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 June 30, 2005
|or                                          
|o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from
 to          

Commission file number 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                 

---

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 August 9, 2005: 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                            |  | 59  
|Item 4.                        |  | Controls and Procedures                                                               |  | 59  
|PART II  Other Information   
|Item 1.                        |  | Legal Proceedings                                                                     |  | 60  
|Item 6.                        |  | Exhibits                                                                              |  | 60  
|                               |  | Signatures                                                                            |  | 61  

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PART I  FINANCIAL INFORMATION  ITEM 1.    FINANCIAL STATEMENTS

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

|                                         |                                                                                    | Three Months Ended
June 30,  |    | Six Months Ended
June 30, |    
|---------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------- | -- | ------------------------- | ---
|
|Operating Revenues                       |                                                                                    |                              |    |                           |    
|                                         | Electric revenues                                                                  |                              | $  | 393                       |    
|                                         | Net gains from price risk management and energy trading                            |                              |    | 17                        |    
|                                         | Operation and maintenance services                                                 |                              |    | 7                         |    
|                                         |                                                                                    |                              |    |                           |    
|                                         |                                                                                    | Total operating revenues     |    |                           | 417
|                                         |                                                                                    |                              |    |                           |    
|Operating Expenses                       |                                                                                    |                              |    |                           |    
|                                         | Fuel                                                                               |                              |    | 134                       |    
|                                         | Plant operations                                                                   |                              |    | 144                       |    
|                                         | Plant operating leases                                                             |                              |    | 44                        |    
|                                         | Operation and maintenance services                                                 |                              |    | 7                         |    
|                                         | Depreciation and amortization                                                      |                              |    | 30                        |    
|                                         | Loss on lease termination, asset impairment and other charges                      |                              |    | 7                         |    
|                                         | Administrative and general                                                         |                              |    | 34                        |    
|                                         |                                                                                    |                              |    |                           |    
|                                         |                                                                                    | Total operating expenses     |    |                           | 400
|                                         |                                                                                    |                              |    |                           |    
|                                         | Operating income (loss)                                                            |                              |    | 17                        |    
|                                         |                                                                                    |                              |    |                           |    
|Other Income (Expense)                   |                                                                                    |                              |    |                           |    
|                                         | Equity in income from unconsolidated affiliates                                    |                              |    | 47                        |    
|                                         | Interest and other income                                                          |                              |    | 15                        |    
|                                         | Gain on sale of assets                                                             |                              |    |                          |    
|                                         | Loss on early extinguishment of debt                                               |                              |    |                          |    
|                                         | Interest expense                                                                   |                              |    | (73                       | )  
|                                         |                                                                                    |                              |    |                           |    
|                                         |                                                                                    | Total other income (expense) |    |                           | (11
|                                         |                                                                                    |                              |    |                           |    
|                                         | Income (loss) from continuing operations before income taxes and minority interest |                              |    | 6                         |    
|                                         | Provision (benefit) for income taxes                                               |                              |    | (11                       | )  
|                                         | Minority interest                                                                  |                              |    |                          |    
|                                         |                                                                                    |                              |    |                           |    
|Income (Loss) From Continuing Operations |                                                                                    |                              | 17 |                           |    
|                                         | Income from operations of discontinued subsidiaries, net of tax (Note 5)           |                              |    | 21                        |    
|                                         |                                                                                    |                              |    |                           |    
|Net Income (Loss)                        |                                                                                    | $                            | 38 |                           | $  
|                                         |                                                                                    |                              |    |                           |    

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 millions, Unaudited)

|                                               |                                                                         | Three Months Ended
June 30,                                                                                                                                                                                                |    | Six Months Ended
June 30, |   
|---------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ------------------------- | --
|
|Net Income (Loss)                              |                                                                         | $                                                                                                                                                                                                                          | 38 |                           | $ 
|Other comprehensive income (loss), net of tax: |                                                                         |                                                                                                                                                                                                                            |    |                           |   
|                                               | Foreign currency translation adjustments:                               |                                                                                                                                                                                                                            |    |                           |   
|                                               |                                                                         | Foreign currency translation adjustments, net of income tax expense (benefit) of $0 for the three months and $1 for the six months ended June 30, 2004, respectively                                                       |    |                           |  
|                                               | 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 $12 and $(20) for the three months and $(43) and $(51) for the six months ended June 30, 2005 and 2004,
respectively |    |                           | 16
|                                               |                                                                         | Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $2 and $(16) for the three months and $5 and $(31) for the six months ended June 30, 2005 and 2004,
respectively        |    |                           | (3
|                                               |                                                                         |                                                                                                                                                                                                                            |    |                           |   
|Other comprehensive income (loss)              |                                                                         |                                                                                                                                                                                                                            | 13 |                           |   
|                                               |                                                                         |                                                                                                                                                                                                                            |    |                           |   
|Comprehensive Income (Loss)                    |                                                                         | $                                                                                                                                                                                                                          | 51 |                           | $ 
|                                               |                                                                         |                                                                                                                                                                                                                            |    |                           |   

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

2

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

|                                         |                                                                                | June 30,
2005                     |       | December 31,
2004
|---------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------- | ----- | -----------------
|Assets                                   |                                                                                |                                   |       |                  
|Current Assets                           |                                                                                |                                   |       |                  
|                                         | Cash and cash equivalents                                                      |                                   | $     | 1,587            
|                                         | Restricted cash                                                                |                                   |       | 109              
|                                         | Short-term investments                                                         |                                   |       |                 
|                                         | Accounts receivabletrade                                                      |                                   |       | 186              
|                                         | Accounts receivableaffiliates                                                 |                                   |       | 70               
|                                         | Assets under price risk management and energy trading                          |                                   |       | 35               
|                                         | Inventory                                                                      |                                   |       | 129              
|                                         | Prepaid expenses and other                                                     |                                   |       | 105              
|                                         |                                                                                |                                   |       |                  
|                                         |                                                                                | Total current assets              |       |                  
|                                         |                                                                                |                                   |       |                  
|Investments in Unconsolidated Affiliates |                                                                                |                                   | 449   |                  
|                                         |                                                                                |                                   |       |                  
|Property, Plant and Equipment            |                                                                                |                                   | 3,521 |                  
|                                         | Less accumulated depreciation and amortization                                 |                                   |       | 770              
|                                         |                                                                                |                                   |       |                  
|                                         |                                                                                | Net property, plant and equipment |       |                  
|                                         |                                                                                |                                   |       |                  
|Other Assets                             |                                                                                |                                   |       |                  
|                                         | Deferred financing costs                                                       |                                   |       | 44               
|                                         | Long-term assets under price risk management and energy trading                |                                   |       | 88               
|                                         | Restricted cash                                                                |                                   |       | 128              
|                                         | Rent payments in excess of levelized rent expense under plant operating leases |                                   |       | 344              
|                                         | Other long-term assets                                                         |                                   |       | 28               
|                                         |                                                                                |                                   |       |                  
|                                         |                                                                                | Total other assets                |       |                  
|                                         |                                                                                |                                   |       |                  
|Assets of Discontinued Operations        |                                                                                |                                   | 2     |                  
|                                         |                                                                                |                                   |       |                  
|Total Assets                             |                                                                                | $                                 | 6,055 |                  
|                                         |                                                                                |                                   |       |                  

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

3

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

|                                                |                                                                                                      | June 30,
2005             |       | December 31,
2004 |    
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------- | ----- | ----------------- | ---
|Liabilities and Shareholder's Equity            |                                                                                                      |                           |       |                   |    
|Current Liabilities                             |                                                                                                      |                           |       |                   |    
|                                                | Accounts payableaffiliates                                                                          |                           | $     | 27                |    
|                                                | Accounts payable and accrued liabilities                                                             |                           |       | 265               |    
|                                                | Dividends payable                                                                                    |                           |       |                  |    
|                                                | Liabilities under price risk management and energy trading                                           |                           |       | 149               |    
|                                                | Interest payable                                                                                     |                           |       | 51                |    
|                                                | Current maturities of long-term obligations                                                          |                           |       | 50                |    
|                                                |                                                                                                      |                           |       |                   |    
|                                                |                                                                                                      | Total current liabilities |       |                   | 542
|                                                |                                                                                                      |                           |       |                   |    
|Long-term obligations net of current maturities |                                                                                                      |                           | 3,165 |                   |    
|Deferred taxes and tax credits                  |                                                                                                      |                           | 190   |                   |    
|Other long-term liabilities                     |                                                                                                      |                           | 497   |                   |    
|Liabilities of discontinued operations          |                                                                                                      |                           | 4     |                   |    
|                                                |                                                                                                      |                           |       |                   |    
|Total Liabilities                               |                                                                                                      |                           | 4,398 |                   |    
|                                                |                                                                                                      |                           |       |                   |    
|Commitments and Contingencies (Note 11)         |                                                                                                      |                           |       |                   |    
|Shareholder's Equity                            |                                                                                                      |                           |       |                   |    
|                                                | Common stock, par value $0.01 per share; 10,000 shares authorized; 100 shares issued and outstanding |                           |       | 64                |    
|                                                | Additional paid-in capital                                                                           |                           |       | 2,188             |    
|                                                | Retained deficit                                                                                     |                           |       | (550              | )  
|                                                | Accumulated other comprehensive income (loss)                                                        |                           |       | (45               | )  
|                                                |                                                                                                      |                           |       |                   |    
|Total Shareholder's Equity                      |                                                                                                      |                           | 1,657 |                   |    
|                                                |                                                                                                      |                           |       |                   |    
|Total Liabilities and Shareholder's Equity      |                                                                                                      | $                         | 6,055 |                   | $  
|                                                |                                                                                                      |                           |       |                   |    

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 millions, Unaudited)

|                                                                        |                                                                                  | Six Months Ended
June 30,                                       |      
|----------------------------------------------------------------------- | -------------------------------------------------------------------------------- | --------------------------------------------------------------- | -----
|
|Cash Flows From Operating Activities                                    |                                                                                  |                                                                 |      
|                                                                        | Income (loss) from continuing operations, net                                    |                                                                 | $    
|                                                                        | Adjustments to reconcile income (loss) to net cash used in operating activities: |                                                                 |      
|                                                                        |                                                                                  | Equity in income from unconsolidated affiliates                 |      
|                                                                        |                                                                                  | Distributions from unconsolidated affiliates                    |      
|                                                                        |                                                                                  | Depreciation and amortization                                   |      
|                                                                        |                                                                                  | Minority interest                                               |      
|                                                                        |                                                                                  | Deferred taxes and tax credits                                  |      
|                                                                        |                                                                                  | Gain on sale of assets                                          |      
|                                                                        |                                                                                  | Loss on early extinguishment of debt                            |      
|                                                                        |                                                                                  | Asset impairment charges                                        |      
|                                                                        | Changes in operating assets and liabilities:                                     |                                                                 |      
|                                                                        |                                                                                  | Increase in restricted cash                                     |      
|                                                                        |                                                                                  | Increase in accounts receivable                                 |      
|                                                                        |                                                                                  | Increase in inventory                                           |      
|                                                                        |                                                                                  | Decrease (increase) in prepaid expenses and other               |      
|                                                                        |                                                                                  | Increase in rent payments in excess of levelized rent expense   |      
|                                                                        |                                                                                  | Increase (decrease) in accounts payable and accrued liabilities |      
|                                                                        |                                                                                  | Increase (decrease) in interest payable                         |      
|                                                                        |                                                                                  | Decrease in net assets under risk management                    |      
|                                                                        |                                                                                  | Other operatingassets                                          |      
|                                                                        |                                                                                  | Other operatingliabilities                                     |      
|                                                                        |                                                                                  |                                                                 |      
|                                                                        |                                                                                  | Net cash 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                                                         |                                                                 |      
|                                                                        | Payments for price appreciation on stock options exercised                       |                                                                 |      
|                                                                        | Financing costs                                                                  |                                                                 |      
|                                                                        |                                                                                  |                                                                 |      
|                                                                        |                                                                                  | Net cash provided by (used in) financing activities             |      
|                                                                        |                                                                                  |                                                                 |      
|Cash Flows From Investing Activities                                    |                                                                                  |                                                                 |      
|                                                                        | Capital expenditures                                                             |                                                                 |      
|                                                                        | Proceeds from sale of interest in projects                                       |                                                                 |      
|                                                                        | Proceeds from sale of discontinued operations                                    |                                                                 |      
|                                                                        | Sale of short-term investments, net                                              |                                                                 |      
|                                                                        | Decrease in restricted cash                                                      |                                                                 |      
|                                                                        | Investments in other assets                                                      |                                                                 |      
|                                                                        |                                                                                  |                                                                 |      
|                                                                        |                                                                                  | Net cash provided by investing activities                       |      
|                                                                        |                                                                                  |                                                                 |      
|Effect on cash from discontinued operations activities                  |                                                                                  |                                                                 | 23   
|                                                                        |                                                                                  |                                                                 |      
|Effect on cash from deconsolidation of subsidiary                       |                                                                                  |                                                                 |     
|                                                                        |                                                                                  |                                                                 |      
|Net decrease in cash and cash equivalents                               |                                                                                  |                                                                 | (684 
|Cash and cash equivalents at beginning of period                        |                                                                                  |                                                                 | 2,272
|                                                                        |                                                                                  |                                                                 |      
|Cash and cash equivalents at end of period                              |                                                                                  |                                                                 | 1,588
|Cash and cash equivalents classified as part of discontinued operations |                                                                                  |                                                                 | (1   
|                                                                        |                                                                                  |                                                                 |      
|Cash and cash equivalents of continuing operations                      |                                                                                  | $                                                               | 1,587
|                                                                        |                                                                                  |                                                                 |      

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  JUNE 30, 2005  (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 six months ended June 30, 2005 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, 2004 and 2003, included
in EME's annual report on Form 10-K for the year ended December 31, 2004. EME follows the same accounting policies for interim reporting purposes. This quarterly report
should be read in connection with such financial statements. Terms used but not defined in this report are defined in EME's annual report on Form 10-K for the year ended
December 31, 2004.

Reclassifications

Certain prior year reclassifications have been made to conform to the current year financial statement presentation. Such reclassifications include the
reclassification of income from continuing operations to discontinued operations for EME's international operations, except the Doga project. Refer to Note 5Discontinued
Operations. Except as indicated, amounts reflected in the notes to the consolidated financial statements relate to continuing operations of EME.

Note 2. Inventory

Inventory is stated at the lower of weighted average cost or market. Inventory at June 30, 2005 and December 31, 2004 consisted of the following:

June 30,
2005

December 31,
2004Coal and fuel oil

$
87

$
65Spare parts, materials and supplies


42


42Total

$
129

$
107


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

Loss on lease termination and other charges for the second quarter and six months ended June 30, 2004 was related to the termination of the Collins Station
lease. 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 $954 million (approximately $586 million after tax) during the second quarter ended June 30, 2004, due to termination of the lease and the

6

---



planned
decommissioning of the asset. Included in the pre-tax loss is a $3 million inventory reserve for excess spare parts at the Collins Station.

Note 4. Accumulated Other Comprehensive Income (Loss)

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

Unrealized Gains
(Losses) on Cash
Flow Hedges

Minimum
Pension Liability
Adjustment

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

$
18

$
(1
)
$
17Current period change


(62
)




(62
)Balance at June 30, 2005

$
(44
)
$
(1
)
$
(45
)


Unrealized losses on cash flow hedges, net of tax, at June 30, 2005, include unrealized losses on commodity hedges primarily related to
Midwest Generation and EME Homer City Generation L.P. (EME Homer City) forward electricity contracts that qualify for hedge accounting. These losses arise because current forecasts of future
electricity prices in these markets are greater than contract prices. Partially offsetting these unrealized losses were unrealized gains on commodity hedges related to EME's share of fuel contracts at
March Point.

As
EME's hedged positions for continuing operations are realized, approximately $55 million, after tax, of the net unrealized losses on cash flow hedges at June 30, 2005
are expected to be reclassified into earnings during the next 12 months. Management expects that reclassification of net unrealized losses will offset energy revenue recognized at market
prices. Actual amounts ultimately reclassified into earnings over the next 12 months could vary materially from this estimated amount as a result of changes in market conditions. The maximum
period over which a cash flow hedge is designated is through December 31, 2006.

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 $1 million during each of the second quarters of 2005 and 2004 and $(3) million and
$4 million during the six months ended June 30, 2005 and 2004, respectively, representing the amount of cash flow hedges' ineffectiveness for continuing operations, reflected in net
gains from price risk management and energy trading in EME's consolidated income statements.

Note 5. Discontinued Operations

Tri Energy Project

On February 3, 2005, EME sold its 25% equity interest in the Tri Energy project pursuant to a Purchase Agreement, dated December 15, 2004, by and
between EME and a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%), referred to as IPM, for approximately $20 million. EME recorded an impairment
charge of approximately $5 million during the fourth quarter of 2004 related to the planned disposition of this investment. The sale of this investment had no significant effect on net income
in the first quarter of 2005.

7

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CBK Project

On January 10, 2005, EME sold its 50% equity interest in the CBK project pursuant to a Purchase Agreement, dated November 5, 2004, by and between
EME and Corporacion IMPSA S.A. Proceeds from the sale were approximately $104 million. EME recorded a pre-tax gain on the sale of approximately $9 million during the first
quarter of 2005.

MEC International B.V.

On December 16, 2004, EME sold the stock and related assets of MEC International B.V. (MECIBV) pursuant to a Purchase Agreement, dated July 29,
2004, by and between EME and IPM. The purchase agreement was entered into following a competitive bidding process. The sale of MECIBV included the sale of EME's interests in ten electric power
generating projects or companies located in Europe, Asia, Australia, and Puerto Rico. Consideration from the sale of MECIBV and related assets was $2.0 billion.

Contact Energy

On September 30, 2004, EME sold its 51.2% interest in Contact Energy to Origin Energy New Zealand Limited pursuant to a Purchase Agreement, dated
July 20, 2004. The purchase agreement was entered into following a competitive bidding process. 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.

Lakeland Project

EME previously owned and operated a 220 MW combined cycle, natural gas-fired power plant located in the United Kingdom, known as the Lakeland project.
The ownership of the project was held through EME's indirect subsidiary, Lakeland Power Ltd., which sold power generated from the plant pursuant to a power sales agreement with Norweb
Energi Ltd., a subsidiary of TXU (UK) Holdings Limited (TXU UK) and an indirect subsidiary of TXU Europe Group plc (TXU Europe). EME ceased consolidating the activities of Lakeland
Power Ltd. in 2002, when an administrative receiver was appointed following a default by Norweb Energi Ltd. under the power sales agreement. Accordingly, EME accounts for its ownership
of Lakeland Power Ltd. on the cost method and earnings are recognized as cash is distributed from this entity.

As
previously disclosed, the administrative receiver of Lakeland Power Ltd. filed a claim against Norweb Energi Ltd. for termination of the power sales agreement. On
November 19, 2002, TXU UK and TXU Europe, together with a related entity, TXU Europe Energy Trading Limited (TXU Energy), entered into formal administration proceedings of their own in the
United Kingdom (similar to bankruptcy proceedings in the United States). On March 31, 2005, Lakeland Power Ltd. received £112 million (approximately
$210 million) from the TXU administrators, representing an interim payment of 97% of its accepted claim of £116 million (approximately $217 million).

From
the amount received, Lakeland Power Ltd., now controlled by a liquidator in the United Kingdom, has made a payment of £20 million (approximately
$37 million) to EME on April 7, 2005 comprised of £7 million (approximately $13 million) for a secured loan which EME purchased from Lakeland
Power Ltd.'s secured creditors in 2004 and certain unsecured receivables from Lakeland Power Ltd., and £13 million (approximately $24 million) as a distribution
to the EME subsidiary that owns the equity interest in Lakeland Power Ltd. The distribution was recognized in income during the quarter ended June 30, 2005. Additionally, Lakeland
Power Ltd. will pay to EME's subsidiary that owns

8

---



the
equity interest in Lakeland Power Ltd. the amount remaining after resolution of any remaining secured and unsecured creditor claims and payment of or provision for tax liabilities and the
fees and expenses associated with Lakeland Power Ltd.'s liquidation.

EME
estimates that the remaining net proceeds after tax (including taxes due in the United States) and net income resulting from the above payments will be approximately
$64 million. These remaining proceeds are expected to be received in late 2005 or in 2006, as Lakeland Power Ltd.'s liquidation progresses. Because the amounts required to settle
outstanding claims and UK taxes have not been
finalized and cannot be estimated precisely in the context of the liquidation, the actual amount of net proceeds and increase in net income may vary materially from the above estimate.

Summarized Financial Information for Discontinued Operations

In accordance with SFAS No. 144, all of the projects discussed above are classified as discontinued operations in the accompanying consolidated statements
of income. Previously issued statements of operations have been restated to reflect discontinued operations reported subsequent to the original issuance date. Summarized results of discontinued
operations are as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,2005

2004

2005

2004Total operating revenues

$


$
354

$


$
748Income before income taxes and minority interest


22


73


22


155Provision (benefit) for income taxes


1


27


(1
)

51Minority interest





20





32Income from operations of discontinued foreign subsidiaries


21


26


23


72Gain on sale before income taxes








9


Gain on sale after income taxes








5





The assets and liabilities associated with the discontinued operations are segregated on the consolidated balance sheets at June 30, 2005
and December 31, 2004. The carrying amount of major asset and liability classifications for EME's international operations recorded as discontinued operations are as follows:

June 30,
2005

December 31,
2004Cash and cash equivalents

$
1

$
2Other current assets


1


2Total current assets


2


4Investments in unconsolidated affiliates





107Assets of discontinued operations

$
2

$
111Accounts payable and accrued liabilities

$


$
1Total current liabilities





1Deferred revenue


4


4Total long-term deferred liabilities


4


4Liabilities of discontinued operations

$
4

$
5


9

---



Note 6. Restructuring Costs

During the first quarter of 2005, EME initiated a review of its domestic organization to better align its resources with its domestic business requirements.
Management and organizational changes have been implemented to streamline EME's reporting relationships and eliminate its regional management structure. As a result of these changes, EME recorded
charges of approximately $3 million and $10 million (pre-tax) in the quarter and six months ended June 30, 2005, respectively, for severance and related costs. These
charges were included in administrative and general expense on EME's consolidated statement of income.

Note 7. 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 Big 4 projects. The Big 4 projects consist of Kern River Cogeneration Company, Midway-Sunset Cogeneration Company, Sycamore Cogeneration
Company and Watson Cogeneration Company.

Three Months Ended
June 30,

Six Months Ended
June 30,2005

2004

2005

2004Operating revenues

$
323

$
302

$
597

$
544Operating income


87


88


137


121Net income


85


85


132


115


Note 8. Employee Benefit Plans

Pension Plans

EME previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $12 million to its pension
plans in 2005. As of June 30, 2005, $1.4 million in contributions have been made. EME anticipates that it will make a majority of its contributions in the third quarter and that its
original expectation will be met by year-end 2005.

Components
of pension expense are:

Three Months Ended
June 30,

Six Months Ended
June 30,2005

2004

2005

2004Service cost

$
4

$
4

$
9

$
8Interest cost


2


2


4


4Expected return on plan assets


(2
)

(1
)

(3
)

(2
)Net amortization and deferral


1





1


Total expense

$
5

$
5

$
11

$
10


Postretirement Benefits Other Than Pensions

EME previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute $1 million to its
postretirement benefits other than pensions in 2005. As of

10

---



June 30,
2005, $0.3 million in contributions have been made. EME anticipates that its original expectation will be met by year-end 2005.

Components
of postretirement benefits other than pensions expense are:

Three Months Ended
June 30,

Six Months Ended
June 30,2005

2004

2005

2004Service cost

$


$


$
1

$
Interest cost


1


1


2


2Amortization of unrecognized prior service costs








(1
)

Total expense

$
1

$
1

$
2

$
2


Note 9. Refinancing

EME Financing Developments

On January 25, 2005, EME repaid the junior subordinated debentures and consequently repaid the cumulative monthly income preferred securities (MIPS) of
$150 million. The junior subordinated debentures are described more fully in Note 10Financial Instruments, included in EME's annual report on Form 10-K
for the year ended December 31, 2004. In connection with the repayment of the junior subordinated debentures, EME recorded a $4 million loss on early extinguishment of debt during the
first quarter of 2005.

Midwest Generation Financing Developments

On April 18, 2005, Midwest Generation completed a refinancing of indebtedness. The refinancing was effected through the amendment and restatement of
Midwest Generation's existing credit facility, originally entered into April 27, 2004. The existing credit facility had provided for a $700 million first priority secured institutional
term loan due in 2011 and a $200 million first priority secured revolving credit, working capital facility due in 2009.

The
refinancing consisted of, among other things, a repricing of Midwest Generation's existing term loan and a new $300 million revolving credit, working capital facility due in
2011. The previously existing $200 million working capital facility remains in place. Midwest Generation drew in full upon the new $300 million working capital facility at closing and
used the proceeds to pay down an equivalent portion of the existing term loan. After giving effect to the paydown, the term loan carries a lower interest rate of LIBOR + 2%. The maturity
date of the repriced term loan remains 2011. The new working capital facility, together with the existing working capital facility, shares first lien priority with the repriced term loan. The new
working capital facility carries an interest rate of LIBOR + 2.25%. The maturity date of the new working capital facility is 2011; however, the lenders can request to be fully repaid in
2010.

On
the day after the closing of the refinancing transaction, EME contributed $300 million in equity to Midwest Generation, and Midwest Generation used the proceeds of this equity
contribution to repay the loans outstanding under the new working capital facility. Thus, after completion of the actions outlined herein, Midwest Generation had $343 million outstanding under
its term loan and $500 million of working capital facilities available for working capital requirements, including credit

11

---



support
for hedging activities. As of June 30, 2005, approximately $5 million was outstanding under these working capital facilities.

Under
the terms of Midwest Generation's credit agreement, Midwest Generation is permitted to distribute 75% of excess cash flow (as defined in the credit agreement). In addition, if
equity is contributed to Midwest Generation, Midwest Generation is permitted to distribute 100% of excess cash flow until the aggregate portion of distributions that Midwest Generation attributes to
the equity contribution equals the amount thereof. Accordingly, Midwest Generation is permitted to distribute 100% of excess cash flow until the aggregate portion of such distributions attributed to
the equity contribution made by EME in Midwest Generation on April 19, 2005 equals $300 million. However, Midwest Generation is required to make concurrently with each distribution an
offer to repay debt in an amount equal to the excess, if any, of one-third of such distribution over the portion thereof attributed to the equity contribution. Thus, Midwest Generation will not be
required to offer to repay debt concurrently with a distribution so long as the portion of each distribution attributed to the April 19, 2005 equity contribution is at least
one-third of such distribution.

Note 10. Income Taxes

EME's income tax provision (benefit) from continuing operations was $23 million and $(380) million during the six months ended June 30, 2005
and 2004, respectively. Income tax benefits are recognized pursuant to a tax-allocation agreement with Edison International. During the second quarter of 2005, EME resolved a dispute
regarding additional taxes asserted by the Internal Revenue Service during the audit of the 1994-1996 tax returns. As a result of the resolution of this item, EME reversed
$11.5 million of accrued taxes which was recorded as a reduction of income taxes during the second quarter of 2005. During the second quarter of 2004, EME recorded a tax benefit of
$368 million primarily relating to the loss on the termination of the Collins Station lease, and during the first quarter of 2004, EME recorded a tax provision of $18 million relating to
the sale of 100% of its stock in Edison Mission Energy Oil & Gas, which in turn held interests in Four Star Oil & Gas.

Note 11. Commitments and Contingencies

Contractual Obligations

Long-Term Debt

EME's long-term debt maturities for the next five twelve-month periods ending June 30 are: 2006$50 million;
2007$49 million; 2008$112 million; 2009$1.0 billion; and 2010$10 million. These amounts have been updated primarily to
reflect financing activities completed during the first six months of 2005. See Note 9Refinancing.

Fuel Supply Contracts

Midwest Generation and EME Homer City have entered into additional fuel purchase commitments with various third-party suppliers during the first six months of
2005. These additional commitments are currently estimated to be $25 million for 2005, $61 million for 2006, $108 million for 2007, $34 million for 2008, and
$53 million for 2009.

Coal Transportation Agreements

Midwest Generation has additional coal transportation commitments during the first six months of 2005. Based on the committed coal volumes in the fuel supply
contracts mentioned above, these

12

---



commitments
are currently estimated to be $32 million for 2005, $50 million for 2006, $109 million for 2007, $37 million for 2008, and $74 million for 2009.

Fuel Supply Dispute

Beginning in 2004, EME Homer City experienced interruptions of supply under two agreements with Unionvale Coal Company and Genesis, Inc. Unionvale and
Genesis claimed that alleged geologic conditions at the Genesis No. 17 Mine in Pennsylvania, which is one source of coal under these multi-source coal contracts, constituted force majeure and
excused contract performance. These two agreements together provide for the delivery to EME Homer City of approximately 20% of EME Homer City's clean coal requirements in 2005 and 2006, and
approximately 10% in 2007.

On
December 21, 2004, Unionvale and Genesis gave notice of termination of one of the agreements, which was scheduled to run through December 2007, under a provision that
they claim allows either party to the agreement to terminate if an event of force majeure lasts 30 days or more. Unionvale and Genesis allege that the geologic problems encountered at the
Genesis No. 17 Mine have continued beyond a 30-day period and excuse their obligation to deliver coal under the agreement. The parties' second agreement with a term through
December 2006 does not contain the same termination provision, and the suppliers have sought contract modifications to the term, quantity, quality and price provisions of this agreement. On
April 26, 2005, Unionvale and Genesis informed EME Homer City that the Genesis No. 17 Mine had been shut down and that no delivery of coal from that mine would be made under either
agreement.

EME
Homer City disputes the force majeure claim and the suppliers' reliance upon this claim to excuse their performance under the multi-source coal agreements. EME Homer City has filed
suit against Unionvale and Genesis in Pennsylvania state court seeking, among other things, equitable relief by way of an order requiring the defendants to fulfill their contractual obligations and
other monetary relief. The parties have reached an agreement in principle to settle the dispute and are continuing settlement negotiations. Contracts have been awarded to alternate suppliers, and
inventory strategies adjusted, to reflect and offset the delivery shortfall for 2005.

Capital Improvements

At June 30, 2005, EME's subsidiaries had firm commitments to spend approximately $12 million on capital expenditures during the remainder of 2005.

Commercial Commitments

Introduction

EME and certain of its 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.

13

---



Standby Letters of Credit

At June 30, 2005, standby letters of credit aggregated $18 million and were scheduled to expire as follows: second half of
2005$5 million; 2006$10 million; and 2007$3 million.

Guarantees and Indemnities

Tax Indemnity Agreements

In
connection with the sale-leaseback transactions that EME has entered into related to the Powerton and Joliet Stations in Illinois, the Collins Station in Illinois, and the
Homer City facilities in Pennsylvania, EME and several 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 Collins
Station lease in April 2004, 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 with respect to specified environmental liabilities before and after
December 15, 1999, the date
of sale. The indemnification claims are reduced by any insurance proceeds and tax benefits related to such claims and are subject to a requirement that Commonwealth Edison 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. This indemnification for
environmental liabilities 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 Company 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. As a general matter, Commonwealth Edison and Midwest Generation apportion responsibility for future asbestos-related
claims based upon the number of exposure sites that are Commonwealth Edison locations or Midwest Generation locations. 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 of either party 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. There were between 130 and 170 cases for which Midwest Generation was
potentially liable and that had not been settled and dismissed at June 30, 2005. Midwest Generation had recorded a $68 million liability at June 30, 2005 related to this matter.

14

---



The
amounts recorded by Midwest Generation for the asbestos-related liability are based upon a number of assumptions. Projecting future events, such as the number of new claims to be
filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be higher or lower
than projected.

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 Generation L.P. (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

The
asset sale agreements for the sale of EME's international assets contain indemnities from EME to the purchasers, including indemnification for taxes imposed with respect to
operations of the assets prior to the sale and for pre-closing environmental liabilities. EME also provided an indemnity to IPM for matters arising out of the exercise by one of its
project partners of a purported right of first refusal. 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. At June 30, 2005, EME had recorded a liability of $85 million related to these matters.

In
connection with the sale of various domestic assets, EME has from time to time provided indemnities to the purchasers for taxes imposed with respect to operations of the asset prior
to 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 50% 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 June 30, 2005, EME had recorded a liability of $7 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 June 30, 2005, if
payment were required, would be $140 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. EME has not recorded a liability related to this indemnity.

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 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.
In December 2003, James 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 removed the lawsuit to federal court, and the court ordered remand to the San Francisco Superior Court. Defendants filed a responding pleading on
May 6, 2005. EME believes that the outcome of this litigation will not have a material adverse effect on its consolidated financial position or results of operations.

16

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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 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 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 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. Doga's request for injunctive relief
was rejected by the Danistay and, on appeal, by the General Council of Administrative Chambers of Danistay. There are no further rights of appeal against the decision regarding the injunction.

On
June 21, 2005, a hearing regarding the merits of the case was held. A decision is expected within one to three months following the hearing. Once the parties are notified of
the decision, they will have 30 days to appeal the decision before the General Council of the Administrative Chambers of Danistay.

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 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 experiences 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.

17

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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 may also 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 as a result.

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

With
respect to the investigation and remediation of contaminated property, EME accrues a liability to the extent that the costs are probable and can be reasonably estimated. Midwest
Generation has accrued approximately $3 million for estimated environmental investigation and remediation costs for the Illinois Plants. This estimate is based upon the number of sites, the
scope of work and the estimated costs for environmental activity where such expenditures could be reasonably estimated. Future estimated costs may vary based on changes in regulations or requirements
of federal, state or local governmental agencies, changes in technology, and actual costs of disposal. In addition, future remediation costs will be affected by the nature and extent of contamination
discovered at the sites that requires remediation. There can be no assurance the existence or extent of all contamination at EME's sites has been fully identified, or that activities at the Illinois
Plants or any other facilities identified in the future may not result in additional environmental claims being asserted against EME and its subsidiaries or additional investigations or remedial
actions being required. See "Note 15. Commitments and ContingenciesEnvironmental Matters and Regulations" in EME's financial statements included in its annual report on
Form 10-K for the year ended December 31, 2004 for a more complete discussion of EME's environmental contingencies.

Note 12. Supplemental Statements of Cash Flows Information

Six Months Ended
June 30,2005

2004Cash paidInterest (net of amount capitalized)

$
147

$
136Income taxes


2


59Cash payments under plant operating leases


154


164Non-cash activities from deconsolidation of variable interest entitiesAssets

$


$
133Liabilities





165


18

---



Note 13. Stock-based Compensation

Edison International has three stock-based employee compensation plans, which are described more fully in Note 14Stock Compensation Plans,
included in EME's annual report on Form 10-K for the year ended December 31, 2004. 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 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
June 30, |    | Six Months Ended
June 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | -- | ------------------------- | -
|
|Net income (loss), as reported                                                                                                              |  | $                           | 38 |                           | $
|Add: stock-based compensation expense included in reported net income (loss), 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 |  |                             | (4 | )                         |  
|                                                                                                                                            |  |                             |    |                           |  
|Pro forma net income (loss)                                                                                                                 |  | $                           | 37 |                           | $
|                                                                                                                                            |  |                             |    |                           |  

See "Statement of Financial Accounting Standards No. 123(R)" included in Note 14 below for further discussion.

Note 14. New Accounting Pronouncements

Statement of Financial Accounting Standards Interpretation No. 46(R)

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 became effective for special purpose entities as
of December 31, 2003 and for all other entities as of March 31, 2004.

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 as of March 31, 2004. The Kwinana project was sold on December 16, 2004 as part of the sale of international operations to IPM and, accordingly, is included in discontinued
operations.

19

---



Variable Interest Entities

EME completed a review of the application of FIN 46R to its subsidiaries and affiliates and concluded that it had 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
June 30, 2005 |    | Ownership
Interest at
June 30, 2005 |    | Description
|------------------------ |  | --------------- |  | --------------------------- | -- | ----------------------------------- | -- | -----------
|Sunrise                  |  | Fellows, CA     |  | $                           | 94 |                                     | 50 | %          
|Watson                   |  | Carson, CA      |  |                             | 88 |                                     | 49 | %          
|Sycamore                 |  | Bakersfield, CA |  |                             | 56 |                                     | 50 | %          
|Midway-Sunset            |  | Fellows, CA     |  |                             | 52 |                                     | 50 | %          
|Kern River               |  | Bakersfield, CA |  |                             | 45 |                                     | 50 | %          

EME determined that it is not the primary beneficiary in these entities; accordingly, EME continues to 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.

FASB Staff Position FIN 46(R)-5

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

Statement of Financial Accounting Standards No. 123(R) and Staff Accounting Bulletin No. 107

In December 2004, the FASB reissued SFAS No. 123(R), "Share-Based Payment." This is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) establishes accounting standards for transactions in which an entity receives
employee services in exchange for (a) equity instruments of the entity or (b) liabilities that are based on the fair value of the entity's equity instruments or that may be settled by
the issuance of equity instruments. The standard will require EME to recognize the grant-date fair value of Edison International stock options and equity based compensation issued to
employees in the statement of income. The standard also requires that such transactions be accounted for using the fair value based method, thereby eliminating use of the intrinsic value method of
accounting in APB No. 25, which was permitted under Statement 123, as originally issued. EME currently uses the intrinsic value accounting method for stock-based compensation. On
April 14, 2005, the Securities and Exchange Commission (SEC) announced a delay in the effective date for the standard to fiscal years beginning after June 15, 2005. EME will implement
the new standard effective January 1, 2006 by applying the modified prospective transition method. The difference in expense between the two accounting methods is shown in
Note 13Stock-Based Compensation above.

In
March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which conveys the SEC staff's views on the interaction between SFAS No. 123(R) and certain
SEC rules and regulations. SAB 107 also provides the SEC staff's views regarding the valuation of share-based payment

20

---



arrangements
for public companies. EME will apply the principles of SAB 107 in conjunction with its adoption of SFAS No. 123(R).

FASB Staff Position FAS 109-1

In December 2004, the FASB issued FASB Staff Position FAS 109-1, "Application of FASB Statement No. 109, 'Accounting for Income
Taxes,' to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004." The primary objective of this Position is to provide guidance on the application of
SFAS No. 109 to the provision within the American Jobs Creation Act of 2004 that provides a tax deduction on qualified production activities under the provisions of Internal Code
Section 199 effective for tax years beginning after December 31, 2004. Under FAS 109-1, recognition of the tax deduction on qualified production activities, which
include the production of electricity, is ordinarily reported in the year it is earned. The deduction is calculated, and the limitations to the deduction are applied at the consolidated income tax
reporting level by the parent of the affiliated group (Edison International). The benefit of the deduction is then allocated among the members of the group in proportion to each member's respective
amount, if any, of income from qualified production activities. For the year ended December 31, 2005, EME does not expect the allocated benefit to have a material impact on its consolidated
financial statements. EME is evaluating the potential effect that the tax deduction will have in future years.

Statement of Financial Accounting Standard Interpretation No. 47

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

Statement of Financial Accounting Standards No. 154

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

21

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

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect Edison Mission Energy's (EME's) current expectations and projections about future events based on
EME's knowledge of present facts and circumstances and assumptions about future events and include any statement that does not directly relate to a historical or current fact. Other information
distributed by EME that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this report and elsewhere, the words "expects,"
"believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should," and variations of such words and similar expressions, or discussions of
strategy or plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those
anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ, or that otherwise could impact EME or its subsidiaries, include but are not limited
to:



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

The MD&A of this Form 10-Q discusses material changes in the results of operations, financial condition and other developments of EME since
December 31, 2004, and as compared to the second

22

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quarter and six months ended June 30, 2004. 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, 2004.

The
MD&A presents 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 Estimates

23Results of Operations

26Liquidity and Capital Resources

40Market Risk Exposures

48


MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING ESTIMATES

Management's Overview

EME Restructuring Activities

During 2004, EME sold most of its international operations. EME's international operations, except for the Doga project, 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. In the first quarter of 2005, EME completed the sale of two international
projects:



While
EME will continue to seek to sell its ownership interest in the Doga project, there is no assurance that such efforts will result in a sale.

In
connection with the sale of its international operations in 2004, together with cash on hand, in January 2005, EME:



In
April 2005, EME made an equity contribution of $300 million to Midwest Generation, which used the proceeds to repay indebtedness. See "Liquidity and Capital
ResourcesMidwest Generation Financing" for a discussion of the Midwest Generation financing.

EME
has also completed a review of its domestic organization to better align its resources with its domestic business requirements. Management and organizational changes have been
implemented to streamline EME's reporting relationships and eliminate its regional management structure. As part of

23

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the
restructuring, EME expects to reduce annualized costs by $7 million (pre-tax) although this decrease is expected to be offset by higher development costs in the future. As a
result of these changes, EME recorded charges of approximately $3 million and $10 million (pre-tax) in the quarter and six months ended June 30, 2005, respectively,
for severance and related costs.

Expiration of the Exelon Power Purchase Agreements

The five-year power purchase agreements between Midwest Generation and Exelon Generation Company expired on December 31, 2004 and, accordingly,
beginning January 1, 2005, all the output from the Illinois Plants is considered merchant generation. In 2004, approximately 53% of the energy and capacity sales from the Illinois Plants were
to Exelon Generation under the power purchase agreements.

The
Exelon Generation power purchase agreement for coal-fired units was structured to provide significant capacity payments and lower energy payments which were primarily
designed to reimburse the cost of production. The agreement also provided for substantial capacity payments during the summer months. The Illinois Plants continue to derive revenue from sales of
capacity and energy to domestic utilities and power marketers. In the current wholesale energy market, energy prices are substantially higher than the energy prices previously set forth in the
agreement, but capacity payments are, and are expected to remain, substantially lower. As a result, the composition of EME's revenues was significantly different in in the first half of 2005 compared
to 2004. EME's merchant generation is subject to significant volatility as described further in "Market Risk ExposuresCommodity Price Risk."

Wholesale Energy Prices in Illinois

Wholesale energy prices at the Northern Illinois Hub (related to the Illinois Plants) have increased substantially in 2005 from the comparable market prices in
2004 driven largely by increases in the market price of natural gas and oil. The average market price during the six months ended June 30, 2005 at the Northern Illinois Hub (related to the
Illinois Plants) increased to $39.01 per MWh, compared to the average market price at "Into ComEd" and the Northern Illinois Hub of $29.84 per MWh during the six months ended June 30, 2004.

Overview of EME's 2005 Financial Performance from Continuing Operations

EME's financial performance in the second quarter and six months ended June 30, 2005 improved over the second quarter and six months ended June 30,
2004 with a number of important items affecting performance:



24

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Critical Accounting Estimates

For a discussion of EME's critical accounting estimates, refer to "Critical Accounting Estimates" on page 38 of EME's annual report on
Form 10-K for the year ended December 31, 2004.

25

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RESULTS OF OPERATIONS

Introduction

This section discusses operating results for the second quarters and six months of 2005 and 2004. Continuing operations include EME's Illinois Plants and Homer
City facilities, energy trading, equity investments in power projects primarily located in California, corporate interest expense and general and administrative expenses. Discontinued operations
include all of EME's international operations, except the Doga project. 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 (Loss) Summary

26Results of Continuing Operations

27Results of Discontinued Operations

35New Accounting Pronouncements

36Proposed Accounting Pronouncements

39


Net Income (Loss) Summary

Net income (loss) is comprised of the following components:

|                                         |  | Three Months Ended
June 30, |    | Six Months Ended
June 30, |  
|---------------------------------------- |  | --------------------------- | -- | ------------------------- | -
|
|
|Income (loss) from continuing operations |  | $                           | 17 |                           | $
|Income from discontinued operations      |  |                             | 21 |                           |  
|                                         |  |                             |    |                           |  
|Net Income (Loss)                        |  | $                           | 38 |                           | $
|                                         |  |                             |    |                           |  

26

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EME's income (loss) from continuing operations for the second quarters and six months ended June 30, 2005 and 2004 is comprised of:

|                                                                    |                                                                                                                                                               | Three Months Ended
June 30, |    | Six Months Ended
June 30, |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | -- | ------------------------- | -
|
|
|Income (loss) from Continuing Operations                            |                                                                                                                                                               | $                           | 17 |                           | $
|Discrete Items (after tax)                                          |                                                                                                                                                               |                             |    |                           |  
|                                                                    | Loss on lease termination, asset impairment and other charges (see "Results of Continuing OperationsEarnings from Consolidated OperationsIllinois Plants") |                             |    |                          |  
|                                                                    | Gain on sale of assets (see
"Results of Continuing OperationsGain on Sale of Assets")                                                                       |                             |    |                          |  
|                                                                    | Other                                                                                                                                                         |                             |    |                          |  
|                                                                    |                                                                                                                                                               |                             |    |                           |  
|Income (loss) from Continuing Operations (excluding discrete items) |                                                                                                                                                               | $                           | 17 |                           | $
|                                                                    |                                                                                                                                                               |                             |    |                           |  

The
increase in the second quarter income from continuing operations, excluding discrete items, was primarily attributable to higher wholesale energy prices at EME's Illinois Plants,
higher energy trading income and resolution of a tax dispute. The year-to-date increase in income from continuing operations, excluding discrete items, was primarily due to
higher wholesale energy prices at EME's Illinois Plants and EME's Homer City facilities, higher energy trading income and resolution of a tax dispute.

Results of Continuing Operations

Overview

EME operates in one line of business, electric power generation. Operating revenues are primarily derived from 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 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.

27

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The
following section provides a summary of the operating results for the second quarters and six months ended June 30, 2005 and 2004 together with discussions of the
contributions by specific projects and of other significant factors affecting these results.

|                                                                      |                                                                                    | Three Months Ended
June 30, |    | Six Months Ended
June 30, |  
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------- | -- | ------------------------- | -
|
|
|Income (Loss) before Taxes and Minority Interest (Earnings/Losses)(1) |                                                                                    |                             |    |                           |  
|                                                                      | Consolidated operations                                                            |                             |    |                           |  
|                                                                      | Illinois Plants                                                                    |                             | $  | 18                        |  
|                                                                      | Homer City                                                                         |                             |    | 8                         |  
|                                                                      | Energy Trading(2)                                                                  |                             |    | 19                        |  
|                                                                      | Doga                                                                               |                             |    |                          |  
|                                                                      | Other                                                                              |                             |    | (1                        | )
|                                                                      | Unconsolidated affiliates                                                          |                             |    |                           |  
|                                                                      | Big 4 projects                                                                     |                             |    | 40                        |  
|                                                                      | Sunrise                                                                            |                             |    | 5                         |  
|                                                                      | March Point                                                                        |                             |    | (4                        | )
|                                                                      | Doga                                                                               |                             |    | 1                         |  
|                                                                      | Other                                                                              |                             |    | 3                         |  
|                                                                      |                                                                                    |                             |    |                           |  
|                                                                      |                                                                                    |                             | 89 |                           |  
|                                                                      | Corporate interest expense                                                         |                             |    | (68                       | )
|                                                                      | Corporate and regional administrative and general                                  |                             |    | (26                       | )
|                                                                      | Gain on sale of assets                                                             |                             |    |                          |  
|                                                                      | Loss on early extinguishment of debt                                               |                             |    |                          |  
|                                                                      | Corporate interest income and other, net                                           |                             |    | 11                        |  
|                                                                      |                                                                                    |                             |    |                           |  
|                                                                      | Income (Loss) from Continuing Operations Before Income Taxes and Minority Interest |                             | $  | 6                         |  
|                                                                      |                                                                                    |                             |    |                           |  

---

28

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Earnings from Consolidated Operations

Illinois Plants

|                                      |                                                               | Three Months Ended
June 30,    |    | Six Months Ended
June 30, |      
|------------------------------------- | ------------------------------------------------------------- | ------------------------------ | -- | ------------------------- | -----
|
|
|Operating Revenues                    |                                                               |                                |    |                           |      
|                                      | Energy revenues                                               |                                | $  | 244                       |      
|                                      | Capacity revenues                                             |                                |    | 8                         |      
|                                      | Other revenues                                                |                                |    | 2                         |      
|                                      | Net gains (losses) from price risk management                 |                                |    | (1                        | )    
|                                      |                                                               |                                |    |                           |      
|                                      | Total operating revenues                                      |                                |    | 253                       |      
|                                      |                                                               |                                |    |                           |      
|Operating Expenses                    |                                                               |                                |    |                           |      
|                                      | Fuel                                                          |                                |    | 72                        |      
|                                      | Plant operations                                              |                                |    | 107                       |      
|                                      | Plant operating leases                                        |                                |    | 19                        |      
|                                      | Depreciation and amortization                                 |                                |    | 25                        |      
|                                      | Loss on lease termination, asset impairment and other charges |                                |    | 7                         |      
|                                      | Administrative and general                                    |                                |    | 5                         |      
|                                      |                                                               |                                |    |                           |      
|                                      | Total operating expenses                                      |                                |    | 235                       |      
|                                      |                                                               |                                |    |                           |      
|Operating Income (Loss)               |                                                               |                                | 18 |                           |      
|                                      |                                                               |                                |    |                           |      
|Other Income (Expense)                |                                                               |                                |    |                           |      
|                                      | Interest income from note receivable from EME                 |                                |    | 29                        |      
|                                      | Interest expense                                              |                                |    | (29                       | )    
|                                      |                                                               |                                |    |                           |      
|                                      | Total other income (expense)                                  |                                |    |                          |      
|                                      |                                                               |                                |    |                           |      
|Income (Loss) Before Taxes            |                                                               | $                              | 18 |                           | $    
|                                      |                                                               |                                |    |                           |      
|Statistics  Coal-Fired Generation(1) |                                                               |                                |    |                           |      
|                                      | Generation (in GWh):                                          |                                |    |                           |      
|                                      |                                                               | Merchant                       |    |                           | 5,834
|                                      |                                                               | Power purchase agreement       |    |                           |     
|                                      |                                                               |                                |    |                           |      
|                                      |                                                               | Total coal-fired generation    |    |                           | 5,834
|                                      |                                                               |                                |    |                           |      
|                                      | Equivalent Availability(2)                                    |                                |    | 62.1%                     |      
|                                      | Forced outage rate(3)                                         |                                |    | 9.6%                      |      
|                                      | Average realized energy price/MWh:                            |                                |    |                           |      
|                                      |                                                               | Merchant                       |    | $                         | 41.83
|                                      |                                                               | Power purchase agreement       |    | $                         |     
|                                      |                                                               | Total coal-fired generation(4) |    | $                         | 41.83

---

29

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Earnings (losses) from the Illinois Plants were $18 million and $110 million during the three and six months ended June 30,
2005, respectively, compared to $(959) million and $(948) million for the comparable periods in the prior year. Included in the 2004 losses of the Illinois Plants were losses related to
the termination of the Collins Station lease of $951 million and a $3 million inventory reserve for excess spare parts at the Collins Station. Management concluded that the Collins
Station was not economically competitive in the marketplace given generation overcapacity and ceased operations effective September 30, 2004. Earnings (losses) from the Illinois Plants,
excluding the above discrete items, were $(5) million and $6 million during the three and six months ended June 30, 2004, respectively. The increase in the second quarter of 2005
earnings of $23 million was primarily attributable to higher energy revenues resulting from increased average realized energy prices. Earnings for the six-month period ended
June 30, 2005 increased $104 million due to the following factors:



Partially
offset by:



Income
from price risk management activities decreased $6 million and $14 million for the second quarter and six months ended June 30, 2005, respectively, compared
to the corresponding periods of 2004. The 2005 decreases were primarily related to the following:



Partially
offset by:



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. Midwest Generation recorded net gains of approximately $0.4 million and

30

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$7 million
for the second quarters of 2005 and 2004, respectively, and $0.2 million and $4 million for the six months ended June 30, 2005 and 2004, respectively,
representing the amount of cash flow hedges' ineffectiveness. The ineffective portion of the cash flow hedges was primarily attributable to changes in the difference between energy prices at the
delivery points set forth in the hedge contracts and the energy prices at the delivery points where power generated by the Illinois Plants is delivered into the transmission system.

The
earnings (losses) of the Illinois Plants included interest income of $29 million and $28 million for the second quarters of 2005 and 2004, respectively, and
$57 million and $56 million for the six months ended June 30, 2005 and 2004, respectively, 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 by EME for accounting purposes.

Homer City

|                       |                                       | Three Months Ended
June 30, |   | Six Months Ended
June 30, |  
|---------------------- | ------------------------------------- | --------------------------- | - | ------------------------- | -
|
|
|Operating Revenues     |                                       |                             |   |                           |  
|                       | Energy revenues                       |                             | $ | 133                       |  
|                       | Capacity revenues                     |                             |   | 5                         |  
|                       | Net losses from price risk management |                             |   | (2                        | )
|                       |                                       |                             |   |                           |  
|                       | Total operating revenues              |                             |   | 136                       |  
|                       |                                       |                             |   |                           |  
|Operating Expenses     |                                       |                             |   |                           |  
|                       | Fuel                                  |                             |   | 60                        |  
|                       | Plant operations                      |                             |   | 37                        |  
|                       | Plant operating leases                |                             |   | 26                        |  
|                       | Depreciation and amortization         |                             |   | 4                         |  
|                       | Administrative and general            |                             |   | 2                         |  
|                       |                                       |                             |   |                           |  
|                       | Total operating expenses              |                             |   | 129                       |  
|                       |                                       |                             |   |                           |  
|Operating Income       |                                       |                             | 7 |                           |  
|                       |                                       |                             |   |                           |  
|Other Income (Expense) |                                       |                             |   |                           |  
|                       | Interest and other income             |                             |   | 2                         |  
|                       | Interest expense                      |                             |   | (1                        | )
|                       |                                       |                             |   |                           |  
|                       | Total other income (expense)          |                             |   | 1                         |  
|                       |                                       |                             |   |                           |  
|Income Before Taxes    |                                       | $                           | 8 |                           | $
|                       |                                       |                             |   |                           |  
|Statistics             |                                       |                             |   |                           |  
|                       | Generation (in GWh)                   |                             |   | 3,102                     |  
|                       | Equivalent Availability(1)            |                             |   | 77.1%                     |  
|                       | Forced outage rate(2)                 |                             |   | 3.6%                      |  
|                       | Average realized energy price/MWh     |                             | $ | 42.93                     |  

---

31

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Earnings from Homer City decreased $7 million and increased $16 million for the second quarter and six months ended June 30,
2005, respectively, compared to the corresponding periods of 2004. The second quarter decrease was primarily due to higher planned maintenance costs and higher fuel costs attributable to higher coal
prices and higher priced SO2 emission allowances. The 2005 six-month increase was primarily attributable to higher energy revenues in 2005 due to higher generation and average realized
energy prices as compared to 2004. During the first quarter of 2004, an unplanned outage at Unit 1 contributed to lower generation and higher maintenance costs. Partially offsetting this increase were
higher fuel costs attributable to higher fuel consumption, higher coal prices and higher priced SO2 emission allowances. Included in fuel costs was $14 million and $7 million during the
second quarters of 2005 and 2004, respectively, and $29 million and $13 million during the six months ended June 30, 2005 and 2004, respectively, related to the net cost of
emission allowances. See "Market Risk ExposuresCommodity Price RiskEmission Allowances Price Risk" for more information regarding the price of SO2 allowances.

Losses
from price risk management activities were $2 million and $8 million for the second quarters of 2005 and 2004, respectively, and $4 million and
$7 million for the six months ended June 30, 2005 and 2004, respectively. The second quarter decrease was primarily attributable to the ineffective portion of forward and futures
contracts which are derivatives that qualify as cash flow hedges under SFAS No. 133. Homer City recorded net gains (losses) of approximately $1 million and $(6) million during the second
quarters of 2005 and 2004, respectively, and $(3) million and $239 during the six months ended June 30, 2005 and 2004, respectively, representing the amount of cash flow hedges'
ineffectiveness. The ineffective gains (losses) from Homer City were primarily 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. The
year-to-date decrease was primarily related to futures contracts that did not qualify for hedge accounting under SFAS No. 133. See "Market Risk
ExposuresCommodity Price Risk" for more information regarding forward market prices.

Seasonal Disclosure

Due to higher electric demand resulting from warmer weather during the summer months, electric revenues generated from the Illinois Plants and the Homer City
facilities are generally higher during the third quarter of each year.

Energy Trading

EME seeks to generate profit from the volatility of the price of electricity, fuels and transmission by buying and selling contracts for their sale or provision,
as the case may be, which are referred to as energy trading activities. Earnings from energy trading activities increased $16 million and $39 million for the second quarter and six
months ended June 30, 2005, respectively, compared to the corresponding periods of 2004. Energy trading activities are primarily focused on understanding the relative values between different
locations in the eastern power grid; particularly those locations in PJM, Midwest Independent Transmission System Operator (MISO), and New York Independent System Operator (NYISO). EME's wholly owned
subsidiary, Edison Mission Marketing & Trading, utilizes over-the-counter products as well as financial transmission rights, transmission congestion contracts, and
virtual incremental and decremental generation bids to capture the differences in prices between various locations. The volatile market conditions during the first six months of 2005, coupled with the
expansion of PJM and the implementation of MISO, have created favorable conditions for Edison Mission Marketing & Trading's trading strategies relative to 2004. The volatile and high priced
markets

32

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have
resulted in relatively more transmission congestion than in 2004. The expansion of PJM and MISO has created a larger market with more locations, creating more opportunities for Edison Mission
Marketing & Trading to implement various strategies.

Earnings from Unconsolidated Affiliates

Big 4 Projects

Earnings from the Big 4 projects increased $1 million and $11 million for the second quarter and six months ended June 30, 2005, compared to
the corresponding periods of 2004. The 2005 six-month increase in earnings was primarily due to higher energy prices in 2005 over 2004.

The
earnings from the Big 4 projects included interest expense from Edison Mission Energy Funding of $2 million and $3 million for the second quarters of 2005 and 2004,
respectively. For the six months ended June 30, 2005 and 2004, earnings included interest expense from Edison Mission Energy Funding of $5 million and $7 million, respectively.

Sunrise

Earnings from the Sunrise project increased $1 million for both the second quarter and six months ended June 30, 2005, compared to the corresponding
periods of 2004. The 2005 increases primarily resulted from higher energy revenues attributable to increased dispatch.

March Point

Earnings from March Point decreased $6 million and $4 million for the second quarter and six months ended June 30, 2005, respectively,
compared to the corresponding periods of 2004. The 2005 decreases in earnings were primarily due to mark-to-market losses on fuel contracts entered into by March Point, which
are derivatives that do not qualify as cash flow hedges under SFAS No. 133.

Doga

In accordance with Statement of Financial Accounting Standards Interpretation No. 46(R), "Consolidation of Variable Interest Entities," EME determined that
it was not the primary beneficiary of the Doga project and, accordingly, deconsolidated this project as of March 31, 2004. Revenues included in EME's consolidated statements of income from the
Doga project were $29 million for the six months ended June 30, 2004, representing revenues from the first quarter of 2004. Earnings from the Doga project were $6 million for the
six months ended June 30, 2004, representing earnings from the first quarter of 2004. Beginning April 1, 2004, EME recorded its interest in the Doga project on the equity method basis of
accounting. Earnings from the Doga project were $1 million and $5 million for the second quarter and six months ended June 30, 2005, respectively, compared to $1 million
for both the second quarter and six months ended June 30, 2004.

Seasonal Disclosure

EME's third quarter equity in income from its 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 energy projects located on the West Coast have power sales contracts that provide for higher payments during the summer months.

33

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Corporate Interest Expense

Three Months Ended
June 30,

Six Months Ended
June 30,2005

2004

2005

2004(in millions)Interest expense to third parties

$
39

$
43

$
79

$
85Interest expense to Midwest Generation


29


28


57


56Total corporate interest expense

$
68

$
71

$
136

$
141


Corporate and Regional Administrative and General Expenses

Administrative and general expenses decreased $7 million and $5 million for the second quarter and six months ended June 30, 2005,
respectively, compared to the corresponding periods of 2004. The decreases were primarily due to decreased use of third-party consultants partially offset by higher costs incurred in 2005 to implement
EME's restructuring plan described under "Management's Overview."

Gain on Sale of Assets

Gain on sale of assets in 2004 consisted of a $47 million gain related to the sale of 100% of EME's stock of Edison Mission Energy Oil & Gas, which
in turn held minority interests in Four Star Oil & Gas, and a $4 million loss related to the sale of EME's interest in Brooklyn Navy Yard Cogeneration Partners, L.P. recorded during the
first quarter of 2004.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt was $4 million in the first six months of 2005. Extinguishment of debt consisted of a $4 million loss related
to the early repayment of EME's junior subordinated debentures recorded during the first quarter of 2005.

Corporate Interest Income and Other, Net

Interest income and other, net increased $11 million and $18 million for the second quarter and six months ended June 30, 2005, respectively,
compared to the corresponding periods of 2004. The increases were primarily attributable to higher interest income resulting from higher average cash balances during the first six months of 2005,
compared with the corresponding period of 2004.

Income Taxes

EME's income tax provision (benefit) from continuing operations was $23 million and $(380) million during the six months ended June 30, 2005
and 2004, respectively. Income tax benefits are recognized pursuant to a tax-allocation agreement with Edison International. See "Liquidity and Capital ResourcesEME's
Liquidity as a Holding CompanyIntercompany Tax-Allocation Agreement." During the second quarter of 2005, EME resolved a dispute regarding additional taxes asserted by the
Internal Revenue Service during the audit of the 1994-1996 tax returns. As a result of the resolution of this item, EME reversed $11.5 million of accrued taxes which was recorded as
a reduction of income taxes during the second quarter of 2005. During the second quarter of 2004, EME recorded a tax benefit of $368 million primarily relating to the loss on the termination of
the Collins Station lease, and during the first quarter of 2004, EME recorded a tax provision of $18 million

34

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relating
to the sale of 100% of its stock in Edison Mission Energy Oil & Gas, which in turn held interests in Four Star Oil & Gas.

Results of Discontinued Operations

Income from discontinued operations, net of tax, was $21 million and $26 million during the second quarters of 2005 and 2004, respectively, and
$28 million and $72 million during the first six months of 2005 and 2004, respectively. During the first six months of 2005, EME completed the following sales:



The
aggregate after-tax gain on the sale of the aforementioned projects was $5 million.

During
the third quarter of 2004, EME reclassified its international activities which were then under contracts for sale as discontinued operations. Subsequently, EME completed the sale
of these operations, except for the Doga project, which is no longer under a contract for sale. While EME continues to seek to sell its ownership interest in this project, there is no assurance that
such efforts will result in a sale during the twelve-month period prescribed under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." As a result, EME reclassified the Doga project to continuing operations during the fourth quarter of 2004, and, accordingly, it is reflected as part of continuing
operations for all periods presented.

Previously Reported Discontinued Operations

Lakeland Project

EME previously owned and operated a 220 MW combined cycle, natural gas-fired power plant located in the United Kingdom, known as the Lakeland project.
The ownership of the project was held through EME's indirect subsidiary, Lakeland Power Ltd., which sold power generated from the plant pursuant to a power sales agreement with Norweb
Energi Ltd., a subsidiary of TXU (UK) Holdings Limited (TXU UK) and an indirect subsidiary of TXU Europe Group plc (TXU Europe). EME ceased consolidating the activities of Lakeland
Power Ltd. in 2002, when an administrative receiver was appointed following a default by Norweb Energi Ltd. under the power sales agreement. Accordingly, EME accounts for its ownership
of Lakeland Power Ltd. on the cost method and earnings are recognized as cash is distributed from this entity.

As
previously disclosed, the administrative receiver of Lakeland Power Ltd. filed a claim against Norweb Energi Ltd. for termination of the power sales agreement. On
November 19, 2002, TXU UK and TXU Europe, together with a related entity, TXU Europe Energy Trading Limited (TXU Energy), entered into formal administration proceedings of their own in the
United Kingdom (similar to bankruptcy proceedings in the United States). On March 31, 2005, Lakeland Power Ltd. received £112 million (approximately
$210 million) from the TXU administrators, representing an interim payment of 97% of its accepted claim of £116 million (approximately $217 million).

From
the amount received, Lakeland Power Ltd., now controlled by a liquidator in the United Kingdom, has made a payment of £20 million (approximately
$37 million) to EME on April 7, 2005

35

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comprised
of £7 million (approximately $13 million) for a secured loan which EME purchased from Lakeland Power Ltd.'s secured creditors in 2004 and certain unsecured
receivables from Lakeland Power Ltd., and £13 million (approximately $24 million) as a distribution to the EME subsidiary that owns the equity interest in Lakeland
Power Ltd. The distribution was recognized in income during the quarter ended June 30, 2005. Additionally, Lakeland Power Ltd. will pay to EME's subsidiary that owns the equity
interest in Lakeland Power Ltd. the amount remaining after resolution of any remaining secured and unsecured creditor claims and payment of or provision for tax liabilities and the fees and
expenses associated with Lakeland Power Ltd.'s liquidation.

EME
estimates that the remaining net proceeds after tax (including taxes due in the United States) and net income resulting from the above payments will be approximately
$64 million. These remaining proceeds are expected to be received in late 2005 or in 2006, as Lakeland Power Ltd.'s liquidation progresses. Because the amounts required to settle
outstanding claims and UK taxes have not been finalized and cannot be estimated precisely in the context of the liquidation, the actual amount of net proceeds and increase in net income may vary
materially from the above estimate.

New Accounting Pronouncements

Statement of Financial Accounting Standards Interpretation No. 46(R)

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 became effective for special purpose entities as
of December 31, 2003 and for all other entities as of March 31, 2004.

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 as of March 31, 2004. The Kwinana project was sold on December 16, 2004 as part of the sale of international operations to IPM and, accordingly, is included in discontinued
operations.

Variable Interest Entities

EME completed a review of the application of FIN 46R to its subsidiaries and affiliates and concluded that it had variable interests in variable interest entities
as defined in this interpretation. The

36

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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
June 30, 2005 |    | Ownership
Interest at
June 30, 2005 |     | Description
|------------------------ |  | --------------- |  | --------------------------- | -- | ----------------------------------- | --- | -----------
|
|Sunrise                  |  | Fellows, CA     |  | $                           | 94 |                                     | 50% |            
|Watson                   |  | Carson, CA      |  |                             | 88 |                                     | 49% |            
|Sycamore                 |  | Bakersfield, CA |  |                             | 56 |                                     | 50% |            
|Midway-Sunset            |  | Fellows, CA     |  |                             | 52 |                                     | 50% |            
|Kern River               |  | Bakersfield, CA |  |                             | 45 |                                     | 50% |            

EME determined that it is not the primary beneficiary in these entities; accordingly, EME continues to 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.

FASB Staff Position FIN 46(R)-5

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

Statement of Financial Accounting Standards No. 123(R) and Staff Accounting Bulletin No. 107

In December 2004, the FASB reissued SFAS No. 123(R), "Share-Based Payment." This is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R) establishes accounting standards for transactions in which an entity receives
employee services in exchange for (a) equity instruments of the entity or (b) liabilities that are based on the fair value of the entity's equity instruments or that may be settled by
the issuance of equity instruments. The standard will require EME to recognize the grant-date fair value of Edison International stock options and equity based compensation issued to
employees in the statement of income. The standard also requires that such transactions be accounted for using the fair value based method, thereby eliminating use of the intrinsic value method of
accounting in APB No. 25, which was permitted under Statement 123, as originally issued. EME currently uses the intrinsic value accounting method for stock-based compensation. On
April 14, 2005, the Securities and Exchange Commission (SEC) announced a delay in the effective date for the standard to fiscal years beginning after June 15, 2005. EME will implement
the new standard effective January 1, 2006 by applying the modified prospective transition method. The difference in expense between the two accounting methods is shown in "Edison Mission
Energy and Subsidiaries Notes to Consolidated Financial StatementsNote 13. Stock-Based Compensation."

In
March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which conveys the SEC staff's views on the interaction between SFAS No. 123(R) and certain
SEC rules and regulations. SAB 107 also provides the SEC staff's views regarding the valuation of share-based payment arrangements for public companies. EME will apply the principles of SAB 107 in
conjunction with its adoption of SFAS No. 123(R).

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FASB Staff Position FAS 109-1

In December 2004, the FASB issued FASB Staff Position FAS 109-1, "Application of FASB Statement No. 109, 'Accounting for Income
Taxes,' to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004." The primary objective of this Position is to provide guidance on the application of
SFAS No. 109 to the provision within the American Jobs Creation Act of 2004 that provides a tax deduction on qualified production activities under the provisions of Internal Code
Section 199 effective for tax years beginning after December 31, 2004. Under FAS 109-1, recognition of the tax deduction on qualified production activities, which
include the production of electricity, is ordinarily reported in the year it is earned. The deduction is calculated, and the limitations to the deduction are applied at the consolidated income tax
reporting level by the parent of the affiliated group (Edison International). The benefit of the deduction is then allocated among the members of the group in proportion to each member's respective
amount, if any, of income from qualified production activities. For the year ended December 31, 2005, EME does not
expect the allocated benefit to have a material impact on its consolidated financial statements. EME is evaluating the potential effect that the tax deduction will have in future years.

Statement of Financial Accounting Standard Interpretation No. 47

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

Statement of Financial Accounting Standards No. 154

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

38

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Proposed Accounting Pronouncements

Statement of Financial Accounting Standard Interpretation, "Accounting for Uncertain Tax Positions"

On July 14, 2005, the FASB published an exposure draft of a proposed interpretation, "Accounting for Uncertain Tax Positions." The exposure draft seeks to
reduce the diversity in practice associated with recognition and measurement in the accounting for income taxes. It would apply to all tax positions accounted for in accordance with FASB Statement
No. 109, "Accounting for Income Taxes." The exposure draft requires that a tax position meet a "probable recognition threshold" for the benefit of the uncertain tax position to be recognized in
the financial statements. The exposure draft contains guidance with respect to the measurement of the benefit that is recognized for an uncertain tax position, when that benefit should be
derecognized, and other matters. The exposure draft has a 60-day comment period and the earliest the final interpretation would be effective is December 31, 2005. EME is currently
assessing the potential impact of the interpretation on its results of operations and financial condition.

39

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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

40Midwest Generation Financing

40Capital Expenditures

41EME's Historical Consolidated Cash Flow

41EME's Credit Ratings

42EME's Liquidity as a Holding Company

43Dividend Restrictions in Major Financings

45Contractual Obligations

45Off-Balance Sheet Transactions

46Environmental Matters and Regulations

46


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, 2004.

EME's Liquidity

At June 30, 2005, EME and its subsidiaries had cash and cash equivalents of $1.6 billion and EME had available the full amount of borrowing capacity
under a $98 million corporate credit facility. EME's consolidated debt at June 30, 2005 was $3.2 billion. In addition, EME's subsidiaries had $5.0 billion of
long-term lease obligations that are due over periods ranging up to 30 years.

Midwest Generation Financing

On April 18, 2005, Midwest Generation completed a refinancing of indebtedness. The refinancing was effected through the amendment and restatement of
Midwest Generation's existing credit facility, originally entered into April 27, 2004. The existing credit facility had provided for a $700 million first priority secured institutional
term loan due in 2011 and a $200 million first priority secured revolving credit, working capital facility due in 2009.

The
refinancing consisted of, among other things, a repricing of Midwest Generation's existing term loan and a new $300 million revolving credit, working capital facility due in
2011. The previously existing $200 million working capital facility remains in place. Midwest Generation drew in full upon the new $300 million working capital facility at closing and
used the proceeds to pay down an equivalent portion of the existing term loan. After giving effect to the paydown, the term loan carries a lower interest rate of LIBOR + 2%. The maturity
date of the repriced term loan remains 2011. The new working capital facility, together with the existing working capital facility, shares first lien priority with the repriced term loan. The new
working capital facility carries an interest rate of LIBOR + 2.25%. The maturity date of the new working capital facility is 2011; however, the lenders can request to be fully repaid in
2010.

On
the day after the closing of the refinancing transaction, EME contributed $300 million in equity to Midwest Generation, and Midwest Generation used the proceeds of this equity
contribution to repay the loans outstanding under the new working capital facility. Thus, after completion of the actions outlined herein, Midwest Generation had $343 million outstanding under
its term loan and $500 million of working capital facilities available for working capital requirements, including credit

40

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support
for hedging activities. As of June 30, 2005, approximately $5 million was outstanding under these working capital facilities.

Under
the terms of Midwest Generation's credit agreement, Midwest Generation is permitted to distribute 75% of excess cash flow (as defined in the credit agreement). In addition, if
equity is contributed to Midwest Generation, Midwest Generation is permitted to distribute 100% of excess cash flow until the aggregate portion of distributions that Midwest Generation attributes to
the equity contribution equals the amount thereof. Accordingly, Midwest Generation is permitted to distribute 100% of excess cash flow until the aggregate portion of such distributions attributed to
the equity contribution made by EME in Midwest Generation on April 19, 2005 equals $300 million. However, Midwest Generation is required to make concurrently with each distribution an
offer to repay debt in an amount equal to the excess, if any, of one-third of such distribution over the portion thereof attributed to the equity contribution. Thus, Midwest Generation will not be
required to offer to repay debt concurrently with a distribution so long as the portion of each distribution attributed to the April 19, 2005 equity contribution is at least
one-third of such distribution.

Capital Expenditures

The estimated capital and construction expenditures of EME's subsidiaries are $22 million for the final two quarters of 2005 and $32 million and
$13 million for 2006 and 2007, respectively. Non-environmental expenditures relate to upgrades to dust collection/mitigation systems and the coal handling system, ash removal
improvements and various other projects. These expenditures are planned to be financed by existing subsidiary credit agreements, cash on hand or cash generated from operations. Included in the
estimated expenditures are environmental expenditures of $7 million for the second half of 2005 and $1 million for 2006. The 2005 environmental expenditures relate to selective catalytic
reduction system improvements at the Homer City facilities.

EME's Historical Consolidated Cash Flow

Consolidated Cash Flows from Operating Activities

Cash used in operating activities decreased $1.1 billion in the first six months of 2005, compared to the first six months of 2004. The 2005 decrease was
primarily attributable to the $960 million lease termination payment in 2004 related to the Collins Station lease and tax-allocation payments received by EME from Edison
International of approximately $3 million during the first six months of 2005, compared to approximately $58 million paid to Edison International during the first six months of 2004. For
further discussion of the tax-allocation payments, see "EME's Liquidity as a Holding CompanyIntercompany Tax-Allocation Agreement." Also contributing
to the decrease were larger distributions from unconsolidated affiliates in 2005, primarily attributable to the Big 4 projects, and operating income in 2005 versus an operating loss in 2004.

Consolidated Cash Flows from Financing Activities

Cash used in financing activities increased $1.9 billion in the first six months of 2005, compared to the first six months of 2004. The 2005 increase was
primarily due to dividend payments made to MEHC of $360 million during 2005, compared to $0 during 2004. The increase was also due to the repayment of EME's junior subordinated debentures of
$150 million in January 2005 and a $302 million repayment in April 2005 related to Midwest Generation's existing term loan. Net borrowings in 2004 consisted of the
$1 billion secured notes and $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.

41

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Consolidated Cash Flows from Investing Activities

Cash provided by investing activities increased $125 million in the first six months of 2005, compared to the first six months of 2004. The 2005 increase
was primarily due to net sales of auction rate securities of $140 million in 2005, compared to $10 million in 2004. Proceeds of $124 million received in 2005 from the sale of
EME's 25% investment in the Tri Energy project and EME's 50% investment in the CBK project were comparable to proceeds of $118 million received in 2004 from the sale of EME's stock of Edison
Mission Energy Oil & Gas and the sale of EME's 50% partnership interest in the Brooklyn Navy Yard project.

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

B1

B+Midwest Generation, LLC:First priority senior secured rating

Ba3

BB-Second priority senior secured rating

B1

BEdison Mission Marketing & Trading

Not Rated

B+


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.

The
credit ratings of EME are below investment grade and, accordingly, EME has historically provided collateral in the form of cash and letters of credit for the benefit of
counterparties for its price risk management and trading activities related to accounts payable and unrealized losses. Midwest Generation provides credit support for forward contracts entered into by
Edison Mission Marketing & Trading related to the Illinois Plants.

EME
and its subsidiaries have provided credit for the benefit of counterparties in the form of cash and letters of credit ($202 million as of June 30, 2005) for price risk
management activities of EME (including Midwest Generation and EME Homer City) and domestic trading activities primarily related to the fair value of open positions.

EME
expects to have higher merchant generation in 2005 than in previous years as a result of the expiration in 2004 of the power purchase agreements between Midwest Generation and Exelon
Generation. The increased merchant generation 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 EME's projects. Using advanced industry analytics, EME estimates that total margin and collateral
requirements to support price risk management could increase to approximately $400 million in 2005 if 56% of the remaining 2005 output and 33% of the 2006 output from the Illinois Plants and
Homer

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City
facilities is sold forward for one year and power prices subsequently increased. Midwest Generation is expected to have cash on hand and $500 million of working capital facilities that can
be used to provide credit support for forward contracts entered into on behalf of the Illinois Plants. As of June 30, 2005, approximately $5 million was outstanding under these
facilities. In addition, EME is expected to have 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

The Homer City sale-leaseback documents restrict EME Homer City Generation L.P.'s (EME Homer City's) ability to enter into trading activities, as
defined in the documents, with Edison Mission Marketing & Trading to sell forward the output of the Homer City facilities if Edison Mission Marketing & Trading does not have an
investment grade credit rating from Standard & Poor's or Moody's or, in the absence of those ratings, if it is not rated as investment grade pursuant to EME's internal credit scoring
procedures. These documents include a requirement that the counterparty to such transactions, and EME Homer City, if acting as seller to an unaffiliated third party, be investment grade. EME currently
sells all 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, 2006. EME Homer City continues to be in compliance with the terms of the consent; however, the consent is revocable by the
sale-leaseback owner participant at any time. The sale-leaseback owner participant has not indicated that it intends to revoke the consent; however, there can be no assurance
that it will not do so in the future. Revocation of the consent would not affect trades between Edison Mission Marketing & Trading and EME Homer City that had been entered into while the
consent was still in effect. EME 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Energy Price Risk Affecting Sales from the Homer City Facilities."

EME's Liquidity as a Holding Company

Overview

At June 30, 2005, EME had corporate cash and cash equivalents of $1.5 billion to meet liquidity needs. See "EME's Liquidity." EME had
no borrowings outstanding or letters of credit outstanding on the $98 million secured line of credit at June 30, 2005. Cash distributions from EME's subsidiaries and partnership
investments, 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."

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 June 30, 2005, EME met both these ratio tests.

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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 is free to use these distributions unless and until an event of default occurs under its corporate credit facility.

At
June 30, 2005, EME also had available $86 million under Midwest Generation EME, LLC's $100 million letter of credit facility with Citibank, N.A., as Issuing Bank,
that expires in December 2006. Under the terms of this letter of credit facility, Midwest Generation EME is required to deposit cash in a bank account in order to cash collateralize any letters
of credit that may be outstanding under the facility. The bank account is pledged to the Issuing Bank. Midwest Generation EME owns 100% of Edison Mission Midwest Holdings, which in turn owns 100% of
Midwest Generation, LLC.

Historical Distributions Received By EME

The following table is presented as an aid in understanding the cash flow of EME's continuing operations 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.

Six Months Ended
June 30,2005

2004(in millions)Distributions from Consolidated Operating Projects:Edison Mission Midwest Holdings (Illinois Plants)

$
171

$
EME Homer City Generation L.P. (Homer City facilities)(1)


41


49Distributions from Unconsolidated Operating Projects:Edison Mission Energy Funding Corp. (Big 4 Projects)(2)


29


21Sunrise Power Company


5


5Holding company for Doga project


17


15Holding companies for Westside projects


6


7Holding companies of other unconsolidated operating projects


4


1Total Distributions

$
273

$
98


---

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 in circumstances where domestic tax losses are incurred. 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

44

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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 is 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 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 June 30, 2005:

|Subsidiary                                             |  | Financial Ratio                    |  | Covenant                           |  | Actual   
|------------------------------------------------------ |  | ---------------------------------- |  | ---------------------------------- |  | ---------
|Midwest Generation, LLC (Illinois Plants)              |  | Interest Coverage Ratio            |  | Greater than or equal to 1.25 to 1 |  | 2.78 to 1
|Midwest Generation, LLC (Illinois Plants)              |  | Secured Leverage Ratio             |  | Less than or equal to 8.75 to 1    |  | 3.18 to 1
|EME Homer City Generation L.P. (Homer City facilities) |  | Senior Rent Service Coverage Ratio |  | Greater than 1.7 to 1              |  | 2.68 to 1
|Edison Mission Energy Funding Corp. (Big 4 Projects)   |  | Debt Service Coverage Ratio        |  | Greater than or equal to 1.25 to 1 |  | 2.97 to 1

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 65 of EME's annual report on
Form 10-K for the year ended December 31, 2004.

Contractual Obligations

Fuel Supply Contracts

Midwest Generation and EME Homer City have entered into additional fuel purchase commitments with various third-party suppliers during the first six months of
2005. These additional commitments are currently estimated to be $25 million for 2005, $61 million for 2006, $108 million for 2007, $34 million for 2008, and
$53 million for 2009.

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Coal Transportation Agreements

Midwest Generation has additional coal transportation commitments during the first six months of 2005. Based on the committed coal volumes in the fuel supply
contracts mentioned above, these commitments are currently estimated to be $32 million for 2005, $50 million for 2006, $109 million for 2007, $37 million for 2008, and
$74 million for 2009.

Fuel Supply Dispute

Beginning in 2004, EME Homer City experienced interruptions of supply under two agreements with Unionvale Coal Company and Genesis, Inc. Unionvale and
Genesis claimed that alleged geologic conditions at the Genesis No. 17 Mine in Pennsylvania, which is one source of coal under these multi-source coal contracts, constituted force majeure and
excused contract performance. These two
agreements together provide for the delivery to EME Homer City of approximately 20% of EME Homer City's clean coal requirements in 2005 and 2006, and approximately 10% in 2007.

On
December 21, 2004, Unionvale and Genesis gave notice of termination of one of the agreements, which was scheduled to run through December 2007, under a provision that
they claim allows either party to the agreement to terminate if an event of force majeure lasts 30 days or more. Unionvale and Genesis allege that the geologic problems encountered at the
Genesis No. 17 Mine have continued beyond a 30-day period and excuse their obligation to deliver coal under the agreement. The parties' second agreement with a term through
December 2006 does not contain the same termination provision, and the suppliers have sought contract modifications to the term, quantity, quality and price provisions of this agreement. On
April 26, 2005, Unionvale and Genesis informed EME Homer City that the Genesis No. 17 Mine had been shut down and that no delivery of coal from that mine would be made under either
agreement.

EME
Homer City disputes the force majeure claim and the suppliers' reliance upon this claim to excuse their performance under the multi-source coal agreements. EME Homer City has filed
suit against Unionvale and Genesis in Pennsylvania state court seeking, among other things, equitable relief by way of an order requiring the defendants to fulfill their contractual obligations and
other monetary relief. The parties have reached an agreement in principle to settle the dispute and are continuing settlement negotiations. Contracts have been awarded to alternate suppliers, and
inventory strategies adjusted, to reflect and offset the delivery shortfall for 2005.

Off-Balance Sheet Transactions

For a discussion of EME's off-balance sheet transactions, refer to "Off-Balance Sheet Transactions" on page 74 of EME's annual report on
Form 10-K for the year ended December 31, 2004. There have been no significant developments with respect to EME's off-balance sheet transactions that affect
disclosures presented in EME's annual report.

Environmental Matters and Regulations

For a discussion of EME's environmental matters, refer to "Environmental Matters and Regulations" on page 77 of EME's annual report on
Form 10-K for the year ended December 31, 2004 and the notes to the Consolidated Financial Statements set forth therein. There have been no significant developments with
respect to environmental matters specifically affecting EME since the filing of EME's annual report, except as follows:

On
May 12, 2005, the Clean Air Interstate Rule (CAIR) was published in the Federal Register. The CAIR requires 28 eastern states and the District of Columbia to address ozone
attainment issues

46

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

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

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

To
the extent that Illinois and Pennsylvania implement US EPA's CAMR by adopting a cap-and-trade program for achieving reductions in mercury emissions, then EME
may have the option to purchase mercury emission allowances, to install control equipment (or otherwise to alter operations so as to reduce mercury emissions), or some combination thereof. If EME were
to implement environmental control technology at its Homer City facilities instead of purchasing allowances to comply with the CAMR and other Clean Air Act developments described in "Environmental
Matters and RegulationsFederalUnited States of America" on page 79 of EME's annual report on Form 10-K for the year ended December 31, 2004, it
currently estimates capital expenditures for such improvements to be
approximately $350 million to $400 million in the 2006-2010 timeframe. However, because the mercury state implementation plans are not due until October 31, 2006 and
such plans may not adopt the CAMR's cap-and-trade program, and because EME cannot predict the outcome of the legal challenge to the CAMR and the US EPA's decision not to
regulate mercury emissions pursuant to Section 112 of the federal Clean Air Act, the full impact of this regulation currently cannot be assessed. EME's approach to meeting these obligations
will continue to be based upon an ongoing assessment of the federal requirements and market conditions.

47

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MARKET RISK EXPOSURES

Introduction

EME's primary market risk exposures are associated with the sale of electricity and capacity from and the procurement of fuel for its uncontracted generating
plants. These market risks arise from fluctuations in electricity, capacity 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 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

48Credit Risk

56Interest Rate Risk

57Fair Value of Financial Instruments

57Regulatory Matters

58


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, 2004.

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, emission
allowances or credits, coal, natural gas and fuel oil, and associated transportation costs in the market areas where EME's merchant plants are located. Among the factors that influence the price of
energy, capacity and ancillary services in these markets are:



48

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A
discussion of commodity price risk for the Illinois Plants and Homer City facilities is set forth below.

Energy Price RiskIntroduction

Electric power generated at EME's merchant plants is generally sold under bilateral arrangements with domestic utilities and power marketers with terms of two
years or less or into the PJM and/or the 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 risk tolerance, and procedures exist which allow for monitoring of all commitments and positions with regular reviews by EME's risk management
committee. Despite this, there can be no assurance that all risks have been accurately identified, measured and/or mitigated.

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

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

Hedging Strategy

EME intends to hedge a portion of its merchant portfolio risk through Edison Mission Marketing & Trading. To the extent that EME 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 EME will hedge its market price risk through forward
over-the-counter sales depends on several factors. First, EME 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, EME's ability to enter into hedging transactions will depend upon its, Midwest Generation's
and Edison Mission Marketing & Trading's credit capacity and upon the over-the-counter forward sales markets having sufficient liquidity to enable EME to identify
counterparties who are able and willing to enter into hedging transactions.

Primary
counterparties for hedging transactions are utilities and power marketing companies. In addition, the Intercontinental Exchange and the New York Mercantile Exchange now permit
trading in cash settled futures contracts. This allows hedge transactions to be executed with financial entities such

49

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as
hedge funds and investment banks. The number of such transactions being cleared has been steadily increasing recently.

In
the case of forward sales of generation and capacity from the Illinois Plants, Midwest Generation is permitted to use its 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 of the Illinois Plants under an 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 EME's contracting strategy for the Illinois Plants. In the case of forward sales of generation and capacity from the Homer City facilities, credit support is provided by EME pursuant
to intercompany arrangements between it and Edison Mission Marketing & Trading. See "Credit Risk," below.

Energy Price Risk Affecting Sales from the Illinois Plants

Pre-2005 Merchant Sales

Energy generated at the Illinois Plants was historically sold under three power purchase agreements between Midwest Generation and Exelon Generation Company,
under which Exelon Generation was 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 capacity payments provided the units under contract with revenue for fixed charges, and the energy payments compensated those units for
all, or a portion of, variable costs of production. The three power purchase agreements with Exelon Generation had all been terminated by December 31, 2004.

To
the extent that energy and capacity from the Illinois Plants was not sold under the power purchase agreements with Exelon Generation, it was sold on a wholesale basis through a
combination of bilateral agreements, forward energy sales and spot market sales. Approximately 51% of the energy and capacity
sales from the Illinois Plants in the first six months of 2004 were made on a wholesale basis outside of the power purchase agreements.

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." Since the expansion of PJM and the commencement of MISO locational marginal pricing markets, EME believes that the most liquid delivery
locations for wholesale trading in the Midwest are the Northern Illinois Hub in PJM, the AEP/Dayton Hub in PJM, and the Cinergy Hub in MISO. Because of proximity, the Midwest Generation assets are
primarily hedged with transactions at the Northern Illinois Hub, but from time to time may be hedged in limited amounts at the AEP/Dayton Hub and the Cinergy Hub.

Effective
May 1, 2004, the transmission system of Commonwealth Edison was placed under the control of PJM as the Northern Illinois control area, and on October 1, 2004, the
transmission system of AEP was integrated into PJM, which linked eastern PJM and the Northern Illinois control areas of the PJM system and improved access from the Illinois Plants into the broader PJM
market. Under the PJM tariff, Midwest Generation is no longer required to arrange and pay separately for transmission when making sales to wholesale buyers located within the PJM system.

Following
the expansion of the PJM system described above, sales of electricity from the Illinois Plants have been made on the basis of 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

50

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to
the Illinois Plants, replaced sales previously made as bilateral sales and spot sales "Into ComEd" and "Into AEP." See "Regulatory Matters" in EME's annual report on Form 10-K
for the year ended December 31, 2004 for a more detailed discussion of developments regarding Commonwealth Edison's joining PJM, and "Basis Risk" below for a discussion of
locational marginal pricing.

2005 Merchant Sales

Beginning on January 1, 2005, electric power generated at the Illinois Plants is generally sold under bilateral arrangements with terms of two years or
less, or into the PJM market. The PJM pool has a short-term market, which establishes an hourly clearing price. The Illinois Plants are situated in the new expanded western PJM control
area and are physically connected to high-voltage transmission lines serving this market.

The
following table depicts the average historical market prices for energy per megawatt-hour during the first six months of 2005 and 2004.

2005(1)

2004January

$
38.36

$
27.88
(2)February


34.92


29.98
(2)March


45.75


30.66
(2)April


38.98


27.88
(2)May


33.60


34.05
(1)June


42.45


28.58
(1)Six-Month Average

$
39.01

$
29.84


---

Forward market prices at 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 by the Illinois Plants into these markets may vary materially from the forward market prices set forth in the table below.

51

---



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

24-Hour
Northern Illinois Hub
Forward Energy Prices*2005July

$
46.64August


48.68September


37.55October


33.44November


35.26December


41.222006 Calendar "strip"(1)

$
42.73


---

The following table summarizes Midwest Generation's hedge position (primarily based on prices at the Northern Illinois Hub) at June 30,
2005:

2005

2006Megawatt hours


9,386,086


9,707,014Average price/MWh(1)

$
38.15

$
41.84


---

Energy Price Risk Affecting Sales from the Homer City Facilities

Electric power generated at the Homer City facilities is generally sold under bilateral arrangements with terms of two years or less, or into the PJM market.
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.

52

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

24-Hour PJM
Historical Energy Prices*2005

2004January

$
45.82

$
51.12February


39.40


47.19March


47.42


39.54April


44.27


43.01May


43.67


44.68June


46.63


36.72Six-Month Average

$
44.54

$
43.71


---

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

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

24-Hour PJM West Hub
Forward Energy Prices*2005July

$
56.50August


58.55September


46.95October


43.52November


44.72December


51.252006 Calendar "strip"(1)

$
53.66


---

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

2005

2006Megawatt hours


4,641,100


5,256,000Average price/MWh(1)

$
44.94

$
51.50


---

53

---





The average price/MWh for Homer City's hedge position is based on PJM West Hub. Energy prices at the Homer City busbar have averaged 6% lower than energy prices at the PJM West Hub
during the past twelve months with the monthly average difference during this period ranging from zero to 13%, which occurred in June 2005. See "Basis Risk" below for a discussion
of the difference.

Basis Risk

Sales made from the Illinois Plants and the Homer City facilities in the real-time or day-ahead market receive the actual spot prices at
the busbars (delivery points) of the individual plants. In order to mitigate price risk from changes in spot prices at the individual plant busbars, 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 individual plant busbars. A liquid market does exist for
a delivery point known as the PJM West Hub in the case of Homer City and for a delivery point known as the Northern Illinois Hub in the case of the Illinois Plants. EME's price risk management
activities use these delivery points 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 of a specific delivery point to be raised or lowered relative to other locations depending on how
the point is affected by transmission constraints. During the past 12 months, transmission congestion in PJM has resulted in prices at the Homer City busbar being lower than those at the PJM
West Hub (the primary trading hub
in PJM for the Homer City facilities) by an average of 6%. By contrast, during the past 12 months, transmission congestion in PJM has not resulted in prices at the Northern Illinois Hub being
significantly different from those at the individual busbars of the Illinois Plants.

By
entering into forward contracts using the PJM West Hub and the Northern Illinois Hub as the delivery points, EME is exposed to "basis risk," which occurs when forward contracts are
executed on a different basis (PJM West Hub for Homer City and the Northern Illinois Hub for the Illinois Plants) than the actual point of delivery (the individual plant busbars). In order to mitigate
basis risk resulting from forward contracts using the 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 basis risk.

Coal Price and Transportation Risk

The Illinois Plants use approximately 18 million to 20.5 million tons of coal annually, primarily obtained from the Southern Powder River Basin of
Wyoming. In addition, the Homer City facilities use approximately 5 million tons of coal annually, obtained from mines located near the facilities in

54

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Pennsylvania.
Coal purchases are made under a variety of supply agreements typically ranging from one year to six years in length. The following table summarizes the percent of expected coal
requirements for the next five years that are under contract at June 30, 2005.

Percent of Coal Requirements Under Contract2005(1)

2006

2007

2008

2009Illinois Plants

110%

98%

96%

29%

29%Homer City facilities(2)

105%

53%

49%

14%

10%


---

EME is subject to price risk for purchases of coal that are not under contract. Prices of Northern Appalachia coal, which is purchased for the
Homer City facilities, increased considerably since 2004. In January 2004, prices of Northern Appalachia coal (with 13,000 British Thermal units (Btu) content and <3.0 SO2 MMBtu
content) were below $40 per ton and increased to more than $60 per ton during 2004. At July 22, 2005, the Energy Information Administration reported the price of Northern Appalachia coal at
$52.50 per ton. The overall increase in the Northern Appalachia coal price has been largely attributed to greater demand from domestic power producers and increased international shipments of coal to
Asia. Prices of Powder River Basin (PRB) coal (with 8,800 Btu content and 0.8 SO2 MMBtu content), which is purchased for the Illinois Plants, have recently increased due to curtailment of coal
shipments for the remainder of 2005 due to increased PRB coal demand from the other regions (east), rail constraints (discussed below) and higher prices for SO2 allowances. At July 22, 2005,
the Energy Information Administration reported the price of $9.66 per ton, which compares to 2004 prices generally below $7 per ton.

During
the first half of 2005, the rail lines that bring coal from the Powder River Basin to the East, including to EME's Illinois Plants, were damaged from derailments caused by heavy
rains. The railroads are in the process of making repairs to these rail lines and have advised their customers, including EME, that shipments will be curtailed by 15% to 20% during the second half of
2005. EME is working with its transportation provider to minimize any disruption of planned shipments. Based on communication with the transportation provider, EME expects to continue receiving a
sufficient amount of coal to generate power at historical levels while these repairs are being completed.

Emission Allowances Price Risk

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

The
price of emission allowances, particularly SO2 allowances issued through the US EPA Acid Rain Program, increased substantially during 2004 and the first half of 2005. The average
price of purchased SO2 allowances increased to $707 per ton during the six months ended June 30, 2005 from $281 per ton during the six months ended June 30, 2004. The increase in the
price of SO2 allowances has been attributed to reduced numbers of both allowance sellers and prior vintage allowances.

55

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

Credit Risk

In conducting EME's price risk management and trading activities, EME contracts with a number of utilities, energy companies, financial institutions, and other
companies, collectively referred to as counterparties. In the event a counterparty were to default on its trade obligation, EME would be exposed to the risk of possible loss associated with
re-contracting the product at a price different from the original contracted price if the non-performing counterparty were unable to pay the resulting liquidated damages owed
to EME. 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 as either: (i) the sum of 60 days of accounts receivable, current fair value of open
positions, and a credit value at risk, or (ii) the sum of delivered and unpaid accounts receivable and the current fair value of open positions. 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 June 30, 2005, the amount of exposure, broken down by the credit ratings of EME's
counterparties was as follows:

S&P Credit Rating

June 30, 2005(in millions)A or higher

$
2A-


15BBB+


82BBB


17BBB-


1Below investment grade


Total

$
117


EME's 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

56

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default
as a result of a bankruptcy, would likely have a material adverse effect on the operations of such power plant.

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

For
the six months ended June 30, 2005, one customer accounted for 11% of EME's consolidated operating revenues. For the six months ended June 30, 2004, one customer
accounted for 15% and a second customer, Exelon Generation, accounted for 33% of EME's consolidated operating revenues. For more information on Exelon Generation see "Commodity Price
RiskEnergy Price Risk Affecting Sales from the Illinois PlantsPre-2005 Merchant Sales."

Interest Rate Risk

Interest rate changes affect the cost of capital needed to operate EME's projects. EME mitigates 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
$3.6 billion at June 30, 2005, compared to the carrying value of $3.2 billion.

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 (in millions):

June 30,
2005

December 31,
2004Commodity price:Electricity

$
(122
)
$
10


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 table summarizes the maturities, the valuation method and the related fair value of EME's commodity price risk management assets and
liabilities as of June 30, 2005 (in millions):

Total Fair
Value

Maturity
<1 year

Maturity
1 to 3
years

Maturity
4 to 5
years

Maturity
>5 yearsPrices actively quoted

$
(122
)
$
(115
)
$
(7
)
$


$



57

---



Energy Trading Derivative Financial Instruments

EME's risk management and trading operations are conducted by its subsidiary, Edison Mission Marketing & Trading. Edison Mission Marketing & Trading
seeks to generate profit from the volatility of the price of electricity, fuels and transmission by buying and selling contracts for their sale or provision, as the case may be, which are referred to
as energy trading activities. Energy trading activities are primarily focused on understanding the relative values between different locations in the eastern power grid; particularly those locations
in PJM, MISO, and NYISO. See "Commodity Price RiskBasis Risk" above for a discussion of locational marginal pricing. Edison Mission Marketing & Trading utilizes
over-the-counter products as well as financial transmission rights, transmission congestion contracts, and virtual incremental and decremental generation bids to capture the
difference in prices between various locations.

The
fair value of the commodity financial instruments related to energy trading activities as of June 30, 2005 and December 31, 2004, are set forth below (in millions):

June 30, 2005

December 31, 2004Assets

Liabilities

Assets

LiabilitiesElectricity

$
114

$
18

$
125

$
36


The change in the fair value of trading contracts for the six months ended June 30, 2005, was as follows (in millions):

Fair value of trading contracts at January 1, 2005

$
89Net gains from energy trading activities


45Amount realized from energy trading activities


(38
)Fair value of trading contracts at June 30, 2005

$
96


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 following table summarizes the maturities, the valuation method and the related fair value of energy
trading assets and liabilities (as of June 30, 2005) (in millions):

Total Fair
Value

Maturity
<1 year

Maturity
1 to 3
years

Maturity
4 to 5
years

Maturity
>5 yearsPrices actively quoted

$
6

$
6

$


$


$
Prices based on models and other valuation methods


90


(2
)

9


7


76Total

$
96

$
4

$
9

$
7

$
76


Regulatory Matters

For a discussion of EME's regulatory matters, refer to "Overview of Domestic FacilitiesIllinois Power Markets" on page 5 of EME's annual
report on Form 10-K for the year ended December 31,

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2004
and "Regulatory Matters" on page 16 of EME's annual report on Form 10-K for the year ended December 31, 2004. There have been no significant developments with
respect to regulatory matters specifically affecting EME since the filing of EME's annual report, except as follows:

Opening of MISO Market

The MISO's day-ahead and real-time locational marginal pricing markets commenced operation on April 1, 2005. Since that time, the
wholesale electricity trading community has opted to trade a product delivered at the Cinergy Hub as defined by MISO rather than at the "Into Cinergy" location that was used previously. EME
anticipates that the opening of the MISO market will lead to increased liquidity in the Midwest electricity markets because locational marginal pricing provides a liquid and credible cash index
against which the trading community can settle contracts.

Passage of Comprehensive Energy Legislation by Congress

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

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of market risk sensitive instruments, refer to "Market Risk Exposures" on page 86 of EME's annual report on Form 10-K
for the year ended December 31, 2004. Refer to "Market Risk Exposures" in Item 2 of this report for an update to that disclosure.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

EME'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 second fiscal quarter of 2005 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 1.    LEGAL PROCEEDINGS

For
a discussion of EME's legal proceedings, refer to "Legal Proceedings" on page 23 of EME's annual report on Form 10-K for the year ended December 31,
2004. There have been no significant developments with respect to EME's legal proceedings specifically affecting EME since the filing of EME's annual report. See "Note 11. Commitments and
ContingenciesContingenciesLegal Developments Affecting Sunrise Power Company" for minor updates on litigation involving Sunrise Power Company.

ITEM 6.    EXHIBITS

|Exhibit No. |  | Description                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | 2005 Performance Goals for the Edison International Executive Incentive Compensation Plan, as adopted May 19, 2005, incorporated by reference to Exhibit 99.1 to Edison International's Current Report on Form 8-K dated May 19, 2005.
|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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