Preparing to operate within the new, stiffer federal emissions restrictions is the major focus of Edison International’s ongoing attempt to extract value from its largely coal-fired fleet of Midwest and Eastern merchant power plants, officials said Thursday.

Senior Edison executives said by the end of this year they will determine how Edison Mission Energy Group (EMG) plans to operate under the stiffer requirements. They spoke during a second quarter earnings conference call.

Overall, the Rosemead, CA-based holding company for Southern California Edison Co. (SCE) reported second quarter profits of $191 million, or 54 cents/share, compared with $357 million, or $1.05/share, in the same period last year. The 2010 quarterly results included the benefits from a one-time tax settlement that was valued at 43 cents/share.

EMG reported losses of $30 million for the second quarter compared with profits of $26 million a year ago. Despite the losses, Edison CEO Ted Craver said he was encouraged by the “recent improvements in capacity and energy prices.”

Craver said Edison management has determined that through what he called “operational focus and financial discipline” the inherent value in EMG can be realized for shareholders. Part of the strategy is to maintain EMG’s separateness with no new capital infusion from the parent company and no distributions from the independent power unit going out to the parent.

Part of the strategy is to seek more diversification from coal-fired generation, and in that regard EMG continues to expand its renewable and gas portions of its portfolio. Craver called out recent successes in getting back on track a bogged down, $575 million, 500 MW natural gas-fired project in Southern California, Walnut Creek Generating Station. The project gained approval for a 10-year contract with its affiliate utility, SCE, in 2008, but it has been bogged down on a number of issues, including air emissions credits.

Earlier this year Edison’s merchant power unit purchased some of the coastal, natural gas-fired generation units owned by AES Corp., and it eventually will close those units and transfer the air emissions credits from the shutdown to the Walnut Creek project.

With the coal-fired generating units in the upper Midwest and its Homer City units in Pennsylvania, CFO Jim Scilacci said Edison is still in the process of working up a plan for how it intends to operate in 2012 and 2013 in the face of increased air emissions restrictions. When it finishes the plan late in this year, Edison hopes to have a clearer idea of the financial ramifications.

“At this point in time, I don’t think we have clearly defined how we are going to operate at Homer City, given the new rules,” Scilacci said. “We have to determine what the emissions credits might cost, how many we can realistically achieve, and what approach we should use in how we might modify the operations of our plants,” he said.

“We’re looking at all operational options to improve out ability to comply,” said EMG President Pedro Pizarro. “We’re looking at a whole universe of things, and once we have that in place we can work through all the implications on the financial side.” Ultimately, at Homer City, EMG will see third-party financing to support the capital needs to upgrade emission control equipment to meet the tougher standards.

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