10-K 1 midwestgeneration201110k.htm FORM 10-K Midwest Generation 2011 10K
 
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, 2011
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, 2011: $0. Number of units outstanding of the registrant's Membership Interests as of February 29, 2012: 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
None
 




 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ii


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

iii


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


iv


GLOSSARY
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.
ACI
activated carbon injection
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
CSAPR
Cross-State Air Pollution Rule
EIA
Energy Information Administration
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
Lehman Brothers Commodity Services, Inc. and Lehman Brothers Holdings, Inc.
LIBOR
London Interbank Offered Rate
MATS
Mercury and Air Toxics Standards
Midwest Generation
Midwest Generation, LLC
MISO
Midwest Independent Transmission System Operator
MMBtu
million British thermal units
Moody's
Moody's Investors Service, Inc.
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)
S&P
Standard & Poor's Ratings Services

1


SIP(s)
state implementation plan(s)
SNCR
selective non-catalytic reduction
SO2
sulfur dioxide
US EPA
United States Environmental Protection Agency


2


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:
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;
volatility of market prices for energy and capacity;
the difficulty of predicting wholesale prices, transmission congestion energy demand, and other aspects of the complex and volatile markets in which Midwest Generation participates;
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, including compliance with the CPS and CAIR or CSAPR (as applicable) and the MATS rule;
Midwest Generation's significant cash requirements and its limited ability to borrow funds and access the capital markets on reasonable terms;
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 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 ISOs and RTOs;
market volatility and other market conditions that could increase Midwest Generation's obligations to post collateral beyond the amounts currently expected, and the potential effect of such conditions on the ability of Midwest Generation to provide sufficient collateral in support of its hedging activities and purchases of fuel;
completion of permitting and construction of Midwest Generation's capital projects;
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;
competition in all aspects of Midwest Generation's business;
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;

3


effects of legal proceedings, 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.

4


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, 2011, 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 for the benefit of Midwest Generation. 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.
At December 31, 2011, Midwest Generation had cash and cash equivalents of $213 million and a total of $497 million of available borrowing capacity under its $500 million credit facility maturing in June 2012. There can be no assurance that Midwest Generation will be eligible to draw on its credit facility prior to maturity. Any replacement of this credit line will likely be on less favorable terms and conditions, and there is no assurance that Midwest Generation will, or will be able to, replace this credit line or any portion of it. Unless energy and capacity prices increase, Midwest Generation expects that it will incur an operating cash flow deficit and operating losses in 2012 and subsequent years. A continuation of these adverse trends coupled with the need to retrofit its plants to comply with governmental regulations will strain Midwest Generation's liquidity. For further discussion of these matters, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview."

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.
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.

Electric Power Industry
The United States electric industry, including companies engaged in providing generation, transmission, distribution and retail

5


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
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 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 each 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 the construction of capacity resources.

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 Midwest Generation and, in the case of utilities, may be 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. The CPS puts these plants at a disadvantage compared with competing plants not subject to similar regulations, and federal air quality regulations such as CSAPR and the MATS rule will put Midwest Generation's plants at a disadvantage compared to plants utilizing other fuels. Potential future climate change regulations could also put the Midwest Generation plants at a disadvantage compared to power plants utilizing other fuels as well as utilities that may be able to recover climate change compliance costs through rate-base mechanisms. The ability of Midwest Generation plants to compete can also be affected by future environmental regulations, by governmental and regulatory activities designed to support the construction and operation of power generation facilities fueled by renewable energy sources, and by developments such as shale gas technology that lower the price of other fuels.

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. In February 2012, Midwest Generation decided to shut down the Crawford Station by the end of 2014.

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. In February 2012, Midwest Generation decided to shut down the Fisk Station by the end of 2012.

The Joliet Station

6


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.

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.

Power Sales
Energy and capacity from the Midwest Generation plants are sold under terms, including price, duration and quantity, arranged by EMMT, an EME subsidiary engaged in power marketing and trading activities, with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Power generated at the Midwest Generation plants is primarily sold into the PJM market.

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 has historically ranged between 17 million to 19 million tons. Coal consumption in the current low natural gas price environment may be lower than the historical range. Coal is transported under transportation agreements with Union Pacific Railroad and various short-haul carriers. In late 2011, Midwest Generation signed new agreements, effective January 1, 2012, to provide such fuel transportation on a long-term basis. 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, 2011, Midwest Generation leased approximately 3,400 railcars to transport the coal from the mines to the generating stations under leases with remaining terms that range from one year to eight 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. The CAIR remains in effect until a replacement regulation becomes effective.

7


CSAPR, like the CAIR, is an allowance-based regulation that provides for emissions trading. Under CSAPR, the amount of actual SO2 or NOX emissions from plant operations will need to be matched by a sufficient amount of SO2 or NOX allowances that are either allocated or purchased in the open market. SO2 allowances under the federal Acid Rain Program cannot be used to satisfy the requirements under CSAPR. In December 2011, the United States Court of Appeals for the District of Columbia granted a stay of CSAPR pending completion of its review of the rule's validity. Midwest Generation believes its current environmental remediation plan developed to comply with the CPS, along with the allowances allocated to it under CSAPR, will be sufficient to comply with the requirements of CAIR or CSAPR (as applicable). For additional information, see "Environmental Matters and Regulations—Air Quality."

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."

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.

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 "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—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. 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.

Reliability Standards

8


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.

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 and affect the timing, cost and construction of capital improvements to the Midwest Generation plants as well as the cost of mitigating the environmental impacts of past operations. In addition, as discussed in "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 8. Commitments and Contingencies," the US EPA and others have from time to time involved Midwest Generation in litigation. 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 Investment Plan" 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."

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.
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 Cross-State Air Pollution 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 a replacement regulation becomes effective.
On July 6, 2011, the US EPA adopted the Cross-State Air Pollution Rule (CSAPR). CSAPR establishes emissions reductions for annual sulfur dioxide (SO2) emissions and annual and ozone season nitrogen oxide (NOx) emissions in two phases: a first phase originally scheduled to be effective January 1, 2012 and, in most states subject to the program (including Illinois), a second phase effective January 1, 2014 that requires additional reductions in annual SO2 emissions.
In December 2011, the United States Court of Appeals for the District of Columbia granted a stay of CSAPR pending completion of its review of the rule's validity. Oral argument is scheduled for April 13, 2012, and a court decision is expected

9


during the third quarter of 2012. The court directed the US EPA to continue administering the CAIR until its review is completed.
CSAPR, like the CAIR, is an allowance-based regulation that provides for emissions trading. If the stay is lifted and CSAPR becomes effective, the amount of actual SO2 or NOx emissions from plant operations will need to be matched by a sufficient amount of SO2 or NOx allowances that are either allocated or purchased in the open market. In connection with CSAPR, the US EPA has, for each phase, established SO2 and NOx allowance allocations for each state and each generating unit subject to the regulation, and at the close of the annual or seasonal compliance period, units will need to surrender allowances for each ton of SO2 and NOx emitted or face penalties.

Revised 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. In June 2011, Illinois submitted their initial recommended attainment/nonattainment designations in connection with the standard. Illinois recommended designating parts of Tazewell County (where the Powerton plant is located) and Will and Cook Counties as nonattainment with this standard. The recommended designation for parts of Will and Cook Counties included the area where the Will County plant is located, but not the areas where Midwest Generation's other plants in those counties are located.

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 Illinois coal-fired electric generating units are subject to the CPS. The CPS also specifies the control technologies that are to be installed on some units by specified dates. Midwest Generation must either install the required technology by the specified deadline or shut down the unit. 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. Midwest Generation substantially completed installation of SNCR equipment in 2011 for compliance with the emission limitations. Capital expenditures relating to these controls were $105 million.
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.
Testing of dry scrubbing using Trona on select Midwest Generation units has demonstrated significant reductions in SO2 emissions. Use of dry sorbent injection technology in conjunction with low sulfur coal is expected to require substantially less capital and time to construct 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 Compliance Plans and Costs."

Mercury/Hazardous Air Pollutants

Mercury and Air Toxics Standards Rule
In December 2011, the US EPA announced the Mercury and Air Toxics Standards (MATS) rule, limiting emissions of hazardous air pollutants (HAPs) from coal- and oil-fired electrical generating units. The rule was published in the Federal Register on February 16, 2012, and becomes effective on April 16, 2012. Midwest Generation does not expect that these standards will require Midwest Generation to make material changes to the approach to compliance with state and federal environmental regulations that it contemplates for CPS compliance.

Illinois
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 0.008 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 will 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.

Ozone

10



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. In September 2011, President Obama announced that the proposed revision was being withdrawn. The ozone NAAQS established in 2008 remains in place, but the implementation process must be completed before the 0.075 parts-per-million standard can be enforced. The US EPA has indicated that it intends to issue initial area designations of attainment, nonattainment, and unclassifiable areas across the nation in 2012. States will then be required to develop and submit SIPs outlining how compliance with the 2008 NAAQS will be achieved. New primary and secondary ozone standards are expected in 2014.
In January 2012, the US EPA indicated that it intended to designate the counties in Illinois where Midwest Generation's coal-fired power plants are located as nonattainment with the 2008 NAAQS.

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.
Illinois has submitted its proposed SIP revisions to the US EPA to address regional haze. Illinois proposed 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. Midwest Generation believes that the control measures being undertaken to comply with other environmental regulations will likely satisfy the requirements of these SIPs.

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 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."

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. In March 2011, the US EPA proposed standards under the federal Clean Water Act that would affect cooling water intake structures at generating facilities. The standards are intended to protect aquatic organisms by reducing capture in screens attached to cooling water intake structures (impingement) and in the water volume brought into the facilities (entrainment). The regulations are expected to be finalized by July 2012. The required measures to comply with the proposed standards regarding entrainment are subject to the discretion of the permitting authority, and Midwest Generation is unable at this time to assess potential costs of compliance, which could be significant for the Midwest Generation plants.
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 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

11


uses. In June 2010, the US EPA published proposed regulations relating to coal combustion residuals that could result in their reclassification. For further discussion see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 9. Environmental Developments."

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

Federal Legislative/Regulatory Developments
In June 2010, the US EPA issued the Prevention of Significant Deterioration (PSD) 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.
Regulation of GHG emissions pursuant to the PSD program could affect efforts to modify the Midwest Generation plants in the future, and could subject new capital projects to additional permitting or emissions control requirements that could delay such projects. 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 and would propose performance standards for emissions from new and modified power plants and emissions guidelines for existing power plants. 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. Midwest Generation's 2011 GHG emissions were approximately 31 million metric tons.

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. For further discussion, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 9. Environmental Developments."

Employees
At December 31, 2011, Midwest Generation employed 962 employees, approximately 702 of whom were covered by a collective bargaining agreement governing wages, certain benefits and working conditions. This collective bargaining agreement expires on December 31, 2013. 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

Liquidity Risks
Midwest Generation has significant cash requirements, limited sources of capital and expects to incur substantial losses in 2012 and subsequent years.
At December 31, 2011, Midwest Generation had cash and cash equivalents of $213 million and $497 million of available borrowing capacity under its $500 million credit facility maturing in June 2012. There can be no assurance that Midwest Generation will be eligible to draw on its credit facility prior to maturity. Any replacement of this credit line will likely be on less favorable terms and conditions, and there is no assurance that Midwest Generation will, or will be able to, replace this credit line or any portion of it.
Unless energy and capacity prices increase, Midwest Generation expects that it will incur an operating cash flow deficit and operating losses in 2012 and subsequent years. A continuation of these adverse trends coupled with the need to retrofit its plants to comply with governmental regulations will strain Midwest Generation's liquidity. Midwest Generation's deteriorating financial results and below-investment grade credit status may limit its ability to extend or replace its credit facility which matures in 2012, should it choose to do so, and the terms and conditions of any refinancing could be substantially less favorable

12


than those in the previous credit facility, depending on market conditions. In the case of a further downgrade, Midwest Generation expects that these negative effects would become more pronounced. 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 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 long-term lease obligations and Midwest Generation's ability to meet these obligations is dependent on payment of interest and principal on its notes receivable from EME.
As of December 31, 2011, Midwest Generation had $555 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 Midwest Generation's lease obligations.
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 lease obligations. If Midwest Generation encounters financial difficulties or becomes unable to pay its lease obligations as they mature, the interests of EME might conflict with the interests of the lease obligations. 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 lease obligations.

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, emissions 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."
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.
Midwest Generation is required to surrender emission allowances equal to emissions of specific substances in connection with

13


the operation of its facilities. This may require the purchase of allowances, which are subject to price volatility and which could be unavailable.
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 environmental regulations, including the CPS, may require material expenditures or unit shutdowns.
Capital expenditures relating to required environmental controls (including the CPS, to which all of Midwest Generation's coal-fired generating units are subject) are expected to be significant. In February 2012, Midwest Generation decided to shut down the Fisk Station by the end of 2012 and the Crawford Station by the end of 2014 and concluded it was less likely to install environmental controls at the Waukegan Station and Joliet Unit 6. Midwest Generation may ultimately decide to shut down the Waukegan Station and Joliet Unit 6, and possibly other units, rather than make improvements. Unit shutdowns could have an adverse effect on Midwest Generation's business, results of operation and financial condition. For more information about Midwest Generation's plans for environmental compliance, see "Item 1. Business—Environmental Matters and Regulations—Air Quality—Nitrogen Oxide and Sulfur Dioxide," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Environmental Compliance Plans and Costs," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets" and "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 9. Environmental Developments."
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 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.
The generation and transmission of electricity are dangerous and involve inherent risks of injury to employees and the general public.
Electricity is dangerous for employees and the general public should they come in contact with power lines or electrical equipment. Injuries caused by such contact can subject Midwest Generation to liability, that despite the existence of insurance coverage, can be significant. Such liabilities could be significant but are very difficult to predict. The range of possible liabilities includes amounts that could adversely affect Midwest Generation's liquidity and results of operations.

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

14


of sales into PJM from the Midwest Generation plants, Midwest Generation has concentrated exposure to market conditions and fluctuations in PJM. Prices for power and capacity have declined significantly due largely to lower natural gas prices and have been affected in recent years by increased use of demand response technology, changes in final demand for power during the economic slowdown, and technological developments that have increased access to natural gas shale reserves, resulting 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. 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."
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 multi-year long-term transportation contract. All of these factors may have an adverse effect on Midwest Generation's financial condition and results of operations. For additional information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Coal and Transportation Price Risk."
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.

Operating Risks
Midwest Generation's capital projects may not be successful.
Midwest Generation's capital projects are subject to risks including, without limitation, risks related to financing, construction, permitting and governmental approvals. Midwest Generation may be required to spend significant amounts before it can determine whether a particular approach is feasible or economically attractive. The timing of such projects may be delayed beyond the date that equipment is ready for installation, in which case Midwest Generation may be required to incur material equipment and/or material costs with no deployment plan at delivery.
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 that are subject to higher risks of failure or outage.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

15


Inapplicable.

ITEM 2.  PROPERTIES
As of December 31, 2011, 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.

Description of Properties
Operating Plant or Site
 
Location
 
Leased/
Owned
 
Fuel
 
Megawatts
 
Electric Generating Facilities
 
 
 
 
 
 
 
 
 
Crawford Station
 
Chicago, Illinois
 
owned
 
coal
 
532

1 
Fisk Station
 
Chicago, Illinois
 
owned
 
coal
 
326

1 
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

2 
Will County Station
 
Romeoville, Illinois
 
owned
 
coal
 
761

3 
Peaking Units
 
 
 
 
 
 
 
 
 
Fisk
 
Chicago, Illinois
 
owned
 
oil
 
197

 
Waukegan
 
Waukegan, Illinois
 
owned
 
oil
 
108

 
Total
 
 
 
 
 
 
 
5,477

 

Non-Operating Plant or Site4
 
Location
Collins Station
 
Grundy County, Illinois
Crawford peaker
 
Chicago, Illinois
Joliet peaker
 
Joliet, Illinois
Calumet peaker
 
Chicago, Illinois
Electric Junction peaker
 
Aurora, Illinois
Lombard peaker
 
Lombard, Illinois
Sabrooke peaker
 
Rockford, Illinois
1 
In February 2012, Midwest Generation decided to shut down the Fisk Station by the end of 2012 and the Crawford Station by the end of 2014.
2 
The Waukegan Station is composed of Units 7 and 8. Midwest Generation shut down permanently Waukegan Station Unit 6 (100 MW) on December 21, 2007.
3 
The Will County Station is composed 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."
4 
Ceased operations before December 31, 2005.

16



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."

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 $225 million in 2011, $125 million in 2010 and $200 million in 2009. For information about distribution restrictions, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Equity Distributions and Tax Payments."


17


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,
 
2011
 
2010
 
2009
 
2008
 
2007
Operating revenues from marketing affiliate
$
1,286

 
$
1,479

 
$
1,487

 
$
1,778

 
$
1,579

Operating expenses 1
1,802

 
1,191

 
1,117

 
1,068

 
971

Operating income (loss)
(516
)
 
288

 
370

 
710

 
608

Interest and other income (expense)
74

 
69

 
55

 
50

 
(122
)
Income (loss) before income taxes
(442
)
 
357

 
425

 
760

 
486

Provision (benefit) for income taxes
(172
)
 
142

 
166

 
283

 
183

Net income (loss)
$
(270
)
 
$
215

 
$
259

 
$
477

 
$
303

1 
Operating expenses in 2011 included asset impairment charges of $640 million. For addition information, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 12. Asset Impairments and Other Charges."

BALANCE SHEET DATA
(in millions)
 
As of December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
Current assets
$
610

 
$
680

 
$
677

 
$
1,193

 
$
409

Total assets
4,190

 
4,942

 
5,063

 
5,711

 
4,912

Current liabilities
239

 
263

 
333

 
380

 
389

Long-term debt

 

 

 
475

 

Lease financing, net of current portion
439

 
556

 
665

 
785

 
912

Other long-term obligations
243

 
345

 
320

 
296

 
294

Member's equity
3,269

 
3,778

 
3,745

 
3,775

 
3,317


CASH FLOW DATA
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
Cash provided by operating activities
$
364

 
$
401

 
$
460

 
$
545

 
$
732

Cash provided by (used in) financing activities
(334
)
 
(245
)
 
(801
)
 
150

 
(824
)
Cash used in investing activities
(112
)
 
(98
)
 
(72
)
 
(110
)
 
(14
)


18


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

MANAGEMENT'S OVERVIEW
Midwest Generation's competitive power generation business consists of the generation and sale into the PJM market of energy and capacity from its 5,172 MW of coal-fired generating plants and 305 MW of oil-fired peaking plants. Midwest Generation's operating results were significantly lower in 2011 compared to 2010 due to lower realized energy and capacity prices and generation. Power prices fell in the fourth quarter of 2011 and have continued to fall in 2012, driven by an abundance of low-priced natural gas, weather conditions and a slow economic recovery. Moreover, the abundance of low-priced natural gas has resulted in increased competition from natural gas-fired generating units in the markets in which Midwest Generation operates, and generation from Midwest Generation's plants has been correspondingly affected. Also at the end of 2011, a favorable long-term rail contract that supplied Midwest Generation's fleet expired and was replaced by a higher priced contract. Midwest Generation expects that its average fuel cost ($/MWh) will increase by approximately one-third in 2012. Finally, as discussed below, Midwest Generation recorded significant impairment charges during the fourth quarter of 2011.
At December 31, 2011, Midwest Generation had cash and cash equivalents of $213 million and $497 million of available borrowing capacity under its $500 million credit facility maturing in June 2012. There can be no assurance that Midwest Generation will be eligible to draw on its credit facility prior to maturity. Any replacement of this credit line will likely be on less favorable terms and conditions, and there is no assurance that Midwest Generation will, or will be able to, replace this credit line or any portion of it.
Unless energy and capacity prices increase, Midwest Generation expects that it will incur an operating cash flow deficit and operating losses in 2012 and subsequent years. A continuation of these adverse trends coupled with the need to retrofit its plants to comply with governmental regulations will strain Midwest Generation's liquidity. In order to retrofit its coal-fired plants, Midwest Generation will need to borrow additional funds or receive additional contributions from EME. Midwest Generation plans to fund operating cash flow deficits through a combination of cash on hand, management of fuel inventories, deferral of operations and maintenance expenses and acceleration of the timing of collections from affiliates, which management believes will provide sufficient liquidity in 2012. Midwest Generation's current business plans are focused on liquidity and operating effectively through the current commodity price cycle and on environmental compliance as described below. There is no assurance that sufficient liquidity will exist beyond 2012 without additional equity contributions from EME.

Highlights of Operating Results
Midwest Generation had a net loss of $270 million in 2011 as compared to net income of $215 million in 2010. Excluding the impairment charges recorded in 2011 and 2010, as described below, the 2011 decrease in earnings was primarily due to lower average realized energy and capacity prices and lower generation.
During the fourth quarter of 2011, Midwest Generation recorded a $386 million after-tax ($640 million pre-tax) charge resulting from the impairment of the long-lived assets of Midwest Generation's Fisk, Crawford and Waukegan Stations. For further discussion, see "Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets" and"Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 12. Asset Impairments and Other Charges."
Midwest Generation's 2010 net income decreased $44 million as compared to 2009. In 2010, Midwest Generation recorded a $24 million after-tax ($40 million pre-tax) charge related to the write-off of capitalized engineering and other costs related to a change in air emissions control technology selection at the Powerton Station. In addition, 2010 results were lower than 2009 due to unrealized losses in 2010 compared to unrealized gains in 2009, and higher plant maintenance costs in 2010, partially offset by higher capacity revenues, a $24 million gain from the sale of bankruptcy claims against Lehman and lower average realized fuel costs. Energy and fuel related unrealized losses in 2010 were $13 million compared to unrealized gains of $45 million in 2009. Results in 2010 included the benefit of power hedge contracts entered into during earlier periods at higher prices than current energy prices.

Environmental Compliance Plans and Costs
During 2011, Midwest Generation continued to advance necessary activities for NOx and SO2 controls to meet the requirements of the CPS. Midwest Generation does not anticipate a material change to its current approach in order to comply with the MATS rule. Midwest Generation expects to continue to develop and implement a compliance program that includes the operations of ACI systems, upgrades to particulate removal systems and the use of dry sorbent injection, combined with its use of low sulfur PRB coal, to meet emissions limits for criteria pollutants, such as NOx and SO2 as well as for HAPs, such as mercury, acid gas and non-mercury metals.

19


A significant decline in power prices from September 30, 2011, combined with new environmental regulations and public policy pressure on coal generation have resulted in continuing uncertainties for merchant coal-fired power plants. Decisions regarding whether or not to proceed with retrofitting any particular remaining units to comply with CPS requirements for SO2 emissions, including those that have received permits, are subject to a number of factors, such as market conditions, regulatory and legislative developments, liquidity and forecasted commodity prices and capital and operating costs applicable at the time decisions are required or made. Midwest Generation may also elect to shut down units, instead of installing controls, to be in compliance with the CPS. Decisions about any particular combination of retrofits and shutdowns Midwest Generation may ultimately employ also remain subject to conditions applicable at the time decisions are required or made. Final decisions on whether to install controls, to install particular kinds of controls, and to actually expend capital or continue with the expenditure of capital will be made as required, subject to the requirements of the CPS and other applicable regulations. In February 2012, Midwest Generation decided to shut down the Fisk Station by the end of 2012 and the Crawford Station by the end of 2014 and concluded it was less likely to retrofit the Waukegan Station rather than the larger Powerton, Joliet and Will County Stations. As a result, Midwest Generation recorded an impairment charge of $640 million at December 31, 2011 related to the Crawford, Fisk and Waukegan Stations. For further discussion, see "Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets" and “Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 12. Asset Impairments and Other Charges.” Units that are not retrofitted may continue to operate until required to shut down by applicable regulations or operate with reduced output.
In connection with its decision to close the Fisk and Crawford Stations, Midwest Generation entered into a Memorandum of Understanding with the City of Chicago, acting through the Commissioner of Health, which acknowledges that the cessation of coal-fired electric generation at the Fisk and Crawford Stations will achieve the objectives of the proposed Chicago Clean Power Ordinance without a need to pass the proposed Clean Power Ordinance or similar ordinances (recognizing that such agreement cannot bind the Chicago City Council or its members). Midwest Generation and the City of Chicago have also agreed to collaborate with key stakeholders to consider potential future uses, ownership and sources of external funding to transition the sites for such uses. The closure of the Fisk and Crawford Stations will be subject to review for reliability by PJM Interconnection LLC, the regional transmission organization that controls the area where these plants are located. In total, Midwest Generation estimates 150 to 180 employees will be affected. The timing and amount of severance benefits, if any, will be determined after completion of review of personnel based on seniority and other factors and, in the case of the Crawford Station, the amount may be affected by the timing of the plant closure. Other obligations related to the Fisk and Crawford Stations could be affected by the plant closing, including sales of capacity, for which Midwest Generation is unable to reasonably estimate the impact, or range of impacts, that could be incurred. Midwest Generation does not expect to incur future capital expenditures to close these plants.
Based on work to date, Midwest Generation estimates the cost of retrofitting the large stations (Powerton, Joliet Units 7 and 8 and Will County) 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 up to approximately $628 million. In order to retrofit its coal-fired plants, Midwest Generation will need to borrow funds or receive additional contributions from EME. The cost of retrofitting Joliet Unit 6 is not included in the large unit amounts as it is less likely that Midwest Generation will make retrofits for this unit. The estimated cost of retrofitting Joliet Unit 6, if made, would be approximately $75 million, while the estimated cost of retrofitting the Waukegan Station, if made, would be approximately $160 million. For further discussion related to Midwest Generation's impairment policy on the unit of account, see "Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets."
In February 2012, Midwest Generation received an extension of its permit to install a dry sorbent injection system at the Powerton Station.

Environmental Regulation Developments
For additional discussion of environmental regulation developments, see "Item 1. Business—Environmental Matters and Regulations" and "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 9. Environmental Developments."

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.

20


 
Years Ended December 31
 
2011
 
2010
 
2009
Operating Revenues (in millions)
$
1,286

 
$
1,479

 
$
1,487

Statistics
 
 
 
 
 
Generation (in GWh)
 
 
 
 
 
Energy contracts
28,145

 
29,798

 
28,977

Load requirements services contract

 

 
1,333

Total
28,145

 
29,798

 
30,310

Aggregate plant performance
 
 
 
 
 
Equivalent availability
82.9
%
 
82.2
%
 
85.3
%
Capacity factor
62.2
%
 
62.3
%
 
63.3
%
Load factor
75.0
%
 
75.8
%
 
74.2
%
Forced outage rate
5.3
%
 
6.2
%
 
5.8
%
Average realized price/MWh
 
 
 
 
 
Energy contracts
$
36.83

 
$
40.12

 
$
41.17

Load requirements services contract
$

 
$

 
$
62.52

Capacity revenues only (in millions)
$
244

 
$
263

 
$
178

Average realized fuel costs/MWh
$
18.06

 
$
17.17

 
$
18.54


Reconciliation of Non-GAAP Disclosures and Statistical Definitions

Average Realized Energy Price
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)
2011
 
2010
 
2009
Operating revenues
$
1,286

 
$
1,479

 
$
1,487

Less:
 
 
 
 
 
Load requirements services contract

 

 
(83
)
Unrealized (gains) losses
(3
)
 
6

 
(30
)
Capacity and other1 revenues
(247
)
 
(290
)
 
(181
)
Realized revenues
$
1,036

 
$
1,195

 
$
1,193

Generation – energy contracts (in GWh)
28,145

 
29,798

 
28,977

Average realized energy price/MWh
$
36.83

 
$
40.12

 
$
41.17

1 
A gain from the sale of the bankruptcy claims against Lehman Brothers is included in 2010.
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.

Average Realized Fuel Costs

21


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 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)
2011
 
2010
 
2009
Fuel costs
$
512

 
$
519

 
$
547

Add back:
 
 
 
 
 
Unrealized gains (losses)
(4
)
 
(7
)
 
15

Realized fuel costs
$
508

 
$
512

 
$
562

Generation (in GWh)
28,145

 
29,798

 
30,310

Average realized fuel costs/MWh
$
18.06

 
$
17.17

 
$
18.54

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.

Statistical Definitions
Load requirements services contract generation represents a load requirements services contract with Commonwealth Edison, awarded as part of an Illinois auction. The contract commenced on January 1, 2007 and 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.
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 a load requirements services contract reflects the contract price for sales to Commonwealth Edison under the load requirements services contract that includes energy, capacity and ancillary services. It is determined by dividing (i) operating revenues related to the contracts by (ii) generation.

Operating Income (Loss)
Operating loss from the Midwest Generation plants was $516 million in 2011 compared to operating income of $288 million in 2010. Operating income decreased $82 million in 2010 compared to 2009. The 2011 decrease in operating income, excluding the $640 million impairment charges previously discussed in "Management's Overview—Highlights of Operating Results," was primarily attributable to lower energy and capacity revenues. The decline in energy revenues was due to lower average realized energy prices and lower generation due to the permanent shutdown of Will County Units 1 and 2 at the end of 2010 in accordance with the CPS. The decline in capacity revenues was due to lower capacity prices from the RPM auction. In addition, the change in operating income was impacted by a $40 million pre-tax charge in 2010 related to the write-off of capitalized engineering and other costs related to a change in air emissions control technology at the Powerton Station and a $24 million gain from the sale of bankruptcy claims against Lehman. The claims originated from power contracts that were terminated in 2008 due to the bankruptcy of Lehman.
The 2010 decrease in operating income from 2009 was primarily attributable to unrealized losses in 2010 compared to

22


unrealized gains in 2009 related to hedge contracts and an increase in plant maintenance costs, partially offset by higher capacity revenues 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. The write-off of capitalized costs at the Powerton Station and the gain from the sale of bankruptcy claims against Lehman also affected the comparison of results between these periods.
Included in operating revenues were unrealized gains (losses) of $3 million, $(6) million and $30 million in 2011, 2010 and 2009, respectively. Unrealized gains (losses) were primarily attributable to economic hedge contracts that are accounted for at fair value with offsetting changes recorded on the consolidated statements of operations. In addition, $10 million and $14 million was reversed from accumulated other comprehensive income and recognized in 2010 and 2009, respectively, related to power contracts with Lehman that were dedesignated as cash flow hedges, subsequently terminated and recorded as unrealized losses in 2008. Unrealized gains (losses) also 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.
Included in fuel costs were $3 million, $13 million and $63 million in 2011, 2010 and 2009, respectively, related to the net cost of emission allowances. Also included in fuel costs were unrealized gains (losses) of $(4) million, and $(7) million and $15 million in 2011, 2010 and 2009, respectively, due to oil futures contracts that 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.

Other Income (Expense)
 
Years Ended December 31,
(in millions)
2011
 
2010
 
2009
Interest and other income
$
3

 
$
5

 
$
5

Interest income from affiliates
111

 
112

 
112

Interest expense
(40
)
 
(48
)
 
(62
)
Total other income
$
74

 
$
69

 
$
55

Interest expense decreased $8 million in 2011 from 2010 and $14 million in 2010 from 2009. The decreases were due to lower interest related to the Powerton-Joliet lease financing during both 2011 and 2010 and lower borrowings outstanding during 2010 on Midwest Generation's working capital facility compared to 2009.

Income Taxes
Midwest Generation's effective tax rates were 39%, 40% and 39% in 2011, 2010 and 2009, respectively. Midwest Generation's effective tax rate varies from the federal statutory rate of 35% primarily due to state income taxes.

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 13. 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."


23


LIQUIDITY AND CAPITAL RESOURCES

Available Liquidity
At December 31, 2011, Midwest Generation had cash and cash equivalents of $213 million and a total of $497 million of available borrowing capacity under its $500 million working capital facility. Midwest Generation's liquidity is also composed 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's working capital facility matures in June 2012. For further discussion, see "Management's Overview" and "Item 1A. Risk Factors—Liquidity Risks." The following table summarizes the status of Midwest Generation's working capital facility at December 31, 2011:
(in millions)
 
Commitment
$
500

Outstanding borrowings

Outstanding letters of credit
3

Amount available
$
497


Capital Investment Plan
Forecasted capital expenditures through 2014 by Midwest Generation are as follows:
(in millions)
2012
 
2013
 
2014
Environmental1
$
35

 
$
102

 
$
311

Plant capital
21

 
46

 
16

Total
$
56

 
$
148

 
$
327

1 
For additional information, see "Management's Overview—Environmental Compliance Plans and Costs."
Midwest Generation plants' projected environmental expenditures would retrofit Powerton Units 5 and 6, Joliet Units 7 and 8 and Will County Units 3 and 4, using dry scrubbing with sodium-based sorbents and upgrading particulate removal systems to comply with CPS requirements for SO2 emissions and the US EPA's regulation on HAP emissions. Decisions regarding whether or not to proceed with retrofitting any particular remaining units to comply with CPS requirements for SO2 emissions, including those that have received permits, 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. Final decisions on whether to install controls, to install particular kinds of controls, and to actually expend capital or continue with the expenditure of capital will be made as required, subject to the requirements of the CPS and other applicable regulations. Furthermore, the timing of commencing capital projects may vary from the amounts set forth in the above table. For additional discussion, see "Management's Overview—Environmental Compliance Plans and Costs."
Plant capital expenditures for Midwest Generation includes capital projects for boiler and turbine controls, major boiler components and electrical systems.

Consolidated Cash Flow
At December 31, 2011, Midwest Generation had cash and cash equivalents of $213 million, compared to $295 million at December 31, 2010. Net cash provided by operating activities totaled $364 million, $401 million and $460 million in 2011, 2010 and 2009, respectively. The 2011 decrease in net cash provided by operating activities was primarily attributable to lower revenues due to lower average realized energy prices and the timing of cash receipts and disbursements related to working capital items, partially offset by higher payments for settlements of derivative contracts in 2010. The 2010 decrease was primarily attributable to lower net income.
Net cash used in financing activities totaled $334 million, $245 million and $801 million in 2011, 2010 and 2009, respectively. The 2011 increase in net cash used in financing activities was primarily due to $100 million of higher distributions by Midwest Generation to its parent in 2011 as compared to 2010. The 2010 decrease from 2009 was due to lower repayments on Midwest Generation's working capital facility of $475 million in 2010 and $75 million less distributions by Midwest Generation to its

24


parent in 2010.
Net cash used in investing activities totaled $112 million, $98 million and $72 million in 2011, 2010 and 2009, respectively, and consisted primarily of capital expenditures.

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.

Credit Ratings

Overview
Credit ratings for Midwest Generation, EME and EMMT as of December 31, 2011 were as follows:
 
 
Moody's Rating
 
S&P Rating
 
Fitch Rating
Midwest Generation1
 
Ba3
 
B+
 
BB-
EME2
 
Caa1
 
B-
 
CCC
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 and Credit Support for Energy Contracts
Midwest Generation sells merchant energy and capacity through EMMT, which currently has a below investment grade credit rating. Midwest Generation is permitted to use its working capital facility, to the extent available, and cash on hand to provide credit support as needed for hedging contracts entered into by EMMT related to the Midwest Generation plants. In addition, Midwest Generation may grant liens on its property in support of hedging contracts associated with 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, 2011, 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.

Equity Distributions and Tax Payments

25


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)
2011
 
2010
 
2009
Equity distributions
$
225

 
$
125

 
$
200

Tax payments under tax-allocation agreements
8

 
136

 
65

Total payments
$
233

 
$
261

 
$
265

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."

Key Ratio Affecting Distributions
Set forth below is the key ratio required under the covenants contained in Midwest Generation's credit agreement at December 31, 2011:
Financial Ratio
Covenant
Actual
Debt-to-capitalization ratio
Less than or equal to 0.60 to 1
0.15 to 1

Financing Restrictions on Distributions
Midwest Generation is bound by the covenants in its credit agreement and certain covenants under the Powerton-Joliet lease documents with respect to Midwest Generation making payments under the leases. 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.

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, 2011:
 
 
 
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
$
787

 
$
151

 
$
302

 
$
93

 
$
241

Operating lease obligations2
67

 
15

 
27

 
13

 
12

Purchase obligations:2
 
 
 
 
 
 
 
 
 
Fuel supply contracts
518

 
223

 
295

 

 

Coal transportation agreements3
3,023

 
386

 
659

 
630

 
1,348

Capital expenditures
22

 
22

 

 

 

Other contractual obligations
79

 
54

 
25

 

 

Employee benefit plan contribution4
84

 
14

 
34

 
36

 

Total Contractual Obligations5,6
$
4,580

 
$
865

 
$
1,342

 
$
772

 
$
1,601

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."

26


3 
Years subsequent to 2012 represent contracts for minimum volumes without regard to payment of alternative liquidated damages or plant closures.
4 
Amount includes estimated contribution for pension plans and postretirement benefits other than pensions. The estimated contributions beyond 2016 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."
5 
At December 31, 2011, Midwest Generation had a total net liability recorded for uncertain tax positions of $37 million, which is excluded from the table. For more information, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 6. Income Taxes."
6 
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 has contingencies related to the NSR and other litigation and environmental remediation, which 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 primarily for leased railcars with termination 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."


27


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 following table summarizes unrealized gains (losses):
 
Years Ended December 31,
(in millions)
2011
 
2010
 
2009
Non-qualifying hedges
$
(2
)
 
$
(11
)
 
$
40

Ineffective portion of cash flow hedges
1

 
(2
)
 
5

Total unrealized gains (losses)
$
(1
)
 
$
(13
)
 
$
45

At December 31, 2011, cumulative unrealized gains of $7 million were recognized from non-qualifying hedge contracts or the ineffective portion of cash flow hedges related to 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 Value Measurements" and "—Note 5. Derivative Instruments and Hedging Activities," respectively.
The net fair value of Midwest Generation's commodity derivatives at December 31, 2011 was $42 million. A 10% change in the market price of the underlying commodity at December 31, 2011 would increase or decrease the net fair value of commodity derivatives by approximately $25 million.

Commodity Price Risk

Introduction
Midwest Generation's operations are exposed 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.

28


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
 
2011
 
2010
 
2009
Northern Illinois Hub
$
33.21

 
$
33.12

 
$
28.68

1 
Energy prices were calculated at the Northern Illinois Hub delivery point using historical hourly day-ahead 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, 2011:
 
24-Hour Forward
Energy Prices1

2012 calendar "strip"2
$
29.75

2013 calendar "strip"2
$
31.41

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.
Power prices at the Northern Illinois Hub fell in the fourth quarter of 2011 and continued to fall in 2012 due to an abundance of low-priced natural gas and the sales volume from the Midwest Generation plants has been correspondingly affected. 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 transactions primarily entered into at the Northern Illinois Hub and to a lesser extent the AEP/Dayton Hub, both in PJM and the Indiana Hub in MISO (including forward contracts accounted for on the accrual basis) at December 31, 2011 for electricity expected to be generated in 2012 and 2013:
 
2012
 
2013
MWh (in thousands)
7,185

 
1,020

Average price/MWh1
$
38.76

 
$
40.43

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.
In January 2012, EMMT entered into 14.7 billion cubic feet of natural gas futures contracts (equivalent to approximately 1,610 GWh of energy only contracts using a ratio of 9.12 MMBtu to 1 MWh) for the Midwest Generation plants to economically hedge energy price risks through December 2012 at an average price of $24.88/MWh.

Capacity Price Risk
Under the RPM, capacity commitments are made in advance to provide a long-term pricing signal for construction of capacity resources. The following table summarizes the status of capacity sales for Midwest Generation at December 31, 2011:

29


 
 
 
 
 
 
 
 
 
 
 
Other Capacity Sales, Net of Purchases2
 
 
 
 
 
 
 
 
 
 
RPM Capacity Sold in Base Residual Auction
 
Aggregate Average Price per MW-day
 
 
Installed Capacity MW
 
Unsold Capacity1
MW
 
Capacity Sold
MW
 
 
 
Average Price per MW-day
 
 
 
MW
 
Price per MW-Day
 
MW
 
 
January 1, 2012 to May 31, 2012
5,477

 
(555
)
 
4,922

 
4,582

 
$
110.00

 
340

 
$
98.92

 
$
109.23

 
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

 
June 1, 2014 to May 31, 2015
5,477

 
(852
)
 
4,625

 
4,625

 
125.99

 

 

 
125.99

 
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.
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.

Basis Risk
Sales made from the Midwest Generation plants in the real-time or day-ahead market receive the actual real-time 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 forward 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 and Indiana Hubs. 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 2011, day-ahead prices at the individual busbars of the Midwest Generation plants were lower than the AEP/Dayton Hub, Cinergy Hub and Northern Illinois Hub by an average of 14%, 4% and less than 1%, respectively, compared to 13%, 6% and less than 1%, respectively, during 2010, due to transmission congestion in PJM.
In order to mitigate basis risk, Midwest Generation may purchase financial transmission rights and basis swaps in PJM. A financial transmission right is a financial instrument that entitles the holder to receive the difference between actual day-ahead prices for two delivery points in exchange for a fixed amount.

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, 2011 for the following three years:
 
2012
 
2013
 
2014
Amount of Coal Under Contract in Millions of Equivalent Tons1
16.0

 
9.8

 
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.
Midwest Generation is subject to price risk for purchases of coal that are not under contract. Market prices of PRB coal based on 8,800 Btu per pound heat content and 0.8 pounds of SO2 per MMBtu sulfur content fluctuated between $12.35 per ton and $15.10 per ton during 2011, as reported by EIA. The December 30, 2011 price of $12.75 per ton compared to a price of $13.60

30


per ton and $9.25 per ton at December 31, 2010 and 2009, respectively, as reported by the EIA. The 2011 fluctuations in PRB coal prices were in line with normal market price volatility with the higher PRB prices reflecting the impact of the CSAPR before it was stayed.
Midwest Generation contracts with rail carriers to transport coal to its facilities. In anticipation of the expiration on December 31, 2011 of its existing rail transportation contracts, during the fourth quarter of 2011, Midwest Generation entered into new multi-year transportation contracts with Union Pacific Railroad and two short-haul carriers for a specified minimum and maximum amount of tons effective January 1, 2012. The estimated minimum annual costs of transportation of coal under these contracts, based on tonnage commitments, are $386 million during 2012, $326 million in 2013, and $333 million in 2014. However, all of the contracts have provisions that address the financial exposure of Midwest Generation related to a plant closure under certain circumstances as specified in the agreements. The contracts provide for quarterly and annual cost adjustments based on a number of factors that may increase the minimum payments.
Midwest Generation believes it is fully contracted in 2012 based on its anticipated coal requirements in 2012.

Emission Allowances Price Risk
If CSAPR becomes effective as issued, the amount of SO2 that a plant emits in its operation will need to be matched by a sufficient amount of SO2 allowances designated under this program (CSAPR SO2 allowances) that are either allocated to the plant under the CSAPR program or purchased in the open market. SO2 allowances under the federal Acid Rain Program cannot be used to satisfy the requirements under CSAPR. For additional information on CSAPR, see "Item 8. Midwest Generation, LLC and Subsidiaries Notes to Consolidated Financial Statements—Note 9. Environmental Developments—Cross-State Air Pollution Rule."

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 June 2012, which exposes Midwest Generation to the risk of earnings loss resulting from changes in interest rates from any borrowings outstanding. At December 31, 2011, Midwest Generation had no borrowings outstanding.


31


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."

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 are evaluated for impairment whenever indicators 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.
In preparing long-term cash forecasts, Midwest Generation includes assumptions about future prices for electricity, capacity, fuel and related products and services, as applicable, future operations and maintenance costs and future capital expenditure requirements under different scenarios. As appropriate, Midwest Generation uses a probability weighted approach when determining whether impairment indicators exist. Assumptions included in the long-term cash flow forecasts for merchant projects include:
Observable market prices for electricity, fuel and related products and services to the extent available and long-term prices developed based on a fundamental price model;
Long-term capacity prices based on the assumption that capacity markets would continue consistent with their current structure, with expected increases in revenues as a result of declines in reserve margins beyond the price of the latest auctions;
Trends for additions and retirements for generation resources; and
Plans for compliance with both existing and possible future environmental regulations.
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.
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 determine the amounts or timing of future revenues, environmental compliance costs or operating expenditures.

32


Effect on 2011 Results.    A significant decline in power prices from September 30, 2011, combined with new environmental regulations and public policy pressure on coal generation have resulted in continuing uncertainties for merchant coal-fired power plants. In connection with the preparation of its year end financial statements, Midwest Generation concluded, based on the current energy price environment, it is less likely that Midwest Generation will install environmental controls required by the CPS at its Fisk, Crawford and Waukegan Stations; and such assessment was an indicator that these stations were impaired. Management updated the probability weighted future undiscounted cash flows expected to be received at these stations and concluded that such amounts did not recover the respective station's carrying amounts. As part of these alternative cash flow scenarios, management considered a shortened estimated useful life of each station if environmental improvements were not made and a forecasted reduction in generation from lower forward power prices. In February 2012, Midwest Generation decided to shut down the Fisk Station by the end of 2012 and the Crawford Station by the end of 2014.
To measure the amount of the impairment loss, the income approach was considered the most relevant, but market data obtained prior to the significant decline in power prices was used to corroborate the income approach. The discounted cash flow analysis assumptions that have the most significant impact on fair value are forecasted energy and capacity prices. The discounted cash flow analysis indicated a fair value of zero. Midwest Generation also concluded it was unlikely that a third party would consummate the purchase of the Fisk, Crawford or Waukegan Stations in the current economic and regulatory environment resulting in a determination that the fair value of each of these stations is zero. This resulted in an impairment charge of $115 million, $186 million and $339 million for Fisk, Crawford and Waukegan Stations, respectively. Environmental and other remediation or ongoing maintenance costs are expected to be offset by the salvage value of the asset groups.
The following table summarizes the net book value of Midwest Generation's asset groups at December 31, 2011:
(in millions)
 
Joliet Station
$
763

Powerton Station
827

Will County Station
523


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 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

33


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."

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 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 sheets.
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."

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, 2011, Midwest Generation had recorded a liability of $54 million related to this contract

34


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."

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."


35


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, 2011.

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 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.


36


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, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 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) 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 and financial statement schedules 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.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 29, 2012


37


MIDWEST GENERATION, LLC AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions)
 
Years Ended December 31,
 
2011
 
2010
 
2009
Operating Revenues from Marketing Affiliate
$
1,286

 
$
1,479

 
$
1,487

Operating Expenses
 
 
 
 
 
Fuel
512

 
519

 
547

Plant operations
457

 
447

 
396

Depreciation and amortization
158

 
155

 
150

Asset impairments and other charges (Note 12)
653

 
48

 
3

Administrative and general
22

 
22

 
21

Total operating expenses
1,802

 
1,191

 
1,117

Operating income (loss)
(516
)
 
288

 
370

Other Income (Expense)
 
 
 
 
 
Interest and other income
114

 
117

 
117

Interest expense
(40
)
 
(48
)
 
(62
)
Total other income
74

 
69

 
55

Income (loss) before income taxes
(442
)
 
357

 
425

Provision (benefit) for income taxes
(172
)
 
142

 
166

Net Income (Loss)
$
(270
)
 
$
215

 
$
259



The accompanying notes are an integral part of these consolidated financial statements.
38


MIDWEST GENERATION, LLC AND SUBSIDIARIES
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
 
Years Ended December 31,
 
2011
 
2010
 
2009
Net Income (Loss)
$
(270
)
 
$
215

 
$
259

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
)
 

Net gain (loss) adjustment, net of tax expense (benefit) of $(8), $(4) and $4 for 2011, 2010 and 2009, respectively
(13
)
 
(6
)
 
6

Amortization of net loss included in expense, net of tax
1

 

 
1

Unrealized gains (losses) on derivatives qualified as cash flow hedges:
 
 
 
 
 
Unrealized holding gains arising during period, net of income tax expense of $15, $29 and $27 for 2011, 2010 and 2009, respectively
23

 
45

 
39

Reclassification adjustments included in net income, net of income tax benefit of $16, $58 and $88 for 2011, 2010 and 2009, respectively
(25
)
 
(90
)
 
(135
)
Other comprehensive loss, net of tax
(14
)
 
(57
)
 
(89
)
Comprehensive Income (Loss)
$
(284
)
 
$
158

 
$
170



The accompanying notes are an integral part of these consolidated financial statements.
39


MIDWEST GENERATION, LLC AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in millions, except unit amounts)
 
December 31,
 
2011
 
2010
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
213

 
$
295

Due from affiliates
109

 
124

Inventory
159

 
123

Interest receivable from affiliate
55

 
56

Derivative assets
43

 
47

Deferred taxes
14

 

Emission allowances

 
2

Other current assets
17

 
33

Total current assets
610

 
680

Property, Plant and Equipment, less accumulated depreciation of $1,152 and $1,541 at respective dates
2,185

 
2,905

Notes receivable from affiliate
1,323

 
1,343

Long-term derivative assets
1

 
3

Deferred taxes
42

 

Other long-term assets
29

 
11

Total Assets
$
4,190

 
$
4,942

Liabilities and Member's Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
35

 
$
43

Accrued liabilities
49

 
60

Due to affiliates
18

 
16

Interest payable
19

 
22

Derivative liabilities
2

 
3

Deferred taxes

 
10

Current portion of lease financing
116

 
109

Total current liabilities
239

 
263

Lease financing, net of current portion
439

 
556

Deferred taxes

 
129

Long-term derivative liabilities

 
2

Benefit plans and other long-term liabilities
243

 
214

Total Liabilities
921

 
1,164

Commitments and Contingencies (Notes 5, 8 and 9)

 

Member's Equity
 
 
 
Membership interests, no par value (100 units authorized, issued and outstanding at each date)

 

Additional paid-in capital
3,511

 
3,511

Accumulated earnings (deficit)
(225
)
 
270

Accumulated other comprehensive loss
(17
)
 
(3
)
Total Member's Equity
3,269

 
3,778

Total Liabilities and Member's Equity
$
4,190

 
$
4,942


The accompanying notes are an integral part of these consolidated financial statements.
40


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, 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

Net loss

 

 
(270
)
 

 
(270
)
Other comprehensive loss

 

 

 
(14
)
 
(14
)
Cash distribution to parent

 

 
(225
)
 

 
(225
)
Balance at December 31, 2011
$

 
$
3,511

 
$
(225
)
 
$
(17
)
 
$
3,269




The accompanying notes are an integral part of these consolidated financial statements.
41


MIDWEST GENERATION, LLC AND SUBSIDIARIES
 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
Years Ended December 31,
 
2011
 
2010
 
2009
Cash Flows From Operating Activities
 
 
 
 
 
Net income (loss)
$
(270
)
 
$
215

 
$
259

Adjustments to reconcile income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
160

 
156

 
153

Asset impairments and other charges
653

 
48

 
3

Deferred taxes
(145
)
 
(33
)
 
76

Other non-cash items

 
(3
)
 
(1
)
Decrease in due to/from affiliates
28

 
9

 
37

Decrease (increase) in inventory
(36
)
 
(15
)
 
2

Increase in other assets
(25
)
 
(2
)
 
(9
)
Decrease in emission allowances
2

 
9

 
41

Decrease in accounts payable and other current liabilities
(7
)
 
(3
)
 
(21
)
Decrease in interest payable
(4
)
 
(4
)
 
(5
)
Increase (decrease) in other liabilities
7

 
44

 
(5
)
Decrease (increase) in derivative assets and liabilities
1

 
(20
)
 
(70
)
Net cash provided by operating activities
364

 
401

 
460

Cash Flows From Financing Activities
 
 
 
 
 
Repayments of long-term debt

 

 
(475
)
Cash distributions to parent
(225
)
 
(125
)
 
(200