愛迪生國際 (EIX) 2005 Q3 法說會逐字稿

Welcome to Edison International's conference call. For your information this call is being recorded, and it will be available for replay at the following numbers. 877-693-4277, and for international calls 402-220-0042. You will need to use the pin code 10501 to access the conference. Also we want to advise that you Edison International is holding a simultaneous webcast of this conference call. This will be on the Company's website in a listen-only mode for interested parties. During the conference you will be on listen-only and there will be a chance for questions and answers at the end. [OPERATOR INSTRUCTIONS]. And at this time I would like to introduce your host, Mr. John Bryson, Chairman and CEO of Edison International. Thank you. And go ahead, Mr. Bryson.

Thank you, and thanks to all of you on the phone. We'll jump right in this morning with what you most want to hear, and that is the forward-looking advisory statement.

During this call we will make forward-looking statements about the financial outlook for Edison International and its subsidiaries and about other future events. Additional forward-looking information may be available on our website at www.edisoninvestor.com. We believe these statements and this information to be reasonable and well-founded. However, actual results could differ materially from current expectations. We have set forth important factors that could cause different results in Edison International's 2004 Form 10-K report, and subsequent 10-Q and 8-K reports, including its third quarter Form 10-Q report which will be filed later today. We encourage to you read those reports carefully.

All right, thank you, Barbara.

And we have this morning put out a release, some of you will have seen it, we have strong favorable third quarter earnings. We're pleased with them. We'll address this in several ways in the course of this call this morning. Let me start by referring to what I think may be the best benchmark, and that is our third quarter year-over-year core earnings. So as you know, the core earnings exclude discontinued operations, they exclude some noncore adjustments, and on the basis of those third quarter earnings, our earnings per share are up 43% over the same period last year. That increase is driven in largest part -- much the largest part, by strong results at our independent power business. Many of you have been following that. As in previous quarters this year we are benefiting from lower interest costs there, higher wholesale prices, and in this quarter, we also have significant gains from trading in those markets in the Midwest, the PJM market, the MISO market, the New York market in which we operate our merchant power plant fleet.

Let me give you reported earnings for the quarter. They were $1.41 per share. That compares with $2.49 per share for the same period last year. That's reported -- I started with core earnings on a core basis. Our earnings per share were $1.24 per share.

In just a minute I'm going to ask Tom McDaniel to go in greater detail with those earnings. Let me, however, start with some comments on our specific earnings. The key here, as those of you who follow us closely, I think, know, is the performance of our merchant coal-fired power plant fleet in those Midwest, Mid-Atlantic markets. I've talked about some of the other features.

Let me comment briefly also on Southern California Edison. Those earnings are up. Other times we would have been pleased to underscore Southern California Edison earnings simply -- this year that on a comparison basis the independent power increase is greater than the Edison -- Southern California Edison utility earnings but they are strong, and again, as those of you who follow us know, the key element in the continuing strength in those earnings and the key element in our five-year strategic plan is the increased capital investment we are making to significantly strengthen and modernize our wire system, our power grid system, so that's principally distribution investments to Southern California Edison. It also includes some transmission investments. That will quarter after quarter after quarter continue to be a big, big factor and for this quarter on a quarter-over-quarter basis, that was the key contributor to the increase in earnings. There are puts and takes around that. We'll go into that. But if you keep your eye on that capital investment program, most of you know, I think, that we have doubled -- doubled our capital investment program over the five year plan that we have relative to what we had done before that.

All right. Let me go to one last thing. In August at the last quarterly earnings call, we raised our earnings guidance for 2005. So we had given the guidance in late 2004. We've had a strong year. In August we increased the guidance. We are today again increasing that guidance. So for the second time this year we're taking 2005 outlook up. Based on what we see now we expect our 2005 core earnings to be in the range of $2.80 to $2.90 per share. That is a little more than 10% above our prior core guidance.

With respect to 2006 earnings guidance, and we get those calls from some of you, we do not anticipate providing that guidance until after we receive the Southern California Edison general rate case decision from the Public Utilities Commission of California. A proposed decision should come down sometime in the next month but we don't expect the Commission's decision likely until January. So we'll provide guidance after we have the basis for guidance that that very important decision will provide.

I'll stop there and let me turn the presentation over to Tom McDaniel who will give additional detail on earnings.

Thanks, John.

I'm going to begin by covering both our quarterly and year-to-date earnings performance compared to last year, and then I'll update you all on the hedging programs underway at MEHC's Midwest Gener Homer City plants, and then I'll provide additional detail on the 2005 earnings guidance. We've tried to make life a little easier for you in following us on this call. Included in our earnings release are four supplemental charts kind of midway through that release that I'll be referring to throughout my comments. Charts one and two cover quarterly and year-to-date core earnings and the specific contributions by business unit. Chart three summarizes information on a quarterly and year-to-date basis, the comparisons of our generation, of plant availability, of wholesale market prices, and of our average recorded energy price and hedging information at Midwest Generation and Homer City. And then chart four sets out the revised earnings guidance for 2005.

Now, if you can go to chart one in the earnings release, that covers the quarterly earnings comparison. As John mentioned, third quarter core earnings were $1.24 per share compared to $0.87 per share in the third quarter of 2004 driven, of course, primarily by stronger operating results at MEHC. And in the interest of time, the I'm going to focus on the main contributor for the quarter, and that is MEHC. MEHC's core earnings were $0.58 per share during the third quarter of 2005 compared to $0.24 per share for the same period in 2004. The increase in core earnings is primarily due to higher wholesale energy prices at Midwest Generation and Homer City. Midwest Generation contributing $0.10 of that gain, and Homer City $0.01, respectively. Higher income from our energy trading operations contributing $0.15, and lower net corporate interest expense contributing $0.06, and then a number of smaller items making up the difference.

Now, I'm going to refer to a couple of numbers on chart number three as we describe the performance in Midwest Generation. First of all, generation at Midwest Gen was down slightly for the quarter. Plant availability was adversely affected by a higher level of forced or unplanned outages during the quarter driven in part by a temporary derating of our Jolliet station because of abnormally high river temperatures which the plant uses for cooling. Thus and we focus on the margins at Midwest Generation. The key driver was higher wholesale energy prices. The average energy price add Midwest Generation, which includes the price of power hedged in previous periods and spot sales during the period increased to $54 a megawatt hour compared to $33 a megawatt hour for the merchant generation occurring during the third quarter of 2004. With regard to Homer City, it had an outstanding summer run with generation up 14% over the same period last year. The average energy price at Homer City increased to $45 a megawatt hour in the third quarter of 2005 compared to $36 a megawatt hour during the third quarter last year.

Although the average energy price earned by Homer City during the third quarter of 2005 was higher than last year, it is quite a bit lower than the average real-time market price of $63 a megawatt hour at the Homer City busbar. Now, this occurred for two principal reasons. First, Homer City entered into hedge contracts in prior periods when market prices were lower, and second, market prices at the PJM West hub increased greater than market prices at the Homer City busbar. As we have indicated in prior filings, Homer City hedges its energy price risk at the PJM West hub, but it sells its power at the Homer City busbar, thus retaining the risk of market price differences, or what we call basis risk, between these two locations. During the quarter, transmission-related congestion within PJM widened the spread between these two locations reducing Homer City's revenues. A disclosure in our 10-Q will provide additional information about energy prices and basis risk relating to our hedging program and I encourage you to read that area.

Turning now to the higher trading income at Edison Mission Marketing & Trading, these earnings were up substantially, and they were largely related to the volatile market conditions that we've experienced during the quarter and through this year in the Midwest and Northeast power markets. EMMT's primary responsibility is to sell the generation from, and to execute hedging programs for, our 7500 megawatt coal-fired merchant fleet. EMMT also utilizes the market knowledge gained from these activities to engage in trading activities which benefit from transmission congestion and energy price volatility. And as I said earlier, these particular areas have been quite volatile this year and have led to the higher income at EMMT.

Now I'll focus back on chart number one on noncore items. Noncore earnings in the third quarter of 2005 totals a positive $0.17 per share and included three items. A $0.19 benefit at SCE from a settlement of an IRS -- a number of IRS issues related to a '91 through '93 tax audit. This was a long time in coming but it was quite favorable settlement for us. The second was positive tax adjustments of $0.08 at MEHC resulting from the previous sale of the international projects. And then three, a $0.10 per share impairment at MEHC's -- of MEHC's entire investment in the March Point project, due to the impact on project cash flow of the rise in natural gas prices for unhedged project -- projected fuel costs. The March Point is 140 megawatt cogeneration project located near Anacortes, Washington, in which MEHC owns a 50% interest. Noncore items for the third quarter of 2004 totaled $1.62 per share and included positive regulatory adjustments of $0.15 at SCE. Discontinued operations of $1.53 per share at MEHC related to the international project sold last year, and impairment and other charges of $0.06 per share primarily related to small peaking units that were decommissioned at Midwest Gen last year. In total, reported earnings for the third quarter of 2005, which include core and noncore items, were $1.41 per share compared to $2.49 per share last year.

Now I'll turn to year-to-date results, and for that, please refer to chart number two in the press release. EIX's year-to-date core earnings for 2005 were $2.43 per share, more than double the $1.15 per share recorded in the same period last year. Each of our reporting entities contributed to this increase. SCE was up $0.25, MEHC up $0.80, Edison Capital up $0.14, and the Holding Company up $0.09. Focusing on SCE first year-to-date core earnings for the period were up -- were $1.56 per share, up $0.25 over the same period last year. The increase is primarily from stronger operating performance in 2005 compared to last year. That's $0.12 of that gain. As well as a favorable resolution of tax issues with the IRS contributing $0.08, and the positive impact of a new IRS regulation contributing $0.05 per share. Turning to MEHC, core earnings were $0.70 per share for the period ending September 30th, 2005, compared to a loss of $0.10 per share for the same period last year. The increase in core earnings is due to the higher wholesale energy prices at Midwest Generation contributing $0.29, Homer City contributing $0.04, higher trading income at EMMT of $0.22, lower net interest expense of $0.14, and a number of other smaller items including higher income at the big four projects making up the difference of $0.11. Year-to-date generation and pricing information for Midwest Generation and Homer City is included chart number three and I'll not go through it on -- that on this call. As we have previously disclosed the positive year-to-date core earnings performance at Edison Capital and at the Holding Company were primarily due to gains from Edison Capital's emerging Europe infrastructure fund recorded in the first quarter and lower net interest expense at the Holding Company.

Turning to noncore items through the first three quarters of 2005, noncore items totaled $0.21 per share comprised of $0.19 at SCE related to the tax settlement discussed earlier, $0.02 at MEHC, which was a combination of two main factors, MEHC's noncore items include $0.17 per share relate to discontinued operations, and this was largely offset by asset impairment charges of $0.10 per share related to the March Point project, and a loss of $0.05 per share from the early pay down of debt recorded in first quarter. Year-to-date 2004 noncore items totaled $0.50 per share comprised of $0.53 in positive regulatory adjustments at SCE related to the general rate case, negative adjustments of $0.03 at MEHC, and MEHC negative adjustments included a loss of $1.86 per share related to the terminations of the Collins lease and decommissioning of the small peakers at Midwest Gen, and this was nearly offset by income from discontinued operations and other project sales of $1.83 per share. EIX reported consolidated earnings through September 30th, 2005, including core and noncore items were $2.64 per share compared to $1.65 per share for the same period in 2004.

And now I'll be referring to chart number three, and I'll update the Midwest Gen and Homer City hedging and coal supply area. Coal availability. During the second quarter earnings call I noted that rail line service disruptions were impacting deliveries of Powder River Basin coal. The situation is essential the same as it was at that time. The railroads are continuing to make repairs to rail lines, and we are continuing to receive sufficient coal supplies to meet our forecast generation for the balance of this year. In addition, Midwest Gen has contracted coal for all of its expected 2006 requirements and 91% of its 2007 requirements. Homer City is fully covered for the balance of this year and has contracted 78% of its expected coal requirements for both 2006 and 2007.

A comment commenting on the hedge program, during the third quarter we entered into additional generation hedges for 2006 and 2007. The volumes and prices are set forth in the attachment to our press release and in our 10-Q. In summary Midwest Gen, we have hedged 14.2 terawatt hours for 2006, and 6.8 terawatt hours for 2007 at an average price of $43 a megawatt hour and $42 a megawatt hour, respectively. At Homer City we have hedged 8.5 terawatt hours for 2006, and 3.6 terawatt hours for 2007, at an average price of $53 a megawatt hour, and $61 a megawatt hour, respectively. Power prices have increased from the dates we entered into our hedges. As a result, our margin deposits as of September 30th have increased substantially to $726 million. Our cash position at EME now stands at $1.3 billion, which includes the impact of the higher collateral requirements supporting our hedging program. Now of that $726 million of collateral, about $550 million of that is in cash, and that would -- as those hedges are acted upon, that cash would roll back to EME unless we did further hedging.

Now I'll turn to the 2005 earnings guidance, and that's on chart four. As John mentioned, due to power prices and results through the third quarter, we are providing the update to our 2005 guidance to a range of $2.80 to $2.90 per share. The guidance for reported earnings which includes 20 -- the guidance for reported earnings which includes $0.21 per share of noncore items is updated to range of $3.01 to $3.11. First, with regard to core earnings, we have increased MEHC's core earnings guidance from a range of $0.55 to $0.65 to $0.85 to $0.95, core earnings at SCE, Edison Capital and the Holding Company remain largely unchanged from the August guidance. Noncore items increased at SCE from $0.11 to $0.19 per share and that's associated with finalizing this IRS agreement. And at MEHC noncore items are being reduced from $0.23 to $0.02 per share because the remaining portion of the Lakeland bankruptcy claim that we have reported on is now expected to be received in 2006 as opposed to later this year.

That completes my review. I'll now open it up for questions, and we would like to put some guidelines on that. It'd be one question per person. If you've got another question, you can go back into the queue and we can get to you later.

Vladimir Jelisavcic, Longacre Management.

Good morning, gentlemen. Congratulations on the excellent quarter. A lot of things went right. Just one somewhat granular question relating to the coal plant that Edison owns on the California-Nevada border. Can you just give us an update as to what's going on with that plant and the issues with the coal supply and environmental issues and let us know whether you anticipate the plant will be neither mothballed or otherwise, please?

This is John Bryson, and I'll start in and ask Al Fohrer to contribute beyond what I say in the event he has something to add. We don't have new announcements with respect to that. The Mojave coal-fired plant you're referring to is a asset -- a benefit for our customers. It would be a good thing for the state of California. Southern California that had plant operating but at this point, there -- the terms simply haven't come together to make that possible. As you likely know, there was a lawsuit a number of years ago, a settlement of that lawsuit, a consent decree from the court that required environmental upgrades to allow the plant to operate beyond the year 2005. That remains in place. The -- then we went through the stage in California where in the -- under the deregulation Southern California Edison was required to sell its ownership share in the plant. We moved to do that, then the State reversed course, concluded it shouldn't be sold, so it went through a period of ups and downs in which making the investments in the environmental upgrades and getting that done simply wasn't possible. Beyond that there've been questions, and you raise them, about coal supply and water supply. There's work on those things, no particular announcement to make. In the end it'd be a good thing for the consumers of Southern California Edison if a path can be found to have that as a diversified part of our generation fleet. Coal offers, done on the right terms, considerable benefits in terms of stability of price, with the natural gas fired units that are so much a large -- so much a part of generation California don't offer, but we don't have anything to add to what we've said in the past.

This is Al Fohrer. We continue to work with all the parties, but the toughest issue surrounding a new water supply -- and for those of you than haven't followed this, Mojave's the only coal plant in the world where the coal is delivered through a 270-mile pipeline. It is the water to the mine that allows us to slurry the coal and bring it in that's the issue. We continue to work to find a viable supply and to get the permitting for it, but that is still the major pacing item. The outlook, as we've explained in the 10-Q, is that it is likely there will be a shutdown at the end of this year, and whether that is temporary, to be followed by a restart, or permanent, is an issue yet to be determined.

Next question.

Paul Fremont, Jefferies.

Thank you. And congratulations on the quarter. If I look at the difference between the '06 hedging information that was provided in the second quarter conference call and the information today, it looks as if the second chunk of hedging, or the additional chunk, is still significantly at levels of pricing below where the current forwards are. I'm just wondering, when we think of those hedges, should we think of the megawatt hours being spread evenly through the -- for the entire year, or should we think of the megawatt hours as potentially being either -- during on or off-peak periods that you're selling?

Paul, we haven't -- we haven't broken out exactly the shape and the periods and the time frames that we undertake our forward hedges. We've tried to provide with you an insight as to what the average price is and what the volumes are, and that's as far as we want to go. Next question.

Brian Tedado [ph], Bank of New York.

Good morning. Just a quick question with regards to Homer City and the basis differential issue that you raised. Is this something from a -- I guess from a management standpoint of these kind of things, is that something that can be hedged out or can be managed, or is it something that kind of caught people by surprise? I know it's been an issue for other parties with plants in that space as well.

Yes, let me have Jim Scilacci cover that for you.

Yes, that's something that we're carefully looking at, because if you look at that the chart that we provided on chart three you can see at the bottom of the page it gives you an indication of the level of the prices at Homer City and at PJM West, and we try to give some perspective of what the basis has been previously, and the chart, you can see, has a basis that's increased substantially over the last year, and there's some reasons for that. Clearly there was a very warm summer, and we experienced more congestion at that location than we had ever previously seen. And so there are some options there, and we're looking at them. They involve entering into transmission contracts, but that's still under consideration.

One of the functions of EMMT is to really focus on market congestion and to focus on the management of that basis risk. And so really you need to think of the operations of Homer City and of EMMT as some what in concert. Next question.

Michael Lucas, Appaloosa Management.

Yes, how are you doing? I'm just curious on what you guys' use is or have you thought about what you might do with cash? I just want to make sure I'm looking at it right. So you've got 1.3 billion in EME. Is that inclusive or excluding the 500 million of collateral, and I guess relative to where natural gas prices are on the forward curve, it seems like you're going to generate a huge amount of money from these assets in the forward year, and I was curious as what is the use of deployment of cash flow?

Well, the -- yes, the 1.3 billion excludes the roughly 550 million of cash collateral. And really our statement with regard to the use of cash at MEHC has not changed, and this is a perfect example of that. We said, one, we would continue to focus on opportunities to delever MEHC, that we would need cash to cover collateral needs relative to our hedging program, and three that we would look for investment in new generation. I think this really spells out why it's important for us to have that type of liquidity, so that we can deal with market situations like this, but we continue to evaluate all three, and we're trying to make the best economic choice for our shareholders in terms of how we ultimately deploy that cash. Next question.

Devin Geoghegan, Zimmer Lucas Partners.

Hi, it's Devin [inaudible]. Thanks for the time today. Just a quick question to follow up on I guess the PJM issues. When you give hedge information for Homer City, is that PJM West financial hub equivalent, or is that a busbar equivalent?

The hedge information is to PJM West.

Next question.

Jose Amante [ph], Frontpoint Partners.

Good morning. I wanted to ask about write-down taken on the Anacortes plant. I wanted to understand if you could provide a bit more color, the write-down had to do with the forecasted fuel outlook. Is there -- I mean, was there a contract revenue -- fixed revenue based on some other, I guess, index gas component that was there, mismatch there? I wanted to understand that and whether or not you foresee the need to take additional write-downs potentially down the road as a result of that.

We've completely written off our investment in March Point, and let me have Jim Scilacci comment on the specifics in terms of the analysis that went into that.

We went through the impairment analysis, and just using forward curves and doing sensitivities around that, the investment -- the remaining investment in March Point, which was about $55 million, we determined through the cash flow analysis that we needed to write that off, and it was -- as you said, because we have a unhedged portion of the gas requirements for the plant, that going through the analysis led to the conclusion that we would not be able to recover the investment based on current forwards. And so we'll continue to evaluate that. If forwards were to change or depending upon how we want to operate the project going forward, we do have contracts with Puget, the local utility there, and the steam is sold to a refinery in the area, which is Shell Oil. So that's -- it's still being looked at carefully.

Next question.

Michael Goldenberg, Luminous Management.

Good morning, guys. Can you hear me?

Yes, we can.

Wanted to focus on Homer City issue. Wanted to know if you use FTRs [ph] to hedge the risk between PJM hub and busbar? Also, another company that operates plants in a similar area next to Homer City said the discount is roughly $10. And I was wondering if you've experienced same discount. And thirdly, if you expect that to continue, or you think this was just a summer anomaly. Thank you.

Yes, I'll let Jim cover that.

Okay. FTRs are a option for hedging that risk, and just by way of background, there's an auction for FTRs that's currently an annual auction. I think there you can actually look at, pick up additional FTRs on a monthly basis but the big auction is on an annual basis. And it's all based on bid analysis. And you have to go through and analyze what it's worth paying for those FTRs, and so that's been -- part of our EMMT operation does that and we are constantly evaluating it. The discount that you referred to, I think in our disclosures on chart three you can see very clearly what the basis has done over the past year. And you can see it's -- historically was more like $2 to $3, and now that level, based on 2005, especially in the third quarter, is up to about $10. And that is historically a level we have not experienced, and it could be from high loads and high temperatures that were experienced during the third quarter. And we'll just have to see going forward what could occur.

Next question.

Mark Minikitz [ph], Citigroup.

Good morning.

Good morning.

I had a question on the Midwest Gen plants. Forced outage rates have been higher for the year and the last conference call you gave a production number of 30.8 terawatt hours. Are you still willing to stand by that? And also, any indication of what we could think post '05 for production numbers?

We're going to be very close to the number that we cited at the end of the second quarter for Midwest Gen, and I guess while I'm saying it at Homer City, we -- now we're looking at something like 14 terawatt hours for the year. We had dropped down to 13.6 based on first quarter performance, because as I mentioned we had a very strong summer run. And we're not going to provide guidance around 2006 until we provide our full guidance. As John mentioned, when we get through general rate case decision.

Okay. Any update though on the forced outage issue besides the river temps, why that's been higher this year?

We had two -- we kind of two acts -- well, not exactly acts of God. We had the higher river temperatures, we also had a barge not related to us that caught on fire and sunk in a river channel that we take coal deliveries from, and that impacted coal delivery to one of our stations for a period of time. But we've also had what we call boiler tube leaks that we've had to address through the summer months and earlier this year as part of our maintenance program, and we're actively working on trying to get those issues dealt with through our maintenance program. Next question.

Ryan Watson, Stanfield Capital.

Hi. I need to understand this Homer City issue a little bit better. Can you just walk me through how you go about getting yourselves in a position like this? I understand you sell at the busbar, but how do you -- what does it mean when exactly you hedge using PJM West? Does that mean you're actually short power -- you're actually short PJM West power and you're long Homer City hub power? Because I just -- why would you ever hedge if that risk is always apparent? I guess could it always reverse, but --

This is Ted. We have -- the way you described it is what we do. We have to go to the most liquid places. There are literally hundreds of these LNP pricing places. Homer City representing three of those. So there is no liquidity to sell forward. You can only sell basically in the day ahead and real-time market at the Homer City busbar. So if you're going to sell forward or hedge, you have to go to liquid hubs, that's PJM West. There are other hubs that we could potentially look at as well, and that's part of the review that Jim Scilacci was mentioning. So we sell forward to PJM West. That creates a basis differential or basis risk between PJM West and Homer City hub. There are FTRs that you can use if they're at the right pricing, and, again, if there's sufficient liquidity to use those to hedge that basis differential. We do use FTRs from time to time to hedge that differential. So our calculus is always do we want to try to sell forward some of this power. If we do, we have to sell it to the hub, and what is the basis risk that we have associated with that.

Next question.

Paul Patterson, Glenrock Associates.

Good morning.

Good morning.

Just on the energy trading, and I'm sorry I didn't catch everything on this, and I haven't been able to locate it on the release, what again was the impact for the quarter and for the year-to-date, and what's the sustainability? You mentioned that it was sort of volatile and that it was sort of opportunistic, it sounded like, at least from your comments. Just -- how do you feel about that going forward and what have you? If you would just elaborate on that.

Well, for the quarter, the positive impact was $0.15, and for year-to-date, it was $0.21 -- $0.22. And we mentioned that we've had -- it's a fair amount of volatility from prices and congestion -- transmission congestion in the region this year. It had an adverse effect on the basis at Homer City. It had a positive impact on the operations of EMMT. And so we're -- we are certainly pleased with the performance at EMMT. It is hard to speculate going forward exactly what those markets will do from a volatility standpoint. So we do know that we continue to be active in that market by view of our operations, and where we see opportunities that we think we can take the skill and knowledge and experience of our people to be able to capture value in that, then we will do it under very tightly controlled risk management policies. Next question.

Maybe -- Paul, John Bryson. I think all I want to do is confirm what Tom said. We take a very, very disciplined approach we control risk tightly. We exercise oversight intensely. We also have a large merchant coal fleet, as you know, that operates in these markets, and that means with as large a position as we have, selling power into not just PJM but MISO and New York, our people are very, very close to these markets, and we think there are times when that provides a foundation for favorable trading positions based on tight risk parameters. And we do think we have insights, we do think we have able people, but none of us would say that this summer's earnings on trading are entirely routinely sustainable. That just isn't the case. Sometimes we'll do more, sometimes we'll do less. It depends on a lot of factors. We are not doing this in a way that seeks to hit big home runs consistently. We're doing it in a very disciplined risk controlled way.

Next question.

Kit Konolige, Morgan Stanley.

Hi. Thanks.

Geeze, Kit, that sounded like arbitrage, not Konolige.

I don't know if that's good or bad. So is it fair to say that if you are -- I guess what I'm struggling with is, this year the basis issue at Homer City was a significant negative, EMMT was a significant positive, and it sounds to me like you're suggesting that those are somewhat related, some what work together, and I guess the sense of that from a -- my simplistic view would be that where there's more volatility and where there's more congestion, that EMMT is in more of a position to make profits trading. So is it your expectation going forward that to the extent that you have basis risk at Homer City that EMMT could potentially be in a position to make up for that?

Kit this is Ted. We've always had the basis risk. Again, any time we sell forward we have to sell -- given the size of that merchant position, we have to sell at the liquid hub. So that's NI Hub and PJM West historically. So we've always had this basis risk. In times of high volatility if we've sold forward at those hubs, the basis risk is likely to be higher or wider. And also in times of volatility, the profitability from EMMT is likely to be higher.

Okay. Next question.

Vladimir Jelisavcic, Longacre Management.

Vladimir, you got back in the queue.

I know, I wanted -- I don't know whether I should thank you or if it's just luck, but I'm here.

Depending on the question.

Just a question for John and Ted. I just wanted to ask a more broad-based question. What's the strategic direction of the Mission business at this point? I mean, with the assistance of a commodity market you guys have done a tremendous job in stabilizing the business, restructuring the debt quite sometime ago, then you sold the international businesses. Where do you go from here with Mission? Do you just run it as is? Do you shrink it? Do you grow it? Where do you go from here?

We don't have anything to say beyond what we've said in the past. We think the right way to operate this business is with really disciplined, tough minded blocking and tackling, and we're very pleased to build up the cash. I think we've stayed on track consistently with what we've said to you in the past we'd do. We've stayed on track with our strategic plan, we've continued to build cash to seek to delever and increase the financial strength of that group, we've undertaken the investments in the wind energy program that we set out for you, we continue to look at generation opportunities in places where new generation is needed. We think we have a superb team of people to build this business in ways that increase the value of the business. As we've said, we've looked around a little bit. We think fairly high prices are being paid in the market by some others. We're not going to do that kind of thing, so we're quite content operating with intense focus a business that we intend to grow over time but in a very, very controlled way. Let me ask what Ted would add to that.

I think John's covered it pretty well, Vladimir. I think in general, we are interested in growing. We see opportunities to grow in a number of markets, both on the asset side and non-asset side, and we really manage all of our unregulated businesses as a -- from a single platform now, and in terms of generation growth, I think it's more likely it'll be on the development side than the asset acquisition side given current market prices, and some of the recent announcements that we've made and have been highlighted here in this call. We are making investments on the -- on wind development. We have a number of things in that side. In certain markets where there's capacity need we'll also look at development on the thermal side, but fundamentally, it's about execution in a disciplined manner.

Next question.

Paul Fremont, Jefferies.

A quick question on the big four contract renegotiations. I think it was Kern River that came due in the summer. Any progress on getting that one redone?

Well, we -- Paul, we continue to operate under an interim standard offer agreement until a contract is completed. We -- the project is continuing its negotiations on a bilateral contract with SCE. We would expect that to come to fruition by the end of this year, and then of course it's got to be submitted to the PUC for approval, and so we're working along that path.

Thanks.

Next question.

Greg Schultz [ph], SAV Capital.

Good morning. I'm jumping on pretty late so if this is repetitive, I apologize. I was pretty pleased with the parent expense. Is that -- was there some one-time in there -- some one-time benefits or is that sort of the new run rate? I mean, it was essentially zero.

You're talking about the Holding Company?

Yes. That's right.

The Holding Company is down year-over-year because we have essentially eliminated all debt at the Holding Company that was in place last year, and we have incurred some higher expense than normal this year associated with various incentive and compensation plans that have hit the Holding Company this year, largely based on stock price performance. Next question.

John Kiani, Credit Suisse First Boston.

Hi, John. Hi, Tom.

Hi, John.

Are there any O&M costs at MEHC that are more specific to '05 that you believe may fall off or start to fall off in '06 and beyond?

This is Ted. On the O&M side, I think we don't really expect a lot of changes on the run rate. The plants are really what drive that. On the G&A side, though, we have undertaken in the first half of the year a number of restructuring activities where we incurred restructuring charges, and that run rate we do expect to continue to trail down as we move forward.

Next question.

Doug Fischer, A.G. Edwards.

Thank you. Good morning. Just a quick, hopefully small question. Current '06 flat forward prices that you're seeing for PJM West and for the Northern Illinois hub? I don't think -- I think you've had those in the release in the past, and just curious.

Doug, you'll -- this is Jim Scilacci. When we get the disclosures out we'll provide that information for '06 and '07 calendar year strips for both Homer City and PJM West.

Next question.

Steve Fleishman, Merrill Lynch.

Hi. Could you just clarify for EMMT the contribution on an absolute basis for this year, both the quarter and year-to-date? I didn't know if the numbers you gave were the delta change or their absolute numbers for this year.

Those were the delta. We're looking at -- it was 84 million for the quarter, 125 million year-to-date. Pretax.

That's pretax?

Yes. Okay. Next question.

Steven Roras [ph], Talon Capital.

Hi. Good morning. You mentioned that you'd put out '06 guidance when you have a final decision from the PUC. Did I hear that right? That was a final in January or the preliminary this month?

When the final decision comes in. Short of the final decision, that's so important we don't want to go forth with guidance. That's really vitally important, and just to elaborate a point that I think most of you understand, there are many things that are important in that decision, but the heart of it is the extent to which the California Public Utilities Commission, which has provided us supportive advance rate making, most of you probably know we went forth to the PUC over a period of years, indicating that we thought it was vitally important to California to improve the infrastructure in the electric system and particularly in our utility where we have modernized meaningfully but we have a ways to go. We can do a better job with what we call infrastructure replacement, which is going beyond traditional maintenance and replacement practices to real investments in economic blocks to improve the system that was approved in a really critical decision in what we call our 2003 general rate case. The PUC's affirmed that. We have reason to think they want to affirm it again, but let's wait until we get the decision, and that decision presumptively will come in in January. Very important to us.

Okay. Next question.

Brooke Glenn-Mullin, J.P. Morgan.

Yes. Good morning. You gave information this morning that you had increased the hedge position of your coal at Homer City. Could you just give us a sense of the pricing outlook at Homer City coal?

Well, we don't provide that kind of information, Brooke. We really take a whole host of things into consideration when we provide our guidance, including the price of coal and so we -- we don't give that information and we're not going to give it right now.

I sense that the energy is running out on these calls and we've held your attention for close to an hour. If there's one more we'll take it, otherwise we'll close to call.

Tom O'Neal [ph], Citadel.

Good morning.

Good morning, Tom.

Hopefully I just missed this but did you provide production for Homer City in the Midwest Gen for 2006?

No, we did not. And we will do that when we provide our guidance for '06.

All right. Thank you all very much. As usual, you're welcome to follow up when you see the Q or immediately following this call with questions to our investor relations group and that will close the call.