EME uses derivative instruments to reduce its exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. Additionally, EME's financial results can be affected by fluctuations in interest rates. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that EME 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 EME's consolidated balance sheets with offsetting changes recorded on the consolidated statements of operations. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized, to the extent effective, on EME's consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive loss until the related forecasted transaction occurs. The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.

Derivative instruments that are utilized for trading purposes are measured at fair value and included on the consolidated balance sheets as derivative assets or liabilities. Changes in fair value are recognized in operating revenues on the consolidated statements of operations.

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

The following table summarizes the notional volumes of derivatives used for hedging and trading activities:

June 30, 2011

				Hedging Activities
Commodity	Instrument	Classification	Unit of Measure	Cash Flow Hedges			Economic Hedges			Trading Activities

Electricity	Forwards/Futures	Sales	GWh		18,901	¹		17,660	³		39,629
Electricity	Forwards/Futures	Purchases	GWh		203	¹		17,750	³		42,863
Electricity	Capacity	Sales	MW-Day (in thousands)		171	²		—			17	²
Electricity	Capacity	Purchases	MW-Day (in thousands)		17	²		—			247	²
Electricity	Congestion	Sales	GWh		—			124	⁴		14,314	⁴
Electricity	Congestion	Purchases	GWh		—			5,459	⁴		287,221	⁴
Natural gas	Forwards/Futures	Sales	bcf		—			1.5			354.1
Natural gas	Forwards/Futures	Purchases	bcf		—			1.5			351.8
Fuel oil	Forwards/Futures	Sales	barrels		—			—			45,000
Fuel oil	Forwards/Futures	Purchases	barrels		—			240,000			70,000
Coal	Forwards/Futures	Sales	tons		—			—			2,564,250
Coal	Forwards/Futures	Purchases	tons		—			—			2,564,250

(in millions)

Instrument	Purpose	Type of Hedge	Notional Amount		Expiration Date

Amortizing interest rate swap	Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt	Cash flow	$	84	June 2016
Amortizing interest rate swap	Convert floating rate (6-month LIBOR) debt to fixed rate (3.415%) debt	Cash flow		110	December 2020
Amortizing interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt	Cash flow		120	December 2025
Amortizing interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt	Cash flow		67	March 2026

December 31, 2010

				Hedging Activities
Commodity	Instrument	Classification	Unit of Measure	Cash Flow Hedges			Economic Hedges			Trading Activities

Electricity	Forwards/Futures	Sales	GWh		16,799	¹		22,456	³		34,630
Electricity	Forwards/Futures	Purchases	GWh		408	¹		22,931	³		37,669
Electricity	Capacity	Sales	MW-Day (in thousands)		190	²		—			136	²
Electricity	Capacity	Purchases	MW-Day (in thousands)		8	²		—			419	²
Electricity	Congestion	Sales	GWh		—			136	⁴		12,020	⁴
Electricity	Congestion	Purchases	GWh		—			1,143	⁴		187,689	⁴
Natural gas	Forwards/Futures	Sales	bcf		—			—			30.6
Natural gas	Forwards/Futures	Purchases	bcf		—			—			34.3
Fuel oil	Forwards/Futures	Sales	barrels		—			250,000			10,000
Fuel oil	Forwards/Futures	Purchases	barrels		—			490,000			10,000
Coal	Forwards/Futures	Sales	tons		—			—			2,630,500
Coal	Forwards/Futures	Purchases	tons		—			—			2,645,500

(in millions)

Instrument	Purpose	Type of Hedge	Notional Amount		Expiration Date

Amortizing interest rate swap	Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt	Cash flow	$	138	June 2016
Amortizing forward starting interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt	Cash flow		122	December 2025
Amortizing forward starting interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt	Cash flow		68	March 2026

¹: EME's hedge products include forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the coal plants which meet the normal purchases and sales exception and are accounted for on the accrual method.
²: EME's hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM Reliability Pricing Model (RPM) auction is not accounted for as a derivative.
³: EME also entered into transactions that adjust financial and physical positions, or day-ahead and real-time positions to reduce costs or increase gross margin. These positions largely offset each other. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.
⁴: 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.

The following table summarizes the fair value of derivative instruments reflected on EME's consolidated balance sheets:

June 30, 2011

		Derivative Assets									Derivative Liabilities
		Derivative Assets									Derivative Liabilities									Net Assets (Liabilities)
(in millions)		Short-term			Long-term			Subtotal			Short-term			Long-term			Subtotal			Net Assets (Liabilities)

Non-trading activities
	Cash flow hedges	$	27		$	2		$	29		$	14		$	34		$	48		$	(19	)
	Economic hedges		60			4			64			51			1			52			12
Trading activities			141			88			229			98			20			118			111

			228			94			322			163			55			218			104
Netting and collateral received¹			(189	)		(31	)		(220	)		(157	)		(32	)		(189	)		(31	)

Total		$	39		$	63		$	102		$	6		$	23		$	29		$	73

December 31, 2010

Non-trading activities
	Cash flow hedges	$	54		$	2		$	56		$	10		$	25		$	35		$	21
	Economic hedges		77			2			79			71			—			71			8
Trading activities			184			103			287			148			29			177			110

			315			107			422			229			54			283			139
Netting and collateral received¹			(269	)		(37	)		(306	)		(223	)		(35	)		(258	)		(48	)

Total		$	46		$	70		$	116		$	6		$	19		$	25		$	91

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

	Cash Flow Hedge Activity¹ Six Months Ended June 30,

	Cash Flow Hedge Activity¹ Six Months Ended June 30,						Income Statement Location
(in millions)	2011			2010			Income Statement Location

Beginning of period derivative gains	$	27		$	175
Effective portion of changes in fair value		(13	)		30
Reclassification to net income		(29	)		(122	)	Operating revenues

End of period derivative gains (losses)	$	(15	)	$	83

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. EME recorded net gains (losses) of none and $(7) million during the second quarters of 2011 and 2010, respectively, and $2 million and $1 million during the six months ended June 30, 2011 and 2010, respectively, in operating revenues on the consolidated statements of operations representing the amount of cash flow hedge ineffectiveness.

The effect of realized and unrealized gains (losses) from derivative instruments used for economic hedging and trading purposes on the consolidated statements of operations is presented below:

		Three Months Ended June 30,						Six Months Ended June 30,

	Income Statement Location	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	Income Statement Location	2011			2010			2011		2010

Economic hedges	Operating revenues	$	20		$	(3	)	$	26	$	(7	)
	Fuel		(2	)		(2	)		4		(1	)
Trading activities	Operating revenues		41			33			57		80

Certain derivative instruments contain margin and collateral deposit requirements. Since EME's and its subsidiaries' credit ratings are below investment grade, EME and its subsidiaries have provided collateral in the form of cash and letters of credit for the benefit of derivative counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features was in an asset position at June 30, 2011 and, accordingly, the contingent features described below do not currently have liquidity exposure. Some hedge contracts include provisions related to a change in control or material adverse effect resulting from amendments or modifications to the related credit facility. Failure by EME or Midwest Generation to comply with these provisions may result in a termination event under the hedge contracts, enabling the counterparties to terminate and liquidate all outstanding transactions and demand immediate payment of amounts owed to them. Future increases in power prices could expose EME, Midwest Generation or Edison Mission Marketing & Trading, Inc. (EMMT) to termination payments or additional collateral postings.

Margin and collateral deposits include cash deposited with counterparties and brokers as credit support under energy contracts. The amount of margin and collateral deposits generally varies based on changes in fair value of the related positions. EME nets counterparty receivables and payables where balances exist under master netting arrangements. EME presents the portion of its margin and cash collateral deposits netted with its derivative positions on its consolidated balance sheets. The following table summarizes margin and collateral deposits provided to and received from counterparties:

(in millions)		June 30, 2011		December 31, 2010


Collateral provided to counterparties
	Offset against derivative liabilities	$	3	$	4
	Reflected in margin and collateral deposits		50		59
Collateral received from counterparties
	Offset against derivative assets		33		52