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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the fiscal year ended December 31, 2010 Commission File Number 333-92047-03~~

~~EME~~For ~~Homer~~the ~~City~~fiscal ~~Generation L.P. (Exact~~year ~~name~~ended ofDecember 31, ~~registrant~~2011 ~~as specified in its charter)~~

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

Commission File Number 333-92047-03

_______________________

EME Homer City Generation L.P.

(Exact name of registrant as specified in its charter)



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

Registrant's telephone number, including area code: (724) 479-9011

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

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



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

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

None

(Title of Class)

_______________________

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý.

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

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



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

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

Aggregate market value of the registrant's common equity held by non-affiliates of the registrant as of June 30, ~~2010~~2011: $0. Number of shares outstanding of the registrant's Common Stock as of ~~February~~ March 28, ~~2011~~2012: Not applicable.

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

DOCUMENTS INCORPORATED BY REFERENCE

None

Table of Contents

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS					1
	GLOSSARY	1
GLOSSARY					3
	FORWARD-LOOKING STATEMENTS	2
PART I		4			4
	ITEM 1. BUSINESS	4			4
	Overview	4			4
		Location and Available Information			4
	Substantial Doubt that Homer City will Continue as a Going Concern	4
	Description of the Industry				4
	Location and Available Information	4
	Electric Power Industry	~~Electric Power Industry~~5			4
	Wholesale Markets	~~Wholesale Markets~~5			5
	PJM	5	~~PJM~~		5
	NYISO	5	~~NYISO~~		5
	Competition	~~Competition~~5			6
	Overview of Facilities Under Lease	6			6
	Water Supply and Other Support Facilities	6			7
	Transmission and Interconnection				7
	Interconnection Agreement	6
	Significant Customers				8
	Power Sales	7
	Fuel Supply	7			8
	Emission Allowances	7			8
	Insurance				8
	Significant Customers	7
	Seasonality				8
	Insurance	7
	Regulatory Matters				9
	Seasonality	7
		General			9
	Regulatory Matters	8
		Federal Power Act			9
	General	8
		Reliability Standards			9
	Federal Power Act	8
		Transmission of Wholesale Power			9
	Reliability Standards	8
	Environmental Matters and Regulations				10
	Transmission of Wholesale Power	8
		Climate Change			10
	Environmental Matters and Regulations	8
			Federal Legislative/Regulatory Developments		10
	Air Quality	8
			Litigation Developments		11
	Nitrogen Oxide and Sulfur Dioxide	9
		Air Quality			11
	Clean Air Interstate and Cross-State Air Pollution Rules	9
			Nitrogen Oxide and Sulfur Dioxide		12
	Revised NAAQS for SO	9
				Clean Air Interstate and Transport Rules	12
	Pennsylvania	9
				Proposed NAAQS for SO2	13
	Mercury/Hazardous Air Pollutants	10
				Pennsylvania	13
	Mercury and Air Toxics Standards Rule	10
			Mercury/Hazardous Air Pollutants		13
	Pennsylvania	10
				Clean Air Mercury Rule/Hazardous Air Pollutant Regulations	13
	Ozone	10
				Pennsylvania	14
	National Ambient Air Quality Standards	10
			Ozone and Particulates		14
	Regional Haze	10
				National Ambient Air Quality Standards	14
	New Source Review Requirements	10
				Pennsylvania	14
	Coal Combustion Wastes	10
			Regional Haze		15
	Climate Change	11
			New Source Review Requirements		15
	Federal Legislative/Regulatory Developments	11
		Coal Combustion Wastes			15
	Litigation Developments	11
	Employees	11			16

Table of Contents

	ITEM 1A. RISK FACTORS	11	16
	Regulatory and Environmental Risks		16
	Liquidity Risks	11
	Market Risks		17
	Regulatory and Environmental Risks	12
	Liquidity Risks		19
	Market Risks	13
	Operating Risks	14	19
	ITEM 1B. UNRESOLVED STAFF COMMENTS	14	20
	ITEM 2. PROPERTIES	14	20
	ITEM 3. LEGAL PROCEEDINGS	14	20
	ITEM 4. RESERVED		20
PART II		15
PART II			21
	ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	15
	ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		21
	ITEM 6. SELECTED FINANCIAL DATA	16
	ITEM 6. SELECTED FINANCIAL DATA		22
	ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
	ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23
	MANAGEMENT'S OVERVIEW	17
	MANAGEMENT'S OVERVIEW		23
	Highlights of Operating Results	17
	Highlights of Operating Results		23
	Substantial Doubt that Homer City will Continue as a Going Concern	17
	Environmental Developments		23
	Homer City Lease	17
		Environmental Issues and Capital Resource Limitations	23
	Environmental Regulation Developments	18
		US EPA Developments	24
	RESULTS OF OPERATIONS	19
	RESULTS OF OPERATIONS		25
	Summary	19
	Summary		25
	Reconciliation of Non-GAAP Disclosures and Statistical Definitions	19
		Statistical Definitions and Reconciliation of Non-GAAP Disclosures	25
	Average Realized Energy Price	19
	Operating Revenues		26
	Statistical Definitions	19
	Operating Expenses		27
	Operating Income (Loss)	20
	Other Income (Expense)	20	27
	Provision for Income Taxes		27
	Income Taxes	20
	Related-Party Transactions		28
	Related Party Transactions	21
	New Accounting Guidance	21	28
	LIQUIDITY AND CAPITAL RESOURCES	22	29
	Cash Flow		29
	Liquidity	22
	Bonus Depreciation Impact		29
	Capital Investment Plan	22
	Capital Expenditures and Lease Covenants		29
	Cash Flow	22
	Payments Made Under Subordinated Revolving Loan and Tax Payments		31
	Credit Ratings	23
	Credit Ratings		32
	Payments Made Under Subordinated Revolving Loan and Tax Payments	23
	Contractual Obligations, Commercial Commitments and Contingencies		33
	Key Ratio Affecting Distributions	23
		Contingencies	33
	Sale-Leaseback Restrictions on Distributions	23
	Off-Balance Sheet Transactions		33
	Contractual Obligations, Commercial Commitments and Contingencies	24
	MARKET RISK EXPOSURES		34
	Contingencies	24
	Introduction		34
	Off-Balance Sheet Transactions	24
	Derivative Instruments		34
	MARKET RISK EXPOSURES	25
		Unrealized Gains and Losses	34
	Introduction	25

Table of Contents

	Fair Value Disclosures			34
Derivative Instruments	25
Commodity Price Risk				35
Unrealized Gains and Losses	25
	Introduction			35
Fair Value Disclosures	25
	Energy Price Risk			35
Commodity Price Risk	25
	Capacity Price Risk			36
Introduction	25
	Basis Risk			37
Energy Price Risk	25
	Coal Price Risk			37
Capacity Price Risk	27
	Emission Allowances Price Risk			38
Basis Risk	27
Credit Risk				38
Coal Price Risk	27
Interest Rate Risk				38
Emission Allowances Price Risk	28
CRITICAL ACCOUNTING ESTIMATES AND POLICIES				39
Credit Risk	28
Introduction				39
Interest Rate Risk	28
Derivatives				39
CRITICAL ACCOUNTING ESTIMATES AND POLICIES	29
Impairment of Long-Lived Assets				40
Introduction	29
	Application to Merchant Coal-Fired Power Plants			41
Impairment of Long-Lived Assets	29
Accounting for Contingencies, Guarantees and Indemnities				41
Derivatives	30
Income Taxes	30			42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK				43
Accounting for Contingencies, Guarantees and Indemnities	31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA				44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE				44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	32
ITEM 9A. CONTROLS AND PROCEDURES				44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	32
Disclosure Controls and Procedures				44
ITEM 9A. CONTROLS AND PROCEDURES	32
Management's Report on Internal Control over Financial Reporting				44
Disclosure Controls and Procedures	32
Internal Control over Financial Reporting				44
Management's Report on Internal Control over Financial Reporting	32
ITEM 9B. OTHER INFORMATION				45
Internal Control over Financial Reporting	32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM				46
ITEM 9B. OTHER INFORMATION	32
STATEMENTS OF INCOME				47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	33
BALANCE SHEETS				48
STATEMENTS OF OPERATIONS	34
STATEMENTS OF PARTNERS' EQUITY				49
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	35
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)				50
BALANCE SHEETS	36
STATEMENTS OF CASH FLOWS				51
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)	37
NOTES TO FINANCIAL STATEMENTS				52
STATEMENTS OF CASH FLOWS	38
Note 1. Summary of Significant Accounting Policies				52
NOTES TO FINANCIAL STATEMENTS	39
	Basis of Presentation			52
Note 1. Summary of Significant Accounting Policies	39
	Cash Equivalents			52
Note 2. Property, Plant and Equipment	43
	Derivative Instruments and Hedging Activities			52
Note 3. Fair Value Measurements	43
	Impairment of Long-Lived Assets			53
Note 4. Long-Term Debt	45
	Income Taxes and Tax-Allocation Agreements			53
Note 5. Derivative Instruments and Hedging Activities	46
	Intangible Assets			54
Note 6. Income Taxes	49
	Inventory			54
Note 7. Compensation and Benefit Plans	50
	New Accounting Guidance			55
Note 8. Commitments and Contingencies	58
		Accounting Guidance Adopted in 2010		55
Note 9. Environmental Developments	62
			Fair Value Measurements and Disclosures	55

iii

Table of Contents

			Accounting Guidance Not Yet Adopted		55
	Note 10. Accumulated Other Comprehensive Income (Loss)	64
		Property, Plant and Equipment			55
	Note 11. Supplemental Cash Flows Information	64
		Restricted Deposits			56
	Note 12. Asset Impairments and Other Charges	64
		Revenue Recognition			56
	Note 13. Related Party Transactions	65
	Note 2. Property, Plant and Equipment				56
	Note 14. Quarterly Financial Data (unaudited)	66
		Asset Retirement Obligations			57
PART III		67
	Note 3. Fair Value Measurements				57
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	67
		Valuation Techniques used to Determine Fair Value			59
	ITEM 11. EXECUTIVE COMPENSATION	67
			Level 1		59
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	67
			Level 2		59
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	67
			Level 3		59
	ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES	67
	Note 4. Long-Term Debt				60
PART IV		68
	Note 5. Derivative Instruments and Hedging Activities				60
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES	68
		Notional Volumes of Derivative Instruments			61
	SIGNATURES	71
		Fair Value of Derivative Instruments			62
		Income Statement Impact of Derivative Instruments			62
		Commodity Price Risk Management			63
		Credit Risk			63
	Note 6. Income Taxes				65
		Current and Deferred Taxes			65
		Effective Tax Rate			66
		Accounting for Uncertainty in Income Taxes			66
			Unrecognized Tax Benefits		66
			Accrued Interest and Penalties		66
	Note 7. Compensation and Benefit Plans				67
		Employee Savings Plan			67
		Pension Plans and Postretirement Benefits Other Than Pensions			67
			Pension Plans		67
			Postretirement Benefits Other Than Pensions		69
		Discount Rate			72
		Plan Assets			72
			Description of Pension and Postretirement Benefits Other Than Pensions Investment Strategies		72
			Determination of the Expected Long-Term Rate of Return on Assets		73
			Capital Markets Return Forecasts		73
			Fair Value of Plan Assets		73
				Pension Plan	74
	Note 8. Commitments and Contingencies				76
		Lease Commitments			76
			Facilities Sale-Leaseback		77
		Other Commitments			78
			Fuel Supply Contracts		78
			Coal Transportation Agreements		78
			Capital Expenditures		78
			Coal Cleaning Agreement		78
			Other Contractual Obligations		79
		Interconnection Agreement			79
		Guarantees and Indemnities			79
			Tax Indemnity Agreements		79
			Environmental Indemnity Related to the Homer City Plant		79

Table of Contents

		Contingencies		80
			New Source Review Lawsuit	80
			Ash Disposal Site	80
			Insurance	81
	Note 9. Environmental Developments			82
		Environmental Issues and Capital Resource Limitations		82
		Greenhouse Gas Regulation		82
		Transport Rule		83
		Hazardous Air Pollutant Regulations		83
		Coal Combustion Wastes		83
	Note 10. Accumulated Other Comprehensive Income (Loss)			84
	Note 11. Supplemental Cash Flows Information			84
	Note 12. Related-Party Transactions			84
		EMMT Agreements		84
		Affiliate Financing		85
		Services Agreements with EME and Edison International		85
		Management and Administration Agreement with Midwest Generation EME, LLC		85
	Note 13. Quarterly Financial Data (unaudited)			86
PART III				87
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			87
	ITEM 11. EXECUTIVE COMPENSATION			87
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			87
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			87
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES			87
PART IV				88
	ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			88
SIGNATURES				93

GLOSSARY

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



ARO(s)	asset retirement obligation(s)
BACT	best available control technology
BART	best available retrofit technology
Btu	British thermal units
CAA	Clean Air Act
CAIR	Clean Air Interstate Rule
CAMR	Clean Air Mercury Rule
CO₂	carbon dioxide
CSAPR	Cross-State Air Pollution Rule
EME	Edison Mission Energy
EMMT	Edison Mission Marketing & Trading, Inc.
FERC	Federal Energy Regulatory Commission
GAAP	United States generally accepted accounting principles
GHG	greenhouse gas
GWh	gigawatt-hours
HAP(s)	hazardous air pollutant(s)
Homer City	EME Homer City Generation L.P.
ISO(s)	independent system operator(s)
MATS	Mercury and Air Toxics Standards
MMBtu	million British thermal units
Moody's	Moody's Investors Service, Inc.
MW	megawatts
MWh	megawatt-hours
NAAQS	National Ambient Air Quality Standard(s)
NERC	North American Electric Reliability Corporation
NO_X	nitrogen oxide
NSR	New Source Review
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
PSD	Prevention of Significant Deterioration
RPM	Reliability Pricing Model
RTO(s)	regional transmission organization(s)
S&P	Standard & Poor's Ratings Services
SIP(s)	state implementation plan(s)
SO₂	sulfur dioxide
US EPA	United States Environmental Protection Agency

Table of Contents

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect Homer City's current expectations and projections about future events based on 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 Homer City that is incorporated in this annual report, or that refers to or incorporates this annual report, may also contain forward-looking statements. In this annual report and elsewhere, the words "expects," "believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should" and variations of such words and similar expressions, or discussions of strategy or plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ from those currently expected, or that otherwise could impact Homer City, include but are not limited to:

1• Homer City's assumptions about its ability to continue as a going concern;

~~Table~~• ofHomer ~~Contents~~City's significant cash requirements and its limited ability to borrow funds and access the capital markets on reasonable terms;

~~Certain of~~• ~~the~~environmental ~~risk~~laws ~~factors listed above are discussed in more detail in "Item 1A. Risk Factors"~~ and inregulations, ~~"Item 7.~~at ~~Management's~~both ~~Discussion~~state and ~~Analysis~~federal oflevels, ~~Financial~~or ~~Condition~~changes ~~and~~in ~~Results of Operations—Market Risk Exposures." Additional information about~~ the ~~risk~~application ~~factors~~of ~~listed~~those ~~above and other risks and uncertainties is contained throughout this annual report. Readers are urged to read this entire annual report~~laws, ~~including~~that ~~the~~could ~~information~~require ~~incorporated~~additional byexpenditures ~~reference,~~or ~~and~~otherwise ~~carefully consider the risks, uncertainties and other factors that~~ affect Homer City's ~~business. Forward-looking~~cost ~~statements~~and ~~speak~~manner ~~only as~~ of ~~the~~doing ~~date they are made~~business, ~~and~~including ~~Homer~~compliance ~~City~~with isthe ~~not~~CAIR ~~obligated to publicly update~~ or ~~revise~~CSAPR ~~forward-looking~~(as ~~statements.~~applicable) ~~Readers~~and ~~should review future reports filed by Homer City with~~ the ~~Securities~~MATS ~~and Exchange Commission.~~ rule;


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


•	the cost and availability of fuel and fuel transportation services;


•	the cost and availability of emission credits or allowances;


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


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


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


•	governmental, statutory, regulatory or administrative changes or initiatives affecting Homer City or the electricity industry generally, including market structure rules and price mitigation strategies adopted by ISOs and RTOs;


•	weather conditions, natural disasters and other unforeseen events;


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


•	competition in all aspects of Homer City's business;


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


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


•	effects of legal proceedings, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards; and


•	general political, economic and business conditions.

Certain of the risk factors listed above are discussed in more detail in "Item 1A. Risk Factors" and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures." Additional information about the risk factors listed above and other risks and uncertainties is contained throughout this annual report. Readers are

Table of Contents

urged to ~~GLOSSARY~~ read this entire annual report, including the information incorporated by reference, and carefully consider the risks, uncertainties and other factors that affect Homer City's business. Forward-looking statements speak only as of the date they are made, and Homer City is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by Homer City with the Securities and Exchange Commission.

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

ARO(s)		asset retirement obligation(s)
BACT		best available control technology
BART		best available retrofit technology
Btu		British thermal units
CAA		Clean Air Act
CAIR		Clean Air Interstate Rule
CAMR		Clean Air Mercury Rule
CO2		carbon dioxide
EME		Edison Mission Energy
EMMT		Edison Mission Marketing & Trading, Inc.
FERC		Federal Energy Regulatory Commission
GAAP		United States generally accepted accounting principles
GHG		greenhouse gas
GWh		gigawatt-hours
HAP(s)		hazardous air pollutant(s)
Homer City		EME Homer City Generation L.P.
ISO(s)		independent system operator(s)
MMBtu		million British thermal units
MW		megawatts
MWh		megawatt-hours
NAAQS		National Ambient Air Quality Standard(s)
NERC		North American Electric Reliability Corporation
NOX		nitrogen oxide
NSR		New Source Review
NYISO		New York Independent System Operator
NYSEG		New York State Electric & Gas Corporation
Penelec		Pennsylvania Electric Company
PJM		PJM Interconnection, LLC
PSD		Prevention of Significant Deterioration
RPM		Reliability Pricing Model
RTO(s)		regional transmission organization(s)
SCR		selective catalytic reduction
SIP(s)		state implementation plan(s)
SO2		sulfur dioxide
Transport Rule		Clean Air Transport Rule
US EPA		United States Environmental Protection Agency

Table of Contents

PART I

ITEM 1. BUSINESS

Overview

Homer City is a Pennsylvania limited partnership with Chestnut Ridge Energy Company as a limited partner with a 99.9 percent interest and Mission Energy Westside Inc. as a general partner with a 0.1 percent interest. Both Chestnut Ridge Energy and Mission Energy Westside are wholly owned subsidiaries of Edison Mission Holdings Co., a wholly owned subsidiary of EME. EME is an indirect wholly owned subsidiary of Edison International. Homer City was formed for the purpose of acquiring, owning and operating three coal-fired electric generating units and related facilities located in Indiana County, Pennsylvania with an aggregate capacity of 1,884 MW, which Homer City collectively refers to as the "Homer City plant," for the purpose of producing electric energy. Homer City acquired the Homer City plant on March 18, 1999 and completed a sale-leaseback of its facilities to third parties in December 2001.

Homer ~~City~~ ~~derives revenues from the sale of energy, capacity and ancillary services into PJM and from bilateral contracts with power marketers and load-serving entities within PJM and NYISO. Homer~~ City is a party to a contract with EMMT, an EME subsidiary engaged in asset management and trading activities, under which EMMT sells energy, ~~capacity~~ and ~~ancillary~~capacity ~~services~~ from the Homer City plant into the wholesale market, ~~engages in hedging activities~~ and provides scheduling and other services. When appropriate market and financial conditions exist, EMMT may also engage in hedging activities for Homer City.

Substantial Doubt that Homer City will Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that Homer City will continue as a going concern. Financial statements prepared on this basis assume the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of these consolidated financial statements. The reduction in energy prices experienced in the fourth quarter of 2011 and into 2012 has adversely impacted cash flow, and Homer City is not expected to be able to generate sufficient cash flow from operations necessary to meet its obligations, including the obligations under the Homer City lease. As described further below under Homer City Lease, it is unlikely that Homer City will continue as a going concern throughout 2012. For discussion of the asset impairment recorded with respect to the Homer City plant, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 12—Asset Impairments and Other Charges."

Homer City Lease

During the fourth quarter of 2011, Homer City failed to obtain sufficient interest from market participants necessary to fund the capital needed to make environmental improvements under the current lease arrangement. The estimated cost of installing SO2 and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is expected to be approximately $700 million to $750 million. Homer City does not currently have sufficient capital and does not expect to generate sufficient funds from operations to complete retrofits. Restrictions under the agreements entered into as part of Homer City's 2001 sale-leaseback transaction affect, and in some cases significantly limit or prohibit, Homer City's ability to incur indebtedness or make capital expenditures. Consequently, Homer City's ability to install environmental compliance equipment will be dependent on funding from the owner-lessors or third parties. Homer City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City's loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both. For further discussion of these matters, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Homer City Lease."

Location and Available Information

Homer City's principal executive offices are located at 1750 Power Plant Road, Homer City, Pennsylvania, 15748-8009, and its telephone number is (724) 479-9011.

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

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

Description of the Industry

Electric Power Industry

The United States electric industry, including companies engaged in providing generation, transmission, distribution and retail sales and service of electric power, has undergone

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~~significant deregulation~~Electric ~~over~~Power ~~the last three decades, which has led to increased competition, especially in the generation sector. See further discussion of regulations under "Regulatory Matters."~~ Industry

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

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

Wholesale Markets

Energy and capacity from the Homer City plant are sold under terms, including price, duration and quantity, arranged by EMMT with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Thus, Homer City is subject to market risks related to the price of energy and capacity from the Homer City plant. Power generated at the Homer City plant is primarily sold into PJM, an RTO which includes all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Sales may also be made into the NYISO, which controls the transmission grid and energy and capacity markets for New York State. Subject to PJM and NYISO transmission availability and reliability considerations, Homer City can transmit up to 1,884 MW from its generating units into NYISO and can deliver up to 1,884 MW into PJM. Homer City does not incur any access or wheeling charges for energy delivered into PJM.

PJM

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

NYISO

The NYISO operates a competitive, non-discriminatory wholesale power market in New York State in response to the FERC's Open Access Rules and includes bid-based electricity and transmission usage markets. The market-clearing price for NYISO's day-ahead and real-time energy markets is set by supplier generation bids and customer demand bids.

Subject to PJM and NYISO transmission availability and reliability considerations, Homer City can transmit up to 1,884 MW from its generating units into NYISO and can deliver up to 1,884 MW into PJM. Homer City does not incur any access or wheeling charges for energy delivered into PJM. Competition

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

State and local environmental regulations, particularly those that impose stringent state specific emission limits, could put the Homer City plant at a disadvantage compared with competing power plants operating in nearby states and subject to less stringent state emission limits or to federal emission limits alone. Federal air quality regulations such as CSAPR and the MATS rule will put the Homer City plant at a disadvantage compared with plants utilizing other fuels. Potential future climate change regulations could also put the Homer City plant at a disadvantage compared to power plants utilizing other fuels as well as utilities that may be able to recover climate change compliance costs through rate-base mechanisms. The ability of the Homer City plant to compete can also be affected by future environmental regulations, by governmental and regulatory activities designed to support the construction and operation of power generation facilities fueled by renewable energy sources, and by developments such as shale gas technology that lower the price of other fuels.

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Competition

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

State and local environmental regulations, particularly those that impose stringent state specific emission limits, could put the Homer City plant at a disadvantage compared with competing power plants operating in nearby states and subject to less stringent state emission limits or to federal emission limits alone. Potential future climate change regulations could also put the Homer City plant at a disadvantage compared to both power plants utilizing other fuels and utilities that may be able to recover climate change compliance costs through rate-base mechanisms. In addition, the ability of these plants to compete may be affected by governmental and regulatory activities designed to support the construction and operation of power generation facilities fueled by renewable energy sources.

Overview of Facilities Under Lease

The business description of Homer City is presented for an understanding of the historical operations of generation from this plant. For a discussion of the status of the Homer City lease, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Homer City Lease."

The Homer City plant is located on a 2,413-acre site approximately 45 miles northeast of Pittsburgh within Indiana County, Pennsylvania. Homer City owns a fee interest in the land and leases the facilities on which the generating units are located pursuant to a sale-leaseback transaction completed in December 2001. As a result of the sale-leaseback transaction, Homer City leased the property on which the generating units are located to the owner lessors through site leases and each owner lessor in turn subleased its undivided ground interest in the property to Homer City through site subleases. The term of the site leases is 45 years from the date of the sale-leaseback, with specified renewal options. The term of the site subleases is 33.67 years, the term of the sale-leaseback financing, and is renewable upon renewal of the Homer City facility leases.

The Homer City plant consists of the generating units, a coal cleaning facility, water supply provided by a 1,800-acre reservoir site known as Two Lick Dam, which is not part of the 2,413-acre site, and associated support facilities. The Homer City generating units benefit from direct transmission access to both PJM and NYISO through seven high voltage lines which interconnect through a switchyard located on the site.

The Homer City units are coal-fired boilers and steam turbine-generator units (referred to as Units 1, 2 and 3 in this annual report). Units 1 and 2 were placed into commercial operation in 1969. Unit 1 has an installed capacity of 620 MW, and Unit 2 has an installed capacity of 614 MW. The Unit 1 and 2 boilers have been retrofitted with low NOx burners to meet Phase I NOx 1990 CAA standards. In addition, both boilers have supplemental over-fired air systems to further reduce NOx emissions to satisfy Pennsylvania Title I (ozone) requirements. ~~SCR~~Selective catalytic reduction units have been installed on Units 1 and 2 for further reduction of NOx emissions.

6Unit 3 commenced commercial operation in 1977 and has an installed capacity of 650 MW. The boiler for Unit 3 was originally constructed with low NOx burners which satisfied Phase I NOx 1990 CAA standards, and a supplemental over-fired air system was installed in 1995 to further reduce NOx emissions. In addition, a FGD system and a selective catalytic reduction system were installed on Unit 3 in 2001.

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Unit 3 commenced commercial operation in 1977 and has an installed capacity of 650 MW. The boiler for Unit 3 was originally constructed with low NOx burners which satisfied Phase I NOx 1990 CAA standards, and a supplemental over-fired air system was installed in 1995 to further reduce NOx emissions. In addition, a FGD system and a SCR system were installed on Unit 3 in 2001.

These improvements were made to enable the Homer City generating units to comply with Phase II of Title IV of the 1990 CAA regarding SO₂ emissions, the Pennsylvania NO_x allowance regulations and Pennsylvania's response to the US EPA SIP Call regarding NO_x emissions.

Water Supply and Other Support Facilities

The Homer City generating units receive their water supply from Two Lick Creek. The water supply to Two Lick Creek is regulated by releases from Two Lick Dam, which is located approximately eight miles upstream from the Homer City plant and is owned, operated and maintained by Homer City in accordance with a dam safety permit and a drought management plan and related consent order and agreement with the PADEP. These facilities were not sold to third parties as part of the 2001 sale-leaseback transaction. Each of the Homer City generating units has a natural draft-cooling tower. A portion of the waste heat in the water leaving the units' condensers is diverted from these towers to a 14-acre polyethylene roofed greenhouse complex located adjacent to the Homer City units. After the water passes through this greenhouse complex, it is returned to the basin of the cooling towers for reuse.

Other support facilities located on the site include a dry ash disposal area, a coal refuse disposal area, coal receiving and storage facilities and water treatment and pumping facilities.

~~Transmission and~~ Interconnection Agreement

~~Existing~~Homer ~~transmission~~City ~~lines~~is ~~leaving~~a party to an interconnection agreement with New York State Electric & Gas Corporation (NYSEG) and Pennsylvania Electric Company (Penelec) to provide interconnection services necessary to interconnect the Homer City ~~generating~~plant ~~units~~with ~~are~~NYSEG's ~~interconnected~~and Penelec's transmission systems. Unless terminated earlier in accordance with ~~both~~specified ~~PJM~~terms, ~~and~~the ~~NYISO.~~interconnection ~~Subject~~agreement will terminate on a date mutually agreed to ~~PJM~~by ~~transmission availability~~Homer City, NYSEG and ~~reliability~~Penelec. ~~considerations,~~The termination date will not exceed the retirement date of the Homer City ~~has~~units. ~~the~~NYSEG ~~ability~~and Penelec have agreed to ~~transmit~~extend ~~full~~the ~~plant~~interconnection ~~output~~services ~~into~~(but ~~NYISO.~~not Inthe ~~addition~~expiration of the agreement) to modifications, additions or upgrades to, or repowering of the Homer City ~~generating~~ units. ~~can~~Homer ~~make~~City ~~use~~is ofrequired anto ~~indirect~~ 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, ~~the~~or ~~East~~repowering ~~Central~~of ~~Area~~the ~~reliability~~Homer ~~market~~City units.

Homer City's general partner, Mission Energy Westside, provides Homer City with all services necessary to interconnect its generating units with their transmission systems, other than services provided under existing tariffs. Unless terminated earlier in accordance with its terms, the interconnection agreement will terminate on a date mutually agreed to by Mission Energy Westside, NYSEG and Penelec. The termination date will not exceed the retirement date of the Homer City units. NYSEG and Penelec have agreed to extend such interconnection services (but not the expiration of the agreement) to modifications, additions, upgrades or repowering of the Homer City units. Mission Energy Westside is required to compensate NYSEG and Penelec for all reasonable costs associated with any modifications, additions or replacements made to NYSEG or Penelec's interconnection facilities or transmission systems in connection with any modification, addition, upgrade or repowering of the Homer City units. 6

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Power ~~Significant Customers~~ Sales

~~For~~Energy and capacity from the Homer City plant are sold under terms, including price, duration and quantity, arranged by EMMT with customers through a ~~discussion~~combination of ~~significant~~bilateral ~~customers~~agreements (resulting from negotiations or from auctions), ~~see~~forward ~~"Item 8~~energy sales and spot market sales. ~~EME~~The Homer City ~~Generation L~~plant is situated in the PJM control area and has direct, high-voltage interconnections to PJM and also to the NYISO.P Electric power generated at the Homer City plant is primarily sold into the PJM market. ~~Notes~~Effective April 1, 2011, EMMT allocated to ~~Financial Statements—Note 5.~~Homer ~~Derivative~~City ~~Instruments~~the ~~and~~benefit ~~Hedging~~of ~~Activities—Credit~~an ~~Risk~~arrangement that allows EMMT to deliver a portion of Homer City's power into the NYISO." To the extent this arrangement is not utilized, Homer City's power is delivered into PJM.

Fuel Supply

Homer City's Units 1 and 2 ~~collectively~~have ~~consume~~historically consumed approximately 32.3 8 million to 3.53 million tons of mid-range sulfur coal per year. Two types of coal are purchased, ready-to-burn and raw coal. Ready-to-burn coal is of the quality that can be burned directly in Units 1 and 2, whereas the raw coal purchased for consumption by Units 1 and 2 must be cleaned in the Homer City coal cleaning facility, which has the capacity to clean up to 5 million tons of coal per year. ~~The~~ ~~Homer~~Unit 3 ~~City~~has ~~coal~~historically ~~cleaning~~consumed ~~facility~~approximately ~~is operated by Homer City Coal Processing Corporation under a coal cleaning agreement that expires December 31, 2012~~1.5 million ~~Unit~~to ~~3 consumes approximately~~ 2 million tons of coal per year and can consume either raw or ready-to-burn coal. Coal consumption in the current low natural gas price environment may be lower than the historical range. A wet scrubber FGD system for Unit 3 enables this unit to burn less expensive, higher sulfur coal, while still meeting environmental standards for emission control. In general, the coal purchased for all three units is acquired locally. ~~Homer City purchases the majority of its coal under term contracts with the balance purchased in the spot market as needed.~~ For additional information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Commodity Price Risk—Coal Price Risk."

Emission Allowances

The federal Acid Rain Program requires electric generating stations to hold SO2 allowances sufficient to cover their annual emissions. Pursuant to Pennsylvania's implementation of the CAIR, the Homer City plant is required to hold seasonal and annual NOx allowances. AsThe ~~part~~CAIR ofremains the acquisition of the Homer City plant, Homer City obtained emission allowance rights that have been or are allocated to these facilities. Homer City purchases (or sells) emission allowances based on the amounts required for actual generation in ~~excess~~effect ofuntil ~~(or~~a ~~less~~replacement ~~than)~~regulation ~~the~~becomes ~~amounts allocated under these programs~~effective. ~~Future regulations, including the Transport Rule, may impact future emission allowance allocations and may require Homer City to purchase additional allowances in amounts that could be significant.~~

CSAPR, like the CAIR, is an allowance-based regulation that provides for emissions trading. Under CSAPR, the amount of actual SO₂ or NO_X emissions from plant operations will need to be matched by a sufficient amount of SO₂ or NO_Xallowances that are either allocated or purchased in the open market. SO₂ allowances under the federal Acid Rain Program cannot be used to satisfy the requirements under CSAPR. In December 2011, the United States Court of Appeals for the District of Columbia granted a stay of CSAPR pending completion of its review of the rule's validity. If the stay is lifted and CSAPR becomes effective, Homer City expects that additional SO₂ allowances under CSAPR will be required for the Homer City plant. The availability and market prices for those allowances are uncertain, but the associated costs could be significant. For additional information, see "Environmental Matters and Regulations—Air Quality."

Significant Customers

For a discussion of significant customers, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 5. Derivative Instruments and Hedging Activities—Credit Risk."

Insurance

For a discussion of insurance, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies—Contingencies—Insurance."

Seasonality

Due to fluctuations in electric demand resulting from warm weather during the summer months and cold weather during the winter months, electric revenues from the Homer City plant normally vary substantially on a seasonal basis. In addition, maintenance outages generally are scheduled during periods of lower projected electric demand (spring and fall), further reducing generation and increasing major maintenance costs which are recorded as an expense when incurred. Accordingly, earnings from the Homer City plant are seasonal and have significant variability from quarter to quarter. Seasonal fluctuations may also be affected by changes in market prices. For further discussion regarding market prices, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Commodity Price Risk—Energy Price Risk."

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expense when incurred. Accordingly, earnings from the Homer City plant are seasonal and have significant variability from quarter to quarter. Seasonal fluctuations may also be affected by changes in market prices. For further discussion regarding market prices, see "Market Risk Exposures—Commodity Price Risk—Energy Price Risk."

Regulatory Matters

General

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

Federal Power Act

The FERC has exclusive jurisdiction over the rates, terms and conditions of wholesale sales of electricity and transmission services in interstate commerce (other than transmission that is "bundled" with retail sales), including ongoing, as well as initial, rate jurisdiction. ~~Rates~~The ~~may~~FERC bealso ~~based~~has onjurisdiction aover ~~cost-of-service approach~~the sale or transfer of specified assets, inincluding ~~geographic~~wholesale power sales contracts and ~~product~~generation ~~markets~~facilities ~~determined~~and, byin ~~the~~some ~~FERC~~cases, tojurisdiction beover ~~workably~~the ~~competitive,~~issuance ~~may~~of besecurities ~~market~~or ~~based.~~the ~~Previously~~assumption ~~approved~~of ~~rates~~specified ~~may~~liabilities ~~also~~and besome ~~revoked~~interlocking ordirectorates. ~~modified~~Dispositions byof ~~the~~Homer ~~FERC~~City's ~~after notice~~jurisdictional assets and ~~opportunity~~certain ~~for~~types ~~hearing.~~of financing arrangements may require FERC approval.

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

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

Reliability Standards

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

Transmission of Wholesale Power

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

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Environmental Matters and Regulations

Legislative and regulatory activities by federal, state, and local authorities in the United States relating to energy and the environment impose numerous restrictions and requirements with respect to the operation of the Homer City plant and affect the timing, cost, design and construction of capital improvements to the Homer City plant as well as the cost of mitigating the environmental impacts of past operations. In addition, as discussed in "Item 8. EME Homer City ~~continues~~Generation L.P. Notes to ~~monitor~~Financial ~~legislative~~Statements—Note 8. Commitments and ~~regulatory~~Contingencies," ~~developments~~the US EPA and toothers ~~evaluate~~have ~~possible strategies~~from ~~for~~time ~~compliance~~to ~~with~~time ~~environmental~~involved ~~regulations~~Homer City in litigation. Additional information about environmental matters affecting Homer City, including projected environmental capital expenditures, is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital ~~Expenditures~~Investment ~~and Lease Covenants~~Plan" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets~~—Application to Merchant Coal-Fired Power Plants~~."

Climate Change

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

Federal Legislative/Regulatory Developments

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

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

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

In December 2010, the US EPA announced that it had entered into a settlement with various states and environmental groups to resolve a long-standing dispute over regulation of GHGs

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from electrical generating units pursuant to the New Source Performance Standards in the CAA. Under the pending settlement, the US EPA will propose performance standards for GHG emissions from new and modified power plants and emissions guidelines for existing power plants in July 2011, and will finalize such regulations by May 2012, with compliance dates for existing power plants expected to be in 2015 or 2016. The specific requirements will not be known until the regulations are finalized.

Since January 2010, the US EPA's Final Mandatory Greenhouse Gas Reporting Rule has required all sources within specified categories, including electric generation facilities, to monitor emissions and to submit annual reports to the US EPA by March 31 of each year, with the first report due on March 31, 2011. Homer City's 2010 GHG emissions were approximately 11.2 million metric tons.

Litigation Developments

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

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

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

Air Quality

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

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

~~Nitrogen Oxide and Sulfur Dioxide~~ 8

Clean Air Interstate and Transport Rules

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

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

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

The Transport Rule is scheduled to be finalized in 2011. The CAIR will remain in place until that time. The Transport Rule may require the installation of additional environmental equipment on Units 1 and 2 at the Homer City plant to reduce SO2 emissions and, depending on the approach adopted, may also require Homer City to procure a significant number of additional allowances pending such installation or curtail operations if it is unable to do so on

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~~acceptable terms.~~Nitrogen ~~For~~Oxide ~~further discussion, see "Item 7. Management's Discussion~~ and ~~Analysis~~Sulfur ~~of Financial Condition and Results of Operations—Management's Overview—Environmental Developments—Environmental Issues and Capital Resource Limitations."~~ Dioxide

Clean Air ~~Proposed~~Interstate ~~NAAQS~~and ~~for~~Cross-State ~~SO2~~ Air Pollution Rules

~~In June~~The ~~2010~~CAIR, issued by the US EPA ~~finalized~~on ~~the~~March 10, ~~primary~~2005, ~~NAAQS~~mandated ~~for~~significant ~~SO2~~reductions byin ~~establishing~~NOx aand ~~new~~SO2 ~~one-hour~~emission ~~standard~~allowance atcaps aunder ~~level~~the ofCAA 75in ~~parts~~28 ~~per~~eastern ~~billion.~~states ~~The~~and ~~final standard~~the isDistrict ~~being~~of ~~taken~~Columbia. ~~into~~In ~~account~~2008, inthe ~~Homer~~U.S. ~~City's~~Court ~~environmental~~of ~~compliance~~Appeals ~~strategy.~~for ~~Revisions~~the toD.C. ~~SIPs~~Circuit toinitially ~~achieve~~vacated ~~compliance with~~ the ~~new~~CAIR, ~~standard~~but ~~are~~later ~~due~~remanded tothe beCAIR ~~submitted~~ to the US EPA byfor ~~February 2014,~~the ~~with~~issuance of a ~~compliance~~revised ~~deadline~~rule. ofThe ~~August~~CAIR ~~2017.~~remains in effect until a replacement regulation becomes effective.

On July 6, 2011, the US EPA adopted the Cross-State Air Pollution Rule (CSAPR). CSAPR establishes emissions reductions for annual sulfur dioxide (SO₂) emissions and annual and ozone season nitrogen oxide (NO_x) emissions in two phases: a first phase originally scheduled to be effective January 1, 2012 and, in most states subject to the program (including Pennsylvania), a second phase effective January 1, 2014 that requires additional reductions in annual SO₂ emissions.

In December 2011, the United States Court of Appeals for the District of Columbia granted a stay of CSAPR pending completion of its review of the rule's validity. Oral argument is scheduled for April 13, 2012, and a court decision is expected during the third quarter of 2012. The court directed the US EPA to continue administering the CAIR until its review is completed.

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

With the staying of CSAPR, CAIR SO₂ allowances have been provided and a sufficient supply is available for purchase to permit Homer City to continue operations consistent with 2011 levels. If the stay is lifted, the SO₂ allowances allocated to Homer City in CSAPR Phase I (25,797 tons in 2012 and 2013) would be significantly lower than the amount that would be required based on Homer City's historical emissions. It is unclear at this time whether Homer City would be able to acquire allowances in sufficient quantity to cover its normal operations during Phase I of CSAPR and whether it would be able to pass through the cost of such allowances in the marketplace. Accordingly, despite the stay, Homer City continues to evaluate alternative options, including reduced dispatch and fuel modifications, for complying with Phase I of CSAPR. The cost of allowances, together with possible operational impacts or reductions of output that may be required to comply with Phase I of CSAPR, could have a material effect on Homer City.

Homer City has begun work on designing SO₂ and particulate emissions control equipment for Units 1 and 2 and preparing the site for their installation. The estimated cost of installing SO₂ and particulate emissions control equipment for Units 1 and 2of the Homer City plant is expected to be approximately $700 million to $750 million. In order for this emissions control equipment to be operational by early 2014, which is the expected deadline under the currently applicable Federal environmental regulations, the construction process would need to begin in the second quarter of 2012.A contractor for engineering, procurement and construction services has been selected to install and construct the emissions control equipment for the Homer City plant. However, construction of these improvements is dependent upon funding from the owner-lessors or third parties. For further discussion of the Homer City lease and environmental improvements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Homer City Lease."

Revised NAAQS for SO₂

In June 2010, the US EPA finalized the primary NAAQS for SO₂ by establishing a new one-hour standard at a level of 75 parts per billion. In June 2011, Pennsylvania submitted its initial recommended attainment/nonattainment designations in connection with the standard. Pennsylvania recommended designating Indiana County, where the Homer City plant is located, as nonattainment for the SO₂NAAQS.

Pennsylvania

The Homer City plant was subject to the federal CAIR during ~~2010~~2011 and complied with both the NOx and SO2 requirements by using existing equipment and purchasing SO2 allowances. Pennsylvania adopted a state version of the CAIR, which the US EPA approved in December 2009. Homer City expects to comply with the Pennsylvania CAIR, which is substantially similar to the federal CAIR as it existed prior to the implementation of CSAPR, in the same manner in which it complies with the federal ~~CAIR~~standards.

~~Mercury/Hazardous Air Pollutants~~ 9

Clean Air Mercury Rule/Hazardous Air Pollutant Regulations

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

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

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Mercury/Hazardous Air Pollutants

Mercury and Air Toxics Standards Rule

In December 2011, the US EPA announced the Mercury and Air Toxics Standards (MATS) rule, limiting emissions of hazardous air pollutants (HAPs) from coal- and oil-fired electrical generating units. The rule was published in the Federal Register on February 16, 2012, and becomes effective on April 16, 2012. Homer City does not expect that these standards will require Homer City to make additional capital expenditures beyond those that would be required for compliance with CSAPR Phase II.

Pennsylvania

~~Until~~ Pennsylvania ~~passes~~currently ~~new~~has ~~legislation~~no ~~authorizing~~state-level ~~the adoption of~~ mercury regulations ~~or the US EPA finalizes a revised HAPs regulation that includes mercury limits, the Homer City plant will not be required to comply with Pennsylvania mercury limitations~~. The PADEP attempted to implement regulations that would have required coal-fired power plants to reduce mercury emissions by 80% by 2010 and 90% by 2015, as embodied in the Pennsylvania CAMR SIP. The rule did not allow the use of emissions trading to achieve compliance. The Pennsylvania Supreme Court upheld a decision by the Commonwealth Court declaring Pennsylvania's mercury rule unlawful, invalid and unenforceable, and enjoining the continued implementation and enforcement of the rule.

Ozone ~~and Particulates~~

National Ambient Air Quality Standards

In January 2010, the US EPA proposed a revision to the primary and secondary NAAQS for 8-hour ozone that it had finalized in 2008. The 8-hour ozone standard established in 2008 was 0.075 parts per million. In January 2010, the US EPA proposed establishing a primary 8-hour ozone NAAQS between 0.060 and 0.070 parts per million and a distinct secondary standard to protect sensitive vegetation and ecosystems. ~~The~~In USSeptember ~~EPA~~2011, isPresident ~~expected~~Obama toannounced ~~finalize~~that the proposed revision towas ~~the~~being withdrawn. The ozone NAAQS byestablished ~~July~~in ~~2011.~~2008 Itremains isin ~~expected~~place, ~~that~~but ~~once~~the implementation process must be completed before the 0.075 parts-per-million standard can be enforced. The US EPA ~~finalizes~~ ~~the~~has ~~revised~~indicated ~~ozone~~that ~~NAAQS,~~ it ~~will~~intends ~~propose~~to aissue ~~second~~initial ~~Transport~~area ~~Rule~~designations ~~that~~of ~~may~~attainment, ~~further~~nonattainment, ~~affect~~and ~~electric~~unclassifiable ~~power~~areas ~~generating~~across ~~units.~~the ~~The~~nation USin ~~EPA~~2012. isStates ~~also~~will ~~expected~~then be required to ~~propose~~develop ~~revised~~and ~~fine~~submit ~~particulate matter~~SIPs outlining how compliance with the 2008 NAAQS inwill ~~2011,~~be ~~which~~achieved. ~~could~~New ~~result~~primary inand ~~further~~secondary ~~emission~~ozone ~~reduction~~standards ~~requirements~~are expected in ~~future years~~2014.

~~Pennsylvania~~ In December 2011, the US EPA indicated that it intended to designate Indiana County, where the Homer City plant is located, as in attainment with the 2008 NAAQS.

In August 2007, the US EPA accepted the PADEP's maintenance plan, which indicated that the existing (and upcoming) regulations controlling emissions of volatile organic compounds and NOx will result in continued compliance with the 1997 8-hour ozone standard. However, in March 2009, the PADEP recommended to the US EPA that Indiana County (where the Homer City plant is located) be designated non-attainment under the US EPA's 2008 revised 8-hour ozone standard. Until the US EPA completes its revision to the 8-hour ozone standard, redesignations are finalized, and additional regulations are developed to achieve attainment with the revised standard, Homer City will not know what specific requirements it will have to meet. However, Homer City expects that its currently installed SCRs will be capable of meeting these new requirements.

Effective April 1, 2009, the PADEP changed its air opacity policy, eliminating many exemptions and reducing the allowable exceedance rate to 0.5% of a unit's operating time. Homer City undertook optimization of unit ramp rates and combustion parameters at the Homer City plant to reduce the deratings required to meet the opacity standards. Additional capital improvements may also be required. Homer City operated below the 0.5% exceedance rate during 2010.

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With respect to fine particulates, in November 2009, the US EPA indicated that Indiana County (where the Homer City plant is located) had not attained applicable standards. The PADEP must submit an updated SIP by November 13, 2012. Homer City cannot predict the potential effects on the Homer City plant of changes to the SIP.

Regional Haze

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

~~Beginning on~~Pennsylvania ~~December 31,~~submitted ~~2009,~~its ~~Pennsylvania~~proposed ~~became~~SIP ~~subject~~revisions to athe ~~two-year~~US EPA ~~deadline~~to ~~after~~address ~~which~~regional ahaze. ~~Federal~~Pennsylvania ~~Implementation~~proposed ~~Plan~~that ~~(which~~the ~~has~~existing ~~not~~particulate ~~yet~~matter ~~been~~emission ~~proposed)~~limits ~~will~~on ~~govern~~the ~~related emission~~Homer ~~issues.~~City ~~Pennsylvania~~plant, ~~submitted~~as ~~its~~well ~~proposed~~as ~~SIP~~the ~~revisions~~plant's toparticipation in the USCAIR, ~~EPA~~would insatisfy ~~December~~the ~~2010.~~BART ~~Pennsylvania~~requirement ~~proposes~~in that state. Because the ~~existing~~CAIR ~~particulate~~was ~~matter~~scheduled ~~emission limits~~to expire on December 31, 2011, the ~~Homer~~US ~~City~~EPA ~~plant~~proposed, on December 30, 2011, a limited disapproval of Pennsylvania's SIP, as well as a Federal Implementation Plan that would allow the Homer City plant's participation in ~~the~~CSAPR ~~CAIR,~~to ~~will~~ satisfy the BART requirement. It is unclear how the stay of CSAPR will affect the Pennsylvania SIP. Homer City believes that the control measures being undertaken to comply with other environmental regulations will likely satisfy the requirements of these SIPs.

New Source Review Requirements

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

Coal Combustion Wastes

US EPA regulations currently classify coal ash and other coal combustion residuals as solid wastes that are exempt from hazardous waste requirements. This classification enables beneficial uses of coal combustion residuals, such as for cement production and fill materials. In June 2010, the US EPA published proposed regulations relating to coal combustion residuals that could result in their reclassification. For further discussion see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 9. Environmental Developments."

In June 2010, the US EPA published proposed regulations relating to coal combustion residuals. Two different proposed approaches are under consideration. The first approach, under which the US EPA would list these residuals as special wastes subject to regulation as 10

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

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

Federal Legislative/Regulatory Developments

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

Regulation of GHG emissions pursuant to the PSD program could affect efforts to modify the Homer City plant in the future and could subject new capital projects to additional permitting or emissions control requirements that could delay such projects. In December 2010, the US EPA announced that it had entered into a settlement with various states and environmental groups to resolve a long-standing dispute over regulation of GHGs from electrical generating units pursuant to the New Source Performance Standards in the CAA and would propose performance standards for emissions from new and modified power plants and emissions guidelines for existing power plants. The specific requirements will not be known until the regulations are finalized. Since January 2010, the US EPA's Final Mandatory Greenhouse Gas Reporting Rule has required all sources within specified categories, including electric generation facilities, to monitor emissions and to submit annual reports to the US EPA by March 31 of each year. Homer City's 2011 GHG emissions were approximately 9 million metric tons.

Litigation Developments

Employees

At December 31, ~~2010~~2011, Homer City employed ~~265~~252 employees, approximately ~~192~~179 of whom are covered by a collective bargaining agreement governing wages, benefits and working conditions. This collective bargaining agreement expires on December 31, 2012.

ITEM 1A. RISK FACTORS

Liquidity Risks

Homer City is not expected to generate sufficient cash flow from operations necessary to meet its obligations.

At December 31, 2011, Homer City had cash and cash equivalents of $84 million. Homer City is obligated to pay $95 million, $84 million and $98 million of senior rent and $65 million, $65 million and $40 million of equity rent in each of 2012, 2013 and 2014, respectively. Current and forthcoming environmental requirements will require Homer City to install SO₂ and particulate emissions control equipment for Units 1 and 2 at a cost of approximately $700 million to $750 million.

The accompanying consolidated financial statements have been prepared assuming that Homer City will continue as a going concern. Financial statements prepared on this basis assume the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of these consolidated financial statements. The reduction in energy prices experienced in the fourth quarter of 2011 and into 2012 has adversely impacted cash flow, and Homer City is not expected to be able to generate sufficient cash flow from operations necessary to meet its obligations, including the obligations under the Homer City lease. As described further below, it is unlikely that Homer City will continue as a going concern throughout 2012.

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from operations to complete retrofits. Restrictions under the agreements entered into as part of Homer City's 2001 sale-leaseback transaction affect, and in some cases significantly limit or prohibit, Homer City's ability to incur indebtedness or make capital expenditures. Consequently, Homer City's ability to install environmental compliance equipment will be dependent on funding from the owner-lessors or third parties. Homer City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City's loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both. For further discussion, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Homer City Lease."

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

Homer City is indirectly owned and controlled by EME. The directors appointed by EME are able to make decisions affecting Homer City's capital structure which could include, subject to contractual obligations and applicable law, decisions on the ultimate disposition of the Homer City plant. The interests of EME may not in all cases be aligned with the interests of the holders of Homer City's debt. As Homer City addresses its financial difficulties or becomes unable to pay its debts as they mature, the interests of EME might conflict with the interests of holders of Homer City's debt.

Regulatory and Environmental Risks

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

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

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

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

16Homer City is required to surrender emission allowances equal to emissions of specific substances in connection with the operation of its facilities. This may require the purchase of allowances, which are subject to price volatility and which could be unavailable.

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retire or suspend operations at its facilities, or restrict or modify the operations of its facilities, and its business, results of operations and financial condition could be adversely affected.

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

The controls imposed on the Homer City plant as a result of environmental regulations may require material expenditures or unit shutdowns.

Capital expenditures relating to required environmental controls for the Homer City plant are expected to be significant and could make some units uneconomic to maintain or operate. Homer City may ultimately decide to shut down units rather than

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making improvements. Unit shutdowns could have an adverse effect on Homer City's business, results of operation and financial condition. For more information about Homer City's plans for environmental compliance, see "Item 1. Business—Environmental Matters and Regulations—Air Quality—Nitrogen Oxide and Sulfur Dioxide," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview—Homer City Lease" and "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 9. Environmental Developments."

Homer City is subject to extensive energy industry regulation.

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

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

The generation and transmission of electricity are dangerous and involve inherent risks of injury to employees and the general public.

Electricity is dangerous for employees and the general public should they come in contact with power lines or electrical equipment. Injuries caused by such contact can subject Homer City to liability that, despite the existence of insurance coverage, can be significant. Such liabilities could be significant but are very difficult to predict. The range of possible liabilities includes amounts that could adversely affect Homer City's liquidity and results of operations.

Market Risks

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

The Homer City plant ~~operates~~does ~~without~~not have long-term power purchase agreements. Because the output of the Homer City plant is not committed to be sold under long-term contracts, the plant is subject to market forces which determine the amount and price of energy, capacity and ancillary services sold from the plant. Unlike most other commodities, electric power can only be stored on a very limited basis and generally must be produced when it is to be used. As a result, the wholesale power markets are subject to significant and unpredictable price fluctuations over relatively short periods of time. Due to the volume of sales into PJM from the Homer City plant, Homer City has concentrated exposure to market conditions and fluctuations in PJM. Prices for power and capacity have declined significantly due largely to lower natural gas prices and have been affected in recent years by increased use of demand response technology, changes in final demand for power during the economic slowdown, and technological developments that have increased access to natural gas shale reserves, resulting in substantial declines in market prices for natural gas which supplies power plants that compete with the Homer City plant.

17Market prices of energy, capacity and ancillary services sold from the Homer City plant are influenced by multiple factors beyond Homer City's control, and thus there is considerable uncertainty whether or when current depressed prices will recover. Homer City's hedging activities may not cover the entire exposure of its assets or positions to market price volatility, and the level of hedging, which is currently low, will vary over time. The effectiveness of Homer City's hedging activities may depend on the amount of credit available for EMMT to post collateral, either in support of performance guarantees or as cash margin, and liquidity requirements may be greater than Homer City anticipates or will be able to meet. Homer City cannot provide assurance that its hedging strategies will successfully mitigate market risks. For more detail with respect to these matters, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Commodity Price Risk."

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fluctuations over relatively short periods of time. Due to the volume of sales into PJM from the Homer City plant, Homer City has concentrated exposure to market conditions and fluctuations in PJM. Prices for power have declined significantly in recent years as a result of increased use of demand response technology, changes in final demand for power during the economic slowdown, and technological developments that have permitted the exploitation of natural gas shale reserves in a way that has resulted in substantial declines in market prices for natural gas which supplies power plants that compete with the Homer City plant.

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

Homer City's financial results can be affected by changes in fuel prices, fuel transportation cost and interruptions in fuel supply.

In addition to volatile power prices, Homer City's business is subject to changes in fuel costs and fuel transportation costs. Fuel costs are volatile and can be influenced by many factors outside Homer City's control. The price at which Homer City can sell its energy may not rise or fall at the same rate as a corresponding rise or fall in fuel costs. Operations at the Homer City plant are dependent upon the availability and affordability of coal which is available only from a limited number of suppliers. All of these factors may have an adverse effect on Homer City's financial condition and results of operations. For additional information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures—Coal Price Risk."

Competition could adversely affect Homer City's business.

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

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Liquidity Risks

Homer City has significant cash requirements and limited sources of capital.

At December 31, 2010, Homer City had cash and cash equivalents of $132 million. Compliance with current and forthcoming environmental requirements will add to Homer City's near-term liquidity needs. If cash flow and other means for assuring liquidity are unavailable or insufficient, Homer City may be unable to complete environmental improvements at its coal plants (which in turn could lead to unit shutdowns) or its ability to provide credit support for contracts for power and fuel related to merchant activities may be severely limited. The terms of debt instruments binding on EME and its subsidiaries, including Homer City, and the terms of the participation agreements and facility leases may restrict Homer City's ability to sell assets, seek additional capital, or restructure or refinance debt to satisfy liquidity needs. If Homer City is unable to meet its obligations, Homer City will have limited ability to obtain additional capital, absent a consent or waiver, unless its partners or EME provide funding, which they are under no legal obligation to do. For further discussion, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

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

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

Operating Risks

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

The operation of power generation facilities is a potentially dangerous activity that involves many operating risks, including transmission disruptions and constraints, equipment failures or shortages, and system limitations, degradation and interruption. Homer City's operations are also subject to risks of human performance and workforce capabilities. There can be no assurance that Homer City's insurance will be sufficient or effective under all circumstances or protect against all hazards to which Homer City may be subject or that the insurance proceeds received for any loss of the facilities or any damage to the facilities would be sufficient to permit Homer City to make any payments of rent under the facility leases. Homer City has older facilities that are subject to higher risks of failure or outage.

Due to the current market environment, the minimum insurance coverage specified under the Homer City sale-leaseback documents is not commercially available at reasonable prices. Homer City has obtained a waiver under the participation agreements that permits it to maintain its current insurance coverage through June 1, ~~2011~~2012. Failure to maintain insurance

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pursuant to the sale-leaseback documents, absent a waiver, could result in an event of default under the documents, which could have a material adverse effect on Homer City.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Inapplicable.

ITEM 2. PROPERTIES

Properties of Homer City are described above under "Item 1. Business—Overview of Facilities Under Lease.," and "—Water Supply and Other Support Facilities."

ITEM 3. LEGAL PROCEEDINGS

For a discussion of the material legal proceedings specifically affecting Homer City, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies."

~~ITEM 4. RESERVED~~ 14

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PART II


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

All the partners' equity of ~~EME~~ Homer City is, as of the date hereof, owned by Mission Energy Westside Inc. and Chestnut Ridge Energy Company. There is no market for ~~EME~~ Homer City's partnership interests.

Dividends will be paid when declared by ~~EME~~ Homer City's general partner. No cash dividends were paid by ~~EME~~ Homer City during ~~2010~~2011, ~~2009~~2010 or ~~2008~~2009.

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ITEM 6. SELECTED FINANCIAL DATA

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

INCOME STATEMENT DATA (in millions)



INCOME STATEMENT DATA
(in millions)
	Years Ended December 31,
	2011			2010			2009			2008			2007
Operating revenues from marketing affiliate	$	527		$	636		$	663		$	717		$	764
Operating expenses¹	973			471			424			464			491
Operating income (loss)	(446		)	165			239			253			273
Interest and other income	—			—			—			5			8
Interest expense	(122		)	(127		)	(128		)	(124		)	(139		)
Income (loss) before income taxes	(568		)	38			111			134			142
Provision for income taxes²	118			11			44			49			54
Net income (loss)	$	(686	)	$	27		$	67		$	85		$	88

	Years Ended December 31,
	2010			2009			2008			2007			2006
Operating revenues from marketing affiliate	$	636		$	663		$	717		$	764		$	642
Operating expenses		471			424			464			491			452
Operating income		165			239			253			273			190
Interest and other income		—			—			5			8			20
Interest expense		(127	)		(128	)		(124	)		(139	)		(145	)
Income before income taxes		38			111			134			142			65
Provision for income taxes		11			44			49			54			26
Net income	$	27		$	67		$	85		$	88		$	39


¹	Operating expenses in 2011 included asset impairment charges of $478 million. For additional information, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 12. Asset Impairments and Other Charges."

~~BALANCE~~2 ~~SHEET~~Provision ~~DATA (~~for income taxes in ~~millions)~~2011 included the impact of a $344 million valuation allowance on its deferred tax asset position. For additional information, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Income Taxes."

		As of December 31,
BALANCE SHEET DATA
		2010		2009		2008			2007			2006
(in millions)
Current assets		$	290	$	342	$	267		$	254		$	347
	As of December 31,
Total assets			2,079		2,160		2,186			2,135			2,264
	2011			2010			2009				2008			2007
Current liabilities			189		217		309			309			310
Current assets	$	213		$	290		$	342			$	267		$	254
Long-term debt to affiliates			479		459		358			394			512
Total assets	1,346			2,079			2,160				2,186			2,135
Lease financing, net of current portion			1,006		1,084		1,150			1,207			1,260
Current liabilities	225			189			217				309			309
Other long-term obligations			59		43		44			70			45
Long-term debt to affiliate	490			479			459				358			394
Partners' equity			346		357		325			155			137
Lease financing, net of current portion	922			1,006			1,084				1,150			1,207
Other long-term obligations	63			59			43				44			70
Partners' equity (deficit)	(354		)	346			357				325			155

CASH FLOW DATA (in millions)



CASH FLOW DATA
(in millions)
	Years Ended December 31,
	2011			2010			2009			2008			2007
Cash provided by operating activities	$	34		$	106		$	151		$	50		$	152
Cash used in financing activities	(68		)	(78		)	(74		)	(89		)	(122		)
Cash used in investing activities	(14		)	(17		)	(15		)	(44		)	(2		)

	Years Ended December 31,
	2010			2009			2008			2007			2006
Cash provided by operating activities	$	106		$	151		$	50		$	152		$	89
Cash used in financing activities		(78	)		(74	)		(89	)		(122	)		(34	)
Cash used in investing activities		(17	)		(15	)		(44	)		(2	)		(1	)

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

MANAGEMENT'S OVERVIEW

Homer City is a Pennsylvania limited partnership engaged in the business of operating and selling energy and capacity from its three coal-fired electric generating units and related facilities located near Pittsburgh, Pennsylvania with an aggregate capacity of 1,884 MW. ~~The profitability of~~ Homer City's isoperating ~~expected~~results ~~to decline~~were significantly lower in 2011 compared to 2010 as a result of lower generation and lower realized energy and capacity prices. ~~(largely~~Homer ~~driven~~City byis ~~the~~engaged ~~expiration~~in ofdiscussions ~~hedge~~with ~~contracts)~~the ~~and~~owner-lessors ~~higher~~regarding ~~fuel~~funding ~~costs.~~of ~~For~~retrofit ~~discussion~~expenditures offor ~~energy~~the ~~and~~Homer ~~fuel~~City ~~price~~plant ~~risks~~that, ~~see~~ ~~"Market~~if ~~Risk~~successful ~~Exposures—Commodity~~in ~~Price~~providing ~~Risk"~~funding, ~~and~~will ~~"Item 1A.~~likely ~~Risk~~result ~~Factors—Market~~in ~~Risks."~~Homer AsCity's aloss ~~result~~ of ~~the~~substantially ~~projected~~all ~~decrease~~beneficial economic interest in ~~profitability~~and material control of the Homer City plant,. ~~Homer~~In ~~City~~addition, ~~may~~as ~~incur~~discussed ~~net~~below, ~~losses~~Homer ~~during~~City ~~2011~~recorded ~~and~~significant inimpairment ~~subsequent~~charges ~~years~~during ~~unless~~the ~~energy~~fourth ~~prices~~quarter ~~recover~~of ~~or its costs decline~~2011.

Highlights of Operating Results

Homer City's had a net ~~income~~loss ~~decreased~~of $40686 million in ~~2010~~2011 as compared to ~~2009.~~net ~~The~~income ~~2010~~of ~~decrease~~$27 million in ~~earnings~~2010. ~~was~~The ~~primarily~~2011 ~~attributable~~results ~~to unrealized~~included ~~losses~~a in$295 million ~~2010~~after-tax ~~compared~~($478 million topre-tax) ~~unrealized~~charge ~~gains~~resulting infrom ~~2009~~the ~~related~~impairment toof ~~hedge~~the ~~contracts~~property, ~~higher~~plant ~~coal costs, lower generation~~ and ~~higher~~equipment ~~plant operations costs~~ related to ~~scheduled~~the ~~plant outages, partially offset by an increase in capacity revenues. The~~ Homer City plant ~~experienced~~and ~~increased~~the ~~forced~~impact ~~outages~~of ina ~~2010~~$344 ~~compared~~million tovaluation ~~2009~~allowance ~~due~~on toits ~~deratings~~deferred totax ~~comply~~asset ~~with~~position ~~opacity restrictions and unscheduled outages. Plant maintenance and overhaul related expenses were higher in 2010~~ due to the ~~deferral~~uncertainty of ~~plant~~Homer ~~outages~~City's inability ~~2009.~~to ~~Coal~~realize ~~costs~~such ~~increased~~tax ~~due~~benefits. toThe ~~higher~~2011 ~~coal~~decrease ~~prices~~in ~~and~~earnings, ~~changes~~excluding in the ~~mix~~ ofimpairment ~~ready—to-burn~~charge ~~coal~~ and ~~raw coal consumed. Results for 2010 included~~ the ~~benefit~~deferred oftax ~~power~~valuation ~~hedge~~allowance,was ~~contracts~~due ~~entered~~to ~~into~~lower ~~during~~generation, ~~earlier~~lower ~~periods~~average atrealized ~~higher~~energy ~~prices~~and ~~than current~~capacity ~~energy~~ prices., ~~For~~and ~~additional~~higher ~~information~~average ~~about~~fuel ~~market~~costs ~~conditions,~~per ~~see "Market Risk Exposures~~MWh."

~~Homer City's~~For ~~net~~further ~~income~~discussion ~~decreased~~of ~~$18 million~~Homer inCity's ~~2009~~impairment ascharge, ~~compared~~see to"Critical ~~2008.~~Accounting ~~The~~Estimates ~~2009~~and ~~decrease~~Policies—Impairment inof ~~earnings~~Long-Lived ~~was~~Assets" ~~primarily~~and ~~attributable~~"Item to8. aEME ~~13%~~Homer ~~decline~~City inGeneration ~~average~~L.P. ~~realized~~Notes ~~energy~~to ~~prices~~Financial ~~resulting from~~Statements—Note 12. ~~lower~~Asset ~~wholesale~~Impairments ~~energy prices~~ and anOther ~~increase~~Charges." inFor ~~interest~~further ~~expense~~discussion ~~due~~of tothe ~~higher~~deferred ~~debt~~tax ~~balances~~valuation onallowance, ~~the~~see ~~subordinated~~"Item ~~revolving loan~~8. ~~These~~EME ~~decreases~~Homer ~~were~~City ~~partially~~Generation ~~offset~~L.P. byNotes ~~higher capacity revenues, lower plant operations expense due in part~~ to ~~the~~Financial ~~deferral~~Statements—Note 6. ofIncome ~~plant overhaul activities and lower coal costs~~Taxes. "

Homer City's ~~Environmental~~net ~~Developments~~ income decreased $40 million in 2010 compared to 2009. The 2010 decrease in earnings was primarily due to unrealized losses in 2010 compared to unrealized gains in 2009, higher coal costs, lower generation and higher plant maintenance costs in 2010, partially offset by higher capacity revenues. Energy related unrealized losses in 2010 were $20 million compared to unrealized gains of $15 million in 2009. Results in 2010 included the benefit of power hedge contracts entered into during earlier periods at higher prices than current energy prices.

Substantial ~~Environmental~~Doubt ~~Issues~~that ~~and~~Homer ~~Capital~~City ~~Resource~~will ~~Limitations~~ Continue as a Going Concern

Homer City's ~~may~~accompanying befinancial ~~required~~statements tohave ~~install~~been ~~additional~~prepared ~~environmental~~assuming ~~equipment~~that onit ~~Units~~will 1continue ~~and~~as 2a togoing ~~comply~~concern, ~~with~~which ~~environmental~~contemplates ~~regulations~~realization ~~under~~of ~~the Transport~~assets ~~Rule.~~and ~~Homer~~the ~~City~~satisfaction ~~projects~~of ~~that~~liabilities ifin ~~SO2~~the ~~reduction~~normal ~~technology~~course ~~becomes~~of ~~required,~~business itfor ~~may~~the ~~need~~12-month toperiod ~~make~~following ~~capital~~the ~~commitments~~date ~~for~~of ~~such~~these ~~equipment~~financial ~~several~~statements. ~~years~~The reduction in ~~advance~~energy ofprices experienced in the ~~effective date~~fourth quarter of ~~such~~2011 ~~requirements.~~and into 2012 has adversely impacted cash flow, and Homer City ~~continues~~is tonot ~~review~~expected ~~technologies~~to ~~available~~be able to ~~reduce~~generate ~~SO2~~sufficient ~~and~~cash ~~mercury~~flow ~~emissions~~from ~~and~~operations necessary to ~~monitor~~meet ~~developments~~its ~~related~~obligations, toincluding ~~hazardous~~the ~~pollutants~~obligations ~~and~~under ~~other environmental~~the ~~regulations~~Homer City lease. ~~The~~As ~~timing~~described further below under Homer City Lease, ~~selection~~it ofis ~~technology~~unlikely ~~and~~that ~~required~~Homer ~~capital~~City ~~costs~~will ~~remain~~continue ~~uncertain.~~as ~~The~~a going concern throughout 2012.

23Homer City Lease

Homer City and its indirect parent, EME, engaged a financial advisor and conducted a bidding process to obtain capital funding from third parties during the second half of 2011 to partially finance the installation of the environmental improvements at the Homer City plant. During the fourth quarter of 2011, such efforts failed to obtain sufficient interest from market participants necessary to fund the capital needed to make such improvements under the current lease arrangement. Homer City does not currently have sufficient capital and does not expect to generate sufficient funds from operations to complete retrofits. Restrictions under the agreements entered into as part of Homer City's 2001 sale-leaseback transaction affect, and in some cases significantly limit or prohibit, Homer City's ability to incur indebtedness or make capital expenditures. Consequently, Homer City's ability to install environmental compliance equipment will be dependent on funding from the owner-lessors or third parties. Homer City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City's loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both.

Homer City is currently engaged in discussions with the owner-lessors through General Electric Capital Corporation (GECC), one of the owner participants, regarding the funding of capital improvements at the Homer City plant. Under the existing

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~~installation of~~Homer ~~environmental~~City ~~compliance~~sale-leaseback ~~equipment~~documents, ~~will~~Homer City would be ~~dependent~~obligated onto ~~lessor~~reimburse ~~decisions~~GECC ~~regarding~~for ~~the~~any ~~funding~~amount ofGECC ultimately agrees to fund for these ~~expenditures~~capital improvements. ~~Restrictions~~If ~~under~~these ~~the~~discussions ~~agreements~~are ~~entered~~successful, ~~into~~it asis ~~part~~expected that an affiliate of ~~Homer City's~~GECC ~~2001~~will ~~sale-leaseback~~obtain ~~transaction~~the ~~could~~economic ~~affect,~~benefit and inmajority ~~some~~ownership ~~cases~~of ~~significantly~~all ~~limit~~the oroperating ~~prohibit,~~assets of Homer City's. ~~ability~~The totransfer ~~incur~~of ~~indebtedness~~ownership orwould ~~make~~be ~~capital~~effected ~~expenditures~~on a consensual basis. ~~EME~~In ~~has~~addition, ~~no legal~~GECC ~~obligation~~is tocurrently ~~provide~~engaged ~~funding.~~in ~~Accordingly,~~discussions ~~final~~with ~~decisions~~certain onof ~~whether~~the toholders ~~install~~of ~~controls,~~the tosecured ~~install~~lease ~~particular~~obligation ~~kinds~~bonds regarding amendments to the terms of ~~controls,~~the ~~and~~8.137% toSenior ~~actually~~Secured ~~expend~~Bonds ~~capital~~due ~~have~~2019 ~~not~~and ~~been~~the ~~made~~8.734% Senior Secured Bonds due 2026, each issued by Homer City Funding LLC.

There is USno ~~EPA~~assurance ~~Developments~~ that an agreement will be reached with the owner-lessors or the existing secured lease obligation bondholders on funding the capital improvements. Homer City is not expected to meet the covenant requirements of its sale-leaseback documents relating to the payment of equity rent at April 1, 2012 and Homer City will be unable to make the required equity rent payment. There is no assurance that subsequent rent payments will be made.Under the sale-leaseback documents, rent payments are comprised of two components, senior rent and equity rent. Senior rent is used exclusively for debt service to secured lease obligation bondholders, while equity rent is paid to the owner-lessors. In order to pay equity rent, among other requirements, Homer City must meet historical and projected senior rent service coverage ratios of 1.7 to 1 (subject to reduction to 1.3 to 1 under certain circumstances). A failure to pay equity rent does not entitle the owner-lessors to foreclose upon Homer City's leasehold interest, but it does result in the suspension of Homer City's ability to make permitted distributions. Moreover, Homer City would be permanently restricted in its ability to make permitted distributions if a failure to pay equity rent when due was not cured within nine months, or even if cured, occurred more than one additional time during the term of the lease. Homer City is not subject to any minimum historical and projected senior rent service coverage ratios except as conditions to distributions and equity rent payments. Also, failure by Homer City to pay equity rent when due in April 2012 could trigger termination of the $48 million senior rent reserve letter of credit. Homer City would then be required to fund the senior rent reserve, and failure to do so could entitle counterparties to seek available remedies under the sale-leaseback documents, including termination or foreclosure upon the leasehold interest. As a result of the expectation that Homer City is likely to lose substantially all beneficial economic interest in and material control of the Homer City plant, Homer City recorded an impairment charge of $478 million for the fourth quarter of 2011. For further discussion, see "Critical Accounting Estimates and Policies—Impairment of Long-Lived Assets" and "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 12. Asset Impairments and Other Charges."

~~For~~As ~~information~~a ~~regarding~~result ~~recent~~of ~~developments~~the financial outlook of Homer City, EMMT has ceased to enter into hedging activities related to future power sales, but continues to enter into spot market energy transactions on behalf of Homer City pursuant to an intercompany agreement. Those transactions are generally back-to-back transactions in ~~environmental~~which ~~regulations~~EMMT enters into a transaction with a third party as a principal and then enters into an equivalent transaction with Homer City. In the case of capacity, ~~see~~EMMT ~~"Item 1~~has sold Homer City capacity in the annual PJM base residual auctions through May 2015. ~~Business—Environmental~~If ~~Matters~~Homer City were to default on its obligations to supply capacity, then Homer City would be liable to EMMT, and ~~Regulations~~ potentially also to PJM, to supply that capacity, and for refunds of capacity payments received and penalties (equal to the greater of 20% of the capacity payments or $20 per MW-day) under the PJM tariffs if it failed to do so."

24Environmental Regulation Developments

For discussion of environmental regulation developments, see “Item 1. Business—Environmental Matters and Regulations" and "Item 8 EME Homer City Generation L.P. Notes to Financial Statements—Note 9. Environmental Developments."

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RESULTS OF OPERATIONS

Summary

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

	Years Ended December 31,		~~Years Ended December 31,~~
			2010			2009		2008
	2011				2010			2009
Operating Revenues (in millions)			$	636		$	663	$	717
Operating Revenues1 (in millions)	$	527			$	636		$	663
Statistics
Generation (in GWh)	~~Generation (in GWh)~~9,428			~~11,028~~	11,028		~~11,446~~	11,446	~~11,334~~
Equivalent availability	~~Equivalent availability~~75.8		%	~~79.7%~~	79.7		~~84.7~~%	84.7	~~80.7%~~	%
Capacity factor	~~Capacity factor~~57.1		%	~~66.8%~~	66.8		~~69.2~~%	69.2	~~68.3%~~	%
Load factor	~~Load factor~~75.4		%	~~83.8%~~	83.8		~~81.7~~%	81.7	~~84.6%~~	%
Forced outage rate	~~Forced outage rate~~13.8		%	~~10.8%~~	10.8		~~9.4~~%	9.4	~~9.8%~~	%
Average realized energy price/MWh	~~Average realized energy price/MWh~~$	46.38	$	~~49.04~~	$	$49.04	~~48.85~~	$	5648.2485
Capacity revenues only (in millions)	~~Capacity revenues only (in millions)~~$	84	$	~~114~~	$	$114	89	$	4689
Average fuel costs/MWh	~~Average fuel costs/MWh~~$	28.58	$	~~25.26~~	$	$25.26	~~21.89~~	$	2321.3589

1 Effective ~~Statistical~~April ~~Definitions~~1, ~~and~~2011, ~~Reconciliation~~EMMT allocated to Homer City the benefit of ~~Non-GAAP~~an ~~Disclosures~~ arrangement that allows EMMT to deliver a portion of Homer City's power into the NYISO. To the extent this arrangement is not utilized, Homer City's power is delivered into PJM.

25Reconciliation of Non-GAAP Disclosures and Statistical Definitions

~~Table~~Average ofRealized ~~Contents~~Energy Price

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

	Years Ended December 31,		~~Years Ended December 31,~~
(in millions)	2011		~~2010~~		2010	~~2009~~			~~2008~~2009
Operating revenues	$	527	$	~~636~~	$	$636	~~663~~		$	~~717~~663
Less:
Unrealized (gains) losses	~~Unrealized~~ (~~gains) losses~~5		)	20	20		~~(15~~	)	(15	~~(21~~	)
Capacity and other revenues	~~Capacity and other revenues~~(85		)	~~(115~~	)(115		~~(89~~)	)	(89	~~(59~~	)
Realized revenues	$	437	$	~~541~~	$	$541	~~559~~		$	~~637~~559
Generation (in GWh)	9,428			~~11,028~~	11,028		~~11,446~~		11,446	~~11,334~~
Average realized energy price/MWh	$	46.38	$	~~49.04~~	$	$49.04	~~48.85~~		$	5648.2485

OnThe ~~February 10,~~average ~~2011,~~realized aenergy ~~steam~~price ~~pipe~~is ~~ruptured~~presented atas ~~Unit~~an 1aid ofin understanding the ~~Homer~~operating ~~City~~results ~~plant,~~of ~~taking~~ the ~~unit off line. As a precautionary measure,~~ Homer City ~~has~~plant. ~~taken Unit~~Average 2realized ~~(which~~energy ~~has~~price ~~the~~is ~~same~~a ~~design)~~non-GAAP ~~off~~performance ~~line~~measure insince ~~order~~such tostatistical ~~further~~measure ~~evaluate~~excludes ~~the~~unrealized ~~equipment~~gains ~~and~~or ~~perform~~losses ~~any~~recorded ~~necessary~~as ~~corrective~~operating ~~work~~revenues. ~~Work~~Management ~~has~~believes ~~commenced~~that ~~to inspect~~ the ~~piping~~average ~~that~~realized ~~failed~~energy ~~and~~price ~~planning activities~~is tomeaningful ~~install~~for ~~replacement~~investors ~~piping~~as onthis ~~both~~information ~~units~~reflects ~~are~~the ~~underway.~~impact ~~Homer~~of ~~City~~hedge iscontracts inat the ~~process~~time of ~~modifying~~actual ~~its~~generation ~~scheduled~~in ~~maintenance~~period-over-period ~~plans~~comparisons toor ~~incorporate~~as ~~this~~compared ~~outage. It is expected that both units will return~~ to ~~service~~real-time ~~during~~market ~~the second quarter of 2011~~prices.

Statistical ~~Operating Revenues~~ Definitions

~~Operating~~• ~~revenues~~Equivalent ~~decreased~~availability ~~$27 million~~reflects inthe ~~2010~~impact ~~compared~~of tothe ~~2009,~~unit's ~~and~~inability ~~$54 million in 2009 compared~~ to ~~2008.~~achieve ~~The~~full ~~2010~~load, ~~decrease~~referred ~~was primarily attributable~~ to ~~unrealized~~as ~~losses~~derating, inas ~~2010~~well ~~compared~~as tooutages ~~unrealized~~which ~~gains~~result in ~~2009~~a ~~related~~complete tounit ~~hedge contracts and lower energy revenues due to lower generation, partially offset by higher capacity revenues~~shutdown. The ~~Homer~~coal ~~City~~plants ~~plant~~are ~~experienced~~not ~~increased~~available ~~forced~~during ~~outages~~periods inof ~~2010,~~planned ~~as compared to 2009 due to deratings to comply with opacity restrictions~~ and ~~unscheduled~~unplanned ~~outages~~maintenance. The ~~2009 decrease~~equivalent inavailability ~~operating~~factor ~~revenues~~is defined as ~~compared~~the tonumber ~~2008~~of ~~was~~MWh ~~primarily~~the ~~attributable~~coal toplants ~~lower~~are ~~energy~~available ~~revenues due~~ to ~~lower average realized energy prices, partially offset by an increase in capacity revenues and slightly higher generation.~~

Included in operating revenues were unrealized gains (losses) from hedging activities of $(20) million, $15 million and $21 million for 2010, 2009 and 2008, 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. The ineffective portion of hedge contracts was attributable to changes in the difference between energy prices at the PJM West Hub (the settlement point under forward contracts) and the energy prices at the Homer City busbar (the delivery point where power generated by the Homer City plant is delivered into the transmission system). 19

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generate electricity ~~Operating~~divided ~~Expenses~~ by the product of the capacity of the coal plants (in MW) and the number of hours in the period.

~~Operating~~• ~~expenses~~The ~~increased~~capacity ~~$47 million~~factor inindicates ~~2010~~how much power a unit generated compared to ~~2009~~the ~~and~~maximum ~~decreased~~amount ~~$40 million~~of inpower ~~2009~~that ~~compared~~could be generated according to ~~2008~~its rating. ~~Operating expenses~~It ~~consist~~is defined as the actual number of ~~fuel,~~MWh ~~plant~~generated ~~operations,~~by ~~depreciation~~the ~~and~~coal ~~amortization,~~plants ~~loss~~divided onby ~~disposal~~the product of ~~assets~~the ~~and~~capacity ~~administrative~~of ~~and~~the ~~general.~~coal ~~The~~plants ~~primary~~(in ~~changes~~MW) inand the ~~components~~number of ~~operating~~hours ~~expenses~~in ~~are discussed~~the ~~below~~period.

~~Fuel expenses~~• ~~increased~~The ~~$28 million~~load infactor ~~2010~~indicates ~~compared~~how tomuch ~~2009~~power ~~and~~a ~~decreased~~unit ~~$19 million~~generated ~~in 2009~~ compared to ~~2008. The 2010 increase in fuel costs was attributable to higher coal costs, partially offset by lower emission allowance costs. Coal costs increased due to higher coal prices and changes in~~ the ~~mix~~maximum amount of ~~ready-to-burn~~power ~~coal~~that ~~and~~a ~~raw~~unit ~~coal consumed. The 2009 decrease~~ was ~~attributable~~available to ~~lower~~generate ~~coal costs and lower emission allowance costs~~electricity. ~~The~~It ~~net~~is ~~cost~~determined ofby ~~emission~~dividing ~~allowances,~~capacity ~~primarily~~factor ~~SO2~~by included in fuel expenses was $7 million, $16 million and $20 million in 2010, 2009 and 2008, respectively. Emission costs decreased in 2010 and in 2009 due to lower market prices. For more information regarding the ~~price~~equivalent ~~of SO2~~availability ~~allowances, see "Market Risk Exposures—Commodity Price Risk—Emission Allowances Price Risk~~factor."

~~Plant operations~~• ~~expenses increased $13 million in 2010 compared to 2009 and decreased $24 million in 2009 compared to 2008.~~ The ~~2010~~forced ~~increase~~outage ~~was~~rate ~~attributable~~refers to ~~higher~~forced ~~scheduled~~outages ~~plant maintenance~~ and ~~overhaul~~deratings ~~related~~excluding ~~expenses~~events inoutside ~~the first half~~ of ~~the~~management's ~~year~~control ~~due~~as todefined ~~the~~by ~~deferral~~NERC. ofExamples ~~plant~~include ~~outages~~floods, intornado ~~2009.~~damage ~~Cost containment efforts~~ and ~~the~~transmission ~~deferral of plant overhaul activities contributed to the decrease in 2009 costs~~outages.

~~Depreciation and~~Operating ~~amortization~~Income ~~were $66 million, $63 million and $64 million during 2010, 2009 and 2008, respectively. Depreciation and amortization primarily includes Homer City's leasehold interest.~~ (Loss)

Operating loss from the Homer City plant was $446 million in 2011 compared to operating income of $165 million in 2010. Operating income decreased $74 million in 2010 compared to 2009. The 2011 decrease in operating income, excluding the $478 million impairment charge previously discussed in "Management's Overview—Highlights of Operating Results," was primarily attributable to lower energy revenues, driven by lower generation and average realized energy prices, lower capacity revenues, and higher plant maintenance costs from outages at Units 1 and 2, partially offset by unrealized gains in 2011 compared to unrealized losses in 2010 related to hedge contracts and lower fuel costs. The decline in fuel costs was primarily due to lower generation, mostly offset by higher coal costs. Coal costs increased due to higher coal prices. The Homer City plant continued to have a high forced outage rate during 2011 partially as a result of the steam pipe rupture on Unit 1 and the related precautionary maintenance on Unit 2.

The 2010 decrease in operating income from 2009 was primarily attributable to unrealized losses in 2010 compared to unrealized gains in 2009 related to hedge contracts, higher coal costs, lower generation, and higher plant operations costs related to scheduled plant outages, partially offset by an increase in capacity revenues. The Homer City plant experienced increased forced outages in 2010 compared to 2009 due to deratings to comply with opacity restrictions and unscheduled outages. Plant maintenance and overhaul related expenses were higher in 2010 due to the deferral of plant outages in 2009. Coal costs increased due to higher coal prices and changes in the mix of ready-to-burn coal and raw coal consumed.

Included in operating revenues were unrealized gains (losses) from hedging activities of $5 million, $(20) million and $15 million for 2011, 2010 and 2009, respectively. Unrealized gains (losses) were primarily attributable to the ineffective portion of hedge contracts at the Homer City plant attributable to changes in the difference between energy prices at the PJM West Hub (the settlement point under forward contracts) and the energy prices at the Homer City busbar (the delivery point where power generated by the Homer City plant is delivered into the transmission system). Included in fuel costs were $9 million, $7 million and $16 million in 2011, 2010 and 2009, respectively, related to the net cost of emission allowances.

For additional discussion, see "Management's Overview—Homer City Lease."

Other Income (Expense)

Interest ~~and~~expense ~~other income~~ was ~~less than~~ $1122 million, ~~less than~~ $1127 million and $5128 million during ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, respectively. Interest ~~and~~expense ~~other~~primarily ~~income typically~~ relates to ~~interest~~the ~~earned~~lease onfinancing ~~cash~~of ~~and~~the ~~cash~~Homer ~~equivalents~~City plant. Interest ~~income~~expense ~~declined~~also ~~primarily~~included ~~due~~$40 million, to$38 million ~~lower~~and ~~interest~~$36 million ~~rates~~during in2011, 2010 and 2009, ~~compared~~respectively, related to ~~2008.~~ InHomer ~~2008,~~City's subordinated revolving loan agreement with Edison Mission Finance Co. Homer City ~~recorded~~had ~~other~~higher ~~income~~long-term ofdebt ~~$3 million~~balances ~~related~~during 2011 as compared to ~~the~~2010 ~~settlement~~and of2009 aon ~~legal~~the ~~dispute.~~subordinated revolving loan agreement.

~~Interest expense~~Income was $127 million, $128 million and $124 million during 2010, 2009 and 2008, respectively. Interest expense primarily relates to the lease financing of the Homer City plant. Interest expense also included $38 million, $36 million and $29 million during 2010, 2009 and 2008, respectively, related to Homer City's subordinated revolving loan agreement with Edison Mission Finance Co. Homer City had higher long-term debt balances during 2010 as compared to 2009 and 2008 on the subordinated revolving loan agreement. Taxes

Homer City's ~~Provision~~effective tax rates were 29% and 40% in 2010 and 2009, respectively. The effective tax rate for 2011 was not meaningful due to Homer City providing a full valuation allowance against its net deferred tax assets at December 31, 2011. Homer City's effective income tax rate in 2010 and 2009 varied 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. For further discussion, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Income Taxes ."

On March 15, 2012, Homer City ~~had~~made an ~~effective~~election ~~income~~to ~~tax~~be ~~provision~~treated ~~rate~~as ofa ~~29%,~~partnership ~~40%~~for federal and ~~37%~~state inincome ~~2010,~~tax ~~2009~~purposes. ~~and~~As ~~2008~~a result, ~~respectively.~~the income or loss of Homer City's ~~effective~~will ~~income~~be ~~tax rate~~allocated ~~varies~~to ~~from~~ the ~~federal~~individual ~~statutory~~partners. ~~rate~~Accordingly, ofon ~~35%~~a ~~primarily~~prospective ~~due~~basis, tono ~~state~~recognition will be given to income taxes ~~and~~in ~~estimated~~Homer ~~benefits~~City's ~~from~~financial astatements ~~federal~~and ~~deduction~~deferred ~~related~~taxes toand ~~qualified~~the ~~domestic~~related ~~production~~valuation ~~activities~~allowance ~~under Section 199~~will ofbe eliminated in the ~~Internal~~first ~~Revenue~~quarter ~~Code.~~of 2012.

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Related- Party Transactions

For a discussion of related- party transactions, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 1. Summary of Significant Accounting Policies—Income Taxes and Tax-Allocation Agreements" and "—Note 1213. Related- Party Transactions."

New Accounting Guidance

For a discussion of new accounting guidance affecting Homer City, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 1. Summary of Significant Accounting Policies—New Accounting Guidance."

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The use of Homer City's cash generated from operations is restricted by the sale-leaseback agreements. Under the participation agreements entered into as part of the sale-leaseback transaction, 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, Homer City's liquidity is substantially based on its ability to generate cash flow from operations. The reduction in energy prices experienced in the fourth quarter of 2011 and into 2012 has adversely impacted cash flow, and Homer City is not expected to be able to generate sufficient cash flow from operations necessary to meet its obligations, including the obligations under the Homer City lease. It is unlikely that Homer City will continue as a going concern throughout 2012. For further discussion, see "—Management's Overview—Homer City Lease" and "Item 1A. Risk Factors—Liquidity Risks."

Capital Investment Plan

Forecasted capital expenditures through 2014 by Homer City are as follows:



(in millions)	2012		2013		2014
Environmental	$	—	$	—	$	—
Plant capital	39		23		14
Total	$	39	$	23	$	14

The capital investment plan set forth above does not include environmental capital expenditures to retrofit the Homer City plant because Homer City does not have the funds for retrofits and has not yet been able to raise capital needed for such retrofits. The funding of Homer City's environmental expenditures will be dependent on external funding. The cost of the SO₂ and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is expected to be approximately $700 million to $750 million. See "Management's Overview—Homer City Lease" for additional discussion.

Plant capital expenditures relate to non-environmental projects such as boiler and turbine controls, major boiler components, coal-cleaning plant refuse disposal and ash disposal. To the extent available, Homer City plans to fund these expenditures with cash on hand or cash generated from operations.

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 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. Homer City had $20 million included in restricted deposits at December 31, 2011 related to these reserve accounts.

Cash Flow

At December 31, ~~2010~~2011, Homer City had cash and cash equivalents of $~~132~~84 million compared to $~~121~~132 million at December 31, ~~2009~~ 2010. Net cash provided by operating activities totaled $~~106~~34 million, $~~151~~106 million and $50151 million in ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, respectively. The ~~2010~~2011 decrease in net cash provided by operating activities was primarily ~~due~~attributable to lower ~~net~~generation ~~income~~from inoutages ~~2010~~at Units 1 and 2, lower energy and capacity prices, and the timing of cash receipts and disbursements related to working capital items, partially offset by ~~changes~~an increase in ~~derivative~~interest ~~assets~~payable ~~and~~to ~~liabilities~~affiliate under the subordinated revolving loan agreement. The ~~2009~~2010 ~~increase~~decrease was primarily due to ~~the~~lower ~~timing~~net ofincome ~~cash~~in ~~receipts~~2010, ~~and~~partially ~~disbursements~~offset ~~related~~by tochanges ~~working~~in ~~capital~~derivative ~~items.~~assets and liabilities.

Net cash used in financing activities totaled $7868 million, $7478 million and $8974 million in ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, respectively. In ~~2010~~2011, Homer City ~~reduced~~borrowed $24 million, net more from its affiliate subordinated revolving loan, ~~by $4 million~~ and lease financing payments were $8 14 million higher, as compared to ~~2009~~2010. In ~~2009~~2010, Homer City ~~borrowed~~paid $25 4 million, net less on its affiliate subordinated revolving loan, and ~~did~~lease ~~not~~financing ~~borrow~~payments ~~any~~were ~~in 2008. Also in 2009, Homer City made~~ $378 million ~~less of principal repayments on its affiliate subordinated revolving loan~~higher, as compared to ~~2008~~2009.

Net cash used in investing activities primarily related to capital expenditures of $18 million, $26 million and $44 million in 2010, 2009 and 2008, respectively. In 2009, Homer City had a $10 million receipt from restricted cash related to permitted withdrawals from restricted deposits pursuant to the sale-leaseback agreements. 22

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

Bonus Depreciation Impact

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

Capital Expenditures and Lease Covenants

At December 31, 2010, forecasted capital expenditures through 2013 by Homer City were as follows:

(in millions)	2011		2012		2013
Plant capital expenditures	$	18	$	25	$	16
Environmental expenditures		—		—		—
Total	$	18	$	25	$	16

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~~Plant~~Net ~~capital~~cash ~~expenditures~~used ~~relate~~in toinvesting ~~non-environmental~~activities ~~projects~~primarily ~~such~~related ~~as upgrades~~ to ~~boiler~~capital ~~and~~expenditures ~~turbine controls, replacement~~ of ~~major boiler components~~$14 million, ~~development~~$18 million ofand a$26 million ~~coal-cleaning~~in ~~plant~~2011, ~~refuse~~2010 ~~site~~ and a2009, ~~new~~respectively. ~~ash~~In ~~disposal site~~2009, ~~and main power transformer replacement.~~ Homer City ~~plans~~also tohad ~~fund~~a ~~these~~$10 ~~expenditures~~million ~~with~~receipt ~~cash~~from ~~on hand~~restricted or cash ~~generated~~related ~~from~~to ~~operations.~~permitted Inwithdrawals ~~addition,~~from ~~Homer~~restricted ~~City~~deposits ~~may~~pursuant ~~receive~~to ~~funds~~the ~~under~~sale-leaseback ~~its subordinated revolving loan~~agreements.

~~The capital~~Credit expenditure forecast set forth in the previous table does not include environmental capital expenditures for Homer City. However, depending on upcoming and future regulatory developments, Homer City may be required to undertake capital projects to install additional pollution control equipment, which will be dependent on lessor decisions regarding the funding of these expenditures. For further information, see "Management's Overview—Environmental Developments—Environmental Issues and Capital Resource Limitations." Ratings

~~Under the participation agreements entered into as part of the sale-leaseback transaction,~~ Homer City's ~~ability to enter into specified transactions and to engage in specified business activities, including financing and investment activities,~~ is ~~subject~~not tocurrently ~~significant restrictions~~rated. ~~These~~Credit ~~restrictions~~ratings ~~could~~for ~~affect,~~EME and inEMMT 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, Homer City's liquidity is substantially based on its ability to generate cash flow from operations. If Homer City is unable to generate cash flow from operations necessary to meet its obligations, Homer City will have limited ability to obtain additional capital unless its partners provide additional funding, which they are ~~under~~as ~~no legal obligation to do.~~ follows:

The rent payments that 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, among other requirements, 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 December 31, 2010, the senior rent service coverage ratio was 2.51 to 1, and Homer City was in compliance with the historical and projected senior rent service coverage ratios. 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. The sale-leaseback documentation does not permit the owner-lessor to terminate the lease in the event of non-payment of the equity portion of the rent while the lease debt is outstanding.



	Moody's Rating	S&P Rating	Fitch Rating
EME¹	Caa1	CCC+	CCC
EMMT	Not Rated	CCC+	Not Rated

~~Homer City's~~1 ~~use~~Senior ofunsecured ~~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~~rating. ~~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~~

30All the above ratings are on negative outlook. Homer City cannot provide assurance that the current 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. 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.

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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 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. Homer City had $20 million included in restricted deposits at December 31, 2010 related to these reserve accounts.

Payments Made Under Subordinated Revolving Loan and Tax Payments

The following table summarizes the payments by 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 any payments made pursuant to tax-allocation agreements:

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~		~~2009~~2010		~~2008~~	2009
Payment of interest	$	$—	38	$	3338	$	31$	33
Payment of principal	—		36	36	42		7942
Subordinated revolving loan payments	—		74	74	75		~~110~~75
Tax payments under tax-allocation agreements	—		—	—	—		15—
Total payments	$	$—	74	$	7574	$	~~125~~$	75

For additional information on the tax-allocation agreements, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 1. Summary of Significant Accounting Policies—Income Taxes and Tax-Allocation Agreements."

31Key Ratio Affecting Distributions

Set forth below is the key ratio required under the lease covenants contained in Homer City's sale-leaseback agreements for the 12 months ended December 31, 2011:



Financial Ratio	Covenant	Actual
Senior rent service coverage ratio	Greater than 1.7 to 1	1.18 to 1

As indicated above, the actual senior rent service coverage ratio of Homer City was below the covenant threshold for the 12 months ended December 31, 2011, and Homer City also did not meet the threshold for the prospective two 12-month periods, which currently precludes Homer City from making distributions, including repayment of certain intercompany loans and from paying the equity portion of the rent payment. For additional information, see "Management's Overview—Homer City Lease."

Sale-Leaseback Restrictions on Distributions

In order to make a distribution, Homer City must be in compliance with the covenants specified in the lease agreements, including the following financial performance requirements measured on the date of distribution. At the end of each quarter, the equity and debt portions of rent then due and payable must have been paid and the senior rent service coverage ratio for the prior 12-month period (taken as a whole and projected for each of the prospective two 12-month periods) must be greater than 1.7 to 1 in order to make the equity portion of the rent payment and other restricted payments. Homer City would be

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permanently restricted ~~Credit~~in ~~Ratings~~ its ability to make distributions if a failure to pay equity rent when due was not cured within nine months, or even if cured, occurred more than one additional time during the term of the lease. EME has not guaranteed Homer City's obligations under the leases. Homer City is not expected to meet the covenant requirements of its sale-leaseback agreements relating to the payment of equity rent at April 1, 2012, and Homer City will be unable to make the required equity rent payment. There is no assurance that subsequent rent payments will be made. For additional information, see "Management's Overview—Homer City Lease."

Homer City is not currently rated. 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 as of December 31, 2010 were as follows:

		Moody's Rating			Standard & Poor's Rating			Fitch Rating
EME1			B3			B-			B-
EMMT			Not Rated			B-			Not Rated

1Senior unsecured rating.

All the above ratings are on negative outlook. Homer City cannot provide assurance that the current 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. 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.

Homer City's sale-leaseback documents restrict Homer City's ability to enter into derivative activities with EMMT to sell forward the output of its facilities if EMMT does not have an investment grade credit rating from Standard & Poor's or Moody's Investors Service, Inc. (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 also include a requirement that Homer City's counterparty to such transactions, whether it is EMMT or another party, and Homer City, if acting as seller to an unaffiliated third party, be investment grade. Homer City, which is not rated, currently sells all the output from its facilities through EMMT, which has a below investment grade credit rating. In order to continue to sell forward the output of its facilities through EMMT, Homer City has obtained a consent from the sale-leaseback owner participants that allows it to enter into such sales, under specified conditions, through March 1, 2014. Homer City continues to be in compliance with the terms of the consent; however, because EMMT's credit rating has dropped below BB-, the consent is revocable by the sale-leaseback owner participants at any time. The sale-leaseback owner participants have not indicated that they intend to revoke the consent; however, there can be no assurance that they will not do so in the future. An additional consequence of EMMT's lowered credit rating is a requirement for EMMT to prepay for Homer City's output to satisfy a requirement under the terms of the consent that outstanding accounts receivable between EMMT and Homer City be reduced to zero. Revocation of the consent would not affect trades between EMMT and Homer City that had been entered into while the consent was still in effect. Homer City is permitted to sell the output of its facilities into the spot market on the terms set forth in its sale-leaseback documents.

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Contractual Obligations, Commercial Commitments and Contingencies

Homer City has contractual obligations and other commercial commitments that represent prospective cash requirements. The following table summarizes Homer City's significant contractual obligations as of December 31, ~~2010~~2011:

					Payments Due by Period	~~Payments Due by Period~~
(in millions)	Total		~~Total~~		Less than1 year	~~Less than 1 year~~		1 to ~~3 years~~3years		~~3 to 5 years~~	3 to 5years		~~More than 5 years~~		More than5 years
Long-term debt to affiliate1	$	626	$	~~611~~	$	$—	—	$	—626	$	~~611~~$	—	$	—	$	—
Lease financing2	1,814			~~1,975~~	160		~~161~~	287	~~309~~		~~245~~196			~~1,260~~	1,171
Operating lease obligations3	2			2	1		1	1	1		—			—	—
Purchase obligations:3
Purchase obligations3
Fuel supply contracts	~~Fuel supply contracts~~267			~~436~~	214		~~287~~	53	~~149~~		—			—	—
	Coal transportation agreements			12			12		—		—			—
Capital expenditures	7				7			—			—				—
	Capital expenditures			4			4		—		—			—
Coal cleaning agreement	6				6			—			—				—
	Coal cleaning agreement			12			6		6		—			—
Other contractual obligations	11				3			8			—				—
	Other contractual obligations			7			7		—		—			—
Employee benefit plan contribution4	20				4			8			8				—
Employee benefit plan contribution4				3			3				—			—
Total Contractual Obligations5	$	2,753			$	395		$	983		$	204			$	1,171
Total Contractual Obligations5			$	3,062		$	481	$	465	$	856		$	1,260

1 ~~1For~~ For additional details, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 4. Long-term Debt." Table assumes long-term debt is held to maturity. Amount also includes interest payments totaling $~~132~~ 136 million over life of debt. 2Amount represents lease payments related to the sale-leaseback of the Homer City plant and includes interest payments over the life of the lease. For further discussion, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies." 3For additional details, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies." 4Amount includes estimated contribution for pension plans and postretirement benefits other than pensions. The estimated contributions beyond 2011 are not available. For more information, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 7. Compensation and Benefit Plans—Pension Plans and Postretirement Benefits Other than Pensions." 5The contractual obligations table does not include derivative obligations and AROs, which are discussed in "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 5. Derivative Instruments and Hedging Activities," and "—Note 2. Property, Plant and Equipment," respectively.


²	Amount represents lease payments related to the sale-leaseback of the Homer City plant and includes interest payments over the life of the lease. For further discussion, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies."


³	For additional details, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies."


⁴	Amount includes estimated contribution for pension plans and postretirement benefits other than pensions. The estimated contributions beyond 2016 are not available. For more information, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 7. Compensation and Benefit Plans—Pension Plans and Postretirement Benefits Other than Pensions."


⁵	The contractual obligations table does not include derivative obligations and AROs, which are discussed in "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 5. Derivative Instruments and Hedging Activities," and "—Note 2. Property, Plant and Equipment," respectively.

Contingencies

Homer City's ~~significant~~has contingencies related to the NSR ~~lawsuit~~and other litigation, ash disposal site and insurance, which are discussed in "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies."

Off-Balance Sheet Transactions

Homer City has no material off-balance sheet transactions.

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MARKET RISK EXPOSURES

Introduction

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 price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. Homer City manages these risks in part by using derivative instruments in accordance with established policies and procedures.

Derivative Instruments

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

Unrealized Gains and Losses

Homer City classifies unrealized gains and losses from derivative instruments (other than the effective portion of derivatives that qualify for hedge accounting) as part of operating revenues. The ~~results of derivative activities are recorded as part of cash flows from operating activities in the statements of cash flows. The~~ following table summarizes unrealized gains (losses):

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~			~~2009~~2010			~~2008~~	2009
Non-qualifying hedges	$	$(1	(1)	)	$	(1	)	$	1$	1
Ineffective portion of cash flow hedges	6		~~(19~~	)	(19	14	)		2014
Total unrealized gains (losses)	$	$5	~~(20~~	)	$	15(20	)	$	21$	15

At December 31, ~~2010~~2011, cumulative unrealized ~~losses~~gains ~~of $5 million~~ were ~~recognized from non-qualifying hedge contracts or the ineffective portion of cash flow hedges related to subsequent periods ($3 million for 2011 and $2 million for 2012)~~immaterial.

Fair Value Disclosures

In determining the fair value of Homer City's derivative positions, Homer City uses third-party market pricing where available. For further explanation of the fair value hierarchy and a discussion of Homer City's derivative instruments, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 3. Fair Value Measurements" and "—Note 5. Derivative Instruments and Hedging Activities," respectively.

The net fair value of Homer City's commodity derivative instruments at December 31, ~~2010~~2011 was a $2 million liability. A 10% change in the market price of the underlying commodity at December 31, ~~2010~~2011 would not be material.

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increase or decrease the fair value of outstanding commodity derivative instruments by approximately $15 million.

Commodity Price Risk

Introduction

Energy Price Risk

~~The following table depicts the average historical market prices for energy per megawatt-hour during the past three years:~~ 25

	24-Hour Average Historical Market Prices1
	2010		2009		2008
PJM West Hub	$	45.88	$	38.31	$	68.56
Homer City Busbar		39.35		34.91		57.72

1Energy prices were calculated at the Homer City busbar (delivery point) and the PJM West Hub using historical hourly real-time prices as published by PJM or provided on the PJM web-site.

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

		24-Hour Forward Energy Prices1 PJM West Hub
2011 calendar "strip"2		$	45.45
2012 calendar "strip"2		$	46.41

1Energy prices were determined by obtaining broker quotes and information from other public sources relating to the PJM West Hub delivery point. 2Market price for energy purchases for the entire calendar year.

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~~actual spot~~The ~~prices~~following ~~for~~table ~~electricity~~depicts ~~delivered by~~ the ~~Homer~~average ~~City~~historical ~~plant~~market ~~into~~prices ~~these~~for ~~markets~~energy ~~may~~per ~~vary~~megawatt-hour ~~materially~~at ~~from~~ the ~~forward~~locations ~~market~~indicated ~~prices~~during ~~set forth in~~ the ~~preceding~~past ~~table.~~three years:

EMMT engages in hedging activities for the Homer City plant to hedge the risk of future change in the price of electricity. The following table summarizes Homer City's hedge positions (including load requirements services contracts and forward contracts accounted for on the accrual basis) as of December 31, 2010 for electricity expected to be generated in 2011 and 2012:



	24-Hour Average Historical Market Prices¹
	2011		2010		2009
PJM West Hub	$	43.57	$	46.56	$	38.75
Homer City Busbar	39.58		39.18		34.27

		2011			2012
MWh (in thousands)			1,819			1,020
Average price/MWh1,2		$	55.58		$	51.17


¹	Energy prices were calculated at the Homer City busbar (delivery point) and the PJM West Hub using historical hourly day-ahead prices as published by PJM or provided on the PJM web-site.

The ~~1The above~~following ~~hedge~~table ~~positions~~sets ~~include~~forth ~~forward contracts for~~ the ~~sale~~forward ofmarket ~~power during different periods of the year and the day. Market~~ prices ~~tend~~for toenergy beper ~~higher during on~~megawatt-~~peak~~hour ~~periods~~as ~~and~~quoted ~~during~~for ~~summer~~sales ~~months,~~into ~~although there is significant variability of power prices during different periods of time. Accordingly,~~ the ~~above hedge positions are not directly comparable to the 24-hour~~ PJM West Hub ~~prices~~at ~~set forth above. 2 The average price/MWh includes 72 to 84 MW for periods ranging from January~~December ~~1, 2011 to May~~ 31, ~~2012 sold in conjunction with load requirements services contracts.~~ 2011:

Capacity Price Risk



	24-Hour Forward Energy Prices¹
2012 calendar "strip"²	$	38.85
2013 calendar "strip"²	$	41.26

~~Under~~1 ~~the~~Energy ~~RPM,~~prices ~~capacity~~were ~~commitments~~determined ~~are~~by ~~made~~obtaining inbroker ~~advance~~quotes toand ~~provide~~information afrom ~~long-term~~other ~~pricing~~public ~~signal~~sources ~~for~~relating ~~capacity resources. The RPM is intended~~ to ~~provide~~the ~~a mechanism for~~ PJM toWest ~~meet~~Hub ~~the~~delivery ~~region's need for generation capacity, while allocating the cost to load-serving entities through a locational reliability charge~~point.

~~The following~~2 ~~table~~Market ~~summarizes~~price ~~the~~for ~~status~~energy ofpurchases ~~capacity sales~~ for ~~Homer~~the ~~City~~entire atcalendar ~~December 31, 2010:~~ year.

												Other Capacity Sales, Net of Purchases3
								RPM Capacity Sold in Base Residual Auction
	Installed Capacity MW		Unsold Capacity1 MW			Capacity Sold2 MW									Average Price per MW-day		Aggregate Average Price per MW-day
								MW		Price per MW-day		MW
January 1, 2011 to May 31, 2011		1,884		(261	)		1,623		1,813		174.29		(190	)		53.95		188.38
June 1, 2011 to May 31, 2012		1,884		(113	)		1,771		1,771		110.00		—			—		110.00
June 1, 2012 to May 31, 2013		1,884		(232	)		1,652		1,736		133.37		(84	)		16.46		139.31
June 1, 2013 to May 31, 2014		1,884		(104	)		1,780		1,780		226.15		—			—		221.03	4

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 plant into these markets may vary materially from the forward market prices set forth in the preceding table.

EMMT ~~1Capacity not~~engages ~~sold~~in ~~arises~~hedging ~~from:~~activities ~~(i) capacity~~for ~~retained~~the toHomer ~~meet~~City ~~forced~~plant ~~outages~~to ~~under~~hedge the ~~RPM~~risk ~~auction~~of ~~guidelines,~~future ~~and~~change ~~(ii) capacity that~~in ~~PJM does not purchase at~~ the ~~clearing~~ price ~~resulting~~of ~~from~~electricity. ~~the~~The ~~RPM~~following ~~auction. 2Excludes 72~~table tosummarizes 84Homer MWCity's ofhedge ~~capacity~~positions for ~~periods~~transactions ~~ranging~~primarily ~~from~~entered ~~January 1,~~into ~~2011~~at tothe ~~May 31,~~PJM ~~2012~~West ~~sold~~Hub inand ~~conjunction~~to ~~with~~a ~~load requirements~~lesser ~~services~~extent ~~contracts. 3Other capacity~~at ~~sales~~other ~~and~~trading ~~purchases,~~locations ~~net~~(including ~~includes~~forward contracts ~~executed~~accounted infor ~~advance~~on of the ~~RPM~~accrual ~~base~~basis) ~~residual~~at ~~auction~~December 31, to2011 ~~hedge~~for ~~the~~electricity ~~price~~expected ~~risk related~~ to ~~such~~be ~~auction,~~generated ~~participation~~ in RPM incremental auctions and other capacity transactions entered into to manage capacity risks. 4Includes the impact of a 100 MW capacity swap transaction executed prior to the base residual auction at $135 per MW-day. 2012:



	2012
MWh (in thousands)	90
Average price/MWh¹	$	49.54

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

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~~Revenues~~Capacity ~~from~~Price the sale of capacity from 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 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, demand side management activities and the cost of new entry. Risk

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



					RPM Capacity Sold in Base Residual Auction			Other Capacity Sales, Net of Purchases²				Aggregate Average Price per MW-day
	Installed Capacity MW	Unsold Capacity¹ MW		Capacity Sold MW	MW	Price per MW-day		MW		Average Price per MW-day		Aggregate Average Price per MW-day
January 1, 2012 to May 31, 2012	1,884	(163	)	1,721	1,771	$	110.00	(50	)	$	30.00	$	112.32
June 1, 2012 to May 31, 2013	1,884	(232	)	1,652	1,736	133.37		(84	)	16.46		139.31
June 1, 2013 to May 31, 2014	1,884	(104	)	1,780	1,780	226.15		—		—		221.03		³
June 1, 2014 to May 31, 2015	1,884	(190	)	1,694	1,694	136.50		—		—		136.50


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


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


³	Includes the impact of a 100 MW capacity swap transaction executed prior to the base residual auction at $135 per MW-day.

Revenues from the sale of capacity from 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 Homer City has an opportunity to capture a higher value associated with those markets.

For additional information regarding capacity sold by Homer City, see "Management's Overview—Homer City Lease."

Basis Risk

Sales made from the Homer City plant in the real-time or day-ahead market receive the actual ~~spot~~real-time ~~prices~~ or day-ahead prices, as the case may be, at the Homer City busbar. In order to mitigate price risk from changes in forward spot prices at the Homer City busbar, 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. Homer City's hedging activities use this settlement point to enter into hedging contracts. To the extent that, on the settlement date of a hedge contract, spot prices at the relevant busbar are lower than spot prices at the settlement point, the proceeds actually realized from the related hedge contract are effectively reduced by the difference. This is referred to as "basis risk." During ~~2010~~2011, ~~transmission~~day-ahead ~~congestion in PJM resulted in~~ prices at the Homer City busbar ~~being~~were lower than those at the PJM West Hub by an average of 149%, compared to 916% during ~~2009~~2010 and 1612% during ~~2008.~~2009, due to transmission congestion in PJM.

~~By entering into cash settled futures contracts and forward contracts using the PJM West Hub as the settlement point, Homer City is exposed to basis risk as described above.~~ In order to mitigate basis risk, Homer City may purchase financial transmission rights and basis swaps in PJM ~~for Homer City~~. A financial transmission right is a financial instrument that entitles the holder to receive the difference between actual ~~spot~~day-ahead prices for two delivery points in exchange for a fixed amount. ~~Accordingly, 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 plant purchases coal primarily from mines located near the facilities in Pennsylvania. Coal purchases are made under a variety of supply agreements. The following table summarizes the amount of coal under contract at December 31, ~~2010~~2011 for the following ~~three~~two years:

		2011			2012			2013
	2012		2013
Amount of Coal Under Contract in Millions of Equivalent Tons1	3.3		40.68			~~1.8~~			~~0.5~~

1 ~~1The~~ The amount of coal under contract in equivalent tons is calculated based on contracted tons and applying a 13,000 Btu equivalent.

37Homer City is subject to price risk for purchases of coal that are not under contract. Market prices of NAPP coal, which are related to the price of coal purchased for the Homer City plant, increased during the past two years. The market price of NAPP coal based on 13,000 Btu per pound heat content and <3.0 pounds of SO2 per MMBtu sulfur content was $73.30 per ton at December 30, 2011, compared to a price of $70 per ton and $52.50 per ton at December 31, 2010 and 2009, respectively, as

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Homer City is subject to price risk for purchases of coal that are not under contract. Prices of Northern Appalachian (NAPP) coal, which are related to the price of coal purchased for the Homer City plant, increased during 2010 from 2009 and decreased during 2009 from 2008. The market price of NAPP coal (with 13,000 Btu per pound heat content and <3.0 pounds of SO2 per MMBtu sulfur content) increased to a price of $70 per ton at December 31, 2010, compared to a price of $52.50 per ton at December 31, 2009, as reported by the ~~Energy Information Administration (~~EIA). In ~~2010~~2011, the price of NAPP coal ranged from $5470 per ton to $7178.20 per ton, as reported by the EIA. The ~~2010~~2011 increase in NAPP coal prices was primarily driven by the export market demand and global coal pricing.

Based on Homer City's anticipated coal requirements in ~~2011 in~~ excess of the amount under contract, Homer City expects that a 10% change in the price of coal at December 31, ~~2010~~2011 would increase or decrease 2012 pre-tax income ~~in 2011~~ by approximately $2 4 million.

Emission Allowances Price Risk

~~The~~If ~~federal~~CSAPR ~~Acid~~becomes ~~Rain~~effective ~~Program~~as ~~requires~~issued, ~~electric~~the ~~generating~~amount ~~stations~~of SO2 that a plant emits in its operation will need to ~~hold~~be matched by a sufficient amount of SO2 allowances ~~sufficient~~designated under this program (CSAPR SO2 allowances) that are either allocated to ~~cover~~the ~~their~~plant ~~annual~~under ~~emissions~~the CSAPR program or purchased in the open market. ~~Pursuant~~ toSO2 ~~Pennsylvania's~~allowances ~~implementation~~under ofthe federal Acid Rain Program cannot be used to satisfy the ~~CAIR~~requirements under CSAPR. For additional information on CSAPR, ~~coal~~see ~~plants~~"Item ~~are~~8. ~~required~~EME toHomer ~~hold~~City ~~seasonal~~Generation L.P. ~~and~~Notes ~~annual~~to ~~NOx~~Financial ~~allowances~~Statements—Note 9. Environmental Developments—Cross-State Air Pollution Rule."

In the event that actual emissions required are greater than allowances held, Homer City is subject to price risk for purchases of emission allowances. The market price for emission allowances may vary significantly. The average purchase price of SO2 allowances was $50 per ton in 2010 and $315 per ton in 2008. Homer City did not make any emission allowance purchases in 2009. Based on broker's quotes and information from public sources, the spot price for SO2 allowances was $9 per ton at December 31, 2010. Homer City does not anticipate any requirements to purchase emission allowances in 2011.

Credit Risk

For further information related to credit risk and how Homer City manages credit risk, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 5. Derivative Instruments and Hedging Activities."

Interest Rate Risk

Homer City has mitigated the risk of interest rate fluctuations by obtaining fixed rate financing on its subordinated revolving loan with Edison Mission Finance. Homer City does not believe that interest rate fluctuations will have a material adverse effect on its financial position or results of operations.

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CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Introduction

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

Impairment of Long-Lived Assets

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

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

In preparing long-term cash forecasts, Homer City includes assumptions about future prices for electricity, capacity, fuel and related products and services, as applicable, future operations and maintenance costs and future capital expenditure requirements under different scenarios. As appropriate, Homer City uses a probability weighted approach when determining whether impairment indicators exist. Assumptions included in the long-term cash flow forecasts for merchant projects include:


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


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


•	Trends for additions and retirements for generation resources; and


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

Homer City includes allocated acquired emission allowances as part of its power plant asset group. Homer City's unit of account is at the plant level and, accordingly, the closure of one of Homer City's units would not result in an impairment of property, plant and equipment unless such condition were to affect an impairment assessment on the entire plant.

Effect if Different Assumptions Used. The estimates and assumptions used to determine whether an impairment exists are subject to a high degree of uncertainty. The estimated fair value of an asset would change materially if different estimates and assumptions were used to determine the amounts or timing of future revenues, environmental compliance costs or operating expenditures.

Effect on 2011 Results. As described in "Management's Overview," Homer City failed to obtain sufficient interest from market participants to fund the capital improvements during the process undertaken in the fourth quarter of 2011, and Homer

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City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City's loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both. In connection with the preparation of its year-end financial statements, Homer City concluded that these events, combined with the current and projected financial condition of Homer City, were indicators of impairment. The long-lived asset group subject to the impairment evaluation was determined to include Homer City's property, plant and equipment. Homer City concluded that the future undiscounted cash flows were insufficient to recover the carrying amount of the asset group. To measure the amount of impairment loss, the income approach was considered the most relevant and resulted in a fair value of $1,085 million. Discounted cash flow analysis based on estimates of future energy, capacity and coal prices and operations and maintenance costs along with the estimated costs of constructing the environmental control equipment was the technique utilized to determine fair value. Accordingly, Homer City recorded an impairment charge of $478 million for the fourth quarter of 2011.

Derivatives

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

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

Key Assumptions and Approach Used. Homer City determines the fair value of derivative instruments based on forward market prices in active markets adjusted for nonperformance risk. If quoted market prices are not available, internally developed models are used to determine the fair value. When actual market prices, or relevant observable inputs are not available, it is appropriate to use unobservable inputs which reflect management assumptions, including extrapolating limited short-term observable data and developing correlations between liquid and non-liquid trading hubs. In assessing nonperformance risks, 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 nonperformance.

In addition, a fair value hierarchy is established that prioritizes the inputs to valuation techniques used to measure fair value. For further information, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 3. Fair Value Measurements."

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

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

Income ~~Impairment of Long-Lived Assets~~ Taxes

Nature of Estimates Required. ~~Long-lived~~As ~~assets,~~part ~~including~~of ~~intangible assets, are evaluated for impairment in accordance with applicable authoritative guidance. Authoritative guidance requires that if~~ the ~~undiscounted~~process ~~expected future cash flow from a company's assets or group~~ of ~~assets~~preparing ~~(without interest charges) is less than~~ its ~~carrying value, asset impairment must be recognized on the~~ financial statements~~. The impairment charges~~, ifHomer ~~applicable,~~City ~~are calculated~~is asrequired ~~the~~to ~~excess~~estimate ~~of the asset's carrying value over~~ its ~~fair~~income ~~value,~~taxes ~~which~~for ~~represents~~each ~~the~~jurisdiction ~~discounted expected future cash flows attributable to the asset or,~~ in ~~the~~which ~~case~~it ofoperates. ~~assets~~This ~~expected~~process ~~to be~~involves ~~sold,~~estimating atactual ~~fair~~current ~~value~~period ~~less~~tax ~~costs~~expense totogether ~~sell.~~with ~~Long-lived~~assessing ~~assets~~temporary ~~for~~differences ~~impairment~~resulting ~~are~~from ~~evaluated~~differing ~~whenever~~treatment ~~indicators~~ of ~~impairment~~items, ~~exist~~such oras ~~when~~depreciation, ~~there~~for istax aand ~~commitment~~accounting ~~to sell or dispose of the asset~~purposes. These ~~evaluations~~differences ~~may~~ result ~~from significant decreases~~ in ~~the~~deferred ~~market~~tax ~~price~~assets ofand ~~an asset~~liabilities, awhich ~~significant~~are ~~adverse~~included ~~change~~within inHomer ~~the~~City's ~~extent~~balance orsheets. ~~manner~~Homer inCity ~~which~~records ana ~~asset~~deferred istax ~~being~~asset ~~used~~valuation inallowance ~~its~~when ~~physical condition,~~it ais ~~significant~~more ~~adverse~~likely ~~change~~than innot ~~legal~~that ~~factors~~all or ina ~~the~~portion ~~business climate that could affect the value~~ of anits ~~asset,~~deferred astax ~~well~~assets aswill ~~economic~~not orbe ~~operational analyses~~realized.

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Homer City ~~Application~~takes certain tax positions it believes are applied in accordance with the applicable tax laws. However, these tax positions are subject to ~~Merchant~~interpretation ~~Coal-Fired~~by ~~Power~~the ~~Plants~~ Internal Revenue Service, state tax authorities and the courts. Homer City determines its uncertain tax positions in accordance with the authoritative guidance.

~~Weak~~Key ~~commodity~~Assumptions ~~prices~~and ~~combined~~Approach ~~with~~Used. Accounting ~~continuing,~~for ~~heightened~~tax ~~public~~obligations ~~policy~~requires ~~pressure~~management onjudgment. ~~coal~~Management ~~generation~~uses ~~have~~judgment ~~resulted~~ in ~~continuing~~determining ~~uncertainties~~whether ~~for merchant~~the ~~coal-fired~~evidence ~~power~~indicates ~~plants~~it is more likely than not, ~~which~~based ~~may~~solely ~~require~~on ~~significant~~the ~~capital~~technical ~~and~~merits, ~~increased~~that ~~operating~~a ~~costs~~tax position will be sustained and to ~~meet~~determine ~~environmental~~the ~~requirements~~amount of tax benefits to be recognized. ~~For~~Judgment is also used in determining the likelihood a ~~discussion~~tax ofposition ~~environmental~~will ~~requirements, see~~be ~~"Item 8~~settled and possible settlement outcomes. ~~EME~~Management must also assess the likelihood that Homer City's ~~Generation L.P.~~deferred ~~Notes~~tax toassets ~~Financial~~will ~~Statements—Note 9.~~be ~~Environmental~~recovered ~~Developments~~from future taxable income or the utilization of losses through a reduction in the loan with Edison Mission Finance." ~~Management~~In ~~has~~assessing ~~reviewed~~its ~~long-term~~uncertain ~~cash~~tax ~~flow forecasts~~positions, ~~that~~Homer ~~include~~City ~~assumptions~~considers, ~~about~~among ~~future~~others, ~~electricity~~the following factors: the facts and ~~fuel~~circumstances ~~prices~~of the position, ~~future~~regulations, ~~capacity~~rulings, ~~payments~~and ~~under~~case ~~the~~law, ~~PJM~~opinions ~~RPM~~or views of legal counsel and other advisers, and ~~future~~the ~~capital~~experience ~~expenditure~~gained ~~requirements~~from ~~under~~similar ~~different~~tax ~~scenarios~~positions. ~~Assumptions~~ ~~included~~Management inevaluates uncertain tax positions at the ~~long-term~~end ~~cash~~of ~~flow~~each ~~forecasts~~reporting ~~include:~~period and makes adjustments when warranted based on changes in fact or law.

~~If electricity~~Effect ~~and~~if ~~capacity~~Different ~~prices~~Assumptions doUsed. Actual ~~not~~income ~~increase~~taxes ~~consistent~~may ~~with~~differ from the ~~fundamental~~estimated ~~forecast~~amounts orwhich ifcould have a significant impact on the liabilities, revenues and expenses recorded in the financial statements. Homer City ~~decides~~continues ~~not~~to be under audit or subject to ~~install~~audit ~~additional~~for ~~environmental~~multiple ~~control~~years ~~equipment,~~in various jurisdictions. Significant judgment is required to determine the ~~forecasted~~tax ~~cash~~treatment ~~flow would~~of particular tax positions that involve interpretations of complex tax laws. A tax liability has been recorded with respect to tax positions in which the outcome is uncertain and the effect is estimable. Such liabilities are based on judgment and a final determination could take many years from the time the liability is recorded and the related filing position is no longer subject to review. Furthermore, settlement of tax positions included in open tax years may be ~~less~~resolved ~~than~~by ~~expected~~compromises of tax positions based on current factors and ~~impairment~~business considerations that may result. in material adjustments to income taxes previously estimated.

~~Homer City~~Effect ~~includes~~on ~~allocated~~2011 ~~acquired~~Results. After ~~emission~~assessing ~~allowances~~the asrealization ~~part~~ of ~~each~~its ~~power~~net ~~plant~~deferred ~~asset~~tax ~~group.~~assets, ~~Homer~~management ~~City's~~believes ~~unit~~it ~~of account~~ is atmore ~~the~~likely ~~plant~~than ~~level~~not ~~and,~~that ~~accordingly,~~it ~~the~~will ~~closure~~not ofbe ~~one of~~able ~~Homer~~to ~~City's~~realize ~~units~~the ~~would~~tax ~~not~~benefits ~~result~~from inany anof ~~impairment~~its ofnet ~~property,~~deferred ~~plant~~tax assets and, ~~equipment~~therefore, ~~unless~~recorded ~~such~~a ~~condition~~valuation ~~were~~allowance toof ~~affect~~$344 anmillion ~~impairment~~during ~~assessment~~the onfourth ~~the~~quarter ~~entire~~of ~~plant~~2011. ~~The~~For ~~net~~further ~~book~~discussion, ~~value~~see of"Item 8. ~~the~~ EME Homer City ~~plant at December~~Generation ~~31,~~L.P. ~~2010~~Notes ~~was~~to ~~$1.6~~Financial Statements—Note ~~billion~~6. Income Taxes."

Accounting for Contingencies, Guarantees and Indemnities

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

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

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a significant financial impact under certain circumstances, and management also considers the probability of such circumstances occurring when estimating the fair value.

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

ITEM 7A.QUANTITATIVE ~~Income~~AND ~~Taxes~~ QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Nature of Estimates Required. As part of the process of preparing its financial statements, Homer City is required to estimate its income taxes for each jurisdiction in which it operates. This process involves estimating actual current period tax expense together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within Homer City's balance sheet.

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

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

Effect if Different Assumptions Used. Actual income taxes may differ from the estimated amounts which could have a significant impact on the liabilities, revenues and expenses recorded in the financial statements. Homer City continues to be under audit or subject to audit for multiple years in various jurisdictions. Significant judgment is required to determine the tax treatment of particular tax positions that involve interpretations of complex tax laws. A tax liability has been recorded with respect to tax positions in which the outcome is uncertain and the effect is estimable. Such liabilities are based on judgment and a final determination could take many years from the time the liability is recorded and the related filing position is no longer subject to review. Furthermore, settlement of tax positions included in open tax years may be resolved by compromises of tax positions based on current factors

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and business considerations that may result in material adjustments to income taxes previously estimated. For further discussion, see "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Income Taxes."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm	33	46
Statements of Income for the years ended December 31, 2010, 2009 and 2008		47
Statements of Operations for the years ended December 31, 2011, 2010 and 2009	34
Balance Sheets at December 31, 2010 and 2009		48
Statements of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009	35
Statements of Partners' Equity for the years ended December 31, 2010, 2009 and 2008		49
Balance Sheets at December 31, 2011 and 2010	36
Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008		50
Statements of Partners' Equity (Deficit) for the years ended December 31, 2011, 2010 and 2009	37
Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008		51
Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009	38
Notes to Financial Statements	39	52


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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Management's Report on Internal Control over Financial Reporting

Homer City's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), for Homer City. Under the supervision and with the participation of the partnership's principal executive officer and principal financial officer, Homer City's management conducted an evaluation of the effectiveness of Homer City's internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under the COSO framework, Homer City's management concluded that Homer City's internal control over financial reporting was effective as of December 31, ~~2010~~2011.

Internal Control over Financial Reporting

There were no changes in 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, Homer City's internal control over financial reporting.

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this report relates that have materially affected, or are reasonably likely to materially affect, Homer City's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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EME HOMER CITY GENERATION L.P. ~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the~~REPORT ~~General~~OF ~~Partner~~INDEPENDENT ofREGISTERED ~~EME~~PUBLIC ~~Homer~~ACCOUNTING ~~City Generation, L.P.:~~ FIRM

~~In our~~To ~~opinion,~~ the ~~financial~~General ~~statements~~Partner ~~listed in the index appearing under Item 8~~ of ~~the Form 10-K present fairly, in all material respects, the financial position of~~ EME Homer City Generation L.P. at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. :

~~As discussed~~In our opinion, the financial statements listed in ~~Note~~the index appearing under Item 18 topresent fairly, in all material respects, the financial ~~statements~~position of EME Homer City Generation L.P. at December 31, 2011 and 2010, and the ~~Partnership~~results ~~changed~~of its operations and its cash flows for each of the ~~manner~~three years in ~~which~~the itperiod ~~accounts~~ended ~~for~~December 31, ~~fair~~2011 ~~value~~in ~~disclosure~~conformity with accounting principles asgenerally accepted in the United States of ~~January 1~~America. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, ~~2010~~on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

~~/s/ PricewaterhouseCoopers~~The financial statements listed in the index appearing under Item ~~LLP Los~~8 ~~Angeles~~have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 1 to the financial statements, ~~California February 28~~the Partnership does not expect to generate sufficient capital from operations necessary to meet its obligations, ~~2011~~which raises substantial doubt on its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

46/s/ PricewaterhouseCoopers LLP

Los Angeles, California

March 28, 2012

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EME HOMER CITY GENERATION L.P.

STATEMENTS OF ~~INCOME (in millions)~~ OPERATIONS

			Years Ended December 31,
			2010			2009			2008
Operating Revenues from Marketing Affiliate			$	636		$	663		$	717
Operating Expenses
	Fuel			279			251			270
	Plant operations			116			103			126
	Depreciation and amortization			66			63			64
	Loss on disposal of assets			5			3			—
	Administrative and general			5			4			4
		Total operating expenses		471			424			464
Operating income				165			239			253
Other Income (Expense)
	Interest and other income			—			—			5
	Interest expense			(127	)		(128	)		(124	)
		Total other expense		(127	)		(128	)		(119	)
Income before income taxes				38			111			134
Provision for income taxes				11			44			49
Net Income			$	27		$	67		$	85

(in millions)



	Years Ended December 31,
	2011			2010			2009
Operating Revenues from Marketing Affiliate	$	527		$	636		$	663
Operating Expenses
Fuel	269			279			251
Plant operations	137			116			103
Depreciation and amortization	68			66			63
Asset impairments and other charges (Note 12)	493			5			3
Administrative and general	6			5			4
Total operating expenses	973			471			424
Operating income (loss)	(446		)	165			239
Other Income (Expense)
Interest expense	(122		)	(127		)	(128		)
Income (loss) before income taxes	(568		)	38			111
Provision for income taxes	118			11			44
Net Income (Loss)	$	(686	)	$	27		$	67

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

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EME HOMER CITY GENERATION L.P.

STATEMENTS ~~BALANCE~~OF ~~SHEETS (in~~COMPREHENSIVE ~~millions~~INCOME (LOSS)

(in millions)

				December 31,
	Years Ended December 31,
				2010			2009
	2011				2010				2009
Assets
Net Income (Loss)	$	(686	)		$	27			$	67
Current Assets
Other comprehensive income (loss), net of tax
	Cash and cash equivalents			$	132		$	121
Pension and postretirement benefits other than pensions:
	Fuel inventory				76			58
Prior service adjustment, net of tax benefit	1				—				—
	Spare parts inventory				33			31
Net gain (loss) adjustment, net of tax expense (benefit) of $4, $(2) and $2 for 2011, 2010 and 2009, respectively	(9		)		(3		)		3
	Deferred taxes				2			—
Unrealized gains (losses) on derivatives qualified as cash flow hedges:
	Derivative assets				8			81
Unrealized holding gains arising during period, net of income tax expense (benefit) of $(3), $14 and $9 for 2011, 2010 and 2009, respectively	17				19				6
	Intangible assets				29			41
Reclassification adjustments included in net income (loss), net of income tax benefit of $0, $38 and $35 for 2011, 2010 and 2009, respectively	(23		)		(54		)		(44		)
	Other current assets				10			10
Other comprehensive loss, net of tax	(14		)		(38		)		(35		)
		Total current assets			290			342
Comprehensive Income (Loss)	$	(700	)		$	(11	)		$	32
Property, plant and equipment, net					1,630			1,683
Deferred taxes					117			102
Long-term derivative assets					—			1
Restricted deposits					27			27
Long-term intangible assets					15			5
Total Assets				$	2,079		$	2,160
Liabilities and Partners' Equity
Current Liabilities
	Accounts payable			$	20		$	19
	Accrued liabilities				10			7
	Due to affiliates				50			60
	Interest payable				21			25
	Interest payable to affiliate				9			9
	Derivative liabilities				—			1
	Deferred taxes				—			31
	Current portion of lease financing				79			65
		Total current liabilities			189			217
Long-term debt to affiliate					479			459
Lease financing, net of current portion					1,006			1,084
Benefit plans and other long-term liabilities					53			43
Long-term derivative liabilities					6			—
Total Liabilities					1,733			1,803
Commitments and Contingencies (Note 8)
Partners' Equity					346			357
Total Liabilities and Partners' Equity				$	2,079		$	2,160

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

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EME HOMER CITY GENERATION L.P.

BALANCE ~~STATEMENTS OF PARTNERS' EQUITY (in millions)~~ SHEETS

(in millions)

			Chestnut Ridge Energy Company			Mission Energy Westside Inc.		Total Partners' Equity
	December 31,
Balance at December 31, 2007			$	154		$	1	$	155
	2011				2010
	Net income			85			—		85
Assets
	Other comprehensive income			85			—		85
Current Assets
Balance at December 31, 2008				324			1		325
Cash and cash equivalents	$	84			$	132
	Net income			67			—		67
Due from affiliates	1				—
	Other comprehensive loss			(35	)		—		(35	)
Inventory	105				109
Balance at December 31, 2009				356			1		357
Deferred taxes	—				2
	Net income			27			—		27
Derivative assets	1				8
	Other comprehensive loss			(38	)		—		(38	)
Emission allowances	19				29
Balance at December 31, 2010			$	345		$	1	$	346
Other current assets	3				10
Total current assets	213				290
Property, Plant and Equipment, less accumulated depreciation of none and $609 at respective dates	1,085				1,630
Deferred taxes	—				117
Restricted deposits	27				27
Long-term emission allowances	16				15
Other long-term assets	5				—
Total Assets	$	1,346			$	2,079
Liabilities and Partners' Equity (Deficit)
Current Liabilities
Accounts payable	$	21			$	20
Accrued liabilities	9				10
Due to affiliates	42				50
Interest payable	20				21
Interest payable to affiliate	49				9
Current portion of lease financing	84				79
Total current liabilities	225				189
Long-term debt to affiliate	490				479
Lease financing, net of current portion	922				1,006
Benefit plans and other long-term liabilities	60				53
Long-term derivative liabilities	3				6
Total Liabilities	1,700				1,733
Commitments and Contingencies (Notes 8 and 9)
Partners' Equity (Deficit)	(354		)		346
Total Liabilities and Partners' Equity (Deficit)	$	1,346			$	2,079

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

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EME HOMER CITY GENERATION L.P.

STATEMENTS OF ~~COMPREHENSIVE~~PARTNERS' ~~INCOME~~EQUITY (~~LOSS~~DEFICIT) ~~(in millions)~~

			Years Ended December 31,
			2010			2009			2008
Net Income			$	27		$	67		$	85
Other comprehensive income (loss), net of tax
	Pension and postretirement benefits other than pensions:
		Prior service adjustment, net of tax		—			—			2
		Net gain (loss) adjustment, net of tax expense (benefit) of $(2), $2 and $(4) for 2010, 2009 and 2008, respectively		(3	)		3			(7	)
	Unrealized gains (losses) on derivatives qualified as cash flow hedges:
		Unrealized holding gains arising during period, net of income tax expense of $14, $9 and $46 for 2010, 2009 and 2008, respectively		19			6			64
		Reclassification adjustments included in net income, net of income tax expense (benefit) of $(38), $(35) and $18 for 2010, 2009 and 2008, respectively		(54	)		(44	)		26
Other comprehensive income (loss), net of tax				(38	)		(35	)		85
Comprehensive Income (Loss)			$	(11	)	$	32		$	170

(in millions)

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



	Chestnut Ridge Energy Company			Mission Energy Westside Inc.		Total Partners' Equity (Deficit)
Balance at December 31, 2008	$	324		$	1	$	325
Net income	67			—		67
Other comprehensive loss	(35		)	—		(35		)
Balance at December 31, 2009	356			1		357
Net income	27			—		27
Other comprehensive loss	(38		)	—		(38		)
Balance at December 31, 2010	345			1		346
Net loss	(686		)	—		(686		)
Other comprehensive loss	(14		)	—		(14		)
Balance at December 31, 2011	$	(355	)	$	1	$	(354	)

50The accompanying notes are an integral part of these financial statements.

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EME HOMER CITY GENERATION L.P.

STATEMENTS OF CASH FLOWS ~~(in millions)~~

			Years Ended December 31,
			2010			2009			2008
Cash Flows From Operating Activities
	Net income		$	27		$	67		$	85
	Adjustments to reconcile income to net cash provided by operating activities:
		Depreciation and amortization		67			63			62
		Deferred taxes		(21	)		(1	)		(4	)
		Loss on disposal of assets		5			3			—
		Other non-cash items		—			1			—
	Increase in due to/from affiliates			22			26			(16	)
	Increase in inventory			(20	)		(10	)		(23	)
	Increase in other current assets			—			—			(11	)
	Decrease (increase) in intangible assets			2			15			(12	)
	Increase (decrease) in accounts payable and other current liabilities			4			—			(3	)
	Decrease in interest payable			(3	)		—			(5	)
	Increase (decrease) in other liabilities			3			2			(2	)
	Decrease (increase) in derivative assets and liabilities			20			(15	)		(21	)
		Net cash provided by operating activities		106			151			50
Cash Flows From Financing Activities
	Borrowings on long-term obligation to affiliate			23			25			—
	Repayments of long-term obligation to affiliate			(36	)		(42	)		(36	)
	Repayments of lease financing			(65	)		(57	)		(53	)
		Net cash used in financing activities		(78	)		(74	)		(89	)
Cash Flows From Investing Activities
	Capital expenditures			(18	)		(26	)		(44	)
	Proceeds from sale of emission allowances			1			1			—
	Decrease in restricted deposits			—			10			—
		Net cash used in investing activities		(17	)		(15	)		(44	)
Net increase (decrease) in cash and cash equivalents				11			62			(83	)
Cash and cash equivalents at beginning of period				121			59			142
Cash and cash equivalents at end of period			$	132		$	121		$	59

(in millions)



	Years Ended December 31,
	2011			2010			2009
Cash Flows From Operating Activities
Net income (loss)	$	(686	)	$	27		$	67
Adjustments to reconcile income (loss) to net cash provided by operating activities:
Depreciation and amortization	68			67			63
Deferred taxes	119			(21		)	(1		)
Asset impairments and other charges	493			5			3
Other non-cash items	—			—			1
Decrease (increase) in due to/from affiliates	(8		)	22			26
Decrease (increase) in inventory	4			(20		)	(10		)
Decrease in other assets	2			—			—
Decrease in emission allowances	9			2			15
Increase (decrease) in accounts payable and other current liabilities	(1		)	4			—
Increase (decrease) in interest payable	38			(3		)	—
Increase in other liabilities	1			3			2
Decrease (increase) in derivative assets and liabilities	(5		)	20			(15		)
Net cash provided by operating activities	34			106			151
Cash Flows From Financing Activities
Borrowings on long-term debt to affiliate	11			23			25
Repayments of long-term debt to affiliate	—			(36		)	(42		)
Repayments of lease financing	(79		)	(65		)	(57		)
Net cash used in financing activities	(68		)	(78		)	(74		)
Cash Flows From Investing Activities
Capital expenditures	(14		)	(18		)	(26		)
Proceeds from sale of emission allowances	—			1			1
Decrease in restricted deposits	—			—			10
Net cash used in investing activities	(14		)	(17		)	(15		)
Net increase (decrease) in cash and cash equivalents	(48		)	11			62
Cash and cash equivalents at beginning of period	132			121			59
Cash and cash equivalents at end of period	$	84		$	132		$	121

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

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EME HOMER CITY GENERATION L.P. ~~NOTES TO FINANCIAL STATEMENTS~~

NOTES TO FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

EME Homer City Generation L.P. (Homer City) is a Pennsylvania limited partnership between Chestnut Ridge Energy Company, as a limited partner with a 99.9 percent interest, and Mission Energy Westside Inc., as a general partner with a 0.1 percent interest. Both Chestnut Ridge Energy and Mission Energy Westside are wholly owned subsidiaries of Edison Mission Holdings Co., a wholly owned subsidiary of Edison Mission Energy (EME). EME is an indirect wholly owned subsidiary of Edison International. The partnership was formed for the purpose of acquiring, owning or leasing and operating three coal-fired electric generating units, and related facilities, which is referred to as the "Homer City plant," located near Pittsburgh, Pennsylvania for the purpose of producing electric energy.

Homer City derives revenues from the sale of energy, capacity and ancillary services into PJM and from bilateral contracts with power marketers and load-serving entities within PJM. Homer City has a contract with Edison Mission Marketing & Trading, Inc. (EMMT), a marketing affiliate, to sell energy, capacity and ancillary services from the Homer City plant, which enables this marketing affiliate to engage in forward sales and hedging transactions to manage electricity price exposure.

On December 7, 2001, Homer City completed a sale-leaseback of the Homer City plant to third-party lessors for an aggregate purchase price of $1.591 billion, made up of $782 million in cash and assumption of debt (the fair value of which was $809 million). This transaction has been accounted for as a lease financing for accounting purposes.

Substantial Doubt that Homer City will Continue as a Going Concern

Homer City Lease

During the fourth quarter of 2011, Homer City failed to obtain sufficient interest from market participants necessary to fund the capital needed to make environmental improvements under the current lease arrangement. The estimated cost of installing SO2 and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is expected to be approximately $700 million to $750 million. Homer City does not currently have sufficient capital and does not expect to generate sufficient funds from operations to complete retrofits. Restrictions under the agreements entered into as part of Homer City's 2001 sale-leaseback transaction affect, and in some cases significantly limit or prohibit, Homer City's ability to incur indebtedness or make capital expenditures. Consequently, Homer City's ability to install environmental compliance equipment will be dependent on funding from the owner-lessors or third parties. Homer City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City's loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both. For further discussion with respect to the lease obligations, see Note 8—Commitments and Contingencies—Lease Commitments.

Basis of Presentation

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

~~Certain prior year reclassifications have been made to conform to the current year financial statement presentation pertaining to immaterial items.~~ 39

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Cash Equivalents

Cash equivalents ~~include~~included money market funds totaling $3128 million and $4031 million at December 31, ~~2010~~2011 and ~~2009~~2010, respectively. The carrying value of cash equivalents equals the fair value as all investments have maturities of less than three months.

Restricted ~~Derivative Instruments and Hedging Activities~~ Deposits

~~Authoritative~~Certain ~~guidance~~cash onbalances ~~derivatives~~are restricted to pay amounts required for lease payments and ~~hedging~~provide ~~establishes~~collateral. ~~accounting~~Included in restricted deposits were $20 million at each of December 31, 2011 and ~~reporting~~2010 ~~standards~~related to lease payments, and $7 million at each of December 31, 2011 and 2010 for ~~derivative~~collateral ~~instruments~~related ~~(including~~to ~~certain derivative~~an ~~instruments~~environmental ~~embedded~~bond. inFor additional information regarding the lease payments, see Note 8—Commitments and Contingencies—Lease Commitments—Facilities Sale-Leaseback.

52Inventory

Inventory is stated at the lower of weighted-average cost or market. Inventory is recorded at actual cost when purchased and then expensed at weighted-average cost as used. Cost is reduced to market value if the market value of inventory has declined and it is probable that revenues earned from the generation of power will not cover the cost of the inventory in the ordinary course of business or if the inventory is determined to be obsolete. Inventory consisted of the following:



	December 31,
(in millions)	2011		2010
Coal, fuel oil and other raw materials	$	68	$	76
Spare parts, materials and supplies	37		33
Total inventory	$	105	$	109

Purchased Emission Allowances

Purchased emission allowances are stated at the lower of weighted-average cost or market. Purchased emission allowances are recorded at cost when purchased and then expensed at weighted-average cost as used. Cost is reduced to market value if the market value of emission allowances has declined and it is probable that revenues earned from the generation of power will not cover the amounts recorded in the ordinary course of business. Purchased emission allowances are classified as current or long-term assets based on the time the allowances are expected to be used. Emission allowances do not have a pre-determined contractual term or expiration date.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. As part of the acquisition of the Homer City plant, Homer City acquired emission allowances under the United States Environmental Protection Agency's (US EPA's) Acid Rain Program. Homer City uses these emission allowances in the normal course of its business to generate electricity and has classified them as part of property, plant and equipment. Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives:



Plant and equipment under lease financing	33.67 years
Leasehold improvements	Shorter of life of lease or estimated useful life
Emission allowances	33.67 years
Equipment, furniture and fixtures	3 to 7 years

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

Impairment of Long-Lived Assets

Homer City evaluates the impairment of its long-lived assets based on a review of estimated future cash flows expected to be generated whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Homer City's unit of account is at the plant level. If the carrying amount of a long-lived asset exceeds the expected future cash flows, undiscounted and without interest charges, then an impairment loss is recognized for the excess of the carrying amount over fair value. Fair value is determined via market, cost and income based valuation techniques, as appropriate. For further discussion, see Note 12—Asset Impairments and Other Charges.

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~~other contracts).~~Revenue Homer City is required to record derivatives on its balance sheets as either assets or liabilities measured at fair value unless otherwise exempted from derivative treatment as normal purchases and sales. All changes in the fair value of derivative instruments are recognized currently in earnings, unless specific hedge criteria are met, which requires that Homer City formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Recognition

~~The accounting~~Generally, ~~guidance~~revenues ~~for~~and ~~cash~~related ~~flow~~costs ~~hedges~~are ~~provides~~recognized ~~that~~when ~~the~~electricity ~~effective~~is ~~portion~~generated ofor ~~gains~~services orare ~~losses~~provided onunless the transaction is accounted for as a derivative ~~instruments~~and ~~designated~~does not qualify for the normal purchases and ~~qualifying~~sales asexception. ~~cash~~Homer ~~flow~~City ~~hedges~~enters beinto ~~reported~~power asand fuel hedging and optimization transactions under a ~~component~~ contract with EMMT. These transactions are executed primarily through the use of ~~other~~physical ~~comprehensive~~forward ~~income~~commodity purchases and besales ~~reclassified~~and ~~into~~financial ~~earnings~~commodity inswaps ~~the~~and ~~same~~options. ~~period~~With ~~during~~respect ~~which~~to its physical forward contracts, Homer City takes title to the ~~hedged~~commodities, ~~forecasted~~and ~~transaction~~assumes ~~affects~~the ~~earnings~~risks and rewards of ownership. ~~The~~Homer ~~remaining~~City ~~gains~~records orthe ~~losses~~settlement of non-trading physical forward contracts on a gross basis. Homer City nets the ~~derivative instruments~~cost of purchased power against related third-party sales in markets that use locational marginal pricing, ifcurrently ~~any~~PJM. Financial swap and option transactions are settled net and, ~~must~~accordingly, beHomer ~~recognized~~City ~~currently~~does innot ~~earnings~~take title to the underlying commodity. Therefore, gains and losses from settlement of financial swaps and options are recorded net in operating revenues in the accompanying statements of operations.

Derivative Instruments and Hedging Activities

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

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

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

Impairment of Long-Lived Assets

Income Taxes and Tax-Allocation Agreements

Homer City has historically made an election to be taxed as a corporation for federal and California state tax purposes. Homer City is included in the consolidated federal and state income tax returns of Edison International and is party to a tax-allocation agreement with its indirect parent, Edison Mission Holdings Co. As long as Edison International continues to own, directly or indirectly, at least 80% of the voting power of the stock of EME and its existing subsidiaries and at least 80% of the value of such stock, Homer City will be included in the consolidated federal and state income tax returns of Edison International. In accordance with the agreement and the tax-allocation procedures in effect, its current tax liability or benefit is generally determined on a separate return basis, except for calculating consolidated state income taxes, for which Homer City uses the state tax apportionment factors of the Edison International group. Also, while Homer City is generally subject to separate return limitations for net losses, under the tax-allocation agreement ~~Homer~~it ~~City~~ is permitted to transfer to Edison Mission Holdings, or its subsidiaries, net operating loss benefits which would not yet be realized in a separate return in exchange for a reduction in ~~its~~Homer City's intercompany account balances (including the subordinated revolving loan). Homer City also has the option, at Homer City's discretion, under its tax-allocation agreement with Edison Mission Holdings to settle federal and state income tax liabilities under the tax-allocation agreement through an increase in indebtedness under the subordinated revolving loan. In 2011 and 2010, Homer City elected its option and ~~2009~~settled $1 million and $32 million, respectively, of intercompany tax liabilities through the subordinated revolving loan. Homer City also files a separate state income tax return in Pennsylvania. Amounts included in due to affiliates on the balance sheet associated with this tax-allocation agreement totaled $2 million and $4 million at December 31, 2011 and 2010, respectively.

53Homer City accounts for deferred income taxes using the asset-and-liability method, wherein deferred tax assets and liabilities are recognized for future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using enacted income tax rates. In assessing the realization of Homer City's deferred tax assets, management considered whether it is more likely than not that the deferred tax assets will be realized. Realization of Homer City's deferred tax assets depends upon its ability to generate taxable income in the future or utilize losses through a reduction in the loan with Edison Mission Finance. On a quarterly basis, management evaluates the recoverability of its deferred tax assets to ensure there is adequate support for the realization of the deferred tax assets. In the event management were to determine that Homer City would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged as a reduction to income in the period such determination was made. At December 31, 2011, Homer City provided a full valuation allowance against its net deferred tax assets. For further information regarding the valuation allowance, see Note 6—Income Taxes.

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On March 15, 2012, Homer City ~~elected~~ ~~its~~made ~~option~~an ~~and~~election ~~settled~~to ~~$32 million~~be ~~and~~treated ~~$118 million,~~as ~~respectively,~~a ofpartnership ~~intercompany~~for federal and state income tax ~~liabilities~~purposes. ~~through~~As a result, the ~~subordinated~~income ~~revolving~~or ~~loan.~~loss of Homer City ~~also~~will ~~files~~ be allocated to the individual partners. Accordingly, on a ~~separate~~ ~~state~~prospective ~~income~~basis, ~~tax~~no ~~return~~recognition inwill ~~Pennsylvania.~~be ~~Amounts~~given ~~included~~to income taxes in ~~due~~Homer toCity's ~~affiliates~~financial onstatements ~~the~~and ~~balance~~deferred ~~sheet~~taxes ~~associated~~and ~~with~~the ~~this~~related ~~tax-allocation~~valuation ~~agreement~~allowance ~~totaled~~will ~~$4 million~~be ~~and $8 million~~eliminated atin ~~December 31,~~the ~~2010~~first ~~and~~quarter ~~2009,~~of ~~respectively~~2012.

~~Homer City~~Interest ~~accounts for deferred~~ income ~~taxes using the asset-and-liability method~~, ~~wherein~~interest ~~deferred~~expense ~~tax assets~~ and ~~liabilities~~penalties ~~are~~associated ~~recognized~~with ~~for future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using enacted~~ income ~~tax~~taxes ~~rates.~~are Atreflected December 31, 2010, Homer City had net federal and state deferred tax assets of $119 million. In assessing the realization of Homer City's deferred tax assets, management considered whether it is more likely than not the deferred tax assets will be realized. The ultimate realization of Homer City's deferred income tax assets depends upon its ability to generate taxable income in ~~the~~provision future or utilize losses through a reduction in the loan with Edison Mission Finance. On a quarterly basis, management evaluates the recoverability of its deferred tax assets to ensure there is adequate support for the realization of the deferred tax assets. In the event management were to determine that Homer City would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged as a reduction to income intaxes ~~the~~on ~~period such determination was made. Because~~ Homer City's isstatements ~~expected to realize deferred tax assets through future taxable income or by reduction~~ of ~~intercompany loans, no valuation allowance has been recorded~~operations.

Intangible Assets

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

Inventory

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

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New Accounting Guidance

Accounting Guidance Adopted in ~~2010~~ 2011

Fair Value Measurements and Disclosures

The Financial Accounting Standards Board (FASB) issued an accounting standards update ~~that~~modifying ~~provides~~the ~~for new~~ disclosure requirements related to fair value measurements. ~~The requirements,~~Under ~~which~~these ~~Homer City adopted effective January 1~~requirements, ~~2010,~~purchases ~~include separate disclosure of significant transfers in~~ and ~~out~~settlements ~~of Levels 1 and 2 and the reasons~~ for the transfers. The update also clarified existing disclosure requirements for the level of disaggregation, inputs and valuation techniques. Since this guidance impacts disclosures only, the adoption did not have an impact on Homer City's results of operations, financial position or cash flows. In addition, effective January 1, 2011, the Level 3 ~~reconciliation of~~ fair value measurements ~~using significant~~are ~~unobservable~~presented ~~inputs~~on ~~should~~a ~~include~~ gross basis, rather than net. ~~information~~Homer ~~about~~City ~~purchases,~~adopted ~~sales,~~this ~~issuances and settlements. The~~ guidance ~~impacts~~effective ~~disclosures only. For further discussion~~January 1, ~~see Note 3—Fair Value Measurements~~2011.

Accounting Guidance Not Yet Adopted

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

In May ~~Property~~2011, ~~Plant~~the FASB issued an accounting standards update modifying the fair value measurement and ~~Equipment~~ disclosure guidance. This guidance prohibits grouping of financial instruments for purposes of fair value measurement and requires the value be based on the individual security. This amendment also results in new disclosures primarily related to Level 3 measurements including quantitative disclosure about unobservable inputs and assumptions, a description of the valuation processes and a narrative description of the sensitivity of the fair value to changes in unobservable inputs. Homer City will adopt this guidance in the first quarter of 2012. The adoption of this standards update is not expected to have a material impact on Homer City's financial position.

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

~~Depreciation and~~In ~~amortization~~June is2011, ~~computed~~the FASB issued an accounting standards update on athe ~~straight-line~~presentation ~~basis~~of ~~over~~comprehensive income. An entity can elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. Homer City will adopt this guidance in the first quarter of 2012. Homer City currently presents the statement of comprehensive income immediately following ~~estimated~~the ~~useful~~statement ~~lives:~~of income and expects to continue to do so. The adoption of this accounting standards update does not change the items that constitute net income and other comprehensive income.

Plant and equipment under lease financing		33.67 years
Leasehold improvements		Shorter of life of lease or estimated useful life
Emission allowances		33.67 years
Equipment, furniture and fixtures		3 to 7 years
Capitalized leased equipment		5 years

Offsetting Assets and Liabilities

~~Certain~~In ~~major~~December ~~pieces~~2011, the FASB issued an accounting standards update modifying disclosure requirements about the nature of ~~Homer~~an ~~City~~entity's ~~equipment~~rights ~~require~~of ~~periodic~~offsetting ~~repairs~~assets and ~~maintenance~~liabilities in the statement of financial position under master netting agreements and related arrangements associated with financial and derivative instruments. ~~These~~The ~~costs,~~guidance ~~including~~requires ~~major~~increased ~~maintenance~~disclosure ~~costs~~of the gross and net recognized assets and liabilities, ~~are~~collateral ~~expensed~~positions ~~as incurred~~and narrative descriptions of setoff rights. Homer City will adopt this guidance effective January 1, 2013. The guidance impacts disclosure only.

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Restricted Deposits

Certain cash balances are restricted to pay amounts required for lease payments and provide collateral. Included in restricted deposits were $20 million at each of December 31, 2010 and 2009 related to lease payments, and $7 million at each of December 31, 2010 and 2009 for collateral related to an environmental bond. For additional information regarding the lease payments, see Note 8—Commitments and Contingencies—Lease Commitments—Facilities Sale-Leaseback.

Revenue Recognition

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

Note 2. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	December 31,	~~December 31,~~
(in millions)	2011	~~2010~~		~~2009~~2010
Land	$	$7	7	$	7
Power plant facilities	2		4	4	3
Plant and equipment under lease financing	760		~~1,582~~	1,582	~~1,589~~
Leasehold improvements	110		~~172~~	172	~~150~~
Emission allowances	198		~~438~~	438	~~434~~
Construction in progress	7		25	25	29
Equipment, furniture and fixtures	1		10	10	10
Capitalized leased equipment	—		1	1	1
			2,239		2,223
	1,085			2,239
Less accumulated depreciation and amortization	—		~~609~~	609	~~540~~
Property, plant and equipment, net	$	$1,085	~~1,630~~	$	1,~~683~~630

As a result of the sale-leaseback transaction on December 7, 2001, a majority of the generating facilities and equipment were classified as power plant and equipment under lease financing. Homer City recorded amortization expense related to the leased facilities of $47 million for all three years ended December 31, ~~2010~~2011, ~~2009~~ 2010 and ~~2008~~2009. Accumulated amortization related to the leased facilities was none and $427 million at December 31, 2011 and 2010, respectively.

56Homer City recorded $478 million of impairment charges related to property, plant and equipment at the Homer City plant in 2011. For additional information, see Note 12—Asset Impairments and Other Charges.

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amortization related to the leased facilities was $427 million and $381 million at December 31, 2010 and 2009, respectively.

Asset Retirement Obligations

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

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

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~		~~2009~~2010		~~2008~~	2009
Beginning balance	$	$7	5	$	35	$	6$	3
Accretion expense	1		1	1	—		—
Revisions			—		—		(3	)
Liabilities added	—			1			2
Liabilities added			1		2		—
Ending balance	$	8		$	7		$	5
Ending balance		$	7	$	5	$	3

Note 3. Fair Value Measurements

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

~~Homer City~~Fair ~~categorizes~~value ~~financial~~is ~~assets~~defined ~~and~~as ~~liabilities~~the ~~into~~price athat ~~fair~~would ~~value~~be ~~hierarchy~~received ~~based~~to onsell ~~valuation~~an ~~inputs~~asset ~~used~~or paid to ~~derive~~transfer ~~fair~~a ~~value.~~liability ~~The~~in ~~hierarchy~~an ~~gives~~orderly transaction between market participants at the ~~highest~~measurement ~~priority~~date (referred to ~~unadjusted~~as ~~quoted market~~an ~~prices~~"exit inprice"). ~~active~~Fair ~~markets~~value ~~for~~of ~~identical~~an ~~assets~~asset ~~and~~or ~~liabilities~~a ~~(Level 1~~liability ~~measurements)~~should ~~and~~consider ~~the~~assumptions ~~lowest~~that ~~priority~~market toparticipants ~~unobservable~~would ~~inputs~~use ~~(Level 3~~in ~~measurements).~~pricing the asset or liability, including assumptions about

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nonperformance risk. The fair value of derivative assets' nonperformance risk was not material as of December 31, 2011 and 2010.

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

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

			As of December 31, 2010
	December 31, 2011
(in millions)	Level 1		~~Level 1~~		Level 2	~~Level 2~~		Level 3		~~Netting1~~	Netting1		~~Total~~		Total
Assets at Fair Value
Money market funds2	~~Money market funds2~~$	28	$	31	$	$—	—	$	—	$	—$	—	$	31	$	28
Electricity contracts	~~Electricity contracts~~—			—	1		5	—	—		3—			8	1
Liabilities at Fair Value
Electricity contracts	~~Electricity contracts~~$	—	$	—	$	$3	3	$	—	$	3$	—	$	6	$	3
				As of December 31, 2009
	December 31, 2010
Assets at Fair Value
Money market funds2	~~Money market funds2~~$	31	$	40	$	$—	—	$	—	$	—$	—	$	40	$	31
Electricity contracts	~~Electricity contracts~~—			—	5		82	—	—		—3			82	8
Liabilities at Fair Value
Electricity contracts	~~Electricity contracts~~$	—	$	—	$	$3	1	$	—	$	—$	3	$	1	$	6

1		Represents the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
2		Included in cash and cash equivalents on Homer City's balance sheets.


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

~~The~~2 ~~following~~Money ~~table~~market ~~sets~~funds ~~forth~~are aincluded ~~summary of changes~~ in ~~the~~cash ~~fair value of assets~~ and ~~liabilities,~~cash ~~net~~equivalents ~~categorized~~on asHomer ~~Level 3:~~City's balance sheets.

(in millions)		2010		2009
Fair value, net asset at beginning of periods		$	—	$	—
Total realized/unrealized gains (losses):
	Included in earnings1		—		(2	)
	Included in accumulated other comprehensive income		—		—
Purchases and settlements, net			—		2
Transfers in or out of Level 3			—		—
Fair value, net asset at end of periods		$	—	$	—

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

1 Reported in operating revenues on Homer City's statements of income.



(in millions)	2011			2010
Fair value, net asset at beginning of periods	$	—		$	—
Total realized/unrealized gains (losses):
Included in earnings¹	(2		)	—
Included in accumulated other comprehensive income	—			—
Settlements	2			—
Transfers in or out of Level 3	—			—
Fair value, net asset at end of periods	$	—		$	—

~~The~~1 ~~change~~Reported in ~~unrealized~~operating ~~gains~~revenues ~~(losses)~~on ~~related~~Homer toCity's ~~assets~~statements ~~and~~of ~~liabilities, net held at December 31, 2010 and 2009 for the years ended December 31, 2010 and 2009 was immaterial~~operations.

~~Homer City~~The ~~determines~~change ~~the~~in ~~fair~~unrealized ~~value~~gains of(losses) ~~transfers~~related into assets and ~~out~~liabilities, ofnet ~~each~~held ~~level~~ at ~~the~~December 31, ~~end~~2011 ofand ~~each~~2010 ~~reporting~~for ~~period.~~the ~~There~~years ~~were~~ended noDecember 31, ~~significant~~2011 ~~transfers~~and ~~between levels during~~ 2010, ~~2009~~was ~~and 2008~~immaterial.

58Homer City determines the fair value of transfers in and out of each level at the end of each reporting period. There were no significant transfers between levels during 2011, 2010 and 2009.

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Valuation Techniques used to Determine Fair Value

Level 1

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

Level 2

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

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

Level 3

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

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

59Non-Recurring Fair Value Measurements

~~Table~~For a discussion of ~~Contents~~non-recurring fair value measurements, see Note 12—Asset Impairments and Other Charges.

derivatives that are classified as Level 3 is determined using uncorroborated non-binding broker quotes and models that may require EMMT to extrapolate short-term observable inputs in order to calculate fair value. Broker quotes are obtained from several brokers and compared against each other for reasonableness.

Note 4. Long-Term Debt

Homer City has entered into a subordinated revolving loan agreement with Edison Mission Finance Co. This loan agreement bears interest at a fixed rate of 8.0% on outstanding amounts and terminates on March 18, 2014. The outstanding balance under the loan agreement was ~~approximately~~ $~~479~~490 million and $~~459~~479 million at December 31, ~~2010~~2011 and ~~2009~~2010, respectively. Homer City is restricted as a part of the sale-leaseback transaction from making any payments under this facility unless specified conditions are met. Homer City incurred interest costs related to its affiliate debt of $3840 million, $3638 million and $2936 million for the years ended December 31, ~~2010~~2011, ~~2009~~ 2010 and ~~2008~~2009, respectively. It is not practicable to estimate the fair value of this financial instrument due to the subordination features of the loan and the provisions of the sale-leaseback agreements for the Homer City plant.

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Note 5. Derivative Instruments and Hedging Activities

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

Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on Homer City's balance sheets as derivative assets or liabilities with offsetting changes recorded on the statements of ~~income~~operations. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized, ~~to the extent effective,~~ on Homer City's balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive ~~income~~loss until reclassified into earnings when the related forecasted transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. The results of derivative activities are recorded in cash flows from operating activities on the statements of cash flows.

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Notional Volumes of Derivative Instruments

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

December 31, 2010
December 31, 2011
Commodity	Instrument	~~Instrument~~Classification	Unit of Measure	~~Classification~~Cash FlowHedges	~~Unit of Measure~~	EconomicHedges	~~Cash Flow Hedges~~			~~Economic Hedges~~
Electricity	Forwards/Futures	~~Forwards/Futures~~Sales, net	GWh	~~Sales~~—	~~GWh1~~	90		~~2,767~~3	2		~~8,845~~	4
Electricity	Capacity	~~Forwards/Futures~~Sales, net	MW-Day (in thousands)	~~Purchases~~29	~~GWh~~2	—		—			~~8,865~~	4
Electricity	Congestion	~~Capacity~~Purchases, net	GWh	~~Sales~~—	~~MW-Day (in thousands)~~	1,267		444	3		—
Electricity		Capacity		Purchases	MW-Day (in thousands)			8	3		—
December 31, 2010
Electricity	Forwards/Futures	~~Congestion~~Sales, net	GWh	~~Sales~~2,767	~~GWh~~1	—		—			~~136~~	5
Electricity	Forwards/Futures	~~Congestion~~Purchases, net	GWh	~~Purchases~~—	~~GWh~~	20		—3			~~503~~	5
December 31, 2009
Electricity	Capacity	Sales, net	MW-Day (in thousands)	36	2	—
Electricity	Congestion	~~Forwards/Futures~~Purchases, net	GWh	~~Sales~~—	~~GWh1~~	367		~~3,703~~4	2		~~7,566~~	4
Electricity		Forwards/Futures		Purchases	GWh			—			7,566	4
Electricity		Capacity		Sales	MW-Day (in thousands)			—			1	3
Electricity		Congestion		Sales	GWh			—			136	5
Electricity		Congestion		Purchases	GWh			—			1,576	5

1		The term gigawatt-hours is referred to as GWh.
2		Includes forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the Homer City plant which meet the normal purchases and sales exception and are accounted for on the accrual method.
3		Homer City's hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM Reliability Pricing Model (RPM) auction is not accounted for as a derivative.
4		Homer City also entered into transactions that adjust financial and physical positions, or day-ahead and real-time positions to reduce costs or increase gross margin. These positions largely offset each other. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.
5		Congestion contracts include financial transmission rights, transmission congestion contracts or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.


¹	Homer City's hedge products include forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the Homer City plant which meet the normal purchases and sales exception and are accounted for on the accrual method.

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


³	These positions adjust financial and physical positions, or day-ahead and real-time positions, to reduce costs or increase gross margin. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.


⁴	Congestion contracts include financial transmission rights, transmission congestion contracts or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.

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Fair Value of Derivative Instruments

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

December 31, 2010
December 31, 2011
	Derivative Assets	~~Derivative Assets~~									~~Derivative Liabilities~~		Derivative Liabilities
																			Net Assets
(in millions)	Short-term				Long-term				Subtotal				Short-term			Long-term				Subtotal			Net Assets (Liabilities)
(in millions)		Short-term			Long-term			Subtotal			Short-term			Long-term		Subtotal
Cash flow hedges	$	1			$	—			$	1			$	—		$	3			$	3		$	(2	)
Cash flow hedges		$	11		$	—		$	11		$	4		$	6	$	10		$	1
Economic hedges	7				1				8				7			1				8			—
Economic hedges			51			—			51			50			—		50			1
	8				1				9				7			4				11			(2		)
			62			—			62			54			6		60			2
Netting1	(7		)		(1		)		(8		)		(7		)	(1		)		(8		)	—
Netting1			(54	)		—			(54	)		(54	)		—		(54	)		—
Total	$	1			$	—			$	1			$	—		$	3			$	3		$	(2	)
Total		$	8		$	—		$	8		$	—		$	6	$	6		$	2
December 31, 2010
December 31, 2009
Cash flow hedges	$	11			$	—			$	11			$	4		$	6			$	10		$	1
Cash flow hedges		$	87		$	—		$	87		$	8		$	—	$	8		$	79
Economic hedges	51				—				51				50			—				50			1
Economic hedges			26			1			27			25			—		25			2
	62				—				62				54			6				60			2
			113			1			114			33			—		33			81
Netting1	(54		)		—				(54		)		(54		)	—				(54		)	—
Netting1			(32	)		—			(32	)		(32	)		—		(32	)		—
Total	$	8			$	—			$	8			$	—		$	6			$	6		$	2
Total		$	81		$	1		$	82		$	1		$	—	$	1		$	81


¹	Netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists with a derivative counterparty.

Income Statement Impact of Derivative Instruments

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

		Cash Flow Hedge Activity1
(in millions)	Cash Flow Hedge Activity1								Income StatementLocation
								Income Statement Location
	2011				2010
(in millions)		2010			2009
Beginning of period derivative gains	$	7			$	66
Accumulated other comprehensive income derivative gain at January 1		$	66		$	130
Effective portion of changes in fair value	14				33
Effective portion of changes in fair value			33			15
Reclassification to earnings	(23		)		(92		)		Operating revenues
Reclassification from accumulated other comprehensive income to net income			(92	)		(79	)	Operating revenues
End of period derivative gains (losses)	$	(2	)		$	7
Accumulated other comprehensive income derivative gain at December 31		$	7		$	66

1 Unrealized derivative gains (losses) are before income taxes. The after-tax amounts recorded in accumulated other comprehensive ~~income~~loss at December 31, ~~2010~~2011 and ~~2009~~2010 were $(3) million and $383 million, respectively.

62For additional information, see Note 10—Accumulated Other Comprehensive Income (Loss).

Homer City recorded net gains (losses) of $7 million, $(10) million and $18 million in 2011, 2010 and 2009, respectively, in operating revenues on the statements of operations representing the amount of cash flow hedge ineffectiveness.

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



		Years Ended December 31,
(in millions)	Income Statement Location	2011		2010
Economic hedges	Operating revenues	$	16	$	(1	)

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

Homer City recorded net gains (losses) of $(10) million, $18 million and $6 million in 2010, 2009 and 2008, respectively, in operating revenues on the statements of income representing the amount of cash flow hedge ineffectiveness.

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

		December 31,
	Income Statement Location
(in millions)		2010			2009
Economic hedges	Operating revenues	$	(1	)	$	(6	)

Commodity Price Risk Management

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

Credit Risk

In conducting Homer City's marketing activities, EMMT enters into transactions with utilities, energy companies, financial institutions, and other companies, collectively referred to as counterparties. In the event a counterparty were to default on its trade obligation, Homer City would be exposed to the risk of possible loss associated with market price changes occurring since the original contract was executed if the nonperforming counterparty were unable to pay the resulting damages owed to Homer City. Further, 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.

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

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to perform pursuant to the terms of its contractual obligations. To mitigate credit risk from counterparties, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary.

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

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 6991%, 3369% and 5433% of Homer City's operating revenues for the years ended December 31, ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, respectively. Moody's Investors Service, Inc. (Moody's) rates PJM's debt Aa3. PJM, a regional transmission organization (RTO) with over 300 member companies, maintains its own credit risk policies and does not extend unsecured credit to non-investment grade companies. Losses resulting from a PJM member default are shared by all other members using a predetermined formula.

For the years ended December 31, ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, EMMT made sales to Constellation Energy Commodities Group, Inc. (Constellation) that accounted for 19less than 1%, 4119% and 2441%, respectively, of Homer City's operating revenues. Sales to Constellation consisted 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 Standard & Poor's Ratings Services (S&P) and Baa3 by Moody's. At December 31, ~~2010~~2011 and ~~2009~~2010, EMMT's account receivable due from Constellation was ~~$13 million~~ none and $2513 million, respectively.

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Note 6. Income Taxes

Current and Deferred Taxes

~~Income~~The ~~tax~~ provision ~~includes~~for ~~the current tax provision from operating~~ income ~~and the change in deferred income~~ taxes ~~during~~is ~~the~~composed ~~year. The components~~ of ~~net~~the ~~accumulated deferred income tax asset were~~following:

				December 31,
	Years Ended December 31,
(in millions)	2011			~~2010~~	2010		~~2009~~		2009
Deferred tax assets
Current
	Property, plant and equipment—basis differences			$	140		$	114
Federal	$	2			$	23			$	32
	Accrued expenses and liabilities				10			6
State	(3		)		6				14
	State taxes				2			3
Total current	(1		)		29				46
	Other				4			1
Deferred
		Total			156			124
Federal	$	89			$	(17	)		$	1
Deferred tax liabilities
State	30				(1		)		(3		)
	Lease financing			$	37		$	21
Total deferred	119				(18		)		(2		)
	Derivative instruments				—			32
Provision for income taxes	$	118			$	11			$	44
		Total			37			53
Deferred tax asset, net				$	119		$	71
Classification of net accumulated deferred income taxes
	Included in current assets			$	2		$	—
	Included in non-current assets			$	117		$	102
	Included in current liabilities			$	—		$	31

The ~~provision~~components ~~for~~of ~~income~~net ~~taxes~~accumulated isdeferred ~~comprised~~income oftax ~~the~~assets ~~following~~were:

				Years Ended December 31,
	December 31,
(in millions)	2011			~~2010~~	2010		~~2009~~			~~2008~~
Current
Deferred tax assets
	Federal			$	23		$	32		$	43
Property, plant and equipment—basis differences	$	353			$	140
	State				6			14			12
Accrued expenses and liabilities	12				10
		Total current			29			46			55
State taxes	—				2
Deferred
Net operating loss carryforwards	28				—
	Federal			$	(17	)	$	1		$	(3	)
Other	9				4
	State				(1	)		(3	)		(3	)
Total	402				156
		Total deferred			(18	)		(2	)		(6	)
Deferred tax liabilities
Provision for income taxes				$	11		$	44		$	49
Lease financing	$	57			$	37
State taxes	1				—
Total	58				37
Net deferred tax assets before valuation allowance	$	344			$	119
Valuation allowance	(344		)		—
Net deferred tax assets	$	—			$	119
Classification of net accumulated deferred income taxes
Included in current assets	$	—			$	2
Included in deferred taxes	$	—			$	117

65During the fourth quarter of 2011, Homer City recorded a valuation allowance on its deferred tax assets due to it being more likely than not that Homer City will be unable to realize the benefits. The total valuation allowance was $344 million for the year ended December 31, 2011, of which $6 million was reflected in other comprehensive income (loss) and the remainder was reflected in net loss.

As of December 31, 2011, Homer City had $81 million of federal net operating loss carryforwards and $12 million of state net operating loss carryforwards, both of which expire in 2031, if unused.

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Effective Tax Rate

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

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~			~~2009~~2010			~~2008~~	2009
Provision for income taxes at federal statutory rate of 35%		$	13		$	39		$	47
Income (loss) before income taxes	$	(568	)		$	38			$	111
State tax, net of federal benefit			4			6			5
Provision (benefit) for income taxes at federal statutory rate of 35%	$	(199	)		$	13			$	39
Deferred tax adjustments1			(4	)		(1	)		(3	)
State tax, net of federal benefit	(22		)		4				6
Other			(2	)		—			—
Change in valuation allowance	338				—				—
Total provision for income taxes		$	11		$	44		$	49
Deferred tax adjustments	—				(4		)		(1		)
Effective tax rate			29%			40%			37%
Other	1				(2		)		—
Total provision for income taxes	$	118			$	11			$	44
Effective tax rate	*				29		%		40		%

* ~~1Deferred tax~~Not ~~adjustments in 2010 included ($1) million of prior period expenses determined to be immaterial to overall results.~~ meaningful

On March 15, 2012, Homer City made an election to be treated as a partnership for federal and state income tax purposes. As a result, the income or loss of Homer City will be allocated to the individual partners. Accordingly, on a prospective basis, no recognition will be given to income taxes in Homer City's financial statements and deferred taxes and the related valuation allowance will be eliminated in the first quarter of 2012.

Accounting for Uncertainty in Income Taxes

Unrecognized Tax Benefits

At December 31, 2011 and 2010, Homer City had $3 million and $2 million, respectively, of unrecognized tax benefits. Homer City had no unrecognized tax benefits at December 31, 2009 ~~and 2008~~. ~~The~~As ~~total~~of ~~amount~~December of31, ~~unrecognized~~2011 ~~tax~~and ~~benefits~~2010, as$1 million of ~~December 31,~~unrecognized ~~2010~~tax ~~that~~benefits, if recognized, would ~~affect~~impact the effective tax rate ~~was $1 million~~.

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

Accrued Interest and Penalties

The total amount of accrued interest expense and penalties was not material as of December 31, ~~2010~~2011 and ~~none as of December 31, 2009~~2010. The total amount of net after-tax interest expense and penalties recognized in income tax expense was not material for each of ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009.

66Bonus Depreciation Impact

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

Note 7. Compensation and Benefit Plans

Employees of ~~EME~~ Homer City are eligible for various benefit plans of Edison International.

Employee Savings Plan

A 401(k) plan is maintained to supplement eligible employees' retirement income. Homer City matches 100% of non-union employee contributions up to 6% of such employees' base annual compensation. Homer City also matches 70% of contributions made by union employees, up to 4% of base annual compensation. Employer contributions vest 20% per year. Contribution expense was approximately $1 million for each year ended December 31, ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009.

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Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

Homer City maintains a pension plan specifically for the benefit of its union employees. A portion of Homer City's non-union employees participate in the Edison International pension plan. Eligibility depends on a number of factors, including the employee's hire date. Both plans are noncontributory, defined benefit pension plans and cover employees who fulfill minimum service requirements. The Edison International plan has a cash balance feature. The expected contributions (all by employer) for the plans are approximately $2.6 million for the year ended December 31, ~~2011~~2012.

~~Volatile~~ The funded position of the company's pension is very sensitive to changes in market conditions. ~~have~~Changes ~~affected~~in overall interest rate levels significantly affect the ~~value~~company's ofliabilities, while assets held in the various trusts established to fund ~~its~~the ~~future~~company's long-term pension ~~benefits~~are affected by movements in the equity and bond markets. The market value of the investments (reflecting investment returns, contributions and benefit payments) within the plan trusts declined 35% during 2008. This reduction in ~~the~~ value of plan assets combined with increased liabilities has resulted in a change in the pension plan funding status from ~~overfunded~~ a surplus to ~~underfunded~~a ~~and~~material ~~will~~deficit, ~~also~~which will result in increased future expense and ~~increased~~cash ~~future~~ contributions. ~~Improved~~The ~~market~~company ~~conditions~~pension inremains ~~2010~~underfunded ~~and~~as ~~2009~~liabilities ~~partially~~have ~~offset~~increased ~~the~~significantly ~~impacts~~as a result of ~~the~~steady ~~2008 market~~declines ~~conditions.~~in interest rates.

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Information on plan assets and benefit obligations is shown below:

	Years Ended December 31,		~~Years Ended December 31,~~
(in millions)	2011		~~2010~~		2010	~~2009~~
Change in projected benefit obligation
Projected benefit obligation at beginning of year	~~Projected benefit obligation at beginning of year~~$	35	$	30	$	$30	27
Service cost	~~Service cost~~1			1	1		1
Interest cost	~~Interest cost~~2			2	2		2
Actuarial loss	~~Actuarial loss~~3			2	2		—
Projected benefit obligation at end of year			$	35		$	30
Benefits paid	(1		)		—
Change in plan assets
Projected benefit obligation at end of year	$	40			$	35
	Fair value of plan assets at beginning of year		$	19		$	15
Change in plan assets
	Actual return on plan assets			3			3
Fair value of plan assets at beginning of year	$	25			$	19
	Employer contributions			3			1
Actual return on plan assets	—				3
Fair value of plan assets at end of year			$	25		$	19
Employer contributions	2				3
Funded status at end of year			$	(10	)	$	(11	)
Benefits paid	(1		)		—
Amounts recognized on balance sheets:
Fair value of plan assets at end of year	$	26			$	25
Long-term liabilities			$	(10	)	$	(11	)
Funded status at end of year	$	(14	)		$	(10	)
Amounts recognized in accumulated other comprehensive income:
Amounts recognized on balance sheets:
Net loss			$	3		$	2
Long-term liabilities	$	(14	)		$	(10	)
Accumulated benefit obligation at end of year			$	30		$	26
Amounts recognized in accumulated other comprehensive income:
Pension plans with an accumulated benefit obligation in excess of plan assets:
Net loss	$	8			$	3
Projected benefit obligation			$	35		$	30
Accumulated benefit obligation at end of year	35				30
Accumulated benefit obligation				30			26
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets				25			19
Projected benefit obligation	$	40			$	35
Weighted-average assumptions used to determine obligations at end of year:
Accumulated benefit obligation	35				30
Discount rate				5.25%			6.0%
Fair value of plan assets	26				25
Rate of compensation increase				4.5%-5.0%			5.0%
Weighted-average assumptions used to determine obligations at end of year:
Discount rate	4.50		%		5.25		%
Rate of compensation increase	4.50		%		4.5% to 5.0%

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

Expense components:

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~			~~2009~~2010			~~2008~~	2009
Service cost	$	$1	1		$	1		$	1$	1
Interest cost	2		2		2	2			2
Expected return on plan assets	(2		(2)	)	(2	(1	)		(21	)	)
Total expense	$	$1	1		$	21		$	1$	2

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

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~		~~2009~~2010			~~2008~~	2009
Net loss (gain)	$	$5	1	$	(31	)	$	5$	(3	)
Total in other comprehensive (income) loss	$	$5	1	$	(31	)	$	5$	(3	)
Total in expense and other comprehensive (income) loss	$	$6	2	$	(12	)	$	6$	(1	)

The estimated amortization ~~amounts~~amount expected to be reclassified from other comprehensive (income) loss for ~~2011~~2012 ~~are~~is ~~immaterial~~$0.5 million for net loss.

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

	Years Ended December 31,	~~Years Ended December 31,~~
		2010			2009			2008
	2011			2010			2009
Discount rate	5.25	%	~~6.0%~~	6.00	%	~~6.25%~~	6.25	%	~~6.25%~~
Rate of compensation increase	4.5% to 5.0%		~~4.5%-5.0%~~	4.5% to 5.0%		~~5.0%~~	5.0	%	~~5.0%~~
Expected long-term return on plan assets	7.5	%	~~7.5%~~	7.5	%	~~7.5%~~	7.5	%	~~7.5%~~

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

Years Ending December 31, (in millions)
Years Ending December 31,(in millions)
2011		$	1
2012	$	2
2012			2
2013	2
2013			2
2014	2
2014			2
2015	2
2015			2
2016	3
2016-2020			13
2017-2021	14

Postretirement Benefits Other Than Pensions

Homer City's non-union employees retiring at or after age 55 with at least ten years of service may be eligible for postretirement medical, dental, and vision coverage. Eligibility for a company contribution toward the cost of these benefits in retirement depends on a number of factors, including the employee's hire date. The expected contributions (all by the employer) for the postretirement benefits other than pensions are $01.81 million for the year ended December 31, ~~2011~~2012.

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Information on plan assets and benefit obligations is shown below:

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~			~~2009~~2010
Change in benefit obligation
Benefit obligation at beginning of year	$	$33	27		$	27
Service cost	1		1		1	1
Interest cost	2		2		2	2
Actuarial loss (gain)			4			(2	)
Actuarial loss	—				4
Benefits paid	(1		(1)	)	(1	(1	)
Benefit obligation at end of year	$	$35	33		$	2733
Change in plan assets
Fair value of plan assets at beginning of year	$	$—	—		$	—
Employer contributions	1		1		1	1
Benefits paid	(1		(1)	)	(1	(1	)
Fair value of plan assets at end of year	$	$—	—		$	—
Funded status at end of year	$	$(35	~~(33~~)	)	$	(2733	)
Amounts recognized on balance sheets:
Long-term liabilities	$	$(35	~~(33~~)	)	$	(2733	)
Amounts recognized in accumulated other comprehensive income:
Prior service credit	$	$(1	(2)	)	$	(2	)
Net loss	7		8		8	3
Weighted-average assumptions used to determine obligations at end of year:
Discount rate	4.75		~~5.5~~%		5.5	~~6.0%~~	%
Assumed health care cost trend rates:
Rate assumed for following year	9.50		~~9.75~~%		9.75	~~8.25%~~	%
Ultimate rate	5.25		~~5.5~~%		5.5	~~5.5%~~	%
Year ultimate rate reached	2019		~~2019~~		2019	~~2016~~

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

Expense components:

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~		~~2009~~2010		~~2008~~	2009
Service cost	$	$1	1	$	1	$	1$	1
Interest cost	2		1	1	1		1
Total expense	$	$3	2	$	2	$	2$	2

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

	Years Ended December 31,	~~Years Ended December 31,~~
(in millions)	2011	~~2010~~		~~2009~~2010			~~2008~~	2009
Net loss (gain)	$	$—	5	$	(25	)	$	6$	(2	)
Prior service credit			—		—			(3	)
Total in other comprehensive (income) loss	$	—		$	5			$	(2	)
Total in other comprehensive (income) loss		$	5	$	(2	)	$	3
Total in expense and other comprehensive (income) loss	$	3		$	7			$	—
Total in expense and other comprehensive (income) loss		$	7	$	—		$	5

The estimated amortization amounts expected to be reclassified from other comprehensive ~~(income)~~ loss for ~~2011~~2012 are $0.54 million for net loss and $(0.32) million for prior service credit.

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

	Years Ended December 31,	~~Years Ended December 31,~~
		2010			2009			2008
	2011			2010			2009
Discount rate	5.50	%	~~6.0%~~	6.00	%	~~6.25%~~	6.25	%	~~6.25%~~
Assumed health care cost trend rates:
Current year	9.75	%	~~8.25%~~	8.25	%	~~8.75%~~	8.75	%	~~9.25%~~
Ultimate rate	5.5	%	~~5.5%~~	5.5	%	~~5.5%~~	5.5	%	~~5.0%~~
Year ultimate rate reached	2019		~~2016~~	2016		~~2016~~	2016		~~2015~~

Increasing the health care cost trend rate by one percentage point would increase the accumulated benefit obligation as of December 31, ~~2010~~2011, by $~~4.8~~5 million and annual aggregate service and interest costs by $0.3 million. Decreasing the health care cost trend rate by one percentage point would decrease the accumulated benefit obligation as of December 31, ~~2010~~2011, by $4.24 million and annual aggregate service and interest costs by $0.3 million.

The following benefit payments are expected to be paid:

Years Ending December 31, (in millions)		Before Subsidy1		Net
Years Ending December 31,(in millions)	BeforeSubsidy1			Net
2011		$	1	$	1
2012	$	1		$	1
2012			1		1
2013	1			1
2013			1		1
2014	1			1
2014			2		2
2015	2			2
2015			2		2
2016	2			2
2016-2020			11		11
2017-2021	11			10

1 ~~1Medicare~~ Medicare Part D prescription drug benefits.

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Discount Rate

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

Plan Assets

Description of Pension and Postretirement Benefits Other ~~Than~~than Pensions Investment Strategies

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

~~Allowable investment types include:~~ 55

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among multiple asset classes, managers, styles and securities. Plan, asset class and individual manager performance is measured against targets. Edison International also monitors the stability of its investment managers' organizations.

Allowable investment types include:


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


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


•	Fixed Income: Fixed income securities issued or guaranteed by the United States government, non-United States governments, government agencies and instrumentalities including municipal bonds, mortgage backed securities and corporate debt obligations. A portion of the fixed income positions may be held in debt securities that are below investment grade.

Opportunistic, Alternative and Other Investments:


•	Opportunistic: Investments in short to intermediate term market opportunities. Investments may have fixed income and/or equity characteristics and may be either liquid or illiquid.


•	Alternative: Limited partnerships that invest in non-publicly traded entities.


•	Other: Investments diversified among multiple asset classes such as global equity, fixed income currency and commodities markets. Investments are made in liquid instruments within and across markets. The investment returns are expected to approximate the plans' expected investment returns.

Asset class portfolio weights are permitted to range within plus or minus 3%. Where approved by the fiduciary investment committee, futures contracts are used for portfolio rebalancing and to reallocate portfolio cash positions. Where authorized, a few of the plans' investment managers employ limited use of derivatives, including futures contracts, options, options on futures and interest rate swaps in place of direct investment in securities to gain efficient exposure to markets. Derivatives are not used to leverage the plans or any portfolios.

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

The overall expected long-term rate of return on assets assumption is based on the long-term target asset allocation for plan assets and capital markets return forecasts for asset classes employed.

Capital Markets Return Forecasts

~~Capital~~Our capital markets return ~~forecasts~~forecast ~~are~~methodologies ~~based~~primarily onuse ~~long-term~~a ~~strategic~~combination ~~planning~~of ~~assumptions~~historical ~~from~~market andata, ~~independent~~current ~~firm~~market ~~which~~conditions, ~~uses~~proprietary ~~its~~forecasting ~~research~~expertise, ~~modeling~~ ~~and~~complex ~~judgment~~models to ~~forecast~~develop ~~rates~~asset ofclass return ~~for~~forecasts ~~global~~and ~~asset classes. In addition,~~ a ~~separate~~building ~~analysis~~block ~~of expected returns is conducted~~approach. The ~~estimated~~forecasts ~~total~~are ~~return~~developed ~~for~~using ~~fixed~~variables ~~income~~such ~~securities~~as ~~is based~~real ~~on historic long~~risk-~~term~~free ~~United~~interest, ~~States~~inflation, ~~government~~and ~~bonds~~asset ~~data.~~class ~~The~~specific ~~estimated~~risk ~~total~~premiums. ~~return~~For ~~for~~equities, ~~intermediate~~the ~~United~~risk ~~States~~premium ~~government bonds~~ is based on ~~historic~~an ~~and~~assumed ~~projected~~average ~~data.~~equity ~~The estimated~~risk ~~rate~~premium of ~~return~~6% ~~for~~over ~~United~~cash. ~~States~~The ~~equities,~~forecasted ~~non-United~~return ~~States~~on private equity and ~~hedge~~opportunistic ~~funds~~investments ~~includes~~are estimated at a 3% premium ~~over~~above ~~the~~public ~~estimated~~equity, ~~total~~reflecting ~~return~~a premium for ~~intermediate~~higher ~~United~~volatility ~~States government~~and ~~bonds~~liquidity. ~~The~~For ~~rate~~fixed ofincome, ~~return~~the ~~for~~risk ~~private~~premium ~~equity~~ is ~~estimated~~based tooff beof a 3%comprehensive ~~premium~~modeling ~~over~~of ~~public~~credit ~~equity, reflecting a premium for higher volatility and illiquidity~~spreads.

Fair Value of Plan Assets

The plan assets for Homer City pension are included in the Southern California Edison Company Retirement Plan Trust (Master Trust) assets which include investments in equity securities, U.S. treasury securities, other fixed-income securities, common/collective funds, mutual funds, other investment entities, foreign exchange and interest rate contracts, and partnership/joint ventures. Equity securities, U.S. treasury securities, mutual and money market funds are classified as Level 1 as fair value is determined by observable, unadjusted quoted market prices in active or highly liquid and transparent markets. Common/collective funds are valued at the net asset value (NAV) of shares held. Although common/collective funds are determined by observable prices, they are classified as Level 2 because they trade in markets that are less active and transparent. The fair value of the underlying investments in equity mutual funds and equity common/collective funds are based upon stock-exchange prices. The fair value of the underlying investments in fixed-income common/collective funds, fixed-income mutual funds and other fixed income securities including municipal bonds are based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information. Foreign exchange and interest rate contracts are classified as Level 2 because the values are based on observable prices but are not traded on an exchange. ~~Future~~Futures contracts trade on an exchange and therefore are classified as Level 1. One of the partnerships is classified as Level 2 since this investment can be ~~readily redeemed at NAV and the underlying investments are liquid~~

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readily redeemed at NAV and the underlying investments are liquid publicly traded fixed-income securities which have observable prices. The remaining partnerships/joint ventures are classified as Level 3 because fair value is determined primarily based upon management estimates of future cash flows. Other investment entities are valued similarly to common collective funds and are, therefore, classified as Level 2. The Level 1 registered investment companies are either mutual or money market funds. The remaining funds in this category are readily redeemable at NAV and classified as Level 2 and are discussed further in at footnote 6 7 to the pension plan master trust investments table below.

Edison International reviews the process/procedures of both the pricing services and the trustee to gain an understanding of the inputs/assumptions and valuation techniques used to price each asset type/class. For further discussion see Note 3—Fair Value Measurements.

Pension Plan

The following table sets forth the Master Trust investments that were accounted for at fair value as of December 31, 2011 by asset class and level within the fair value hierarchy:



(in millions)	Level 1			Level 2		Level 3		Total
Corporate stocks¹	$	642		$	—	$	—	$	642
Partnerships/joint ventures²	—			140		448		588
Common/collective funds³	—			582		—		582
Corporate bonds⁴	—			497		—		497
U.S. government and agency securities⁵	104			351		—		455
Other investment entities⁶	—			247		—		247
Registered investment companies⁷	79			29		—		108
Interest-bearing cash	5			—		—		5
Other	(1		)	69		—		68
Total	$	829		$	1,915	$	448	$	3,192
Receivables and payables, net								(39		)
Net plan assets available for benefits								3,153
Homer City's share of net plan assets								$	26

The following table sets forth the Master Trust investments that were accounted for at fair value as of December 31, 2010 by asset class and level within the fair value hierarchy:

(in millions)	Level 1	~~Level 1~~		Level 2		~~Level 3~~	Level 3		~~Total~~		Total
Corporate stocks1	$	$786	~~786~~	$	—	$	—$	—	$	~~786~~	$	786
Common/collective funds2			—		600		—			600
Partnerships/joint ventures2	—			155			345				500
Corporate bonds3			—		555		—			555
Common/collective funds3	—			600			—				600
Partnerships/joint ventures4			—		155		345			500
Corporate bonds4	—			555			—				555
U.S. government and agency securities5	84		84	316	~~316~~		—			~~400~~	400
Registered investment companies6			84		169		—			253
Other investment entities6	—			236			—				236
Other investment entities7			—		159		—			159
Registered investment companies7	84			92			—				176
Interest-bearing cash	5		5	—	—		—			5	5
Other	2		2	30	30		—			32	32
Total	$	$961	~~961~~	$	1,984	$	~~345~~$	345	$	~~3,290~~	$	3,290
Receivables and payables, net										~~(55~~	)(55		)
Net plan assets available for benefits										~~3,235~~	3,235
Homer City's share of net plan assets									$	25	$	25

741 Corporate stocks are diversified. For 2011 and 2010, respectively, performance is primarily benchmarked against the Russell Indexes (60% and 63%) and Morgan Stanley Capital International (MSCI) index (40% and 37%).


²	Partnerships/joint venture Level 2 investments consist primarily of a partnership which invests in publicly traded fixed income securities, primarily from the banking and finance industry and U.S. government agencies. At December 31, 2011 and 2010,

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~~The~~respectively, ~~following~~approximately ~~table~~55% ~~sets~~and ~~forth~~60% of the ~~Master~~Level 3 ~~Trust~~partnerships ~~investments~~are ~~that~~invested ~~were~~in ~~accounted~~(1) ~~for~~asset atbacked ~~fair~~securities, ~~value~~including asdistressed mortgages and (2) commercial and residential loans and debt and equity of ~~December~~banks. The remaining Level ~~31,~~3 ~~2009~~partnerships byare ~~asset~~invested ~~class~~in small private equity and ~~level~~venture ~~within the~~capital ~~fair~~funds. ~~value~~Investment ~~hierarchy:~~strategies for these funds include branded consumer products, early stage technology, California geographic focus, and diversified US and non-US fund-of-funds.

(in millions)	Level 1		Level 2		Level 3		Total
Corporate stocks1	$	678	$	—	$	—	$	678
Common/collective funds2		—		612		—		612
Corporate bonds3		—		469		—		469
Partnerships/joint ventures4		—		101		240		341
U.S. government and agency securities5		104		352		—		456
Registered investment companies6		73		58		—		131
Other investment entities7		—		135		—		135
Interest-bearing cash		5		—		—		5
Foreign exchange contracts		—		6		—		6
Other		—		7		—		7
Total	$	860	$	1,740	$	240	$	2,840
Receivables and payables, net								17
Net plan assets available for benefits								2,857
Homer City's share of net plan assets							$	19

At December 31, 2011 and 2010, respectively, the common/collective assets were invested in equity index funds that seek to track performance of the Standard and Poor's (S&P 500) Index (29% and 29%), Russell 200 and Russell 1000 indexes (27% and 28%) and the MSCI Europe, Australasia and Far East (EAFE) Index (10% and 11%). A non-index U.S. equity fund representing 23% of this category for both 2011 and 2010 is actively managed. Another fund representing 8% of this category for both 2011 and 2010 is a global asset allocation fund.

4 ~~1Corporate stocks~~Corporate are diversified. For 2010 and 2009, respectively, performance is primarily benchmarked against the Russell Indexes (63% and 61%) and Morgan Stanley Capital International (MSCI) indexes (37% and 39%). 2At December 31, 2010 and 2009, respectively, the common/collective assets were invested in equity index funds that seek to track performance of the Standard and Poor's (S&P 500) Index (29% and 33%), Russell 200 and Russell 1000 indexes (28% and 26%) and the MSCI Europe, Australasia and Far East (EAFE) Index (11% and 10%). A non-index U.S. equity fund representing 23% and 20% of this category as of December 31, 2010 and 2009, respectively, is actively managed. Another fund representing 8% and 7% of this category, as of December 31, 2010 and 2009, respectively, is a global asset allocation fund. 3Corporate bonds are diversified. At December 31, ~~2010~~2011 and ~~2009~~2010, respectively, this category includes $65 53 million and $52 65 million for collateralized mortgage obligations and other asset backed securities of which $17 10 million and $12 17 million are below investment grade. 4Partnership/joint venture Level 2 investments consist primarily of a partnership which invests in publicly traded fixed income securities, primarily from the banking and finance industry and U.S. government agencies. Approximately 60% of the Level 3 partnerships are invested in asset backed securities including distressed mortgages. The remaining Level 3 partnerships are invested in small private equity and venture capital funds. Investment strategies for these funds include branded consumer products, early stage technology, California geographic focus, and diversified U.S. and non-U.S. fund-of-funds. 5Level 1 U.S. government and agency securities are U.S. treasury bonds and notes. Level 2 primarily relate to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. 6Level 1 of registered investment companies consists of a global equity mutual fund which seeks to outperform the MSCI World Total Return Index. Level 2 of this category primarily consists of (1) short-term, emerging market and high yield bond funds and (2) a hedge fund that invests through liquid instruments in a global diversified portfolio of equity, fixed income, interest rate, foreign currency and commodities markets. 7At December 31, 2010 and 2009, respectively, 57% and 64% of the other investment entities balance is invested in emerging market equity securities. At December 31, 2010 and 2009, respectively, about 24% and 17% of the assets in this category are invested in domestic

755 Level 1 U.S. government and agency securities are U.S. treasury bonds and notes. Level 2 primarily relates to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

~~Table~~6 Other investment entities were primarily invested in (1) emerging market equity securities, (2) a hedge fund that invests through liquid instruments in a global diversified portfolio of ~~Contents~~equity, fixed income, interest rate, foreign currency and commodities markets, and (3) domestic mortgage backed securities.

~~mortgage backed~~7 ~~securities.~~Level ~~Most~~1 of ~~the~~registered ~~remaining~~investment ~~funds~~companies ~~invest~~consisted inof ~~below~~a ~~grade~~global ~~fixed~~equity ~~income~~mutual ~~securities~~fund ~~including~~which ~~foreign~~seeks ~~issuers~~to outperform the MSCI World Total Return Index. Level 2 primarily consisted of short-term, emerging market, high yield bond funds and government inflation-indexed bonds.

At both December 31, ~~2010~~2011 and ~~2009~~2010, approximately 69% ~~and 67%, respectively,~~ of the publicly traded equity investments, including equities in the common/collective funds, were located in the United States.

The following table sets forth a summary of changes in the fair value of Level 3 investments for ~~2010~~2011 and ~~2009~~2010:

(in millions)	2011		~~2010~~		2010	~~2009~~
Fair value, net at beginning of period	$	345	$	~~240~~	$	$240	~~111~~
Actual return on plan assets:
Relating to assets still held at end of period	~~Relating to assets still held at end of period~~6			42	42		34
Relating to assets sold during the period	~~Relating to assets sold during the period~~22			24	24		6
Purchases and dispositions, net				39			89
Purchases	130				108
Transfers in and/or out of Level 3				—			—
Dispositions	(55		)		(69		)
Fair value, net at end of period			$	345		$	240
Transfers in and /or out of Level 3	—				—
Fair value, net at end of period	$	448			$	345

Note 8. Commitments and Contingencies

Lease Commitments

Homer City has a lease financing with respect to its facilities, which is described in more detail below. Homer City also has operating leases in place relating mainly to tractors and trucks. ~~At December 31, 2010, the future minimum payments over the next five years were as follows:~~

Years Ending December 31, (in millions)	Operating Leases		Lease Financing
2011	$	1	$	161
2012		1		160
2013		—		149
2014		—		138
2015		—		107
Thereafter		—		1,260
Total future commitments	$	2	$	1,975
Amount representing interest				890
Net commitments			$	1,085

Operating lease expense amounted to $1 million, $1 million and $2 million in 2010, 2009 and 2008, respectively.

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At December 31, 2011, the future operating and lease financing commitments were as follows:



Years Ending December 31, (in millions)	Operating Leases		Lease Financing
2012	$	1	$	160
2013	1		149
2014	—		138
2015	—		107
2016	—		89
Thereafter	—		1,171
Total future commitments	$	2	$	1,814
Amount representing interest			808
Net commitments			$	1,006

Operating lease expense amounted to $1 million for each year ended December 31, 2011, 2010 and 2009.

Facilities Sale-Leaseback

On December 7, 2001, Homer City completed the sale-leaseback of its Homer City plant to third-party lessors. The transaction has been accounted for as a lease financing for accounting purposes, which means that Homer City reflects the Homer City plant as an asset on its balance sheet, although Homer City has no legal ownership, and records the net present value of the future minimum lease payments as lease debt. Under the terms of the 33.67 year leases, Homer City is obligated to make semi-annual lease payments on each April 1 and October 1. The gain on the sale of the Homer City plant has been deferred and is being amortized over the term of the lease.

Under the participation agreements entered into as part of the sale-leaseback transaction, 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, Homer City's liquidity is substantially based on its ability to generate cash flow from operations. IfFor ~~Homer~~additional ~~City~~discussion isregarding ~~unable~~potential toimpact ~~generate cash flow from operations necessary~~ to ~~meet~~the ~~its~~lease ~~obligations~~agreements, ~~Homer~~see ~~City~~Note ~~will have~~1—Summary ~~limited~~of ~~ability~~Significant toAccounting ~~obtain~~Policies—Substantial ~~additional~~Doubt ~~capital~~that ~~unless~~Homer ~~its~~City ~~partners~~will ~~provide~~Continue ~~additional~~as ~~funding,~~a ~~which~~Going ~~they are under no legal obligation to do~~Concern.

~~The rent~~Under ~~payments~~the ~~that~~sale-leaseback documents, Homer City ~~owes~~rent ~~under~~payments ~~the sale-leaseback transaction~~ are comprised of two components, a senior rent ~~portion~~ and an equity rent ~~portion~~. ~~The~~Senior ~~senior~~ rent is used exclusively for debt service to ~~the~~secured ~~holders~~lease ofobligation ~~the senior secured bonds~~bondholders, while ~~the~~ equity rent is paid to the owner -lessors. IfIn ~~specified~~order ~~debt~~to pay equity rent, among other requirements, Homer City must meet historical and projected senior rent service coverage ratios ~~are~~of 1.7 to 1 (subject to reduction to 1.3 to 1 under certain circumstances). The senior rent service coverage ratio of 1.18 to 1 for the 12 months ended December 31, 2011 was below the covenant threshold and Homer City also did not ~~met~~meet ~~while~~the threshold for the ~~lease~~prospective ~~debt is~~two ~~outstanding~~12-month periods, which currently precludes Homer City ~~will~~from bemaking ~~restricted~~distributions, including repayment of certain intercompany loans and from paying the equity portion of the rent payment. A failure to pay equity rent does not entitle the owner -lessors. ~~Accordingly~~to foreclose upon Homer City's leasehold interest, but it does result in the ~~sale-leaseback~~suspension ~~documentation~~of ~~does~~Homer City's ability to make permitted distributions. Moreover, Homer City would be permanently restricted in its ability to make permitted distributions if a failure to pay equity rent when due was not ~~permit~~cured within nine months, or even if cured, occurred more than one additional time during the ~~lessor~~term ~~to terminate~~of the lease. Homer City is not subject to any minimum historical and projected senior rent service coverage ratios except as conditions to distributions and equity rent payments. Also, failure by Homer City to pay equity rent when due in ~~the~~April ~~event~~2012 ofcould ~~non-payment~~trigger termination of the ~~equity~~$48 million ~~portion~~senior rent reserve letter of credit. Homer City would then be required to fund the senior rent ~~while~~reserve, and failure to do so could entitle counterparties to seek available remedies under the ~~lease~~sale-leaseback ~~debt~~documents, isincluding ~~outstanding.~~termination or foreclosure upon the leasehold interest.

~~In order~~Homer toCity's ~~pay~~use ~~the equity portion~~ of ~~the~~cash ~~rent,~~in ~~Homer~~its ~~City~~bank accounts is ~~required~~limited to ~~meet~~specific ~~historical~~operating and ~~projected~~capital ~~senior~~expenditures ~~rent~~as ~~service~~set ~~coverage~~forth ~~ratios of 1.7 to 1, subject to reduction to 1.3 to 1 under circumstances specified~~ in the ~~participation~~security ~~agreements.~~deposit ~~During~~agreement ~~the~~executed ~~12 months~~as ~~ended~~part ~~December 31,~~of ~~2010,~~ the ~~senior~~sale-leaseback ~~rent service coverage ratio was 2~~transaction.51 ~~to 1.~~ The ~~senior~~amount ~~rent service coverage ratio is determined by dividing net cash flow as defined~~ in ~~the~~certain ~~participation~~reserve ~~agreements~~accounts bywill ~~the~~be ~~senior~~available ~~rent~~for payments due inon ~~that period. If all accrued rent, including both~~ the ~~senior portion and the~~ equity portion of ~~the~~lease rent, ~~has~~during ~~been~~specified ~~paid~~periods, and ~~all other required conditions have been met, amounts remaining~~ in ~~the~~accordance ~~distribution account will be available for distribution to the partners in Homer City or available to prepay principal under the intercompany loan agreement~~ with ~~Edison Mission Finance, subject to certain restrictions in~~ the sale-leaseback ~~documentation, including restrictions on distributions.~~

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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 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. Homer City had $20 million included in restricted deposits at each of December 31, ~~2010~~2011 and ~~2009~~2010 related to these reserve accounts.

Other Commitments

Certain other minimum commitments are estimated as follows:

(in millions)	2012	~~2011~~		~~2012~~2013		~~2013~~	2014
Fuel supply contracts	$	$214	~~287~~	$	~~116~~53	$	33$	—
Coal transportation agreements			12		—		—
Capital expenditures	7			—			—
Capital expenditures			4		—		—
Coal cleaning agreement	6			—			—
Coal cleaning agreement			6		6		—
Other contractual obligations	3			4			4
Other contractual obligations			7		—		—
	$	230		$	57		$	4
		$	316	$	122	$	33

Fuel Supply Contracts

At December 31, ~~2010~~2011, Homer City had commitments to purchase coal from third-party suppliers at fixed prices, subject to adjustment clauses. The contracts require Homer City to purchase a minimum quantity over the term of the contracts, with an option at Homer City's discretion to purchase additional amounts as stated in the agreements.

Capital ~~Coal Transportation Agreements~~ Commitments

At December 31, ~~2010~~2011, Homer City ~~had~~plans ~~contractual~~to ~~agreements~~finance ~~for~~firm ~~the transportation of coal by rail. The~~ commitments ~~under~~for ~~these~~capital ~~contracts~~expenditures ~~are based~~with oncash ~~minimum~~generated ~~quantities.~~from operations.

Capital Expenditures

At December 31, 2010, Homer City plans to finance firm commitments for capital expenditures related to non-environmental improvements with cash generated from operations.

Coal Cleaning Agreement

Homer City entered into a coal cleaning agreement with Homer City Coal Processing Corporation to operate and maintain a coal cleaning plant owned by Homer City. The agreement expires on December 31, 2012.

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Other Contractual Obligations

At December 31, ~~2010~~2011, Homer City had contractual commitments for the purchase of limestone ~~and ammonia~~.

Interconnection Agreement

Homer City's ~~general partner, Mission Energy Westside,~~ is a party to an interconnection agreement with New York State Electric & Gas Corporation (NYSEG) and Pennsylvania Electric Company (Penelec) to provide interconnection services necessary to interconnect the Homer City plant 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~~Homer ~~Energy Westside~~City, NYSEG and Penelec. The termination 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~~Homer ~~Energy~~City ~~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 plant, Homer City and its indirect parent, EME, entered into tax indemnity agreements. Under these tax indemnity agreements, Homer City and EME agreed to indemnify the equity investors in the sale-leaseback transaction for specified adverse tax consequences that could result in certain situations set forth in the tax indemnity agreements, including specified defaults under the respective leases. The potential indemnity obligation under these tax indemnity agreements could be significant. Due to the nature of the obligations under these tax indemnity agreements, Homer City cannot determine a maximum potential liability which would be triggered by a valid claim from the lessors. Homer City has not recorded a liability related to these indemnities.

Environmental Indemnity Related to the Homer City Plant

In connection with the acquisition of the Homer City plant, Homer City agreed to indemnify the sellers with respect to specified environmental liabilities before and after the date of sale. ~~Payments~~Edison ~~would~~Mission beEnergy ~~triggered under this indemnity by a valid claim from the sellers.~~ (EME) guaranteed this obligation of Homer City. Also, in connection with the sale-leaseback transaction related to the Homer City plant, Homer City agreed to indemnify the owner-lessors for specified environmental liabilities. Due to the nature of the obligations under these indemnity provisions, they are not subject to a maximum potential liability and do not have expiration dates. Homer City has not recorded a liability related to this indemnity. For a discussion of the New Source Review lawsuit filed against Homer City, see "—Contingencies—New Source Review ~~Lawsuit."~~and ~~Homer~~Other ~~City has not recorded a liability related to this indemnity~~Litigation. "

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Indemnities Provided under Sale-Leaseback Agreement

In connection with the sale-leaseback transaction related to the Homer City plant, Homer City and its indirect parent, EME, entered into tax indemnity agreements. Under certain of these tax indemnity agreements, Homer City, as the lessee in the sale-leaseback transaction agreed to indemnify the respective owner-lessors for specified adverse tax consequences that could result from certain situations set forth in each tax indemnity agreement, including specified defaults under the respective leases The potential indemnity obligations under these tax indemnity agreements could be significant. Due to the nature of these potential obligations, Homer City cannot determine a range of estimated obligation which would be triggered by a valid claim from the owner-lessors. Homer City has not recorded a liability related for these matters.

EME agreed to indemnify the owner-lessors in the sale-leaseback transaction related to the Homer City plant for certain negative federal income tax consequences should the rent payments be "levelized" for tax purposes and for potential foreign tax credit losses in the event that the owner-lessor's debt is characterized as recourse, rather than nonrecourse. This indemnity covers a limited range of possible tax consequences that are unrelated to performance under the lease.

Other Indemnities

Homer City provides other indemnifications through contracts entered into in the normal course of business. Homer City's obligations under these agreements may or may not be limited in terms of time and/or amount, and in some instances Homer City may have recourse against third parties. Homer City cannot determine a range of estimates and has not recorded a liability related to these indemnities.

Contingencies

In ~~New~~addition ~~Source~~to ~~Review~~the ~~Lawsuit~~ matters disclosed in these notes, Homer City is involved in other legal, tax and regulatory proceedings before various courts and governmental agencies regarding matters arising in the ordinary course of business. Homer City believes the outcome of these other proceedings, individually and in the aggregate, will not materially affect its results of operations or liquidity.

In January 2011, the US EPA filed a complaint in the Western District of Pennsylvania against Homer City, the sale-leaseback owner participants of the Homer City plant, and two prior owners of the Homer City plant. The complaint alleges violations of the Prevention of Significant Deterioration (PSD) and Title V provisions of the Clean Air Act (CAA) and its implementing regulations, including requirements contained in the Pennsylvania State Implementation Plan (SIP). The PSD counts allege that the prior owners of the Homer City plant performed projects in the 1990s that triggered state and federal PSD permitting requirements by increasing emissions of sulfur dioxide (SO2) and/or particulate matter. All defendants are alleged to have failed to comply with the PSD permitting requirements for those projects. The complaint also alleges that, as a result of triggering PSD permitting requirements, including the requirement to install controls sufficient to meet best available control technology (BACT) emissions rates for SO2 and/or particulate matter, the owners and operators have been required, but have failed, to incorporate emissions limitations that meet BACT into the station's Title V operating permit. In addition to seeking penalties ranging from $32,500 to $37,500 per violation, per day, the complaint calls for an injunction ordering Homer City to install controls sufficient to meet BACT emissions rates at all units subject to the complaint; to obtain new PSD or New Source Review ~~permits for those units; to amend its applications under Title V of the CAA; to conduct audits of its operations to determine whether any additional modifications have occurred;~~ and to ~~offset~~Other ~~and mitigate the harm to public health and the environment caused by the alleged CAA violations. PADEP, the State of New York and the State of New Jersey have intervened in the lawsuit.~~ Litigation

~~Also in~~In January 2011, ~~two~~the ~~residents~~US EPA filed a complaint in the Western District of Pennsylvania, ~~on behalf of themselves and all others similarly situated,~~ against Homer City, the sale-leaseback owner participants of the Homer City plant, and two prior owners of the Homer City plant,. ~~EME,~~The ~~Mission~~complaint ~~Energy~~alleged ~~Holding~~violations ~~Company,~~of the PSD and ~~Edison~~Title ~~International~~V provisions of the CAA, ~~claiming~~as ~~that~~a result of projects in the 1990s performed by prior owners without PSD permits and the subsequent failure to incorporate emissions limitations that meet BACT into the station's Title V operating permit. In addition to seeking penalties ranging from $32,500 to $37,500 per violation, per day, the complaint called for an injunction ordering Homer City ~~plant~~to ~~had~~install ~~adversely~~controls ~~affected~~sufficient ~~their~~to ~~health~~meet BACT emission rates at all units subject to the complaint and ~~property~~for ~~values~~other remedies. The ~~plaintiffs~~PADEP ~~seek~~(Pennsylvania toDepartment ~~have~~of ~~their~~Environmental ~~suit~~Protection), ~~certified~~the asState aof ~~class~~New ~~action~~York and ~~request~~the ~~injunctive~~State ~~relief~~of New Jersey intervened in the lawsuit. In October 2011, all of the ~~funding~~claims in the US EPA's lawsuit were dismissed with prejudice. An appeal of ~~a health~~the ~~assessment~~dismissal ~~study~~is ~~and~~pending ~~medical~~before ~~monitoring,~~the ~~compensatory~~Third ~~and~~Circuit ~~punitive~~Court ~~damages~~of Appeals.

~~An adverse~~Also ~~decision~~in ~~could~~January ~~involve~~2011, ~~penalties~~two ~~and~~residents ~~remedial~~filed ~~actions~~a ~~that~~complaint ~~would~~in ~~have~~the aWestern ~~material~~District ~~adverse~~of ~~impact~~Pennsylvania, on ~~the~~behalf ~~financial~~of ~~condition~~themselves and ~~results~~all others similarly situated, against Homer City, the sale-leaseback owner participants of ~~operations~~the Homer City plant, two prior owners of the Homer City. plant, EME, and Edison International, claiming that emissions from the Homer City ~~cannot~~plant ~~predict~~ had adversely affected their health and property values. The plaintiffs sought to have their suit certified as a class action and requested injunctive relief, the ~~outcome~~funding of ~~these~~a ~~matters~~health orassessment ~~estimate~~study and medical monitoring, as well as compensatory and punitive damages. In October 2011, the ~~impact~~claims in the purported class action lawsuit that were based on ~~its~~the ~~facilities,~~federal ~~its~~CAA ~~results~~were ofdismissed ~~operations~~with prejudice, ~~financial~~while ~~position~~state orlaw ~~cash~~statutory ~~flows~~and common law claims were dismissed without prejudice to re-file in state court should the plaintiffs choose to do so. Homer City does not know whether the plaintiffs will file a complaint in state court.

In February 2012, Homer City received a 60-day Notice of Intent to Sue indicating the Sierra Club’s intent to file a citizen lawsuit alleging violations of emissions standards and limitations under the CAA and the Pennsylvania Air Pollution Control Act.

Adverse decisions in these cases could involve penalties, remedial actions and damages that could have a material impact on the financial condition and results of operations of Homer City. Homer City cannot predict the outcome of these matters or estimate the impact on the Homer City plant, or its results of operations, financial position or cash flows. Homer City has not recorded a liability for this matter.

Ash Disposal Site

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. Homer City's permit allows it to dispose of coal combustion by-products, including fly ash, bottom ash, pyrites, gypsum, 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. Homer

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coal combustion by-products, including fly ash, bottom ash, pyrites, gypsum, 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. 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 Homer City that would require the development of an assessment or abatement plan. 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, 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 Homer City's financial statements under current regulations.

Insurance

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 $1.6 billion. Under the terms of the participation agreements entered into as part of Homer City's sale-leaseback transaction, Homer City is required to maintain specified minimum insurance coverages with insurers having specific minimum ratings if and to the extent that such insurance is available on a commercially reasonable basis. ~~Although~~Some of the insurers providing Homer City's insurance ~~covering~~do not meet the minimum ratings required under the participation agreements. Homer City ~~plant~~has isobtained ~~comparable~~a towaiver ~~insurance~~under ~~coverages~~the ~~normally~~participation ~~carried~~agreements bywhich ~~companies~~permits ~~engaged~~it into ~~similar~~maintain ~~businesses, and~~its ~~owning~~current ~~similar~~insurance ~~properties~~through June 1, ~~the~~2012. ~~insurance~~Homer ~~coverages~~City ~~that~~also ~~are~~carries ingeneral ~~place~~liability doinsurance ~~not~~covering ~~meet~~liabilities ~~the~~to ~~minimum~~third ~~insurance~~parties ~~coverages~~for ~~required~~bodily ~~under~~injury ~~the~~or ~~participation~~property ~~agreements.~~damage Inresulting ~~addition~~from operations, ~~some~~automobile ofliability ~~the~~insurance ~~insurers providing~~and ~~Homer~~excess ~~City's~~liability insurance. doLimits ~~not~~and ~~meet~~deductibles ~~the~~in ~~minimum~~respect ~~ratings~~of ~~required~~these ~~under~~insurance ~~the~~policies ~~participation~~are ~~agreements.~~consistent ~~Due~~with to the ~~current~~requirements ~~market~~of ~~environment,~~ the ~~minimum~~participation ~~insurance~~agreements. ~~coverage~~However, ~~and~~some ~~rating~~insurers ~~are~~providing ~~not commercially~~general ~~available~~liability atcoverage ~~reasonable~~do ~~prices.~~not ~~Homer~~meet ~~City~~the ~~has~~minimum ~~obtained~~ratings arequirements ~~waiver~~ under the participation agreements. ~~which~~The waiver obtained permits itHomer City to ~~maintain~~retain ~~its~~these ~~current~~insurers ~~insurance~~for ~~through~~all ~~June 1,~~of ~~2011.~~its insurance coverages.

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. However, some insurers providing general liability coverage do not meet the minimum ratings requirements under the participation agreements. The waiver obtained permits Homer City to retain these insurers for all of its insurance coverages.

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Note 9. Environmental Developments

Environmental Issues and Capital Resource Limitations

Homer City ~~may~~has bebegun ~~required~~work toon ~~install~~designing ~~additional~~SO2 ~~environmental~~and particulate emissions control equipment onfor Units 1 and 2 toand ~~comply~~preparing ~~with environmental regulations under~~ the ~~Clean Air~~site ~~Transport~~for ~~Rule~~their ~~(Transport Rule) described below~~installation. ~~Homer~~The ~~City~~estimated ~~projects~~cost ~~that~~of ifinstalling SO2 ~~reduction~~and ~~technology~~particulate ~~becomes~~emissions ~~required,~~control itequipment ~~may need to make capital commitments~~ for ~~such~~Units 1 ~~equipment several~~and ~~years~~2 ~~in advance~~ of the ~~effective date of such requirements.~~ Homer City ~~continues~~plant is expected to ~~review~~be ~~technologies~~approximately ~~available~~$700 million to ~~reduce~~$750 million. ~~SO2~~In ~~and~~order ~~mercury~~for this emissions ~~and~~control toequipment ~~monitor developments related~~ to ~~hazardous~~be ~~pollutants~~operational ~~and~~by ~~other~~early ~~environmental regulations. The timing~~2014, ~~selection~~which ofis ~~technology~~the ~~and~~expected ~~required~~deadline ~~capital~~under ~~costs~~the ~~remain~~currently ~~uncertain.~~applicable ~~The~~Federal ~~installation of~~ environmental ~~compliance equipment~~regulations, ~~will~~the beconstruction ~~dependent~~process onwould ~~lessor~~need ~~decisions~~to ~~regarding~~begin in the ~~funding~~second quarter of ~~these expenditures~~2012. ~~Restrictions~~A ~~under~~contractor ~~the~~for ~~agreements~~engineering, ~~entered~~procurement ~~into~~and asconstruction ~~part~~services ofhas ~~Homer~~been ~~City's~~selected ~~2001~~to ~~sale-leaseback transaction~~install ~~could affect,~~ and inconstruct ~~some~~the ~~cases~~emissions ~~significantly~~control ~~limit~~equipment orfor ~~prohibit,~~the Homer City's ~~ability~~plant. toHowever, ~~incur~~construction ~~indebtedness~~of orthese ~~make~~improvements ~~capital~~is ~~expenditures.~~dependent ~~EME~~upon ~~has~~funding nofrom ~~legal~~the ~~obligation~~owner-lessors toor ~~provide~~third ~~funding~~parties. ~~Accordingly,~~ ~~final~~For ~~decisions~~additional ~~on whether to install controls~~information, tosee ~~install~~Note 1—Summary ~~particular~~of ~~kinds~~Significant ofAccounting ~~controls,~~Policies—Substantial ~~and~~Doubt tothat ~~actually~~Homer ~~expend~~City ~~capital~~will ~~have~~Continue ~~not~~as ~~been~~a ~~made.~~Going Concern.

Greenhouse Gas Regulation

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

Significant developments include the following:

82• In June 2010, the US EPA issued the Prevention of Significant Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule, known as the "GHG tailoring rule." This regulation generally subjects newly constructed sources of GHG emissions and newly modified existing major sources to the PSD air permitting program (and later, to the Title V permitting program), beginning in January 2011. The current program, which applies to only new or newly modified sources, is not expected to have an immediate effect on the Homer City plant. However, regulation of GHG emissions pursuant to this program could affect efforts to modify the Homer City plant in the future, and could subject new capital projects to additional permitting and emissions control requirements that could delay such projects. A challenge to the GHG tailoring

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~~appropriate. The~~rule ~~Supreme~~(along ~~Court's~~with ~~decision~~other ~~may~~GHG ~~resolve~~regulations ~~the~~and ~~question~~determinations ofissued ~~whether~~by orthe ~~not~~US EPA) ~~this~~is ~~type~~pending ofbefore ~~litigation~~the ~~presents~~U.S. ~~questions~~Court ~~capable~~ of ~~judicial~~Appeals ~~resolution~~for orthe ~~political questions that should be resolved by elected officials~~D.C. Circuit.

• Under ~~Transport~~a ~~Rule~~ December 2010 settlement agreement, the US EPA was to propose performance standards for GHG emissions from new and modified power plants and emissions guidelines for existing power plants. Proposed GHG emissions limits for new power plants were released by the US EPA on March 27, 2012. The status of the US EPA's efforts to develop GHG emissions performance standards for existing plants that are modified, and emissions guidelines for unmodified existing power plants (which would trigger a requirement for states to revise their SIPs) is unknown.

• In ~~July~~June ~~2010~~2011, the USU.S. ~~EPA~~Supreme ~~issued~~Court adismissed ~~Notice~~public ofnuisance ~~Proposed~~claims ~~Rulemaking~~against ~~for~~five apower ~~proposed rule~~companies, ~~known~~ruling asthat the ~~Transport~~CAA ~~Rule,~~and ~~which~~the ~~would~~US ~~require~~EPA 31actions ~~eastern states~~the ~~(including~~CAA ~~Pennsylvania)~~authorizes ~~and~~displace federal common law nuisance claims that might arise from the ~~District~~emission of ~~Columbia~~greenhouse togases. ~~reduce~~The ~~power~~court ~~plant~~also ~~emissions~~affirmed ofthe ~~nitrogen~~Second ~~oxide~~Circuit's ~~(NOx)~~determination ~~and~~that ~~SO2~~at ~~substantially,~~least ~~starting~~some inof ~~2012,~~the ~~with~~plaintiffs ~~additional reductions~~had instanding ~~2014~~to bring the case. The ~~Transport~~court ~~Rule~~did ~~would~~not ~~replace~~address whether the ~~Clean~~CAA ~~Air~~also ~~Interstate~~preempts ~~Rule.~~state law claims arising from the same circumstances.

~~The Transport~~• ~~Rule~~An isappeal ~~scheduled~~before tothe beNinth ~~finalized~~Circuit inof ~~2011~~a federal district order dismissing a case against EME's parent company, Edison International, and other defendants, had been deferred pending the U.S. ~~The~~Supreme ~~Transport~~Court's ~~Rule~~ruling ~~may~~described ~~require~~above. In the ~~installation~~case, ofwhich ~~additional~~was ~~environmental~~brought ~~equipment~~by tothe ~~reduce~~Alaskan ~~SO2~~Native ~~emissions~~Village atof ~~Units~~Kivalina, 1the ~~and~~plaintiffs 2seek damages of up to $400 million for the ~~Homer~~cost ~~City~~of ~~facilities~~relocating ~~and~~the village, ~~depending~~which onthey claim is no longer protected from storms because the ~~approach~~Arctic ~~adopted,~~sea ~~may~~ice ~~also~~has ~~require~~melted ~~Homer~~as ~~City~~the toresult ~~procure~~of aclimate ~~significant~~change. ~~amount~~The stay of ~~additional~~the ~~allowances~~appeal orhas ~~curtail~~been ~~operations~~lifted ifand itargument isbefore ~~unable~~the toNinth doCircuit sowas ~~on acceptable~~held ~~terms.~~in November 2011.

•

In May 2011, private citizens filed a purported class action complaint in the United States District Court for the Southern District of Mississippi, naming a large number of defendants, including Homer City's parent company EME. Plaintiffs allege that the defendants' activities resulted in emissions of substantial quantities of greenhouse gases that have contributed to climate change and sea level rise, which in turn are alleged to have increased the destructive force of Hurricane Katrina. The lawsuit alleged causes of action for negligence, public and private nuisance, and trespass, and seeks unspecified compensatory and punitive damages. The claims in this lawsuit were nearly identical to a subset of the claims that were raised against many of the same defendants in a previous lawsuit that was filed in, and dismissed by, the same federal district court where the current case has been filed. In March 2012, the United States District Court dismissed all of the plaintiffs' claims. Homer City does not know whether the plaintiffs will appeal this ruling.

Cross-State Air Pollution Rule

Hazardous Air Pollutant Regulations

In ~~accordance~~December ~~with a consent decree entered in April 2010~~2011, the US EPA ~~committed~~announced tothe ~~proposing~~Mercury ~~regulations~~and byAir ~~March~~Toxics ~~2011~~Standards (MATS) rule, limiting emissions of ~~Hazardous~~ ~~Air~~hazardous ~~Pollutants~~air pollutants (HAPs) from coal- and oil-fired electrical generating units ~~that are major sources of HAPs, and to finalizing such regulations by November 2011~~. The ~~emissions~~ ~~standards~~rule ~~must~~was bepublished ~~designed~~in ~~to achieve~~ the ~~maximum~~Federal ~~degree~~Register ofon ~~emission~~February ~~reduction~~16, ~~that the US EPA determines is achievable for the affected units~~2012, ~~taking into account costs~~ and ~~non-air~~ ~~quality~~becomes ~~environmental~~effective ~~and~~on ~~health~~April ~~benefits (also referred to as maximum available control technology~~16, ~~or MACT standard)~~2012. ~~Unlike~~Homer ~~the~~City ~~Clean~~does ~~Air~~not ~~Mercury~~expect ~~Rule,~~that ~~the US EPA must regulate all of the HAPs emitted by~~ these ~~generating units. Compliance with the MACT~~ standards will berequire ~~required~~Homer ~~three~~City ~~years after the effective date of the final regulations. Until the US EPA's regulations are finalized, EME cannot determine whether the actions it is taking~~ to ~~comply~~make ~~with~~additional ~~other~~capital ~~legal~~expenditures ~~requirements~~beyond ~~(including~~those ~~the~~that ~~CPS)~~would ~~will~~ be ~~sufficient~~required tofor ~~address~~compliance ~~its~~with ~~obligations~~CSAPR ~~under~~Phase ~~the new regulations~~II.

Coal Combustion Wastes

US EPA regulations currently classify coal ash and other coal combustion residuals as solid wastes that are exempt from hazardous waste requirements. In June 2010, the US EPA published proposed regulations relating to coal combustion residuals that could result in their reclassification. Two different proposed approaches are under consideration. If the US EPA lists these residuals as special wastes subject to regulation as hazardous wastes, as proposed under one alternative, could require Homer City to incur additional capital and operating costs without assurance that the additional costs could be recovered.

83The first approach, under which the US EPA would list these residuals as special wastes subject to regulation as hazardous wastes, could require Homer City to incur additional capital and operating costs The second approach, under which the US EPA would regulate these residuals as nonhazardous wastes, would establish minimum technical standards for units that are used for the disposal of coal combustion residuals, but would allow procedural and enforcement mechanisms (such as permit requirements) to be exclusively a matter of state law. Many of the proposed technical standards are similar under both proposed

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options (for example, surface impoundments may need to be retrofitted, depending on which standard is finally adopted), but the second approach is not expected to require the retrofitting of landfills used for the disposal of coal combustion residuals.

Note 10. Accumulated Other Comprehensive Income (Loss)

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

(in millions)	Unrealized Gains (Losses) on Cash Flow Hedges		~~Unrealized Gains on Cash Flow Hedges~~		Unrecognized Losses and Prior Service Adjustments, Net1	~~Unrecognized Gain (Losses) and Prior Service Adjustments, Net1~~			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2008			$	76		$	(5	)	$	71
Balance at December 31, 2009	$	38			$	(2	)		$	36
	Change for 2009			(38	)		3			(35	)
Change for 2010	(35		)		(3		)		(38		)
Balance at December 31, 2009				38			(2	)		36
Balance at December 31, 2010	3				(5		)		(2		)
	Change for 2010			(35	)		(3	)		(38	)
Change for 2011	(6		)		(8		)		(14		)
Balance at December 31, 2010			$	3		$	(5	)	$	(2	)
Balance at December 31, 2011	$	(3	)		$	(13	)		$	(16	)

1 ~~1For~~ For further detail, see Note 7—Compensation and Benefit Plans.

Unrealized ~~gains~~losses on cash flow hedges, net of tax, at December 31, ~~2010~~2011, consist of futures and forward electricity contracts that qualify for hedge accounting. These ~~gains~~losses arise because current forecasts of future electricity prices are ~~lower~~higher than Homer City's contract prices. Approximately $~~5 million~~1 million of unrealized gains on cash flow hedges, ~~net of tax,~~ are expected to be reclassified into earnings during the next 12 months. Management expects that reclassification of net unrealized gains will increase energy revenues 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 commodity cash flow hedge is designated is through May 31, 2014.

Note 11. Supplemental Cash Flows Information

	Years Ended December 31,		~~Years Ended December 31,~~
(in millions)	2011		~~2010~~		2010	~~2009~~		~~2008~~2009
Cash paid
Interest	~~Interest~~$	83	$	~~130~~	$	$130	~~127~~	$	~~130~~127
Income taxes	~~Income taxes~~1			—	—		9	9	22
Non-cash investing and financing activities
Non-cash settlement of intercompany tax liabilities through an increase in the subordinated revolving loan agreement with affiliate	~~Non-cash settlement of intercompany tax liabilities through an increase in the subordinated revolving loan agreement with affiliate~~$	1	$	32	$	$32	~~118~~	$	42118
Non-cash activities from accrued capital expenditures	1				—			—

Note 12. ~~Related-Party~~Asset ~~Transactions~~ Impairments and Other Charges

Homer ~~EMMT~~City ~~Agreements~~ recorded a $478 million charge related to asset impairments at the Homer City plant for the fourth quarter of 2011. Homer City failed to obtain sufficient interest from market participants to fund the capital improvements during the process undertaken in the fourth quarter of 2011, and Homer City is currently engaged in discussions with the owner-lessors regarding the potential for such funding. Homer City expects that the outcome of any such discussions, if successful in providing funding for the Homer City plant, will likely result in Homer City's loss of substantially all beneficial economic interest in and material control of the Homer City plant. Failure to resolve the source of funding of necessary capital expenditures for the Homer City plant could result in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both. In connection with the preparation of its year-end financial statements, Homer City concluded that these events, combined with the current and projected financial condition of Homer City, were indicators of impairment. The long-lived asset group subject to the impairment evaluation was determined to include Homer City's property, plant and equipment. Homer City concluded that the future undiscounted cash flows were insufficient to recover the carrying amount of the asset group. To measure the

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~~allowances. Homer~~amount ~~City~~of ~~compensates~~impairment ~~EMMT~~loss, ~~with~~the ~~respect~~income toapproach ~~these~~was ~~transactions~~considered ~~and~~the ~~reimburses~~most ~~EMMT~~relevant ~~for brokers fees, taxes,~~ and ~~other~~resulted ~~reasonably~~in ~~incurred~~a ~~direct~~fair ~~out-of-pocket expenses.~~value ~~Payment for these services is due within 30 days~~ of ~~billing. The net fees earned by EMMT were~~ $1,085 million ~~for each of the years ended December 31, 2010, 2009 and 2008~~. ~~EMMT~~ ~~prepays~~Discounted ~~Homer~~cash ~~City~~flow inanalysis ~~advance~~based ~~for~~on ~~the~~estimates ~~full month's expected power generation. As a result~~ of ~~the~~future ~~accelerated payments~~energy, ~~Homer~~capacity ~~City~~and ~~had~~coal ~~liabilities~~prices toand ~~EMMT~~operations ofand ~~$45 million~~maintenance ~~and $50 million~~costs atalong ~~December 31,~~with ~~2010~~the ~~and~~estimated ~~2009,~~costs ~~respectively,~~of ~~for~~constructing ~~products~~the ~~paid~~environmental ~~for~~control byequipment ~~EMMT~~was ~~but~~the ~~not~~technique ~~yet~~utilized ~~delivered~~to bydetermine ~~Homer~~fair ~~City~~value.

Homer City ~~entered~~also ~~into~~recorded ~~several~~charges ~~transactions through EMMT for the purchase or sale~~ of ~~SO2 and NOx allowances. All transactions were completed at the market price on the date of the transaction. Homer City received (paid)~~ $~~(5)~~ 15 million, $15 million and $~~(33)~~ 3 million ~~during~~in ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, respectively, ~~for~~primarily ~~net~~related ~~sales~~to ~~(purchases)~~the retirement of ~~SO2~~equipment ~~and~~replaced ~~NOx allowances.~~during overhauls.

Fair Value

The fair value of the long-lived asset group as determined using the discounted cash flow models discussed above qualified as Level 3 in the fair value hierarchy.

Note 13. Related Party Transactions

EMMT Agreements

Homer City has entered into a master purchase, sale and services agreement with EMMT, pursuant to which EMMT arranges for purchases and sales of the following products, including related services: (i) electric energy and capacity; (ii) fuel oil; and (iii) emission allowances. Homer City compensates EMMT with respect to these transactions and reimburses EMMT for brokers fees, taxes, and other reasonably incurred direct out-of-pocket expenses. Payment for these services is due within 30 days of billing. The net fees earned by EMMT were less than $1 million for each of the years ended December 31, 2011, 2010 and 2009. EMMT prepays Homer City in advance for the full month's expected power generation. As a result of the accelerated payments, Homer City had liabilities to EMMT of $38 million and $45 million at December 31, 2011 and 2010, respectively, for products paid for by EMMT but not yet delivered by Homer City.

Homer City entered into several transactions through EMMT for the purchase or sale of SO₂ and NO_x allowances. All transactions were completed at the market price on the date of the transaction. Homer City received (paid) $0.4 million, $(5) million and $1 million during 2011, 2010 and 2009, respectively, for net sales (purchases) of SO₂ and NO_x allowances.

Affiliate Financing

Homer City obtained financing from Edison Mission Finance in connection with its acquisition of the Homer City plant. For further discussion, see Note 4—Long-Term Debt.

Services Agreements with EME and Edison International

Certain administrative services such as payroll, employee benefit programs, insurance, and information technology are shared among all affiliates of Edison International and the costs of these corporate support services are allocated to all affiliates. The cost of services provided by Edison International and EME, including those related to Homer City, are allocated based on one of the following formulas: percentage of the time worked, equity in investment and advances, number of employees, or multi-factor (operating revenues, operating expenses, total assets and total employees). Homer City participates in a common payroll and benefit program with all Edison International employees. In addition, Homer City is billed for any direct labor and out-of-pocket expenses for services directly requested for the benefit of the partnership. Homer City believes the allocation methodologies are reasonable. Homer City made reimbursements for the cost of these programs and other services totaling $86 million, $98 million and $89 million for the years ended December 31, ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009, respectively. Homer City had a net payable of $10.3 million and $21 million at December 31, ~~2010~~2011 and ~~2009~~2010, respectively, related to these agreements.

Homer City participates in the insurance program of Edison International, including property, general liability, workers compensation and various other specialty policies. Homer City's insurance premiums are generally based on its share of risk related to each policy. In connection with the property insurance program, a portion of the risk is reinsured by a captive insurance subsidiary of Edison International.

Management and Administration Agreement with Midwest Generation EME, LLC

Homer City and Midwest Generation EME entered into a management and administration agreement pursuant to which Midwest Generation EME charges Homer City for management and administrative services. Actual costs billable under this agreement for each of the years ended December 31, ~~2010~~2011, ~~2009~~2010 and ~~2008~~2009 were $2 million,. Homer City had a payable of $20.3 million and $30.2 million at December 31, 2011 and 2010, respectively., due to Midwest Generation EME related to this agreement.

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~~Homer City had a payable of $0.2~~Note ~~million and $0~~14.~~3 million~~ atQuarterly ~~December 31,~~Financial ~~2010~~Data ~~and 2009, respectively, due to Midwest Generation EME related to this agreement.~~ (unaudited)

Note 13. Quarterly Financial Data (unaudited)



(in millions)	First			Second			Third		Fourth				Total
2011
Operating revenues	$	115		$	137		$	158	$	117			$	527
Operating income (loss)	(3		)	(8		)	38		(473		)	¹	(446		)
Provision (benefit) for income taxes	(14		)	(15		)	3		144			²	118
Net income (loss)	(20		)	(23		)	5		(648		)	¹	(686		)
2010
Operating revenues	$	175		$	129		$	173	$	159			$	636
Operating income	50			12			60		43				165
Provision (benefit) for income taxes	7			(8		)	11		1				11
Net income (loss)	11			(12		)	17		11				27

(in millions)		First		Second			Third		Fourth		Total
2010
	Operating revenues	$	175	$	129		$	173	$	159	$	636
	Operating income		50		12			60		43		165
	Provision (benefit) for income taxes		7		(8	)		11		1		11
	Net income (loss)		11		(12	)		17		11		27
2009
	Operating revenues	$	165	$	161		$	170	$	167	$	663
	Operating income		49		60			66		64

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