UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission File Number 333-92047-03

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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)   

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

| |  | None             |  | 
| |  | ---------------- |  | 
| |  | (Title of Class) |  | 

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):    Large accelerated
filer o    Accelerated filer o    Non-accelerated filer
ý

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

Aggregate market value of the registrant's common equity held by non-affiliates of the registrant as of June 30, 2006: $0. Number of shares
outstanding of the registrant's Common Stock as of February 28, 2007: 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 REFERENCENone



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TABLE OF CONTENTS

|         |  |                                                                                                              |  | Page
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  | Glossary                                                                                                     |  | ii  
|PART I  
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 1A. |  | Risk Factors                                                                                                 |  | 13  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 20  
|Item 2.  |  | Properties                                                                                                   |  | 20  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 21  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 21  
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 22  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 23  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 25  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 57  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 58  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 58  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 58  
|Item 9B. |  | Other Information                                                                                            |  | 58  
|PART III
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 94  
|Item 11. |  | Executive Compensation                                                                                       |  | 94  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 94  
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 94  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 94  
|PART IV 
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 96  
|         |  | Signatures                                                                                                   |  | 101 

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GLOSSARY

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

|ARO                 |  | asset retirement obligations                                                                                                            
|------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Btu                 |  | British thermal units                                                                                                                   
|CAIR                |  | Clean Air Interstate Rule                                                                                                               
|CAMR                |  | Clean Air Mercury Rule                                                                                                                  
|Commonwealth Edison |  | Commonwealth Edison Company                                                                                                             
|EME                 |  | Edison Mission Energy                                                                                                                   
|EME Homer City      |  | EME Homer City Generation L.P.                                                                                                          
|EMMT                |  | Edison Mission Marketing & Trading, Inc.                                                                                                
|EPA                 |  | Environmental Protection Agency                                                                                                         
|EPAct 2005          |  | Energy Policy Act of 2005                                                                                                               
|EWG                 |  | exempt wholesale generator                                                                                                              
|FASB                |  | Financial Accounting Standards Board                                                                                                    
|FERC                |  | Federal Energy Regulatory Commission Financial Accounting Standards Interpretation No. 46, "Consolidation of Variable Interest Entities"
|GWh                 |  | gigawatt-hours                                                                                                                          
|ISO                 |  | independent system operator                                                                                                             
|kV                  |  | kilovolt                                                                                                                                
|LIBOR               |  | London Interbank Offered Rate                                                                                                           
|MD&A                |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                   
|MEHC                |  | Mission Energy Holding Company                                                                                                          
|MISO                |  | Midwest Independent Transmission System Operator                                                                                        
|MMBtu               |  | million British thermal units                                                                                                           
|Moody's             |  | Moody's Investors Service, Inc.                                                                                                         
|MW                  |  | megawatts                                                                                                                               
|MWh                 |  | megawatt-hours                                                                                                                          
|NAPP                |  | Northern Appalachian                                                                                                                    
|NOx                 |  | 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                                                                                                                
|PUHCA 1935          |  | Public Utility Holding Company Act of 1935 (as amended)                                                                                 
|PUHCA 2005          |  | Public Utility Holding Company Act of 2005                                                                                              
|PURPA               |  | Public Utility Regulatory Policies Act of 1978 (as amended)                                                                             
|                    |  |                                                                                                                                         

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|RGGI            |  | Regional Greenhouse Gas Initiative                                                                                                      
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|RPM             |  | reliability pricing model                                                                                                               
|RTO             |  | regional transmission organizations                                                                                                     
|S&P             |  | Standard & Poor's Ratings Services                                                                                                      
|SECA            |  | Seams Elimination Cost Adjustment                                                                                                       
|SFAS            |  | Statement of Financial Accounting Standards issued by the FASB                                                                          
|SFAS No. 123(R) |  | Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment"                                                           
|SFAS No. 133    |  | Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities"                     
|SFAS No. 155    |  | Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments"                              
|SFAS No. 157    |  | Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"                                                          
|SFAS No. 158    |  | Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post-Retirement Plans"
|SIP             |  | State Implementation Plan                                                                                                               
|SO2             |  | sulfur dioxide                                                                                                                          
|US EPA          |  | United States Environmental Protection Agency                                                                                           

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PART I

ITEM 1.    BUSINESS

The Company

EME 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 a wholly owned subsidiary of MEHC and is an indirect wholly owned subsidiary of Edison International. EME Homer City was formed for the purpose of
acquiring, owning and operating three coal-fired electric generating units and related facilities located near Pittsburgh, Pennsylvania with an aggregate capacity of 1,884 MW, which EME
Homer City collectively refers to as the "Homer City facilities," for the purpose of producing electric energy. EME Homer City acquired the Homer City facilities on March 18, 1999.

EME
Homer City derives revenue from the sale of energy, capacity and ancillary services into PJM and NYISO and from bilateral contracts with power marketers and load serving entities
within PJM and NYISO. EME Homer City has a contract with EMMT, a marketing affiliate, to sell energy, capacity and ancillary services from the Homer City facilities, which enables EMMT to engage in
forward sales and hedging transactions to manage electricity price exposure.

On
December 7, 2001, EME Homer City completed a sale-leaseback of its facilities to third-party lessors for an aggregate purchase price of $1.591 billion, made
up of $782 million in cash and the assumption of the obligations under Edison Mission Holdings Co.'s 8.137% Senior Secured Bonds due 2019 and 8.734% Senior Secured Bonds due 2026, which EME
Homer City refers to collectively as the senior secured bonds (the fair value of which was $809.3 million), which were guaranteed by EME Homer City. EME Homer City's transaction has been
accounted for as a lease financing for accounting purposes. Consent of the holders of the senior secured bonds was required for the sale-leaseback transaction and, in connection with the
transaction, the senior secured bonds were converted into pass-through bonds registered with the Securities and Exchange Commission. Also in connection with the transaction, EME Homer City
was released from its guarantee on the senior secured bonds, but it remains indirectly liable to make payments on the pass-through bonds, through its semi-annual lease
payments. For more information on the sale-leaseback transaction, see "Item 8. Financial Statements and Supplementary DataNotes to Financial
StatementsNote 9. Commitments and Contingencies."

EME,
MEHC and Edison International each are registered with the Securities and Exchange Commission and have financial statements that are filed in accordance with rules enacted by the
Securities and Exchange Commission. For more information regarding each of these companies, see their respective annual reports on Form 10-K for the year ended December 31,
2006.

EME
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.

EME
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 and are available on the Securities and Exchange Commission's
internet web site at http://www.sec.gov.

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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 EME Homer City's current expectations and projections about future events based on EME Homer City's knowledge of present facts and circumstances and assumptions about
future events and include any statement that does not directly relate to a historical or current fact. Other information distributed by EME Homer City
that is incorporated in this 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, or that otherwise could impact EME Homer City, include but are not limited to:

Certain
of the risk factors listed above are discussed in more detail in "Item 1A. Risk Factors" below and in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of

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OperationsMarket
Risk Exposures." Additional information about the risk factors listed above and other risks and uncertainties is contained throughout this annual report. Readers are
urged to read this entire annual report, including the information incorporated by reference, and carefully consider the risks, uncertainties and other factors that affect EME Homer City's business.
Forward-looking statements speak only as of the date they are made, and EME Homer City is not obligated to publicly update or revise forward-looking statements. Readers should review future reports
filed by EME Homer City with the Securities and Exchange Commission.

Description of the Industry

Industry Overview

The United States electric industry, including companies engaged in providing generation, transmission, distribution and ancillary services, has undergone
significant deregulation, which has led to increased competition. Until the enactment of PURPA, utilities and government-owned power agencies were the only producers of bulk electric power intended
for sale to third parties in the United States. PURPA encouraged the development of independent power by removing regulatory constraints relating to the production and sale of electric energy by
certain non-utilities and requiring electric utilities to buy electricity from specified types of non-utility power producers, known as qualifying facilities, under specified
conditions. The passage of the Energy Policy Act of 1992 further encouraged the development of independent power by significantly expanding the options available to independent power producers with
respect to their regulatory status and by liberalizing transmission access. In addition, in EPAct 2005, Congress made several changes to PURPA and other statutory provisions recognizing that a
significant market for electric power produced by independent power producers, such as EME Homer City, has developed in the United States and indicating that competitive wholesale electricity markets
have become accepted as a fundamental aspect of the electricity industry.

As
part of the regulatory developments discussed above, the FERC encouraged the formation of ISOs and RTOs. In those areas where ISOs and RTOs have been formed, market participants have
expanded access to transmission service. 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. See further discussion of regulations under "Regulatory
MattersU.S. Federal Energy Regulation."

Power Markets

PJM

The Homer City facilities are located in the control area managed by PJM. PJM operates a wholesale spot energy market and determines the market-clearing price for
each hour based on bids submitted by participating generators which indicate the minimum prices a bidder is willing to accept to be dispatched at various incremental generation levels. PJM conducts
both day-ahead and real-time energy markets. PJM's energy markets are based on locational marginal pricing, which establishes hourly prices at specific locations throughout
PJM. Locational marginal pricing is determined by considering a number of factors, including generator bids, load requirements, transmission congestion and transmission losses. PJM requires all load
serving entities to maintain prescribed levels of capacity, including a reserve margin, to ensure system reliability. PJM also determines the amount of capacity available from each specific generator
and operates capacity markets. PJM's capacity markets have a single market-clearing

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price.
Load serving entities and generators, such as EME Homer City, may participate in PJM's capacity markets or transact capacity sales on a bilateral basis.

NYISO

The NYISO was established in 1999 to operate a competitive, non-discriminatory wholesale power market 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, EME 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. EME Homer City does not incur any access or wheeling charges for any energy delivered into PJM.

For
a discussion of the market risks related to EME Homer City's sale of electricity, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsMarket Risk Exposures."

Competition

EME Homer City is subject to intense competition from energy marketers, utilities, industrial companies and other independent power producers. For a number of
years, natural gas has been the fuel of choice for new power generation facilities for economic, operational and environmental reasons. While natural gas-fired facilities will continue to
be an important part of the nation's generation portfolio, some regulated utilities are now constructing clean coal units and renewable resources, often with subsidies or under legislative mandate.
These utilities generally have a lower cost of capital than most independent power producers and often are 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.

Where
EME Homer City sells power from the Homer City facilities, it is subject to market fluctuations in prices based on a number of factors, including the amount of capacity available
to meet demand, the price and availability of fuel and the presence of transmission constraints. Some of EME Homer City's competitors, such as electric utilities and distribution companies, have their
own generation capacity, including nuclear generation. These companies, generally larger than EME Homer City, have a lower cost of capital and may have competitive advantages as a result of their
scale and location of their generation facilities.

Overview of Facilities Under Lease

The Homer City facilities are located on a 2,413-acre site approximately 45 miles northeast of Pittsburgh within Indiana County, Pennsylvania. EME
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.
The Homer City facilities consist of the generating units, a coal cleaning facility, water supply provided by an 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 four 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, which are essentially
identical to one another, were placed into commercial operation in 1969. Unit 1 has an installed capacity of 620 MW, and Unit 2 has an

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installed
capacity of 614 MW. The Unit 1 and 2 boilers have been retrofitted with low NOX burners to meet Phase I NOX 1990 Clean Air Act standards. In addition, both boilers
have supplemental over-fired air systems to further reduce NOX emissions to satisfy Pennsylvania Title I (ozone) requirements. Selective catalytic reduction units have been
installed on Units 1 and 2 for further reduction of NOX emissions.

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 Clean Air Act standards, and a supplemental over-fired air system was installed in 1995 to further reduce NOX emissions. In addition, a wet
scrubber flue gas desulfurization system and a selective catalytic reduction 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 Clean Air Act regarding SO2 emissions, the Pennsylvania
NOX allowance regulations and Pennsylvania's response to the EPA's SIP Call regarding NOX emissions.

Significant Customers

During the past three fiscal years, EME Homer City derived a significant source of its operating revenues from electric power sold into the PJM market by EMMT.
Sales into PJM accounted for approximately 58%, 85% and 45% of EME Homer City's operating revenues for the years ended December 31, 2006, 2005 and 2004, respectively. For the year ended
December 31, 2006, EMMT also made sales to Coral Power, LLC that accounted for approximately 21% of EME Homer City's operating revenues. For the year ended December 31, 2005, EMMT also
made sales to Cincinnati Gas & Electric Company and to Constellation Power Source, Inc. that accounted for approximately 22% and 11%, respectively, of EME Homer City's operating
revenues. For the year ended December 31, 2004, EMMT also made sales to BP Energy Company that accounted for approximately 35% of EME Homer City's operating revenues.

Fuel Supply

Units 1 and 2 typically consume approximately 3.3 million to 3.5 million tons of mid-range sulfur coal per year. Approximately 90% or
more of this coal is obtained under contracts with the remainder purchased in the spot market as needed. Two types of coal are purchased, ready to burn coal and raw coal. Ready to burn coal is of a
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 City coal cleaning facility utilizes heavy media cyclones, froth flotation and spiral separators to reduce the ash and sulfur content
of the raw coal to meet both combustion and environmental requirements. The Homer City coal cleaning facility is operated by Homer City Coal Processing Corporation under a coal cleaning agreement that
expires December 31, 2010.

Unit
3 consumes approximately 2 million tons of coal per year. EME Homer City purchases the majority of its Unit 3 coal under contracts with the balance purchased in the spot
market. A wet scrubber flue gas desulfurization 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 originates from mines that are within approximately 100 miles of the Homer City facilities. It is delivered to the station by truck and
by rail.

See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesContractual Obligations,
Commitments and

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Contingencies,"
for additional discussion of contractual commitments related to EME Homer City's fuel supply and coal transportation contracts.

Emission Allowances

Certain state and federal environmental laws require power plant operators to hold or obtain emission allowances equal, on an annual basis, to their plants'
emissions of SO2 and, on a seasonal basis, to their plants' emissions of NOX. Emission allowances were acquired as part of the acquisition of the Homer City facilities.
Additional allowances are purchased by EME Homer City when operations make this necessary and are sold by EME Homer City when it has more than needed for planned levels of operation.

See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesEnvironmental Matters and
Regulations" for a discussion of environmental regulations related to emissions. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsMarket
Risk ExposuresCommodity Price RiskEmission Allowances Price Risk" for a discussion of price risks related to the purchase or sale of emission allowances.

Transmission and Interconnection

Existing transmission lines leaving the Homer City generating units are interconnected with both PJM and NYISO. EME Homer City is able to transmit full plant
output into PJM through an 85-mile 345 kV line and 34-mile, 19-mile and 15-mile 230 kV lines owned by Penelec, an affiliate of FirstEnergy Corp. Subject
to PJM transmission availability and reliability considerations, EME Homer City has the ability to transmit full plant output into NYISO through 175-mile and 207-mile 345 kV
lines owned by NYSEG. In addition, a 13-mile 230 kV line from the Homer City generating units provides an indirect interconnection to the East Central Area reliability market.

The
points of interconnection with the Homer City units include:



The
ownership of the transmission and distribution assets for the Homer City facilities, including the site switchyard, substation and support equipment, remained with Penelec and NYSEG
following EME Homer City's acquisition of the facilities. These companies entered into an interconnection agreement with EME Homer City's general partner, Mission Energy Westside, which provides EME
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. This date will not exceed the retirement date of the
Homer City units. NYSEG and Penelec have agreed to extend such interconnection services (but not the expiration of the agreement) to modifications, additions, upgrades or repowering of the Homer City
units. Mission Energy Westside is required to compensate NYSEG and Penelec for all reasonable costs associated with any modifications, additions or replacements made to NYSEG or Penelec's
interconnection facilities or transmission systems in connection with any modification, addition, upgrade or repowering of the Homer City units.

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On November 18, 2004, the FERC issued an order eliminating regional through and out transmission rates in the region encompassed by PJM and the MISO. The effect of this order was
to eliminate so-called rate pancaking between PJM and the MISO on a prospective basis. Rate pancaking occurs when energy must move through multiple, separately priced transmission systems
to travel from its point of production to its point of delivery, and each transmission owner along the line charges separately for the use of its system. At the same time, the FERC also imposed a
transitional revenue recovery mechanism which has created controversy and some continuing uncertainty as to its impact on transactions in the region. The mechanism required the filing of tariffs by
PJM and the MISO imposing a SECA to be in effect until May 1, 2006, to compensate the "new PJM companies"American Electric Power, or AEP, Commonwealth Edison and Dayton
Power & Light, among othersfor lost revenues attributable to the elimination of such rates. On November 30, 2004, the FERC clarified that SECAs can be recovered for lost
revenues associated with elimination of intra-RTO pancaked rates.

The
response to the November 18 and November 30 orders from the parties potentially liable for the SECAs was strongly negative. Rehearings were sought by a broad range of
interests that are opposed to the imposition of SECAs. Although both PJM and the MISO have made tariff filings with the FERC that purport to comply with the orders and eliminate through and out
transmission rates as of December 1, 2004, numerous protests to such filings have been made, challenging SECAs on legal and equitable grounds and demanding evidentiary hearings by the FERC.
Pending further orders of the FERC and/or the outcome of future hearings, under the provisions of the PJM tariff as filed, EME Homer City is currently not subject to SECAs with respect to its sales of
power within PJM. It is not possible, however, to predict the outcome of the FERC proceedings or to rule out the possibility that EME Homer City could be ordered in the future to pay SECAs with
respect to sales within PJM after December 1, 2004.

For
further discussion of the market risks related to EME Homer City's transmission service, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsMarket Risk Exposures."

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 facilities and is owned, operated and maintained by EME 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 an ash disposal area, a coal refuse disposal area, coal receiving and storage facilities and water treatment and pumping facilities.

Insurance

EME Homer City maintains insurance policies that are comparable to those carried by other electric generating facilities of 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 $1.1 billion. Under the terms of the participation agreements entered into as part of EME

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Homer
City's sale-leaseback transaction, EME Homer City is required to maintain specified minimum insurance coverages if and to the extent that such insurance is available on a
commercially reasonable basis. Although the insurance covering the Homer City facilities is comparable to insurance coverages normally carried by companies engaged in similar businesses, and owning
similar properties, the insurance coverages that are in place do not meet the minimum insurance coverages required under the participation agreements. Due to the current market environment, the
minimum insurance coverage is not commercially available at reasonable prices. EME Homer City has obtained a waiver under the participation agreements which permits it to maintain its current
insurance coverage through June 1, 2007.

EME
Homer City also carries general liability insurance covering liabilities to third parties for bodily injury or property damage resulting from operations, automobile liability
insurance and excess liability insurance. Limits and deductibles in respect of these insurance policies are consistent with the requirements of the participation agreements.

Seasonality

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

Regulatory Matters

General

EME Homer City's operations are subject to extensive regulation by government agencies. Federal laws and regulations govern, among other things, transactions by
and with purchasers of power, including utility companies, the operations of a power plant and the ownership of a power plant. Under limited circumstances where exclusive federal jurisdiction is not
applicable or specific exemptions or waivers from state or federal laws or regulations are otherwise unavailable, federal and/or state utility regulatory commissions may have broad jurisdiction over
non-utility owned electric power plants. Energy-producing projects are also subject to federal, state and local laws and regulations that govern the geographical location, zoning land use
and operation of a project. Federal, state and local environmental requirements generally require that a wide variety of permits and other approvals be obtained before the commencement of construction
or operation of an energy-producing facility and that the facility then operate in compliance with these permits and approvals.

EME
Homer City is subject to a varied and complex body of laws and regulations that are in a state of flux. Intricate and changing environmental and other regulatory requirements could
necessitate substantial expenditures and could create a significant risk of expensive delays or significant loss of value in a power plant if EME Homer City were to become unable to function as
planned due to changing requirements or local opposition.

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U.S. Federal Energy Regulation

The FERC has ratemaking jurisdiction and other authority with respect to interstate wholesale sales and transmission of electric energy (other than transmission
that is "bundled" with retail sales) under the Federal Power Act and with respect to certain interstate sales, transportation and storage of natural gas under the Natural Gas Act of 1938. Prior to
February 8, 2006, the Securities and Exchange Commission had regulatory powers with respect to upstream owners of electric and natural gas utilities under PUHCA 1935, which was repealed as of
that date by EPAct 2005. The enactment of PURPA and the adoption of regulations under that Act by the FERC provided incentives for the development of cogeneration facilities and small power production
facilities using alternative or renewable fuels by establishing certain exemptions from the Federal Power Act and PUHCA 1935 for the owners of qualifying facilities. The passage of the Energy Policy
Act in 1992 further encouraged independent power production by providing additional exemptions from PUHCA 1935 for EWGs such as EME Homer City.

The Energy Policy Act of 2005

A comprehensive energy bill was passed by the U.S. House and Senate in July 2005 and was signed by President Bush on August 8, 2005. Known as "EPAct
2005," this comprehensive legislation includes provisions for the repeal of PUHCA 1935 and amendments to PURPA, for merger review reform, for the introduction of new regulations regarding
"Transmission Operation Improvements," for FERC authority to impose civil penalties for violation of its regulations, for transmission rate reform, for incentives for various generation technologies
and for the extension through December 31, 2007 of production tax credits for wind and other specified types of generation.

The
FERC has finalized rules to implement the congressionally mandated repeal of PUHCA 1935, effective February 8, 2006, and enactment of PUHCA 2005. The repeal of PUHCA 1935 and
its replacement by PUHCA 2005 effectively eliminates many of the restrictions on outside investment in the electricity industry, investment by and transactions between utilities, and geographic
constraints on utility systems. PUHCA 1935 repeal is expected to enable investment in utility systems by private equity funds, financial institutions, foreign utility companies, and other
non-utility companies without
the burden of registration as a "public utility holding company." It also eliminates limits on investment in non-utility operations companies that were registered holding companies under
PUHCA 1935, subject to other applicable regulatory limitations, as well as geographic limits on potential utility combinations. PUHCA 2005 is primarily a "books and records access" statute and does
not give the FERC any new substantive authority under the Federal Power Act or Natural Gas Act. The FERC has also issued final rules to implement the electric company merger and acquisition provisions
of EPAct 2005.

Under
both PUHCA 1935 and PUHCA 2005, a company engaged exclusively in the business of owning and/or operating a facility used for the generation of electric energy exclusively for sale
at wholesale may be exempted from regulation as an EWG. On March 12, 1999, the general counsel of the FERC issued a letter determining that, based on the facts stated in EME Homer City's
application for EWG status, EME Homer City is an EWG. If EME Homer City were to lose its EWG status, defaults under the covenants in EME Homer City's agreements could be triggered.

Federal Power Act

The Federal Power Act grants the FERC 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. This jurisdiction allows the FERC to revoke or modify
previously approved rates after notice and opportunity

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for
hearing. These rates may be based on a cost-of-service approach or, in geographic and product markets determined by the FERC to be workably competitive, may be market
based. EWGs and other non-qualifying facility independent power projects are subject to the Federal Power Act and to the FERC's ratemaking jurisdiction thereunder, but the FERC typically
grants EWGs the authority to charge market-based rates to purchasers which are not affiliated electric utility companies as long as the absence of market power is shown. In addition, the Federal Power
Act grants the FERC jurisdiction over the sale or transfer of jurisdictional facilities, including wholesale power sales contracts and, after EPAct 2005, generation facilities, and in some cases,
jurisdiction over the issuance of securities or the assumption of specified liabilities and some interlocking directorates. In granting authority to make sales at market-based rates, the FERC
typically also grants blanket approval for certain obligations, such as those related to the issuance of securities.

EME
Homer City is subject to the FERC ratemaking regulation under the Federal Power Act. In addition, the FERC's order, as is customary with market-based rate schedules, reserved the
right to revoke EME Homer City's market-based rate authority on a prospective basis if it is subsequently determined that EME Homer City or any of its affiliates possess excessive market power. If the
FERC were to revoke EME Homer City's market-based rate authority, it would be necessary for EME Homer
City to file, and obtain the FERC's acceptance of, EME Homer City's rate schedule as a cost-of-service rate schedule. In addition, the loss of market-based rate authority would
subject EME Homer City to the accounting, record keeping and reporting requirements that are imposed on utilities with cost-based rate schedules.

PJM
Reliability Pricing Model

On
August 31, 2005, PJM filed under sections 205 and 206 of the Federal Power Act a proposal for a RPM to replace its existing construct for the purchase and sale of capacity.
PJM's proposal offered RPM as a way to address deficiencies in PJM's current structure in a comprehensive and integrated manner. On April 20, 2006, the FERC issued an Initial Order on RPM,
finding PJM's existing capacity construct to be unjust and unreasonable as a long-term capacity solution, because it fails to set prices adequate to ensure energy resources to meet PJM's
reliability responsibilities. Although the FERC did not find the RPM proposal, as filed by PJM, to be a just and reasonable replacement for the current capacity construct, because some elements of the
proposal need further development and elaboration, it did find that certain elements of the RPM proposal, with some adjustment and clarification, could form the basis for a just and reasonable
capacity market. Accordingly, in the order the FERC provided guidance on PJM's RPM proposal, noted other features that need to be included in a just and reasonable capacity market, and established
further proceedings to resolve these issues. On September 29, 2006, a comprehensive settlement agreement among PJM and many of its stakeholders, including EME, embodying a proposed capacity
market construct for PJM, was submitted to the FERC for approval. On December 22, 2006, the FERC issued an order conditionally approving the RPM settlement. EME Homer City continues to review
and evaluate the FERC order, but believes at this time that the implementation of the settlement will benefit the Homer City facilities.

FERC
Order Regarding PJM Marginal Losses

On
May 1, 2006, the FERC issued an order in response to a complaint filed by Pepco Holdings, Inc. against PJM regarding marginal losses for transmission. The FERC concluded
that PJM had violated its tariff by not implementing marginal losses and further directed PJM to implement marginal losses by October 2, 2006. On June 19, 2006, the FERC issued an order
delaying implementation of marginal losses in PJM until June 1, 2007. On August 3, 2006, PJM filed its Tariff and Operating Agreement

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changes
to implement marginal losses. On November 6, 2006, the FERC issued an order accepting those Tariff and Operating Agreement changes.

Implementation
of marginal losses will adjust the algorithm that calculates locational marginal prices to include a component for marginal transmission losses in addition to the already
included component for
congestion. This may reduce market prices for sellers in the Western PJM and Northern Illinois regions, including the Homer City facilities.

State Energy Regulation

Overview

State public utility commissions have broad jurisdiction over non-qualifying facility independent power projects, including EWGs, which are considered
public utilities in many states. This jurisdiction can include the issuance of certificates of public convenience and necessity and/or other certifications to construct, own and operate a facility,
engage in retail energy sales, as well as the regulation of organizational, accounting, financial and other corporate matters on an ongoing basis. Some states that have restructured their electric
industries require generators to register to provide electric service to customers. Many states are currently undergoing significant changes in their electric statutory and regulatory frameworks that
result from restructuring the electric industries that may affect generators in those states. Although the FERC generally has exclusive jurisdiction over the rates charged by a
non-qualifying facility independent power project to its wholesale customers, a state's public utility commission has the ability, in practice, to influence the establishment of these
rates by asserting jurisdiction over a purchasing utility's ability to pass the resulting cost of purchased power through to its retail customers. In addition, states may assert jurisdiction over the
siting and construction of independent power projects and, among other things, the issuance of securities, related party transactions and the sale or other transfer of assets by these facilities. The
actual scope of jurisdiction over independent power projects by state public utility commissions varies from state to state. Although state public utility commissions do not have any jurisdiction to
modify the terms of wholesale power sales, EME Homer City cannot provide assurance that its power sales contracts will not be subject to adverse consequences as a result of regulatory actions by a
state commission, even though it sells power exclusively at wholesale.

Pennsylvania

Under the Pennsylvania Public Utility Law, the Pennsylvania Public Utility Commission regulates all public utilities operating in Pennsylvania. A "public utility"
under this law includes any entity that owns or operates equipment or facilities for the production, generation, transmission or distribution of gas, electricity or steam for the production of light,
heat or power to the public for consumption. The Pennsylvania Public Utility Law does not specifically address the utility status of entities selling electricity at wholesale within Pennsylvania.
Because EME Homer City sells electricity exclusively in the wholesale market and does not hold itself out to the public generally as a supplier of utility service, EME Homer City is not likely to be
regulated as a public utility under the Pennsylvania Public Utility Law. If, however, EME Homer City were deemed to be a Pennsylvania public utility, the Pennsylvania Public Utility Commission could
retroactively apply several provisions of the Pennsylvania Public Utility Law to EME Homer City. One of those provisions requires every public utility to obtain a certificate of public convenience and
necessity from the Pennsylvania Public Utility Commission prior to rendering service as a public utility. If the Pennsylvania Public Utility Commission were to require EME Homer City to obtain a
certificate of public convenience and necessity, EME Homer City might be required to discontinue operation of its units pending application for, and receipt of, this certificate. Another

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provision
requires every public utility to obtain Pennsylvania Public Utility Commission approval before it issues or guarantees securities. If EME Homer City were found to be a public utility, its
failure to have obtained this approval could call into question the validity of its obligations under the documents entered into in connection with the sale-leaseback. In addition, EME
Homer City would then be subject to other laws and regulations applicable to Pennsylvania public utilities, except for rate regulation. EME Homer City's rates would remain subject to the jurisdiction
of the FERC.

New York

Under the New York Public Service Law, the New York Public Service Commission regulates all public utility companies or utility companies operating in New York. A
public utility company or utility company under the New York Public Service Law includes, among other things, any entity engaged in the production, transmission or distribution of electricity to the
public for light, heat or power purposes. EME Homer City, as an EWG, does not provide electricity directly to the public, but instead sells only to power marketers and energy service companies.
Although the New York Public Service Law is silent with respect to the utility status of electric corporations selling electricity wholesale within New York, EME Homer City will not likely be subject
to regulation as a New York public utility. If, however, EME Homer City were deemed to be a public utility under the New York Public Service Law, the New York Public Service Commission could
retroactively apply specified provisions of the statute to EME Homer City. In addition, EME Homer City would then be subject to other laws and regulations applicable to New York public utility
companies, except for rate regulation. EME Homer City's rates would remain subject to the jurisdiction of the FERC.

Transmission of Wholesale Power

EME 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 a jurisdictional public utility under the Federal Power Act, Order No. 2000, and subsequent orders.

The
Energy Policy Act of 1992 laid the groundwork for a competitive wholesale market for electricity by, among other things, expanding the FERC's authority to order electric utilities to
transmit third-party electricity over their transmission lines, thus allowing qualifying facilities under PURPA, power marketers and those qualifying as EWGs under PUHCA 1935, such as EME Homer City,
to more effectively compete in the wholesale market. See "Regulatory MattersU.S. Federal Energy Regulation" for further detail on legislative developments.

In
1996, the FERC issued Order No. 888, also known as the Open Access Rules, which required utilities to offer eligible wholesale transmission customers open access on utility
transmission lines on a comparable basis to the utilities' own use of the lines and directed jurisdictional public utilities that control a substantial portion of the nation's electric transmission
networks to file uniform, non-discriminatory open access tariffs containing the terms and conditions under which they would provide such open access transmission service. The FERC
subsequently issued Order Nos. 888-A, 888-B and 888-C to clarify the terms that jurisdictional transmitting utilities are required to include in their open access
transmission tariffs, and also issued Order No. 889, which required those transmitting utilities to abide by specified standards of conduct when using their own transmission systems to make
wholesale sales of power, and to post specified transmission information, including information about transmission requests and availability, on a publicly available computer bulletin board.

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On February 15, 2007, the FERC issued Order No. 890 with the stated intent of promoting competition in wholesale power markets and strengthening the electric power grids. Order
No. 890 is designed to strengthen the Open Access Rules embodied in Order No. 888, increase transparency in the rules applicable to planning and use of the transmission system, make
undue discrimination in transmission easier to detect, and facilitate the FERC's enforcement efforts in remedying such discrimination. Public utility transmission providers, including RTOs and ISOs,
are required to make changes in their tariffs to comply with Order No. 890. Order No. 890 will take effect within 60 days of its publication in the Federal Register, which is expected to
occur within 30 days of its issuance.

See
"Transmission and Interconnection" for further discussion of developments and other transmission issues affecting the Homer City facilities.

Environmental Matters and Regulations

See the discussion on environmental matters and regulations in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesEnvironmental Matters and Regulations."

Employees

At December 31, 2006, EME Homer City employed 265 employees, approximately 196 of whom are covered by a collective bargaining agreement governing wages,
benefits and working conditions. This collective bargaining agreement, which expired on December 31, 2006, was extended to December 31, 2007 by mutual agreement.

ITEM 1A.    RISK FACTORS

EME Homer City's ability to make payments of lease rent under the facility leases is subject to market risks related to wholesale energy prices.

EME Homer City's ability to make payments of lease rent on the facility leases is dependent on revenues generated by the Homer City facilities, which depend on
the facilities' performance level and on market conditions for the sale of capacity and energy.

The
Homer City facilities derive revenues from the sale of energy and capacity into PJM and NYISO and from bilateral contracts with power marketers and load serving entities within PJM,
NYISO and the surrounding markets. Participants in PJM and NYISO are not guaranteed any specified rate of return on their capital investments through recovery of mandated rates payable by purchasers
of electricity. Therefore, with the exception of nominal revenue, EME Homer City's revenues and results of operations are dependent upon prevailing market prices for energy, capacity and ancillary
services. The factors that influence the market prices for these products in PJM and NYISO include:

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In
addition, unlike most other commodities, electric power can only be stored on a very limited basis and generally must be produced concurrently with its use. As a result, the wholesale
power markets are subject to significant and unpredictable price fluctuations over relatively short periods of time.

There
is no assurance that EME Homer City will be successful in selling power into its markets or that the prices received for its power will generate positive cash flow. If EME Homer
City's operations do not meet these objectives, it may not be able to generate enough cash to service its own debt and lease obligations, which could have a material adverse effect on EME Homer City.
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsMarket Risk Exposures."

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

EME Homer City's business is subject to changes in fuel costs, which may negatively affect its financial results and financial position by increasing the cost of
producing power. The fuel markets can be volatile, and actual fuel prices can differ from EME Homer City's expectations.

Although
EME Homer City attempts to purchase fuel based on its known fuel requirements, it is still subject to the risks of supply interruptions, transportation cost increases, and fuel
price volatility. In addition, fuel deliveries may not exactly match energy sales, due in part to the need to purchase fuel inventories in advance for reliability and dispatch requirements. The price
at which EME Homer City can sell its energy may not rise or fall at the same rate as a corresponding rise or fall in fuel costs. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of OperationsMarket Risk ExposuresCommodity Price Risk."

EME Homer City may not be able to hedge market risks effectively.

EME Homer City is exposed to market risks through its ownership and operation of the Homer City facilities. These market risks include, among others, volatility
arising from the timing differences associated with buying fuel, converting fuel into energy and delivering energy to a buyer. Through EMMT, EME Homer City uses forward contracts and derivative
financial instruments, such as futures contracts and options, to manage market risks and exposure to fluctuating electricity and fuel prices. However, EME Homer City cannot provide assurance that
these strategies will successfully mitigate market risks, or that they will not result in net losses.

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EME
Homer City may not cover the entire exposure of its assets or positions to market price volatility, and the level of coverage will vary over time. Fluctuating commodity prices may
negatively affect EME Homer City's financial results to the extent that assets and positions have not been hedged.

The
effectiveness of EME Homer City's hedging activities may depend on the amount of working capital available to post as collateral in support of these transactions, either in support
of performance guarantees or as a cash margin. The amount of credit support that must be provided typically is based on the difference between the price of the commodity in a given contract and the
market price of the commodity. Significant movements in market prices can result in a requirement to provide cash collateral
and letters of credit in very large amounts. Without adequate liquidity to meet margin and collateral requirements, EME Homer City could be exposed to the following:

As
a result of these and other factors, EME Homer City cannot predict with precision the effect that risk management decisions may have on its businesses, operating results or financial
position.

EME Homer City is exposed to credit and performance risk from third parties under supply and transportation contracts.

The Homer City facilities rely on contracts for the supply and transportation of fuel and other services required for their operation. EME Homer City's operations
are exposed to the risk that counterparties will not perform their obligations. If a counterparty failed to perform under a contract, EME Homer City would need to obtain alternate suppliers or
alternate means of transportation for its requirements of fuel or other services, which could result in higher costs or disruptions in its operations. Furthermore, EME Homer City is exposed to credit
risk because damages related to a breach of contract may not be recoverable. Accordingly, the failure of a supplier to fulfill its contractual obligations could have a material adverse effect on EME
Homer City's financial results.

EME Homer City is subject to extensive energy industry regulation.

EME 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.
Under limited circumstances where exclusive federal jurisdiction is not applicable or specific exemptions or waivers from state or federal laws or regulations are otherwise unavailable, federal and/or
state utility regulatory commissions may have broad jurisdiction over non-utility owned electric power plants such as the Homer City facilities. 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. See "Regulatory
Matters."

In
addition to its exposure to government regulation affecting all electric power suppliers and generating companies on a national level, EME Homer City is especially susceptible to
regulatory actions and litigation outcomes that are specific to the geographic power market in which the Homer City facilities are located. For example, the FERC may impose various forms of market
mitigation measures,

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including
price caps and operating restrictions, where it determines that potential market power might exist and that the public interest requires mitigation. In addition, ISOs and RTOs 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 EME Homer City's results of operations.

There
is no assurance that the introduction of new laws or other future regulatory developments will not have a material adverse effect on EME Homer City's business, results of
operations or financial condition, nor is there any assurance that EME Homer City will be able to obtain and comply with all necessary licenses, permits and approvals for its facilities. If EME Homer
City cannot comply with all applicable regulations, its business, results of operations and financial condition could be adversely affected.

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

EME Homer City's operations are subject to extensive environmental regulations with respect to, among other things, air quality, water quality, waste disposal,
and noise. EME Homer City is required to comply with these regulations, as well as 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 EME Homer City to civil or criminal liability, the imposition of liens or fines, or actions by regulatory agencies seeking to
curtail EME Homer City's operations. EME 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.

EME
Homer City devotes significant resources to environmental monitoring, pollution control equipment and emission allowances to comply with environmental regulatory requirements. EME
Homer City believes that it is currently in substantial compliance with environmental regulatory requirements. However, the current trend is toward more stringent standards, stricter regulation, and
more expansive application of environmental regulations. Environmental advocacy groups and regulatory agencies in the United States have been focusing considerable attention on carbon dioxide
emissions from
coal-fired power plants and their potential role in climate change. The adoption of laws and regulations to implement carbon dioxide controls could adversely affect the Homer City
facilities. Also, coal plant emissions of NOX and SO2, mercury and particulates are subject to increased controls and mitigation expenses. Additionally, the State of
Pennsylvania is contemplating air pollution control regulations that are more stringent than existing and proposed federal regulations. The continued operation of the Homer City facilities will
require substantial capital expenditures for environmental controls.

In
addition, future environmental laws and regulations, and future enforcement proceedings that may be taken by environmental authorities could affect the costs and the manner in which
EME Homer City conducts its business. There is no assurance that EME Homer City would be able to recover these increased costs from its customers or that its business, financial condition and results
of operations would not be materially adversely affected. Changing environmental regulations could require EME Homer City to purchase additional emission allowances or install additional pollution
control technology, and could make some units uneconomical to maintain or operate. If EME 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesEnvironmental Matters and Regulations."

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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. Meeting all the necessary requirements can delay or sometimes prevent the completion of a proposed project as well as require extensive modifications to existing projects, which
may involve significant capital expenditures. EME 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
facilities.

Competition could adversely affect EME Homer City's business.

The independent power industry is characterized by numerous capable competitors, some of whom may have more extensive operating experience in the acquisition and
development of power projects, larger staffs, and greater financial resources than EME Homer City. Several 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. This could affect EME Homer City's ability to compete effectively in the markets in which those entities operate.

Further,
in recent years some power markets, including PJM and NYISO, have been characterized by strong and increasing competition as a result of regulatory changes and other factors
which can contribute to a reduction in market prices for power from time to time. These regulatory and other changes may increase competitive pressures in these markets.

Newer
plants owned by EME Homer City's competitors are often more efficient than the Homer City facilities. This may put the Homer City facilities at a competitive disadvantage to the
extent that its competitors are able to produce more power from each increment of fuel than the Homer City facilities are capable of producing. Over time, the Homer City facilities may become obsolete
in their markets, or be unable to compete, because of the construction of newer, more efficient power plants.

EME Homer City may not be able to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and capital expenditures,
which could adversely affect its results of operations.

The factors that influence EME Homer City's ability to arrange for financing and its costs of capital include:

While
EME Homer City believes that its sources of capital will be adequate to meet its obligations for the foreseeable future, this belief is based on a number of material assumptions,
including without limitation assumptions about its ability to access the capital and commercial lending markets and its operating and financial performance. Any of these assumptions could prove to be
incorrect. EME Homer City cannot provide assurance that its projected sources of capital will be available when needed or that its actual cash requirements will not be greater than expected.

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Restrictions in the participation agreements and facility leases limit or prohibit EME Homer City from entering into some transactions that it otherwise
might enter into.

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

In
connection with the sale-leaseback transaction, EME Homer City entered into a designated account representative agreement with the owner lessors which provides that, for
as long as the facility leases are in effect, EME Homer City will be irrevocably able to appoint the designated account representatives on file with the US EPA or the PADEP, as the case may be,
entitled to buy, sell and otherwise dispose of emission allowances without any payments or consideration to the owner lessors. The agreement provides that upon termination of a facility lease, the
applicable owner lessor will have the right to appoint itself or any other person as EME Homer City's successor designated account representative for purposes of any future emission allowances not
then owned by EME Homer City. If a facility lease were to terminate before its expiration, this event would also terminate the account representative agreement, and EME Homer City would be required to
write-off any unamortized emission allowances that it would no longer control.

Restrictions in the financing documents binding on EME Homer City and its affiliates limit the ability of EME Homer City to enter into specified
transactions that it otherwise might enter into.

EME and MEHC have entered into debt agreements that contain restrictive covenants that are applicable to their subsidiaries, including EME Homer City. EME Homer
City has not guaranteed these obligations. However, these financing documents contain restrictions on the ability of EME Homer City to enter into specified transactions or engage in specified business
activities, including, in some instances, a requirement that EME obtain the approval of MEHC's board of directors. EME Homer City's sale-leaseback documents also contain financial and
investment covenants. These restrictions may significantly impede the ability of EME Homer City to take advantage of business opportunities as they arise, to grow its business or compete effectively,
to make capital expenditures when required, or to develop and implement any refinancing plans in respect of its indebtedness.

In
addition, in connection with the entry by EME Homer City or its affiliates into new financings or amendments to existing financing arrangements, EME Homer City's financial and
operational flexibility may be further reduced as a result of more restrictive covenants, requirements for security and other terms that are often imposed on sub-investment grade entities.

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

The operation of power generation facilities involves many operating risks, including:

These
and other hazards can cause significant personal injury or loss of life, severe damage to and destruction of property, plant and equipment, contamination of or damage to the
environment, and suspension of operations. The occurrence of one or more of the events listed above could decrease or eliminate revenues generated by the Homer City facilities or significantly
increase the costs of operating them, and could also result in EME Homer City's being named as a defendant in lawsuits asserting claims for substantial damages, potentially including environmental
cleanup costs, personal injury, property damage, fines and penalties. Equipment and plant warranties and insurance may not be sufficient or effective under all circumstances to cover lost revenues or
increased expenses. A decrease or elimination in revenues generated by the facilities or an increase in the costs of operating them could decrease or eliminate funds available to make lease rent
payments and could have a material adverse effect on EME Homer City.

EME
Homer City is required to have insurance for the facilities, including all-risk property damage insurance, commercial general public liability insurance, boiler and
machinery coverage and business interruption insurance. EME Homer City cannot provide assurance that the insurance coverage for the facilities will be available in the future on commercially
reasonable terms. EME Homer City also cannot provide assurance that the insurance proceeds received for any loss of the facilities or
any damage to the facilities will be sufficient to permit EME Homer City to make any payments of rent under the facility leases.

Due
to the current market environment, the minimum insurance coverage specified under the EME Homer City sale-leaseback documents is not commercially available at reasonable
prices. EME Homer City has obtained a waiver under the participation agreements that permits it to maintain its current insurance coverage through June 1, 2007. Failure to maintain insurance
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 EME Homer City. For more
information on the insurance maintained by EME Homer City, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of

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OperationsLiquidity
and Capital ResourcesContractual Obligations, Commitments and ContingenciesContingencies."

The accounting for EME Homer City's hedging activities may increase the volatility of its quarterly and annual financial results.

EMMT, on behalf of EME Homer City, engages in hedging activities in order to mitigate EME Homer City's exposure to market risk with respect to electricity sales
from its generation facilities, fuel utilized by those facilities and emissions allowances. EMMT generally attempts to balance its fixed-price physical and financial purchases and sales commitments in
terms of contract volumes and the timing of performance and delivery obligations through the use of financial and physical derivative contracts. These derivative contracts are recorded on EME Homer
City's balance sheet at fair value pursuant to SFAS No. 133. Some of these derivative contracts do not qualify under SFAS No. 133 for hedge accounting and changes in their fair value are
therefore recognized currently in earnings as unrealized gains or losses. As a result, EME Homer City's financial results, including gross margin, operating income and balance sheet ratios, will at
times be volatile and subject to fluctuations in value primarily due to changes in electricity and fuel prices. For a more detailed discussion of the accounting treatment of EME Homer City's hedging
activities, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsMarket Risk ExposuresAccounting for Energy Contracts."

ITEM 1B.    UNRESOLVED STAFF COMMENTS

Inapplicable.

ITEM 2.    PROPERTIES

EME Homer City owns a fee interest in the 2,413-acre site on which its generating units and the other facilities are located, as well as another
approximately 1,800 acres associated with the Two Lick Dam area. The site is approximately 45 miles northeast of Pittsburgh, Pennsylvania in Indiana County. As a result of the
sale-leaseback transaction on December 7, 2001, EME 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 back to EME 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 EME Homer City facility leases. As long as the facility leases and the site subleases are in effect, the rents payable under the site leases and under the site subleases will be automatically
offset against each other so that no amounts will be payable by EME Homer City or the owner lessors with respect to these agreements. EME Homer City also leases portions of the site to other third
parties. Those leases are described below.

EME
Homer City leases the surface of an approximately 14-acre parcel to Alpha Coal Sales Company, LLC upon which the coal blending facility is located. Alpha Coal, using Unit
Mix as an operator, blends various coals mined by Alpha and others for sale to EME Homer City. EME Homer City also leases an office building located on the site to Unit Mix, which Unit Mix uses for
administrative activities associated with the coal blending facility. Each of the leases expires no later than June 30, 2009.

EME
Homer City has granted Linn Operating Co. the right to operate and produce gas from existing wells located on the site, provided that gas is found in paying quantities. EME Homer
City receives 16%

20

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of
the market value of the gas at the wellhead as royalties and also has the right to receive 250,000 cubic feet of gas at no charge from each well per annum. Linn Operating Co. currently purchases
gas from EME Homer City at market value at the wellhead.

ITEM 3.    LEGAL PROCEEDINGS

No material legal proceedings are presently pending against EME Homer City.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Inapplicable.

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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 2006, 2005 or 2004.

22

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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.

|                                                         |  | Years Ended December 31, |         
|-------------------------------------------------------- |  | ------------------------ | --------
|
|
|INCOME STATEMENT DATA                                    |  |                          |         
|Operating revenues                                       |  | $                        | 641,796 
|Operating expenses                                       |  |                          | 451,739 
|                                                         |  |                          |         
|Operating income                                         |  |                          | 190,057 
|Interest and other income                                |  |                          | 20,302  
|Interest expense                                         |  |                          | (145,546
|                                                         |  |                          |         
|Income (loss) before income taxes                        |  |                          | 64,813  
|Provision (benefit) for income taxes                     |  |                          | 25,581  
|                                                         |  |                          |         
|Income (loss) before accounting change                   |  |                          | 39,232  
|Cumulative effect of change in accounting, net of tax(1) |  |                          |        
|                                                         |  |                          |         
|Net income (loss)                                        |  | $                        | 39,232  
|                                                         |  |                          |         

---

23

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|                             |  | As of December 31,
|---------------------------- |  | ------------------
|
|
|BALANCE SHEET DATA           |  |                   
|Assets                       |  | $                 
|Current liabilities          |  |                   
|Long-term debt to affiliates |  |                   
|Lease financing              |  |                   
|Other long-term obligations  |  |                   
|Partners' equity (deficit)   |  |                   

|                                                |  | Years Ended December 31, |        
|----------------------------------------------- |  | ------------------------ | -------
|
|
|CASH FLOW DATA                                  |  |                          |        
|Cash provided by operating activities           |  | $                        | 88,726 
|Cash used in financing activities               |  |                          | (34,602
|Cash provided by (used in) investing activities |  |                          | (533   

24

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

This MD&A contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These
statements reflect EME Homer City's current expectations and projections about future events based on EME Homer City's knowledge of present facts and circumstances and assumptions about future events
and include any statement that does not directly relate to a historical or current fact. Other information distributed by EME Homer City that is incorporated in this MD&A, or that refers to or
incorporates this MD&A, may also contain forward-looking statements. In this MD&A 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. See "Item 1. BusinessForward-Looking Statements"
and "Item 1A. Risk Factors" for a discussion of some of the risks, uncertainties and other important factors that could cause results to differ, or otherwise could impact EME Homer City. Additional
information about the risks and uncertainties is contained throughout this MD&A. Readers are urged to read this entire annual report, including the information incorporated by reference, and carefully
consider the risks, uncertainties and other factors that affect EME Homer City's business. Forward-looking statements speak only as of the date they are made, and EME Homer City is not obligated to
publicly update or revise forward-looking statements. Readers should review future reports filed by EME Homer City with the Securities and Exchange Commission.

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

PageManagement's Overview; Critical Accounting Estimates

26Results of Operations

29Liquidity and Capital Resources

36Market Risk Exposures

49


25

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MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING ESTIMATES

Management's Overview

Introduction

EME Homer City is a Pennsylvania limited partnership formed for the purpose of acquiring, owning and operating three coal-fired electric generating
units and related facilities located near Pittsburgh, Pennsylvania with an aggregate capacity of 1,884 MW. EME Homer City does not have any plans to purchase or develop new power plants at this time.
In December 2001, EME Homer City completed a sale-leaseback transaction of the Homer City facilities to third-party lessors. The sale-leaseback transaction is accounted
for as a lease financing for financial reporting purposes.

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

Overview of EME Homer City's Operating Performance

EME Homer City's net income (loss) was $39.2 million, ($11.1) million and ($12.0) million in 2006, 2005 and 2004, respectively. The 2006 increase of income
was primarily attributable to $34.3 million (pre-tax) in unrealized gains in 2006 compared to $41.6 million (pre-tax) in unrealized losses in 2005 and
$12.9 million (pre-tax) in unrealized losses in 2004. The change from unrealized losses to unrealized gains was primarily from the ineffective portion of 2005 and 2004 cash flow
hedge contracts that settled during 2006. The ineffective portion of hedge contracts that qualify as cash flow hedges under SFAS No. 133 resulted from changes in the difference between energy
prices at PJM West Hub and energy prices at the Homer City busbar. See "Market Risk ExposuresAccounting for Energy Contracts" for more information.

Also
contributing to an increase in income were higher average realized energy prices and lower SO2 emission allowance costs. The average realized energy price received by
EME Homer City increased to $48.02/MWh in 2006 as compared to $45.05/MWh in 2005 and $35.93/MWh in 2004. The average realized energy prices compare to average real-time market prices at
the Homer City busbar of $45.15/MWh in 2006, $54.80/MWh in 2005 and $40.79/MWh in 2004. The average realized energy price was higher than the average real-time market price due to hedge
contracts entered into in prior periods. Average market prices declined in 2006 compared to 2005 due to lower natural gas prices.

The
cost of SO2 emission allowances (pre-tax) decreased to $34.5 million in 2006 as compared to $81.3 million in 2005 and $42.2 million in
2004. EME Homer City purchased fewer allowances in 2006 and at lower market prices. The price of emission allowances, particularly SO2 allowances issued through the Acid Rain Program of
the US EPA decreased in 2006 from 2005 year-end prices and increased substantially in 2005 and 2004. The average price of purchased SO2 allowances was $664 per ton in
2006, $1,219 per ton in 2005 and $435 per ton in 2004. See "Market Risk ExposuresCommodity Price RiskEmission Allowances Price Risk" for additional information.

Partially
offsetting the above increases in income were lower energy margins (energy revenues less fuel expenses) in 2006, as compared to 2005, as a result of lower generation, net of an
estimated insurance recovery related to the Unit 3 outage, described below.

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Unit 3 Outage

On January 29, 2006, the main power transformer on Unit 3 of the Homer City facilities failed, resulting in a suspension of operations at this unit. EME
Homer City secured a replacement transformer and Unit 3 returned to service on May 5, 2006. EME Homer City has adjusted its previously planned outage schedules for Unit 3 and the other Homer
City units in order to minimize to the extent practicable overall outage activities for all units through the first half of 2007. The main transformer failure resulted in claims under EME Homer City's
property and business interruption insurance policies. At December 31, 2006, EME Homer City had a $16.8 million receivable related to these claims. Resolution of the claims is subject to
a number of uncertainties, including computations of the lost profit during the outage period.

Critical Accounting Estimates

Introduction

The accounting policies described below are viewed by management as "critical" because their correct application requires the use of material judgments and
estimates, and they have a material impact on EME Homer City's results of operations and financial position.

Derivative Financial Instruments and Hedging Activities

EME Homer City uses derivative financial instruments for hedging activities for non-trading purposes. Derivative financial instruments are mainly
utilized to manage exposure from changes in electricity and fuel prices. EME Homer City follows SFAS No. 133, which requires derivative financial instruments to be recorded at their fair value
unless an exception applies. SFAS No. 133 also requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. For
derivatives that qualify for hedge accounting, depending on the nature of the hedge, changes in fair value are either offset by changes in the fair value of the hedged assets, liabilities or firm
commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. For further discussion, see "Market Risk ExposuresAccounting for Energy Contracts."

Management's
judgment is required to determine if a transaction meets the definition of a derivative and, if it does, whether the normal sales and purchases exception applies or whether
individual transactions qualify for hedge accounting treatment. Determining the fair value of derivatives under SFAS No. 133 is a critical accounting estimate because the fair value of a
derivative is susceptible to significant change resulting from a number of factors, including: volatility of energy prices, credits risks, market liquidity and discount rates. See "Market Risk
Exposures" for a description of risk management activities and sensitivities to change in market prices.

Impairment of Long-Lived Assets

EME Homer City follows SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). EME Homer City
evaluates long-lived assets whenever indicators of impairment exist. This accounting standard 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 in the financial statements. The amount of impairment is determined by the difference between
the carrying amount and fair value of the asset.

27

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The
assessment of impairment is a critical accounting estimate because significant management judgment is required 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 EME Homer City considers 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 expected future undiscounted cash flow from the Homer City facilities is a critical accounting estimate because:
(1) estimating future prices of energy and capacity in wholesale energy markets is susceptible to significant change, and (2) the period of the forecast is over an extended period of
time due to the estimated remaining useful life of 28.67 years for the Homer City facilities, and (3) the impact of an impairment on EME Homer City's financial position and results of
operations would be material. At December 31, 2006, the expected undiscounted future cash flow from long-lived assets exceeded the carrying value of those assets.

Income Taxes

SFAS No. 109, "Accounting for Income Taxes" requires the asset and liability approach for financial accounting and reporting for deferred income taxes. EME
Homer City uses the asset and liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences. See "Item 8. Financial
Statements and Supplementary DataNotes to Financial StatementsNote 7. Income Taxes" for additional details.

As
part of the process of preparing its financial statements, EME Homer City is required to estimate its income taxes in each jurisdiction in which it operates. This process involves
estimating actual current tax exposure 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 EME Homer City's balance sheet. At December 31, 2006, EME Homer City had net federal and state deferred tax
assets of $31.6 million. In assessing the realization of EME 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 EME Homer City's deferred income 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 EME 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.

For
additional information regarding EME Homer City's accounting policies, see "Item 8. Financial Statements and Supplementary DataNotes to Financial
StatementsNote 2. Summary of Significant Accounting Policies."

28

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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 EME
Homer City's operations.

Years Ended December 31,2006

2005

2004Operating Revenues(in millions)

$
642

$
592

$
497StatisticsGeneration (in GWh)


12,286


13,637


13,292Equivalent availability(1)


81.9%


85.2%


85.1%Capacity factor(2)


74.3%


82.4%


80.1%Load factor(3)


90.7%


96.7%


94.1%Forced outage rate(4)


13.5%


4.8%


5.3%Average realized energy price/MWh(5)

$
48.02

$
45.05

$
35.93Capacity revenue only (in millions)

$
16

$
18

$
28Average fuel costs/MWh

$
23.05

$
21.08

$
16.15


---

Operating Revenues

Operating revenues increased $50.2 million in 2006 compared to 2005, and $94.4 million in 2005 compared to 2004. The 2006 increase was primarily
attributable to changes in unrealized gains (losses) related to hedge contracts. Included in operating revenues were unrealized gains (losses) from hedge activities of $34.3 million, $(41.6)
million and $(12.9) million in 2006, 2005 and 2004, respectively.
Unrealized gains (losses) were primarily attributable to the ineffective portion of forward and futures contracts which are derivatives that qualify as cash flow hedges under SFAS No. 133. The
ineffective portion of hedge contracts at Homer City was primarily attributable to changes in the difference between energy prices at 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 facilities is delivered into the transmission system). At December 31, 2006, unrealized
losses of $11.1 million were recognized from the ineffective portion of cash flow hedges related to 2007. See "Market Risk ExposuresCommodity Price Risk" and
"Accounting for Energy Contracts" for more information.

Also
contributing to an increase in revenues in 2006 were higher average realized energy prices offset by lower generation due to higher forced outages, including the Unit 3 outage
earlier in 2006. The

29

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average
realized energy price received by EME Homer City in 2006, 2005 and 2004 was $48.02/MWh, $45.05/MWh and $35.93/MWh, respectively, compared to the average real-time market price at
the Homer City busbar for the same periods of $45.15/MWh, $54.80/MWh and $40.79/MWh, respectively. EME Homer City's average realized energy price varies from the average real-time market
price due to: (1) hedge contracts having been entered into in prior periods, and (2) changes in the differential in market prices at the PJM West Hub versus the Homer City busbar. The
increase in the differential is referred to as a widening of the basis between these PJM locations. EME Homer City hedges its energy price risk at PJM West Hub and retains the risk that the basis
between PJM West Hub and Homer City widens. During 2005, the basis between these two locations widened substantially resulting in ineffective losses on hedge contracts. See "Market Risk
ExposuresCommodity Price RiskBasis Risk."

On
January 29, 2006, the main power transformer on Unit 3 of the Homer City facilities failed, resulting in a suspension of operations at this unit. EME Homer City secured a
replacement transformer and Unit 3 returned to service on May 5, 2006. EME Homer City has adjusted its previously planned outage schedules for Unit 3 and the other Homer City units in order to
minimize to the extent practicable overall outage activities for all units through the first half of 2007.

The
2005 increase in operating revenues was primarily due to higher average realized energy prices partially offset by lower capacity payments and increased losses related to hedging
activities.

Seasonal Disclosure

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

Operating Expenses

Operating expenses decreased $11.8 million in 2006 compared to 2005, and increased $96.0 million in 2005 compared to 2004. Operating expenses
consisted of expenses for fuel, gain on sale of emission allowances, plant operations, depreciation and amortization, and administrative and general expenses. The change in the components of operating
expenses is discussed below.

Fuel
expenses decreased $4.3 million in 2006 compared to 2005, and increased $72.8 million in 2005 compared to 2004. The 2006 decrease was due to lower generation and lower
cost of SO2 emission allowances, partially offset by higher coal costs driven primarily by scheduled price increases, the expiration in 2005 of certain lower-priced contracts and premiums
charged for lower sulfur coal. The 2005 increase was due to an increase in the market price of SO2 emission allowances and higher coal prices. EME Homer City's cost of SO2
emission allowances was $34.5 million, $81.3 million and $42.2 million in 2006, 2005 and 2004, respectively. See "Market Risk ExposuresCommodity Price
RiskEmission Allowances Price Risk" for more information regarding the price of SO2 allowances.

Gain
from the sale of emission allowances was $2.2 million, $4.9 million and none during 2006, 2005 and 2004, respectively. EME Homer City sold excess NOX
emission allowances to affiliates and third parties in 2006 and 2005.

30

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Plant
operations costs decreased $5.7 million in 2006 compared to 2005, and increased $23.8 million in 2005 compared to 2004. Plant operations costs include labor and
overhead, contract services, parts and supplies and other administrative costs. EME Homer City had higher maintenance and repair costs for Unit 3 in 2006 relating to the unplanned outage in January,
but was partially offset by an estimated insurance recovery of $6.0 million related to the transformer. EME Homer City was also able to adjust its previously planned outage schedules for Unit 3
and its other units in order to minimize the overall outage activities for all units for the year. The 2005 increase in plant operations costs is primarily due to higher planned equipment maintenance
costs and the cost of replacing the catalyst for the pollution
control equipment in 2005. Planned maintenance expenses will vary year to year based on the scheduled cycle times of equipment.

Depreciation
and amortization were $59.4 million, $63.4 million and $63.0 million during 2006, 2005 and 2004, respectively. As a result of the
sale-leaseback in December 2001, depreciation and amortization consists primarily of EME Homer City's leasehold interest, which is being depreciated over the minimum term of the
leases of 33.67 years.

Administrative
and general expenses were $5.2 million, $5.5 million and $1.8 million during 2006, 2005 and 2004, respectively. The 2005 increase is due to higher
shared management and administrative costs from an affiliate of EME, Midwest Generation EME, LLC, and a change in estimate of Pennsylvania capital taxes which lowered 2004 expenses.

Other Income (Expense)

Interest expense was $145.5 million, $146.9 million and $150.9 million during 2006, 2005 and 2004, respectively. Interest expense primarily
relates to the lease financing of the Homer City facilities that originated in December 2001. Interest expense also includes interest of $39.9 million, $37.1 million and
$38.2 million during 2006, 2005 and 2004, respectively, from EME Homer City's subordinated revolving loan agreement with Edison Mission Finance.

Interest
and other income was $20.3 million, $3.6 million and $1.3 million during 2006, 2005 and 2004, respectively. Interest and other income (expense) primarily
relates to interest earned on cash and cash equivalents offset by fees paid to EME Homer City's marketing affiliate. The 2006 increase was primarily attributable to an estimated insurance recovery of
$10.8 million related to the Unit 3 outage and higher interest earned on temporary cash investments. The 2005 increase is due to higher interest earned on temporary cash investments.

Provision (Benefit) for Income Taxes

EME Homer City had effective income tax provision (benefit) rates of 39.5%, (26.6)% and (39.6)% in 2006, 2005 and 2004, respectively. EME Homer City's effective
income tax provision (benefit) rate varies from the federal statutory rate of 35% 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.

Related Party Transactions

EMMT Agreements

EME 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.

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EME Homer City compensates EMMT in accordance with the following table 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.

Service

CompensationEnergy and/or capacity

$.02/MWh ($.02/MW-day for capacity)Fuel oil

$.05/bblEmission allowances

$.25/SO2 allowance; and $25/NOX allowance


The net fees earned by EMMT were $0.7 million, $0.6 million and $0.7 million for the years ended December 31, 2006,
2005 and 2004, respectively. Beginning in the second quarter of 2003, EMMT began prepaying in full for the following month's expected power generation. As a result of the accelerated payments, EME
Homer City had payables due to EMMT of $91.8 million, $90.1 million and $66.5 million at December 31, 2006, 2005 and 2004, respectively.

EME
Homer City entered into several transactions through EMMT for the purchase or sale of SO2 and NOX allowances. All transactions were completed at market price
on the date of the transaction. Net consideration paid by EME Homer City was $27.4 million, $80.0 million and $43.9 million during 2006, 2005 and 2004, respectively.

During
2003, EMMT entered into agreements using the capacity of the Homer City facilities to participate in auction revenue rights awarded through PJM to load serving entities. The
auction revenue rights were applicable to the period from June 1, 2003 through May 31, 2004, and the benefits of the agreements were passed on to EME Homer City. EME Homer City's share
of auction revenue rights of $16.5 million was paid by May 31, 2004. Revenue related to the auction revenue rights was recognized on a straight-line basis over the period of
the agreements.

Fuel Services Agreements

EME Homer City has entered into an agreement with Edison Mission Energy Services, Inc. to provide fuel and transportation services related to coal and fuel
oil. Under the terms of this agreement, EME Homer City pays a service fee of $.06 for each ton of coal delivered and $.05 for each barrel of fuel oil delivered, plus the actual cost of the
commodities. The amount billable under this agreement for the three years ended December 31, 2006, 2005 and 2004 was $0.3 million, $0.4 million and $0.4 million,
respectively.

Affiliate Financing

EME Homer City obtained financing from Edison Mission Finance Co., in connection with its acquisition of the Homer City facilities, in the form of a subordinated
revolving loan. The subordinated revolving loan matures in 2014, with no scheduled repayment prior to its maturity. This loan is subordinated to EME Homer City's lease rent obligations, with interest
and principal payments subject to limitations based on EME Homer City's ability to make distributions under the sale-leaseback agreements. On December 8, 2003, EME Homer City
amended and restated the subordinated revolving loan agreement and issued a note evidencing its repayment obligations under the loan agreement. The amended and restated subordinated revolving loan
agreement had no effect on the financial terms of the agreement.

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Tax-Allocation Agreements

EME 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, EME 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 since EME Homer City's formation, its current tax liability or benefit is generally determined on a separate return basis, except for
calculating consolidated state income taxes, for which EME Homer City uses the long term state tax apportionment factors of the Edison International group. Also, while EME Homer City is generally
subject to separate return limitations for net losses, under the tax-allocation agreement EME Homer 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 intercompany account balances (including the subordinated revolving loan). EME 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 $25.6 million and $50.6 million at
December 31, 2006 and 2005, respectively.

On
March 31, 2006, EME Homer City entered into an amendment of its tax-allocation agreement with Edison Mission Holdings to provide for the option, at EME Homer City's
discretion, to settle federal and state income tax liabilities under the tax-allocation agreement through an increase in indebtedness under the subordinated revolving loan agreement with
Edison Mission Finance. Pursuant to this amendment, EME Homer City elected this option to settle $60.2 million of intercompany tax liabilities through a loan under the subordinated revolving
loan agreement with Edison Mission Finance.

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 EME 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). EME Homer City participates in a common payroll and benefit program with all Edison International employees. In addition, EME Homer City is billed for any
direct labor and out-of-pocket expenses for services directly requested for the benefit of the partnership. EME Homer City believes the allocation methodologies are reasonable.
EME Homer City made reimbursements for the cost of these programs,
payroll funding and other services totaling $32.1 million, $31.9 million and $30.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. EME Homer
City had a net payable of $0.1 million at December 31, 2006 and a net receivable of $0.3 million at December 31, 2005 due to/from Edison International related to these
programs.

EME
Homer City participates in the insurance program of Edison International, including property, general liability, workers compensation and various other specialty policies. EME 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.

33

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Management and Administration Agreement with Midwest Generation EME, LLC

In April 2004, EME Homer City and Midwest Generation EME entered into a new management and administration agreement pursuant to which Midwest Generation
EME began charging EME Homer City for management and administrative services. Actual costs billable under this agreement for the years ended December 31, 2006, 2005 and 2004 were
$2.7 million, $2.9 million and $1.4 million, respectively. EME Homer City had a payable of $0.2 million at December 31, 2006 and 2005, due to Midwest Generation EME
related to this agreement.

New Accounting Pronouncements

Accounting Principles Adopted

Statement of Financial Accounting Standards No. 123(R)

SFAS No. 123(R) requires companies to use the fair value accounting method for stock-based compensation. EME Homer City implemented SFAS No. 123(R)
in the first quarter of 2006 and applied the modified prospective transition method. Under the modified prospective method, SFAS No. 123(R) was applied effective January 1, 2006 to the
unvested portion of awards previously granted and will be applied to all prospective awards. Prior financial statements were not restated under this method. SFAS No. 123(R) resulted in the
recognition of expense for all stock-based compensation awards. In addition, EME Homer City elected to calculate the pool of windfall tax benefits as of the adoption of SFAS No. 123(R) based on
the method (also known as the short-cut method) proposed in FSP FAS 123(R)-3, "Transition Election to Accounting for the Tax Effects of Share Based Payment Awards." Prior to January 1,
2006, EME Homer City used the intrinsic value method of accounting, which resulted in no recognition of expense for Edison International stock options. The adoption of this standard had an
insignificant impact on EME Homer City's financial statements.

FASB Staff Position FIN 46(R)-6

In April 2006, the FASB issued Staff Position FIN 46(R)-6, "Determining Variability to be Considered in Applying FIN 46(R)." FIN
46(R)-6 states that the variability to be considered in applying FIN 46(R) shall be based on an analysis of the design of the entity following a two-step process. The first
step is to analyze the nature of the risks in the entity. The second step would be to determine the purpose(s) for which the entity was created and determine the variability (created by the risks
identified in Step 1) the entity is designed to create and pass along to its interest holders. The guidance in this FASB Staff Position was effective prospectively beginning July 1,
2006, although companies had until December 31, 2006 to elect retrospective applications. EME Homer City adopted FIN 46(R)-6 prospectively beginning July 1, 2006. Applying
the guidance had no effect on EME Homer City's financial statements for the year ended December 31, 2006.

Statement of Financial Accounting Standards No. 158

In September 2006, the FASB issued SFAS No. 158, which amends the accounting by employers for defined benefit pension plans and postretirement
benefits other than pensions. SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement plans as assets or
liabilities in their balance sheet; the assets or liabilities are offset through other comprehensive income. EME Homer City adopted SFAS No. 158 prospectively on December 31, 2006. SFAS
No. 158 also requires companies to align the measurement dates for their plans to their fiscal year-ends; EME Homer City already has a fiscal year-end measurement date
for all of its postretirement plans. Upon adoption, EME Homer City recorded additional postretirement benefit

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liabilities
of $2.6 million (included in benefit plans and other) and a reduction to accumulated other comprehensive income (a component of partners' equity) of $1.5 million, net of tax.

Staff Accounting Bulletin No. 108

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides interpretive guidance on the consideration of the effects
of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 requires additional quantitative testing to determine whether a
misstatement is material. EME Homer City implemented SAB No. 108 for the filing of its Annual Report on Form 10-K for the year ended December 31, 2006. Applying the
guidance had no effect on EME Homer City's financial statements for the year ended December 31, 2006.

Accounting Principles Not Yet Adopted

Statement of Financial Accounting Standard Interpretation No. 48

In July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," that clarifies the accounting for uncertain
tax positions. An enterprise would be required to
recognize, in its financial statements, the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates it is more likely than not, based solely on
the technical merits, that the position will be sustained on audit. EME Homer City will adopt the new interpretation in the first quarter of 2007. The new interpretation is not expected to result in a
material adjustment to partners' equity.

Statement of Financial Accounting Standards No. 155

In February 2006, the FASB issued SFAS No. 155, which amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for at fair value at acquisition, at issuance, or
when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have
to be bifurcated. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to remeasurement after January 1, 2007. The fair value election provided for in
paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133
prior to the adoption of this Statement. EME Homer City does not expect the adoption of this standard to have a material impact on EME Homer City's financial statements.

Statement of Financial Accounting Standards No. 157

In September 2006, the FASB issued a new accounting standard on fair value measurements (SFAS No. 157). SFAS No. 157 clarifies the definition
of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. EME Homer City will adopt SFAS No. 157 on January 1, 2008. EME
Homer City is currently evaluating the impact of adopting SFAS No. 157 on its financial statements.

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LIQUIDITY AND CAPITAL RESOURCES

Introduction

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

PageCash Flow

36Capital Expenditures and Lease Covenants

37Distributions to EME

38Credit Ratings

38Contractual Obligations, Commitments and Contingencies

39Off-Balance Sheet Transactions

43Environmental Matters and Regulations

43


Cash Flow

At December 31, 2006, EME Homer City had cash and cash equivalents of $113.8 million compared to $60.2 million at December 31, 2005.
Net working capital at December 31, 2006 was $36.2 million compared to $(200.9) million at December 31, 2005. Net working capital increased $237.1 million primarily due to
an increase in cash and cash equivalents and an increase in net derivative assets largely driven by a decline in forward power prices and settlement of hedge contracts during 2006. Partially
offsetting these increases was a decrease in current deferred tax assets.

Net
cash provided by operating activities was $88.7 million, $76.8 million and $68.3 million in 2006, 2005 and 2004, respectively. The 2006 increase was primarily
due to a temporary increase in interest payable to Edison Mission Finance and the timing of cash receipts and disbursements related to working capital
items. EME Homer City made a $35 million interest payment to Edison Mission Finance in January 2007. EME Homer City received advance payments in the amounts of $43.5 million and
$20 million at the end of March and April 2006, respectively, from EMMT against future deliveries of power to it under its trading arrangements with EME Homer City, to assist with a cash
shortfall resulting from reduced revenues and higher maintenance costs caused by the Unit 3 outage. EME Homer City had a payable to EMMT of $15.5 million at December 31, 2006 related to
these advance payments, which was applied against amounts invoiced to EMMT in January 2007. The 2005 increase in operating cash flow was primarily due to the timing of cash receipts and
disbursements related to working capital items.

Net
cash used in financing activities was $34.6 million, $79.2 million and $59.7 million in 2006, 2005 and 2004, respectively. The 2006 decrease in cash used in
financing activities was primarily due to no repayments made under the subordinated revolving loan agreement with Edison Mission Finance while borrowings increased in 2006, as compared to net
repayments on that affiliate debt in 2005. The 2006 borrowings include an $8.8 million advance made by EME in March, through Edison Mission Finance, to assist EME Homer City with the cash
shortfall relating to the Unit 3 outage. In October 2006, EME Homer City returned the $8.8 million to Edison Mission Finance as an interest payment. The 2005 increase was primarily due
to higher net payments made under the subordinated revolving loan with Edison Mission Finance and higher scheduled repayments of the lease financing, partially offset by lower net payments under the
lease swap agreement.

Net
cash used in investing activities was $0.5 million, $11.6 million and $26.3 million in 2006, 2005 and 2004, respectively. The 2006 decrease in cash used in
investing activities was due to lower capital expenditures and proceeds received in 2006 related to a settlement with Alstom Power in connection with

36

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the
2002 outage of Unit 3. The 2005 decrease was primarily due to lower capital expenditures, lower deposits into restricted cash and proceeds received from the sale of excess NOX emission
allowances in 2005. In 2004, EME Homer City deposited $7.1 million to restricted cash related to an environmental bond. Capital expenditures were $10.8 million, $16.3 million and
$19.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The 2006 capital expenditures were primarily related to non-environmental improvements. The
2005 capital expenditures were for SCR system performance improvements and non-environmental improvements. The 2004 capital expenditures were primarily related to
non-environmental improvements.

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

Capital Expenditures and Lease Covenants

At December 31, 2006, the three-year estimated capital expenditures by EME Homer City were as follows:

2007

2008

2009(in millions)Plant capital expenditures

$
19.0

$
25.7

$
20.0Environmental expenditures


8.9


9.5


14.7Total

$
27.9

$
35.2

$
34.7


Plant capital expenditures relate to non-environmental projects such as upgrades to boiler and turbine controls, a spare main power
transformer, railroad interconnection and an expansion of a coal cleaning plant refuse site. Environmental expenditures relate to projects such as mercury emission monitoring and control and SCR
performance improvements. EME Homer City plans to finance these expenditures with cash on hand or cash generated from operations. See further discussion regarding possible additional capital
expenditures, including environmental control equipment, under "Environmental Matters and RegulationsAir Quality Regulation."

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

The
rent payments that EME Homer City owes under the sale-leaseback agreements are comprised of two components, a senior rent portion and an equity rent portion. The senior
rent is used exclusively for debt service to the holders of the senior secured bonds issued in connection with the sale-leaseback

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transaction,
while the equity rent is paid to the owner-lessors. In order to pay the equity portion of the rent, EME Homer City is required to meet historical and projected senior rent service
coverage ratios of 1.7 to 1 subject to reduction to 1.3 to1 under circumstances specified in the participation agreements. During the 12 months ended December 31, 2006, the senior rent
service coverage ratio was 2.32 to 1. The senior rent service coverage ratio is determined by dividing net cash flow as defined in the participation agreements by the senior rent due in that period.
In addition, if EME Homer City does not meet specified debt service coverage ratios while the lease debt is outstanding, it will not pay the equity portion of the rent to the owner-lessors.
Accordingly, the sale-leaseback documentation does not permit the lessor to terminate the lease in the event of non-payment of the equity portion of the rent while the lease
debt is outstanding.

EME
Homer City's use of cash in its bank accounts is limited to specific operating and capital expenditures as set forth in the security deposit agreement executed as part of the
sale-leaseback transaction. The amount in certain reserve accounts will be available for payments due on the equity portion of lease rent during specified periods, and in accordance with
the sale-leaseback documents, unless there is a default in the payment of the senior portion of lease rent, in which case the amount will be available to pay such senior portion of the
lease rent. The release of funds from these restricted cash accounts is permitted, provided EME Homer City maintains specified reserve balances in accordance with the sale-leaseback
documents, no event of default shall have occurred or be continuing and no two failed rent payments shall have occurred. EME Homer City had $40 million included in restricted cash at
December 31, 2006 related to these reserve accounts.

Distributions to EME

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

Years Ended December 31,2006

2005

2004(in millions)Payment of interest(1)

$


$
47.7

$
29.1Payment of principal





38.3


31.9Total payments

$


$
86.0

$
61.0


---

Credit Ratings

EME Homer City is not currently rated. EME Homer City has entered into a contract with EMMT for the sale of energy and capacity from its facilities, which enables
this marketing affiliate to engage in forward sales and hedging. Credit ratings for EME and EMMT, at December 31, 2006, were as follows:

Moody's Rating

S&P RatingEME

B1

BB-EMMT

Not Rated

BB-


On September 29, 2006, S&P raised the credit rating of EME and EMMT to BB- from B+. EME Homer City cannot provide assurance
that the credit ratings above will remain in effect for any given period of time or that one or more of these ratings will not be lowered. EME Homer City notes that these credit ratings are not
recommendations to buy, sell or hold securities and may be revised at any time by a rating agency.

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EME Homer City's sale-leaseback documents restrict EME Homer City's ability to enter into trading activities, as defined in the documents, with EMMT to sell forward the
output of its facilities if EMMT does not have an investment grade credit rating from Standard &Poor's or Moody's or, in the absence of those ratings, if it is not rated as investment grade
pursuant to EME's internal credit scoring procedures. These documents include a requirement that the counterparty to such transactions, and EME Homer City, if acting as seller to an unaffiliated third
party, be investment grade. EME Homer City, which is not rated, currently sells all the output from its facilities through EMMT, which has a below investment grade credit rating. Therefore, in order
for EME Homer City to continue to sell forward the output of its facilities, either: (1) EME Homer City must obtain consent from the sale-leaseback owner participant to permit it to
sell directly into the market or through EMMT; or (2) EMMT must provide assurances of performance consistent with the requirements of the sale-leaseback documents. EME Homer City
has obtained a consent from the sale-leaseback owner participant that will allow it to enter into such sales, under specified conditions, through December 31, 2008. EME Homer City
continues to be in compliance with the terms of the consent. EME Homer City is permitted to sell the output of its facilities into the spot market at any time. See "Market Risk
ExposuresCommodity Price Risk."

Contractual Obligations, Commitments and Contingencies

Contractual Obligations

The following table summarizes EME Homer City's significant contractual obligations as of December 31, 2006.

Payments Due by Period (in millions)Contractual Obligations

Total

Less than
1 year

1 to 3
years

3 to 5
years

More than 5 yearsLong-term debt to affiliate(1)

$
848.0

$


$


$


$
848.0Lease financing(2)


2,583.3


150.8


302.9


315.4


1,814.2Lease swap agreement


(51.6
)

1.0


1.5


2.6


(56.7
)Operating lease obligations(3)


1.4


0.5


0.7


0.2


Purchase obligations:Capital improvements


0.7


0.7








Fuel supply contracts


345.3


219.5


125.8





Coal transportation


20.2


9.7


10.5





Coal cleaning agreement


21.4


5.4


10.7


5.3


Other contractual obligations


4.7


1.5


3.2





Employee benefit plan contribution(4)


2.0


2.0








Total Contractual Obligations

$
3,775.4

$
391.1

$
455.3

$
323.5

$
2,605.5


---

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Lease Financing

On December 7, 2001, EME Homer City completed a sale-leaseback of its facilities to third-party lessors for an aggregate purchase price of
$1.591 billion, comprised of $782 million in cash and assumption of debt (the fair value of which was $809.3 million). Under the terms of the 33.67-year leases, EME
Homer City is obligated to make semi-annual lease payments on each April 1 and October 1. The gain recognized on the sale of the facilities has been deferred and is being
amortized over the term of the leases.

Lease Swap Agreement

In connection with the sale-leaseback transaction, EME Homer City has entered into a swap agreement with a bank in order to more effectively match its
cash flow, which generally is higher during the summer months when energy prices are higher, with its lease payments. Beginning in April 2002 through April 2014, the bank makes a swap
payment to EME Homer City in April of each year and EME Homer City makes a swap payment to the bank in October of each year. The amount of each swap payment is designed to reverse the amounts of the
semi-annual payments due under the lease so that EME Homer City effectively has lower cash obligations in April and higher cash obligations in October. In April 2006, EME Homer City
received a swap payment of $62.4 million, and in October 2006 EME Homer City made a swap payment of $63.1 million, resulting in a net deposit balance due from the bank of
$45.4 million at December 31, 2006. EME Homer City is also required to fund one-sixth of the October swap payment each month, between April and September of each year, into a
restricted cash account. The implicit interest rate, which was fixed at inception of the swap agreement, is based on LIBOR during periods that EME Homer City has a net deposit with the bank, and LIBOR
plus 5% during periods that EME Homer City has a net loan with the bank.

Purchase Obligations

Capital Improvements

At December 31, 2006, EME Homer City had firm commitments in 2007 for capital expenditures primarily related to SCR system performance improvements.

Fuel Supply Contracts

At December 31, 2006, EME Homer City had fuel purchase commitments with various third-party suppliers for the purchase of bituminous steam coal and fuel
oil. The remaining contracts' lengths range from one year to three years. The contracts require EME Homer City to purchase a minimum quantity over the term of the contracts, with an option at EME
Homer City's discretion to purchase additional amounts as stated in the agreements. For further discussion, see "Market Risk ExposuresCommodity Price RiskCoal
Price Risk."

Coal Transportation Agreements

At December 31, 2006, EME Homer City had contractual commitments for the transport by rail of coal to its facilities, with remaining contract lengths that
range from one year to two years. The minimum commitments are based on the contract provisions, which consist of fixed prices, subject to adjustment clauses. Although trucking remains the predominant
mode of transportation for coal shipments to the Homer City facilities, rail transportation is expected to increase in 2007 as EME Homer City diversifies its alternative modes of transporting coal to
the plant site.

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Coal Cleaning Agreement

Effective January 1, 2006, EME Homer City entered into a coal cleaning agreement with Homer City Coal Processing Corporation to operate and maintain a coal
cleaning plant owned by EME Homer City. The agreement expires on December 31, 2010.

Other Contractual Obligations

At December 31, 2006, EME Homer City had contractual commitments for the purchase of limestone, which is used for the wet scrubber flue gas desulfurization
system on Unit 3, under contracts with remaining lengths from one year to three years.

Commercial Commitments

Interconnection Agreement

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

Guarantees and Indemnities

Tax Indemnity Agreements

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

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

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

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Contingencies

Ash Disposal Site

EME Homer City's ash disposal site is a permitted Class I Residual Waste Landfill, the most stringently regulated of the three categories of residual waste
landfills authorized by the regulations of the PADEP. EME Homer City's permit allows it to dispose of coal combustion by-products, including fly ash, bottom ash and pyrites, and
miscellaneous plant wastes at the landfill. The wastes are deposited in compacted layers within lifts, or sections. Each lift where coal ash is disposed must be capped and covered when it reaches
final grade. EME Homer City must also monitor groundwater quality at and adjacent to the ash disposal site through a network of monitoring wells and report the results to the PADEP on a periodic
basis. In the event that a disposal facility's groundwater monitoring identifies degradation in any of its wells, the PADEP's regulations require the facility to first confirm the existence and nature
of the degradation by conducting a groundwater assessment. If the assessment confirms groundwater degradation in excess of the applicable regulatory standards, the facility is then required to prepare
and implement an abatement plan that could include measures such as installing a liner in a previously unlined area. To date, no degradation has been found in the groundwater monitoring system at EME
Homer City that would require the development of an assessment or abatement plan. EME Homer City also provides financial assurance in the form of a surety bond to guarantee its closure and
post-closure obligations at the landfill. The estimated closure date is 2018. Management does not believe that the costs of maintaining and closing the ash disposal site will have a
material impact on EME Homer City's financial statements.

Insurance

EME Homer City maintains insurance policies that 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 $1.1 billion. Under the terms of the participation agreements entered into as part of EME Homer City's
sale-leaseback transaction, EME Homer City is required to maintain specified minimum insurance coverages if and to the extent that such insurance is available on a commercially reasonable
basis. Although the insurance covering the Homer City facilities is comparable to insurance coverages normally carried by companies engaged in similar businesses, and owning similar properties, the
insurance coverages that are in place do not meet the minimum insurance coverages required under the participation agreements. Due to the current market environment, the minimum insurance coverage is
not commercially available at reasonable prices. EME Homer City has obtained a waiver under the participation agreements which permits it to maintain its current insurance coverage through
June 1, 2007.

EME
Homer City also carries general liability insurance covering liabilities to third parties for bodily injury or property damage resulting from operations, automobile liability
insurance and excess liability insurance. Limits and deductibles in respect of these insurance policies are consistent with the requirements of the participation agreements.

On
January 29, 2006, the main power transformer on Unit 3 of the Homer City facilities failed, resulting in a suspension of operations at this unit. EME Homer City secured a
replacement transformer and Unit 3 returned to service on May 5, 2006. The main transformer failure resulted in claims under EME Homer City's property and business interruption insurance
policies. At December 31, 2006, EME Homer City had a $16.8 million receivable, of which $10.8 million relates to business interruption

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insurance
coverage and has been reflected in interest and other income (expense) in EME Homer City's income statements. In January 2007, EME Homer City received a $3.5 million cash
payment related to the replacement transformer.

FERC Notice Regarding Investigatory Proceeding against EMMT

At the end of October 2006, EMMT was advised by the enforcement staff at the FERC that it is prepared to recommend that the FERC initiate a formal
investigatory proceeding and seek monetary sanctions against EMMT for alleged violation of the FERC's rules with respect to certain bidding practices employed by EMMT. EMMT is engaged in discussions
with the staff to explore the possibility of resolution of this matter. Should a formal proceeding be commenced, EMMT will be entitled to contest any alleged violations before the FERC and an
appropriate court. EMMT has advised EME Homer City that EMMT believes that it has complied with the FERC's rules and that it intends to contest vigorously any allegation of violation. EMMT has further
advised EME Homer City that it cannot predict at this time the outcome of this matter or estimate the possible liability should the outcome be adverse.

Tax Matters

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

Off-Balance Sheet Transactions

EME Homer City has no material off-balance sheet transactions.

Environmental Matters and Regulations

Introduction

The construction and operation of power plants are subject to environmental regulation by federal, state and local authorities. EME Homer City believes that it is
in substantial compliance with existing environmental regulatory requirements. Typically, environmental laws and regulations require a lengthy and complex process for obtaining licenses, permits and
approvals prior to construction, operation or modification of a project or generating facility. Meeting all the necessary requirements can delay or sometimes prevent the completion of a proposed
project, as well as require extensive modifications to existing projects, which may involve significant capital expenditures. If EME Homer City fails to comply with applicable environmental laws, it
may be subject to injunctive relief or penalties and fines imposed by regulatory authorities.

Air Quality Regulation

Federal environmental regulations require reductions in emissions beginning in 2009 and require states to adopt implementation plans that are equal to or more
stringent than the federal requirements. Compliance with these regulations and SIPs will affect the costs and the manner in which EME Homer City conducts its business, and will require EME Homer City
to make substantial additional capital expenditures. There is no assurance that EME Homer City would be able to recover these increased costs from its customers or that EME Homer City's financial
position and results of operations would not be materially adversely affected as a result.

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Clean Air Act

On May 12, 2005, the CAIR was published in the Federal Register. The CAIR requires 28 eastern states and the District of Columbia to address ozone
attainment issues by reducing regional NOX and SO2 emissions. The CAIR reduces the current Clean Air Act Title IV Phase II SO2 emissions allowance cap for 2010 and
2015 by 50% and 65%, respectively. The CAIR also requires reductions in regional NOX emissions in 2009 and 2015 by 53% and 61%, respectively, from 2003 levels. The CAIR has been challenged
in court, which may result in changes to the substance of the rule and to the timetables for implementation.

EME
Homer City expects that compliance with the CAIR and the regulations and revised SIPs developed as a consequence of the CAIR will result in increased capital expenditures and
operating expenses. EME Homer City's approach to meeting these obligations will consist of a blending of capital expenditure and emission allowance purchases that will be based on an ongoing
assessment of the dynamics of its market conditions.

The
Pennsylvania Environmental Quality Board accepted the PADEP's proposed SIP to implement the CAIR on February 20, 2007. The SIP is very similar to the Federal CAIR with modest
NOX set asides for generation from renewables and waste coal. At this time EME plans to comply with the proposal using existing pollution control equipment supplemented with the purchase
of SO2 credits for the first phase of the rule which is effective in 2010.

Mercury Regulation

The CAMR, published in the Federal Register on May 18, 2005, creates a market-based cap-and-trade program to reduce nationwide
utility emissions of mercury in two distinct phases. In the first phase of the program, which will come into effect in 2010, the annual nationwide cap will be 38 tons. Emissions of mercury are
to be reduced primarily by taking advantage of mercury reductions achieved by reducing SO2 and NOX emissions under the CAIR. In the second phase, which is to take effect in
2018, coal-fired power plants will be subject to a lower annual
cap, which will reduce emissions nationwide to 15 tons. States may join the trading program by adopting the CAMR model trading rule in state regulations, or they may adopt regulations that mirror the
necessary components of the model trading rule. States are not required to adopt a cap-and-trade program and may promulgate alternative regulations, such as command and control
regulations, that are equivalent to or more stringent than the CAMR's suggested cap-and-trade program. Any program adopted by a state must be approved by the US EPA.

Contemporaneous
with the adoption of the CAMR, the US EPA rescinded its previous finding that mercury emissions from coal-fired power plants had to be regulated as a
hazardous air pollutant pursuant to Section 112 of the federal Clean Air Act, which would have imposed technology-based standards. Both the US EPA's rescission action and the CAMR are being
challenged in the courts. Because EME Homer City cannot predict the outcome of these challenges, which could result in changes to the CAMR rules and timetables, the full impact of this regulation
currently cannot be assessed.

On
February 17, 2007, the PADEP published in the Pennsylvania Bulletin regulations that would require coal-fired power plants to reduce mercury emissions by 80% by
2010 and 90% by 2015. The rule does not allow the use of emissions trading to achieve compliance. The rule became final upon publication.

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At
this time EME Homer City expects its facilities to achieve compliance by the 2010 deadline with mercury removal achieved by an existing flue gas desulfurization system on one
generating unit and by sorbent injection on the other two units. EME Homer City has deferred making commitments for the installation of further environmental controls at its facilities at this time,
but continues to study available environmental control technologies and estimated costs to reduce SO2 and mercury and to monitor developments related to mercury and other environmental
regulations.

Ambient Air Quality Standards

The US EPA designated non-attainment areas for its 8-hour ozone standard on April 30, 2004, and for its fine particulate matter
standard on January 5, 2005. Indiana County, the location of the Homer City facilities, is in a non-attainment area for both standards.

On
September 22, 2006 the US EPA issued a final rule that implements the revisions to its fine particulate standard originally proposed on January 17, 2006. Under the new
rule, the annual standard remains the same but the 24-hour fine particulate standard is significantly more stringent.
The rule may require states to impose further emission reductions beyond those necessary to meet the existing standards. EME Homer City anticipates that any such further emissions reduction
obligations would not be imposed under this standard until 2015 at the earliest, and intends to consider such rules as part of its overall plan for environmental compliance.

The
Homer City facilities comply with current ozone requirements due to the selective catalytic reduction systems installed at each unit. Particulate requirements are met using a
combination of scrubber reductions from Unit 3 and the purchase of SO2 allowances. Pennsylvania has not yet proposed new regulations to implement the National Ambient Air Quality Standards
for 8-hour ozone or for fine particulates. These SIPs are to be submitted to US EPA by June 15, 2007 and April 5, 2008, respectively. Although the final form of the SIPs is not yet known, at this time
EME Homer City anticipates that current treatment will be sufficient to meet the SIP requirements for 8-hour ozone, and that the SIP for fine particulates will require the continued use of the
existing scrubber supplemented by the purchase of SO2 allowances.

Regional Haze

The goal of the 1999 regional haze regulations is to restore visibility in mandatory federal Class I areas, such as national parks and wilderness areas, to
natural background conditions in 60 years. Sources such as power plants that are reasonably anticipated to contribute to visibility impairment in Class I areas may be required to install
Best Available Retrofit Technology (BART) or implement other control strategies to meet regional haze control requirements. States are required to revise their SIPs to demonstrate reasonable further
progress towards meeting regional haze goals. Emission reductions achieved through other ongoing control programs may be sufficient to demonstrate reasonable progress toward the long-term
goal, particularly for the first 10 to 15 year phase of the program. States must develop SIPs by December 2007. It is possible that sources subject to the CAIR will be able to satisfy
their obligations under the regional haze regulations through compliance with the CAIR. However, until the SIPs are revised, EME Homer City cannot predict whether it will be required to install BART
or implement other control strategies, and cannot identify the financial impacts of any additional control requirements.

In
Pennsylvania, the PADEP considers the CAIR to meet the BART requirements, and the Homer City facilities are only required to consider reductions in emissions of suspended particulate
matter (PM10), which at this time have not been developed by the state.

45

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New Source Review Requirements

Since 1999, the US EPA has pursued a coordinated compliance and enforcement strategy to address Clean Air Act NSR compliance issues at the nation's
coal-fired power plants. The NSR regulations impose certain requirements on facilities, such as electric generating stations, in the event that modifications are made to air emissions
sources at a facility. The US EPA's strategy included both the filing of a number of suits against power plant owners, and the issuance of a number of administrative notices of violation to power
plant owners alleging NSR violations. EME Homer City has not been named as a defendant in these lawsuits and has not received any administrative Notices of Violation alleging NSR violations at its
facilities.

On
October 13, 2005, the US EPA proposed a change to the NSR program. The proposal put forth several options for a new emissions test based on the impact of a facility
modification on a facility's maximum hourly emissions or its emissions per unit of energy produced. The existing NSR emissions test is based on the impact of a modification on a generating station's
net annual emissions.

In
October 2005, the US EPA announced a revised NSR strategy to take account of recent US EPA rulemakings, such as the CAIR and regional haze rules, affecting
coal-fired power plants. Under the revised strategy, while the US EPA will continue to pursue filed cases and cases in active negotiation, it intends to shift its future enforcement focus
from coal-fired power plants to other sectors where compliance assurance activities have the potential to produce significant environmental benefits.

Prior
to EME Homer City's purchase of the Homer City facilities, the US EPA requested information under Section 114 of the Clean Air Act from the prior owners of the plant
concerning physical changes at the plant. This request was part of the US EPA's industry-wide investigation of compliance by coal-fired plants with the Clean Air Act NSR
requirements. Other than this request for information, no NSR enforcement-related proceedings have been initiated by the US EPA with respect to any of EME Homer City's facilities.

EME
Homer City will continue to monitor developments with respect to the NSR program and NSR enforcement to assess what implications, if any, they will have on its facilities, its
results of operations or financial position.

Water Quality Regulation

The discharge from the treatment plant receiving the wastewater stream from EME Homer City's Unit 3 flue gas desulfurization system has exceeded the stringent
water-quality based limits for selenium in the
station's National Pollutant Discharge Elimination System permit. As a result, EME Homer City was notified in April 2002 by the PADEP that it was included in the Quarterly Noncompliance Report
submitted to the US EPA. With PADEP's approval, EME Homer City has undertaken a pilot program utilizing biological treatment. EME Homer City prepared a draft of a consent order and agreement
addressing the selenium issue and presented it to the PADEP for consideration in connection with the renewal of the station's National Pollutant Discharge Elimination System permit. The PADEP has
included civil penalties in consent agreements related to other facilities with selenium treatment issues, but the amount of civil penalties that may be assessed against EME Homer City cannot be
estimated at this time.

Environmental Remediation

Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of any facility, including an electric
generating facility, may be required to investigate

46

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and
remediate releases or threatened releases of hazardous or toxic substances or petroleum products located at that facility, and may be held liable to a governmental entity or to third parties for
property damage, personal injury, natural resource damages, and investigation and remediation costs incurred by these parties in connection with these releases or threatened releases. In addition,
persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility may be liable for the costs to remediate releases of hazardous substances from
such facilities even where the disposal of such wastes was undertaken in compliance with applicable laws. Many of these laws, including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, commonly referred to as CERCLA, as amended by the Superfund Amendments and Reauthorization Act of 1986, impose liability without regard to whether the owner knew of or caused
the presence of the hazardous substances, and courts have interpreted liability under these laws to be strict and joint and several.

Federal,
state and local laws, regulations and ordinances also govern the removal, encapsulation or disturbance of asbestos-containing materials when these materials are in poor
condition or in the event of construction, remodeling, renovation or demolition of a building. Those laws and regulations may impose liability for release of asbestos-containing materials and may
provide for the ability of third parties to seek recovery from owners or operators of these properties for personal injury associated with asbestos-containing materials. In connection with the
ownership and operation of its facilities, EME Homer City may be liable for these costs. EME Homer City has agreed to indemnify the sellers of the Homer City facilities for specified environmental
liabilities. See "Contractual Obligations, Commitments and ContingenciesGuarantees and Indemnities" for a discussion of the indemnity agreement.

Climate Change

To date, the United States has chosen to pursue a voluntary greenhouse gas emissions reduction program to meet its obligations as a signatory to the United
Nations Framework Convention on Climate Change. Currently a number of bills are proposed or under discussion in Congress to mandate reductions of greenhouse gas emissions. At this point, EME Homer
City is unable to determine whether any of these proposals will be enacted into law or to estimate their potential effect on EME Homer City.

There
have been petitions from states and other parties to compel the US EPA to regulate greenhouse gases under the CAIR. Also, in 2004, several states and environmental organizations
brought a complaint in federal court in New York, alleging that several electric utility corporations are jointly and severally liable under a theory of public nuisance for damages caused by the
alleged contribution to global warming resulting from carbon dioxide emissions from coal-fired power plants owned and operated by these companies or their subsidiaries. EME Homer City was
not named as a defendant in the complaint. The case was dismissed and is currently on appeal with the United States Court of Appeals for the Second Circuit.

In
April 2006, private citizens brought a complaint in federal court in Mississippi against numerous defendants, including several electric utilities, arguing that emissions from
the defendants' facilities contributed to climate change and seeking monetary damages related to the 2005 hurricane season. EME Homer City was not named as a defendant in the complaint.

On
December 20, 2005, seven northeastern states entered into a Memorandum of Understanding to create a regional initiative to establish a cap and trade greenhouse gas program for
electric generators, referred to as the RGGI. In August 2006, the participating states issued a model rule to be used as a basis for individual state legislative and regulatory action to implement the
program. Pennsylvania is not

47

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a
signatory to the RGGI, although it participated as an observer of the process. Recent reports indicate that Pennsylvania is planning to announce a climate change policy that may include joining the
RGGI. If Pennsylvania were to join the RGGI, this could have a material impact on the Homer City facilities.

The
ultimate outcome of the climate change debate could have a significant economic effect on EME Homer City. Any legal obligation that would require EME Homer City to reduce
substantially its emissions of carbon dioxide or would impose additional costs or charges for the emission of carbon dioxide could have a materially adverse effect on EME Homer City.

48

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MARKET RISK EXPOSURES

Introduction

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

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

PageCommodity Price Risk

49Accounting for Energy Contracts

54Derivative Financial Instruments

55Credit Risk

56Interest Rate Risk

57


Commodity Price Risk

Overview

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

49

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Introduction

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

EME
Homer City's operations expose it to commodity price risk, which represents the potential loss that can be caused by a change in the market value of a particular commodity. In
addition to prevailing market prices, EME Homer City's ability to derive profits from the sale of electricity will be affected by the cost of production, including costs incurred to comply with
environmental regulations. Commodity price risks are actively monitored by a risk management committee to ensure compliance with EME Homer City's risk management policies through EMMT. Policies are in
place which define risk management processes, and procedures exist which allow for monitoring of all commitments and positions with regular reviews by a risk management committee. Despite this, there
can be no assurance that all risks have been accurately identified, measured and/or mitigated.

EMMT
uses "value at risk" to identify, measure, monitor and control EME Homer City's overall market risk exposure. The use of value at risk allows management to aggregate overall
commodity risk, compare risk on a consistent basis and identify the risk factors. Value at risk measures the possible loss over a given time interval, under normal market conditions, at a given
confidence level. Given the inherent limitations of value at risk and relying on a single risk measurement tool, EMMT supplements this
approach with the use of stress testing and worst-case scenario analysis for key risk factors, as well as stop-loss limits and counterparty credit exposure limits.

Hedging Strategy

To reduce its exposure to market risk, EME Homer City hedges a portion of its merchant portfolio risk through EMMT. To the extent that EME Homer City does not
hedge its merchant portfolio, the unhedged portion will be subject to the risks and benefits of spot market price movements. Hedge transactions are primarily implemented through:

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

Energy Price Risk

All the energy and capacity from the Homer City facilities is sold under terms, including price and quantity, arranged by EMMT with customers through a
combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Electric power

50

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

The
following table depicts the average historical market prices for energy per megawatt-hour at the Homer City busbar and in PJM West Hub (EME Homer City's primary trading
hub) during the past three years:

|               |  | Historical Energy Prices(1)
24-Hour PJM
|-------------- |  | ---------------------------------------
|
|
|January        |  | $                                      
|February       |  |                                        
|March          |  |                                        
|April          |  |                                        
|May            |  |                                        
|June           |  |                                        
|July           |  |                                        
|August         |  |                                        
|September      |  |                                        
|October        |  |                                        
|November       |  |                                        
|December       |  |                                        
|               |  |                                        
|Yearly Average |  | $                                      
|               |  |                                        

---

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

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The
following table sets forth the forward month-end market prices for energy per megawatt-hour for the calendar 2007 and 2008 "strips," which are defined as
energy purchases for the entire calendar year, as quoted for sales into the PJM West Hub during 2006:

24-Hour PJM West Hub Forward Energy Prices(1)2007

2008January 31, 2006

$
70.89

$
67.69February 28, 2006


62.16


60.09March 31, 2006


66.79


64.37April 30, 2006


70.11


68.07May 31, 2006


63.22


61.33June 30, 2006


63.80


62.58July 31, 2006


67.66


64.26August 31, 2006


65.23


63.17September 30, 2006


57.61


58.25October 31, 2006


57.97


59.31November 30, 2006


61.26


61.83December 31, 2006


52.13


59.13


---

The following table summarizes Homer City's hedge position at December 31, 2006:

2007

2008

2009Megawatt-hours


7,590,000


7,232,000


2,048,000Average price/MWh(1)

$
64.35

$
60.85

$
71.05


---

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

Basis Risk

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

52

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Under
PJM's market design, locational marginal pricing, which establishes market prices at specific locations throughout PJM by considering factors including generator bids, load
requirements, transmission congestion and losses, can cause the price of a specific delivery point to be higher or lower relative to other locations depending on how the point is affected by
transmission constraints. 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 2006, transmission congestion in PJM has resulted in prices at the Homer
City busbar being lower than those at the PJM West Hub by an average of 12%, compared to 10% during 2005 and 4% during 2004. The monthly average difference during 2006 ranged from 3% to 23%.

By
entering into cash settled futures contracts and forward contracts using the PJM West Hub as the settlement point, EME Homer City is exposed to basis risk as described above. In order
to mitigate basis risk, EME Homer City purchased 3.5 terawatt-hours of financial transmission rights and basis swaps in PJM for EME Homer City during the period January 1, 2007 through
May 31, 2007, and may continue to purchase financial transmission rights and basis swaps in the future. A financial transmission right is a financial instrument that entitles the holder to
receive the difference of actual spot prices for two delivery points in exchange for a fixed amount. Accordingly, EME Homer City's hedging activities include using financial transmission rights alone
or in combination with forward contracts and basis swap contracts to manage basis risk.

Coal Price Risk

The Homer City facilities purchase coal primarily obtained from mines located near the facilities in Pennsylvania. Coal purchases are made under a variety of
supply agreements extending through 2009. The following table summarizes the amount of coal under contract at December 31, 2006 for the next three years.

2007

2008

2009Amount of coal under contract in millions of tons(1)

5.2

2.1

0.8


---

EME Homer City is subject to price risk for purchases of coal that are not under contract. Prices of NAPP coal, which are related to the price of
coal purchased for the Homer City facilities, decreased slightly in 2006 from 2005 year-end prices and increased considerably during 2005 and 2004. The price of NAPP coal (with
13,000 Btu per pound heat content and <3.0 pounds of SO2per MMBtu sulfur content) fluctuated between $37.50 per ton and $45.00 per ton during 2006, with a price of $43.00 per
ton at December 15, 2006, as reported by the Energy Information Administration. The 2006 decrease in the NAPP coal price was largely due to the combined effects of mild weather, easing natural
gas prices and improving eastern stockpiles. In 2005, the price of NAPP coal fluctuated between $44.00 per ton and $57.00 per ton, with a price of $45.00 per ton at December 30, 2005, as
reported by the Energy Information Administration. In 2004, the price of NAPP coal increased to more than $60.00 per ton from below $40.00 per ton in January 2004. The 2005 overall increase in
the NAPP coal price was largely attributed to greater demand from domestic power producers and increased international shipments of coal to Asia.

53

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Based on EME Homer City's anticipated coal requirements in 2007 in excess of the amount under contract, EME Homer City expects that a 10% change in the price of coal at
December 31, 2006 would increase or decrease pre-tax income in 2007 by approximately $1.1 million.

Emission Allowances Price Risk

The federal Acid Rain Program requires electric generating stations to hold SO2 allowances, and Pennsylvania regulations implemented the federal
NOX SIP Call requirement. Under these programs, EME Homer City purchases (or sells) emission allowances based on the amounts required for actual generation in excess of (or less than) the
amounts allocated under these programs. As part of the acquisition of the Homer City facilities, EME Homer City obtained the rights to the emission allowances that have been or are allocated to these
facilities.

The
price of emission allowances, particularly SO2 allowances issued through the federal Acid Rain Program, decreased in 2006 from 2005 year-end prices and
increased substantially during 2005 and 2004. The average price of purchased SO2allowances was $664 per ton during 2006, $1,219 per ton during 2005 and $435 per ton during 2004. The
decrease in the price of SO2 allowances during 2006 from 2005 year-end prices has been attributed to a decline in natural gas prices and fuel switching from oil to gas.
The 2005 increase in the price of SO2 allowances had been attributed to reduced numbers of both allowance sellers and prior-year allowances. The price of SO2
allowances, determined by obtaining broker quotes and information from other public sources, was $476 per ton as of January 31, 2007.

Based
on EME Homer City's anticipated SO2 emission allowances requirements in 2007, EME Homer City expects that a 10% change in the price of SO2 emission
allowances at December 31, 2006 would increase or decrease pre-tax income in 2007 by approximately $4 million. See "Liquidity and Capital ResourcesEnvironmental
Matters and Regulations" for a discussion of environmental regulations related to emissions.

Accounting for Energy Contracts

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

SFAS
No. 133 affects the timing of income recognition, but has no effect on cash flow. To the extent that income varies under SFAS No. 133 from accrual accounting (i.e.,
revenue recognition based on

54

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settlement
of transactions), EME Homer City records unrealized gains or losses. Unrealized SFAS No. 133 gains or losses result from:

  the
change in fair value (sometimes called mark-to-market) of economic hedges that relate to subsequent periods, 
               and

  offsetting
amounts to the realized gains and losses in the period non-qualifying hedges are settled.

  the
current period ineffectiveness on the hedge program for subsequent periods. This occurs because the ineffective gains or losses are recorded in the
current period, whereby the energy revenues related to generation being hedged will be recorded in the subsequent period along with the effective portion of the related hedge transaction, and

  offsetting
amounts to the realized ineffective gains and losses in the period cash flow hedges are settled.

EME
Homer City classifies unrealized gains and losses from energy contracts as part of operating revenues. The results of derivative activities are recorded as part of cash flow from
operating activities in the statement of cash flow. The following table summarizes unrealized gains (losses) for the three-year period ended December 31, 2006:

Years Ended December 31,2006

2005

2004(in millions)Non-qualifying hedges

$
1.6

$
(1.3
)
$
0.7Ineffective portion of cash flow hedges


32.7


(40.3
)

(13.6
)Total unrealized gains (losses)

$
34.3

$
(41.6
)
$
(12.9
)


Derivative Financial Instruments

The following table summarizes the fair values for outstanding financial instruments used for hedging activities. The increase in fair value of electricity
contracts at December 31, 2006 as compared to December 31, 2005 is attributable to a decline in the average market prices for power as compared to contracted prices at
December 31, 2006, which is the valuation date.

December 31,
2006

December 31,
2005(in thousands)Commodity price:Electricity contracts

$
89,099

$
(230,546
)


In assessing the fair value of EME Homer City's derivative financial instruments, EMMT uses a variety of methods and assumptions based on the
market conditions and associated risks existing at each

55

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balance
sheet date. The fair value of commodity price contracts takes into account quoted market prices, time value of money, volatility of the underlying commodities and other factors. A 10% change
in the market price at December 31, 2006 would increase or decrease the fair value of outstanding derivative commodity price contracts by approximately $98 million. The following table
summarizes the maturities and the related fair value, based on actively traded prices, of EME Homer City's commodity derivative assets and liabilities as of December 31, 2006 (in thousands):

Total Fair
Value

Maturity
< 1 year

Maturity
1 to 3 years

Maturity
4 to 5 years

Maturity
> 5 yearsPrices actively quoted

$
89,099

$
79,867

$
9,232

$


$



Credit Risk

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

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

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

EME
Homer City derives a significant source of its operating revenues from electric power sold into the PJM market by EMMT. Sales into PJM accounted for approximately 58% of EME Homer
City's operating revenues for the year ended December 31, 2006. Moody's rates PJM's senior unsecured debt Aa3. PJM, an ISO with over 300 member companies, maintains its own credit risk policies
and does not extend unsecured credit to non-investment grade companies. Any losses due to a PJM member default

56

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are
shared by all other members based upon a predetermined formula. For the year ended December 31, 2006, a second customer accounted for 21% of EME Homer City's operating revenues.

Interest Rate Risk

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

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."

57

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

|Financial Statements: |                                                                                                | 
|--------------------- | ---------------------------------------------------------------------------------------------- | 
|                      | Report of Independent Registered Public Accounting Firm                                        | 
|                      | Statements of Income (Loss) for the years ended December 31, 2006, 2005 and 2004               | 
|                      | Balance Sheets at December 31, 2006 and 2005                                                   | 
|                      | Statements of Partners' Equity for the years ended December 31, 2006, 2005 and 2004            | 
|                      | Statements of Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004 | 
|                      | Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                  | 
|                      | Notes to Financial Statements                                                                  | 

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

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

EME Homer City's management, with the participation of the partnership's principal executive officer and principal financial officer, has evaluated the
effectiveness of EME Homer City's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as
of the end of such period, EME Homer City's disclosure controls and procedures are effective.

Internal Control over Financial Reporting

There were no changes in EME Homer City's internal control over financial reporting (as such term is defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, EME 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 General Partner of EME Homer City Generation L.P.:

In
our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of EME Homer City Generation L.P. at
December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 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 Note 2 to the financial statements, the Partnership changed the manner in which it accounts for defined benefit pension plans and other postretirement plans as of
December 31, 2006.

PricewaterhouseCoopers
LLP
Los Angeles, California

February 28,
2007

59

---





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

|                                            |                                            | Years Ended December 31, |        
|------------------------------------------- | ------------------------------------------ | ------------------------ | -------
|
|Operating Revenues from Marketing Affiliate |                                            | $                        | 641,796
|Operating Expenses                          |                                            |                          |        
|                                            | Fuel                                       |                          |        
|                                            | Gain on sale of emission allowances        |                          |        
|                                            | Plant operations                           |                          |        
|                                            | Depreciation and amortization              |                          |        
|                                            | Loss on asset impairment and other charges |                          |        
|                                            | Loss (gain) on disposal of assets          |                          |        
|                                            | Administrative and general                 |                          |        
|                                            |                                            |                          |        
|                                            |                                            | Total operating expenses |        
|                                            |                                            |                          |        
|Operating income                            |                                            |                          | 190,057
|                                            |                                            |                          |        
|Other Income (Expense)                      |                                            |                          |        
|                                            | Interest and other income                  |                          |        
|                                            | Interest expense                           |                          |        
|                                            |                                            |                          |        
|                                            |                                            | Total other expense      |        
|                                            |                                            |                          |        
|Income (loss) before income taxes           |                                            |                          | 64,813 
|Provision (benefit) for income taxes        |                                            |                          | 25,581 
|                                            |                                            |                          |        
|Net Income (Loss)                           |                                            | $                        | 39,232 
|                                            |                                            |                          |        

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

60

---





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

|                                        |                                                | December 31,                      |          
|--------------------------------------- | ---------------------------------------------- | --------------------------------- | ---------
|
|Assets                                  |                                                |                                   |          
|Current Assets                          |                                                |                                   |          
|                                        | Cash and cash equivalents                      |                                   | $        
|                                        | Fuel inventory                                 |                                   |          
|                                        | Spare parts inventory                          |                                   |          
|                                        | Deposits under lease swap agreement            |                                   |          
|                                        | Derivative assets                              |                                   |          
|                                        | Deferred taxes                                 |                                   |          
|                                        | Other current assets                           |                                   |          
|                                        |                                                |                                   |          
|                                        |                                                | Total current assets              |          
|                                        |                                                |                                   |          
|Property, Plant and Equipment           |                                                |                                   | 2,142,813
|                                        | Less accumulated depreciation and amortization |                                   |          
|                                        |                                                |                                   |          
|                                        |                                                | Net property, plant and equipment |          
|                                        |                                                |                                   |          
|Deferred taxes                          |                                                |                                   | 65,781   
|Restricted cash                         |                                                |                                   | 47,119   
|Trust deposits                          |                                                |                                   | 325      
|Long-term derivative assets             |                                                |                                   | 10,797   
|                                        |                                                |                                   |          
|Total Assets                            |                                                | $                                 | 2,264,562
|                                        |                                                |                                   |          
|Liabilities and Partners' Equity        |                                                |                                   |          
|Current Liabilities                     |                                                |                                   |          
|                                        | Accounts payable                               |                                   | $        
|                                        | Accrued liabilities                            |                                   |          
|                                        | Due to affiliates                              |                                   |          
|                                        | Interest payable                               |                                   |          
|                                        | Interest payable to affiliates                 |                                   |          
|                                        | Derivative liabilities                         |                                   |          
|                                        | Deferred taxes                                 |                                   |          
|                                        | Current portion of lease financing             |                                   |          
|                                        |                                                |                                   |          
|                                        |                                                | Total current liabilities         |          
|                                        |                                                |                                   |          
|Long-term debt to affiliate             |                                                |                                   | 512,447  
|Lease financing, net of current portion |                                                |                                   | 1,259,932
|Benefit plans and other                 |                                                |                                   | 42,867   
|Long-term derivative liabilities        |                                                |                                   | 1,565    
|                                        |                                                |                                   |          
|Total Liabilities                       |                                                |                                   | 2,127,162
|                                        |                                                |                                   |          
|Commitments and Contingencies(Note 9)   |                                                |                                   |          
|Partners' Equity (Deficit)              |                                                |                                   | 137,400  
|                                        |                                                |                                   |          
|Total Liabilities and Partners' Equity  |                                                | $                                 | 2,264,562
|                                        |                                                |                                   |          

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

61

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

|                             |                                                                                 | Chestnut Ridge Energy Company                                                               |         | Mission Energy
Westside Inc. |         | Total
Partners' Equity |    
|---------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------- | ---------------------------- | ------- | ---------------------- | ---
|Balance at December 31, 2003 |                                                                                 | $                                                                                           | 53,713  |                              | $       | 876                    |    
|                             | Net loss                                                                        |                                                                                             |         | (12,026                      | )       |                        | (12
|                             | Non-cash contribution of services                                               |                                                                                             |         | 446                          |         |                        |   
|                             | Unrealized losses on derivatives qualified as cash flow hedges:                 |                                                                                             |         |                              |         |                        |    
|                             |                                                                                 | Other unrealized holding losses arising during period, net of income tax benefit of $25,854 |         |                              | (31,451 | )                      |    
|                             |                                                                                 | Reclassification adjustments included in net loss, net of income tax benefit of $38,135     |         |                              | 46,457  |                        |    
|                             |                                                                                 |                                                                                             |         |                              |         |                        |    
|Balance at December 31, 2004 |                                                                                 |                                                                                             | 57,139  |                              |         | 879                    |    
|                             |                                                                                 |                                                                                             |         |                              |         |                        |    
|                             | Net loss                                                                        |                                                                                             |         | (11,095                      | )       |                        | (11
|                             | Unrealized losses on derivatives qualified as cash flow hedges:                 |                                                                                             |         |                              |         |                        |    
|                             |                                                                                 | Other unrealized holding losses arising during period, net of income tax benefit of $37,307 |         |                              | (50,456 | )                      |    
|                             |                                                                                 | Reclassification adjustments included in net loss, net of income tax expense of $45,071     |         |                              | (61,632 | )                      |    
|                             |                                                                                 |                                                                                             |         |                              |         |                        |    
|Balance at December 31, 2005 |                                                                                 |                                                                                             | (66,044 | )                            |         | 755                    |    
|                             |                                                                                 |                                                                                             |         |                              |         |                        |    
|                             | Net income                                                                      |                                                                                             |         | 39,193                       |         |                        | 39 
|                             | Adjustment to initially apply SFAS No. 158, net of income tax benefit of $1,096 |                                                                                             |         | (1,500                       | )       |                        | (2 
|                             | Unrealized gains on derivatives qualified as cash flow hedges:                  |                                                                                             |         |                              |         |                        |    
|                             |                                                                                 | Other unrealized holding gains arising during period, net of income tax expense of $117,537 |         |                              | 160,834 |                        |    
|                             |                                                                                 | Reclassification adjustments included in net income, net of income tax benefit of $2,893    |         |                              | 3,960   |                        |    
|                             |                                                                                 |                                                                                             |         |                              |         |                        |    
|Balance at December 31, 2006 |                                                                                 | $                                                                                           | 136,443 |                              | $       | 957                    |    
|                             |                                                                                 |                                                                                             |         |                              |         |                        |    

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

62

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

|                                               |                                                                         | Years Ended December 31,                                                                                                                                                      |        
|---------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------
|
|Net Income (Loss)                              |                                                                         | $                                                                                                                                                                             | 39,232 
|Other comprehensive income (loss), net of tax: |                                                                         |                                                                                                                                                                               |        
|                                               | Unrealized gains (losses) on derivatives qualified as cash flow hedges: |                                                                                                                                                                               |        
|                                               |                                                                         | Other unrealized holding gains (losses) arising during period, net of income tax expense (benefit) of $117,537, $(37,307) and $(25,854) for 2006, 2005 and 2004, respectively |        
|                                               |                                                                         | Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $(2,893), $45,071 and $(38,135) for 2006, 2005 and 2004, respectively      |        
|                                               |                                                                         |                                                                                                                                                                               |        
|Other comprehensive income (loss)              |                                                                         |                                                                                                                                                                               | 164,959
|                                               |                                                                         |                                                                                                                                                                               |        
|Comprehensive Income (Loss)                    |                                                                         | $                                                                                                                                                                             | 204,191
|                                               |                                                                         |                                                                                                                                                                               |        

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

63

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

|                                                     |                                            | Years Ended December 31,                                                                 |                                           
|---------------------------------------------------- | ------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------
|
|Cash Flows From Operating Activities                 |                                            |                                                                                          |                                           
|                                                     | Income (loss) after accounting change, net |                                                                                          | $                                         
|                                                     |                                            | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                           
|                                                     |                                            |                                                                                          | Depreciation and amortization             
|                                                     |                                            |                                                                                          | Non-cash contribution of services         
|                                                     |                                            |                                                                                          | Deferred taxes                            
|                                                     |                                            |                                                                                          | Loss on asset impairment and other charges
|                                                     |                                            |                                                                                          | (Gain) loss on asset disposal             
|                                                     |                                            |                                                                                          | Gain on sale of emission allowances       
|                                                     |                                            | Increase in due to affiliates                                                            |                                           
|                                                     |                                            | Increase in inventory                                                                    |                                           
|                                                     |                                            | Decrease (increase) in other assets                                                      |                                           
|                                                     |                                            | Increase (decrease) in accounts payable                                                  |                                           
|                                                     |                                            | Increase (decrease) in accrued liabilities                                               |                                           
|                                                     |                                            | Increase (decrease) in interest payable                                                  |                                           
|                                                     |                                            | Increase (decrease) in other liabilities                                                 |                                           
|                                                     |                                            | Decrease (increase) in derivative assets and liabilities                                 |                                           
|                                                     |                                            |                                                                                          |                                           
|                                                     | Net cash provided by operating activities  |                                                                                          |                                           
|                                                     |                                            |                                                                                          |                                           
|Cash Flows From Financing Activities                 |                                            |                                                                                          |                                           
|                                                     |                                            | Advances under lease swap agreement                                                      |                                           
|                                                     |                                            | Payments under lease swap agreement                                                      |                                           
|                                                     |                                            | Borrowings on long-term obligations from affiliates                                      |                                           
|                                                     |                                            | Repayments on debt obligations from affiliates                                           |                                           
|                                                     |                                            | Repayments of lease financing                                                            |                                           
|                                                     |                                            |                                                                                          |                                           
|                                                     | Net cash used in financing activities      |                                                                                          |                                           
|                                                     |                                            |                                                                                          |                                           
|Cash Flows From Investing Activities                 |                                            |                                                                                          |                                           
|                                                     |                                            | Proceeds from sale of assets                                                             |                                           
|                                                     |                                            | Proceeds from sale of emission allowances                                                |                                           
|                                                     |                                            | Trust deposits                                                                           |                                           
|                                                     |                                            | Proceeds from settlement of claim                                                        |                                           
|                                                     |                                            | Capital expenditures                                                                     |                                           
|                                                     |                                            | Decrease (increase) in restricted cash                                                   |                                           
|                                                     |                                            |                                                                                          |                                           
|                                                     | Net cash used in investing activities      |                                                                                          |                                           
|                                                     |                                            |                                                                                          |                                           
|Net increase (decrease) in cash and cash equivalents |                                            |                                                                                          | 53,591                                    
|Cash and cash equivalents at beginning of period     |                                            |                                                                                          | 60,248                                    
|                                                     |                                            |                                                                                          |                                           
|Cash and cash equivalents at end of period           |                                            | $                                                                                        | 113,839                                   
|                                                     |                                            |                                                                                          |                                           

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

64

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

Note 1. General

EME 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 EME. EME is a wholly owned subsidiary of MEHC and is an indirect wholly owned subsidiary of Edison International. The partnership was formed on October 31,
1998 for the purpose of acquiring, owning and operating three coal-fired electric generating units, and related facilities, which are referred to as the "Homer City facilities," located
near Pittsburgh, Pennsylvania for the purpose of producing electric energy.

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

On
December 7, 2001, EME Homer City completed a sale-leaseback of the Homer City facilities 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 $809.3 million). This transaction has been accounted for as a lease financing
for accounting purposes.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

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

The
preparation of financial statements in conformity with generally accepted accounting principles requires EME 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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents include time deposits and other investments totaling $36.8 million and $38.4 million at December 31, 2006 and 2005,
respectively, with maturities of three months or less.

Derivative Instruments

SFAS No. 133 as amended and interpreted by other related accounting literature, establishes accounting and reporting standards for derivative instruments
(including certain derivative instruments embedded in other contracts). SFAS No. 133 requires companies to record derivatives on their balance sheets as either assets or liabilities measured at
their fair value unless exempted from derivative treatment as a normal sale and purchase. EME Homer City's physical coal contracts did not qualify as derivatives under SFAS No. 133. All changes
in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The results of derivative

65

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activities
are recorded as part of cash flows from operating activities in the accompanying statements of cash flows.

SFAS
No. 133 sets forth the accounting requirements for cash flow hedges. SFAS No. 133 provides that the effective portion of the gain or loss on a derivative instrument
designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period during which the hedged
forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings.

Impairment of Long-Lived Assets

EME 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. If the carrying amount of the asset exceeds the amount of the expected future cash flows,
undiscounted and without interest charges, then an impairment loss for EME Homer City's long-lived assets is recognized in accordance with SFAS No. 144.

Income Taxes

EME Homer City has made an election to be taxed as a corporation for federal and California state tax purposes. EME 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, EME 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 since EME Homer City's formation, its current tax liability or
benefit is generally determined on a separate return basis, except for calculating consolidated state income taxes, for which EME Homer City uses the long-term state tax apportionment
factors of the Edison International group. Also, while EME Homer City is generally subject to separate return limitations for net losses, under the tax-allocation agreement EME Homer 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
intercompany account balances (including the subordinated revolving loan). EME Homer City also files a separate state income tax return in Pennsylvania. Because EME Homer City is expected to realize
deferred tax assets through future taxable income or by reduction of intercompany loans, no valuation allowance has been recorded.

Amounts
included in due to affiliates on the balance sheet associated with this tax-allocation agreement totaled $25.6 million and $50.6 million at
December 31, 2006 and 2005, respectively. EME Homer 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.

Inventory

Inventory consists of spare parts, coal and fuel oil and is stated at the lower of weighted average cost or market.

66

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New Accounting Pronouncements

Accounting Principles Adopted

Statement of Financial Accounting Standards No. 123(R)

SFAS
No. 123(R) requires companies to use the fair value accounting method for stock-based compensation. EME Homer City implemented SFAS No. 123(R) in the first quarter of
2006 and applied the modified prospective transition method. Under the modified prospective method, SFAS No. 123(R) was applied effective January 1, 2006 to the unvested portion of
awards previously granted and will be applied to all prospective awards. Prior financial statements were not restated under this method. SFAS No. 123(R) resulted in the recognition of expense
for all stock-based compensation awards. In addition, EME Homer City elected to calculate the pool of windfall tax benefits as of the adoption of SFAS No. 123(R) based on the method (also known
as the short-cut method) proposed in FSP FAS 123(R)-3, "Transition Election to Accounting for the Tax Effects of Share Based Payment Awards." Prior to January 1, 2006, EME Homer City
used the intrinsic value method of accounting, which resulted in no recognition of expense for Edison International stock options. The adoption of this standard had an insignificant impact on EME
Homer City's financial statements.

FASB Staff Position FIN 46(R)-6

In
April 2006, the FASB issued Staff Position FIN 46(R)-6, "Determining Variability to be Considered in Applying FIN 46(R)." FIN 46(R)-6 states that the
variability to be considered in applying FIN 46(R) shall be based on an analysis of the design of the entity following a two-step process. The first step is to analyze the nature of the
risks in the entity. The second step would be to determine the purpose(s) for which the entity was created and determine the variability (created by the risks identified in Step 1) the entity
is designed to create and pass along to its interest holders. The guidance in this FASB Staff Position was effective prospectively beginning July 1, 2006, although companies had until
December 31, 2006 to elect retrospective applications. EME Homer City adopted FIN 46(R)-6 prospectively beginning July 1, 2006. Applying the guidance had no effect on EME
Homer City's financial statements for the year ended December 31, 2006.

Statement of Financial Accounting Standards No. 158

In
September 2006, the FASB issued SFAS No. 158, which amends the accounting by employers for defined benefit pension plans and postretirement benefits other than pensions.
SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement plans as assets or liabilities in their balance sheet;
the assets or liabilities are offset through other comprehensive income. EME Homer City adopted SFAS No. 158 prospectively on December 31, 2006. SFAS No. 158 also requires
companies to align the measurement dates for their plans to their fiscal year-ends; EME Homer City already has a fiscal year-end measurement date for all of its postretirement
plans. Upon adoption, EME Homer City recorded additional postretirement benefit liabilities of $2.6 million (included in benefit plans and other) and a
reduction to accumulated other comprehensive income (a component of partners' equity) of $1.5 million, net of tax.

Staff Accounting Bulletin No. 108

In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which provides interpretive guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 requires additional quantitative testing to determine whether a misstatement is
material. EME Homer City implemented SAB No. 108 for the filing of its Annual Report on Form 10-K for the year ended December 31, 2006.

67

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Applying
the guidance had no effect on EME Homer City's financial statements for the year ended December 31, 2006.

Accounting Principles Not Yet Adopted

Statement of Financial Accounting Standard Interpretation No. 48

In
July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," that clarifies the accounting for uncertain tax positions. An
enterprise would be required to recognize, in its financial statements, the best estimate of the impact of a tax position by determining if the weight of the available evidence indicates it is more
likely than not, based solely on the technical merits, that the position will be sustained on audit. EME Homer City will adopt the new interpretation in the first quarter of 2007. The new
interpretation is not expected to result in a material adjustment to partners' equity.

Statement of Financial Accounting Standards No. 155

In
February 2006, the FASB issued SFAS No. 155, which amends SFAS No. 133 and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for at fair value at acquisition, at issuance, or when a previously
recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated.
SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to remeasurement after January 1, 2007. The fair value election provided for in paragraph 4(c)
of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133 prior to the adoption
of this Statement. EME Homer City does not expect the adoption of this standard to have a material impact on EME Homer City's financial statements.

Statement of Financial Accounting Standards No. 157

In
September 2006, the FASB issued a new accounting standard on fair value measurements (SFAS No. 157). SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on fair value measurements. EME Homer City will adopt SFAS No. 157 on January 1, 2008. EME Homer City is
currently evaluating the impact of adopting SFAS No. 157 on its financial statements.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation and amortization is computed on a straight-line basis over the following estimated
useful lives:

Plant and equipment under lease financing

33.67 yearsLeasehold improvements

Shorter of life of lease or estimated useful lifeEmission allowances

33.67 yearsEquipment, furniture and fixtures

3 to 7 yearsCapitalized leased equipment

5 years


As part of the acquisition of the Homer City facilities, EME Homer City acquired emission allowances under the US EPA's Acid Rain Program.
Although the emission allowances granted under this program are freely transferable, EME Homer City intends to use substantially all the emission allowances

68

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in
the normal course of its business to generate electricity. Accordingly, EME Homer City has classified emission allowances expected to be used to generate power as part of property, plant and
equipment.

Repairs and Maintenance

Certain major pieces of equipment require repairs and maintenance on a periodic basis. These costs, including major maintenance costs, are expensed as incurred.

Revenue Recognition

EME Homer City records revenue and related costs as electricity is generated or services are provided unless EME Homer City is subject to SFAS No. 133 and
does not qualify for the normal sales and
purchases exception. EME 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, EME Homer City takes title to the commodities, and assumes the risks
and rewards of ownership. Therefore, EME Homer City records settlement of non-trading physical forward contracts on a gross basis. Consistent with Emerging Issues Task Force
No. 03-11, "Reporting Realized Gains and Losses on Derivative Instruments that are Subject to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, and Not Held for Trading Purposes," EME 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, EME Homer City does not take title to the underlying commodity. Therefore, gains and losses from settlement of financial swaps
and options are recorded net. Managed risks typically include commodity price risk associated with fuel purchases and power sales.

Note 3. Accumulated Other Comprehensive Income (Loss)

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

Unrealized Gains (Losses) on Cash Flow Hedges

Unrecognized Losses and
Prior Service Costs, Net

Accumulated Other Comprehensive Income (Loss)(in thousands)Balance at December 31, 2004

$
5,149

$


$
5,149Change for 2005


(112,201
)




(112,201
)Balance at December 31, 2005


(107,052
)




(107,052
)Change for 2006


164,959





164,959SFAS No. 158 adjustments(1)





(1,502
)

(1,502
)Balance at December 31, 2006

$
57,907

$
(1,502
)
$
56,405


---

Unrealized gains on cash flow hedges, net of tax, at December 31, 2006, include unrealized gains on commodity hedges related to futures and
forward energy sales contracts that qualify for hedge accounting. These gains arise because current forecasts of future electricity prices are lower than EME Homer City's contract prices. The change
from unrealized losses to unrealized gains during 2006 resulted from a decrease in market prices for power and hedge contracts that settled during 2006.

As
EME Homer City's hedged positions are realized, approximately $52.6 million, after tax, of the net unrealized gains on cash flow hedges at December 31, 2006 are expected
to be reclassified into earnings during the next twelve months. Management expects that reclassification of net unrealized gains

69

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will
offset energy revenue recognized at market prices. Actual amounts ultimately reclassified into earnings over the next 12 months could vary materially from this estimated amount as a result
of changes in market conditions. The maximum period over which a cash flow hedge is designated is through December 31, 2009.

Under
SFAS No. 133, the portion of a cash flow hedge that does not offset the change in value of the transaction being hedged, which is commonly referred to as the ineffective
portion, is immediately recognized in earnings. EME Homer City recorded net losses of $4.0 million, $62.6 million and $13.6 million during the years ended December 31,
2006, 2005 and 2004, respectively, representing the amount of cash flow hedges' ineffectiveness, reflected in operating revenues in the income statements.

Note 4. Property, Plant and Equipment

At December 31, 2006 and 2005, property, plant and equipment consisted of the following:

2006

2005(in thousands)Land

$
7,284

$
7,284Power plant facilities


2,637


2,637Plant and equipment under lease financing


1,591,036


1,591,192Leasehold improvements


91,345


82,172Emission allowances


433,777


438,068Construction in progress


6,533


9,118Equipment, furniture and fixtures


9,285


9,013Capitalized leased equipment


916


9162,142,813


2,140,400Less accumulated depreciation and amortization


348,853


289,472Property, plant and equipment, net

$
1,793,960

$
1,850,928


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. EME Homer City recorded amortization expense related to the leased facilities of $47.3 million for all three years ended
December 31, 2006, 2005 and 2004. Accumulated amortization related to the leased facilities was $239.4 million and $192.2 million at December 31, 2006 and 2005,
respectively.

Asset Retirement Obligations

Effective January 1, 2003, EME Homer City adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities
to record the fair value of a liability for an ARO in the period in which it is incurred. When the 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 to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

In
March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset Retirement Obligations," an interpretation of SFAS No. 143. This interpretation clarifies that an
entity is required to recognize 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. This interpretation became effective as of December 31, 2005 for EME Homer City. The adoption of this interpretation had no impact on EME Homer City's financial statements.

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EME Homer City recorded a liability representing expected future costs associated with site reclamation, facilities dismantlement and removal of environmental hazards as follows:

2006

2005

2004(in thousands)Beginning balance

$
5,140

$
4,672

$
4,248Accretion expense


514


468


424Ending balance

$
5,654

$
5,140

$
4,672


Note 5. Long-Term Debt

EME Homer City entered into a subordinated revolving loan agreement during 1999 with Edison Mission Finance. This loan agreement bears interest at a fixed rate of
8.0% on outstanding amounts and
terminates on March 18, 2014. On December 8, 2003, EME Homer City amended and restated the loan agreement with Edison Mission Finance and issued a note evidencing its repayment
obligations under the loan agreement. The amended and restated loan agreement had no effect on the financial terms of the agreement. EME Homer City owed approximately $512 million and
$439 million under the loan agreement at December 31, 2006 and 2005, respectively. EME Homer City is restricted under the participation agreements entered into as a part of the
sale-leaseback transaction from making any payments under this facility unless specified conditions are met.

EME
Homer City incurred interest costs related to its affiliate debt of $39.9 million, $37.1 million and $38.2 million for the years ended December 31, 2006,
2005 and 2004, respectively.

Note 6. Risk Management and Derivative Financial Instruments

Commodity Price Risk Management

EME Homer City's risk management policy allows for the use of derivative financial instruments through EMMT to limit financial exposure from fluctuations in
electricity, capacity, fuel prices, emission allowances and transmission rights for non-trading purposes. Use of these instruments exposes EME Homer City to commodity price risks, which
represent the potential loss that can be caused by a change in the market value of a particular commodity. Commodity price risks are actively monitored by a risk management committee to ensure
compliance with EME Homer City's risk management policies through EMMT. Policies are in place which define risk management processes, and procedures exist which allow for monitoring of all commitments
and positions with regular reviews by a risk management committee. Despite this, there can be no assurance that all risks have been accurately identified, measured and/or mitigated. EMMT uses "value
at risk" to identify, measure, monitor and control its overall market risk exposure. The use of value at risk allows management to aggregate overall commodity risk, compare risk on a consistent basis
and identify risk factors. Value at risk measures the possible loss over a given time interval, under normal market conditions, at a given confidence level. Given the inherent limitations of value at
risk and relying on a single risk measurement tool, EMMT supplements this approach with the use of stress testing and worst-case scenario analysis for key risk factors, as well as
stop-loss limits and counterparty credit exposure limits.

The
following table summarizes the carrying amounts and fair values for outstanding financial instruments used for hedging activities. The change in fair value of electricity contracts
in 2006 as compared to 2005 is attributable to the decline in average market prices for power as compared to

71

---



contracted
prices at December 31, 2006, which is the valuation date, causing the fair value of the contracts to become assets instead of liabilities.

December 31, 2006

December 31, 2005Carrying Amount

Fair Value

Carrying Amount

Fair Value(in thousands)Commodity price:Electricity

$
89,099

$
89,099

$
(230,546
)
$
(230,546
)


In assessing the fair value of EME Homer City's electricity contracts, EME Homer City uses a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date. The fair value of the electricity contracts takes into account quoted market prices, time value of money, volatility of the underlying
commodities and other factors.

Credit Risk

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

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

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

EME
Homer City derives a significant source of its operating revenues from electric power sold into the PJM market by EMMT. Sales into PJM accounted for approximately 58%, 85% and 45% of
EME

72

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Homer
City's operating revenues for the years ended December 31, 2006, 2005 and 2004, respectively. Moody's rates PJM's senior unsecured debt Aa3. PJM, an ISO with over 300 member companies,
maintains its own credit risk policies and does not extend unsecured credit to non-investment grade companies. Any losses due to a PJM member default are shared by all members based upon a
predetermined formula.

For
the year ended December 31, 2006, EMMT also made sales to Coral Power, LLC that accounted for approximately 21% of EME Homer City's operating revenues. For the year ended
December 31, 2005, EMMT made sales to Cincinnati Gas & Electric Company and Constellation Power Source, Inc. that accounted for approximately 22% and 11% of EME Homer City's
operating revenues, respectively. For the year ended December 31, 2004, approximately 35% of EME Homer City's operating revenues were from sales to BP Energy Company.

Note 7. Income Taxes

Income tax expense (benefit) includes the current tax liability (benefit) from operations and the change in deferred income taxes during the year. The components
of the net accumulated deferred income tax asset were:

Years Ended December 31,2006

2005(in thousands)Deferred tax assetsLease financing

$
96,099

$
102,292Derivative assets





97,288Employee benefits





3,735Accrued expenses


4,079


State taxes


2,991


Net operating losses


283


412Other


1,020


3,275Total


104,472


207,002Deferred tax liabilitiesProperty, plant and equipmentbasis differences

$
35,557

$
56,812Derivative liabilities


36,196


Total


71,753


56,812Deferred tax asset, net

$
32,719

$
150,190Classification of accumulated deferred income taxes:Included in current assets

$


$
75,516Included in non-current assets

$
65,781

$
74,674Included in current liabilities

$
33,062

$



EME Homer City has $4.3 million and $6.3 million of Pennsylvania net operating loss carryforwards at December 31, 2006 and
December 31, 2005, respectively, which expire beginning in 2022. For years beginning after December 31, 2006, the Pennsylvania net operating loss carryforwards are limited in use to the
greater of $3 million per year or 12.5% of taxable income.

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The
provision (benefit) for income taxes is comprised of the following:

Years Ended December 31,2006

2005

2004(in thousands)CurrentFederal

$
21,698

$
20,643

$
5,180State


5,586


7,532


5,381Total current


27,284


28,175


10,561DeferredFederal


(2,107
)

(26,371
)

(11,254
)State


404


(5,819
)

(7,193
)Total deferred


(1,703
)

(32,190
)

(18,447
)Provision (benefit) for income taxes

$
25,581

$
(4,015
)
$
(7,886
)


Variations from the 35% federal statutory rate are as follows:

Years Ended December 31,2006

2005

2004(in thousands)Provision (benefit) for federal income taxes at statutory rate

$
22,684

$
(5,292
)
$
(6,973
)Increase (decrease) in taxes from:State tax, net of federal benefit


3,795


1,276


227Reversal of valuation allowance








(1,404
)Qualified production deduction


(507
)




Other


(391
)

1


264Total provision (benefit) for income taxes

$
25,581

$
(4,015
)
$
(7,886
)Effective tax (benefit) rate


39.5
%

(26.6
)%

(39.6
)%


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

On
March 31, 2006, EME Homer City entered into an amendment of its tax-allocation agreement with Edison Mission Holdings to provide for the option, at EME Homer City's
discretion, to settle federal and state income tax liabilities under the tax-allocation agreement through an increase in indebtedness under the subordinated revolving loan agreement with
Edison Mission Finance. Pursuant to this amendment, EME Homer City elected this option to settle $60.2 million of intercompany tax liabilities through a loan under the subordinated revolving
loan agreement with Edison Mission Finance.

Note 8. Compensation and Benefit Plans

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

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Employee Savings Plan

A 401(k) plan is maintained to supplement eligible employees' retirement income. EME Homer City matches 100% of non-union employee contributions up to
6% of such employees' base annual compensation. EME 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 for the years ended December 31, 2006, 2005 and 2004 was approximately $593,000, $566,000 and $487,000, respectively.

Pension Plans and Postretirement Benefits Other Than Pensions

SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit pension plan and other postretirement plans as
assets or liabilities in their balance sheet; the assets or liabilities are offset through other comprehensive income. See Note 2Summary of Significant Accounting
PoliciesNew Accounting Pronouncements for further discussion. EME Homer City adopted SFAS No. 158 prospectively on December 31, 2006.

Pension Plans

EME Homer City maintains a pension plan specifically for the benefit of its union employees. A portion of EME 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 $1.7 million for the year ended December 31, 2007. The amount is subject to change based on,
among other things, the limits established for federal tax deductibility.

The
fair value of plan assets is determined by market value.

Information
on plan assets and benefits obligations is shown below:

Years Ended December 31,2006

2005(in thousands)Change in projected benefit obligationProjected benefit obligation at beginning of year

$
23,484

$
21,527Service cost


1,618


1,799Interest cost


1,247


1,143Actuarial gain


(1,736
)

(582
)Benefits paid


(134
)

(403
)Projected benefit obligation at end of year

$
24,479

$
23,484


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---





Years Ended
December 31,2006

2005(in thousands)Accumulated benefit obligation at end of year

$
17,439

$
16,974Change in plan assetsFair value of plan assets at beginning of year

$
13,363

$
11,164Actual return on plan assets


2,207


1,246Employer contributions


769


1,356Benefits paid


(134
)

(403
)Fair value of plan assets at end of year

$
16,205

$
13,363Determination of net recorded liabilityFunded status

$
(8,274
)
$
(10,121
)Unrecognized net loss





2,604Net recorded liability

$
(8,274
)
$
(7,517
)Additional detail of amounts recognized in balance sheets:Intangible asset

$


$
Accumulated other comprehensive income


(248
)

Additional detail of amounts recognized in accumulated other comprehensive income:Prior service cost

$


$
Net actuarial gain


(248
)

Pension plan with an accumulated benefit obligation in excess of plan assets:Projected benefit obligation

$
3,400

$
23,484Accumulated benefit obligation


3,299


16,974Fair value of plan assets


1,491


13,363Weighted-average assumptions at end of year:Discount rate


5.75
%

5.50
%Rate of compensation increase


5.00
%

5.00
%


76

---



Expense components are:

Years Ended December 31,2006

2005

2004(in thousands)Service cost

$
1,618

$
1,799

$
1,640Interest cost


1,247


1,143


1,058Expected return on plan assets


(1,095
)

(888
)

(678
)Net amortization


4


121


108Total expense

$
1,774

$
2,175

$
2,128Change in accumulated other comprehensive income

$
248

$


$
Weighted-average assumptions:Discount rate


5.50%


5.50%


6.00%Rate of compensation increase


5.00%


5.00%


5.00%Expected return on plan assets


7.50%


7.50%


7.50%


The estimated amortization amount for 2007 is $26,000 for net actuarial gain.

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

Years Ending December 31,

(in thousands)2007

$
5892008


6592009


7552010


8132011


8952012-2016


4,545


Asset allocations are:

December 31,Target for
20072006

2005United States equity

45%

47%

47%Non-United States equity

25%

26%

26%Private equity

4%

2%

2%Fixed income

26%

25%

25%


Postretirement Benefits Other Than Pensions

A portion of EME Homer City's non-union employees retiring at or after age 55 with at least ten years of service are eligible for postretirement
health care, dental, life insurance and other benefits paid in part by EME Homer City. Eligibility depends on a number of factors, including the employee's hire date. Employees in union-represented
positions who were eligible to retire prior to May 14, 2002 are covered under the postretirement benefit plans of GPU, Inc., their employer prior to EME Homer City's acquisition of the
facilities in 1999. EME Homer City has accounted for postretirement benefit obligations on the basis of a substantive plan under SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pension" (SFAS No. 106). A substantive plan means that EME Homer City assumed for accounting purposes that it would provide postretirement benefits to union-

77

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represented
employees following the conclusion of negotiations to replace the benefits agreement scheduled to expire on May 14, 2003. In May 2003, EME Homer City reached agreement with
the union on a new collective bargaining agreement covering wages, benefits and working conditions. This agreement, which expired December 31, 2006, was extended to December 31, 2007 by
mutual agreement. Accordingly, EME Homer City will amortize the impact over the estimated remaining service of covered employees.

On
December 8, 2003, President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Act authorized a federal subsidy to be provided to plan
sponsors for certain prescription drug benefits under Medicare. EME Homer City adopted a new accounting pronouncement for the effects of the Act, effective July 1, 2004, which reduced EME Homer
City's accumulated benefits obligation by $1.5 million upon adoption.

The
expected contributions (all by the employer) for the postretirement benefits other than pensions trust are $271,000 for the year ended December 31, 2007. This amount is
subject to change based on, among other things, the Act referenced above and the impact of any benefit plan amendments.

The
fair value of plan assets is determined by market value.

Information
on plan assets and benefit obligations is shown below:

Years Ended December 31,2006

2005(in thousands)Change in benefit obligationBenefit obligation at beginning of year

$
20,870

$
17,475Service cost


849


742Interest cost


1,221


1,142Actuarial loss


378


1,593Plan participant contributions


22


Benefits paid


(192
)

(82
)Benefit obligation at end of year

$
23,148

$
20,870Change in plan assetsFair value of plan assets at beginning of year

$


$
Employer contributions


170


82Plan participant contributions


22


Benefits paid


(192
)

(82
)Fair value of plan assets at end of year

$


$
Determination of net recorded liabilityFunded status

$
(23,148
)
$
(20,870
)Unrecognized net loss





3,159Unrecognized prior service cost





(504
)Net recorded liability

$
(23,148
)
$
(18,215
)


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---



Additional details of amounts recognized in accumulated other comprehensive income:Prior service cost

$
(400
)
$
Net actuarial loss


3,246


Weighted-average assumptions at end of year:Discount rate


5.75%


5.50%Assumed health care cost trend rates:Rate assumed for following year


9.25%


10.25%Ultimate rate


5.00%


5.00%Year ultimate rate reached


2011


2011


Expense components are:

Years Ended December 31,2006

2005

2004(in thousands)Service cost

$
849

$
742

$
631Interest cost


1,221


1,142


956Amortization of unrecognized prior service costs


(104
)

(104
)

(107
)Amortization of unrecognized net loss


291


307


Total expense

$
2,257

$
2,087

$
1,480Weighted-average assumptions:Discount rate


5.50%


5.75%


6.25%Assumed health care cost trend rates:Current year


10.25%


10.00%


12.00%Ultimate rate


5.00%


5.00%


5.00%Year ultimate rate reached


2011


2010


2010


The estimated amortization amounts for 2007 are $(104,000) for prior service costs and $222,000 for net actuarial loss.

Increasing
the health care cost trend rate by one percentage point would increase the accumulated obligation as of December 31, 2006, by $4.1 million and annual aggregate
service and interest costs by $423,000. Decreasing the health care cost trend rate by one percentage point would decrease the accumulated obligation as of December 31, 2006, by
$3.5 million and annual aggregate service and interest costs by $351,000.

79

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The following benefit payments are expected to be paid:

Years ended December 31,

Before Subsidy

Net(in thousands)2007

$
274

$
2712008


400


3952009


559


5522010


734


7242011


929


9142012-2016


7,071


6,883


Discount Rate

The discount rate enables EME Homer City to state expected future cash flows at a present value on the measurement date. EME 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. Three yield curves
were considered: two corporate yield curves (Citigroup and AON) and a curve based on treasury rates (plus 90 basis points). EME Homer City also compared the yield curve analysis against the Moody's AA
Corporate bond rate.

Description of Pension and Postretirement Benefits Other 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. EME Homer City employs multiple investment management firms. Investment managers within each asset class cover a range of investment styles and
approaches. Risk is controlled through diversification among multiple asset classes, managers, styles, and securities. Plan, asset class and individual manager performance is measured against targets.
EME Homer City also monitors the stability of its investments managers' organizations.

Allowable
investment types include:

Permitted
ranges around asset class portfolio weights are plus or minus 5%. Where approved by the fiduciary investment committee, futures contracts are used for portfolio rebalancing and
to approach fully invested portfolio positions. Where authorized, a few of the plan's 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.

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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 target asset allocation for plan assets and capital markets return
forecasts for asset classes employed. A portion of postretirement benefits other than pensions trust asset returns are subject to taxation, so the expected long-term rate of return for
these assets is determined on an after-tax basis.

Capital Markets Return Forecasts

The estimated total return for fixed income is based on an equilibrium yield for intermediate United States government bonds plus a premium for exposure to
non-government bonds in the broad fixed income market. The equilibrium yield is based on analysis of historic data and is consistent with experience over various economic environments. The
premium of the broad market over United States government bonds is a historic average premium. The estimated rate of return for equity is estimated to be a 3% premium over the estimated total return
of intermediate United States government bonds. This value is determined by combining estimates of real earnings growth, dividend yields and inflation, each of which is determined using historical
analysis. The rate of return for private equity is estimated to be a 5% premium over public equity, reflecting a premium for higher volatility and illiquidity.

Note 9. Commitments and Contingencies

Lease Commitments

EME Homer City had operating leases in place relating mainly to tractors and trucks. EME Homer City also has a lease financing with respect to its facilities,
which is described in more detail below. At December 31, 2006, the future minimum payments over the next five years were as follows:

Years Ending December 31,

Operating
Leases

Lease
Financing(in thousands)2007

$
493

$
150,8022008


475


152,1732009


257


150,7762010


142


154,9922011


79


160,378Thereafter





1,814,158Total future commitments

$
1,446


2,583,279Amount representing interest





(1,273,559
)Net commitments




$
1,309,720


Operating lease expense amounted to $1.0 million, $1.1 million and $0.7 million in 2006, 2005 and 2004, respectively.

Facilities Sale-Leaseback

On December 7, 2001, EME Homer City completed the sale-leaseback of its Homer City facilities to third-party lessors for an aggregate purchase
price of $1.591 billion, comprised of $782 million in cash and assumption of debt (the fair value of which was $809.3 million). The leases EME Homer City entered into as part of
this transaction are referred to as facility leases. The transaction has been

81

---



accounted
for as a lease financing for accounting purposes, which means that EME Homer City reflects the Homer City facilities as an asset on its balance sheet, although EME 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, EME 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 facilities has been deferred and is being amortized over the term of the
lease.

The
rent payments that EME Homer City owes under the sale-leaseback transaction 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, while the equity rent is paid to the owner lessors. If EME Homer City does not meet specified debt service
coverage ratios while the lease debt is outstanding, it will not pay the equity portion of the rent to the owner lessors. Accordingly, the sale-leaseback documentation does not permit the
lessor to terminate the lease in the event of non-payment of the equity portion of the rent while the lease debt is outstanding.

In
order to pay the equity portion of the rent, EME Homer City is required to meet historical and projected senior rent service coverage ratios of 1.7 to 1, subject to reduction to 1.3
to 1 under
circumstances specified in the participation agreements. During the 12 months ended December 31, 2006, the senior rent service coverage ratio was 2.32 to 1. The senior rent service
coverage ratio is determined by dividing net cash flow as defined in the participation agreements by the senior rent due in that period. If all accrued rent, including both the senior portion and the
equity portion of the rent, has been paid and all other required conditions have been met, amounts remaining in the distribution account will be available for distribution to the partners in EME 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.

EME
Homer City's use of cash in its bank accounts is limited to specific operating and capital expenditures as set forth in the Security Deposit Agreement executed as part of the
sale-leaseback transaction. The amount in certain reserve accounts will be available for payments due on the equity portion of lease rent during specified periods, and in accordance with
the sale-leaseback documents, unless there is a default in the payment of the senior portion of lease rent, in which case the amount will be available to pay such senior portion of the
lease rent. The release of funds from these restricted cash accounts is permitted, provided EME Homer City maintains specified reserve balances in accordance with the sale-leaseback
documents, no event of default shall have occurred or be continuing and no two failed rent payments shall have occurred. EME Homer City had $40.0 million included in restricted cash at
December 31, 2006 and 2005.

Lease Swap Agreement

In connection with the sale-leaseback transaction, EME Homer City has entered into a swap agreement with a bank in order to more effectively match its
cash flow, which generally is higher during the summer months when energy prices are higher, with its lease payments. Beginning in April 2002 through April 2014, the bank makes a swap
payment to EME Homer City in April of each year and EME Homer City makes a swap payment to the bank in October of each year. The amount of each swap payment is designed to reverse the amounts of the
semi-annual payments due under the lease so that EME Homer City effectively has lower cash obligations in April and higher cash obligations in October. In April 2006, EME Homer City
received a swap payment of $62.4 million, and in October 2006 EME Homer City made a swap payment of $63.1 million, resulting in a net deposit balance due from the bank of
$45.4 million at December 31, 2006. EME Homer City is also required to fund one-sixth of the October swap payment each month, between April and September of each year, into a
restricted cash

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account.
The implicit interest rate, which was fixed at inception of the swap agreement, is based on LIBOR during periods that EME Homer City has a net deposit with the bank, and LIBOR plus 5% during
periods that EME Homer City has a net loan with the bank.

Other Commitments

Capital Improvements

At December 31, 2006, EME Homer City had firm commitments to spend approximately $0.7 million on capital expenditures in 2007 primarily related to
SCR system performance improvements. These capital expenditures are planned to be financed by cash generated from operations.

Fuel Supply Contracts

At December 31, 2006, EME Homer City had fuel purchase commitments with various third-party suppliers for the purchase of bituminous steam coal and fuel
oil. The remaining contracts' lengths range from one year to three years. The contracts require EME Homer City to purchase a minimum quantity over the term of the contracts, with an option at EME
Homer City's discretion to purchase additional amounts as stated in the agreements. Based on the contract provisions that consist of fixed prices, subject to adjustment clauses in certain cases, these
minimum commitments are currently estimated to be $345.3 million in the next three years summarized as follows: 2007$219.5 million; 2008$93.6 million;
and 2009$32.2 million.

Coal Transportation Agreements

At December 31, 2006, EME Homer City had contractual commitments for the transport of coal by rail to its facilities, with remaining contract lengths that
range from one year to two years. The minimum commitments are based on the contract provisions, which consist of fixed prices, subject to adjustment clauses. Although trucking remains the predominant
mode of transportation for coal shipments to the Homer City facilities, rail transportation is expected to increase in 2007 as EME Homer City diversifies its alternative modes of transporting coal to
the plant site. These minimum commitments are currently estimated to be $20.2 million in the next two years summarized as follows: 2007$9.7 million; and
2008$10.5 million.

Coal Cleaning Agreement

Effective January 1, 2006, EME Homer City entered into a coal cleaning agreement with Homer City Coal Processing Corporation to operate and maintain a coal
cleaning plant owned by EME Homer City. The agreement expires on December 31, 2010. Based on the contract provisions, the minimum commitments are currently estimated to be $21.4 million
in the next four years summarized as follows: 2007$5.4 million; 2008$5.4 million; 2009$5.3 million; and
2010$5.3 million.

Other Contractual Obligations

At December 31, 2006, EME Homer City had contractual agreements for the purchase of limestone, which is used for the wet scrubber flue gas desulfurization
system on Unit 3, under contracts with remaining lengths from one year to three years. The minimum commitments are currently estimated to be $4.7 million in the next three years summarized as
follows: 2007$1.5 million; 2008$1.6 million; and 2009$1.6 million.

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Interconnection Agreement

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

Guarantees and Indemnities

Tax Indemnity Agreements

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

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

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

Contingencies

Ash Disposal Site

EME Homer City's ash disposal site is a permitted Class I Residual Waste Landfill, the most stringently regulated of the three categories of residual waste
landfills authorized by the regulations of the PADEP. EME Homer City's permit allows it to dispose of coal combustion by-products, including fly ash, bottom ash and pyrites, and
miscellaneous plant wastes at the landfill. The wastes are deposited in compacted layers within lifts, or sections. Each lift where coal ash is disposed must be capped and covered when it reaches
final grade. EME Homer City must also monitor groundwater quality at and adjacent to the ash disposal site through a network of monitoring wells and report the results to the PADEP on a periodic
basis. In the event that a disposal facility's groundwater monitoring identifies degradation in any of its wells, the PADEP's regulations require the facility to first confirm the existence and nature
of the degradation by conducting a groundwater assessment. If the assessment confirms

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groundwater
degradation in excess of the applicable regulatory standards, the facility is then required to prepare and implement an abatement plan that could include measures such as installing a
liner in a previously unlined area. To date, no degradation has been found in the groundwater monitoring system at EME Homer City that would require the development of an assessment or abatement plan.
EME Homer City also provides financial assurance in the form of a surety bond to guarantee its closure and post-closure obligations at the landfill. The estimated closure date is 2018.
Management does not believe that the costs of maintaining and closing the ash disposal site will have a material impact on EME Homer City's financial statements.

Insurance

EME Homer City maintains insurance policies that are comparable to those carried by other electric generating facilities of a similar size. The insurance program
includes all-risk real and personal property insurance, including coverage for losses from boiler and machinery breakdowns, and the perils of earthquake and flood, subject to certain
sublimits. The property insurance program currently covers losses up to $1.1 billion. Under the terms of the participation agreements entered into as part of EME Homer City's
sale-leaseback transaction, EME Homer City is required to maintain specified minimum insurance coverages if and to the extent that such insurance is available on a commercially reasonable
basis. Although the insurance covering the Homer City facilities is comparable to insurance coverages normally carried by companies engaged in similar businesses, and owning similar properties, the
insurance coverages that are in place do not meet the minimum insurance coverages required under the participation agreements. Due to the current market environment, the minimum insurance coverage is
not commercially available at reasonable prices. EME Homer City has obtained a waiver under the participation agreements which permits it to maintain its current insurance coverage through
June 1, 2007.

EME
Homer City also carries general liability insurance covering liabilities to third parties for bodily injury or property damage resulting from operations, automobile liability
insurance and excess liability insurance. Limits and deductibles in respect of these insurance policies are consistent with the requirements of the participation agreements.

On
January 29, 2006, the main power transformer on Unit 3 of the Homer City facilities failed, resulting in a suspension of operations at this unit. EME Homer City secured a
replacement transformer and Unit 3 returned to service on May 5, 2006. The main transformer failure resulted in claims under EME Homer City's property and business interruption insurance
policies. At December 31, 2006, EME Homer City had a $16.8 million receivable, of which $10.8 million relates to business interruption insurance coverage and has been reflected in
interest and other income (expense) in EME Homer City's income statements. In January 2007, EME Homer City received a $3.5 million cash payment related to the replacement transformer.

FERC Notice Regarding Investigatory Proceeding against EMMT

At the end of October 2006, EMMT was advised by the enforcement staff at the FERC that it is prepared to recommend that the FERC initiate a formal
investigatory proceeding and seek monetary sanctions against EMMT for alleged violation of the FERC's rules with respect to certain bidding practices employed by EMMT. EMMT is engaged in discussions
with the staff to explore the possibility of resolution of this matter. Should a formal proceeding be commenced, EMMT will be entitled to contest any alleged violations before the FERC and an
appropriate court. EMMT has advised EME Homer City that EMMT believes that it has complied with the FERC's rules and that it intends to contest vigorously any allegation of violation. EMMT has further
advised EME Homer City that it cannot predict at this time the outcome of this matter or estimate the possible liability should the outcome be adverse.

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Environmental Matters and Regulations

Introduction

The construction and operation of power plants are subject to environmental regulation by federal, state and local authorities. EME Homer City believes that it is
in substantial compliance with existing environmental regulatory requirements. Typically, environmental laws and regulations require a lengthy and complex process for obtaining licenses, permits and
approvals prior to construction, operation or modification of a project or generating facility. Meeting all the necessary requirements can delay or sometimes prevent the completion of a proposed
project, as well as require extensive modifications to existing projects, which may involve significant capital expenditures. If EME Homer City fails to comply with applicable environmental laws, it
may be subject to injunctive relief or penalties and fines imposed by regulatory authorities.

Air Quality Regulation

Federal environmental regulations require reductions in emissions beginning in 2009 and require states to adopt implementation plans that are equal to or more
stringent than the federal requirements. Compliance with these regulations and SIPs will affect the costs and the manner in which EME Homer City conducts its business, and will require EME Homer City
to make substantial additional capital expenditures. There is no assurance that EME Homer City would be able to recover these increased costs from its customers or that EME Homer City's financial
position and results of operations would not be materially adversely affected as a result.

Clean Air Act

On May 12, 2005, the CAIR was published in the Federal Register. The CAIR requires 28 eastern states and the District of Columbia to address ozone
attainment issues by reducing regional NOX and SO2 emissions. The CAIR reduces the current Clean Air Act Title IV Phase II SO2 emissions allowance cap for 2010 and
2015 by 50% and 65%, respectively. The CAIR also requires reductions in regional NOX emissions in 2009 and 2015 by 53% and 61%, respectively, from 2003 levels. The CAIR has been challenged
in court, which may result in changes to the substance of the rule and to the timetables for implementation.

EME
Homer City expects that compliance with the CAIR and the regulations and revised SIPs developed as a consequence of the CAIR will result in increased capital expenditures and
operating expenses. EME Homer City's approach to meeting these obligations will consist of a blending of capital expenditure and emission allowance purchases that will be based on an ongoing
assessment of the dynamics of its market conditions.

The
Pennsylvania Environmental Quality Board accepted the PADEP's proposed SIP to implement the CAIR on February 20, 2007. The SIP is very similar to the Federal CAIR with modest
NOX set asides for generation from renewables and waste coal. At this time EME plans to comply with the proposal using existing pollution control equipment supplemented with the purchase
of SO2 credits for the first phase of the rule which is effective in 2010.

Mercury Regulation

The CAMR, published in the Federal Register on May 18, 2005, creates a market-based cap-and-trade program to reduce nationwide
utility emissions of mercury in two distinct phases. In the first phase of the program, which will come into effect in 2010, the annual nationwide cap will be 38

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tons.
Emissions of mercury are to be reduced primarily by taking advantage of mercury reductions achieved by reducing SO2 and NOX emissions under the CAIR. In the second phase,
which is to take effect in 2018, coal-fired power plants will be subject to a lower annual cap, which will reduce emissions nationwide to 15 tons. States may join the trading program by
adopting the CAMR model trading rule in state regulations, or they may adopt regulations that mirror the necessary components of the model trading rule. States are not required to adopt a
cap-and-trade program and may promulgate alternative regulations, such as command and control regulations, that are equivalent to or more stringent than the CAMR's suggested
cap-and-trade program. Any program adopted by a state must be approved by the US EPA.

Contemporaneous
with the adoption of the CAMR, the US EPA rescinded its previous finding that mercury emissions from coal-fired power plants had to be regulated as a
hazardous air pollutant pursuant to Section 112 of the federal Clean Air Act, which would have imposed technology-based standards. Both the US EPA's rescission action and the CAMR are being
challenged in the courts. Because EME Homer City cannot predict the outcome of these challenges, which could result in changes to the CAMR rules and timetables, the full impact of this regulation
currently cannot be assessed.

On
February 17, 2007, the PADEP published in the Pennsylvania Bulletin regulations that would require coal-fired power plants to reduce mercury emissions by 80% by
2010 and 90% by 2015. The rule does not allow the use of emissions trading to achieve compliance. The rule became final upon publication.

At
this time EME Homer City expects its facilities to achieve compliance by the 2010 deadline with mercury removal achieved by an existing flue gas desulfurization system on one
generating unit and by sorbent injection on the other two units. EME Homer City has deferred making commitments for the installation of further environmental controls at its facilities at this time,
but continues to study available environmental control technologies and estimated costs to reduce SO2 and mercury and to monitor developments related to mercury and other environmental
regulations.

Ambient Air Quality Standards

The US EPA designated non-attainment areas for its 8-hour ozone standard on April 30, 2004, and for its fine particulate matter
standard on January 5, 2005. Indiana County, the location of the Homer City facilities, is in a non-attainment area for both standards.

On
September 22, 2006 the US EPA issued a final rule that implements the revisions to its fine particulate standard originally proposed on January 17, 2006. Under the new
rule, the annual standard remains the same but the 24-hour fine particulate standard is significantly more stringent. The rule may require states to impose further emission reductions
beyond those necessary to meet the existing standards. EME Homer City anticipates that any such further emissions reduction obligations would not be imposed under this standard until 2015 at the
earliest, and intends to consider such rules as part of its overall plan for environmental compliance.

The
Homer City facilities comply with current ozone requirements due to the selective catalytic reduction systems installed at each unit. Particulate requirements are met using a
combination of scrubber reductions from Unit 3 and the purchase of SO2 allowances. Pennsylvania has not yet proposed new regulations to implement the National Ambient Air Quality Standards
for 8-hour ozone or for fine particulates. These SIPs are to be submitted to US EPA by June 15, 2007 and April 5, 2008, respectively. Although the final form of the SIPs is not yet known, at this time
EME Homer City anticipates that current treatment will be sufficient to meet the SIP requirements for 8-hour ozone, and that the SIP for

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fine
particulates will require the continued use of the existing scrubber supplemented by the purchase of SO2 allowances.

Regional Haze

The goal of the 1999 regional haze regulations is to restore visibility in mandatory federal Class I areas, such as national parks and wilderness areas, to
natural background conditions in 60 years. Sources such as power plants that are reasonably anticipated to contribute to visibility impairment in Class I areas may be required to install
Best Available Retrofit Technology (BART) or implement other control strategies to meet regional haze control requirements. States are required to revise their SIPs to demonstrate reasonable further
progress towards meeting regional haze goals. Emission reductions achieved through other ongoing control programs may be sufficient to demonstrate reasonable progress toward the long-term
goal, particularly for the first 10 to 15 year phase of the program. States must develop SIPs by December 2007. It is possible that sources subject to the CAIR will be able to satisfy
their obligations under the regional haze regulations through compliance with the CAIR. However, until the SIPs are revised, EME Homer City cannot predict whether it will be required to install BART
or implement other control strategies, and cannot identify the financial impacts of any additional control requirements.

In
Pennsylvania, the PADEP considers the CAIR to meet the BART requirements, and the Homer City facilities are only required to consider reductions in emissions of suspended particulate
matter (PM10), which at this time have not been developed by the state.

New Source Review Requirements

Since 1999, the US EPA has pursued a coordinated compliance and enforcement strategy to address Clean Air Act NSR compliance issues at the nation's
coal-fired power plants. The NSR regulations impose certain requirements on facilities, such as electric generating stations, in the event that modifications are made to air emissions
sources at a facility. The US EPA's strategy included both the filing of a number of suits against power plant owners, and the issuance of a number of administrative notices of violation to power
plant owners alleging NSR violations. EME Homer City has not been named as a defendant in these lawsuits and has not received any administrative Notices of Violation alleging NSR violations at its
facilities.

On
October 13, 2005, the US EPA proposed a change to the NSR program. The proposal put forth several options for a new emissions test based on the impact of a facility
modification on a facility's maximum hourly emissions or its emissions per unit of energy produced. The existing NSR emissions test is based on the impact of a modification on a generating station's
net annual emissions.

In
October 2005, the US EPA announced a revised NSR strategy to take account of recent US EPA rulemakings, such as the CAIR and regional haze rules, affecting
coal-fired power plants. Under the revised strategy, while the US EPA will continue to pursue filed cases and cases in active negotiation, it intends to shift its future enforcement focus
from coal-fired power plants to other sectors where compliance assurance activities have the potential to produce significant environmental benefits.

Prior
to EME Homer City's purchase of the Homer City facilities, the US EPA requested information under Section 114 of the Clean Air Act from the prior owners of the plant
concerning physical changes at the plant. This request was part of the US EPA's industry-wide investigation of compliance by coal-fired plants with the Clean Air Act NSR
requirements. Other than this request for information, no

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NSR
enforcement-related proceedings have been initiated by the US EPA with respect to any of EME Homer City's facilities.

EME
Homer City will continue to monitor developments with respect to the NSR program and NSR enforcement to assess what implications, if any, they will have on its facilities, its
results of operations or financial position.

Water Quality Regulation

The discharge from the treatment plant receiving the wastewater stream from EME Homer City's Unit 3 flue gas desulfurization system has exceeded the stringent
water-quality based limits for selenium in the station's National Pollutant Discharge Elimination System permit. As a result, EME Homer City was notified in April 2002 by the PADEP that it was
included in the Quarterly Noncompliance Report submitted to the US EPA. With PADEP's approval, EME Homer City has undertaken a pilot program utilizing biological treatment. EME Homer City prepared a
draft of a consent order and agreement addressing the selenium issue and presented it to the PADEP for consideration in connection with the renewal of the station's National Pollutant Discharge
Elimination System permit. The PADEP has included civil penalties in consent agreements related to other facilities with selenium treatment issues, but the amount of civil penalties that may be
assessed against EME Homer City cannot be estimated at this time.

Environmental Remediation

Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of any facility, including an electric
generating facility, may be required to investigate and remediate releases or threatened releases of hazardous or toxic substances or petroleum products located at that facility, and may be held
liable to a governmental entity or to third parties for property damage, personal injury, natural resource damages, and investigation and remediation costs incurred by these parties in connection with
these releases or threatened releases. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility may be liable for the costs
to remediate releases of hazardous substances from such facilities even where the disposal
of such wastes was undertaken in compliance with applicable laws. Many of these laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, commonly referred to
as CERCLA, as amended by the Superfund Amendments and Reauthorization Act of 1986, impose liability without regard to whether the owner knew of or caused the presence of the hazardous substances, and
courts have interpreted liability under these laws to be strict and joint and several.

Federal,
state and local laws, regulations and ordinances also govern the removal, encapsulation or disturbance of asbestos-containing materials when these materials are in poor
condition or in the event of construction, remodeling, renovation or demolition of a building. Those laws and regulations may impose liability for release of asbestos-containing materials and may
provide for the ability of third parties to seek recovery from owners or operators of these properties for personal injury associated with asbestos-containing materials. In connection with the
ownership and operation of its facilities, EME Homer City may be liable for these costs. EME Homer City has agreed to indemnify the sellers of the Homer City facilities for specified environmental
liabilities. See "Guarantees and Indemnities" for a discussion of the indemnity agreement.

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Climate Change

To date, the United States has chosen to pursue a voluntary greenhouse gas emissions reduction program to meet its obligations as a signatory to the United
Nations Framework Convention on Climate Change. Currently a number of bills are proposed or under discussion in Congress to mandate reductions of greenhouse gas emissions. At this point, EME Homer
City is unable to determine whether any of these proposals will be enacted into law or to estimate their potential effect on EME Homer City.

There
have been petitions from states and other parties to compel the US EPA to regulate greenhouse gases under the CAIR. Also, in 2004, several states and environmental organizations
brought a complaint in federal court in New York, alleging that several electric utility corporations are jointly and severally liable under a theory of public nuisance for damages caused by the
alleged contribution to global warming resulting from carbon dioxide emissions from coal-fired power plants owned and operated by these companies or their subsidiaries. EME Homer City was
not named as a defendant in the complaint. The case was dismissed and is currently on appeal with the United States Court of Appeals for the Second Circuit.

In
April 2006, private citizens brought a complaint in federal court in Mississippi against numerous defendants, including several electric utilities, arguing that emissions from
the defendants' facilities contributed to climate change and seeking monetary damages related to the 2005 hurricane season. EME Homer City was not named as a defendant in the complaint.

On
December 20, 2005, seven northeastern states entered into a Memorandum of Understanding to create a regional initiative to establish a cap and trade greenhouse gas program for
electric generators, referred to as the RGGI. In August 2006, the participating states issued a model rule to be used as a basis for individual state legislative and regulatory action to implement the
program. Pennsylvania is not a signatory to the RGGI, although it participated as an observer of the process. Recent reports indicate that Pennsylvania is planning to announce a climate change policy
that may include joining the RGGI. If Pennsylvania were to join the RGGI, this could have a material impact on the Homer City facilities.

The
ultimate outcome of the climate change debate could have a significant economic effect on EME Homer City. Any legal obligation that would require EME Homer City to reduce
substantially its emissions of carbon dioxide or would impose additional costs or charges for the emission of carbon dioxide could have a materially adverse effect on EME Homer City.

Note 10. Related Party Transactions

EMMT Agreements

EME 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.

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EME
Homer City compensates EMMT in accordance with the following table 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.

Service

CompensationEnergy and/or capacity

$.02/MWh ($.02/MW-day for capacity)Fuel oil

$.05/bblEmission allowances

$.25/SO2 allowance; and $25/NOX allowance


The net fees earned by EMMT were $0.7 million, $0.6 million and $0.7 million for the years ended December 31, 2006,
2005 and 2004, respectively. Beginning in the second quarter of 2003, EMMT began prepaying in full for the following month's expected power generation. As a result of the accelerated payments, EME
Homer City had payables due to EMMT of $91.8 million and $90.1 million at December 31, 2006 and 2005, respectively.

EME
Homer City entered into several transactions through EMMT for the purchase or sale of SO2 and NOX allowances. All transactions were completed at market price
on the date of the transaction. Net consideration paid by EME Homer City was $27.4 million, $80.0 million and $43.9 million during 2006, 2005 and 2004, respectively.

During
2003, EMMT entered into agreements using the capacity of the Homer City facilities to participate in auction revenue rights awarded through PJM to load serving entities. The
auction revenue rights were applicable to the period from June 1, 2003 through May 31, 2004, and the benefits of the agreements were passed on to EME Homer City. EME Homer City's share
of auction revenue rights of $16.5 million was paid by May 31, 2004. Revenue related to the auction revenue rights was recognized on a straight-line basis over the period of
the agreements.

Fuel Services Agreements

EME Homer City entered into an agreement with Edison Mission Energy Services, Inc. to provide fuel and transportation services related to coal and fuel
oil. Under the terms of this agreement, EME Homer City pays a service fee of $.06 for each ton of coal delivered and $.05 for each barrel of fuel oil delivered, plus the actual cost of the
commodities. The amount billable under this agreement for the three years ended December 31, 2006, 2005 and 2004 was $0.3 million, $0.4 million and $0.4 million,
respectively.

Affiliate Financing

EME Homer City has obtained financing from Edison Mission Finance in connection with its acquisition of the Homer City facilities. For further discussion, see
Note 5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 EME 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). EME Homer City participates in a common payroll and benefit program with all Edison International

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employees.
In addition, EME Homer City is billed for any direct labor and out-of-pocket expenses for services directly requested for the benefit of the partnership. EME Homer
City believes the allocation methodologies are reasonable. EME Homer City made reimbursements for the cost of these programs, payroll funding and other services totaling $32.1 million,
$31.9 million and $30.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. EME Homer City had a net payable of $0.1 million at December 31,
2006 and a net receivable of $0.3 million at December 31, 2005 due to/from Edison International related to these programs.

EME
Homer City participates in the insurance program of Edison International, including property, general liability, workers compensation and various other specialty policies. EME 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

In April 2004, EME Homer City and Midwest Generation EME entered into a new management and administration agreement pursuant to which Midwest Generation
EME began charging EME Homer City for management and administrative services. Actual costs billable under this agreement for the years ended December 31, 2006, 2005 and 2004 were
$2.7 million, $2.9 million and $1.4 million, respectively. EME Homer City had a payable of $0.2 million at December 31, 2006 and 2005, due to Midwest Generation EME
related to this agreement.

Note 11. Supplemental Statements of Cash Flows Information

Years Ended December 31,2006

2005

2004(in thousands)Cash paidInterest

$
115,136

$
161,433

$
143,714Income taxes


2,010


4,795


Non-cash investing and financing activitiesNon-cash settlement of intercompany tax liabilities through an increase in the subordinated revolving loan agreement

$
60,154

$


$



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Note 12. Quarterly Financial Data (unaudited)

|2006                                 |  | First |         | Second |   | Third(1) |  | Fourth |         | Total
|------------------------------------ |  | ----- | ------- | ------ | - | -------- |  | ------ | ------- | -----
|
|Operating revenues                   |  | $     | 122,652 |        | $ | 148,080  |  | $      | 198,745 |      
|Operating income                     |  |       | 12,391  |        |   | 34,500   |  |        | 76,637  |      
|Provision (benefit) for income taxes |  |       | (9,062  | )      |   | 4,158    |  |        | 17,376  |      
|Net income (loss)                    |  |       | (12,559 | )      |   | 8,734    |  |        | 23,911  |      

|2005                                 |  | First |         | Second |   | Third(i) |   | Fourth |         | Total |  
|------------------------------------ |  | ----- | ------- | ------ | - | -------- | - | ------ | ------- | ----- | -
|Operating revenues                   |  | $     | 157,153 |        | $ | 136,120  |   | $      | 168,021 |       | $
|Operating income                     |  |       | 54,471  |        |   | 22,305   |   |        | 46,431  |       |  
|Provision (benefit) for income taxes |  |       | 8,126   |        |   | (6,265   | ) |        | 4,528   |       |  
|Net income (loss)                    |  |       | 10,448  |        |   | (8,146   | ) |        | 5,900   |       |  

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Omitted pursuant to General Instruction I.(2)(c).

Code of Business Conduct and Ethics for Principal Officers

EME Homer City has adopted a Ethics and Compliance Code that applies to its principal executive officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions. The Ethics and Compliance Code is posted on the Internet website maintained by EME Homer City's ultimate parent, Edison International, at
www.edisonethics.com. Any amendment to or waiver from a provision of the Ethics and Compliance Code that must be disclosed under rules and forms of the Securities and Exchange Commission will be
disclosed at the same Internet website address within four business days following the date of the amendment or waiver.

ITEM 11.    EXECUTIVE COMPENSATION

Omitted pursuant to General Instruction I.(2)(c).

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Omitted pursuant to General Instruction I.(2)(c).

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Omitted pursuant to General Instruction I.(2)(c).

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

INDEPENDENT ACCOUNTANT FEES

The following table sets forth the aggregate fees billed to EME Homer City for the fiscal years ended December 31, 2006 and December 31, 2005, by
PricewaterhouseCoopers LLP:

EME Homer City Generation L.P.2006

2005($000)Audit Fees

$
481

$
375Audit Related Fees





Tax Fees





All Other Fees








The Edison International Audit Committee reviews with management and pre-approves all audit services to be performed by the
independent accountants and all non-audit services that are not prohibited and that require pre-approval under the Securities Exchange Act. The Edison International Audit
Committee's pre-approval responsibilities may be delegated to one or more Edison International

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Audit
Committee members, provided that such delegate(s) presents any pre-approval decisions to the Edison International Audit Committee at its next meeting. The independent auditors must
assure that all audit and non-audit services provided to EME Homer City have been approved by the Edison International Audit Committee.

During
the fiscal year ended December 31, 2006, all services performed by the independent accountants were pre-approved by the Edison International Audit Committee,
regardless of whether the services required pre-approval under the Securities Exchange Act.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Agreement of Limited Partnership of EME Homer City Generation L.P., dated as of December 7, 2001, incorporated by reference to Exhibit 3.2 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                                                                                                                                                                                                                                               
|4.1         |  | First Amended and Restated Indenture, dated as of December 7, 2001 among Homer City Funding LLC and The Bank of New York, as successor trustee to United States Trust Company of New York, incorporated by reference to Exhibit 4.1.1 to EME Homer City
Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                         
|4.1.1       |  | Form of 8.137% Senior Secured Bond due 2019 (included in Exhibit 4.1.1), incorporated by reference to Exhibit 4.1.2 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                                                                                                           
|4.1.2       |  | Form of 8.734% Senior Secured Bond due 2026 (included in Exhibit 4.1.1), incorporated by reference to Exhibit 4.1.3 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                                                                                                           
|4.1.3       |  | Assumption Agreement, dated as of December 7, 2001, among EME Homer City Generation, L.P., Homer City OL1 LLC, Homer City OL2 LLC, Homer City OL3 LLC, Homer City OL4 LLC, Homer City OL5 LLC, Homer City OL6 LLC, Homer City OL7 LLC, Homer
City OL8 LLC, Homer City Funding LLC and The Bank of New York as successor to United States Trust Company of New York, incorporated by reference to Exhibit 4.1.4 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.
|4.2         |  | Indenture of Trust and Security Agreement, dated as of December 7, 2001, between Homer City OL1 LLC, The Bank of New York, as Lease Indenture Trustee and Security Agent, incorporated by reference to Exhibit 4.2 to EME Homer City Generation L.P.'s
Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                            
|4.2.1       |  | Schedule identifying substantially identical agreements to Indenture of Trust and Security Agreement constituting Exhibit 4.2 hereto, incorporated by reference to Exhibit 4.2.1 to EME Homer City Generation L.P.'s Form 10-K for the year ended December
31, 2001.                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|4.2.2 |  | Form of Initial Lessor Note (included in Exhibit 4.2), incorporated by reference to Exhibit 4.2.2 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                         
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3   |  | Facility Lease Agreement, dated as of December 7, 2001, between Homer City OL1 LLC and EME Homer City Generation L.P., incorporated by reference to Exhibit 4.3 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                                                                                                                                                                                                                                                                                           
|4.3.1 |  | Schedule identifying substantially identical agreements to Facility Lease Agreement constituting Exhibit 4.3 hereto, incorporated by reference to Exhibit 4.3.1 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                                                                                                                                                                                                                                                                                           
|4.4   |  | Participation Agreement, dated as of December 7, 2001, among EME Homer City Generation L.P., Homer City OL1 LLC, as Facility Lessor and Ground Lessee, Wells Fargo Bank Northwest National Association, General Electric Capital Corporation, The Bank of
New York as the Security Agent, The Bank of New York as Lease Indenture Trustee, Homer City Funding LLC and The Bank of New York as Bondholder Trustee, incorporated by reference to Exhibit 4.4 to EME Homer City Generation L.P.'s Form 10-K for the
year ended December 31, 2001.
|4.4.1 |  | Schedule identifying substantially identical agreements to Participation Agreement constituting Exhibit 4.4 hereto, incorporated by reference to Exhibit 4.4.1 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                                                                                                                                                                                                                                                                                            
|4.4.2 |  | Appendix A (Definitions) to the Participation Agreement constituting Exhibit 4.4 hereto, incorporated by reference to Exhibit 4.4.2 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2004.                                                                                                                                                                                                                                                                                                                       
|4.5   |  | Owner Lessor Subordination Agreement, dated as of December 7, 2001, by and among Homer City OL1 LLC as the Owner Lessor, General Electric Capital Corporation as the Owner Participant and The Bank of New York, as the Lease Indenture Trustee,
incorporated by reference to Exhibit 4.5 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                 
|4.5.1 |  | Schedule identifying substantially identical agreements to Owner Lessor Subordination Agreement constituting Exhibit 4.5 hereto, incorporated by reference to Exhibit 4.5.1 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                                                                                                                                                                                                                                                                               
|4.6   |  | Lease Subordination Agreement, dated as of December 7, 2001, by and among Homer City OL1 LLC, as the Owner Lessor, GE Capital Corporation as the Owner Participant, EME Homer City Generation L.P. as Facility Lessee and The Bank of New York as Security
Agent, incorporated by reference to Exhibit 4.6 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                
|4.6.1 |  | Schedule identifying substantially identical agreements to Lease Subordination Agreement constituting Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.6.1 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                                                                                                                                                                                                                                                                                      
|4.7   |  | Pledge and Collateral Agreement made by Edison Mission Holdings Co. in favor of The Bank of New York, as successor to United States Trust Company of New York, as Collateral Agent, dated as of December 7, 2001, incorporated by reference to Exhibit 4.7
to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|4.8    |  | Assumption and Release Agreement, dated as of December 7, 2001, among Edison Mission Holdings Co., Edison Mission Finance Co., EME Homer City Generation L.P. and The Bank of New York (as successor in interest to United States Trust Company of New
York), as Bondholder Trustee and Collateral Agent, incorporated by reference to Exhibit 4.8 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                   
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.9    |  | Open-End Mortgage, Security Agreement and Assignment of Rents, dated as of December 7, 2001, among Homer City OLI LLC, as the Owner Lessor to The Bank of New York, as Security Agent and Mortgagee, incorporated by reference to Exhibit 4.9 to EME Homer
City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                        
|4.9.1  |  | Schedule identifying substantially identical agreements to Open-End Mortgage, Security Agreement and Assignment of Rents constituting Exhibit 4.9 hereto, incorporated by reference to Exhibit 4.9.1 to EME Homer City Generation L.P.'s Form 10-K for the
year ended December 31, 2003.                                                                                                                                                                                                                                                 
|10.1   |  | Guarantee, dated August 1, 1998, between Edison Mission Energy, Pennsylvania Electric Company, NGE Generation, Inc. and New York State Electric & Gas Corporation, incorporated by reference to Exhibit 10.54 to Edison Mission Energy's Form 10-K for
the year ended December 31, 1998.                                                                                                                                                                                                                                                 
|10.2   |  | Amended and Restated Guarantee and Collateral Agreement, dated as of December 7, 2001, made by EME Homer City Generation L.P. in favor of The Bank of New York as successor to United States Trust Company of New York, as Collateral Agent, incorporated
by reference to Exhibit 10.16.4 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                                            
|10.3   |  | Amended and Restated Security Deposit Agreement, dated as of December 7, 2001, among EME Homer City Generation L.P. and The Bank of New York as Collateral Agent, incorporated by reference to Exhibit 10.18.2 to EME Homer City Generation L.P.'s Form
10-K for the year ended December 31, 2001.                                                                                                                                                                                                                                       
|10.4   |  | Asset Purchase Agreement, dated August 1, 1998, between Pennsylvania Electric Company, NGE Generation, Inc., New York State Electric & Gas Corporation and Mission Energy Westside, Inc., incorporated by reference to Exhibit 2.4 to Edison Mission
Energy's Form 10-K for the year ended December 31, 1998.                                                                                                                                                                                                                            
|10.5   |  | Intercompany Loan Subordination Agreement, dated March 18, 1999, among Edison Mission Holdings Co., Edison Mission Finance Co., Homer City Property Holdings, Inc., Chestnut Ridge Energy Co., Mission Energy Westside Inc., EME Homer City Generation
L.P. and United States Trust Company of New York, incorporated by reference to Exhibit 10.60.3 to Amendment No. 2 of Edison Mission Holdings Co.'s registration statement on Form S-4 filed with the Securities and Exchange Commission on February 29,
2000 (File No. 333-92047).
|10.5.1 |  | Amended and Restated Intercompany Loan Subordination Agreement, dated as of December 7, 2001, among Edison Mission Holdings Co., Edison Mission Finance Co., Homer City Property Holdings, Inc., Chestnut Ridge Energy Co., Mission Energy Westside, Inc.,
EME Homer City Generation L.P. and The Bank of New York, as successor to United States Trust Company of New York, incorporated by reference to Exhibit 10.23.1 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31,
2001.                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|10.6    |  | Amended and Restated Subordinated Revolving Loan Agreement, dated as of December 8, 2003, by and between EME Homer City Generation L.P., as Borrower and Edison Mission Finance Co., as Lender, incorporated by reference to Exhibit 10.1 to EME Homer
City Generation L.P.'s Form 8-K dated December 11, 2003.                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7    |  | Designated Account Representative Agreement Relating to the NOx Allowance Program, entered into as of December 7, 2001, by and between EME Homer City Generation L.P., Homer City OL1 LLC, Homer City OL2 LLC, Homer City OL3 LLC, Homer City OL4 LLC,
 Homer City OL5 LLC, Homer City OL6 LLC, Homer City OL7 LLC and Homer City OL8 LLC, incorporated by reference to Exhibit 10.27 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.
|10.8    |  | Designated Account Representative Agreement Relating to the Acid Rain Program, entered into as of December 7, 2001, by and between EME Homer City Generation L.P., Homer City OL1 LLC, Homer City OL2 LLC, Homer City OL3 LLC, Homer City OL4 LLC, Homer
City OL5 LLC, Homer City OL6 LLC, Homer City OL7 LLC and Homer City OL8 LLC, incorporated by reference to Exhibit 10.28 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.     
|10.9    |  | Assignment Agreement, dated December 7, 2001, between The Bank of New York, EME Homer City Generation L.P., Edison Mission Marketing & Trading, Inc. and Edison Mission Energy Fuel Services, Inc., incorporated by reference to Exhibit 10.29 to EME
Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                                       
|10.10   |  | Sub-Assignment Agreement, dated as of December 7, 2001, between The Bank of New York, EME Homer City Generation L.P., Edison Mission Marketing & Trading, Inc., and Edison Mission Energy Fuel Services, Inc., incorporated by reference to Exhibit
10.31 to EME Homer City Generation L.P.'s Form 10-K for the year ended December 31, 2001.                                                                                                                            
|10.11   |  | Amended and Restated Debt Service Reserve Letter of Credit and Reimbursement Agreement, dated as of April 1, 2005, by and among Homer City OL1 LLC and Union Bank of California, N.A., as issuing bank and as agent, incorporated by reference to Exhibit
10.1 to EME Homer City Generation L.P.'s Form 10-Q for the quarter ended March 31, 2005.                                                                                                                       
|10.11.1 |  | Schedule identifying substantially identical agreements to the Amended and Restated Debt Service Reserve Letter of Credit and Reimbursement Agreement constituting Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.1.1 to EME Homer City
Generation L.P.'s Form 10-Q for the quarter ended March 31, 2005.                                                                                                                                                 
|10.12   |  | Tax-Allocation Agreement, effective January 1, 2002, by and between EME Homer City Generation L.P. and Edison Mission Holdings Co., incorporated by reference to Exhibit 10.32 to EME Homer City Generation L.P.'s Form 10-Q for the quarter ended
September 30, 2002.                                                                                                                                                                                                   
|10.12.1 |  | Amendment No. 1 to Tax-Allocation Agreement, effective March 31, 2006, by and between EME Homer City Generation L.P. and Edison Mission Holdings Co., incorporated by reference to Exhibit 10.1 to EME Homer City Generation L.P.'s Form 10-Q for the
quarter ended March 31, 2006.                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|10.13 |  | Master Purchase, Sale and Services Agreement, dated October 31, 2002, between EME Homer City Generation L.P. and Edison Mission Marketing & Trading, Inc., incorporated by reference to Exhibit 10.33 to EME Homer City Generation L.P.'s Form 10-K
for the year ended December 31, 2002.          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Master Emissions Allowance Purchase and Sale Agreement, dated October 31, 2002, between EME Homer City Generation L.P. and Edison Mission Marketing & Trading, Inc., incorporated by reference to Exhibit 10.34 to EME Homer City Generation L.P.'s
Form 10-K for the year ended December 31, 2002.
|10.15 |  | Power Purchase and Sale Agreement, dated October 31, 2002, between EME Homer City Generation L.P. and Edison Mission Marketing & Trading, Inc., incorporated by reference to Exhibit 10.35 to EME Homer City Generation L.P.'s Form 10-K for the year
ended December 31, 2002.                     
|10.16 |  | Management and Administration Agreement, effective as of April 27, 2004, between EME Homer City Generation L.P. and Midwest Generation EME, LLC, incorporated by reference to Exhibit 10.1 to EME Homer City Generation L.P.'s Form 10-Q for the quarter
ended March 31, 2004.                     
|31.1* |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                                                                                                                                                    
|31.2* |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                                                                                                                                                    
|32*   |  | Statement Pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                      

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | EME HOMER CITY GENERATION L.P.(REGISTRANT)
| |  | ------------------------------------------
| |  | By:                                       
| |  | By:                                       
| |  | Date:                                     

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|Signature                                |  | Title                                                                      |  | Date             
|---------------------------------------- |  | -------------------------------------------------------------------------- |  | -----------------
|                                         |  |                                                                            |  |                  
|/s/ Guy F. GorneyGuy F. Gorney           |  | Director and President
(Principal Executive Officer)                       |  | February 28, 2007
|/s/ W. James ScilacciW. James Scilacci   |  | Director and Vice President
(Principal Financial Officer)                  |  | February 28, 2007
|/s/ Mark C. ClarkeMark C. Clarke         |  | Vice President and Controller
(Controller or Principal Accounting Officer) |  | February 28, 2007
|/s/ Raymond W. VickersRaymond W. Vickers |  | Director                                                                   |  | February 28, 2007

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