(1)

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

(2)

Electric purchaser abbreviations are as follows:

(3)

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

(4)

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

(5)

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

(6)

Minority interest in three projects.

(7)

Minority interest in one project.

Americas

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

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

Illinois Plants

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

        The Illinois plants are comprised of the following:

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

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

Homer City Facilities

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

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

Major Investments in California Cogeneration Projects

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

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

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

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

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

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

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

Other Small Investments in Energy Projects

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

Americas Projects Offered For Sale

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

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

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

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

Asset Sales

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

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Investment in Four Star Oil and Gas Company

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

Asia-Pacific

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

Australia

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

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

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

New Zealand

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

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

(1)

Located in Australia.

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

Indonesia

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

Philippines

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

Thailand

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

Europe and Middle East

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

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United Kingdom

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

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

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

Italy

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

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

Spain

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

Turkey

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

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

Discontinued Operations

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

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

Trading and Risk Management Activities

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

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

•

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

•

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

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

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

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

Seasonality

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

Regulatory Matters

General

        Our operations are subject to extensive regulation by governmental agencies in each of the countries in which we conduct operations. Our domestic operating projects are subject to energy, environmental and other governmental laws and regulations at the federal, state and local levels in connection with the development, ownership and operation of, and use of electric energy, capacity and related products, including ancillary services from our projects. Federal laws and regulations govern, among other things, transactions by and with purchasers of power, including utility companies, the operations of a project and the ownership of a project. Under limited circumstances where exclusive federal jurisdiction is not applicable or specific exemptions or waivers from state or federal laws or regulations are otherwise unavailable, federal and/or state utility regulatory commissions may have broad jurisdiction over non-utility owned electric power plants. Energy producing projects are also subject to federal, state and local laws and regulations that govern the geographical location, zoning, land use and operation of a project. Federal, state and local environmental requirements generally require that a wide variety of permits and other approvals be obtained before the commencement of construction or operation of an energy producing facility and that the facility then operate in compliance with these permits and approvals. While we believe the requisite approvals for our existing projects have been obtained and that our business is operated in substantial compliance with applicable laws, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce. Regulatory compliance for the construction of new facilities is a costly and time consuming process. Intricate and changing environmental and other regulatory requirements may necessitate substantial expenditures and may create a significant risk of expensive delays or significant loss of value in a project if the project is unable to function as planned due to changing requirements or local opposition.

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

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U.S. Federal Energy Regulation

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

        A "qualifying facility" under the Public Utility Regulatory Policies Act is a cogeneration facility or a small power production facility that satisfies criteria adopted by the Federal Energy Regulatory Commission. In order to be a qualifying facility, a cogeneration facility must (i) sequentially produce both useful thermal energy, such as steam, and electric energy, (ii) meet specified operating standards, and energy efficiency standards when oil or natural gas is used as a fuel source and (iii) not be controlled, or more than 50% owned by one or more electric utilities (where "electric utility" is interpreted with reference to the Public Utility Holding Company Act definition of an "electric utility company"), electric utility holding companies (defined by reference to the Public Utility Holding Company Act definitions of "electric utility company" and "holding company") or affiliates of such entities. A small power production facility seeking to be a qualifying facility must produce power from renewable energy sources, such as geothermal energy, waste sources of fuel, such as waste coal, or any combination thereof and must meet the ownership restrictions discussed above. Before 1990, a small power production facility seeking to be a qualifying facility was subject to 30 MW or 80 MW size limits, depending upon its fuel source. In 1990, these limits were lifted for solar, wind, waste, and geothermal qualifying facilities, provided that applications for or notices of qualifying facility status were filed with the Federal Energy Regulatory Commission for these facilities on or before December 31, 1994, and provided, in the case of new facilities, the construction of these facilities commenced on or before December 31, 1999.

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

        A "foreign utility company" under the Public Utility Holding Company Act is, in general, an entity located outside the United States that owns or operates facilities used for the generation, distribution or transmission of electric energy for sale or the distribution at retail of natural or manufactured gas, but that derives none of its income, directly or indirectly, from such activities within the United States.

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

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

        Currently, in addition to the facilities owned or operated by us, a number of our operating projects, including the Homer City facilities, the Illinois plants, and Brooklyn Navy Yard facilities, are subject to the Federal Energy Regulatory Commission ratemaking regulation under the Federal Power Act. Our future domestic non-qualifying facility independent power projects will also be subject to Federal Energy Regulatory Commission jurisdiction on rates.

         The Public Utility Holding Company Act —Unless exempt or found not to be a holding company by the Securities and Exchange Commission, a company that falls within the definition of a holding company must register with the Securities and Exchange Commission and become subject to Securities and Exchange Commission regulation as a registered holding company under the Public Utility Holding Company Act. "Holding company" is defined in Section 2(a)(7) of the Public Utility Holding Company Act to include, among other things, any company that owns 10% or more of the voting securities of an electric utility company. "Electric utility company" is defined in Section 2(a)(3) of the Public Utility Holding Company Act to include any company that owns facilities used for generation, transmission or distribution of electric energy for resale. Exempt wholesale generators and foreign utility companies are not deemed to be electric utility companies and qualifying facilities are not considered facilities used for the generation, transmission or distribution of electric energy for resale. Securities and Exchange Commission precedent also indicates that it does not consider "paper facilities," such as contracts and tariffs used to make power sales, to be facilities used for the generation, transmission or distribution of electric energy for resale, and power marketing activities will not, therefore, result in an entity being deemed to be an electric utility company.

        A registered holding company is required to limit its utility operations to a single integrated utility system and to divest any other operations not functionally related to the operation of that utility system. In addition, a registered holding company will require Securities and Exchange Commission approval for the issuance of securities, other major financial or business transactions (such as mergers) and transactions between and among the holding company and holding company subsidiaries.

        Because it owns Southern California Edison, an electric utility company, Edison International, our ultimate parent company, is a holding company. Edison International is, however, exempt from registration pursuant to Section 3(a)(1) of the Public Utility Holding Company Act, because the public utility operations of the holding company system are predominantly intrastate in character. Consequently, we are not a subsidiary of a registered holding company, so long as Edison International continues to be exempt from registration pursuant to Section 3(a)(1) or another of the exemptions enumerated in Section 3(a). Nor are we a holding company under the Public Utility Holding Company Act, because our interests in power generation facilities are exclusively in qualifying facilities, exempt wholesale generators and foreign utility companies. All international projects and specified U.S. projects that we might develop or acquire will be non-qualifying facility independent power projects. We intend for each project to qualify as an exempt wholesale generator or as a foreign utility company. Loss of exempt wholesale generator, qualifying facility or foreign utility company status for one or more projects could result in our becoming a holding company subject to registration and regulation under the Public Utility Holding Company Act and could trigger defaults under the covenants in our project agreements. Becoming a holding company could, on a retroactive basis, lead to, among other things, fines and penalties and could cause certain of our project agreements and other contracts to be voidable.

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         Public Utility Regulatory Policies Act of 1978 —The Public Utility Regulatory Policies Act provides two primary benefits to qualifying facilities. First, as discussed above, ownership of qualifying facilities will not result in a company's being deemed an electric utility company for purposes of the Public Utility Holding Company Act. In addition, all cogeneration facilities and all small production facilities that generate power from sources other than geothermal and whose capacity exceeds 30 MW that are qualifying facilities are exempt from most provisions of the Federal Power Act and regulations of the Federal Energy Regulatory Commission thereunder. Second, the Federal Energy Regulatory Commission regulations promulgated under the Public Utility Regulatory Policies Act require that electric utilities purchase electricity generated by qualifying facilities at a price based on the purchasing utility's avoided cost, and that the utilities sell back up power to the qualifying facility on a non-discriminatory basis. The Federal Energy Regulatory Commission's regulations define "avoided cost" as the incremental cost to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, the utility would generate itself or purchase from another source. The Federal Energy Regulatory Commission's regulations also permit qualifying facilities and utilities to negotiate agreements for utility purchases of power at prices different from the utility's avoided costs. While it has been common for utilities to enter into long-term contracts with qualifying facilities in order, among other things, to facilitate project financing of independent power facilities and to reflect the deferral by the utility of capital costs for new plant additions, increasing competition and the development of new power markets have resulted in a trend toward shorter term power contracts that would place greater risk on the project owner.

        If one of the projects in which we have an interest were to lose its status as a qualifying facility, the project would no longer be entitled to the qualifying facility-related exemptions from regulation under the Public Utility Holding Company Act and the Federal Power Act. As a result, the project could become subject to rate regulation by the Federal Energy Regulatory Commission under the Federal Power Act, and we could inadvertently become a holding company under the Public Utility Holding Company Act. Under Section 26(b) of the Public Utility Holding Company Act, any project contracts that are entered into in violation of the Public Utility Holding Company Act, including contracts entered into during any period of non-compliance with the registration requirement, could be determined by the courts or the Securities and Exchange Commission to be void. If a project were to lose its qualifying facility status, we could attempt to avoid holding company status on a prospective basis by qualifying the project owner as an exempt wholesale generator. However, assuming this changed status would be permissible under the terms of the applicable power sales agreement, rate approval from the Federal Energy Regulatory Commission would be required. In addition, the project would be required to cease selling electricity to any retail customers, in order to qualify for exempt wholesale generator status, and could become subject to additional state regulation. Loss of qualifying facility status by one project could also potentially cause other projects with the same partners to lose their qualifying facility status to the extent those partners became electric utilities, electric utility holding companies or affiliates of such companies for purposes of the ownership criteria applicable to qualifying facilities. Loss of qualifying facility status could also trigger defaults under covenants to maintain qualifying facility status in the project's power sales agreements, steam sales agreements and financing agreements and result in termination, penalties or acceleration of indebtedness under such agreements. If a power purchaser were to cease taking and paying for electricity or were to seek to obtain refunds of past amounts paid because of the loss of qualifying facility status, we cannot assure you that the costs incurred in connection with the project could be recovered through sales to other purchasers. Moreover, our business and financial condition could be adversely affected if regulations or legislation were modified or enacted that changed the standards for maintaining qualifying facility status or that eliminated or reduced the benefits, such as the mandatory purchase provisions of the Public Utility Regulatory Policies Act and exemptions currently enjoyed by qualifying facilities. Loss of qualifying facility status on a retroactive basis could lead to, among other things, fines and penalties being levied against us, or claims by a utility customer for the refund of payments previously made.

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        We endeavor to develop our qualifying facility projects, monitor regulatory compliance by these projects and choose our customers in a manner that minimizes the risks of losing these projects' qualifying facility status. However, some factors necessary to maintain qualifying facility status are subject to risks of events outside our control. For example, loss of a thermal energy customer or failure of a thermal energy customer to take required amounts of thermal energy from a cogeneration facility that is a qualifying facility could cause a facility to fail to meet the requirements regarding the minimum level of useful thermal energy output. Upon the occurrence of this type of event, we would seek to replace the thermal energy customer or find another use for the thermal energy that meets the requirements of the Public Utility Regulatory Policies Act.

         Natural Gas Act —Many of the domestic operating facilities that we own, operate or have investments in use natural gas as their primary fuel. Under the Natural Gas Act, the Federal Energy Regulatory Commission has jurisdiction over certain sales of natural gas and over transportation and storage of natural gas in interstate commerce. The Federal Energy Regulatory Commission has granted blanket authority to all persons to make sales of natural gas without restriction but continues to exercise significant oversight with respect to transportation and storage of natural gas services in interstate commerce.

State Energy Regulation, California Deregulation and Recent Foreign Regulatory Matters

        See the discussion on state regulation, California deregulation and recent foreign regulatory matters in "Management's Discussion and Analysis of Results of Operations and Financial Condition—The California Power Crisis," and "Management's Discussion and Analysis of Results of Operations and Financial Condition—Market Risk Exposures."

Transmission of Wholesale Power

        Generally, projects that sell power to wholesale purchasers other than the local utility to which the project is interconnected require the transmission of electricity over power lines owned by others, also known as wheeling. The prices and other terms and conditions of transmission contracts are regulated by the Federal Energy Regulatory Commission, when the entity providing the wheeling service is a jurisdictional public utility under the Federal Power Act. Until 1992, the Federal Energy Regulatory Commission's ability to compel wheeling was very limited, and the availability of voluntary wheeling service could be a significant factor in determining whether a site was viable for project development.

        The Federal Energy Regulatory Commission's authority under the Federal Power Act to require electric utilities to provide transmission service on a case by case basis to qualifying facilities, exempt wholesale generators, and other power generators was expanded substantially by the Energy Policy Act. Furthermore, in 1996 the Federal Energy Regulatory Commission issued a rulemaking order, Order 888, in which the Federal Energy Regulatory Commission asserted the power, under its authority to eliminate undue discrimination in transmission, to compel all jurisdictional public utilities under the Federal Power Act to file open access transmission tariffs consistent with a pro forma tariff drafted by the Federal Energy Regulatory Commission. The Federal Energy Regulatory Commission subsequently issued Orders 888-A, 888-B and 888-C to clarify the terms that jurisdictional transmitting utilities are required to include in their open access transmission tariffs. The Federal Energy Regulatory Commission also issued Order 889, which required those transmitting utilities to abide by specified standards of conduct when using their own transmission systems to make wholesale sales of power, and to post specified transmission information, including information about transmission requests and availability, on a publicly available computer bulletin board.

        In issuing Order No. 888 et al ., the Federal Energy Regulatory Commission determined that the open-access rules set forth in the Order would apply to transmission with respect to wholesale sales and also with respect to retail transactions where the transmission component had been unbundled from the

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retail sale by state regulatory action or voluntarily by the utility making the retail sale. The Commission declined to assert jurisdiction over retail transmission that remained bundled into the retail sale. Subsequent court appeals of Order No. 888 have been brought by parties challenging the Order on the basis that the Commission had no authority to regulate the transmission of unbundled retail sales and by those challenging the Commission's failure to include the transmission of bundled retail sales in the order. On June 30, 2000, the U.S. Court of Appeals for the District of Columbia Circuit upheld the decision by the Federal Energy Regulatory Commission in both respects, finding that the Commission did have jurisdiction to regulate transmission of unbundled retail transactions, and that it was not required to assert jurisdiction over transmission embedded in bundled retail sales. In an opinion issued on March 4, 2002, the Supreme Court affirmed the decision of the Court of Appeals.

        In the meantime, while Order No. 888 was pending judicial review, it became apparent to the Federal Energy Regulatory Commission that the Order was not having the desired effects of eliminating discriminatory behavior by transmission owning utilities and in promoting the development of competitive wholesale electricity markets. Accordingly, in an effort to remedy the shortcomings it perceived, the Commission, on December 20, 1999, issued Order No. 2000, which required all transmission-owning utilities to file by December 15, 2000, a statement of their plans with respect to placing their transmission assets under a Regional Transmission Organization, or RTO, meeting certain criteria set forth in the Order. Although Order No. 2000 did not mandate that a utility join an RTO, it set forth various incentives for voluntary action by utilities to take such action and required them to explain in detail their reasons for deviating from the objectives set forth in the Order. RTOs meeting the Commission's criteria in Order No. 2000 were required to be operationally independent of the transmission-owning utilities whose assets they controlled and to possess other essential attributes, such as regional scope and configuration, the authority to receive and rule upon requests for service, a separate tariff governing all transactions of the RTO, a market monitoring capability, and other features. In subsequent orders, the Commission has progressively tightened its policies in favor of RTO formation, by such means as an explicit proposal that approvals of market-based rate authority for affiliates of utilities owning transmission should be tied to such utilities' placing their transmission assets in an RTO meeting the criteria of Order No. 2000. These and other regulatory initiatives by the Federal Energy Regulatory Commission are ongoing, and it is not possible to predict the extent of future developments. However, the direction of regulatory policy at the Commission appears generally positive for continued progress toward competitive wholesale electricity markets.

Retail Competition

        In response to pressure from retail electric customers, particularly large industrial users, the state commissions or state legislatures of most states are considering, or have considered, whether to open the retail electric power market to competition. Retail competition is possible when a customer's local utility agrees, or is required, to unbundle its distribution service, (for example, the delivery of electric power through its local distribution lines), from its transmission and generation service, (for example, the provision of electric power from the utility's generating facilities or wholesale power purchases). Several state commissions and legislatures have issued orders or passed legislation requiring utilities to offer unbundled retail distribution service, which is called retail wheeling, and phasing in retail wheeling over the next several years.

        The competitive pricing environment that will result from retail competition may cause utilities to experience revenue shortfalls and deteriorating creditworthiness. However, we expect that most, if not all, state plans will insure that utilities receive sufficient revenues, through a distribution surcharge if necessary, to pay their obligations under existing long-term power purchase contracts with qualifying facilities and exempt wholesale generators. On the other hand, qualifying facilities and exempt wholesale generators may be subject to pressure to lower their contract prices in an effort to reduce the stranded investment costs of their utility customers.

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Environmental Matters and Regulations

        See discussion on environmental matters and regulations in "Management's Discussion and Analysis of Results of Operations and Financial Condition—Environmental Matters and Regulations."

Employees

        At December 31, 2001, Edison Mission Energy employed 3,021 people, all of whom were full-time employees and 188, 152 and 1,236 of whom were covered by collective bargaining agreements in the United Kingdom, Australia and the United States, respectively. We believe we have good relations with our employees.

        Between early June and mid-October of 2001, our subsidiary, Midwest Generation, and the union that represents the employees at the Illinois plants were in negotiations to replace the expired collective bargaining agreement, covering wages and working conditions. The union authorized a strike that began on June 28, 2001. Midwest Generation operated the Illinois plants during the strike. Negotiations have concluded with a new four-year agreement that was ratified by the represented employees on October 16, 2001. Pursuant to the reinstatement process, employees began returning to work on October 22, 2001.

Our Relationship with Certain Affiliated Companies

        Edison Mission Energy is an indirect subsidiary of Edison International. Edison International is a holding company. Edison International is also the corporate parent of Southern California Edison, an electric utility that buys and sells power in California. Southern California Edison has faced material operating disruptions as a result of the California power crisis. For a description of the California power crisis, see "Management's Discussion and Analysis of Results of Operations and Financial Condition—The California Power Crisis."

Tax Sharing Agreement

        We are also included in the consolidated federal income tax and combined state franchise tax returns of Edison International. We calculate our income tax provision on a separate company basis under a tax sharing arrangement with The Mission Group, which in turn has an agreement with Edison International. Tax benefits generated by us and used in the Edison International consolidated tax return are recognized by us without regard to separate company limitations.