EME HOMER CITY GENERATION LP - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q



(Mark one)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2012
	or
¨	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 333-92047-03

_______________________

EME HOMER CITY GENERATION L.P.

(Exact name of registrant as specified in its charter)



Pennsylvania (State or other jurisdiction of incorporation or organization)	33-0826938 (I.R.S. Employer Identification No.)
1750 Power Plant Road Homer City, Pennsylvania (Address of principal executive offices)	15748 (Zip Code)

Registrant's telephone number, including area code: (724) 479-9011

_______________________

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Number of shares outstanding of the registrant's ownership interests as of November 1, 2012: Not applicable.

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TABLE OF CONTENTS



	GLOSSARY	iii
PART I - FINANCIAL INFORMATION		1
	ITEM 1. FINANCIAL STATEMENTS	1
	STATEMENTS OF OPERATIONS	1
	STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	2
	BALANCE SHEETS	3
	STATEMENTS OF PARTNERS' EQUITY (DEFICIT)	4
	STATEMENTS OF CASH FLOWS	5
	NOTES TO FINANCIAL STATEMENTS	6
	Note 1. Summary of Significant Accounting Policies	6
	Note 2. Fair Value Measurements	7
	Note 3. Derivative Instruments and Hedging Activities	8
	Note 4. Income Taxes	10
	Note 5. Compensation and Benefit Plans	10
	Note 6. Commitments and Contingencies	11
	Note 7. Environmental Developments	14
	Note 8. Accumulated Other Comprehensive Loss	14
	Note 9. Supplemental Cash Flows Information	15
	Note 10. Asset Impairments and Other Charges	15
	ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
	MANAGEMENT'S OVERVIEW	17
	Environmental Regulation Developments	17
	RESULTS OF OPERATIONS	18
	Summary	18
	Reconciliation of Non-GAAP Disclosures and Statistical Definitions	18
	Average Realized Energy Price	18
	Statistical Definitions	18
	Seasonality	19
	Operating Income (Loss)	19
	Income Taxes	19
	New Accounting Guidance	19
	LIQUIDITY AND CAPITAL RESOURCES	20
	Liquidity	20
	Cash Flow	20
	Credit Ratings	20
	Distribution Restrictions	21
	Contractual Obligations and Contingencies	21
	Contractual Obligations	21
	Contingencies	21

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	Environmental Matters and Regulations	21
	MARKET RISK EXPOSURES	22
	Fair Value Disclosures	22
	Commodity Price Risk	22
	Energy Price Risk	22
	Capacity Price Risk	23
	Basis Risk	23
	Coal Price Risk	23
	Credit Risk	24
	Interest Rate Risk	24
	CRITICAL ACCOUNTING ESTIMATES AND POLICIES	24
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
	ITEM 4. CONTROLS AND PROCEDURES	24
	Disclosure Controls and Procedures	24
	Internal Control over Financial Reporting	24
PART II - OTHER INFORMATION		25
	ITEM 1. LEGAL PROCEEDINGS	25
	ITEM 1A. RISK FACTORS	25
	ITEM 6. EXHIBITS	25
	SIGNATURES	26

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GLOSSARY

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



ARO(s)	asset retirement obligation(s)
BACT	best available control technology
BART	best available retrofit technology
Btu	British thermal units
CAA	Clean Air Act
CAIR	Clean Air Interstate Rule
CAMR	Clean Air Mercury Rule
CO₂	carbon dioxide
CSAPR	Cross-State Air Pollution Rule
EME	Edison Mission Energy
EMMT	Edison Mission Marketing & Trading, Inc.
FERC	Federal Energy Regulatory Commission
GAAP	United States generally accepted accounting principles
GECC	General Electric Capital Corporation
GHG	greenhouse gas
GWh	gigawatt-hours
Homer City	EME Homer City Generation L.P.
Homer City MTA	Master Transaction Agreement between Homer City and GECC
ISO(s)	independent system operator(s)
MATS	Mercury and Air Toxics Standards
MMBtu	million British thermal units
Moody's	Moody's Investors Service, Inc.
MW	megawatts
MWh	megawatt-hours
NAAQS	National Ambient Air Quality Standard(s)
NERC	North American Electric Reliability Corporation
NO_X	nitrogen oxide
NSR	New Source Review
NYISO	New York Independent System Operator
NYSEG	New York State Electric & Gas Corporation
PADEP	Pennsylvania Department of Environmental Protection
Penelec	Pennsylvania Electric Company
PJM	PJM Interconnection, LLC
PSD	Prevention of Significant Deterioration
RPM	Reliability Pricing Model
RTO(s)	regional transmission organization(s)
S&P	Standard & Poor's Ratings Services
SCR	selective catalytic reduction
SIP(s)	state implementation plan(s)
SO₂	sulfur dioxide
Transport Rule	Clean Air Transport Rule
US EPA	United States Environmental Protection Agency

iii

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EME HOMER CITY GENERATION L.P.

STATEMENTS OF OPERATIONS

(in millions, unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Operating Revenues
Operating revenues from marketing affiliate	$	101		$	158		$	272		$	410
Operating revenues	21			—			28			—
Total operating revenues	122			158			300			410
Operating Expenses
Fuel	90			81			241			196
Plant operations	19			22			63			118
Depreciation and amortization	9			16			35			50
Asset impairments and other charges	153			—			158			15
Administrative and general	1			1			3			4
Total operating expenses	272			120			500			383
Operating income (loss)	(150		)	38			(200		)	27
Other Income (Expense)
Interest expense	(30		)	(30		)	(90		)	(91		)
Income (loss) before income taxes	(180		)	8			(290		)	(64		)
Provision (benefit) for income taxes	—			3			—			(26		)
Net Income (Loss)	$	(180	)	$	5		$	(290	)	$	(38	)

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

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EME HOMER CITY GENERATION L.P.

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions, unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Income (Loss)	$	(180	)	$	5		$	(290	)	$	(38	)
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on derivatives qualified as cash flow hedges
Unrealized holding gains arising during the periods, net of income tax expense of $2 and $5 for the three and nine months ended September 30, 2011, respectively	1			2			1			7
Reclassification adjustments included in net income (loss), net of income tax benefit of $1 and $6 for the three and nine months ended September 30, 2011, respectively	3			(3		)	2			(9		)
Other comprehensive income (loss)	4			(1		)	3			(2		)
Comprehensive Income (Loss)	$	(176	)	$	4		$	(287	)	$	(40	)

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

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EME HOMER CITY GENERATION L.P.

BALANCE SHEETS

(in millions, unaudited)



	September 30, 2012			December 31, 2011
Assets
Current Assets
Cash and cash equivalents	$	58		$	84
Accounts receivable	4			—
Due from affiliates	—			1
Inventory	57			105
Derivative assets	—			1
Emission allowances	14			19
Other current assets	9			3
Total current assets	142			213
Property, plant and equipment, less accumulated depreciation of $35 million and none at respective dates	1,061			1,085
Restricted deposits	27			27
Long-term emission allowances	—			16
Other long-term assets	5			5
Carrying value adjustment	(153		)	—
Total Assets	$	1,082		$	1,346
Liabilities and Partners' Deficit
Current Liabilities
Accounts payable	$	24		$	21
Accrued liabilities	9			9
Due to affiliates	23			42
Interest payable	39			20
Interest payable to affiliate	—			49
Current portion of lease financing	147			84
Total current liabilities	242			225
Long-term debt to affiliate	492			490
Interest payable to affiliate	79			—
Lease financing, net of current portion	851			922
Benefit plans and other long-term liabilities	59			60
Long-term derivative liabilities	—			3
Total Liabilities	1,723			1,700
Commitments and Contingencies (Notes 6 and 7)
Partners' Deficit	(641		)	(354		)
Total Liabilities and Partners' Deficit	$	1,082		$	1,346

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

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EME HOMER CITY GENERATION L.P.

STATEMENTS OF PARTNERS' EQUITY (DEFICIT)

(in millions, unaudited)



	Chestnut Ridge Energy Company				Mission Energy Westside Inc.			Total Partners' Deficit
Balance at December 31, 2011		$	(355	)		$	1		$	(354	)
Net loss		(290		)		—			(290		)
Other comprehensive income		3				—			3
Balance at September 30, 2012		$	(642	)		$	1		$	(641	)

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

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EME HOMER CITY GENERATION L.P.

STATEMENTS OF CASH FLOWS

(in millions, unaudited)



	Nine Months Ended September 30,
	2012			2011
Cash Flows From Operating Activities
Net loss	$	(290	)	$	(38	)
Adjustments to reconcile loss to net cash provided by operating activities:
Depreciation and amortization	35			51
Deferred taxes and tax credits	—			(4		)
Asset impairments and other charges	158			15
Decrease in due to affiliates	(16		)	(34		)
Increase in receivables	(4		)	—
Decrease in inventory	48			5
Increase in other assets	(6		)	—
Decrease in emission allowances	21			2
Increase in accounts payable and other current liabilities	6			—
Increase in interest payable	49			49
Increase in derivative assets and liabilities	—			(2		)
Increase in other operating - liabilities	—			2
Net cash provided by operating activities	1			46
Cash Flows From Financing Activities
Borrowings on long-term debt to affiliate	—			11
Repayments of lease financing	(8		)	(71		)
Net cash used in financing activities	(8		)	(60		)
Cash Flows From Investing Activities
Capital expenditures	(19		)	(10		)
Net cash used in investing activities	(19		)	(10		)
Net decrease in cash and cash equivalents	(26		)	(24		)
Cash and cash equivalents at beginning of period	84			132
Cash and cash equivalents at end of period	$	58		$	108

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

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EME HOMER CITY GENERATION L.P.

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

EME Homer City Generation L.P.'s (Homer City) significant accounting policies were described in "Note 1—Summary of Significant Accounting Policies" on page 39 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. Homer City follows the same accounting policies for interim reporting purposes, with the exception of accounting principles adopted as of January 1, 2012, as discussed below in "—New Accounting Guidance." This quarterly report should be read in conjunction with such financial statements and notes.

In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state the financial position and results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (GAAP) for the periods covered by this quarterly report on Form 10-Q. The results of operations for the three- and nine-month periods ended September 30, 2012 are not necessarily indicative of the operating results for the full year.

The December 31, 2011 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

On March 15, 2012, Homer City made an election to be treated as a partnership for federal and state income tax purposes. As a result, the income or loss attributable to Homer City is allocated to its individual partners and Homer City's deferred tax assets of $344 million and the valuation allowance of the same amount were eliminated. Effective January 1, 2012, no recognition will be given to income taxes in Homer City's financial statements.

Going Concern

The accompanying financial statements have been prepared assuming that Homer City will continue as a going concern. Financial statements prepared on this basis assume the realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of these financial statements.

On September 21, 2012, Homer City and an affiliate of GECC entered into a Master Transaction Agreement (Homer City MTA) for the divestiture by Homer City of substantially all of its assets and certain specified liabilities. On October 3, 2012, GECC entered into a Plan Support Agreement (the PSA) with the holders of approximately 76% of the outstanding principal amount of the secured lease obligation bonds issued by Homer City Funding, LLC as part of the original sale-leaseback transaction. Under the PSA, the parties committed to support and implement a reorganization plan of Homer City Funding, LLC and to solicit votes on a prepackaged plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. On October 5, 2012, GECC commenced the solicitation. Homer City Funding, LLC is an affiliate of GECC and not related to Homer City or any other EME affiliate.

Completion of the Homer City MTA is subject to the satisfaction of a number of closing conditions, including the successful restructuring and reorganization of Homer City Funding, LLC and receipt of the regulatory approvals required for the transfer of the Homer City plant to GECC. If an agreement to modify the terms of the bonds is not approved and consummated or if other closing conditions of the Homer City MTA are not met, Homer City may become the subject of bankruptcy proceedings. Divestiture by Homer City of substantially all of its assets and certain specified liabilities will constructively terminate the activity of Homer City. In connection with the wind down of operations, Homer City intends to allow its collective bargaining agreement with its represented employees to expire as scheduled on December 31, 2012.

For additional information, see Note 6—Commitments and Contingencies—Homer City Lease, Note 5—Compensation and Benefit Plans—Benefit Obligations Under the Master Transaction Agreement, and Note 10—Asset Impairments and Other Charges.

Operating Revenues

Effective June 1, 2012, Edison Mission Marketing and Trading, Inc. (EMMT) assigned capacity contracts they have been awarded through the PJM Interconnection, LLC (PJM) reliability pricing model (RPM) base residual auction to Homer City. As a result, Homer City will receive payment for their participation in the RPM auction directly from PJM and the associated revenues are reflected in operating revenues in the accompanying statements of operations.

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Cash Equivalents

Cash equivalents included money market funds totaling $20 million and $28 million at September 30, 2012 and December 31, 2011, respectively. The carrying value of cash equivalents equals the fair value as all investments have original maturities of less than three months.

Inventory

Inventory is stated at the lower of weighted-average cost or market. Inventory is recorded at actual cost when purchased and then expensed at weighted-average cost as used. Inventory consisted of the following:



(in millions)	September 30, 2012		December 31, 2011
Coal, fuel oil and other raw materials	$	19	$	68
Spare parts, materials and supplies	38		37
Total inventory	$	57	$	105

New Accounting Guidance

Accounting Guidance Adopted in 2012

Fair Value Measurement

In May 2011, the Financial Accounting Standards Board (FASB) issued an accounting standards update modifying the fair value measurement and disclosure guidance. This guidance prohibits grouping of financial instruments for purposes of fair value measurement and requires the value be based on the individual security. This amendment also results in new disclosures primarily related to Level 3 measurements including quantitative disclosure about unobservable inputs and assumptions, a description of the valuation processes and a narrative description of the sensitivity of the fair value to changes in unobservable inputs. Homer City adopted this guidance effective January 1, 2012. For further information, see Note 2—Fair Value Measurements.

Presentation of Comprehensive Income

In June 2011 and December 2011, the FASB issued accounting standards updates on the presentation of comprehensive income. An entity can elect to present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. Homer City adopted this guidance effective January 1, 2012 and elected to present two separate but consecutive statements. The adoption of these accounting standards updates did not change the items that constitute net income and other comprehensive income.

Accounting Guidance Not Yet Adopted

Offsetting Assets and Liabilities

In December 2011, the FASB issued an accounting standards update modifying the disclosure requirements about the nature of an entity's rights of offsetting assets and liabilities in the statement of financial position under master netting agreements and related arrangements associated with financial and derivative instruments. The guidance requires increased disclosure of the gross and net recognized assets and liabilities, collateral positions and narrative descriptions of setoff rights. Homer City will adopt this guidance effective January 1, 2013.

Note 2. Fair Value Measurements

Recurring Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an "exit price"). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk, which was not material as of September 30, 2012 and December 31, 2011.

Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

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The following table sets forth assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:



(in millions)	September 30, 2012
Level 1 assets - money market funds¹		$	20

(in millions)	December 31, 2011
Level 1 assets - money market funds¹		$	28
Level 2 assets - electricity contracts		$	1
Level 2 liabilities - electricity contracts		$	3


¹	Money market funds are included in cash and cash equivalents on Homer City's balance sheets.

The fair value of transfers in and out of each level is determined at the end of each reporting period. There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2012 and 2011.

Valuation Techniques used to Determine Fair Value

Level 1

The fair value of Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded derivatives and money market funds.

Level 2

The fair value of Level 2 assets and liabilities is determined using the income approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. This level includes over-the-counter derivatives.

Over-the-counter derivative contracts are valued using standard pricing models to determine the net present value of estimated future cash flows. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges or comparison to executed trades are used to validate and corroborate the primary price source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity.

Level 3

The fair value of Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. This level includes over-the-counter options and derivative contracts that trade infrequently, such as congestion revenue rights and long-term power agreements.

Fair Value of Long-term Debt

The carrying amount of Homer City's subordinated loan with an affiliate was $492 million at September 30, 2012 and $490 million at December 31, 2011. It is not practicable to estimate the fair value of this financial instrument due to the subordination features of the loan and the provisions of the sale-leaseback agreements for the Homer City plant.

Note 3. Derivative Instruments and Hedging Activities

Homer City uses derivative instruments to reduce its exposure to market risks that arise from price fluctuations of electricity, capacity and transmission rights. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that Homer City does not use derivative instruments to hedge these market risks, the unhedged portions will be subject to the risks and benefits of spot market price movements.

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Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on Homer City's balance sheets as derivative assets or liabilities with offsetting changes recorded on the statements of operations. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on Homer City's balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive loss until reclassified into earnings when the related forecasted transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. The results of derivative activities are recorded in cash flows from operating activities on the statements of cash flows.

Where Homer City's derivative instruments are subject to a master netting agreement and the criteria of authoritative guidance are met, Homer City presents its derivative assets and liabilities on a net basis on its balance sheets.

Notional Volumes of Derivative Instruments

Homer City had no outstanding derivative hedge positions at September 30, 2012. The following table summarizes the notional volumes of derivatives used for hedging activities at December 31, 2011:



Commodity	Instrument	Classification	Unit of Measure	Cash Flow Hedges		Economic Hedges
Electricity	Forwards/Futures	Sales, net	GWh	—		90	²
Electricity	Capacity	Sales, net	GW-Day	29	¹	—
Electricity	Congestion	Purchases, net	GWh	—		1,267	³


¹	Homer City's hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM RPM auction is not accounted for as a derivative.


²	These positions adjust financial and physical positions, or day-ahead and real-time positions, to reduce costs or increase gross margin. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.


³	Congestion contracts include financial transmission rights, transmission congestion contracts or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.

Fair Value of Derivative Instruments

The following table summarizes the fair value of commodity derivative instruments for non-trading purposes reflected on Homer City's balance sheets at December 31, 2011:



	Derivative Assets									Derivative Liabilities
(in millions)	Short-term			Long-term			Subtotal			Short-term			Long-term			Subtotal			Net Liabilities
Cash flow hedges	$	1		$	—		$	1		$	—		$	3		$	3		$	(2	)
Economic hedges	7			1			8			7			1			8			—
	8			1			9			7			4			11			(2		)
Netting¹	(7		)	(1		)	(8		)	(7		)	(1		)	(8		)	—
Total	$	1		$	—		$	1		$	—		$	3		$	3		$	(2	)


¹	Netting of derivative receivables and derivative payables is permitted when a legally enforceable master netting agreement exists with a derivative counterparty.

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Income Statement Impact of Derivative Instruments

The following table provides the cash flow hedge activity as part of accumulated other comprehensive loss:



(in millions)	Cash Flow Hedge Activity¹						Income Statement Location
	Nine Months Ended September 30,
	2012			2011
Beginning of period derivative gains (losses)	$	(2	)	$	7
Effective portion of changes in fair value	1			12
Reclassification to earnings	1			(15		)	Operating revenues
End of period derivative gains	$	—		$	4


¹	Unrealized derivative gains (losses) are before income taxes. The after-tax amount recorded in accumulated other comprehensive loss at September 30, 2011 was $1 million.

For additional information, see Note 8—Accumulated Other Comprehensive Loss.

Homer City recorded net gains (losses) of none and $2 million during the three months ended September 30, 2012 and 2011, respectively, and $(1) million and $4 million during the nine months ended September 30, 2012 and 2011, respectively, in operating revenues on the statements of operations representing the amount of cash flow hedge ineffectiveness.

The effect of realized and unrealized gains (losses) from derivative instruments on the statements of operations is presented below:



		Three Months Ended September 30,					Nine Months Ended September 30,
(in millions)	Income Statement Location	2012		2011			2012	2011
Economic hedges	Operating revenues	$	—	$	(3	)	—	$	15

Note 4. Income Taxes

Homer City had an effective income tax rate of 41% for the nine months ended September 30, 2011, which varied from the federal statutory rate of 35% due to state income taxes. On March 15, 2012, Homer City made an election to be treated as a partnership for federal and state income tax purposes. As a result, the income or loss attributable to Homer City is allocated to its individual partners. Accordingly, no income taxes were recognized in Homer City's financial statements for 2012.

Note 5. Compensation and Benefit Plans

Pension Plans and Postretirement Benefits Other Than Pensions

Pension Plans

During the nine months ended September 30, 2012, Homer City made contributions of $2.3 million, and during the remainder of 2012, expects to make $0.5 million of additional contributions.

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The following were components of pension expense:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Service cost	$	0.5		$	0.4		$	1.5		$	1.2
Interest cost	0.5			0.4			1.4			1.3
Expected return on plan assets	(0.5		)	(0.5		)	(1.5		)	(1.5		)
Net amortization	0.1			—			0.3			—
Total expense	$	0.6		$	0.3		$	1.7		$	1.0

Postretirement Benefits Other Than Pensions

During the nine months ended September 30, 2012, Homer City made contributions of $0.9 million.

The following were components of postretirement benefits expense:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2012		2011		2012		2011
Service cost	$	0.2	$	0.2	$	0.6	$	0.5
Interest cost	0.4		0.4		1.2		1.4
Net amortization	—		—		0.1		0.1
Total expense	$	0.6	$	0.6	$	1.9	$	2.0

Benefit Obligations Under the Master Transaction Agreement

Under the Homer City MTA, Homer City will retain the postretirement benefits other than pensions (PBOP) and pensions of Homer City for periods prior to the closing of the transaction. Homer City will contribute approximately $32 million to voluntary employee beneficiary association trusts to fund the PBOP obligation prior to the closing of the Homer City MTA. These funds will be used exclusively to provide medical and other welfare benefits due to Homer City employees and cannot revert to Homer City or EME-related successor companies in future periods.

Note 6. Commitments and Contingencies

Homer City Lease

Homer City received a forbearance of the $47 million senior rent payment due October 1, 2012. Homer City made the required April 1, 2012 senior rent payment of $48 million but did not make the April 1, 2012 payment of equity rent of $65 million and was granted a waiver by the owner-lessors of any rent default event with respect to the payment of the equity rent for all purposes other than restrictions on distributions from Homer City, including repayment of its intercompany loan, and the $48 million senior rent reserve letter of credit remains in place. Homer City and an affiliate of GECC entered into the Homer City MTA for the divestiture by Homer City of substantially all of its assets and certain specified liabilities. For further discussion, see Note 1—Summary of Significant Accounting Policies—Going Concern, and refer to "Note 8. Commitments and Contingencies—Lease Commitments—Facilities Sale-Leaseback" in Item 8 on page 59 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

Fuel Supply Contracts and Coal Transportation Agreements

During the second and third quarters of 2012, Homer City entered into additional contractual agreements for the purchase of coal and during the second quarter of 2012 entered into contractual agreements for the transportation of coal. At September 30, 2012, Homer City's commitments for the purchase and transportation of coal were estimated to aggregate $161 million, which consists of $101 million for the remainder of 2012 and $60 million in 2013.

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Capital Commitments

At September 30, 2012, Homer City had firm commitments to spend approximately $8 million during the remainder of 2012 for capital expenditures. Homer City intends to fund these expenditures with cash on hand, subject to availability. Any amounts incurred to construct flue gas desulfurization units are being funded by GECC.

Guarantees and Indemnities

Indemnities Related to the Homer City Plant

In connection with the original acquisition of the Homer City plant, Homer City agreed to indemnify the sellers with respect to specified environmental liabilities before and after the date of sale. Edison Mission Energy (EME) guaranteed this obligation of Homer City. Also, in connection with the sale-leaseback transaction related to the Homer City plant, Homer City agreed to indemnify the owner-lessors for specified environmental liabilities. Due to the nature of the obligations under these indemnity provisions, they are not subject to a maximum potential liability and do not have expiration dates. Homer City has not recorded a liability related to this indemnity. For a discussion of the New Source Review lawsuit filed against Homer City, see "—Contingencies—New Source Review and Other Litigation."

Indemnities Provided under Sale-Leaseback Agreement

In connection with the sale-leaseback transaction related to the Homer City plant, Homer City and its indirect parent, EME, entered into tax indemnity agreements. Under certain of these tax indemnity agreements, Homer City, as the lessee in the sale-leaseback transaction, agreed to indemnify the respective owner-lessors for specified adverse tax consequences that could result from 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, Homer City cannot determine a range of estimated obligations which would be triggered by a valid claim from the owner-lessors. Homer City has not recorded a liability related for these matters.

Upon closing of the Homer City MTA, the tax indemnity agreement between Homer City and GECC will be terminated and GECC will release Homer City from its obligations thereunder. Completion of the Homer City MTA is subject to the satisfaction of a number of closing conditions, including the successful restructuring and reorganization of an affiliate of GECC and receipt of the regulatory approvals required for the transfer of the Homer City plant to GECC. For further discussion, see Note 1—Summary of Significant Accounting Policies—Going Concern.

Other Indemnities

Homer City provides other indemnifications through contracts entered into in the normal course of business. Homer City's obligations under these agreements may or may not be limited in terms of time and/or amount, and in some instances Homer City may have recourse against third parties. Homer City cannot determine a range of estimates and has not recorded a liability related to these indemnities.

Contingencies

In addition to the matters disclosed in these notes, Homer City is involved in other legal, tax and regulatory proceedings before various courts and governmental agencies regarding matters arising in the ordinary course of business. Homer City believes the outcome of these other proceedings will not, individually or in the aggregate, materially affect its results of operations or liquidity.

New Source Review and Other Litigation

In January 2011, the United States Environmental Protection Agency (US EPA) filed a complaint in the Western District of Pennsylvania against Homer City, the sale-leaseback owner participants of the Homer City plant, and two prior owners of the Homer City plant. The complaint alleged violations of the Prevention of Significant Deterioration (PSD) and Title V provisions of the Clean Air Act (CAA), as a result of projects in the 1990s performed by prior owners without PSD permits and the subsequent failure to incorporate emissions limitations that meet best available control technology (BACT) into the station's Title V operating permit. In addition to seeking penalties ranging from $32,500 to $37,500 per violation, per day, the complaint called for an injunction ordering Homer City to install controls sufficient to meet BACT emission rates at all units subject to the complaint and for other remedies. The PADEP, the State of New York and the State of New Jersey intervened in the lawsuit. In October 2011, all of the claims in the US EPA's lawsuit were dismissed with prejudice. An appeal of the dismissal is pending before the Third Circuit Court of Appeals.

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Also in January 2011, two residents filed a complaint in the Western District of Pennsylvania, on behalf of themselves and all others similarly situated, against Homer City, the sale-leaseback owner participants of the Homer City plant, two prior owners of the Homer City plant, EME, and Edison International, claiming that emissions from the Homer City plant had adversely affected their health and property values. The plaintiffs sought to have their suit certified as a class action and requested injunctive relief, the funding of a health assessment study and medical monitoring, as well as compensatory and punitive damages. In October 2011, the claims in the purported class action lawsuit that were based on the federal CAA were dismissed with prejudice, while state law statutory and common law claims were dismissed without prejudice to re-file in state court should the plaintiffs choose to do so. Homer City does not know whether the plaintiffs will file a complaint in state court.

In February 2012, Homer City received a 60-day Notice of Intent to Sue indicating the Sierra Club’s intent to file a citizen lawsuit alleging violations of emissions standards and limitations under the CAA and the Pennsylvania Air Pollution Control Act.

Adverse decisions in these cases could involve penalties, remedial actions and damages that could have a material impact on the financial condition and results of operations of Homer City. Homer City cannot predict the outcome of these matters or estimate the impact on the Homer City plant, or its results of operations, financial position or cash flows. Homer City has not recorded a liability for these matters.

Ash Disposal Site

Homer City's ash disposal site is a permitted Class I Residual Waste Landfill, the most stringently regulated of the three categories of residual waste landfills authorized by the regulations of the PADEP. Homer City's permit allows it to dispose of coal combustion by-products, including fly ash, bottom ash, pyrites, gypsum, and miscellaneous plant wastes at the landfill. The wastes are deposited in compacted layers within lifts, or sections. Each lift where coal ash is disposed must be capped and covered when it reaches final grade. Homer City must also monitor groundwater quality at and adjacent to the ash disposal site through a network of monitoring wells and report the results to the PADEP on a periodic basis. In the event that a disposal facility's groundwater monitoring identifies degradation in any of its wells, the PADEP's regulations require the facility to first confirm the existence and nature of the degradation by conducting a groundwater assessment. If the assessment confirms groundwater degradation in excess of the applicable regulatory standards, the facility is then required to prepare and implement an abatement plan that could include measures such as installing a liner in a previously unlined area. To date, no degradation has been found in the groundwater monitoring system at Homer City that would require the development of an assessment or abatement plan. Homer City also provides financial assurance in the form of a surety bond to guarantee its closure and post-closure obligations at the landfill. The estimated closure date is 2018. On October 1, 2012, Homer City received the required permits from PADEP allowing for expansion of the landfill effective until December 2021. Management does not believe that the costs of maintaining and closing the ash disposal site will have a material impact on Homer City's financial statements under current regulations.

Insurance

Homer City maintains insurance policies that it believes are comparable to those carried by other electric generating facilities of a similar size. The insurance program includes all-risk real and personal property insurance, including coverage for losses from boiler and machinery breakdowns, and the perils of earthquake and flood, subject to certain sublimits. The property insurance program currently covers losses up to $1 billion. Due to the construction of particulate emissions control equipment for Units 1 and 2, Homer City also maintains builders all risk insurance, including advance loss of profit coverage. The builders risk insurance program covers losses up to $570 million. The participation agreements do not specifically require builders risk insurance. Homer City also carries general liability insurance covering liabilities to third parties for bodily injury or property damage resulting from operations, automobile liability insurance and excess liability insurance. Limits and deductibles in respect of all insurance policies are consistent with the requirements of the participation agreements. Under the terms of the participation agreements entered into as part of Homer City's sale-leaseback transaction, Homer City is required to maintain specified minimum insurance coverages with insurers having specific minimum ratings if and to the extent that such insurance is available on a commercially reasonable basis. Some of the insurers providing Homer City's insurance do not meet the minimum ratings required under the participation agreements. Homer City has obtained a waiver under the participation agreements which permits it to maintain its current insurance through June 1, 2013.

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Note 7. Environmental Developments

Cross-State Air Pollution Rule

In August 2012, the U.S. Court of Appeals for the District of Columbia Circuit vacated the US EPA's Cross-State Air Pollution Rule (CSAPR) and directed the US EPA to continue administering the Clean Air Interstate Rule (CAIR) pending the promulgation of a valid replacement. In October 2012, the US EPA filed a petition seeking to have the decision reviewed by the full District of Columbia Circuit.

Hazardous Air Pollutant Regulations

In December 2011, the US EPA announced the Mercury and Air Toxics Standards (MATS) rule, limiting emissions of hazardous air pollutants from coal- and oil-fired electrical generating units. The rule was published in the Federal Register on February 16, 2012, and became effective on April 16, 2012. A number of parties have filed notices of appeal challenging the rule.

Greenhouse Gas Regulation

In March 2012, the US EPA announced proposed carbon dioxide emissions limits for new power plants. The status of the US EPA's efforts to develop greenhouse gas emissions performance standards for existing plants is unknown.

In June 2012, the U.S. Court of Appeals for the D.C. Circuit dismissed the challenge by industry groups and some states to the Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, known as the "GHG tailoring rule." In August 2012, states and industry groups challenging the rule filed a petition seeking to have the decision reviewed by the full District of Columbia Circuit.

In July 2012, the US EPA published a final rule maintaining the CO₂ equivalent emissions thresholds (for purposes of PSD and Title V permitting) originally established in the GHG tailoring rule.

Greenhouse Gas Litigation

In March 2012, the federal district court in Mississippi dismissed, in its entirety, the purported class action complaint filed by private citizens in May 2011, naming a large number of defendants, including Homer City's parent company EME, for damages allegedly arising from Hurricane Katrina. In April 2012, the plaintiffs filed an appeal with the Fifth Circuit Court of Appeals. Plaintiffs allege that the defendants' activities resulted in emissions of substantial quantities of greenhouse gases that have contributed to climate change and sea level rise, which in turn are alleged to have increased the destructive force of Hurricane Katrina. The lawsuit alleges causes of action for negligence, public and private nuisance, and trespass, and seeks unspecified compensatory and punitive damages. The claims in this lawsuit are nearly identical to a subset of the claims that were raised against many of the same defendants in a previous lawsuit that was filed in, and dismissed by, the same federal district court where the current case has been filed.

In September 2012, a three-judge panel of the U.S Court of Appeals for the Ninth Circuit affirmed the dismissal of a case brought against EME's parent company, Edison International, and other defendants, by the Alaskan Native Village of Kivalina. In October 2012, the plaintiffs requested a rehearing by a larger panel of Ninth Circuit judges.

Note 8. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following:



(in millions)	Unrealized Gains (Losses) on Cash Flow Hedges				Unrecognized Losses and Prior Service Adjustments, Net¹				Accumulated Other Comprehensive Loss
Balance at December 31, 2011		$	(3	)		$	(13	)		$	(16	)
Current period change		3				—				3
Balance at September 30, 2012		$	—			$	(13	)		$	(13	)


¹	For further detail, see Note 5—Compensation and Benefit Plans.

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Note 9. Supplemental Cash Flows Information



	Nine Months Ended September 30,
(in millions)	2012		2011
Cash paid
Interest	$	41	$	43
Income taxes	$	—	$	1
Non-cash investing and financing activities
Non-cash settlement of intercompany tax liabilities through an increase in the subordinated revolving loan agreement with affiliate	$	2	$	1

Accrued capital expenditures at September 30, 2012 were none. Accrued capital expenditures will be included as an investing activity in the statements of cash flows in the period paid.

Note 10. Asset Impairments and Other Charges

The Homer City MTA requires the transfer of substantially all the assets and certain specified liabilities of Homer City to a GECC affiliate. Under the Homer City MTA, Homer City will retain PBOP and pension liabilities for Homer City employees for periods prior to the transfer and liabilities related to affiliate balances (for additional information see Note 5—Compensation and Benefit Plans—Benefit Obligations Under the Master Transaction Agreement). Divestiture by Homer City of substantially all of its assets and certain specified liabilities will constructively terminate the activity of Homer City.

Homer City has concluded that the assets that are expected to be transferred pursuant to the Homer City MTA are required to be classified as assets held for sale at September 30, 2012. The assets that are classified as held for sale are required to be written down to fair value which is equal to the carrying value of liabilities that Homer City will transfer. Accordingly, Homer City recorded a $153 million charge during the third quarter of 2012. Homer City also recorded $5 million of asset retirement charges during the first and second quarters of 2012.

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

This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect Homer City's current expectations and projections about future events based on Homer City's knowledge of present facts and circumstances and assumptions about future events and include any statement that does not directly relate to a historical or current fact. Other information distributed by Homer City that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this quarterly report on Form 10-Q, the words "expects," "believes," "anticipates," "estimates," "projects," "intends," "plans," "probable," "may," "will," "could," "would," "should" and variations of such words and similar expressions, or discussions of strategy or plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. Some of the risks, uncertainties and other important factors that could cause results to differ from those currently expected, or that otherwise could impact Homer City, include but are not limited to:


•	the completion of the transactions for the divestiture of Homer City's leasehold interest pursuant to the terms of the Homer City MTA, and the timing and structure of such transaction;


•	Homer City's assumptions about its ability to continue as a going concern;


•	Homer City's significant cash requirements and its limited ability to borrow funds and access the capital markets on reasonable terms;


•	environmental laws and regulations, at both state and federal levels, or changes in the application of those laws, that could require additional expenditures or otherwise affect Homer City's cost and manner of doing business, including compliance with the CAIR and the MATS rule;


•	supply and demand for electric capacity and energy, and the resulting prices and dispatch volumes, in the wholesale markets to which Homer City's generating units have access;


•	the cost and availability of fuel and fuel transportation services;


•	the cost and availability of emission credits or allowances;


•	transmission congestion in and to each market area and the resulting differences in prices between delivery points;


•	the difficulty of predicting wholesale prices, transmission congestion, energy demand, and other aspects of the complex and volatile markets in which Homer City participates;


•	the availability and creditworthiness of counterparties, and the resulting effects on liquidity in the power and fuel markets in which Homer City operates;


•	the ability of counterparties to pay amounts owed in excess of collateral provided in support of their obligations;


•	governmental, statutory, regulatory or administrative changes or initiatives affecting Homer City or the electricity industry generally, including market structure rules and price mitigation strategies adopted by ISOs and RTOs;


•	market volatility and other market conditions that could increase Homer City's obligations to post collateral beyond the amounts currently expected, and the potential effect of such conditions on the ability of Homer City to provide sufficient collateral in support of its hedging activities and purchases of fuel;


•	weather conditions, natural disasters and other unforeseen events;


•	the extent of additional supplies of capacity, energy and ancillary services from current competitors or new market entrants, including the development of new generation facilities, and technologies that may be able to produce electricity at a lower cost than Homer City's generating facilities and/or increased access by competitors to Homer City's markets as a result of transmission upgrades;


•	competition in all aspects of Homer City's business;


•	operating risks, including equipment failure, availability, heat rate, output, costs of repairs and retrofits, and availability and cost of spare parts;


•	creditworthiness of suppliers and their ability to deliver goods and services under their contractual obligations to Homer City or to pay damages if they fail to fulfill those obligations;

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•	effects of legal proceedings, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards; and


•	general political, economic and business conditions.

Additional information about risks and uncertainties, including more detail about the factors described above, is contained throughout this MD&A and in "Item 1A. Risk Factors" on page 11 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. Readers are urged to read this entire quarterly report on Form 10-Q and the annual report on Form 10-K for the year ended December 31, 2011, including the information incorporated by reference, and to carefully consider the risks, uncertainties and other factors that affect Homer City's business. Forward-looking statements speak only as of the date they are made, and Homer City is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by Homer City with the Securities and Exchange Commission.

This MD&A discusses material changes in the results of operations, financial condition and other developments of Homer City since December 31, 2011, and as compared to the third quarter ended September 30, 2011. This discussion presumes that the reader has read or has access to the MD&A included in Item 7 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

MANAGEMENT'S OVERVIEW

On September 21, 2012, Homer City and an affiliate of GECC entered into the Homer City MTA for the divestiture by Homer City of substantially all of its assets and certain specified liabilities. On October 3, 2012, GECC entered into a Plan Support Agreement (the PSA) with the holders of approximately 76% of the outstanding principal amount of the secured lease obligation bonds issued by Homer City Funding, LLC as part of the original sale-leaseback transaction. Under the PSA, the parties committed to support and implement a reorganization plan of Homer City Funding, LLC and to solicit votes on a prepackaged plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. On October 5, 2012, GECC commenced the solicitation. Homer City Funding, LLC is an affiliate of GECC and not related to Homer City or any other EME affiliate. In addition, Homer City received a forbearance of the $47 million senior rent payment that had been due October 1, 2012 and was granted a waiver of the $65 million equity rent payment that had been due April 1, 2012.

Accordingly, during the third quarter of 2012, Homer City met the definition of assets held for sale and recorded a $153 million charge to write-down its assets to net realizable value. Divestiture by Homer City of substantially all of its assets and certain specified liabilities will constructively terminate the activity of Homer City. In connection with the wind down of operations, Homer City intends to allow its collective bargaining agreement with its represented employees to expire as scheduled on December 31, 2012.

For further discussion related to the Homer City MTA, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 1. Summary of Significant Accounting Policies—Going Concern," "—Note 5. Compensation and Benefit Plans—Benefit Obligations Under the Master Transaction Agreement," and "—Note 10. Asset Impairments and Other Charges. For further discussion of the Homer City lease, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Commitments and Contingencies—Homer City Lease" and refer to "Management's Overview—Homer City Lease" in Item 7 on page 17 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

Environmental Regulation Developments

For a discussion of environmental regulation developments, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 7. Environmental Developments."

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RESULTS OF OPERATIONS

Summary

The table below summarizes total revenues as well as key performance measures related to the Homer City plant.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Operating Revenues (in millions)	$	122		$	158		$	300		$	410
Statistics
Generation (in GWh)	2,770			2,800			7,393			6,969
Equivalent availability	93.8		%	89.0		%	88.6		%	71.7		%
Capacity factor	66.6		%	67.3		%	59.7		%	56.5		%
Load factor	71.0		%	75.7		%	67.4		%	78.7		%
Forced outage rate	3.9		%	10.2		%	4.4		%	17.0		%
Average realized energy price/MWh	$	37.43		$	51.18		$	33.22		$	48.90
Capacity revenues only (in millions)	$	18		$	18		$	54		$	66
Average fuel costs/MWh	$	32.50		$	28.83		$	32.57		$	28.11

Reconciliation of Non-GAAP Disclosures and Statistical Definitions

Average Realized Energy Price

The average realized energy price reflects the average price at which energy is sold into the market including the effects of hedges, real-time and day-ahead sales and PJM fees and ancillary services. It is determined by dividing (i) operating revenues less unrealized gains (losses) and other non-energy related revenues by (ii) generation as shown in the table below. Revenues related to capacity sales are excluded from the calculation of average realized energy price.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2012			2011			2012			2011
Operating revenues	$	122		$	158		$	300		$	410
Less:
Unrealized (gains) losses	—			3			—			(2		)
Capacity and other revenues	(18		)	(18		)	(54		)	(67		)
Realized revenues	$	104		$	143		$	246		$	341
Generation (in GWh)	2,770			2,800			7,393			6,969
Average realized energy price/MWh	$	37.43		$	51.18		$	33.22		$	48.90

The average realized energy price is presented as an aid in understanding the operating results of the Homer City plant. Average realized energy price is a non-GAAP performance measure since such statistical measure excludes unrealized gains or losses recorded as operating revenues. This measure may not be comparable to those of other companies. Management believes that the average realized energy price is meaningful for investors as this information reflects the impact of hedge contracts at the time of actual generation in period-over-period comparisons or as compared to real-time market prices.

Statistical Definitions

•

Equivalent availability reflects the impact of the unit's inability to achieve full load, referred to as derating, as well as outages which result in a complete unit shutdown. The coal plants are not available during periods of planned and unplanned maintenance. The equivalent availability factor is defined as the number of MWh the coal plants are available to generate electricity divided by the product of the capacity of the coal plants (in MW) and the number of hours in the period.

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•	The capacity factor indicates how much power a unit generated compared to the maximum amount of power that could be generated according to its rating. It is defined as the actual number of MWh generated by the coal plants divided by the product of the capacity of the coal plants (in MW) and the number of hours in the period.


•	The load factor indicates how much power a unit generated compared to the maximum amount of power that a unit was available to generate electricity. It is determined by dividing capacity factor by the equivalent availability factor.


•	The forced outage rate refers to forced outages and deratings excluding events outside of management's control as defined by NERC. Examples include floods, tornado damage and transmission outages.

Seasonality

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

Operating Income (Loss)

Homer City had an operating loss of $150 million for the third quarter of 2012 as compared to operating income of $38 million for the third quarter of 2011 and Homer City had an operating loss of $200 million for the nine months ended September 30, 2012 as compared to operating income of $27 million for the corresponding period of 2011.

The decreases in operating income were primarily attributable to the $153 million charge recorded in the third quarter of 2012 related to the plan to transition ownership of the Homer City plant to GECC and lower energy margins, partially offset by a decline in plant maintenance costs due to outages at Units 1 and 2 during the first quarter of 2011 and due to lower planned overhauls in the second quarter of 2012. In addition, depreciation expense decreased for the third quarter and nine months ended September 30, 2012 as a result of a $478 million impairment charge recorded in the fourth quarter of 2011. Lower energy margins were due to lower average realized energy prices and higher coal and emission allowance costs. Included in fuel costs were $8 million and $2 million during the third quarters of 2012 and 2011, respectively, and $21 million and $3 million for the nine months ended September 30, 2012 and 2011, respectively, related to the net cost of emission allowances.

Income Taxes

New Accounting Guidance

For a discussion of new accounting guidance affecting Homer City, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 1. Summary of Significant Accounting Policies—New Accounting Guidance."

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The use of Homer City's cash generated from operations is restricted by the sale-leaseback agreements. Under the participation agreements entered into as part of the sale-leaseback transaction, Homer City's ability to enter into specified transactions and to engage in specified business activities, including financing and investment activities, is subject to significant restrictions. These restrictions could affect, and in some cases significantly limit or prohibit, its ability to, among other things, merge, consolidate or sell its assets, create liens on its properties or assets, enter into non-permitted trading activities, enter into transactions with its affiliates, incur indebtedness, create, incur, assume or suffer to exist guarantees or contingent obligations, make restricted payments to its partners, make capital expenditures, own subsidiaries, liquidate or dissolve, engage in non-permitted business activities, sublease its leasehold interests in the facilities or make improvements to the facilities. Accordingly, Homer City's liquidity is substantially based on its ability to generate cash flow from operations.

Homer City's use of cash in its bank accounts is limited to specific operating and capital expenditures as set forth in the security deposit agreement executed as part of the sale-leaseback transaction. Homer City had $20 million included in restricted deposits at September 30, 2012 related to these reserve accounts. The reserve was not available to pay equity rent due on April 1, 2012 because of a failure to meet the required rent coverage ratios.

For further discussion, see "Management's Overview" and refer to "Item 1A. Risk Factors—Liquidity Risks" on page 11 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

Cash Flow

At September 30, 2012, Homer City had cash and cash equivalents of $58 million compared to $84 million at December 31, 2011. Net cash provided by operating activities was $1 million in the first nine months of 2012 compared to $46 million in the first nine months of 2011. Net cash provided by operating activities in 2012 was primarily impacted by lower energy margins related to lower average realized energy prices, higher coal and emission allowance costs and the timing of cash receipts and disbursements related to working capital items. Homer City's liquidity has continued to deteriorate throughout 2012, and to mitigate this strain, Homer City utilized existing coal inventory during the period. Additional coal inventory was required to support continuing operations, and during the second and third quarters of 2012, Homer City entered into additional contractual agreements for the purchase of coal. For further discussion, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Commitments and Contingencies—Fuel Supply Contracts and Coal Transportation Agreements."

Net cash used in financing activities decreased $52 million in the first nine months of 2012 compared to the first nine months of 2011. The 2012 decrease was primarily due to lower repayments of the lease financing in 2012 as compared to 2011.

Net cash used in investing activities increased $9 million in the first nine months of 2012 compared to the first nine months of 2011, due to higher capital expenditures.

Credit Ratings

Homer City is not currently rated. Credit ratings for EME and EMMT as of September 30, 2012 were as follows:



	Moody's Rating	S&P Rating	Fitch Rating
EME¹	Ca	CCC	C
EMMT	Not Rated	CCC	Not Rated


¹	Senior unsecured rating.

All the above ratings are on negative outlook. Homer City cannot provide assurance that the current credit ratings above will remain in effect for any given period of time or that one or more of these ratings will not be lowered. Homer City notes that these credit ratings are not recommendations to buy, sell or hold securities and may be revised at any time by a rating agency.

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Distribution Restrictions

For a description of the restrictions binding on Homer City, refer to "Payments Made Under Subordinated Revolving Loan and Tax Payments" in Item 7 on page 23 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. Homer City is restricted from making distributions.

Contractual Obligations and Contingencies

Contractual Obligations

Fuel Supply Contracts and Coal Transportation Agreements

For a discussion of fuel supply contracts and coal transportation agreements, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Commitments and Contingencies—Fuel Supply Contracts and Coal Transportation Agreements."

Capital Commitments

For a discussion of capital commitments, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Commitments and Contingencies—Capital Commitments."

Contingencies

Homer City has contingencies related to the NSR and other litigation, ash disposal site and insurance, which are discussed in "EME Homer City Generation L.P. Notes to Financial Statements—Note 6. Commitments and Contingencies—Contingencies."

Environmental Matters and Regulations

For a discussion of Homer City's environmental matters, refer to "Environmental Matters and Regulations" in Item 1 on page 8 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. There have been no significant developments with respect to environmental matters specifically affecting Homer City since the filing of Homer City's annual report, except as set forth in "EME Homer City Generation L.P. Notes to Financial Statements—Note 7. Environmental Developments."

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MARKET RISK EXPOSURES

For a detailed discussion of Homer City's market risk exposures, including commodity price risk, credit risk and interest rate risk, refer to "Market Risk Exposures" in Item 7 on page 25 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

Fair Value Disclosures

In determining the fair value of Homer City's derivative positions, Homer City uses third-party market pricing where available. For further explanation of the fair value hierarchy and a discussion of Homer City's derivative instruments, see "EME Homer City Generation L.P. Notes to Financial Statements—Note 2. Fair Value Measurements" and "—Note 3. Derivative Instruments and Hedging Activities," respectively.

Commodity Price Risk

Energy Price Risk

Energy and capacity from the Homer City plant are sold under terms, including price, duration and quantity, arranged by EMMT with customers through a combination of bilateral agreements (resulting from negotiations or from auctions), forward energy sales and spot market sales. Power is sold into PJM at spot prices based upon locational marginal pricing.

The following table depicts the average historical market prices for energy per megawatt-hour at the locations indicated for the first nine months of 2012 and 2011:



	24-Hour Average Historical Market Prices¹
	2012		2011
PJM West Hub	$	33.23	$	46.13
Homer City Busbar	30.14		41.55


¹	Energy prices were calculated at the Homer City Busbar delivery point and the PJM West Hub using historical hourly day-ahead prices as published by PJM or provided on the PJM web-site.

The following table sets forth the forward market prices for energy per megawatt-hour as quoted for sales into the PJM West Hub at September 30, 2012:



	24-Hour Forward Energy Prices¹
	PJM West Hub
2012
October		$	34.50
November		34.22
December		38.82
2013 calendar "strip"²		$	38.21
2014 calendar "strip^"2		$	39.36


¹	Energy prices were determined by obtaining broker quotes and information from other public sources relating to the PJM West Hub delivery point.


²	Market price for energy purchases for the entire calendar year.

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

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Capacity Price Risk

Under the RPM, capacity commitments are made in advance to provide a long-term pricing signal for construction and maintenance of capacity resources. The following table summarizes the status of capacity sales for Homer City at September 30, 2012:



	RPM Capacity Sold in Base Residual Auction			Other Capacity Purchases, Net of Sales¹				Aggregate Average Price per MW-day
	MW	Price per MW-day		MW		Average Price per MW-day		Aggregate Average Price per MW-day
October 1, 2012 to May 31, 2013	1,736	$	133.37	(207	)	$	8.16	$	150.35
June 1, 2013 to May 31, 2014	1,780	226.15		—		—		221.03		^2.00
June 1, 2014 to May 31, 2015	1,694	136.50		—		—		136.50
June 1, 2015 to May 31, 2016	1,703	167.46		—		—		167.46


¹	Other capacity sales and purchases, net includes contracts executed in advance of the RPM base residual auction to hedge the price risk related to such auction, participation in RPM incremental auctions and other capacity transactions entered into to manage capacity risks.


²	Includes the impact of a 100 MW capacity swap transaction executed prior to the base residual auction at $135 per MW-day.

Revenues from the sale of capacity from Homer City beyond the periods set forth above will depend upon the amount of capacity available and future market prices either in PJM or nearby markets if Homer City has an opportunity to capture a higher value associated with those markets.

Effective April 16, 2012, EMMT assigned the awards it received related to Homer City capacity to Homer City effective as of June 1, 2012. As a result of the financial outlook of Homer City, as previously discussed, EME's subsidiary, EMMT, has ceased to enter into hedging activities related to future power sales, but continues to enter into short-term energy transactions on behalf of Homer City pursuant to an intercompany agreement. Those transactions are generally back-to-back transactions in which EMMT enters into a transaction with a third party as a principal and then enters into an equivalent transaction with Homer City. If Homer City were to default on its obligations to supply capacity, then Homer City would be liable to PJM to supply that capacity and failure to do so would expose Homer City to penalties under the PJM tariffs. If one or more of the Homer City units were to be unavailable as a capacity resource and Homer City did not fulfill this obligation through market transactions, then Homer City would be required to refund any capacity payments received and would be assessed by PJM a penalty equal to the greater of 20% of the capacity payments or $20 per MW-day.

Basis Risk

During the nine months ended September 30, 2012 and 2011, day-ahead prices at the Homer City busbar were lower than those at the PJM West Hub by an average of 9% and 10% respectively. Differences in day-ahead pricing generally arise due to transmission congestion.

Coal Price Risk

The Homer City plant purchases coal primarily from mines located near the facilities in Pennsylvania. Coal purchases are made under a variety of supply agreements. The following table summarizes the amount of coal under contract at September 30, 2012 for the remainder of 2012 and 2013:



	October through December 2012	2013
Amount of Coal Under Contract in Millions of Equivalent Tons¹	1.6	0.9


¹	The amount of coal under contract in equivalent tons is calculated based on contracted tons and applying a 13,000 Btu equivalent.

Homer City is subject to price risk for purchases of coal that are not under contract. Market prices of NAPP coal are related to the price of coal purchased for the Homer City plant. The market price of NAPP coal based on 13,000 Btu per pound heat

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content and less than 3.0 pounds of SO₂ per MMBtu sulfur content decreased to a price of $64.10 per ton at September 28, 2012, compared to a price of $73.30 per ton at December 30, 2011, as reported by the EIA.

Credit Risk

Homer City derives a significant source of its operating revenues from electric power sold into the PJM market by EMMT as its agent. Sales into PJM accounted for approximately 99% of Homer City's operating revenues for the nine months ended September 30, 2012.

Interest Rate Risk

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

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

For a discussion of Homer City's critical accounting policies, refer to "Critical Accounting Estimates and Policies" in Item 7 on page 29 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of market risk sensitive instruments, refer to "Market Risk Exposures" in Item 7 on page 25 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. For an update to that disclosure, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk Exposures."

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Homer City's management, under the supervision and with the participation of the partnership's principal executive officer and principal financial officer, has evaluated the effectiveness of Homer City's disclosure controls and procedures (as that 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 third quarter of 2012. Based on that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the third quarter of 2012, Homer City's disclosure controls and procedures were effective.

Internal Control over Financial Reporting

There were no changes in Homer City's internal control over financial reporting (as that term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the third quarter of 2012 that have materially affected, or are reasonably likely to materially affect, Homer City's internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a discussion of Homer City's legal proceedings, refer to "Note 8. Commitments and Contingencies—Contingencies" on page 61 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. There have been no significant developments with respect to legal proceedings specifically affecting Homer City since the filing of Homer City's annual report on Form 10-K for the year ended December 31, 2011.

ITEM 1A. RISK FACTORS

For a discussion of the risks, uncertainties, and other important factors which could materially affect Homer City's business, financial condition, or future results, refer to "Item 1A. Risk Factors" on page 11 of Homer City's annual report on Form 10-K for the year ended December 31, 2011. The risks described in Homer City's annual report on Form 10-K and in this report are not the only risks facing Homer City. Additional risks and uncertainties that are not currently known, or that are currently deemed to be immaterial, also may materially adversely affect Homer City's business, financial condition or future results.

The completion of the transactions for the divestiture of Homer City's operating assets and leasehold interest pursuant to the terms of the Master Transaction Agreement between Homer City and Homer City Generation, L.P. may not occur as contemplated.

Homer City has entered into a Master Transaction Agreement with Homer City Generation, L.P., an affiliate of GECC, under which Homer City has agreed to transfer substantially all of its assets related to the Homer City plant, and certain specified liabilities, to Homer City Generation, L.P. Closing of the divestiture transaction contemplated by the Master Transaction Agreement is subject to the satisfaction of a number of closing conditions, including the successful restructuring and reorganization of Homer City Funding, LLC, an affiliate of GECC, and receipt of the regulatory approvals required for the transfer of the Homer City plant to Homer City Generation, L.P. If the transaction is not consummated, Homer City would likely have insufficient liquidity to continue operations, resulting in Homer City's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders, which could include foreclosing on the leased assets, the general partner of Homer City, or both, and could also become the subject of bankruptcy proceedings. For additional information, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Management's Overview."

ITEM 6. EXHIBITS



Exhibit No.	Description
10.1	Master Transaction Agreement, dated September 21, 2012, by and between EME Homer City Generation L.P. and Homer City Generation, L.P., incorporated by reference to Exhibit 10.1 to EME Homer City Generation L.P.'s Form 8-K filed October 3, 2012.
31.1	Certification of the President 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.
101	Financial statements from the quarterly report on Form 10-Q of EME Homer City Generation L.P. for the quarter ended September 30, 2012, filed on November 1, 2012, formatted in XBRL: (i) the Statements of Operations, (ii) the Statements of Comprehensive Income (Loss), (iii) the Balance Sheets, (iv) the Statements of Partners' Equity (Deficit), (v) the Statements of Cash Flows, and (vi) the Notes to Financial Statements.

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SIGNATURES

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



	EME HOMER CITY GENERATION L.P. (REGISTRANT)
	By:	Mission Energy Westside Inc., as General Partner
	By:	/s/ Maria Rigatti
		Maria Rigatti Director and Vice President (Duly Authorized Officer and Principal Financial Officer)
	Date:	November 1, 2012

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