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Executives

Dennis Barber – Vice President of Investor Relations

Mark M. Jacobs - President and Chief Executive Officer

Brian Landrum - Chief Operating Officer

Rick J. Dobson - Chief Financial Officer

Analysts

John Kiani - Deutsche Bank

Lasan Johong - RBC Capital Markets

Angie Storozynski - Macquarie Research Equities

Neal [Metra] – Simmons & Company

Brian Russo - Ladenburg Thalmann & Co.

Charles [Charette] – Credit Suisse

Michael Lapides - Goldman Sachs

Raymond Lund - Goldman Sachs

Brian Tidel - Broadpoint Capital

Paul Patterson - Glenrock Association

Reliant Energy, Inc. (RRI) Q4 2008 Earnings Call March 2, 2009 9:00 AM ET

Operator

Good morning ladies and gentlemen, and welcome to the Reliant Energy fourth quarter 2008 earnings call. (Operator Instructions) I will now turn the call over to Mr. Dennis Barber.

Dennis Barber

Good morning and welcome to Reliant Energy's conference call. Leading the call this morning are Mark Jacobs, President and CEO; Brian Landrum, Chief Operating Officer; and Rick Dobson, our CFO. Following our prepared remarks, we'll have a question-and-answer session.

In addition to releasing our earnings this morning, we also announced the sale of our Texas Retail business to NRG. The press releases, as well as the slide presentation we are using today, are available on our website at www.reliant.com in the Investors section. A replay of this call will also be available on the website approximately two hours after the call.

Consistent with our past practice, we're using several non-GAAP measures, to provide additional insight into operating results. Reconciliations of the non-GAAP measures to GAAP figures are available on the website. Some items we adjusted for this quarter include: unrealized gains and losses on energy derivatives, which is an ongoing adjustment; $66.0 million in costs associated with the unwind of the credit-enhanced Retail structure; and the non-cash goodwill impairment of $305.0 million.

As many of you know, we update our outlook each quarter using forward commodity prices. The current outlook uses forward commodity prices as of January 23, 2009. Additionally, given our announced sale of the Retail business, our outlook excludes Retail results since we anticipate discontinued operations accounting treatment for that segment beginning in the first quarter of 2009.

I would also remind you that any projections or forward-looking statements made on this call are subject to cautionary statements on forward-looking information contained in our SEC filings.

I will now turn it over to Mark.

Mark M. Jacobs

Welcome to our fourth quarter earnings call. I am sure all of you saw this morning’s announcement that we have agreed to sell our Texas Retail business to NRG and I want to start this morning by sharing my prospective of this transaction with you.

There are three key points here. First, this transaction will create significant value for our shareholders. Second, going forward Retail Energy will be well positioned with a diversified portfolio of generation assets, a strong balance sheet, and robust liquidity. And third, this sale represents an important milestone in the review of strategic alternatives that our Board of Directors commenced in October. The Board continues to examine additional alternatives to enhance shareholder value in a thorough and systematic manner.

Let me share with you some of the specifics of the transaction. The sale price is $288.0 million in cash. The final purchase price will be increased for working capital at the time of closing. In addition, we expect the Retail business to generate an additional $150.0 million to $225.0 million of free cash flow prior to closing. The transaction also eliminates $2.0 billion of capital requirements that support the Retail business under the credit sleeve.

Energy has reached a separate agreement with Merrill Lynch regarding the credit sleeve and we have entered into a transition agreement with Merrill Lynch that will resolve the litigation between us when the sale closes.

The only regulatory approval required is Hart-Scott-Rodino clearance and we expect closing to occur in the second quarter.

The Retail Energy brand name will stay with the Retail business and following the closing our company will adopt a new name that has not yet been determined.

So where does the sale of the Retail business leave us? Going forward Retail Energy will have a Wholesale business with over 14,000 megawatts of generation capacity. The portfolio is well diversified across geographic region, fuel type, and position on the dispatch curve. And it’s operating at top-quartile performance levels.

In these uncertain times, the marketplace is a premium on liquidity and balance-sheet strength. The transaction we announced this morning eliminates any uncertainty relating to the company’s overall liquidity position. Pro forma for the sale, we expect to have $1.5 billion in cash, $2.0 billion in total liquidity, and net debt of only $1.4 billion.

Now those of you who are veterans of our story know that we have always made ample liquidity and a strong balance sheet high priorities. Many of you will remember the 3x debt to EBITDA target we introduced in 2004.

And after Rick joined us he developed a target debt range of $2.0 billion to $2.5 billion. He described it at the time as a balance sheet for the trough of the cycle. That was one year ago, well before the current economic turmoil came into full view.

We have always recognized the risk inherent in a cyclical, commodity business and we have developed the capital structure and liquidity position with this in mind. The fact is that we have reduced our net debt level by nearly $6.0 billion since 2002, and while that figure represents a long-term focus, actions we took in 2008 bolstered our position.

Last year we announced and closed the sale of the Big Horn Power Plant for $500.0 million. That transaction represented an attractive value at the time, even more so with the benefit of hindsight. But what was equally important was what we did not do in 2008. As our cash position was building through the year, warnings signs of trouble ahead were starting to emerge.

At that time we made the strategic decision not to redeploy cash but rather use it to build our liquidity cushion. Given the events of the last five months, this was clearly the right strategic choice. Today we have over $750.0 million more cash than we did at the beginning of 2008.

Now let me speak for a minute about the future. In light of the current economic climate, we continue to be acutely focused on mitigating risk and with the degree of economic uncertainty that exists, it’s not enough to rely solely on today’s forward curves for commodity prices. We have carefully evaluated a wide range of potential scenarios. Some of you may recall us describing our scenario-based approach at our investor conference two years ago. We clearly understand the impact on our business in each of these cases and continue to evaluate actions to further mitigate risks.

Rick will review our updated financial outlook. You will see the impact of lower commodity prices. Now many of you probably think of Reliant as largely unhedged and that’s true as it relates to energy margin, but here are a couple of points to keep in mind.

Over half of our expected Wholesale gross margin comes from capacity sales in power purchase agreements. That revenue is hedged. Second, several of our coal plants are true base-load plants and generate energy margin in virtually any scenario.

The bottom line, when you take our earnings profile and overlay our liquidity and balance sheet position, we are highly confident that we have the wherewithal to operate through a significant and prolonged downturn if that’s how things play out.

I will now turn the call over to Brian Landrum, our Chief Operating Officer.

Brian Landrum

Given today’s announcement, I will make just a few quick comments on Retail. Since the end of the third quarter we have experienced a meaningful drop in supply costs. We are also seeing a change in the competitive dynamics. Higher cost of capital, tighter credit, and greater supply risk have increased the cost of doing business substantially for all retailers. As supply costs have fallen, Retail gross margins have expanded to compensate for the increased costs and risks.

You may recall that in the first three quarters of 2008 we made significant investments in our customer and life-time value pricing strategy. The change in supply cost and the competitive environment in the fourth quarter of 2008 and the first quarter of 2009 have provided the opportunity to realize a return on these investments.

As a result of these favorable market conditions, and strong execution by the Retail team, we achieved better than expected results in the fourth quarter and are well positioned for the upcoming period.

Let’s turn to Wholesale on Slide 5. I want to start by recognizing an extraordinary accomplishment by our Wholesale team. With the culmination of a multi-year program we have demonstrated the ability to achieve top-quartile commercial availability.

We finished 2008 with a commercial capacity factor over 87%, a five-point improvement over 2007. By leveraging the sustainable capability, we expect to achieve 87% to 88% CCF in 2009 and 2010. In fact, our coal fleet achieved over 88% CCF in the fourth quarter with five stations over 93% and Seward at 99.8%.

We made progress on our safety performance as well in 2008. Our safety incident rate is down by more than 40% in the past two years and last year the rate was 60% better than the industry average.

During the fourth quarter natural gas prices declined faster than coal prices, which compressed dark spreads. You may recall that during the second and third quarter last year we had fewer run hours in part because generators were bidding contracted cost of coal rather than the market cost.

Market prices for coal in the fourth quarter were in line with generators’ contracted costs, which reversed the trend. Consequently open contribution margin was better than expected due to increased generation volume.

2009 forward dark spread show further tightening. Recall that we buy coal about one year in advance to ensure availability. In 2008 we realized a significant gain under this practice but for 2009 coal prices have declined since we procured supply last year. The outlook is down for both open wholesale contribution margin and fuel hedges as a result.

We are well positioned, though, to generate attractive open gross margin despite lower commodity forward curves. Over $500.0 million of open gross margin is from capacity sales and PPAs, which are not tied to commodity prices and our base-load plants and PJMs, such as Seward, Shawville, Keystone, Conemaugh, and Portland, have significant earnings potential, even in low-commodity environments. The 40 Bcf gas hedge we discussed in November is a positive offset to the dark spread in coal price declines as well.

Looking forward, we are beginning to see the effects of the economic downturn on demand. Where they are normalized, PJM demand declined in the fourth quarter of last year and year-to-date consistent with GDP contracting. MISO demand was off slightly more than the national average. With the lower dark spreads and lower demand, we are forecasting a reduction in generation volumes. Frequently, however, weather variances can have a greater impact on demand than the economy, as was the case in January when it was much cooler than normal.

We continue to be on track to complete de-scrubber installations at Cheswick and Keystone during 2009. Our environmental capital expenditures are forecasted to decline substantially later this year as a result. The implementation of additional mercury controls is also on schedule to meet the Pennsylvania mercury regulations by 2010. This could be affected by current activity in the Pennsylvania state courts.

As we have discussed previously, environmental capital spending is likely to increase over time under tighter regulations. Today there remains a great deal of uncertainty on the timing and level of these costs. We are actively following the potential changes in the clean air interstate rule and clean air mercury rule as a result of ongoing legal action.

Along with a number of other power generators, we received a notice of violation from the EPA in January related to the new source review provision of the Clean Air Act for Portland, Shawville, and Keystone. We believe we have complied fully with the provisions in the statute but these are well positioned stations where in time, and under certain scenarios, it could be economic to add environmental controls at Portland and Shawville to complement the Keystone scrubber installation. We expect several years to pass before the implications of the full set of issues become clear.

To be prepared for a more dynamic environment we have implemented a flexible and responsive operating and maintenance capital spending plan for 2009. This will allow us to target spending to the highest value opportunities.

Let me now turn the call over to Rick Dobson, our Chief Financial Officer.

Rick J. Dobson

Let’s turn to Slide 7 and talk about 2008 before I discuss what the sale of our retail segment means to our free cash flow profile and liquidity. Our open EBITDA was $496.0 million in 2008. This was $460.0 million lower than 2007, primarily driven by challenges in our retail segment as a result of Hurricane Ike, extreme second quarter weather, congestion, with life-time value pricing decisions.

Adjusted EBITDA was $339.0 million greater than open EBITDA, settling at $835.0 million, $47.0 million lower than 2007. The significant increase to adjusted EBITDA was due to coal purchases at below market prices and to a lesser extent, gains on the sale of our Big Horn plant and sales of emission and exchange allowances.

Now let’s turn to the Wholesale business on Slide 8. Mild weather during the third quarter of 2008 and declining commodity prices in the fourth quarter drove 10 terawatt hours or $105.0 million of lower economic generation. This was offset by improved commercial capacity factor of 4.9%, or $37.0 million, and significantly higher capacity payments, driving the other margin positive variants of $103.0 million.

As a consideration for $46.0 million of lower O&M costs and lower units margins on a comparable plant basis, we ended 2008 with an increase in overall open contribution margin of $38.0 million.

Let’s move to the Retail operations on Slide 9. Stronger fourth quarter performance in our mass business helped us narrow the 2008 contribution loss to $7.0 million. This was significantly better than our previously forecasted loss of $85.0 million to $135.0 million discussed in our last outlook.

The challenges created by Hurricane Ike in the third quarter, extreme weather and congestion in the second quarter, and life-time value pricing decisions were the primary catalysts for the $511.0 million in lower year-over-year performance.

Moving to Slide 10, let’s take a look at our year-to-date cash flows. Free cash flow was down approximately $200.0 million due to lower operating cash flows and capital expenditures to install the Keystone and Cheswick scrubbers, partially offset by proceeds from emission exchange allowance sales and lower emission purchases. Even with this negative variance we produced $40.0 million of free cash flow in 2008.

Turning to Slide 11, let’s talk about some of the details related to the sale of our retail segment. As Mark said, the sales price is $288.0 million. In accordance with our secured debt agreements, the net proceeds plus the return of our working capital investment will be offered to secured bond holders to reduce secured debt. In addition, we will get the cash flow through closing, which we estimate will be in the second quarter.

As Mark mentioned, this also resolves the Merrill Lynch litigation and removes the current $2.0 billion Retail collateral requirement as well as any additional continued collateral exposure related to our approximate 400 BCFe fixed price supply position.

Slide 12 depicts the amount of cash, liquidity, and debt at January 31, 2009, and the pro forma impact of the retail sale. Also shown is the amount of collateral and contingent collateral currently necessary to support the Retail business. What is clearly evident from this slide is that after the sale of the Retail segment we remain a well-capitalized, wholesale power generator with a robust cash and liquidity position.

Now let’s discuss our 2009 and 2010 outlook on Slide 13. First, I would like to point out that our outlook is based on commodity prices as of January 23, 2009. This also includes 2009 and 2010 NYMEX natural gas prices of approximately $5.00 and $6.50 per MMBtu respectively. It also includes coal in the mid-$2.00 per MMBtu range.

Compared to our last outlook natural gas and coal spread contraction is the primary force behind our lower open Wholesale contribution margin.

Our strategy of purchasing coal approximately one year in advance for operational reasons can create cash flow variances in any given period. In 2008 advanced coal procurement produced a positive variance of $272.0 million. As you can see, in the middle of this page, our 2009 procurement is forecasted to reduce earnings by $172.0 million based on the January 4, 2009, markets.

The combination of tightening commodity spreads and coal purchases result in 2009 and 2010 total free cash flow of $86.0 million. As we have seen, commodity prices can be extremely volatile so to help with the understanding of how this impacts our business, we provide directional sensitivities related to the major commodity price drivers in our appendix.

Let me finish briefly with discussing our cash and liquidity profile. Our cash and liquidity position is approximately $1.5 billion and $2.0 billion respectively, at the end of February 2009. We have a modest debt maturity profile of $400.0 million in May 2010 and this profile, combined with our Wholesale generating assets, leaves us in a well-capitalized position to take the steps necessary to enhance shareholder value.

Let me now turn it back over to Mark for some concluding remarks.

Mark M. Jacobs

Let me wrap up on Slide 14 with a summary of key points. The sale of the Retail business will create value for our shareholders. It eliminates the capital requirements and uncertainty of the retail business. The Wholesale business is a well-diversified portfolio of generation assets.

Our strategy to reduce debt and our robust liquidity levels position us well to manage through challenging times. We are confident that we can operate through even the most difficult of scenarios.

In times like these it is easy to fall into the trap of believing that market conditions will always be challenging but I believe that things are never as good as they seem in the up cycle and they’re never as bad as they seem in the down cycle. Eventually the economy will right itself and when the economic engine restarts, Retail Energy is well positioned to benefit from market improvements.

At the same time, we are continuing to explore the full range of strategic alternatives to improve upon that plan. During the Q&A portion of the call we ask that you please focus on the announcement we made today and our earnings results. We will not be addressing any specifics related to the ongoing review of strategic alternatives.

Let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Kiani - Deutsche Bank.

John Kiani - Deutsche Bank

What was your prior level of corporate G&A that wasn’t allocated to either Wholesale or Retail? And it looks like the amount changed. Can you talk about how much it’s come down by and what the dynamics there are?

Rick J. Dobson

Let me answer the tactical part of that. The corporate G&A historically was running around $155.0 million, $160.0 million, $165.0 million depending on what we have going on during the year. So what slide are you looking says your . . .?

John Kiani - Deutsche Bank

Slide 13 shows it now down at $87.0 million or so. So is that the sale of Retail and that is what we should think about as the run rate corporate G&A that’s not pushed down or allocated to the Wholesale assets?

Rick J. Dobson

That’s absolutely correct.

John Kiani - Deutsche Bank

You normally provide an outlook that’s three years forward but today you only gave 2009 and 2010. Can you talk a little about the change in that disclosure?

Mark M. Jacobs

I think just with the volatility we have seen in commodity prices we felt it appropriate here to provide the two years of data based on forward curves. And again, I think for those interested here, you have got access to the same forward curves we do. It would be fairly easy to just take those with the data we provide and calculate further years if you would like to do that.

Operator

Your next question comes from Lasan Johong - RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Why the decision to keep the C&I business outside of Texas, from the Retail perspective?

Mark M. Jacobs

You may recall that in December we announced that we had sold the eastern C&I business to Hess, so that business closed at the end of December. So the only remaining C&I business we have right now is our Illinois C&I business, which is very small, and we are continuing to work on alternatives to wind that business down.

Lasan Johong - RBC Capital Markets

Why now? I mean, you and I have had many discussions about what you could do in a down cycle and one of the things we agreed on was that a down cycle is a good time to buy, not to sell. And it seems like with NRG on the brink of collapsing, or falling towards Exelon, you would have had some good opportunities to pick up some assets that could have helped you mitigate the risks of the Retail business. So why the decision to sell instead of wait?

Mark M. Jacobs

Well, you will recall on our last earnings call we described our plans to modify the Retail strategy in light of the increased cost of capital. And importantly the lack of, on a long-term basis, the availability of the Merrill Lynch credit sleeve. We described that plan as winding down the C&I business. We would continue to operate a mass market business.

That strategy would have had us using less capital but frankly, the way that we would think about that value proposition there is we would charge a market cost, if you will, for the amount of capital used in that mass market business. And when you compare that with the earnings profile that we felt that that business was able to achieve over time, it would have modestly exceeded that cost to capital.

So as we step back and think about it, we believe that this transaction here creates more value than the plan that we had described on the last call. Let me share with you some of the reasons we came to that conclusion, but I think importantly it eliminates $2.0 billion of capital requirements that today Merrill Lynch provides under the sleeve. As Rick had highlighted, there is an additional contingent capital of 400 BCFe here so that number could get bigger.

And importantly, it resolves the pending litigation with Merrill Lynch. And that’s one, as we assess that, if that ran its course there are a number of different ways that that could have played out but obviously that would have a significant impact on the value of the Retail business.

And I think as we put all that together here, what this transaction represents for us is much more certainty. We talked about in the prepared comments how liquidity, balance-sheet strength in this type of market is so critically important and that’s one of the things that this transaction really brings to us, is certainty around those topics.

Lasan Johong - RBC Capital Markets

$1.5 billion in cash, it’s starting to get a little crazy, shall we say, even in the liquidity-constrained environment. You’ve got to have some plans for that money at some point, at some time. Any kind of insight as to what you want to do with that kind of cash? I mean, that’s a lot of money for just doing nothing on your balance sheet.

Mark M. Jacobs

I certainly acknowledge that $1.5 billion is a lot of cash. As we have described before, on a long-term basis our intention is to deploy that cash against those areas where we think we can create the most value for shareholders. But I’ve got to tell you, in this type of market environment, we are going to make sure that from a wherewithal standpoint that we have the ability to manage through a wide range of commodity scenarios.

As Rick described in his comments, we have looked at a lot of different scenarios here and again, we’re going to be very cautious in terms of the redeployment of that cash in this type of market environment.

Lasan Johong - RBC Capital Markets

I mean, you couldn’t do the business with $1.0 billion?

Mark M. Jacobs

I’m not saying that, I’m just saying we’re going to approach this cautiously in the market environment.

Operator

Your next question comes from Angie Storozynski - Macquarie Research Equities.

Angie Storozynski - Macquarie Research Equities

I have a question about the potential change in your environmental capex. I understood in the past that some of your coal plants were simply too small to really invest in emission controls. How did it change? And then why did it change? We see some fuel switching, especially in the Southeast. Your coal plants, looking at their heat rates, would probably qualify for some lower production volumes as well. Why would you invest money in these plants and what made you change your mind about it?

Mark M. Jacobs

Let me give you a few high-level points and then Brian can fill in some of the details. But we’re committed to environmental stewardship. It’s one of our core values. Our current outlook includes environment capex that’s based on existing laws and our existing plan. Our expectation is that over time we’re going to see an increasing focus on the environment and we’re going to have more stringent rules and regulations and our intention, obviously, is to comply with those, and we may make additional environment upgrades that are attractive from a financial returns standpoint.

But I’m not sure if you mis-heard something in the prepared comments, but we did not say that we intended to additional money in some of these smaller plants.

Angie Storozynski - Macquarie Research Equities

So should we then assume that, do you expect that these plants will be maintaining their current volumes or should we just assume that going forward, because of the lack of investments, looking at the forward curve I’m not sure we should be simply assuming that they are going to be running much, much less?

Brian Landrum

We have looked at the forward curves and the effect of the forward prices on what our generation volumes will be and you will see those generation volumes for 2009 and 2010 in our outlook.

I do agree that you could see some gas switching in those forward curves, especially as we get the seasonal reduction in gas bases from say Henry Hub to TETCO M3, and yeah, you may see some lower run hours in those seasonal periods, but that’s not inconsistent with our current forecast is.

As you look out in time, depending on what the environmental controls end up being, and I said, we expect there’s a lot of uncertainly around the timing and the form those regulations might take, and we believe it’s going to take several years for those regulations to play out.

Our view is that we will do what is economic at our stations. So some of the stations, you’re right, we’ve talked before and we continue to believe, are probably too small or don’t have enough run hours to justify the capital required to either add state-of-the-art notch controls or SO2 controls, but others do justify or others are justified economically, and we talked about a couple of those in this call, being potentially Portland and Shawville.

But it all depends on how those uncertain regulations play out and at this point we can’t tell you what that timing would be or what those costs would be.

Angie Storozynski - Macquarie Research Equities

And given the volatility in commodity prices that we’re seeing right now, any changes going forward to your hedging strategy? Should we still assume that you’re not going to be hedging your output?

Mark M. Jacobs

The Wholesale business is a capital-intensive and cyclical business. We expect that we’re going to see volatility in the earning stream from that. Our basic approach has been to capitalize that business in a way that reflects the underlying earnings volatility. We don’t think it makes sense to try to take a business that is inherently volatile and try to turn it into one with stable earnings by hedging and then to lever up based off of that.

The problem with that approach that we’ve seen is at some point those hedges run out. Now, most of you are familiar with our open model. I often find that people assume, because we have talked about the open model, that that means we’re unhedged, but really, the open model to us is a way to transparently report our results, which clearly breaks out the earning power of the assets in the current market environment from the impact of hedges, both fuel hedges and in power hedges.

Today, as we mentioned, we are largely unhedged on the energy margin. I think as Brian covered in his comments, over 50% though of our expected wholesale gross margin is hedged through capacity payments and power purchase agreements.

That being said, there are a couple of reasons that we’ve described that we would hedge the energy margin component of that. One is around a value proposition. If we felt now was a better time to sell that output versus later. And the second is around preserving balance sheet strength. And again, as I mentioned, that’s not our primary tool, but certainly one that we would have in the tool kit as we look at different types of down-side scenarios.

And I did mention earlier that we have looked at a number of those stressed commodity prices scenarios and we have evaluated, and will continue to evaluate, whether hedges could or would make sense to play a part of that role in risk mitigation.

Operator

Your next question comes from Neal [Metra] – Simmons & Company.

Neal [Metra] – Simmons & Company

I have a question about some of the economic factors. Can you talk about the low economic factor you’re projecting for the MISO coal plant in 2009 versus 2010, at 22% in 2009. It looks like you’re only expecting to run profitably about 50% of the time during on-peak hours and what are some of the reasons for this? Like coal.-to-gas switching or environmental costs, etc.?

Brian Landrum

The outlook for MISO, and I notice that relative to 2008 and our last forecast for 2009 is down, and the primary reason for that is forward curves. The way we generate this forecast is we run an economic dispatch model that looks at our marginal costs and takes forward curves into account to determine how the stack’s likely to play out and how our plants will run in that environment.

MISO is on-peak about 75% of the time it’s on coal competition, so you do have some gas switching but the bulk of it is just demand and forward curve outlook.

Neal [Metra] – Simmons & Company

Are you seeing the same kind of issues in your Western PJM plants that trade closer to MISO than the PJM West hub?

Brian Landrum

I would say to a lesser extent. But directionally similar.

Neal [Metra] – Simmons & Company

On the coal procurement side, you talked about purchasing your coal or hedging it one year in advance. How long can you wait before you start to procure 2010 supply?

Brian Landrum

We’ve been buying coal about one year in advance for some time now. We do that to ensure availability. 2008 was a particularly tight year for supply, up until the September downturn in the market and so we acquired a part of our 2009 coal relatively early during 2008. And as we were going through that period we made some volumetric commitments for 2010 and 2011 back in 2008, of a percentage of our typical burns.

And so the volumes for 2010 and 2011, a part of those volumes are already lined up. They have not been priced yet. So contractually, we set up the price for those later in the year as we get closer to when we’re going to burn. And that’s been an improvement in our approach than previously. Previously we would procure and price well in advance of the timing we’ve got this year.

So hopefully what we’ll get is coal prices much closer to what our cost of coal will be when we burn, in that process.

Operator

Your next question comes from Brian Russo - Ladenburg Thalmann & Co.

Brian Russo - Ladenburg Thalmann & Co.

You did comment earlier that the Board would continue with reviewing strategic alternatives. This is even after the Retail sale. And I was wondering if you were looking to pursue individual asset sales or a sale of the entire company?

Mark M. Jacobs

As I mentioned in the prepared comments, the sale of the Retail business represents an important milestone in that review of the strategic alternatives. But that being said, the Board is continuing to evaluate other alternatives to enhance shareholder value. We are looking at the full gamut of possibilities and that’s something that is a very high priority, as you would imagine, for the Board. And we are approaching that in a very thorough and systematic manner. So it is really not appropriate for us to comment on the progress or nature of those alternatives here until the Board determines the course of action.

Operator

Your next question comes from Charles [Charette] – Credit Suisse.

Charles [Charette] – Credit Suisse

Could you give some more information on your potential debt reduction? You talked about reducing secured debt, how is that going to be constructed or what are you looking at doing?

Rick J. Dobson

You’re probably talking about Slide 12 that I went over. In accordance with our secured debt agreement, we will offer the proceeds of the sale, which we expect to be around $400.0 million, to the secured debt holders at par. And what we projected here, on Slide 12, is that they will take that, and it pulls our secured debt down into the $700.0 million to $800.0 million range.

And that’s really what the agreements call for and that’s what we project to happen and I suspect it will happen, based on where they’re trading right now.

Charles [Charette] – Credit Suisse

So you’re going to have offer par to all those secured debt holders.

Operator

Your next question comes from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

Just a question on environmental capex at the existing coal fleet. Can you talk about which units, besides the ones that are already scrubbed, both in Ohio and in PJM, are kind of most viable for scrubbing somewhere down the road and whether they would be both scrubbing and SCRs.

Mark M. Jacobs

The stations, it tends to go by, if you look at the generation volume by station, you can get a pretty good sense of which ones are more attractive than other because what you economic find is what’s the indifference point between the cost of an emissions credit through time and the cost of capital and the MPB on that capital for adding the controls.

The primary stations where we’ve looked at this activity, and you can see it in some of the scenarios we’re run before, are Avon, Portland, and Shawville. We are currently scrubbed at a number of our existing stations; about half of our existing coal fleet will be scrubbed when we complete the Chesapeake and Keystone scrubbers this year. And so the three remaining ones it would make sense for us to do scrubbers would be those three stations, Avon, Shawville, and Portland.

Operator

Your next question comes from Raymond Lund - Goldman Sachs.

Raymond Lund - Goldman Sachs

The debt repurchase, or what you have to offer from your asset sale proceeds, is it specifically for the two secured bond issues, the two 6.75% bonds?

Rick J. Dobson

That’s correct.

Raymond Lund - Goldman Sachs

And can you talk a little bit about, is there any covenant issues that would arise giving you lower guidance. I think you had a 4x secured leverage test but it looks like you’re okay. Is that fair to assess?

Rick J. Dobson

As you can tell, we have an ample amount of liquidity and we do have that one covenant in the credit agreement that you’ve just cited at four-to-one. When you look at the forecast, the outlook, you can see there is ample cushion. And the guts of that covenant work as the following: you take the remaining secure debt that’s outstanding and you can kind of see the projection on Slide 12, the range; and then there is a deduction for the level of cash that we have on our balance sheet, limited to $500.0 million; and then a deduction for cash margin deposits, which we project around $100.0 million.

So the hurdle we have to make is on realistically about $100.0 million, $200.0 million, maybe $250.0 million of secured debt in that four-to-one covenant. And so when you run the numbers on that, outlook-wise, it doesn’t take much EBITDA to make that covenant.

Raymond Lund - Goldman Sachs

Can you talk a little about the cash and how that’s broken down? Can you say how much of that cash is up at the REI level?

Mark M. Jacobs

The number that I talked about, the $1.5 billion cash, pro forma for the closing of the sale, the Retail transaction, will be all at the parent company.

Raymond Lund - Goldman Sachs

Any ideas about what you would do with the Orion end on bond in 2010. Would you look to refi that or any early thoughts there?

Mark M. Jacobs

It is a little bit early. Obviously we have the cash and liquidity to meet that maturity if that’s a decision that makes sense. In this marketplace, if there was a marketplace that emerged where it made sense to refi that in a way that worked covenant-wise that we were happy with, we might consider that. But right now we’re developing our plans around the fact that we would retire that debt.

But like I said, you never know what’s going to happen in the marketplace and so we might refinance a portion, or all of it, if the market allows.

Operator

Brian Tidel - Broadpoint Capital

The Orion bonds, potentially having to refi if need be, I assume you would do that at the corporate level and not at the sub.

Mark M. Jacobs

Yes. I don’t think I used the word “have” to refinance. I used the terms we have ample liquidity and we are more than prepared to retire it if that would make sense in the marketplace.

But we have to wait and see what emerges in the marketplace. I can’t speculate on how we do it or if we would do it at this point in time. We’re just looking at all the options and we’re preparing for retirement if we have to, but if the marketplace is there and it’s something that makes sense in terms of how we think about covenants, then we would do it. If not, we’ll take it out.

Brian Tidel - Broadpoint Capital

What I was getting at is you talked about wanting to simplify the cap structure to keep everything at the corporate level and eliminate cash straps, etc. I guess that’s still the same thinking, it’s still the best option if you can do it at corporate?

Mark M. Jacobs

That would be the best option.

Brian Tidel - Broadpoint Capital

With regard to the proceeds from Retail, in terms of the timing and how it would work, would it be a two-step process in terms of when you get the initial proceeds in you would make an offer to the bond holders and then when the working capital settles out then you make another, or do you wait until it’s all done and do it at the latter point?

Mark M. Jacobs

I don’t have the answer to that question in detail. I would suspect we would make the first offer with the bulk of the proceeds, on the receipt of those. And then there would be a follow-on offer when we had certainty around the working capital.

Brian Tidel - Broadpoint Capital

Both the muni bonds and the 6.75% corporate bonds?

Mark M. Jacobs

That’s correct.

Brian Tidel - Broadpoint Capital

And is there any reduction in terms of the size of the revolver, anything that having to do with the bank debt, that changes because of the asset sale?

Mark M. Jacobs

No, there is not.

Operator

Your next question comes from Paul Patterson - Glenrock Association.

Paul Patterson - Glenrock Association

Just briefly on the Retail business, can you give us a feel for what the contribution from the former priced to be legacy customers was, for 2008?

Mark M. Jacobs

We don’t really break out or think about it that, but here’s the way that you might think about that. We have got just over 1.5 million residential customers. Just under 1.0 million of those are in the Houston service territory and over 500,000 are in other parts of the state. So we’re about two-thirds Houston and one-third. Now, if you took that 1.0 million, there are some in there that have never changed providers, there’s others that have signed up with us, either they have moved into the area since the market opened to competition or they have switched and switched back to us. But that’s how I would think about that.

Paul Patterson - Glenrock Association

But you can’t give us any more of a feel for the margin element at all?

Mark M. Jacobs

We have typically described that a little bit higher margins in the original incumbent service territory and a little bit lower margins in other parts of the state where we have had to compete more on price.

Operator

There are no further questions in the queue.

Mark M. Jacobs

Our webcast will be available about two hours after the call. Thank you all for your participation.

Operator

This concludes today’s conference call.

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Source: Reliant Energy, Inc. Q4 2008 Earnings Call Transcript
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