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, 2004                 
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 000-24890

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

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

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

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

Number of shares outstanding of the registrant's Common Stock as of August 6, 2004: 100 shares (all shares held by an affiliate of the registrant).



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TABLE OF CONTENTS

|                            |  |                                                                                       |  | Page
|--------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                            |  | PART I  Financial Information                                                        |  |     
|Item 1.                     |  | Financial Statements                                                                  |  | 1   
|Item 2.                     |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 24  
|Item 3.                     |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 68  
|Item 4.                     |  | Controls and Procedures                                                               |  | 69  
|PART II  Other Information |  |                                                                                      
|Item 6.                     |  | Exhibits and Reports on Form 8-K                                                      |  | 70  
|                            |  | Signatures                                                                            |  | 71  

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PART I  FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

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

|                                |                                                                                | Three Months Ended
June 30,  |          | Six Months Ended
June 30, |          
|------------------------------- | ------------------------------------------------------------------------------ | ---------------------------- | -------- | ------------------------- | ---------
|
|Operating Revenues              |                                                                                |                              |          |                           |          
|                                | Electric revenues                                                              |                              | $        | 696,522                   |          
|                                | Net gains from price risk management and energy trading                        |                              |          | 5,788                     |          
|                                | Operation and maintenance services                                             |                              |          | 10,778                    |          
|                                |                                                                                |                              |          |                           |          
|                                |                                                                                | Total operating revenues     |          |                           | 713,088  
|                                |                                                                                |                              |          |                           |          
|Operating Expenses              |                                                                                |                              |          |                           |          
|                                | Fuel                                                                           |                              |          | 216,345                   |          
|                                | Plant operations and transmission costs                                        |                              |          | 244,843                   |          
|                                | Plant operating leases                                                         |                              |          | 46,523                    |          
|                                | Operation and maintenance services                                             |                              |          | 9,371                     |          
|                                | Depreciation and amortization                                                  |                              |          | 74,760                    |          
|                                | Loss on lease termination, asset impairment and other charges                  |                              |          | 954,256                   |          
|                                | Administrative and general                                                     |                              |          | 46,595                    |          
|                                |                                                                                |                              |          |                           |          
|                                |                                                                                | Total operating expenses     |          |                           | 1,592,693
|                                |                                                                                |                              |          |                           |          
|                                | Operating loss                                                                 |                              |          | (879,605                  | )        
|                                |                                                                                |                              |          |                           |          
|Other Income (Expense)          |                                                                                |                              |          |                           |          
|                                | Equity in income from unconsolidated affiliates                                |                              |          | 96,017                    |          
|                                | Interest and other income                                                      |                              |          | 5,038                     |          
|                                | Gain on sale of assets                                                         |                              |          |                          |          
|                                | Interest expense                                                               |                              |          | (143,436                  | )        
|                                | Dividends on preferred securities                                              |                              |          |                          |          
|                                |                                                                                |                              |          |                           |          
|                                |                                                                                | Total other income (expense) |          |                           | (42,381  
|                                |                                                                                |                              |          |                           |          
|                                | Loss from continuing operations before income taxes and minority interest      |                              |          | (921,986                  | )        
|                                | Benefit for income taxes                                                       |                              |          | (357,039                  | )        
|                                | Minority interest                                                              |                              |          | (19,997                   | )        
|                                |                                                                                |                              |          |                           |          
|Loss From Continuing Operations |                                                                                |                              | (584,944 | )                         |          
|                                | Loss from operations of discontinued foreign subsidiaries, net of tax (Note 7) |                              |          | (117                      | )        
|                                |                                                                                |                              |          |                           |          
|Loss Before Accounting Change   |                                                                                |                              | (585,061 | )                         |          
|                                | Cumulative effect of change in accounting, net of tax (Note 15)                |                              |          |                          |          
|                                |                                                                                |                              |          |                           |          
|Net Loss                        |                                                                                | $                            | (585,061 | )                         | $        
|                                |                                                                                |                              |          |                           |          

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

1

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

|                                               |                                                                         | Three Months Ended
June 30,                                                                                                                                                                                                             |          | Six Months Ended
June 30, |        
|---------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | ------------------------- | -------
|
|Net Loss                                       |                                                                         | $                                                                                                                                                                                                                                       | (585,061 | )                         | $      
|Other comprehensive income (loss), net of tax: |                                                                         |                                                                                                                                                                                                                                         |          |                           |        
|                                               | Foreign currency translation adjustments:                               |                                                                                                                                                                                                                                         |          |                           |        
|                                               |                                                                         | Foreign currency translation adjustments, net of income tax expense (benefit) of $(344) and $2,269 for the three months and $1,173 and $1,304 for the six months ended June 30, 2004 and 2003,
respectively                             |          |                           | (29,199
|                                               | Minimum pension liability adjustment                                    |                                                                                                                                                                                                                                         |          | 171                       |        
|                                               | 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 $(20,229) and $20,527 for the three months and $(50,876) and $2,933 for the six months ended June 30,
2004 and 2003, respectively |          |                           | (3,853 
|                                               |                                                                         | Reclassification adjustments included in net income (loss), net of income tax expense (benefit) of $(15,736) and $447 for the three months and $(31,487) and $(3,484) for the six months ended June 30, 2004
and 2003, respectively     |          |                           | 22,030 
|                                               |                                                                         |                                                                                                                                                                                                                                         |          |                           |        
|Other comprehensive income (loss)              |                                                                         |                                                                                                                                                                                                                                         | (10,851  | )                         |        
|                                               |                                                                         |                                                                                                                                                                                                                                         |          |                           |        
|Comprehensive Loss                             |                                                                         | $                                                                                                                                                                                                                                       | (595,912 | )                         | $      
|                                               |                                                                         |                                                                                                                                                                                                                                         |          |                           |        

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 thousands, Unaudited)

|                                         |                                                                                  | June 30,
2004                     |            | December 31,
2003
|---------------------------------------- | -------------------------------------------------------------------------------- | --------------------------------- | ---------- | -----------------
|Assets                                   |                                                                                  |                                   |            |                  
|Current Assets                           |                                                                                  |                                   |            |                  
|                                         | Cash and cash equivalents                                                        |                                   | $          | 467,757          
|                                         | Accounts receivabletrade, net of allowance of $6,751 in 2004 and $6,470 in 2003 |                                   |            | 336,165          
|                                         | Accounts receivableaffiliates                                                   |                                   |            | 500,960          
|                                         | Assets under price risk management and energy trading                            |                                   |            | 30,877           
|                                         | Inventory                                                                        |                                   |            | 158,810          
|                                         | Prepaid expenses and other                                                       |                                   |            | 158,045          
|                                         |                                                                                  |                                   |            |                  
|                                         |                                                                                  | Total current assets              |            |                  
|                                         |                                                                                  |                                   |            |                  
|Investments in Unconsolidated Affiliates |                                                                                  |                                   | 1,632,677  |                  
|                                         |                                                                                  |                                   |            |                  
|Property, Plant and Equipment            |                                                                                  |                                   | 8,313,379  |                  
|                                         | Less accumulated depreciation and amortization                                   |                                   |            | 1,319,588        
|                                         |                                                                                  |                                   |            |                  
|                                         |                                                                                  | Net property, plant and equipment |            |                  
|                                         |                                                                                  |                                   |            |                  
|Other Assets                             |                                                                                  |                                   |            |                  
|                                         | Goodwill                                                                         |                                   |            | 853,176          
|                                         | Deferred financing costs                                                         |                                   |            | 81,665           
|                                         | Long-term assets under price risk management and energy trading                  |                                   |            | 97,670           
|                                         | Restricted cash                                                                  |                                   |            | 285,785          
|                                         | Rent payments in excess of levelized rent expense under plant operating leases   |                                   |            | 272,244          
|                                         | Other long-term assets                                                           |                                   |            | 119,154          
|                                         |                                                                                  |                                   |            |                  
|                                         |                                                                                  | Total other assets                |            |                  
|                                         |                                                                                  |                                   |            |                  
|Assets of Discontinued Operations        |                                                                                  |                                   | 1,422      |                  
|                                         |                                                                                  |                                   |            |                  
|Total Assets                             |                                                                                  | $                                 | 11,990,198 |                  
|                                         |                                                                                  |                                   |            |                  

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 thousands, Unaudited)

|                                                |                                                                                                      | June 30,
2004                        |            | December 31,
2003 |          
|----------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ----------------- | ---------
|Liabilities and Shareholder's Equity            |                                                                                                      |                                      |            |                   |          
|Current Liabilities                             |                                                                                                      |                                      |            |                   |          
|                                                | Accounts payableaffiliates                                                                          |                                      | $          | 31,934            |          
|                                                | Accounts payable and accrued liabilities                                                             |                                      |            | 382,709           |          
|                                                | Liabilities under price risk management and energy trading                                           |                                      |            | 219,522           |          
|                                                | Interest payable                                                                                     |                                      |            | 109,923           |          
|                                                | Short-term obligations                                                                               |                                      |            | 31,199            |          
|                                                | Current maturities of long-term obligations                                                          |                                      |            | 111,904           |          
|                                                |                                                                                                      |                                      |            |                   |          
|                                                |                                                                                                      | Total current liabilities            |            |                   | 887,191  
|                                                |                                                                                                      |                                      |            |                   |          
|Long-Term Obligations Net of Current Maturities |                                                                                                      |                                      | 6,794,534  |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Long-Term Deferred Liabilities                  |                                                                                                      |                                      |            |                   |          
|                                                | Deferred taxes and tax credits                                                                       |                                      |            | 1,272,196         |          
|                                                | Deferred revenue                                                                                     |                                      |            | 415,725           |          
|                                                | Long-term incentive compensation                                                                     |                                      |            | 29,339            |          
|                                                | Long-term liabilities under price risk management and energy trading                                 |                                      |            | 112,416           |          
|                                                | Junior subordinated debentures                                                                       |                                      |            | 154,639           |          
|                                                | Preferred securities subject to mandatory redemption                                                 |                                      |            | 158,250           |          
|                                                | Other                                                                                                |                                      |            | 326,587           |          
|                                                |                                                                                                      |                                      |            |                   |          
|                                                |                                                                                                      | Total long-term deferred liabilities |            |                   | 2,469,152
|                                                |                                                                                                      |                                      |            |                   |          
|Liabilities of Discontinued Operations          |                                                                                                      |                                      | 84         |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Total Liabilities                               |                                                                                                      |                                      | 10,150,961 |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Minority Interest                               |                                                                                                      |                                      | 504,681    |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Commitments and Contingencies(Note 10)          |                                                                                                      |                                      |            |                   |          
|Shareholder's Equity                            |                                                                                                      |                                      |            |                   |          
|                                                | Common stock, par value $0.01 per share; 10,000 shares authorized; 100 shares issued and outstanding |                                      |            | 64,130            |          
|                                                | Additional paid-in capital                                                                           |                                      |            | 2,634,864         |          
|                                                | Retained deficit                                                                                     |                                      |            | (1,327,900        | )        
|                                                | Accumulated other comprehensive loss                                                                 |                                      |            | (36,538           | )        
|                                                |                                                                                                      |                                      |            |                   |          
|Total Shareholder's Equity                      |                                                                                                      |                                      | 1,334,556  |                   |          
|                                                |                                                                                                      |                                      |            |                   |          
|Total Liabilities and Shareholder's Equity      |                                                                                                      | $                                    | 11,990,198 |                   | $        
|                                                |                                                                                                      |                                      |            |                   |          

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

4

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

|                                                                        |                                                                                       | Six Months Ended
June 30,                                       |           
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ----------
|
|Cash Flows From Operating Activities                                    |                                                                                       |                                                                 |           
|                                                                        | Loss from continuing operations, after accounting change, net                         |                                                                 | $         
|                                                                        | Adjustments to reconcile loss to net cash provided by (used in) operating activities: |                                                                 |           
|                                                                        |                                                                                       | Equity in income from unconsolidated affiliates                 |           
|                                                                        |                                                                                       | Distributions from unconsolidated affiliates                    |           
|                                                                        |                                                                                       | Depreciation and amortization                                   |           
|                                                                        |                                                                                       | Minority interest                                               |           
|                                                                        |                                                                                       | Deferred taxes and tax credits                                  |           
|                                                                        |                                                                                       | Asset impairment charges                                        |           
|                                                                        |                                                                                       | Gain on sale of assets                                          |           
|                                                                        |                                                                                       | Cumulative effect of change in accounting, net of tax           |           
|                                                                        | Changes in operating assets and liabilities:                                          |                                                                 |           
|                                                                        |                                                                                       | Increase in accounts receivable  trade                         |           
|                                                                        |                                                                                       | Increase in accounts receivable  affiliates                    |           
|                                                                        |                                                                                       | Decrease (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 in interest payable                                    |           
|                                                                        |                                                                                       | Decrease (increase) in net assets under risk management         |           
|                                                                        | Other operating, net                                                                  |                                                                 |           
|                                                                        |                                                                                       |                                                                 |           
|                                                                        |                                                                                       |                                                                 | (1,058,370
|                                                                        | Operating cash flows from discontinued operations                                     |                                                                 |           
|                                                                        |                                                                                       |                                                                 |           
|                                                                        |                                                                                       | Net cash provided by (used in) operating activities             |           
|                                                                        |                                                                                       |                                                                 |           
|Cash Flows From Financing Activities                                    |                                                                                       |                                                                 |           
|                                                                        | Borrowings on long-term debt and lease swap agreements                                |                                                                 |           
|                                                                        | Payments on long-term debt agreements                                                 |                                                                 |           
|                                                                        | Short-term financing and lease swap agreements, net                                   |                                                                 |           
|                                                                        | Cash dividends to minority shareholders                                               |                                                                 |           
|                                                                        | Financing costs                                                                       |                                                                 |           
|                                                                        |                                                                                       |                                                                 |           
|                                                                        |                                                                                       | Net cash provided by financing activities                       |           
|                                                                        |                                                                                       |                                                                 |           
|Cash Flows From Investing Activities                                    |                                                                                       |                                                                 |           
|                                                                        | Investments in and loans to energy projects                                           |                                                                 |           
|                                                                        | Purchase of common stock of acquired companies                                        |                                                                 |           
|                                                                        | Capital expenditures                                                                  |                                                                 |           
|                                                                        | Proceeds from return of capital and loan repayments                                   |                                                                 |           
|                                                                        | Proceeds from sale of interest in projects                                            |                                                                 |           
|                                                                        | Decrease in restricted cash                                                           |                                                                 |           
|                                                                        | Investments in other assets                                                           |                                                                 |           
|                                                                        |                                                                                       |                                                                 |           
|                                                                        |                                                                                       |                                                                 | 145,767   
|                                                                        | Investing cash flows from discontinued operations                                     |                                                                 |           
|                                                                        |                                                                                       |                                                                 |           
|                                                                        |                                                                                       | Net cash provided by (used in) investing activities             |           
|                                                                        |                                                                                       |                                                                 |           
|Effect of exchange rate changes on cash                                 |                                                                                       |                                                                 | 8,062     
|Effect on cash from deconsolidation of subsidiaries                     |                                                                                       |                                                                 | (34,231   
|                                                                        |                                                                                       |                                                                 |           
|Net increase (decrease) in cash and cash equivalents                    |                                                                                       |                                                                 | (36,127   
|Cash and cash equivalents at beginning of period                        |                                                                                       |                                                                 | 504,093   
|                                                                        |                                                                                       |                                                                 |           
|Cash and cash equivalents at end of period                              |                                                                                       |                                                                 | 467,966   
|Cash and cash equivalents classified as part of discontinued operations |                                                                                       |                                                                 | (209      
|                                                                        |                                                                                       |                                                                 |           
|Cash and cash equivalents of continuing operations                      |                                                                                       | $                                                               | 467,757   
|                                                                        |                                                                                       |                                                                 |           

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, 2004  (Dollars in millions, Unaudited)

Note 1.   General

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

Edison
Mission Energy's (EME's) significant accounting policies are described in Note 2 to its Consolidated Financial Statements as of December 31, 2003 and 2002, included in
EME's annual report on Form 10-K for the year ended December 31, 2003. EME follows the same accounting policies for interim reporting purposes, with the exception of the change in accounting
for variable interest entities (see Note 16). This quarterly report should be read in connection with such financial statements.

Terms
used but not defined in this report are defined in EME's annual report on Form 10-K for the year ended December 31, 2003. Certain prior period amounts have been reclassified
to conform to the current period financial statement presentation. These reclassifications had no effect on net income or shareholder's equity.

EME's
independent auditors' audit opinion for the year ended December 31, 2003 contains an explanatory paragraph that indicates the consolidated financial statements included in
its 2003 annual report on Form 10-K have been prepared on the basis that EME will continue as a going concern and that the uncertainty about Edison Mission Midwest Holdings' ability to repay or
refinance $693 million of debt that matures in December 2004 raises substantial doubt about EME's ability to continue as a going concern. In April 2004, all of the outstanding
debt of Edison Mission Midwest Holdings was
repaid in full through new financings obtained by Midwest Generation. For further discussion, see Note 9Refinancing.

Note 2.   Dispositions

Agreements to Sell International Projects

On July 20, 2004, EME entered into an agreement to sell its 51.2% interest in Contact Energy to Origin Energy Limited for total consideration of NZ$1,674.7
million (approximately $1.1 billion), which includes the assumption of NZ$535 million of debt. Completion of the sale, currently expected in the fourth quarter of 2004, is subject to
closing conditions and action by the New Zealand Takeovers Panel. EME has entered into a foreign currency hedge in order to protect against a depreciation in the value of the New Zealand dollar (in
which the sales price is denominated) versus the U.S. dollar.

On
July 29, 2004, EME entered into an agreement to sell its remaining international power generation portfolio, owned by a wholly owned Dutch subsidiary, MEC International BV, to
a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%). The purchase price is $2.3 billion, subject to certain purchase price adjustments prior to closing that are
expected to result in a net purchase price of approximately $2.2 billion. Closing of the BV transaction is subject to

6

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approval
by International Power's shareholders and to a number of regulatory approvals and project level consents. The sale is expected to close in the fourth quarter of 2004.

Together,
these two transactions represent the sale of all of EME's interests in its international projects. Net proceeds from these two transactions are expected to be approximately
$2.5 billion to EME after taxes, transaction expenses and purchase price adjustments. EME's initial estimate of the after-tax gain on sale of its international projects is approximately
$550 million. Net proceeds from the sale will be used to repay the $800 million secured loan at Mission Energy Holdings International, Inc. and other indebtedness. EME will retain
its ownership of the subsidiaries associated with the Lakeland project (see Note 7Discontinued Operations) and some inactive subsidiaries.

The
following table presents the condensed financial position of MEC International BV at June 30, 2004.

June 30, 2004Cash

$
198Property, plant and equipment


4,128Other assets


2,392Total assets

$
6,718Accounts payable

$
158Debt


2,840Deferred taxes


596Other liabilities


914Minority interest


733Equity


1,477Total liabilities and equity

$
6,718


Beginning
in the third quarter of 2004, EME will report its international operations as discontinued operations.

Sales of Domestic Projects

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

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

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 terminated the Collins Station lease through a negotiated transaction with the lease equity investor. Midwest Generation made a
lease termination payment of approximately

7

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$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 and plans to continue fulfilling its obligation under the power purchase agreement with Exelon Generation,
which is scheduled to expire at the end of 2004. 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 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.

Following
the termination of the Collins Station lease, Midwest Generation announced plans to permanently cease operations at the Collins Station by December 31, 2004 and
decommission the plant. On July 30, 2004, PJM accepted Midwest Generation's request to cease operations at the Collins Station. PJM found that the decommissioning of the plant would not affect
the operation or reliability of the PJM markets. As a result of the change in useful life, EME changed the estimated useful life of the remaining plant assets to the end of 2004. Accordingly, EME
plans to depreciate $20 million of plant assets over the period May through December 2004. At June 30, 2004, EME had not accrued for exit costs related to the expected
reduction in personnel as such amounts were not determinable at that time.

EME
anticipates that the termination payment and decomissioning will result in a substantial income tax deduction, thereby providing additional tax-allocation payments through the income
tax-allocation agreement when such loss can be used by Edison International in its consolidated and combined income tax returns. EME's receivable to be realized under the tax-allocation agreement was
$494 million at June 30, 2004, approximately $370 million of which is attributable to the Collins Station lease termination and decommissioning, and is included under accounts
receivable  affiliates in the consolidated balance sheet.

Asset
impairment charges were $251 million for the second quarter and six months ended June 30, 2003. Asset impairment charges in 2003 consisted of $245 million
related to the impairment of eight small peaking plants owned by Midwest Generation in Illinois and $6 million related to the write-down of EME's investment in the Gordonsville project due to
its planned disposition.

Note 4.     Goodwill and Intangible Assets

Effective January 1, 2002, EME adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
establishes accounting and reporting standards requiring goodwill not to be amortized but rather tested for impairment at least annually at the reporting unit level. EME will perform its annual
evaluation of goodwill on October 1, 2004 or sooner if indicators of impairment exist.

8

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Included in "Other long-term assets" on EME's consolidated balance sheet at June 30, 2004 and December 31, 2003 are customer contracts with a gross carrying amount of
$100 million and $104 million, respectively, and accumulated amortization of $15 million and $12 million, respectively. The contracts have a weighted average amortization
period of 20 years. For both of the three months ended June 30, 2004 and 2003, the amortization expense was $1 million. Amortization expense was $3 million and
$2 million for the six months ended June 30, 2004 and 2003, respectively. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for
fiscal years 2004 through 2008 is approximately $6 million each year.

Changes
in the carrying amount of goodwill, by geographical segment, for the six months ended June 30, 2004 are as follows:

|                                     |  | Americas |   | Asia Pacific |   | Europe |   | Total |    
|------------------------------------ |  | -------- | - | ------------ | - | ------ | - | ----- | ---
|Carrying amount at December 31, 2003 |  | $        | 2 |              | $ | 561    |   | $     | 304
|Translation adjustments and other    |  |          |  |              |   | (18    | ) |       | 4  
|                                     |  |          |   |              |   |        |   |       |    
|Carrying amount at June 30, 2004     |  | $        | 2 |              | $ | 543    |   | $     | 308
|                                     |  |          |   |              |   |        |   |       |    

Note 5. Inventory

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

June 30,
2004

December 31,
2003Coal and fuel oil

$
91

$
90Spare parts, materials and supplies


68


76Total

$
159

$
166


Note 6. Accumulated Other Comprehensive Income (Loss)

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

|                             |  | Currency
Translation
Adjustments |     | Unrealized Gains
(Losses) on Cash
Flow Hedges |   | Minimum
Pension Liability
Adjustment |   | Accumulated Other
Comprehensive
Income (Loss) |    
|---------------------------- |  | -------------------------------- | --- | --------------------------------------------- | - | ------------------------------------ | - | --------------------------------------------- | ---
|Balance at December 31, 2003 |  | $                                | 145 |                                               | $ | (156                                 | ) | $                                             | (11
|Current period change        |  |                                  | (7  | )                                             |   | (8                                   | ) |                                               |   
|                             |  |                                  |     |                                               |   |                                      |   |                                               |    
|Balance at June 30, 2004     |  | $                                | 138 |                                               | $ | (164                                 | ) | $                                             | (11
|                             |  |                                  |     |                                               |   |                                      |   |                                               |    

The
amount of commodity hedges included in unrealized gains (losses) on cash flow hedges, net of tax, at June 30, 2004, was a loss of $99 million. The amount of interest
rate hedges included in unrealized gains (losses) on cash flow hedges, net of tax, at June 30, 2004, was a loss of $65 million.

Unrealized
losses on commodity hedges included those related to the hedge agreement with the State Electricity Commission of Victoria for electricity prices from the Loy Yang B project
in Australia, and Homer City and Midwest Generation forward electricity contracts that did not meet the normal sales and purchases exception under SFAS No. 133. These losses arise because current
forecasts of future electricity prices in these markets are greater than contract prices. Unrealized losses on interest

9

---



rate
hedges included those related to EME's share of interest rate swaps of its unconsolidated affiliates, the Loy Yang B project and the Spanish Hydro project.

As
EME's hedged positions are realized, approximately $47 million, after tax, of the net unrealized losses on cash flow hedges at June 30, 2004 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. The maximum
period over which EME has designated a cash flow hedge, excluding those forecasted transactions related to the payment of variable interest on existing financial instruments, is 12 years. 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.

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 and $10 million during the second quarters of 2004 and 2003, respectively, and $5
million and $2 million during the six months ended June 30, 2004 and 2003, respectively, representing the amount of cash flow hedges' ineffectiveness, reflected in net gains
(losses) from price risk management and energy trading in EME's consolidated income statement.

Contact
Energy enters into cross currency interest rate swaps that qualify as fair value hedges. These cross currency swap contracts involve swapping fixed and floating-rate U.S. and
Australian dollar loans into floating-rate New Zealand dollar loans. During the second quarter and six months ended June 30, 2004, EME recorded approximately $2 million
representing the amount of fair value hedges' ineffectiveness from changes in the fair value of hedge positions, reflected in net gains (losses) from price risk management and energy trading in EME's
consolidated income statement. EME had no comparable results in 2003.

Note 7. Discontinued Operations

Sale of International Operations

As described in Note 2, EME entered into agreements to sell its international operations in July 2004. As a result, beginning in the third quarter of 2004,
EME will reclassify current and historical results of its international operations as discontinued operations.

Ferrybridge and Fiddler's Ferry Plants

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

The
balance sheet at June 30, 2004 and December 31, 2003, is comprised of current assets of $1 million and $5 million, respectively. In addition, there were
other long-term assets of $1 million and current liabilities of $1 million at December 31, 2003.

10

---



Lakeland Project

In 2001, EME ceased consolidating the activities of Lakeland Power Ltd. when an administrator receiver was appointed following a default by Norweb Energi Ltd, the
counterparty to a long-term power sales agreement. The consolidated financial statements have been restated to conform to discontinued operations treatment for all historical periods presented. In
2003, a third party completed the purchase of the Lakeland power plant from the administrative receiver for £24 million. The proceeds from the sale and existing cash were used to
fund partial repayment of the outstanding debt owed to secured creditors of the project. Lakeland Power Ltd.'s administrative receiver has filed a claim against Norweb Energi Ltd. for termination of
the power purchase agreement. To the extent that Lakeland Power Ltd. receives payment under its claim, such amounts will first be used to repay amounts due to creditors. Any residual amount will be
distributed to EME's subsidiary that owns the outstanding shares of Lakeland Power Ltd. There is no assurance that there will be any cash available to distribute from the ultimate resolution of this
claim.

Summarized
results of discontinued operations are as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,2004

2003

2004

2003Total operating revenues

$


$


$


$
Loss before income taxes





(1
)




(1
)Loss from operations of discontinued foreign subsidiaries





(2
)




(2
)


Note 8. Employee Benefit Plans

Pension Plans

EME previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $13 million to its United
States pension plans in 2004. As of June 30, 2004, $3 million in contributions have been made. EME anticipates that its original expectation will be met by year-end 2004.

Components
of pension expense for United States plans are:

Three Months Ended
June 30,

Six Months Ended
June 30,2004

2003

2004

2003Service cost

$
4

$
4

$
8

$
8Interest cost


2


2


4


4Expected return on plan assets


(1
)

(1
)

(2
)

(2
)Net amortization and deferral











Total expense

$
5

$
5

$
10

$
10


EME
expects to contribute approximately $4 million to its foreign pension plans in 2004. As of June 30, 2004, approximately $2 million in contributions have been
made.

11

---



Components
of pension expense for foreign plans are:

Three Months Ended
June 30,

Six Months Ended
June 30,2004

2003

2004

2003Service cost

$
1

$
1

$
2

$
1Interest cost


1


1


2


2Expected return on plan assets


(1
)

(1
)

(2
)

(2
)Curtailment/settlement











2Net amortization and deferral











Total expense

$
1

$
1

$
2

$
3


Postretirement Benefits Other Than Pensions

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

Components
of postretirement benefits expense are:

Three Months Ended
June 30,

Six Months Ended
June 30,2004

2003

2004

2003Service cost

$


$


$


$
Interest cost


1


1


2


2Expected return on plan assets











Net amortization and deferral











Total expense

$
1

$
1

$
2

$
2


Note 9. Refinancing

EME Financing Developments

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

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

Midwest Generation Financing Developments

On April 27, 2004, Midwest Generation completed a private offering of $1 billion aggregate principal amount of its 8.75% second priority senior
secured notes due 2034. Holders of the notes may

12

---



require
Midwest Generation to repurchase, or Midwest Generation may elect to repay, the notes on May 1, 2014 and on each one-year anniversary thereafter at 100% of their principal amount, plus
accrued and unpaid interest. Concurrent with the issuance of the notes, Midwest Generation borrowed $700 million under a new first priority senior secured term loan facility. The term loan has
a final maturity of April 27, 2011 and bears interest at LIBOR plus 3.25% per annum. Midwest Generation has agreed to repay $1,750,000 of the term loan on each quarterly payment date. Midwest
Generation also entered into a new five-year $200 million working capital facility that replaced a prior facility. The new working capital facility also provides for the issuance of letters of credit.
As of June 30, 2004, Midwest Generation had borrowed $40 million under the working capital facility and had reimbursement obligations under a letter of credit for approximately
$3 million that expires in 2005. Midwest Generation used the proceeds of the notes issuance and the term loan to refinance $693 million of indebtedness (plus accrued interest and fees) owed by
its direct parent, Edison Mission Midwest Holdings Co., which had been guaranteed by Midwest Generation and was due in December 2004, and to make the termination payment under the Collins
Station lease in the amount of approximately $960 million.

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

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

Note 10. Commitments and Contingencies

Contractual Obligations

EME's long-term debt maturities for the five twelve-month periods ended June 30, 2004 are: 2005$112 million;
2006$258 million; 2007$987 million; 2008$228 million; 2009$1.1 billion; and thereafter$4.3 billion.
These amounts have been updated primarily to reflect financing activities completed during the second quarter of 2004. See Note 9Refinancing.

Capital Improvements

At June 30, 2004, EME's subsidiaries had firm commitments to spend approximately $62 million ($8 million related to domestic operations) on
construction and other capital investments during the remainder of 2004 through 2008. These expenditures are planned to be financed by existing subsidiary credit facilities and cash generated from
these operations. The construction and other capital expenditures primarily relate to the construction of a power plant in New Zealand by Contact Energy and planned improvements at Midwest Generation.

13

---



Commercial Commitments

Introduction

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

Standby Letters of Credit

At June 30, 2004, standby letters of credit aggregated $130 million and were scheduled to expire as follows: remainder of
2004$64 million; 2005$30 million; and 2008 and thereafter$36 million.

Guarantees and Indemnities

Tax
Indemnity Agreements

In
connection with the sale-leaseback transactions that EME has entered into related to the Collins Station and the Powerton and Joliet Stations in Illinois and the Homer City facilities
in Pennsylvania, EME or one of its subsidiaries entered into tax indemnity agreements. Under these tax indemnity
agreements, these entities agreed to indemnify the lessors in the sale-leaseback transactions for specified adverse tax consequences that could result in certain situations set forth in each tax
indemnity agreement, including specified defaults under the respective leases. The potential indemnity obligations under these tax indemnity agreements could be significant. Due to the nature of these
potential obligations, EME cannot determine a maximum potential liability which would be triggered by a valid claim from the lessors. EME has not recorded a liability related to these indemnities. In
connection with the termination of the lease for the Collins Station (See Note 9Refinancing), Midwest Generation will continue to have obligations under the tax indemnity agreement with
the former lease equity investor.

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

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

Midwest
Generation entered into a supplemental agreement with Commonwealth Edison and Exelon Generation Company, LLC on February 20, 2003 to resolve a dispute regarding
interpretation of its reimbursement obligation for asbestos claims under the environmental indemnities set forth in the Asset Sale Agreement. Under this supplemental agreement, Midwest Generation
agreed to reimburse Commonwealth Edison and Exelon Generation for 50% of specific existing asbestos claims and expenses less recovery of insurance costs, and agreed to a sharing arrangement for
liabilities and expenses associated with future asbestos related claims as specified in the agreement. The obligations under this agreement are not subject to a maximum liability. The supplemental
agreement has a five-year term with an automatic renewal provision (subject to the right to terminate). Payments are made

14

---



under
this indemnity upon tender by Commonwealth Edison of appropriate proof of liability for an asbestos-related settlement, judgment, verdict, or expense. At June 30, 2004, Midwest Generation
had $14 million recorded as a liability related to this matter and had made $1 million in payments through June 2004.

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

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

Indemnities
Provided under Asset Sale Agreements

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

Guarantee
of Brooklyn Navy Yard Contractor Settlement Payments

On
March 31, 2004, EME completed the sale of 100% of the stock of Mission Energy New York, Inc., which holds a fifty percent partnership interest in Brooklyn Navy Yard
Cogeneration Partners, L.P. (referred to as Brooklyn Navy Yard) to BNY Power Partners LLC. Brooklyn Navy Yard owns a 286 MW gas-fired cogeneration power plant in Brooklyn, New York. In
February 1997, the construction contractor asserted general monetary claims under the turnkey agreement against Brooklyn Navy Yard. A settlement agreement was executed on January 17,
2003, and all litigation has been dismissed. EME agreed to indemnify Brooklyn Navy Yard and, in connection with the sale of EME's interest in Brooklyn Navy Yard, BNY Power Partners for any payments
due under this settlement agreement, which are scheduled through 2006. At June 30, 2004, EME recorded a liability of $10 million related to this indemnity.

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

15

---



contracts.
The obligations under the indemnification agreements as of June 30, 2004, if payment were required, would be $168 million. EME has no reason to believe that any of these
projects will either cease operations or reduce its electric power producing capability during the term of its power contract.

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

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

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. Defendants,
including Sunrise Power Company, have stipulated to respond to the complaint thirty days after it is assigned to a specific court of the San Francisco Superior Court. In December 2003,
Mr. Millar filed a First Amended Class Action and Representative Action Complaint which contains allegations similar to those in the earlier complaint but also alleges a class action.
One of the newly added parties has again removed the lawsuit to federal court. After various procedural motions, the case has been assigned to Judge Whaley in San Diego, who will hear plaintiff's
motion to remand and any motions to dismiss later this year. 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

---



Regulatory Developments Affecting Doga Project

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

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

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

On
May 12, 2003, the Danistay rejected Doga's request for injunctive relief (as well as those of the other power companies with similar claims). On July 10, 2003, Doga
appealed the Danistay's ruling. Doga's appeal was heard by the General Council of the Administrative Chambers of Danistay on October 10, 2003 and was rejected. There are no further rights of
appeal against the decision regarding the injunction. The Danistay will continue to hear the merits of Doga's lawsuit. A decision is expected to be rendered late in 2004.

Supply Contract from NRG Power Marketing

EMMT was obligated to provide electricity to an unconsolidated 25%-owned affiliate, CL Power Sales Eight, L.L.C., referred to as CL Eight. As of May 27,
2004, EMMT was no longer the power supplier to CL Eight. Accordingly, this contingent liability terminated as of that date.

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.

17

---



Litigation

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

Environmental Matters and Regulations

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

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

18

---



Note 11.     Business Segments

EME operates predominantly in one line of business, electric power generation, with reportable segments organized by geographic region: Americas, Asia Pacific and
Europe. See Note 2Dispositions for a description of the agreements related to the sale of EME's international operations.

|Three Months Ended                                                                 |                          | Americas |      | Asia Pacific |   | Europe |     | Corporate/
Other |     | Total |  
|---------------------------------------------------------------------------------- | ------------------------ | -------- | ---- | ------------ | - | ------ | --- | ---------------- | --- | ----- | -
|June 30, 2004                                                                      |                          |          |      |              |   |        |     |                  |     |       |  
|Operating revenues from consolidated subsidiaries                                  |                          | $        | 357  |              | $ | 270    |     | $                | 80  |       | $
|Net gains (losses) from price risk management and energy trading                   |                          |          | 2    |              |   | 9      |     |                  | (5  | )     |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|                                                                                   | Total operating revenues |          | $    | 359          |   | $      | 279 |                  | $   | 75    |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|Income (loss) from continuing operations before income taxes and minority interest |                          | $        | (901 | )(1)         | $ | 87     |     | $                | 6   |       | $
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|June 30, 2003                                                                      |                          |          |      |              |   |        |     |                  |     |       |  
|Operating revenues from consolidated subsidiaries                                  |                          | $        | 330  |              | $ | 257    |     | $                | 110 |       | $
|Net gains (losses) from price risk management and energy trading                   |                          |          | 23   |              |   | 1      |     |                  | (6  | )     |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|                                                                                   | Total operating revenues |          | $    | 353          |   | $      | 258 |                  | $   | 104   |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|Income (loss) from continuing operations before income taxes and minority interest |                          | $        | (195 | )(2)         | $ | 53     |     | $                | (19 | )     | $
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  

|Six Months Ended                                                                   |                          | Americas |      | Asia Pacific |   | Europe |     | Corporate/
Other |     | Total |  
|---------------------------------------------------------------------------------- | ------------------------ | -------- | ---- | ------------ | - | ------ | --- | ---------------- | --- | ----- | -
|June 30, 2004                                                                      |                          |          |      |              |   |        |     |                  |     |       |  
|Operating revenues from consolidated subsidiaries                                  |                          | $        | 716  |              | $ | 531    |     | $                | 242 |       | $
|Net gains (losses) from price risk management and energy trading                   |                          |          | 3    |              |   | 7      |     |                  | (3  | )     |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|                                                                                   | Total operating revenues |          | $    | 719          |   | $      | 538 |                  | $   | 239   |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|Income (loss) from continuing operations before income taxes and minority interest |                          | $        | (818 | )(1)         | $ | 152    |     | $                | 44  |       | $
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|June 30, 2003                                                                      |                          |          |      |              |   |        |     |                  |     |       |  
|Operating revenues from consolidated subsidiaries                                  |                          | $        | 698  |              | $ | 450    |     | $                | 242 |       | $
|Net gains (losses) from price risk management and energy trading                   |                          |          | 27   |              |   | (5     | )   |                  | (11 | )     |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|                                                                                   | Total operating revenues |          | $    | 725          |   | $      | 445 |                  | $   | 231   |  
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  
|Income (loss) from continuing operations before income taxes and minority interest |                          | $        | (156 | )(2)         | $ | 69     |     | $                | 5   |       | $
|                                                                                   |                          |          |      |              |   |        |     |                  |     |       |  

---

19

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Note 12.     Investments in Unconsolidated Affiliates

The following table presents summarized financial information of the significant subsidiary investments in unconsolidated affiliates accounted for by the equity
method. The significant subsidiary investments include the California Power Group, Watson Cogeneration Company, PT Paiton Energy and ISAB Energy S.r.l. The California Power Group (not a legal entity)
consists of Kern River Cogeneration Company, Sycamore Cogeneration Company, Coalinga Cogeneration Company, Mid-Set Cogeneration Company, Salinas River Cogeneration Company, Sargent Canyon Cogeneration
Company, and Sunrise Power Company, LLC. For the three and six months ended June 30, 2003, the significant subsidiary investments also included Four Star Oil & Gas Company. EME
sold 100% of its stock of Edison Mission Energy Oil & Gas, which in turn held minority interests in Four Star Oil & Gas, on January 7, 2004. Therefore, Four Star Oil & Gas
is not included in the balances for the three and six months ended June 30, 2004.

Three Months Ended
June 30,

Six Months Ended
June 30,2004

2003

2004

2003Operating revenues

$
572

$
611

$
1,089

$
1,171Operating income


186


225


320


386Income before accounting change


136


175


218


297Net income


136


175


218


279


Note 13.     Supplemental Statements of Cash Flows Information

Six Months Ended
June 30,2004

2003Cash paidInterest (net of amount capitalized)

$
247

$
220Income taxes (receipts)


97


(60
)Cash payments under plant operating leases


164


197Details of assets acquiredFair value of assets acquired

$


$
333Liabilities assumed





58Net cash paid for acquisitions

$


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

$
220

$
Liabilities


254





Note 14.     Stock-based Compensation

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

20

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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 loss, as reported                                                                                                                       |  | $                           | (585 | )                         | $
|Add: stock-based compensation expense included in reported net 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 |  |                             |     |                           |  
|                                                                                                                                            |  |                             |      |                           |  
|Pro forma net loss                                                                                                                          |  | $                           | (582 | )                         | $
|                                                                                                                                            |  |                             |      |                           |  

Note 15.     Cumulative Effect of Change in Accounting Principle

Effective January 1, 2003, EME adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is increased to its present value each period, and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. As of January 1, 2003, EME
recorded a $9 million, after tax, decrease to net income as the cumulative effect of the adoption of SFAS No. 143.

Note 16.     New Accounting Pronouncements

Statement of Financial Accounting Standards Interpretation No. 46

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

Variable Interest Entities

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

21

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following
table summarizes the variable interest entities in which EME has a significant variable interest:

|Variable Interest Entity |  | Location              |  | Investment at
June 30, 2004 |     | Ownership
Interest at
June 30, 2004 |    | Description
|------------------------ |  | --------------------- |  | --------------------------- | --- | ----------------------------------- | -- | -----------
|Paiton                   |  | East Java, Indonesia  |  | $                           | 600 |                                     | 45 | %          
|EcoEléctrica             |  | Peñuelas, Puerto Rico |  |                             | 295 |                                     | 50 | %          
|ISAB                     |  | Sicily, Italy         |  |                             | 96  |                                     | 49 | %          
|Watson                   |  | Carson, CA            |  |                             | 95  |                                     | 49 | %          
|Sunrise                  |  | Fellows, CA           |  |                             | 84  |                                     | 50 | %          
|CBK                      |  | Manila, Philippines   |  |                             | 82  |                                     | 50 | %          
|Sycamore                 |  | Bakersfield, CA       |  |                             | 60  |                                     | 50 | %          
|Midway-Sunset            |  | Fellows, CA           |  |                             | 54  |                                     | 50 | %          
|Kern River               |  | Bakersfield, CA       |  |                             | 46  |                                     | 50 | %          
|IVPC4 Srl                |  | Italy                 |  |                             | 42  |                                     | 50 | %          
|Tri Energy               |  | Bangkok, Thailand     |  |                             | 22  |                                     | 25 | %          
|Doga                     |  | Esenyurt, Turkey      |  |                             | 14  |                                     | 80 | %          

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

Deconsolidation of Variable Interest Entities

In accordance with FIN 46R, EME determined that it was not the primary beneficiary of the following two projects due to the provisions of long-term power
contracts which are variable interests. Accordingly, EME deconsolidated these projects at March 31, 2004:



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FASB Staff Position FAS 106-2

In May 2004, the FASB issued FASB Staff Position FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." The primary objective of the position is to provide accounting guidance related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. EME will
adopt this guidance in the third quarter of 2004. If EME's retiree health care plans provide prescription drug benefits that are deemed to be actuarially equivalent to Medicare benefits, EME will
recognize the subsidy in the measurement of its accumulated obligation and record an actuarial gain. Proposed federal regulations defining actuarial equivalency are expected in the third quarter of
2004, with final regulations expected
to be released by year-end 2004. Until the proposed regulations are issued, EME is unable to predict the effect of the new law on its postretirement health care costs and obligations.

23

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

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

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

PageManagement's Overview; Critical Accounting Policies and Estimates

24Results of Operations

28Liquidity and Capital Resources

44Market Risk Exposures

55


MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Overview

Introduction

During the first six months of 2004, management continued to implement the restructuring plan announced during the fourth quarter of 2003, including the
sale of EME's international assets and refinancing of 2004 debt maturities.

Disposition of EME's International Operations

As indicated in EME's annual report on Form 10-K for the year ended December 31, 2003, EME engaged investment bankers to market for sale its international
project portfolio. Subsequent to June 30, 2004, EME announced the following:



24

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Together,
these two transactions represent the sale of all of EME's interests in its international projects. Net proceeds from these two transactions are expected to be approximately
$2.5 billion to EME after taxes, transaction expenses and purchase price adjustments. EME's initial estimate of the after-tax gain on sale of its international projects is approximately
$550 million. Net proceeds from the sale will be used to repay the $800 million secured loan at Mission Energy Holdings International, Inc. and other indebtedness. See "Edison
Mission Energy and Subsidiaries Notes to Consolidated Financial StatementsNote 2. Dispositions." EME will retain its ownership of the Lakeland project (see "Results of
OperationsConsolidated Operating ResultsDiscontinued Operations") and some inactive international subsidiaries.

Completion of Midwest Generation Refinancing

On April 27, 2004, Midwest Generation completed the issuance of $1 billion aggregate principal amount of its 8.75% second priority senior secured
notes and entered into a new credit agreement, which includes a $700 million, first priority senior secured term loan facility and a $200 million, first priority senior secured working
capital facility. Proceeds from these transactions were used to refinance $693 million of indebtedness (plus accrued interest and fees) and to make termination payments under the Collins
Station lease in the amount of approximately $960 million. The new working capital facility replaced an existing working capital facility. Completion of these financings was a major goal for
2004. See "Liquidity and Capital ResourcesKey Financing DevelopmentsMidwest Generation Financing Developments" for further details related to these financings. Also, see
"Liquidity and Capital ResourcesTermination of the Collins Station Lease" for details related to termination of the Collins Station lease.

EME Financing Developments

On April 27, 2004, EME replaced its $145 million corporate credit facility with a new three-year $98 million secured corporate credit
facility. In addition, EME repaid the remaining $28 million due under the Coal and Capex facility (guaranteed by EME) in April 2004. Accordingly, this credit agreement has been
terminated and EME no longer has a contingent liability related to this credit agreement.

Overview of EME's 2004 Financial Performance

EME's financial performance in the second quarter and six months ended June 30, 2004 and 2003 included a number of important items:



25

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Excluding
these items, EME's income (loss) from continuing operations was $1 million and $3 million during the three and six months ended June 30, 2004,
respectively, compared to $(12) million and $(20) million during the comparable periods of the prior year. Key items affecting EME's operating performance included:



Elimination of Restrictions on Dividends to MEHC

EME amended its certificate of incorporation and bylaws in May 2004 to eliminate the so-called "ring-fencing" provisions that were implemented in early
2001 during the California energy crisis. The ring-fencing provisions were implemented to protect EME's credit rating from the negative events then affecting Edison International and its subsidiary,
Southern California Edison. Despite the ring-fencing provisions, EME's Standard & Poor's credit rating fell to "B" and therefore, EME's management believed that these provisions, which included
dividend restrictions and a requirement to maintain an independent director, were no longer necessary.

In
July 2004, EME made dividend payments totaling $69 million to its parent, Mission Energy Holding Company, or MEHC.

Expansion of PJM in Illinois

The Illinois Plants are located within the service territory of Exelon Generation's affiliate, Commonwealth Edison, which on April 27, 2004 was granted
approval by the Federal Energy Regulatory Commission (the FERC), to join PJM Interconnection, LLC (PJM) effective May 1, 2004. For further discussion, see "Market Risk
ExposuresRegulatory Matters."

Dispositions of Investments in Energy Plants

On March 31, 2004, EME completed the sale of its 50% partnership interest in Brooklyn Navy Yard Cogeneration Partners L.P. to a third party for a sales
price of approximately $42 million. EME recorded an impairment charge of $53 million during the fourth quarter of 2003 related to the planned

26

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disposition
of this investment and a pre-tax loss of approximately $4 million during the first quarter of 2004 due to changes in the terms of the sale.

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

Critical Accounting Policies and Estimates

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

27

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RESULTS OF OPERATIONS

Introduction

This section discusses operating results for the second quarters and six months of 2004 and 2003, first from the point of view of EME on a consolidated basis and
thereafter with respect to each of the three regional segments. This section also discusses the effect of new accounting pronouncements on EME's consolidated financial statements. It is organized
under the following headings:

PageConsolidated Operating Results

28Regional Operating Results

34New Accounting Pronouncements

42


Consolidated Operating Results

Net Loss Summary

Net loss is comprised of the following components:

|                                  |  | Three Months Ended June 30, |      | Six Months Ended June 30, |  
|--------------------------------- |  | --------------------------- | ---- | ------------------------- | -
|
|
|Loss from continuing operations   |  | $                           | (585 | )                         | $
|Loss from discontinued operations |  |                             |     |                           |  
|Cumulative changes in accounting  |  |                             |     |                           |  
|                                  |  |                             |      |                           |  
|Net Loss                          |  | $                           | (585 | )                         | $
|                                  |  |                             |      |                           |  

EME's loss from continuing operations for the second quarter and six months ended June 30, 2004 and 2003 is comprised of:

|                                                                    |                                                                                           | Three Months Ended June 30, |      | Six Months Ended June 30, |  
|------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------- | ---- | ------------------------- | -
|
|
|Loss from Continuing Operations                                     |                                                                                           | $                           | (585 | )                         | $
|Discrete Items (after tax)                                          |                                                                                           |                             |      |                           |  
|                                                                    | Loss on lease termination, asset impairment and other charges (see "Operating Expenses") |                             |      | (586                      | )
|                                                                    | Gain on sale of assets (see "Other Income (Expense)")                                    |                             |      |                          |  
|                                                                    |                                                                                           |                             |      |                           |  
|Income (loss) from Continuing Operations (excluding discrete items) |                                                                                           | $                           | 1    |                           | $
|                                                                    |                                                                                           |                             |      |                           |  

The increase in the second quarter income from continuing operations, excluding discrete items, was primarily due to improved performance from
Contact Energy and the ISAB project and higher earnings from EME's Homer City facility due to higher generation and energy prices. The year-to-date increase in income from continuing operations,
excluding discrete items, was primarily due to increased

28

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profitability
at EME's Illinois Plants from higher energy margins and higher earnings from Contact Energy, EME's First Hydro plant and the ISAB project. Partially offsetting these increases was the
absence of earnings from Four Star Oil & Gas, which was sold on January 7, 2004, and higher interest expense.

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

Operating Revenues

Electric revenues increased $11 million and $103 million for the second quarter and six months ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. The second quarter increase was primarily due to increased electric revenues from Contact Energy mostly attributable to increased retail revenues and an
increase in the value of the New Zealand dollar compared to the U.S. dollar. In addition, electric revenues increased from Homer City due to higher generation and higher energy prices. Partially
offsetting these increases were no second quarter 2004 revenues from the Doga and Kwinana projects due to the adoption of FIN 46 resulting in the deconsolidation of these projects on March 31,
2004.

The
2004 year-to-date increase was primarily due to strengthening of foreign currencies in New Zealand, Australia and United Kingdom (estimated impact was approximately
$99 million using the change in exchange rates times the current year-to-date foreign currency revenues), increased revenues from Contact Energy as described above and from Loy Yang B due to
higher generation. In addition, revenues increased due to higher revenues from the Illinois Plants and the First Hydro plant. Partially offsetting these increases were no second quarter 2004 revenues
from the Doga and Kwinana projects due to the deconsolidation of these projects on March 31, 2004.

Net
gains (losses) from price risk management and energy trading activities are comprised of:

|                      |  | Three Months Ended June 30, |   | Six Months Ended June 30, |  
|--------------------- |  | --------------------------- | - | ------------------------- | -
|
|
|Price risk management |  | $                           | 1 |                           | $
|Energy trading        |  |                             | 5 |                           |  
|                      |  |                             |   |                           |  
|Net gains             |  | $                           | 6 |                           | $
|                      |  |                             |   |                           |  

Net
gains and (losses) from price risk management activities result from recording derivatives at fair value under Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133). Included in net gains (losses) from price risk management were:



29

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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 a net gain (loss) of approximately $(1) million and $10 million during the second quarters of 2004 and 2003, respectively,
and $5 million and $2 million during the six months ended June 30, 2004 and 2003, respectively, representing the amount of the ineffective portion of the cash flow hedges. The
ineffective gains (losses) during the second quarter and six months ended June 30, 2004 and 2003 from Homer City were partially attributable to changes in the difference between energy prices
at PJM West Hub (the delivery point under forward contracts) and the energy prices at the delivery point where power generated by the Homer City facilities is delivered into the transmission system
(referred to as the Homer City busbar). In addition, Homer City recognized ineffective gains (losses) related to forward contracts that expired during the respective periods. See "Market Risk
ExposuresCommodity Price RiskAmericas" for more information regarding forward market prices.

The
net gains from energy trading activities were the result of proprietary trading in the power markets in which EME has power plants. Gains from proprietary energy trading activities
during the first six months of 2004 were lower than the corresponding period in 2003 due to less favorable market conditions (prices and volatility).

EME's
third quarter electric revenues are generally materially higher than revenues related to other quarters of the year because warmer weather during the summer months results
in higher electric revenues from the Homer City facilities and the Illinois Plants. By contrast, the First Hydro plants generally have higher electric revenues during their winter months.

Operating Expenses

Fuel costs decreased $27 million and $10 million for the second quarter and six months ended June 30, 2004, respectively, compared to
the corresponding periods of 2003. The second quarter decrease was primarily due to the deconsolidation of the Doga and Kwinana projects on March 31, 2004 and decreased fuel costs from Contact
Energy primarily due to lower wholesale electricity and gas sales. Partially offsetting these decreases were increased fuel costs from Homer City primarily due to higher sulfur-dioxide emission
prices. The 2004 year-to-date decrease was primarily due to the deconsolidation of the Doga and Kwinana projects and decreased fuel costs from Contact Energy, partially offset by increased purchased
power costs from the First Hydro plant.

Plant
operations and transmission costs decreased $3 million and increased $12 million for the second quarter and six months ended June 30, 2004,
respectively, compared to the corresponding

30

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periods
of 2003. Transmission costs were $75 million and $63 million for the second quarters of 2004 and 2003, respectively, and $143 million and $118 million for the
six months ended June 30, 2004 and 2003, respectively. The 2004 increases in transmission costs were primarily due to higher retail sales generated by Contact Energy and an increase in
the value of the New Zealand dollar compared to the U.S. dollar. The year-to-date increase in transmission costs was partially offset by lower plant operations expenses at the Illinois Plants due to
lower property taxes, plant overhaul expenses and railcar lease costs.

Plant
operating leases expense decreased $5 million and $6 million for the second quarter and six months ended June 30, 2004, respectively, compared to the
corresponding periods of 2003. The 2004 decreases were primarily due to the termination of the Collins Station lease on April 27, 2004.

Depreciation
and amortization expenses increased $3 million and $5 million for the second quarter and six months ended June 30, 2004, respectively, compared
to the corresponding periods of 2003. The 2004 increases were primarily due to higher depreciation expense from Contact Energy attributable to the strengthening of the New Zealand dollar compared to
the U.S. dollar. In addition, contributing to the 2004 year-to-date increase in depreciation expense from Contact Energy was higher depreciation expense associated with the Taranaki Station
acquisition in March 2003.

Loss
on lease termination and other charges was $954 million for the second quarter and six months ended June 30, 2004. Loss on lease termination and other charges
in 2004 consisted of $951 million related to the termination of the Collins Station lease (refer to "Liquidity and Capital ResourcesTermination of the Collins Station Lease" for
further discussion) and a $3 million inventory reserve for excess spare parts at the Collins Station due to Midwest Generation's plan to decommission the Collins Station and cease operations at
the Station by December 31, 2004.

Asset
impairment charges were $251 million for the second quarter and six months ended June 30, 2003. Asset impairment charges in 2003 consisted of $245 million
related to the impairment of eight small peaking plants owned by Midwest Generation in Illinois and $6 million related to the write-down of EME's investment in the Gordonsville project due to
its planned disposition. The impairment charge relating to the peaking plants resulted from a revised long-term outlook for capacity revenues from the peaking plants. The lower capacity revenue
outlook is the result of a number of factors, including higher long-term natural gas prices and the current generation overcapacity in the MAIN region market.

Administrative
and general expenses increased $4 million and $11 million for the second quarter and six months ended June 30, 2004, compared to the
corresponding periods of 2003. The increases were primarily due to higher costs incurred to implement EME's restructuring plan described under "Management's Overview." During the second quarter and
six months ended June 30, 2004, EME incurred costs of $7 million and $13 million, respectively, compared to $5 million and $6 million for the second quarter
and six months ended June 30, 2003, respectively.

Other Income (Expense)

Equity in income from unconsolidated affiliates increased 42% and 22% for the second quarter and six months ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. The second quarter increase was primarily due to an increase in EME's share of income from the Big 4 projects, and the March Point,
EcoEléctrica and ISAB projects. The year-to-date increase was primarily due to an increase in EME's share of income from EcoEléctrica, Paiton Energy, ISAB and
March Point projects. Partially offsetting the second quarter and year-to-date increases was the absence of earnings from EME's investment in Four Star Oil & Gas, which was sold on
January 7, 2004.

31

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Interest
and other income increased $5 million and $4 million for the second quarter and six months ended June 30, 2004, respectively, compared to the
corresponding periods of 2003. The 2004 increases were primarily due to higher interest income and foreign exchange gains from EME's intercompany
loans. In the corresponding periods of 2003, EME recorded foreign exchange losses from EME's intercompany loans.

Gains
on sale of assets were $43 million in the first six months of 2004 and none in the first six months of 2003. Gains on sale of assets in 2004 consisted of a
$47 million gain related to the sale of EME's stock of Edison Mission Energy Oil & Gas and a $4 million loss related to the sale of EME's interest in Brooklyn Navy Yard
Cogeneration Partners L.P. See "Management's OverviewDispositions of Investments in Energy Plants" for more information related to these dispositions.

Interest
expense increased $25 million and $43 million for the second quarter and six months ended June 30, 2004, respectively, compared to the corresponding
periods of 2003. The 2004 increases were due to the issuance of the $800 million secured loan received by EME's subsidiary, Mission Energy Holdings International, in December 2003 and a
change in classification of dividend payments on preferred securities recorded as interest expense commencing July 1, 2003. In addition, interest expense increased in the second quarter due to
the issuance of $1.7 billion in new debt at Midwest Generation in April 2004, which was mostly offset by lower interest expense at Midwest Generation due to a reduction of approximately
$1.7 billion in debt partially from the proceeds of such transactions.

Income Taxes

EME's annual effective tax rate (excluding state tax reallocation benefits, the income tax provision related to the sale of Four Star Oil & Gas, and income
tax benefit related to the loss on lease termination) was 35% during the six months ended June 30, 2004, compared to 49% (excluding state tax reallocation benefits, the impact of a
change in statutory tax rates in Turkey, and income tax benefit related to impairment charges) during the first six months of 2003. The lower effective income tax rate in 2004 from 2003 is
primarily attributable to increased earnings from taxable unconsolidated affiliates in 2004 (and therefore not included in EME's consolidated tax provision). During the first six months of 2004
and 2003, EME recorded additional state tax benefits, net of federal income taxes, of $5 million and $10 million, respectively, as a result of participation in a tax-allocation agreement
with Edison International. 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 second quarter of 2003, EME recorded a tax benefit of $98 million relating to the impairment of the small peaking plants in Illinois and its Gordonsville project. 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. The Turkish corporate tax rate decreased from 33% to 30%, retroactive to January 1, 2003, as a result of legislation passed in April 2003. In accordance with SFAS
No. 109, "Accounting for Income Taxes," the reductions in the Turkish income tax rates resulted in an increase in income tax expense of approximately $4 million during the second quarter
of 2003 due to a reduction in deferred tax assets. The tax legislation was subsequently changed resulting in an increase in the Turkish corporate tax rate to 33% for the year 2004 only.

Minority Interest

Minority interest expense increased $10 million and $19 million for the second quarter and six months ended June 30, 2004,
respectively, compared to the corresponding periods of 2003. Minority interest primarily relates to the 49% ownership of Contact Energy by the public in New Zealand.

32

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Discontinued Operations

Ferrybridge and Fiddler's Ferry Plants

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

During
the second quarter and six months ended June 30, 2003, EME recorded losses of $1 million from discontinued operations primarily related to taxes.

Lakeland Project

In 2001, EME ceased consolidating the activities of Lakeland Power Ltd. when an administrator receiver was appointed following a default by Norweb Energi Ltd, the
counterparty to a long-term power sales agreement. The consolidated financial statements have been restated to conform to discontinued operations treatment for all historical periods presented. In
2003, a third party completed the purchase of the Lakeland power plant from the administrative receiver for £24 million. The proceeds from the sale and existing cash were used to
fund partial repayment of the outstanding debt owed to secured creditors of the project. Lakeland Power Ltd.'s administrative receiver has filed a claim against Norweb Energi Ltd. for termination of
the power purchase agreement. To the extent that Lakeland Power Ltd. receives payment under its claim, such amounts will first be used to repay amounts due to creditors. Any residual amount will be
distributed to EME's subsidiary that owns the outstanding shares of Lakeland Power Ltd. There is no assurance that there will be any cash available to distribute from the ultimate resolution of this
claim.

During
the second quarter and six months ended June 30, 2003, EME recorded $1 million from discontinued operations related to administrative expenses incurred as
part of the close-out activities.

Cumulative Effect of Change in Accounting Principle

Statement of Financial Accounting Standards No. 143

Effective January 1, 2003, EME adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is increased to its present value each period, and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. As of January 1, 2003, EME
recorded a $9 million, after tax, decrease to net income as the cumulative effect of the adoption of SFAS No. 143.

33

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Regional Operating Results

Overview

EME operates predominantly in one line of business, electric power generation, organized by three geographic regions: Americas, Asia Pacific and Europe. Operating
revenues are derived from EME's majority-owned domestic and international entities. Intercompany interest expense and income between EME and its consolidated subsidiaries have been eliminated in the
following project results, except as
described below with respect to loans provided to EME from a wholly owned subsidiary, Midwest Generation. Equity in income from unconsolidated affiliates relates to energy projects where EME's
ownership interest is 50% or less in the projects. The equity method of accounting is generally used to account for the operating results of entities over which EME has a significant influence but in
which it does not have a controlling interest. With respect to entities accounted for under the equity method, EME recognizes its proportional share of the income or loss of such entities.

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

Americas

General

The following section provides a summary of the Americas region's operating results for the second quarter and six months ended June 30, 2004 and
2003 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, |  
|------------------------------------------------------------------ | ------------------------- | --------------------------- | ---- | ------------------------- | -
|
|
|Operating Revenues from Consolidated Subsidiaries                  |                           |                             |      |                           |  
|                                                                   | Illinois Plants           |                             | $    | 220                       |  
|                                                                   | Homer City                |                             |      | 130                       |  
|                                                                   | Other                     |                             |      | 7                         |  
|                                                                   |                           |                             |      |                           |  
|                                                                   |                           | $                           | 357  |                           | $
|                                                                   |                           |                             |      |                           |  
|Income (Loss) before Taxes and Minority Interest (Earnings/Losses) |                           |                             |      |                           |  
|                                                                   | Consolidated operations   |                             |      |                           |  
|                                                                   | Illinois Plants           |                             | $    | (959                      | )
|                                                                   | Homer City                |                             |      | 15                        |  
|                                                                   | Other                     |                             |      | 3                         |  
|                                                                   | Unconsolidated affiliates |                             |      |                           |  
|                                                                   | Big 4 projects            |                             |      | 39                        |  
|                                                                   | Four Star Oil & Gas       |                             |      |                          |  
|                                                                   | Sunrise                   |                             |      | 4                         |  
|                                                                   | March Point               |                             |      | 2                         |  
|                                                                   | Other                     |                             |      | 8                         |  
|                                                                   | Regional overhead         |                             |      | (13                       | )
|                                                                   |                           |                             |      |                           |  
|                                                                   |                           | $                           | (901 | )                         | $
|                                                                   |                           |                             |      |                           |  

34

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Illinois Plants

|                                   |                                     | Three Months Ended
June 30, |    | Six Months Ended
June 30,
|---------------------------------- | ----------------------------------- | --------------------------- | -- | -------------------------
|
|Statistics  Coal-Fired Generation |                                     |                             |    |                          
|                                   | Generation (in GWhr):               |                             |    |                          
|                                   |                                     | Power purchase agreement    |    |                          
|                                   |                                     | Merchant                    |    |                          
|                                   |                                     |                             |    |                          
|                                   |                                     | Total coal-fired generation |    |                          
|                                   |                                     |                             |    |                          
|                                   | Equivalent Availability(1)          |                             |    | 70.8%                    
|                                   | Forced outage rate(2)               |                             |    | 9.1%                     
|                                   | Average realized energy price/MWhr: |                             |    |                          
|                                   |                                     | Power purchase agreement    |    | $                        
|                                   |                                     | Merchant                    |    | $                        
|                                   |                                     |                             |    |                          
|                                   |                                     | Total coal-fired generation |    | $                        
|                                   |                                     |                             |    |                          
|Capacity revenues (in millions)    |                                     | $                           | 67 |                          

---

Operating revenues from the Illinois Plants decreased $1 million and increased $22 million for the second quarter and
six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. Revenues for the second quarter of 2004 were approximately the same as the second quarter of
2003, as higher generation and merchant energy prices were offset by a decrease in capacity revenues under the power purchase agreements. The year-to-date increase was primarily due to higher energy
revenues due to increased merchant generation at the coal plants released from their power purchase agreement with Exelon Generation and higher merchant energy prices. This increase was partially
offset by lower capacity revenues resulting from the reduction in megawatts contracted under the power purchase agreements. The merchant generation currently earns minimal capacity revenues. For more
information on the power purchase agreements and wholesale energy markets, see "Market Risk ExposuresCommodity Price RiskAmericasIllinois Plants."

Losses
from the Illinois Plants increased $721 million and $668 million for the second quarter of 2004 and the six-month period ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. Discrete items affecting the losses of the Illinois Plants include:



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, compared to $7 million and $(35) million for the comparable periods in the prior year. The decrease in the second quarter

35

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earnings
was $12 million. Earnings for the six-month period increased $41 million due to the following factors:



The
earnings (losses) of the Illinois Plants included interest income of $28 million for both the second quarters of 2004 and 2003 and $56 million for both the
six months ended June 30, 2004 and 2003 related to loans to EME. In August 2000, Midwest Generation, which owns or leases the Illinois Plants, entered into a sale-leaseback
transaction of the Powerton-Joliet facilities. The proceeds from the sale of these facilities were loaned to EME, which also provided a guarantee of the related lease obligations of Midwest
Generation. The Powerton-Joliet sale-leaseback is recorded as an operating lease for accounting purposes.

Homer City

|           |                                    | Three Months Ended
June 30, |   | Six Months Ended
June 30,
|---------- | ---------------------------------- | --------------------------- | - | -------------------------
|
|Statistics |                                    |                             |   |                          
|           | Generation (in GWhr)               |                             |   | 3,360                    
|           | Availability(1)                    |                             |   | 83.2%                    
|           | Forced outage rate(2)              |                             |   | 1.1%                     
|           | Average realized energy price/MWhr |                             | $ | 36.50                    
|           | Capacity revenues (in millions)    |                             | $ | 8                        

---

Operating revenues from Homer City increased $27 million and decreased $4 million for the second quarter and six months ended
June 30, 2004, respectively, compared to the corresponding periods of 2003. The second quarter increase was primarily due to increased generation attributable to higher planned outages in 2003
and higher energy prices. The 2004 six-month decrease primarily resulted from lower electric revenues from the Homer City facilities due to lower generation from an unplanned outage at Unit 1 in
February 2004.

Earnings
from Homer City increased $11 million and decreased $16 million for the second quarter and six months ended June 30, 2004, respectively, compared to
the corresponding periods of 2003. The second quarter increase was primarily due to higher revenues as described above. The 2004 six-month decrease in earnings was due to lower revenues as described
above, higher maintenance costs from the outage during the first quarter of 2004 and increased sulfur-dioxide emission prices. See "Market Risk ExposuresCommodity Price
RiskAmericasHomer City Facilities."

Gains
(losses) from price risk management activities were $(8) million and $5 million for the second quarters of 2004 and 2003, respectively, and $(7) million and
$(3) million for the six months

36

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ended
June 30, 2004 and 2003, respectively. The gains (losses) represent the ineffective portion of forward contracts which are derivatives that qualify as cash flow hedges under SFAS No. 133
and gains (losses) related to futures contracts that did not qualify for hedge accounting under SFAS No. 133. See "Consolidated Operating ResultsOperating Revenues" for
further discussion.

Big 4 Projects

Earnings from the Big 4 projects increased $6 million for the second quarter of 2004, compared to the corresponding period of 2003. The change in earnings
was largely due to higher energy prices in 2004. For the six-month period ended June 30, 2004, the impact of the higher energy prices in 2004 was offset due to planned outages at the Sycamore
Cogeneration plant and the Watson Cogeneration plant in March 2004.

The
earnings from the Big 4 projects included interest expense from Edison Mission Energy Funding of $3 million and $4 million for the second quarters of 2004 and 2003,
respectively. For the six months ended June 30, 2004 and 2003, earnings included interest expense from Edison Mission Energy Funding of $7 million and $8 million,
respectively.

Four Star Oil & Gas

EME's share of earnings from Four Star Oil & Gas Company were $11 million and $26 million for the second quarter and six months ended
June 30, 2003, respectively, with no earnings recorded in 2004 from its ownership interest due to the sale of the project. The 2004 earnings represent the gain on sale of 100% of EME's stock of
Edison Mission Energy Oil & Gas, which in turn held minority interests in
Four Star Oil & Gas, on January 7, 2004. See "Management's OverviewDispositions of Investments in Energy Plants."

Sunrise

Earnings from the Sunrise project decreased $4 million and $6 million for the second quarter and six months ended June 30, 2004,
respectively, compared to the corresponding periods of 2003. The 2004 decreases primarily resulted from higher interest expense due to the completion of the Sunrise project financing in
September 2003.

March Point

Earnings from March Point increased $2 million and $5 million for the second quarter and six months ended June 30, 2004,
respectively, compared to the corresponding periods of 2003. The 2004 increases in earnings were primarily due to higher operating revenues in 2004 due to a planned outage in June 2003 and the
ineffective portion of fuel contracts entered into by March Point, which are derivatives that qualified as cash flow hedges under SFAS No. 133.

Other

Net earnings from other projects in the Americas region (consolidated subsidiaries and unconsolidated affiliates) increased $13 million and $5 million for
the second quarter and six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increases were primarily due to higher earnings from the
EcoEléctrica project, mostly because of higher operating revenues in 2004 over 2003 resulting from plant outages from November 2002 through February 2003 and a
$6 million loss related to the write-down of EME's investment in the Gordonsville

37

---



project
in the second quarter of 2003. Partially offsetting these increases were lower gains from energy trading activities in the second quarter and six months ended June 30, 2004.

Seasonal Disclosure

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

Asia Pacific

General

The following section provides a summary of the Asia Pacific region's operating results for the second quarter and six months ended June 30, 2004
and 2003 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, |  
|------------------------------------------------------------------ | ------------------------- | --------------------------- | --- | ------------------------- | -
|
|
|Operating Revenues from Consolidated Subsidiaries                  |                           |                             |     |                           |  
|                                                                   | Contact Energy            |                             | $   | 213                       |  
|                                                                   | Loy Yang B                |                             |     | 50                        |  
|                                                                   | Other                     |                             |     | 7                         |  
|                                                                   |                           |                             |     |                           |  
|                                                                   |                           | $                           | 270 |                           | $
|                                                                   |                           |                             |     |                           |  
|Income (Loss) before Taxes and Minority Interest (Earnings/Losses) |                           |                             |     |                           |  
|                                                                   | Consolidated operations   |                             |     |                           |  
|                                                                   | Contact Energy(1)         |                             | $   | 55                        |  
|                                                                   | Loy Yang B                |                             |     | 13                        |  
|                                                                   | Other                     |                             |     | 4                         |  
|                                                                   | Unconsolidated affiliates |                             |     |                           |  
|                                                                   | Paiton                    |                             |     | 14                        |  
|                                                                   | Other                     |                             |     | 3                         |  
|                                                                   | Regional overhead         |                             |     | (2                        | )
|                                                                   |                           |                             |     |                           |  
|                                                                   |                           | $                           | 87  |                           | $
|                                                                   |                           |                             |     |                           |  

---

Contact Energy

Operating revenues increased $18 million and $62 million for the second quarter and six months ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. The 2004 increases

38

---



were
primarily due to higher electricity retail and generation revenues arising from the Taranaki combined-cycle plant purchased in March 2003 and increased number of retail customers in the
year 2003, as well as ongoing strength in retail volumes, tariff adjustments and management of transmission constraints. In addition, there was a 10% and 16% increase in the average exchange rate of
the New Zealand dollar compared to the U.S. dollar during the second quarter and six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003.

Earnings
from Contact Energy, included in the consolidated statements of income of EME as described above, increased $31 million and $52 million for the second quarter and
six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increases were primarily due to increased margins due to the factors described above
related to revenues. In addition, gains (losses) from price risk management activities were $10 million and $7 million for the second quarter and six months ended June 30, 2004,
respectively, compared to $1 million and $(5) million for the second quarter and six months ended June 30, 2003, respectively. The gains (losses) from price risk management
activities primarily related to a change in market value of electricity and financial contracts that were not designated as cash flow hedges for hedge accounting under SFAS No. 133. Also included in
the 2004 gains from price risk management activities was approximately $2 million representing the ineffective portion of cross currency interest rate swaps. These are derivatives that qualify
as fair value hedges under SFAS No. 133. See "Market Risk ExposuresForeign Exchange Rate Risk" for further discussion related to the cross currency interest rate swaps.

Loy Yang B

Operating revenues increased $6 million and $25 million for the second quarter and six months ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. The 2004 increases in operating revenues were primarily due to higher generation in 2004 in comparison to 2003 as a result of a planned outage in
March 2003 and a 11% and 20% increase in the average exchange rate of the Australian dollar compared to the U.S. dollar during the second quarter and six months ended June 30,
2004, respectively, compared to the corresponding periods of 2003.

Earnings
from Loy Yang B increased $1 million and $15 million for the second quarter and six months ended June 30, 2004, respectively, compared to the
corresponding periods of 2003. The 2004 increases in earnings were due to higher electric revenues discussed above.

Paiton Energy

Earnings from Paiton Energy decreased $1 million and increased $9 million for the second quarter and six months ended June 30, 2004,
respectively, compared to the corresponding periods of 2003. The second quarter decrease was primarily due to decreased revenues mostly due to lower availability resulting from a planned outage in
June 2004. The 2004 year-to-date increase in earnings was primarily attributable to a decrease in Indonesian income taxes resulting from interest expense from partner subordinated loans and
lower costs incurred in 2004 related to debt restructuring activities, partially offset by lower revenues described above.

Other

Operating revenues from other consolidated subsidiaries in the Asia Pacific region decreased $11 million and $6 million for the second quarter and
six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 decreases were primarily due to the deconsolidation of the Kwinana project on
March 31, 2004. Beginning April 1, 2004, EME recorded its interest in the Kwinana project on the equity method of accounting.

39

---



Earnings from other projects in the Asia Pacific region (consolidated subsidiaries and unconsolidated affiliates) increased $2 million and $7 million for the second quarter and
six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increases in earnings were primarily due to higher earnings from the CBK project in
the Philippines.

Europe

General

The following section provides a summary of the Europe region's operating results for the second quarter and six months ended June 30, 2004 and 2003
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, |  
|------------------------------------------------------------------ | ------------------------- | --------------------------- | -- | ------------------------- | -
|
|
|Operating Revenues from Consolidated Subsidiaries                  |                           |                             |    |                           |  
|                                                                   | First Hydro               |                             | $  | 71                        |  
|                                                                   | Doga(1)                   |                             |    |                          |  
|                                                                   | Other                     |                             |    | 9                         |  
|                                                                   |                           |                             |    |                           |  
|                                                                   |                           | $                           | 80 |                           | $
|                                                                   |                           |                             |    |                           |  
|Income (Loss) before Taxes and Minority Interest (Earnings/Losses) |                           |                             |    |                           |  
|                                                                   | Consolidated operations   |                             |    |                           |  
|                                                                   | First Hydro               |                             | $  | (10                       | )
|                                                                   | Doga(1)                   |                             |    |                          |  
|                                                                   | Other                     |                             |    | 6                         |  
|                                                                   | Unconsolidated affiliates |                             |    |                           |  
|                                                                   | ISAB                      |                             |    | 12                        |  
|                                                                   | Other(1)                  |                             |    | 3                         |  
|                                                                   | Regional overhead         |                             |    | (5                        | )
|                                                                   |                           |                             |    |                           |  
|                                                                   |                           | $                           | 6  |                           | $
|                                                                   |                           |                             |    |                           |  

---

First Hydro

Operating revenues increased $2 million and $34 million for the second quarter and six months ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. The second quarter increase was due to a 12% increase in the average exchange rate of the British pound compared to the U.S. dollar during the second
quarter of 2004, compared to the same prior year quarter. Partially offsetting this increase was lower volumes of power sales in the second quarter of 2004. The 2004 year-to-date increase resulted
primarily from higher volumes of power sales and higher ancillary services revenues in 2004. In addition, there were higher electric revenues from the First Hydro plant due to a 13% increase in the
average exchange rate of the British pound compared to the U.S. dollar during the

40

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six months
ended June 30, 2004, compared to the same prior year period. The First Hydro plant is expected to provide for higher electric revenues during its winter months.

Earnings
from First Hydro increased $6 million and $20 million for the second quarter and six months ended June 30, 2004, respectively, compared to the
corresponding periods of 2003. The 2004 increase in earnings is partially due to a $5 million and $3 million loss from price risk management activities for the second quarter and
six months ended June 30, 2004, respectively, compared to a $6 million and $11 million loss from price risk management activities for the second quarter and
six months ended June 30, 2003, respectively. First Hydro's gains (losses) from price risk management relate to the change in market value of commodity contracts that are recorded at
fair value under SFAS No. 133, with changes in fair value recorded through the income statement.

Doga

Revenues from Doga were $34 million and $67 million for the second quarter and six months ended June 30, 2003, respectively. Revenues
from Doga were $29 million for the six months ended June 30, 2004, representing revenues from the first quarter of 2004. Earnings from Doga were $2 million and $6 million
for the second quarter and six months ended June 30, 2003, respectively. Earnings from Doga were $6 million for the six months ended June 30, 2004, representing
earnings from the first quarter of 2004. There were no revenues or earnings recorded on a consolidated basis during the second quarter of 2004 due to the deconsolidation of the Doga project on
March 31, 2004. Beginning April 1, 2004, EME recorded its interest in the Doga project on the equity method of accounting.

ISAB

Earnings from ISAB increased $13 million and $10 million for the second quarter and six months ended June 30, 2004, respectively,
compared to the corresponding periods of 2003. The 2004 increases were primarily due to higher generation in 2004 as compared to 2003 resulting from a major planned overhaul of the plant in
April 2003.

Other

Operating revenues from other consolidated subsidiaries in the Europe region increased $2 million and $4 million for the second quarter and
six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increase in operating revenues was primarily due to increased operating revenues
from EME's Spanish Hydro project largely due to higher generation caused by more rainfall in the first six months of 2004, compared to the first six months of 2003.

Earnings
from other projects in the Europe region (consolidated subsidiaries and unconsolidated affiliates) increased $9 million and $11 million for the second quarter and
six months ended June 30, 2004, respectively, compared to the corresponding periods of 2003. The 2004 increase in earnings was primarily due to increased earnings from EME's Italian Wind
project mostly due to higher generation caused by more wind in the first six months of 2004, compared to the first six months of 2003. In addition, included in earnings from
unconsolidated affiliates for the second quarter of 2004 and the six months ended June 30, 2004 is EME's proportional share of income from the Doga project commencing April 1,
2004.

41

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New Accounting Pronouncements

Statement of Financial Accounting Standards Interpretation No. 46

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

Variable Interest Entities

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

|Variable Interest Entity |  | Location              |  | Investment at
June 30, 2004 |     | Ownership
Interest at
June 30, 2004 |    | Description
|------------------------ |  | --------------------- |  | --------------------------- | --- | ----------------------------------- | -- | -----------
|Paiton                   |  | East Java, Indonesia  |  | $                           | 600 |                                     | 45 | %          
|EcoEléctrica             |  | Peñuelas, Puerto Rico |  |                             | 295 |                                     | 50 | %          
|ISAB                     |  | Sicily, Italy         |  |                             | 96  |                                     | 49 | %          
|Watson                   |  | Carson, CA            |  |                             | 95  |                                     | 49 | %          
|Sunrise                  |  | Fellows, CA           |  |                             | 84  |                                     | 50 | %          
|CBK                      |  | Manila, Philippines   |  |                             | 82  |                                     | 50 | %          
|Sycamore                 |  | Bakersfield, CA       |  |                             | 60  |                                     | 50 | %          
|Midway-Sunset            |  | Fellows, CA           |  |                             | 54  |                                     | 50 | %          
|Kern River               |  | Bakersfield, CA       |  |                             | 46  |                                     | 50 | %          
|IVPC4 Srl                |  | Italy                 |  |                             | 42  |                                     | 50 | %          
|Tri Energy               |  | Bangkok, Thailand     |  |                             | 22  |                                     | 25 | %          
|Doga                     |  | Esenyurt, Turkey      |  |                             | 14  |                                     | 80 | %          

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

42

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Deconsolidation of Variable Interest Entities

In accordance with FIN 46R, EME determined that it was not the primary beneficiary of the following two projects due to the provisions of long-term power
contracts which are variable interests. Accordingly, EME deconsolidated these projects at March 31, 2004:



FASB Staff Position FAS 106-2

In May 2004, the FASB issued FASB Staff Position FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003." The primary objective of the position is to provide accounting guidance related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. EME will
adopt this guidance in the third quarter of 2004. If EME's retiree health care plans provide prescription drug benefits that are deemed to be actuarially equivalent to Medicare benefits, EME will
recognize the subsidy in the measurement of its accumulated obligation and record an actuarial gain. Proposed federal regulations defining actuarial equivalency are expected in the third quarter of
2004, with final regulations expected to be released by year-end 2004. Until the proposed regulations are issued, EME is unable to predict the effect of the new law on its postretirement health care
costs and obligations.

43

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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

44Key Financing Developments

44Termination of the Collins Station Lease

452004 Capital Expenditures

46EME's Historical Consolidated Cash Flow

46EME's Credit Ratings

47EME's Liquidity as a Holding Company

49Dividend Restrictions in Major Financings

51Off-Balance Sheet Transactions

54Environmental Matters and Regulations

54


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

EME's Liquidity

At June 30, 2004, EME and its subsidiaries had cash and cash equivalents of $468 million and EME had available the full amount of borrowing capacity
under a $98 million corporate credit facility. EME's consolidated debt at June 30, 2004 was $6.9 billion. In addition, EME's subsidiaries had $5.3 billion of long-term lease
obligations that are due over periods ranging up to 31 years.

Key Financing Developments

EME Financing Developments

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

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

Midwest Generation Financing Developments

On April 27, 2004, Midwest Generation completed a private offering of $1 billion aggregate principal amount of its 8.75% second priority senior secured
notes due 2034. Holders of the notes may require Midwest Generation to repurchase, or Midwest Generation may elect to repay, the notes on May 1, 2014 and on each one-year anniversary thereafter
at 100% of their principal amount, plus

44

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accrued
and unpaid interest. Concurrent with the issuance of the notes, Midwest Generation borrowed $700 million under a new first priority senior secured term loan facility. The term loan has
a final maturity of April 27, 2011 and bears interest at LIBOR plus 3.25% per annum. Midwest Generation has agreed to repay $1,750,000 of the term loan on each quarterly payment date. Midwest
Generation also entered into a new five-year $200 million working capital facility that replaced a prior facility. The new working capital facility also provides for the issuance of letters of credit.
As of June 30, 2004, Midwest Generation had borrowed $40 million under the working capital facility and had reimbursement obligations under a letter of credit for approximately
$3 million that expires in 2005. Midwest Generation used the proceeds of the notes issuance and the term loan to refinance $693 million of indebtedness (plus accrued interest and fees) owed by
its direct parent, Edison Mission Midwest Holdings Co., which had been guaranteed by Midwest Generation and was due in December 2004, and to make the termination payment under the Collins
Station lease in the amount of approximately $960 million.

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

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

Termination of the Collins Station Lease

On April 27, 2004, Midwest Generation terminated the Collins Station lease through a negotiated transaction with the lease equity investor. Midwest
Generation made a lease termination payment of approximately $960 million. This amount represented the $774 million of lease debt outstanding, plus accrued interest, and the amount owed
to the lease equity investor for early termination of the lease. Midwest Generation received title to the Collins Station as part of the transaction and plans to continue fulfilling its obligation
under the power purchase agreement with Exelon Generation, which is scheduled to expire at the end of 2004. 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 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.

Following
the termination of the Collins Station lease, Midwest Generation announced plans to permanently cease operations at the Collins Station by December 31, 2004 and
decommission the plant. On July 30, 2004, PJM accepted Midwest Generation's request to cease operations at the Collins Station. PJM found that the decommissioning of the plant would not affect
the operation or reliability of the PJM markets. As a result of the change in useful life, EME changed the estimated useful life of the remaining plant assets to the end of 2004. Accordingly, EME
plans to depreciate $20 million of plant assets over the period May through December 2004. At June 30, 2004, EME had not accrued for exit costs related to the expected
reduction in personnel as such amounts were not determinable at that time.

45

---



EME
anticipates that the termination payment and decommissioning will result in a substantial income tax deduction, thereby providing additional tax-allocation payments through the
income tax-allocation agreement when such loss can be used by Edison International in its consolidated and combined income tax returns. EME's receivable to be realized under the tax-allocation
agreement was $494 million at June 30, 2004, approximately $370 million of which is attributable to the Collins Station lease termination and decommissioning, and is included
under accounts receivable  affiliates in the consolidated balance sheet.

2004 Capital Expenditures

The estimated capital and construction expenditures of EME's subsidiaries for the final two quarters of 2004 are $35 million. These expenditures are
planned to be financed by existing subsidiary credit agreements and cash generated from their operations.

EME's Historical Consolidated Cash Flow

Consolidated Cash Flows from Operating Activities

Net cash provided by (used in) operating activities:

Six Months Ended
June 30,2004

2003(in millions)Continuing operations

$
(1,059
)
$
25Discontinued operations


3


$
(1,056
)
$
25


Cash
used in operating activities from continuing operations increased $1.1 billion in the first six months of 2004, compared to the first six months of 2003. The 2004
increase was primarily attributable to the $960 million lease termination payment in 2004 related to the Collins Station lease and tax-allocation payments of $58 million paid to Edison
International during the first six months of 2004, compared to $89 million in tax-allocation payments received by EME from Edison International during the first six months of
2003. EME made tax payments in the first half of 2004 primarily attributable to taxable income resulting from the sale of the Four Star Oil & Gas and Brooklyn Navy Yard projects. For further
discussion of the tax-allocation payments, see "EME's Liquidity as a Holding CompanyIntercompany Tax-Allocation Agreement."

Consolidated Cash Flows from Financing Activities

Net cash provided by financing activities:

Six Months Ended
June 30,2004

2003(in millions)Continuing operations

$
898

$
477


Cash
provided by financing activities from continuing operations increased $421 million in the first six months of 2004, compared to the first six months of 2003. The 2004
increase was due to a higher level of borrowings in 2004 compared to 2003, primarily due to the $1 billion secured notes and $700

46

---



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. Net borrowings in 2003 consisted of $275 million in borrowings at Contact Energy used to finance the acquisition of the
Taranaki power station and net borrowings of $275 million on EME's corporate credit facility in 2003.

Consolidated Cash Flows from Investing Activities

Net cash provided by (used in) investing activities:

Six Months Ended
June 30,2004

2003(in millions)Continuing operations

$
146

$
(369
)Discontinued operations


1


5$
147

$
(364
)


Cash
provided by investing activities from continuing operations increased $515 million in the first six months of 2004, compared to the first six months of 2003. The 2004
increase was due to a combination of the following:



EME's Credit Ratings

Overview

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

Moody's Rating

S&P RatingEME

B2

BMidwest Generation, LLC:First priority senior secured rating

Ba3

B
+Second priority senior secured rating

B1

B
-Edison 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. On August 2, 2004, following EME's announcements related to the sale of its international project portfolio, Standard & Poor's placed the credit ratings on
CreditWatch with positive implications. 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.

47

---



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

Edison
Mission Marketing & Trading has provided credit for the benefit of counterparties in the form of cash and letters of credit ($94 million as of June 30, 2004) for EME's price risk
management and domestic trading activities (including Midwest Generation and Homer City) related to accounts payable and unrealized losses. 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 on its behalf. In that regard, as of June 30, 2004, Midwest
Generation has provided Edison Mission Marketing & Trading $44 million, which Edison Mission Marketing & Trading has used to provide a portion of the credit for counterparties noted above. A
subsidiary of EME has also supported a portion of First Hydro's United Kingdom hedging activities through a cash collateralized credit facility, under which letters of credit totaling £18
million have been issued as of June 30, 2004.

EME
anticipates that sales of power from its Illinois Plants, Homer City facilities and First Hydro plants in the United Kingdom may require additional credit support, depending upon
market conditions and the strategies adopted for the sale of this power. Changes in forward market prices and margining requirements could further increase the need for credit support for the price
risk management and trading activities related to these projects. EME currently projects potential working capital required to support price risk management and trading activity to be between
$100 million and $200 million from time to time.

Credit Rating of Edison Mission Marketing & Trading

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

48

---



EME's Liquidity as a Holding Company

Overview

At June 30, 2004, EME had corporate cash and cash equivalents of $114 million to meet liquidity needs. EME had no borrowings outstanding or letters
of credit outstanding on the $98 million secured line of credit at June 30, 2004. Cash distributions from EME's subsidiaries and partnership investments, tax-allocation payments from
Edison International and unused capacity under its corporate credit facility represent EME's major sources of liquidity to meet its cash requirements. The timing and amount of distributions from EME's
subsidiaries may be affected by many factors beyond its control. See "Dividend Restrictions in Major Financings." In addition, the right of EME to receive
tax-allocation payments, and the timing and amount of tax-allocation payments received by EME are subject to factors beyond EME's control. See "Intercompany Tax-Allocation Agreement."

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

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

49

---



Historical Distributions Received By EME

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

Six Months Ended
June 30,2004

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

$
49

$
127Holding companies of other consolidated operating projects





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


21


20Sunrise Power Company


5


Holding companies for Westside projects


7


13Holding companies of other unconsolidated operating projects


1


4Total Distributions from Domestic Projects

$
83

$
165International Projects (Mission Energy Holdings International)Distributions from Consolidated Operating Projects:First Hydro Holdings (First Hydro project)

$
29

$
18Loy Yang B


3


12Contact Energy


27


16Valley Power





5Kwinana(1)


4


2Holding companies of other consolidated operating projects


8


Distributions from Unconsolidated Operating Projects:ISAB Energy





1IVPC4 (Italian Wind project)


1


3Derwent


1


Doga


15


Paiton





9Tri Energy


2


Holding companies of other unconsolidated operating projects


7


Total Distributions from International Projects

$
97

$
66Total Distributions

$
180

$
231


---

Intercompany Tax-Allocation Agreement

EME is included in the consolidated federal and combined state income tax returns of Edison International and is eligible to participate in tax-allocation
payments with other subsidiaries of Edison International. EME has historically received tax-allocation payments related to domestic net operating losses incurred by EME. The right of EME to receive
and the amount and timing of tax-allocation payments are dependent on the inclusion of EME in the consolidated income tax returns of Edison

50

---



International
and its subsidiaries and other factors, including the consolidated taxable income of Edison International and its subsidiaries, the amount of net operating losses and other tax items of
EME, its subsidiaries, and other subsidiaries of Edison International and specific procedures regarding allocation of state taxes. EME receives tax-allocation payments for tax losses when and to the
extent that the consolidated Edison International group generates sufficient taxable income in order to be able to utilize EME's tax losses in the consolidated income tax returns for Edison
International and its subsidiaries. Based on the application of the factors cited above, EME may be obligated during periods it generates taxable income to make payments under the tax-allocation
agreements.

Dividend Restrictions in Major Financings

General

Each of EME's direct or indirect subsidiaries is organized as a legal entity separate and apart from EME and its other subsidiaries. Assets of EME's subsidiaries
are not available to satisfy EME's 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, 2004:

|Subsidiary                                             |  | Financial Ratio                    |  | Covenant                           |  | Actual      
|------------------------------------------------------ |  | ---------------------------------- |  | ---------------------------------- |  | ------------
|Midwest Generation, LLC
(Illinois Plants)              |  | Interest Coverage Ratio            |  | Greater than or equal to 1.25 to 1 |  | 2.76 to 1(1)
|Midwest Generation, LLC
(Illinois Plants)              |  | Secured Leverage Ratio             |  | Less than or equal to 8.75 to 1    |  | 5.31 to 1   
|EME Homer City Generation L.P. (Homer City facilities) |  | Senior Rent Service Coverage Ratio |  | Greater than 1.7 to 1              |  | 2.78 to 1   
|Edison Mission Energy Funding Corp. (Big 4 Projects)   |  | Debt Service Coverage Ratio        |  | Greater than or equal to 1.25 to 1 |  | 2.53 to 1   
|Mission Energy Holdings International                  |  | Interest Coverage Ratio            |  | Greater than or equal to 1.3 to 1  |  | 3.38 to 1(2)

---

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

51

---



Midwest Generation Financing Restrictions on Distributions

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

Covenants in Credit Facility

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



In
addition, Midwest Generation's distributions are limited in amount. The aggregate amount of distributions made by Midwest Generation since April 27, 2004 may not exceed the sum
of (i) 75% of excess cash flow (as defined in the credit facility) generated since that date, plus (ii) up to 100% of the amount of equity contributions or subordinated loans made by EME
or a subsidiary of EME to Midwest Generation after April 27, 2004, but in this latter case only to the extent excess cash flow not used for a dividend under (i) is available for such
payments. If Midwest Generation is rated investment grade, the aggregate amount of distributions made by Midwest Generation may equal but not exceed 100% of excess cash flow generated since becoming
investment grade plus 75% of excess cash flow generated during the period between April 27, 2004 and the date immediately prior to becoming investment grade.

Covenants in Indenture

Midwest Generation's new indenture contains restrictions on its ability to make a distribution substantially similar to those in the credit facility. However, the
indenture does not provide the ability to distribute 100% of excess cash flow upon the occurrence of certain events. Under the indenture, however, failure to achieve the conditions required for
distributions will not result in a default, nor does the indenture contain any other financial performance requirements.

52

---



Mission Energy Holdings International Interest Coverage Ratio

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

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

|                                 |                                                                           | June 30, 2004 |     | December 31, 2003 |  
|-------------------------------- | ------------------------------------------------------------------------- | ------------- | --- | ----------------- | -
|
|
|Funds Flow from Operations       |                                                                           |               |     |                   |  
|                                 | Historical distributions from international projects(1)                   |               | $   | 201               |  
|                                 | Other fees and cash payments considered distributions under the term loan |               |     | 16                |  
|                                 | Administrative and general expenses                                       |               |     | (1                | )
|                                 |                                                                           |               |     |                   |  
|Total Funds Flow from Operations |                                                                           | $             | 216 |                   | $
|                                 |                                                                           |               |     |                   |  
|Term Loan Interest Expense       |                                                                           | $             | 33  |                   | $
|                                 |                                                                           |               |     |                   |  
|Interest Coverage Ratio          |                                                                           |               |     |                   |  
|                                 |                                                                           |               |     |                   |  

---

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

53

---



Summarized
combined financial information (unaudited) of Mission Energy Holdings International, Inc. and its subsidiaries and Edison Mission Project Co. is set forth below:

|           |  | Three Months Ended
June 30, |     | Six Months Ended
June 30,
|---------- |  | --------------------------- | --- | -------------------------
|
|
|Revenues   |  | $                           | 353 |                          
|Expenses   |  |                             | 315 |                          
|           |  |                             |     |                          
|Net income |  | $                           | 38  |                          
|           |  |                             |     |                          

|                       |                              | June 30,
2004 |       | December 31,
2003
|---------------------- | ---------------------------- | ------------- | ----- | -----------------
|
|Current assets         |                              | $             | 501   |                  
|Noncurrent assets      |                              |               | 6,319 |                  
|                       |                              |               |       |                  
|                       | Total assets                 |               | $     | 6,820            
|                       |                              |               |       |                  
|Current liabilities    |                              | $             | 425   |                  
|Noncurrent liabilities |                              |               | 4,529 |                  
|Minority interest      |                              |               | 733   |                  
|Equity                 |                              |               | 1,133 |                  
|                       |                              |               |       |                  
|                       | Total liabilities and equity |               | $     | 6,820            
|                       |                              |               |       |                  

The
majority of noncurrent liabilities are comprised of project financing arrangements that are non-recourse to EME.

Off-Balance Sheet Transactions

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

Environmental Matters and Regulations

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

54

---



MARKET RISK EXPOSURES

Introduction

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

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

PageCommodity Price Risk

55Credit Risk

63Interest Rate Risk

64Foreign Exchange Rate Risk

65Fair Value of Financial Instruments

66Regulatory Matters

67


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

Commodity Price Risk

General Overview

EME's merchant power plants and energy trading activities expose EME to commodity price risks. 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 tolerances for each EME regional business unit. Procedures exist which allow for monitoring
of all commitments and positions with regular reviews by the risk management committee. In order to provide more predictable earnings and cash flow, EME may hedge a portion of its plant fuel
requirements and/or the electric output of its merchant plants, the output of which is not committed to be sold under long-term contracts. When appropriate, EME manages the spread between electric
prices and fuel prices, and uses forward contracts, swaps, futures, or options contracts to achieve those objectives. There is no assurance that contracts to hedge changes in market prices will be
effective.

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



55

---





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

Americas

Introduction

Electric power generated at EME's domestic merchant plants is generally sold under bilateral arrangements with utilities and power marketers under short-term
transactions with terms of two years or less or, as has been the case for the Homer City facilities, to 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 on May 1, 2004.

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

Illinois Plants

Energy generated at the Illinois Plants has historically been sold under three power purchase agreements between EME's wholly owned subsidiary, Midwest
Generation, and Exelon Generation Company, under which Exelon Generation is obligated to make capacity payments for the plants under contract and energy payments for the energy produced by these
plants and taken by Exelon Generation. The power purchase agreements began on December 15, 1999 and expire in December 2004. The capacity payments provide the units under contract with
revenue for fixed charges, and the energy payments compensate those units for all, or a portion of, variable costs of production.

Approximately
49% and 64% of the energy and capacity sales from the Illinois Plants in the first six months of 2004 and 2003, respectively, were to Exelon Generation under the
power purchase agreements. As a result of Exelon Generation's election to release units from contract for 2004, Midwest Generation's reliance on sales into the wholesale market increased in 2004 from
2003. As discussed in detail below, 3,859 MW of Midwest Generation's generating capacity (2,383 MW related to its coal-fired generation units, 1,084 MW related to its Collins
Station, and 392 MW related to its peaking units) remains subject to power purchase agreements with Exelon Generation in 2004. 2004 is the final contract year under these power purchase
agreements.

The
energy and capacity from units not subject to a power purchase agreement with Exelon Generation are sold under terms, including price and quantity, negotiated by Edison Mission

56

---



Marketing &
Trading with customers through a combination of bilateral agreements, forward energy sales and spot market sales. These arrangements generally have a term of two years or less.
Thus, EME is subject to market risks related to the price of energy and capacity from those units. EME expects that capacity prices for merchant energy sales will, in the near term, be substantially
less than those Midwest Generation currently receives under its existing agreements with Exelon Generation. EME further expects that the lower revenues resulting from this difference will be offset in
part by energy prices, which EME believes will, in the near term, be higher for merchant energy sales than those Midwest Generation currently receives under its existing agreements. EME intends to
manage this price risk, in part, by accessing both the wholesale customer and over-the-counter markets described below as well as using derivative financial instruments in accordance with established
policies and procedures.

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

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

Into ComEd*Historical Energy PricesOn-Peak(1)

Off-Peak(1)

24-HrJanuary

$
43.30

$
15.18

$
27.88February


43.05


18.85


29.98March


40.38


21.15


30.66April


39.50


16.76


27.88Four-Month Average

$
41.56

$
17.99

$
29.10


---

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

The
average market prices at the Northern Illinois Hub delivery point during the months of May and June of 2004 were $34.05 per MWhr and $28.58 per MWhr,
respectively. Energy prices were

57

---



calculated
at the Northern Illinois Hub delivery point using hourly real-time prices as published by PJM. There is no comparison for the same months in 2003. Forward market prices in the
Northern Illinois Hub fluctuate as a result of a number of factors, including natural gas prices, transmission congestion, changes in market rules, electricity demand which is affected by weather and
economic growth, plant outages in the region, and the amount of existing and planned power plant capacity. The actual spot prices for electricity delivered into these markets may vary materially from
the forward market prices set forth in the table below.

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

2004

24-Hour Northern
Illinois Hub
Forward Energy Prices*July

$
37.25August


40.26September


30.16October


27.66November


27.94December


31.722005 Calendar "strip"(1)

$
33.09


---

Midwest Generation intends to hedge a portion of its merchant portfolio risk through Edison Mission Marketing & Trading. To the extent it
does not do so, the unhedged portion will be subject to the risks and benefits of spot market price movements. The extent to which Midwest Generation will hedge its market price risk through forward
over-the-counter sales depends on several factors. First, Midwest Generation will evaluate over-the-counter market prices to determine whether sales at forward market prices are sufficiently
attractive compared to assuming the risk associated with spot market sales. Second, Midwest Generation's ability to enter into hedging transactions will depend upon its and Edison Mission
Marketing & Trading's credit capacity and upon the over-the-counter forward sales markets having sufficient liquidity to enable Midwest Generation to identify counterparties who are able and
willing to enter into hedging transactions with it. Midwest Generation is permitted to use its new working capital facility and cash on hand to provide credit support for forward contracts entered
into by Edison Mission Marketing & Trading for capacity and energy generation by Midwest Generation under an intercompany energy services agreement between Midwest Generation and Edison Mission
Marketing & Trading. Utilization of this credit facility in support of such forward contracts is expected to provide additional liquidity support for implementation of Midwest Generation's
contracting strategy for the Illinois Plants. See "Credit Risk," below.

In
addition to the prevailing market prices, Midwest Generation's ability to derive profits from the sale of electricity from the released units will be affected by the cost of
production, including costs incurred to comply with environmental regulations. The costs of production of the released units vary and, accordingly, depending on market conditions, the amount of
generation that will be sold from the released units is expected to vary from unit to unit. In this regard, Midwest Generation suspended operations of Will County Units 1 and 2 at the end of
2002 pending improvement in market conditions.

58

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Under
PJM's proposed revisions to the PJM tariff, the integration of Commonwealth Edison into PJM, which was implemented on May 1, 2004, could result in market power mitigation
measures being imposed on future power sales by Midwest Generation in the Northern Illinois Control Area (NICA) energy and capacity markets. In addition, power produced by Midwest Generation not under
contract with Exelon Generation has been sold in the past using transmission obtained from Commonwealth
Edison under its open-access tariff filed with the Federal Energy Regulatory Commission (the FERC), and the application of the PJM tariff to Commonwealth Edison's transmission system could also affect
the rates, terms and conditions of transmission service received by Midwest Generation. EME and Midwest Generation continue to oppose the imposition of market power mitigation measures proposed by PJM
for the NICA energy and capacity markets. EME is unable to predict the outcome of these efforts, the effect of integration of Commonwealth Edison into PJM on an "islanded" basis, the timing or effect
of integration of American Electric Power into PJM, or any final integration configuration for PJM on the markets into which Midwest Generation sells its power. See "Regulatory Matters"
for further discussion.

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

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

Homer City Facilities

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

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

24-Hour PJM
Historical Energy Prices*2004

2003January

$
51.12

$
36.56February


47.19


46.13March


39.54


46.85April


43.01


35.35May


44.68


32.29June


36.72


27.26Six-Month Average

$
43.71

$
37.41


---

59

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

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



Under
the PJM market design, locational marginal pricing (sometimes referred to as LMP), which establishes hourly prices at specific locations throughout PJM by considering factors
including generator bids, load requirements, transmission congestion and losses, has the effect of raising prices at those delivery points affected by transmission congestion. During the past
12 months, an increase in transmission congestion at delivery points east of the Homer City facilities has resulted in prices at the PJM West Hub (which includes delivery points east of the
Homer City facilities) being higher than those at the Homer City busbar on an average of two percent.

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

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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, 2004:

2004

24-Hour PJM West
Forward Energy Prices*July

$
50.29August


52.62September


42.04October


41.26November


40.97December


42.282005 Calendar "strip"(1)

$
44.40


---

The ability of EME's subsidiary, EME Homer City, to make payments under the long-term lease entered into as part of the sale-leaseback transaction
depends on revenues generated by the Homer City facilities, which depend in part on the market conditions for the sale of capacity and energy. These market conditions are beyond EME's control.

Europe

United Kingdom

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

The
electricity trading arrangements introduced in March 2001 provide, among other things, for the establishment of a range of voluntary short-term power exchanges and brokered
markets operating from a year or more in advance to 1 hour prior to the delivery or receipt of power. In the final hour after the notification of all contracts, the system operator can accept bids and
offers in the Balancing Mechanism to balance generation and demand and resolve any transmission constraints. There is a mandatory settlement process for recovering imbalances between contracted and
metered volumes with strong incentives for being in balance, and a Balancing and Settlement Code Panel to oversee governance of the Balancing Mechanism. The system operator can also purchase system
reserve and response services to maintain the quality of the electrical supply directly from generators (generally referred to as "ancillary services"). Ancillary services contracts typically run for
up to a year and can consist of both fixed amounts and variable amounts represented by prices for services that are only paid for when actually called upon by the grid operator. A key feature of the
trading arrangements is the requirement for firm physical delivery, which means that a generator must deliver, and a consumer must take delivery of, its net contracted positions or pay for any energy
imbalance at the imbalance prices calculated by the system operator based on the prices of bids and offers accepted in the Balancing Mechanism. This provides an incentive for parties to contract in
advance and for the development of forwards and futures markets. Under these arrangements, there has been an increased emphasis on credit quality, including the need for parent company guarantees or
letters of credit for companies below investment grade.

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The
wholesale price of electricity has decreased significantly in recent years. The reduction has been driven principally by surplus generating capacity and increased competition. During
2003, prices were more volatile. There was further downward pressure on wholesale prices in the first part of the year followed by some recovery during the summer in prices and in the peak/off peak
differentials for the 2003-2004 winter period. That recovery tailed off towards the end of the year with a considerable narrowing in the peak/off peak differentials which has continued during the
first half of 2004. Compliance with First Hydro's bond financing documents is subject to market conditions for electric energy and ancillary services, which are beyond First Hydro's control.

Asia Pacific

Australia

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

New Zealand

Contact Energy generates about 30% of New Zealand's electricity and is one of the largest retailers of natural gas and electricity in New Zealand. A substantial
portion of Contact Energy's generation output is matched with the demand of its retail electricity customers or sold through forward contracts with other wholesale electricity counterparties. The
forward contracts and/or option contracts have varying terms that expire on various dates through March 31, 2007, although the majority of the forward contracts are short term (less than two
years).

The
New Zealand government has recently established a new governance body to be known as the Electricity Commission along with a set of rules to govern the market. The Electricity
Governance Regulations and Rules were finalized in 2003. The Regulations came into force on January 16, 2004, and the Rules came into force during February and
March of 2004. Among other things, the Electricity Commission has been given:



62

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The
New Zealand government announced in July 2003 that it would purchase a new 155 MW power plant before winter 2004 to increase electricity security. The plant is situated at
Whirinaki, Hawkes Bay. The Electricity Commission will include this plant in its portfolio of reserve energy. The Whirinaki plant is located on a site leased to the government from Contact Energy and
is operated under contract by Contact Energy. The plant was officially opened on June 1, 2004 and is now operational.

Contact
Energy has begun retailing electricity in Victoria, Australia under the Red Energy brand. Contact has entered into arrangements with an Australian-based generation company to
mitigate exposure to wholesale power prices.

Credit Risk

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

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

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

63

---



is
based on net exposure under these agreements. At June 30, 2004, the credit ratings of EME's counterparties were as follows:

S&P Credit Rating

June 30, 2004(in millions)A or higher

$
27A-


6BBB+


55BBB


13BBB-


Below investment grade


6Total

$
107


Exelon Generation accounted for 16% and 21% of EME's consolidated operating revenues for the first half of 2004 and 2003, respectively. The
percentage is less in the first half of 2004 because a smaller number of plants are subject to contracts with Exelon Generation. See "Commodity Price
RiskAmericasIllinois Plants." Any failure of Exelon Generation to
make payments under the power purchase agreements could adversely affect EME's results of operations and financial condition.

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

Interest Rate Risk

Interest rate changes affect the cost of capital needed to operate EME's projects. EME has mitigated the risk of interest rate fluctuations by arranging for fixed
rate financing or variable rate financing with interest rate swaps, interest rate options or other hedging mechanisms for a number of its project financings. Interest expense included
$17 million and $23 million of additional interest expense for the six months ended June 30, 2004 and 2003, respectively, as a result of interest rate hedging mechanisms.
EME has entered into several interest rate swap agreements under which the maturity date of the swaps occurs prior to the final maturity of the underlying debt.

EME
had short-term obligations of $31 million at June 30, 2004, consisting of promissory notes related to Contact Energy. The fair values of these obligations approximated
their carrying values at June 30, 2004, and would not have been materially affected by changes in market interest rates. 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 $7.0 billion at June 30, 2004, compared to the carrying value of
$6.9 billion.

64

---



Foreign Exchange Rate Risk

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

The
First Hydro plant in the U.K. and the plants in Australia have been financed in their local currencies, pounds sterling and Australian dollars, respectively, thus hedging the
majority of their acquisition costs against foreign exchange fluctuations. As discussed in "Management's Overview," EME entered into sales agreements for its international operations. The sales price
for Contact Energy is denominated in New Zealand dollars. EME has entered into a foreign currency hedge to protect against a depreciation in the value of the New Zealand dollar versus the U.S. dollar
for this sales agreement. The remaining sales agreement is denominated in U.S. dollars.

During
the first six months of 2004, foreign currencies in Australia and New Zealand decreased in value compared to the U.S. dollar by 8% and 4%, respectively (determined by the
change in the exchange rates from December 31, 2003 to June 30, 2004). The decrease in value of these currencies was the primary reason for the foreign currency translation loss of
$7 million during the first six months of 2004. Included in the foreign currency translation loss was a foreign currency translation gain of approximately $8 million related to
the translation of an intercompany loan with a foreign affiliate denominated in Euro. During the first six months of 2004, the Euro increased in value by 4% (determined by the change in the
exchange rate from December 31, 2003 to June 30, 2004).

Contact
Energy enters into foreign currency forward exchange contracts to hedge identifiable foreign currency commitments associated with transactions in the ordinary course of business.
The contracts are primarily in Australian, New Zealand and U.S. dollars with varying maturities through February 2006. At June 30, 2004, the outstanding notional amount of the contracts
totaled $36 million and the fair value of the contracts totaled $(1) million.

In
addition, Contact Energy enters into cross currency interest rate swap contracts in the ordinary course of business. These cross currency swap contracts involve swapping fixed and
floating-rate U.S. and Australian dollar loans into floating-rate New Zealand dollar loans with varying maturities through April 2018.

EME
will continue to monitor its foreign exchange exposure and analyze the effectiveness and efficiency of hedging strategies in the future.

65

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Fair Value of Financial Instruments

Non-Trading Derivative Financial Instruments

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

June 30,
2004

December 31,
2003Derivatives:Interest rate:Interest rate swap/cap agreements

$
(17
)
$
(29
)Interest rate options





(1
)Commodity price:Electricity


(165
)

(126
)Foreign currency forward exchange agreements


(1
)

(2
)Cross currency interest rate swaps


(111
)

(91
)


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, 2004 (in millions):

Total Fair
Value

Maturity
<1 year

Maturity
1 to 3
years

Maturity
4 to 5
years

Maturity
>5 yearsPrices actively quoted

$
(82
)
$
(83
)
$
1

$


$
Prices based on models and other valuation methods


(83
)

15


26


(13
)

(111
)Total

$
(165
)
$
(68
)
$
27

$
(13
)
$
(111
)


The fair value of the electricity rate swap agreements (included under commodity price-electricity) entered into by the Loy Yang B plant and the
First Hydro plant has been estimated by discounting the future net cash flows resulting from the difference between the average aggregate contract price per MW and a forecasted market price per MW
multiplied by the number of MW remaining to be sold under the contract.

Energy Trading Derivative Financial Instruments

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

66

---



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

June 30, 2004

December 31, 2003Assets

Liabilities

Assets

LiabilitiesElectricity

$
97

$
4

$
104

$
11Other











1Total

$
97

$
4

$
104

$
12


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

Fair value of trading contracts at January 1, 2004

$
92Net gains from energy trading activities


5Amount realized from energy trading activities


(4
)Fair value of trading contracts at June 30, 2004

$
93


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, 2004) (in millions):

Total Fair
Value

Maturity
<1 year

Maturity
1 to 3
years

Maturity
4 to 5
years

Maturity
>5 yearsPrices actively quoted

$
1

$
1

$


$


$
Prices based on models and other valuation methods


92


(2
)

6


5


83Total

$
93

$
(1
)
$
6

$
5

$
83


Regulatory Matters

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

Commonwealth
Edison's application to join PJM was approved by the Federal Energy Regulatory Commission (the FERC) on April 27, 2004, with an effective date of May 1, 2004.

On
March 19, 2004, in a separate but related matter, the FERC issued an order having the effect of postponing to December 1, 2004 the effective date for elimination of
regional through and out rates in the region encompassed by PJM (as expanded by the addition of Commonwealth Edison and as to be further expanded by the addition of American Electric Power (AEP)) and
the Midwest Independent System Operator (MISO). The effect of this order is that the so-called rate pancaking was not

67

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eliminated
prior to Commonwealth Edison's integration into PJM, nor will it be eliminated prior to AEP's scheduled date for integration into PJM. Rate pancaking occurs when energy must move through
multiple, separately priced transmission systems to travel from its point of production to its point of delivery, and each transmission owner along the line charges separately for the use of its
system. The FERC included in its order a strong statement that the existing through and out rates must be eliminated no later than December 1, 2004. The transmission owners and other
stakeholder interests in the region have met on several occasions, attempting to create an acceptable long-term rate structure for the combined PJM/MISO footprint. Those discussions are taking place
pursuant to settlement procedures and a schedule administered by a FERC Administrative Law Judge and are expected to continue through September 2004. It is not possible at this time to predict
the outcome of such discussions. Until through and out rates are eliminated, EME will continue to have to pay transmission charges for power sold for delivery outside of Commonwealth Edison's former
control area, now known under PJM as NICA.

On
March 24, 2004, the FERC, in another order, rejected a proposal by PJM for certain market mitigation procedures to be applied to the new NICA. On April 23, 2004, PJM
filed a request for rehearing of one aspect of the March 24 order and an "Explanation" relating to another aspect of such order, and supplemented its filing on April 26, 2004. EME and
Midwest Generation filed a motion for a procedural schedule allowing 30 days for EME and Midwest Generation to prepare and submit analyses responding to PJM's filings, which was granted by the FERC.
Following such submissions, PJM filed additional material purporting to support its requested mitigation mechanisms, and EME and Midwest Generation responded to each of those submissions. The issues
remain pending for decision by the FERC. It is not possible at this time to predict the outcome of this matter or the impact of the market monitor's proposed mitigation measures should they or some
form of them be adopted.

On
July 27, 2004, AEP reached a settlement with staff of the Virginia State Corporation Commission (VSCC) that would allow AEP to transfer control of its transmission lines in the state
to PJM. The settlement eliminates the need for the FERC to act to ensure that AEP is able to enter PJM on October 1, 2004, the target date set by both AEP and PJM. The settlement, if approved
by the VSCC, will end the battle between FERC and Virginia over state and federal rights governing regional transmission organization (RTO) membership and will help facilitate AEP's entry into PJM by
October 1, 2004. The parties to the settlement requested VSCC to act on it within 15 days.

Apart
from the uncertainties regarding the market mitigation issues discussed previously, the direct impact on Midwest Generation of the above-described matters will for the most part be
limited to the delay in the elimination of regional through and out rates. This is not expected to have a material effect on Midwest Generation's financial results with respect to the period between
the May 1, 2004 integration of Commonwealth Edison and the mandated elimination of the through and out rates on December 1, 2004. The impact on power prices in the new NICA and in the
surrounding bilateral markets by reason of the islanded integration of Commonwealth Edison is difficult to predict, but it is not currently anticipated that it will have a material effect upon Midwest
Generation's financial results in the period prior to the integration of AEP into PJM, currently scheduled for October 1, 2004.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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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 such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, EME's disclosure controls and procedures are effective.

Internal Control Over Financial Reporting

There have not been any changes in EME's internal control over financial reporting (as such term is defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, EME's internal control
over financial reporting.

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PART II  OTHER INFORMATION

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

Exhibit No.

Description31.1

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.


Date of Report

Date Filed

Item(s) ReportedApril 2, 2004

April 5, 2004

5March 31, 2004

April 7, 2004

5April 27, 2004

April 28, 2004

5, 7May 7, 2004

May 12, 2004

12*May 28, 2004

May 28, 2004

5, 7


---

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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: | August 6, 2004
| |  | ----- | --------------

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