Eme Homer City Generation 10Q 2005 Q3 Quarterly report

QuickLinks -- Click here to rapidly navigate through this document

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

Form 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-92047-03

EME HOMER CITY GENERATION L.P.
(Exact name of registrant as specified in its charter)

Pennsylvania (State or other jurisdiction of incorporation or organization)		33-0826938 (I.R.S. Employer Identification No.)
1750 Power Plant Road Homer City, Pennsylvania (Address of principal executive offices)		15748 (Zip Code)
Registrant's telephone number, including area code:(724) 479-9011

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

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

Number of shares outstanding of the registrant's ownership interests as of November 4, 2005: Not applicable.

TABLE OF CONTENTS

		Page
PART I – Financial Information
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	30
PART II – Other Information
Item 1.	Legal Proceedings	31
Item 6.	Exhibits	31
	Signatures	32

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EME HOMER CITY GENERATION L.P.
STATEMENTS OF INCOME (LOSS)
(In thousands, Unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2005			2004			2005			2004
Operating Revenues from Marketing Affiliate
	Energy revenues		$	184,722		$	129,873		$	472,816		$	363,222
	Capacity revenues			5,033			6,355			14,296			22,018
	Losses from price risk management			(21,734	)		(6,225	)		(25,818	)		(12,777	)

		Total operating revenues		168,021			130,003			461,294			372,463

Operating Expenses
	Fuel			84,048			59,486			207,841			154,672
	Plant operations			20,732			14,422			79,804			69,241
	Depreciation and amortization			15,889			15,677			47,633			47,187
	Loss on asset impairment and other charges			257			—			257			—
	Administrative and general			664			587			2,576			1,164

		Total operating expenses		121,590			90,172			338,111			272,264

Operating income				46,431			39,831			123,183			100,199

Other Income (Expense)
	Interest and other income (expense)			762			68			2,199			507
	Gain on disposal of assets			—			—			24			—
	Interest expense			(36,765	)		(37,924	)		(110,815	)		(113,155	)

		Total other expense		(36,003	)		(37,856	)		(108,592	)		(112,648	)

Income (loss) before income taxes				10,428			1,975			14,591			(12,449	)
Provision (benefit) for income taxes				4,528			890			6,389			(3,398	)

Net Income (Loss)			$	5,900		$	1,085		$	8,202		$	(9,051	)

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

EME HOMER CITY GENERATION L.P.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, Unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2005			2004			2005			2004
Net Income (Loss)			$	5,900		$	1,085		$	8,202		$	(9,051	)
Other comprehensive income (loss), net of tax:
	Unrealized gains (losses) on derivatives qualified as cash flow hedges:
		Other unrealized holding gains (losses) arising during period, net of income tax benefit of $70,471 and $2,510 for the three months and $87,402 and $36,164 for the nine months ended September 30, 2005 and 2004, respectively		(85,936	)		(3,061	)		(106,584	)		(44,055	)
		Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $20,532 and $(11,579) for the three months and $21,348 and $(31,367) for the nine months ended September 30, 2005 and 2004, respectively		(25,039	)		14,121			(26,033	)		38,253

Other comprehensive income (loss)				(110,975	)		11,060			(132,617	)		(5,802	)

Comprehensive Income (Loss)			$	(105,075	)	$	12,145		$	(124,415	)	$	(14,853	)

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

EME HOMER CITY GENERATION L.P.
BALANCE SHEETS
(In thousands, Unaudited)

			September 30, 2005			December 31, 2004
Assets
Current Assets
	Cash and cash equivalents		$	167,144		$	74,246
	Fuel inventory			23,321			25,093
	Spare parts inventory			24,672			24,168
	Deposits under lease swap agreement			—			42,803
	Assets under price risk management			4,790			7,900
	Other current assets			3,996			4,140

		Total current assets		223,923			178,350

Property, Plant and Equipment				2,139,082			2,124,818
	Less accumulated depreciation and amortization			273,716			226,540

		Net property, plant and equipment		1,865,366			1,898,278

Deferred taxes				137,600			35,215
Restricted cash				47,124			47,119
Long-term assets under price risk management				121			—

Total Assets			$	2,274,134		$	2,158,962

Liabilities and Partners' Equity
Current Liabilities
	Accounts payable		$	5,401		$	3,394
	Accrued liabilities			48,403			29,515
	Due to affiliates			90,347			103,500
	Interest payable			53,978			37,893
	Interest payable to affiliates			9,168			19,297
	Advances under lease swap agreement			15,815			—
	Liabilities under price risk management			227,020			2,251
	Current portion of lease financing			47,000			40,641

		Total current liabilities		497,132			236,491

Long-term debt to affiliate				453,369			475,853
Lease financing, net of current portion				1,309,720			1,356,720
Benefit plans and other				34,036			31,880
Long-term liabilities under price risk management				46,274			—

Total Liabilities				2,340,531			2,100,944

Commitments and Contingencies (Note 4)
Partners' Equity				(66,397	)		58,018

Total Liabilities and Partners' Equity			$	2,274,134		$	2,158,962

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

EME HOMER CITY GENERATION L.P.
STATEMENTS OF PARTNERS' EQUITY
(In thousands, Unaudited)

		Chestnut Ridge Energy Company			Mission Energy Westside Inc.			Total Partners' Equity
Balance at December 31, 2004		$	57,139		$	879		$	58,018
	Net income		8,194			8			8,202
	Other comprehensive loss		(132,484	)		(133	)		(132,617	)

Balance at September 30, 2005		$	(67,151	)	$	754		$	(66,397	)

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

EME HOMER CITY GENERATION L.P.
STATEMENTS OF CASH FLOWS
(In thousands, Unaudited)

			Nine Months Ended September 30,
			2005			2004
Cash Flows From Operating Activities
	Net Income (Loss)		$	8,202		$	(9,051	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization		47,633			47,187
		Non-cash contribution of services		—			446
		Deferred taxes		(102,385	)		(21,526	)
		Loss on asset impairment and other charges		257			—
		Gain on asset disposal		(24	)		—
	Decrease (increase) in due to/from affiliates			(13,153	)		7,415
	Decrease in inventory			1,268			1,819
	Decrease in other assets			144			2,488
	Increase (decrease) in accounts payable			2,007			(3,729	)
	Increase in accrued liabilities			18,888			8,103
	Increase in interest payable			5,956			14,770
	Increase (decrease) in other liabilities			2,156			(3,100	)
	Increase in net liabilities under price risk management			141,414			16,204

Net cash provided by operating activities				112,363			61,026

Cash Flows From Financing Activities
	Advances under lease swap agreement			58,618			53,065
	Borrowings on long-term obligations from affiliates			1,325			2,297
	Repayments on debt obligations from affiliates			(23,808	)		(31,872	)
	Repayments of lease financing			(40,641	)		(29,562	)

Net cash used in financing activities				(4,506	)		(6,072	)

Cash Flows From Investing Activities
	Capital expenditures			(14,978	)		(15,144	)
	Proceeds from sale of assets			24			—
	Increase in restricted cash			(5	)		(6,861	)

Net cash used in investing activities				(14,959	)		(22,005	)

Net increase in cash and cash equivalents				92,898			32,949
Cash and cash equivalents at beginning of period				74,246			91,975

Cash and cash equivalents at end of period			$	167,144		$	124,924

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

EME HOMER CITY GENERATION L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)

Note 1. General

In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to present fairly the financial position and results of operations for the periods covered by this report. The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of the operating results for the full year.

EME Homer City Generation L.P.'s (EME Homer City's) significant accounting policies are described in Note 2 to its financial statements as of December 31, 2004 and 2003, included in its annual report on Form 10-K for the year ended December 31, 2004. EME Homer City follows the same accounting policies for interim reporting purposes. This quarterly report should be read in connection with such financial statements. Terms used but not defined in this report are defined in EME Homer City's annual report on Form 10-K for the year ended December 31, 2004.

Note 2. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consisted of the following:

	Unrealized Gains (Losses) on Cash Flow Hedges			Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance at December 31, 2004	$	5,149		$	5,149
Current period change		(132,617	)		(132,617	)

Balance at September 30, 2005	$	(127,468	)	$	(127,468	)

Unrealized losses on cash flow hedges, net of tax, at September 30, 2005, include unrealized losses on commodity hedges primarily related to futures and forward energy sales contracts that qualify for hedge accounting. These losses arise because current forecasts of future electricity prices are greater than EME Homer City's contract prices. The increase in the unrealized losses during the third quarter of 2005 resulted from a combination of new hedges for 2006 and 2007 and an increase in market prices for power driven largely from higher natural gas and oil prices.

As EME Homer City's hedged positions are realized, approximately $109.6 million, after tax, of the net unrealized losses on cash flow hedges will be reclassified into earnings during the next twelve months. Management expects that reclassification of net unrealized losses will offset energy revenue recognized at market prices. Actual amounts ultimately reclassified to earnings over the next twelve months could vary materially from this estimated amount as a result of changes in market conditions. The maximum period over which a cash flow hedge is designated is through December 31, 2007.

Under SFAS No. 133, the portion of a cash flow hedge that does not offset the change in value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EME Homer City recorded net losses of $31.6 million and $8.7 million during the third quarters of 2005 and 2004, respectively, and $34.8 million and $8.7 million during the nine months ended September 30, 2005 and 2004, respectively, representing the amount of cash flow hedges' ineffectiveness, reflected in losses from price risk management in the income statements.

Note 3. Employee Benefit Plans

Pension Plan

EME Homer City previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $2.0 million to its pension plan in 2005. As of September 30, 2005, $1.1 million in contributions have been made. EME Homer City anticipates meeting its original expectation by year-end 2005.

Components of pension expense are:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
				(in thousands)
Service cost	$	434		$	376		$	1,331		$	1,128
Interest cost		275			245			844			735
Expected return on plan assets		(225	)		(169	)		(663	)		(507	)
Net amortization and deferral		8			—			61			—

Total expense	$	492		$	452		$	1,573		$	1,356

Postretirement Benefits Other Than Pensions

EME Homer City previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $67 thousand to its postretirement benefits other than pensions in 2005. As of September 30, 2005, $50 thousand in contributions have been made. EME Homer City anticipates meeting its original expectation by year-end 2005.

Components of postretirement benefits other than pensions expense are:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
				(in thousands)
Service cost	$	207		$	149		$	565		$	455
Interest cost		301			220			802			684
Amortization of prior service costs		(26	)		(27	)		(78	)		(82	)
Amortization of unrecognized loss		78			—			88			25

Total expense	$	560		$	342		$	1,377		$	1,082

Note 4. Commitments and Contingencies

Capital Improvements

At September 30, 2005, EME Homer City had firm commitments to spend approximately $0.2 million on capital expenditures during the remainder of 2005 primarily related to planned selective catalytic reduction system (SCR) performance improvements.

Fuel Supply Contracts

EME Homer City has entered into additional fuel purchase commitments with various third-party suppliers during the first nine months of 2005. These additional commitments are currently estimated

to be $1.7 million for 2005, $77.3 million for 2006, $90.6 million for 2007, $19.3 million for 2008, and $9.0 million for 2009.

Commitments

Interconnection Agreement

EME Homer City's general partner, Mission Energy Westside, is a party to an interconnection agreement with New York State Electric & Gas Corporation, or NYSEG, and Pennsylvania Electric Company, or Penelec, an affiliate of FirstEnergy Corp., to provide interconnection services necessary to interconnect the Homer City facilities with NYSEG and Penelec's transmission systems. Unless terminated earlier in accordance with specified terms, the interconnection agreement will terminate on a date mutually agreed to by Mission Energy Westside, NYSEG and Penelec. This date will not exceed the retirement date of the Homer City units. NYSEG and Penelec have agreed to extend such interconnection services (but not the expiration of the agreement) to modifications, additions, upgrades or repowering of the Homer City units. Mission Energy Westside is required to compensate NYSEG and Penelec for all reasonable costs associated with any modifications, additions or replacements made to NYSEG or Penelec's interconnection facilities or transmission systems in connection with any modification, addition, upgrade or repowering to the Homer City units.

Contingencies

Guarantees and Indemnities

Tax Indemnity Agreements—

In connection with the sale-leaseback transaction related to the Homer City facilities, EME Homer City and its parent, Edison Mission Energy (EME), entered into tax indemnity agreements. Under these tax indemnity agreements, EME Homer City and EME agreed to indemnify the equity investors in the sale-leaseback transaction for specified adverse tax consequences that could result in certain situations set forth in the tax indemnity agreements, including specified defaults under the respective leases. The potential indemnity obligation under these tax indemnity agreements could be significant. Due to the nature of the obligations under these tax indemnity agreements, EME Homer City cannot determine a maximum potential liability. The indemnities would be triggered by a valid claim from the lessors. EME Homer City has not recorded a liability related to these indemnities.

Indemnity Provided as Part of the Acquisition of the Homer City Facilities—

In connection with the acquisition of the Homer City facilities, EME Homer City agreed to indemnify the sellers with respect to specific environmental liabilities before and after the date of sale as specified in the Asset Purchase Agreement dated August 1, 1998. EME guaranteed the obligations of EME Homer City under the Asset Purchase Agreement. Due to the nature of the obligation under this indemnity provision, it is not subject to a maximum potential liability and does not have an expiration date. Payments would be triggered under this indemnity by a claim from the sellers. EME Homer City has not recorded a liability related to this indemnity.

Ash Disposal Site

EME Homer City's ash disposal site is a permitted Class I Residual Waste Landfill, the most stringently regulated of the three categories of residual waste landfills authorized by the regulations of the Pennsylvania Department of Environmental Protection (PADEP). EME Homer City's permit allows it to dispose of coal combustion by-products, including fly ash, bottom ash and pyrites, and

miscellaneous plant wastes at the landfill. The wastes are deposited in compacted layers within lifts, or sections.

Each lift where coal ash is disposed must be capped and covered when it reaches final grade. EME Homer City must also monitor groundwater quality at and adjacent to the ash disposal site through a network of monitoring wells and report the results to PADEP on a periodic basis. In the event that a disposal facility's groundwater monitoring identifies degradation in any of its wells, PADEP's regulations require the facility to first confirm the existence and nature of the degradation by conducting a groundwater assessment. If the assessment confirms groundwater degradation in excess of the applicable regulatory standards, the facility is then required to prepare and implement an abatement plan that could include measures such as installing a liner in a previously unlined area. To date, no degradation has been found in the groundwater monitoring system at EME Homer City that would require the development of an assessment or abatement plan. EME Homer City also provides financial assurance in the form of a surety bond to guarantee its closure and post-closure obligations at the landfill. The estimated closure date is 2018. Management does not believe that the costs of maintaining and closing the ash disposal site will have a material impact on EME Homer City's results of operations or financial position.

Insurance

EME Homer City maintains insurance policies that are comparable to those carried by other electric generating facilities of a similar size. The insurance program includes all-risk real and personal property insurance, including coverage for losses from boiler and machinery breakdowns, and the perils of earthquake and flood, subject to certain sublimits. The property insurance program currently covers losses up to $1 billion. Under the terms of the participation agreements entered into on December 7, 2001 as part of the sale-leaseback transaction, EME Homer City is required to maintain specified minimum insurance coverages if and to the extent that such insurance is available on a commercially reasonable basis. Although the insurance covering the Homer City facilities is comparable to insurance coverages normally carried by companies engaged in similar businesses, and owning similar properties, the insurance coverages that are in place do not meet the minimum insurance coverages required under the participation agreements. Due to the current market environment, the minimum insurance coverage is not commercially available at reasonable prices. EME Homer City has obtained a waiver under the participation agreements which permits it to maintain its current insurance coverage through June 1, 2006.

EME Homer City 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 consistent with the requirements of the participation agreements.

Income Taxes

EME Homer City is, and may in the future be, under examination by tax authorities with respect to positions it takes in connection with the filing of its tax returns. Matters raised upon tax audit may involve substantial amounts, which, if resolved unfavorably, could possibly be material, though EME Homer City does not believe unfavorable resolutions of matters involving substantial amounts are likely to occur. In EME Homer City's opinion, it is unlikely that the resolution of any such tax audit matters will have a material adverse effect upon EME Homer City's financial condition or results of operations.

Environmental Matters and Regulations

EME Homer City is subject to environmental regulation by federal, state and local authorities in the United States. EME Homer City believes that it is in substantial compliance with environmental regulatory requirements and that maintaining compliance with current requirements will not materially affect its financial position or results of operations. However, possible future developments, such as the promulgation of more stringent environmental laws and regulations, future proceedings that may be initiated by environmental authorities, and settlements agreed to by other companies could affect the costs and the manner in which EME Homer City conducts its business, and may also cause it to make substantial additional capital expenditures. There is no assurance that EME Homer City would be able to recover these increased costs from its customers or that EME Homer City's financial position and results of operations would not be materially adversely affected as a result.

Typically, environmental laws and regulations require a lengthy and complex process for obtaining licenses, permits and approvals prior to construction, operation or modification of a project or generating facility. Meeting all the necessary requirements can delay or sometimes prevent the completion of a proposed project, as well as require extensive modifications to existing projects, which may involve significant capital expenditures. As a result of the sale-leaseback transaction, a number of permits that EME Homer City held have been transferred to the owner lessors. Other permits have been modified so that they are held jointly with the owner lessors. EME Homer City has no reason to believe that these transfers and modifications will negatively affect its business or results of operations. If EME Homer City fails to comply with applicable environmental laws, it may be subject to injunctive relief or penalties and fines imposed by regulatory authorities.

Note 5. Supplemental Statements of Cash Flows Information

	Nine Months Ended September 30,
	2005		2004
	(in thousands)
Cash paid for interest	$	104,541	$	98,072
Cash paid for income taxes		3,755		—

Note 6. New Accounting Pronouncements

FASB Staff Position FIN 46(R)-5

In March 2005, the FASB issued Staff Position FIN 46(R)-5, "Implicit Variable Interests Under FIN 46" (FIN 46(R)-5). FIN 46(R)-5 states that a reporting entity should consider whether it holds an implicit variable interest in a variable interest entity or in a potential variable interest entity. If the aggregate of the explicit and implicit variable interests held by the reporting entity and its related parties would, if held by a single party, identify that party as the primary beneficiary, the party within the group most closely associated with the variable interest entity should be deemed the primary beneficiary. The guidance of FIN 46(R)-5 is effective for reporting periods beginning after March 3, 2005. FIN 46(R)-5 did not affect EME Homer City's accounting for variable interest entities.

FASB Staff Position FAS 109-1

In December 2004, the FASB issued FASB Staff Position FAS 109-1, "Application of FASB Statement No. 109, 'Accounting for Income Taxes,' to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004." The primary objective of this Position is to provide guidance on the application of SFAS No. 109 to the provision within the American Jobs Creation Act of 2004 that provides a tax deduction on qualified production activities under the

provisions of Internal Code Section 199 effective for tax years beginning after December 31, 2004. Under FAS 109-1, recognition of the tax deduction on qualified production activities, which include the production of electricity, is ordinarily reported in the year it is earned. The deduction is calculated, and the limitations to the deduction are applied at the consolidated income tax reporting level by the parent of the affiliated group (Edison International). The benefit of the deduction is then allocated among the members of the group in proportion to each member's respective amount, if any, of income from qualified production activities. For the year ended December 31, 2005, EME Homer City does not expect the allocated benefit to have a material impact on its financial statements. EME Homer City will apply FAS 109-1 in computing income taxes as tax deductions related to qualified production activities are earned.

Statement of Financial Accounting Standard Interpretation No. 47

In March 2005, the FASB issued Financial Accounting Standard Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" (FIN 47). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and (or) method of settlement. EME Homer City is required to adopt FIN 47 by the end of 2005. EME Homer City is currently assessing the impact of FIN 47 on its results of operations and financial condition.

Statement of Financial Accounting Standards No. 153

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." SFAS No. 153 amends and clarifies that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Beginning in the third quarter of 2005, SFAS No. 153 is applicable to nonmonetary asset exchanges. The adoption of this standard had no impact on EME Homer City's financial statements.

Statement of Financial Accounting Standards No. 154

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" (SFAS No. 154), which replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS No. 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the effects of the change, the new accounting principle must be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and a corresponding adjustment must be made to the opening balance of retained earnings for that period. When it is impracticable to determine the cumulative effect of the change, the new principle must be applied as if it were adopted prospectively from the earliest date practicable. SFAS No. 154 is effective for all accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This standard does not change the transition provisions of any existing pronouncements. EME Homer City does not expect the adoption of this standard will have a material impact on its financial statements.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect EME Homer City Generation L.P.'s (EME Homer City's) current expectations and projections about future events based on EME Homer City'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 EME Homer City that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this 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 are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ, or that otherwise could impact EME Homer City, 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 EME Homer City's generating units have access;
•: the cost and availability of fuel and fuel transportation services;
•: the availability of sufficient collateral in support of EME Homer City's hedging activities and purchases of fuel;
•: 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;
•: governmental, statutory, regulatory or administrative changes or initiatives affecting EME Homer City or the electricity industry generally, including market structure rules and environmental regulations that could require additional expenditures or otherwise affect EME Homer City's cost and manner of doing business;
•: 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, including new plants and technologies that may be developed in the future;
•: operating risks, including equipment failure, availability, heat rate and output;
•: general political, economic and business conditions; and
•: weather conditions, natural disasters and other unforeseen events.

Certain of the risk factors listed above are discussed in more detail in "Market Risk Exposures" below, and under "Risks Related to the Business" in the MD&A included in Item 7 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004. Additional information about the risk factors listed above and other risks and uncertainties is contained throughout this MD&A. Readers are urged to read this entire quarterly report, including the information incorporated by reference, and carefully consider the risks, uncertainties and other factors that affect EME Homer City's business. The information contained in this report is subject to change without notice. Forward-looking statements speak only as of the date they are made and EME Homer City is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by EME Homer City with the Securities and Exchange Commission.

The MD&A of this Form 10-Q discusses material changes in the results of operations, financial condition and other developments of EME Homer City since December 31, 2004, and as compared to the third quarter and nine months ended September 30, 2004. This discussion presumes that the reader has read or has access to the MD&A included in Item 7 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004.

The MD&A presents a discussion of EME Homer City's financial results and analysis of its financial condition. It is presented in four major sections:

		Page
Management's Overview; Critical Accounting Estimates		13
Results of Operations		15
Liquidity and Capital Resources		18
Market Risk Exposures		23

MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING ESTIMATES

Management's Overview

Introduction

EME Homer City was formed for the purpose of acquiring, owning and operating three coal-fired electric generating units and related facilities located near Pittsburgh, Pennsylvania with an aggregate capacity of 1,884 MW. In December 2001, EME Homer City completed a sale-leaseback of the Homer City facilities to third-party lessors which is accounted for as a lease financing for financial reporting purposes.

EME Homer City derives revenue from the sale of energy, capacity and ancillary services into PJM Interconnection, LLC, commonly referred to as PJM, and the New York Independent System Operator, or NYISO, and from bilateral contracts with power marketers and load serving entities within PJM. EME Homer City has entered into a contract with a marketing affiliate for the sale of energy, capacity and ancillary services from the Homer City facilities, which enables this marketing affiliate to engage in forward sales and hedging transactions to manage electricity price exposure.

Overview of EME Homer City's 2005 Operating Performance

EME Homer City's net income increased $4.8 million and $17.3 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. The changes in earnings were primarily due to:

•: An increase in the average energy price of merchant generation to $45.45 per MWh and $44.17 per MWh in the third quarter and nine months ended September 30, 2005, respectively, from $35.99 per MWh and $36.36 per MWh during the third quarter and nine months ended September 30, 2004, respectively.
•: An increase in generation to 4,060 GWh and 10,697 GWh during the third quarter and nine months ended September 30, 2005, respectively, compared to 3,562 GWh and 9,937 GWh during the third quarter and nine months ended September 30, 2004, respectively. During the third quarter of 2004, temporary fuel supply interruptions were managed through a reduction of off-peak generation and spot purchases of higher priced coal.

Partially offset by:

•: An increase in the cost of sulfur dioxide (SO2) emission allowances which has been attributed to reduced numbers of both allowance sellers and prior vintage allowances. The net cost of emission allowances increased to $22.2 million and $50.9 million during the third quarter and nine months ended September 30, 2005, respectively, from $10.4 million and $23.5 million during the third quarter and nine months ended September 30, 2004, respectively.
•: An increase in coal costs driven by an increase in Northern Appalachia coal prices which has been attributed to greater demand from domestic power producers and increased international shipments of coal to Asia. See "Market Risk Exposures—Commodity Price Risk—Coal Price and Transportation Risk," and "Liquidity and Capital Resources—Contractual Obligations—Fuel Supply Dispute" for the status of the discussions regarding EME Homer City's coal supply contracts.

Critical Accounting Estimates

For a discussion of EME Homer City's critical accounting estimates, refer to "Critical Accounting Estimates" on page 22 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004.

RESULTS OF OPERATIONS

Introduction

This section discusses the results for the third quarters and nine months ended September 30, 2005 and 2004 on EME Homer City's financial statements.

Summary

The table below summarizes revenues and key performance measures related to coal-fired generation, which represents the majority of EME Homer City's operations.

		Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Revenues (in millions)
	Energy	$	185		$	130		$	473		$	363
	Capacity		5			6			14			22
	Loss from price risk management		(22	)		(6	)		(26	)		(13	)

	Total operating revenues	$	168		$	130		$	461		$	372

Statistics
	Generation (in GWh)		4,060			3,562			10,697			9,937
	Equivalent availability(1)		98.7%			91.7%			88.0%			82.9%
	Forced outage rate(2)		0.2%			1.4%			3.6%			5.6%
	Average energy price/MWh	$	45.45		$	35.99		$	44.17		$	36.36

(1): The availability factor is determined by the number of megawatt-hours the coal units are available to generate electricity divided by the product of the capacity of the coal units (in megawatts) and the number of hours in the period. 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 units are not available during periods of planned and unplanned maintenance.
(2): EME Homer City refers to unplanned maintenance as a forced outage.

Operating Revenues

Operating revenues increased $38.0 million and $88.8 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. Energy and capacity sales were made through contracts with EME Homer City's marketing affiliate, Edison Mission Marketing & Trading. The 2005 increases were primarily due to increased generation and higher average energy prices as compared to 2004. During the third quarter of 2004, coal deliveries under contracts with four fuel suppliers to EME Homer City were temporarily interrupted. As a result of these interruptions, EME Homer City reduced generation during off-peak periods when power prices were lower and purchased coal from alternative suppliers at spot prices which were substantially higher than the contract prices from these four fuel suppliers. These factors contributed to lower generation in the third quarter of 2004. During the first quarter of 2004, an unplanned outage at Unit 1 contributed to lower generation.

The average energy price earned by EME Homer City during the third quarter and nine months ended September 30, 2005 was $45.45/MWh and $44.17/MWh compared to the average real-time market price at the Homer City busbar for the same periods of $62.56/MWh and $50.54/MWh. EME Homer City's average energy price was lower than the average real-time market price due to: (1) hedge

contracts having been entered into in prior periods when market prices were lower, and (2) the differential in market prices at the PJM West Hub versus the Homer City busbar having increased (referred to as a widening of the basis between these PJM locations). EME Homer City hedges its energy price risk at PJM West Hub and retains the risk that the basis between PJM West Hub and Homer City widens. See "Market Risk Exposures—Commodity Price Risk—Basis Risk."

Losses from price risk management activities increased $15.5 million and $13.0 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. The 2005 increases were primarily attributable to the ineffective portion of forward and futures contracts which are derivatives that qualify as cash flow hedges under SFAS No. 133. Under SFAS No. 133, the portion of a cash flow hedge that does not offset the change in value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EME Homer City recorded net losses of $31.6 million and $8.7 million during the third quarters of 2005 and 2004, respectively, and $34.8 million and $8.7 million during the nine months ended September 30, 2005 and 2004, respectively, representing the amount of cash flow hedges' ineffectiveness. The ineffective losses were primarily attributable to an increase in the difference between energy prices at the PJM West Hub (the settlement point under forward contracts) and the energy prices at the delivery point where power generated by the Homer City facilities is delivered into the transmission system (referred to as the Homer City busbar). In addition, EME Homer City recognized ineffective gains (losses) related to forward contracts that expired during the respective periods. Partially offsetting the ineffective losses were gains in 2005 primarily related to futures contracts that did not qualify for hedge accounting under SFAS No. 133. See "Market Risk Exposures—Commodity Price Risk" for more information regarding forward market prices.

Due to higher electric demand resulting from warmer weather during the summer months, electric revenues are generally higher during the third quarter of each year. However, as a result of recent increases in market prices for power (driven in part from higher natural gas and oil prices), this historical trend may not be applicable to quarterly revenue in the future.

Operating Expenses

Operating expenses increased $31.4 million and $65.8 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. Operating expenses consist of fuel, plant operations, depreciation and amortization, and administrative and general expenses. The change in the components of operating expenses is discussed below.

Fuel expenses increased $24.6 million and $53.2 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. The 2005 increases were due to an increase in coal costs from higher coal prices and increased generation. In addition, the net cost of emission allowances increased to $22.2 million and $50.9 million in the third quarter and nine months ended September 30, 2005, respectively, from $10.4 million and $23.5 million in the corresponding periods of 2004, primarily due to an increase in the cost of purchasing SO2 emission allowances at higher market prices. See "Market Risk Exposures—Commodity Price Risk—Emission Allowances Price Risk" for more information regarding the price of SO2 allowances.

Plant operations costs increased $6.3 million and $10.6 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. Plant operations costs include labor and overhead, contract services, parts and supplies and other administrative costs. During the third quarter of 2004, plant maintenance costs were reduced by a change in estimate of a contractor settlement. Without this reduction in the third quarter of 2004, plant operations costs increased $1.4 million and $5.7 million in the third quarter and nine months ended

September 30, 2005, respectively. The year-to-date increase in plant operations costs is due to higher planned equipment maintenance costs, the cost of replacing the catalyst for the pollution control equipment in 2005 and lower maintenance costs in the third quarter of 2004.

Administrative and general expenses increased $1.4 million in the nine months ended September 30, 2005, compared to the corresponding period of 2004. The 2005 year-to-date increase is due to higher shared management and administrative costs and a change in estimate of Pennsylvania capital taxes that occurred in 2004.

Other Income (Expense)

Interest expense decreased $1.2 million and $2.3 million in the third quarter and nine months ended September 30, 2005, respectively, compared to the corresponding periods of 2004. Interest expense primarily relates to the lease financing of the Homer City facilities that originated in December 2001. Interest expense also includes interest of $9.3 million and $9.6 million in the third quarters ended September 30, 2005 and 2004, respectively, and $28.1 million and $28.5 million in the nine months ended September 30, 2005 and 2004, respectively, from EME Homer City's subordinated revolving loan agreement with Edison Mission Finance.

Provision (Benefit) for Income Taxes

EME Homer City had effective income tax provision (benefit) rates during the first nine months of 2005 and 2004 of 43.8% and (27.3%), respectively. EME Homer City's effective income tax provision (benefit) rate varies from the federal statutory rate of 35% due to state income taxes.

New Accounting Pronouncements

For a discussion of new accounting pronouncements affecting EME Homer City, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 6. New Accounting Pronouncements."

LIQUIDITY AND CAPITAL RESOURCES

Introduction

The following discussion of liquidity and capital resources is organized in the following sections:

		Page
Cash Flow		18
Capital Expenditures and Lease Covenants		18
Contractual Obligations		19
Distributions to Edison Mission Energy		20
Credit Ratings		20
Off-Balance Sheet Transactions		21
Environmental Matters and Regulations		21

For a complete discussion of these issues, read this quarterly report in conjunction with EME Homer City's annual report on Form 10-K for the year ended December 31, 2004.

Cash Flow

At September 30, 2005, EME Homer City had cash and cash equivalents of $167.1 million, compared to $74.2 million at December 31, 2004. Net working capital at September 30, 2005 was $(273.2) million, compared to $(58.1) million at December 31, 2004. Net working capital decreased $215.1 million from year-end primarily due to a $227.9 million increase in net liabilities under price risk management related to electricity contracts and a $58.6 million change in the lease swap position.

Net cash provided by operating activities increased $51.3 million in the first nine months of 2005, compared to the corresponding period of 2004. The change in operating cash flow is primarily due to income in 2005 versus losses in 2004 and the timing of cash receipts and disbursements related to working capital items.

Net cash used in financing activities decreased $1.6 million in the first nine months of 2005, compared to the corresponding period of 2004. The 2005 decrease was primarily due to lower payments on affiliate debt and higher receipts under the lease swap agreement, partially offset by higher repayments of the lease financing.

Net cash used in investing activities decreased $7.0 million in the first nine months of 2005, compared to the corresponding period of 2004. The decrease is due to a deposit of $6.9 million to restricted cash in 2004 related to an environmental bond.

The use of EME Homer City's cash generated from operations is restricted by the sale-leaseback agreements. EME Homer City believes that it will have adequate liquidity to meet its obligations as they become due in the next 12 months.

Capital Expenditures and Lease Covenants

EME Homer City plans to spend $6.9 million for the final quarter of 2005 and $12.6 million and $14.0 million in 2006 and 2007, respectively, for capital expenditures. Included in the estimated expenditures is $3.9 million for the final quarter of 2005, $4.9 million in 2006 and $3.1 million in 2007 related to environmental projects such as selective catalytic reduction system (SCR) performance

improvements on all three units. Non-environmental expenditures relate to upgrades to the coal handling system, ash removal improvements and various other projects.

Under the participation agreements entered into as part of the sale-leaseback transaction, EME Homer City's ability to enter into specified transactions and to engage in specified business activities, including financing and investment activities, is subject to significant restrictions. These restrictions could affect, and in some cases significantly limit or prohibit, its ability to, among other things, merge, consolidate or sell its assets, create liens on its properties or assets, enter into non-permitted trading activities, enter into transactions with its affiliates, incur indebtedness, create, incur, assume or suffer to exist guarantees or contingent obligations, make restricted payments to its partners, make capital expenditures, own subsidiaries, liquidate or dissolve, engage in non-permitted business activities, sublease its leasehold interests in the facilities or make improvements to the facilities. Accordingly, its liquidity is substantially based on its ability to generate cash flow from operations. If EME Homer City is unable to generate cash flow from operations necessary to meet its obligations, EME Homer City will have limited ability to obtain additional capital, unless its partners provide additional funding, which they are under no legal obligation to do.

The rent payments that EME Homer City owes under the sale-leaseback are comprised of two components, a senior rent portion and an equity rent portion. The senior rent is used exclusively for debt service to the holders of the senior secured bonds issued in connection with the sale-leaseback, while the equity rent is paid to the owner-lessors. In order to pay the equity portion of the rent, EME Homer City is required to meet historical and projected senior rent service coverage ratios of 1.7 to 1 subject to reduction to 1.3 to 1 under circumstances specified in the participation agreements. During the 12 months ended September 30, 2005, the senior rent service coverage ratio was 3.03 to 1. The senior rent service coverage ratio is determined by dividing net cash flow as defined in the participation agreements by the senior rent due in that period. In addition, if EME Homer City does not meet specified debt service coverage ratios while the lease debt is outstanding, it will not pay the equity portion of the rent to the owner-lessors. Accordingly, the sale-leaseback documentation does not permit the lessor to terminate the lease in the event of non-payment of the equity portion of the rent while the lease debt is outstanding.

EME Homer City's use of cash in its bank accounts is limited to specific operating and capital expenditures as set forth in the Security Deposit Agreement executed as part of the sale-leaseback transaction. The amount in certain reserve accounts will be available for payments due on the equity portion of lease rent during specified periods, and in accordance with the sale-leaseback documents, unless there is a default in the payment of the senior portion of lease rent, in which case the amount will be available to pay such senior portion of the lease rent. The release of funds from these restricted cash accounts is permitted, provided EME Homer City maintains specified reserve balances in accordance with the sale-leaseback documents, no event of default shall have occurred or be continuing and no two failed rent payments shall have occurred. EME Homer City had $40.0 million included in restricted cash at September 30, 2005 related to these reserve accounts.

Contractual Obligations

Fuel Supply Contracts

EME Homer City has entered into additional fuel purchase commitments with various third-party suppliers during the first nine months of 2005. These additional commitments are currently estimated to be $1.7 million for 2005, $77.3 million for 2006, $90.6 million for 2007, $19.3 million for 2008, and $9.0 million for 2009.

Fuel Supply Dispute

Beginning in 2004, EME Homer City experienced interruptions of supply under two agreements with Unionvale Coal Company and Genesis, Inc. Unionvale and Genesis claimed that alleged geologic conditions at the Genesis No. 17 Mine in Pennsylvania, which is one source of coal under these multi-source coal contracts, constituted force majeure and excused contract performance. These two agreements together provide for the delivery to EME Homer City of approximately 20% of EME Homer City's clean coal requirements in 2005 and 2006, and approximately 10% in 2007. Claims arising from these matters have been resolved in a confidential settlement, and the lawsuit has been dismissed. EME Homer City has awarded contracts to alternate suppliers, and adjusted its inventory strategies to reflect and offset the delivery shortfall for 2005.

Distributions to Edison Mission Energy

The following table summarizes the payments by EME Homer City under its subordinated revolving loan that constitute permitted distributions pursuant to the terms of the sale-leaseback transaction (in millions):

	Nine Months Ended September 30,
	2005			2004
Payment of interest	$	38.2		$	29.1
Payment of principal		23.8			31.9

Total payments	$	62.0	*	$	61.0

*: On October 3, 2005, EME Homer City made a distribution of $24.0 million to Edison Mission Energy.

Credit Ratings

EME Homer City is not currently rated. However, EME Homer City has entered into a contract with a marketing affiliate, Edison Mission Marketing & Trading, for the sale of energy and capacity from its facilities, which enables this marketing affiliate to engage in forward sales and hedging.

Credit ratings for Edison Mission Energy and Edison Mission Marketing & Trading are as follows:

		Moody's Rating		S&P Rating
Edison Mission Energy		B1		B+
Edison Mission Marketing & Trading		Not Rated		B+

EME Homer City cannot provide assurance that the credit ratings above will remain in effect for any given period of time or that one or more of these ratings will not be lowered. EME Homer City notes that these credit ratings are not recommendations to buy, sell or hold securities and may be revised at any time by a rating agency.

EME Homer City's sale-leaseback documents restrict EME Homer City's ability to enter into trading activities, as defined in the documents, with Edison Mission Marketing & Trading to sell forward the output of its facilities if Edison Mission Marketing & Trading does not have an investment grade credit rating from Standard & Poor's or Moody's or, in the absence of those ratings, if it is not rated as investment grade pursuant to EME's internal credit scoring procedures. These documents include a requirement that the counterparty to such transactions, and EME Homer City, if acting as

seller to an unaffiliated third party, be investment grade. EME Homer City currently sells all the output from its facilities through Edison Mission Marketing & Trading, which has a below investment grade credit rating, and EME Homer City is not rated. Therefore, in order for EME Homer City to continue to sell forward the output of its facilities, either: (1) EME Homer City must obtain consent from the sale-leaseback owner participant to permit it to sell directly into the market or through Edison Mission Marketing & Trading; or (2) Edison Mission Marketing & Trading must provide assurances of performance consistent with the requirements of the sale-leaseback documents. EME Homer City has obtained a consent from the sale-leaseback owner participant that will allow it to enter into such sales, under specified conditions, through December 31, 2006. EME Homer City continues to be in compliance with the terms of the consent; however, the consent is revocable by the sale-leaseback owner participant at any time. The sale-leaseback owner participant has not indicated that it intends to revoke the consent; however, there can be no assurance that it will not do so in the future. Revocation of the consent would not affect trades between Edison Mission Marketing & Trading and EME Homer City that had been entered into while the consent was still in effect. EME Homer City is permitted to sell the output of its facilities into the spot market at any time. See "Market Risk Exposures—Commodity Price Risk."

Off-Balance Sheet Transactions

For a discussion of EME Homer City's off-balance sheet transactions, refer to "Off-Balance Sheet Transactions" on page 39 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004. There have been no significant developments with respect to EME Homer City's off-balance sheet transactions that affect disclosures presented in EME Homer City's annual report.

Environmental Matters and Regulations

For a discussion of EME Homer City's environmental matters, refer to "Environmental Matters and Regulations" on page 39 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004. There have been no other significant developments with respect to environmental matters specifically affecting EME Homer City since the filing of its annual report, except as follows:

On May 12, 2005, the Clean Air Interstate Rule (CAIR) was published in the Federal Register. The CAIR requires 28 eastern states and the District of Columbia to address ozone attainment issues by reducing regional NOx and SO2 emissions. The CAIR reduces the current SO2 (i.e., Clean Air Act Title IV Phase II) emissions allowance cap in 2010 and 2015 by 50% and 65%, respectively. Regional NOx emissions are required to be reduced in 2009 and 2015 by 53% and 61%, respectively, from 2003 levels. The CAIR has been challenged in court by state, environmental and industry groups, which may result in changes to the substance of the rule and to the timetables for implementation. EME Homer City is reviewing the impact of the rule on its business plan. Given the uncertainty of the requirements that will need to be implemented and the options available to meet the NOx and SO2 reductions, EME Homer City at this time cannot accurately estimate the cost to meet these obligations.

The Clean Air Mercury Rule (CAMR), published in the Federal Register on May 18, 2005, creates a market-based cap-and-trade program that will reduce nationwide utility emissions of mercury in two distinct phases. In the first phase of the program, which will come into effect in 2010, the annual nationwide cap is 38 tons and emissions will be reduced primarily by taking advantage of "co-benefit" reductions; that is, mercury reductions achieved by reducing sulfur dioxide and nitrogen oxides emissions under the CAIR. In the second phase, due in 2018, coal-fired power plants will be subject to a second annual cap, which will reduce emissions nationwide to 15 tons upon full implementation. States may join the trading program by adopting the CAMR model trading rule in state regulations, or they may adopt regulations that mirror the necessary components of the model trading rule. States are

not required to adopt a cap-and-trade program and may promulgate alternative regulations, such as command and control regulations, that are equivalent to or more stringent than the CAMR's suggested cap-and-trade program. Any program adopted by a state must be approved by the US EPA.

Contemporaneous with the adoption of the CAMR, the US EPA rescinded its previous finding that mercury emissions from coal-fired electric generating units were required to be regulated pursuant to Section 112 of the federal Clean Air Act. Litigation has already been filed challenging the US EPA's rescission action and claiming that the agency should have imposed technology-based limitations on mercury emissions instead of adopting a market-based program. Litigation was also filed to challenge the CAMR following its publication in the Federal Register. As a result of these challenges, the CAMR rules may change in terms of substance and timetables.

To the extent that Pennsylvania implements US EPA's CAMR by adopting a cap-and-trade program for achieving reductions in mercury emissions, then EME Homer City may have the option to purchase mercury emission allowances, to install control equipment (or otherwise to alter operations so as to reduce mercury emissions), or some combination thereof. If EME Homer City were to implement environmental control technology instead of purchasing allowances to comply with the CAMR and other Clean Air Act developments described in "Environmental Matters and Regulations—Federal—United States of America" on page 39 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004, it currently estimates capital expenditures for such improvements to be approximately $350 million to $400 million in the 2006-2010 timeframe. However, because the mercury state implementation plans are not due until October 31, 2006 and such plans may not adopt the CAMR's cap-and-trade program, and because EME Homer City cannot predict the outcome of the legal challenge to the CAMR and the US EPA's decision not to regulate mercury emissions pursuant to Section 112 of the federal Clean Air Act, the full impact of this regulation currently cannot be assessed. EME Homer City's approach to meeting these obligations will continue to be based upon an ongoing assessment of the federal requirements and market conditions.

MARKET RISK EXPOSURES

Introduction

EME Homer City's primary market risk exposures arise from fluctuations in electricity, capacity and fuel prices, emissions allowances and transmission rights. EME Homer City manages these risks in part by using derivative financial instruments in accordance with established policies and procedures.

This section discusses these market risk exposures under the following headings:

		Page
Commodity Price Risk		23
Derivative Financial Instruments		28
Credit Risk		28
Interest Rate Risk		29
Regulatory Matters		29

For a complete discussion of these issues, read this quarterly report in conjunction with EME Homer City's annual report on Form 10-K for the year ended December 31, 2004.

Commodity Price Risk

Overview

EME Homer City's revenues and results of operations will depend upon prevailing market prices for capacity, energy, ancillary services, emission allowances or credits, coal, natural gas and fuel oil, and associated transportation costs in PJM and NYISO. Among the factors that influence future market prices for energy, capacity and ancillary services in PJM and NYISO are:

•: prevailing market prices for coal, natural gas and fuel oil, and associated transportation costs;
•: the cost and availability of emission credits or allowances;
•: 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;
•: transmission congestion in and to each market area and the resulting differences in prices between delivery points;
•: the availability, reliability and operation of nuclear generating plants, where applicable, and the extended operation of nuclear generating plants in PJM and NYISO beyond their presently expected dates of decommissioning;
•: weather conditions prevailing in PJM and NYISO from time to time; and
•: the rate of electricity usage as a result of factors such as regional economic conditions and the implementation of conservation programs.

EME Homer City's merchant operations expose it 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 by a risk management committee to ensure compliance with EME Homer City's risk management policies through Edison Mission Marketing & Trading. Policies are in place which define risk tolerance, and procedures exist which allow for monitoring of all

commitments and positions with regular reviews by a risk management committee. Despite this, there can be no assurance that all risks have been accurately identified, measured and/or mitigated.

Edison Mission Marketing & Trading uses a "value at risk" analysis in its daily business to identify, measure, monitor and control EME Homer City's overall market risk exposure. The use of value at risk allows management to aggregate overall commodity risk, compare risk on a consistent basis and identify the risk factors. Value at risk measures the possible 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, Edison Mission Marketing & Trading supplements this approach with the use of stress testing and worst-case scenario analysis for key risk factors, as well as stop loss limits and counterparty credit exposure limits.

Hedging Strategy

To reduce its exposure to market risk, EME Homer City hedges a portion of its merchant portfolio risk through Edison Mission Marketing & Trading. To the extent that EME Homer City does not hedge its merchant portfolio, the unhedged portion will be subject to the risks and benefits of spot market price movements. Hedge transactions are primarily implemented through the use of contracts cleared on the Intercontinental Trading Exchange and the New York Mercantile Exchange. Hedge transactions are also entered into as forward sales to utilities and power marketing companies.

The extent to which EME Homer City hedges its market price risk depends on several factors. First, EME Homer City evaluates over-the-counter market prices to determine whether sales at forward market prices are sufficiently attractive compared to assuming the risk associated with spot market sales. Second, EME Homer City's ability to enter into hedging transactions depends upon its and Edison Mission Marketing & Trading's credit capacity and upon the forward sales markets having sufficient liquidity to enable EME Homer City to identify appropriate counterparties for hedging transactions.

Energy Price Risk

Electric power generated at the Homer City facilities is generally sold into the PJM market. The PJM pool has short-term markets, which establish an hourly clearing price. The Homer City facilities are situated in the PJM control area and are physically connected to high-voltage transmission lines serving both the PJM and NYISO markets.

The following table depicts the average historical market prices for energy per megawatt-hour in PJM during the first nine months of 2005 and 2004:

	Historical Energy Prices* 24-Hour PJM
	Homer City				West Hub
	2005		2004		2005		2004
January	$	45.82	$	51.12	$	49.53	$	55.01
February		39.40		47.19		42.05		44.22
March		47.42		39.54		49.97		39.21
April		44.27		43.01		44.55		42.81
May		43.67		44.68		43.64		48.04
June		46.63		36.72		53.72		38.05
July		54.63		40.09		66.34		43.64
August		66.39		34.76		82.83		38.59
September		66.67		40.62		76.82		41.96

Nine-Month Average	$	50.54	$	41.97	$	56.61	$	43.50

*: Energy prices were calculated at the Homer City busbar (delivery point) and PJM West Hub using historical hourly real-time prices provided on the PJM-ISO web-site.

Forward market prices at the PJM West Hub fluctuate as a result of a number of factors, including natural gas prices, transmission congestion, changes in market rules, electricity demand which is affected by weather and economic growth, plant outages in the region, and the amount of existing and planned power plant capacity. The actual spot prices for electricity delivered by the Homer City facilities into these markets may vary materially from the forward market prices set forth in the table below.

The following table sets forth the forward market prices for energy per megawatt-hour as quoted for sales into the PJM West Hub at September 30, 2005:

		24-Hour PJM West Hub Forward Energy Prices*
2005
	October	$	69.90
	November		74.49
	December		80.80
2006 Calendar "strip"(1)		$	72.01
2007 Calendar "strip"(1)		$	62.18

(1): Market price for energy purchases for the entire calendar year, as quoted for sales into the PJM West Hub.
*: Energy prices were determined by obtaining broker quotes and information from other public sources relating to the PJM West Hub delivery point. Forward prices at PJM West Hub are generally higher than the prices at the Homer City busbar.

The following table summarizes Homer City's hedge position at September 30, 2005:

		2005			2006			2007
Megawatt hours			2,215,125			8,525,200			3,618,000
Average price/MWh(1)		$	43.14		$	53.24		$	60.68

(1): The above hedge positions include forward contracts for the sale of power during different periods of the year and the day. Market prices tend to be higher during on-peak periods during the day and during summer months, although there is significant variability of power prices during different periods of time. Accordingly, the above hedge position at September 30, 2005 is not directly comparable to the 24-hour PJM West Hub prices set forth above.

The average price/MWh for Homer City's hedge position is based on PJM West Hub. Energy prices at the Homer City busbar have been lower than energy prices at the PJM West Hub. See "—Basis Risk" below for a discussion of the difference.

Basis Risk

Sales made from the Homer City facilities in the real-time or day-ahead market receive the actual spot prices at the busbar (delivery point) of the plant. In order to mitigate price risk from changes in spot prices at the Homer City busbar, EME Homer City may enter into cash settled futures contracts as well as forward contracts with counterparties for energy to be delivered in future periods. Currently, there is not a liquid market for entering into these contracts at the Homer City busbar. A liquid market does exist for a settlement point known as the PJM West Hub. EME Homer City's price risk management activities use this settlement point (and, to a lesser extent, other similar trading hubs) to enter into hedging contracts. EME Homer City's revenues with respect to such forward contracts include:

•: sales of actual generation in the amounts covered by such forward contracts with reference to PJM spot prices at the Homer City busbar, plus,
•: sales to third parties at the price under such hedging contracts at designated settlement points (generally the PJM West Hub) less the cost of power at spot prices at the same designated settlement points.

Under the PJM market design, locational marginal pricing (sometimes referred to as LMP), which establishes hourly prices at specific locations throughout PJM by considering factors including generator bids, load requirements, transmission congestion and losses, can cause the price of a specific delivery point to be raised or lowered relative to other locations depending on how the point is affected by transmission constraints. 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 by EME Homer City as "basis risk." During the past 12 months, transmission congestion in PJM has resulted in prices at the Homer City busbar being lower than those at the PJM West Hub (the primary trading hub in PJM for the Homer City facilities) by an average of 9%. The monthly average difference during this period ranged from zero to 20%, which occurred in August 2005. For comparison, the same difference during 2004 was 4%.

By entering into cash settled futures contracts and forward contracts using the PJM West Hub (or other similar trading hubs) as the settlement point, EME Homer City is exposed to basis risk as described above. In order to mitigate basis risk, EME Homer City has participated in purchasing financial transmission rights in PJM, and may continue to do so in the future. A financial transmission right is a financial instrument that entitles the holder thereof to receive actual spot prices at one point

of delivery and pay prices at another point of delivery that are pegged to prices at the first point of delivery, plus or minus a fixed amount. Accordingly, EME Homer City's price risk management activities include using financial transmission rights alone or in combination with forward contracts to manage basis risk.

Coal Price and Transportation Risk

The Homer City facilities use approximately 5 million tons of coal annually, obtained from mines located near the facilities in Pennsylvania. Coal purchases are made under a variety of supply agreements typically ranging from one year to five years in length. The following table summarizes the percent of expected coal requirements for the next five years that are under contract at September 30, 2005.

		2005(1)		2006		2007		2008		2009
Percent of coal requirements under contract(2)		101%		78%		78%		21%		15%

(1): The percentage in 2005 is calculated based on coal supply and expected generation requirements for a full year.
(2): Adjusted for expected deliveries under an executed agreement to settle outstanding contract disputes. See "—Liquidity and Capital Resources—Contractual Obligations—Fuel Supply Dispute" for more information regarding fuel supply interruptions and the dispute with two suppliers.

EME Homer City is subject to price risk for purchases of coal that are not under contract. Prices of Northern Appalachia coal, which is purchased for the Homer City facilities, increased considerably since 2004. In January 2004, prices of Northern Appalachia coal (with 13,000 British Thermal units (Btu) content and <3.0 SO2 MMBtu content) were below $40 per ton and increased to more than $60 per ton during 2004. On September 30, 2005, the Energy Information Administration reported the price of Northern Appalachia coal at $54.00 per ton. The overall increase in the Northern Appalachia coal price has been largely attributed to greater demand from domestic power producers and increased international shipments of coal to Asia.

Emission Allowances Price Risk

Under the federal Acid Rain Program (which requires electric generating stations to hold sulfur dioxide allowances) and Pennsylvania State Implementation Plan (SIP) regulations implementing the federal NOx SIP Call requirement, EME Homer City purchases (or sells) emission allowances based on the amounts required for actual generation in excess of (or less than) the amounts allocated under these programs. As part of the acquisition of the Homer City facilities, EME Homer City obtained the rights to the emission allowances that have been or are allocated to these facilities.

The price of emission allowances, particularly SO2 allowances issued through the US EPA Acid Rain Program, increased substantially during 2004 and the first nine months of 2005. The average price of purchased SO2 allowances increased to $765 per ton during the nine months ended September 30, 2005 from $281 per ton during the nine months ended September 30, 2004. The increase in the price of SO2 allowances has been attributed to reduced numbers of both allowance sellers and prior vintage allowances.

See "Liquidity and Capital Resources—Environmental Matters and Regulations" for a discussion of environmental regulations related to emissions.

Derivative Financial Instruments

The following table summarizes the fair values for outstanding financial instruments used for price risk management activities (in thousands). The change in fair value of electricity contracts at September 30, 2005 as compared to December 31, 2004 is attributable to the increase in average market prices for power as compared to contracted prices at September 30, 2005, which is the valuation date, causing the fair value of the contracts to become liabilities instead of assets.

		September 30, 2005			December 31, 2004
Commodity price:
	Electricity contracts	$	(268,384	)	$	5,648

In assessing the fair value of EME Homer City's derivative financial instruments, Edison Mission Marketing & Trading uses a variety of methods and assumptions based on the market conditions and associated risks existing at each balance sheet date. The fair value of commodity price contracts takes into account quoted market prices, time value of money, volatility of the underlying commodities and other factors. The following table summarizes the maturities, the valuation method and the related fair value of EME Homer City's commodity price risk management assets and liabilities as of September 30, 2005 (in thousands):

		Total Fair Value			Maturity <1 year			Maturity 1 to 3 years			Maturity 4 to 5 years			Maturity >5 years
Prices actively quoted		$	(268,384	)	$	(222,230	)	$	(46,154	)	$	—		$	—

Credit Risk

In conducting price risk management activities, Edison Mission Marketing & Trading enters into contracts with a number of utilities, energy companies and financial institutions and other companies, collectively referred to as counterparties. In the event a counterparty were to default on its trade obligation, EME Homer City would be exposed to the risk of possible loss associated with reselling the contracted product at a lower price if the non-performing counterparty were unable to pay the resulting liquidated damages owed to EME Homer City. EME Homer City would be exposed to the risk of non-payment of accounts receivable accrued for products delivered prior to the time such counterparty defaulted.

To manage credit risk, Edison Mission Marketing & Trading looks at the risk of a potential default by counterparties. Credit risk is measured by the loss that would be incurred if the counterparties failed to perform pursuant to the terms of their contractual obligations. Edison Mission Marketing & Trading measures, monitors and mitigates, to the extent possible, credit risk. To mitigate counterparty risk, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary. Edison Mission Marketing & Trading also takes other appropriate steps to limit or lower credit exposure. Processes have also been established to determine and monitor the creditworthiness of counterparties. Edison Mission Marketing & Trading manages portfolio credit risk based on credit ratings using published ratings of counterparties and other publicly disclosed information, such as financial statements, regulatory filings, and press releases, to guide it in the process of setting credit levels, risk limits and contractual arrangements, including master netting agreements. A risk management committee regularly reviews the credit quality of Edison Mission Marketing & Trading's counterparties. Despite this, there can be no assurance that these efforts will be wholly successful in mitigating credit risk or that collateral pledged will be adequate.

In addition, coal for the Homer City facilities is purchased from suppliers under contracts which may be for multiple years. A number of the coal suppliers for the Homer City facilities do not currently have an investment grade credit rating and, accordingly, EME Homer City may have limited recourse to collect damages from a supplier in the event of default. EME Homer City seeks to mitigate this risk through diversification of its coal suppliers and through guarantees and other collateral arrangements when available. Despite this, there can be no assurance that these efforts will be successful in mitigating credit risk from coal suppliers.

For the nine months ended September 30, 2005, Edison Mission Marketing & Trading made sales to one customer that accounted for 20% and another customer that accounted for 12% of EME Homer City's operating revenues. For the nine months ended September 30, 2004, Edison Mission Marketing & Trading made sales to one customer that accounted for 35% of EME Homer City's operating revenues.

Interest Rate Risk

EME Homer City has mitigated the risk of interest rate fluctuations by obtaining fixed rate financing on its outstanding long-term debt with its affiliate. EME Homer City does not believe that interest rate fluctuations will have a material adverse effect on its financial position or results of operations.

Regulatory Matters

For a discussion of EME Homer City's regulatory matters, refer to "Regulatory Matters" on page 10 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004. There have been no other significant developments with respect to regulatory matters specifically affecting EME Homer City since the filing of its annual report except as follows:

Passage of Comprehensive Energy Legislation by Congress

A comprehensive energy bill was passed by the House and Senate in July 2005 and was signed into law by the President on August 8, 2005. Known as "EPAct 2005," this comprehensive legislation includes provisions for the repeal of the Public Utility Holding Company Act (PUHCA), for amendments to the Public Utility Regulatory Policies Act of 1978 (PURPA), for the introduction of new regulations regarding "Transmission Operation Improvements," for Transmission Rate Reform, for incentives for various generation technologies and for the extension through December 31, 2007 of production tax credits for wind and other specified types of generation. A number of these provisions will require implementing regulations to be promulgated by the Federal Energy Regulatory Commission (FERC). EME Homer City is currently assessing the potential impact of this legislation and the likely regulations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of market risk sensitive instruments, refer to "Market Risk Exposures" on page 46 of EME Homer City's annual report on Form 10-K for the year ended December 31, 2004. Refer to "Market Risk Exposures" in Item 2 of this report for an update to that disclosure.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

EME Homer City's management, under the supervision and with the participation of the partnership's principal executive officer and principal financial officer, has evaluated the effectiveness of EME Homer City's disclosure controls and procedures (as that 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 such evaluation, the principal executive officer and principal financial officer have concluded that, as of the end of the period, EME Homer City's disclosure controls and procedures are effective.

Internal Control Over Financial Reporting

There were no changes in EME Homer City'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 quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, EME Homer City's internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS

Exhibit No.		Description
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32		Statement Pursuant to 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		EME HOMER CITY GENERATION L.P. (REGISTRANT)
		By:		Mission Energy Westside Inc., as General Partner
		By:		/s/ W. James Scilacci W. James Scilacci Director and Vice President
		Date:		November 4, 2005

QuickLinks

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

EME HOMER CITY GENERATION L.P. STATEMENTS OF INCOME (LOSS) (In thousands, Unaudited)
EME HOMER CITY GENERATION L.P. STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands, Unaudited)
EME HOMER CITY GENERATION L.P. BALANCE SHEETS (In thousands, Unaudited)
EME HOMER CITY GENERATION L.P. STATEMENTS OF PARTNERS' EQUITY (In thousands, Unaudited)
EME HOMER CITY GENERATION L.P. STATEMENTS OF CASH FLOWS (In thousands, Unaudited)
EME HOMER CITY GENERATION L.P. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2005 (Unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS

SIGNATURES

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Eme Homer City Generation Inactive 10-Q2005 Q3 Quarterly report

Content analysis