity are expected to be "wholesale customer" and "over-the-counter." Wholesale customer transactions are bilateral sales for resale to regional buyers, including investor-owned utilities, municipal utilities, rural electric cooperatives and retail energy suppliers. Wholesale customer transactions include real-time, daily and longer term structured sales; they are not arranged through brokers and may be tailored to meet the specific requirements of wholesale electricity consumers. Over-the-counter markets are generally accessed through third-party brokers and electronic exchanges, and include forward sales of electricity. The most liquid over-the-counter markets in the Midwest region are "Into Cinergy," and, to a lesser extent, "Into ComEd." Liquidity in the over-the-counter markets is lower than it has been in prior years as a consequence of the decision by many trading entities to discontinue operations and the financial problems of others resulting in far fewer creditworthy participants in these electricity markets.

"Into Cinergy" and "Into ComEd" are bilateral markets for the sale or purchase of electrical energy for future delivery. The emergence of "Into Cinergy," and "Into ComEd" as commercial hubs for the trading of physical power has not only facilitated transparency of wholesale power prices in these markets but also provides liquidity required to support risk management strategies utilized to mitigate exposure to electricity price volatility. Energy is traded in the form of physically delivered megawatt-hours. Delivery is either made (1) into the receiving control area's transmission system (i.e., Cinergy's or ComEd's transmission system) by the seller's daily election of control area interface, or (2) by procuring energy generated from a source within the receiving control area. Almost all of Midwest Generation's plants are capable of meeting the current "Into ComEd" delivery criteria. Performance of transactions in these markets is subject to contracts that generally provide for liquidated damages supported by a variety of credit requirements, which may include independent credit assessment, parental guarantees, letters of credit and cash margining arrangements. As noted, however, liquidity in all of these markets has been adversely affected by recent financial problems among trading and marketing entities.

For a discussion of the risks related to Midwest Generation's sale of electricity, see "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

On December 15, 1999, Midwest Generation entered into three separate five-year power purchase agreements with Commonwealth Edison that expire on December 31, 2004. In January 2001, Commonwealth Edison assigned these agreements to Exelon Generation. Under these agreements, Midwest Generation has agreed to make the capacity of its power generation stations available to Exelon Generation. These agreements allow Midwest Generation to sell any excess electric energy, including energy not dispatched by Exelon Generation, to other purchasers under specified conditions. Payments under these power purchase agreements constituted approximately 99% of Midwest Generation's energy and capacity revenues during all three years ended December 31, 2002, 2001 and 2000, with the balance coming from third-party sales of electric energy. As discussed in detail below, Exelon Generation has released 4,548 MW of Midwest Generation's generating capacity from the power purchase agreements for 2003. 4,739 MW of Midwest Generation's generating capacity remains subject to power purchase agreements with Exelon Generation.

Under this agreement, Exelon Generation purchases capacity and thus has the right to take from Midwest Generation energy generated by the coal-fired stations. The agreement provides for capacity payments for the units under contract, whether or not energy is generated, and for energy payments for energy generated by Midwest Generation and taken by Exelon Generation. The capacity payments provide Midwest Generation revenue for fixed charges such as debt service, labor and insurance, and the energy payment compensates Midwest Generation for variable costs of actual electricity production. Exelon Generation also compensates Midwest Generation for the cost of startups, shutdowns and some low-load operations, which are not covered by the normal energy charge rate. Midwest Generation, for its part, supplies ancillary services with respect to such units. If Exelon Generation does not request all available energy from the units under contract, Midwest Generation may sell the excess energy to third parties, subject to several conditions.

The agreement identifies the units that are contracted to Exelon Generation and for each contract year denominates them either as committed units or option units for that contract year. Committed units for each contract year remain subject to the agreement for that contract year, but Exelon Generation has the option to retain, subject to the agreement, all or part of the capacity of those units denominated as option units for a contract year. Any capacity of the option units which Exelon Generation does not elect to retain for a contract year is released from the terms of the agreement for that and subsequent contract years. The capacity of the committed units for both of 2003 and 2004 is 1,696 MW. For 2003, Exelon Generation has elected to retain 1,265 MW of the capacity of those units that were denominated as option units for that contract year. For contract year 2004, Exelon Generation has the option to terminate one or more option units by giving Midwest Generation notice of its exercise of its option by July 3, 2003.

The following table lists the committed coal units, the option units for which Exelon Generation has exercised its call option for 2003 but which may be released for 2004, and the units which, as of January 1, 2003, were released from the terms of the power purchase agreement, along with related pricing information set forth in the power purchase agreement.

The coal-fired units power purchase agreement sets forth different capacity charges for the summer months and the non-summer months. The capacity payments are based on the contracted amounts identified in the power purchase agreement and are adjusted by a factor that is in part based on the group equivalent availability factor. If the group equivalent availability factor is higher than a specified threshold, then the adjustment factor calculation provides Midwest Generation with the opportunity to increase the normal monthly capacity payment, but if the group equivalent availability factor is lower than the minimum, then Midwest Generation is penalized by a loss in the monthly capacity payment. The monthly capacity payment adjustment factor provides Midwest Generation with an incentive to maintain the individual units at high equivalent availabilities. The group equivalent availability factor required in the calculation for potentially achieving the full monthly capacity payment for the coal-fired units is 65% for the summer months and 55% for the non-summer months.

Under the Collins Station power purchase agreement, Exelon Generation purchases capacity and thus has the right to take from Midwest Generation electric energy generated by the units at the Collins Station. The agreement provides for capacity payments for the units under contract, whether or not energy is generated, and for energy payments for energy generated by Midwest Generation and taken by Exelon Generation. The capacity payments provide Midwest Generation revenue for fixed charges such as debt service, labor and insurance, and the energy payment compensates Midwest Generation for variable costs of actual electricity production. The agreement also includes the requirement that Midwest Generation supply ancillary services with respect to units under contract. Exelon Generation is obligated to dispatch and purchase a specified minimum amount of electric energy or pay an additional payment calculated under the agreement to meet this minimum purchase requirement. If Exelon Generation does not request all available energy from the units under contract, Midwest Generation may sell the excess energy to third parties, subject to several conditions.

Pursuant to the provisions of the agreement, Exelon Generation has elected to retain, for contract year 2003, 1,084 MW of capacity of the units at the Collins Station, thus releasing from the contract 1,614 MW of capacity. For contract year 2004, Exelon Generation has the option to terminate one or more option units by giving Midwest Generation notice of its exercise of its option by October 3, 2003.

The following table lists the generating units at the Collins Station for which Exelon Generation has not exercised its option to terminate for 2003 but which may be released for 2004, and the generating units which, as of January 1, 2003, were, as a result of the exercise by Exelon Generation of its option to terminate, released from the terms of the power purchase agreement, along with related pricing information set forth in the power purchase agreement.

The Collins Station power purchase agreement divides the capacity charges into summer months and non-summer months. The capacity payments are based on the contracted amounts identified in the agreement and are adjusted by a factor that is in part based on the group equivalent availability factor. With respect to all electricity purchased under the agreement, Exelon Generation is obligated to pay: a monthly capacity charge for the reserved units which varies according to the time of year; a per megawatt-hour energy charge; various charges for start-up of the reserved units; low load charges that apply at any hour in which Exelon Generation schedules a reserved unit to operate at an output below a level specified in the agreement; and an annual settlement amount to the extent natural gas prices exceed a specified amount and Exelon Generation dispatches a minimum amount of electric energy.

Under the peaking units power purchase agreement, Exelon Generation purchases capacity and thus has the right to take from Midwest Generation electric energy generated by the peaking units.

The agreement provides for capacity payments for the units under contract, whether or not energy is generated, and for energy payments for energy generated by Midwest Generation and taken by Exelon Generation. If Exelon Generation does not request all available energy from the units under contract, Midwest Generation may sell the excess energy to third parties, subject to several conditions.

Pursuant to the provisions of the agreement, Exelon Generation has elected to retain, for contract year 2003, 694 MW of capacity of the peaking units, thus releasing from the contract 250 MW of capacity. For contract year 2004, Exelon Generation has the option to terminate one or more option units by giving Midwest Generation notice of its exercise of its option by October 3, 2003.

The following table shows the peaking units as to which Exelon Generation has not exercised its option to terminate for 2003 but which may be released for 2004, and the peaking units which were, as a result of the exercise by Exelon Generation of its option to terminate, released from the terms of the power purchase agreement, along with related pricing information set forth in the power purchase agreement.

Coal is the fuel for 5,645 MW of Midwest Generation's generating capacity. The coal is purchased from several suppliers that operate mines in the Southern Powder River Basin of Wyoming. The coal is purchased under a variety of supply agreements ranging from one year to ten years in length. The total volume of coal consumed annually is approximately 15,500,000 to 16,500,000 tons.

All coal is transported under long-term transportation agreements with the Union Pacific Railroad and various delivering carriers. The coal is delivered in unit trains of 115 to 126 railcars each. As of December 31, 2002, Midwest Generation leased approximately 3,600 railcars to transport the coal from the mines to the generating stations. The railcar leases have terms that range from as short as one-and-a-half years up to seventeen years, with options to extend or purchase certain railcars at the end of the lease term. The coal is transported nearly 1,200 miles from the mines to the stations which are located in the greater Chicago metropolitan area, except for the Powerton Station, which is located near Pekin, Illinois.

Coal is delivered to two stations via chartered river barges. The coal is first delivered to the Will County Station in Romeoville, Illinois, by unit trains where it is transferred from the railcars, blended as necessary to meet station specifications, and loaded into river barges. These barges are towed by an independent contractor under a transportation agreement with Midwest Generation to the stations located inside the city limits of Chicago.

The 2,698 MW Collins Station is a gas-fired steam generating station which may also burn fuel oil. Approximately 3,000,000 barrels of usable on-site fuel oil storage exist at the station. Edison Mission Marketing & Trading, Midwest Generation's marketing affiliate, purchases the natural gas and provides price risk management services for both fuel oil and natural gas. All fuel oil purchasing is done, as necessary, by Edison Mission Energy Services, Inc., another affiliate.

Approximately 944 MW of peaking capacity in the form of simple cycle combustion turbines are located throughout the northern part of Illinois. These units are fueled with either natural gas or distillate fuel oils, depending on the specific site. The natural gas is purchased by Edison Mission Marketing & Trading. The distillate fuel oil is purchased by Edison Mission Energy Services, Inc. under annual contracts with local suppliers, and the residual fuel oil is purchased as required by generation forecasts.

See "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition—Contractual Obligations, Commitments and Contingencies," for additional discussion of contractual commitments related to Midwest Generation's fuel supply contracts.

The operating performance of the stations, based on equivalent availability factors for the years 2000 to 2002, is shown below. The equivalent availability factor, a ratio expressed as a percentage, is the number of megawatt-hours that each station is available to generate electricity divided by the product of the capacity of each station (in megawatts) and the number of hours in the period.

Facility	2000	2001	2002
Collins	86.9%	83.0%	92.5%
Crawford	82.0%	79.6%	88.1%
Fisk	93.9%	85.0%	77.4%
Joliet Unit 6	81.7%	78.5%	89.7%
Joliet Units 7 and 8	74.8%	73.1%	88.6%
Powerton	80.8%	88.8%	80.2%
Waukegan	83.7%	91.9%	79.0%
Will County	74.0%	79.4%	91.2%

Midwest Generation's operating and maintenance plan, as well as several planned overhauls of major equipment and controls, are consistent with Midwest Generation's goal of prudently operating and maintaining the units. Midwest Generation utilizes state-of-the-art computerized maintenance systems to plan and schedule all maintenance activities. Midwest Generation also employs a preventative maintenance program complemented by new predictive maintenance technologies such as lubrication analysis, thickness testing, thermography, vibration analysis and acoustic analysis. Reliability-centered maintenance techniques are currently being developed for critical systems to better define condition monitoring parameters and redefine maintenance strategies.

Station units at Joliet, Will County, Crawford, Waukegan and Fisk Stations and off-site peakers located at Electric Junction, Lombard, Calumet, Bloom and Sabrooke are connected to Commonwealth Edison's 138kV transmission system. The offsite peakers are connected via transmission substations, and the remaining units are connected through various circuit breakers and transformers. Power output from the Collins Station's units is connected to Commonwealth Edison's 765kV transmission system and 345kV transmission system. The two Joliet units subject to the lease transactions and the two Powerton units deliver their power into Commonwealth Edison's 345kV transmission system.

Midwest Generation maintains insurance coverages consistent with those normally carried by companies engaged in similar business and owning similar properties. Midwest Generation's insurance program includes all-risk property insurance, including business interruption, covering real and personal property, including losses from boilers, machinery breakdowns, and the perils of earthquake and flood, subject to specific sublimits. Midwest Generation also carries general liability insurance covering liabilities to third parties for bodily injury or property damage resulting from operations, automobile liability insurance and excess liability insurance. Further, Midwest Generation has the benefit of title insurance. Limits and deductibles in respect of these insurance policies are comparable to those carried by other electric generating facilities of similar size.

Under the terms of the power purchase agreements with Exelon Generation, Midwest Generation receives significantly higher capacity payments during June through September, the summer months. Accordingly, Midwest Generation's operating results are substantially higher during these months and lower, including expected losses, during non-summer months. In addition, Midwest Generation expects that future electric revenues will be higher in the third quarter of each year due to higher demand for electricity resulting from warmer weather in the summer months.

The Energy Policy Act of 1992 laid the groundwork for a competitive wholesale market for electricity. Among other things, the Energy Policy Act expanded the Federal Energy Regulatory Commission's authority to order electric utilities to transmit, or wheel, third-party electricity over their transmission lines, thus allowing qualifying facilities under the Public Utility Regulatory Policies Act of 1978, power marketers and those qualifying as exempt wholesale generators under the Public Utility Holding Company Act of 1935 to compete more effectively in the wholesale market.

In April 1996, the Federal Energy Regulatory Commission issued Order No. 888, also known as the Open Access Rules, which require utilities to offer eligible wholesale transmission customers non-discriminatory open access on utility transmission lines on a comparable basis to the utilities' own use of the lines. In addition, the Open Access Rules directed jurisdictional public utilities that control a substantial portion of the nation's electric transmission networks to file uniform, non-discriminatory open access tariffs containing the terms and conditions under which they would provide such open access transmission service. On March 4, 1997, the Federal Energy Regulatory Commission issued Order No. 888-A, reaffirming its basic determinations in Order No. 888, promoting wholesale competition through open access non-discriminatory transmission services by public utilities.

In December 1999, the Federal Energy Regulatory Commission issued Order No. 2000, which required all transmission-owning utilities to file by December 15, 2000, a statement of their plans with

respect to placing operating control over their transmission assets under a Regional Transmission Organization, or RTO, meeting certain criteria set forth in the Order. Although Order No. 2000 did not mandate that a utility join an RTO, it set forth various incentives for voluntary joining and required utilities to explain in detail their reasons for deviating from the objectives set forth in the Order. RTOs meeting the Commission's criteria in Order No. 2000 were required to be operationally independent of the transmission-owning utilities whose assets they controlled and to possess other essential attributes, such as regional scope and configuration, the authority to receive and rule upon requests for service, a separate tariff governing all transactions of the RTO, a market monitoring capability, and other features. In subsequent orders, the Commission has progressively tightened its policies in favor of RTO formation, including an explicit proposal that approvals of market-based rate authority for affiliates of utilities owning transmission should be tied to the utilities' placing functional control over their transmission assets in an RTO meeting the criteria of Order No. 2000. On January 15, 2003, the Federal Energy Regulatory Commission proposed to allow additional percentage points on a utility's return on equity when it participates in a RTO, divests its RTO-operated transmission assets, or pursues additional measures that promote efficient operation and expansion of the transmission grid. As outlined below, the Commission has also proposed to establish a standard market design that would govern transmission service and energy trading arrangements in all regions of the country. These and other regulatory initiatives by the Federal Energy Regulatory Commission are continuing to unfold at the present time, and it is not possible to predict how far or how fast they will go. However, the direction of regulatory policy at the Commission at the present time appears generally positive for continued progress toward competitive wholesale electricity markets.

Over the past few years, Congress has considered various pieces of legislation to restructure the electric industry which would require, among other things, customer choice, repeal of the Public Utility Holding Company Act and of the Public Utility Regulatory Policies Act. In January 2001, President Bush appointed a Cabinet level task force, headed by Vice President Cheney, to examine long-term energy policy. The task force was prompted in part by the California power crisis and its potential effect on neighboring states and other parts of the U.S. economy. The task force has issued reports that form the basis for the Bush administration's energy legislative proposals. There are also a number of other proposals that have been introduced in Congress that incorporate provisions related to restructuring electricity markets. It is unclear at this time which proposals, if any, will be enacted, and what the effects will be.

The Energy Policy Act did not preempt state authority to regulate retail electric service. Historically, in most states, competition for retail customers is limited by statutes or regulations granting existing electric utilities exclusive retail franchises and service territories. Since the passage of the Energy Policy Act, the advisability of retail competition has been the subject of intense debate in federal and state legislative and regulatory forums. Many states have taken steps to facilitate retail competition as a means to stimulate competitive generation rates. Retail competition in Illinois commenced on October 1, 1999 for mostly large commercial and industrial customers, and full access, for all residential customers, occurred by May 1, 2002.

Federal laws and regulations govern, among other things, transactions by and with purchasers of power, including utility companies, the operations of a power plant and the ownership of a power plant. Under limited circumstances where exclusive federal jurisdiction is not applicable or specific exemptions or waivers from state or federal laws or regulations are otherwise unavailable, federal and/or state utility regulatory commissions may have broad jurisdiction over non-utility owned electric power plants.

Energy-producing projects are also subject to federal, state and local laws and regulations that govern the geographical location, zoning, land use and operation of a project. Federal, state and local environmental requirements generally require that a wide variety of permits and other approvals be obtained before the commencement of construction or operation of an energy-producing facility and that the facility then operate in compliance with these permits and approvals.

Midwest Generation is subject to a varied and complex body of laws and regulations that are in a state of flux and which both public officials and private parties may seek to enforce. Intricate and changing environmental and other regulatory requirements may necessitate substantial expenditures and may create a significant risk of expensive delays or significant loss of value in a power plant if it is unable to function as planned due to changing requirements or local opposition.

State public utility commissions have broad jurisdiction over non-qualifying facility independent power projects, including exempt wholesale generators, which are considered public utilities in many states. This jurisdiction often includes the issuance of certificates of public convenience and necessity and/or other certifications to construct, own and operate a facility, engage in retail energy sales, as well as the regulation of organizational, accounting, financial and other corporate matters on an ongoing basis.

Some states that have restructured their electric industries require generators to register to provide electric service to customers. Many states are currently undergoing significant changes in their electric statutory and regulatory frameworks that result from restructuring the electric industries that may affect generators in those states. Although the Federal Energy Regulatory Commission generally has exclusive jurisdiction over the rates charged by a non-qualifying facility independent power project to its wholesale customers, a state's public utility commission has the ability, in practice, to influence the establishment of these rates by asserting jurisdiction over a purchasing utility's ability to pass the resulting cost of purchased power through to its retail customers. In addition, states may assert jurisdiction over the siting and construction of independent power projects and, among other things, the issuance of securities, related party transactions and the sale or other transfer of assets by these facilities. The actual scope of jurisdiction over independent power projects by state public utility commissions varies from state to state.

Although state public utility commissions do not have any jurisdiction to modify the terms of wholesale power sales, Midwest Generation cannot provide assurance that its power sales contracts will not be subject to adverse consequences as a result of regulatory actions by a state commission even though it sells power exclusively at wholesale.

In December 1997, the Governor of Illinois signed into law the Electric Service Customer Choice and Rate Relief Law of 1997. Midwest Generation refers to this law as the Illinois Electric Law. The Illinois Electric Law required electric utilities to file delivery services implementation plans for non-residential retail customers no later than March 1, 1999 and for residential customers no later than August 1, 2001 and allowed utilities to recover the costs associated with the provision of delivery services. The Illinois Electric Law also required the Illinois Commerce Commission to adopt reliability rules for the transmission and distribution systems of Illinois utilities. These rules have been adopted and include reporting and penalty provisions that apply to Commonwealth Edison.

Illinois' transition to retail electric competition was conducted in phases with approximately one-third of non-residential customers having had the opportunity to purchase electricity from

alternative retail electric suppliers or electric utilities serving retail customers outside their service areas, effective October 1, 1999. Choice of suppliers is now available to all non-residential customers, and the retail market for residential electric customers was opened to competition on May 1, 2002. Currently, there are no alternative retail electric suppliers certified to sell electricity to residential customers in Illinois. Alternative retail electric suppliers include any person or company, other than an Illinois electric utility, that sells electricity to one or more retail electric customers in Illinois.

During the transition to full open access, customers that switch to alternative retail electric suppliers or electric utilities serving retail customers outside their service areas may be required to pay transition charges, also known as "stranded cost" charges, to compensate the utilities that previously supplied these customers for past investments, including investments in generating plants. The Illinois Electric Law calls for these transition charges to end no later than December 31, 2006, although some utilities may petition the Illinois Commerce Commission to extend the period for collection of transition charges until December 31, 2008.

The Illinois Electric Law provides that each Illinois electric utility that owns or controls transmission facilities or provides transmission services in Illinois, and is a member in the Mid-American Interconnected Network, shall submit for approval to the Federal Energy Regulatory Commission an application for establishing or joining an independent system operator. On December 11,

Delaware (State or other jurisdiction of incorporation or organization)		33-0868558 (I.R.S. Employer Identification No.)
One Financial Place 440 South LaSalle Street, Suite 3500 Chicago, Illinois (Address of principal executive offices)		60605 (Zip Code)
Registrant's telephone number, including area code: (312) 583-6000
Securities registered pursuant to Section 12(b) of the Act:
None (Title of Class)		Not Applicable (name of each exchange on which registered)

			Summer(1) Capacity Charge ($ per MW Month)		Non-Summer(1) Capacity Charge ($ per MW Month)		Energy Prices ($/MWhr)
Generating Unit		Unit Size (MW)	Summer(1) Capacity Charge ($ per MW Month)		Non-Summer(1) Capacity Charge ($ per MW Month)		Energy Prices ($/MWhr)
Generating Unit		Unit Size (MW)	2003	2004	2003	2004	2003	2004
Committed Units
	Waukegan Unit 7	328	11,000	11,000	1,375	1,375	17.0	17.0
	Crawford Unit 8	326	11,000	11,000	1,375	1,375	17.0	17.0
	Will County Unit 4	520	11,000	11,000	1,375	1,375	17.0	17.0
	Joliet Unit 8	522	11,000	11,000	1,375	1,375	17.0	17.0

		1,696
Option Units(2)
	Waukegan Unit 6	100	21,300	21,300	2,663	2,663	20.0	20.0
	Waukegan Unit 8	361	21,300	21,300	2,663	2,663	20.0	20.0
	Fisk Unit 19	326	21,300	21,300	2,663	2,663	20.0	20.0
	Crawford Unit 7	216	21,300	21,300	2,663	2,663	20.0	20.0
	Will County Unit 3	262	21,300	21,300	2,663	2,663	20.0	20.0

		1,265
Released Units(3)
	Will County Unit 1(4)	156
	Will County Unit 2(4)	154
	Joliet Unit 6	314
	Joliet Unit 7	522
	Powerton Unit 5	769
	Powerton Unit 6	769

		2,684

		5,645

			Summer(1) Capacity Charge ($ per MW Month)		Non-Summer(1) Capacity Charge ($ per MW Month)		Energy Prices ($/MWhr)
Generating Unit		Unit Size (MW)	Summer(1) Capacity Charge ($ per MW Month)		Non-Summer(1) Capacity Charge ($ per MW Month)		Energy Prices ($/MWhr)
Generating Unit		Unit Size (MW)	2003	2004	2003	2004	2003	2004
Option Units(2)
	Collins Unit 1	554	8,333	8,333	2,083	2,083	33	34
	Collins Unit 3	530	8,333	8,333	2,083	2,083	33	34

		1,084
Released Units(3)
	Collins Unit 2	554
	Collins Unit 4(4)	530
	Collins Unit 5(4)	530

		1,614

		2,698

		Summer(1) Capacity Charge ($ per MW Month)		Non-Summer(1) Capacity Charge ($ per MW Month)		Energy Prices ($/MWhr)
Generating Unit	Unit Size (MW)	Summer(1) Capacity Charge ($ per MW Month)		Non-Summer(1) Capacity Charge ($ per MW Month)		Energy Prices ($/MWhr)
Generating Unit	Unit Size (MW)	2003	2004	2003	2004	2003	2004
Option Units(2)	694	9,500	9,500	1,500	1,500	55-90	60-95
Released Units(3)	250

	944