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Steve Himes – IR

Ed Muller – Chairman and CEO

J. William Holden, III - CFO

John O'Neal – Chief Commercial Officer

Paul Gillespie – SVP, Tax


Lasan Johong - RBC Capital Markets

Brian Russo - Ladenburg Thalmann & Co.

Gregg Orrill - Barclays Capital

Neel Mitra – Simmons & Company

Robert Howard – Prospector Partners

Brian Chin - Citigroup

Paul Patterson - Glenrock Associates

Mirant Corporation (MIR) Q2 2009 Earnings Call August 7, 2009 9:00 AM ET


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

For opening remarks and introductions I'd like to turn the call over to Steve Himes, Director or Investor Relations. Please go ahead.

Steve Himes

Thank you, [Audrey]. Good morning, everyone, and thank you for joining us today for Mirant's second quarter 2009 earnings call.

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

Speaking today will be Ed Muller, Mirant's Chairman and Chief Executive Officer, and Bill Holden, Mirant's Chief Financial Officer. Also in the room [break in audio] available to answer questions are John O'Neal, Mirant's Chief Commercial Officer, Paul Gillespie, our SVP of Tax, and Gary Garcia, Mirant's Treasurer.

Moving to Slide 1, the safe harbor, during the call we will make forward-looking statements which are subject to risks and uncertainties. Factors that could cause the actual results to differ materially from management's projections or estimates or 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 will turn the call over to Ed Muller.

Ed Muller

Thanks, Steve, and good morning, everyone. I'll try and remember to tell you what page I'm on as I move forward, and I'll start on Page 3 with the highlights.

As we said the last time we spoke in May, our hedging strategy continues to mitigate the effects of volatile commodity prices in this environment, downward-moving prices. And as a result of that and how this company is structured, we continue to have a strong balance sheet with adequate liquidity for our business.

Moving to Page 4 and the results for the second quarter and first six months, for the quarter, as you can see, our adjusted EBITDA of $200 million for the second quarter of 2009 is up 40% over the same quarter last year. And for the six months, our adjusted EBITDA of $395 million is up 12% over the first half last year.

The change is attributable to the following and the factors are listed on Page 4, which is higher realized value from our hedges and lower operations and maintenance costs offset by lower energy gross margins, pretty much what you would expect in a marketplace where prices have been falling. And we are a company that has had and continues to have and will continue to have as our strategy hedging forward.

The lower O&M costs come from a variety of factors but include as significant factors that in the first half of 2008 we took planned outages to connect up the SCRs at some of our coal plants in Maryland, which is part of our program for complying with the Maryland Healthy Air Act. Also in 2008 in April we closed down permanently the Lovett station in New York.

Moving to Page 5, an update on guidance, Bill Holden later will provide much more detail. As to 2009 we are affirming exactly the same guidance we gave in May - $873 million of adjusted EBITDA for the year. For 2010 we are reducing guidance from the $609 million we provided in May to $570 million.

And these changes, which Bill will walk through, really flow directly from the factors that we listed in May and we list here, which is how adjusted EBITDA for the company is likely to change with movements in commodity prices. So that is if you take the $609 million and you look at the changes there, you will come quite easily to the $570 million and this is reflecting what's occurring in the market.

Our updated guidance for both years reflects lower energy gross margins - again, no surprise - partially offset by higher realized value of hedges. For 2009 it also reflects that we are having a particularly good year in our proprietary trading activities, where we're having higher gross margins without having changed one iota of what our risk parameters are.

Turning to Page 6, a chart we have provided each time and will continue to provide, which is where we stand on our hedges. And you'll see some increases. Those are the shaded areas at the tops of the columns. And those increases in hedges flow from two factors. One is we have added hedges in a variety of instances consistent with our approach, and second when our forecasted expected generation goes down our hedge level goes up without our doing anything else. So we have a combination of both factors there on Page 6.

On Page 7, an update on the market, our business since May of 2009. I'll summarize it this way: Gas prices are down. Power prices are down as well, but more than gas. Coal is relatively flat. And the result of all that is for us dark spreads have contracted. And that is true for the near term 2009 and 2010 and for the longer term, 2011 through 2013.

Page 8 is a chart we have not provided previously, but it is to address what is going on in the marketplace given the economic conditions in which the nation finds itself. This is a comparison of second quarter real-time average hourly demand in the Mid-Atlantic region of PJM, which is our major market. The blue bars reflect actual demand. The orange bars reflect that demand adjusted based on the weather for the second quarter of 2009.

And what this shows when you cut to the chase, no great surprise, is that up until the economy went into deep recession demand was growing on a weather-adjusted basis about 1.8% annually, which is consistent with historic norms. 2009 - and this is true on peak and off peak - has fallen here, as we're showing it, about 6.5% compared to 2008.

We attribute this completely to overall economic activity, particularly because we see the comparable numbers at the off-peak level. We expect that when the economy rebounds that we will see this start to turn around.

Page 9, a chart we've showing you in the past, unchanged from our May chart, which shows where we're taking data from the various markets and doing our own analysis, the reserve margins, and we continue to see in PJM East, which is the market that it is most significant for us here, that by 2011, which is not that far off, that we see that these markets are going to go into imbalance, that is, that they are going to fall below acceptable reserve margins. That has been true and that remains true. The only thing that has changed is that this imbalance is somewhat delayed given the economic conditions we are in. But the trend remains inexorably the same.

Page 10, an update on our very large capital program in Maryland to comply with the Maryland Healthy Air Act. We remain on budget and on schedule. And through nearly the end of July we have paid out $1.268 billion of the $1.674 billion we will be expending on this project, and we expect it to be completed this year.

And with that, turning to Page 11, I'll turn this over to Bill Holden.

J. William Holden, III

Thank you, Ed. Good morning.

As shown on Slide 11, adjusted EBITDA for the second quarter of 2009 was $200 million as compared to $143 million for the same period in 2008 and $395 million for the first six months of 2009 as compared to $354 million for the first half of 2008. The increases in adjusted EBITDA for both the second quarter and the year-to-date periods were principally the result of higher realized gross margins and lower operations and maintenance expenses. I'll cover realized gross margin in more detail on the next slide.

Adjusted income from continuing operations, which is adjusted EBITDA less interest, taxes, depreciation and amortization, was $131 million for the second quarter and $246 million for the year-to-date as compared to $66 million for the second quarter of 2008 and $224 million for the first half of last year.

The most notable items that bridge adjusted income from continuing operations to income from continuing operations - a GAAP measure - are unrealized gains or losses on derivatives and bankruptcy charges and legal contingencies.

Unrealized losses on derivatives were $14 million for the second quarter as compared to net unrealized losses of $874 million for the same period last year. For the year-to-date we had net unrealized gains of $240 million as compared to unrealized losses of $1.177 billion for the first half of last year.

Bankruptcy charges and legal contingencies for the quarter and the year-to-date include $62 million related to the MC Asset Recovery settlement with Southern Company. This amount includes $52 million as reimbursement for funds previously provided to MC Asset Recovery and the reversal of a $10 million accrual for future funding to MC Asset Recovery.

Our average share count is lower in the 2009 period as compared to the 2008 period principally because of share repurchases.

And finally, our earnings per share based on adjusted income from continuing operations increased to $0.90 per share for the second quarter of 2009 from $0.29 per share for the second quarter of 2008 and increased to $1.70 per share for the first half of 2009 or $0.97 per share for the same period last year.

Turning to Slide 12, this slide presents the components of the company's realized gross margin for the second quarter of 2009 and the six months ended June 30, 2009 as well as the comparable periods for 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 in fuel oil management activities. The decrease of $131 million for the quarter and the decrease of $219 million for the year-to-date were the result of lower energy gross margins from our generating facilities, reflecting a decrease in power prices and an increase in the cost of emissions allowances. The lower energy gross margins from our generating facilities were partially offset by an increase in the realized gross margins from our proprietary trading and fuel oil management activities.

Contracted and capacity, the dark blue bar, represents gross margin received from capacity sold in ISO and RTO-administered capacity markets through [our MAR] contracts, through tolling agreements and from ancillary services. The $5 million increase for the quarter resulted from higher capacity prices in the mid-Atlantic. The $9 million increase for the year-to-date resulted from higher capacity prices in the mid-Atlantic region, partially offset by lower-capacity revenue in the Northeast and California.

And finally, realized value of hedges, the yellow bar, was up $171 million for the quarter and was up by $243 million for the year-to-date. These amounts reflect the actual margin upon settlement of our power and fuel hedging contracts and the difference between market prices and contract costs for coal that we have purchased under long-term contract. 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 to Slide 13, this slide presents cash flow information for the second quarter of 2009 and the six months ended June 30, 2009 and for the same periods last year. The increases in cash provided by operating activities result from a number of factors, including decreases in collateral posted with counterparties that resulted from decreases in forward energy prices. Other significant items include higher realized gross margins, lower working capital requirements as a result of lower power prices and the implementation of weekly settlements with PJM, and the case received from the MC Asset Recovery settlement.

Adjusting for the cash received from the MC Asset Recovery settlement, proceeds for the sales of emission allowances and capitalized interest arrives at adjusted net cash provided by operating activities of $83 million for the quarter and $364 million for the year-to-date. Reducing these amounts for total capital expenditures results in an adjust free cash flow deficit of $93 million for the quarter and adjusted free cash flow of $19 million for the first six months of 2009.

Our Maryland Healthy Air Act capital expenditures, which are nonrecurring 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 the expenditures related to the Maryland Healthy Air Act. Accordingly, adding back actual expenditures under that program results in adjusted free cash flow of $33 million or $0.23 per share for the second quarter of 2009 and $267 million or $1.84 per share for the 2009 year-to-date period.

Turning to Page 14, this slide presents our debt and liquidity as of June 30, 2009. Consolidated debt was $2.635 billion at June 30th, a $2 million reduction from consolidated debt at March 31, 2009.

Total cash and cash equivalents was $1.865 billion. Within this amount cash balances at Mirant North America and its subsidiaries at June 30, 2009 of $423 million are currently unavailable to Mirant Corporation because of the free cash flow requirements under the restricted payments test of Mirant North America's senior credit facility. The primary item lowering the free cash flow calculation in the restricted payments test is the significant capital expenditure program of Mirant Mid-Atlantic related to the Maryland Healthy Air Act.

We did not expect the effect of the restriction on distributions to be material given that the majority of our liquidity needs arises from the activities of Mirant North America and its subsidiaries. The restriction does not limit Mirant North America from making distributions to Mirant Americas Generation to fund interest payments on its senior notes, and the majority of our total cash and cash equivalents are held unrestricted at Mirant Corporation. Further, we are in compliance with the financial ratio covenants and, based on our guidance for 2010, we will remain in compliance.

Also included in total cash and cash equivalents was $52 million related to the MC Asset Recovery settlement with Southern Company that was unavailable for distribution to Mirant Corporation and shown as restricted at June 30, 2009. This amount became available and was transferred to Mirant Corporation on July 15.

And finally, our total availability including amounts available under the Mirant North America revolver and synthetic LC facility was $2.418 billion.

Turning to Slide 15, as Ed mentioned previously, we are affirming our adjusted EBITDA guidance for 2009 at $873 million and reducing our adjusted EBITDA guidance for 2010 to $570 million, all based on forward market prices as of July 14, 2009. Deducting projected net interest expenditures and income taxes paid or refunded, and factoring in projected changes in working capital, adjusted net cash provided by operating activities is projected to be $624 million for 2009 and $393 million for 2010.

I will note here that we do not expect to owe any taxes related to the MC Asset Recovery settlement with Southern Company.

Reducing adjusted net cash provided by operating activities by projected capital expenditures of $726 million and $437 million for 2009 and 2010, respectively, derives an adjusted free cash flow deficit of $102 million for 2009 and an adjusted free cash flow deficit of $44 million for 2010.

Adding back the Maryland Healthy Air Act expenditures for 2009 and 2010 - which, as I stated earlier, are nonrecurring in nature and will be funded by existing cash - results in adjusted free cash flow without the Maryland Healthy Air Act CapEx of $388 million for 2009 and $143 million for 2010. Based on our closing stock price and diluted share count as of August 4th, the adjusted free cash flow yield without the Maryland Healthy Air Act CapEx is 14.5% for 2009 and 5.3% for 2010.

Our hedged adjusted gross margin for 2009 is $1.363 billion or 89% of our projected realized gross margin. For 2010 our hedged adjusted gross margin is $1.046 billion or 82% of our projected realized gross margin. Hedged adjusted gross margin is defined as hedged merchant and contracted and capacity, which would include reliability must-run agreements and capacity sold in ISO and RTO-administered capacity markets.

And finally, hedge adjusted EBITDA, which is defined as hedged adjusted gross margin less projected operating and other expenses, is $708 million or 81% of our projected adjusted EBITDA for 2009 and $336 million or 59% of our projected adjusted EBITDA for 2010.

Turning to Slide 16, this slide presents the components of adjusted gross margin included in our guidance for 2009 and 2010. Adjusted gross margin is projected to decrease from $1.528 billion in 2009 to $1.28 billion in 2010. The $248 million decrease is principally the result of a $333 million decrease in realized value of hedges and a $17 million decrease in contracted and capacity partially offset by a $102 million increase in energy realized gross margins. I will discuss this in more detail on Slide 18.

Turning to Slide 17, this slide presents a comparison of our guidance for 2009 and 2010 given on May 8, 2009 to the update being provided today. For 2009 adjusted EBITDA guidance is unchanged at $873 million. While our 2009 guidance is unchanged, a number of the components of our adjusted EBITDA guidance are different. The changes are comprised of the following:

First, $124 million decrease in energy gross margin, principally related to three factors - a $153 million decrease resulting from market prices and generation changes and a $4 million decrease related to expected results from fuel oil management, partially offset by a $33 million increase in expected results from proprietary trading activity.

Next, a $122 million increase in the realized value of hedges as a result of lower power prices partially offset by lower coal prices.

Third, a $6 million reduction in contracted and capacity revenues.

And finally, an $8 million decrease in operating and other expenses.

For 2010, adjusted EBITDA is projected to be $570 million, a decrease of $39 million from the guidance given on May 8th. The change is comprised of the following items:

First, a $159 million decrease in energy gross margin principally because of a $157 million decrease from market price and generation changes, together with a $1 million increase in expected results from fuel oil management and a $3 million decrease in expected results from proprietary trading activities.

Second, a $107 million increase in the realized value of hedges as a result of lower power prices.

Third, a $6 million increase in contracted and capacity revenues.

And finally, a $19 million decrease in operating and other expenses.

Turning to Slide 18, this slide presents a bridge from our 2009 guidance to our 2010 guidance. Our 2010 guidance is $303 million lower than our 2009 guidance. This decrease is comprised of the following:

First, a $102 million increase in energy gross margins principally related to a $160 million increase in market price and generation changes primarily related to higher power prices partially offset by increases in coal prices and a $7 million increase in commercial availability partially offset by a $22 million decrease in expected results from fuel oil management and a $43 million decrease in projected results from proprietary trading.

Second, a $333 million decrease in the realized value of hedges principally due to a lower hedged percentage of our expected generation in 2010 as compared to 2009 and to higher market prices for power in 2010. Our hedges were also executed at higher prices for 2009 as compared to 2010.

Third, a $17 million decrease in contracted and capacity gross margin, principally as a result of a decrease in PJM RPM capacity revenues.

And finally, a $55 million decrease primarily related to an increase in operating and other expenses as a result of an increase in plant operating costs principally related to operating the scrubbers on our Maryland plant and lower projected sales of emissions allowances to third parties in 2010.

Slide 19 addresses some of the key sensitivities regarding the guidance for 2009 and 2010 that we are providing today. NYMEX gas prices used in our guidance are as of July 14th and are $4.07 per million BTUs for the balance of 2009 and $5.66 per million BTU for 2010.

Based on our hedge position for 2009, a $1 per million BTU change in natural gas prices will not change our projected adjusted EBITDA for the balance of 2009. Based on our unhedged adjusted EBITDA for 2010, a $1 price move in natural gas will result in a change in adjusted EBITDA of approximately $15 million for 2010.

Energy price changes due to heat rate movements of 500 BTU per kilowatt hour will result in a change of adjusted EBITDA of approximately $1 million for the balance of 2009 and $19 million for next year. The heat rates shown are 7x24 Pepco forward implied market heat rates as of July 14th.

And finally, a $1 move in the price of carbon credits to comply with RGGI will result in a change of adjusted EBITDA of approximately $3 million for the balance of 2009 and $11 million for 2010. This sensitivity is based on our hedged position and our view that power prices will increase as the cost of complying with RGGI increases.

Turning to Slide 20, this slide presents a breakdown of our projected capital expenditures for 2009 and 2010. Note that the 2009 amounts include actual results through June 30. The total estimated cost for compliance with the Maryland Healthy Air Act remains at $1.674 billion. Prior to this year we'd expended $997 million. Other environmental expenditures include $34 million deposited into escrow in the third quarter of 2008 that is expected to be spent between 2009 and 2011 for control of small dust particles pursuant to the Potomac River settlement.

Our normalized maintenance CapEx is approximately $100 million per year, but as shown on the [break in audio] it's projected to be higher in 2009 and 2010 because of upgrades that will be timed in conjunction with the Maryland Healthy Air Act environmental retrofits.

Finally, I note that the table in this slide excludes any potential capital expenditures related to brownfield or greenfield projects.

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


Ed Muller

Thanks, Bill. I'm on Page 21.

In summary, hedging has continued to cushion Mirant, particularly this year, in '09, and somewhat next year from the effect of falling commodity prices.

The supply and demand imbalance, which we've been forecasting to come, we continue to see coming, although at a slower pace than previously projected in light of the decline in economic activity in the nation.

We remain on target to comply with Maryland's Healthy Air Act by January 1, as required, and we are on our budget for doing that.

And, finally, we continue to have a strong balance sheet, with adequate and appropriate liquidity for our business.

And with that, we're ready for questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Lasan Johong - RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Very interesting from the perspective of the prop trading thing that you guys are doing. It sounds like it's starting to become a major focus for you guys. I wanted to see what kind of risks - I don't if that's the best way to put - but what kind of risks you're taking, what kind of VARs you are trading around. And, related to that, in 2010 guidance are you assuming zero in your EBITDA for prop trading?

Ed Muller

All right, let me see if I can take this and answer your questions.

First of all, let me repeat - we have a variety of risk controls that have been and remain in place, and we have not altered them at all. We've just had very good performance within the same risk criteria that we have set.

We expect prop trading in '10 to be profitable and to continue, just not as profitable as this year. This year is just particularly good.

And I think in general I've covered your questions. I think we describe our VAR in the 10-Q, don't we, Bill or Gary?

J. William Holden, III

We describe how we use it. I don't think we actually include that.

Ed Muller

That's fine. But we have not changed it. It was just a very good performance.

Lasan Johong - RBC Capital Markets

Demand was down, you said. Was it straight across the board or was there a specific sector, such as the industrial, that had kind of a high concentration of impact?

Ed Muller

Well, remember, we are not a utility; we are a wholesale generator. We deliver the power. And so we rely on what the regional transmission organizations tell us. And so we don't know. But given what we're seeing in general across the country, I suspect you've got a big chunk of this that is industrial. And I note that it is down in the off peak, so any notions that it's coming, for example, from demand-side management and so on, I think, would be false.


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

Brian Russo - Ladenburg Thalmann & Co.

It looks like your base load generation volumes were up quite significantly, both in the Mid-Atlantic and the Northeast. Could you just kind of break that down? How much of the increase was attributable to the absence of outages and then what can be attributed just to performance?

Ed Muller

I think the biggest factor is the outages that we took on a planned basis to tie in the SCRs, which control nox emissions.

Brian Russo - Ladenburg Thalmann & Co.

And when we look at 2010, are you assuming an increase in generation volumes or something consistent with 2009?

J. William Holden, III

They're probably going to be very consistent with what we're seeing in 2009. Our expected generation, we don't calculate our expected generation independent of where power prices are, but power prices generally are higher for next year than what we're seeing for this year. But I would expect that on balance generation volumes should be pretty similar next year.

Brian Russo - Ladenburg Thalmann & Co.

And then any comments on once-through cooling potential regulation in California and how that might impact any recontracting of your [inaudible] out there?

Ed Muller

Well, this comment: We, like everyone else who has one-through cooling, recognize the wish of many people to get off once-through cooling and we take that into account in our planning and our thinking. And as we assess it, we think about what is economic and what is not economic, but beyond that I'm not prepared to go right now.


Your next question comes from Gregg Orrill - Barclays Capital.

Gregg Orrill - Barclays Capital

One of the items of guidance you call out is fuel oil management. Could you remind us of what the assets you have there are and how you manage that, kind of what you're looking for 2010?

Ed Muller

Sure. John, do you want to take this?

John O'Neal

Yes. Gregg, we own plants in the Mid-Atlantic and in New York and in New England at Chalk Point, Bowline and Canal, respectively, that all burn six oil. And at all those locations we have storage as well, and in addition to that we have some third-party storage that we contract for in the Mid-Atlantic also.

And so that system, the combination of that stored capability plus the expected burns from our generation at those oil-burning plants, comprises our fuel oil management activities. So, again, in total it's about 2.5 or 3 million barrels of storage. And we manage that as a system, so we'll put the oil in tankage and then we will put on hedges against that and just try to optimize that system over time.

It's a relatively small piece of our activity. You can see the changes period-over-period are relatively small and we're not forecasting a lot of change on that going forward.

J. William Holden, III

The only thing I would add is that included in the 2009 guidance relative to 2010 are some inventory hedges on fuel oil that will settle this year and increase gross margin relative to next year.

Gregg Orrill - Barclays Capital

Are you willing to disclose what you're looking for in guidance for 2010 as opposed to year-over-year?

J. William Holden, III

No, I don't think we've broken that out in the past.

Gregg Orrill - Barclays Capital

I also wanted to ask about what you're seeing in terms of the basis for power prices in your Mid-Atlantic region versus PJM West.

Ed Muller

It's obviously, Gregg, been a lot lower this year than what we've seen in previous years. That's driven by a couple factors, I would say. One is lower overall economic activity, which has meant there's been lower demand on the east side of the system relative to other parts of PJM. And then the second factor would just be lower overall fuel prices, so as fuel prices come down - to the extent you need higher-cost generation on the eastern side of the system, that generation is relatively cheaper than last year because fuel prices are lower.

So the combination of those two events has caused the basis to contract quite considerably here in the catch market.

Gregg Orrill - Barclays Capital

Can you quantify what that is?

Ed Muller

You mean in what way - dollars per megawatt hour?

Gregg Orrill - Barclays Capital

Yes. What are you seeing on a forward basis?

Ed Muller

Well, on a forward basis I don't have those numbers right in front of me. We're seeing basis at Pepco these days, it might clear $3 - $4 a megawatt hour on an on-peak basis, higher than the West hub. On a forward basis if we'd sat back last year and looked at summer of 2009 it might have been as high as $15 a megawatt hour. So it's definitely come in quite considerably here in the cash months compared to where people expect it to be.

We seek to hedge a lot of that basis risk away. Through the market we're able to hedge a lot of our basis exposure away, so we obviously don't have a lot of that rolling into the cash market because we've hedged a lot of that away.


Your next question comes from Neel Mitra – Simmons & Company.

Neel Mitra – Simmons & Company

I just had a follow up question regarding the basis between the Pepco zone and PJM West. How far do you typically hedge that in advance? I know you roll out five years sometimes. I know PJM East isn't as liquid of a market. But how much have you managed for 2010 now that the basis has come down so much in the spot markets in 2009?

John O'Neal

I don't think we've ever disclosed - obviously, for competitive reasons - our specific hedge percentage as it relates to the basis. I will say that we've hedged a substantial portion of the 2010 amount without being any more specific than that.

As it relates to our hedging strategy in general with that, as you know, that market's a lot less liquid than the West hub. And we're typically reliant on things like the SOS auctions or the BGS auctions in New Jersey, where people actually get short that position and look to hedge it, and so those SOS auctions typically go out two to two and a half years.

So with that in mind that's how we kind of think about the tenor of hedging that we do around our basis, out about two, two and a half years.

Neel Mitra - Simmons & Company

So you were able to hedge 2010 basis before it came down pretty rapidly?

Ed Muller

I know you'd like the answer, but we don't go into when we put our hedges on and at what price. You can assume our strategy, as we have said, is that we hedge and we hedge regularly. And as John has indicated, we are substantially hedged on the basis through '10.

Neel Mitra - Simmons & Company

And of the lower guided Pepco heat rate for 2010 from the last earnings presentation, how much of that is due to PJM West's heat rates coming down versus the basis to Pepco coming down?

J. William Holden, III

I haven't broken that out, Neel, to look at the specific parts. I mean, the heat rates are down at the West hub as well as being down at the Pepco zone, so it's some combination of both, I'm sure.


Your next question comes from Robert Howard – Prospector Partners.

Robert Howard – Prospector Partners

Just wondering, cash balance, you've got a lot of cash now and that required CapEx spend is gradually working its way down. I was just sort of wondering what your thoughts were on what happens if that continues to get smaller and what you're looking at?

J. William Holden, III

We continue to look at it within the same framework that we've described and by that I mean we look at a handful of criteria which include the outlook for the business based on current commodity price levels and preserving the credit profile of the business.

We also, though, look at potential downside case scenarios and we set our cash balances to ensure that we can maintain adequate liquidity for the business in that type of environment, including CapEx and other obligations that we see within the planning horizon.

And then we also have to maintain liquidity for working capital requirements that would arise in the event of price spikes.

As we sit here today I think we're comfortable with our cash balances; we think we have adequate liquidity for the business. As we move through time and we get some of the Maryland Healthy Air Act capital expenditures behind us, I would anticipate we probably wouldn't need to hold the same level of cash balances that we do today.

Robert Howard - Prospector Partners

And also, with the performance of the prop trading - don't want to pound on this too much - was it the improvement from new trades that were entered in in the quarter or were sort of existing trades, kind of something happened that gave you a nice bump up, that kind of came in better than expected or something?

Ed Muller

The answer's yes. It's a variety of factors. You should not expect this and think of this as one trade hiding out there that explains all this; it's a variety of things that will realize this year.


Your next question comes from Brian Chin - Citigroup.

Brian Chin - Citigroup

A question on the 2010 guidance. I see the production estimates in the appendix in the back, the expected levels of generation. If I compare those millions of megawatt hours versus what we've got for '09 so far, I think I see that you guys are expecting a slight bump up in production levels, possibly an industrial recovery. Am I reading that right or can you give us some qualitative color around that?

John O'Neal

You know, again, Brian, we don't calculated our expected generation independently. We basically rely on where market prices are and then we run our models and out of that comes our expected generation. And so, as you would expect, with energy prices being relatively low this year compared to next year, in general we should see more generation from our fleet next year than we've seen this year.

I mean, there has been some displacement of coal-fired generation by natural gas earlier this year. While we didn't see a lot of that, there was some of it. As you look on a forward basis, with gas prices being higher and energy prices in general being higher in 2010, we should see somewhat less of that.

And so in general I think, yes, that you could expect our generation could be at or slightly above the 2009 levels next year.

Brian Chin - Citigroup

So another way of saying that is that you're taking the contango shape of forward commodities, using that to back into what the implied level of generation would be, and you're not really making a claim on whether an industrial recovery would happen. You're saying if it's embedded in the forward power prices, then it is what it is.

John O'Neal

That's correct. That's absolutely right.

Brian Chin - Citigroup

And then I noticed the provision for income taxes was zero this quarter. Could you just help me understand why that is?

Paul Gillespie

We had overprovided in the previous quarter.

Brian Chin - Citigroup

Okay, so it's just a quarter-on-quarter down kind of thing? It's not related to NOLs or anything like that?

Paul Gillespie

No, it's not.

Brian Chin - Citigroup

And then lastly, you guys held guidance for '09 even though the second quarter number was pretty strong. Is that only because commodity prices in '09, the forward commodity price strip, has come down a little bit or is there sort of an implicit guidance reduction in that given that the second quarter '09 number was pretty healthy?

J. William Holden, III

I haven't thought about it as an implicit guidance reduction.

The way we developed the guidance, as we mentioned a few minutes ago, we've looked at forward commodity price curves at July 14 and projected guidance or adjusted EBITDA for the full year on that basis. So while commodity prices are down, we've been hedged, which largely offsets the affect of that.

Brian Chin - Citigroup

Okay. I'll take my further questions offline. Thank you very much.


Your next question comes from Paul Patterson - Glenrock Associates.

Paul Patterson - Glenrock Associates

Unfortunately - I've been looking at the slides; I've got a vision problem with some of them, so I apologize if it's there - but on the stockpiles of coal and other fuels, how is that looking in terms of what you have there and how might that impact 2010?

Ed Muller

Well, first I'll let John talk about whether we see any impact on '10, but our stockpiles are up and are quite healthy.

John O'Neal

Yes, I mean, Paul, the only thing I'd add to that is, like a lot of folks, our stockpiles have been very healthy; all the mines and all the rails have performed very well the first half of this year. And so we've gotten all the coal that we've contracted for and the system's working well and so our inventories are very healthy. I don't see any impact.

As we look into 2010, we expect we'll enter the year with very healthy inventories. We're mostly contracted and hedged out for next year, so I don't really see any issues in that regard.

Paul Patterson - Glenrock Associates

I guess what I was referring to is that there's some companies that seem to be stockpiling more expensive fuel because of lower demand and lower power prices. And as a result, in some cases, depending on the company, there seems to be a situation where higher fuel - let's say higher coal costs or whatever it might be - are being deferred, essentially, potentially into next year. You guys aren't experiencing anything like that?

J. William Holden, III

Well, I mean, we're burning our coal as we normally would. Our activities are no different this year than they've been in any other year.

It is true that we generally will have in some cases higher-priced coal next year relative to this year, but that’s all reflected in our numbers. As we go through our realized numbers it reflects the fact that we will be burning coal at those prices next year.

Paul Patterson - Glenrock Associates

Okay, so there hasn't been really all that big a difference in terms of what your expected dispatch was with respect to some of these plants and stockpiling of the fuel?

J. William Holden, III

That's correct.


(Operator Instructions) And, gentlemen, there appear to be no further questions at this time. I'll turn the conference back to you.

Steve Himes

Thank you, [Audrey].

We want to thank everyone for joining us today and thank you for your interest in Mirant. If you think of additional questions, we'll be available by the phone shortly. Thanks a lot.


This does conclude today's conference call. Thank you for your participation.

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