Eme Homer City Generation 10Q 2008 Q3 Quarterly report

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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, 2008

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		33-0826938
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1750 Power Plant Road Homer City, Pennsylvania		15748
(Address of principal executive offices)		(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. Yesý Noo

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


Large accelerated filero		Accelerated filero		Non-accelerated filerý (Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noý

Number of shares outstanding of the registrant's ownership interests as of November 7, 2008: Not applicable.

TABLE OF CONTENTS

		Page

	Glossary	ii
	PART I – Financial Information
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4T.	Controls and Procedures	37
	PART II – Other Information
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 6.	Exhibits	39
	Signatures	40

GLOSSARY

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


Btu		British thermal units
CAIR		Clean Air Interstate Rule
CONE		cost of new entry
EME		Edison Mission Energy
EME Homer City		EME Homer City Generation L.P.
EMMT		Edison Mission Marketing & Trading, Inc.
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIN No. 39-1		Financial Accounting Standards Board Staff Position No. 39-1, "Amendment of FASB Interpretation No. 39"
Fitch		Fitch Ratings
FSP SFAS No. 133-1 and FIN No. 45-4		Financial Accounting Standards Board Staff Position No. 133-1 and FIN No. 45-4, "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161."
FSP SFAS No. 142-3		Financial Accounting Standards Board Staff Position SFAS No. 142-3, "Determination of the Useful Life of Intangible Assets"
GHG		greenhouse gas
GWh		gigawatt-hours
MD&A		Management's Discussion and Analysis of Financial Condition and Results of Operations
MMBtu		million British thermal units
Moody's		Moody's Investors Service, Inc.
MW		megawatts
MWh		megawatt-hours
NAPP		Northern Appalachian
NOV		Notice of Violation
NO_X		nitrogen oxide
NYISO		New York Independent System Operator
NYSEG		New York State Electric & Gas Corporation
PADEP		Pennsylvania Department of Environmental Protection
Penelec		Pennsylvania Electric Company
PJM		PJM Interconnection, LLC
RPM		Reliability Pricing Model
S&P		Standard & Poor's Ratings Services
SFAS		Statement of Financial Accounting Standards issued by the FASB


SFAS No. 133		Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities"
SFAS No. 157		Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
SFAS No. 161		Statement of Financial Accounting Standards No. 161, "Disclosures About Derivative Instruments and Hedging Activities" (an amendment of FASB No. 133)
SIP(s)		state implementation plan(s)
SO₂		sulfur dioxide
US EPA		United States Environmental Protection Agency

iii

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

			Three Months Ended September 30,						Nine Months Ended September 30,

			2008			2007			2008			2007
Operating Revenues from Marketing Affiliate			$	236		$	199		$	548		$	573
Operating Expenses
	Fuel			78			85			202			225
	Plant operations			22			18			108			93
	Depreciation and amortization			16			15			48			46
	Administrative and general			1			1			3			3

		Total operating expenses		117			119			361			367

Operating income				119			80			187			206

Other Income (Expense)
	Interest and other income			3			4			5			8
	Interest expense			(31	)		(34	)		(95	)		(106	)

		Total other expense		(28	)		(30	)		(90	)		(98	)

Income before income taxes				91			50			97			108
Provision for income taxes				36			21			38			44

Net Income			$	55		$	29		$	59		$	64

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

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

			Three Months Ended September 30,					Nine Months Ended September 30,

			2008			2007		2008		2007
Net Income			$	55		$	29	$	59	$	64
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 expense (benefit) of $153 and $(1) for the three months and $19 and $(55) for the nine months ended September 30, 2008 and 2007, respectively		213			—		26		(75	)
		Reclassification adjustments included in net income, net of income tax expense (benefit) of $20 and $(5) for the three months and $(15) and $(21) for the nine months ended September 30, 2008 and 2007, respectively		(27	)		7		21		28

Other comprehensive income (loss)				186			7		47		(47	)

Comprehensive Income			$	241		$	36	$	106	$	17

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

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

			September 30, 2008		December 31, 2007

Assets
Current Assets
	Cash and cash equivalents		$	171	$	142
	Due from affiliates			1		1
	Fuel inventory			45		30
	Spare parts inventory			28		26
	Derivative assets			19		—
	Deferred taxes			—		6
	Intangible assets			28		45
	Other current assets			10		4

		Total current assets		302		254

Property, Plant and Equipment				2,188		2,155
	Less accumulated depreciation and amortization			460		411

		Net property, plant and equipment		1,728		1,744

Deferred taxes				81		96
Long-term derivative assets				32		—
Restricted cash				37		37
Long-term intangible assets				8		4

Total Assets			$	2,188	$	2,135

Liabilities and Partners' Equity
Current Liabilities
	Accounts payable		$	21	$	17
	Accrued liabilities			13		16
	Due to affiliates			192		169
	Interest payable			47		31
	Interest payable to affiliates			22		8
	Derivative liabilities			7		15
	Deferred taxes			3		—
	Current portion of lease financing			57		53

		Total current liabilities		362		309

Long-term debt to affiliate				373		394
Lease financing, net of current portion				1,150		1,207
Benefit plans and other				40		39
Long-term derivative liabilities				2		31

Total Liabilities				1,927		1,980

Commitments and Contingencies (Note 6)
Partners' Equity				261		155

Total Liabilities and Partners' Equity			$	2,188	$	2,135

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

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

		Chestnut Ridge Energy Company		Mission Energy Westside Inc.		Total Partners' Equity

Balance at December 31, 2007		$	154	$	1	$	155
	Net income		59		—		59
	Other comprehensive income		47		—		47

Balance at September 30, 2008		$	260	$	1	$	261

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

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

				Nine Months Ended September 30,

				2008			2007
Cash Flows From Operating Activities
	Net income			$	59		$	64
		Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization		49			47
			Deferred taxes		(10	)		5
		Decrease in due to/from affiliates			23			13
		Decrease (increase) in inventory			(17	)		4
		Decrease (increase) in other current assets			(6	)		2
		Decrease (increase) in intangible assets			13			(17	)
		Increase in accounts payable and other current liabilities			1			2
		Increase (decrease) in interest payable			30			(14	)
		Increase in other liabilities			1			2
		Decrease (increase) in derivative assets and liabilities			(7	)		5

	Net cash provided by operating activities				136			113

Cash Flows From Financing Activities
		Refund of deposit under lease swap agreement			—			45
		Repayments of long-term debt to affiliate			(21	)		(67	)
		Repayments of lease financing			(53	)		(50	)

	Net cash used in financing activities				(74	)		(72	)

Cash Flows From Investing Activities
		Capital expenditures			(33	)		(8	)
		Restricted cash			—			10

	Net cash provided by (used in) investing activities				(33	)		2

Net increase in cash and cash equivalents					29			43
Cash and cash equivalents at beginning of period					142			114

Cash and cash equivalents at end of period				$	171		$	157

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

EME HOMER CITY GENERATION L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

EME Homer City's significant accounting policies are described in Note 1 to its financial statements included in its annual report on Form 10-K for the year ended December 31, 2007. EME Homer City follows the same accounting policies for interim reporting purposes, with the exception of accounting principles adopted as of January 1, 2008 as discussed below in "—New Accounting Pronouncements." This quarterly report should be read in conjunction with such financial statements.

In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to fairly state the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America for the periods covered by this quarterly report on Form 10-Q. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the operating results for the full year.

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

New Accounting Pronouncements

Accounting Principles Adopted

FASB Staff Position FIN No. 39-1—

In April 2007, the FASB issued FIN No. 39-1. This pronouncement permits companies to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. In addition, upon the adoption, companies were permitted to change their accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting agreements. EME Homer City adopted FIN No. 39-1 effective January 1, 2008. EME Homer City does not currently have margining agreements and accordingly, adoption of FIN No. 39-1 did not have an impact on its financial statements.

Statement of Financial Accounting Standards No. 159—

In February 2007, the FASB issued SFAS No. 159, "Fair Value Option for Financial Assets and Liabilities, Including an Amendment of FASB Statement No. 115," which provides an option to report eligible financial assets and liabilities at fair value, with changes in fair value recognized in earnings. EME Homer City adopted this pronouncement effective January 1, 2008. The adoption had no impact because EME Homer City did not make an optional election to report additional financial assets and liabilities at fair value.

Statement of Financial Accounting Standards No. 157—

In September 2006, the FASB issued SFAS No. 157, which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. EME Homer City adopted SFAS No. 157 effective January 1, 2008. The adoption did not result in any retrospective adjustment to its financial statements. The accounting requirements for employers' pension and other postretirement benefit plans are effective at the end of 2008, which is the next measurement date for these benefit plans. The effective date will be January 1, 2009 for nonfinancial assets and liabilities which are measured or disclosed on a non-recurring basis. For further discussion, see Note 2—Fair Value Measurements.

FSP SFAS No. 157-3—

On October 10, 2008, the FASB issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This position clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. It also reaffirms the notion of fair value as an exit price as of the measurement date. This position was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption had no impact on EME Homer City's financial statements.

Accounting Principles Not Yet Adopted

Statement of Financial Accounting Standards No. 161—

In March 2008, the FASB issued SFAS No. 161, which requires additional disclosures related to derivative instruments, including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. EME Homer City will adopt SFAS No. 161 in the first quarter of 2009. SFAS No. 161 will impact disclosures only and will not have an impact on EME Homer City's results of operations, financial condition or cash flows.

Statement of Financial Accounting Standards No. 162—

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles," which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with U.S. GAAP. This statement transfers the GAAP hierarchy from the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles" to the FASB. SFAS No. 162 is effective on November 15, 2008. EME Homer City expects that the adoption of this standard will not have an impact on EME Homer City's results of operations, financial condition or cash flows.

FSP SFAS No. 142-3—

In April 2008, the FASB issued FSP SFAS No. 142-3 which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets." The intent of

the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted accounting principles. EME Homer City will adopt FSP SFAS No. 142-3 on January 1, 2009. EME Homer City is currently evaluating the impact, if any, that the adoption of this position could have on its financial statements.

FSP SFAS No. 133-1 and FIN No. 45-4—

In September 2008, the FASB issued FSP SFAS No. 133-1 and FIN No. 45-4. FSP SFAS No. 133-1 requires enhanced disclosures by sellers of credit derivatives and amends FASB Interpretation No. 45 (FIN No. 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," to require additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend SFAS No. 133 and FIN No. 45 are effective for reporting periods ending after November 15, 2008. Since FSP FAS No. 133-1 and FIN No. 45-4 only require additional disclosures, the adoption will not impact EME Homer City's financial position, results of operations or cash flows.

Note 2. Fair Value Measurements

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price" in SFAS No. 157). SFAS No. 157 clarifies that a fair value measurement for a liability should reflect the entity's nonperformance risk. In addition, SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are:

•: Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities;
•: Level 2 – Pricing inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
•: Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurements and unobservable.

EME Homer City's assets and liabilities carried at fair value primarily consist of derivative contracts. Derivative contracts primarily relate to power and include contracts for forward physical sales and purchases, options and forward price swaps which settle only on a financial basis (including futures contracts). Derivative contracts can be exchange traded or over-the-counter traded.

The fair value of derivative contracts takes into account quoted market prices, time value of money, volatility of the underlying commodities and other factors. Derivatives that are exchange traded in active markets for identical assets or liabilities are classified as Level 1. The majority of derivative contracts used for hedging purposes are based on forward market prices in active markets (PJM West Hub) adjusted for non-performance risks. EME Homer City obtains forward market prices from traded exchanges (ICE Futures U.S. or New York Mercantile Exchange) and available broker quotes. Then, EME Homer City selects a primary source that best represents traded activity for each market to develop observable forward market prices in determining fair value of these positions. Broker quotes or

prices from exchanges are used to validate and corroborate the primary source. Broker quotes are considered observable when corroborated with prices from exchanges. The majority of the fair value of EME Homer City's derivative contracts determined in this manner are classified as Level 2.

Derivatives that trade infrequently (such as financial transmission rights and over-the-counter derivatives at illiquid locations) and derivatives with counterparties that have significant non-performance risks, as discussed below, are classified as Level 3. For illiquid financial transmission rights, EME Homer City reviews objective criteria related to system congestion on a quarterly basis and other underlying drivers and adjusts fair value when EME Homer City concludes a change in objective criteria would result in a new valuation that better reflects the fair value. Changes in fair values are based on the hypothetical sale of illiquid positions. In circumstances where EME Homer City cannot verify fair value with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. As markets continue to develop and more pricing information becomes available, EME Homer City continues to assess valuation methodologies used to determine fair value.

In assessing non-performance risks, EME Homer City reviews credit ratings of counterparties (and related default rates based on such credit ratings) and prices of credit default swaps. The market price (or premium) for credit default swaps represents the price that a counterparty would pay to transfer the risk of default, typically bankruptcy, to another party. A credit default swap is not directly comparable to the credit risks of derivative contracts, but provides market information of the related risk of non-performance. In light of recent market events, EME Homer City utilized market prices for credit default swaps in reducing the fair value of derivative assets with financial institutions by $2 million at September 30, 2008.

The following table sets forth EME Homer City's financial assets that were accounted for at fair value as of September 30, 2008 by level within the fair value hierarchy.

		Level 1		Level 2			Level 3		Total at September 30, 2008

		(in millions)
Assets at Fair Value
	Derivative contracts	$	—	$	44		$	—	$	44
Liabilities at Fair Value
	Derivative contracts	$	—	$	(2	)	$	—	$	(2	)

The following table sets forth a summary of changes in the fair value of EME Homer City's Level 3 derivative contracts, net for the periods ended September 30, 2008.

		Three Months Ended September 30, 2008			Nine Months Ended September 30, 2008

		(in millions)
Fair value of derivative contracts, net at beginning of periods		$	(3	)	$	(2	)
Total realized/unrealized gains (losses):
	Included in earnings(1)		33			35
	Included in accumulated other comprehensive income (loss)		4			1
Purchases and settlements, net			(33	)		(35	)
Transfers in or out of Level 3			(1	)		1

Fair value of derivative contracts, net at September 30, 2008		$	—		$	—

(1): Reported in operating revenues on EME Homer City's statements of income.

The changes in unrealized gains (losses) related to derivative contracts, net held at September 30, 2008 during the quarter and nine-month period ended September 30, 2008 were immaterial.

Note 3. Accumulated Other Comprehensive Income (Loss)

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

	Unrealized Gains (Losses) on Cash Flow Hedges			Unrecognized Losses and Prior Service Costs, Net(1)		Accumulated Other Comprehensive Income (Loss)

	(in millions)
Balance at December 31, 2007	$	(14	)	$	—	$	(14	)
Current period change		47			—		47

Balance at September 30, 2008	$	33		$	—	$	33

(1): For further detail, see Note 4—Compensation and Benefit Plans.

Unrealized gains on cash flow hedges, net of tax, at September 30, 2008, included unrealized gains on commodity hedges related to futures and forward electricity contracts that qualify for hedge accounting. These gains arise because current forecasts of future electricity prices are lower than EME Homer City's contract prices. As EME Homer City's hedged positions are realized, $13 million, after tax, of the net unrealized gains on cash flow hedges at September 30, 2008 are expected to be reclassified into earnings during the next 12 months. Management expects that reclassification of net unrealized gains will increase energy revenue recognized at market prices. Actual amounts ultimately reclassified into earnings over the next 12 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, 2010.

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 gains (losses) of $9 million and $(5) million during the third quarters of 2008 and 2007, respectively, and $(7) million and $(15) million during the nine months ended September 30, 2008 and 2007, respectively, representing the amount of cash flow hedges' ineffectiveness, reflected in operating revenues on EME Homer City's income statements.

Note 4. Compensation and Benefit Plans

Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

As of September 30, 2008, EME Homer City had made approximately $1.7 million in contributions to its pension plans and estimates to make $0.3 million of contributions in the last three months of 2008.

The following are components of pension expense:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2008			2007			2008			2007
	(in millions)
Service cost	$	0.4		$	0.4		$	1.1		$	1.2
Interest cost		0.4			0.3			1.2			1.0
Expected return on plan assets		(0.3	)		(0.3	)		(1.1	)		(1.0	)
Amortization of net gain		(0.1	)		—			(0.1	)		—

Total expense	$	0.4		$	0.4		$	1.1		$	1.2

Postretirement Benefits Other Than Pensions

As of September 30, 2008, EME Homer City had made approximately $0.3 million in contributions to its postretirement benefits other than pensions and estimates to make $0.1 million of contributions in the last three months of 2008.

The following are components of postretirement benefits expense:

	Three Months Ended September 30,				Nine Months Ended September 30,

	2008		2007		2008			2007
	(in millions)
Service cost	$	0.2	$	0.2	$	0.6		$	0.6
Interest cost		0.3		0.4		1.1			1.0
Amortization of prior service costs		—		—		(0.1	)		—
Amortization of net loss		0.1		—		0.2			0.1

Total expense	$	0.6	$	0.6	$	1.8		$	1.7

Note 5. Income Taxes

EME Homer City had effective income tax provision rates of 40% and 41% for the nine months ended September 30, 2008 and 2007, respectively. EME Homer City's effective income tax provision rate varies from the federal statutory rate of 35% primarily due to state income taxes and estimated benefits from a federal deduction related to qualified domestic production activities under Section 199 of the Internal Revenue Code.

EME Homer City is included in the federal consolidated income tax return filed by Edison International. During the third quarter of 2008, the Internal Revenue Service commenced an

examination of Edison International's consolidated federal income tax return for the tax years 2003 - 2006.

Note 6. Commitments and Contingencies

Commitments

Capital Improvements

At September 30, 2008, EME Homer City had firm commitments to spend approximately $13 million on capital expenditures during the remainder of 2008 and $8 million in 2009 related to non-environmental improvements such as upgrades to boiler and turbine controls, replacement of major boiler components, main power transformer replacement and environmental improvements such as mercury emission monitoring and control. These capital expenditures are planned to be financed by cash generated from operations.

Other Contractual Obligations

EME Homer City had entered into contractual agreements during the first nine months of 2008 to purchase materials for environmental controls equipment. These commitments are currently estimated to be $18 million, summarized as follows: 2010—$5 million, 2011—$5 million, 2012—$4 million, and thereafter—$4 million.

Interconnection Agreement

EME Homer City's general partner, Mission Energy Westside, a wholly owned subsidiary of EME, is a party to an interconnection agreement with NYSEG and Penelec to provide interconnection services necessary to interconnect the Homer City facilities with NYSEG's 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 the interconnection services (but not the expiration of the agreement) to modifications, additions or upgrades to, 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's or Penelec's interconnection facilities or transmission systems in connection with any modification, addition or upgrade to, or repowering of the Homer City units.

Guarantees and Indemnities

Tax Indemnity Agreements

In connection with the sale-leaseback transaction related to the Homer City facilities, EME Homer City and its indirect parent, 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 potential obligations under these tax indemnity agreements, EME Homer City cannot determine a maximum potential liability which 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. Payments would be triggered under this indemnity by a valid claim from the sellers. EME guaranteed the obligations of EME Homer City. 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. EME Homer City has not recorded a liability related to this indemnity.

Contingencies

RPM Buyers' Complaint

On May 30, 2008, a group of entities referring to themselves as the "RPM Buyers" filed a complaint at the FERC asking that PJM's RPM, as implemented through the transitional base residual auctions establishing capacity payments for the period from June 1, 2008 through May 31, 2011, be found to have produced unjust and unreasonable capacity prices. The RPM Buyers alleged that the absence of price discipline provided by new capacity resources, together with the ability of existing resources to withhold some capacity within the RPM rules, produced capacity prices in the transition period that are not comparable to those that would have been produced in a competitive market or determined under cost-based regulation, and have requested that the FERC order refunds based on that difference.

On July 10, 2008, EME responded to the RPM Buyers' complaint asking that it be dismissed based upon various legal precedents. A number of other parties, including PJM, also responded to the RPM Buyers' complaint asking that it be dismissed. On September 19, 2008, the FERC dismissed the RPM Buyers' complaint, finding that the RPM Buyers had failed to allege or prove that any party violated PJM's tariff and market rules, and that the prices determined during the transition period were determined in accordance with PJM's FERC-approved tariff. On October 20, 2008, the RPM Buyers requested rehearing of the FERC's order dismissing their complaint. This matter is currently pending before the FERC. EME Homer City cannot predict the outcome of this matter.

New Source Review Notice of Violation

On June 12, 2008, EME Homer City received an NOV from the US EPA alleging that, beginning in 1988, EME Homer City (or former owners of the Homer City facilities) performed repair or replacement projects at Homer City Units 1 and 2 without first obtaining construction permits as required by the Prevention of Significant Deterioration requirements of the Clean Air Act. The US EPA also alleges that EME Homer City has failed to file timely and complete Title V permits. EME Homer City has met with the US EPA and has expressed its intent to explore the possibility of a settlement. If no settlement is reached and the United States Department of Justice files suit, litigation could take many years to resolve the issues alleged in the NOV. EME Homer City is investigating the NOV claims and is developing a litigation strategy. EME Homer City cannot predict at this time what effect this matter may have on its facilities, its results of operations, financial position or cash flows.

EME Homer City has sought indemnification for liability and defense costs associated with the NOV from the sellers under the asset purchase agreement pursuant to which EME Homer City acquired the Homer City facilities. The sellers responded by denying the indemnity obligation, but accepting the defense of the claims.

EME Homer City notified the sale-leaseback owner participants of the Homer City facilities of the NOV under the operative indemnity provisions of the sale-leaseback documents. The owner participants of the Homer City facilities, in turn, have sought indemnification and defense from EME Homer City for costs and liability associated with the EME Homer City NOV. EME Homer City responded by undertaking the indemnity obligation and defense of the claims.

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 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 the PADEP on a periodic basis. In the event that a disposal facility's groundwater monitoring identifies degradation in any of its wells, the 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. Based on the remaining capacity of the landfill and the estimated material requiring future disposal, EME Homer City has begun permitting additional areas for expansion of the landfill. 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 financial statements.

Insurance

EME Homer City maintains insurance policies that it believes 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 $1.325 billion. Under the terms of the participation agreements entered into as part of EME Homer City's 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, 2009.

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.

Environmental Matters and Regulations

The construction and operation of power plants are subject to environmental regulation by federal, state and local authorities. EME Homer City believes that it is in substantial compliance with existing environmental regulatory requirements. However, possible future developments, such as the promulgation of more stringent environmental laws and regulations, future proceedings that may be initiated by environmental and other regulatory authorities, cases in which new theories of liability are recognized, and settlements agreed to by other companies that establish precedent or expectations for the power industry, could affect the costs and the manner in which EME Homer City conducts its business and could require substantial additional capital or operational expenditures or the ceasing of operations at certain of its facilities. There is no assurance that EME Homer City's financial position and results of operations would not be materially adversely affected. EME Homer City is unable to predict the precise extent to which additional laws and regulations may affect its future operations and capital expenditure requirements.

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 or operational expenditures. If EME Homer City fails to comply with applicable environmental laws, it may be subject to injunctive relief or penalties and fines imposed by federal and state regulatory authorities.

In July 2008, a three-judge panel of the District of Columbia Circuit Court of Appeals issued a decision to vacate the CAIR in its entirety and remand to the US EPA to issue a new rule consistent with the decision once the Court issues its mandate. The decision raised significant questions as to whether the US EPA will be able to design cap-and-trade programs for NO_X and SO₂ that are authorized and consistent with the Clean Air Act provisions that address upwind contributions to downwind states' noncompliance with national ambient air quality standards for ozone and fine particulate matter. Following the decision, the US EPA requested that states reinstate the existing "SIP Call" ozone season NO_X cap-and-trade program, which was due to be replaced by the CAIR.

In September 2008, the US EPA and other parties requested a rehearing of the decision by the same three-judge panel or by the full District of Columbia Circuit Court. In October 2008, the Court ordered the petitioners in the CAIR litigation to file a response to the request for rehearing and specifically address whether any party is seeking to vacate the CAIR and whether the Court should stay its mandate until the US EPA promulgates a revised rule. Although EME Homer City cannot predict the outcome of this proceeding, this latest order suggests that the Court may be willing to leave the CAIR in place in some form. The Court's order vacating the CAIR will not become effective until the Court responds to the petitions for a rehearing of its decision; until then, compliance with the CAIR, including the annual NO_X requirements, will be required.

EME Homer City is monitoring developments related to the D.C. Circuit's CAIR proceedings. Because Pennsylvania promulgated its regulations in response to the CAIR, there is substantial uncertainty as to the impact on Pennsylvania's regulatory program if the Court denies the petitions for rehearing and issues a mandate to vacate the CAIR, which is modeled on the CAIR and is dependent on the interstate emissions trading program established by the CAIR. In addition, the US EPA has allowed states to rely on compliance with the CAIR to satisfy obligations under other Clean Air Act programs, including regional haze regulations and reasonably available control technology requirements. Depending on what happens with respect to the CAIR, the Homer City facilities may be subject to additional requirements pursuant to these programs. EME Homer City continues to plan to meet the

requirements of the CAIR as required under current law effective January 1, 2009. For further discussion, see "Note 8. Commitments and Contingencies—Environmental Matters and Regulations—Air Quality Regulation—Clean Air Interstate Rule" to EME Homer City's financial statements included in its annual report on Form 10-K for the year ended December 31, 2007.

Note 7. Supplemental Cash Flows Information

		Nine Months Ended September 30,

		2008		2007
		(in millions)
Cash paid
	Interest	$	64	$	120
	Income taxes		21		2

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

This MD&A contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect 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 quarterly report on Form 10-Q, the words "expects," "believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should," and variations of such words and similar expressions, or discussions of strategy or plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ, or that otherwise could impact EME Homer City, include but are not limited to:

•: the availability and creditworthiness of counterparties to enter into hedge transactions to reduce market price risk;
•: 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;
•: market volatility and other market conditions that could increase EME Homer City's obligations to post collateral beyond the amounts currently expected, and the potential effect of such conditions on the ability of EME Homer City to provide sufficient collateral in support of its 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;
•: environmental laws and regulations, at both state and federal levels, 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, and technologies that may be able to produce electricity at a lower cost than EME Homer City's generating facilities and/or increased access by competitors to EME Homer City's markets as a result of transmission upgrades;
•: the difficulty of predicting wholesale prices, transmission congestion, energy demand, and other aspects of the complex and volatile markets in which EME Homer City participates;
•: operating risks, including equipment failure, availability, heat rate, output and availability and cost of spare parts and repairs;
•: effects of legal proceedings, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards;

•: general political, economic and business conditions; and
•: weather conditions, natural disasters and other unforeseen events.

Additional information about risks and uncertainties, including more detail about the factors described above, is contained throughout this MD&A and in the "Risk Factors" section included in Part I, Item 1A of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007. Readers are urged to read this entire quarterly report on Form 10-Q and carefully consider the risks, uncertainties and other factors that affect EME Homer City's business. 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.

This MD&A discusses material changes in the results of operations, financial condition and other developments of EME Homer City since December 31, 2007, and as compared to the third quarter of 2007 and nine months ended September 30, 2007. 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, 2007.

This MD&A is presented in four sections:

		Page

Management's Overview; Critical Accounting Policies		18
Results of Operations		20
Liquidity and Capital Resources		23
Market Risk Exposures		29

MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING POLICIES

Management's Overview

Introduction

EME Homer City is a Pennsylvania limited partnership 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. EME Homer City does not have any plans to purchase or develop new power plants at this time. In December 2001, EME Homer City completed a sale-leaseback transaction of the Homer City facilities to third-party lessors. The sale-leaseback transaction is accounted for as a lease financing for financial reporting purposes.

The Homer City facilities are located in the control area managed by PJM. The energy and capacity from the Homer City facilities are sold under terms, including price and quantity, arranged by EMMT, on behalf of EME Homer City, to customers through a combination of bilateral agreements, forward energy sales and spot market sales. See "Market Risk Exposures" for further discussion of forward market prices.

Industry Developments

Commodity Prices

Since June 30, 2008, forward energy prices have decreased substantially driven by lower natural gas prices and current global economic conditions. The forward energy market prices for 2009 and 2010 at September 30, 2008 for the PJM West Hub have decreased 30% and 22%, respectively, since June 30,

2008. At September 30, 2008, EME Homer City had entered into derivative hedge contracts that are recorded at fair value on its financial statements. Since forward energy prices have decreased since June 30, 2008, the fair value of derivative hedge contracts changed from a net liability position at June 30, 2008 to a net asset position at September 30, 2008, with the effective portion of the contracts recorded as an increase in partners' equity ($33 million, after tax). See "Market Risk Exposures—Commodity Price Risk" for further discussion.

Regulatory Developments

In July 2008, a three-judge panel of the District of Columbia Circuit Court of Appeals issued a decision to vacate the CAIR in its entirety and remand to the US EPA to issue a new rule consistent with the decision. In September 2008, US EPA and other parties requested a rehearing of its decision by the same three-judge panel or by the full District of Columbia Circuit Court. In October 2008, the Court ordered the petitioners in the CAIR litigation to file a response to the request for rehearing and specifically address whether any party is seeking to vacate the CAIR and whether the Court should stay its mandate until the US EPA promulgates a revised rule. Although EME Homer City cannot predict the outcome of this proceeding, this latest order suggests that the Court may be willing to leave the CAIR in place in some form. The Court's order vacating the CAIR will not become effective until the Court responds to the petitions for a rehearing of its decision; until then, compliance with the CAIR, including the annual NO_X requirements, will be required. If the Court denies the petitions for rehearing and issues a mandate to vacate the CAIR, there will be substantial uncertainty as to the impact of this decision on the SIP regulations promulgated by Pennsylvania in response to the CAIR.

Notwithstanding these developments, the Homer City facilities continue to be governed by state rules as well as the existing "SIP Call" ozone season NO_X cap-and-trade program (which was due to be replaced by the CAIR). For further discussion, see "Liquidity and Capital Resources—Environmental Matters and Regulations—Air Quality Regulation—Clean Air Interstate Rule."

EME Homer City continues to plan to meet the requirements of the CAIR as required under current law effective January 1, 2009.

Overview of EME Homer City's Operating Performance

EME Homer City's net income increased $26 million and decreased $5 million for the quarter and nine months ended September 30, 2008, respectively, compared to the corresponding periods of 2007. The third quarter increase in net income was primarily attributable to higher operating revenues from higher average realized energy and capacity prices and an increase in unrealized gains related to hedge contracts. The year-to-date decrease in net income was primarily attributable to lower operating revenues primarily from lower generation and higher plant maintenance expenses. Higher forced outages, lower off-peak dispatch and extended planned overhauls in 2008 contributed to lower generation and higher maintenance expenses.

Critical Accounting Policies

For a discussion of EME Homer City's critical accounting policies, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview; Critical Accounting Policies—Critical Accounting Policies" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007.

RESULTS OF OPERATIONS

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,

		2008		2007		2008		2007
Operating Revenues (in millions)		$	236	$	199	$	548	$	573
Statistics
	Generation (in GWh)		3,354		3,759		8,796		10,211
	Equivalent availability(1)		93.6%		96.5%		80.9%		89.0%
	Capacity factor(2)		80.5%		90.2%		70.9%		82.6%
	Load factor(3)		86.0%		93.4%		87.6%		92.8%
	Forced outage rate(4)		4.0%		3.5%		8.1%		3.7%
	Average realized energy price/MWh(5)	$	61.95	$	51.48	$	57.69	$	54.42
	Capacity revenue only (in millions)	$	14	$	9	$	33	$	22
	Average fuel costs/MWh	$	23.30	$	22.48	$	23.02	$	22.00

(1): The equivalent availability factor is defined as the number of MWh the coal plants are available to generate electricity divided by the product of the capacity of the coal plants (in MW) and the number of hours in the period. Equivalent availability reflects the impact of the unit's inability to achieve full load, referred to as derating, as well as outages which result in a complete unit shutdown. The coal plants are not available during periods of planned and unplanned maintenance.
(2): The capacity factor is defined as the actual number of MWh generated by the coal plants divided by the product of the capacity of the coal plants (in MW) and the number of hours in the period.
(3): The load factor is determined by dividing capacity factor by the equivalent availability factor.
(4): Homer City refers to unplanned maintenance as a forced outage.
(5): The average realized energy price reflects the average price at which energy is sold into the market including the effects of hedges, real-time and day-ahead sales and PJM fees and ancillary services. It is determined by dividing (i) operating revenue less (plus) unrealized SFAS No. 133 gains (losses) and other non-energy related revenue by (ii) total generation. Revenue related to capacity sales are excluded from the calculation of average realized energy price.

		Three Months Ended September 30						Nine Months Ended September 30

		2008			2007			2008			2007
		(in millions)
Operating revenues		$	236		$	199		$	548		$	573
Less (plus):
	Unrealized (gains) losses		(14	)		3			(7	)		5
	Other revenues		(15	)		(9	)		(34	)		(23	)

Realized revenues		$	207		$	193		$	507		$	555

Generation (in GWh)			3,354			3,759			8,796			10,211
Average realized energy price/MWh		$	61.95		$	51.48		$	57.69		$	54.42

Operating Revenues

Operating revenues increased $37 million and decreased $25 million in the third quarter and nine months ended September 30, 2008, respectively, compared to the corresponding periods of 2007. The third quarter increase was primarily attributable to an increase in unrealized gains related to hedge contracts (discussed below) and higher average realized energy prices. The year-to-date decrease was primarily attributable to lower generation partially offset by higher average realized energy prices. Higher forced outages, lower off-peak dispatch and extended planned overhauls in 2008 contributed to lower generation. The average realized energy price for the nine months ended September 30, 2008 was below the 24-hour PJM average market price at the Homer City busbar primarily due to effective hedge prices being below market prices for the same period. Capacity revenues increased in the third quarter and nine months ended September 30, 2008, as compared to the corresponding periods of 2007, as a result of participating in the PJM RPM auction.

Included in operating revenues were unrealized gains (losses) from hedging activities of $14 million and $(3) million for the third quarters of 2008 and 2007, respectively, and $7 million and $(5) million for the nine months ended September 30, 2008 and 2007, respectively. Unrealized gains (losses) 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. See "Market Risk Exposures—Commodity Price Risk" and "Market Risk Exposures—Accounting for Energy Contracts" for more information regarding forward market prices and unrealized gains (losses), respectively.

Seasonal Disclosure

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

Operating Expenses

Operating expenses decreased $2 million and $6 million for the third quarter and nine months ended September 30, 2008, compared to the corresponding periods of 2007. Operating expenses consisted of expenses for fuel, plant operations, depreciation and amortization, and administrative and general expenses. The change in components of operating expenses is discussed below.

Fuel expenses decreased $7 million and $23 million for the third quarter and nine months ended September 30, 2008, respectively, compared to the corresponding periods of 2007. The decreases were primarily attributable to lower coal consumption as a result of lower generation and lower SO₂ emission allowance costs. The cost of SO₂ allowances decreased to $9 million and $16 million during the third quarter and nine months ended September 30, 2008, respectively, from $11 million and $23 million during the third quarter and nine months ended September 30, 2007, respectively, due to lower emission usage and a decrease in the market price of SO₂ emission allowances.

Plant operations expenses increased $4 million and $15 million for the third quarter and nine months ended September 30, 2008, respectively, compared to the corresponding periods of 2007. The increases were primarily attributable to higher maintenance expenses in 2008. EME Homer City had

higher forced outages and scheduled maintenance in 2008 due to tube leak repairs, an extended planned overhaul and a fan motor failure.

Other Income (Expense)

Interest expense decreased $3 million and $11 million in the third quarter and nine months ended September 30, 2008, respectively, compared to the corresponding periods of 2007. Interest expense primarily relates to the lease financing of the Homer City facilities that originated in December 2001. Interest expense also included interest of $8 million and $9 million in the third quarters of 2008 and 2007, respectively, and $23 million and $29 million in the nine months ended September 30, 2008 and 2007, respectively, on EME Homer City's subordinated revolving loan agreement with Edison Mission Finance. EME Homer City had lower long-term debt balances during 2008 as compared to 2007 on the subordinated revolving loan agreement.

Provision for Income Taxes

EME Homer City had effective income tax provision rates of 40% and 41% for the first nine months of 2008 and 2007, respectively. EME Homer City's effective income tax provision rate varies from the federal statutory rate of 35% primarily due to state income taxes and estimated benefits from a federal deduction related to qualified domestic production activities under Section 199 of the Internal Revenue Code.

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 1. Summary of Significant Accounting Policies—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		23
Capital Expenditures and Lease Covenants		24
Payments Made Under Subordinated Revolving Loan and Tax Payments		25
Credit Ratings		25
Contractual Obligations and Contingencies		26
Environmental Matters and Regulations		27

For a complete discussion of these issues, read this quarterly report on Form 10-Q in conjunction with EME Homer City's annual report on Form 10-K for the year ended December 31, 2007.

Cash Flow

At September 30, 2008, EME Homer City had cash and cash equivalents of $171 million, compared to $142 million at December 31, 2007. Net working capital at September 30, 2008 was $(60) million, compared to $(55) million at December 31, 2007. The decrease in working capital was primarily attributable to the timing of cash receipts and disbursements related to working capital items.

Net cash provided by operating activities increased $23 million in the first nine months of 2008, compared to the corresponding period of 2007. The 2008 increase was primarily due to the timing of interest payments to Edison Mission Finance related to the subordinated revolving loan and lower purchases of SO₂ emission allowances in 2008, partially offset by an increase in coal inventory primarily due to lower than expected generation.

Net cash used in financing activities increased $2 million in the first nine months of 2008, compared to the corresponding period of 2007. In 2008, EME Homer City made $46 million less in debt repayments under the subordinated revolving loan agreement, as compared to 2007. In 2007, EME Homer City received a $45 million refund of a deposit related to the termination of the lease swap agreement.

Net cash used in investing activities was $33 million in the first nine months of 2008, compared to cash provided by investing activities of $2 million in the first nine months of 2007. The 2008 change was primarily due to a $25 million increase in capital expenditures.

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

At September 30, 2008, the estimated capital expenditures by EME Homer City through 2010 were as follows:

	October through December 2008		2009		2010

	(in millions)
Plant capital expenditures	$	11	$	29	$	55
Environmental expenditures		3		8		14

Total	$	14	$	37	$	69

Plant capital expenditures relate to non-environmental projects such as upgrades to boiler and turbine controls, replacement of major boiler components, main power transformer replacement and ash site disposal development. Environmental expenditures relate to projects such as mercury emission monitoring and control. EME Homer City plans to fund these expenditures with cash on hand or cash generated from operations. For further discussion regarding possible additional capital expenditures, including environmental control equipment, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Environmental Matters and Regulations—Air Quality Regulation" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007.

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, EME Homer City's 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 on attractive terms and conditions, 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 agreements 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 transaction, 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, 2008, the senior rent service coverage ratio was 2.95 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 $30 million included in restricted cash at September 30, 2008 related to these reserve accounts.

Payments Made Under Subordinated Revolving Loan and Tax Payments

The following table summarizes the payments by EME Homer City under its subordinated revolving loan with Edison Mission Finance Co., a subsidiary of EME, that constitute permitted distributions pursuant to the terms of the sale-leaseback transaction and payments made pursuant to tax-allocation agreements:

	Nine Months Ended September 30,

	2008(1)		2007
	(in millions)
Payment of interest	$	9	$	60
Payment of principal		21		68

Subordinated revolving loan payments		30		128
Tax payments under tax-allocation agreements		14		—

Total payments	$	44	$	128

(1): On October 1, 2008, EME Homer City made a permitted distribution payment under the subordinated revolving loan of $80 million.

Credit Ratings

EME Homer City is not currently rated. EME Homer City has entered into a contract with EMMT 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 EME and EMMT, at September 30, 2008, were as follows:



EME	B1	BB-	BB-
EMMT	Not Rated	BB-	Not Rated

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 EMMT to sell forward the output of its facilities if EMMT does not have an investment grade credit rating from S&P 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, which is not rated, currently sells all the output from its facilities through EMMT, which has a below investment grade credit rating. 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 EMMT; or (2) EMMT 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 participants that will allow it to enter into such sales, under specified conditions, through December 31, 2008. EME Homer City continues to be in compliance with the terms of the consent. 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."

Contractual Obligations and Contingencies

Contractual Obligations

Capital Improvements

Other Contractual Obligations

Contingencies

RPM Buyers' Complaint

PJM's tariff and market rules, and that the prices determined during the transition period were determined in accordance with PJM's FERC-approved tariff. On October 20, 2008, the RPM Buyers requested rehearing of the FERC's order dismissing their complaint. This matter is currently pending before the FERC. EME Homer City cannot predict the outcome of this matter.

New Source Review Notice of Violation

Environmental Matters and Regulations

For a discussion of EME Homer City's environmental matters, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Environmental Matters and Regulations" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007 and the notes to the financial statements set forth therein. There have been no significant developments with respect to environmental matters specifically affecting EME Homer City since the filing of EME Homer City's annual report, except as follows:

Air Quality Regulation

Ambient Air Quality Standards

On March 12, 2008, the US EPA signed a final rule that implements revisions to the primary and secondary national ambient air quality standards for ozone, originally proposed on July 11, 2007. With regard to the primary standard for ozone, the US EPA has reduced the 8-hour standard to 0.075 parts per million (ppm) from the current standard of 0.84 ppm. The rule became effective on May 27, 2008. Attainment dates for the new standards range between 2013 and 2030, depending on the severity of the non-attainment. Available data indicates that the area in which the Homer City facilities are located is likely to be in attainment. EME Homer City intends to consider the new standards as part of its overall plan for environmental compliance.

Clean Air Interstate Rule

In July 2008, a three-judge panel of the District of Columbia Circuit Court of Appeals issued a decision to vacate the CAIR in its entirety and remand to the US EPA to issue a new rule consistent with the decision once the Court issues its mandate. The decision raised significant questions as to whether the US EPA will be able to design cap-and-trade programs for NO_X and SO₂ that are authorized and consistent with the Clean Air Act provisions that address upwind contributions to downwind states' noncompliance with national ambient air quality standards for ozone and fine particulate matter. Following the decision, the US EPA requested that states reinstate the existing "SIP Call" ozone season NO_X cap-and-trade program, which was due to be replaced by the CAIR.

MARKET RISK EXPOSURES

Introduction

EME Homer City's primary market risk exposures are associated with the sale of electricity and capacity from, and the procurement of fuel for, its electric generating facilities. These market risks arise from fluctuations in electricity, capacity and fuel prices, emission 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		29
Accounting for Energy Contracts		34
Derivative Financial Instruments		35
Credit Risk		36
Interest Rate Risk		37
Regulatory Matters		37

For a complete discussion of these issues, read this quarterly report on Form 10-Q in conjunction with EME Homer City's annual report on Form 10-K for the year ended December 31, 2007.

Commodity Price Risk

Introduction

EME Homer City sells all of its energy and capacity into wholesale power markets through EMMT. EMMT enters into forward contracts for EME Homer City's electric output in order to provide more predictable earnings and cash flow. When appropriate, EMMT manages the spread between electric prices and fuel prices through the use of forward contracts, swaps, futures, or options contracts. There is no assurance that contracts to hedge changes in market prices will be effective.

EME Homer City's 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 EMMT. Policies are in place which define risk management processes, 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.

In addition to prevailing market prices, EME Homer City's ability to derive profits from the sale of electricity will be affected by the cost of production, including costs incurred to comply with environmental regulations. The costs of production of the units vary and, accordingly, depending on market conditions, the amount of generation that will be sold from the units is expected to vary.

EMMT uses "earnings at risk" to identify, measure, monitor and control EME Homer City's overall market risk exposure with respect to hedge positions at the Homer City facilities. The use of this measure allows management to aggregate overall commodity risk, compare risk on a consistent basis and identify the risk factors. Earnings at risk measures the potential change in value of an asset or position, in each case over a given time interval, under normal market conditions, at a given

confidence level. Given the inherent limitations of this measure and reliance on a single type of risk measurement tool, EMMT supplements this approach with the use of stress testing and worst-case scenario analysis for key risk factors, as well as stop-loss triggers and counterparty credit exposure limits.

Hedging Strategy

To reduce its exposure to market risk, EME Homer City hedges a portion of its electricity sales through EMMT. To the extent that EME Homer City does not hedge its electricity sales, 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,
•: forward sales transactions entered into on a bilateral basis with third parties, including electric utilities and power marketing companies, and
•: participation in capacity auctions.

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 the types of hedge transactions set forth above at forward market prices are sufficiently attractive compared to assuming the risk associated with fluctuating spot market sales. Second, EME Homer City's ability to enter into hedging transactions depends upon EMMT'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

All the energy and capacity from the Homer City facilities is sold under terms, including price and quantity, arranged by EMMT with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Electric power generated at the Homer City facilities is generally sold into the PJM market. PJM has a short-term market, which establishes 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 at the Homer City busbar and in PJM West Hub (EME Homer City's primary trading hub) during the first nine months of 2008 and 2007:

	Historical Energy Prices(1) 24-Hour PJM

	Homer City				West Hub
	2008		2007		2008		2007
January	$	54.32	$	40.30	$	66.80	$	44.63
February		61.74		64.27		68.29		73.93
March		65.37		55.00		70.48		61.02
April		61.99		52.42		69.12		58.74
May		49.37		48.12		59.84		53.89
June		78.72		45.88		98.50		60.19
July		72.39		48.23		91.80		58.89
August		60.16		55.44		73.91		71.00
September		52.33		48.90		66.04		60.14

Nine-Month Average	$	61.82	$	50.95	$	73.86	$	60.27

(1): 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 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 in turn is affected by weather, economic growth and other factors), plant outages in the region, and the amount of existing and planned power plant capacity. The actual spot prices for electricity delivered by the 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, 2008:

		24-Hour PJM West Hub Forward Energy Prices(1)

2008
	October	$	57.79
	November		55.32
	December		59.53

2009 Calendar "strip"(2)		$	66.23
2010 Calendar "strip"(2)		$	68.31

(1): 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.
(2): Market price for energy purchases for the entire calendar year, as quoted for sales into the PJM West Hub.

The following table summarizes EME Homer City's hedge position at September 30, 2008:

	2008		2009		2010

GWh		1,708		4,096		2,654
Average price/MWh(1)	$	60.90	$	82.84	$	90.52

(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 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, 2008 is not directly comparable to the 24-hour PJM West Hub prices set forth above.

The average price/MWh for EME 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.

Capacity Price Risk

On June 1, 2007, PJM implemented the RPM for capacity. The purpose of the RPM is to provide a long-term pricing signal for capacity resources. The RPM provides a mechanism for PJM to satisfy the region's need for generation capacity, the cost of which is allocated to load-serving entities through a locational reliability charge.

The following table summarizes the status of capacity sales for EME Homer City at September 30, 2008:

		October 1, 2008 to May 31, 2009			June 1, 2009 to May 31, 2010		June 1, 2010 to May 31, 2011		June 1, 2011 to May 31, 2012

Fixed Price Capacity Sales
	MW		820			1,670		1,813		1,771
	Price per MW-day	$	111.92		$	191.32	$	174.29	$	110.00
Variable Capacity Sales
	MW		905			—		—		—
	Price per MW-day	$	62.22	(1)		—		—		—

(1): Actual contract price is a function of NYISO capacity auction clearing prices for October 2008 and forward over-the-counter NYISO capacity prices on September 30, 2008 for November 2008 through May 2009.

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

Prior to the RPM auctions for the relevant delivery periods, EME Homer City sold a portion of its capacity to an unrelated third party for the delivery period of June 1, 2008 through May 31, 2009. EME Homer City is not receiving the RPM auction clearing price for this previously sold capacity. The price EME Homer City is receiving for these capacity sales is a function of NYISO capacity clearing prices resulting from separate NYISO capacity auctions.

Basis Risk

Sales made from the Homer City facilities in the real-time or day-ahead market receive the actual spot prices or day-ahead prices, as the case may be, at the Homer City busbar. 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, a liquid market for entering into these contracts at the Homer City busbar does not exist. A liquid market does exist at the PJM West Hub. EME Homer City's hedging activities use this settlement point 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 the 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 PJM's market design, locational marginal pricing, which establishes market 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 higher or lower relative to other locations depending on how the point is affected by transmission constraints. Effective June 1, 2007, PJM implemented marginal losses which adjusts the algorithm that calculates locational marginal prices to include a component for marginal transmission losses in addition to the component included for congestion. To the extent that, on the settlement date of a hedge contract, spot prices at the relevant busbar are lower than spot prices at the settlement point, the proceeds actually realized from the related hedge contract are effectively reduced by the difference. This is referred to as "basis risk." During the nine months ended September 30, 2008, transmission congestion in PJM has resulted in prices at the Homer City busbar being lower than those at the PJM West Hub by an average of 16%, compared to 15% during the nine months ended September 30, 2007. The monthly average difference during the 12 months ended September 30, 2008 ranged from 7% to 21%.

By entering into cash settled futures contracts and forward contracts using the PJM West Hub as the settlement point, EME Homer City is exposed to basis risk as described above. In order to mitigate basis risk, EME Homer City may purchase financial transmission rights and basis swaps in PJM for EME Homer City. A financial transmission right is a financial instrument that entitles the holder to receive the difference of actual spot prices for two delivery points in exchange for a fixed amount. Accordingly, EME Homer City's hedging activities include using financial transmission rights alone or in combination with forward contracts and basis swap contracts to manage basis risk.

Coal Price Risk

The Homer City facilities purchase coal primarily obtained from mines located near the facilities in Pennsylvania. Coal purchases are made under a variety of supply agreements extending through 2011.

The following table summarizes the amount of coal under contract at September 30, 2008 for the remainder of 2008 and the following three years.

		October through December 2008			2009			2010			2011

Amount of coal under contract in millions of tons(1)(2)			1.9			4.5			0.4			0.3

(1): The amount of coal under contract in tons is calculated based on contracted tons and applying a 13,000 Btu equivalent.
(2): At September 30, 2008, there are options to purchase additional coal of 0.3 million tons in 2009, 1.9 million tons in 2010 and 1.4 million tons in 2011.

EME Homer City is subject to price risk for purchases of coal that are not under contract. Prices of NAPP coal, which are related to the price of coal purchased for the Homer City facilities, increased substantially during 2008 from 2007 year-end prices. The price of NAPP coal (with 13,000 Btu per pound heat content and <3.0 pounds of SO₂ per MMBtu sulfur content) increased to $143 per ton at October 3, 2008 from $55.25 per ton at December 21, 2007, as reported by the Energy Information Administration. The 2008 increase in the NAPP coal price was primarily attributable to: 1) increased international and Atlantic basin coal demand, 2) port and rail infrastructure problems and monsoon flooding in Australia, 3) a record cold winter in China, and 4) an energy crisis in South Africa.

Emission Allowances Price Risk

The federal Acid Rain Program requires electric generating stations to hold SO₂ allowances, and Pennsylvania regulations implemented the federal NO_X SIP Call requirement. 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. 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.

The average price of purchased SO₂ allowances decreased to $316 per ton during the first nine months of 2008 from $521 per ton during 2007. The price of SO₂ allowances, determined by obtaining broker quotes and information from other public sources, was $155 per ton as of September 30, 2008.

For an updated discussion of environmental regulations related to emissions, see "Liquidity and Capital Resources—Environmental Matters and Regulations—Air Quality Regulation—Clean Air Interstate Rule."

Accounting for Energy Contracts

EME Homer City uses a number of energy contracts to manage exposure from changes in the price of electricity, including forward sales and purchases of physical power and forward price swaps which settle only on a financial basis (including futures contracts). EME Homer City follows SFAS No. 133, and under this Standard these energy contracts are generally defined as derivative financial instruments. Importantly, SFAS No. 133 requires changes in the fair value of each derivative financial instrument to be recognized in earnings at the end of each accounting period unless the instrument qualifies for hedge accounting under the terms of SFAS No. 133. For derivatives that do qualify for cash flow hedge accounting, changes in their fair value are recognized in other comprehensive income until the hedged item settles and is recognized in earnings. However, the ineffective portion of a derivative that qualifies for cash flow hedge accounting is recognized currently in earnings. For further discussion of derivative financial instruments, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview; Critical Accounting

Policies—Critical Accounting Policies—Derivative Financial Instruments and Hedging Activities" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007.

SFAS No. 133 affects the timing of income recognition, but has no effect on cash flow. To the extent that income varies under SFAS No. 133 from accrual accounting (i.e., revenue recognition based on settlement of transactions), EME Homer City records unrealized gains or losses. EME Homer City classifies unrealized gains and losses from energy contracts as part of operating revenues. The results of derivative activities are recorded as part of cash flows from operating activities on the statements of cash flows. The following table summarizes unrealized gains (losses) for the third quarters of 2008 and 2007 and nine months ended September 30, 2008 and 2007:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2008			2007			2008		2007
	(in millions)
Non-qualifying hedges	$	(2	)	$	(1	)	$	—	$	—
Ineffective portion of cash flow hedges		16			(2	)		7		(5	)

Total unrealized gains (losses)	$	14		$	(3	)	$	7	$	(5	)

During the three months ended September 30, 2008, unrealized gains resulting from the ineffective portion of cash flow hedges resulted primarily from a change in the fair value of derivatives from a net derivative liability position at June 30, 2008 to a net derivative asset position at September 30, 2008. SFAS No. 133 limits the amounts recorded in accumulated other comprehensive income to the lesser of the change in the fair value of the derivative or the hedge item (forecasted transaction).

At September 30, 2008, unrealized losses of $14 million were recognized from non-qualifying hedge contracts or the ineffective portion of cash flow hedges related to subsequent periods ($4 million for the remainder of 2008, $5 million for 2009, and $5 million for 2010).

Derivative Financial Instruments

The following table summarizes the fair values for outstanding financial instruments used for hedging activities. The increase in fair value of electricity contracts at September 30, 2008 as compared to December 31, 2007 is attributable to a decline in the average market prices for power as compared to contracted prices at September 30, 2008, which is the valuation date.

		September 30, 2008		December 31, 2007

		(in millions)
Commodity price:
	Electricity contracts	$	42	$	(46	)

In assessing the fair value of EME Homer City's derivative financial instruments, EMMT uses quoted market prices and forward market prices adjusted for credit risk. 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 and the

related fair value, primarily based on actively traded prices, of EME Homer City's commodity derivative assets and liabilities as of September 30, 2008:

	Total Fair Value		Maturity <1 year		Maturity 1 to 3 years		Maturity 4 to 5 years		Maturity >5 years

	(in millions)
Prices actively quoted	$	42	$	12	$	30	$	—	$	—

Prices actively quoted in the preceding table includes derivatives whose fair value is based on quoted market prices and forward market prices adjusted for credit risk.

Credit Risk

In conducting EME Homer City's hedging activities, EMMT contracts with a number of utilities, energy companies, financial institutions, and other companies, collectively referred to as counterparties. In the event a counterparty were to default on its trade obligation, EME Homer City would be exposed to the risk of possible loss associated with re-contracting the product at a price different from the original contracted price if the non-performing counterparty were unable to pay the resulting liquidated damages owed to EME Homer City. Further, EME Homer City would be exposed to the risk of non-payment of accounts receivable accrued for products delivered prior to the time a counterparty defaulted.

To manage credit risk, EMMT looks at the risk of a potential default by counterparties. Credit risk is measured by the loss that would be incurred if counterparties failed to perform pursuant to the terms of their contractual obligations. EMMT measures, monitors and mitigates credit risk to the extent possible. To mitigate credit risk from counterparties, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary. EMMT also takes other appropriate steps to limit or lower credit exposure. Processes have also been established to determine and monitor the creditworthiness of counterparties. EMMT manages the credit risk on the portfolio 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 EMMT'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 to 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 in the event of default by a supplier. 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.

EME Homer City derives a significant source of its operating revenues from electric power sold into the PJM market by EMMT. Sales into PJM accounted for approximately 48% of EME Homer City's operating revenues for the nine months ended September 30, 2008. Moody's rates PJM's debt Aa3. PJM, an independent system operator with over 300 member companies, maintains its own credit risk policies and does not extend unsecured credit to non-investment grade companies. Any losses due to a PJM member default are shared by all other members based upon a predetermined formula.

For the nine months ended September 30, 2008, a second customer, Constellation Energy Commodities Group, Inc., accounted for 33% of EME Homer City's operating revenues. Sales to Constellation largely consist of energy sales under forward contracts. The contract with Constellation is guaranteed by Constellation Energy Group, Inc., which has a senior unsecured debt rating of BBB by S&P and Baa2 by Moody's.

Interest Rate Risk

EME Homer City has mitigated the risk of interest rate fluctuations by obtaining fixed rate financing on its subordinated revolving loan with Edison Mission Finance. 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 "Item 1. Business—Regulatory Matters" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007. There have been no significant developments with respect to regulatory matters specifically affecting EME Homer City since the filing of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007, except as follows:

On April 4, 2008, the FERC issued an order rejecting PJM's request to revise its RPM to reflect PJM's claimed rise in its CONE values. CONE is one of the two components used by PJM to determine its Variable Resource Requirement curve for the RPM auction. PJM also proposed to add a new section to its tariff permitting PJM to unilaterally request a CONE increase for use in its May 2008 RPM auction for the 2011/2012 delivery year. In rejecting the proposal, the FERC found that PJM had not met timing provisions in its existing tariff to provide sufficient time for stakeholder review of the analysis and advance planning and that it had also failed to establish that its proposal to revise that provision was necessary on a one-time emergency basis to ensure reliable service.

The effect of FERC's actions on future RPM auctions cannot be determined at this time. The CONE as established for the May 2008 RPM auction for the 2011/2012 delivery year is lower than the PJM request.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of market risk sensitive instruments, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007. Refer to "Market Risk Exposures" in Item 2 of this quarterly report on Form 10-Q for an update to that disclosure.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

EME Homer City's management, 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 that 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 changes as described below 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 period 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.

Effective July 1, 2008, the human resources module was implemented as part of the Edison International enterprise-wide project. The implementation of this module and the related workflow capabilities resulted in a material change to EME Homer City's financial reporting controls and procedures. Therefore, EME Homer City is modifying the design and documentation of the internal control process and procedures relating to the new timekeeping system to replace and supplement existing internal controls over financial reporting, as appropriate. The system changes were undertaken to integrate systems and consolidate information, and were not undertaken in response to any actual or perceived deficiencies in EME Homer City's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material legal proceedings against EME Homer City in 2008, except as follows:

New Source Review Notice of Violation

ITEM 1A. RISK FACTORS

For a discussion of the risks, uncertainties, and other important factors which could materially affect EME Homer City's business, financial condition, or future results, refer to "Item 1A. Risk Factors" of EME Homer City's annual report on Form 10-K for the year ended December 31, 2007. The risks described in EME Homer City's annual report on Form 10-K and in this report are not the only risks facing EME Homer City. Additional risks and uncertainties that are not currently known, or that are currently deemed to be immaterial, also may materially adversely affect EME Homer City's business, financial condition or future results.

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.
		By:		Mission Energy Westside Inc., as General Partner

		By:		/s/ John P. Finneran, Jr. John P. Finneran, Jr. Director and Vice President (Duly Authorized Officer and Principal Financial Officer)
		Date:		November 7, 2008

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TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EME HOMER CITY GENERATION L.P. STATEMENTS OF COMPREHENSIVE INCOME (In millions, Unaudited)
EME HOMER CITY GENERATION L.P. BALANCE SHEETS (In millions, Unaudited)
EME HOMER CITY GENERATION L.P. STATEMENTS OF PARTNERS' EQUITY (In millions, Unaudited)
EME HOMER CITY GENERATION L.P. STATEMENTS OF CASH FLOWS (In millions, Unaudited)
EME HOMER CITY GENERATION L.P. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2008 (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 4T. CONTROLS AND PROCEDURES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 6. EXHIBITS

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Eme Homer City Generation Inactive 10-Q2008 Q3 Quarterly report

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