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

Form 10-Q

Commission file number 333-68632

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

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

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

        Number of shares outstanding of the registrant's Common Stock as of November 8, 2004: 1,000 shares (all shares held by an affiliate of the registrant).

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

Note 1. General

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

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

        MEHC'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 MEHC 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 MEHC's ability to continue as a going concern. In April 2004, all of the outstanding debt of Edison Mission Midwest Holdings was repaid in full through new financings obtained by Midwest Generation. For further discussion, see Note 7—Refinancing.

Interim Financial Presentation

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

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

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

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

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

Note 2. Discontinued Operations

Contact Energy

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

MEC International B.V.

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

Lakeland Project

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

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

Ferrybridge and Fiddler's Ferry Plants

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

Summarized Financial Information for Discontinued Operations

        Summarized results of discontinued operations are as follows:

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

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

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

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

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

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

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

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

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

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

Note 4. Inventory

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

Note 5. Accumulated Other Comprehensive Income (Loss)

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

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

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

•

Continuing Operations—Unrealized losses on commodity hedges for continuing operations included those primarily related to EME Homer City Generation L.P. (EME 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.


As EME's hedged positions for continuing operations are realized, approximately $29 million, after tax, of the net unrealized losses on cash flow hedges at September 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. Actual amounts ultimately reclassified into earnings over the next 12 months could vary materially from this estimated amount as a result of changes in market conditions. The maximum period over which a cash flow hedge is designated is through December 31, 2006.

•

Discontinued Operations—Unrealized losses on commodity hedges for discontinuing operations included primarily the hedge agreement with the State Electricity Commission of Victoria for electricity prices from the Loy Yang B project in Australia that did not meet the normal sales and purchases exception under SFAS No. 133. Unrealized losses on interest rate hedges pertained to discontinued operations only and 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.


The unrealized losses for discontinued operations will be reclassified into earnings upon the completion of the sale of the international projects.

        Under SFAS No. 133, the portion of a cash flow hedge that does not offset the change in value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EME recorded net gains (losses) of approximately $(13) million and $3 million during the third quarters of 2004 and 2003, respectively, and $(9) million and $3 million during the nine months ended September 30, 2004 and 2003, respectively, representing the amount of cash flow hedges' ineffectiveness for continuing operations, reflected in net gains (losses) from price risk management and energy trading in EME's consolidated income statement.

        Interest rate swaps entered into to hedge the floating interest rate risk on the $385 million term loan qualified for treatment as cash flow hedges under SFAS No. 133 with appropriate adjustments made to other comprehensive income. At December 31, 2003, MEHC recorded a decrease of approximately $3 million, after tax, to other comprehensive income resulting from unrealized holding losses on these contracts. On July 2, 2004, the interest rate swaps were terminated. During the third quarter and nine months ended September 30, 2004, MEHC recorded an increase of approximately $1 million, after tax, to other comprehensive income resulting from the gain realized upon termination of these contracts. During the nine months ended September 30, 2004, MEHC also recorded an increase of approximately $2 million, after tax, to other comprehensive income resulting from unrealized gains on these contracts through June 30, 2004. During the quarter and nine months ended September 30, 2003, MEHC recorded an increase of approximately $1 million, after tax, to other comprehensive income resulting from unrealized gains on these contracts.

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Note 6. Employee Benefit Plans

Pension Plans

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

        Components of pension expense for United States plans are:

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:

Note 7. Refinancing

MEHC Financing Developments

        On April 5, 2004, the lenders under MEHC's $385 million term loan due in 2006 exercised their right to require MEHC to repurchase $100 million of principal amount at par on July 2, 2004 (referred to as the "Term Loan Put-Option"). The $100 million principal, plus interest, was paid on July 2, 2004.

EME Financing Developments

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

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

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

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

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Note 8. Commitments and Contingencies

Contractual Obligations

        MEHC's long-term debt maturities for the next five twelve-month periods ending September 30 are: 2005—$657 million; 2006—$335 million; 2007—$332 million; 2008—$1.2 billion; 2009—$613 million; and thereafter—$2.3 billion. These amounts have been updated primarily to reflect financing activities completed during the first nine months of 2004. See Note 7—Refinancing.

Fuel Supply Contracts

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

Capital Improvements

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

Commercial Commitments

Introduction

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

Standby Letters of Credit

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

Guarantees and Indemnities

Tax Indemnity Agreements—

        In connection with the sale-leaseback transactions that EME has entered into related to the Collins Station and the Powerton and Joliet Stations in Illinois and the Homer City facilities in Pennsylvania, EME or one of its subsidiaries entered into tax indemnity agreements. Under these tax indemnity agreements, these entities agreed to indemnify the lessors in the sale-leaseback transactions for specified adverse tax consequences that could result in certain situations set forth in each tax indemnity agreement, including specified defaults under the respective leases. The potential indemnity obligations under these tax indemnity agreements could be significant. Due to the nature of these

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potential obligations, EME cannot determine a maximum potential liability which would be triggered by a valid claim from the lessors. EME has not recorded a liability related to these indemnities. In connection with the termination of the lease for the Collins Station (See Note 7—Refinancing), Midwest Generation will continue to have obligations under the tax indemnity agreement with the former lease equity investor.

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

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

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

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

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

Indemnities Provided under Asset Sale Agreements—

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

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triggered under these indemnities by valid claims from the sellers or purchasers, as the case may be. EME has not recorded a liability related to these indemnities.

Guarantee of Brooklyn Navy Yard Contractor Settlement Payments—

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

Capacity Indemnification Agreements—

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

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

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

Subsidiary Guarantee for Performance of Unconsolidated Affiliate—

        A subsidiary of EME has guaranteed the obligations of an unconsolidated affiliate to make payments to a third party for power delivered under a fixed-price power sales agreement. This agreement runs through 2007. EME believes there is sufficient cash flow to pay the power suppliers, assuming timely payment by the power purchasers. Due to the nature of this indemnity, a maximum potential liability cannot be determined. To the extent EME's subsidiary would be required to make

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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 re-assigned to Judge Whaley in San Diego, who has heard plaintiff's motion to remand and has asked for supplemental briefing. A decision on the remand is expected before the end of 2004. EME believes that the outcome of this litigation will not have a material adverse effect on its consolidated financial position or results of operations.

Regulatory Developments Affecting Doga Project

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

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

        On October 3, 2002, Doga (and several other power producers in Turkey acting independently) filed a lawsuit in the Danistay, Turkey's high administrative court, against the Energy Market Regulatory Authority seeking both an injunction and permanent invalidation of certain provisions of

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the new regulation on the grounds of the illegality and unconstitutionality of any new license requirement that does not take into account the vested rights of a company operating pursuant to previously agreed terms of the Implementation Contract.

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

Income Taxes

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

Litigation

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

Environmental Matters and Regulations

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

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

Note 9. Dispositions of Investments in Energy Plants

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

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

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

Note 10. Investments in Unconsolidated Affiliates

        The following table presents summarized financial information of the significant subsidiary investments in unconsolidated affiliates accounted for by the equity method. The significant subsidiary investments include the California Power Group, Watson Cogeneration Company, Midway-Sunset Cogeneration Company and March Point Cogeneration Company. 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 nine months ended September 30, 2003, the significant subsidiary investments also included Gordonsville Energy, L.P., Four Star Oil & Gas Company and Brooklyn Navy Yard Cogeneration Partners, L.P. EME sold its interests in Gordonsville Energy and Brooklyn Navy Yard on November 21, 2003 and March 31, 2004, respectively. In addition, 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, Gordonsville Energy, Brooklyn Navy Yard and Four Star Oil & Gas are not included in the balances for the three and nine months ended September 30, 2004.

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Note 11. Supplemental Statements of Cash Flows Information

Note 12. Stock-based Compensation

        Edison International has three stock-based employee compensation plans, which are described more fully in Note 16—Stock Compensation Plans, included in MEHC'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 stock on the date of grant. The following table illustrates the effect on net income if EME had used the fair value accounting method.

Note 13. Cumulative Effect of Change in Accounting Principle

        Effective January 1, 2003, EME adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value

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

Note 14. New Accounting Pronouncements

Emerging Issues Task Force Issue No. 02-14

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

Statement of Financial Accounting Standards Interpretation No. 46

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

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following table summarizes the variable interest entities held by continuing operations in which EME has a significant variable interest:

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

Deconsolidation of Variable Interest Entities

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

FASB Staff Position FAS 106-2

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

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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 Mission Energy Holding Company's (MEHC'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 MEHC'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 MEHC since December 31, 2003, and as compared to the third quarter and nine months ended September 30, 2003. This discussion presumes that the reader has read or has access to the MD&A included in Item 7 of MEHC's annual report on Form 10-K for the year ended December 31, 2003.

        The presentation of information below pertaining to Edison Mission Energy (EME) and its consolidated subsidiaries should not be understood to mean that EME has agreed to pay or become liable for any debt of MEHC. EME and MEHC are separate entities with separate obligations. MEHC is the sole obligor on the 13.50% senior secured notes due 2008 and the $285 million term loan due 2006, and neither EME nor any of its subsidiaries or other investments has any obligation with respect to the notes or the term loan.

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

MANAGEMENT'S OVERVIEW; CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Overview

MEHC as a Holding Company

        MEHC has a 100% ownership interest in EME, which itself operates through its subsidiaries and affiliates. EME continues to operate predominantly in one line of business, electric power generation with all of its continuing operations located in the United States. MEHC has no business activities other than through its ownership interest in EME. During 2001, MEHC issued $800 million of senior secured notes and borrowed $385 million under a term loan. MEHC's ability to honor its obligations under the senior secured notes and the term loan is entirely dependent upon the receipt of dividends from EME and receipt of tax-allocation payments from MEHC's parent, Edison Mission Group Inc.,

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and ultimately Edison International. See Liquidity and Capital Resources—Intercompany Tax-Allocation Agreement. Dividends from EME are limited based on its earnings and cash flow, business and tax considerations, and restrictions imposed by applicable law.

        On April 5, 2004, the lenders under MEHC's $385 million term loan due in 2006 exercised their right to require MEHC to repurchase $100 million of principal amount at par on July 2, 2004 (referred to as the "Term Loan Put-Option"). The $100 million principal, plus interest, was paid on July 2, 2004.

Dividends to MEHC

        In July and October 2004, EME made dividend payments of $69 million and $5 million, respectively, to MEHC. These payments were used together with cash on hand to meet the Term Loan Put-Option payment discussed above.

        EME amended its certificate of incorporation and bylaws in May 2004 to eliminate the so-called "ring-fencing" provisions that were implemented in early 2001 during the California energy crisis, which had included restrictions on dividends.

Disposition of EME's International Operations

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

•

EME completed the sale of its 51.2% interest in Contact Energy Limited (Contact Energy) to Origin Energy New Zealand Limited on September 30, 2004. Consideration for the sale was NZ$1,101.4 million (approximately US$739 million) in cash and NZ$535 million (approximately US$359 million) of debt assumed by the purchaser. The after-tax gain on the sale of Contact Energy was $141 million. EME also entered into a purchase option to hedge against a decrease in the value of the New Zealand dollar. The purchased option was settled in October 2004 with a net after-tax cost of $15 million. The majority of the proceeds were used to repay $600 million of the $800 million secured loan at Mission Energy Holdings International, Inc. with the balance retained for general corporate purposes (See "Liquidity and Capital Resources—Key Financing Developments—EME Financing Developments.")



•

EME entered into an agreement dated July 29, 2004 to sell its remaining international power generation portfolio, owned by a wholly owned Dutch subsidiary, MEC International B.V., to a consortium comprised of International Power plc (70%) and Mitsui & Co., Ltd. (30%). The purchase price is $2.3 billion, subject to certain purchase price adjustments prior to closing that are expected to result in a net purchase price of approximately $2.2 billion. Closing of the BV transaction is subject to approval by International Power's shareholders and to a number of regulatory approvals and project level consents. If certain project level approvals and consents are not obtained, one or more projects may be excluded from the sale transaction and the purchase price may be adjusted accordingly. EME's estimate of the after-tax gain on the sale of its international projects is approximately $120 million. 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, except that EME will retain its ownership of the Lakeland project and some inactive international subsidiaries. The estimated net gain on sale of international projects, including recognition of a deferred tax benefit of $327 million during the third quarter of 2004, is $573 million. See "Mission

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Energy Holding Company and Subsidiaries Notes to Consolidated Financial Statements—Note 2. Discontinued Operations."

Accounting Presentation of Discontinued and Continuing Operations

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

Overview of EME's 2004 Financial Performance from Continuing Operations

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

•

The second quarter of 2004 included a $954 million (pre-tax) loss on termination of the lease related to the Collins Station and the return of its ownership to EME. During the third quarter of 2004, EME reached an agreement with Exelon Generation Company LLC (Exelon Generation) to terminate the power purchase agreement for the two units at the Collins Station that remained under contract to September 30, 2004. Management concluded the Collins Station was not economically competitive in the current marketplace given the current generation overcapacity in the region and ceased operations effective September 30, 2004. The Collins Station is in the process of being decommissioned.



•

The third quarter of 2004 included a charge of $29 million (pre-tax) related to impairment of six small peaking units in Illinois. In September 2004, management completed an analysis of future competitiveness in the expanded PJM Interconnection, LLC (PJM) marketplace of its eight small peaking units in Illinois. Based on this analysis, management decided to decommission six of the eight units, subject to regulatory review and approval. As a result of this decision, projected future cash flows associated with the Illinois peaking units were less than the book value of the units resulting in an impairment. The 2003 results include a $245 million (pre-tax) loss related to the impairment of these small peaking units in Illinois.



•

The 2004 results include a pre-tax gain of $47 million from the sale of the company owning EME's interests in Four Star Oil & Gas Company, partially offset by a $4 million loss on the sale of the company holding EME's interest in the Brooklyn Navy Yard project.



•

The 2003 results include a $6 million (pre-tax) loss related to the write-down of EME's investment in the Gordonsville project, which was sold in the fourth quarter of 2003.

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

•

A reduction in earnings from the Illinois Plants due in large part to:



•

lower capacity payments due under the power purchase agreements with Exelon Generation as a result of Exelon Generation's prior year election to reduce the number of units under contract. Accordingly, capacity revenues decreased $52 million and $81 million during the third quarter and nine months of 2004, respectively, compared to the same periods of 2003.

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•

higher interest expense from the indebtedness incurred in 2004, compared to the interest and rent expense incurred in 2003.



•

the availability factor of the Illinois Plants was down slightly at 81.8% during the nine months ended September 30, 2004, compared to 82.3% during the nine months ended September 30, 2003.



•

A reduction in earnings from the Homer City facilities due in large part to:



•

lower availability factor of the Homer City facilities at 82.9% during the nine months ended September 30, 2004, compared to 87.8% during the nine months ended September 30, 2003. Planned and unplanned outages were higher during the 2004 period compared to 2003, including the unplanned outage related to Unit 1 in the first quarter of 2004.



•

higher maintenance costs related to the outages discussed above and higher sulfur emission costs.



•

temporary fuel supply interruptions during the third quarter which were managed through a reduction of off-peak generation and spot purchases of higher price coal.

Dispositions of Investments in Other Energy Plants

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

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

Expansion of PJM in Illinois

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

Critical Accounting Policies and Estimates

        For a discussion of EME's critical accounting policies, refer to "Critical Accounting Policies and Estimates" on page 46 of MEHC's annual report on Form 10-K for the year ended December 31, 2003.

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RESULTS OF OPERATIONS

Introduction

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

Net Income (Loss) Summary

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

        MEHC's loss from continuing operations for the third quarter and nine months ended September 30, 2004 was $26 million and $75 million, respectively, compared to $24 million and $74 million for the third quarter and nine months of 2003. There was no significant change in loss from continuing operations in 2004 from 2003.

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

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

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

Results of Continuing Operations

Overview

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

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

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