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Executives

Steve Himes – Director, IR

Ed Muller – Chairman, President and CEO

Bill Holden – SVP and CFO

Paul Gillespie – SVP, Tax

John O’Neal – SVP and Chief Commercial Officer

Analysts

Brian Chin – Citigroup

Neel Mitra – Simmons & Company

Lasan Johong – RBC Capital Markets

Ali Agha – SunTrust Robinson Humphrey

Jeff Coviello – Duquesne Capital

Sakeeb Meerzo [ph] – JPMorgan

Brandon Blossman – Tudor, Pickering, Holt & Co.

Brian Russo – Ladenburg Thalmann

Julien Dumoulin-Smith – UBS

Keith Stanley – Deutsche Bank

Terran Miller – Knight

Gregg Orrill – Barclays Capital

Ameet Thakkar – Bank of America/Merrill Lynch

Nitin Dahiya – KLS Diversified

Mirant Corporation (MIR) Q2 2010 Earnings Call Transcript August 6, 2010 9:00 AM ET

Operator

Good day everyone and welcome to the Mirant Corporation second quarter 2010 earnings call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Steve Himes, Director of Investor Relations at Mirant. Please go ahead.

Steve Himes

Thank you, Angel, and good morning, everyone. Thank you for joining us today for Mirant’s second quarter 2010 earnings call. If you don’t already have a copy, the press release, financial statements, and second quarter filing with the SEC are available on our Web site at www.mirant.com. The slide presentation is also available on our Web site, 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, our Senior Vice President of Tax; and Gary Garcia, Mirant’s Treasurer.

With regard to the Safe Harbor slides; during the call we will be making forward-looking statements including about the proposed merger with RRI Energy, which are subject to risks and uncertainties. Factors that could cause actual results to differ materially from management’s projections, forecasts, estimates, and expectations, are discussed in the Company’s SEC filings. These filings as well as our materials presented today describe how you may obtain copies of the SEC filed materials related to the proposed merger, as well as information regarding persons who may participate in the merger solicitation. We encourage you to read all of the safe harbors and the materials therein.

Lastly 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 Web site or at the end of our presentation.

With that I would like to turn the call over to Ed.

Ed Muller

Thanks, Steve, and good morning, everyone. I’ll start on slide number 5 with an update on our announced and planned merger with RRI to create GenOn Energy. First, as you can see on the slide, we and RRI together filed an amended S-4 in response to comments we received from the Securities and Exchange Commission. We did that in early July. We’ve received further comments and we expect with RRI to file a further amended S-4 very shortly.

Second, we have entered into agreements with financial institutions for the financing for GenOn. We are planning to arrange $2.9 billion of financing for GenOn, which will refinance $1.8 billion of funded debt and will replace existing revolving credit facilities at each of Mirant and RRI. The new financing will consist of a revolving credit facility, a term loan, and unsecured notes at GenOn.

In terms of regulatory approvals we have now received the necessary clearance from the New York State Public Service Commission. We have as well as we announced earlier this week received approval from the Federal Energy Regulatory Commission.

We have also received a second request from the Department of Justice in connection with our filing into the Hart-Scott-Rodino Act, and we are proceeding to respond. We continue to expect the merger to close by the end of 2010.

Turning to the next page, slide number 5, financial highlights; you can see our numbers there as we have announced them this morning. Our adjusted EBITDA for the second quarter was $149 million compared to $200 million for the same quarter last year.

As in the past, our hedging strategy provided a positive contribution to our financial results. Our realized value of hedges was lower, because power prices increased in the second quarter and because our power hedges for 2010 were put on at lower power prices than our power hedges for 2009.

Also, our fuel oil management activities in the second quarter of this year contributed a relatively small amount to our results compared to the same period in ‘09 and that is because we had a very favorable settlement of inventory hedges last year in the second quarter. Those decreases were offset somewhat by the higher energy gross margins from our Mid-Atlantic generation that resulted both from higher power prices and lower emissions costs.

For the first six months, all of those factors are applicable. In addition, we had some factors which we described to you during our May call, and those are lower energy gross margin from Northeast generation and lower net gains from sales of emissions and those show why the 2010 first six months of $311 million of adjusted EBITDA is lower than 2009 of $395 million. Bill Holden will walk through these numbers in further detail shortly.

On slide number six, the same operations data that we have been providing showing to you that our safety rate performance continues to be very good as does our commercial availability.

Turning to page number seven, the market update that we provide each quarter, none of this should surprise anyone. In the near term, our natural gas prices have increased some, in the longer term they have decreased some. When we net everything out, you can see that on-peak dark spreads in the near-term have increased while off-peak dark spreads in the near term have decreased and dark spreads in the long term have declined generally.

Turning to page number eight, the long-term story for Mirant and in essence for this sector is that reserve margins continue to be forecasted to decline. If you look at the bottom line, that is solid orange line that is for PJM East, which includes our Mid-Atlantic plant.

We can see that, as has been the case, we are marching inexorably toward a period of reserve margins that are not safe and are inadequate. This demonstrates the value of incumbency. This is coming about because demand is forecasted to grow even given the current economic conditions and because little new generation is being built. Again I repeat this demonstrates what I think is value of incumbency and a value that is only going to increase.

Turning to page number nine, our hedge levels as we provide each quarter, you will see when you look to the right some open white boxes, which says that our hedge levels have decreased in these items. For our coal in 2010, that is because compared to the last time we provided you with this chart, we have burned more coal than we expected and we expect to burn more coal for the remainder of the year. For the power, when you look at ‘12, ‘13 and ‘14, those decreases reflect not that we have taken off hedges, but rather than our forecasted generation from our coal fleet has gone up.

And then turning now to page number 10, an update on the Marsh Landing generating station, which we will be building out of our Contra Costa site in the Bay area. We are moving right along here as planned. The California Energy Commission, which has to give us the necessary environmental permits, is expected to give a vendor its final decision at the end of this month.

The CPUC, the California Public Utilities Commission approved the PPA that we entered into with for the gas and electric and did so right at the end of July, both of those approvals, the one that is expected at the end of August from the California Energy Commission, and the one we have already received from the California Public Utilities Commission are subject to request for re-hearing generally within a 30-day period.

We are moving along with project financing and expect to close it in the third quarter, and we expect to commence construction later in this year, and as we have consistently planned expect to have the project up and running by mid-2013.

And with that, I’ll turn this over to Bill, who will give us more of the details.

Bill Holden

Thanks, Ed, and good morning, everyone. As shown on slide number 11, net loss was $263 million for the second quarter of 2010 as compared to net income of $163 million for the same period in 2009. The decrease in net income of $426 million, primarily results from a decrease of $326 million in unrealized gross margin, a decrease of $48 million in realized gross margins, an increase of $36 million in operating expenses, and an increase $15 million in interest expense.

The increase in operating expenses reflects the $62 million gain from MC Asset Recovery settlement with Southern in 2009, partially offset by $37 million postretirement healthcare benefits curtailment gain in 2010. The increase in operating expense also includes $17 million of higher depreciation, primarily related to the scrubbers that were placed in service late last year.

Net income was $144 million for the first six months of 2010 as compared to $543 million for the same period in 2009. The decrease of $399 million, primarily results from a decrease of $228 million in unrealized gross margins, a decrease of $80 million in realized gross margins, and an increase of $68 million in operating expenses, and an increase of $27 million in interest expense.

In addition to the effect of the MC Asset Recovery settlement in 2009 and the postretirement healthcare benefits curtailment gain in 2010. The increase in operating expenses for year-to-date also included $32 million higher depreciation primarily related to the scrubbers and $14 million lower gains on emission sales for the year-to-date 2010.

Adjusted net income was $46 million for the second quarter 2010 as compared to $131 million for the same period in 2009, and $107 million for the first six months of 2010 as compared to $246 million for the first half of 2009.

The most notable items to bridge adjusted net income to net income, a GAAP measure, are unrealized gains or losses on derivatives, bankruptcy charges and legal contingences, and the postretirement benefit curtailment gain.

Unrealized losses on derivatives were $340 million for the second quarter 2010 as compared to net unrealized losses of $14 million for the same period in 2009. For the year-to-date, we had net realized gains of $12 million as compared to unrealized gains of $240 million for the first half of last year.

The net unrealized losses for the quarter resulted primarily from increases in forward power prices and from power and fuel contracts that settled during the period for which net unrealized gains had been previously recognized.

The net unrealized gains for the year-to-date resulted from decreases in forward power and natural gas prices partially offset by unrealized losses from power and fuel contracts that settled during the period for which net unrealized gains have been previously recognized. In addition, the quarter and the year-to-date reflect the recognition of coal agreements at fair value, beginning in the second quarter of 2010.

Adjusted EBITDA, which is adjusted net income less interest, taxes, depreciation, and amortization was $149 million for the second quarter of 2010 as compared to $200 million for the same period in 2009 and $311 million for the first six months of 2010 as compared to $395 million for the first half of 2009. The decreases in adjusted EBITDA for the periods were 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 quarter reflects higher depreciation expense of $17 million, higher net interest expense of $16 million and higher provision for income taxes of $1 million.

The increase in interest, taxes, depreciation and amortization for the year-to-date reflect higher depreciation expense of $32 million and higher net interest expense of $30 million offset by lower provision for income taxes of $7 million.

Finally, our earnings per share based on adjusted net income decreased to $0.32 per share for the second quarter of 2010 from $0.90 per share for the second quarter of 2009 and decreased to $0.73 per share for the first half of 2010 from $1.70 per share for the same period last year.

Turning to slide number 12. This slide presents the components of the Company’s realized gross margin for the second quarter of 2010 and the six months ended June 30, 2010, as well as the comparable periods for 2009. Energy, shown as the light blue bar, represents gross margins from the generation of electricity at market prices, fuel sales and purchases at market prices, fuel handling, steam sales and our proprietary trading and fuel oil management activities.

The increase of $25 million for the quarter and the increase of $24 million for the year-to-date were principally the result of higher energy gross margins from our Mid-Atlantic generating facilities, reflecting higher power prices and a decrease in the cost of emissions allowances offset by lower realized gross margins from our fuel oil management activities.

Fuel oil management contributed relatively small amount in 2010 relative to 2009 because of the value realized on inventory hedges that settled in the second quarter of last year. The year-to-date also reflects lower energy gross margins from Northeast generating facilities.

Contracted and capacity, the dark blue bar represents gross margin received from capacity sold in ISO and RTO administered capacity markets through RMR contracts, through tolling agreements and from ancillary services.

The slight increase for the quarter resulted from higher capacity prices in the Northeast. The increase of $9 million for the year-to-date resulted primarily from higher capacity revenues across all three regions.

Finally, realized value of hedges, the yellow bar, was down by $74 million for the quarter and was down by $113 million for the year-to-date. As Ed mentioned, the realized value of hedges was lower for the 2010 periods because the average market price for power was higher during 2010 for the same period in 2009, and also because our power hedges for 2010 were executed at lower prices than our hedges for 2009.

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 number 13, this slide presents cash flow information for the second quarter of 2010 and the six months ended June 30, 2010 and for the comparable periods of 2009. The decrease of $265 million in cash provided by operating activities for the quarter is principally related to a decrease of $82 million related to changes in collateral, primarily as a result of increases in forward power prices.

There was also an increase of $60 million in inventories, as a result of larger volume of fuel oil purchased at higher prices, lower realized gross margin of $48 million, a decrease of $38 million as a result of changes in net accounts receivable and payable, an increase of $16 million in net interest expense, and a decrease of $12 million in funds on deposit.

The decrease of $234 million in cash provided by operating activities for the year-to-date is principally related to lower realized gross margins of $82 million, excluding the effect of non-cash lower cost of market adjustments primarily on fuel inventory, an increase of $46 million in inventories, as a result of larger volumes of fuel oil purchased at higher prices, a decrease in cash provided of $43 million related to changes in collateral, an increase of $30 million in net interest expense, and a decrease of $24 million in funds on deposits.

Adjusting for the cash received as proceeds from the sales of emissions allowances and capitalized interest related to cash interest paid arrives at adjusted net cash used in operating activities of $154 million for the quarter compared to adjusted net cash provided by operating activities of $150 million for the year-to-date.

Reducing these amounts for total capital expenditures, excluding capitalized interest, results in adjusted free cash flow deficits of $226 million for the quarter, and $7 million for the first six months of 2010.

Our Maryland Healthy Air Act capital expenditures and Marsh Landing capital expenditures and working capital requirements are nonrecurring 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 both programs results in an adjusted free cash flow deficit of $195 million, or $1.34 per share for the second quarter 2010, and adjusted free cash flow of $72 million, or $0.49 per share for the 2010 year-to-date period.

Turning to page 14, this slide presents our debt and liquidity as of June 30, 2010. Consolidated debt was $2.562 billion at June 30, 2010. As of June 30, Mirant had total cash and cash equivalents of $1.849 billion of which $431 million was restricted at Mirant North America and its subsidiaries, and was not available for distribution to Mirant at June 30.

Based on the results of the second quarter, we expect Mirant North America will make a distribution of approximately $110 million later this month. Although we expect Mirant North America to remain in compliance with its financial covenants, it is likely it will be restricted from making distributions in future periods beyond amounts permitted for interest payable by Mirant Americas Generation, primarily because of the remaining payments on the capital expenditure program to comply with the Maryland Healthy Air Act.

When the capital expenditures no longer affect the free cash flow calculation, Mirant North America is expected to be able to again make distributions. We do not expect the potential restriction on future distributions to have any effect on operations.

Finally, our total available liquidity, including amounts available under the Mirant North America revolver and the synthetic LC facility was $2.5 billion.

Turning to slide number 15, this slide presents a breakdown of our projected capital expenditures for 2010 and 2011. We expect to pay $269 million related to the Maryland Healthy Air Act in 2010. $77 million of this amount was paid through Q2. Other environmental expenditures include the remaining $33 million deposit in the escrow in the third quarter of 2008 and expected to be spent between 2010 and 2012 for control of small dust particles as part of the Potomac River agreement.

Our estimate for normalized maintenance CapEx remains at approximately $50 million to $60 million per year and reflects the current outlook for commodity prices. Construction expenditures include the estimated amounts for the construction of our Marsh Landing generating facility, which will commence operations in mid-2013.

With that, I’ll turn it back to Ed, who’ll wrap up and open the call for your questions.

Ed Muller

Thanks, Bill. I’m on slide number 16. So to summarize, we are marching along right on schedule to close and complete the merger with RRI to create GenOn Energy, which will deliver significant value to stockholders through the savings that we have said and commit to achieving.

As in the past, hedging has continued to cushion Mirant’s results and did so both in the quarter and in the first six months from the effects of relatively low commodity prices. The markets, particularly Eastern markets, are forecasted to tighten because little generation is being built reiterating the value of incumbent positions.

Finally, we are marching along as planned and as we had said we would to permit finance and commence construction of our Marsh Landing generating facility later this year, so that it will go into operation in mid-2013.

With that, Angel, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions). And we’ll go first to Brian Chin, Citigroup.

Brian Chin – Citigroup

For the slide number 9, where you had forecasted volumes going up, just what’s caused your outlook to change on the volumes? A review of the macro economy, is it commodity prices? Can you give a little bit color there?

Ed Muller

John, do you want to take this?

John O’Neal

In general, basically our forecasted generation is going up slightly just because of changes in commodity prices. We use a forward curve. This is not our own forecast at all. We’re just relying on the forward curves based on a July curve date, and it’s a reflection of commodity prices at that time.

Brian Chin – Citigroup

And then secondly, can you remind me which hub do you tend to hedge up most of your power sales contracts at? Is it an agglomeration of PJM East, sort of nodal points, is it PJM West?

Ed Muller

John?

John O’Neal

We generally used, as you would expect, the most liquid points in the market, for the most part we’re using the PJM West Hub. We have in addition to that for a portion of our hedging, done some hedging with NYMEX Henry Hub gas swaps, so there’s a portion of our hedges that are that, that primarily is for elongated hedging. As we move closer in we convert our hedges from the West Hub to the Pepco zone, which is where our generation is located. If you think about that, six months to 12 months, 18 months out, we’re rolling all of our hedges from the Pepco or from West Hub or from natural gas into the Pepco zone where our generation is located.

Brian Chin – Citigroup

Do you hedge out your basis differentials at the same time that you put on your hedges on PJM West or do you do it when you shift over to the Pepco zone?

John O’Neal

You’re talking about our power basis?

Brian Chin – Citigroup

Yes.

John O’Neal

Generally, it’s done when we convert the hedges to the Pepco zone.

Operator

And we’ll go n ext to Neel Mitra, Simmons & Company International.

Neel Mitra – Simmons & Company

Just wanted to get your thoughts on the Clean Air Transport Rule, there’ve been any CapEx impact to the Maryland fleet given that you have the requirements under the Maryland Healthy Air Act? And then the second part, if your long emission allowances with discoveries you already have, how would the lack of interstate trading impact the amount of emissions allowance you’d be allowed to sell?

Ed Muller

I’m going to let John answer these, but let me give you a preface first. I think, it is important that we recognize that these are proposed rules, in fact proposed with three different options. So we are far from knowing what the rules will be, and when they will be. Given the number of options provided and the general uncertainty with any proposed rule dealing with the complex issues that this rule is attempting to deal with, it is very hard to forecast clearly where we’re going.

So I think, it’s incumbent on all of us in the sector and who think about this not to start jumping to any conclusions in any direction here. We, of course, are spending a lot of time assessing this and figuring out what we think is the best solution both as a matter of policy and for Mirant. So I say that because each time the deal with these, I get the sense that folks think because they’ve been proposed, they are already rules tomorrow morning. They are not and they will not be. So with that John do you want to address Neel’s question?

John O’Neal

Yes, as to the second part of the question, Neel. In general, we are net long emissions credit for SO2 and NOx as a result of the environmental controls we’ve put on in Maryland. As you know, when the rule was proposed, prices for those credits dropped significantly such that the value of those credits is really immaterial to our results going forward. So while we do have a relatively long position given the uncertainty around that proposed rules, the value of those credits is de minimis. It’s unclear as to whether or not they’ll have any value going forward.

Ed Muller

As to your first question we would think for the Maryland plants which we have scrubbed and put NOx controls on, we think we’re state-of-the-art on all those.

Neel Mitra – Simmons & Company

And then the recent run-up in Central Appalachian coal prices. Are you seeing the same kind of run up in the type of coal that you generally use for your fleet in outer years, and I’m specifically referring to the higher sulfur in Northern Appalachian coal?

John O’Neal

I would say the market has moved up somewhat in sympathy over the last month or so. The Northern App prices falling, what we’ve seen somewhat in the Central App. The back of the curve has not moved nearly as much as what we’ve seen in the front of the curve. The front of the curve has moved up more than the back half. The back is relatively unchanged over the last several months.

Operator

And we’ll go next to Lasan Johong, RBC Capital Markets.

Lasan Johong – RBC Capital Markets

I’m not quite sure what is going on with the generation in the second quarter, but your Mid-Atlantic mid-intermediate generation and your peaking units doing very well, but the Basel was down significantly. I’m not sure I understand why.

Ed Muller

John, do you want to take this?

John O’Neal

In the second quarter, we had two rather large planned outages at our Maryland stations. One was at the Morgantown Station, another was at Chalk Point Station. Both of those were planned outages. They were scheduled with the ISO and they went off as planned during the second quarter. That resulted in lower generation in 2010 relative to 2009. Adjusted for those outages, our generation would have been higher in the second quarter of 2010 than it was in 2009, but again, we had large planned outages during the quarter.

Lasan Johong – RBC Capital Markets

So does that mean weather was strong? How much pickup have you seen in industrial activity?

John O’Neal

We are not a load serving entity, so it’s hard for us to account it much on look. Certainly the weather has been hot and you’ve seen a lot of demand in the system that’s resulted in increase in our generation. For example, if you look, you’ll see that our intermediate and our peaking units in the Mid-Atlantic ran much more in the second quarter of 2010 than they did in 2009. That’s reflective of higher prices and increased demand on the system during the quarter.

Lasan Johong – RBC Capital Markets

On the NOLs, why does the merged entity have to wait five years before it can utilize the NOLs and how much of the $2.7 billion will be used thereafter?

Ed Muller

Paul.

Paul Gillespie

The merged entity will be required to reset the so-called annual use limitation at the time of the merger and that reset will be based on the current stock prices. That will have the effective substantially diminishing the amount of the NOLs that can be used compared with the pre-merger period. As a result of that we do not anticipate being able to use NOLs for five years. Once we’re out of that five-year period, we expect to be able to use somewhere between $100 million to $125 million of NOLs per year.

Lasan Johong – RBC Capital Markets

For how long?

Paul Gillespie

Until the NOLs expire.

Lasan Johong – RBC Capital Markets

All $2.7 billion?

Paul Gillespie

No. We expect that we will write-off approximately $2 billion of the Mirant NOLs because they will expire unused.

Lasan Johong – RBC Capital Markets

Last question, the second request for Hart-Scott-Rodino, did that have anything to do with Mid-Atlantic market power issues?

Ed Muller

It is a broad request and this is not uncommon in the reviews done by the government either the Department of Justice as it’s reviewing this matter or the Federal Trade Commission, and I wouldn’t draw any other conclusion there nor will we go into any of the particulars, but it’s a broad request.

Operator

And we’ll go next to Ali Agha, SunTrust Robinson Humphrey

Ali Agha – SunTrust Robinson Humphrey

Ed, as you look at your performance through the first half of the year, would you categorize that as on plan, above plan, below plan. How would you look at the numbers that have come in so far?

Ed Muller

Ali, when we announced the merger in April we said that we would no longer be giving guidance and so I don’t want to go down the path here of comparing to plan and so on.

Ali Agha – SunTrust Robinson Humphrey

I wasn’t thinking that you would quantify it, but just wondering if things have been running as you would have wanted them to.

Ed Muller

We are content with how things are running.

Ali Agha – SunTrust Robinson Humphrey

On the debt refinancing that is going on as part of the merger process, the pricing that you’re looking at or getting a sense of for the new debt, the cost of that debt, is that coming in again as you would have thought higher, lower, any color on that?

Ed Muller

No.

Bill Holden

I would say it is certainly within our definition of accessible financing in the merger agreement, beyond that I can’t really comment, we haven’t priced all of the notes in the term loan yet, and so that will happen when we bring them to market, but certainly within the definition of accessible financing.

Ali Agha – SunTrust Robinson Humphrey

Roughly the timing, Bill, on having that lined up?

Bill Holden

Well, as you will note, we’ve signed the commitments for the revolving credit facility and then the syndication for that is in process. We haven’t made any decisions yet as to when we will launch the offering for the term loan and the notes although we continue to think about it the same way, and that is that we recognize that if markets are open and we can get the financing completed then it takes that risk off the table with respect to completing the merger. So we’re continuing to look at it, haven’t made any decisions to this point.

Ali Agha – SunTrust Robinson Humphrey

Final question, when you look at your current liquidity and cash position are you still of the opinion that that is the amount you would need currently to play out your stress case scenarios or has that thinking changed somewhat?

Ed Muller

We think that the amounts we have are appropriate still.

Ali Agha – SunTrust Robinson Humphrey

So you don’t think that you have any excess cash still at this point?

Ed Muller

Nothing that we would consider meaningful.

Operator

And we’ll go next to Jeff Coviello, Duquesne Capital.

Jeff Coviello – Duquesne Capital

I had I guess just a clarifying question. So on the revolver, the $750 million to $1 billion is actually that’s now committed with a group of banks?

Bill Holden

Correct.

Jeff Coviello – Duquesne Capital

Just kind of a question on environmental stuff. There’s been this local jurisdiction I guess Montgomery County has the carbon tax. I know, you guys are challenging, and I just wanted to understand what’s your thoughts were around the challenge and the basis for appeal, and if there’s any other kind of jurisdictions that are talking about that, or should we look at it as a one-off?

Ed Muller

Well I don’t know of other jurisdictions that are looking at it right now. We have appealed the decision of the U.S. District Court in Maryland to the United States Court of Appeals for the Fourth Circuit challenging this levy, which as you’ll recall, was designed so that it imposes a fee on one entity in Montgomery County. We think that as a matter of policy that this is very unwise policy. Carbon issues, climate issues and so on should be addressed globally, and at the very least, if we’re not going to address them globally, they ought to be addressed nationally.

As we’ve seen, we are not yet at a national consensus on this. To move to a regional level is, I think, much less wise than national. To move to a county is particularly unwise and when you think about it, the Dickerson station in Maryland is fully scrubbed and has NOx controls.

To the extent to that it’s cost of production is raised by this fee, it means that it may from time to time be displaced by coal plants further to the West that do not have those controls, and whatever the emissions are, they will be made. They will get into the atmosphere because there is no fence at the Montgomery County line nor there’s a fence at the U.S. line for carbon emission. So it’s a just matter of very bad policy. I won’t address the various legal arguments. I don’t think that would be appropriate, but we intend to challenge it and we have filed and appealed in the United States Court of Appeals for the Fourth Circuit.

Operator

And we’ll go next to Sakeeb Meerzo [ph], JPMorgan.

Sakeeb Meerzo – JPMorgan

Just on HSR, so the broad second was received about three weeks ago. I was just wondering if there is any plan to substantially comply with that and have you given the DoJ all they need? On the financing, slide number four mentions 1.9 in unsecured notes. It was my impression it was $1.9 billion in aggregate between the term loan and the bonds and it lines up with the notional on the four tranches being redeemed, and I think your S-4 mentions 1.9 in aggregate as well. So just wondering if there is an additional $500 million of financing plan. And then whenever you do come to market with the notes and if it’s before foreclosing the deal, is there any plan to take out the legacy bonds ahead of close to avoid double interest?

Ed Muller

We’ll answer them in reverse order. Bill, why don’t you take the financing questions first?

Bill Holden

Up to $1.9 billion for the notes, we’ve done that to be able to give us flexibility for two reasons. One, if the revolver is $750 million and instead of $1 billion, we’ll have the ability to move some of that into the funded debt. And then second, we also wanted the flexibility to be able to react to market conditions when we launch and be able to adjust the components of the funded debt if we see that that is economic to do.

The total amount of financing that we intend to raise, including the revolving credit facility is still $2.9 billion. As we have outlined, our base plan is that we will have a $1 billion revolving credit facility at $500 million term loan in a $1.4 billion notes offering.

Ed Muller

As to your question on the second request on the Hart-Scott-Rodino Act, we’re proceeding to respond and our expectation is that we will have the necessary clearance in place, so that we can close this transaction, complete the merger before the end of the year.

Sakeeb Meerzo – JPMorgan

Bill, just on the second part of the financing question, about if you come to market earlier on the bonds to take advantage of the firm market.

Bill Holden

If we fund into escrow one of the conditions for the availability of the revolver and for the release of funds to escrow would be the closing of the merger, so we would not be able to redeem the existing debt at Mirant North America RRI in advance of closing.

Operator

And we’ll go next to Brandon Blossman, Tudor, Pickering, Holt & Co.

Brandon Blossman – Tudor, Pickering, Holt & Co.

You hit most of my questions. Can we talk about hedging strategy, it looks like very little was done, just a small increment in 2011 during the quarter. Looking forward, does that imply that you see dark spreads looking a little bit better in the future than they do currently?

Ed Muller

John, do you want to take this?

John O’Neal

Brandon, we traded off here over the last several years. We have put on hedges in prior period at levels that we found very attractive. As you know we hedged to protect against the downside price environment, and we think our current hedges protect us against that downside price environment, so we’re very comfortable with our hedge levels.

Certainly, we think that as you we look at reserve margins and other things that you look out in the future now with generation getting build, environmental things coming our way, we think there’s an expectation that markets could tightened and that could create some upward pressure on prices, but in general, we’re hedging to protect against the downside price scenario, and we feel that our current hedge levels provide that.

Ed Muller

Let me just augment what John said, we will continue to have the approach of hedging out this profile, the slope of these curves on the chart on page nine will be consistent going forward, but we are at the same time as to when we put on hedges and so on we are generally opportunistic is assessing the market. So I wouldn’t draw any inference here that we’ve changed our approach.

Brandon Blossman – Tudor, Pickering, Holt & Co.

Somewhat related smaller item. The Morgantown blending facility, when will that come online and will that change your kind of coal procurement strategy for that facility?

Ed Muller

John?

John O’Neal

It will come online later this year. We expect sometime in the fourth quarter. It will give us a lot more flexibility to take a larger variety of coals into Morgantown than we do currently. As we’ve described in the past we generally are burning the Northern App coal. In the past that’s been around at three pound sulfur at Morgantown.

With the scrubbers that we have in place we can go to higher sulfurs, so that creates opportunities to burn up the 4, 4.5 pound sulfur. We think with the blending facility that will give us some opportunity to try even more things including maybe potentially some higher sulfurs that we blend with some lower sulfur Central App and deliver an overall lower cost to the facility going forward.

Right now as you look at the forward curve for coal, the Northern App prices are generally the lowest out there. But that changes all the time. We occasionally will see a distressed cargo with Central App. or very high sulfur Northern App that is blended with the Central App to come down and hit our sweet spot for that facility. So the blending facility is going to give us a lot more flexibility than we have now. We think over time it will result in lower delivered cost at Morgantown that we have now. But as we look out right now the Northern App prices generally are the lowest from the board.

Operator

And we’ll go next to Brian Russo, Ladenburg Thalmann.

Brian Russo – Ladenburg Thalmann

Could you just maybe comment on your coal delivery costs? I see on slide number 20, you’ve got your average contract price prior to delivery.

John O’Neal

Generally we pay somewhere between $20 to $23 per ton to deliver up to our Maryland facilities, and it’s about the same for Potomac River as well. Three Maryland facilities are served by TSX and the Potomac River Station is served by the Norfolk Southern.

Brian Russo – Ladenburg Thalmann

Any comments on what you’re seeing in terms of your basis differential in the forward years?

John O’Neal

It has improved somewhat. We’ve actually had a very hot summer, so the Pepco base is relative to the PJM West Hub has been very strong this summer and that’s translated into modest improvement further off the curve, but generally, the curve has not moved very much further off the curve for that basis.

Operator

And we’ll go next to Julien Dumoulin-Smith, UBS.

Julien Dumoulin-Smith – UBS

Just wanted to clarify on Brian’s comments with regards to basis. I wanted to find out what nominally are you seeing as far as basis, just kind of a dollar figure, if you will, or a percent figure of power prices? Relative to historicals, have you seen any compression? Just to whatever degree you can comment there would be appreciated?

John O’Neal

I don’t have the exact numbers right in front of me. It obviously changes a bit. The on peak basis is different than the off peak basis and the shape of that changes out the curve. It’s measured in dollar per megawatt hour. It’s several dollars per megawatt hour better than the West Hub, and again, I don’t have it right in front of me.

In terms of where it is, I would say it’s lower than it has been in the past as natural gas prices declined and as fuel costs in general declined. The base is compressed relative to the West Hub as you would expect and so that has occurred as well. So in general, it’s lower than it was several years ago. It’s obviously here in the front of the curve it’s been higher than the forward curve had it because of the very hot weather that we have seen.

Julien Dumoulin-Smith – UBS

And then the second question I had, this is going back to a comment on the RRI call. Just looking at the delta between the CapEx forecast to 2014 and the S-4 seems that there was $146 million delta there. You might have been able to comment on where that difference in point of view on environmental values came from?

Ed Muller

I am going to let Bill answer the first. I don’t want to know will we go into the details of what is in the S-4, but Bill, within those confines if you can broadly address this.

Bill Holden

I think we have described this generally in S-4, but we took the RRI with management case and then we applied some of our assumptions regarding the potential impact to future environment legislation, most notably the Clean Air Interstate Rules and it was really as a result of those assumptions that we made the changes to the RRI management case.

Operator

And we’ll move next to Keith Stanley, Deutsche Bank.

Keith Stanley – Deutsche Bank

I know you don’t want to get into too many of the details of the S-4, but this is a very quick question, can you disclose if the martial ending gross project is a part of those internal projections into 2013 and 2014?

Ed Muller

I don’t want to start unwinding it. Each company as you would expect for its Board prepare projections. Those projections are reflected in the S-4 taking into account what each company’s management saw as the things occurring out in the outer years. Bill talked about the CAIR rules and you can imagine that as I said earlier in this call figuring out what those things are going to be is fraught with a lot of uncertainty right now. So beyond that we’re not going to go.

Keith Stanley – Deutsche Bank

Presumably though since you seem to be on target with this project that would be included in sort of what management is expecting for the future?

Ed Muller

Well, I don’t want to presume anything. We are on target for that project and you can look back and see how long we have been projecting that we’ll be on target and draw whatever conclusions you wish, but beyond that we won’t go.

Operator

And we’ll move next to Terran Miller, Knight.

Terran Miller – Knight

Just another follow-up on the financing plan and I apologize, but A) Are the bank facilities going to be secured, and if secured what are they going to be secured by? And have you made any determination whether or not the senior unsecured notes will be similar in structure to the existing RRI notes or do you expect it to have a different covenant package?

Bill Holden

I’ll start with the bank facility and the term loan. The credit facility and the term loan will be secured obligations. They will be secured obligations at the GenOn level. They will be guaranteed by certain of the subsidiaries of GenOn. I think, we’ve noted in the 10-Q that the subsidiaries of Mirant North America, excluding Mirant Mid-Atlantic and MET, would be expected to be guarantors.

However, the ability of those subsidiaries to be guarantors will depend on the ability to meet the debt incurrence test that’s in the MAG Indenture and the one that specifically applies to the subsidiaries is the consolidated debt-to-EBITDA ratio of 6.75 times or less and so to the extent we meet that covenant then the subsidiaries would be guarantors, but I’d reiterate Mirant Mid-Atlantic and MET would not be guarantors and MAG itself would not be a guarantor.

And then on the RRI side, the Reliant Mid-Atlantic and Reliant Energy Services likewise would not be guarantors. With respect to the notes, I don’t have a lot to offer there yet and we haven’t completed all the final documentation on the notes. We expect they would be issued at the GenOn level, but beyond that we haven’t made all the final determinations.

Operator

And we’ll go next to Gregg Orrill, Barclays Capital.

Gregg Orrill – Barclays Capital

Do you have an estimate of the NOL for the combined company?

Ed Muller

Paul?

Paul Gillespie

We have a five-year outlook for the use of the NOLs for the combined company. We do not have an estimate of the NOLs for the combined company other than what appears in the S-4. We do anticipate however that we will continue to apply a valuation allowance to the deferred tax asset that results from the NOLs.

Gregg Orrill – Barclays Capital

And then on trona, can you speak to the ability to use that as a way to comply with the onslaught of EPA regulations notably that have rule within the context of the agreements you have in Virginia with the Potomac River?

Ed Muller

Well, using trona has proved effective for us at Potomac River. We have run tests using a very close chemical cousin, sodium bicarbonate and stuff that comes in the nice orange Arm and Hammer box. We have to have it in a finer grind. Have run some tests and are seeking approval in the Virginia from the authorities to substitute it for trona, which would give us some operational improvements. But if you question more broadly, can this be used in other plants? It can be. It depends what limitations are put on the plants and whether the increased costs render the plant still viable.

Gregg Orrill – Barclays Capital

Do you think trona qualifies as a best available control technology?

Ed Muller

The level of removal for trona and its various cousins is less than the level of removable achieved by a scrubber.

Operator

And we’ll go next to Ameet Thakkar, Bank of America/Merrill Lynch.

Ameet Thakkar – Bank of America/Merrill Lynch

You guys saw fairly a good result from the latest PJM RPM capacity auction. I was wondering if you could kind of tell us how much capacity you cleared in the 2013, ‘14 auction and what you guys are thinking as far as kind of broader picture items that we should think about for the upcoming auction next May.

Ed Muller

As you know, we have to comply very carefully with the various rules here, and it is important in our competitive position. So beyond what is public already we won’t be going.

Operator

And we’ll go next to Nitin Dahiya, KLS Diversified.

Nitin Dahiya – KLS Diversified

Just one question on the refinancing stuff. You did say that even if you were to do the new bonds before you would have put them in escrow and kind of take out the old debt only with the transaction. But with the respect to the 13s, your current thought is to take them out as the transaction closes or wait until the first of next year for the calls price to step down?

John O’Neal

This would be the Mirant North America notes doing 13.

Nitin Dahiya – KLS Diversified

That’s right.

John O’Neal

I think what you said is that our plan is to optionally redeem the notes, the exact timing we haven’t decided.

Nitin Dahiya – KLS Diversified

There is nothing in the guarantee or whatever that would prevent you from extending the take out until a few months later?

John O’Neal

I’m really not prepared to comment I think beyond what we’ve said with respect to that.

Operator

That appears to be all the questions we have at this time. I’ll turn it back over to you Mr. Himes for any closing comments or remarks.

Steve Himes

We just want to thank everyone for joining us today and for your interest in Mirant. If you have any further questions we will be available later on and have a great day.

Operator

That concludes today’s conference. We thank you for your participation.

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Source: Mirant Corporation Q2 2010 Earnings Call Transcript
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