RRI Energy Q1 2010 Earnings Call Transcript

May. 8.10 | About: NRG Energy, (NRG)

RRI Energy, Inc. (RRI) Q1 2010 Earnings Call May 6, 2010 10:00 AM ET

Executives

Dennis Barber - VP, IR

Mark Jacobs - President and CEO

Rick Dobson - EVP and CFO

Analysts

Daniel Eggers - Credit Suisse

Brandon Blossman - Tudor, Pickering, Holt

Lasan Johong - RBC Capital Markets

Nitin Dahiya - Nomura Securities

Brian Chin - Citigroup

Ameet Thakkar - Bank of America/Merrill Lynch

Michael Lapides - Goldman Sachs

Neel Mitra - Simmons & Company International.

Gregg Orrill - Barclays Capital

Robert Howard - Prospector Partners

Raymond Leung - Goldman Sachs

John King - Western Asset Management

Operator

Welcome to the RRI Energy's First Quarter 2010 Earnings Conference call. My name is Christine and I will be your operator for today's conference. (Operator Instructions). I will now turn the call over to Mr. Dennis Barber, Vice President, Investor Relations, Mr. Barber, you may begin.

Dennis Barber

Good morning and welcome to RRI Energy's first quarter conference call. Leading the call this morning are Mark Jacobs, President and CEO and Rick Dobson, our Chief Financial Officer. Following our prepared remarks, we'll have a question and answer session.

The earnings release as well as the slide presentation we are using today is available on our website at www.rrienergy.com in the investor relation section. A replay of this call will also be available on the website approximately two hours after the call.

Consistent with our past practice, we are using several non-GAAP measures to provide additional insight into the operating results. Reconciliations of the non-GAAP measures to GAAP figures are available on the website.

As we previously indicated, we are not updating the 2010 or 2011 outlook in light of our pending merger with Mirant and do not expect to do so until after the transaction is closed.

I would remind you that the principle near term drivers of our open and adjusted EBITDA or commodity prices. We have provide commodity price sensitivities that allow you to generally understand the impact of the commodity price changes on our outlook. And finally any projections or forward looking statements made on this call are subject to the Safe Harbors contained in our SEC filings and actual results may differ materially from the projections in these forward-looking statements.

I'll now turn it over to Mark.

Mark Jacobs

Thank you Dennis, and good morning everyone. Welcome to our first quarter earnings call. This morning, we released our Q1, 2010 results. We reported open EBITDA of $25 million and adjusted EBITDA of $32 million. We also generated $61 million of free cash flow during the quarter. All of these figures were up slightly versus Q1 2009. Rick will take you through the results in more detail but the headlines are that we continue to execute well despite the challenging commodity price in economic environment. The highlight since our last earnings call, is our announced merger with Mirant Corporation to form GenOn Energy.

On slide five, I wanted to touch on the principle benefits of this transaction. The bottom line is that this transaction creates significant near-term value, while it preserves the fundamental value proposition of a recovery in commodity prices and supply demand fundamentals. GenOn will be able to operate with $150 million lower cost than the combined spending of Mirant and RRI Energy is separate companies.

The savings come from the scalability of cost operate the business, that are outside of plant spending. Corporate support and G&A costs. While cost reductions will come from both Mirant and RRI, here’s a simplistic way to think about the $150 million figure. If you add total support cost for both companies on a standalone basis, you come up with approximately $390 million.

Let’s assume that half of that were $195 million is from each company, achieving $150 million in savings mean adding an incremental $45 million of cost to either company on a standalone basis to support the addition of the others plans. We are very confident these savings will be fully realized in 2012. We are also committed to building GenOn with the best operating practices from each of Mirant and RRI Energy. Undoubtedly, using the best practices from both companies we’ll find other opportunities to improve the bottom line.

But they are not included in the $150 million figure. Now, a few other highlights of the combination. Genon will be strong financially with manageable debt levels and ample liquidity. The merger will create one of the largest merchant generation companies in the US with 24,7000 megawatts of capacity. And Genon will have a diversified geographic presence in increased scale in important competitive markets like TJM.

On slide six, I’ll provide an update on the steps to close the merger. The key takeaway is that we are on track to close before the end of the year. There are three significant steps to get the transaction closed. Regulatory approvals, financing and shareholder approval, in terms of regulatory approvals we filed for New York public service commission approval two weeks ago and we expect to be making the FERC Hart-Scott-Rodino filings in the very near future.

We will fully cooperate with a regulatory agencies and their review of the transaction but we are not aware of any material issues. Rick and Bill Holden, Mirant’s CFO are leading our efforts on the financing front. To remind you between Mirant and RRI there is approximately $1.8 billion of debt that we intend to address prior to closing.

In addition, we expect to replace our respective revolving credit arrangements with the new facility. The team is in active dialog with a variety of financing sources and is evaluating the best path forward.

With regard to shareholder approval, the next step is to file the preliminary joint proxy statement with the SEC. The lawyers and accountants have harder work preparing this document and we expect to file it before the end of Q2.

Before the leaving this slide I wanted to touch on the integration work that’s under way, Bill Holden and I, Co-Chair the integration team. The full integration team meets weekly in person and is making very good progress to ensure that we meet the cost savings commitment and are in a position to operate seamlessly day one after closing.

Moving to slide 7, on our last earnings call I reviewed our 2010 initiatives, as you know our industry is subject to a number of factors we cannot control, such as natural gas prices and supply demand fundamentals. Our focus is squarely on what we can’t control, how we operate the business, how we finance it, how we manage risk and how we position it to create long term value. This slide provides an update on our progress since our last call.

As I discussed the announced merger with Mirant is the highlight. From my prospective the merger transaction is a significant accomplishment with respect to our priority to create value from industry consolidation. Notwithstanding the merger, we are still highly focused on the rest of these initiatives and I wanted to touch on a couple of them on the slide. One of the most important areas is operational excellence. Our goal is to be the best operator of power plants and capture every nickel of value out of our assets.

On our last call, we discussed our view on the appropriate measuring sticks for success. The total margin capture factor measures effectiveness and the cost per megawatt in cost per megawatt hour measure efficiency. We are on track with there metrics we discussed on the last earnings call.

Rick will provide you additional information on these in a moment.

Turning to forward capacity revenue, you’ll recall that First Energy is moving into PJM effective June 2011. This move impacts our Avon Lake Niles in Newcastle plants which will move from ISO to PJM. In March, PJM conducted an RPM integration capacity option for planning years 2011 and 2012, relating to the First Energy move. We bid our three plants which totaled just over 1150 megwatts into the special auction. As we expected, prices in integration auction cleared in line with prices from the base auctions.

$109 per megawatt day for planning your 2011 and $20 per megawatt a day in planning your 2012. All of our capacity cleared in planning year 2011 and 65% of the mega watts cleared in planning your2012.

The bottom line results from this quarter, are the recaptured an additional $54 million of incremental future forward capacity revenue. As you may be aware the base RPM capacity auction for planning year 2013 is underway. Results are scheduled to be posted by PJM next week. We will be reporting on the effect to our future forward capacity revenues on our next earnings call.

And finally, I want to touch on the scrubber installation at the Cheswick station. We have a plant out that’s underway during which we’ll complete the tying end of the scrubber. I expect this to be completed in Q2, at which point about half of our coal generated mega watt hours will come from scrub plants.

I’ll now turn the call over to Rick Dobson our Chief Financial Officer.

Rick Dobson

Thank you, Mark. Let’s turn to slide nine. Open energy gross margin available was relatively flat year-over-year. The averaging unit margins declined at Seward, Keystone, Conima and Shawville, while margins in the western part of PJM improved relative to year ago.

The impact of energy has brought planned and unplanned, drove the 6 million decline in open energy loss margin. I will discuss this in more detail in the next slide that addresses operational effectiveness as well as efficiency. Improved PJM auctions results for the period affecting the first quarter of 2010 drove the increase in other margin up 20 million.

In addition our general administrative and other expenses declined 9 million but the alignment of our business to a pure merchant generator platform was completed in the latter half of 2009. Open EBITDA was 25 million in the first quarter of 2010. Our natural gas and power hedges performed as expected in the first quarter of 2010, bringing our adjusted EBITDA to 32 million, compared to 20 million last year.

We generated free cash flow of 61 million in the first quarter of this year compared to 45 million last year. We had lower capital expenditures as we were approaching the end of our chedric scrub insulation as Mark mention.

Before I move on to the next slide, I want to touch on something you will see when you review our first quarter GAAP financial statements. As many of you know from our fourth quarter discussions related to FASB statement 144, we are required to evaluate our long lived assets for impairment, as market conditions materially change. Since we had significant gas coal spread contraction in the first quarter of this year, we performed such a review.

The review resulted in impairments totaling approximately 250 million at our Rima and Miles plants. As many of you may recall, these plants are new store profit or marginal category that we discussed at our investor conference last July.

Let's turn to slide 10, we captured 82.4% of the available gross margin from our generation fleet in the first quarter of 2010, compared to 85.2% in 2009, the variance was primarily driven by a planned outage at our Shawville plant. As well an unplanned outage at our Cheswick plant., we are still on track to deliver our annual target of 90%. As most of you know the shorter months are when many of our planned outages occur as well as when we generate lower volumes.

As such the quarterly TMCF percentages tend to average less than our full year projection. Our cost per megawatt hour in the first quarter of 2010 was $4 better than 2009. As we have slightly higher generation volumes driven by a cold January in the Northeast, combined with lower G&A and maintenance capital expenditures in 2010. The same lower cost factors also drove a $1200 improvement in cost per megawatt versus 2009.

Let's now review slide 11, as part of our 2010 capital structure priorities in consistent with our capital structure philosophy, we retired the Orion senior notes was 400 million of cash in early May. As you recall we implanted a modest hedging program for 2010 and 2011 designed to deliver free cash breakeven or better and protect our existing cash position. The hedging program provides added flexibility that enabled us to redeploy cash to retire the Orion notes.

With the Orion senior note retirement we have approximately. $2.4 billion of gross debt, including our off balance sheet leases and $1.4 billion in available liquidity which includes $750 million of cash. A combination of hedging program balance sheet philosophy and solid-liquid profile leave us well-positioned to create long-term shareholder value.

With that, let me turn it back Mark to wrap up.

Mark Jacobs

Thanks Rick. Let me wrap up on slide 12. We are recognized that our business is highly leveraged to a commodity price in economic recovery. It’s the fundamental value proposition in any merchant power stock. Our approach is simple. We’re focused on the things we can control. The announced merger with Mirant fits perfectly with this philosophy. The transaction will create significant near-term value through corporate in G&A cost savings. Value, that is within our control, value that can be delivered irrespective of the direction of commodity prices through the economy.

Bottom line, the Mirant merger preserves the fundamental RRI value proposition, increases efficiency and improves our long-term position.

With that, operator let’s open the line for questions.

Question-And-Answer Session

Operator

Thank you, we will now take question. (Operators Instructions). The first question comes from Daniel Eggers from Credit Suisse, please go ahead.

Daniel Eggers - Credit Suisse

I was wondering if you could kind of talk a little bit more about the interim capacity auction, how you guys are thinking about bid strategy given the fact that not all megawatts cleared from the first planning auction to the second as the price went down. What's building into that bid and how should we think about that affecting, maybe the strategy coming in for the upcoming auction?

Mark Jacobs

Well, Dan you know (inaudible) as we mentioned that was held in March of this year, we did clear all of our megawatts and planning year 2011. We cleared about 65% of those in 2012. As I mentioned in the prepared comments the price levels that came out of that auction were very consistent with the price levels we saw in the original base of auctions about a $109 per megawatt for planning your 2011 and $20 per megawatt day for planning your 2012.

There are a number of restrictions that we have in parameters in terms of how we bid those units, all of those in essence of subject to Caps in terms of how we can bid those that in the essence are based on your variable cost. But I will tell you this that the results came in really just as we expected both from a price level as well as the units that we had clear.

Daniel Eggers - Credit Suisse

I guess as we look at this the upcoming auction, given the fact the forward energy values are certainly challenged. Does that change the behavior of bidding all the assets in, or showing more price sensitivity to whether you commit some of the capacity, particularly after you move out of the tier one assets?

Mark Jacobs

Again, I had come back to those the point of there are a number of rules and regulations that we comply with in all respects in terms of how you can bid. So, there are some very specific rules in terms of the maximum amount that you are allowed to bid that from a capacity standpoint. Some of that takes into account, historical energy margin that’s burnt in then used of the unit and what’s your avoidable costs are if you don’t run the unit instead.

So, really as I said that bidding strategy I wouldn’t be appropriate for me to get into the kind of specifics of that but we fully comply with all the rules associated with PGM auctions.

Daniel Eggers - Credit Suisse

On guidance, can you remind me, you guys are going to update guidance one more time in the proxy? And if so, can you just tell us what approximate date commodity curve you guys are using on those numbers?

Mark Jacobs

What you are going to see when we file the preliminary prospectus, here you will see a summary of the financial information, that each of the ROI and Mirant boards used in evaluating the transaction and the financial information that was provided to our financial advisors in rendering their fairness opinions. That curve date as I recall is a mid March type of curve date.

Daniel Eggers - Credit Suisse

And then I guess because you guys aren't showing that hedge data anymore, can you just give a little color you knows what you are seeing on the coal markets, your appetite for contracting today and kind of, if you are seeing any difference between the quoted forward prices and what you are actually able to buy coal for?

Mark Jacobs

I guess just commodity prices in general I’d say since the beginning of the year we continue to see pressure on gas prices, coal prices in general. It remained relatively flat, as we have talked about before the principle core contracting season is Q2 spilling into a little bit into Q3 so a lot of the coded prices that you see out there in the market are for smaller transaction not significant amounts of volume, so we are just now starting to get into that contracting season here and again most of those agreements are bilateral they are covered by confidentiality provisions here but I would say in general as I said we have seen coal prices kind of hang in there since price levels at the beginning of the year.

Daniel Eggers - Credit Suisse

One last one on that, Mark. Will you give any updated color at the next earnings call around coal hedging activity if this is the busy period?

Mark Jacobs

Certainly we are not going to be in a position to provide outlook. I do think as I said we’ll be able to give you an update just in terms of significant activities that we’ve undertaken. So I think that would be a reasonable expectations.

Operator

The next question comes from Brandon Blossman from Tudor, Pickering, Holt.

Brandon Blossman - Tudor, Pickering, Holt

Just to hit on RPM one more time, what do you see in this auction as far as fundamentals? I know, the energy component have come off a little bit, which should help and supply/demand doesn't look horrible vis-à-vis last time. Do you have any thoughts about that?

Mark Jacobs

The first point I’d make as you guys noted capacity markets in the RPM in particular provides a very meaningful source of revenue for us. Its predictable that we can see several years out. We’ve got about 7600 mega watts to bid in to the auction and again as I mentioned those results, we expect those to be posted at the end of next week. When you think about the fundamentals I’d point to a couple of things that are going to changes in the 2013 auction versus the 2012 auction. The first is the removal of the offer cap on existing demand resources. You may recall that finding your 2012 auction the existing demand resource effectively have to bid in with zero. The first energy load is going to be included in this auction and there was more with that move. There was more load that came in, then generation volume that came in.

There are some increases in the net comb rate that will raise the demand curve. And then PJM made some updates on the transmission that will be a positive for both eastern Mac and Mac where we have significant part of our assets. I think the wild cards in the auction brand you put out is how much this demand response bid at terms of a price, what if any new generation bids in at. and I think the other factor that could have an impact on the auction is kind of what if any new LBAs clear. And that potentially has a negative impact for RTO because as you know if an LBA clears, it goes into the rest of the auction at zero. So all of that is as I said is a long way of saying, what we’re anxious to see the results for these along with everybody else.

Brandon Blossman - Tudor, Pickering, Holt

Any additional color that you should be willing or able to provide around the $1.8 billion of new debt?

Mark Jacobs

Well that’s something that Rick and Bill Holden and our respective financing teams are hard at work. It’s the highest priority right now within our respective financing staff. It would be premature for me to comment on that other than to say the team is really looking at all of the available options it has to us in trying to developing a plan that we think is going to give us the highest chance of success, give us attractive financing going forward.

Brandon Blossman - Tudor, Pickering, Holt

No big hiccups so far and you are getting a reasonably positive response from?

Mark Jacobs

Well the teams are engaged in active dialogue with a number of financing sources and you guys track the financing markets as closely as we do. And again, we think we continue to feel like the financing markets are attractive and we’re very confident that we can get the financing done on terms that are going to be attractive for our shareholders and check that requirement often in terms of getting the merger closed.

Brandon Blossman - Tudor, Pickering, Holt

Time for one more question?

Mark Jacobs

Sure

Brandon Blossman - Tudor, Pickering, Holt

Any thoughts about alternative coal supplies for next year given that there is obvious tightness in the pit seam market Illinois basin coal? Any test runs on PRB or changes in that front?

Mark Jacobs

Yeah, in general Brandon I’d as say we approach the coal contracting season we are always evaluating a wide range of potential sources here. As you know the boilers and the units we have in general were engineered and designed for specific types and grades of coal. So the degrees of freedom we have to change those specifications of coal without significant capital expenditures are somewhat limited that being said, as we said we have used PRB coal and blended that in at a couple of our different facilities and that’s something the team is actively working on today. As we approach that contracting season define the right kind of overall optimal blend in our coal for us that is going to give us best performance in the units at the lowest cost.

Operator

Our next question comes from Lasan Johong from RBC Capital Markets.

Lasan Johong - RBC Capital Markets

The 2013 auction where only 65% of the 1150 megawatts cleared, what price would you have had to see to have cleared all the 1150?

Mark Jacobs

Lasan I really can't get into the specifics of that, because that gets into our specific bidding behavior and we do have an active auction going on right now. I think you can take from looking at the results of prior auctions where we’ve had a significant, the higher percentage. You can just track back whether RTO price is cleared for the last several auctions and how much of its had cleared if you want to get kind of a ballpark estimate of where that might be, but again it really wouldn’t be appropriate for me to get into the specific bidding characteristics we have given that we got an open auction right now.

Lasan Johong - RBC Capital Markets

Fair enough. On the $250 million write-down for Niles and (inaudible), is that reflective of kind of the then prevalent situation or is that reflective of what Reliant thinks is the future value of these plans going forward? In other words, was it the metrics that were used to measure whether you need to take the write-downs based upon kind of the forward curve at the time or is it a view of what Reliant management thinks is the worst of those plants?

Rick Dobson

The test incorporates the four view and part of it and since we saw a pretty precipitous drop in the forward curves, that caused a couple of those plan to trip the test and so it's a part of the analysis. Its not all of the analysis, part of it's are fundamental view, but part of it's the forward curves.

Lasan Johong - RBC Capital Markets

Can you give us a sense of how much was what?

Rick Dobson

I’ll say this much at this point. The forward curves play are significant part in the testing but they’re not all the part, they’re not all it.

Lasan Johong - RBC Capital Markets

Okay. Makes a lot more sense.

Mark Jacobs

The key point to comeback to that Lasan, it wasn’t any fundamental change in our perspective at a long-term way we would operate the assets and other was really it was, this tripping over the test this quarter versus not having tripped it previous quarter is entirely due to a change in the forward curves.

Rick Dobson

Mark, made a good point. This FAS144 signs of very prescriptive cash and that once you calculate the certain, it makes sense for you to stay very consistent how to calculate and we are being consistent as we go quarter-to-quarter very consistent. The forward curves are part of that calculation on a consistent basis and when they change dramatically down like they did from quarter-to-quarter you could see a plan come in and then once it misses the undiscounted test.

Then we would go and look at from a fair value perspective.

Lasan Johong - RBC Capital Markets

Understood. It's very similar to an E&P ceiling test that we use. Okay that makes perfect sense to me. One last question related to the $1.8 billion in debt. I'm assuming that Reliant/Mirant is prepared to use the $2.5 billion war chest to pay off that $1.8 billion if the debt holders become difficult. Is that a fair statement?

Rick Dobson

Well, I put it this way, we have got $1.8 billion Lasan of debt to deal with, the plan is for us to address that debt, principally through refinancing we may consider some other alternatives such as the consent solicitation and that’s something that the team is working on. I would say this in terms of the cash balances that’s something the combined company is going to be focused on having the appropriate amount of cash going forward. But I would look principally for that debt to be addressed through refinancing or other needs.

Lasan Johong - RBC Capital Markets

Is it fair to say that you would pursue a covenant like package?

Mark Jacobs

Again, the team Lasan is looking at all the different options and again I don’t want to kind of get in front of them in terms of what we ultimately conclude. What’s going to be important at the end of the day is debt its attractively priced, it gives us flexibility. That’s consistent with our balance sheet philosophy you are having a strong balance sheet and exactly kind of the package of instruments that we put together, that’s something as we said the team is working on the optimal mix of those

Operator

Your next question comes from Nitin Dahiya from Nomura Securities

Nitin Dahiya - Nomura Securities

Sorry to beat the dead horse but on the financing, just one question. Do you still intend to do all the financing at the parent GenOn level or are you also looking at doing it at other parts of the structure if you like?

Rick Dobson

At this point Mark said it really well, we have got a wide array of options at our disposal and we are in the process of making that determination right now as we speak so we’ll get to that in due time and but it is just too early to speculate at this point in time. I think that’s kind of where we are going to be in this call from a forward looking question prospective.

Nitin Dahiya - Nomura Securities

Fair enough. I have just asked because you were pretty clear last time that that is what you were looking at. So is something changed or is it just that you don't want to comment on it?

Mark Jacobs

I’d say what we articulate last time is that the revolvers and replacing the revolvers we would expect to do that at the GenOn parent company level. So nothing has changed from what we’ve communicated before

Rick Dobson

Nothing has changed and everything is still on the table, its just too early to speculate on it.

Nitin Dahiya - Nomura Securities

On the sensitivities that you provide, are these pro forma for the move to PJM or are they on, if you like, as this basis where things stand today.

Mark Jacobs

Yeah the move to PJM would not effect those sensitivities that we provided that are primarily commodity price sensitivities.

Nitin Dahiya - Nomura Securities

So you just use a constant e-trade. Okay, so because that’s fixed that doesn’t move anything. And lastly, in terms of coal to gas switching, the worse is last year. Are you seeing any changes on that front?

Mark Jacobs

We’ve seen natural gas prices decline. But I would say this we are in the shoulder period year-over-year. So we really haven’t seen that. And again obviously we can tell you from our own portfolio what we are seeing. I think we are now getting into the part of the year as temperatures increase and load comes up that we may see more of that if gas prices continue to be under pressure. But I would say in kind of the shoulder periods hear the aggregate load levels haven’t been high enough to see a whole bunch of coal to gas switching.

Operator

The next question comes from Brian Chin from Citigroup.

Brian Chin - Citigroup

Just to confirm so the preliminary prospectus was going to be filed in mid-March of 2011?

Mark Jacobs

No we said that’ll be filed here by the end of this Q2.

Brian Chin - Citigroup

By end of Q2. Definitely didn’t hear that. Second is that the California Water Resources Board, approve a more stringent ones through cooling or reaffirm more stringent once through cooling set of requirements. Can you just talk through any sort of updated thoughts that you might have is already on that?

Mark Jacobs

Sure. Brian I think what you are referring to is the Board did adopt the policy once through cooling on actually Tuesday of this week. That policy impacts are manually on Ormond Beach units. We are currently reviewing the policy and the ability of our units to meet the compliance requirements. But the headlines are that are the both plans will have compliance dates of 20-20, but that date could change if the units are needed for reliability. I would say I am cautiously optimistic that we are going to be able to comply with that new rule without adding cooling towers or sharing the units down. But I would also acknowledge there were a number of last minute changes if they are hearing to adopt that rule and there is still some ongoing confusion over exactly what the other water board did approve.

Brian Chin - Citigroup

Okay. So mechanically, how could you meet the standards without putting in cooling towers? What are some of the options?

Mark Jacobs

Yeah there is a track 2 compliance where with true operational changes and you know we get the capacity factor of the plant isn’t that high we would be able to comply with rule. And I just say you know stepping back if you just look at it from a big picture, these are units out there that have single digit capacity factors they play a valuable capacity role. And you know given the limited run hours and limited impact on use of sea water, you just you know I’ll actually touch it doesn’t make a whole lot of sense to add lots of new capital such as cooling towers to those types of units.

Brian Chin - Citigroup

Right, right. Okay and then on the RPM auction are you guys generally thinking that its going to be this years auction that’s get effected by all of the different pending EPA rule changes or are you thinking that its actually more next year’s auction that’s going to be incrementally effected by the different rule changes?

Mark Jacobs

Brian I don’t think there is any question and again I can’t speak for others and we are we are going to have to see the results when they get posted I will tell you as we have thought about that as a team and developed our strategy for bidding clearly kind of what the environmental landscape and rules are going to be is something that kind of weighs in to that decision and again whether that shows up in prices this year the way people bid I think that’s going to be some we are going to have to wait and see the results of the auction.

Operator

The next question comes from Ameet Thakkar from Bank of America/Merrill Lynch. Please go ahead.

Ameet Thakkar - Bank of America/Merrill Lynch

Just a quick question on the Cheswick scrubber tie-in, that's scheduled to be finished sometime in 2Q. What sorts of incremental fuel expense should we expect from, lime or urea?

Rick Dobson

Ameet you are going to see a little bit increase in some of the operating O&M cost again you are going to see corresponding reduction in the emission prices I would say at the press level of emission prices that we have today. I wouldn't expect the economic from the Cheswick unit to be materially different once we get scrubber on from what they are today.

Operator

The next question comes from Michael Lapides from Goldman Sachs. Please go ahead.

Michael Lapides - Goldman Sachs

Hey, guys, my apologies. Asked and answered.

Operator

The next question comes from Neel Mitra from Simmons & Company International. Please go ahead.

Neel Mitra - Simmons & Company International.

Just had a question in California. What are the opportunities to lock in the incremental 690 megawatts of capacity at prices similar to what you did for 2012?

Mark Jacobs

Yes Neel, that's something we have got in the origination team that’s actively working on opportunities for that remaining un-contracted capacity and that’s something that team is focused on every day, they come into the office, and look for opportunities to monetize that capacity, remaining capacity that we have in the plans?

Neel Mitra - Simmons & Company International.

Do you think you’ll be able to realize prices similar to 2012, or is there a fundamental difference in the environment between those two years?

Mark Jacobs

Well, I say this I think every year is different and I think the time at which your contract provides for different sets of opportunities. Here so, again I wouldn’t look necessarily to 2012 to be a guide for prices we could get for that unit but again rest assure sure that our team is working to get the absolute best price for that capacity that we can get.

Neel Mitra - Simmons & Company International.

And then on coal to gas switching, may be looking a little bit more specifically how Hunterstown is running. Is that asset running as much as 2009 or have you seen the capacity factor come down to normalized levels?

Mark Jacobs

Yeah, we’ve seen Hunterstown town run somewhat but it did not run as much as we saw it run in periods when we sold coal to gas switching last year. So when you see when you go through the detailed disclosures we have, you are going to see the generation volumes from Hunterstown being down versus last year.

Neel Mitra - Simmons & Company International.

What about your stint the last month or so?

Mark Jacobs

Again, I’d say we’ll have a day here and there where it’s been picked up but I’d say in general we have not seen a lot of run hours understanding last month.

Rick Dobson

Yeah, Mark, you said it well. We’re in a shoulder period, that’s really difficult to see the differentiation you need to get into the summer and the fall like we had last year where Hunterstown did make a big push in the switching area.

Operator

Your next question comes from Gregg Orrill from Barclays Capital, please go ahead.

Gregg Orrill - Barclays Capital

Wanted to come back to the RPM auction again, and I was wondering if you had a view on sort of where the demand response, bidder's profitability wise and any thoughts you had on their bidding behavior in the upcoming auction?

Mark Jacobs

I don’t have any unique insights I think the demand responds, there is a range of different types of demand response I would say in general. I think that’s been one of the real benefits of the competitive market structures that it has brought demand response, non-traditional forms of supply to their, one of the things that we feel strongly about is the demand response have to live up to certain types of performance standards just like supply, it has to live up to. But the specifics of kind of where those individuals are going bid. Again that really isn’t wouldn’t be for us to speculate on.

Gregg Orrill - Barclays Capital

Okay. Also, what is your expectation on how EPA is going to roll out the proposal on the revised care rules sort of timing and how that's getting caught up in anything else in Washington?

Mark Jacob

I think there is no question that the political agenda has changed but when I come back and assess this it may not have changed as much as many including myself originally thought, and I think if you roll the cost back a little bit I think many people thought that CO2 legislation was going to be a near certainty. I think things have gotten deferred delayed on that as you are very well aware of. The EPAs has made a lot of resistance from multiple constituencies on actions that they take.

So, from a timing standpoint I think this is going to take a little bit long bit longer to play out here. That being said my expectation is we are going to continue to see more stringent environmental regulation overtime and again my expectation is that we will be making additional environmental upgrades to our fleet over time, one of the ways we have tried to address that is by providing transparency in our public filings in terms of the types of investments that we will be likely considering over the next couple of years.

Operator

Next question comes from Julian (Inaudible) Smith from UBS. Please go ahead.

Unidentified Analyst

Just wanted to ask a couple of quick questions. I know you haven't disclosed the hedge value or broken that kind of template but any change from the last disclosure as far as the hedges that you're willing to share with us?

Rick Dobson

No there isn’t something significant for that. We haven’t put any new hedges on and so we gave all the detail around the hedge components of the last couple of quarters so if you want it to remark, then you can do that work yourself but there is no significant new positions being put on the company

Unidentified Analyst

And then, secondly, out of the $54 million number that you guys discussed, is that entirely RPM or is there something else there needs to be aware of?

Rick Dobson

No that’s entirely RPM and again that most of that came from the planning year 2011 auction but as you know that planning year 2011 auction spills into 2012 so there is roughly I would say $27 million of that that impacts calendar year 2011 and $24 million or so that impacts calendar year 2012 and then a small piece of that, and that spills over into calendar year 2013

Unidentified Analyst

And then a final question, touching on another environmental issue here, the coal-ash proposed ruling that came out the other day, any initial read thoughts impacts if you will, timing?

Mark Jacobs

As most of you are aware that, that EPA action is really a response to the Asheville and TVA Kingston station. I think it’s important to point out that RRI doesn’t use long-term wet fly ash storage disposable like what the TVA Kingston station used, the vast majority of our station use dry handling in disposal methods.

That being said, we recognized the need for additional regulation on ash handling. We support a non-hazardous designation of coal ash. The EPA did release a proposed collateral on Tuesday as I am sure most of you are aware that was a 500-page proposal.

So our team is busy reviewing that proposal. But I think that the punch line here is that there were two options, the EPA laid out within that role; one is a hazardous treatment for non-beneficial use and the second path was a non-hazardous treatment. That’s a very unusual step for the EPA to take to provide kind of multiple options here. My sense is that’s in response to a significant amount of input and our effort under way to deviate from what I think would have been there, initial path of going down these hazardous root. But I think its too early to tell exactly how that’s going to impact us or how ultimately that role is going to play out.

Operator

The next question comes from Robert Howard from Prospector Partners, please go ahead.

Robert Howard - Prospector Partners

I wanted to check in just again about the 2012 auction. Was that the reduction in how much you won based on at all on any change in bidding strategy year-to-year or was that all by new sources of generation or demand response new things that might have bid into the auction?

Mark Jacobs

Again Robert the prices in that incremental option cleared. So we had a few set of side the assets are moving into the First Energy territory. We had a couple other assets [Bruno Island and El Rema] that did not clear in that original 2012 auction given those lower prices. So as I said there really isn’t I think anything any new news from my standpoint coming out of the interim auction here because they cleared pretty much on top over the base auction did.

Robert Howard - Prospector Partners

That's fine. With the impairments, does that analysis get completely redone with the merger in terms of as you're doing the merger accounting? Does that reach that again?

Rick Dobson

Howard there is different accounting in merger accounting under the acquisition FASB. So there will be a reevaluation again on the consummation of the merger. And it will be a reevaluation of our assets as for, because for accounting purposes, Mirant's the acquirer.

Robert Howard - Prospector Partners

Do the assumptions change in that? Do you go out a further number of years or do you have to source your pricing all from forward curves or anything that kind of is treated differently like that?

Rick Dobson

No the assumptions will be similar to what we have used to what we go through and do the net present value analysis, when a plant fails the test. So it will be in the same range of how we look at the fair value of the plants once they fail the test. So you will see our best effort, we will make an effort in the proxy when it's filed to project that in a pro forma basis and then that will get done in what I call final pro forma and that closes the transaction.

Robert Howard - Prospector Partners

But I guess that's going to have to be done for all of your assets.

Rick Dobson

It will be done for all of our assets versus ones that trip the discounted test.

Robert Howard - Prospector Partners

So in theory, these guys have just got impaired, if curves could move in such a way you're going to have to write it back up?

Rick Dobson

This is the one circumstance, that rarity in accounting and that if curves move back up those plans could be written up under that test.

Robert Howard - Prospector Partners

Okay, that's it for me, thanks.

Operator

The next question comes from Raymond Leung from Goldman Sachs.

Raymond Leung - Goldman Sachs

Hi, guys. Thanks for all of your time today. Just want to go back to the financing issue. I know it's still early in the process. You mentioned you may look at consent solicitations. Can you elaborate on that and talk about what you are thinking there and what boxes you may target?

Mark Jacobs

Yes Raymond again, the team is looking at a wide range options on that and I think it would be pre mature to speculate on that but again we are looking at kind of anything and everything in terms of part of the financing plan.

Raymond Leung - Goldman Sachs

Any idea when you know a better idea? What you are looking to do?

Mark Jacobs

We will announce that when we got that idea.

Operator

Next question from John King from Western Asset Management

John King - Western Asset Management

Quick merger structure question for you. If I understand correctly, Mirant Corp. will be merged into RRI Energy, which will then be renamed as Genon, do you have that right so far?

Rick Dobson

Actually the way it will work John will be that Mirant Corp. will be merged into a newly formed subsidiary of RRI Energy Corp. with Mirant Corp. being the survivor of that merger. And so as a result for the transaction Mirant Corp. would then be a wholly-owned subsidiary of RRI Energy which will then be renamed to Genon Energy.

John King - Western Asset Management

Okay great. The follow-up to that, will the rest of the corporate structures, the Mirant Americas structure and the Rema and the Orion structures below that, will those generally remain intact as they are or is there in the plan to integrate those or to do anything with those?

Mark Jacobs

As it relates specifically to the merger. I just went through what will be the only effect on corporate entities in terms of the merger.

John King - Western Asset Management

Okay. That's fair. And then lastly on the timing of the financing, did you say you intended to have the financing lined up and ready to go and executed prior to merger close? If so, would just the proceeds be held in escrow until closing? Is that what I understood from earlier in the call?

Rick Dobson

The team is working on the best way to do that but it is a requirement, our condition to closing the merger. That financing be addressed. We ultimately do that ahead of time or concurrent with again, those are the options of the teams looking at.

Mark Jacobs

Thank you very much for your time today. We appreciate your interest in RRI Energy. Have a good day.

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