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Executives

Steve Himes – IR

Ed Muller – Chairman and CEO

Jim Iaco – EVP and CFO

Bob Edgell – EVP and COO

John O'Neal – Chief Commercial Officer

Paul Gillespie – SVP, Tax

Analysts

Neel Mitra – Simmons & Company

Paul Patterson – Glenrock Associates

Robert Howard – Prospector Partners

Jeff Coviello – Duquesne Capital

Brian Russo – Ladenburg Thalmann & Co.

Carlos Rodriguez – Hartford Investment Management

Lasan Johong – RBC Capital Markets

Brian Chin [ph] – Citi

Barry Koperberg [Ph] - Tology Capital [Ph]

Mirant Corporation (MIR) Q1 2009 Earnings Call Transcript May 8, 2009 11:00 AM ET

Operator

Good day, everyone, and welcome to Mirant Corporation's first quarter 2009 earnings call. Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. Steve Himes, Director of Investor Relations. Please go ahead sir.

Steve Himes

Thank you, Sisilia. Good morning, everyone, and thank you for joining us today for Mirant's first quarter 2009 earnings call.

If you do not already have a copy, the press release, financial statements, and first quarter filing with the SEC are available on our website at www.mirant.com. A slide presentation will also be available on our website and a replay of the call will be available approximately two hours after we finish.

Speaking today will be Ed Muller, Mirant's Chairman and Chief Executive Officer, and Jim Iaco, Mirant's Chief Financial Officer. Also in the room and available to answer questions are Bob Edgell, Chief Operating Officer; Bill Holden, Treasurer; John O'Neal, Chief Commercial Officer; and Paul Gillespie, our Senior Vice President of Tax.

Moving to the safe harbor, during the call we will make forward-looking statements that are subject to certain risks and uncertainties. Factors that could cause actual results to differ materially from management's projections, forecasts, estimates and expectations are discussed in the company's SEC filings. We encourage you to read them.

Our slide presentation and discussion on this call may include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available on our website or at the end of our slide presentation.

And with that, I'll turn the call over to Mr. Ed Muller.

Ed Muller

Thanks, Steve and good morning everyone. I will try and remember to tell you what page I am on in the presentation as we go through it and I have some folks here in Atlanta with me to remind you if I forget.

I'm on page three to start, just in the sense of an overview before we turn to the particulars. We have had and continue to have a strategy of hedging forward, and in this marketplace that has particularly helped us mitigate the effects of volatile commodity prices. We hedge so that we can comfortably assure ourselves of meeting our obligations and show that we don't have to keep – we would regard as excess capital on the balance sheet (inaudible) for the market. Speaking of our balance sheet, we have a strong balance sheet as we have had with more of an adequate liquidity to our business.

Turning to page four and the results for the first quarter, our adjusted EBITDA of $195 million is down a little from the same period in 2008, and its down because energy prices have been down particularly because of compressed dark spreads, particularly for us – because of compressed dark spreads in the Mid-Atlantic largely offset by the realized value of our hedges. And this is the story of what is occurring for us this quarter and as we look forward to the year and for next year as we adjust our guidance that is power prices generally have softened, but we are – we offset that by our hedges, not completely but in substantial part this year and some part next year.

Turning to page five, you can see how we are changing our – adjusting our guidance for 2009, we are reducing it from 897 million to 873 million and for 2010 from 667 million to 609 million for the same reason, lower energy gross margins partially offset by higher realized value of hedges. Nothing dramatic has changed in the business, these are conditions in the market and the results – offset by the results of our strategy of hedging. And Jim, later in his presentation will go over the guidance numbers in much greater detail.

Turning to page six, market update, we do this update based on our current data in the marketplace compared to most current data we gave on our last call in February. And what you can see first looking at the near term is that, for 2009, as (inaudible) gas prices have declined, there is a lot in storage and the demand has been weak given the economic conditions. For 2010, our gas prices are slightly higher than they were in February. And following natural gas prices, power prices which are highly correlated have declined for 2009 since last February and are little higher for 2010. Coal prices have been declining and dark spreads as a result of that have expanded for – dark spreads have expanded some for 2009 and 2010.

Looking longer term 2011 to 2013, gas prices are up. They are actually up some this morning, the comp [ph] is up I think around 4.20 and as we were actually putting this data together today, the range is about $7.10 to a little over 7.30. Power prices are also higher reflecting the same factors. Coal prices have declined some and dark spreads has expanded some.

Turning to page seven as we have consistently, we are showing you here six years of hedge profile and you will see that the pastor shaded boxes reflect incremental hedges since the last time we showed this to you, and the white or open boxes show where we are less hedged and we can be less hedged for two reasons, one, we may have in our commercial operations chosen to reduce some of our coverage because we saw financial advantage of doing so or as you would expect that it to be out year as what we are seeing there is higher and expect the generation as we go forward and – the same actual hedges in place, but more generation we are slightly less hedged, but you can see we’ve added some hedges particularly in 10, 11 and 12 for our baseload coal.

Turning to page eight, same graph we’ve been showing you updated, which shows how in our markets the reserve margins look. The trend lines remain the same, so I would note both in New England and in New York, the ISO have reforecasted demand side management and think that the supply and demand imbalance pushes for further out. So if you would have compared this to the last time we did it, you would see that those lines have moved up on the page. But for us what’s particularly important given our concentration of assets in the Mid-Atlantic is what’s going on in PJM East and there the trend remains as it has been, which is probably the trouble is coming and there is a nice thing for an incumbent but it is not a nice thing for someone who is responsible – part of the responsible group as we are for meeting the electric needs in our nation and to say that we are inexorably moving to supply and demand imbalance is not a positive thing, it is a positive thing in a narrow business sense for us of course we like that, but as a matter of policy, this is not good.

Turning to page nine, an update on our program to comply with the Maryland Healthy Air Act, this is the program that (inaudible) at our three coal stations Maryland controls for NOx, Mercury, and Sox. And we have completed and have stated sometime ago all of the controls for controlling nitrogen oxide and we are well along the way of completing the scrubbers, which will enable us to control well of sulphur dioxide and mercury. And as you can see here on our program of $1.674 billion through the end of April last month, we have paid out cash $1.194 billion leaving 480 billion to go on our program, we are on budget, we are on schedule, we expect to have this completed as we have planned by the end of this year.

And with that, I will turn to page 10 and I will turn to Jim Iaco.

Jim Iaco

Thank you, Ed. Good morning. As shown on slide 10, adjusted EBITDA for the first quarter of 2009 was $195 million as compared to 211 million for the first quarter of 2008. As Ed mentioned earlier, the $16 million decrease in adjusted EBITDA was principally the result of a decrease in realized gross margin and I will cover this in more detail on the next slide.

Deducting interest, taxes, depreciation and amortization from adjusted EBITDA derives adjusted net income of 115 million as compared to 158 million. The increase in interest, taxes, depreciation and amortization for 2009 reflects lower interest income as a result of lower interest rates on invested cash and lower average cash balances, partially offset by lower interest expense as a result of lower outstanding debt and higher interest capitalized on projects under construction.

The only significant item that bridges adjusted net income to income from continuing operations, a GAAP measure is unrealized gains or losses on derivatives, which principally reflect a mark-to-market net gain or loss on our hedging activities. That can be seen on the slide, there was a net gain of 254 million for the first quarter of 2009 as compared to a net loss of 303 million for the first quarter of 2008. This net change of 557 million was primarily due to decreases in forward power and natural gas prices.

Our average share count is lower in the 2009 periods as compared to the 2008 periods principally due to share repurchases. And finally, our earnings per share based on adjusted income from continuing operations increased to $0.79 for the first quarter of 2009 as compared to $0.66 for the first quarter of 2008.

Turning to slide 11, this slide presents the components of the company's realized gross margin for the first quarter of 2009 and 2008. Energy, shown as the light blue bar, represents gross margin from the generation of electricity at market prices, fuel sales and purchases at market prices, fuel handling, steam sales, and our proprietary trading and fuel oil management activities.

The decrease of 88 million was primarily the result of a decrease in power prices and an increase in the cost of emissions allowances. In addition, generation volumes decreased 5% primarily because our Mid-Atlantic baseload units generated less as a result of decreases in natural gas prices at times making an uneconomic for certain of our coal fired units to generate.

Contracted and capacity, the dark blue bar, which was relatively flat quarter to quarter represents gross margin received from capacity sold in ISO and RTO administered capacity markets through RMR contracts through tolling agreements and from ancillary services. And finally, realized value of hedges was up $72 million due to a $151 million increase in realized value from power hedge contracts, partially offset by a $79 million decrease in the realized value of fuel hedging contracts.

These amounts reflect the actual margin upon the settlement of our power and fuel hedging contracts and the difference between market prices and contract costs for coal that we purchased under long term agreements. Power hedging contracts include sales of both power and natural gas used to hedge power prices, as well as hedges to capture the incremental value related to the geographic location of our physical assets.

Turning now to slide 12, this slide presents cash flow information for the first quarter of 2009 and 2008. The $28 million increase in adjusted net cash provided by operating activities was principally the result of a decrease in cash used due to lower commodity prices and an increase in proceeds from sale of excess emission allowances to third parties, partially offset by an increase in inventory as a result of the purchase of higher volumes of coal and higher prices and to the increase in net interest expense that I discussed on slide 10.

Reducing adjusted net cash provided by operating activities for total cash capital expenditures result in adjusted free cash flow of 112 million for the first quarter of 2009. Our Maryland Healthy Air Act capital expenditures, which are non-recurring in nature, have been and will be funded by existing cash, therefore a more meaningful presentation of free cash flow is to use free cash flow adjusted for these expenditures related to the Maryland Healthy Air Act. Accordingly, adding back actual expenditures under that program results in an adjusted free cash flow of 234 million or $1.61 per share for the first quarter of 2009.

Turning to slide 13, this slide presents our debt and liquidity as of March 31, 2009. Consolidated debt, which is $2.637 billion at March 31, 2009 is $39 million lower than consolidated debt at December 31, 2008 principally due to repayments of the Mirant North America term loan. Our available cash and cash equivalents, including amounts available under the Mirant North America revolver and synthetic letter of credit facility, amounted to $2.494 billion at March 31, 2009.

Cash balances of 424 million at Mirant North America and its subsidiaries at March 31, 2009 are currently unavailable to Mirant Corporation because of the free cash flow requirements under the restricted payment test of Mirant North America's senior credit facility. The primary factor lowering the free cash flow calculation in the restricted payment test is the significant capital expenditure program of Mirant Mid-Atlantic related to the Maryland Healthy Air Act.

We do not expect the liquidity effect of the restriction on distribution under the Mirant North America's senior credit facility to be material given that the majority of our liquidity needs rise from the activities of Mirant North America and its subsidiaries, the restriction does not limit Mirant North America from making distributions to Mirant America's generation to fund interest payments on its senior notes and the majority of our total available cash and cash equivalents are held unrestricted at Mirant Corporation. Furthermore, we are in compliance with all of the financial ratio covenants and based upon our guidance for 2009 and 2010, we will remain in compliance.

Turning to slide 14, as Ed previously mentioned, we are reducing our guidance for 2009 from 897 million to 873 million and for 2010 from 667 million to 609 million, all based on forward market prices as of April 14, 2009. As Ed mentioned on slide six, prices have increased since April 14, but are still lower than they were when we gave previous guidance in February. Deducting projected net interest expenditures and income taxes paid and factoring in projected changes in working capital, adjusted net cash flow provided by operations is projected to be $646 million and $439 million for 2009 and 2010, respectively.

Let me take a moment to elaborate on one item. As discussed in our first quarter 10-Q filed today, on March 31, 2009, the Southern Company and MC Asset Recovery entered into a settlement agreement resolving claims assorted by MC Asset Recovery. As a remainder, under the plan of reorganization the rights – certain actions filed by the Mirant and various other subsidiaries against third parties are transferred to MC Asset Recovery. MC Asset Recovery although wholly owned by Mirant is governed by managers who are independent of Mirant and its other subsidiaries. We are currently reviewing the settlement between the Southern Company and MC Asset Recovery in order to determine what if any taxes [ph] we will be responsible for. Our guidance for 2009 does not include any material provision or payment with respect to that settlement.

Reducing adjusted net cash flow provided by operations by projected capital expenditures of 737 million and 421 million for 2009 and 2010 respectively derives an adjusted free cash flow deficit of 91 million for 2009 and adjusted free cash flow of 18 million for 2010. Adding back in the Maryland Healthy Air Act capital expenditures for 2009 and 2010, which as I stated earlier, are non-recurring in nature and will be funded by existing cash, results in adjusted free cash flow without the Maryland Healthy Air Act CapEx of 399 million for 2009 and 205 million for 2010 or a yield of 19.2% and 9.8% respectively based on our closing stock price and diluted share count as of May 05, 2009.

Our hedged realized gross margin for 2009 is $1.333 billion or 87% of our projected realized gross margin for the year. For 2010, our hedged realized gross margin is $980 million or 73% of our projected realized gross margin for 2010. Hedged realized gross margin is defined as hedged merchant generation and other contracted capacity which would include reliability must-run agreements and capacity sold in ISO and RTO administered capacity markets. And finally, hedged adjusted EBITDA, which is defined as hedged realized gross margin reduced by our projected operating and other expenses for a full calendar year, is 670 million or 77% of our projected adjusted EBITDA for 2009 and 251 million or 41% of our projected adjusted EBITDA for 2010.

Turning to slide 15, this slide presents the components of realized gross margin, included in our guidance for 2009 and 2010. Realized gross margin is projected to decrease from $1.536 billion in 2009 to 1.338 billion in 2010. The $198 million decrease is principally the result of a $318 million decrease in realized value of hedges and a $17 million decrease in contracted and capacity revenues, these two [ph] negative or decrease is partially offset by a $137 million increase in energy realized gross margins. I'll discuss these in more detail on slide 17.

Turning to slide 16, this slide presents the comparison of our guidance for 2009 and 2010 given on February 27 to the update being provided today. For 2009, adjusted EBITDA is projected to decrease by 24 million. This change is comprised with the following

First, a $56 [ph] million decrease in energy gross margins principally due to three factors, a $75 million decrease due to market price and generation changes, partially offset by a $7 million increase in expected results from fuel oil management activities and a $2 million increase in expected results from proprietary trading activities.

Next, a $52 million increase in the realized value of hedges, as a result of lower power prices partially offset by lower coal prices. Next, a $4 million decrease in contracted and capacity revenues, due primarily to a change in the generation assumptions for New York and finally, a $6 million increase in operating and other expenses due to a $4 million decrease in sales of excess emission allowances to third parties and a $2 million increase in plant operating cost.

In 2010, adjusted EBITDA is projected to decrease by 58 million. This change is comprised of the following

First, a $91 million decrease in energy gross margins principally due to three factors; an $89 million increase due to market prices and generation changes, a $1 million decrease in expected results from fuel oil management activities, and a $1 million decrease in expected results from proprietary trading activities.

Next, a $43 million increase in the realized value of hedges as a result of lower power prices, partially offset by lower coal prices. Next, a $4 million decrease in contracted and capacity revenues due primarily to a change in the generation assumptions for New York and finally, a $6 million increase in operating and other expenses due to a $5 million decrease in sales of (inaudible) emission allowances to third parties and a $1 million increase in plant operating cost.

Turning to slide 17, this slide presents the bridge from our 2009 guidance to our 2010 guidance. Our 2010 guidance is $264 million lower than our 2009 guidance. This decrease is comprised of the following

First, we have a $137 million increase in energy gross margins principally due to four factors; a $155 million increase in marketplace and generation changes principally due to increases in power prices, partially offset by increases in coal prices. Second, a $7 million increase in commercial availability, and these two positive factors are partially offset by a $5 million decrease in realized gross margins from our proprietary trading activities and a $20 million decrease in realized gross margins from our fuel oil management activities, which reflects reduced results from this activity as a result of lower expected burns [ph] at our own plants and overall reduced demand in the US Atlantic coast oil market.

Next, a $318 million decrease in the realized value of hedges principally due to a lower hedge percentage of our expected generation in 2010 as compared to 2009 and to higher power prices in 2010. Next, a $17 million decrease in contracted and capacity gross margins principally the result of a decrease in the PJM RPM capacity revenues for 2010 as compared to 2009. And finally, a $66 million decrease primarily due to an increase in operating and other expenses as a result of an increase in plant operating cost, primarily the result of installing the scrubbers on our Maryland asset and lower sales of excess emission allowances to third parties.

Turning now to slide 18, this slide addresses some of the key sensitivities regarding the guidance for 2009 and 2010 that we are providing today. NYMEX gas prices utilized in our guidance are as of April 14 and are $4.33 per MMBTU for the balance of 2009 and $5.99 per MMBTU for 2010. Based upon our unhedged adjusted EBITDA for 2009 and 2010, a $1 price move in natural gas will result in a change in adjusted EBITDA of approximately $6 million for the balance of ‘09 and $34 million for all of ‘10. Energy price changes due to heat rate movements of 500 BTUs per kilowatt hour will result in a change in adjusted EBITDA of approximately $7 million for the balance of 2009 and $34 million for 2010. The heat rates shown are 7 by 24 Pepco forward implied market heat rates as of April 14. And finally, a $1 price move of carbon credits will result in a change in adjusted EBITDA of approximately 5 million for the balance of 2009 and $9 million for all of 2010. This sensitivity is based on our hedge position and our view that power prices will increase as the cost of compliance with Reggie increases.

Turning to slide 19, this slide presents a breakdown of our projected capital expenditures for 2009 and 2010. Note that 2009 amounts include actual results through March 31. The total estimated cost for compliance with the Maryland Healthy Air Act remains, as Ed mentioned earlier, at $1.674 billion. Prior to this year, we have expended $997 million. Our normalized maintenance CapEx approximates a $100 million per year that is shown in the table is projected to be higher in 2009 and 2010 due to upgrades that will be timed in conjunction with the Maryland Healthy Air Act environmental retrofits. The table on this slide excludes funds related to potential Brownfield or Greenfield projects.

And with that, I will turn it back to Ed, who will wrap up and open up the call for your questions.

Ed Muller

Thanks, Jim. And I'm on page 20. The takeaways we see here are the following. Hedging as we said earlier has continued to cushion us in 2009 and somewhat in 2010 from the downdraft in commodity prices. The tightening supply and demand trends or its benefit incumbents are projected to continue, although the pace at which they are approaching equilibrium or imbalance rather has slowed. We remain on target to comply with the Maryland’s Healthy Air Act by the end of this year and we (inaudible) a strong balance sheet with adequate liquidity for our business.

Steve Himes

Sisilia, we will now take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question today comes from Neel Mitra with Simmons & Company.

Neel Mitra – Simmons & Company

Hi. I wanted to get a better understanding on your thought of capital allocation going forward, about 2 billion in cash, how are you looking at Brownfield development, distressed asset acquisitions or share debt repurchases and at this time, do you have any preferences towards allocating that cash among those buckets or timing regarding that?

Ed Muller

Well, good morning, Neel.

Neel Mitra – Simmons & Company

Good morning.

Ed Muller

We first have to look at how much cash we need in the business and we do that on the same basis that we have previously said we do, so looking at the outlook for the business, preserving our credit profile, maintaining adequate liquidity including for capital expenditures and maintaining sufficient working capital. And I think that has always been our view and it will continue to be our view and of course in the current environment, I think it’s very important that we continue to appear to this criteria rigorously which we do. And as to how we would use excess capital, your question is a good one, it is theoretical and it depends on what we see as the options in front of us and valuing each, and I can’t just grab and I don’t think it would be appropriate to grab and say, we prefer one to the other. We prefer to deliver the most value to the owners of this company and there we will make our decision.

Neel Mitra – Simmons & Company

Okay. And I also wanted to ask a general question on your thoughts on M&A in general. What do you see as some of the pros and cons of an IPP entering into a transaction at this point in creating value with the weak commodity in credit environment as well as the financing cost associated with change of control covenants on debt?

Ed Muller

Well, that’s a mouthful. I think overall that this is a sector in which there can be real benefit from consolidation and the reason for that is that the G&A will run each of the players [ph] in this sector is substantial, and so each of the players in this business could scale up its business without meaningfully increasing its G&A. So that tells you just a simple fact that if you have consolidation, you could have substantial G&A savings, so there is some value to be created there. And that’s on the positive side. There also would be operational synergies I am sure.

On the negatives, the financing markets are extremely difficult and anyone having to go and try and refinance or redo their financing in the market right now, which is the (inaudible) for obvious reasons, it’s hard if you can do it at all and if you can, it’s going to very expensive, so tremendous diminishing of value in doing so. And beyond that, I think there are all the usual issues that have people value themselves, every CEO worth his salt or her salt, including this one, always thinks that his stock is vastly undervalued and thinks that everybody else is overvalued and that is always the difficulty in finding a way to achieve the benefits the company’s consolidation.

Neel Mitra – Simmons & Company

Okay great, thank you very much.

Ed Muller

Fair enough.

Operator

And we will go next to Paul Patterson of Glenrock Associates.

Paul Patterson – Glenrock Associates

Good morning guys how were you?

Fine Paul. Good morning.

Paul Patterson – Glenrock Associates

I want to sort of touch basically once again on the sort of demand supply outlook, that you guys have adjusted here and sort of asked you what we have seen with respect to the newer guys who are basically now pretty factoring a large amount of demand response, and we are not really seeing that with respect to PJM, although if you look at the state policy to Maryland, New Jersey, and Pennsylvania they are pretty aggressive in terms of at least what their goals are. I don't know what they're going to achieve and I just was wondering if you sort of talk a little bit about that and how we should be thinking about that, you know New York versus PJM, versus these protections that are out there. And then renewables are willing, now they don't necessarily, you know particularly wind isn’t all that rely on them and say had some capacity value, how do you see that impacting you guys just from a margin perspective if we see some of these renewable growth come in, you know just because of the variable cost etcetera, could you give a little favor on that?

Ed Muller

Sure. Let me talk about the demand side of the management. I think Paul that sort of, it is easier as it is in many things to talk about it, then it is to be certain about what will actually be manifested and, you know we spend time as we think about this thinking about what will happen if the talk and the reliance on the talk doesn't turn into reality. I'm not certain to the answer, but we will need to see how things actually turn out and we will need to see how things turn out when the economy begins to tip upward and demand rises and the economic activity rises and people are more reluctant, certainly industrially to cut back. So, we are looking at it, we are pondering it, we think a lot, but I wouldn't pretend that we have great comfort in knowing exactly how this is going to play out. We think it is one of the big uncertainties out there.

On the renewable side what we are thinking about is the fact that most of the renewables, certainly solar and wind do not in most places have a 100% availability. Wind in California remember exactly but it is probably in the 10% [ph] range and it has this horrible pattern of being unavailable when it is hot at the peak time in the state, which means you need possible fuel backup for it, or you need some backup for it, but the reality is today that is possible to a backup you need peak in plan. So, we see this as just changing how the system is going to operate. But it will be very dependent on where you look at.

The wind runs, blows harder and more consistently in the upper mid-west for example then it does in California. So, you have to go market by market and look at it. We're not seeing a lot of this in our principal market in the mid-Atlantic and so right now it is just not much of a factor and we are thinking more about, what may or may not happen with the demand side management and to repeat what I have said before, you know, I have been in many meetings where people are saying things that I would call important to us that is they are saying this is where we should go, and there should be more demand side management and we're going to have it and it is a good thing to do.

But we all – those of us who have been in this industry a long time know that saying the words one thing and actually having to come home is another and it can look better when we are unfortunately in negative economic times are people are very cautious and industrial mode is down and even retail mode is down. Then when things start booming along and everybody – nobody wants to miss a minute and so on and people are feeling prosperous and they will pay their bill. So, I don't know the answer Paul, but I think it is all too easy to jump to a conclusion from hearing speeches and words and seeing policy statements. The facts are going to speak much more louder.

Paul Patterson – Glenrock Associates

So, I guess structurally than what I'm wondering is, why is New York and New England, like why are those reserve margins changing so much more than PJM and I guess what is the – is there something structurally there that's basically not allowing some of these aggressive programs in these states versus why I guess – what is causing the difference there in terms of a demand response being taken into account in that reserve margin?

Jim Iaco

Paul, I don't think it has anything to do with the fundamentals in the market. It is the fundamentals for those who have the responsibility to do the forecast and it reflects their judgment of what's going to happen. And forecasts, the forecast – without criticizing anyone because when we make forecast, we are also wrong, everybody making the forecast is wrong.

Paul Patterson – Glenrock Associates

Okay, so these are the forecasts of the ISO’s and they all necessarily reflect what your actual market outlook is, is that the way to take about it?

Jim Iaco

That is correct. What we do there is we assemble the data that we can obtain from the ISOs and we display it for you. We should not take those charts as reflecting our judgments and our forecast.

Paul Patterson – Glenrock Associates

Okay and then just finally contracting capacity in New York, you mentioned those, just recalling that $6 million difference in guidance on slide 16, could you just elaborate a little more on what that this? Sorry it is $4 million.

Ed Muller

Yes it is basically just generation assumptions for bull line, Paul.

Paul Patterson – Glenrock Associates

Okay. Thank you.

Operator

And we will go next to Robert Howard of Prospector Partners.

Robert Howard – Prospector Partners

Good morning

Ed Muller

Good morning Rob.

Robert Howard – Prospector Partners

I wanted to ask your CapEx forecast dropped a bit for ‘09, is that just sort of finding new ways to try to resolve a bit or is some of it maybe because there was less operating running assumptions during the year, wonder what the change is going on there?

Ed Muller

Rob the first part you broke up a little bit, could you just repeat that again, you were referring to the Maryland healthy Iraq expenditures?

Robert Howard – Prospector Partners

Just the CapEx in general. I think comparing the forecast from – for this call from the last call looks like you went down about $17 million.

Ed Muller

It is just timing. It's all timing.

Robert Howard – Prospector Partners

So you shifted some more things, some things as to the future a little bit?

Ed Muller

Yes that is correct.

Robert Howard – Prospector Partners

Okay. And then a little bit just about your hedging, you talked about adding some new hedges, just wondering a little bit out of your strategy you know in this low price – relatively low price environment, does that mean you are being a little less aggressive in setting new hedges than you might have been historically in the past?

Ed Muller

Well I think Rob – first notice that we added in out years and if you look at prices in the out years they are stronger than in the current period, reflecting expectations for economic recovery and thus – for example on gas prices, reflecting the fact that the number of drilling rigs in operation as commented on land rigs in the US or North America were down somewhere on 50%, the same is happening in the water, not at 50% but it to is declining. What we hedge for throughout on two basis is, it is our general strategy to hedge to mitigate the effects of commodity price swings and so that we can more appropriately manage our balance sheet, but when we look at it, we do so broadly speaking in two ways, one is we are – rig – our commercial judgments, and the commercial operations led by John O'Neal now, when do we think is the right time to go to the market. But the second is, in times like these where we have seen no prices we are looking at downside cases and liquidity cases and making sure that we can safely steam through anything in this environment that is out there and so we at times will hedge even beyond what we would normally do for pure commercial reasons. To make sure that we have absolutely protected ourselves and the balance sheet of this company going forward.

Robert Howard – Prospector Partners

Okay. Sounds like good thing to do. Well lastly just a mission sales increase, at least the revenue increase from that, does that, due to – were you selling more credits or more credits to higher price and sort of just wondering just sort of why the change is so big.

Ed Muller

John O'Neal.

John O'Neal

It is driven primarily by sales that we did very early in the year that is relatively high prices compared to where they are now. So with the combination of getting some sales off at higher prices and just the volume of sales, you know we frontloaded our activities relative to last year, did more earlier in this year.

Robert Howard – Prospector Partners

So, by the terms of, I guess the total volume of sales, you are not expecting to be much different than you had in the past?

John O’Neal

That is correct.

Robert Howard – Prospector Partners

Okay thank you.

Operator

And we will go next to Jeff Coviello of Duquesne Capital.

Jeff Coviello – Duquesne Capital

Hi good morning guys.

Ed Muller

Good morning Jeff, how are you?

Jeff Coviello – Duquesne Capital

I am all right. Ed a question, you mentioned, I think you mentioned earlier in the call that you might have sold some coal funds and that should have been in the cash flow, I just was wondering about how many, you know and then how that kind of rolled through the cash flow and I guess, thinking of the times are running a little less so your interest is getting high and that is probably why sold and I was wondering whether kind of your days of inventory was at the coal plants right now.

Jim Iaco

Hi Jeff this is Jim. I think you are referring to my comments on slide 12, where I talked about our adjusted net cash provided by operating activities?

Jeff Coviello – Duquesne Capital

Yes.

Jim Iaco

What happened in the quarter is – and when you look at – first quarter of ’09 compared to '08, we bought more inventory in the ,09 quarter, more coal inventory and of course prices were higher than they were in ‘08. So that was just a negative cash flow item in the quarter. The first quarter of ’09 compared to '08. So, we didn't sell any coal.

Jeff Coviello – Duquesne Capital

And it looks like you did some more hedging in ’11 and ’12 on the power side.

Jim Iaco

That is correct.

Jeff Coviello – Duquesne Capital

Okay. I was wondering on that MCS [ph] at recovery, how – the way I understand at is that money is going to go to kind of old creditors in the old equity and how could there be a tax liability to Maryland?

Ed Muller

A couple of things on this Jeff. And Paul Gillespie is here who heads our tax and if I get this wrong he will amplify that. So that everybody's on the same page, first we have a very thorough and detailed description of this in the 10-Q filed this morning. But to remind everyone and as Jim mentioned earlier, the activities of MC asset recovery or MCAR, Mirant Corporation Asset Recovery, are – while in the name of Mirant, do not – are not managed by us at all and there was, it was part of the plan of reorganization, under which the company emerged from bankruptcy that certain claims would be transferred to them MCAR would be pursued. And as part of that there are various arrangements made on how taxes would be handled. Paul would you want to –

Paul Gillespie

Although MCS recovery is independently managed, it is nevertheless part of Mirant for tax purposes. Thus, should any part of the recovery be considered taxable income included in Mirant’s taxable income. Under the plan of bankruptcy, Mirant would be responsible for the tax on the first 175 million net recoveries of $175 million.

Jeff Coviello – Duquesne Capital

Got it. Okay. I understand, okay guys thank you very much.

Ed Muller

Certainly.

Operator

And our next question comes from Brian Russo – Ladenburg Thalmann.

Brian Russo – Ladenburg Thalmann & Co.

Well good morning

Ed Muller

Good morning Brian.

Brian Russo – Ladenburg Thalmann & Co.

Could you maybe quantify the fuel management in prop training contributions to margins assumed in 2009 and 2010.

Bob Edgell

I don't know if I have that – I don’t have that, you know we have to get back to you on that Brian.

Brian Russo – Ladenburg Thalmann & Co.

Okay sure. And then is there any way to quantify the megawatt hours off decreased runtime at the base floor plans in the first quarter as a result of more efficient gas-fired generation displacing those megawatt hours?

Ed Miller

The answer is no. You know we are certainly sensitive to the fact that given the – where gas prices are that that can occur and probably is occurring somewhere out, but we haven't disclosed it, nor do we have frankly a precise number on it because you have got a lot of pieces moving around, you have demand overall, you got weather adjustments, you got how people are bidding their plans, you just got too many things going around to be able at this point to isolate that and we are not able to.

Brian Russo – Ladenburg Thalmann & Co.

Okay. Using the forward curves outlined in commodity assumptions outlined in your guidance, can we assume that the trends we have in the first quarter will continue to the remainder of the year, in terms of the base low generation volumes?

Bob Edgell

I will take that. I mean I would generally say, you know our forecast is going to be based on prior to the (inaudible) and see obviously the low price time to the year to show the seasons are in – you know April and May, so you would expect that gas prices are low, power prices are low, the co-units might not dispatch as much, so once you kind of get through the shoulders getting into some amounts, the coal units are going to dispatch what they most typically have because again gas is going to be on the margin on the total hours, the coal unit run times are not going to change too much and that same phenomena really flows off to the balance of the year.

Brian Russo – Ladenburg Thalmann & Co.

Got it. Thank you.

Operator

And we will go next to Carlos Rodriguez of Hartford Investment Management.

Carlos Rodriguez – Hartford Investment Management

Yes thanks for taking my call. Ed just looking at page 8 the reserve margins, I am just trying to understand, you know the – the foot note says that the reserve margins incorporate the latest ISO information, so we understand that these reserve margins or trends or outlook for – through 2013 are consistent with the ISOs?

Ed Muller

Yes.

Carlos Rodriguez – Hartford Investment Management

Okay and can you just assess for us the risk of increased transmission infrastructure build out in terms reducing that effective or excuse me increasing the effective reserve margin in PJM East from power coming from RGO [ph].

Ed Muller

The ISO knows as – that – as to what is proposed out that and assuming that just as it assumes and we are required to sort of assume in the various capacity options that occur as to when things will get built. You know if anything happens on transmission, it is – that it doesn't get built sooner. It gets built later just because of our position in all of the regulatory issues, litigation issues that arise every time somebody wants to deal in the transmission arena.

Carlos Rodriguez – Hartford Investment Management

So in terms of addressing the tightening reserve margin, which would be the easier solution in terms of remedying that, would it be increased transmission build out or would it be increased capacity build out within PJM East?

Ed Muller

Well as a general matter, thank you for the question, so I can get up on my high horse. Transmission doesn't create capacity, it just moves it around. So, in the long-term you do not solve a need for an electric generating generation by building transmission lines, you got to build generation and I think in PJM East you would accomplish a lot more by building generation and the generation would be there for a long time. You know by building transmission and if the transmission is effectively moving power, electricity from areas that are current surplus to current efficiency. If the surplus gets eaten up, then you got this transmission line however we got to pay for forever that it isn’t really declining. It may help you to reliability and how you operate systems.

So, in terms of system planning, the right thing to do I think for PJM East, is you got to add capacity. Having said that I will disclose that that's how I will do in the current environment in addition to the normal (inaudible) it is – the meaningful capacity that can be added anytime soon is powerful fuel base and there are concerns about the climate for sound activation were heavily focused on coal, gas is a fossil fuel and accepted wisdom is that it contributes for a unit of electrical output at least half of the greenhouse gases that coal contributed. So, as we see a society across the globe to deal with this, the opposition is profound.

Carlos Rodriguez – Hartford Investment Management

Thanks very much.

Operator

We will go next to Lasan Johong of RBC Capital Markets.

Lasan Johong – RBC Capital Markets

Thank you. I am kind of curious about your views on forward-looking power and commodity prices in general, it looks like, you sound like you are very bullish. Is there an opportunity for Mirant at some point if we start to see very precipitously low gas prices is there a chance of opportunity that you would think about monetizing some of your hedges and then riding the rebound in commoditizers backup and then maybe capturing the same move twice if you would?

Ed Muller

Well a couple of things and good morning. First, I wouldn't accept the characterization of being bullish. I think the trend lines are going to – are upward, given reserve margins, given the fact that the drilling activity for natural gas has fallen precipitously, but it presides to many things here and I think it is the always dangerous for anyone to think that they are smarter in the market and I certainly do not think that we are. We are stood and observing the market and participating it, but thinking we are not smarter than it is dangerous. I think overall the trend lines are positive and how we manage the commercial position and how we manage the hedge is designed to maximize and we do put positions on and take positions of some time to time, but beyond telling you that I don't say you would be appropriate to tell how we respond because first, we would always be assessing a host of factors at a given time, including how we see our exposure for our balance sheet, but also what we think is occurring in the market and what our various sophisticated commercial group thinks make sense at the time. So, I think it is very hard to give you a role of torment. And say we will do this or that in a given circumstance.

Lasan Johong – RBC Capital Markets

Okay then let me get a little bit more specifics, I'm looking at your page 7 presentation and obviously the one thing that kind of sticks out of the stocks is probably the fact that you are way over hedged on your field relative to your power in ‘11 and completely the opposite in ’13, so my first thing seems to say perhaps you're doing some sort of a struggle or timing hedge between ‘11 and ‘13 and that at some point before you get to probably the beginning of ‘11 that these would eventually even itself out. Is that a correct viewpoint, or is it just a naked bet on fuel or – and/or power in ’11 and ‘13.

Ed Muller

Well a couple of things. First, as in the past and as people say in the future we don't comment on the specifics of our hedges other than to show you where we are as a percentage of what we expect to occur. Second, as we have said before and as I expect would be the case, the purchasing particularly of coal tends by us to be somewhat lumpy – and that we go to the market, we tested and periodically when we think it is appropriate we buy but we often do multi-year buys. So when we do that we certainly are – it won’t look like, we have more coal and we have power locked in and this will move from time to time, but as you can see particularly if you look at 2009 and 2010 they inevitably will even out, but I wouldn't draw more from how these charges will look and that is the way that we have operated the business and the way we will continue to operate the business.

Lasan Johong – RBC Capital Markets

So basically what you see is what you get, there is no sophistication behind what is going on here rather than to say that timing of the coal purchases versus hedging of power is going to be a little different?

Ed Muller

That is a lot of sophistication going on –

Lasan Johong – RBC Capital Markets

No, I didn't mean that.

Ed Muller

But we are not prepared to do – particularly as we are in the market on every day and every hour just to save more than that.

Lasan Johong – RBC Capital Markets

Okay thank you.

Operator

And we will go next to Carlos [ph] of Citi [ph]

Brian Chin – Citi

Hi it's Brian Chin [ph].

Ed Muller

Hi Brian.

Brian Chin – Citi

Hi good morning. I'm sorry if you had mentioned this earlier, I missed the first part of the call, how am I to read a fairly large number of management turnover issues here that I can't help but wonder if this was (inaudible) something larger, can you comment on that?

Ed Muller

Absolutely, it is not a (inaudible) anything larger it is a result of our being very blessed. And we have been blessed with a lot of talent and are blessed with a lot of talent at the upper ranks of the company and given the size of the company now and what our operations are. The senior team, the current senior team and I have realized that we have more talent at the top of this company than we need and so we are as a result of that realigning it to – if you will come to have the right quantity of senior talent prior to the company and there's nothing more to it in that, we have terrific people who will be retiring and we have terrific people who will be assisting me in leading this company.

Brian Chin – Citi

So, this joint decision was taken unanimously by everybody involved?

Ed Muller

That is correct.

Brian Chin – Citi

Okay al right and then I got one other question on the reserve margins numbers that you guys have, you know you look at the PJM East numbers and PJM itself didn't break out any portion of PJM East during the last March and being really great and the numbers came out well below in that curve as well as (inaudible) and then for 2012, 2013, from my conversations with a number of different investors, it seems like, I'm going to venture here that the general consensus for this RPM closing today somewhere around the 110 mark, which is pretty flat with last year and doesn't seem to imply a fairly tight reserve margin out anywhere in PJM East. So, how do we square that RPM results that we have seen so far for 2011 and 2012, and what I would say is investor expectations for the next auction versus your forecast for PJM East, which suggest things are pretty high.

Ed Muller

First, we are looking at here some of the years and people, again as I said earlier this is a forecast, the bidding process for the current auction is underway through today as I recall, and it would be highly inappropriate for us to comment on our thinking on something that is currently being bid and will probably violate some rules somewhere or another and we are not going to violate them. So, let me say this and then I will have John O'Neal can augment as appropriate. We take the data and we are doing our best here on what is slide eight, tell you what we are seeing out there.

We have people to see it once they are forecasting on a variety of factors – often is different, you know we have to go back from it’s a natural gas prices on the either term gas has gone up the last two days quite significantly, probably up over $0.25 a million BTU, we now have storage that’s been going up as well and you might say that is countercyclical. What people are estimating what they think is going to happen, that’s going to happen in the economy, there are lot of people beyond just hard fax who are forecasting and that is – as it ought to be and that is appropriate.

Brian Chin – Citi

Okay. Thank you.

Operator

And we will go next to Barry Koperberg [ph], Tology Capital [ph].

Barry Koperberg – Tology Capital

Hi, Ed. I am trying to understand something if you could explain a little bit the reduction in 2010 guidance in light of a couple of factors. Your results should be positively correlated with power and natural gas, and just from early in the presentation you said that since February both of those are up and coal prices are down, and yet 2010 EBITDA is directionally down by about 10% or so. Can you just speak about that?

Bob Edgell

Yes, let me take it and then John you should augment what happened post April 14. First of all, our guidance – we use commodity price curves as of April 14, so when you look at April 14 as compared to the curves we used for previous guidance which I believe –

John O'Neal

February 10.

Bob Edgell

Thank you everybody. February 10, prices are down, we have had just general decline – in that timeframe between February 10 and April 14, prices were down. Now since April 14, prices have moved up and that was what was Ed was commenting on slide six, he was giving you a current perspective on the market as we sit here today, not as of April 14 whereas our guidance reflects what the market reflected on April 14, not today.

Barry Koperberg – Tology Capital

So, the presentation itself is inconsistent.

Bob Edgell

Inconsistent is a word I don’t like, but we have this so that everyone understands, when we give guidance, this is a very careful process with many checks and balances, and so we need to have a cut off day and when we give you market information it is more current and so you have almost a two week swing in there. I wouldn’t call inconsistent, we are trying to be as accurate and as complete as we can be, but if we try to give guidance on data that is only a few days old, we could not do so in a manner that we would find ourselves comfortable with and rigorously.

Barry Koperberg – Tology Capital

Fair enough. But I am not trying to trap you into a statement, but I guess just more trying to understand the trends as you look at in 2010, would it be fair then to say the 2010 directionally based on where prices are today would actually be up rather than down.

Bob Edgell

Here is what we do, remember, we gave you sensitivity. Now, when we give guidance it is not simple enough to simply grab business out, so everything moves because we are looking at a variety of factors and that is why the process needs a cut off day because many factors come into what’s going to occur including for example our outage schedule which we don’t disclose for competitive reasons. So a lot is going on that goes into guidance if you would say, everything else is fun, which is what we do when we give you those sensitivity. So, if you wish to assume, everything else is constant and you can take the gas price and you can adjust the guidance, but I will tell you that if we are doing it and we do, do this, we don’t assume everything else is constant because everything is moving, which is why it takes us a very serious and rigorous effort to get it nailed down for having dates there.

Barry Koperberg – Tology Capital

Okay, that’s helpful. Thank you.

Operator

And with no further questions in queue, I would like to turn the conference back over to Mr. Steve Himes for any additional or concluding comments.

Steve Himes

We just want to thank everyone for joining us today and thanks for your interest in Mirant, if you have further questions, we will be available later on. Thank you.

Operator

That does conclude today's conference ladies and gentlemen. We appreciate everyone’s participation today.

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Source: Mirant Corporation Q1 2009 Earnings Call Transcript
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