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

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Form 10-Q

|(Mark one)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended September 30, 2004            
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 000-24890

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EDISON MISSION ENERGY(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation
or organization)             |  | 95-4031807(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------- |  | ----------------------------------------------
|18101 Von Karman Avenue
Irvine, California(Address of principal executive offices) |  | 92612(Zip Code)                               
|Registrant's telephone number, including area code:(949) 752-5588                 

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

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

Number of shares outstanding of the registrant's Common Stock as of November 8, 2004: 100 shares (all shares held by an affiliate of the registrant).



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TABLE OF CONTENTS

|                             |  |                                                                                       |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFinancial Information
|Item 1.                      |  | Financial Statements                                                                  |  | 1   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 22  
|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 63  
|Item 4.                      |  | Controls and Procedures                                                               |  | 63  
|PART IIOther Information   
|Item 6.                      |  | Exhibits                                                                              |  | 64  
|                             |  | Signatures                                                                            |  | 65  

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PART IFINANCIAL INFORMATION  ITEM 1. FINANCIAL STATEMENTS

EDISON MISSION ENERGY AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME  (In thousands, Unaudited)

|                                         |                                                                                  | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |        
|---------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------- | ------- | ------------------------------- | -------
|
|Operating Revenues                       |                                                                                  |                                  |         |                                 |        
|                                         | Electric revenues                                                                |                                  | $       | 507,023                         |        
|                                         | Net gains (losses) from price risk management and energy trading                 |                                  |         | (3,723                          | )      
|                                         | Operation and maintenance services                                               |                                  |         | 5,935                           |        
|                                         |                                                                                  |                                  |         |                                 |        
|                                         |                                                                                  | Total operating revenues         |         |                                 | 509,235
|                                         |                                                                                  |                                  |         |                                 |        
|Operating Expenses                       |                                                                                  |                                  |         |                                 |        
|                                         | Fuel                                                                             |                                  |         | 162,525                         |        
|                                         | Plant operations                                                                 |                                  |         | 89,560                          |        
|                                         | Plant operating leases                                                           |                                  |         | 43,978                          |        
|                                         | Operation and maintenance services                                               |                                  |         | 4,564                           |        
|                                         | Depreciation and amortization                                                    |                                  |         | 38,894                          |        
|                                         | Loss on lease termination, asset impairment and other charges                    |                                  |         | 35,200                          |        
|                                         | Administrative and general                                                       |                                  |         | 38,955                          |        
|                                         |                                                                                  |                                  |         |                                 |        
|                                         |                                                                                  | Total operating expenses         |         |                                 | 413,676
|                                         |                                                                                  |                                  |         |                                 |        
|                                         | Operating income (loss)                                                          |                                  |         | 95,559                          |        
|                                         |                                                                                  |                                  |         |                                 |        
|Other Income (Expense)                   |                                                                                  |                                  |         |                                 |        
|                                         | Equity in income from unconsolidated affiliates                                  |                                  |         | 107,084                         |        
|                                         | Interest and other income (expense)                                              |                                  |         | (1,356                          | )      
|                                         | Gain on sale of assets                                                           |                                  |         |                                |        
|                                         | Interest expense                                                                 |                                  |         | (78,193                         | )      
|                                         | Dividends on preferred securities                                                |                                  |         |                                |        
|                                         |                                                                                  |                                  |         |                                 |        
|                                         |                                                                                  | Total other income (expense)     |         |                                 | 27,535 
|                                         |                                                                                  |                                  |         |                                 |        
|                                         | Income (loss) from continuing operations before income taxes                     |                                  |         | 123,094                         |        
|                                         | Provision (benefit) for income taxes                                             |                                  |         | 37,908                          |        
|                                         |                                                                                  |                                  |         |                                 |        
|Income (Loss) From Continuing Operations |                                                                                  |                                  | 85,186  |                                 |        
|                                         | Income from operations of discontinued foreign subsidiaries, net of tax (Note 2) |                                  |         | 499,668                         |        
|                                         |                                                                                  |                                  |         |                                 |        
|Income Before Accounting Change          |                                                                                  |                                  | 584,854 |                                 |        
|                                         | Cumulative effect of change in accounting, net of tax (Note 13)                  |                                  |         |                                |        
|                                         |                                                                                  |                                  |         |                                 |        
|Net Income                               |                                                                                  | $                                | 584,854 |                                 | $      
|                                         |                                                                                  |                                  |         |                                 |        

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

1

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EDISON MISSION ENERGY AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  (In thousands, Unaudited)

|                                               |                                                                         | Three Months Ended
September 30,                                                                                                                                                                                                             |         | Nine Months Ended
September 30, |         
|---------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------------------------- | --------
|
|Net Income                                     |                                                                         | $                                                                                                                                                                                                                                            | 584,854 |                                 | $       
|Other comprehensive income (loss), net of tax: |                                                                         |                                                                                                                                                                                                                                              |         |                                 |         
|                                               | Foreign currency translation adjustments:                               |                                                                                                                                                                                                                                              |         |                                 |         
|                                               |                                                                         | Foreign currency translation adjustments, net of income tax expense (benefit) of $(105) and $260 for the three months and $1,068 and $1,564 for the nine months ended September 30, 2004 and 2003, respectively                              |         |                                 | 33,165  
|                                               |                                                                         | Reclassification adjustments for sale of investment in a foreign subsidiary                                                                                                                                                                  |         |                                 | (134,014
|                                               | Minimum pension liability adjustment                                    |                                                                                                                                                                                                                                              |         | 22                              |         
|                                               | 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 $4,808 and $21,498 for the three months and $(46,068) and $24,431 for the nine months ended September 30, 2004 and 2003,
 respectively |         |                                 | (2,933  
|                                               |                                                                         | Reclassification adjustments included in net income (loss), net of income tax benefit of $19,214 and $1,963 for the three months and $50,701 and $5,447 for the nine months ended September 30, 2004 and 2003,
respectively                  |         |                                 | 26,841  
|                                               |                                                                         |                                                                                                                                                                                                                                              |         |                                 |         
|Other comprehensive income (loss)              |                                                                         |                                                                                                                                                                                                                                              | (76,919 | )                               |         
|                                               |                                                                         |                                                                                                                                                                                                                                              |         |                                 |         
|Comprehensive Income (Loss)                    |                                                                         | $                                                                                                                                                                                                                                            | 507,935 |                                 | $       
|                                               |                                                                         |                                                                                                                                                                                                                                              |         |                                 |         

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

2

---





EDISON MISSION ENERGY AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  (In thousands, Unaudited)

|                                         |                                                                                | September 30,
2004                |            | December 31,
2003
|---------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------- | ---------- | -----------------
|Assets                                   |                                                                                |                                   |            |                  
|Current Assets                           |                                                                                |                                   |            |                  
|                                         | Cash and cash equivalents                                                      |                                   | $          | 1,155,847        
|                                         | Accounts receivabletrade                                                      |                                   |            | 189,889          
|                                         | Accounts receivableaffiliates                                                 |                                   |            | 173,462          
|                                         | Assets under price risk management and energy trading                          |                                   |            | 15,089           
|                                         | Inventory                                                                      |                                   |            | 112,130          
|                                         | Prepaid expenses and other                                                     |                                   |            | 86,700           
|                                         |                                                                                |                                   |            |                  
|                                         |                                                                                | Total current assets              |            |                  
|                                         |                                                                                |                                   |            |                  
|Investments in Unconsolidated Affiliates |                                                                                |                                   | 502,685    |                  
|                                         |                                                                                |                                   |            |                  
|Property, Plant and Equipment            |                                                                                |                                   | 3,474,199  |                  
|                                         | Less accumulated depreciation and amortization                                 |                                   |            | 676,029          
|                                         |                                                                                |                                   |            |                  
|                                         |                                                                                | Net property, plant and equipment |            |                  
|                                         |                                                                                |                                   |            |                  
|Other Assets                             |                                                                                |                                   |            |                  
|                                         | Deferred financing costs                                                       |                                   |            | 64,636           
|                                         | Long-term assets under price risk management and energy trading                |                                   |            | 94,442           
|                                         | Restricted cash                                                                |                                   |            | 129,602          
|                                         | Rent payments in excess of levelized rent expense under plant operating leases |                                   |            | 276,924          
|                                         | Other long-term assets                                                         |                                   |            | 17,200           
|                                         |                                                                                |                                   |            |                  
|                                         |                                                                                | Total other assets                |            |                  
|                                         |                                                                                |                                   |            |                  
|Assets of Discontinued Operations        |                                                                                |                                   | 4,501,518  |                  
|                                         |                                                                                |                                   |            |                  
|Total Assets                             |                                                                                | $                                 | 10,118,294 |                  
|                                         |                                                                                |                                   |            |                  

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

3

---





EDISON MISSION ENERGY AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS  (In thousands, Unaudited)

|                                                |                                                                                                      | September 30,
2004                   |            | December 31,
2003 |          
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ----------------- | ---------
|Liabilities and Shareholder's Equity            |                                                                                                      |                                      |            |                   |          
|Current Liabilities                             |                                                                                                      |                                      |            |                   |          
|                                                | Accounts payableaffiliates                                                                          |                                      | $          | 16,021            |          
|                                                | Accounts payable and accrued liabilities                                                             |                                      |            | 256,055           |          
|                                                | Liabilities under price risk management and energy trading                                           |                                      |            | 65,746            |          
|                                                | Interest payable                                                                                     |                                      |            | 94,473            |          
|                                                | Current maturities of long-term obligations                                                          |                                      |            | 656,500           |          
|                                                |                                                                                                      |                                      |            |                   |          
|                                                |                                                                                                      | Total current liabilities            |            |                   | 1,088,795
|                                                |                                                                                                      |                                      |            |                   |          
|Long-Term Obligations Net of Current Maturities |                                                                                                      |                                      | 3,735,194  |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Long-Term Deferred Liabilities                  |                                                                                                      |                                      |            |                   |          
|                                                | Deferred taxes and tax credits                                                                       |                                      |            | 249,524           |          
|                                                | Junior subordinated debentures                                                                       |                                      |            | 154,639           |          
|                                                | Other                                                                                                |                                      |            | 335,870           |          
|                                                |                                                                                                      |                                      |            |                   |          
|                                                |                                                                                                      | Total long-term deferred liabilities |            |                   | 740,033  
|                                                |                                                                                                      |                                      |            |                   |          
|Liabilities of Discontinued Operations          |                                                                                                      |                                      | 2,783,197  |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Total Liabilities                               |                                                                                                      |                                      | 8,347,219  |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Minority Interest of Discontinued Operations    |                                                                                                      |                                      | 1,033      |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Commitments and Contingencies(Note 8)           |                                                                                                      |                                      |            |                   |          
|Shareholder's Equity                            |                                                                                                      |                                      |            |                   |          
|                                                | Common stock, par value $0.01 per share; 10,000 shares authorized; 100 shares issued and outstanding |                                      |            | 64,130            |          
|                                                | Additional paid-in capital                                                                           |                                      |            | 2,579,819         |          
|                                                | Retained deficit                                                                                     |                                      |            | (760,450          | )        
|                                                | Accumulated other comprehensive loss                                                                 |                                      |            | (113,457          | )        
|                                                |                                                                                                      |                                      |            |                   |          
|Total Shareholder's Equity                      |                                                                                                      |                                      | 1,770,042  |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Total Liabilities and Shareholder's Equity      |                                                                                                      | $                                    | 10,118,294 |                   | $        
|                                                |                                                                                                      |                                      |            |                   |          

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

4

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EDISON MISSION ENERGY AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands, Unaudited)

|                                                                        |                                                                                       | Nine Months Ended
September 30,                               |          
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ---------
|
|Cash Flows From Operating Activities                                    |                                                                                       |                                                               |          
|                                                                        | Loss from continuing operations, after accounting change, net                         |                                                               | $        
|                                                                        | Adjustments to reconcile loss to net cash provided by (used in) operating activities: |                                                               |          
|                                                                        |                                                                                       | Equity in income from unconsolidated affiliates               |          
|                                                                        |                                                                                       | Distributions from unconsolidated affiliates                  |          
|                                                                        |                                                                                       | Depreciation and amortization                                 |          
|                                                                        |                                                                                       | Deferred taxes and tax credits                                |          
|                                                                        |                                                                                       | Asset impairment charges                                      |          
|                                                                        |                                                                                       | Gain on sale of assets                                        |          
|                                                                        |                                                                                       | Cumulative effect of change in accounting, net of tax         |          
|                                                                        | Changes in operating assets and liabilities:                                          |                                                               |          
|                                                                        |                                                                                       | Increase in accounts receivabletrade                         |          
|                                                                        |                                                                                       | Increase in accounts receivableaffiliates                    |          
|                                                                        |                                                                                       | Decrease in inventory                                         |          
|                                                                        |                                                                                       | Decrease in prepaid expenses and other                        |          
|                                                                        |                                                                                       | Increase in rent payments in excess of levelized rent expense |          
|                                                                        |                                                                                       | Increase in accounts payable and accrued liabilities          |          
|                                                                        |                                                                                       | Increase in interest payable                                  |          
|                                                                        |                                                                                       | Decrease (increase) in net assets under risk management       |          
|                                                                        | Other operating, net                                                                  |                                                               |          
|                                                                        |                                                                                       |                                                               |          
|                                                                        |                                                                                       | Net cash provided by (used in) operating activities           |          
|                                                                        |                                                                                       |                                                               |          
|Cash Flows From Financing Activities                                    |                                                                                       |                                                               |          
|                                                                        | Borrowings on long-term debt and lease swap agreements                                |                                                               |          
|                                                                        | Payments on long-term debt agreements                                                 |                                                               |          
|                                                                        | Cash dividends to parent                                                              |                                                               |          
|                                                                        | Financing costs                                                                       |                                                               |          
|                                                                        |                                                                                       |                                                               |          
|                                                                        |                                                                                       | Net cash provided by (used in) financing activities           |          
|                                                                        |                                                                                       |                                                               |          
|Cash Flows From Investing Activities                                    |                                                                                       |                                                               |          
|                                                                        | Investments in and loans to energy projects                                           |                                                               |          
|                                                                        | Capital expenditures                                                                  |                                                               |          
|                                                                        | Proceeds from sale of interest in projects                                            |                                                               |          
|                                                                        | Decrease in restricted cash                                                           |                                                               |          
|                                                                        | Investments in other assets                                                           |                                                               |          
|                                                                        |                                                                                       |                                                               |          
|                                                                        |                                                                                       | Net cash provided by (used in) investing activities           |          
|                                                                        |                                                                                       |                                                               |          
|Net changes in cash of discontinued operations                          |                                                                                       |                                                               | 43,545   
|                                                                        |                                                                                       |                                                               |          
|Net increase in cash and cash equivalents                               |                                                                                       |                                                               | 788,310  
|Cash and cash equivalents at beginning of period                        |                                                                                       |                                                               | 504,093  
|                                                                        |                                                                                       |                                                               |          
|Cash and cash equivalents at end of period                              |                                                                                       |                                                               | 1,292,403
|Cash and cash equivalents classified as part of discontinued operations |                                                                                       |                                                               | (136,556 
|                                                                        |                                                                                       |                                                               |          
|Cash and cash equivalents of continuing operations                      |                                                                                       | $                                                             | 1,155,847
|                                                                        |                                                                                       |                                                               |          

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

5

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EDISON MISSION ENERGY AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  SEPTEMBER 30, 2004  (Dollars in millions, Unaudited)

Note 1. General

In the opinion of management, all adjustments, including recurring accruals, have been made that are necessary to present fairly the consolidated financial
position and results of operations for the periods covered by this report. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the operating
results for the full year.

Edison
Mission Energy's (EME's) significant accounting policies are described in Note 2 to its Consolidated Financial Statements as of December 31, 2003 and 2002, included
in EME's annual report on Form 10-K for the year ended December 31, 2003. EME follows the same accounting policies for interim reporting purposes, with the exception of the
change in accounting for variable interest entities (see Note 14). This quarterly report should be read in connection with such financial statements. Terms used but not defined in this report
are defined in EME's annual report on Form 10-K for the year ended December 31, 2003.

EME's
independent auditors' audit opinion for the year ended December 31, 2003 contains an explanatory paragraph that indicates the consolidated financial statements included in
its 2003 annual report on Form 10-K have been prepared on the basis that EME will continue as a going concern and that the uncertainty about Edison Mission Midwest Holdings' ability
to repay or refinance $693 million of debt that matures in December 2004 raises substantial doubt about EME's ability to continue as a going concern. In April 2004, all of the
outstanding debt of Edison Mission Midwest Holdings was repaid in full through new financings obtained by Midwest Generation. For further discussion, see Note 7Refinancing.

Interim Financial Presentation

Beginning in this third quarter report on Form 10-Q, the consolidated financial statements for all periods presented reflect the
reclassification of the results of EME's international power generation portfolio as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). Refer to Note 2Discontinued Operations, which presents detailed information regarding the
discontinued international operations. Certain other reclassifications have been made to prior year amounts to conform to current year classifications.

Furthermore,
as a result of the reclassification of the results of EME's international operations as discontinued operations, certain footnotes presented in EME's second quarter report
on Form 10-Q for the quarter ended June 30, 2004 are no longer required to be presented. Goodwill that had been presented in the second quarter report on
Form 10-Q is primarily related to the acquisitions of Contact Energy Limited (Contact Energy) and First Hydro. In addition, intangible assets subject to amortization are primarily
related to customer contracts at Contact Energy. Accordingly, activity relating to goodwill and intangible assets described above is now reflected as part of discontinued operations.

EME
continues to operate predominantly in one line of business, electric power generation, with all of its continuing operations located in the United States. As a result of the sale of
Contact Energy and announced plans to sell the remainder of its portfolio of international assets (which made up the

6

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reportable
segments in Asia Pacific and Europe), EME does not meet the criteria for segment reporting and, therefore, this footnote has been removed.

Except
as indicated, amounts reflected in the notes to the consolidated financial statements relate to continuing operations of EME.

Note 2. Discontinued Operations

Contact Energy

On September 30, 2004, EME completed the sale of its 51.2% interest in Contact Energy to Origin Energy New Zealand Limited. Consideration for the sale was
NZ$1,101.4 million (approximately US$739 million) in cash and NZ$535 million (approximately US$359 million) of debt assumed by the purchaser. The after-tax gain
on the sale of Contact Energy was $141 million. On October 5, 2004, EME repaid $600 million of the $800 million secured loan at Mission Energy Holdings
International, Inc. with the majority of the proceeds received from the sale of Contact Energy. The remaining proceeds will be retained for general corporate purposes.

MEC International B.V.

On July 29, 2004, EME entered into an agreement to sell its remaining international power generation portfolio, owned by a wholly owned Dutch subsidiary,
MEC International B.V., to a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%) (the BV transaction). The purchase price is $2.3 billion, subject
to certain purchase price adjustments prior to closing that are expected to result in a net purchase price of approximately $2.2 billion. Closing of the BV transaction is subject to approval by
International Power's shareholders and to a number of regulatory approvals and project level consents. If certain project level approvals and consents are not obtained, one or more projects may be
excluded from the sale transaction and the purchase price may be adjusted accordingly. The sale is expected to close in the fourth quarter of 2004. EME's estimate of the after-tax gain on
the sale of its international projects is approximately $120 million. Net proceeds from the sale will be used to repay the remaining $200 million due from the $800 million secured
loan at Mission Energy Holdings International, Inc., other indebtedness and for general corporate purposes. EME will retain its ownership of the subsidiaries associated with the Lakeland
project and some inactive subsidiaries.

Lakeland Project

In 2001, EME ceased consolidating the activities of Lakeland Power Ltd. when an administrative receiver was appointed following a default by Norweb
Energi Ltd, the counterparty to a long-term power sales agreement. The consolidated financial statements have been restated to conform to discontinued operations treatment for all
historical periods presented. In 2003, a third party completed the purchase of the Lakeland power plant from the administrative receiver for £24 million. The proceeds from the sale
and existing cash were used to fund partial repayment of the outstanding debt owed to secured creditors of the project. Lakeland Power Ltd.'s administrative receiver has filed a claim against
Norweb Energi Ltd. for termination of the power purchase agreement. To the extent that Lakeland Power Ltd. receives payment under its claim, such amounts will first be used to repay
amounts due to creditors. In October 2004, EME purchased the secured creditors' debt from Lakeland Power Ltd. for approximately £6 million. The purchase of the
outstanding bank debt was completed to enhance EME's overall position to maximize recovery from the ultimate proceeds received from the claim against Norweb Energi. EME's subsidiary that owns the
outstanding shares of Lakeland

7

---



Power Ltd.
will be entitled to receive any residual amount of the proceeds from the claim after creditors' claims are resolved.

Ferrybridge and Fiddler's Ferry Plants

On December 21, 2001, EME completed the sale of the Ferrybridge and Fiddler's Ferry coal-fired power plants located in the United Kingdom to
two wholly owned subsidiaries of American Electric Power. In addition, as part of the transactions, the purchasers acquired other assets and assumed specified liabilities associated with the plants.
The sale was the result of a competitive bidding process. EME acquired the plants in 1999 from PowerGen UK plc for £1.3 billion. In accordance with SFAS No. 144, the results
of Ferrybridge and Fiddler's Ferry have been reflected as discontinued operations in EME's consolidated financial statements.

Summarized Financial Information for Discontinued Operations

Summarized results of discontinued operations are as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003Total operating revenues

$
354

$
412

$
1,132

$
1,087Income before income taxes and minority interest


60


83


222


153Provision (benefit) for income taxes


(317
)

27


(266
)

56Minority interest


(18
)

(17
)

(50
)

(31
)Income from operations of discontinued foreign subsidiaries


359


39


438


66Gain on sale before income taxes


312





312


Gain on sale after income taxes


141





141





During the third quarter ended September 30, 2004, EME recorded a deferred income tax benefit of $327 million in accordance with
Emerging Issues Task Force Issue No. 93-17,
"Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation," (EITF 93-17). Under EITF
93-17, because the tax basis of the stock of EME's Dutch subsidiary, MEC International B.V., exceeds EME's book basis, an adjustment to deferred taxes was required during the third quarter
of 2004. The tax basis of the stock of MEC International B.V. exceeds the book basis primarily due to taxable income recognized in the United States on several types of foreign earnings (generally
referred to as Subpart F income under U.S. income tax regulations). Even though EME recorded current taxes payable in the United States on Subpart F income, no recognition of deferred taxes was
recorded under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," until the operations of MEC International B.V. were classified as discontinued operations.

The
assets and liabilities associated with the discontinued operations and assets held for sale are segregated on the consolidated balance sheets at September 30, 2004 and
December 31, 2003. The

8

---



carrying
amount of major asset and liability classifications for EME's international operations recorded as discontinued operations and held for sale are as follows:

September 30,
2004

December 31,
2003Cash and cash equivalents

$
137

$
218Accounts receivabletrade, net of allowance of $6 million in 2003


45


220Other current assets


85


191Total current assets


267


629Investments


1,158


1,080Net property, plant and equipment


2,579


4,522Goodwill


308


865Other long-term assets


190


334Total other assets


498


1,199Assets of discontinued operations

$
4,502

$
7,430Accounts payable and accrued liabilities

$
61

$
230Interest payable


28


59Current maturities of long-term obligations


29


82Other current liabilities


24


185Total current liabilities


142


556Long-term obligations net of current maturities


1,707


2,640Deferred taxes and tax credits


378


606Deferred revenue


423


570Other long-term liabilities


133


340Total long-term deferred liabilities


934


1,516Liabilities of discontinued operations

$
2,783

$
4,712


Note 3. Loss on Lease Termination, Asset Impairment and Other Charges

Loss on lease termination, asset impairment and other charges was $35 million and $989 million for the third quarter and nine months ended
September 30, 2004, respectively. On April 27, 2004, EME's subsidiary, Midwest Generation, LLC (Midwest Generation) terminated the Collins Station lease through a negotiated transaction
with the lease equity investor. Midwest Generation made a lease termination payment of approximately $960 million. This amount represented the $774 million of lease debt outstanding,
plus accrued interest, and the amount owed to the lease equity investor for early termination of the lease. Midwest Generation received title to the Collins Station as part of the transaction. EME
recorded a pre-tax loss of approximately $956 million (approximately $587 million after tax) due to termination of the lease and the planned decommissioning of the asset and
disposition of excess inventory.

Following
the termination of the Collins Station lease, Midwest Generation announced plans to permanently cease operations at the Collins Station by December 31, 2004 and
decommission the plant. On July 30, 2004, PJM Interconnection, LLC (PJM) accepted Midwest Generation's request to cease operations at the Collins Station. PJM found that the decommissioning of
the plant would not affect the operation or reliability of the PJM markets. During the third quarter of 2004, EME reached an agreement with Exelon Generation Company LLC (Exelon Generation) to
terminate the power

9

---



purchase
agreement effective September 30, 2004 for the two units at the Collins Station that remained under contract. As a result of the termination of the power purchase agreement, EME
revised the estimated useful life of the remaining plant assets to end on September 30, 2004 instead of December 31, 2004. Accordingly, EME recorded a pre-tax impairment
charge of $5 million during the third quarter of 2004. In October 2004, EME finalized plans to reduce the workforce in Illinois and expects to recognize a $4 million
pre-tax charge for exit costs during the fourth quarter of 2004.

In
September 2004, management completed an analysis of future competitiveness in the expanded PJM marketplace of its eight small peaking units in Illinois. Based on this analysis,
management decided to decommission six of the eight small peaking units, subject to regulatory review and approval. As a result of this decision, projected future cash flows associated with the
Illinois peaking units were less than the book value of the units, resulting in an impairment under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or the
Disposal of Long-Lived Assets." During the third quarter of 2004, EME recorded a pre-tax impairment charge of $29 million (approximately $18 million after tax).

EME
anticipates that the lease termination payment and decommissioning of the Collins Station and small peaking units will result in substantial income tax deductions.

Asset
impairment charges were $251 million for the nine months ended September 30, 2003. Asset impairment charges in 2003 consisted of $245 million related to the
impairment of eight small peaking units owned by Midwest Generation in Illinois and $6 million related to the write-down of EME's investment in the Gordonsville project, which was
sold in the fourth quarter of 2003.

Note 4. Inventory

Inventory is stated at the lower of weighted average cost or market. Inventory at September 30, 2004 and December 31, 2003 consisted of the
following:

September 30,
2004

December 31,
2003Coal and fuel oil

$
71

$
77Spare parts, materials and supplies


41


43Total

$
112

$
120


Note 5. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss), including discontinued operations, consisted of the following:

|                              |  | Currency
Translation
Adjustments |      | Unrealized Gains
(Losses) on Cash
Flow Hedges |   | Minimum
Pension Liability
Adjustment |   | Accumulated Other
Comprehensive
Income (Loss) |    
|----------------------------- |  | -------------------------------- | ---- | --------------------------------------------- | - | ------------------------------------ | - | --------------------------------------------- | ---
|Balance at December 31, 2003  |  | $                                | 145  |                                               | $ | (156                                 | ) | $                                             | (11
|Current period change         |  |                                  | (107 | )                                             |   | 16                                   |   |                                               |   
|                              |  |                                  |      |                                               |   |                                      |   |                                               |    
|Balance at September 30, 2004 |  | $                                | 38   |                                               | $ | (140                                 | ) | $                                             | (11
|                              |  |                                  |      |                                               |   |                                      |   |                                               |    

The amount of commodity hedges included in unrealized gains (losses) on cash flow hedges, net of tax, at September 30, 2004, was a loss of
$63 million. The amount of interest rate hedges included in

10

---



unrealized
gains (losses) on cash flow hedges, net of tax, at September 30, 2004, was a loss of $77 million. Unrealized losses included both continuing and discontinued operations as
follows:





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 recorded net gains (losses) of approximately $(13) million and $3 million during the third quarters of 2004 and 2003, respectively, and $(9)
million and $3 million during the nine months ended September 30, 2004 and 2003, respectively, representing the amount of cash flow hedges' ineffectiveness for continuing operations,
reflected in net gains (losses) from price risk management and energy trading in EME's consolidated income statement.

Note 6. Employee Benefit Plans

Pension Plans

EME previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $13 million to its United
States pension plans in 2004. As of September 30, 2004, $9 million in contributions have been made. EME anticipates that its original expectation will be met by year-end
2004.

11

---



Components
of pension expense for United States plans are:

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003Service cost

$
4

$
4

$
12

$
12Interest cost


2


2


6


6Expected return on plan assets


(1
)

(1
)

(3
)

(3
)Net amortization and deferral











Total expense

$
5

$
5

$
15

$
15


Postretirement Benefits Other Than Pensions

EME previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $1 million to its
postretirement benefits other than its pension plan in 2004. EME expects to make these contributions in the fourth quarter of 2004.

Components
of postretirement benefits expense are:

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003Service cost

$


$


$


$
Interest cost


1


1


3


3Expected return on plan assets











Net amortization and deferral











Total expense

$
1

$
1

$
3

$
3


Note 7. Refinancing

EME Financing Developments

On October 5, 2004, EME repaid $600 million of the $800 million secured loan at Mission Energy Holdings International, Inc. with the
majority of the proceeds received from the sale of Contact Energy.

On
April 27, 2004, EME replaced its $145 million corporate credit facility with a new $98 million secured corporate credit facility. This credit facility matures on
April 27, 2007. Loans made under this credit facility bear interest at LIBOR plus 3.50% per annum. As security for its obligations under this credit facility, EME pledged its ownership
interests in the holding companies through which it owns its interests in the Illinois Plants, the Homer City facilities, the Westside projects and the Sunrise project. EME also granted a security
interest in an account into which all distributions received by it from the Big 4 projects will be deposited. EME will be free to use these distributions unless and until an event of default occurs
under its corporate credit facility.

In
addition, EME completed the repayment of the remaining $28 million due under the Coal and Capex facility (guaranteed by EME) in April 2004. Accordingly, this credit
agreement has been terminated and EME no longer has a contingent liability related to this credit agreement.

12

---



Midwest Generation Financing Developments

On April 27, 2004, Midwest Generation completed a private offering of $1 billion aggregate principal amount of its 8.75% second priority senior
secured notes due 2034. Holders of the notes may require Midwest Generation to repurchase, or Midwest Generation may elect to repay, the notes on May 1, 2014 and on each one-year
anniversary thereafter at 100% of their principal amount, plus accrued and unpaid interest. Concurrent with the issuance of the notes, Midwest Generation borrowed $700 million under a new first
priority senior secured term loan facility. The term loan has a final maturity of April 27, 2011 and bears interest at LIBOR plus 3.25% per annum. Midwest Generation has agreed to repay
$1,750,000 of the term loan on each quarterly payment date. Midwest Generation also entered into a new five-year $200 million working capital facility that replaced a prior
facility. The new working capital facility also provides for the issuance of letters of credit. As of September 30, 2004, Midwest Generation had no borrowings outstanding under the working
capital facility and had reimbursement obligations under a letter of credit for approximately $3 million that expires in 2005. Midwest Generation used the proceeds of the notes issuance and the
term loan to refinance $693 million of indebtedness (plus accrued interest and fees) owed by its direct parent, Edison Mission Midwest Holdings Co., which had been guaranteed by Midwest
Generation and was due in December 2004, and to make the termination payment under the Collins Station lease in the amount of approximately $960 million.

Midwest
Generation is permitted to use the new working capital facility and cash on hand to provide credit support (either through loans or letters of credit) for forward contracts with
third-party counterparties entered into by Edison Mission Marketing & Trading on its behalf for capacity and energy generated from the Illinois Plants. Utilization of this credit facility in
support of such forward contracts provides additional liquidity support for implementation of EME's contracting strategy for the Illinois Plants.

The
term loan and working capital facility share a first priority lien and the senior secured notes have a second priority lien in a collateral package which consists of, among other
things, substantially all the coal-fired generating plants owned by Midwest Generation and the assets relating to those plants, as well as the equity interests of Midwest Generation and
its parent company and the intercompany notes entered into by EME and Midwest Generation in connection with the Powerton-Joliet sale-leaseback transaction.

Note 8. Commitments and Contingencies

Contractual Obligations

EME's long-term debt maturities for the next five twelve-month periods ending September 30 are: 2005$657 million;
2006$50 million; 2007$332 million; 2008$420 million; 2009$613 million; and thereafter$2.3 billion.
These amounts have been updated primarily to reflect financing activities completed during the first nine months of 2004. See Note 7Refinancing.

Fuel Supply Contracts

Midwest Generation and Homer City have entered into additional fuel purchase agreements with various third-party suppliers during the first nine months of 2004.
Midwest Generation and Homer City's fuel purchase commitments under these agreements are currently estimated to be $22 million for 2004, $63 million for 2005, $97 million for
2006, $101 million for 2007, and $57 million for 2008.

13

---



Capital Improvements

At September 30, 2004, EME's subsidiaries had firm commitments to spend approximately $11 million on capital expenditures during the remainder of
2004 and 2005. These expenditures are planned to be financed by existing subsidiary credit facilities and cash generated from operations. The construction and other capital expenditures primarily
relate to planned improvements at Midwest Generation. During the third quarter of 2004, Midwest Generation decided to return Will County Units 1 and 2 to service. Operations at these units were
suspended in 2002, pending recovery of market prices. As part of returning these units to service, Midwest Generation expects to spend approximately $10 million installing environmental
improvements by June 30, 2005.

Commercial Commitments

Introduction

EME and certain of is subsidiaries have various financial and performance guarantees and indemnifications which are issued in the normal course of business. As
discussed below, these contracts include performance guarantees, standby letters of credit, guarantee of debt and indemnifications.

Standby Letters of Credit

At September 30, 2004, standby letters of credit aggregated $48 million and were scheduled to expire as follows: remainder of
2004$35 million; and 2005$13 million.

Guarantees and Indemnities

Tax Indemnity Agreements

In
connection with the sale-leaseback transactions that EME has entered into related to the Collins Station and the Powerton and Joliet Stations in Illinois and the Homer
City facilities in Pennsylvania, EME or one of its subsidiaries entered into tax indemnity agreements. Under these tax indemnity agreements, these entities agreed to indemnify the lessors in the
sale-leaseback transactions for specified adverse tax consequences that could result in certain situations set forth in each tax indemnity agreement, including specified defaults under the
respective leases. The potential indemnity obligations under these tax indemnity agreements could be significant. Due to the nature of these potential obligations, EME cannot determine a maximum
potential liability which would be triggered by a valid claim from the lessors. EME has not recorded a liability related to these indemnities. In connection with the termination of the lease for the
Collins Station (See Note 7Refinancing), Midwest Generation will continue to have obligations under the tax indemnity agreement with the former lease equity investor.

Indemnities Provided as Part of the Acquisition of the Illinois Plants

In
connection with the acquisition of the Illinois Plants, EME agreed to indemnify Commonwealth Edison Company (Commonwealth Edison) with respect to environmental liabilities before and
after the date of sale as specified in the Asset Sale Agreement dated March 22, 1999. The indemnification claims are reduced by any insurance proceeds and tax benefits related to such claims
and are subject to a requirement by Commonwealth Edison to take all reasonable steps to mitigate losses related to any such indemnification claim. Due to the nature of the obligation under this
indemnity, a maximum potential liability cannot be determined. The indemnification for the environmental liabilities referred

14

---



to
above is not limited in term and would be triggered by a valid claim from Commonwealth Edison. Except as discussed below, EME has not recorded a liability related to this indemnity.

Midwest
Generation entered into a supplemental agreement with Commonwealth Edison and Exelon Generation on February 20, 2003 to resolve a dispute regarding interpretation of its
reimbursement obligation for asbestos claims under the environmental indemnities set forth in the Asset Sale Agreement. Under this supplemental agreement, Midwest Generation agreed to reimburse
Commonwealth Edison and Exelon Generation for 50% of specific existing asbestos claims and expenses less recovery of insurance costs, and agreed to a sharing arrangement for liabilities and expenses
associated with future asbestos related claims as specified in the agreement. The obligations under this agreement are not subject to a maximum liability. The supplemental agreement has a
five-year term with an automatic renewal provision (subject to the right to terminate). Payments are made under this indemnity upon tender by Commonwealth Edison of appropriate proof of
liability for an asbestos-related settlement, judgment, verdict, or expense. At September 30, 2004, Midwest Generation had $14 million recorded as a liability related to this matter and
had made $3 million in payments through September 2004.

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

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

Indemnities Provided under Asset Sale Agreements

In
connection with the sale of assets, EME has provided indemnities to the purchasers for taxes imposed with respect to operations of the asset prior to the sale, and EME or its
subsidiaries have received similar indemnities from purchasers related to taxes arising from operations after the sale. EME has also provided indemnities to purchasers for items specified in each
agreement (for example, specific pre-existing litigation matters and/or environmental conditions). Due to the nature of the obligations under these indemnity agreements, a maximum
potential liability cannot be determined. Not all indemnities under the asset sale agreements have specific expiration dates. Payments would be triggered under these indemnities by valid claims from
the sellers or purchasers, as the case may be. EME has not recorded a liability related to these indemnities.

Guarantee of Brooklyn Navy Yard Contractor Settlement Payments

On
March 31, 2004, EME completed the sale of 100% of the stock of Mission Energy New York, Inc., which holds a fifty percent partnership interest in Brooklyn Navy Yard
Cogeneration Partners, L.P. (referred to as Brooklyn Navy Yard) to BNY Power Partners LLC. Brooklyn Navy Yard owns a 286 MW gas-fired cogeneration power plant in Brooklyn, New York. In
February 1997, the construction contractor asserted general monetary claims under the turnkey agreement against Brooklyn Navy Yard. A settlement agreement was executed on January 17,
2003, and all litigation has been dismissed. EME agreed to indemnify Brooklyn Navy Yard and, in connection with the sale of EME's interest in Brooklyn Navy Yard, BNY Power Partners for any payments
due under this settlement agreement, which are scheduled through 2006. At September 30, 2004, EME had recorded a liability of $11 million related to this indemnity.

15

---



Capacity Indemnification Agreements

EME
has guaranteed, jointly and severally with Texaco Inc., the obligations of March Point Cogeneration Company under its project power sales agreements to repay capacity payments
to the project's power purchaser in the event that the power sales agreements terminate, March Point Cogeneration Company abandons the project, or the project fails to return to normal operations
within a reasonable time after a complete or partial shutdown, during the term of the power contracts. In addition, subsidiaries of EME have guaranteed the obligations of Kern River Cogeneration
Company and Sycamore Cogeneration Company under their project power sales agreements to repay capacity payments to the projects' power purchaser in the event that the projects unilaterally terminate
their
performance or reduce their electric power producing capability during the term of the power contracts. The obligations under the indemnification agreements as of September 30, 2004, if payment
were required, would be $162 million. EME has no reason to believe that any of these projects will either cease operations or reduce its electric power producing capability during the term of
its power contract.

Bank Indemnity under a Letter of Credit Supporting ISAB Energy's Debt Service Reserve Account

EME
agreed to indemnify its lenders under its credit facilities from amounts drawn on a $35 million letter of credit issued for the benefit of the lenders to ISAB Energy, a 49%
unconsolidated affiliate, in lieu of ISAB Energy funding a debt service reserve account using additional equity contributions. Accordingly, a default under ISAB Energy's project debt could result in a
draw under the letter of credit. The letter of credit is renewed each six-month period or until ISAB Energy funds the debt service account. The indemnification is subject to the maximum
amount drawn under the letter of credit. EME has not recorded a liability related to this indemnity. The agreement for the sale of EME's international assets requires the buyer to replace this letter
of credit prior to or concurrently with the closing.

Subsidiary Guarantee for Performance of Unconsolidated Affiliate

A
subsidiary of EME has guaranteed the obligations of an unconsolidated affiliate to make payments to a third party for power delivered under a fixed-price power sales agreement. This
agreement runs through 2007. EME believes there is sufficient cash flow to pay the power suppliers, assuming timely payment by the power purchasers. Due to the nature of this indemnity, a maximum
potential liability cannot be determined. To the extent EME's subsidiary would be required to make payments under the guarantee, EME's subsidiary and EME are indemnified by Peabody Energy Corporation
pursuant to the 2000 Purchase and Sale Agreement for Citizens Power LLC. EME's subsidiary has not recorded a liability related to this indemnity.

Contingencies

Legal Developments Affecting Sunrise Power Company

Sunrise Power Company, in which EME's wholly owned subsidiary owns a 50% interest, sells all its output to the California Department of Water Resources. On
May 15, 2002, Sunrise Power Company was served with a complaint filed in the Superior Court of the State of California, City and County of San Francisco, by James M. Millar, "individually, and
on behalf of the general public and as a representative taxpayer suit" against sellers of long-term power to the California Department of Water Resources, including Sunrise Power Company.
The lawsuit alleges that the defendants, including Sunrise Power Company, engaged in unfair and fraudulent business practices by knowingly taking advantage of a manipulated power market to obtain
unfair contract terms. The lawsuit seeks to enjoin

16

---



enforcement
of the "unfair and oppressive terms and conditions" in the contracts, as well as restitution by the defendants of excessive monies obtained by the defendants. Plaintiffs in several other
class action lawsuits pending in Northern California have filed petitions seeking to have the Millar lawsuit consolidated with those lawsuits. Defendants, including Sunrise Power Company, have
stipulated to respond to the complaint thirty days after it is assigned to a specific court of the San Francisco Superior Court. In December 2003, Mr. Millar filed a First Amended Class
Action and Representative Action Complaint which contains allegations similar to those in the earlier complaint but also alleges a class action. One of the newly added parties has again removed the
lawsuit to federal court. After various procedural motions, the case has been re-assigned to Judge Whaley in San Diego, who has heard plaintiff's motion to remand and has asked for
supplemental briefing. A decision on the remand is expected before the end of 2004. EME believes that the outcome of this litigation will not have a material adverse effect on its consolidated
financial position or results of operations.

Regulatory Developments Affecting Doga Project

On August 4, 2002, a new Electricity Market License Regulation was implemented in Turkey. The new regulation contains, among other things, a requirement
that each generator obtain a generation license. Historically, Doga's Implementation Contract has been its sole license. The new regulation contemplates an initial fixed license fee and a yearly
license fee based on the amount of energy generated, which will increase the project's costs of operation by an undetermined amount. In addition, the new regulation allows the possibility of insertion
of provisions in a new license which may be different from those in the Implementation Contract.

The
effect of the new regulation is still undetermined, as the new license provisions have not been specified. Doga complied with the new regulation's stipulation to apply for a new
generation license by June 2, 2003. The license has not been issued yet. If actions or inactions undertaken pursuant to the new regulation directly or indirectly impede, hinder, prevent or
delay the operation of the Doga facility or increase Doga's cost of performing its obligations under its project documents, this may constitute a
"risk event" under Doga's Implementation Contract. A risk event may permit Doga to request an increase in its tariff or, under certain circumstances, request a buyout of the project by the Ministry of
Energy and Natural Resources.

On
October 3, 2002, Doga (and several other power producers in Turkey acting independently) filed a lawsuit in the Danistay, Turkey's high administrative court, against the Energy
Market Regulatory Authority seeking both an injunction and permanent invalidation of certain provisions of the new regulation on the grounds of the illegality and unconstitutionality of any new
license requirement that does not take into account the vested rights of a company operating pursuant to previously agreed terms of the Implementation Contract.

On
May 12, 2003, the Danistay rejected Doga's request for injunctive relief (as well as those of the other power companies with similar claims). On July 10, 2003, Doga
appealed the Danistay's ruling. Doga's appeal was heard by the General Council of the Administrative Chambers of Danistay on October 10, 2003 and was rejected. There are no further rights of
appeal against the decision regarding the injunction. The Danistay will continue to hear the merits of Doga's lawsuit. A decision is not expected to be rendered before the second quarter of 2005.

Income Taxes

EME is, and may in the future be, under examination by tax authorities in varying tax jurisdictions 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

17

---



anticipated,
could possibly be material. However, in EME's opinion, it is unlikely that the resolution of any such matters will have a material adverse effect upon EME's financial condition or results
of operations.

Litigation

EME and its subsidiaries experience other routine litigation in the normal course of its business. None of such pending routine litigation is expected to have a
material adverse effect on EME's consolidated financial position or results of operations.

Environmental Matters and Regulations

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

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 fails to comply with applicable environmental laws, it may be subject to injunctive relief or penalties and fines imposed by
regulatory authorities.

Note 9. Dispositions of Investments in Energy Plants

On January 7, 2004, EME completed the sale of 100% of its stock of Edison Mission Energy Oil & Gas, which in turn held minority interests in Four
Star Oil & Gas, to Medicine Bow Energy Corporation. Proceeds from the sale were approximately $100 million. EME recorded a pre-tax gain on the sale of approximately
$47 million during the first quarter of 2004.

On
March 31, 2004, EME completed the sale of 100% of its stock of Mission Energy New York, Inc., which in turn owned a 50% partnership interest in Brooklyn Navy Yard
Cogeneration Partners L.P. to a third party for a sales price of approximately $42 million. EME recorded an impairment charge of $53 million during the fourth quarter of 2003 related to
the planned disposition of this investment and a pre-tax loss of approximately $4 million during the first quarter of 2004 due to changes in the terms of the sale.

Note 10. Investments in Unconsolidated Affiliates

The following table presents summarized financial information of the significant subsidiary investments in unconsolidated affiliates accounted for by the equity
method. The significant subsidiary investments include the California Power Group and Watson Cogeneration Company. The California Power Group (not a legal entity) consists of Kern River Cogeneration
Company, Sycamore

18

---



Cogeneration
Company, Coalinga Cogeneration Company, Mid-Set Cogeneration Company, Salinas River Cogeneration Company, Sargent Canyon Cogeneration Company, and Sunrise Power Company, LLC.
For the three and nine months ended September 30, 2003, the significant subsidiary investments also included Four Star Oil & Gas Company. EME sold 100% of its stock of Edison Mission
Energy Oil & Gas, which in turn held minority interests in Four Star Oil & Gas, on January 7, 2004. Therefore, Four Star Oil & Gas is not included in the balances for the
three and nine months ended September 30, 2004.

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003Operating revenues

$
413

$
468

$
960

$
1,149Operating income


202


231


326


423Income before accounting change


198


228


313


420Net income


198


228


313


402


Note 11. Supplemental Statements of Cash Flows Information

Nine Months Ended
September 30,2004

2003Components Related to Continuing OperationsCash paidInterest (net of amount capitalized)

$
144

$
190Income taxes (receipts)


44


(86
)Cash payments under plant operating leases


213


255Components Related to Discontinued OperationsCash paidInterest (net of amount capitalized)


225


152Income taxes (receipts)


42


35Details of assets acquiredFair value of assets acquired

$


$
333Liabilities assumed





58Net cash paid for acquisitions

$


$
275Non-cash activities from deconsolidation of variable interest entitiesAssets

$
220

$
Liabilities


254





Note 12. Stock-based Compensation

Edison International has three stock-based employee compensation plans, which are described more fully in Note 16Stock Compensation Plans,
included in EME's annual report on Form 10-K for the year ended December 31, 2003. EME accounts for those plans using the intrinsic value method. Upon grant, no stock-based
employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common

19

---



stock
on the date of grant. The following table illustrates the effect on net income if EME had used the fair value accounting method.

|                                                                                                                                            |  | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --- | ------------------------------- | -
|
|Net income, as reported                                                                                                                     |  | $                                | 585 |                                 | $
|Add: stock-based compensation expense included in reported net income, net of related tax effects                                           |  |                                  | 3   |                                 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |  |                                  | (1  | )                               |  
|                                                                                                                                            |  |                                  |     |                                 |  
|Pro forma net income                                                                                                                        |  | $                                | 587 |                                 | $
|                                                                                                                                            |  |                                  |     |                                 |  

Note 13. Cumulative Effect of Change in Accounting Principle

Effective January 1, 2003, EME adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires entities to record the fair value of a liability for an asset retirement obligation 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. As of
January 1, 2003, EME recorded a $9 million, after tax, decrease to net income as the cumulative effect of the adoption of SFAS No. 143.

Note 14. New Accounting Pronouncements

Emerging Issues Task Force Issue No. 02-14

In June 2004, the Emerging Issues Task Force reached a consensus on Issue No. 02-14, "Whether an Investor Should Apply the Equity Method
of Accounting to Investments Other Than Common Stock." EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common
stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments
in either common stock or in-substance common stock of an investee, provided that the investor has the ability to exercise significant influence over the operating and financial policies
of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. EME does not expect the adoption of EITF
02-14 to have a material impact on its consolidated financial statements.

Statement of Financial Accounting Standards Interpretation No. 46

In December 2003, the FASB re-issued Statement of Financial Accounting Standards Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46R). The primary objective of the interpretation is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through
means other than voting rights; such entities are known as variable interest entities. Under this interpretation, the primary beneficiary is the variable interest holder that absorbs a majority of
expected losses; if no variable interest holder meets this criteria, then it is the variable interest holder that receives a majority of the expected residual returns. The primary

20

---



beneficiary
is required to consolidate the variable interest entity unless specific exceptions or exclusions are met. This interpretation applies to variable interest entities created after
January 31, 2003, and applies to variable interest entities in which EME holds a variable interest that it acquired before February 1, 2003. This interpretation is effective for special
purpose entities as of December 31, 2003 and for all other entities as of March 31, 2004.

Variable Interest Entities

EME completed a review of the application of FIN 46R to its subsidiaries and affiliates and concluded that it has variable interests in variable interest entities
as defined in this interpretation. The following
table summarizes the variable interest entities held by continuing operations in which EME has a significant variable interest:

|Variable Interest Entity |  | Location        |  | Investment at
September 30, 2004 |     | Ownership
Interest at
September 30, 2004 |    | Description
|------------------------ |  | --------------- |  | -------------------------------- | --- | ---------------------------------------- | -- | -----------
|Sunrise                  |  | Fellows, CA     |  | $                                | 112 |                                          | 50 | %          
|Watson                   |  | Carson, CA      |  |                                  | 100 |                                          | 49 | %          
|Sycamore                 |  | Bakersfield, CA |  |                                  | 63  |                                          | 50 | %          
|Midway-Sunset            |  | Fellows, CA     |  |                                  | 54  |                                          | 50 | %          
|Kern River               |  | Bakersfield, CA |  |                                  | 49  |                                          | 50 | %          

EME has determined that it is not the primary beneficiary in these entities; accordingly, EME will account for its variable interests on the
equity method. EME's maximum exposure to loss in these variable interest entities is generally limited to its investment in these entities.

Deconsolidation of Variable Interest Entities

In accordance with FIN 46R, EME determined that it was not the primary beneficiary of the Doga and Kwinana projects and, accordingly, deconsolidated these
projects at March 31, 2004. The Doga and Kwinana projects are part of the sale of international operations and, accordingly, are included in discontinued operations.

FASB Staff Position FAS 106-2

In May 2004, the FASB issued FASB Staff Position FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." The primary objective of the position is to provide accounting guidance related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003. EME adopted this guidance effective July 1, 2004, which had an immaterial impact on its consolidated financial statements. According to proposed federal regulations, EME's retiree
health care plans provide prescription drug benefits that are deemed to be actuarially equivalent to Medicare benefits. Accordingly, EME recognized the subsidy in the measurement of its accumulated
obligation and recorded an actuarial gain.

21

---





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

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements.
These statements are based on Edison Mission Energy's (EME's) knowledge of present facts, current expectations about future events and assumptions about future developments. Forward-looking statements
are not guarantees of performance; they are subject to risks, uncertainties and assumptions that could cause actual future activities and results of operations to be materially different from those
set forth in this discussion. Important factors that could cause actual results to differ include risks set forth in "Market Risk Exposures" below, and under "Risks Related to the Business" in the
MD&A included in Item 7 of EME's annual report on Form 10-K for the year ended December 31, 2003.

The MD&A of this Form 10-Q discusses material changes in the results of operations, financial condition and other developments of EME since
December 31, 2003, and as compared to the third quarter and nine months ended September 30, 2003. This discussion presumes that the reader has read or has access to the MD&A included in
Item 7 of EME's annual report on Form 10-K for the year ended December 31, 2003.

The
MD&A presents a discussion of management's focus during the third quarter of 2004, including forward-looking information, and a discussion of EME's financial results and analysis of
its financial condition. It is presented in four major sections:

PageManagement's Overview; Critical Accounting Policies and Estimates

22Results of Operations

26Liquidity and Capital Resources

41Market Risk Exposures

51


MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Overview

Introduction

During the third quarter of 2004, management focused on the sale of EME's international assets as part of the restructuring plan announced during the fourth
quarter of 2003 and improving the performance and stability of the core assets of its continuing operations. Highlights of these activities are described below.

Disposition of EME's International Operations

As indicated in EME's annual report on Form 10-K for the year ended December 31, 2003, EME engaged investment bankers to market for sale
its international project portfolio. During the third quarter of 2004:



22

---





Together,
these two transactions represent the sale of all of EME's interests in its international projects except that EME will retain its ownership of the Lakeland project and some
inactive international subsidiaries. The estimated net gain on sale of international projects, including recognition of a deferred tax benefit of $327 million during the third quarter of 2004,
is $573 million. See "Edison Mission Energy and Subsidiaries Notes to Consolidated Financial StatementsNote 2. Discontinued Operations."

Accounting Presentation of Discontinued and Continuing Operations

Beginning in this third quarter report on Form 10-Q, all of EME's international operations are accounted for as discontinued operations in
accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and, accordingly, all prior periods have been
restated to reclassify the results of operations and assets and liabilities as discontinued operations. Continuing operations include EME's Illinois Plants and Homer City facilities, and equity
investments in power projects primarily located in California. EME financial statements and the discussion set forth herein have been adjusted to this format of reporting.

Overview of EME's 2004 Financial Performance from Continuing Operations

EME's financial performance from continuing operations during the third quarter and nine months ended September 30, 2004 and 2003 included a number of
important items:



23

---





Excluding
these items, EME's income (loss) from continuing operations was $107 million and $31 million during the three and nine months ended September 30, 2004,
respectively, compared to $161 million and $113 million during the comparable periods of the prior year. Key items affecting EME's operating performance included:



Elimination of Restrictions on Dividends to MEHC

EME amended its certificate of incorporation and bylaws in May 2004 to eliminate the so-called "ring-fencing" provisions that were
implemented in early 2001 during the California energy crisis, which had included restrictions on dividends. In July and October 2004, EME made dividend payments of $69 million and
$5 million, respectively, to its parent, Mission Energy Holding Company, or MEHC.

Dispositions of Investments in Other Energy Plants

On January 7, 2004, EME completed the sale of 100% of its stock of Edison Mission Energy Oil & Gas, which in turn held minority interests in Four
Star Oil & Gas, to Medicine Bow Energy

24

---



Corporation.
Proceeds from the sale were approximately $100 million. EME recorded a pre-tax gain on the sale of approximately $47 million during the first quarter of 2004.

On
March 31, 2004, EME completed the sale of 100% of its stock of Mission Energy New York, Inc., which in turn owned a 50% partnership interest in Brooklyn Navy Yard
Cogeneration Partners L.P., to a third party for a sales price of approximately $42 million. EME recorded an impairment charge of
$53 million during the fourth quarter of 2003 related to the planned disposition of this investment and a pre-tax loss of approximately $4 million during the first quarter of
2004 due to changes in the terms of the sale.

Expansion of PJM in Illinois

The Illinois Plants are located within the service territory of Exelon Generation's affiliate, Commonwealth Edison, which on April 27, 2004 was granted
approval by the Federal Energy Regulatory Commission (the FERC) to join PJM effective May 1, 2004. EME had protested the integration of Commonwealth Edison into PJM before American Electric
Power (AEP), because Commonwealth Edison's service territory, independent of AEP, was only partially integrated into PJM via a limited transmission pathway of 500 MW capability. This lack of
interconnection capability limited Midwest Generation's access to the broader PJM market. These concerns became moot on October 1, 2004, when AEP was integrated into PJM. As of
October 1, 2004, Midwest Generation had direct access to a fully interconnected market that covers twelve states and the District of Columbia, and serves a peak load of over 107,000 MW
over 49,300 miles of transmission lines. For further discussion, see "Market Risk ExposuresRegulatory Matters."

Critical Accounting Policies and Estimates

For a discussion of EME's critical accounting policies, refer to "Critical Accounting Policies and Estimates" on page 47 of EME's annual report on
Form 10-K for the year ended December 31, 2003.

25

---



RESULTS OF OPERATIONS

Introduction

This section discusses operating results for the third quarters and nine months of 2004 and 2003. Beginning in this third quarter report on
Form 10-Q, all of EME's international operations are accounted for as discontinued operations. Discontinued operations are discussed separately below until completion of the sale of
these operations as an aid to understanding the performance of these projects during the third quarter and nine months ended September 30, 2004. Continuing operations include EME's Illinois
Plants and Homer City facilities, equity investments in power projects primarily located in California, corporate interest expense and general and administrative expenses. This section also discusses
the effect of new accounting pronouncements on EME's consolidated financial statements. It is organized under the following headings:

PageNet Income Summary

26Results of Continuing Operations

27Results of Discontinued Operations

34New Accounting Pronouncements

39


Net Income Summary

Net income is comprised of the following components:

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003(in millions)Income (loss) from continuing operations

$
85

$
161

$
(548
)
$
(40
)Income from discontinued operations


500


39


579


66Cumulative changes in accounting











(9
)Net Income

$
585

$
200

$
31

$
17


EME's 2003 loss from a change in accounting principle resulted from the adoption of a new accounting standard for asset retirement obligations.
See "Results of Continuing OperationsCumulative Effect of Change in Accounting Principle" for further discussion of this change in accounting.

26

---



EME's
income (loss) from continuing operations for the third quarters and nine months ended September 30, 2004 and 2003 is comprised of:

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003(in millions)Income (Loss) from Continuing Operations

$
85

$
161

$
(548
)
$
(40
)Discrete Items (after tax)Loss on lease termination, asset impairment and other charges (see "Results of Continuing OperationsEarnings from Consolidated OperationsIllinois Plants")


(22
)




(608
)

(153
)Gain on sale of assets (see "Results of Continuing OperationsEarnings from Unconsolidated AffiliatesFour Star Oil & Gas")








29


Income from Continuing Operations (excluding discrete items)

$
107

$
161

$
31

$
113


The decrease in the third quarter income from continuing operations, excluding discrete items, was primarily attributable to lower capacity
revenues at EME's Illinois Plants and lower earnings from EME's Homer City facilities, due to lower generation and higher fuel costs related to the cost of emission allowances. In addition, the
decrease in earnings was due to the absence of earnings from Four Star Oil & Gas, which was sold on January 7, 2004. The year-to-date decrease in income from
continuing operations, excluding discrete items, was primarily attributable to lower earnings from EME's Homer City facilities described above, and an absence of earnings from Four Star Oil &
Gas.

Results of Continuing Operations

Overview

EME operates in one line of business, electric power generation. Operating revenues are primarily related to the sale of power generated from the Illinois Plants
and Homer City facilities. Intercompany interest expense and income between EME and its consolidated subsidiaries have been eliminated in the following project results, except as described below with
respect to loans provided to EME from a wholly owned subsidiary, Midwest Generation. Equity in income from unconsolidated affiliates relates to energy projects where EME's ownership interest is 50% or
less in the projects. The equity method of accounting is generally used to account for the operating results of entities in which EME has a significant influence but in which it does not have a
controlling interest. With respect to entities accounted for under the equity method, EME recognizes its proportional share of the income or loss of such entities.

EME uses the words "earnings" or "losses" in this section to describe income or loss from continuing operations before income taxes and minority
interest.

27

---



The
following section provides a summary of the operating results for the third quarter and nine months ended September 30, 2004 and 2003 together with discussions of the
contributions by specific projects and of other significant factors affecting these results.

|                                             |                                                              | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |  
|-------------------------------------------- | ------------------------------------------------------------ | -------------------------------- | --- | ------------------------------- | -
|
|
|Income (Loss) before Taxes (Earnings/Losses) |                                                              |                                  |     |                                 |  
|                                             | Consolidated operations                                      |                                  |     |                                 |  
|                                             | Illinois Plants                                              |                                  | $   | 98                              |  
|                                             | Homer City                                                   |                                  |     | 26                              |  
|                                             | Other                                                        |                                  |     | 4                               |  
|                                             | Unconsolidated affiliates                                    |                                  |     |                                 |  
|                                             | Big 4 projects                                               |                                  |     | 72                              |  
|                                             | Four Star Oil & Gas                                          |                                  |     |                                |  
|                                             | Sunrise                                                      |                                  |     | 28                              |  
|                                             | March Point                                                  |                                  |     | (1                              | )
|                                             | Other                                                        |                                  |     | 5                               |  
|                                             |                                                              |                                  |     |                                 |  
|                                             |                                                              |                                  | 232 |                                 |  
|                                             | Corporate interest expense                                   |                                  |     | (70                             | )
|                                             | Corporate and regional administrative and general            |                                  |     | (39                             | )
|                                             | Gain on sale of assets                                       |                                  |     |                                |  
|                                             | Corporate depreciation and other, net                        |                                  |     |                                |  
|                                             |                                                              |                                  |     |                                 |  
|                                             | Income (Loss) from Continuing Operations Before Income Taxes |                                  | $   | 123                             |  
|                                             |                                                              |                                  |     |                                 |  

28

---



Earnings from Consolidated Operations

Illinois Plants

|                                 |                                                               | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |      
|-------------------------------- | ------------------------------------------------------------- | -------------------------------- | --- | ------------------------------- | -----
|
|Operating Revenues               |                                                               |                                  |     |                                 |      
|                                 | Energy revenues                                               |                                  | $   | 201                             |      
|                                 | Capacity revenues                                             |                                  |     | 170                             |      
|                                 | Net losses from price risk management                         |                                  |     | (3                              | )    
|                                 |                                                               |                                  |     |                                 |      
|                                 | Total operating revenues                                      |                                  |     | 368                             |      
|                                 |                                                               |                                  |     |                                 |      
|Operating Expenses               |                                                               |                                  |     |                                 |      
|                                 | Fuel                                                          |                                  |     | 102                             |      
|                                 | Plant operations                                              |                                  |     | 75                              |      
|                                 | Plant operating leases                                        |                                  |     | 19                              |      
|                                 | Depreciation and amortization                                 |                                  |     | 33                              |      
|                                 | Loss on lease termination, asset impairment and other charges |                                  |     | 35                              |      
|                                 | Administrative and general                                    |                                  |     | 2                               |      
|                                 |                                                               |                                  |     |                                 |      
|                                 | Total operating expenses                                      |                                  |     | 266                             |      
|                                 |                                                               |                                  |     |                                 |      
|Operating Income (Loss)          |                                                               |                                  | 102 |                                 |      
|                                 |                                                               |                                  |     |                                 |      
|Other Income (Expense)           |                                                               |                                  |     |                                 |      
|                                 | Interest income from note receivable from EME                 |                                  |     | 28                              |      
|                                 | Interest expense                                              |                                  |     | (32                             | )    
|                                 |                                                               |                                  |     |                                 |      
|                                 | Total other income (expense)                                  |                                  |     | (4                              | )    
|                                 |                                                               |                                  |     |                                 |      
|Income (Loss) Before Taxes       |                                                               | $                                | 98  |                                 | $    
|                                 |                                                               |                                  |     |                                 |      
|StatisticsCoal-Fired Generation |                                                               |                                  |     |                                 |      
|                                 | Generation (in GWhr):                                         |                                  |     |                                 |      
|                                 |                                                               | Power purchase agreement         |     |                                 | 3,892
|                                 |                                                               | Merchant                         |     |                                 | 4,408
|                                 |                                                               |                                  |     |                                 |      
|                                 |                                                               | Total coal-fired generation      |     |                                 | 8,300
|                                 |                                                               |                                  |     |                                 |      
|                                 | Equivalent Availability(1)                                    |                                  |     | 91.9%                           |      
|                                 | Forced outage rate(2)                                         |                                  |     | 5.0%                            |      
|                                 | Average realized energy price/MWhr:                           |                                  |     |                                 |      
|                                 |                                                               | Power purchase agreement         |     | $                               | 16.56
|                                 |                                                               | Merchant                         |     | $                               | 32.96
|                                 |                                                               |                                  |     |                                 |      
|                                 |                                                               | Total coal-fired generation      |     | $                               | 25.27
|                                 |                                                               |                                  |     |                                 |      

---

29

---



Losses from the Illinois Plants increased $751 million for the nine months ended September 30, 2004, compared to the corresponding
period of 2003. Discrete items affecting the losses of the Illinois Plants include:



Earnings
from the Illinois Plants, excluding the above discrete items, were $133 million and $139 million during the three and nine months ended September 30, 2004,
respectively, compared to $181 million and $146 million for the comparable periods in the prior year. The decrease in the third quarter earnings was $48 million due to the
following factors:



Partially
offset by:



The
nine months earnings for 2004 from the Illinois Plants decreased $7 million, compared to the corresponding period of 2003 primarily due to a decrease in capacity revenues
under the power purchase agreements. This decrease was mostly offset by higher energy revenues, lower fuel costs, and lower plant operating lease costs, described above. The higher energy revenues
were a result of increased merchant generation at the coal plants released from their power purchase agreement with Exelon Generation and higher merchant energy prices.

Losses
from price risk management activities decreased $3 million and $2 million for the third quarter and nine months ended September 30, 2004, respectively,
compared to the corresponding periods of 2003. The gains (losses) represent the ineffective portion of forward contracts which are derivatives that qualify as cash flow hedges under SFAS
No. 133, gains (losses) related to power contracts that did not qualify for hedge accounting under SFAS No. 133, and realized gains on swaps and financial transmission rights that did
not qualify for hedge accounting under SFAS No. 133. Midwest Generation recorded net losses of approximately $5 million for both the third quarters of 2004 and 2003 and
$0.2 million and $1 million during the nine months ended September 30, 2004 and 2003, respectively, representing the amount of cash flow hedges ineffectiveness. The ineffective
portion of the cash flow hedges was partially attributable to differences in energy prices between "Into ComEd" and delivery points outside "Into ComEd" prior to May 1, 2004 and differences in
energy prices between the aggregate Midwest Generation unit price and other delivery points, effective May 1, 2004. In addition, Midwest Generation recognized ineffective gains (losses) on the
ineffective portion of forward contracts that expired during the respective periods.

30

---



The
earnings (losses) of the Illinois Plants included interest income of $28 million for the third quarters of both 2004 and 2003 and $85 million for the nine months ended
of both September 30, 2004 and 2003 related to loans to EME. In August 2000, Midwest Generation, which owns or leases the Illinois Plants, entered into a sale-leaseback
transaction of the Powerton-Joliet facilities. The proceeds from the sale of these facilities were loaned to EME, which also provided a guarantee of the related lease obligations of Midwest
Generation. The Powerton-Joliet sale-leaseback is recorded as an operating lease for accounting purposes.

Homer City

|                       |                                               | Three Months Ended
September 30, |    | Nine Months Ended
September 30, |  
|---------------------- | --------------------------------------------- | -------------------------------- | -- | ------------------------------- | -
|
|Operating Revenues     |                                               |                                  |    |                                 |  
|                       | Energy revenues                               |                                  | $  | 130                             |  
|                       | Capacity revenues                             |                                  |    | 6                               |  
|                       | Net gains (losses) from price risk management |                                  |    | (6                              | )
|                       |                                               |                                  |    |                                 |  
|                       | Total operating revenues                      |                                  |    | 130                             |  
|                       |                                               |                                  |    |                                 |  
|Operating Expenses     |                                               |                                  |    |                                 |  
|                       | Fuel                                          |                                  |    | 60                              |  
|                       | Plant operations                              |                                  |    | 14                              |  
|                       | Plant operating leases                        |                                  |    | 25                              |  
|                       | Depreciation and amortization                 |                                  |    | 4                               |  
|                       | Administrative and general                    |                                  |    | 1                               |  
|                       |                                               |                                  |    |                                 |  
|                       | Total operating expenses                      |                                  |    | 104                             |  
|                       |                                               |                                  |    |                                 |  
|Operating Income       |                                               |                                  | 26 |                                 |  
|                       |                                               |                                  |    |                                 |  
|Other Income (Expense) |                                               |                                  |    |                                 |  
|                       | Interest expense                              |                                  |    | (1                              | )
|                       | Other income (expense)                        |                                  |    | 1                               |  
|                       |                                               |                                  |    |                                 |  
|                       | Total other income (expense)                  |                                  |    |                                |  
|                       |                                               |                                  |    |                                 |  
|Income Before Taxes    |                                               | $                                | 26 |                                 | $
|                       |                                               |                                  |    |                                 |  
|Statistics             |                                               |                                  |    |                                 |  
|                       | Generation (in GWhr)                          |                                  |    | 3,562                           |  
|                       | Availability(1)                               |                                  |    | 91.7%                           |  
|                       | Forced outage rate(2)                         |                                  |    | 1.4%                            |  
|                       | Average realized energy price/MWhr            |                                  | $  | 35.99                           |  

---

Earnings from Homer City decreased $34 million and $49 million for the third quarter and nine months ended September 30,
2004, respectively, compared to the corresponding periods of 2003. During the third quarter of 2004, coal deliveries under contracts with four fuel suppliers to Homer City were temporarily
interrupted. As a result of these interruptions, Homer City reduced generation during off-peak periods when power prices were lower and purchased coal from alternative suppliers at spot
prices which were substantially higher than the contract prices from these four fuel suppliers. These

31

---



factors
contributed to lower generation in the third quarter of 2004. Management is currently seeking to secure the delivery of the coal shortfall under existing contracts with these fuel suppliers
and is reviewing these contracts to determine what further course of action, if any, should be undertaken. In addition, the increase in sulfur emission costs during the third quarter of 2004 is
reflected in higher fuel costs. The 2004 nine-month decrease in earnings was due to lower generation during the third quarter of 2004 described above, from an unplanned outage at Unit 1 in
February 2004, higher maintenance costs from the outage during the first quarter of 2004 and higher sulfur emission costs. Losses from price risk management activities in 2004 also contributed
to the decrease in earnings for the third quarter and year-to-date period in 2004.

Losses
from price risk management activities increased $13 million and $17 million for the third quarter and nine months ended September 30, 2004, respectively,
compared to the corresponding periods of 2003. The losses represent the ineffective portion of forward and futures contracts which are derivatives that qualify as cash flow hedges under SFAS
No. 133 and gains (losses) related to futures contracts that did not qualify for hedge accounting under SFAS No. 133. Homer City recorded net gains (losses) of approximately $(9) million
and $7 million during the third quarters of 2004 and 2003, respectively, and $(9) million and $3 million during the nine months ended September 30, 2004 and 2003, respectively,
representing the amount of the ineffective portion of the cash flow hedges. The ineffective gains (losses) during the third quarter and nine months ended September 30, 2004 and 2003 from Homer
City were partially attributable to changes in the difference between energy prices at PJM West Hub (the delivery point under forward contracts) and the energy prices at the delivery point where power
generated by the Homer City facilities is delivered into the transmission system (referred to as the Homer City busbar). In addition, Homer City recognized ineffective gains (losses) related to
forward contracts that expired during the respective periods. See "Market Risk ExposuresCommodity Price RiskAmericas" for more information regarding forward market prices.

Earnings from Unconsolidated Affiliates

Big 4 Projects

Earnings from the Big 4 projects increased $7 million for both the third quarter and nine months ended September 30, 2004, compared to the
corresponding periods of 2003. The change in earnings was largely due to higher energy prices in 2004. For the nine months ended September 30, 2004, the impact of the higher energy prices in
2004 was partially offset due to planned outages at the Sycamore Cogeneration plant and the Watson Cogeneration plant in March 2004.

The
earnings from the Big 4 projects included interest expense from Edison Mission Energy Funding of $3 million and $4 million for the third quarters of 2004 and 2003,
respectively. For the nine months ended September 30, 2004 and 2003, earnings included interest expense from Edison Mission Energy Funding of $10 million and $12 million,
respectively.

Four Star Oil & Gas

EME's share of earnings from Four Star Oil & Gas Company was $13 million and $39 million for the third quarter and nine months ended
September 30, 2003, respectively, with no earnings recorded in 2004 from its ownership interest due to the sale of the project. The 2004 earnings represent the gain on sale of 100% of EME's
stock of Edison Mission Energy Oil & Gas, which in turn held minority interests in Four Star Oil & Gas, on January 7, 2004. Proceeds from the sale were approximately
$100 million. EME recorded a pre-tax gain on the sale of approximately $47 million during the first quarter of 2004.

32

---



Sunrise

Earnings from the Sunrise project decreased $1 million and $7 million for the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003. The 2004 decreases primarily resulted from higher interest expense due to the completion of the Sunrise project financing in
September 2003.

March Point

Earnings from March Point decreased $3 million and increased $1 million for the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003. The third quarter decrease in earnings was primarily due to the ineffective portion of fuel contracts entered into by March Point, which
are derivatives that qualified as cash flow hedges under SFAS No. 133. The year-to-date increase was attributable to higher operating revenues in 2004 because there was
no planned outage in 2004, as there was during the corresponding period in June 2003.

Other

Gains from energy trading activities were $6 million and $12 million for the third quarters of 2004 and 2003, respectively, and $11 million
and $37 million for the nine months ended September 30, 2004 and 2003, respectively. The net gains from energy trading activities were the result of proprietary trading in the power
markets in which EME has power plants. Gains from proprietary energy trading activities during the first nine months of 2004 were lower than the corresponding period in 2003 due to less favorable
market conditions (prices and volatility).

The
2004 increase was also due in part to the absence of the $6 million loss related to the write-down of EME's investment in the Gordonsville project which occurred
in the second quarter of 2003.

Seasonal Disclosure

EME's third quarter equity in income from its domestic energy projects is materially higher than equity in income related to other quarters of the year due to
warmer weather during the summer months and
because a number of EME's domestic energy projects located on the West Coast have power sales contracts that provide for higher payments during the summer months.

Corporate Interest Expense

Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003(in thousands)Interest expense to third parties

$
41,516

$
48,865

$
125,525

$
130,344Interest expense to Midwest Generation


28,298


28,333


84,931


85,022Total interest expense

$
69,814

$
77,198

$
210,456

$
215,366


Administrative and General Expenses

Administrative and general expenses increased $6 million and $4 million for the third quarter and nine months ended September 30, 2004,
compared to the corresponding periods of 2003. The increases

33

---



were
primarily due to increased use of third party consultants and higher performance-based compensation.

Income Taxes

EME's effective income tax benefit rate from continuing operations during the nine months ended September 30, 2004 was 38% compared to 57% during the first
nine months of 2003. The higher effective income tax benefit rate in 2003 is due to higher state tax benefits, net of federal income taxes recognized under the tax-allocation agreement
with Edison International, and a lower tax rate on earnings for EME's investment in Four Star Oil & Gas during 2003 as a result of a dividends received deduction. During the first nine months
of 2004 and 2003, EME recorded additional state tax benefits, net of federal income taxes, of $5 million and $15 million, respectively, as a result of participation in the
tax-allocation agreement with Edison International.

Cumulative Effect of Change in Accounting Principle

Statement of Financial Accounting Standards No. 143

Effective January 1, 2003, EME adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires entities to record the fair value of a liability for an asset retirement obligation 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. As of January 1, 2003, EME recorded a $9 million, after tax, decrease to net income as the cumulative effect of the adoption of SFAS No. 143.

Results of Discontinued Operations

As discussed under Management's Overview, EME:



During
the third quarter ended September 30, 2004, EME recorded a deferred income tax benefit of $327 million in accordance with Emerging Issues Task Force Issue
No. 93-17, "Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation," (EITF
93-17). Under EITF 93-17, because the tax basis of the stock of EME's Dutch subsidiary, MEC International B.V., exceeds EME's book basis, an adjustment to deferred taxes was
required during the third quarter of 2004. The tax basis of the stock of MEC International B.V. exceeds the book basis primarily due to taxable income recognized in the

34

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United
States on several types of foreign earnings (generally referred to as Subpart F income under U.S. income tax regulations). Even though EME recorded current taxes payable in the United States on
Subpart F income, no recognition of deferred taxes was recorded under Statement of Financial Accounting Standards No. 109, " Accounting for Income Taxes," until the operations of MEC
International B.V. were classified as discontinued operations.

As
the sale of the remaining international power projects is expected to be completed during the fourth quarter of 2004, the following interim information is provided as an aid in
understanding the performance of the international projects consistent with prior quarterly reports.

|                                                                   |                           | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |  
|------------------------------------------------------------------ | ------------------------- | -------------------------------- | --- | ------------------------------- | -
|
|
|Operating Revenues from Consolidated Subsidiaries                  |                           |                                  |     |                                 |  
|                                                                   | Contact Energy            |                                  | $   | 239                             |  
|                                                                   | First Hydro               |                                  |     | 75                              |  
|                                                                   | Loy Yang B                |                                  |     | 51                              |  
|                                                                   | Doga(3)                   |                                  |     |                                |  
|                                                                   | Other                     |                                  |     | 11                              |  
|                                                                   |                           |                                  |     |                                 |  
|                                                                   |                           | $                                | 376 |                                 | $
|                                                                   |                           |                                  |     |                                 |  
|Income (Loss) before Taxes and Minority Interest (Earnings/Losses) |                           |                                  |     |                                 |  
|                                                                   | Consolidated operations   |                                  |     |                                 |  
|                                                                   | Contact Energy(2)         |                                  | $   | 34                              |  
|                                                                   | First Hydro               |                                  |     | 1                               |  
|                                                                   | Loy Yang B                |                                  |     | 16                              |  
|                                                                   | Doga(3)                   |                                  |     |                                |  
|                                                                   | Other                     |                                  |     | 4                               |  
|                                                                   | Unconsolidated affiliates |                                  |     |                                 |  
|                                                                   | Paiton                    |                                  |     | 16                              |  
|                                                                   | ISAB                      |                                  |     | 13                              |  
|                                                                   | EcoEléctrica              |                                  |     | 6                               |  
|                                                                   | Italian Wind              |                                  |     |                                |  
|                                                                   | Doga(3)                   |                                  |     | 2                               |  
|                                                                   | Other                     |                                  |     | 2                               |  
|                                                                   |                           |                                  |     |                                 |  
|                                                                   |                           | $                                | 94  |                                 | $
|                                                                   |                           |                                  |     |                                 |  

---

35

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Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003(in millions)Income before taxes and minority interest (project basis)

$
94

$
92

$
316

$
179Depreciation expense


20





20


Income before taxes and minority interest under generally accepted accounting principles.

$
114

$
92

$
336

$
179


Contact Energy

Operating revenues increased $11 million and $73 million for the third quarter and nine months ended September 30, 2004, respectively,
compared to the corresponding periods of 2003. The 2004 increases were primarily due to higher electricity retail and generation revenues arising from the Taranaki combined-cycle plant purchased in
March 2003 and increased number of retail customers in the year 2003, as well as ongoing strength in retail volumes, tariff adjustments and management of transmission constraints. In addition,
there was a 12% and 15% increase in the average exchange rate of the New Zealand dollar compared to the U.S. dollar during the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003.

Earnings
from Contact Energy, included in the consolidated statements of income of EME as described above, decreased $8 million and increased $44 million for the third
quarter and nine months ended September 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 year-to-date increase was primarily due to increased margins due to the
factors described above related to revenues. In addition, gains (losses) from price risk management activities were $(6) million and $1 million for the third quarter and nine months ended
September 30, 2004, respectively, compared to $7 million and $2 million for the third quarter and nine months ended September 30, 2003, respectively. The gains (losses)
from price risk management activities primarily related to a change in market value of electricity and financial contracts that were not designated as cash flow hedges for hedge accounting under SFAS
No. 133. Also included in the gains (losses) from price risk management activities during the third quarter and nine months ended September 30, 2004 was approximately $(1) million and
$1 million, respectively, representing the ineffective portion of cross currency interest rate swaps. These are derivatives that qualify as fair value hedges under SFAS No. 133.

First Hydro

Operating revenues decreased $12 million and increased $21 million for the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003. The third quarter decrease was due to lower volumes of power sales in the third quarter of 2004. Partially

36

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offsetting
this decrease was a 13% increase in the average exchange rate of the British pound compared to the U.S. dollar during the third quarter of 2004, compared to the same prior year quarter. The
2004 year-to-date increase resulted primarily from higher volumes of power sales and higher ancillary services revenues in 2004. In addition, there were higher electric
revenues from the First Hydro plant due to a 13% increase in the average exchange rate of the British pound compared to the U.S. dollar during the nine months ended September 30, 2004, compared
to the same prior year period. The First Hydro plant is expected to provide for higher electric revenues during its winter months.

Earnings
from First Hydro increased $9 million and $29 million for the third quarter and nine months ended September 30, 2004, respectively, compared to the
corresponding periods of 2003. The 2004 increase in earnings is primarily due to an $8 million and $5 million gain from price risk management activities for the third quarter and nine
months ended September 30, 2004, respectively, compared to an $8 million and $20 million loss from price risk management activities for the third quarter and nine months ended
September 30, 2003, respectively. First Hydro's gains (losses) from price risk management relate to the change in market value of commodity contracts that are recorded at fair value under SFAS
No. 133, with changes in fair value recorded through the income statement.

Loy Yang B

Operating revenues increased $4 million and $29 million for the third quarter and nine months ended September 30, 2004, respectively,
compared to the corresponding periods of 2003. The 2004 increases in operating revenues were primarily due to higher generation in 2004 compared to 2003 as a result of a planned outage in
March 2003 and an 8% and 16% increase in the average exchange rate of the Australian dollar compared to the U.S. dollar during the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003.

Earnings
from Loy Yang B increased $2 million and $17 million for the third quarter and nine months ended September 30, 2004, respectively, compared to the
corresponding periods of 2003. The 2004 increases in earnings were due to higher electric revenues discussed above.

Paiton Energy

Earnings from Paiton Energy decreased $2 million and increased $7 million for the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003. The third quarter decrease was primarily due to decreased revenues mostly due to lower availability resulting from a planned outage during
the third quarter of 2004. The 2004 year-to-date increase in earnings was primarily attributable to a decrease in Indonesian income taxes resulting from interest expense
from partner subordinated loans and lower costs incurred in 2004 related to debt restructuring activities, partially offset by lower revenues described above.

Doga

Revenues from Doga were $31 million and $98 million for the third quarter and nine months ended September 30, 2003, respectively. Revenues
from Doga were $29 million for the nine months ended September 30, 2004, representing revenues from the first quarter of 2004. There were no revenues recorded on a consolidated basis
during the three months ended September 30, 2004 due to the deconsolidation of the Doga project on March 31, 2004. Beginning April 1, 2004, EME recorded its interest in the Doga
project on the equity method of accounting.

37

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Earnings from Doga (consolidated) were $8 million and $14 million for the third quarter and nine months ended September 30, 2003, respectively. Earnings from Doga
(consolidated) were $6 million for the nine months ended September 30, 2004, representing earnings for the first quarter of 2004. Earnings from Doga (unconsolidated) were
$2 million and $3 million for the third quarter and nine months ended September 30, 2004, respectively. The earnings of Doga (unconsolidated) are reported after local country
taxes and are, therefore, not comparable to the earnings of Doga (consolidated) which are before local country taxes. The net income of the Doga project before minority interest improved during the
nine months ended September 30, 2004, compared to the same period of 2003 due to lower income taxes.

ISAB

Earnings from ISAB increased $9 million for the nine months ended September 30, 2004, compared to the corresponding period of 2003. There was no
change in earnings for the third quarter of 2004 compared to the third quarter of 2003. The 2004 increase was primarily attributable to higher revenues, from a tariff increase resulting from higher
energy prices, and higher generation in 2004 as compared to 2003, resulting from a major planned overhaul of the plant in April 2003.

EcoEléctrica

Earnings from the EcoEléctrica project increased $4 million and $17 million for the third quarter and nine months ended
September 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increases were primarily due to higher operating revenues in 2004 over 2003 resulting from plant
outages from November 2002 through February 2003.

Italian Wind

Earnings from the Italian Wind project increased $1 million and $6 million for the third quarter and nine months ended September 30, 2004,
respectively, compared to the corresponding periods of 2003. The 2004 increases were primarily due to higher revenues from a tariff increase resulting from higher
energy prices and higher generation caused by more wind in the first nine months of 2004, compared to the first nine months of 2003.

Other

Operating revenues from other consolidated subsidiaries decreased $9 million and $11 million for the third quarter and nine months ended
September 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 decreases were primarily due to the deconsolidation of the Kwinana project on March 31, 2004.
Beginning April 1, 2004, EME recorded its interest in the Kwinana project on the equity method of accounting.

Earnings
from other projects (consolidated subsidiaries and unconsolidated affiliates) increased $2 million and $13 million for the third quarter and nine months ended
September 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increases in earnings were primarily due to higher earnings from the CBK project in the Philippines due
to the completion of Kalayaan Phase II units in early 2004 and EME's Spanish Hydro project largely due to higher generation caused by more rainfall in the first nine months of 2004, compared to the
first nine months of 2003.

38

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Previously Reported Discontinued Operations

Ferrybridge and Fiddler's Ferry Plants

On December 21, 2001, EME completed the sale of the Ferrybridge and Fiddler's Ferry coal-fired power plants located in the United Kingdom to
two wholly owned subsidiaries of American Electric Power. In addition, as part of the transactions, the purchasers acquired other assets and assumed specified liabilities associated with the plants.
The sale was the result of a competitive bidding process. EME acquired the plants in 1999 from PowerGen UK plc for £1.3 billion. In accordance with SFAS No. 144, the results
of Ferrybridge and Fiddler's Ferry have been reflected as discontinued operations in EME's consolidated financial statements.

During
the second quarter of 2003, EME recorded losses of $1 million from discontinued operations primarily related to taxes.

Lakeland Project

In 2001, EME ceased consolidating the activities of Lakeland Power Ltd. when an administrative receiver was appointed following a default by Norweb
Energi Ltd, the counterparty to a long-term power sales agreement. The consolidated financial statements have been restated to conform to discontinued operations treatment for all
historical periods presented. In 2003, a third party completed the purchase of the Lakeland power plant from the administrative receiver for £24 million. The proceeds from the sale
and existing cash were used to fund partial repayment of the outstanding debt owed to secured creditors of the project. Lakeland Power Ltd.'s administrative receiver has filed a claim against
Norweb Energi Ltd. for termination of the power purchase agreement. To the extent that Lakeland Power Ltd. receives payment under its claim, such amounts will first be used to repay
amounts due to creditors. In October 2004, EME purchased the secured creditors' debt from Lakeland Power Ltd. for approximately £6 million. The purchase of the
outstanding bank debt was completed to enhance EME's overall position to maximize recovery from the ultimate proceeds received from the claim against Norweb Energi. EME's subsidiary that owns the
outstanding shares of Lakeland Power Ltd. will be entitled to receive any residual amount of the proceeds from the claim after creditors' claims are resolved.

During
the third quarter and nine months ended September 30, 2003, EME recorded losses of $423 thousand and approximately $1 million, respectively, from discontinued
operations related to administrative expenses incurred as part of the close-out activities.

New Accounting Pronouncements

Emerging Issues Task Force Issue No. 02-14

In June 2004, the Emerging Issues Task Force reached a consensus on Issue No. 02-14, "Whether an Investor Should Apply the Equity Method
of Accounting to Investments Other Than Common Stock." EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting
common stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has
investments in either common stock or in-substance common stock of an investee, provided that the investor has the ability to exercise significant influence over the operating and
financial policies of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. EME does not expect the
adoption of EITF 02-14 to have a material impact on its consolidated financial statements.

39

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Statement of Financial Accounting Standards Interpretation No. 46

In December 2003, the FASB re-issued Statement of Financial Accounting Standards Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46R). The primary objective of the interpretation is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through
means other than voting rights; such entities are known as variable interest entities. Under this interpretation, the primary beneficiary is the variable interest holder that absorbs a majority of
expected losses; if no variable interest holder meets this criteria, then it is the variable interest holder that receives a majority of the expected residual returns. The primary beneficiary is
required to consolidate the variable interest entity unless specific exceptions or exclusions are met. This interpretation applies to variable interest entities created after January 31, 2003,
and applies to variable interest entities in which EME holds a variable interest that it acquired before February 1, 2003. This interpretation is effective for special purpose entities as of
December 31, 2003 and for all other entities as of March 31, 2004.

Variable Interest Entities

EME completed a review of the application of FIN 46R to its subsidiaries and affiliates and concluded that it has variable interests in variable interest entities
as defined in this interpretation. The following table summarizes the variable interest entities held by continuing operations in which EME has a significant variable interest:

|Variable Interest Entity |  | Location        |  | Investment at
September 30, 2004 |     | Ownership
Interest at
September 30, 2004 |    | Description
|------------------------ |  | --------------- |  | -------------------------------- | --- | ---------------------------------------- | -- | -----------
|Sunrise                  |  | Fellows, CA     |  | $                                | 112 |                                          | 50 | %          
|Watson                   |  | Carson, CA      |  |                                  | 100 |                                          | 49 | %          
|Sycamore                 |  | Bakersfield, CA |  |                                  | 63  |                                          | 50 | %          
|Midway-Sunset            |  | Fellows, CA     |  |                                  | 54  |                                          | 50 | %          
|Kern River               |  | Bakersfield, CA |  |                                  | 49  |                                          | 50 | %          

EME has determined that it is not the primary beneficiary in these entities; accordingly, EME will account for its variable interests on the
equity method. EME's maximum exposure to loss in these variable interest entities is generally limited to its investment in these entities.

Deconsolidation of Variable Interest Entities

In accordance with FIN 46R, EME determined that it was not the primary beneficiary of the Doga and Kwinana projects and, accordingly, deconsolidated these
projects at March 31, 2004. The Doga and Kwinana projects are part of the sale of international operations and, accordingly, are included in discontinued operations.

FASB Staff Position FAS 106-2

In May 2004, the FASB issued FASB Staff Position FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." The primary objective of the position is to provide accounting guidance related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003. EME adopted this guidance effective July 1, 2004, which had an immaterial impact on its consolidated financial statements. According to proposed federal regulations, EME's retiree
health care plans provide prescription drug benefits that are deemed to be actuarially equivalent to Medicare benefits. Accordingly, EME recognized the subsidy in the measurement of its accumulated
obligation and recorded an actuarial gain.

40

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LIQUIDITY AND CAPITAL RESOURCES

Introduction

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

PageEME's Liquidity

41Key Financing Developments

41Termination of the Collins Station Lease

422004 Capital Expenditures

43EME's Historical Consolidated Cash Flow

43EME's Credit Ratings

44EME's Liquidity as a Holding Company

45Dividend Restrictions in Major Financings

47Contractual Obligations

50Off-Balance Sheet Transactions

50Environmental Matters and Regulations

50


For a complete discussion of these issues, read this quarterly report in conjunction with EME's annual report on Form 10-K for
the year ended December 31, 2003.

EME's Liquidity

At September 30, 2004, EME and its subsidiaries had cash and cash equivalents of $1.2 billion, including $739 million received from the sale
of Contact Energy, and EME had available the full amount of borrowing capacity under a $98 million corporate credit facility. On October 5, 2004, EME repaid $600 million of the
$800 million secured loan at Mission Energy Holdings International, Inc. with the majority of the proceeds received from the sale of Contact Energy. EME's consolidated debt at
September 30, 2004 was $4.4 billion. In addition, EME's subsidiaries had $5.3 billion of long-term lease obligations that are due over periods ranging up to
31 years.

Key Financing Developments

EME Financing Developments

On April 27, 2004, EME replaced its $145 million corporate credit facility with a new $98 million secured corporate credit facility. This
credit facility matures on April 27, 2007. Loans made under this credit facility bear interest at LIBOR plus 3.50% per annum. As security for its obligations under this credit facility, EME
pledged its ownership interests in the holding companies through which it owns its interests in the Illinois Plants, the Homer City facilities, the Westside projects, and the Sunrise project. EME also
granted a security interest in an account into which all distributions received by it from the Big 4 projects will be deposited. EME will be free to use these distributions unless and until an event
of default occurs under its corporate credit facility.

In
addition, EME completed the repayment of the remaining $28 million due under the Coal and Capex facility (guaranteed by EME) in April 2004. Accordingly, this credit
agreement has been terminated and EME no longer has a contingent liability related to this credit agreement.

41

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Midwest Generation Financing Developments

On April 27, 2004, Midwest Generation completed a private offering of $1 billion aggregate principal amount of its 8.75% second priority senior
secured notes due 2034. Holders of the notes may require Midwest Generation to repurchase, or Midwest Generation may elect to repay, the notes on May 1, 2014 and on each one-year
anniversary thereafter at 100% of their principal amount, plus accrued and unpaid interest. Concurrent with the issuance of the notes, Midwest Generation borrowed $700 million under a new first
priority senior secured term loan facility. The term loan has a final maturity of April 27, 2011 and bears interest at LIBOR plus 3.25% per annum. Midwest Generation has agreed to repay
$1,750,000 of the term loan on each quarterly payment date. Midwest Generation also entered into a new five-year $200 million working capital facility that replaced a prior
facility. The new working capital facility also provides for the issuance of letters of credit. As of September 30, 2004, Midwest Generation had no borrowings outstanding under the working
capital facility and had reimbursement obligations under a letter of credit for approximately $3 million that expires in 2005. Midwest Generation used the proceeds of the notes issuance and the
term loan to refinance $693 million of indebtedness (plus accrued interest and fees) owed by its direct parent, Edison Mission Midwest Holdings Co., which had been guaranteed by Midwest
Generation and was due in December 2004, and to make the termination payment under the Collins Station lease in the amount of approximately $960 million.

Midwest
Generation is permitted to use the new working capital facility and cash on hand to provide credit support (either through loans or letters of credit) for forward contracts with
third-party counterparties entered into by Edison Mission Marketing & Trading on its behalf for capacity and energy generated from the Illinois Plants. Utilization of this credit facility in
support of such forward contracts provides additional liquidity support for implementation of EME's contracting strategy for the Illinois Plants.

The
term loan and working capital facility share a first priority lien and the senior secured notes have a second priority lien in a collateral package which consists of, among other
things, substantially all the coal-fired generating plants owned by Midwest Generation and the assets relating to those plants, as well as the equity interests of Midwest Generation and
its parent company and the intercompany notes entered into by EME and Midwest Generation in connection with the Powerton-Joliet sale-leaseback transaction.

Termination of the Collins Station Lease

On April 27, 2004, Midwest Generation terminated the Collins Station lease through a negotiated transaction with the lease equity investor. Midwest
Generation made a lease termination payment of approximately $960 million. This amount represented the $774 million of lease debt outstanding, plus accrued interest, and the amount owed
to the lease equity investor for early termination of the lease. Midwest Generation received title to the Collins Station as part of the transaction. EME recorded a pre-tax loss of
approximately $956 million (approximately $587 million after tax) due to termination of the lease and the planned decommissioning of the asset and disposition of excess inventory.

Following
the termination of the Collins Station lease, Midwest Generation announced plans to permanently cease operations at the Collins Station by December 31, 2004 and
decommission the plant. On July 30, 2004, PJM accepted Midwest Generation's request to cease operations at the Collins Station. PJM found that the decommissioning of the plant would not affect
the operation or reliability of the PJM markets. During the third quarter of 2004, EME reached an agreement with Exelon Generation to terminate the power purchase agreement effective
September 30, 2004 for the two units at the Collins Station that remained under contract. As a result of the termination of the power

42

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purchase
agreement, EME revised the estimated useful life of the remaining plant assets to end on September 30, 2004 instead of December 31, 2004. Accordingly, EME recorded a
pre-tax impairment charge of $5 million during the third quarter of 2004. In October 2004, EME finalized plans to reduce the workforce in Illinois and expects to recognize a
$4 million pre-tax charge for exit costs during the fourth quarter of 2004.

In
September 2004, management completed an analysis of future competitiveness in the expanded PJM marketplace of its eight small peaking units in Illinois. Based on this analysis,
management decided to decommission six of the eight small peaking units, subject to regulatory review and approval. As a result of this decision, projected future cash flows associated with the
Illinois peaking units were less than the book value of the units resulting in an impairment under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or the
Disposal of Long-Lived Assets." During the third quarter of 2004, EME recorded a pre-tax impairment charge of $29 million (approximately $18 million after tax).

EME
anticipates that the lease termination payment and decommissioning of the Collins Station and small peaking units will result in substantial income tax deductions.

2004 Capital Expenditures

The estimated capital and construction expenditures of EME's subsidiaries for the final quarter of 2004 are $12 million. These expenditures are planned to
be financed by existing subsidiary credit agreements and cash generated from their operations. During the third quarter of 2004, Midwest Generation decided to return Will County Units 1 and 2 to
service. Operations at these units were suspended in 2002, pending recovery of market prices. As part of returning these units to service, Midwest Generation expects to install environmental
improvements of approximately $10 million by June 30, 2005. In addition, Homer City plans to spend approximately $17 million related to environmental improvements prior to the
summer of 2005.

EME's Historical Consolidated Cash Flow

Consolidated Cash Flows from Operating Activities

Cash used in operating activities from continuing operations increased $1.3 billion in the first nine months of 2004, compared to the first nine months of
2003. The 2004 increase was primarily attributable to the $960 million lease termination payment in 2004 related to the Collins Station lease and tax-allocation payments of
$43 million paid to Edison International during the first nine months of 2004, compared to $89 million in tax-allocation payments received by EME from Edison International
during the first nine months of 2003. EME made tax payments in the first three quarters of 2004 primarily attributable to taxable income resulting from the sale of the Four Star Oil & Gas and
Brooklyn Navy Yard projects. For further discussion of the tax-allocation payments, see "EME's Liquidity as a Holding CompanyIntercompany
Tax-Allocation Agreement." In addition, distributions from unconsolidated affiliates during the first nine months of 2004 were lower than the corresponding period of 2003, primarily
because the 2003 distributions included $151 million from completion of the Sunrise project financing in September 2003.

Consolidated Cash Flows from Financing Activities

Cash provided by financing activities from continuing operations increased $891 million in the first nine months of 2004, compared to the first nine months
of 2003. The 2004 increase was due to a higher level of borrowings in 2004 compared to 2003, primarily due to the $1 billion secured notes and

43

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$700 million
term loan facility received by Midwest Generation in April 2004 partially offset by the repayment of $693 million related to Edison Mission Midwest Holdings' credit
facility and $28 million related to the Coal and Capex facility in April 2004.

Consolidated Cash Flows from Investing Activities

Cash provided by investing activities from continuing operations increased $912 million in the first nine months of 2004, compared to the first nine months
of 2003. The 2004 increase was due to a combination of the following:



EME's Credit Ratings

Overview

Credit ratings for EME and its subsidiaries, Midwest Generation, LLC and Edison Mission Marketing & Trading, are as follows:

Moody's Rating

S&P RatingEME

B
1
BMidwest Generation, LLC:First priority senior secured rating

B
a3
B
+Second priority senior secured rating

B
1
B
-Edison Mission Marketing & Trading

Not Rated

B


On August 6, 2004, Moody's raised EME's credit rating to B1 from B2. EME cannot provide assurance that its current credit ratings or the
credit ratings of its subsidiaries will remain in effect for any given period of time or that one or more of these ratings will not be lowered. EME notes that these credit ratings are not
recommendations to buy, sell or hold its securities and may be revised at any time by a rating agency.

EME
does not have any "rating triggers" contained in subsidiary financings that would result in EME being required to make equity contributions or provide additional financial support to
its subsidiaries.

Edison
Mission Marketing & Trading has provided credit for the benefit of counterparties in the form of cash and letters of credit ($93 million as of September 30,
2004) for EME's price risk management and domestic trading activities (including Midwest Generation and Homer City) related to accounts payable and unrealized losses. A subsidiary of EME has also
supported a portion of First Hydro's United Kingdom hedging activities through a cash collateralized credit facility, under which letters of credit totaling £22 million have been
issued as of September 30, 2004.

44

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With
the remaining power purchase agreements with Exelon Generation expiring on December 31, 2004, EME expects to generate higher merchant generation in 2005 which will increase
the potential for margin and collateral requirements. Changes in forward market prices and the strategies adopted for merchant generation could further increase the need for credit support for price
risk management activities related to these projects. EME estimates that total margin and collateral requirements to support price risk management could increase to approximately $400 million
if 50% of merchant generation from the Illinois Plants and Homer City facilities was sold forward for one year and power prices subsequently increased using common industry analytics. Midwest
Generation has cash on hand and a $200 million working capital facility that can be used to provide credit support for forward contracts entered into on behalf of the Illinois Plants. In
addition, EME has cash on hand and a $98 million working capital facility that can be used to provide credit support for its subsidiaries. See "EME's Liquidity" for further discussion.

Credit Rating of Edison Mission Marketing & Trading

Pursuant to the Homer City sale-leaseback documents, a below investment grade credit rating of Edison Mission Marketing & Trading restricts the
ability of EME Homer City Generation L.P. to enter into permitted trading activities, as defined in the documents, with Edison Mission Marketing & Trading to sell forward the output of the
Homer City facilities. 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 currently sells all of the output from the Homer City facilities through Edison Mission Marketing & Trading, which has a below investment grade credit
rating, and EME Homer City is not rated. Therefore, in order for EME to continue to sell forward the output of the Homer City facilities, either: (1) EME must obtain consent from the
sale-leaseback owner participant to permit EME Homer City to sell directly into the market or through Edison Mission Marketing & Trading; or (2) Edison Mission
Marketing & Trading must provide assurances of performance consistent with the requirements of the sale-leaseback documents. EME has obtained a consent from the
sale-leaseback owner participant that will allow EME Homer City to enter into such sales, under specified conditions, through December 31, 2004. EME Homer City continues to be in
compliance with the terms of the consent; however, the consent is revocable. The owner participant has not indicated that it intends to revoke the consent; however, there can be no assurance that it
will not do so in the future. Revocation of the consent would not affect trades between Edison Mission Marketing & Trading and EME Homer City that had been entered into while the consent was
still in effect. EME is permitted to sell the output of the Homer City facilities into the spot market at any time. See "Market Risk ExposuresCommodity Price
RiskAmericasHomer City Facilities."

EME's Liquidity as a Holding Company

Overview

At September 30, 2004, EME had corporate cash and cash equivalents of $84 million to meet liquidity needs. EME's corporate cash and cash equivalents
increased by $139 million subsequent to September 30, 2004 from the net cash received from the sale of Contact Energy less the repayment of subsidiary indebtedness. See "EME's
Liquidity." EME had no borrowings outstanding or letters of credit outstanding on the $98 million secured line of credit at September 30, 2004. Cash distributions from EME's subsidiaries
and partnership investments, tax-allocation payments from Edison International and unused capacity under its corporate credit facility represent EME's major sources of liquidity to meet
its cash requirements. The timing and amount of distributions from EME's subsidiaries may be affected by many factors beyond its control. See "Dividend Restrictions in Major Financings."
In addition, the right of EME to receive tax-allocation payments, and the timing and

45

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amount
of tax-allocation payments received by EME are subject to factors beyond EME's control. See "Intercompany Tax-Allocation Agreement."

EME's
secured corporate credit facility provides credit available in the form of cash advances or letters of credit. In addition to the interest payments, EME pays a commitment fee of
0.50% on the unutilized
portion of the facility. EME has agreed to maintain a minimum interest coverage ratio and a minimum recourse debt to recourse capital ratio (as such ratios are defined in the credit agreement). At
September 30, 2004, EME met both these ratio tests.

As
security for its obligations under its new corporate credit facility, EME pledged its ownership interests in the holding companies through which it owns its interests in the Illinois
Plants, the Homer City facilities, the Westside projects and the Sunrise project. EME also granted a security interest in an account into which all distributions received by it from the Big 4 projects
will be deposited. EME will be free to use these distributions unless and until an event of default occurs under its corporate credit facility.

Historical Distributions Received By EME

The following table is presented as an aid in understanding the cash flow of EME and its various subsidiary holding companies which depend on distributions from
subsidiaries and affiliates to fund general and administrative costs and debt service costs of recourse debt.

Nine Months Ended
September 30,2004

2003(in millions)Domestic ProjectsDistributions from Consolidated Operating Projects:EME Homer City Generation L.P. (Homer City facilities)

$
61

$
102Holding companies of other consolidated operating projects





1Distributions from Unconsolidated Operating Projects:Edison Mission Energy Funding Corp. (Big 4 Projects)


80


74Four Star Oil & Gas Company





15Sunrise Power Company


5


66Holding companies for Westside projects


13


20Holding companies of other unconsolidated operating projects


1


5Total Distributions from Domestic Projects

$
160

$
283


46

---



International Projects (Mission Energy Holdings International)Distributions from Consolidated Operating Projects:First Hydro Holdings (First Hydro project)

$
29

$
18Loy Yang B


12


22Doga





18Contact Energy


50


16Valley Power





8Kwinana(1)


4


4Holding companies of other consolidated operating projects


10


Distributions from Unconsolidated Operating Projects:ISAB Energy


24


1IVPC4 (Italian Wind project)


18


8Derwent


1


1Doga


15


EcoEléctrica


9


Paiton





9Tri Energy


2


Holding companies of other unconsolidated operating projects


4


2Total Distributions from International Projects

$
178

$
107Total Distributions

$
338

$
390


---

Intercompany Tax-Allocation Agreement

EME is included in the consolidated federal and combined state income tax returns of Edison International and is eligible to participate in
tax-allocation payments with other subsidiaries of Edison International. EME has historically received tax-allocation payments related to domestic net operating losses incurred
by EME. The right of EME to receive and the amount and timing of tax-allocation payments is dependent on the inclusion of EME in the consolidated income tax returns of Edison International
and its subsidiaries and other factors, including the consolidated taxable income of Edison International and its subsidiaries, the amount of net operating losses and other tax items of EME, its
subsidiaries, and other subsidiaries of Edison International and specific procedures regarding allocation of state taxes. EME receives tax-allocation payments for tax losses when and to
the extent that the consolidated Edison International group generates sufficient taxable income in order to be able to utilize EME's tax
losses in the consolidated income tax returns for Edison International and its subsidiaries. Based on the application of the factors cited above, EME may be obligated during periods it generates
taxable income to make payments under the tax-allocation agreements.

Dividend Restrictions in Major Financings

General

Each of EME's direct or indirect subsidiaries is organized as a legal entity separate and apart from EME and its other subsidiaries. Assets of EME's subsidiaries
are not available to satisfy EME's

47

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obligations
or the obligations of any of its other subsidiaries. However, unrestricted cash or other assets that are available for distribution may, subject to applicable law and the terms of
financing arrangements of the parties, be advanced, loaned, paid as dividends or otherwise distributed or contributed to EME or to its subsidiary holding companies.

Key Ratios of EME's Principal Subsidiaries Affecting Dividends

Set forth below are key ratios of EME's principal subsidiaries for the twelve months ended September 30, 2004:

|Subsidiary                                             |  | Financial Ratio                    |  | Covenant                           |  | Actual      
|------------------------------------------------------ |  | ---------------------------------- |  | ---------------------------------- |  | ------------
|Midwest Generation, LLC (Illinois Plants)              |  | Interest Coverage Ratio            |  | Greater than or equal to 1.25 to 1 |  | 2.39 to 1(1)
|Midwest Generation, LLC (Illinois Plants)              |  | Secured Leverage Ratio             |  | Less than or equal to 8.75 to 1    |  | 5.94 to 1   
|EME Homer City Generation L.P. (Homer City facilities) |  | Senior Rent Service Coverage Ratio |  | Greater than 1.7 to 1              |  | 2.73 to 1   
|Edison Mission Energy Funding Corp. (Big 4 Projects)   |  | Debt Service Coverage Ratio        |  | Greater than or equal to 1.25 to 1 |  | 2.54 to 1   
|Mission Energy Holdings International                  |  | Interest Coverage Ratio            |  | Greater than or equal to 1.3 to 1  |  | 3.92 to 1(2)

---

For a more detailed description of the covenants binding EME's principal subsidiaries that may restrict the ability of those entities to make
distributions to EME directly or indirectly through the other holding companies owned by EME, refer to "Dividend Restrictions in Major Financings" on page 82 of EME's annual report on
Form 10-K for the year ended December 31, 2003.

Midwest Generation Financing Restrictions on Distributions

Midwest Generation is bound by the covenants in its credit facility and indenture as well as certain covenants under the Powerton-Joliet lease documents with
respect to Midwest Generation making payments under the leases. These covenants include restrictions on the ability to, among other things, incur debt, create liens on its property, merge or
consolidate, sell assets, make investments, engage in transactions with affiliates, make distributions, make capital expenditures, enter into agreements restricting its ability to make distributions,
engage in other lines of business or engage in transactions for any speculative purpose. In addition, the credit facility contains financial covenants binding on Midwest Generation.

48

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Covenants in Credit Agreement

In order for Midwest Generation to make a distribution, it must be in compliance with covenants specified under its credit agreement. Compliance with the
covenants in its credit agreement includes maintaining the following two financial performance requirements:



In
addition, Midwest Generation's distributions are limited in amount. The aggregate amount of distributions made by Midwest Generation since April 27, 2004 may not exceed the sum
of (i) 75% of excess cash flow (as defined in the credit agreement) generated since that date, plus (ii) up to 100% of the amount of equity contributions or subordinated loans made by
EME or a subsidiary of EME to Midwest Generation after April 27, 2004, but in this latter case only to the extent excess cash flow not used for a dividend under (i) is available for such
payments. With the remaining 25% of excess cash flow, Midwest Generation must offer to prepay the term loan to the lenders. Each of the lenders may, at its option, decline such prepayment with respect
to its pro rata share of the term loan. If Midwest Generation is rated investment grade, the aggregate amount of distributions made by Midwest Generation may equal but not exceed 100% of excess cash
flow generated since becoming investment grade plus 75% of excess cash flow generated during the period between April 27, 2004 and the date immediately prior to becoming investment grade.

Excess
cash flow was $117 million for the period between April 27, 2004 and September 30, 2004. At September 30, 2004, Midwest Generation met both of the
covenant requirements described above under the credit agreement and made a distribution of $88 million in October 2004. As required under the credit agreement, Midwest Generation made
an offer to the lenders to prepay $29 million of the term loan, of which $5 million was accepted by certain lenders and repaid on October 20, 2004. The remaining
$24 million of excess cash flow not repaid will be retained by Midwest Generation as working capital or used to make a voluntary prepayment at a later date, as provided under the credit
agreement.

Covenants in Indenture

Midwest Generation's indenture contains restrictions on its ability to make a distribution substantially similar to those in the credit agreement. Failure to
achieve the conditions required for distributions will not result in a default under the indenture, nor does the indenture contain any other financial performance requirements.

Mission Energy Holdings International Interest Coverage Ratio

Under the credit agreement governing its term loan, Mission Energy Holdings International has agreed to maintain a minimum interest coverage ratio of 1.30 to 1
beginning March 2004 for the trailing twelve-month period.

49

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The
following table sets forth the major components of the interest coverage ratio for the twelve months ended September 30, 2004 and the year ended December 31, 2003 on a
pro forma basis assuming the term loan had been in existence at the beginning of 2003:

|                                 |                                                                           | September 30, 2004 |     | December 31, 2003 |  
|-------------------------------- | ------------------------------------------------------------------------- | ------------------ | --- | ----------------- | -
|
|
|Funds Flow from Operations       |                                                                           |                    |     |                   |  
|                                 | Historical distributions from international projects                      |                    | $   | 237               |  
|                                 | Other fees and cash payments considered distributions under the term loan |                    |     | 16                |  
|                                 | Administrative and general expenses                                       |                    |     | (2                | )
|                                 |                                                                           |                    |     |                   |  
|Total Funds Flow from Operations |                                                                           | $                  | 251 |                   | $
|                                 |                                                                           |                    |     |                   |  
|Term Loan Interest Expense       |                                                                           | $                  | 48  |                   | $
|                                 |                                                                           |                    |     |                   |  
|Interest Coverage Ratio          |                                                                           |                    |     |                   |  
|                                 |                                                                           |                    |     |                   |  

---

The above details of Mission Energy Holdings International's interest coverage ratio are provided as an aid to understanding the components of the
computations that are set forth in the term loan credit agreement. The terms Funds Flow from Operations and Interest Expense are as defined in the term loan and are not the same as would be determined
in accordance with generally accepted accounting principles.

Contractual Obligations

Fuel Supply Contracts

Midwest Generation and Homer City have entered into additional fuel purchase agreements with various third-party suppliers during the first nine months of 2004.
Midwest Generation and Homer City's fuel purchase commitments under these agreements are currently estimated to be $22 million for 2004, $63 million for 2005, $97 million for
2006, $101 million for 2007, and $57 million for 2008.

Off-Balance Sheet Transactions

For a discussion of EME's off-balance sheet transactions, refer to "Off-Balance Sheet Transactions" on page 96 of EME's annual report on
Form 10-K for the year ended December 31, 2003. Except as set forth under "Liquidity and Capital ResourcesTermination of the Collins Station Lease," there have
been no other significant developments that affect disclosures presented in the annual report.

Environmental Matters and Regulations

For a discussion of EME's environmental matters, refer to "Environmental Matters and Regulations" on page 98 of EME's annual report on
Form 10-K for the year ended December 31, 2003 and the notes to the Consolidated Financial Statements set forth therein. There have been no other significant developments
with respect to environmental matters specifically affecting EME since the filing of its annual report.

50

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MARKET RISK EXPOSURES

Introduction

EME's primary market risk exposures are associated with the sale of electricity from and the procurement of fuel for its uncontracted generating plants. These
market risks arise from fluctuations in electricity and fuel prices, emission allowances, transmission rights, interest rates and foreign currency exchange rates. EME manages these risks in part by
using derivative financial instruments in accordance with established policies and procedures. See "Management's Overview; Critical Accounting Policies and Estimates" and "Liquidity and Capital
ResourcesEME's Credit Ratings" for a discussion of market developments and their impact on EME's credit and the credit of its counterparties.

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

PageCommodity Price Risk

51Credit Risk

58Interest Rate Risk

60Foreign Exchange Rate Risk

60Fair Value of Financial Instruments

60Regulatory Matters

62


For a complete discussion of these issues, read this quarterly report in conjunction with EME's annual report on Form 10-K for
the year ended December 31, 2003.

Commodity Price Risk

General Overview

EME's revenues and results of operations of its merchant power plants will depend upon prevailing market prices for capacity, energy, ancillary services, fuel
oil, coal and natural gas and associated transportation costs and emission credits in the market areas where EME's merchant plants are located. Among the factors that influence the price of power in
these markets are:



A
discussion of commodity price risk by region is set forth below.

51

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Americas

Introduction

Electric power generated at EME's domestic merchant plants is generally sold under bilateral arrangements with utilities and power marketers under
short-term transactions with terms of two years or less or to the PJM and/or the New York Independent System Operator (NYISO) markets. As discussed further below, beginning in 2003, EME
has been selling a significant portion of the power generated from its Illinois Plants into wholesale power markets, including PJM since May 1, 2004.

EME's
merchant operations expose it to commodity price risk, which represents the potential loss that can be caused by a change in the market value of a particular commodity. Commodity
price risks are actively monitored by a risk management committee to ensure compliance with EME's risk management policies. Policies are in place which define the risk tolerance for EME's merchant
activities. Procedures exist which allow for monitoring of all commitments and positions with regular reviews by the risk management committee. Despite this, there can be no assurance that all risks
have been accurately identified, measured and/or mitigated.

Illinois Plants

Status
of the Exelon Generation Power Purchase Agreements

Energy
generated at the Illinois Plants has historically been sold under three power purchase agreements between EME's wholly owned subsidiary, Midwest Generation, and Exelon Generation
Company, under which Exelon Generation is obligated to make capacity payments for the plants under contract and energy payments for the energy produced by these plants and taken by Exelon Generation.
The power purchase agreements began on December 15, 1999. The power purchase agreement for the Collins Station was terminated effective September 30, 2004; the other two contracts (for
coal-fired generation and peaking units) expire in December 2004. The capacity payments provide the units under contract with revenue for fixed charges, and the energy payments
compensate those units for all, or a portion of, variable costs of production.

Approximately
57% and 68% of the energy and capacity sales from the Illinois Plants in the first nine months of 2004 and 2003, respectively, were to Exelon Generation under the power
purchase agreements. As a result of Exelon Generation's election to release units from contract for 2004, Midwest Generation's reliance on sales into the wholesale market increased in 2004 from 2003.
For the nine months ended September 30, 2004, 3,859 MW of Midwest Generation's generating capacity (2,383 MW related to its coal-fired generation units, 1,084 MW related to its
Collins Station, and 392 MW related to its peaking units) were subject to power purchase agreements with Exelon Generation. Following the termination of the Collins Station power purchase agreement,
2,775 MW will be subject to power purchase agreements with Exelon Generation during the fourth quarter of 2004. 2004 is the final contract year under these power purchase agreements.

Merchant Sales

The
energy and capacity from units not subject to a power purchase agreement with Exelon Generation are sold under terms, including price and quantity, negotiated by Edison Mission
Marketing & Trading with customers through a combination of bilateral agreements, forward energy sales and spot market sales. These arrangements generally have a term of two years or less.
Thus, EME is subject to market risks related to the price of energy and capacity from those units. Capacity prices for merchant energy sales are, and are expected in the near term to remain,
substantially less than

52

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those
Midwest Generation currently receives under the 1999 power purchase agreements with Exelon Generation. EME further expects that the lower revenues resulting from this difference will be offset
in part by energy prices, which EME believes will, in the near term, be higher for merchant energy sales than those Midwest Generation currently receives under its existing agreements. EME intends to
manage this price risk, in part, by accessing both the wholesale customer and over-the-counter markets described below as well as using derivative financial instruments in
accordance with established policies and procedures.

Prior
to May 1, 2004, the primary markets available to Midwest Generation for wholesale sales of electricity from the Illinois Plants were direct "wholesale customers" and
broker-arranged "over-the-counter customers." The most liquid over-the-counter markets in the Midwest region have historically been for sales into the
control area of Cinergy and, to a lesser extent, for sales into the control areas of Commonwealth Edison and American Electric Power, referred to as "Into ComEd" and "Into AEP," respectively. "Into
ComEd" and "Into AEP" are bilateral markets for the sale or purchase of electrical energy for future delivery. Due to geographic proximity, "Into ComEd" was the primary market for Midwest Generation.

The
following table depicts the historical average market prices for energy per megawatt-hour "Into ComEd" for the first four months of 2004.

Into ComEd*Historical Energy PricesOn-Peak(1)

Off-Peak(1)

24-HrJanuary

$
43.30

$
15.18

$
27.88February


43.05


18.85


29.98March


40.38


21.15


30.66April


39.50


16.76


27.88Four-Month Average

$
41.56

$
17.99

$
29.10


---

Following Commonwealth Edison's joining PJM on May 1, 2004, sales of electricity from the Illinois Plants now include bilateral and spot
sales into PJM, with spot sales being based on locational marginal pricing. These sales, into the expanded PJM, the primary market currently available to Midwest Generation, replaced sales previously
made as bilateral sales and spot sales "Into ComEd." See "Regulatory Matters" for a more detailed discussion of recent developments regarding Commonwealth Edison's joining PJM and
"Homer City Facilities" below for a discussion of locational marginal pricing. Performance of transactions in these markets is subject to contracts that generally provide for liquidated
damages supported by a variety of credit requirements, which may include independent credit assessment, parent company guarantees, letters of credit, and cash margining arrangements.

53

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The
following table depicts the historical average market prices for energy per megawatt-hour since joining PJM on May 1, 2004.

Historical Energy Prices

Northern
Illinois HubMay

$
34.05June


28.58July


30.92August


26.31September


27.98Five-Month Average

$
29.57


---

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

The
following table sets forth the forward market prices for energy per megawatt-hour as quoted for sales into the Northern Illinois Hub at September 30, 2004:

24-Hour Northern
Illinois Hub
Forward Energy Prices*2004October

$
25.86November


27.52December


30.492005 Calendar "strip"(1)

$
32.82


---

Midwest Generation intends to hedge a portion of its merchant portfolio risk through Edison Mission Marketing & Trading. The following
table summarizes Midwest Generation's hedge position (primarily based on prices at the Northern Illinois Hub) at September 30, 2004:

2004

2005

2006Megawatt hours


3,250,276


4,659,585


438,000Average price/MWhr

$
27.87

$
38.14

$
31.50


To the extent Midwest Generation does not hedge its merchant portfolio, the unhedged portion will be subject to the risks and benefits of spot
market price movements. The extent to which Midwest Generation will hedge its market price risk through forward over-the-counter sales depends on several factors. First,
Midwest Generation will evaluate over-the-counter market prices to determine whether sales at forward market prices are sufficiently attractive compared to assuming the risk
associated with spot market sales. Second, Midwest Generation's ability to enter into hedging transactions will depend

54

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upon
its and Edison Mission Marketing & Trading's credit capacity and upon the over-the-counter forward sales markets having sufficient liquidity to enable Midwest
Generation to identify counterparties who are able and willing to enter into hedging transactions with it. Midwest Generation is permitted to use its new working capital facility and cash on hand to
provide credit support for forward contracts entered into by Edison Mission Marketing & Trading for capacity and energy generation by Midwest Generation under an intercompany energy services
agreement between Midwest Generation and Edison Mission Marketing & Trading. Utilization of this credit facility in support of such forward contracts is expected to provide additional liquidity
support for implementation of Midwest Generation's contracting strategy for the Illinois Plants. See "Credit Risk," below.

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

Effective
May 1, 2004, the transmission system of Commonwealth Edison became integrated into PJM. Over EME's and Midwest Generation's objections, such integration was allowed to
occur in advance of the integration of American Electric Power into PJM, which had resulted in the creation of an islanded market within PJM limited to the service territory of Commonwealth Edison.
Concerns about the islanded market of Commonwealth Edison became moot on October 1, 2004, when American Electric Power was integrated into PJM. In general, power produced by Midwest Generation
not under contract with Exelon Generation has been sold in the past using transmission obtained from Commonwealth Edison under its open-access tariff filed with the FERC, and the
application of the PJM tariff to Commonwealth Edison's transmission system could also affect the rates, terms and conditions of transmission service received by Midwest Generation. Given the recent
integration of American Electric Power into PJM, such changes, if any, are not expected to have a material effect on Midwest Generation. See "Regulatory Matters" for further discussion.

In
addition to the price risks described previously, Midwest Generation's ability to transmit energy to counterparty delivery points to consummate spot sales and hedging transactions may
also be affected by transmission service limitations and constraints and new standard market design proposals proposed by and currently pending before the FERC. Although the FERC and the relevant
industry participants are
working to minimize such issues, Midwest Generation cannot determine how quickly or how effectively such issues will be resolved.

EME
is continuing to monitor the activities at the FERC related to the expansion of PJM and to advocate regulatory positions that promote efficient and fair markets in which the Illinois
Plants compete.

Homer City Facilities

Electric power generated at the Homer City facilities is sold under bilateral arrangements with domestic utilities and power marketers pursuant to transactions
with terms of two years or less, or to the PJM or the NYISO markets. These pools have short-term markets, which establish an hourly clearing price. The Homer City facilities are situated
in the PJM control area and are physically connected to high-voltage transmission lines serving both the PJM and NYISO markets.

55

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The
following table depicts the average market prices per megawatt-hour in PJM during the first nine months of 2004 and 2003:

24-Hour PJM
Historical Energy Prices*2004

2003January

$
51.12

$
36.56February


47.19


46.13March


39.54


46.85April


43.01


35.35May


44.68


32.29June


36.72


27.26July


40.09


36.55August


34.76


39.27September


40.62


28.71Nine-Month Average

$
41.97

$
36.55


---

As shown on the above table, the average historical market prices at the Homer City busbar (delivery point) during the first nine months of 2004
were higher than the average historical market prices during the first nine months of 2003. Forward market prices in PJM fluctuate as a result of a number of factors, including natural gas prices,
transmission congestion, changes in market rules, electricity demand which is affected by weather and economic growth, plant outages in the region, and the amount of existing and planned power plant
capacity. The actual spot prices for electricity delivered into these markets may vary materially from the forward market prices set forth in the table below.

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



Under
the PJM market design, locational marginal pricing (sometimes referred to as LMP), which establishes hourly prices at specific locations throughout PJM by considering factors
including generator bids, load requirements, transmission congestion and losses, can cause the price at a specific delivery point to be raised or lowered relative to other locations depending on how
the point is impacted by transmission constraints. During the past 12 months, transmission congestion in PJM has resulted in prices at the PJM West Hub (the primary trading hub in PJM) being
higher than those at Homer City by an average of three percent.

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By
entering into forward contracts using the PJM West Hub as the delivery point, EME is exposed to "basis risk," which occurs when forward contracts are executed on a different basis (in
this case PJM West Hub) than the actual point of delivery (Homer City busbar). In order to mitigate basis risk resulting from forward contracts using PJM West Hub as the delivery point, EME has
participated in purchasing financial transmission rights in PJM, and may continue to do so in the future. A financial transmission right is a financial instrument that entitles the holder thereof to
receive actual spot prices at one point of delivery and pay prices at another point of delivery that are pegged to prices at the first point of delivery, plus or minus a fixed amount. Accordingly,
EME's price risk management activities include using financial transmission rights alone or in combination with forward contracts to manage the risks associated with changes in prices within the PJM
market.

The
following table sets forth the forward market prices for energy per megawatt-hour as quoted for sales into the PJM West Hub at September 30, 2004:

24-Hour PJM West Hub
Forward Energy Prices*2004October

$
39.23November


41.40December


45.152005 Calendar "strip"(1)

$
46.19


---

The following table summarizes Homer City's hedge position at September 30, 2004:

2004

2005Megawatt hours


2,287,200


6,336,000Average price/MWhr

$
36.66

$
44.48


The average price/MWhr for Homer City's hedge position is based on PJM West Hub. Energy prices at the PJM West Hub have averaged three percent
higher than energy prices at Homer City during the past twelve months. A discussion of the basis risk between PJM West Hub and Homer City is set forth above.

Market
conditions for the sale of capacity and energy from the Homer City facilities affect the ability of EME's subsidiary, EME Homer City, to meet its obligations under the Homer City
sale-leaseback documents. These market conditions are beyond EME's control.

Europe

United Kingdom

The First Hydro plant sells electrical energy and ancillary services through bilateral contracts of varying terms in the England and Wales wholesale electricity
market.

The
electricity trading arrangements introduced in March 2001 provide, among other things, for the establishment of a range of voluntary short-term power exchanges and
brokered markets operating from a year or more in advance to 1 hour prior to the delivery or receipt of power. In the final hour

57

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after
the notification of all contracts, the system operator can accept bids and offers in the Balancing Mechanism to balance generation and demand and resolve any transmission constraints. There is a
mandatory settlement process for recovering imbalances between contracted and metered volumes with strong incentives for being in balance, and a Balancing and Settlement Code Panel to oversee
governance of the Balancing Mechanism. The system operator can also purchase system reserve and response services to maintain the quality of the electrical supply directly from generators (generally
referred to as "ancillary services"). Ancillary services contracts typically run for up to a year and can consist of both fixed amounts and variable amounts represented by prices for services that are
only paid for when actually called upon by the grid operator. A key feature of the trading arrangements is the requirement for firm physical delivery, which means that a generator must deliver, and a
consumer must take delivery of, its net contracted positions or pay for any energy imbalance at the imbalance prices calculated by the system operator based on the prices of bids and offers accepted
in the Balancing Mechanism. This provides an incentive for parties to contract in advance and for the development of forwards and futures markets. Under these arrangements, there has been an increased
emphasis on credit quality, including the need for parent company guarantees or letters of credit for companies below investment grade.

The
wholesale price of electricity fell significantly between 2002 and 2003. The reduction was driven principally by surplus generating capacity and increased competition. During 2003,
prices were more volatile, and in the second half of 2004, prices for baseload electricity have risen in line with increases in the cost of gas for generation. The increases have been accompanied
during 2004 by a considerable narrowing in the peak/off peak differentials. Compliance with First Hydro's bond financing documents is subject to market conditions for electric energy and ancillary
services, which are beyond First Hydro's control.

Asia Pacific

Australia

The Loy Yang B plant and the Valley Power Peaker project sell electrical energy through a centralized electricity pool, which provides for a system of generator
bidding, central dispatch and a settlements system based on a clearing market for each half-hour of every day. The National
Electricity Market Management Company, operator and administrator of the pool, determines a spot price each half-hour. To mitigate exposure to price volatility of the electricity traded
into the pool, the Loy Yang B plant and the Valley Power Peaker project have entered into a number of financial hedges. The State Hedge agreement with the State Electricity Commission of Victoria is a
long-term contractual arrangement based upon a fixed price commencing May 8, 1997 and terminating October 31, 2016. The State Government of Victoria, Australia guarantees the
State Electricity Commission of Victoria's obligations under the State Hedge. From January 2003 to July 2014, approximately 77% of the Loy Yang B plant output sold is hedged under the
State Hedge. From August 2014 to October 2016, approximately 55% of the Loy Yang B plant output sold is hedged under the State Hedge. Additionally, the Loy Yang B plant and the Valley
Power Peaker project have entered into a number of derivative contracts to mitigate further against price volatility inherent in the electricity pool. These contracts consist of fixed forward
electricity contracts and/or cap contracts that expire on various dates through December 31, 2006.

Credit Risk

In conducting EME's price risk management and trading activities, EME contracts with a number of utilities, energy companies and financial institutions,
collectively referred to as counterparties. In the event a counterparty were to default on its trade obligation, EME would be exposed to the risk of

58

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possible
loss associated with reselling the contracted product at a lower price if the non-performing counterparty were unable to pay the resulting liquidated damages owed to EME. Further,
EME would be exposed to the risk of non-payment of accounts receivable accrued for products delivered prior to the time such counterparty defaulted.

To
manage credit risk, EME 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. EME measures, monitors and mitigates, to the extent possible, credit risk. To mitigate counterparty risk, master netting agreements are used
whenever possible and counterparties may be required to pledge collateral when deemed necessary. EME also takes other appropriate steps to limit or lower credit exposure. Processes have also been
established to determine and monitor the creditworthiness of counterparties. EME 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 EME'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.

EME
measures credit risk exposure from counterparties of its merchant energy activities by the sum of: (i) 60 days of accounts receivable, (ii) current fair value of
open positions, and (iii) a credit value at risk.
EME's subsidiaries enter into master agreements and other arrangements in conducting price risk management and trading activities which typically provide for a right of setoff in the event of
bankruptcy or default by the counterparty. Accordingly, EME's credit risk exposure from counterparties is based on net exposure under these agreements. At September 30, 2004, the credit ratings
of EME's counterparties were as follows:

S&P Credit Rating

September 30, 2004(in millions)A or higher

$
49A-


26BBB+


113BBB


21BBB-


10Below investment grade


12Total

$
231


Exelon Generation accounted for 41% and 46% of EME's consolidated operating revenues for the first nine months of 2004 and 2003, respectively. The
percentage is less in 2004 because a smaller number of plants are subject to contracts with Exelon Generation. See "Commodity Price RiskAmericasIllinois Plants."
Any failure of Exelon Generation to make payments under the power purchase agreements could adversely affect EME's results of operations and financial condition.

EME's
contracted power plants and the plants owned by unconsolidated affiliates in which EME owns an interest sell power under long-term power purchase agreements. Generally,
each plant sells its output to one counterparty. Accordingly, a default by a counterparty under a
long-term power purchase agreement, including a default as a result of a bankruptcy, would likely have a material adverse affect on the operations of such power plant.

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Approximately 15% of EME's consolidated operating revenues for the first nine months of 2004 were to BP Energy Company, a third-party customer. (An investment grade affiliate of BP
Energy has guaranteed payment of amounts due under the related contracts.)

Interest Rate Risk

Interest rate changes affect the cost of capital needed to operate EME's projects. EME has mitigated the risk of interest rate fluctuations by arranging for fixed
rate financing or variable rate financing with interest rate swaps, interest rate options or other hedging mechanisms for a number of its project financings. The fair market values of
long-term fixed interest rate obligations are subject to interest rate risk. The fair market value of EME's total long-term obligations (including current portion) was
$4.8 billion at September 30, 2004, compared to the carrying value of $4.4 billion.

Foreign Exchange Rate Risk

Fluctuations in foreign currency exchange rates can affect, on a U.S. dollar equivalent basis, the amount of EME's equity contributions to, and distributions
from, its international projects. At times, EME has hedged a portion of its current exposure to fluctuations in foreign exchange rates through financial derivatives, offsetting obligations denominated
in foreign currencies, and indexing underlying project agreements to U.S. dollars or other indices reasonably expected to correlate with foreign exchange movements. In addition, EME has used
statistical forecasting techniques to help assess foreign exchange risk and the probabilities of various outcomes. EME cannot provide assurances, however, that fluctuations in exchange rates will be
fully offset by hedges or that currency movements and the relationship between certain macroeconomic variables will behave in a manner that is consistent with historical or forecasted relationships.

The
First Hydro plant in the U.K. and the plants in Australia have been financed in their local currencies, pounds sterling and Australian dollars, respectively, thus hedging the
majority of their acquisition costs against foreign exchange fluctuations. As discussed in "Management's Overview," EME entered into sales agreements for its international operations.

Fair Value of Financial Instruments

Non-Trading Derivative Financial Instruments

The following table summarizes the fair values for outstanding derivative financial instruments used in EME's continuing operations for purposes other than
trading by risk category and instrument type (in millions):

September 30,
2004

December 31,
2003Commodity price:Electricity

$
(49
)
$
(7
)


In assessing the fair value of EME's non-trading derivative financial instruments, EME uses a variety of methods and assumptions based
on the market conditions and associated risks existing at each balance sheet date. The fair value of commodity price contracts takes into account quoted market prices, time value of money, volatility
of the underlying commodities and other factors. The following

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table
summarizes the maturities, the valuation method and the related fair value of EME's commodity price risk management assets and liabilities as of September 30, 2004 (in millions):

Total Fair
Value

Maturity
<1 year

Maturity
1 to 3 years

Maturity
4 to 5 years

Maturity
>5 yearsPrices actively quoted

$
(49
)
$
(58
)
$
9

$


$



Energy Trading Derivative Financial Instruments

EME's risk management and trading operations are conducted by its subsidiary, Edison Mission Marketing & Trading. As a result of a number of industry and
credit-related factors, Edison Mission Marketing & Trading has minimized its price risk management and trading activities not related to EME's power plants or investments in energy projects. To
the extent Edison Mission Marketing & Trading engages in trading activities, Edison Mission Marketing & Trading seeks to manage price risk and to create stability of future income by
selling electricity in the forward markets and, to a lesser degree, to generate profit from price volatility of electricity and fuels by buying and selling these commodities in wholesale markets. EME
generally balances forward sales and purchase contracts and manages its exposure through a value at risk analysis as described under "Commodity Price Risk."

The
fair value of the commodity financial instruments related to energy trading activities as of September 30, 2004 and December 31, 2003, are set forth below (in
millions):

September 30, 2004

December 31, 2003Assets

Liabilities

Assets

LiabilitiesElectricity

$
98

$
6

$
104

$
11Other











1Total

$
98

$
6

$
104

$
12


The change in the fair value of trading contracts for the nine months ended September 30, 2004, was as follows (in millions):

Fair value of trading contracts at January 1, 2004

$
92Net gains from energy trading activities


11Amount realized from energy trading activities


(11
)Fair value of trading contracts at September 30, 2004

$
92


Quoted market prices are used to determine the fair value of the financial instruments related to energy trading activities, except for the power
sales agreement with an unaffiliated electric utility that EME's subsidiary purchased and restructured and a long-term power supply agreement with another unaffiliated party. EME's
subsidiary recorded these agreements at fair value based upon a discounting of future electricity prices derived from a proprietary model using a discount rate equal to the cost of borrowing the
non-recourse debt incurred to finance the purchase of the power supply agreement. The

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following
table summarizes the maturities, the valuation method and the related fair value of energy trading assets and liabilities (as of September 30, 2004) (in millions):

Total Fair
Value

Maturity
<1 year

Maturity
1 to 3 years

Maturity
4 to 5 years

Maturity
>5 yearsPrices actively quoted

$
1

$
1

$


$


$
Prices based on models and other valuation methods


91


(2
)

7


5


81Total

$
92

$
(1
)
$
7

$
5

$
81


Regulatory Matters

For a discussion of EME's regulatory matters, refer to "Regulatory Matters" on page 24 of EME's annual report on Form 10-K for the year ended
December 31, 2003. There have been no other significant developments with respect to regulatory matters specifically affecting EME since the filing of its annual report, except as follows:

Commonwealth
Edison's application to join PJM was approved by the FERC on April 27, 2004, with an effective date of May 1, 2004. EME had protested such action before the
FERC because the integration of Commonwealth Edison into PJM in advance of American Electric Power (AEP) created an isolated market within PJM limited to the service territory of Commonwealth Edison.
The integration of AEP into PJM had been delayed by the actions of state regulatory authorities in Virginia and Kentucky. However, the issues raised in the Kentucky proceedings were resolved in
June 2004 and the Virginia case was settled in August 2004, which permitted the integration of AEP to take place without incident on October 1, 2004.

On
March 19, 2004, in a separate but related matter, the FERC issued an order having the effect of postponing to December 1, 2004 the effective date for elimination of
regional through and out rates in the region encompassed by PJM (as expanded by the addition of Commonwealth Edison and AEP) and the Midwest Independent System Operator (MISO). The effect of this
order was that the so-called rate pancaking was not eliminated prior to the integration of Commonwealth Edison and AEP into PJM. 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. The FERC included in its order a strong statement that the existing through and out rates must be eliminated no later than December 1, 2004.

The
transmission owners and other stakeholder interests in the region met on several occasions from June through early September 2004, attempting to reach consensus on an
acceptable long-term rate structure for the combined PJM/MISO footprint. A consensus among all affected parties could not be reached; however, two competing proposals for a
long-term rate structure have emerged from such discussions and both were filed with the FERC on October 1, 2004. Neither of those plans would impose transmission costs on system
users other than load-serving entities. However, the FERC has also initiated an investigation under Section 206 of the Federal Power Act, which would permit the agency to adopt a
structure different from those which have been proposed by the parties. In its order initiating the investigation, the FERC reiterated its previous statement that it would act on such a structure by
December 1, 2004. Until through and out rates are eliminated, EME will continue to have to pay transmission charges for power sold for delivery to customers within the MISO. In addition, sales
to customers outside of the MISO and PJM will continue to be subject to the through and out rates applicable to such transactions.

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On
July 27, 2004, AEP reached a settlement with staff of the Virginia State Corporation Commission that allowed AEP to transfer control of its transmission lines in the state to
PJM. The settlement eliminated the need for the FERC to act to ensure that AEP was able to enter PJM on October 1, 2004, the target date set by both AEP and PJM. Such integration took place on
October 1, 2004, as previously noted.

Given
the removal of the uncertainties regarding the market structure issues discussed previously, the direct impact on Midwest Generation of the above-described matters will be limited
to the delay in the elimination of regional through and out rates. This is not expected to have a material effect on Midwest Generation's financial results prior to the anticipated elimination of such
rates between PJM and the MISO on December 1, 2004.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of market risk sensitive instruments, refer to "Market Risk Exposures" on page 106 of EME's annual report on Form 10-K for the
year ended December 31, 2003. Refer to "Market Risk Exposures" in Item 2 for an update to that disclosure.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

EME's management, with the participation of the company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of EME'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 that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period, EME's disclosure controls
and procedures are effective.

Internal Control Over Financial Reporting

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

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PART IIOTHER INFORMATION

ITEM 6. EXHIBITS

|Exhibit No. |  | Description                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Purchase Agreement, dated July 29, 2004, by and among Edison Mission Energy, IPM Eagle LLP, International Power plc, Mitsui & Co., Ltd. and the other sellers on the signature page hereto.
|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 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.

| |  | EDISON MISSION ENERGY(REGISTRANT)
| |  | ---------------------------------
| |  | By:                              
| |  | Date:                            

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