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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PART IV

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission File Number 333-59348



Midwest Generation, LLC
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation
or organization)
  33-0868558
(I.R.S. Employer Identification No.)

235 Remington Boulevard, Suite A
Bolingbrook, Illinois
(Address of principal executive offices)

 


60440
(Zip Code)

Registrant's telephone number, including area code: (630) 771-7800

Securities registered pursuant to Section 12(b) of the Act:

None   Not Applicable
(Title of Class)   (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

    None     
    (Title of Class)    



        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý

        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 ý.

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý   Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý

        Aggregate market value of the registrant's Membership Interests held by non-affiliates of the registrant as of June 30, 2010: $0. Number of units outstanding of the registrant's Membership Interests as of February 28, 2011: 100 units (all units held by an affiliate of the registrant).

        The registrant meets the conditions set forth in General Instruction I.(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K under the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE

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TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

  1

GLOSSARY

 
3

PART I

 
4

ITEM 1. BUSINESS

 
4
 

Overview

 
4
   

Location and Available Information

  4
 

Description of the Industry

 
5
   

Electric Power Industry

  5
   

Wholesale Markets

  5
   

Competition

  6
 

Overview of Facilities

 
6
   

The Crawford Station

  6
   

The Fisk Station

  6
   

The Joliet Station

  6
   

The Powerton Station

  7
   

The Waukegan Station

  7
   

The Will County Station

  7
   

On-Site Peaking Facilities

  7
 

Transmission

 
7
 

Significant Customers

 
7
 

Fuel Supply

 
8
   

Emission Allowances

  8
 

Insurance

 
8
 

Seasonality

 
9
 

Regulatory Matters

 
9
   

General

  9
   

Federal Power Act

  9
   

Reliability Standards

  10
   

Transmission of Wholesale Power

  10
   

Dodd-Frank Act

  10
 

Environmental Matters and Regulations

 
10
   

Climate Change

  11
     

Federal Legislative/Regulatory Developments

  11
     

Regional Initiatives

  12
     

Litigation Developments

  12
   

Air Quality

  12
     

Nitrogen Oxide and Sulfur Dioxide

  13
       

Clean Air Interstate and Transport Rules

  13
       

Proposed NAAQS for SO2

  14
       

Illinois

  14
     

Mercury/Hazardous Air Pollutants

  15
       

Clean Air Mercury Rule/Hazardous Air Pollutant Regulations

  15
       

Illinois

  15
     

Ozone and Particulates

  16

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National Ambient Air Quality Standards

  16
       

Illinois

  16
     

Regional Haze

  16
     

New Source Review Requirements

  17
   

Water Quality

  17
     

Clean Water Act

  17
   

Coal Combustion Wastes

  17
 

Employees

  18

ITEM 1A. RISK FACTORS

 
18
 

Regulatory and Environmental Risks

 
18
 

Market Risks

 
20
 

Liquidity Risks

 
21
 

Operating Risks

 
22

ITEM 1B. UNRESOLVED STAFF COMMENTS

 
23

ITEM 2. PROPERTIES

 
23
 

Description of Properties

 
24

ITEM 3. LEGAL PROCEEDINGS

 
24

ITEM 4. RESERVED

 
24

PART II

 
25

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 
25

ITEM 6. SELECTED FINANCIAL DATA

 
26

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

 
27
 

MANAGEMENT'S OVERVIEW

 
27
 

Highlights of Operating Results

 
27
 

Environmental Developments

 
28
   

Environmental Compliance Plans and Costs

  28
   

US EPA Developments

  29
 

Liquidity

 
29
 

RESULTS OF OPERATIONS

 
30
 

Summary

 
30
   

Statistical Definitions and Reconciliation of Non-GAAP Disclosures

  30
 

Operating Revenues

 
32
 

Operating Expenses

 
33
 

Other Income (Expense)

 
34
 

Provision For Income Taxes

 
34
 

Related-Party Transactions

 
34
 

New Accounting Guidance

 
34
 

LIQUIDITY AND CAPITAL RESOURCES

 
35

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Available Liquidity

  35
   

Bonus Depreciation Impact

  35
 

Consolidated Cash Flow

 
35
 

Capital Expenditures

 
36
 

Credit Facility and Other Covenants

 
36
 

Equity Distributions and Tax Payments

 
37
 

Powerton-Joliet Lease Payments

 
37
 

Credit Ratings

 
38
   

Overview

  38
   

Credit Rating of EMMT

  38
 

Contractual Obligations, Commercial Commitments and Contingencies

 
39
   

Contingencies

  39
 

Off-Balance Sheet Transactions

 
39
 

MARKET RISK EXPOSURES

 
40
 

Introduction

 
40
 

Derivative Instruments

 
40
   

Unrealized Gains and Losses

  40
   

Fair Value Disclosures

  40
 

Commodity Price Risk

 
41
   

Introduction

  41
   

Energy Price Risk

  41
   

Capacity Price Risk

  42
   

Basis Risk

  43
   

Coal and Transportation Price Risk

  44
   

Emission Allowances Price Risk

  44
 

Credit Risk

 
45
 

Interest Rate Risk

 
45
 

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 
46
 

Introduction

 
46
 

Derivatives

 
46
 

Impairment of Long-Lived Assets

 
47
   

Application to Merchant Coal-Fired Power Plants

  48
 

Accounting for Contingencies, Guarantees and Indemnities

 
49
 

Income Taxes

 
49

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 
50

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
51

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 
51

ITEM 9A. CONTROLS AND PROCEDURES

 
51
 

Disclosure Controls and Procedures

 
51
 

Management's Report on Internal Control over Financial Reporting

 
51

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Internal Control over Financial Reporting

  51

ITEM 9B. OTHER INFORMATION

 
52

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
53

CONSOLIDATED STATEMENTS OF INCOME

  54

CONSOLIDATED BALANCE SHEETS

  55

CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY

  56

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  57

CONSOLIDATED STATEMENTS OF CASH FLOWS

  58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
59
 

Note 1. Summary of Significant Accounting Policies

 
59
   

Basis of Presentation

  59
   

Cash Equivalents

  59
   

Derivative Instruments and Hedging Activities

  60
   

Deferred Financing Costs

  60
   

Impairment of Long-Lived Assets

  60
   

Income Taxes and Tax-Allocation Agreements

  60
   

Intangible Assets

  61
   

Inventory

  61
   

New Accounting Guidance

  61
     

Accounting Guidance Adopted in 2010

  61
       

Fair Value Measurements and Disclosures

  61
     

Accounting Guidance Not Yet Adopted

  62
   

Property, Plant and Equipment

  62
   

Restricted Deposits

  63
   

Revenue Recognition

  63
 

Note 2. Property, Plant and Equipment

 
63
   

Asset Retirement Obligations

  64
 

Note 3. Fair Value Measurements

 
65
   

Valuation Techniques used to Determine Fair Value

  66
     

Level 1

  66
     

Level 2

  66
     

Level 3

  67
 

Note 4. Long-Term Debt

 
67
   

Credit Facility

  67
   

Other Covenants

  68
 

Note 5. Derivative Instruments and Hedging Activities

 
68
   

Notional Volumes of Derivative Instruments

  69
   

Fair Value of Derivative Instruments

  70
   

Income Statement Impact of Derivative Instruments

  70
   

Contingent Features

  71
   

Collateral Deposits

  72
   

Commodity Price Risk Management

  72
   

Credit Risk

  72
 

Note 6. Income Taxes

 
74
   

Current and Deferred Taxes

  74
   

Effective Tax Rate

  75
   

Accounting for Uncertainty in Income Taxes

  75
     

Unrecognized Tax Benefits

  75

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Accrued Interest and Penalties

  76
 

Note 7. Compensation and Benefit Plans

 
76
   

Employee Savings Plan

  76
   

Pension Plans and Postretirement Benefits Other Than Pensions

  76
     

Pension Plans

  76
     

Postretirement Benefits Other Than Pensions

  79
   

Discount Rate

  82
   

Plan Assets

  82
     

Description of Pension and Postretirement Benefits Other Than Pensions Investment Strategies

  82
     

Determination of the Expected Long-Term Rate of Return on Assets

  83
     

Capital Markets Return Forecasts

  83
     

Fair Value of Plan Assets

  83
       

Pension Plan

  84
 

Note 8. Commitments and Contingencies

 
86
   

Lease Commitments

  86
     

Powerton-Joliet Facilities Sale-Leaseback

  87
   

Other Commitments

  87
     

Fuel Supply Contracts

  87
     

Coal Transportation Agreements

  88
     

Capital Expenditures

  88
     

Other Contractual Obligations

  88
   

Interconnection Agreement

  88
   

Guarantees and Indemnities

  88
     

Tax Indemnity Agreements

  88
     

Environmental Indemnities Related to the Midwest Generation Plants

  89
   

Contingencies

  90
     

Environmental Remediation

  90
     

New Source Review Lawsuit

  90
   

Insurance

  91
 

Note 9. Environmental Developments

 
91
   

Environmental Compliance Plans and Costs

  91
   

Greenhouse Gas Regulation

  92
   

Transport Rule

  93
   

Hazardous Air Pollutant Regulations

  93
   

Water Quality

  93
     

Clean Water Act

  93
   

Coal Combustion Wastes

  94
 

Note 10. Accumulated Other Comprehensive Income (Loss)

 
94
 

Note 11. Supplemental Cash Flows Information

 
95
 

Note 12. Related-Party Transactions

 
95
   

EMMT Agreements

  95
   

Notes Receivable from EME

  95
   

Services Agreements with EME and Edison International

  96
   

Agreements with Midwest Generation EME, LLC

  96
     

Management and Administration Agreement

  96
     

Support Services Agreement

  96
 

Note 13. Quarterly Financial Data (unaudited)

 
97

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FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements 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 and include any statement that does not directly relate to a historical or current fact. 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," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should," and variations of such words and similar expressions, or discussions of strategy or plans, 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 from those currently expected, or that otherwise could impact Midwest Generation, include but are not limited to:

Midwest Generation's ability to borrow funds and access the capital markets on reasonable terms;

environmental laws and regulations, at both state and federal levels, or changes in the application of those laws, that could require additional expenditures or otherwise affect Midwest Generation's cost and manner of doing business;

supply and demand for electric capacity and energy, and the resulting prices and dispatch volumes, in the wholesale markets to which Midwest Generation's generating units have access;

the cost and availability of fuel, sorbents, and other commodities used for power generation and emission controls, and of related transportation services;

the cost and availability of emission credits or allowances;

transmission congestion in and to each market area and the resulting differences in prices between delivery points;

the difficulty of predicting wholesale prices, transmission congestion, energy demand, and other aspects of the complex and volatile markets in which Midwest Generation participates;

the availability and creditworthiness of counterparties, and the resulting effects on liquidity in the power and fuel markets in which Midwest Generation operates and/or the ability of counterparties to pay amounts owed in excess of collateral provided in support of their obligations;

governmental, statutory, regulatory or administrative changes or initiatives affecting Midwest Generation or the electricity industry generally, including market structure rules and price mitigation strategies adopted by independent system operators and regional transmission organizations;

market volatility and other market conditions that could increase Midwest Generation's obligations to post collateral beyond the amounts currently expected, and the potential

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    effect of such conditions on the ability of Midwest Generation to provide sufficient collateral in support of its hedging activities and purchases of fuel;

weather conditions, natural disasters and other unforeseen events;

the extent of additional supplies of capacity, energy and ancillary services from current competitors or new market entrants, including the development of new generation facilities, and technologies that may be able to produce electricity at a lower cost than Midwest Generation's generating facilities and/or increased access by competitors to Midwest Generation's markets as a result of transmission upgrades;

operating risks, including equipment failure, availability, heat rate, output, costs of repairs and retrofits, and availability and cost of spare parts;

creditworthiness of suppliers and their ability to deliver goods and services under their contractual obligations to Midwest Generation or to pay damages if they fail to fulfill those obligations;

effects of legal proceedings, including the New Source Review lawsuit discussed in this annual report, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards; and

general political, economic and business conditions.

Certain of the risk factors listed above are discussed in more detail in "Item 1A. Risk Factors" and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures." Additional information about the risk factors listed above and other risks and uncertainties is contained throughout this annual report. Readers are urged to read this entire annual report, including the information incorporated by reference, and carefully consider the risks, uncertainties and other factors that affect Midwest Generation's business. Forward-looking statements speak only as of the date they are made, 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.

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GLOSSARY

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

 
ARO(s)   asset retirement obligation(s)
BART   best available retrofit technology
bcf   billion cubic feet
Btu   British thermal units
CAA   Clean Air Act
CAIR   Clean Air Interstate Rule
CAMR   Clean Air Mercury Rule
CO2   carbon dioxide
Commonwealth Edison   Commonwealth Edison Company
CPS   Combined Pollutant Standard
EME   Edison Mission Energy
EMMT   Edison Mission Marketing & Trading, Inc.
FASB   Financial Accounting Standards Board
FERC   Federal Energy Regulatory Commission
GAAP   United States generally accepted accounting principles
GHG   greenhouse gas
GWh   gigawatt-hours
HAP(s)   hazardous air pollutant(s)
Illinois EPA   Illinois Environmental Protection Agency
ISO(s)   independent system operator(s)
kV   kilovolt
Lehman Brothers   Lehman Brothers Commodity Services, Inc. (filed for bankruptcy on October 3, 2008) and Lehman Brothers Holdings, Inc. (filed for bankruptcy on September 15, 2008)
LIBOR   London Interbank Offered Rate
Midwest Generation   Midwest Generation, LLC
MMBtu   million British thermal units
MW   megawatts
MWh   megawatt-hours
NAAQS   National Ambient Air Quality Standard(s)
NERC   North American Electric Reliability Corporation
NOX   nitrogen oxide
NSR   New Source Review
PJM   PJM Interconnection, LLC
PRB   Powder River Basin
PSD   Prevention of Significant Deterioration
RPM   Reliability Pricing Model
RTO(s)   regional transmission organization(s)
SIP(s)   state implementation plan(s)
SNCR   selective non-catalytic reduction
SO2   sulfur dioxide
Transport Rule   Clean Air Transport Rule
US EPA   United States Environmental Protection Agency
 

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PART I

ITEM 1.  BUSINESS

Overview

Midwest Generation was formed on July 12, 1999 as a 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 EME. EME 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 and selling the capacity and energy of, the power generation assets it purchased from Commonwealth Edison, which are referred to as the Midwest Generation plants. Midwest Generation acquired the Midwest Generation plants on December 15, 1999.

As of December 31, 2010, Midwest Generation operated 5,477 MW of power plants, based on installed capacity acknowledged by PJM, consisting of:

six coal-fired generating plants consisting of 5,172 MW, which include the Powerton, Joliet, Will County, Waukegan, Crawford and Fisk Stations; and

the Fisk and Waukegan on-site, oil-fired generating peakers consisting of 305 MW.

Midwest Generation is a party to a contract with EMMT, an EME subsidiary engaged in asset management and trading activities, under which EMMT sells energy and capacity from the Midwest Generation plants into the wholesale market, engages in hedging activities and provides scheduling and other services. Midwest Generation is also a party to a revolving credit agreement with EMMT under which it can make revolving loans to, or have letters of credit issued on behalf of, EMMT in order to provide credit support for forward contracts. EMMT has the ability to enter 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 lessor debt of $1.147 billion in Pass-Through Certificates which were registered with the Securities and Exchange Commission.


Location and Available Information

Midwest Generation's principal executive offices are located at 235 Remington Boulevard, Suite A, Bolingbrook, Illinois 60440, and its telephone number is (630) 771-7800.

Midwest Generation's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, are electronically filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and are available on the Securities and Exchange Commission's internet web site at http://www.sec.gov.

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EME files separately an Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. Such reports are available on the Securities and Exchange Commission's internet website at http://www.sec.gov.


Description of the Industry

Electric Power Industry

The United States electric industry, including companies engaged in providing generation, transmission, distribution and retail sales and service of electric power, has undergone significant deregulation over the last three decades, which has led to increased competition, especially in the generation sector. See further discussion of regulations under "Regulatory Matters."

In areas where ISOs and RTOs have been formed, market participants have open access to transmission service typically at a system-wide rate. ISOs and RTOs may also operate real-time and day-ahead energy and ancillary service markets, which are governed by FERC-approved tariffs and market rules. The development of such organized markets into which independent power producers are able to sell has reduced their dependence on bilateral contracts with electric utilities. In addition, capacity markets in various regional wholesale power markets compensate supply resources for the capability to supply electricity when needed, and demand resources for the electricity they avoid using.


Wholesale Markets

Energy and capacity from the Midwest Generation plants are sold under terms, including price, duration and quantity, arranged by EMMT with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Thus, Midwest Generation is subject to market risks related to the price of energy and capacity from the Midwest Generation plants. Power generated at the Midwest Generation plants is primarily sold into PJM, an RTO which includes all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Sales may also be made from PJM into the Midwest Independent Transmission System Operator (MISO) RTO, which includes all or parts of Illinois, Wisconsin, Indiana, Michigan, Ohio, and other states in the region.

PJM operates a wholesale spot energy market and determines the market-clearing price for each hour based on bids submitted by participating generators indicating the minimum prices at which a bidder is willing to dispatch energy at various incremental generation levels. PJM requires all load-serving entities and generators, such as Midwest Generation, to maintain prescribed levels of capacity, including a reserve margin, to ensure system reliability. PJM's capacity markets have a single market-clearing price for each capacity zone. In May of every year, PJM conducts an annual capacity auction (RPM) to commit generation, energy efficiency, and demand side resources three years forward, and to provide a long-term pricing signal for capacity resources.

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Competition

Midwest Generation is subject to competition from energy marketers, public utilities, government-owned power agencies, industrial companies, financial institutions, and other independent power producers. These companies may have competitive advantages as a result of scale, the location of their generation facilities or other factors. Some of Midwest Generation's competitors have a lower cost of capital than most independent power producers and, in the case of utilities, are often able to recover fixed costs through rate base mechanisms, allowing them to build, buy and upgrade generation without relying exclusively on market clearing prices to recover their investments.

State and local environmental regulations, particularly those that impose stringent state specific emission limits, could put the Midwest Generation plants at a disadvantage compared with competing power plants operating in nearby states and subject to less stringent state emission limits or to federal emission limits alone, and the CPS could put these plants at a disadvantage compared with competing plants not subject to similar regulations. Potential future climate change regulations could also put Midwest Generation's coal-fired plants at a disadvantage compared to both power plants utilizing other fuels and utilities that may be able to recover climate change compliance costs through rate-base mechanisms. In addition, the ability of these plants to compete may be affected by governmental and regulatory activities designed to support the construction and operation of power generation facilities fueled by renewable energy sources.


Overview of Facilities

The Crawford Station

The Crawford Station is a 532 MW coal-fired power plant located in Cook County, Illinois, and is within the city limits of Chicago. The Crawford Station occupies approximately 72 acres, inclusive of the switchyard. The operating units are referred to as Units 7 and 8 and began operations in 1958 and 1961, respectively.


The 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 Fisk Station is located on approximately 44 acres, inclusive of the switchyard. The operating unit comprising the Fisk Station is referred to as Unit 19 and began operations in 1959.


The Joliet Station

The Joliet Station is located in Joliet, Will County, Illinois, approximately 40 miles southwest of Chicago on an approximately 467-acre site. The operating units comprising the Joliet Station are referred to as Units 6, 7 and 8. Only Units 7 and 8 are subject to the sale-leaseback transaction 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 290 MW coal-fired unit located adjacent to, but across the Des Plaines River from, Joliet Units 7 and 8. Joliet Units 7 and 8 are coal-fired and have a combined capacity of 1,036 MW.

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The Powerton Station

The Powerton Station is a 1,538 MW coal-fired station located in Pekin, Tazwell County, Illinois on an approximately 568-acre site. The Powerton Station is subject to the sale-leaseback transaction described in this annual report. The site also includes an approximately 1,440-acre lake. The operating units comprising the Powerton Station are referred to as Units 5 and 6 and began operations in 1972 and 1975, respectively.


The Waukegan Station

The Waukegan Station is a 689 MW coal-fired power plant located in Waukegan, Lake County, Illinois, on Lake Michigan. The Waukegan Station occupies approximately 194 acres, inclusive of the switchyard. The operating units comprising the Waukegan Station are referred to as Units 7 and 8 and began operations in 1958 and 1962, respectively. Midwest Generation shut down permanently Unit 6, representing 100 MW of capacity, on December 21, 2007.


The Will County Station

The Will County Station is a 761 MW coal-fired power plant located in Romeoville, Will County, Illinois. The Will County Station is located on approximately 215 acres, inclusive of the switchyard. The operating units comprising the Will County Station are referred to as Units 3 and 4 and began operations between 1955 and 1963. Midwest Generation shut down permanently Units 1 and 2 representing 299 MW of capacity, on December 29, 2010.


On-Site Peaking Facilities

The on-site peaking units consist of 305 MW at Fisk and Waukegan, which were commissioned in 1968. The Fisk and Waukegan peaking units burn fuel oil. Natural gas is used by the Fisk peaking unit for ignition. 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.


Transmission

Station units at Will County, Crawford, Waukegan, and Joliet Unit 6 are connected to Commonwealth Edison's 138 kV transmission systems. The Fisk Station is connected via various circuit breakers and transformers to transmission substations. The Joliet Units 7 and 8, subject to the sale-leaseback transaction described in this annual report, and the two Powerton units deliver their power into Commonwealth Edison's 345 kV transmission system. The Midwest Generation plants are generally dispatched into the PJM market, and sales may also be made from PJM into the MISO.


Significant Customers

For a discussion of significant customers, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 5. Derivative Instruments and Hedging Activities—Credit Risk."

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Fuel Supply

The Midwest Generation plants purchase coal from several suppliers located in the Southern PRB of Wyoming. The total volume of coal consumed annually is largely dependent on the amount of generation and ranges between 17.5 million to 19.5 million tons. Coal is transported under long-term transportation agreements with Union Pacific Railroad and various short-haul carriers. Midwest Generation's long-term rail transportation contract with Union Pacific Railroad expires at the end of 2011. For additional information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Commodity Price Risk—Coal and Transportation Price Risk." As of December 31, 2010, Midwest Generation leased approximately 3,900 railcars to transport the coal from the mines to the generating stations, and the leases have remaining terms that range from less than one year to nine years, with options to extend the leases or purchase some railcars at the end of the lease terms.

Coal for the Fisk and Crawford Stations is typically shipped by rail to the Will County Station where it is transferred from the railcars, blended as necessary to meet station specifications, and loaded into river barges. These barges are towed to the stations by an independent contractor under a transportation agreement with Midwest Generation. Occasionally, third-party transloading facilities are utilized.


Emission Allowances

The federal Acid Rain Program requires electric generating stations to hold SO2 allowances sufficient to cover their annual emissions. Pursuant to Illinois' implementation of the CAIR, the Midwest Generation plants are required to hold seasonal and annual NOx allowances. As part of the acquisition of the Midwest Generation plants, Midwest Generation obtained emission allowance rights that have been or are allocated to these facilities. Midwest Generation purchases (or sells) emission allowances based on the amounts required for actual generation in excess of (or less than) the amounts allocated under these programs. Future regulations, including the Transport Rule, may impact future emission allowance allocations and may require Midwest Generation to purchase additional allowances in amounts that could be significant.


Insurance

Midwest Generation maintains insurance policies 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 boiler or 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. Limits and deductibles in respect of these insurance policies are comparable to those carried by other electric generating facilities of similar size. No assurance can be given that Midwest Generation's insurance will be adequate to cover all losses.

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Seasonality

Due to fluctuations in electric demand resulting from warm weather during the summer months and cold weather during the winter months, electric revenues from the Midwest Generation plants normally vary substantially on a seasonal basis. In addition, maintenance outages generally are scheduled during periods of lower projected electric demand (spring and fall), further reducing generation and increasing major maintenance costs which are recorded as an expense when incurred. Accordingly, earnings from the Midwest Generation plants are seasonal and have significant variability from quarter to quarter. Seasonal fluctuations may also be affected by changes in market prices. For further discussion regarding market prices, see "Market Risk Exposures—Commodity Price Risk—Energy Price Risk."


Regulatory Matters

General

Midwest Generation's operations are subject to extensive regulation. Midwest Generation is subject to energy, environmental and other governmental laws and regulations at the federal, state and local levels in connection with the ownership and operation of the Midwest Generation plants, and the use of electric energy, capacity and related products, including ancillary services, from those facilities. In addition, Midwest Generation is subject to the market rules, procedures, and protocols of the markets in which it participates.


Federal Power Act

The FERC has exclusive jurisdiction over the rates, terms and conditions of wholesale sales of electricity and transmission services in interstate commerce (other than transmission that is "bundled" with retail sales), including ongoing, as well as initial, rate jurisdiction. Rates may be based on a cost-of-service approach or, in geographic and product markets determined by the FERC to be workably competitive, may be market based. Previously approved rates may also be revoked or modified by the FERC after notice and opportunity for hearing.

The FERC also has jurisdiction over the sale or transfer of specified assets, including wholesale power sales contracts and generation facilities and, in some cases, jurisdiction over the issuance of securities or the assumption of specified liabilities and some interlocking directorates. Dispositions of Midwest Generation's jurisdictional assets and certain types of financing arrangements may require FERC approval.

Midwest Generation, an exempt wholesale generator (EWG), is subject to the FERC's ratemaking jurisdiction under the Federal Power Act, but has been authorized to sell power at market-based rates to purchasers which are not affiliated electric utility companies as long as the absence of market power is shown. If Midwest Generation were to lose its EWG status, defaults under the covenants in Midwest Generation's agreements could be triggered.

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Reliability Standards

NERC establishes and enforces reliability standards for the bulk power system. Midwest Generation believes it has taken appropriate steps to be compliant with current NERC reliability standards that apply to its operations.


Transmission of Wholesale Power

Midwest Generation utilizes power lines owned by others for the transmission of electricity. The prices and other terms and conditions of transmission contracts are regulated by the FERC when the entity providing the transmission service is subject to FERC jurisdiction.


Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") provides the Commodity Futures Trading Commission and the Securities and Exchange Commission with jurisdiction to regulate financial derivative products, including swaps, options and other derivative products, collectively referred to in this annual report as "swaps." These agencies are required to issue rules and regulations that implement regulation of swaps markets by July 2011.

The Dodd-Frank Act subjects swaps to new mandatory clearing and trading requirements, if no exemption applies. It may also impose capital requirements on non-exempt market participants. The clearing and trading requirements could result in increased margining requirements which may increase the costs of hedging activity. Midwest Generation, through EMMT, uses swaps to hedge commercial risks associated with the generation, purchase and sale of electricity and fuel to wholesale customers.

If new clearing, trading or other requirements are applicable to EMMT under the Dodd-Frank Act rules and regulations, the potential impact will depend on the content of those rules and regulations, which remains uncertain.


Environmental Matters and Regulations

Legislative and regulatory activities by federal, state, and local authorities in the United States relating to energy and the environment impose numerous restrictions and requirements with respect to the operation of the Midwest Generation plants. Midwest Generation continues to monitor legislative and regulatory developments and to evaluate possible strategies for compliance with environmental regulations. Additional information about environmental matters affecting Midwest Generation, including projected environmental capital expenditures, is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Expenditures" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets—Application to Merchant Coal-Fired Power Plants."

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Climate Change

There have been a number of federal and state legislative and regulatory initiatives to reduce GHG emissions. Any climate change regulation or other legal obligation that would require substantial reductions in emissions of GHGs or that would impose additional costs or charges for the emission of GHGs could significantly increase the cost of generating electricity from fossil fuels, and especially from coal-fired plants, which could adversely affect Midwest Generation.


Federal Legislative/Regulatory Developments

Efforts to pass comprehensive federal climate change legislation have not yet been successful. The timing, contents, and potential effects on Midwest Generation of federal legislation imposing limits on GHG emissions remain uncertain. However, the US EPA has begun to issue federal GHG regulations that are likely to impact Midwest Generation's operations.

In June 2010, the US EPA issued the Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, known as the "GHG tailoring rule." This regulation generally subjects newly constructed sources of GHG emissions and newly modified existing major sources to the PSD air permitting program beginning in January 2011 (and later, to the Title V permitting program under the CAA); however, the GHG tailoring rule significantly increases the emissions thresholds that apply before facilities are subjected to these programs. The emissions thresholds for CO2 equivalents in the final rule vary from 75,000 tons per year to 100,000 tons per year depending on the date and whether the sources are new or modified.

A challenge to the GHG tailoring rule (along with other GHG regulations and determinations issued by the US EPA) is pending before the U.S. Court of Appeals for the D.C. Circuit. Regulation of GHG emissions pursuant to the PSD program could affect efforts to modify the Midwest Generation plants in the future. If Midwest Generation is required to install controls in the future or otherwise modify its operations in order to reduce GHG emissions, the potential impact of the GHG tailoring rule will depend on the nature and timing of the controls or modifications, which remain uncertain.

In December 2010, the US EPA announced that it had entered into a settlement with various states and environmental groups to resolve a long-standing dispute over regulation of GHGs from electrical generating units pursuant to the New Source Performance Standards in the CAA. Under the pending settlement, the US EPA will propose performance standards for GHG emissions from new and modified power plants and emissions guidelines for existing power plants in July 2011, and will finalize such regulations by May 2012, with compliance dates for existing power plants expected to be in 2015 or 2016. The specific requirements will not be known until the regulations are finalized.

Since January 2010, the US EPA's Final Mandatory Greenhouse Gas Reporting Rule has required all sources within specified categories, including electric generation facilities, to monitor emissions and to submit annual reports to the US EPA by March 31 of each year, with the first report due on March 31, 2011. Midwest Generation's 2010 GHG emissions were approximately 34.1 million metric tons.

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Regional Initiatives

The Midwest Generation plants may be affected by the Midwestern Greenhouse Gas Reduction Accord, by which six Midwestern states, including Illinois, and the Canadian province of Manitoba agreed to develop regional GHG emission reduction goals using a multi-sector cap-and-trade program. In May 2010, the Midwestern Greenhouse Gas Reduction Accord Advisory Group finalized recommendations and a model rule for emissions reduction targets and the design of a regional cap-and-trade program to serve as a basis for individual state legislative or regulatory action. However, there is substantial uncertainty as to whether the parties to the Midwestern Greenhouse Gas Reduction Accord intend to continue their efforts to develop or implement such a program, especially in light of the failure to pass a federal cap-and-trade program in the 111th Congress.


Litigation Developments

Litigation alleging that GHG is a public and private nuisance may affect Midwest Generation whether or not it is named as a defendant. The law is unsettled on whether or not this litigation presents questions capable of judicial resolution or political questions that should be resolved by the legislative or executive branches.

In December 2010, the Supreme Court agreed to review a case in which an appellate panel had endorsed the availability of judicial remedies for nuisance allegedly caused by GHG emissions associated with climate change. Oral argument before the Supreme Court is scheduled for April 2011. Currently pending while the Supreme Court considers the matter before it is an appeal before the Ninth Circuit of a federal district order dismissing a case against Midwest Generation's ultimate parent company, Edison International, and other defendants brought by the Alaskan Native Village of Kivalina in which the plaintiffs seek damages of up to $400 million for the cost of relocating the village, which the plaintiffs claim is no longer protected from storms because the Arctic sea ice has melted as the result of climate change. Edison International and the other defendants in the lawsuit recently requested the Ninth Circuit to defer oral argument on the appeal pending the Supreme Court's decision on related issues.

Midwest Generation cannot predict whether the legal principles emerging from the U.S. Supreme Court or any of the cases in the appellate courts will result in the filing of new actions with similar claims or whether Congress, in considering climate legislation, will address directly the availability of courts for these sorts of claims.


Air Quality

The CAA, which regulates air pollutants from mobile and stationary sources, has a significant impact on the operation of the Midwest Generation plants. The CAA requires the US EPA to establish concentration levels in the ambient air for six criteria pollutants to protect public health and welfare. These concentration levels are known as National Ambient Air Quality Standards, or NAAQS. The six criteria pollutants are carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, and SO2.

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Federal environmental regulations require states to adopt state implementation plans, known as SIPs, for certain pollutants, which detail how the state will attain the standards that are mandated by the relevant law or regulation. The SIPs must be equal to or more stringent than the federal requirements and must be submitted to the US EPA for approval. Each state identifies the areas within its boundaries that meet the NAAQS (attainment areas) and those that do not (non-attainment areas), and must develop a SIP both to bring non-attainment areas into compliance with the NAAQS and to maintain good air quality in attainment areas. If the attainment status of areas changes, states may be required to develop new SIPs that address the changes. Many of Midwest Generation's facilities are located in areas that have not attained NAAQS for ozone (affected by NOx emissions from power plants) and fine particulate matter (affected by SO2 and NOx emissions from power plants).

As described further below, on December 11, 2006, Midwest Generation entered into an agreement with the Illinois EPA, which was subsequently embodied in an Illinois rule called Combined Pollutant Standard or CPS, to reduce mercury, NOx and SO2 emissions at the Midwest Generation plants. The CPS requires Midwest Generation to achieve air emission reductions for NOx and SO2, and those reductions should contribute to or effect compliance with various existing US EPA ambient air quality standards. It is possible that if lower ozone, particulate matter, NOx or SO2 NAAQS are finalized by US EPA in the future, Illinois may implement regulations that are more stringent than those required by the CPS.


Nitrogen Oxide and Sulfur Dioxide

Clean Air Interstate and Transport Rules

The CAIR, issued by the US EPA on March 10, 2005, mandated significant reductions in NOx and SO2 emission allowance caps under the CAA in 28 eastern states and the District of Columbia. In 2008, the U.S. Court of Appeals for the D.C. Circuit initially vacated the CAIR, but later remanded the CAIR to the US EPA for the issuance of a revised rule. The CAIR remains in effect until the US EPA finalizes a revised regulation.

In July 2010, the US EPA issued a Notice of Proposed Rulemaking for a proposed rule, known as the Transport Rule, which would require 31 eastern states (including Illinois) and the District of Columbia to reduce power plant emissions of NOx and SO2 substantially, starting in 2012, with additional reductions in 2014. The Transport Rule would replace the CAIR.

The US EPA has proposed allocating emission allowances based on historic and projected emissions data from power plants, along with three possible approaches to emission allowance trading. Under its preferred approach, a pollution limit would be set for each state, intrastate trading of allowances would be permitted among power plants, and limited interstate trading would also be permitted consistent with the requirement that each state meet its own pollution control obligations. Under the first alternative, a pollution limit would be set for each state, and only intrastate trading of allowances would be permitted. Under the second alternative, a pollution limit would be set for each state, an emissions limit would be set for each power plant, and limited emissions averaging would be permitted among affected units. In January 2011, the US EPA proposed two other possible approaches to emission allowance allocation. Both approaches would allocate allowances among units within each state based on

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each unit's proportional share of the state's total historic heat input, and the second approach would add a constraint based on a unit's reasonably foreseeable maximum emissions under the proposed Transport Rule trading programs.

The Transport Rule is scheduled to be finalized in 2011. The CAIR will remain in place until that time. Depending on the approach adopted, the Transport Rule may provide allowance allocations for the Midwest Generation plants which are adequate for the plants' needs or may require the Midwest Generation plants to procure additional allowances, based on projected emissions using the Illinois CPS allowable emission rates.


Proposed NAAQS for SO2

In June 2010, the US EPA finalized the primary NAAQS for SO2 by establishing a new one-hour standard at a level of 75 parts per billion. The final standard is being taken into account in Midwest Generation's environmental compliance strategy. Revisions to SIPs to achieve compliance with the new standard are due to be submitted to the US EPA by February 2014, with a compliance deadline of August 2017.


Illinois

On December 11, 2006, Midwest Generation entered into an agreement with the Illinois EPA to reduce mercury, NOx and SO2 emissions at the Midwest Generation plants. The agreement has been embodied in the CPS. All of Midwest Generation's coal-fired electric generating units are subject to the CPS. The principal emission standards and control technology requirements for NOx and SO2 under the CPS are as described below:

NOx Emissions—Beginning in calendar year 2012 and continuing in each calendar year thereafter, Midwest Generation must comply with an annual and seasonal NOx emission rate of no more than 0.11 lbs/million Btu. In addition to these standards, Midwest Generation must install and operate SNCR equipment on Units 7 and 8 at the Crawford Station by December 31, 2015.

SO2 Emissions—Midwest Generation must comply with an overall SO2 annual emission rate beginning with 0.44 lbs/million Btu in 2013 and decreasing annually until it reaches 0.11 lbs/million Btu in 2019 and thereafter.

The CPS also specifies the control technologies that are to be installed on some units by specified dates. In these cases, Midwest Generation must either install the required technology by the specified deadline or shut down the unit. The CPS also required Midwest Generation to shut down Unit 6 at the Waukegan Station by December 31, 2007, and Units 1 and 2 at the Will County Station by December 31, 2010, which it has done.

During 2009, Midwest Generation conducted tests of NOx removal technology based on SNCR that may be employed to meet CPS requirements. Based on this testing, Midwest Generation has concluded that installation of SNCR technology on multiple units will meet the NOx portion of the CPS. Capital expenditures for installation of SNCR equipment are expected to be approximately $109 million in 2011.

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Testing of dry scrubbing using Trona on select Midwest Generation units has demonstrated significant reductions in SO2 emissions. Use of this technology in conjunction with low sulfur coal is expected to require substantially less capital and time than the use of spray dryer absorber technology, but would likely result in higher ongoing operating costs and may consequently result in lower dispatch rates and competitiveness of Midwest Generation's plants, depending on competitors' costs. For additional discussion, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Environmental Developments—Environmental Compliance Plans and Costs."


Mercury/Hazardous Air Pollutants

Clean Air Mercury Rule/Hazardous Air Pollutant Regulations

The CAMR was established by the US EPA as an attempt to reduce mercury emissions from existing coal-fired power plants using a cap-and-trade program. In February 2007, the U.S. Court of Appeals for the D.C. Circuit vacated both the CAMR and the related US EPA decision to remove oil- and coal-fired power plants from the list of sources to be regulated under the provision of the CAA governing emissions of HAPs.

In accordance with a consent decree entered in April 2010, the US EPA committed to proposing regulations by March 16, 2011 limiting emissions of HAPs from coal- and oil-fired electrical generating units that are major sources of HAPs, and to finalizing such regulations by November 2011. The emissions standards must be designed to achieve the maximum degree of emission reduction that the US EPA determines is achievable for the affected units, taking into account costs and non-air quality environmental and health benefits (also referred to as maximum achievable control technology, or MACT standard). Unlike the CAMR, the US EPA must regulate all of the HAPs emitted by these generating units. Compliance with the MACT standards will be required three years after the effective date of the final regulations. Until the US EPA's regulations are finalized, Midwest Generation cannot determine whether the actions it is taking to comply with other legal requirements (including the CPS) will be sufficient to address its obligations under the new regulations.


Illinois

Midwest Generation's compliance with the CPS supersedes the Illinois mercury regulations that would otherwise be applicable to the Midwest Generation plants. The CPS requires that, beginning in calendar year 2015, and continuing thereafter on a rolling 12-month basis, Midwest Generation must either achieve an emission standard of .008 lbs mercury/GWh gross electrical output or a minimum 90% reduction in mercury for each unit (except Unit 3 at the Will County Station, which will be included in calendar year 2016).

Midwest Generation installed required carbon injection equipment on all operating units in 2009 to achieve the necessary mercury reductions. Capital expenditures relating to these controls were $42 million. Midwest Generation will also be required to install cold side electrostatic precipitator or baghouse equipment on Unit 7 at the Waukegan Station by December 31, 2013, and on Unit 3 at the Will County Station by December 31, 2015. The Illinois EPA granted Midwest Generation a construction permit to install a cold-side electrostatic precipitator on Unit 7 at the Waukegan Station in November 2010.

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Ozone and Particulates

National Ambient Air Quality Standards

In January 2010, the US EPA proposed a revision to the primary and secondary NAAQS for 8-hour ozone that it had finalized in 2008. The 8-hour ozone standard established in 2008 was 0.075 parts per million. In January 2010, the US EPA proposed establishing a primary 8-hour ozone NAAQS between 0.060 and 0.070 parts per million and a distinct secondary standard to protect sensitive vegetation and ecosystems. The US EPA is expected to finalize the revision to the ozone NAAQS by July 2011. It is expected that once the US EPA finalizes the revised ozone NAAQS, it will propose a second Transport Rule that may further affect electric power generating units. The US EPA is also expected to propose revised fine particulate matter NAAQS in 2011, which could result in further emission reduction requirements in future years.


Illinois

The Illinois SIP for compliance with the 1997 8-hour ozone standard was submitted to the US EPA in March 2009. The SIP for fine particulates was submitted to the US EPA in June 2010. As the fine particulate and ozone standards are finalized, as described above, Illinois may be required to implement additional emission control measures to address emissions of NOx, SO2 and volatile organic compounds.


Regional Haze

The regional haze rules under the CAA are designed to prevent impairment of visibility in certain federally designated areas. The goal of the rules is to restore visibility in mandatory federal Class I areas, such as national parks and wilderness areas, to natural background conditions by 2064. Sources such as power plants that are reasonably anticipated to contribute to visibility impairment in Class I areas may be required to install BART or implement other control strategies to meet regional haze control requirements. The US EPA issued a final rulemaking on regional haze in 2005, requiring emission controls that constitute BART for industrial facilities that emit air pollutants which reduce visibility by causing or contributing to regional haze. These amendments required states to develop implementation plans to comply with BART by December 2007, to identify the facilities that will have to reduce SO2, NOx and particulate matter emissions, and then to set BART emissions limits for those facilities. Failure to do so would result in the imposition of a Federal Implementation Plan.

Beginning on December 31, 2009, Illinois became subject to a two-year deadline after which a Federal Implementation Plan (which has not yet been proposed) will govern related emission issues. Illinois has prepared proposed revisions to its SIP and is expected to submit them to the US EPA in 2011. Illinois proposes that the emission reductions that the Midwest Generation plants will be required to make pursuant to the CPS, discussed above in "—Nitrogen Oxide and Sulfur Dioxide—Illinois," satisfy the BART requirement.

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New Source Review Requirements

The NSR regulations impose certain requirements on facilities, such as electric generating stations, if modifications are made to air emissions sources at the facility. Since 1999, the US EPA has pursued a coordinated compliance and enforcement strategy to address NSR compliance issues at the nation's coal-fired power plants. The strategy has included both the filing of suits against a number of power plant owners, and the issuance of administrative Notice of Violations to a number of power plant owners alleging NSR violations. The US EPA has filed enforcement actions against Midwest Generation alleging NSR violations. For further discussion, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies—Contingencies—New Source Review Lawsuit."


Water Quality

Clean Water Act

Regulations under the federal Clean Water Act govern critical operating parameters at generating facilities, such as the temperature of effluent discharges and the location, design and construction of cooling water intake structures at generating facilities. The US EPA is rewriting these regulations following a 2009 U.S. Supreme Court decision that held that the US EPA may consider, but is not required to use, a cost-benefit analysis for this purpose. The Supreme Court set a deadline of March 2011 for draft regulations, which are to be finalized by July 2011. Because there are no defined compliance targets absent a new rule, Midwest Generation is reviewing a wide range of possible control technologies. A new rule could have a material impact on Midwest Generation's operations, but Midwest Generation cannot determine the financial impact until the final compliance criteria have been published.

Midwest Generation is a party to an administrative proceeding before the Illinois Pollution Control Board to determine whether more stringent thermal and effluent water quality standards for the Chicago Area Waterway System and Lower Des Plaines River, which supply cooling water to the Fisk, Crawford, Will County, and Joliet Stations, will be implemented. The rule, if implemented, is expected to affect the manner in which those stations use water for station cooling. It is not possible to predict the timing for resolution of the proceeding, the final form of the rule, or how it would impact the operation of the affected stations; however, significant capital expenditures may be required.


Coal Combustion Wastes

US EPA regulations currently classify coal ash and other coal combustion residuals as solid wastes that are exempt from hazardous waste requirements. This classification enables beneficial uses of coal combustion residuals, such as for cement production and fill materials. Midwest Generation currently provides a portion of its coal combustion residuals for beneficial uses. Midwest Generation is also examining the impact of current and proposed emission control technologies on ash quality for beneficial use.

In June 2010, the US EPA published proposed regulations relating to coal combustion residuals. Two different proposed approaches are under consideration. The first approach,

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under which the US EPA would list these residuals as special wastes subject to regulation as hazardous wastes, could require Midwest Generation to incur additional capital and operating costs. The second approach, under which the US EPA would regulate these residuals as nonhazardous wastes, would establish minimum technical standards for units that are used for the disposal of coal combustion residuals, but would allow procedural and enforcement mechanisms (such as permit requirements) to be exclusively a matter of state law. Many of the proposed technical standards are similar under both proposed options (for example, surface impoundments may need to be retrofitted, depending on which standard is finally adopted), but the second approach would not require the retrofitting of landfills used for the disposal of coal combustion residuals.


Employees

At December 31, 2010, Midwest Generation employed 987 employees, approximately 729 of whom were covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers, Local 15, AFL-CIO (Local 15), governing wages, certain benefits and working conditions. This agreement expires on December 31, 2011. Midwest Generation also has a separate collective bargaining agreement governing retirement, health care, disability and insurance benefits that expires on March 31, 2015.

ITEM 1A.  RISK FACTORS

Regulatory and Environmental Risks

Midwest Generation is subject to extensive environmental regulation and permitting requirements that may involve significant and increasing costs.

Midwest Generation's operations are subject to extensive and frequently changing environmental regulations with respect to, among other things, air quality, water quality and waste disposal which involve significant and increasing costs and substantial uncertainty. Midwest Generation is required to obtain, and comply with conditions established by, licenses, permits and other approvals in order to construct, operate or modify its facilities. Failure to comply with these requirements could subject Midwest Generation to civil or criminal liability, the imposition of liens or fines, or actions by regulatory agencies seeking to curtail Midwest Generation's operations. Midwest Generation may also be exposed to risks arising from past, current or future contamination at its former or existing facilities or with respect to off-site waste disposal sites that have been used in its operations.

Midwest Generation devotes significant resources to environmental monitoring, pollution control equipment and emission allowances to comply with environmental regulatory requirements. Midwest Generation believes that it is currently in substantial compliance with environmental regulatory requirements. However, the US EPA has filed an enforcement action against Midwest Generation alleging violations of the CAA and other regulations at the Midwest Generation plants. For more detail with respect to these matters, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies."

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The current trend is toward more stringent standards, stricter regulation, and more expansive application of environmental regulations. The adoption of laws and regulations to implement CO2 controls could adversely affect coal-fired power plants. Other environmental laws, particularly with respect to air emissions, disposal of ash, wastewater discharge and cooling water systems, are also generally becoming more stringent. The continued operation of the Midwest Generation plants is expected to require substantial capital expenditures for environmental controls. If Midwest Generation cannot comply with all applicable regulations, it could be required to retire or suspend operations at some of its facilities, or restrict or modify the operations of its facilities, and its business, results of operations and financial condition could be adversely affected.

Typically, environmental laws require a lengthy and complex process for obtaining licenses, permits and approvals prior to construction, operation or modification of a project or generating facility. Midwest Generation cannot provide assurance that it will be able to obtain and comply with all necessary licenses, permits and approvals for the Midwest Generation plants. If there is a delay in obtaining required approvals or permits or if Midwest Generation fails to obtain and comply with such permits, the operation of the Midwest Generation plants may be interrupted or become subject to additional costs.

The controls imposed on the Midwest Generation plants as a result of the CPS may require material expenditures or unit shutdowns.

All of Midwest Generation's Illinois coal-fired electric generating units are subject to the CPS. Capital expenditures relating to controls contemplated by the CPS are expected to be significant and could make some units uneconomic to maintain or operate. Midwest Generation may ultimately decide to comply with CPS requirements by shutting down units rather than making improvements. Unit shutdowns could have an adverse effect on Midwest Generation's business results of operation and financial condition. For more information about the CPS requirements and Midwest Generation's plans for compliance, see "Item 1. Business—Environmental Matters and Regulations—Air Quality—Nitrogen Oxide and Sulfur Dioxide—Illinois."

Midwest Generation is subject to extensive energy industry regulation.

Midwest Generation's operations are subject to extensive regulation by governmental agencies. Federal laws and regulations govern, among other things, transactions by and with purchasers of power, including utility companies, the development and construction of generation facilities, the ownership and operation of generation facilities, and access to transmission. Generation facilities are also subject to federal, state and local laws and regulations that govern, among other things, the geographical location, zoning, land use and operation of a project. Midwest Generation in the course of its business must obtain and periodically renew licenses, permits and approvals for its facilities. The FERC may impose various forms of market mitigation measures, including price caps and operating restrictions, where it determines that potential market power might exist and that the public interest requires mitigation. RTOs and ISOs may impose bidding and scheduling rules, both to curb the potential exercise of market power and to facilitate market functions. Such actions may materially affect Midwest Generation's results of operations. The Midwest Generation plants

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are also subject to mandatory reliability standards promulgated by NERC, compliance with which can increase the facilities' operating costs or capital expenditures.

This extensive governmental regulation creates significant risks and uncertainties for Midwest Generation's business. Existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to Midwest Generation or its facilities or operations in a manner that may have a detrimental effect on its business or result in significant additional costs.


Market Risks

Midwest Generation's operations are subject to market risks related to wholesale energy prices because it operates without long-term power purchase agreements. Wholesale energy prices have substantially declined in recent years.

The Midwest Generation plants do not have long-term power purchase agreements. Because the output of these power plants is not committed to be sold under long-term contracts, these projects are subject to market forces which determine the amount and price of energy, capacity and ancillary services sold from the power plants. Unlike most other commodities, electric power can only be stored on a very limited basis and generally must be produced when it is to be used. As a result, the wholesale power markets are subject to significant and unpredictable price fluctuations over relatively short periods of time. Due to the volume of sales into PJM from the Midwest Generation plants, Midwest Generation has concentrated exposure to market conditions and fluctuations in PJM. Prices for power have declined significantly in recent years as a result of increased use of demand response technology, changes in final demand for power during the economic slowdown, and technological developments that have permitted the exploitation of natural gas shale reserves in a way that has resulted in substantial declines in market prices for natural gas which supplies power plants that compete with the Midwest Generation plants.

Market prices of energy, capacity and ancillary services sold from these power plants are influenced by multiple factors beyond Midwest Generation's control, and thus there is considerable uncertainty whether or when current depressed prices will recover or whether Midwest Generation can effectively hedge the risks involved on economic terms. Midwest Generation's hedging activities may not cover the entire exposure of its assets or positions to market price volatility, and the level of coverage will vary over time. The effectiveness of Midwest Generation's hedging activities may depend on the amount of credit available to post collateral, either in support of performance guarantees or as cash margin, and liquidity requirements may be greater than Midwest Generation anticipates or will be able to meet. Midwest Generation cannot provide assurance that its hedging strategies will successfully mitigate market risks. For more detail with respect to these matters, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Commodity Price Risk."

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Midwest Generation's financial results can be affected by changes in prices, transportation cost, and supply interruptions related to fuel, sorbents, and other commodities used for power generation and emission controls.

In addition to volatile power prices, Midwest Generation's business is subject to changes in the cost of fuel, sorbents, and other commodities used for power generation and emission controls, and in the cost of transportation. These costs can be volatile and are influenced by many factors outside Midwest Generation's control. Operations at Midwest Generation's coal plants are dependent upon the availability and affordability of coal which is available only from a limited number of suppliers and which is transported by rail under a long-term transportation contract that will expire in 2011. All of these factors may have an adverse effect on Midwest Generation's financial condition and results of operations.

Competition could adversely affect Midwest Generation's business.

Midwest Generation has numerous competitors in all aspects of its business, some of whom may have greater liquidity, greater access to credit and other financial resources, lower cost structures, greater ability to withstand losses, larger staffs or more experience than Midwest Generation. Multiple participants in the wholesale markets, including many regulated utilities, have a lower cost of capital than most merchant generators and often are able to recover fixed costs through rate base mechanisms, allowing them to build, buy and upgrade generation assets without relying exclusively on market clearing prices to recover their investments. These factors could affect Midwest Generation's ability to compete effectively in the markets in which those entities operate. Newer plants owned by Midwest Generation's competitors are often more efficient than Midwest Generation's facilities and may also have lower costs of operation. Over time, the Midwest Generation plants may become obsolete in their markets, or be unable to compete with such plants.


Liquidity Risks

Midwest Generation has significant cash requirements and limited sources of capital.

At December 31, 2010, Midwest Generation had cash and cash equivalents of $295 million and $497 million of available borrowing capacity under its $500 million credit facility maturing in June 2012. Compliance with current and forthcoming environmental requirements will add to Midwest Generation's near-term liquidity needs. Midwest Generation's below-investment grade credit status may limit its ability to extend or replace credit facilities, including those maturing in 2012, should it choose to do so, and the terms and conditions of any refinancing could be substantially less favorable than those in the current credit facilities, depending on market conditions. In the case of a further downgrade, Midwest Generation expects that these negative effects would become more pronounced. If Midwest Generation's credit facilities are not extended or replaced, or if cash flow and other means for assuring liquidity are unavailable or insufficient, Midwest Generation may be unable to complete environmental improvements at its coal plants (which in turn could lead to unit shutdowns) or its ability to provide credit support for contracts for power and fuel related to merchant activities may be severely limited. The terms of debt instruments binding on EME and its subsidiaries, including Midwest Generation, may restrict Midwest Generation's ability to sell assets, seek additional capital, or restructure or refinance debt to satisfy liquidity needs. For further

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discussion, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Midwest Generation has a substantial amount of indebtedness, including long-term lease obligations and Midwest Generation's ability to meet its obligations under its long-term leases is dependent on payment of interest and principal on its notes receivable from EME.

As of December 31, 2010, Midwest Generation had $665 million in lease financing obligations. During 2000, Midwest Generation loaned $1.367 billion to EME from the proceeds of the sale-leaseback of the Powerton and Joliet plants. Midwest Generation's ability to meet its obligations under the Powerton and Joliet leases is partially dependent on receiving payment from EME on the intercompany notes evidencing this loan. A default by EME in the payment of these intercompany notes would result in a shortfall of cash available to Midwest Generation to meet its lease and debt obligations. A default by Midwest Generation in meeting its lease obligations could give rise to various remedies, including the right to terminate the Powerton and Joliet leases, which would result in the loss of revenues from the Powerton and Joliet power plants and would have a material adverse effect on Midwest Generation's business, results of operations and financial condition.

The interests of EME as Midwest Generation's equity holder may conflict with the interests of holders of debt.

Midwest Generation is indirectly owned and controlled by EME. The directors appointed by EME are able to make decisions affecting Midwest Generation's capital structure. The interests of EME may not in all cases be aligned with the interests of the holders of Midwest Generation's debt. If Midwest Generation encounters financial difficulties or becomes unable to pay its debts as they mature, the interests of EME might conflict with the interests of holders of Midwest Generation's debt. In addition, EME may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to Midwest Generation's business or the holders of Midwest Generation's debt.


Operating Risks

The Midwest Generation plants may be affected by general operating risks and hazards customary in the power generation industry. Midwest Generation may not have adequate insurance to cover all these hazards.

The operation of power generation facilities is a potentially dangerous activity that involves many operating risks, including transmission disruptions and constraints, equipment failures or shortages, and system limitations, degradation and interruption. Midwest Generation's operations are also subject to risks of human performance and workforce capabilities. There can be no assurance that Midwest Generation's insurance will be sufficient or effective under all circumstances or protect against all hazards to which Midwest Generation may be subject. Midwest Generation has a number of older facilities with potentially higher risks of failure or outage than an average plant.

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

Inapplicable.

ITEM 2.  PROPERTIES

As of December 31, 2010, Midwest Generation owned a fee interest in the Midwest Generation plants, with the exception of the Powerton Station and the Joliet Units 7 and 8, as more particularly described below. In December 1999, Commonwealth Edison sold only a portion of its then owned properties related to the Midwest Generation plants to Midwest Generation and retained the remaining portions of the properties for its own uses. Midwest Generation and Commonwealth Edison have various reciprocal permanent and temporary easements over Midwest Generation's respective parcels for the location, use, maintenance and repair of those facilities and equipment that are used in connection with the operations of Midwest Generation and Commonwealth Edison.

In conjunction with the sale-leaseback of the Powerton Station and Joliet Units 7 and 8 in August 2000, Midwest Generation leased substantially all the property on which the generating units are located to the owner trusts under site leases, and the owner trusts in turn subleased their undivided ground interest in the property back to Midwest Generation under site subleases. The terms of the site subleases are 33.75 years for the Powerton property and 30 years for the Joliet property, with renewal options. Rent is paid on each January 2 and July 2.

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Description of Properties

Operating Plant or Site
  Location
  Leased/
Owned

  Fuel
  Megawatts
 
   

Electric Generating Facilities

                   
 

Crawford Station

  Chicago, Illinois   owned   coal     532  
 

Fisk Station

  Chicago, Illinois   owned   coal     326  
 

Joliet Unit 6

  Joliet, Illinois   owned   coal     290  
 

Joliet Units 7 and 8

  Joliet, Illinois   leased   coal     1,036  
 

Powerton Station

  Pekin, Illinois   leased   coal     1,538  
 

Waukegan Station

  Waukegan, Illinois   owned   coal     689 1
 

Will County Station

  Romeoville, Illinois   owned   coal     761 2

Peaking Units

                   
 

Fisk

  Chicago, Illinois   owned   oil     197  
 

Waukegan

  Waukegan, Illinois   owned   oil     108  
                   

Total

                5,477  
   

Non-Operating Plant or Site

                   
   
 

Collins Station3

  Grundy County, Illinois                
 

Crawford peaker4

  Chicago, Illinois                
 

Joliet peaker5

  Joliet, Illinois                
 

Calumet peaker5

  Chicago, Illinois                
 

Electric Junction peaker5

  Aurora, Illinois                
 

Lombard peaker5

  Lombard, Illinois                
 

Sabrooke peaker5

  Rockford, Illinois                
   
1
The Waukegan Station is comprised of Units 7 and 8. Midwest Generation shut down permanently Waukegan Station Unit 6 (100 MW) on December 21, 2007.

2
The Will County Station is comprised of Units 3 and 4. Midwest Generation shut down permanently Will County Station Units 1 and 2, totaling 299 MW of capacity, on December 29, 2010 in accordance with the CPS. For further discussion, see "Item 1. Business—Environmental Matters and Regulations—Air Quality—Nitrogen Oxide and Sulfur Dioxide—Illinois."

3
All Collins Station units ceased operations and were decommissioned on or before December 31, 2004.

4
Peaking units ceased operations as of April 21, 2005.

5
Peaking units ceased operations as of December 31, 2004.

ITEM 3.  LEGAL PROCEEDINGS

For a discussion of the material legal proceedings specifically affecting Midwest Generation, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies."

ITEM 4.  RESERVED

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PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

All the outstanding membership interest of Midwest Generation is, as of the date hereof, owned by Edison Mission Midwest Holdings Co., which is an indirect wholly owned subsidiary of Edison International. There is no market for Midwest Generation's membership interest.

Distributions on the membership interest will be paid when declared by Midwest Generation's board of managers. Midwest Generation paid cash distributions to Edison Mission Midwest Holdings totaling $125 million in 2010, $200 million in 2009 and $206 million in 2008.

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ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data was derived from Midwest Generation's audited financial statements and is qualified in its entirety by the more detailed information and financial statements, including the notes to the financial statements, included in this annual report.


INCOME STATEMENT DATA
(in millions)

 
  Years Ended December 31,  
 
  2010
  2009
  2008
  2007
  2006
 
   

Operating revenues from marketing affiliate

  $ 1,479   $ 1,487   $ 1,778   $ 1,579   $ 1,399  

Operating expenses

    1,191     1,117     1,068     971     910  
       

Operating income

    288     370     710     608     489  

Interest and other income (expense)

    69     55     50     (122 )   (83 )
       

Income before income taxes

    357     425     760     486     406  

Provision for income taxes

    142     166     283     183     159  
       

Net income

  $ 215   $ 259   $ 477   $ 303   $ 247  
   

BALANCE SHEET DATA
(in millions)

 
  As of December 31,  
 
  2010
  2009
  2008
  2007
  2006
 
   

Current assets

  $ 680   $ 677   $ 1,193   $ 409   $ 601  

Total assets

    4,942     5,063     5,711     4,912     5,284  

Current liabilities

    263     333     380     389     363  

Long-term debt

            475         1,326  

Lease financing, net of current portion

    556     665     785     912     1,030  

Other long-term obligations

    345     320     296     294     184  

Member's equity

    3,778     3,745     3,775     3,317     2,381  
   

CASH FLOW DATA
(in millions)

 
  Years Ended December 31,  
 
  2010
  2009
  2008
  2007
  2006
 
   

Cash provided by operating activities

  $ 401   $ 460   $ 545   $ 732   $ 874  

Cash provided by (used in) financing activities

    (245 )   (801 )   150     (824 )   (819 )

Cash used in investing activities

    (98 )   (72 )   (110 )   (14 )   (8 )
   

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

MANAGEMENT'S OVERVIEW

Midwest Generation is a limited liability company engaged in the business of operating and selling energy and capacity from its 5,172 MW of coal-fired generating plants and 305 MW of oil-fired peaking plants. The profitability of Midwest Generation is expected to decline significantly in 2011 as a result of lower realized energy prices (largely driven by the expiration of hedge contracts) and higher fuel costs. In addition, the profitability of the Midwest Generation plants is expected to be adversely affected in 2012 by a decline in capacity prices (projected to begin in June 2012) and higher rail transportation costs (due to the expiration at the end of 2011 of a favorable long-term rail contract). For discussion of energy and fuel price risks, see "Market Risk Exposures—Commodity Price Risk" and "Item 1A. Risk Factors—Market Risks."


Highlights of Operating Results

Midwest Generation's net income decreased $44 million in 2010 as compared to 2009. Excluding the $24 million write-off of capitalized costs related to the Powerton Station described below, the 2010 decrease in earnings was primarily attributable to unrealized losses in 2010 compared to unrealized gains in 2009 related to hedge contracts and an increase in plant maintenance costs, partially offset by higher capacity revenues, a gain from the sale of bankruptcy claims against Lehman Brothers, and lower average realized fuel costs. Plant maintenance and overhaul related expenses were higher in 2010 due to the deferral of plant outages in 2009. Average realized fuel costs per megawatt-hour were lower in 2010 as compared to 2009 primarily due to lower emission allowance costs partially offset by higher costs for activated carbon, which is used to reduce mercury emissions. Results for 2010 included the benefit of power hedge contracts entered into during earlier periods at higher prices than current energy prices. For additional information about market conditions, see "Market Risk Exposures."

During the fourth quarter of 2010, Midwest Generation recorded a $24 million after-tax ($40 million pre-tax) write-off of capitalized engineering and other costs for air emissions control technology that is not currently being pursued for use at the Powerton Station. These activities were previously suspended as Midwest Generation pursued testing and evaluation of the use of a dry sorbent injection system using Trona or similar sorbents, which is expected to require lower capital costs. The Illinois EPA recently issued construction permits to authorize installation of a dry sorbent injection system using Trona or similar sorbents to meet emission reductions required under the CPS, which Midwest Generation currently expects to use if this project is undertaken. For further discussion, see "—Environmental Developments—Environmental Compliance Plans and Costs," below.

Midwest Generation's net income decreased $218 million in 2009 as compared to 2008. The 2009 decrease in earnings was primarily attributable to a 21% decline in average realized energy prices resulting from lower wholesale energy prices, higher fuel costs to comply with the CAIR annual NOx emission program that began in 2009 and new mercury emission controls, partially offset by higher capacity revenues, unrealized gains related to hedge

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contracts and lower plant operations expense due in part to the deferral of plant overhaul activities.


Environmental Developments

Environmental Compliance Plans and Costs

During 2010, Midwest Generation continued its permitting and planning activities for NOx and SO2 controls to meet the requirements of the CPS. Midwest Generation has received all necessary permits from the Illinois EPA to allow the installation of SNCR technology on multiple units to meet the NOx portion of the CPS. In November 2010 and February 2011, the Illinois EPA issued construction permits authorizing Midwest Generation to install a dry sorbent injection system using Trona or its equivalent at the Waukegan generating station's Unit 7 and Units 5 and 6 at the Powerton Station. The permit for Unit 7 at the Waukegan Station also authorizes Midwest Generation to convert the existing electrostatic precipitator to a cold-side design which will improve removal efficiency of particulate matter to satisfy the particulate control requirements of the CPS.

Testing of dry scrubbing using Trona on select Midwest Generation units has demonstrated significant reductions in SO2 emissions. Use of this technology in conjunction with low sulfur coal is expected to require substantially less capital and time than the use of spray dryer absorber technology, but would likely result in higher ongoing operating costs and may consequently result in lower dispatch rates and competitiveness of Midwest Generation's plants, depending on competitors' costs.

Based on work to date, Midwest Generation estimates the cost of retrofitting all units, using dry scrubbing with sodium-based sorbents to comply with CPS requirements for SO2 emissions, and the associated upgrading of existing particulate removal systems, would be approximately $1.2 billion in 2010 dollars. If these projects are undertaken, these expenditures would be incurred through 2018.

Decisions regarding whether or not to proceed with the above projects or other approaches to compliance remain subject to a number of factors, such as market conditions, regulatory and legislative developments, and forecasted commodity prices and capital and operating costs applicable at the time decisions are required or made. Midwest Generation could also elect to shut down units, instead of installing controls, to be in compliance with the CPS. Therefore, decisions about any particular combination of retrofits and shutdowns it may ultimately employ also remain subject to conditions applicable at the time decisions are required or made. Due to existing uncertainties about these factors, Midwest Generation intends to defer final decisions about particular units for the maximum time available. Accordingly, final decisions on whether to install controls, to install particular kinds of controls, and to actually expend capital that is budgeted may not occur until 2012 for some of the units and potentially later for others. Preconstruction engineering and initial construction work for a project may occur in 2011 in advance of a final decision to continue or complete the project.

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US EPA Developments

For information regarding recent developments in environmental regulations, see "Item 1. Business—Environmental Matters and Regulations."


Liquidity

At December 31, 2010, Midwest Generation had cash and cash equivalents of $295 million and a total of $497 million of available borrowing capacity under its $500 million working capital facility. Midwest Generation's liquidity is also comprised of cash flow generated from operations and payments by EME under the intercompany notes issued in connection with the Powerton-Joliet facilities sale-leaseback.

Midwest Generation has not yet committed to the completion of environmental compliance activities for all of its plants. Expenditures for NOx and SO2 controls through 2013 are estimated at $481 million based on an assumption that Midwest Generation would retrofit all units over the compliance period, which extends to 2018. Depending upon the facilities selected to be retrofitted, the cost of such retrofitting, and the timing of funding requirements beyond the near term, Midwest Generation may utilize operating cash flow, draw on its credit facility, when available, or seek debt financing to fund capital expenditures.

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RESULTS OF OPERATIONS

Summary

The table below summarizes total revenues as well as key performance measures related to coal-fired generation, which represents the majority of Midwest Generation's operations.

 
  Years Ended December 31  
 
  2010
  2009
  2008
 
   

Operating Revenues (in millions)

  $ 1,479   $ 1,487   $ 1,778  
   

Statistics

                   
 

Generation (in GWh)

                   
   

Energy contracts

    29,798     28,977     26,010  
   

Load requirements services contracts

        1,333     5,090  
       
   

Total

    29,798     30,310     31,100  
   
 

Aggregate plant performance

                   
   

Equivalent availability

    82.2%     85.3%     81.0%  
   

Capacity factor

    62.3%     63.3%     64.8%  
   

Load factor

    75.8%     74.2%     80.0%  
   

Forced outage rate

    6.2%     5.8%     8.3%  
 

Average realized price/MWh

                   
   

Energy contracts

  $ 40.12   $ 41.17   $ 51.82  
   

Load requirements services contracts

  $   $ 62.52   $ 62.64  
 

Capacity revenues only (in millions)

  $ 263   $ 178   $ 111  
 

Average realized fuel costs/MWh

  $ 17.17   $ 18.54   $ 15.49  
   


Statistical Definitions and Reconciliation of Non-GAAP Disclosures

Generation from load requirements services contracts represents two load requirements services contracts, awarded as part of an Illinois auction, with Commonwealth Edison that commenced on January 1, 2007. One contract expired in May 2008 and the remaining contract expired in May 2009.

Equivalent availability reflects the impact of the unit's inability to achieve full load, referred to as derating, as well as outages which result in a complete unit shutdown. The coal plants are not available during periods of planned and unplanned maintenance. The equivalent availability factor is defined as the number of MWh the coal plants are available to generate electricity divided by the product of the capacity of the coal plants (in MW) and the number of hours in the period.

The capacity factor indicates how much power a unit generated compared to the maximum amount of power that could be generated according to its rating. It is defined as the actual number of MWh generated by the coal plants divided by the product of the capacity of the coal plants (in MW) and the number of hours in the period.

The load factor indicates how much power a unit generated compared to the maximum amount of power that a unit was available to generate electricity. It is determined by dividing capacity factor by the equivalent availability factor.

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The forced outage rate refers to forced outages and deratings excluding events outside of management's control as defined by NERC. Examples include floods, tornado damage and transmission outages.

The average realized price for load requirements services contracts reflects the contract price for sales to Commonwealth Edison under the load requirements services contracts that includes energy, capacity and ancillary services. It is determined by dividing (i) operating revenues related to the contracts by (ii) generation.

The average realized energy price is presented as an aid in understanding the operating results of the Midwest Generation plants. Average realized energy price is a non-GAAP performance measure since such statistical measure excludes unrealized gains or losses recorded as operating revenues. Management believes that the average realized energy price is meaningful for investors as this information reflects the impact of hedge contracts at the time of actual generation in period-over-period comparisons or as compared to real-time market prices.

The average realized energy price reflects the average price at which energy is sold into the market including the effects of hedges, real-time and day-ahead sales and PJM fees and ancillary services. It is determined by dividing (i) operating revenues less unrealized gains (losses) and other non-energy related revenues by (ii) generation as shown in the table below. Revenues related to capacity sales are excluded from the calculation of average realized energy price.

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Operating revenues

  $ 1,479   $ 1,487   $ 1,778  

Less:

                   
 

Load requirements services contracts

        (83 )   (319 )
 

Unrealized (gains) losses

    6     (30 )   6  
 

Capacity and other1 revenues

    (290 )   (181 )   (117 )
       

Realized revenues

  $ 1,195   $ 1,193   $ 1,348  
   

Generation – energy contracts (in GWh)

   
29,798
   
28,977
   
26,010
 

Average realized energy price/MWh

 
$

40.12
 
$

41.17
 
$

51.82
 
   
1
A gain from the sale of the bankruptcy claims against Lehman Brothers is included in 2010.
The average realized fuel costs are presented as an aid in understanding the operating results of the Midwest Generation plants. Average realized fuel costs are a non-GAAP performance measure since such statistical measure excludes unrealized gains or losses recorded as fuel costs. Management believes that average realized fuel costs are meaningful for investors as this information reflects the impact of hedge contracts at the time of actual generation in period-over-period comparisons.

The average realized fuel costs reflect the average cost per MWh at which fuel is consumed for generation sold into the market, including emission allowance costs and the

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    effects of hedges. It is determined by dividing (i) fuel costs adjusted for unrealized gains (losses) by (ii) generation as shown in the table below:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Fuel costs

  $ 519   $ 547   $ 482  

Add back:

                   
 

Unrealized gains

    (7 )   15      
       

Realized fuel costs

  $ 512   $ 562   $ 482  
   

Total generation (in GWh)

   
29,798
   
30,310
   
31,100
 

Average realized fuel costs/MWh

 
$

17.17
 
$

18.54
 
$

15.49
 
   


Operating Revenues

Operating revenues decreased $8 million in 2010 compared to 2009 and decreased $291 million in 2009 compared to 2008. The 2010 decrease was primarily attributable to the expiration of favorably priced hedges and the sale of energy at lower market prices, and unrealized losses in 2010 compared to unrealized gains in 2009 related to hedge contracts, partially offset by higher capacity revenues and a gain from the sale of bankruptcy claims against Lehman Brothers. The 2009 decrease in operating revenues was primarily due to lower energy revenues partially offset by higher capacity revenues and unrealized gains related to hedge contracts. The decrease in energy revenues was primarily attributable to lower average realized energy prices.

In 2010, Midwest Generation sold its bankruptcy claims against Lehman Brothers and recorded a gain of $24 million. The claims originated from power contracts that were terminated in 2008 due to the bankruptcy of Lehman Brothers, as discussed below.

Included in operating revenues were unrealized gains (losses) of $(6) million, $30 million and $(6) million in 2010, 2009 and 2008, respectively. Unrealized gains (losses) in 2010 and 2009 were primarily due to economic hedge contracts that are accounted for at fair value with offsetting changes recorded on the consolidated statements of income. In addition, $10 million and $14 million were reversed from accumulated other comprehensive income and recognized in 2010 and 2009, respectively, related to the power contracts with Lehman Brothers. Unrealized losses in 2008 included a $24 million write-down of power contracts with Lehman Brothers for 2009 and 2010 forecasted generation. These contracts qualified as cash flow hedges until Midwest Generation dedesignated the contracts due to nonperformance risk and subsequently terminated the contracts. The change in fair value was recorded as an unrealized loss during 2008. In addition, unrealized gains (losses) included the ineffective portion of hedge contracts at the Midwest Generation plants attributable to changes in the difference between energy prices at the Northern Illinois Hub (the settlement point under forward contracts) and the energy prices at the Midwest Generation plants' busbars (the delivery point where power generated by the Midwest Generation plants is delivered into the transmission system) resulting from marginal losses.

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Operating Expenses

Operating expenses increased $74 million in 2010 from 2009 and increased $49 million in 2009 from 2008. Operating expenses consist of fuel, plant operations, asset write-downs and (gain) on buyout of contract, depreciation and amortization, and administrative and general. The primary changes in the components of operating expenses are discussed below.

Fuel costs decreased $28 million in 2010 from 2009 and increased $65 million in 2009 from 2008. The 2010 decrease was primarily attributable to lower annual NOx emission allowance costs and lower generation, partially offset by lower realized and unrealized gains from oil futures contracts and higher costs for activated carbon, which is used to reduce mercury emissions. The 2009 increase in fuel costs was primarily attributable to annual NOx emission allowances costs to comply with the CAIR program that began in 2009 and higher costs for activated carbon, partially offset by realized and unrealized gains from oil futures contracts.

Included in fuel costs were annual NOx emission allowance costs of $13 million and $58 million in 2010 and 2009, respectively, and activated carbon costs used for the reduction of mercury emissions of $47 million, $31 million and $8 million in 2010, 2009 and 2008, respectively. Also included in fuel costs were realized and unrealized gains of $2 million and $18 million in 2010 and 2009, respectively, due to oil futures contracts which were accounted for as economic hedges. These contracts were entered into in 2010 and 2009 to hedge variable fuel oil components of rail transportation costs.

Plant operations expenses increased $51 million in 2010 from 2009 and decreased $37 million in 2009 from 2008. The 2010 increase was attributable to higher scheduled plant maintenance and overhaul related expenses in 2010 due to the deferral of plant outages in 2009. Cost containment efforts and the deferral of plant overhaul activities contributed to the decrease in 2009 costs.

Asset write-downs and (gain) on buyout of contract of $48 million in 2010 included $40 million for the write-off of capitalized engineering and other costs for air emissions control technology that is not currently being pursued for use at the Powerton Station and $8 million primarily related to the retirement of assets at the Powerton Station due to plant maintenance activities. 2008 included a $15 million gain related to the buyout of a fuel contract. For further discussion, see "Management's Overview—Highlights of Operating Results" and "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies—Fuel Supply Contracts."

Depreciation and amortization expense increased $5 million in 2010 from 2009 and $3 million in 2009 from 2008. The 2010 and 2009 increases were attributable to an increase in assets being placed in service.

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Other Income (Expense)

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Interest and other income

  $ 5   $ 5   $ 14  

Interest income from affiliates

    112     112     113  

Interest expense

    (48 )   (62 )   (77 )
       

Total other income

  $ 69   $ 55   $ 50  
   

Interest and other income decreased $9 million in 2009 from 2008. The 2009 decrease was attributable to $2 million lower interest income due to lower cash balances in 2009, $3 million recorded to other income in 2008 for settlement of a claim related to barge traffic closed in 2005, and $3 million recorded in other income in 2009, compared to $6 million in 2008, for business interruption coverage related to insurance claims from unplanned outages.

Interest expense decreased $14 million in 2010 from 2009 and $15 million in 2009 from 2008. The 2010 decrease was due to lower interest related to the Powerton-Joliet lease financing and lower borrowings outstanding during 2010 on Midwest Generation's working capital facility. The 2009 decrease was primarily due to lower interest expense related to the Powerton-Joliet lease financing and $6 million of interest costs in 2008 included as part of a resolution of a labor matter.


Provision For Income Taxes

Midwest Generation had an effective income tax provision rate of 40%, 39% and 37% in 2010, 2009 and 2008, respectively. Midwest Generation's effective income tax rate varies from the federal statutory rate of 35% primarily due to state income taxes and estimated benefits from a federal deduction related to qualified domestic production activities under Section 199 of the Internal Revenue Code.


Related-Party Transactions

For a discussion of related-party transactions, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—Income Taxes and Tax-Allocation Agreements and—Note 12. Related-Party Transactions."


New Accounting Guidance

For a discussion of new accounting guidance affecting Midwest Generation, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—New Accounting Guidance."

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LIQUIDITY AND CAPITAL RESOURCES

Available Liquidity

At December 31, 2010, Midwest Generation had cash and cash equivalents of $295 million and a total of $497 million of available borrowing capacity under its $500 million working capital facility. Midwest Generation's liquidity is also comprised of cash flow generated from operations and payments by EME under the intercompany notes issued in connection with the Powerton-Joliet facilities sale-leaseback.

The following table summarizes the status of Midwest Generation's working capital facility at December 31, 2010, which matures in June 2012:

(in millions)
   
 
   

Commitment

  $ 500  

Outstanding letters of credit

    (3 )
       

Amount available

  $ 497  
   

Midwest Generation may seek to extend or replace its credit facility or retire it by other means. The terms and conditions of any refinancing could be substantially different than those in the current credit facility.

For additional discussion of liquidity, see "Management's Overview—Liquidity."


Bonus Depreciation Impact

The Small Business Jobs Act of 2010 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) extended 50% bonus depreciation for qualifying property through 2012 and created a new 100% bonus depreciation for qualifying property placed in service between September 9, 2010 and December 31, 2011. Subject to updated Internal Revenue Service regulations clarifying the definitions of capital expenditures that qualify for 100% bonus depreciation, Midwest Generation's capital expenditures are expected to qualify, accelerating federal tax deductions in 2010 and 2011.


Consolidated Cash Flow

At December 31, 2010, Midwest Generation had cash and cash equivalents of $295 million, compared to $237 million at December 31, 2009. Net cash provided by operating activities totaled $401 million, $460 million and $545 million in 2010, 2009 and 2008, respectively. The 2010 and 2009 decreases in net cash provided by operating activities were largely attributable to lower net income.

Net cash provided by (used in) financing activities totaled $(245) million, $(801) million and $150 million in 2010, 2009 and 2008, respectively. The 2010 decrease was due to no borrowings or repayments on Midwest Generation's working capital facility in 2010 and $75 million less distributions by Midwest Generation to its parent in 2010 as compared to 2009. The 2009 change was primarily due to $475 million of repayments on Midwest

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Generation's working capital facility in 2009, as compared to net borrowings of $475 million in 2008.

Net cash used in investing activities totaled $98 million, $72 million and $110 million in 2010, 2009 and 2008, respectively, and consisted primarily of capital expenditures. The 2010 increase was due to higher capital expenditures. The 2009 decrease was due to lower capital expenditures.


Capital Expenditures

At December 31, 2010, forecasted capital expenditures through 2013 by Midwest Generation were as follows:

(in millions)
  2011
  2012
  2013
 
   

Plant capital expenditures

  $ 34   $ 23   $ 29  

Environmental expenditures

    151     132     198  
       

Total

  $ 185   $ 155   $ 227  
   

Plant capital expenditures relate to non-environmental projects such as boiler components, generator stator rewinds, condenser re-tubing, and main power transformer replacement.

Environmental expenditures include $109 million for expenditures in 2011 related to SNCR equipment and $372 million for expenditures in 2011 to 2013 to begin to retrofit initial units using dry scrubbing with sodium-based sorbents to comply with CPS requirements for SO2 emissions. Midwest Generation could elect to shut down units instead of installing controls to be in compliance with the CPS, and, therefore, decisions about any particular combination of retrofits and shutdowns it may ultimately employ to comply remain subject to conditions applicable at the time decisions are required or made. Accordingly, the environmental expenditures for Midwest Generation in the preceding table represent current projects only and are subject to change based upon a number of considerations. Actual expenditures could be higher or lower. Preconstruction engineering and initial construction work for a project may occur in 2011 in advance of a final decision to continue or complete the project. For additional discussion, see "Management's Overview—Environmental Developments—Environmental Compliance Plans and Costs."


Credit Facility and Other Covenants

Midwest Generation maintains a $500 million working capital facility that matures in June 2012, with an option to extend for up to two years. The interest rate on borrowings outstanding under this credit facility is currently LIBOR plus 1.15%, unless average utilized commitments during a period exceed $250 million. As of December 31, 2010, Midwest Generation had no borrowings outstanding and $3 million of letters of credit had been utilized under this working capital facility.

Midwest Generation is bound by the covenants in its credit agreement and certain covenants under the Powerton-Joliet lease documents. These covenants include restrictions on the ability to, among other things, incur debt, create liens on its property, merge or consolidate, sell

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assets, make investments, engage in transactions with affiliates, make distributions, make capital expenditures, enter into agreements restricting its ability to make distributions, engage in other lines of business, enter into swap agreements, or engage in transactions for any speculative purpose. In order for Midwest Generation to make a distribution, it must be in compliance with the covenants specified under its credit agreement, including maintaining a historical debt to capitalization ratio of no greater than 0.60 to 1. At December 31, 2010, the debt to capitalization ratio was 0.15 to 1.

Midwest Generation is permitted to use its working capital facility and cash on hand to provide credit support for hedging transactions related to the Midwest Generation plants entered into by EMMT. Utilization of this credit facility in support of these hedging transactions provides additional liquidity support for implementation of Midwest Generation's contracting strategy for the Midwest Generation plants. In addition, Midwest Generation may grant liens on its property in support of hedging transactions associated with the Midwest Generation plants. For additional discussion, see "Market Risk Exposures—Credit Risk."


Equity Distributions and Tax Payments

The following table summarizes the payments by Midwest Generation as equity distributions through Edison Mission Midwest Holdings and payments made pursuant to tax-allocation agreements:

(in millions)
  2010
  2009
  2008
 
   

Equity distributions

  $ 125   $ 200   $ 206  

Tax payments under tax-allocation agreements

    136     65     349  
       

Total payments

  $ 261   $ 265   $ 555  
   

For additional information on the tax-allocation agreements, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—Income Taxes and Tax-Allocation Agreements."


Powerton-Joliet Lease Payments

As part of the sale-leaseback of the Powerton Station and Units 7 and 8 of the Joliet Station, Midwest Generation loaned the proceeds (in the original amount of $1.367 billion) to EME in exchange for promissory notes in the same aggregate amount. EME's obligations under the promissory notes payable to Midwest Generation are general corporate obligations of EME and are not contingent upon receiving distributions from its subsidiaries. There is no assurance that EME will have sufficient cash flow to meet these obligations. Furthermore, EME has guaranteed Midwest Generation's lease obligations under these leases. If EME fails to pay under its guarantee, including payments due under the Powerton-Joliet leases in the event that Midwest Generation could not make such payments, this would result in an event of default under the Powerton and Joliet leases. This event would have a material adverse effect on Midwest Generation.

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Credit Ratings

Overview

Credit ratings for Midwest Generation, EME and EMMT as of December 31, 2010 were as follows:

 
  Moody's Rating
  Standard &
Poor's Rating

  Fitch Rating
 

Midwest Generation1

  Ba2   B+   BB

EME2

  B3   B-   B-

EMMT

  Not Rated   B-   Not Rated
 
1
First priority senior secured rating.

2
Senior unsecured rating.

All the above ratings are on negative outlook. Midwest Generation cannot provide assurance that its current credit ratings or the credit ratings of its subsidiaries will remain in effect for any given period of time or that one or more of these ratings will not be lowered. Midwest Generation notes that these credit ratings are not recommendations to buy, sell or hold its securities and may be revised at any time by a rating agency.

Midwest Generation's coal contracts include provisions that provide the right to request additional collateral to support payment obligations for delivered coal and may vary based on Midwest Generation's credit ratings.


Credit Rating of EMMT

Midwest Generation sells merchant energy and capacity through EMMT, which currently has a below investment grade credit rating. Midwest Generation currently has cash on hand to provide credit support as needed for hedging contracts entered into by EMMT related to the Midwest Generation plants.

EMMT borrows under its revolving credit agreement with Midwest Generation to provide credit support for futures and forward contracts. Loans provided under this revolving credit agreement are repaid by EMMT upon the return of the funds under the terms of the related forward contracts. The amount repaid includes interest earned, if any, under margin agreements supporting such contracts. As of December 31, 2010, EMMT had no borrowings outstanding under this revolving credit agreement.

Midwest Generation anticipates that sales of its power through EMMT may require additional credit support, depending upon market conditions and the strategies adopted for the sale of this power. Changes in forward market prices and margin requirements and increases in merchant sales could further increase the need for credit support related to hedging activities. Midwest Generation is able to provide collateral to support bilateral contracts for power and fuel to the extent that any such transactions relate to its merchant energy operations. Depending on market conditions and the volume and duration of forward sales, there is no assurance that Midwest Generation will be able to provide sufficient credit support to EMMT.

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Contractual Obligations, Commercial Commitments and Contingencies

Midwest Generation has contractual obligations and other commercial commitments that represent prospective cash requirements. The following table summarizes Midwest Generation's significant consolidated contractual obligations as of December 31, 2010:

 
   
  Payments Due by Period  
(in millions)
  Total
  Less than
1 year

  1 to 3
years

  3 to 5
years

  More than
5 years

 
   

Lease financing1

  $ 938   $ 151   $ 302   $ 218   $ 267  

Operating lease obligations2

    79     16     32     14     17  

Purchase obligations:2

                               
 

Fuel supply contracts

    329     195     134          
 

Coal transportation agreements

    219     219              
 

Capital expenditures

    116     116              
 

Other contractual obligations

    118     50     68          

Employee benefit plan contribution3

    15     15              
       

Total Contractual Obligations4

  $ 1,814   $ 762   $ 536   $ 232   $ 284  
   
1
Amount represents lease payments related to the Powerton-Joliet sale-leaseback transaction and includes interest payments over the life of the lease. For further discussion, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies."

2
For additional details, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies."

3
Amount includes estimated contribution for pension plans and postretirement benefits other than pensions. The estimated contributions beyond 2011 are not available. For more information, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 7. Compensation and Benefit Plans—Pension Plans and Postretirement Benefits Other than Pensions."

4
The contractual obligations table does not include derivative obligations and AROs, which are discussed in "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 5. Derivative Instruments and Hedging Activities," and "—Note 2. Property, Plant and Equipment," respectively.


Contingencies

Midwest Generation's significant contingencies related to the NSR lawsuit and environmental remediation are discussed in "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies."


Off-Balance Sheet Transactions

Midwest Generation has off-balance sheet activities related to operating leases in place for equipment, primarily leased railcars, with termination option dates in various years through 2019. For further discussion, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies—Lease Commitments."

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MARKET RISK EXPOSURES

Introduction

Midwest Generation's primary market risk exposures are associated with the sale of electricity and capacity from, and the procurement of fuel for, its merchant power plants. These market risks arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. Additionally, Midwest Generation's financial results can be affected by fluctuations in interest rates. Midwest Generation manages these risks in part by using derivative instruments in accordance with established policies and procedures.


Derivative Instruments

Midwest Generation uses derivative instruments to reduce its exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. For derivative instruments recorded at fair value, changes in fair value are recognized in earnings at the end of each accounting period unless the instrument qualifies for hedge accounting. For derivatives that qualify for cash flow hedge accounting, changes in their fair value are recognized in other comprehensive income until the hedged item settles and is recognized in earnings. However, the ineffective portion of a derivative that qualifies for cash flow hedge accounting is recognized currently in earnings.


Unrealized Gains and Losses

Midwest Generation classifies unrealized gains and losses from derivative instruments (other than the effective portion of derivatives that qualify for hedge accounting) as part of operating revenues or fuel costs. The results of derivative activities are recorded as part of cash flows from operating activities on the consolidated statements of cash flows. The following table summarizes unrealized gains (losses):

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Non-qualifying hedges

  $ (11 ) $ 40   $ (16 )

Ineffective portion of cash flow hedges

    (2 )   5     10  
               

Total unrealized gains (losses)

  $ (13 ) $ 45   $ (6 )
   

At December 31, 2010, cumulative unrealized gains of $9 million were recognized from non-qualifying hedge contracts or the ineffective portion of cash flow hedges related to subsequent periods ($7 million for 2011 and $2 million for 2012).


Fair Value Disclosures

In determining the fair value of Midwest Generation's derivative positions, Midwest Generation uses third-party market pricing where available. For further explanation of the fair value hierarchy and a discussion of Midwest Generation's derivative instruments, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 3. Fair

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Value Measurements" and "—Note 5. Derivative Instruments and Hedging Activities," respectively.

The fair value of Midwest Generation's derivative instruments at December 31, 2010 was $45 million. A 10% change in the market price of the underlying commodity at December 31, 2010 would increase or decrease the fair value of outstanding commodity derivative instruments by approximately $41 million.


Commodity Price Risk

Introduction

Midwest Generation's operations create exposure to commodity price risk, which reflects the potential impact of a change in the market value of a particular commodity. Commodity price risks are actively monitored, with oversight provided by a risk management committee, to ensure compliance with Midwest Generation's risk management policies, through EMMT. Despite this, there can be no assurance that all risks have been accurately identified, measured and/or mitigated.


Energy Price Risk

Energy and capacity from the Midwest Generation plants are sold under terms, including price, duration and quantity, arranged by EMMT with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Power is sold into PJM at spot prices based upon locational marginal pricing. Hedging transactions related to generation are generally entered into at the Northern Illinois Hub, and to a lesser extent, the AEP/Dayton Hub, both in PJM.

The following table depicts the average historical market prices for energy per megawatt-hour during the past three years:

 
  24-Hour Average Historical Market Prices1  
 
  2010
  2009
  2008
 
   

Northern Illinois Hub

  $ 33.08   $ 28.86   $ 49.01  
   

1   Energy prices were calculated at the Northern Illinois Hub delivery point using historical hourly real-time prices as published by PJM or provided on the PJM web-site.

The following table sets forth the forward market prices for energy per megawatt-hour as quoted for sales into the Northern Illinois Hub at December 31, 2010:

 
  24-Hour Forward
Energy Prices1
Northern Illinois Hub

 
   

2011 calendar "strip"2

  $ 30.68  

2012 calendar "strip"2

  $ 32.37  
   

1   Energy prices were determined by obtaining broker quotes and information from other public sources relating to the Northern Illinois Hub delivery point.

2

 

Market price for energy purchases for the entire calendar year.

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Forward market prices at the Northern Illinois Hub fluctuate as a result of a number of factors, including natural gas prices, transmission congestion, changes in market rules, electricity demand (which in turn is affected by weather, economic growth, and other factors), plant outages in the region, and the amount of existing and planned power plant capacity. The actual spot prices for electricity delivered by the Midwest Generation plants into these markets may vary materially from the forward market prices set forth in the preceding table.

EMMT engages in hedging activities for the Midwest Generation plants to hedge the risk of future change in the price of electricity. The following table summarizes Midwest Generation's hedge positions for contracts entered into at both the Northern Illinois Hub and AEP/Dayton Hub (including forward contracts accounted for on the accrual basis) as of December 31, 2010 for electricity expected to be generated in 2011 and 2012:

 
  2011
  2012
 
   

MWh (in thousands)

    10,870     3,358  

Average price/MWh1

  $ 37.75   $ 38.11  
   

1   The above hedge positions include forward contracts for the sale of power and futures contracts during different periods of the year and the day. Market prices tend to be higher during on-peak periods and during summer months, although there is significant variability of power prices during different periods of time. Accordingly, the above hedge positions are not directly comparable to the 24-hour Northern Illinois Hub prices set forth above.


Capacity Price Risk

Under the RPM, capacity commitments are made in advance to provide a long-term pricing signal for capacity resources. The RPM is intended to provide a mechanism for PJM to meet the region's need for generation capacity, while allocating the cost to load-serving entities through a locational reliability charge.

The following table summarizes the status of capacity sales for Midwest Generation at December 31, 2010:

 
   
   
   
   
   
  Other Capacity Sales, Net of Purchases2    
 
 
   
   
   
  RPM Capacity Sold in Base Residual Auction    
 
 
  Installed
Capacity
MW

  Unsold
Capacity1
MW

  Capacity
Sold
MW

   
  Average
Price per
MW-day

  Aggregate
Average
Price per
MW-day

 
 
  MW
  Price per
MW-day

  MW
 
   

January 1, 2011 to May 31, 2011

    5,477     (548 )   4,929     4,929   $ 174.29           $ 174.29  

June 1, 2011 to May 31, 2012

    5,477     (495 )   4,982     4,582     110.00     400   $ 85.00     107.99  

June 1, 2012 to May 31, 2013

    5,477     (773 )   4,704     4,704     16.46             16.46  

June 1, 2013 to May 31, 2014

    5,477     (827 )   4,650     4,650     27.73             27.73  
   
1
Capacity not sold arises from: (i) capacity retained to meet forced outages under the RPM auction guidelines, and (ii) capacity that PJM does not purchase at the clearing price resulting from the RPM auction.

2
Other capacity sales and purchases, net includes contracts executed in advance of the RPM base residual auction to hedge the price risk related to such auction, participation in RPM incremental auctions and other capacity transactions entered into to manage capacity risks.

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The RPM auction capacity prices for the delivery period of June 1, 2012 to May 31, 2013 and June 1, 2013 to May 31, 2014 varied between different areas of PJM. In the western portion of PJM, affecting Midwest Generation, the prices of $16.46 per MW-day and $27.73 per MW-day were substantially lower than other areas' capacity prices. The impact of lower capacity prices for these periods compared to previous years will have an adverse effect on Midwest Generation's revenues unless such lower capacity prices are offset by an unavailability of competing resources and increased energy prices.

Revenues from the sale of capacity from Midwest Generation beyond the periods set forth above will depend upon the amount of capacity available and future market prices either in PJM or nearby markets if Midwest Generation has an opportunity to capture a higher value associated with those markets. Under PJM's RPM system, the market price for capacity is generally determined by aggregate market-based supply conditions and an administratively set aggregate demand curve. Among the factors influencing the supply of capacity in any particular market are plant forced outage rates, plant closings, plant delistings (due to plants being removed as capacity resources and/or to export capacity to other markets), capacity imports from other markets, demand side management activities and the cost of new entry.


Basis Risk

Sales made from the Midwest Generation plants in the real-time or day-ahead market receive the actual spot prices or day-ahead prices, as the case may be, at the busbars (delivery points) of the individual plants. In order to mitigate price risk from changes in spot prices at the individual plant busbars, Midwest Generation may enter into cash settled futures contracts as well as forward contracts with counterparties for energy to be delivered in future periods. Currently, a liquid market for entering into these contracts at the individual plant busbars does not exist. A liquid market does exist for settlement points at the Northern Illinois Hub and the AEP/Dayton Hub. Midwest Generation's hedging activities use these settlement points (and, to a lesser extent, other similar trading hubs) to enter into hedging contracts. To the extent that, on the settlement date of a hedge contract, spot prices at the relevant busbar are lower than spot prices at the settlement point, the proceeds actually realized from the related hedge contract are effectively reduced by the difference. This is referred to as "basis risk." During 2010, transmission congestion in PJM resulted in prices at the individual busbars of the Midwest Generation plants being lower than those at the AEP/Dayton Hub and Northern Illinois Hub by an average of 13% and 1%, respectively, compared to 14% and 1%, respectively, during 2009.

By entering into cash settled futures contracts and forward contracts using the Northern Illinois Hub and the AEP/Dayton Hub (or other similar trading hubs) as settlement points, Midwest Generation is exposed to basis risk as described above. In order to mitigate basis risk, Midwest Generation may purchase financial transmission rights and basis swaps in PJM for Midwest Generation. A financial transmission right is a financial instrument that entitles the holder to receive the difference between actual spot prices for two delivery points in exchange for a fixed amount. Accordingly, Midwest Generation's hedging activities include using financial transmission rights alone or in combination with forward contracts and basis swap contracts to manage basis risk.

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Coal and Transportation Price Risk

The Midwest Generation plants purchase coal primarily from the Southern PRB of Wyoming. Coal purchases are made under a variety of supply agreements. The following table summarizes the amount of coal under contract at December 31, 2010 for the following two years:

 
  2011
  2012
 
   

Amount of Coal Under Contract in Millions of Equivalent Tons1,2

    15.9     9.8  
   

1   The amount of coal under contract in equivalent tons is calculated based on contracted tons and applying an 8,800 Btu equivalent.

2

 

In January 2011, Midwest Generation entered into additional contractual agreements for the purchase of 1.25 million tons for 2011.

Midwest Generation is subject to price risk for purchases of coal that are not under contract. Prices of PRB coal (with 8,800 Btu per pound heat content and 0.8 pounds of SO2 per MMBtu sulfur content) purchased for the Midwest Generation plants increased during 2010 from 2009 year-end prices and declined during 2009 from 2008 year-end prices. The price of PRB coal fluctuated between $9.80 per ton and $15.35 per ton during 2010, with a price of $13.60 per ton at December 31, 2010, compared to a price of $9.25 per ton at December 31, 2009, as reported by the Energy Information Administration (EIA). The 2010 increase in PRB coal prices was due to the draw down of inventory levels and flat to slight declines of PRB coal production.

Midwest Generation has contracts for the transport of coal to its facilities. The primary contract is with Union Pacific Railroad (and various short-haul carriers), which extends through 2011. Midwest Generation is exposed to price risk related to transportation rates after the expiration of its existing transportation contracts. Current market transportation rates for PRB coal are higher than the existing rates under contract. Transportation costs are approximately half of the delivered cost of PRB coal to the Midwest Generation plants.

Based on Midwest Generation's anticipated coal requirements in 2011 in excess of the amount under contract, Midwest Generation expects that a 10% change in the price of coal at December 31, 2010 would increase or decrease pre-tax income in 2011 by approximately $4 million.


Emission Allowances Price Risk

The federal Acid Rain Program requires electric generating stations to hold SO2 allowances sufficient to cover their annual emissions. Pursuant to Illinois' implementation of the CAIR, coal plants are required to hold seasonal and annual NOx allowances.

In the event that actual emissions required are greater than allowances held, Midwest Generation is subject to price risk for purchases of emission allowances. The market price for emission allowances may vary significantly. The average purchase price of annual NOx

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allowances was $987 per ton in 2010 and $1,431 per ton in 2009. Based on broker's quotes and information from public sources, the spot price for SO2 allowances and annual NOx allowances was $9 per ton and $320 per ton, respectively, at December 31, 2010.

Based on Midwest Generation's anticipated SO2 requirements and annual and seasonal NOx requirements for 2011 beyond those allowances already purchased, Midwest Generation expects that a 10% change in the price of SO2 emission allowances and annual and seasonal NOx emission allowances at December 31, 2010 would increase or decrease pre-tax income in 2011 by approximately $0.5 million.


Credit Risk

For further information related to credit risk and how Midwest Generation manages credit risk, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 5. Derivative Instruments and Hedging Activities."


Interest Rate Risk

Interest rate changes can affect earnings and the cost of capital for capital improvements. Midwest Generation has a $500 million working capital facility, maturing in 2012, which exposes Midwest Generation to the risk of earnings loss resulting from changes in interest rates from any borrowings outstanding. At December 31, 2010, Midwest Generation had no borrowings outstanding.

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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Introduction

The accounting policies described below are considered critical to obtaining an understanding of Midwest Generation's consolidated financial statements because their application requires the use of significant estimates and judgments by management in preparing Midwest Generation's consolidated financial statements. Management estimates and judgments are inherently uncertain and may differ significantly from actual results achieved. Management considers an accounting estimate to be critical if the estimate requires significant assumptions and changes in the estimate or if different estimates that could have been selected had been used could have a material impact on Midwest Generation's results of operations or financial position. For more information on Midwest Generation's accounting policies, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies."


Derivatives

Midwest Generation uses derivative instruments to manage exposure to changes in electricity, fuel oil and interest rates. Derivative instruments that do not meet the normal purchases and sales exception at fair value are recorded with changes in the derivative's fair value recognized currently in earnings unless specific hedge accounting criteria are met. For derivatives that qualify for cash flow hedge accounting treatment, the effective portion of the changes in the derivative's fair value is recognized in other comprehensive income until the hedged item is recognized in earnings.

Management's judgment is required to determine if a transaction meets the definition of a derivative and, if it does, whether the normal purchases and sales exception applies or whether individual transactions qualify for hedge accounting treatment. Management's judgment is also required to determine the fair value of derivative transactions.

Key Assumptions and Approach Used.    Midwest Generation determines the fair value of derivative instruments based on forward market prices in active markets adjusted for nonperformance risk. If quoted market prices are not available, internally developed models are used to determine the fair value. When actual market prices, or relevant observable inputs are not available, it is appropriate to use unobservable inputs which reflect management assumptions, including extrapolating limited short-term observable data and developing correlations between liquid and non-liquid trading hubs. In assessing nonperformance risks, Midwest Generation reviews credit ratings of counterparties (and related default rates based on such credit ratings) and prices of credit default swaps. The market price (or premium) for credit default swaps represents the price that a counterparty would pay to transfer the risk of default, typically bankruptcy, to another party. A credit default swap is not directly comparable to the credit risks of derivative contracts, but provides market information of the related risk of nonperformance.

In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value. For further information, see "Item 8. Midwest

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Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 3. Fair Value Measurements."

Effect if Different Assumptions Used.    As described above, fair value is determined using a combination of market information or observable data and unobservable inputs which reflect management's assumptions. Changes in observable data and unobservable inputs would impact results.

For Midwest Generation's derivative instruments that are measured at fair value using quantitative pricing models, a significant change in estimate could affect Midwest Generation's results of operations. For further sensitivities in Midwest Generation's assumptions used to calculate fair value, see "Market Risk Exposures—Derivative Instruments—Fair Value Disclosures." For further information on derivative instruments, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 5. Derivative Instruments and Hedging Activities."


Impairment of Long-Lived Assets

Nature of Estimates Required.    Long-lived assets, including intangible assets, are evaluated for impairment in accordance with applicable authoritative guidance. Authoritative guidance requires that if the undiscounted expected future cash flow from a company's assets or group of assets (without interest charges) is less than its carrying value, asset impairment must be recognized on the financial statements. The impairment charges, if applicable, are calculated as the excess of the asset's carrying value over its fair value, which represents the discounted expected future cash flows attributable to the asset or, in the case of assets expected to be sold, at fair value less costs to sell. Long-lived assets for impairment are evaluated whenever indicators of impairment exist or when there is a commitment to sell or dispose of the asset. These evaluations may result from significant decreases in the market price of an asset, a significant adverse change in the extent or manner in which an asset is being used in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of an asset, as well as economic or operational analyses.

Key Assumptions and Approach Used.    The assessment of impairment requires significant management judgment to determine: (1) if an indicator of impairment has occurred, (2) how assets should be grouped, (3) the forecast of undiscounted expected future cash flow over the asset's estimated useful life to determine if an impairment exists, and (4) if an impairment exists, the fair value of the asset or asset group. Factors that are considered important, which could trigger an impairment, include operating losses, projected future operating losses, the financial condition of counterparties, or significant negative industry or economic trends. The determination of fair value requires management to apply judgment in: (1) estimating future prices of energy and capacity in wholesale energy markets and fuel prices that are susceptible to significant change, (2) environmental and maintenance expenditures, and (3) the time period due to the length of the estimated remaining useful lives.

Effect if Different Assumptions Used.    The estimates and assumptions used to determine whether an impairment exists are subject to a high degree of uncertainty. The estimated fair value of an asset would change materially if different estimates and assumptions were used to

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determine the amounts or timing of future revenues, environmental compliance costs or operating expenditures.


Application to Merchant Coal-Fired Power Plants

Weak commodity prices combined with continuing, heightened public policy pressure on coal generation have resulted in continuing uncertainties for merchant coal-fired power plants, which may require significant capital and increased operating costs to meet environmental requirements. For a discussion of environmental requirements, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 9. Environmental Developments." Management has reviewed long-term cash flow forecasts that include assumptions about future electricity and fuel prices, future capacity payments under the PJM RPM, and future capital expenditure requirements under different scenarios. Assumptions included in the long-term cash flow forecasts include:

Observable market prices for electricity and fuel to the extent available and long-term prices developed based on a fundamental price model;

Long-term capacity prices based on the assumption that the PJM RPM capacity market would continue consistent with its current structure, with expected increases in revenues as a result of declines in reserve margins beyond the price of the latest auctions; and

Plans for compliance with both existing and possible future environmental regulations.

If electricity and capacity prices do not increase consistent with the fundamental forecast or if Midwest Generation decides not to install additional environmental control equipment and, instead, shuts down one or more coal-fired power plants, the forecasted cash flow would be less than expected and impairment may result.

Midwest Generation includes allocated acquired emission allowances as part of each power plant asset group. Midwest Generation's unit of account is at the plant level and, accordingly, the closure of a unit at a multi-unit site would not result in an impairment of property, plant and equipment unless such condition were to affect an impairment assessment on the entire plant.

The following table summarizes the net book value of Midwest Generation's asset groups at December 31, 2010:

(in millions)
   
 
   

Crawford Station

  $ 178  

Fisk Station

    124  

Joliet Station

    771  

Powerton Station

    856  

Waukegan Station

    365  

Will County Station

    537  
   

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Accounting for Contingencies, Guarantees and Indemnities

Nature of Estimates Required.    Midwest Generation records loss contingencies when it determines that the outcome of future events is probable of occurring and when the amount of the loss can be reasonably estimated. When a guarantee or indemnification subject to authoritative guidance is entered into, Midwest Generation records a liability for the estimated fair value of the underlying guarantee or indemnification. Gain contingencies are recognized in the financial statements when they are realized.

Key Assumptions and Approach Used.    The determination of a reserve for a loss contingency is based on management judgment and estimates with respect to the likely outcome of the matter, including the analysis of different scenarios. Liabilities are recorded or adjusted when events or circumstances cause these judgments or estimates to change. In assessing whether a loss is a reasonable possibility, Midwest Generation may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases. Midwest Generation provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. Some guarantees and indemnifications could have a significant financial impact under certain circumstances, and management also considers the probability of such circumstances occurring when estimating the fair value.

Midwest Generation agreed to reimburse Commonwealth Edison and Exelon Generation Company LLC for 50% of specific asbestos claims pending as of February 2003 and related expenses less recovery of insurance costs, and agreed to a sharing arrangement for liabilities and expenses associated with future asbestos-related claims as specified in a supplemental agreement. The estimated liability is based on studies that estimate future losses based on claims experience and other available information. In calculating future losses, various assumptions were made, including, but not limited to, the settlement of future claims under the supplemental agreement, the distribution of exposure sites and that the filing date of asbestos claims will not be after 2044. At December 31, 2010, Midwest Generation had recorded a liability of $56 million related to this contract indemnity.

Effect if Different Assumptions Used.    Actual amounts realized upon settlement of contingencies may be different than amounts recorded and disclosed and could have a significant impact on the liabilities, revenues and expenses recorded on the consolidated financial statements. In addition, for guarantees and indemnities actual results may differ from the amounts recorded and disclosed and could have a significant impact on Midwest Generation's consolidated financial statements. For a discussion of contingencies, guarantees and indemnities, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies—Guarantees and Indemnities," "—Contingencies" and "Item 1. Business—Environmental Matters and Regulations."


Income Taxes

Nature of Estimates Required.    As part of the process of preparing its consolidated financial statements, Midwest Generation is required to estimate its income taxes for each jurisdiction

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in which it operates. This process involves estimating actual current period tax expense together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within Midwest Generation's consolidated balance sheet.

Midwest Generation takes certain tax positions it believes are applied in accordance with the applicable tax laws. However, these tax positions are subject to interpretation by the Internal Revenue Service, state tax authorities and the courts. Midwest Generation determines its uncertain tax positions in accordance with the authoritative guidance.

Key Assumptions and Approach Used.    Accounting for tax obligations requires management judgment. Management uses judgment in determining whether the evidence indicates it is more likely than not, based solely on the technical merits, that a tax position will be sustained and to determine the amount of tax benefits to be recognized. Judgment is also used in determining the likelihood a tax position will be settled and possible settlement outcomes. In assessing its uncertain tax positions, Midwest Generation considers, among others, the following factors: the facts and circumstances of the position, regulations, rulings, and case law, opinions or views of legal counsel and other advisers, and the experience gained from similar tax positions. Management evaluates uncertain tax positions at the end of each reporting period and makes adjustments when warranted based on changes in fact or law.

Effect if Different Assumptions Used.    Actual income taxes may differ from the estimated amounts which could have a significant impact on the liabilities, revenues and expenses recorded in the financial statements. Midwest Generation continues to be under audit or subject to audit for multiple years in various jurisdictions. Significant judgment is required to determine the tax treatment of particular tax positions that involve interpretations of complex tax laws. A tax liability has been recorded with respect to tax positions in which the outcome is uncertain and the effect is estimable. Such liabilities are based on judgment and a final determination could take many years from the time the liability is recorded and the related filing position is no longer subject to review. Furthermore, settlement of tax positions included in open tax years may be resolved by compromises of tax positions based on current factors and business considerations that may result in material adjustments to income taxes previously estimated. For further discussion, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 6. Income Taxes."

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information responding to Item 7A is filed with this report under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Midwest Generation's management, under the supervision and with the participation of the company's President and Chief Financial Officer, has evaluated the effectiveness of Midwest Generation's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this report. Based on that evaluation, the President and Chief Financial Officer concluded that, as of the end of the period, Midwest Generation's disclosure controls and procedures were effective.


Management's Report on Internal Control over Financial Reporting

Midwest Generation's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), for Midwest Generation. Under the supervision and with the participation of its President and Chief Financial Officer, Midwest Generation's management conducted an evaluation of the effectiveness of Midwest Generation's internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under the COSO framework, Midwest Generation's management concluded that Midwest Generation's internal control over financial reporting was effective as of December 31, 2010.


Internal Control over Financial Reporting

There were no changes in Midwest Generation's internal control over financial reporting (as that term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the

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period to which this report relates that have materially affected, or are reasonably likely to materially affect, Midwest Generation's internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

None.

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MIDWEST GENERATION, LLC AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Member and Board of Managers of Midwest Generation, LLC:

In our opinion, the consolidated financial statements listed in the index appearing under Item 8 of the Form 10-K present fairly, in all material respects, the financial position of Midwest Generation, LLC and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) of the Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for fair value disclosure principles as of January 1, 2010.

/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 28, 2011

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MIDWEST GENERATION, LLC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
(in millions)

 
  Years Ended December 31,  
 
  2010
  2009
  2008
 
   

Operating Revenues from Marketing Affiliate

  $ 1,479   $ 1,487   $ 1,778  

Operating Expenses

                   
 

Fuel

    519     547     482  
 

Plant operations

    447     396     433  
 

Depreciation and amortization

    155     150     147  
 

Asset write-downs and (gain) on buyout of contract (Notes 2 and 8)

    48     3     (16 )
 

Administrative and general

    22     21     22  
       
   

Total operating expenses

    1,191     1,117     1,068  
       

Operating income

    288     370     710  
       

Other Income (Expense)

                   
 

Interest and other income

    117     117     127  
 

Interest expense

    (48 )   (62 )   (77 )
       
   

Total other income

    69     55     50  
       

Income before income taxes

    357     425     760  

Provision for income taxes

    142     166     283  
       

Net Income

  $ 215   $ 259   $ 477  
   

The accompanying notes are an integral part of these consolidated financial statements.

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MIDWEST GENERATION, LLC AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
(in millions, except unit amounts)

 
  December 31,  
 
  2010
  2009
 
   

Assets

             

Current Assets

             
 

Cash and cash equivalents

  $ 295   $ 237  
 

Due from affiliates

    124     137  
 

Fuel inventory

    85     74  
 

Spare parts inventory

    38     34  
 

Interest receivable from affiliate

    56     55  
 

Derivative assets

    47     98  
 

Intangible assets

    2     11  
 

Other current assets

    33     31  
       
   

Total current assets

    680     677  
       

Property, plant and equipment, net

    2,905     3,002  

Notes receivable from affiliate

    1,343     1,348  

Long-term derivative assets

    3     24  

Other assets

    11     12  
       

Total Assets

  $ 4,942   $ 5,063  
   

Liabilities and Member's Equity

             

Current Liabilities

             
 

Accounts payable

  $ 43   $ 39  
 

Accrued liabilities

    60     66  
 

Due to affiliates

    16     20  
 

Interest payable

    22     26  
 

Derivative liabilities

    3     19  
 

Deferred taxes

    10     43  
 

Current portion of lease financing

    109     120  
       
   

Total current liabilities

    263     333  
       

Lease financing, net of current portion

    556     665  

Deferred taxes

    129     167  

Long-term derivative liabilities

    2     4  

Benefit plans and other long-term liabilities

    214     149  
       

Total Liabilities

    1,164     1,318  
       

Commitments and Contingencies (Notes 5 and 8)

             

Member's Equity

             
 

Membership interests, no par value; 100 units authorized, issued and outstanding

         
 

Additional paid-in capital

    3,511     3,511  
 

Accumulated earnings

    270     180  
 

Accumulated other comprehensive income

    (3 )   54  
       

Total Member's Equity

    3,778     3,745  
       

Total Liabilities and Member's Equity

  $ 4,942   $ 5,063  
   

The accompanying notes are an integral part of these consolidated financial statements.

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MIDWEST GENERATION, LLC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY
(in millions)

 
  Membership
Interests

  Additional
Paid-in
Capital

  Accumulated
Earnings
(Deficit)

  Accumulated
Other
Comprehensive
Income (Loss)

  Member's
Equity

 
   

Balance at December 31, 2007

  $   $ 3,587   $ (226 ) $ (44 ) $ 3,317  
 

Net income

            477         477  
 

Other comprehensive income

                187     187  
 

Cash distribution to parent

        (76 )   (130 )       (206 )
       

Balance at December 31, 2008

        3,511     121     143     3,775  
 

Net income

            259         259  
 

Other comprehensive loss

                (89 )   (89 )
 

Cash distribution to parent

            (200 )       (200 )
       

Balance at December 31, 2009

        3,511     180     54     3,745  
 

Net income

            215         215  
 

Other comprehensive loss

                (57 )   (57 )
 

Cash distribution to parent

            (125 )       (125 )
       

Balance at December 31, 2010

  $   $ 3,511   $ 270   $ (3 ) $ 3,778  
   

The accompanying notes are an integral part of these consolidated financial statements.

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MIDWEST GENERATION, LLC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)

 
  Years Ended December 31,  
 
  2010
  2009
  2008
 
   

Net Income

  $ 215   $ 259   $ 477  

Other comprehensive income (loss), net of tax

                   
 

Pension and postretirement benefits other than pensions:

                   
   

Prior service adjustment, net of tax benefit of $(4) for 2010

    (6 )       (1 )
   

Net gain (loss) adjustment, net of tax expense (benefit) of $(4), $4 and $(13) for 2010, 2009 and 2008, respectively

    (6 )   6     (21 )
   

Amortization of net loss included in expense, net of tax

        1      
 

Unrealized gains (losses) on derivatives qualified as cash flow hedges:

                   
   

Unrealized holding gains arising during period, net of income tax expense of $29, $27 and $93 for 2010, 2009 and 2008, respectively

    45     39     146  
   

Reclassification adjustments included in net income, net of income tax expense (benefit) of $(58), $(88) and $40 for 2010, 2009 and 2008, respectively

    (90 )   (135 )   63  
       

Other comprehensive income (loss), net of tax

    (57 )   (89 )   187  
       

Comprehensive Income

  $ 158   $ 170   $ 664  
   

The accompanying notes are an integral part of these consolidated financial statements.

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MIDWEST GENERATION, LLC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

 
  Years Ended December 31,  
 
  2010
  2009
  2008
 
   

Cash Flows From Operating Activities

                   
 

Net income

  $ 215   $ 259   $ 477  
 

Adjustments to reconcile income to net cash provided by operating activities:

                   
   

Depreciation and amortization

    156     153     151  
   

Asset write-downs and (gain) on buyout of contract

    48     3     (16 )
   

Deferred taxes

    (33 )   76     20  
   

Other non-cash items

    (3 )   (1 )   (1 )
 

Decrease (increase) in due to/from affiliates

    9     37     (128 )
 

Decrease (increase) in inventory

    (15 )   2     (18 )
 

Decrease in loans to affiliate for margin deposits

            54  
 

Increase in other assets

    (2 )   (9 )   (10 )
 

Decrease (increase) in intangible assets

    9     41     (30 )
 

Decrease in accounts payable and other current liabilities

    (3 )   (21 )    
 

Decrease in interest payable

    (4 )   (5 )   (3 )
 

Increase (decrease) in other liabilities

    44     (5 )   (16 )
 

Decrease (increase) in derivative assets and liabilities

    (20 )   (70 )   65  
       
   

Net cash provided by operating activities

    401     460     545  
       

Cash Flows From Financing Activities

                   
 

Borrowings on long-term debt

            700  
 

Repayments of long-term debt

        (475 )   (225 )
 

Cash distributions to parent

    (125 )   (200 )   (206 )
 

Repayment of capital lease obligation

    (120 )   (126 )   (119 )
       
   

Net cash provided by (used in) financing activities

    (245 )   (801 )   150  
       

Cash Flows From Investing Activities

                   
 

Capital expenditures

    (107 )   (78 )   (116 )
 

Proceeds from sale of assets

            1  
 

Proceeds from sale of emission allowances

    3     1     2  
 

Proceeds from settlement of claim

    1          
 

Decrease (increase) in restricted deposits

        1     (1 )
 

Repayment of loan to affiliate

    5     4     4  
       
   

Net cash used in investing activities

    (98 )   (72 )   (110 )
       

Net increase (decrease) in cash and cash equivalents

    58     (413 )   585  

Cash and cash equivalents at beginning of period

    237     650     65  
       

Cash and cash equivalents at end of period

  $ 295   $ 237   $ 650  
   

The accompanying notes are an integral part of these consolidated financial statements.

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MIDWEST GENERATION, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Midwest Generation, LLC (Midwest Generation) is an indirect wholly owned subsidiary of Edison Mission Energy (EME). EME is an indirect wholly owned subsidiary of Edison International. Midwest Generation was formed for the purpose of acquiring, owning or leasing and operating multiple fossil-fuel electric generating units located within the state of Illinois, which are referred to as the Midwest Generation plants, for the purpose of producing electric energy.

As of December 31, 2010, Midwest Generation operated 5,477 MW of power plants, based on installed capacity acknowledged by PJM, consisting of:

six coal-fired generating plants consisting of 5,172 MW, which include the Powerton, Joliet, Will County, Waukegan, Crawford and Fisk Stations; and

the Fisk and Waukegan on-site, oil-fired generating peakers consisting of 305 MW.

Midwest Generation has a contract with Edison Mission Marketing & Trading, Inc. (EMMT), a marketing affiliate, to sell energy and capacity into the wholesale market, to engage in hedging activities and to provide scheduling and other services. Midwest Generation has a revolving credit agreement with EMMT in order to make revolving loans to, or have letters of credit issued on behalf of, EMMT, in order to provide credit support for forward contracts. EMMT also purchases natural gas and has the ability to enter into fuel hedging arrangements on Midwest Generation's behalf.


Basis of Presentation

The consolidated financial statements include the accounts of Midwest Generation and its subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements.

The preparation of financial statements in conformity with United States generally accepted accounting principles requires Midwest Generation to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain prior year reclassifications have been made to conform to the current year financial statement presentation pertaining to immaterial items.


Cash Equivalents

Cash equivalents include money market funds totaling $270 million and $237 million at December 31, 2010 and 2009, respectively. The carrying value of cash equivalents equals the fair value as all investments have maturities of less than three months.

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Derivative Instruments and Hedging Activities

Authoritative guidance on derivatives and hedging establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). Midwest Generation is required to record derivatives on its balance sheets as either assets or liabilities measured at fair value unless otherwise exempted from derivative treatment as normal purchases and sales. All changes in the fair value of derivative instruments are recognized currently in earnings, unless specific hedge criteria are met, which requires that Midwest Generation formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

The accounting guidance for cash flow hedges provides that the effective portion of gains or losses on derivative instruments designated and qualifying as cash flow hedges be reported as a component of other comprehensive income and be reclassified into earnings in the same period during which the hedged forecasted transaction affects earnings. The remaining gains or losses on the derivative instruments, if any, must be recognized currently in earnings.

Where Midwest Generation's derivative instruments are subject to a master netting agreement and the criteria of authoritative guidance are met, Midwest Generation presents its derivative assets and liabilities on a net basis on its consolidated balance sheets. The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows. Derivative and hedging accounting policies are discussed further in Note 5—Derivative Instruments and Hedging Activities.


Deferred Financing Costs

Bank, legal and other direct costs incurred in connection with obtaining financing are deferred and amortized as interest expense using a method that approximates the effective interest rate method over the term of the related debt. Accumulated amortization of these costs at December 31, 2010 and 2009 amounted to $4 million and $3 million, respectively. Amortization of deferred financing costs charged to interest expense was $1 million in each of 2010, 2009 and 2008.


Impairment of Long-Lived Assets

Midwest Generation evaluates the impairment of its long-lived assets based on a review of estimated future cash flows expected to be generated whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount of the asset exceeds the expected future cash flows, undiscounted and without interest charges, then an impairment loss is recognized.


Income Taxes and Tax-Allocation Agreements

Midwest Generation is included in the consolidated federal and state income tax returns of Edison International and is party to a tax-allocation agreement with its parent Edison Mission Midwest Holdings. As long as Edison International continues to own, directly or indirectly, at least 80% of the voting power of the stock of EME and its existing subsidiaries and at least 80% of the value of such stock, Midwest Generation will be included in the consolidated

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federal and state income tax returns of Edison International. In accordance with the agreement and the tax-allocation procedures that have been in effect since Midwest Generation's formation, its current tax liability or benefit is generally determined on a separate return basis, except for calculating consolidated state income taxes, for which Midwest Generation uses the state tax apportionment factors of the Edison International group. Also, while Midwest Generation is generally subject to separate return limitations for net losses, under the tax-allocation agreement it is permitted to transfer to Edison Mission Midwest Holdings, or its subsidiaries, net operating loss benefits which would not yet be realized in a separate return in exchange for a reduction in Midwest Generation's intercompany account balances (including subordinated loans). The amount on the balance sheet associated with this tax-allocation agreement totaled $9 million and $11 million at December 31, 2010 and 2009, respectively, included in due to affiliates.

Midwest Generation accounts for deferred income taxes using the asset-and-liability method, wherein deferred tax assets and liabilities are recognized for future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using enacted income tax rates.


Intangible Assets

Intangible assets consist of emission allowances purchased by Midwest Generation. These emission allowances are stated at weighted average cost. Emission allowances do not have a pre-determined contractual term or expiration date. Acquired intangible assets with indefinite lives are not amortized; rather they are tested at least annually for impairment or when events or changes in circumstances indicate that the asset might be impaired. Intangible assets are periodically reviewed when impairment indicators are present to assess recoverability from future operations using undiscounted future cash flows.


Inventory

Inventory consists of spare parts, coal, fuel oil, and other raw materials and is stated at the lower of weighted average cost or market. Inventory is recorded at actual cost when purchased and then expensed at weighted-average cost as used. Generally, cost is reduced to market value if the market value of inventory has declined and it is probable that revenues earned from the generation of power will not cover the cost of the inventory in the ordinary course of business.


New Accounting Guidance

Accounting Guidance Adopted in 2010

Fair Value Measurements and Disclosures

The Financial Accounting Standards Board (FASB) issued an accounting standards update that provides for new disclosure requirements related to fair value measurements. The requirements, which Midwest Generation adopted effective January 1, 2010, include separate disclosure of significant transfers in and out of Levels 1 and 2 and the reasons for the transfers. The update also clarified existing disclosure requirements for the level of

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disaggregation, inputs and valuation techniques. Since this guidance impacts disclosures only, the adoption did not have an impact on Midwest Generation's consolidated results of operations, financial position or cash flows. In addition, effective January 1, 2011, the Level 3 reconciliation of fair value measurements using significant unobservable inputs should include gross rather than net information about purchases, sales, issuances and settlements. The guidance impacts disclosures only. For further discussion, see Note 3—Fair Value Measurements.


Accounting Guidance Not Yet Adopted

Recently issued accounting standards updates by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the Securities and Exchange Commission that were effective after December 31, 2010 are not expected to have a material effect on Midwest Generation's consolidated results of operations or financial position.


Property, Plant and Equipment

Property, plant and equipment are stated at cost. Gains and losses from the sale of assets are recognized at the time of the transaction. As part of the acquisition of the Midwest Generation plants, Midwest Generation acquired emission allowances under the United States Environmental Protection Agency's (US EPA's) Acid Rain Program. Midwest Generation uses these emission allowances in the normal course of its business to generate electricity and has classified them as part of property, plant and equipment.

Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:

 

Power plant facilities

  3 to 30 years

Emission allowances

  25 to 33.75 years

Equipment, furniture and fixtures

  3 to 7 years

Plant and equipment under lease financing

  30 to 33.75 years
 

The remaining estimated useful life or lease term at December 31, 2010 for the Midwest Generation coal plants is as follows:

 

Crawford Station

  14 years

Fisk Station

  14 years

Joliet Unit 6

  19 years

Joliet Units 7 and 81

  20 years

Powerton Station1

  23 years

Waukegan Station

  14 years

Will County Station

  19 years
 

1   Represents leased facilities. The leases may be renewed based on criteria outlined in their respective agreements.

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Estimated useful lives of individual facilities could be impacted by decisions related to the installation of environmental remediation equipment. If environmental compliance equipment is not installed, the useful life may be shortened.

Certain major pieces of Midwest Generation's equipment require periodic repairs and maintenance. These costs, including major maintenance costs, are expensed as incurred.


Restricted Deposits

Restricted deposits of $3 million as of December 31, 2010 and 2009 were included in other assets on Midwest Generation's consolidated balance sheet. These cash balances are restricted to provide collateral for fuel suppliers.


Revenue Recognition

Generally, revenues and related costs are recognized when electricity is generated or services are provided unless the transaction is accounted for as a derivative and does not qualify for the normal purchases and sales exception. Midwest Generation enters into power and fuel hedging and optimization transactions under a contract with EMMT. These transactions are executed primarily through the use of physical forward commodity purchases and sales and financial commodity swaps and options. With respect to its physical forward contracts, Midwest Generation generally takes title to the commodities, and assumes the risks and rewards of ownership. Midwest Generation records the settlement of non-trading physical forward contracts on a gross basis. Midwest Generation nets the cost of purchased power against related third-party sales in markets that use locational marginal pricing, currently PJM. Financial swap and option transactions are settled net and, accordingly, Midwest Generation does not take title to the underlying commodity. Therefore, gains and losses from settlement of financial swaps and options are recorded net in operating revenues on the accompanying consolidated income statements.


Note 2. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 
  December 31,  
(in millions)
  2010
  2009
 
   

Land

  $ 43   $ 33  

Power plant facilities

    2,101     2,035  

Emission allowances

    834     834  

Construction in progress

    111     128  

Equipment, furniture and fixtures

    18     16  

Plant and equipment under lease financing

    1,339     1,348  
       

    4,446     4,394  

Less accumulated depreciation and amortization

    1,541     1,392  
       

Property, plant and equipment, net

  $ 2,905   $ 3,002  
   

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Property, plant and equipment includes assets which are capitalized under lease financing. Midwest Generation recorded amortization expense related to the leased facilities of $42 million for all three years ended December 31, 2010, 2009 and 2008. Accumulated amortization related to the leased facilities was $433 million and $393 million at December 31, 2010 and 2009, respectively.

In 2010, Midwest Generation recorded a $40 million write-off reflected in "Asset-write-downs and (gain) on buyout of contract" of capitalized construction in progress costs for air emissions control technology that is not currently being pursued for use at the Powerton Station. In addition, Midwest Generation recorded a loss on disposal of assets of $8 million primarily related to the retirement of assets at the Powerton Station due to plant maintenance activities also reflected in "Asset write-downs and (gain) on buyout of contract" on Midwest Generation's consolidated statements of income.


Asset Retirement Obligations

Authoritative guidance on asset retirement obligations (AROs) requires entities to record the fair value of a liability for an ARO in the period in which it is incurred, including a liability for the fair value of a conditional ARO, if the fair value can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement. When an ARO liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is increased for accretion expense to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Settlement of an ARO liability for an amount other than its recorded amount results in an increase or decrease in expense.

Midwest Generation has conditional AROs related to asbestos removal and disposal costs for owned buildings and power plant facilities. Midwest Generation has not recorded a liability related to these structures because it cannot reasonably estimate the obligation's fair value at this time. The range of time over which Midwest Generation may settle these obligations in the future (demolition or other method) is sufficiently large to not allow for the use of expected present value techniques.

Midwest Generation recorded a liability representing expected future costs associated with site reclamation, facilities dismantlement and removal of environmental hazards, which is included in benefit plans and other long-term liabilities on Midwest Generation's consolidated balance sheets. A reconciliation of the changes in the ARO liability is as follows:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Beginning balance

  $ 2   $ 2   $ 1  

Revisions

             

Liabilities added

            1  
       

Ending balance

  $ 2   $ 2   $ 2  
   

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Note 3. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price"). Fair value of an asset or a liability should consider assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk. The fair value of derivative assets' nonperformance risk was not material as of December 31, 2010 and 2009.

Midwest Generation categorizes financial assets and liabilities into a fair value hierarchy based on valuation inputs used to derive fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The following table sets forth Midwest Generation's assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:

 
  As of December 31, 2010  
(in millions)
  Level 1
  Level 2
  Level 3
  Netting and
Collateral1

  Total
 
   

Assets at Fair Value

                               
 

Money market funds2

  $ 270   $   $   $   $ 270  
       
 

Derivatives

                               
   

Electricity

  $   $ 42   $   $ 8   $ 50  
   

Fuel oil

    8             (8 )    
       
 

Total assets

  $ 8   $ 42   $   $   $ 50  
       

Liabilities at Fair Value

                               
 

Derivatives

                               
   

Electricity

  $   $ 5   $   $   $ 5  
       
 

Total liabilities

  $   $ 5   $   $   $ 5  
   



 

 

As of December 31, 2009

 
   

Assets at Fair Value

                               
 

Money market funds2

  $ 237   $   $   $   $ 237  
       
 

Derivatives

                               
   

Electricity

  $   $ 134   $ 3   $ (33 ) $ 104  
   

Natural gas

    2                 2  
   

Fuel oil

    16                   16  
       
 

Total assets

  $ 18   $ 134   $ 3   $ (33 ) $ 122  
       

Liabilities at Fair Value

                               
 

Derivatives

                               
   

Electricity

  $   $ 22   $   $ 1   $ 23  
       
 

Total liabilities

  $   $ 22   $   $ 1   $ 23  
   

1   Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

2

 

Included in cash and cash equivalents on Midwest Generation's consolidated balance sheets.

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The following table sets forth a summary of changes in the fair value of assets and liabilities, net categorized as Level 3:

(in millions)
  2010
  2009
 
   

Fair value, net asset at beginning of periods

  $ 3   $ 1  

Total realized/unrealized gains (losses):

             
 

Included in earnings1

        24  
 

Included in accumulated other comprehensive income

    3     3  

Purchases and settlements, net

    (3 )   (24 )

Transfers in or out of Level 3

    (3 )   (1 )
       

Fair value, net asset at end of periods

  $   $ 3  
   

Change during the periods in unrealized gains related to assets and liabilities, net held at end of periods1

 
$

1
 
$

2
 
   

1   Reported in operating revenues on Midwest Generation's consolidated statements of income.

Midwest Generation determines the fair value of transfers in and out of each level at the end of each reporting period. There were no significant transfers between levels during 2010, 2009 and 2008.


Valuation Techniques used to Determine Fair Value

Level 1

Level 1 includes assets and liabilities where unadjusted quoted prices in active markets are available at the measurement date for identical assets and liabilities. Financial assets and liabilities classified as Level 1 include exchange-traded derivatives and money market funds.


Level 2

Level 2 pricing inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the derivative instrument. Financial assets and liabilities utilizing Level 2 inputs include over-the-counter derivatives.

Derivative contracts that are over-the-counter traded are valued using pricing models and are generally classified as Level 2. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. Forward market prices are developed based on the source that best represents trade activity in each market. Broker quotes or prices from exchanges are used to validate and corroborate the primary source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity. Broker quotes are incorporated when corroborated with other information which may include a combination of prices from exchanges, other brokers, and comparison to executed trades.

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Level 3

Level 3 includes financial assets and liabilities where fair value is determined using techniques that require significant unobservable inputs. Over-the-counter options, bilateral contracts, capacity contracts, qualifying facilities contracts, derivative contracts that trade infrequently (such as financial transmission rights and over-the-counter derivatives at illiquid locations), long-term power agreements, and derivative contracts with counterparties that have significant nonperformance risks are classified as Level 3. In circumstances where EMMT cannot verify fair value with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. As markets continue to develop and more pricing information becomes available, EMMT continues to assess valuation methodologies used to determine fair value.

For derivative contracts that trade infrequently (illiquid financial transmission rights), changes in fair value are based on the hypothetical sale of illiquid positions. Objective criteria are reviewed, including system congestion and other underlying drivers and fair value is adjusted when it is concluded that a change in objective criteria would result in a new valuation that better reflects fair value. For illiquid long-term power agreements, fair value is based upon a discounting of future electricity and natural gas prices derived from a proprietary model using the risk free discount rate for a similar duration contract, adjusted for credit risk and market liquidity. Changes in fair value are based on changes to forward market prices, including forecasted prices for illiquid forward periods. The fair value of the majority of Midwest Generation's derivatives that are classified as Level 3 is determined using uncorroborated non-binding broker quotes and models that may require EMMT to extrapolate short-term observable inputs in order to calculate fair value. Broker quotes are obtained from several brokers and compared against each other for reasonableness.


Note 4. Long-Term Debt

Credit Facility

Midwest Generation maintains a $500 million working capital facility that matures in June 2012, with an option to extend for up to two years. The interest rate on borrowings outstanding under this credit facility is currently London Interbank Offered Rate (LIBOR) plus 1.15%, except if average utilized commitments during a period exceed $250 million, in which case the margin increases to 1.275%. Midwest Generation uses its secured working capital facility to provide credit support for its hedging activities and for general working capital purposes. Midwest Generation can also support its hedging activities by granting liens to eligible hedge counterparties. As of December 31, 2010 and 2009, Midwest Generation had no borrowings outstanding and $3 million of letters of credit had been utilized under its working capital facility.

In connection with Midwest Generation's working capital facility, Midwest Generation has given a first priority security interest in substantially all the coal-fired generating plants owned by Midwest Generation and the assets relating to those plants, the receivables of EMMT directly related to Midwest Generation's hedging activities, and the pledge of the intercompany notes from EME (approximately $1.3 billion at December 31, 2010). The net book value of assets pledged or mortgaged was approximately $2.8 billion at December 31,

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2010. In addition to these assets, Midwest Generation's membership interests and the capital stock of Edison Mission Midwest Holdings were pledged.


Other Covenants

Midwest Generation is bound by the covenants in its credit agreement and certain covenants under the Powerton-Joliet lease documents. These covenants include restrictions on the ability to, among other things, incur debt, create liens on its property, merge or consolidate, sell assets, make investments, engage in transactions with affiliates, make distributions, make capital expenditures, enter into agreements restricting its ability to make distributions, engage in other lines of business, enter into swap agreements, or engage in transactions for any speculative purpose. In order for Midwest Generation to make a distribution, it must be in compliance with the covenants specified under its credit agreement, including maintaining a debt to capitalization ratio of no greater than 0.60 to 1. At December 31, 2010, the debt to capitalization ratio was 0.15 to 1.


Note 5. Derivative Instruments and Hedging Activities

Midwest Generation uses derivative instruments to reduce its exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that Midwest Generation does not use derivative instruments to hedge these market risks, the unhedged portions will be subject to the risks and benefits of spot market price movements.

Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on Midwest Generation's consolidated balance sheets with offsetting changes recorded on the consolidated statements of income. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized, to the extent effective, on Midwest Generation's consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive income until the related forecasted transaction occurs.

Where Midwest Generation's derivative instruments are subject to a master netting agreement and the criteria of authoritative guidance are met, Midwest Generation presents its derivative assets and liabilities on a net basis on its consolidated balance sheets.

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Notional Volumes of Derivative Instruments

The following table summarizes the notional volumes of derivatives used for hedging activities:

December 31, 2010  
Commodity
  Instrument
  Classification
  Unit of
Measure

  Cash Flow
Hedges

  Economic
Hedges

 
   

Electricity

  Forwards/Futures   Sales   GWh1     12,961 2   13,437 4

Electricity

  Forwards/Futures   Purchases   GWh     408 2   14,066 4

Electricity

  Capacity   Sales   MW-Day
(in thousands)
    146 3    

Electricity

  Congestion   Purchases   GWh         144 5

Fuel oil

  Forwards/Futures   Sales   barrels         250,000  

Fuel oil

  Forwards/Futures   Purchases   barrels         490,000  
   


December 31, 2009


 

 

 

 

 

 

 

 

 

 

 
   

Electricity

 

Forwards/Futures

 

Sales

 

GWh1

   
20,653

2
 
19,004

4

Electricity

  Forwards/Futures   Purchases   GWh     106 2   18,406 4

Electricity

  Capacity   Sales   MW-Day
(in thousands)
    254 3    

Electricity

  Capacity   Purchases   MW-Day
(in thousands)
    11 3   2 3

Natural gas

  Forwards/Futures   Sales   bcf1         3.3  

Fuel oil

  Forwards/Futures   Sales   barrels         250,000  

Fuel oil

  Forwards/Futures   Purchases   barrels         625,000  
   

1   The terms gigawatt-hours and billion cubic feet are referred to as GWh and bcf, respectively.

2

 

Includes forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the Midwest Generation plants which meet the normal purchases and sales exception and are accounted for on the accrual method.

3

 

Midwest Generation's hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM Reliability Pricing Model (RPM) auction is not accounted for as a derivative.

4

 

Midwest Generation also entered into transactions that adjust financial and physical positions, or day-ahead and real-time positions to reduce costs or increase gross margin. These positions largely offset each other. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.

5

 

Congestion contracts include financial transmission rights, transmission congestion contracts or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.

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Fair Value of Derivative Instruments

The following table summarizes the fair value of commodity derivative instruments for non-trading purposes reflected on Midwest Generation's consolidated balance sheets:

December 31, 2010  
 
  Derivative Assets   Derivative Liabilities    
 
 
  Net Assets
 
(in millions)
  Short-term
  Long-term
  Subtotal
  Short-term
  Long-term
  Subtotal
 
   

Cash flow hedges

  $ 41   $ 2   $ 43   $ 3   $ 2   $ 5   $ 38  

Economic hedges

    26     1     27     20         20     7  
       

    67     3     70     23     2     25     45  

Netting and collateral received1

    (20 )       (20 )   (20 )       (20 )    
       

Total

  $ 47   $ 3   $ 50   $ 3   $ 2   $ 5   $ 45  
   


December 31, 2009


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
   

Cash flow hedges

 
$

152
 
$

17
 
$

169
 
$

61
 
$

4
 
$

65
 
$

104
 

Economic hedges

    176     7     183     154         154     29  
       

    328     24     352     215     4     219     133  

Netting and collateral received1

    (230 )       (230 )   (196 )       (196 )   (34 )
       

Total

  $ 98   $ 24   $ 122   $ 19   $ 4   $ 23   $ 99  
   

1   Netting of derivative receivables and derivative payables and the related cash collateral received and paid is permitted when a legally enforceable master netting agreement exists with a derivative counterparty.


Income Statement Impact of Derivative Instruments

The following table provides the activity of accumulated other comprehensive income, containing information about the changes in the fair value of cash flow hedges, to the extent effective, and reclassification from accumulated other comprehensive income into results of operations:

 
  Cash Flow Hedge Activity1    
 
  Income Statement
Location

(in millions)
  2010
  2009
 

Accumulated other comprehensive income derivative gain at January 1

  $ 111   $ 268    

Effective portion of changes in fair value

    74     66    

Reclassification from accumulated other comprehensive income to net income

    (148 )   (223 ) Operating revenues
         

Accumulated other comprehensive income derivative gain at December 31

  $ 37   $ 111    
 

1   Unrealized derivative gains are before income taxes. The after-tax amounts recorded in accumulated other comprehensive income at December 31, 2010 and 2009 were $23 million and $68 million, respectively.

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The portion of a cash flow hedge that does not offset the change in the value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings.

Midwest Generation recorded net gains of $7 million, $5 million and $1 million in 2010, 2009 and 2008, respectively, in operating revenues on the consolidated statements of income representing the amount of cash flow hedge ineffectiveness.

The effect of realized and unrealized gains (losses) from derivative instruments used for non-trading purposes on the consolidated statements of income is presented below:

 
   
  December 31,  
 
  Income Statement Location
 
(in millions)
  2010
  2009
 
   

Economic hedges

  Operating revenues   $ 7   $ 39  

  Fuel costs     2     18  
   


Contingent Features

Midwest Generation sells merchant energy and capacity through EMMT, which has a below investment grade credit rating. Midwest Generation has cash on hand to provide credit support as needed for hedging contracts entered into by EMMT related to the Midwest Generation plants. EMMT borrows under its revolving credit agreement with Midwest Generation to provide credit support for futures and forward contracts. Loans provided under this revolving credit agreement are repaid by EMMT upon the return of the funds under the terms of the related forward contracts. The amount repaid includes interest earned, if any, under margin agreements supporting such contracts. As of December 31, 2010, EMMT had no borrowings outstanding under this revolving credit agreement.

Midwest Generation has entered into derivative contracts directly with third parties that do not require margin, but contain provisions that require Midwest Generation to comply with the terms and conditions of its credit facility. The credit facility contains financial covenants. Some hedge contracts include provisions related to a change in control or material adverse effect resulting from amendments or modifications to the related credit facility. Failure by Midwest Generation to comply with these provisions may result in a termination event under the hedge contracts, enabling the counterparties to terminate and liquidate all outstanding transactions and demand immediate payment of amounts owed to them. EMMT has hedge contracts that do not require margin, but provide that each party can request additional credit support in the form of adequate assurance of performance in the case of an adverse development affecting the other party. The aggregate fair value of all derivative instruments with credit-risk-related contingent features is in an asset position at December 31, 2010 and, accordingly, the contingent features described above do not currently have liquidity exposure. Future increases in power prices could expose Midwest Generation to termination payments or additional collateral postings under the contingent features described above.

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Collateral Deposits

Collateral deposits include cash collateral received from counterparties and brokers as credit support under derivative contracts. The amount of collateral deposits generally varies based on changes in fair value of the related positions. Midwest Generation nets counterparty receivables and payables where balances exist under master netting arrangements. Midwest Generation presents the portion of its cash collateral deposits netted with its derivative positions on its consolidated balance sheets. Cash collateral received from others that was offset against derivative assets totaled none and $34 million at December 31, 2010 and 2009, respectively.


Commodity Price Risk Management

Midwest Generation's operations create exposure to commodity price risk, which reflects the potential impact of a change in the market value of a particular commodity. Commodity price risks are actively monitored, with oversight provided by a risk management committee, to ensure compliance with Midwest Generation's risk management policies, through EMMT. EMMT uses estimates of the variability in gross margin to help identify, measure, monitor and control Midwest Generation's overall market risk exposure and earnings volatility with respect to hedge positions at the Midwest Generation plants. This measure allows management to aggregate overall commodity risk, compare risk on a consistent basis and identify changes in risk factors. Variability in gross margin measures the potential change in value of an asset or position, in each case over a given time interval, under normal market conditions, at a given confidence level. Given the inherent limitations of this measure and reliance on a single type of risk measurement tool, EMMT supplements this approach with the use of stress testing and worst-case scenario analysis for key risk factors, as well as stop-loss triggers volumetric exposure limits. When appropriate, EMMT manages the spread between the electric prices and fuel prices, and uses forward contracts, swaps, futures, or options contracts to achieve those objectives.


Credit Risk

In conducting Midwest Generation's marketing activities, EMMT enters into transactions with utilities, energy companies, financial institutions, and other companies, collectively referred to as counterparties. In the event a counterparty were to default on its trade obligation, Midwest Generation would be exposed to the risk of possible loss associated with market price changes occurring since the original contract was executed if the nonperforming counterparty were unable to pay the resulting damages owed to Midwest Generation. Midwest Generation's agreement with EMMT transfers the risk of non-payment of accounts receivable from counterparties to EMMT. Notwithstanding the foregoing, Midwest Generation will not be in default under the credit agreement if it fails to enforce payment from EMMT in the case of nonpayment of an account receivable from a counterparty, so long as the counterparty is rated investment grade.

The obligations of Midwest Generation under the credit agreement are secured by, among other things, an account of EMMT in which EMMT will deposit funds received from third-party counterparties for sales of energy and capacity from the Midwest Generation plants. See Note 4—Long-term Debt and Note 12—Related-Party Transactions—EMMT Agreements.

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To manage credit risk, EMMT evaluates the risk of potential defaults by counterparties. Credit risk is measured as the loss that EMMT would expect to incur if a counterparty failed to perform pursuant to the terms of its contractual obligations. To mitigate credit risk from counterparties, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary.

The majority of the coal for the Midwest Generation plants is purchased from suppliers under contracts which may be for multiple years. None of the coal suppliers to the Midwest Generation plants have investment grade credit ratings and, accordingly, Midwest Generation may have limited recourse to collect damages in the event of default by a supplier.

Midwest Generation derives a significant source of its operating revenues from electric power sold into the PJM market by EMMT. Sales into PJM accounted for approximately 79%, 62% and 58% of Midwest Generation's consolidated operating revenues for the years ended December 31, 2010, 2009 and 2008, respectively. Moody's Investors Service, Inc. (Moody's) rates PJM's debt Aa3. PJM, an RTO with over 300 member companies, maintains its own credit risk policies and does not extend unsecured credit to non-investment grade companies. Losses resulting from a PJM member default are shared by all other members using a predetermined formula.

For the year ended December 31, 2008, Midwest Generation derived 18% of its consolidated operating revenues from the sale of energy, capacity and ancillary services generated at the Midwest Generation plants to Commonwealth Edison Company (Commonwealth Edison) under load requirements services contracts.

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Note 6. Income Taxes

Current and Deferred Taxes

Income tax provision includes the current tax provision from operating income and the change in deferred income taxes during the year. The components of net accumulated deferred income tax liability were:

 
  December 31,  
(in millions)
  2010
  2009
 
   

Deferred tax assets

             
 

State taxes

  $ 9   $ 7  
 

Deferred income

    1     5  
 

Accrued charges and liabilities

    6      
       
   

Total

    16     12  
       

Deferred tax liabilities

             
 

Derivative instruments

  $ 1   $ 48  
 

Lease financing

        45  
 

Property, plant and equipment—basis differences

    154     120  
 

Accrued charges and liabilities

        9  
       
   

Total

    155     222  
       

Deferred tax liabilities, net

  $ 139   $ 210  
   

Classification of accumulated deferred income taxes

             
 

Included in current liabilities

  $ 10   $ 43  
 

Included in non-current liabilities

  $ 129   $ 167  
   

The provision for income taxes is comprised of the following:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Current

                   
 

Federal

  $ 112   $ 75   $ 224  
 

State

    24     24     39  
       
   

Total current

    136     99     263  
       

Deferred

                   
 

Federal

  $ 7   $ 59   $ 14  
 

State

    (1 )   8     6  
       
   

Total deferred

    6     67     20  
       

Provision for income taxes

  $ 142   $ 166   $ 283  
   

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Effective Tax Rate

The table below contains a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision from operations:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Provision for income taxes at federal statutory rate of 35%

  $ 125   $ 149   $ 266  

State tax, net of federal benefit

    14     19     29  

Qualified production deduction

    (7 )   (3 )   (12 )

Deferred tax adjustments1

    9          

Other

    1     1      
       

Total provision for income taxes

  $ 142   $ 166   $ 283  
   

Effective tax rate

   
40%
   
39%
   
37%
 
   

1   Deferred tax adjustments in 2010 included $8 million of prior period expenses determined to be immaterial to overall results.


Accounting for Uncertainty in Income Taxes

Unrecognized Tax Benefits

The following table provides a reconciliation of unrecognized tax benefits:

(in millions)
  2010
  2009
  2008
 
   

Balance at January 1

  $   $ 21   $ 21  

Tax positions taken during the current year

                   
 

Increases

             
 

Decreases

             

Tax positions taken during a prior year

                   
 

Increases1

    44          
 

Decreases

             

Decreases for settlements during the period

   
   
(21

)
 
 

Decreases resulting from a lapse in statute of limitations

             
       

Balance at December 31

  $ 44   $   $ 21  
   
1
Unrecognized tax benefits relate to tax positions taken in prior years and result from a review of Midwest Generation's deferred tax assets and liabilities.

The total amount of unrecognized tax benefits as of December 31, 2010 that, if recognized, would affect the effective tax rate was $41 million.

Edison International's federal income tax returns and its California combined franchise tax returns are currently open for years subsequent to 2002. In addition, specific California refund claims made by Edison International for years 1991 through 2002 remain subject to audit.

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Accrued Interest and Penalties

The total amount of accrued interest expense and penalties was $16 million as of December 31, 2010 and not material as of December 31, 2009. The total amount of interest expense and penalties recognized in income tax expense was $16 million for 2010 and not material for each of 2009 and 2008.


Note 7. Compensation and Benefit Plans

Employees of Midwest Generation are eligible for various benefit plans of Edison International.


Employee Savings Plan

A 401(k) plan is maintained to supplement eligible employees' retirement income. Midwest Generation matches 100% of non-union employee contributions, up to 6% of such employees' base annual compensation. Midwest Generation also matches 75% of contributions made by union employees, up to 6% of base annual compensation. Employer contributions vest 20% per year. Contribution expense was approximately $5 million for each year ended December 31, 2010, 2009 and 2008.


Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

Midwest Generation maintains a pension plan specifically for the benefit of its union employees. A portion of Midwest Generation's non-union employees participate in the Edison International pension plan. Eligibility depends on a number of factors, including the employee's hire date. Both plans are noncontributory, defined benefit pension plans and cover employees who fulfill minimum service requirements. The Edison International plan has a cash balance feature. The expected contributions (all by employer) for the plans are approximately $13.9 million for the year ended December 31, 2011.

Volatile market conditions have affected the value of the trusts established to fund its future long-term pension benefits. The market value of the investments (reflecting investment returns, contributions and benefit payments) within the plan trusts declined 35% during 2008. This reduction in the value of plan assets resulted in a change in the pension plan funding status from overfunded to underfunded and will also result in increased future expense and increased future contributions. Improved market conditions in 2010 and 2009 partially offset the impacts of the 2008 market conditions.

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Information on plan assets and benefit obligations is shown below:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
 
   

Change in projected benefit obligation

             
 

Projected benefit obligation at beginning of year

  $ 136   $ 115  
 

Service cost

    12     11  
 

Interest cost

    8     7  
 

Actuarial loss

    11     5  
 

Benefits paid

    (3 )   (2 )
       

Projected benefit obligation at end of year

  $ 164   $ 136  
   

Change in plan assets

             
 

Fair value of plan assets at beginning of year

  $ 82   $ 62  
 

Actual return on plan assets

    13     16  
 

Employer contributions

    17     6  
 

Benefits paid

    (3 )   (2 )
       

Fair value of plan assets at end of year

  $ 109   $ 82  
   

Funded status at end of year

 
$

(55

)

$

(54

)
   

Amounts recognized on consolidated balance sheets:

             

Long-term liabilities

  $ (55 ) $ (54 )

Amounts recognized in accumulated other comprehensive income:

             

Prior service cost

  $ 1   $ 1  

Net loss

    19     14  

Accumulated benefit obligation at end of year

 
$

140
 
$

114
 

Pension plans with an accumulated benefit obligation in excess of plan assets:

             

Projected benefit obligation

  $ 164   $ 136  

Accumulated benefit obligation

    140     114  

Fair value of plan assets

    109     82  

Weighted-average assumptions used to determine obligations at end of year:

             

Discount rate

    5.25%     6.0%  

Rate of compensation increase

    5.0%     5.0%  
   

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Expense components and other amounts recognized in other comprehensive (income) loss

Expense components:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Service cost

  $ 12   $ 11   $ 11  

Interest cost

    8     7     6  

Expected return on plan assets

    (7 )   (4 )   (6 )

Net amortization

        1      
       

Total expense

  $ 13   $ 15   $ 11  
   

Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Net loss (gain)

  $ 4   $ (6 ) $ 28  

Prior service cost

            2  

Amortization of net loss

        (1 )    
       

Total in other comprehensive (income) loss

  $ 4   $ (7 ) $ 30  
   

Total in expense and other comprehensive (income) loss

 
$

17
 
$

8
 
$

41
 
   

The estimated amortization amounts expected to be reclassified from other comprehensive loss for 2011 are $0.2 million for prior service costs and $0.4 million for net loss.

The following are weighted-average assumptions used to determine expenses:

 
  Years Ended December 31,  
 
  2010
  2009
  2008
 
   

Discount rate

    6.0%     6.25%     6.25%  

Rate of compensation increase

    5.0%     5.0%     5.0%  

Expected long-term return on plan assets

    7.5%     7.5%     7.5%  
   

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The following are benefit payments, which reflect expected future service, expected to be paid:

Years Ending December 31,
(in millions)

   
 
   

2011

  $ 5  

2012

    6  

2013

    8  

2014

    9  

2015

    11  

2016-2020

    80  
   


Postretirement Benefits Other Than Pensions

Midwest Generation's non-union employees retiring at or after age 55 with at least 10 years of service may be eligible for postretirement medical, dental, vision, and life insurance coverage. Eligibility for a company contribution toward the cost of these benefits in retirement depends on a number of factors, including the employee's hire date. Union-represented employees who retire at age 55 with at least 10 years of service may be eligible for access to postretirement medical, dental, vision and hearing coverage by paying the full cost for these benefits. The expected contributions (all by the employer) for the postretirement benefits other than pensions are $0.7 million for the year ended December 31, 2011.

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Information on plan assets and benefit obligations is shown below:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
 
   

Change in benefit obligation

             

Benefit obligation at beginning of year

  $ 36   $ 38  

Service cost

    1     1  

Interest cost

    2     2  

Amendments

    11     (1 )

Actuarial loss (gain)

    5     (3 )

Benefits paid

    (1 )   (1 )
       

Benefit obligation at end of year

  $ 54   $ 36  
   

Change in plan assets

             

Fair value of plan assets at beginning of year

  $   $  

Employer contributions

    1     1  

Benefits paid

    (1 )   (1 )
       

Fair value of plan assets at end of year

  $   $  
   

Funded status at end of year

 
$

(54

)

$

(36

)
   

Amounts recognized on consolidated balance sheets:

             

Long-term liabilities

  $ (54 ) $ (36 )

Amounts recognized in accumulated other comprehensive income:

             

Prior service cost

  $ 11   $ 1  

Net loss

    12     6  

Weighted-average assumptions used to determine obligations at end of year:

             

Discount rate

    5.5%     6.0%  

Assumed health care cost trend rates:

             

Rate assumed for following year

    9.75%     8.25%  

Ultimate rate

    5.5%     5.5%  

Year ultimate rate reached

    2019     2016  
   


Expense components and other amounts recognized in other comprehensive (income) loss

Expense components:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Service cost

  $ 1   $ 1   $ 1  

Interest cost

    2     2     2  

Amortization of prior service credit

            (1 )

Amortization of net loss

            1  
       

Total expense

  $ 3   $ 3   $ 3  
   

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Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss:

 
  Years Ended December 31,  
(in millions)
  2010
  2009
  2008
 
   

Net loss (gain)

  $ 5   $ (4 ) $ 6  

Prior service cost (credit)

    11     (1 )    

Amortization of prior service credit

            1  

Amortization of net loss

            (1 )
       

Total in other comprehensive (income) loss

  $ 16   $ (5 ) $ 6  
   

Total in expense and other comprehensive (income) loss

 
$

19
 
$

(2

)

$

9
 
   

The estimated amortization amounts expected to be reclassified from other comprehensive (income) loss for 2011 are $0.3 million for prior service cost and $0.6 million for net loss.

The following are weighted-average assumptions used to determine expense:

 
  Years Ended December 31,  
 
  2010
  2009
  2008
 
   

Discount rate

    6.0%     6.25%     6.25%  

Assumed health care cost trend rates:

                   

Current year

    8.25%     8.75%     9.25%  

Ultimate rate

    5.5%     5.5%     5.0%  

Year ultimate rate reached

    2016     2016     2015  
   

Increasing the health care cost trend rate by one percentage point would increase the accumulated benefit obligation as of December 31, 2010 by $10.4 million and annual aggregate service and interest costs by $0.6 million. Decreasing the health care cost trend rate by one percentage point would decrease the accumulated benefit obligation as of December 31, 2010 by $8.7 million and annual aggregate service and interest costs by $0.5 million.

The following benefit payments are expected to be paid:

Years Ending December 31,
(in millions)

  Before
Subsidy1

  Net
 
   

2011

  $ 1   $ 1  

2012

    1     1  

2013

    1     1  

2014

    1     1  

2015

    2     2  

2016-2020

    16     16  
   
1
Medicare Part D prescription drug benefits.

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Discount Rate

The discount rate enables Midwest Generation to state expected future cash flows at a present value on the measurement date. Midwest Generation selects its discount rate by performing a yield curve analysis. This analysis determines the equivalent discount rate on projected cash flows, matching the timing and amount of expected benefit payments. Two corporate yield curves were considered, Citigroup and AON.


Plan Assets

Description of Pension and Postretirement Benefits Other Than Pensions Investment Strategies

The investment of plan assets is overseen by a fiduciary investment committee. Plan assets are invested using a combination of asset classes, and may have active and passive investment strategies within asset classes. Target allocations for pension plan assets are 30% for United States equities, 16% for non-United States equities, 35% for fixed income, 15% for opportunistic and/or alternative investments and 4% for other investments. Edison International employs multiple investment management firms. Investment managers within each asset class cover a range of investment styles and approaches. Risk is managed through diversification among multiple asset classes, managers, styles and securities. Plan, asset class and individual manager performance are measured against targets. Edison International also monitors the stability of its investments managers' organizations.

Allowable investment types include:

United States Equities: Common and preferred stocks of large, medium, and small companies which are predominantly United States-based.

Non-United States Equities: Equity securities issued by companies domiciled outside the United States and in depository receipts which represent ownership of securities of non-United States companies.

Fixed Income: Fixed income securities issued or guarantee