EME HOMER CITY GENERATION LP - FORM 10-Q - May 2, 2012

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - EME HOMER CITY GENERATION LPFinancial_Report.xls
EX-10.1 - IMPLEMENTATION AGREEMENT - EME HOMER CITY GENERATION LPhc1q2012ex101.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - EME HOMER CITY GENERATION LPhc1q2012ex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - EME HOMER CITY GENERATION LPhc1q2012ex311.htm
EX-32 - STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 - EME HOMER CITY GENERATION LPhc1q2012ex32.htm

 

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 March 31, 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.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
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 May 2, 2012: Not applicable.

 





TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i



ii

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.
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
NOX
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

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

EME HOMER CITY GENERATION L.P.
 
STATEMENTS OF OPERATIONS
(in millions, unaudited)

 
Three Months Ended March 31,
 
2012
 
2011
Operating Revenues from Marketing Affiliate
$
98

 
$
115

Operating Expenses
 
 
 
Fuel
84

 
52

Plant operations
19

 
47

Depreciation and amortization
13

 
17

Administrative and general
1

 
2

Total operating expenses
117

 
118

Operating loss
(19
)
 
(3
)
Other Income (Expense)
 
 
 
Interest expense
(30
)
 
(31
)
Loss before income taxes
(49
)
 
(34
)
Benefit for income taxes
—

 
(14
)
Net Loss
$
(49
)
 
$
(20
)

The accompanying notes are an integral part of these financial statements.
1

EME HOMER CITY GENERATION L.P.
 
STATEMENTS OF COMPREHENSIVE LOSS
(in millions, unaudited)

 
Three Months Ended March 31,
 
2012
 
2011
Net Loss
$
(49
)
 
$
(20
)
Other comprehensive income (loss), net of tax
 
 
 
Unrealized gains (losses) on derivatives qualified as cash flow hedges
 
 
 
Unrealized holding gains arising during period, net of income tax expense of $0 and $1 for the three months ended March 31, 2012 and 2011, respectively
—

 
4

Reclassification adjustments included in net loss, net of income tax benefit of $0 and $2 for the three months ended March 31, 2012 and 2011, respectively
—

 
(3
)
Other comprehensive income, net of tax
—

 
1

Comprehensive Loss
$
(49
)
 
$
(19
)

The accompanying notes are an integral part of these financial statements.
2

EME HOMER CITY GENERATION L.P.
 
BALANCE SHEETS
(in millions, unaudited)

 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
84

 
$
84

Due from affiliates
—

 
1

Inventory
62

 
105

Derivative assets
—

 
1

Emission allowances
19

 
19

Other current assets
3

 
3

Total current assets
168

 
213

Property, Plant and Equipment, less accumulated depreciation of $13 and none at respective dates
1,083

 
1,085

Restricted deposits
27

 
27

Long-term emission allowances
9

 
16

Other long-term assets
5

 
5

Total Assets
$
1,292

 
$
1,346

Liabilities and Partners' Deficit
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
10

 
$
21

Accrued liabilities
10

 
9

Due to affiliates
17

 
42

Interest payable
39

 
20

Interest payable to affiliate
—

 
49

Current portion of lease financing
84

 
84

Total current liabilities
160

 
225

Long-term debt to affiliate
490

 
490

Interest payable to affiliate
59

 
—

Lease financing, net of current portion
922

 
922

Benefit plans and other long-term liabilities
61

 
60

Long-term derivative liabilities
3

 
3

Total Liabilities
1,695

 
1,700

Commitments and Contingencies (Notes 6 and 7)

 

Partners' Deficit
(403
)
 
(354
)
Total Liabilities and Partners' Deficit
$
1,292

 
$
1,346



The accompanying notes are an integral part of these financial statements.
3

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
 
(49
)
 
 
 
—

 
 
 
(49
)
 
Balance at March 31, 2012
 
$
(404
)
 
 
 
$
1

 
 
 
$
(403
)
 

The accompanying notes are an integral part of these financial statements.
4

EME HOMER CITY GENERATION L.P.
 
STATEMENTS OF CASH FLOWS
(in millions, unaudited)

 
Three Months Ended March 31,
 
2012
 
2011
Cash Flows From Operating Activities
 
 
 
Net loss
$
(49
)
 
$
(20
)
Adjustments to reconcile loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
13

 
17

Decrease in due to affiliates
(24
)
 
(32
)
Decrease (increase) in inventory
43

 
(6
)
Decrease (increase) in other assets
7

 
(1
)
Increase (decrease) in accounts payable and other current liabilities
(12
)
 
21

Increase in interest payable
29

 
31

Increase in other liabilities
—

 
1

Increase in derivative assets and liabilities
—

 
(3
)
Net cash provided by operating activities
7

 
8

Cash Flows From Financing Activities
 
 
 
Borrowings on long-term debt to affiliate
—

 
10

Net cash provided by financing activities
—

 
10

Cash Flows From Investing Activities
 
 
 
Capital expenditures
(7
)
 
(3
)
Net cash used in investing activities
(7
)
 
(3
)
Net increase in cash and cash equivalents
—

 
15

Cash and cash equivalents at beginning of period
84

 
132

Cash and cash equivalents at end of period
$
84

 
$
147


The accompanying notes are an integral part of these financial statements.
5

EME HOMER CITY GENERATION L.P.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

Note 1. Summary of Significant Accounting Policies
Basis of Presentation
EME Homer City Generation L.P.'s (Homer City's) 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-month period ended March 31, 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.
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. Homer City's liquidity has continued to deteriorate during the first quarter of 2012. Absent a working capital loan or other infusion of cash, Homer City is not expected to have sufficient cash flow to meet its operating expenses and other obligations either in the near term or during 2012, including the rent payment due on October 1, 2012. This may require Homer City to temporarily suspend plant operations until sufficient working capital is obtained. It is unlikely that Homer City will continue as a going concern throughout 2012. For additional information, see Note 6—Commitments and Contingencies—Homer City Lease and Environmental Project.
Homer City has been engaged in discussions with the owner-lessors through General Electric Capital Corporation (GECC), beneficial owner of a majority of the owner-participants, regarding the funding of capital improvements at the Homer City plant and transfer to an affiliate of GECC of the economic benefit and majority ownership of all the operating assets of Homer City. On March 29, 2012, Homer City and GECC entered into an Implementation Agreement (the Agreement) with respect to the Homer City plant. As addressed by the Agreement, an affiliate of the GECC-controlled owner-lessors of the Homer City plant has entered into an engineering, procurement and construction agreement and is in the process of executing related agreements for the construction of environmental improvements. GECC will have discretion over all decisions related to such agreements. Homer City agreed to conduct its business as set forth in the Agreement and to use commercially reasonable efforts to provide assistance to GECC and its affiliates in connection with the construction agreements. The Agreement also requires Homer City, at the request of GECC, to enter into one or more implementation transactions, as defined in the Agreement, for the divestiture of its leasehold interest in the Homer City plant (and, under certain circumstances, related assets and liabilities as specified) and to assist GECC in obtaining certain third-party consents or waivers. Homer City and GECC also agreed to enter into a transition services agreement in connection with any implementation transaction. There is no assurance that Homer City and GECC will actually consummate a divestiture transaction as contemplated by the Agreement. For additional information, see Note 6—Commitments and Contingencies—Homer City Lease and Environmental Project.
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 the 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.
Cash Equivalents
Cash equivalents included money market funds totaling $5 million and $28 million at March 31, 2012 and December 31, 2011, respectively. The carrying value of cash equivalents equals the fair value as all investments have maturities of less than three months.

6

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)
March 31,
2012
 
December 31,
2011
Coal, fuel oil and other raw materials
$
24

 
$
68

Spare parts, materials and supplies
38

 
37

Total inventory
$
62

 
$
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. 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 March 31, 2012 and December 31, 2011.
Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to derive 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).

7

The following presents assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
(in millions)
March 31, 2012
Level 1 assets - money market funds1
 
$
5

 
Level 2 liabilities - electricity contracts
 
$
3

 
 
 
 
 
(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 months ended March 31, 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 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 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. Homer City has no Level 3 assets or liabilities.
Long-term Debt
The carrying amount of Homer City's subordinated loan with an affiliate was $490 million at both March 31, 2012 and 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, fuel, emission allowances 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.
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

8

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
The following table summarizes the notional volumes of derivatives used for hedging activities:
March 31, 2012
 
 
 
 
 
 
Commodity
Instrument
Classification
Unit of Measure
Cash Flow
Hedges
 
Economic
Hedges
 
Electricity
Capacity
Sales, net
MW-Day (in thousands)
33

1 
—

 
Electricity
Congestion
Purchases, net
GWh
—

 
498

3 
December 31, 2011
 
 
 
 
 
 
Electricity
Forwards/Futures
Sales, net
GWh
—

 
90

2 
Electricity
Capacity
Sales, net
MW-Day (in thousands)
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 Interconnection, LLC Reliability Pricing Model (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.

9

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:
March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
9

 
1

 
10

 
10

 
1

 
11

 
(1
)
 
10

 
1

 
11

 
10

 
4

 
14

 
(3
)
Netting1
(10
)
 
(1
)
 
(11
)
 
(10
)
 
(1
)
 
(11
)
 
—

Total
$
—

 
$
—

 
$
—

 
$
—

 
$
3

 
$
3

 
$
(3
)
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
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.
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
Three Months Ended March 31,
2012
 
2011
Beginning of period derivative gains (losses)
$
(2
)
 
$
7

 
 
Effective portion of changes in fair value
—

 
5

 
 
Reclassification to earnings
(1
)
 
(5
)
 
Operating revenues
End of period derivative gains (losses)
$
(3
)
 
$
7

 
 
1 
Unrealized derivative gains (losses) are before income taxes. The after-tax amounts recorded in accumulated other comprehensive loss at March 31, 2012 and 2011 were $(3) million and $4 million, respectively.
For additional information, see Note 8—Accumulated Other Comprehensive Loss.
The portion of a cash flow hedge that does not offset the change in the value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. Homer City recorded net gains of none and $1 million during the first quarters of 2012 and 2011, respectively, in operating revenues on the statements of operations representing the amount of cash flow hedge ineffectiveness.

10

The effect of realized and unrealized gains (losses) from derivative instruments used for non-trading purposes on the statements of operations is presented below:
 
 
Three Months Ended March 31,
(in millions)
Income Statement Location
2012
 
2011
Economic hedges
Operating revenues
$
—

 
$
4


Note 4. Income Taxes
Homer City had an effective income tax rate of 41% for the first quarter of 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 the individual partners. Accordingly, for the first quarter of 2012, no income taxes were recognized in Homer City's financial statements.

Note 5. Compensation and Benefit Plans
Pension Plans and Postretirement Benefits Other Than Pensions
Pension Plans
During the three months ended March 31, 2012, Homer City made contributions of $0.5 million, and during the remainder of 2012, expects to make $2.1 million of additional contributions.
The following were components of pension expense:
 
Three Months Ended March 31,
(in millions)
2012
 
2011
Service cost
$
0.5

 
$
0.4

Interest cost
0.4

 
0.5

Expected return on plan assets
(0.5
)
 
(0.5
)
Net amortization
0.2

 
—

Total expense
$
0.6

 
$
0.4

Postretirement Benefits Other Than Pensions
During the three months ended March 31, 2012, Homer City made contributions of $0.3 million, and during the remainder of 2012, expects to make $0.8 million of additional contributions.
The following were components of postretirement benefits expense:
 
Three Months Ended March 31,
(in millions)
2012
 
2011
Service cost
$
0.2

 
$
0.2

Interest cost
0.4

 
0.5

Total expense
$
0.6

 
$
0.7


Note 6. Commitments and Contingencies
Homer City Lease and Environmental Project
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. On March 30, 2012, Homer City 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. For

11

further discussion of the Homer City lease, refer to "Item 8. EME Homer City Generation L.P. Notes to Financial Statements—Note 8. Commitments and Contingencies—Lease Commitments—Facilities Sale-Leaseback" on page 59 of Homer City's annual report on Form 10-K for the year ended December 31, 2011.
On March 29, 2012, Homer City and GECC entered into an Implementation Agreement (the Agreement) with respect to the Homer City plant. As addressed by the Agreement, an affiliate of the GECC-controlled owner-lessors of the Homer City plant has entered into an engineering, procurement and construction agreement and is in the process of executing related agreements for the construction of environmental improvements. GECC will have discretion over all decisions related to such agreements. Homer City agreed to conduct its business as set forth in the Agreement and to use commercially reasonable efforts to provide assistance to GECC and its affiliates in connection with the construction agreements. The Agreement also requires Homer City, at the request of GECC, to enter into one or more implementation transactions, as defined in the Agreement, for the divestiture of its leasehold interest in the Homer City plant (and, under certain circumstances, related assets and liabilities as specified) and to assist GECC in obtaining certain third-party consents or waivers. Homer City and GECC also agreed to enter into a transition services agreement in connection with any implementation transaction. There is no assurance that Homer City and GECC will actually consummate a divestiture transaction as contemplated by the Agreement.
The Agreement also contains certain indemnities by each party in favor of the other. The Agreement may be terminated by GECC in its sole discretion at any time effective immediately upon delivery of notice to Homer City. Homer City may terminate the Agreement in connection with certain terminations of the construction agreements, subject to certain conditions.
The estimated cost of installing sulfur dioxide (SO2) and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is expected to be approximately $700 million to $750 million. On April 2, 2012, Homer City received the permit to construct such improvements from the Pennsylvania Department of Environmental Protection (PADEP).
Capital Commitments
At March 31, 2012, Homer City had firm commitments to spend approximately $17 million during the remainder of 2012 for capital expenditures. Homer City intends to fund these expenditures with cash on hand, subject to availability.
Guarantees and Indemnities
Indemnities Related to the Homer City Plant
In connection with the 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." Also, in connection with the Implementation Agreement discussed above, Homer City has agreed to enter into one or more implementation transactions, at the request of GECC, on the terms outlined in the Implementation Agreement, which include indemnification for specified matters.
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 obligation which would be triggered by a valid claim from the owner-lessors. Homer City has not recorded a liability related for these matters.
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.

12

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, individually and in the aggregate, will not 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.
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. Based on the remaining capacity of the landfill and the estimated material requiring future disposal, Homer City has begun permitting additional areas for expansion of the landfill. 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

13

insurance program currently covers losses up to $1.6 billion. 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, 2012. 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 these insurance policies are consistent with the requirements of the participation agreements. However, some insurers providing general liability coverage do not meet the minimum ratings requirements under the participation agreements. The waiver obtained permits Homer City to retain these insurers for all of its insurance coverages.

Note 7. Environmental Developments
Developments during the first quarter of 2012 include the following:
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.
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.

Note 8. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following:
(in millions)
Unrealized 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
 
—

 
 
 
—

 
 
 
—

 
Balance at March 31, 2012
 
$
(3
)
 
 
 
$
(13
)
 
 
 
$
(16
)
 
1 
For further detail, see Note 5—Compensation and Benefit Plans.
Unrealized losses on cash flow hedges, at March 31, 2012, consist of electricity capacity contracts that qualify for hedge accounting. These losses arise because current forecasts of electricity capacity prices are higher than Homer City's contract prices. Approximately $1 million of unrealized gains on cash flow hedges are expected to be reclassified into earnings during the next 12 months. The maximum period over which a commodity cash flow hedge is designated is through May 31, 2014.


14

Note 9. Supplemental Cash Flows Information
 
Three Months Ended March 31,
(in millions)
2012
 
2011
Cash paid
 
 
 
Income taxes
$
—

 
$
1

Accrued capital expenditures at March 31, 2012 were $6 million. Accrued capital expenditures will be included as an investing activity in the statements of cash flows in the period paid.


15

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 Implementation Agreement between Homer City and GECC, 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 or CSAPR (as applicable) 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 and/or 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;

16

•
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 first quarter ended March 31, 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
Net loss from the Homer City plant increased $29 million for the first quarter of 2012, compared to the first quarter of 2011. The decrease in earnings was primarily attributable to lower energy margins and the election to treat Homer City as a partnership for income tax reporting purposes in 2012, partially offset by a decline in plant maintenance costs due to outages at Units 1 and 2 during the first quarter of 2011. Lower energy margins were due to lower average realized energy prices and higher coal and emission allowance costs. In addition, depreciation expense decreased for the first quarter of 2012 as a result of the impairment charge recorded in the fourth quarter of 2011.
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. On March 30, 2012, Homer City 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's liquidity has continued to deteriorate during the first quarter of 2012. Absent a working capital loan or other infusion of cash, Homer City is not expected to have sufficient cash flow to meet its operating expenses and other obligations either in the near term or during 2012, including the rent payment due on October 1, 2012. This may require Homer City to temporarily suspend plant operations until sufficient working capital is obtained. For further discussion of the Homer City lease, 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.
Homer City has been engaged in discussions with the owner-lessors through GECC, beneficial owner of a majority of the owner-participants, regarding the funding of capital improvements at the Homer City plant and transfer to an affiliate of GECC of the economic benefit and majority ownership of all the operating assets of Homer City. On March 29, 2012, Homer City and GECC entered into an Implementation Agreement (the Agreement) with respect to the Homer City plant. As addressed by the Agreement, an affiliate of the GECC-controlled owner-lessors of the Homer City plant has entered into an engineering, procurement and construction agreement and is in the process of executing related agreements for the construction of environmental improvements. GECC will have discretion over all decisions related to such agreements. Homer City agreed to conduct its business as set forth in the Agreement and to use commercially reasonable efforts to provide assistance to GECC and its affiliates in connection with the construction agreements. The Agreement also requires Homer City, at the request of GECC, to enter into one or more implementation transactions, as defined in the Agreement, for the divestiture of its leasehold interest in the Homer City plant (and, under certain circumstances, related assets and liabilities as specified) and to assist GECC in obtaining certain third-party consents or waivers. Homer City and GECC also agreed to enter into a transition services agreement in connection with any implementation transaction. The estimated cost of installing SO2 and particulate emissions control equipment for Units 1 and 2 of the Homer City plant is expected to be approximately $700 million to $750 million. On April 2, 2012, Homer City received the permit to construct such improvements from PADEP. There is no assurance that Homer City and GECC will actually consummate a divestiture transaction as contemplated by the Agreement.
Certain divestitures of Homer City's leasehold interest in the plant are subject to consent rights of the holders of the secured lease obligation bonds issued in connection with the original sale-leaseback transaction. GECC is currently engaged in discussions and has reached an agreement in principle on a non-binding restructuring term sheet with certain of the holders of the secured lease obligation bonds regarding amendments to the terms of the 8.137% Senior Secured Bonds due 2019 and the 8.734% Senior Secured Bonds due 2026, each issued by Homer City Funding LLC. Even though an agreement in principle has been reached with certain holders of secured lease obligation bonds, that agreement may not be approved by the secured lease

17

obligation bondholders as required under the operative documents to effectuate the necessary modifications to the terms of the bonds. If an agreement to modify the terms of the bonds is not approved and consummated in a timely manner, then the protections of Chapter 11 of the U.S. Bankruptcy Code may be necessary.

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."


18

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 March 31,
 
2012
 
2011
Operating Revenues (in millions)
$
98

 
$
115

Statistics
 
 
 
Generation (in GWh)
2,607

 
1,943

Equivalent availability
93.4
%
 
59.2
%
Capacity factor
63.4
%
 
47.8
%
Load factor
67.8
%
 
80.7
%
Forced outage rate
4.4
%
 
27.1
%
Average realized energy price/MWh
$
30.86

 
$
45.31

Capacity revenues only (in millions)
$
18

 
$
24

Average fuel costs/MWh
$
32.07

 
$
26.96


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 March 31,
(in millions)
2012
 
2011
Operating revenues
$
98

 
$
115

Less:
 
 
 
Unrealized gains
—

 
(2
)
Capacity and other revenues
(18
)
 
(25
)
Realized revenues
$
80

 
$
88

Generation (in GWh)
2,607

 
1,943

Average realized energy price/MWh
$
30.86

 
$
45.31

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.


19

•
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 Loss
Operating loss from the Homer City plant increased $16 million for the first quarter of 2012, compared to the first quarter of 2011. The 2012 increase in operating loss was primarily attributable to 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. Lower energy margins were due to lower average realized energy prices and higher coal and emission allowance costs. In addition, depreciation expense decreased for the first quarter of 2012 as a result of the impairment charge recorded in the fourth quarter of 2011.
Included in operating revenues were unrealized gains from hedge activities of none and $2 million for the first quarters of 2012 and 2011, respectively. Unrealized gains in the first quarter of 2011 were attributable to both economic hedge contracts that are accounted for at fair value with offsetting changes recorded in the statement of operations and the ineffective portion of hedge contracts at the Homer City plant attributable to changes in the difference between energy prices at the PJM West Hub (the settlement point under forward contracts) and the energy prices at the Homer City busbar (the delivery point where power generated by the Homer City plant is delivered into the transmission system). Included in fuel costs were $7 million and $0.3 million during the quarters ended March 31, 2012 and 2011, respectively, related to the net cost of emission allowances.

Income Taxes
Homer City had an effective income tax rate of 41% for the first quarter of 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 the individual partners. Accordingly, for the first quarter of 2012, no income taxes were recognized in Homer City's financial statements.

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."


20

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. The amount in certain reserve accounts will be available for payments due on the equity portion of lease rent during specified periods, and in accordance with the sale-leaseback documents, unless there is a default in the payment of the senior portion of lease rent, in which case the amount will be available to pay such senior portion of the lease rent. The release of funds from these restricted cash accounts is permitted, provided Homer City maintains specified reserve balances in accordance with the sale-leaseback documents, no event of default shall have occurred or be continuing and no two failed rent payments shall have occurred. Homer City had $20 million included in restricted deposits at March 31, 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.
Homer City is not expected to be able to generate sufficient cash flow from operations necessary to meet its obligations, including the obligations under the Homer City lease. 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 both March 31, 2012 and December 31, 2011, Homer City had cash and cash equivalents of $84 million. Net cash provided by operating activities decreased $1 million in the first quarter of 2012 compared to the first quarter of 2011. Net cash provided by operating activities in 2012 was primarily impacted by lower energy margins and the timing of cash receipts and disbursements related to working capital items.
Net cash provided by financing activities decreased $10 million in the first quarter of 2012 compared to the first quarter of 2011. The 2012 decrease in net cash provided by financing activities was primarily due to lower borrowings from its affiliate subordinated revolving loan in 2012 as compared to 2011.
Net cash used in investing activities increased $4 million in the first quarter of 2012 compared to the first quarter of 2011 due to higher capital expenditures.

Credit Ratings
Homer City is not currently rated. Credit ratings for EME and EMMT are as follows:
 
Moody's Rating
 
S&P Rating
 
Fitch Rating
EME1
Caa3
 
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.


21

Key Ratio Affecting Distributions
Set forth below is the key ratio required under the lease covenants contained in Homer City's sale-leaseback agreements for the 12 months ended March 31, 2012:
Financial Ratio
Covenant
Actual
Senior rent service coverage ratio
Greater than 1.7 to 1
1.09 to 1
As indicated above, the actual senior rent service coverage ratio of Homer City was below the covenant threshold for the 12 months ended March 31, 2012, and Homer City also did not meet the threshold for the prospective two 12-month periods, which currently precludes Homer City from making distributions, including repayment of certain intercompany loans, and from paying the equity portion of the rent payment. On March 30, 2012, Homer City 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. For additional information, see "Management's Overview."
For a more detailed 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.

Contractual Obligations and Contingencies
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."


22

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 quarters of 2012 and 2011:
 
24-Hour Average
Historical Market Prices1
 
2012
 
2011
PJM West Hub
$
31.82

 
$
46.48

Homer City Busbar
29.01

 
41.12

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 March 31, 2012:
 
24-Hour Forward
Energy Prices1
 
PJM West Hub
2012
 
 
 
April
 
$
28.65

 
May
 
28.90

 
June
 
32.19

 
July
 
36.55

 
August
 
37.28

 
September
 
30.35

 
October
 
29.83

 
November
 
30.82

 
December
 
35.37

 
2013 calendar "strip"2
 
$
37.44

 
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.

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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.

Capacity Price Risk
Under the RPM, capacity commitments are made in advance to provide a long-term pricing signal for construction of capacity resources. The following table summarizes the status of capacity sales for Homer City at March 31, 2012:
 
 
 
 
 
 
 
RPM Capacity
Sold in Base
Residual Auction
 
Other Capacity Sales,
Net of Purchases2
 
Aggregate Average Price per MW-day
 
 
Installed Capacity
MW
 
Unsold Capacity1
MW
 
Capacity Sold
MW
 
MW
 
Price per
MW-day
 
MW
 
Average Price per MW-day
 
 
April 1, 2012 to May 31, 2012
1,884

 
(163
)
 
1,721

 
1,771

 
$
110.00

 
(50
)
 
$
30.00

 
$
112.32

 
June 1, 2012 to May 31, 2013
1,884

 
(355
)
 
1,529

 
1,736

 
133.37

 
(207
)
 
8.16

 
150.35

 
June 1, 2013 to May 31, 2014
1,884

 
(104
)
 
1,780

 
1,780

 
226.15

 
—

 
—

 
221.03

3 
June 1, 2014 to May 31, 2015
1,884

 
(190
)
 
1,694

 
1,694

 
136.50

 
—

 
—

 
136.50

 
1 
Capacity not sold arises from: (i) capacity retained to meet forced outages under the RPM auction guidelines, and (ii) capacity that PJM does not purchase at the clearing price resulting from the RPM auction.
2 
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.
3 
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 three months ended March 31, 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 12%, respectively. Differences in day-ahead pricing generally arise due to transmission congestion.

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 97% of Homer City's operating revenues for the three months ended March 31, 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.


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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 period covered by this report. Based on that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period, Homer City's disclosure controls and procedures are 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 period to which this report relates that have materially affected, or are reasonably likely to materially affect, Homer City's internal control over financial reporting.


25

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, including the completion of transactions between GECC and holders of the secured lease obligation bonds, pursuant to the terms of the Implementation Agreement between Homer City and GECC may not occur as contemplated.
Homer City has entered into an Implementation Agreement with GECC regarding the funding of capital improvements at the Homer City plant and the transfer of the economic benefit and majority ownership of all the operating assets of Homer City to an affiliate of GECC. Certain divestitures of Homer City's assets are subject to consent rights of the holders of the secured lease obligation bonds issued in connection with the original sale-leaseback transaction and there is no assurance their consent will be obtained. If the divestiture transactions contemplated by the Implementation Agreement are not consummated or if GECC terminates the agreement, 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. 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*
Implementation Agreement, dated March 29, 2012, between EME Homer City Generation L.P. and General Electric Capital Corporation.
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 March 31, 2012, filed on May 2, 2012, formatted in XBRL: (i) the Statements of Operations, (ii) the Statements of Comprehensive Loss, (iii) the Balance Sheets, (iv) the Statements of Partners' Equity, (v) the Statements of Cash Flows, and (vi) the Notes to Financial Statements tagged as blocks of text.
*
Confidential treatment has been requested for certain portions omitted from this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

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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:
May 2, 2012



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EME HOMER CITY GENERATION LP Reports

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