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Executives

Edward Muller - Chairman, Chief Executive Officer, President and Member of Executive Committee

John O'Neal - Chief Commercial Officer and Senior Vice President

Steve Himes - Manager of Investor relations

J. Holden - Chief Financial Officer and Senior Vice President

Analysts

Angie Storozynski - Macquarie Research

Nitin Dahiya - Lehman Brothers

Daniel Scott - Dahlman Rose & Company, LLC

Brandon Blossman - Tudor Pickering

Julien Dumoulin-Smith - UBS Investment Bank

Robert Howard - Prospector Partners

Mirant (MIR) Q1 2010 Earnings Call May 7, 2010 9:00 AM ET

Operator

Good day, everyone, and welcome to the Mirant Corporation's First Quarter 2010 Earnings Call. For opening remarks and introductions, I would like to turn the call over to Mr. Steve Himes, Director of Investor Relations of Mirant. Please go ahead, sir.

Steve Himes

Thanks, Regina. Good morning, everyone, and thank you for joining us today for Mirant's First Quarter 2010 Earnings Call. If you don't 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. 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 and available to answer questions are John O'Neal, Mirant's Chief Commercial Officer; Paul Gillespie, Senior Vice President of Tax; and Gary Garcia, our Treasurer.

Moving to Slides 2 and 3. The Safe Harbor. During the call, we will make forward-looking statements which are subject to risks and uncertainties. Factors that could cause 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 sure 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'd like to turn it over to Ed.

Edward Muller

Thanks, Steve, and good morning, everyone. I'll start on Slide 4, and I'll try and remember to tell you what slide I'm on. And the folks here in the room will remind me if I forget.

Let me start by reiterating some of the key aspects of our announcement on April 11 that we will merge with RRI Energy to form GenOn Energy. As we've previously said, we expect to complete the merger by the end of 2010. The strategic drivers of the transaction are shown on Slide 4.

And first, among them is that the merger will create real and immediate value to the significant cost savings we expect to achieve as a merged entity. We remain confident we will realize $150 million in annual cost savings through a reduction in corporate overhead. We expect to be able to capture these savings quickly, achieving the full $150 million run rate at the start of 2012.

Second, we will have a stronger balance sheet, ample liquidity and increased financial flexibility. This will further improve financial stability and enable the combined company to navigate better through industry cycles and commodity price fluctuations. Third, GenOn will be one of the largest independent power producers in the United States, with over 24,700 megawatts of generating capacity. With increased scale and greater diversity across core geographies and dispatch, GenOn will be strategically well positioned in our key markets.

And fourth, we think merging these two companies now under this structure leaves both sets of stockholders well positioned to capture fully any upside resulting from improvements in market fundamentals. In essence, the stockholders of each company will be invested in the same business with a more efficient scale structure.

Turning to Slide 5. The steps to close the transaction. They include our planned refinancing of both companies revolvers and addressing $1.8 billion of debt comprised of the following: The Mirant North America Senior Secured Term Loan due in 2013, the Mirant North America Senior Notes due in 2013, the RRI Energy Secured Bonds due in 2014 and RRI's Pennsylvania Economic Development Financing Authority or PEDFA Secured Notes due in 2036. We will also need the approval of the stockholders of both Mirant and RRI and we'll need regulatory approvals from the FERC and the New York Public Service Commission and clearance in the Hart-Scott-Rodino Improvements Act. We made the necessary filing with the New York PSC on April 23.

Turning now on Slide 6 to the first quarter. As we announced this morning, our adjusted EBITDA was $162 million, down from our results in the first quarter of 2009. Although our strategy is to hedge, the value of hedges depends on when we put them on. Given declines in commodity prices, it’s to be expected that the value of our hedges in the first quarter of 2010 was less than the value of hedges in the first quarter of 2009. We also had lower energy gross margins in the Northeast and lower gains from sales on admissions allowances. Some of those declines were offset by higher energy gross margins in the mid-Atlantic. Bill Holden will go through all of this in more detail shortly.

Turning now to Slide 7. In February, when we announced our results for 2009, we noted that in 2009, our safety performance and commercial availability had improved significantly over prior years. As you'll see, our performance in the first quarter this year continued that trend. Our commercial availability, that is the percent of maximum achievable gross margin that was achieved, was 93% in the first quarter.

On Slide 8. We provided, as we do each quarter, an update on the market in PJM since February. Natural gases, both near term and longer term, have declined. Power prices have declined. Coal prices haven't changed much. With the result, both near term and longer term, the dark spreads have compressed.

On Slide 9. As we do each quarter, we show the forecasted reserved margins in the markets in which we operate. You'll see that the reserve margins in New England and New York have improved from what we showed you last quarter. The improvements result forecasted reductions in demand. In contrast, the reserve margins in PJM and in particular for PJM East, have declined because of some retirements and because some capacity additions are now expected to be completed later than previously expected.

It is easy in a period of recession and low commodity prices to think that we don’t need to worry about reserve margins. And that is wrong. This recession will, and perhaps it already has, and as you can see on Slide 8, we are just a few years from being at a dangerous level of reserves in PJM East. Given how long it takes to add generation, this is worrisome from a societal viewpoint, even if it is good news for an incumbent generator, like Mirant.

On Slide 10. Again as we do each quarter, we show our hedge levels through 2014. You'll note that our hedged position for both power and fuel has increased. This is largely because of lower expected generation.

On Slides 11 and 12, we've provided our update on the Marsh Landing Generating Station. You'll see that by the third quarter of this year, we expect to have all necessary permits to have the approval of the PPA or Power Purchase Agreement by the California Public Utilities Commission and to close project financing. As we said during our call in February, we expect the all-in funding requirements to be at slightly over $700 million. And we expect to commence construction later this year and to begin commercial operation of the station by mid-2013.

And with that, I will turn this to Slide 13 and to Bill Holden. He’ll walk you through the numbers.

J. Holden

Thank you, Ed, and good morning, everyone. As shown on Slide 13, net income was $407 million for the first quarter of 2010, compared to $380 million for the same period in 2009. The increase of $27 million primarily results from an increase of $98 million in unrealized gross margin, partially offset by a decrease of $32 million in realized gross margin and an increase of $32 million in operating expenses.

The increase in operating expenses included an increase of $15 million in depreciation and amortization expense, principally as a result of the scrubbers that were placed in service in December of 2009. Also included was a decrease of $13 million in gains on sales of assets, net as a result of lower gains on admission sales and $6 million of scrubber operating costs.

Adjusted net income was $61 million for the first quarter 2010 compared to $115 million for the same period in 2009. The most notable items that bridge adjusted net income to net income, a GAAP measure, are unrealized gains or losses derivatives and lower costs or market inventory adjustments net.

Unrealized gains were $352 million for the first quarter of 2010, as compared to unrealized gains of $254 million for the same period in 2009. The net unrealized gain resulted from decreases in forward power and fuel prices, which resulted in unrealized gains on our hedging activities and our proprietary trading and fuel oil management activities.

Adjusted EBITDA, which is adjusted net income less interest, taxes, depreciation and amortization, was $162 million for the first quarter 2010, as compared to $195 million for the same period in 2009. The decrease in adjusted EBITDA for the period was principally the result of lower realized gross margins. I'll cover realized gross margin in more detail on the next slide.

The increase in interest taxes, depreciation and amortization for the period-over-period reflects higher depreciation expense of $15 million and higher net interest expense of $14 million, partially offset by a lower provision for income taxes of $8 million. And finally, our earnings per share, based on adjusted net income, decreased to $0.42 per share for first quarter of 2010 from $0.79 per share for 2009.

Turning to Slide 14. This slide presents the components of the company's realized gross margin for the first quarter of 2010, as well as the comparable period last year. Energy, shown as the light blue bar, decreased by $1 million. Energy represents gross margin from the generation of electricity and market prices, fuel sales and purchases at market prices, fuel handling, steam sales and our proprietary trading and fuel oil management activity.

Contracted & Capacity, the dark blue bar, represents gross margin received from capacity sold in ISO- and RTO-administered capacity markets through armor [ph] contracts, through tolling agreements and from ancillary services. The $8 million increase for the period resulted primarily from higher capacity revenues in mid-Atlantic and California.

And finally, Realized Value of Hedges, the yellow bar, was down by $39 million for the period, principally because our power hedges for 2010 were executed at lower prices than our power hedges for 2009.

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 agreements. Our 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 15. This slide presents cash flow information for the first quarter 2010 and the comparable period for 2009. The increase of $31 million in cash provided by operating activities for the first quarter 2010 was principally related to an increase of $84 million related to changes in net accounts receivable and payable, partially offset by lower realized gross margin of $34 million, excluding the effect of non-cash lower cost of market adjustments on fuel inventory. And a decrease of $26 million related to changes in collateral, primarily as a result of changes in forward energy prices.

Adjusting for cash received from the sale of admissions allowances, arrived at adjusted net cash provided by operating activities of $304 million for the first quarter. Reducing this amount for total capital expenditures, excluding capitalized interest, results in adjusted free cash flow of $219 million for the quarter.

Our Maryland Healthy Air Act capital expenditures are non-recurring in nature. Therefore, a more meaningful presentation of free cash flow is to use free cash flow adjusted for these amounts. Accordingly, adding back actual expenditures for this program results in adjusted free cash flow of $267 million or $1.83 per share for the quarter.

Turning to Page 16. This slide presents our debt and liquidity as of March 31, 2010. Consolidated debt was $2.564 billion at March 31. Consolidated debt is $67 million lower than at year end, principally because of a mandatory principal prepayment and quarterly amortization on the term loan at Mirant North America. As of March 31, Mirant had total cash and cash equivalents of $2.105 billion, of which $553 million was restricted at Mirant North America and its subsidiaries and not available for distribution to Mirant. We do not expect the restriction on distributions from Mirant North America to have any effect on operations. And finally, our total liquidity, including amounts available under the Mirant North America revolver and the synthetic LC facility, was $2.729 billion.

Turning to Slide 17. This slide presents the breakdown of our projected capital expenditures for 2010 and 2011. We expect to pay the remaining $269 million related to the Maryland Healthy Air Act in 2010. $48 million of this amount was paid in Q1.

Other environmental expenditures includes the remaining $33 million deposit into escrow in the third quarter of 2008 and expected to be spent between 2010 and 2012 for control of small dust particles pursuant to the Potomac River settlement. Our estimate for normalized maintenance capital expenditures after 2010 remains at approximately $50 million to $60 million per year and reflects the current outlook for commodity prices.

Construction expenditures included the estimated amounts for the construction of our Marsh Landing Generating facility, which will commence operations in mid-2013. And with that, I'll turn it back to Ed who will wrap up and open the call to your questions.

Edward Muller

Thanks, Bill. I'm on Slide 18. And to wrap up our presentation here, let me reiterate that, as I began, the creation of GenOn Energy by the merger of Mirant and RRI will deliver significant value to our stockholders, and we expect to complete this transaction later this year.

Second, hedging has cushioned Mirant in the first quarter from the effects of relatively low commodity prices, although not quite as much of a cushion as we had a year ago in the same quarter. The supply-demand balance is forecasted in PJM, and particularly in PJM East, to tighten, although at a slower pace than previously projected. And Mirant continues to make progress on permitting, financing and commencing construction of its Marsh Landing Generating facility later this year, so that we will go into commercial operation in mid-2013. And with that, Regina, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Jeff Cramer with UBS.

Unidentified Analyst

I'm just wondering if you could, I guess, update us on where you are with the financing, with the expected timing. And is this still expected to take place at the GenOn level entirely?

Edward Muller

Bill, you want to take that?

J. Holden

Yes. Our thinking with respect to the financing hasn't changed. We expect to replace the revolvers at both Mirant and RRI with the new revolving credit facility at the GenOn level. And we expect to address the $1.8 billion of debt by refinancing that with new senior notes at the GenOn level. The financing is progressing. Both companies have been working on it together. And we're still confident that we can close and certainly in time to meet the schedule of closing the transaction.

Unidentified Analyst

With regards to the debt at Mirant North America. I mean, is there really any, I guess, situation here? Or whether that debt would remain outstanding? I mean, it seems like you're pretty focused on removing the debt at that boxes [ph]. Would you agree?

J. Holden

Our plan is to refinance that debt with new debt at the GenOn Energy level.

Operator

We'll hear next from Robert Howard with Prospect Partners.

Robert Howard - Prospector Partners

I wanted to ask your CapEx forecast for 2011 changed a little bit. From last quarter, it looked like the Marsh Landing number got knocked down. So I'm wondering what was going on there?

J. Holden

Rob, this is Bill. What we've done as we’ve moved forward with the development of Marsh Landing, we have refined the timing of the capital expenditures that we expect for Marsh Landing. And so you've seen some shifting between years, although our overall expected funding cost hasn't really changed.

Robert Howard - Prospector Partners

So it’s still the same cost there. And I guess is there more -- will that be changing further over time? Or how much more is there to lock it down or whatever?

Edward Muller

Rob, it's Ed. We, yesterday, signed the EPC contract for this project with Kiewitt, which is disclosed in the 10-Q which we have filed today. And that's for a price of around $0.5 billion. So I think we're getting very close to tying down the pieces here.

Daniel Scott - Dahlman Rose & Company, LLC

And I can't remember, but I guess there's no guidance in the presentation or updates on that because of the whole merger process? Is that right?

Edward Muller

That is correct.

Operator

We'll hear next from Nomura Securities, Nitin Dahiya.

Nitin Dahiya - Lehman Brothers

Ed, as you look at the combined business. How do you look at sizing the trading side of it? Because, if a recall in the past, you have suggested about a $50 million kind of normalized contribution from the trading side, but now that the business is much larger, are you revisiting that?

Edward Muller

No, we still expect and contemplate the same level of results there.

Operator

We'll hear next from Pearce Hammond with Simmons and Company.

Pearce Hammond

Where are your current coal inventories and days of burn? And then the second question on coal. Have you noticed any declines in coal deliveries recently due to safety-driven supply challenges in Appalachia?

John O'Neal

This is John O'Neal. Our coal inventories, which got drawn down fairly significantly during the winter with the weather and storm-related events. Hopefully, through the end of Q1 and here in to Q2, at Chalk Point, we're well north of 20 days and similar at Dickerson. We're building nicely. At Morgantown, we are going to have lower inventories this summer because we are in the process of completing a coal-blending facility, which because of that we will just manage at a lower inventory level until that project is completed, somewhere around 10 to 15 days of supply. As to your second question, we have not noticed any change in our deliveries because of anything related to the mine accident.

Unidentified Analyst

So do you think you're going to have to access the spot market at all this year in any significant way?

J. Holden

Well, if you look at our hedge percentages, we do have some open coal to buy. We have some open position for the balance of the year. So that has created some opportunities for us to go into the spot market. And we have made a few spot purchases here in Q2 and would expect that we make a few additional ones over the balance of the year. So yes, we have been in the spot market somewhat.

Operator

Our next question will, from Brandon Blossman with Tudor, Pickering, Holt.

Brandon Blossman - Tudor Pickering

Bill, can you comment on the project structure. The project capitalization for Marsh Landing. How much debt are you thinking about taking out there?

J. Holden

Yes, we're planning to finance Marsh Landing on a project-financed basis. We're right in the midst of that. So I'm not ready yet to provide anything further on what the capital structure might be.

Brandon Blossman - Tudor Pickering

The forecasted CapEx is total, correct? Including whatever debt you may take out against that?

J. Holden

The CapEx that we show in the CapEx table is total capital expenditures for 2010 and '11 for Marsh Landing. Just keep in mind that the construction won’t be completed until mid-2013. So some of the CapEx takes place outside of those years.

Brandon Blossman - Tudor Pickering

Hedging, you said that the hedging percentage increased though largely because of changes in forecasted gen-time, runtimes. So is it fair to assume that no real material hedging took place in the quarter?

Edward Muller

Well, we did some hedging during the quarter. I think what I said was designed to convey the facts, which is the increase came largely because of expected lower generation, but not completely.

Brandon Blossman - Tudor Pickering

And can you comment just on your view of the draft legislation from the EPA on coal ash?

Edward Muller

Well, it seems to be an ongoing trend in activities by the government. The proposal is long. It's some 500 pages. And it came out, I think, on Thursday. So though we have been reviewing it and assessing it, I'm not yet ready to comment on it.

Operator

We'll hear next from Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank

First, with regards to Mirant Marsh Landing. I just noticed the comment at least in the slide saying mid-2013 versus what I'd previously seen as May 2013, is that to be more of a timing function, perhaps, a month or two out now?

Edward Muller

You picked up on it a difference and it is a difference that is only slight. As you know, we need, and as we’ve said, we need the approval of the Power Purchase Agreement by the California Public Utilities Commission. We need various permits from the California Energy Commission. All of that is going along fine. But given the fact that we need those approvals and we do not control them, we do our part, but we don't control the process, we have just gone off having as much of a pinpoint down to a month and gone to mid. But we are by and large seeing that we're progressing pretty much as we have anticipated and expected.

Julien Dumoulin-Smith - UBS Investment Bank

And then with regards to the Clover, and I don't mean to push the subject. But any sense as far as what's going to happen over at the Morgantown facility as far as being able to blend incrementally?

Edward Muller

Blending. John, do you want to speak to that?

John O'Neal

Certainly, it's going to give us additional flexibility to burn some coals that we previously have not been able to burn and dial in and exactly hit the spec that the plant likes. I think we've talked in the past about being able to bring in some higher sulfur coals and blend them with some lower sulfur coals. And kind of hit the sweet spot for that station. But again, the project will complete at the end of this year and we’ll have a lot more experience after it's done.

Julien Dumoulin-Smith - UBS Investment Bank

One of your power peers yesterday discussed power basis. I was just wondering if you could talk about what you're seeing as far as PJM West versus East-type deliveries, particularly to PEPCO. And with regard to hedging on the basis as well?

John O'Neal

Sure, basis has, we're in the Pepco zone. So when we talk about basis for us in particular, we talk about the spread between the Pepco zone and the West hub. And that has come off quite considerably over, say, the last year and half as you would expect with lower power demand and lower overall commodity prices. The market, there is still a very positive spread between the Pepco zone and the West hub, as you would expect, because it's a more constrained zone. The market does, as you look on a forward basis, and of course, we rely on the market for all of our projections and what not. But as we look forward, the market seems to be pricing in the effects of the trail line, which as we understand it is expected to come online sometime in 2011. But there is still a very positive basis between the Pepco zone and the West hub.

Julien Dumoulin-Smith - UBS Investment Bank

Any expectations for RPM, as far as Pepco goes?

Edward Muller

We're right in the midst of that. I think bids are due today. And I don't think it’d be appropriate for us to be commenting on it.

Julien Dumoulin-Smith - UBS Investment Bank

Just with regards to the quarter. How much of the quarter the fuel oil and marketing and trading? If you can pinpoint a number there, I’m sorry if I missed it.

J. Holden

The contribution to adjusted EBITDA for the quarter from fuel management and proprietary trading together was about $8 million higher than last quarter. And together, it was about $21 million -- about $19 million.

Operator

We'll hear next from Ladenburg Thalmann’s Brian, Russo.

Brian Russo

Any more detail you can provide on the Marsh Landing PPA. And if not, when will that be made public?

Edward Muller

Well, it is before the California Public Utilities Commission and until it has approved it, I wouldn't expect it to be made public.

Brian Russo

Is there a specific start date that's kind of embedded in the PPA?

Edward Muller

Well, I think it's fair to assume when we say that we expect to go into commercial operation in mid-2013 that is consistent with what the PPA provides.

Brian Russo

Could you comment a little bit on the first quarter '10 volumes? Looks like the intermediate volumes were down significantly in the mid-Atlantic and Northeast. And then maybe talk about the trends you see for the remainder of the year.

Edward Muller

Because we're not giving guidance, we are not going to be giving trends. But we’ll be happy to talk to you about the first quarter.

J. Holden

As it relates to the intermediate units in the first quarter of 2009, it’s primarily, as compared to 2010, it's primarily as a result of reduced generation at our Northeast facility. As you’ll recall, the Canal facility oftentimes ran for reliability. And it did quite significantly in the first part of 2009. During 2009, there was some transmission upgrades that resulted in less need for the Canal station to run for reliability. And as a result, we saw significantly less runtime for the Canal station in the first quarter of 2010. As it relates to the mid-Atlantic, we had a very cold winter and our coal units ran slightly more in the first quarter of 2010 than they did in the first quarter of 2009.

Operator

Our next question will, from Angie Storozynski with Macquarie capital.

Angie Storozynski - Macquarie Research

In your press release, you referred to your CapEx and you say that once your CapEx is done, you will be able to restart your distribution to shareholders. Should we read into it that it’s potential share buybacks coming?

J. Holden

Angie, this is Bill. I think you're referring to the paragraph that covers the cash and cash equivalents. And then what we're referring to there is that there's a test for distribution at the Mirant North America level that determines how much cash can be distributed from Mirant North America to Mirant Corporation. And then it’s that distribution test, currently, while we're in compliance with the covenants, the amount that we can distribute up to Mirant Corp. is currently restricted by the terms of the covenant. And the reason for that is that the free cash flow calculation in the covenant takes into account capital expenditures. And therefore, the amount has been affected by the large amount of capital expenditures for compliance with the Maryland Healthy Air Act. And then what we're saying is when those expenditures no longer affect the calculation at the Mirant North America level, we'd expect to be able to resume distributions from Mirant North America to Mirant Corp. Our thinking on cash levels at Mirant Corporation at the parent level hasn't changed. So we're not implying anything about future returns of capital.

Angie Storozynski - Macquarie Research

And about mid-Atlantic. The strong results in mid-Atlantic. How much was the weather impact?

Edward Muller

John, do you want to speak to this?

John O'Neal

Yes. Angie, in what way? Just.

Angie Storozynski - Macquarie Research

I mean, it seems the region was very strong. Do you think and it's clearly driven by higher volumes? Do you think that it's in anyway related just to the cold winter?

John O'Neal

We certainly had higher prices this year than we did last year. So that resulted in some higher runtimes for our generation, both in January and February, as compared to 2009. I will say that in March, gas prices were much lower and demand was much lower. And so we actually had some reduced runtimes in March as compared to the prior year. But that's, overall, I would say, prices were somewhat higher 2010 than they were in 2009.

Operator

We'll hear next from Sakeeb Meerzo [ph] with JPMorgan.

Unidentified Analyst

On capital structure. Can you expand on what you mean by addressing $1.8 billion of debt? And what option does that encompass over and above just a simple refinancing? And second on the timing. How do you balance the state of the markets today, which appear open to you, versus not having the debt on your books too long ahead of year end or whenever your [indiscernible] close? And then finally, on the free cash flow in the Mirant North America credit facility. How far out does that free cash flow calculation look? Is it next 12 months? And can we expect the $300-odd million CapEx in 2011 to be sufficiently low to avoid tripping that? So potentially we could see this RP-test restriction being removed in about three quarters. And does that impact your desire to take out this debt in any way?

J. Holden

I'll take all those. I’ll see if I can make sure I hit them all and if I haven't, you can remind me. With respect to the financing plans, as we said back when we announced the transaction with RRI, our plan is to address the $1.8 billion of debt, which Ed outlined earlier. I think, certainly, we're reviewing different alternatives. And if there's the potential to improve the overall capital structure by keeping any debt that would be attractive to keep, we would certainly consider that. And then if we think it's an improvement, we would certainly pursue it. But as I said earlier on the call, our base thinking on this has not changed: that we're going to address the funded debt at MNA, as well as the secured debt and the PEDFA notes at RRI with the new unsecured notes at the parent, the GenOn Energy level. With respect to how we balance the timing and the market risk, we are looking at that now. We are mindful that the debt markets seem to be in good shape and are open to us now. And we are progressing with the financing. We haven't made any decisions yet, but we're certainly mindful of the fact that the sooner we go to market, that risk for the transaction is behind us. And then I think the final part of the question was with respect to the free cash flow calculation at Mirant North America and how that affects the ability to make distributions. The free cash flow calculation is a trailing 12-month calculation. So it looks back. For each reporting period, we look back for the trailing 12-month period. With respect to how whether that has had an effect on our thinking with respect to the capital structure at GenOn Energy, I think we expect that putting the new debt at the parent level will accomplish the things that I outlined back in April. It will allow us to retain as much of -- to combine the capital structures of the two companies, retain as much of the existing debt at both companies as much as possible, and provide an adequate level of financial flexibility going forward. So we certainly expect that having the new debt at the parent level will give us more financial flexibility then, going forward, than we would have if we have it down at the subsidiaries.

Operator

Our final question will come from Keith Stanley with Deutsche Bank.

Unidentified Analyst

For the upcoming RPM auction. I understand you don't want to be too specific given the timing of the auction, but can you provide some more general color on why Pepco is being modeled separately from Southwest Mack [ph] and PJM’s planning parameters. And then any thoughts on the potential for Pepco to receive its own locational [ph] price meter in this auction? Or in the future?

Edward Muller

John, why don't you take it?

John O'Neal

I'll take the first one and as I said, we're not going to comment on the second one. As it relates to the first one, it’s procedural and it really as to do with how PJM models the market. And they add some calculations of the need within a market area, and the transmission limitations within that market area. And they do a test every year to determine whether or not, based on those -- there’s a ratio they calculate, based on those ratios whether or not they need to test a particular area as an LDA. And in this case, they did that test and determined that they needed to test Pepco as an LDA. So it's purely the tariff as prescribed by PJM that led to that for this year.

Unidentified Analyst

It looks like you’ve added a fair amount of hedges during the quarter. Any chance you’re willing to say, roughly, when you were active in the market? Whether it was sort of in the winter months, when we saw some better pricing. Or towards the second half of the quarter?

Edward Muller

Well, first, let me clarify because as we said before, the increase in our hedged position, which we showed on those bar charts, largely is a result of projected lower generation in future periods. Some of that comes, the increased hedge position, from adding hedges. And as to when we added them and so on, no we're not prepared to say.

Operator

That does conclude our question-and-answer session. I would like to turn the call back Mr. Steve Himes for closing remarks.

Steve Himes

Thanks, Regina. We just want thank everyone for joining us today and we appreciate your interest in Mirant. And we look forward to talking to you soon. Thank you.

Operator

Thank you. That does conclude today's conference call. We thank you all for your participation.

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Source: Mirant Q1 2010 Earnings Call Transcript
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