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Executives

Dennis Barber - VP, IR

Mark Jacobs - President and CEO

Rick Dobson - CFO

Analysts

Brian Chin - Citigroup

Neel Mitra - Simmons & Company

Lasan Johong - RBC Capital Markets

Brandon Blossman - Tudor Pickering

Ameet Thakkar - Bank of America

Michael Lapides - Goldman Sachs

Gregg Orrill - Barclays Capital

Zakeeb Mirza - JP Morgan

Nitin Dahiya - KLS Diversified

RRI Energy, Inc. (RRI) Q3 2010 Earnings Call November 3, 2010 10:00 AM ET

Operator

Welcome to the RRI Energy Third Quarter 2010 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Dennis Barber, Vice President of Investor Relations. Mr. Barber, you may begin.

Dennis Barber

Good morning, and welcome to RRI Energy's third 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 will 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 Relations 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 for 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 principal near-term drivers of our open and adjusted EBITDA are commodity prices. We have provided some commodity price sensitivities that allow you to generally understand the impact commodity price changes would have on an outlook.

Turning to Slide 2 of the presentation, all projections or forward-looking statements we make today, including about the proposed merger with Mirant, are based on our current expectations and involve risks, assumptions, and uncertainties. These statements are subject to the Safe Harbors contained in the slide. Actual results may differ materially from our projections or forward-looking statements as a result of many factors, including those described in this slide and in our SEC filings.

The Safe Harbors in Slide 3 describe how you may obtain copies of our SEC filed materials related to the proposed merger. We urge you to read all these Safe Harbors and the referenced materials.

I will now turn it over to Mark.

Mark Jacobs

Welcome to our third quarter earnings call. This morning, we released our Q3 2010 results, which are summarized on Slide 5. We reported open and adjusted EBITDA of $212 million. For the first nine months of the year, open EBITDA was $241 million and adjusted EBITDA was $244 million.

2010 year-to-date free cash flow is $84 million. Each of these figures was up significantly versus 2009. Rick will take you through the results in more detail, but the headlines are the Q3 results were bolstered by significantly warmer than normal weather in Eastern US and market conditions have improved in 2010, but reflected challenging commodity price in economic environment.

On Slide 6, I will provide you an update on the pending merger with Mirant. The key takeaway is that we have made significant progress since our last earnings call and we are on track to close the merge by the end of the year. Last week shareholders of both RRI and Mirant overwhelming approved the merger. My take is that our shareholder see, as we do that this transaction creates significant value.

In September, we have raised funded debt in a range for new revolving credit facility, which will satisfy the financing condition in the merger agreement. GenOn will have a strong balance sheet and attractive debt maturity profile and adequate liquidity.

The transaction has been cleared by the Federal Energy Regulatory Commission and the New York State Public Service Commission. There is one remaining item to be completed before we close the merge and that’s Federal Antitrust Clearance. We are working closely with the Department of Justice in its review with the transaction and we are not aware of any material issues.

Once we receive antitrust clearance, we will be prepared to close the merger promptly. I have been very pleased with the integration efforts to-date. Our respected teams are working very well together and they have made excellent progress. I am confident the GenOn is ready for day one operation.

Before I turn the call over to Rick, I want to touch on the external landscape on Slide 7. Market fundamentals have improved, but continue to be challenging. On a year-over-year basis Eastern US power demand was up over 9% in Q3 versus last year. Weather played a large role this increase.

Higher demand translated into improved market prices. Average on-peak power prices at PJM West hub for Q3 were up over $24 per megawatt hour versus last year. Improved heat rates were significant contributor of better power prices in Q3 with average on-peak heat rates increasing from 11.8 in 2009 to 13.8 in 2010.

It’s noteworthy that an increase in demand, in this case due to weather, led to a significant increase in heat rates. To me, it demonstrates the leverage to a recovery and supply/demand fundamentals.

It’s also worth looking at power demand on a weather adjusted basis. It’s grown over the past year mirroring the increase in economic activity. In our regions we have seen 6% bounce back in MISO and about 2.5% in Western PJM.

Turning to forward curves. Gas-coal spreads continue to soften having declined from the beginning of the year permitted by weaker natural gas prices and coal prices that have remained essentially flat over the last two quarters, after a modest increase in Q1.

However, heat rate improvement in forward price has been sufficient to offset the decline in the gas-coal spreads and maintain forward dark spreads at about the same level as they were early in the year.

Over the last several years, I have discussed my belief that we will see increasingly stringent environmental regulations over time. The EPA has several proceedings underway that will impact the economics of operating coal plants. It’s an understandable area focus for the investment community.

I don’t have a crystal ball and how and when new environmental rules and regulations will take shape, but history shows that it will take longer than most expect and draft rules will undergo significant modification before becoming final rules, and certainly reliability concerns will have to be addressed.

Without getting in to the specifics of each potential of new rule, I will share with you some of my observations on the impacted tougher rules and regulations would have on the industry.

Some suggest the potential new regulations will create challenges for coal generators such as RRI. To be clear more stringent environmental regulations will likely force to retirement of many older coal units, while others will be retrofitted with emission controls, but in my view it’s more relevant to consider the long-term impacts the potential environmental rules would have on industry fundamentals.

As an industry, we are adding very little new capacity. Current reserve margins provide a cushion for future demand growth, especially in a scenario where an economic recovery occurs more quickly. However, significant coal plant retirements will likely lead to lower reserve margins and significantly tighter supply demand conditions over time, in effect accelerating the effects of an economic recovery.

Additional rules and regulations will increase the price of electricity, especially in those hours where coal is on the margin. More electric generation will come from gas powered plants, is they replace retired coal units. That in turn will create more demand for natural gas and reduce demand for coal, a benefit per gas-coal spreads. Take in together these factors point to high energy in capacity prices for all forms of generation assets that remain in the stack, especially scrubbed coal plants.

Now let me bring this back to the RRI fleet, when we see tighter environmental regulations, will likely retire some of our units. Keep in mind that many of these are marginal units and in today’s market environment are close to break-even on a cash-on-cash basis.

We are also likely to invest capital to add environmental controls at some units, but only in cases where we have a high confidence level that will earn an attractive rate of return on net additional investment.

Most importantly we will likely see a significantly improvement in the profitability of the overall fleet because of the factors are mentioned. Improved supply demand fundamentals, higher power prices and an improved gas-goal spread.

I will now turn the call over to Rick Dobson.

Rick Dobson

Let's turn to Slide 9 and talk about the key takeaways for the third quarter. Our open EBITDA was $212 million in the third quarter of 2010, a $79 million improvement over 2009. The improvement was primarily driven by increases in energy gross margin as a result of much warmer weather in July in the first half of August as well as better economic conditions.

Our 2010 adjusted EBITDA was the same as the open EBITDA as the aggregate of our hedges and other items a little impact on the third quarter. The difference in coal procurement prices between 2010 and 2009 accounts to the vast majority of the $33 million positive variance in hedges relative to 2009.

Moving on to free cash flow, as many of you know, our third quarter generally drives a majority of our cash flow given include the heavy load summer (inaudible) season. We also past mature outage spending and interest payment all that consider, we generate $84 million of cash so far this year compared to use of $182 million for the same period last year. The primary drivers are strong third quarter results and lower environmental spending on the Cheswick Keystone scrubber.

Before I move on to the next slide, I want to touch on something you will see, when we review our third quarter GAAP financial statements. As you may recall from our first quarter discussion related to FASB statement 144, now as ASC 360, we are require to evaluate our long-lived assets for impairment as market conditions materially change.

Since we had significant GAAP cause spread contraction in the third quarter of this year, we performed that review. The review is (inaudible) impairment totaling $113 million at our tightest and New Castle plant.

Let's turn to slide 10, where we illustrate our effectiveness and efficiency metrics for the year so far. Overall TMCF is about 2.5% lower than 2009. As I talked about last quarter, we have taken steps to improve the performance we saw in the first half of this year and while we have not yet completed closed the GAAP, we are seeing benefits from our actions. Our unplanned outage rate in the third quarter was 3% lower than we experienced in the first quarter.

Moving to our efficiency measure both our cost per megawatt hour and per megawatt have improved over 2009. Our cost per megawatt of capacity was modestly lower due to reductions in G&A and other indirect cost.

These reductions more than offset increases in outage spending and enhancing unit performance. Our cost per megawatt hours lower due to the cost reduction I just mentioned as well as the increased generation volumes.

Let’s now review Slide 11. As you recall we implemented a hedging program for 2010 and 2011 designed to deliver free cash flow break-even or better, as a mean to protecting our existing cash position.

Last month we finished pricing our primary coal needs for 2011 excluding (inaudible) our average 2011 coal cost is just under $54 per ton before delivery cost. Additionally, we added more power hedges for 2011 bringing our total power hedges to 8.2 terawatt hours or 49% and an average price of $47 per megawatt hour. No other material changes that remain to our hedge generation profile.

Let’s turn to Slide 12. The merger financing that Mark referenced in his earlier remarks provides for the discharge of certain RRI in managed secured and unsecured debts as well as the seasons of the PEDFA bonds. This debt maturity profile provides GenOn with adequate resources for the 2011 debt maturity and a very sound liquidity position going forward. GenOn capital structure gives a solid platform and to create shareholder value.

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

Mark Jacobs

Let me conclude my comments on slide 13. I expect this to be the last earnings call we will host as RRI. Going forward we will be discussing GenOn’s results. I want to acknowledge my RRI coworkers and thank them for their extraordinary efforts and contributions. It’s a privilege working with them and I look forward to working with GenOn team respectively.

The merge with Mirant represents a major step forward for RRI. A step that creates near-term value to corporate support and G&A cost savings. In the intermediate longer term, GenOn will have an improved position with greater scale and efficiency and a strong balance sheet. Importantly, the merger also preserves the fundamental value proposition of a recovery in commodity prices and supply/demand fundamentals.

With that, operator, let us open the line for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions).

The first question comes from Brian Chin from Citigroup. Please go ahead.

Brian Chin - Citigroup

Can you talk a little bit more about the increase in coal hedges in 2011? The addition of 50% is quite a big jump. Does that signal a particular point of view? How does it relate to the efforts to integrate the Mirant hedging strategy versus your hedging strategy, just a little bit extra color that would be helpful?

Mark Jacobs

The additional procurement of coal is really consistent with the strategy that we’ve been employing here in coal procurement. I think as we talked about on prior calls, generally in October is when we price a significant portion of the coal for the following year and so that’s what we get this year is said consistent with what we have done for the last couple of years.

Brian Chin - Citigroup

Also could we take a stab just how much EBITDA impact is higher than normal weather gave to you in the third quarter?

Mark Jacobs

Yes, let’s say, a difficult calculation to get at. What I mentioned in the prepared comments, the overall demand for power in the Eastern US was up about 9% on an actual basis. On a weather adjusted basis, that’s probably closer to 2%. There is a significant portion that demand again that we would attribute to being weather related. We saw heat rates, on peak heat rates versus last year up by about two points. Clearly a meaningful portion of that two point increase had to do with weather-related demand.

Operator

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

Neel Mitra - Simmons & Company

I had a question on clear capacity for the PJM capacity auction on page 18. It seems like the amount that was unclear went for me, 122 megawatts in 2012 to 455 in 2013. I was wondering if you can maybe comment on which plans cleared in the 2013 auction that didn’t in 2012 and may be some of the drivers for that?

Mark Jacobs

Yes, Neel as you know the bidding strategy that we employ into the RPM auction we’ve really do that is a proprietary confidential for the company. We try to provide the details in terms of how many megawatts have cleared and how many if not cleared. As it relates to specific plans, I don’t think it’s appropriate for us to get into that.

Neel Mitra - Simmons & Company

Was it mainly in rest of pool or just?

Mark Jacobs

Sure, with you they were all RTO assets.

Neel Mitra - Simmons & Company

Then Mark you talked about some of them maybe tier 2 and tier 3 assets possibly installing some environmental controls is the economics [arrive]. Could you possibly share which assets in those groupings which you possibly invest in at this point and may be also roughly what percentage of EBITDA comes from the tier 2 and tier 3 plans?

Mark Jacobs

Sure. Neel, I guess I’d make a couple of comments. One is these are really, we approached these is clearly economic decisions and the bottom-line is that we’re going to invest in projects when we have a high confidence level that those projects will return the invested capital rate that exceeds our hurdle rate.

Now the challenging answering that question now is we don’t have clarity on what the environmental rules, regulations are so, it’s really impossible to do that calculations. I would point you back to some of the disclosures we’ve had in our 10-K that layout the range of environmental expenditures in projects that we would expect to evaluate over time and what we ultimately end up moving forward on, my guess will be a subset of some of those things that we have laid out. Again really it’s going to depend on specifically what those rules and regulations are because that that at the end of the days going to determine the economics in terms of what the returns are to us.

We’ve also just in terms of the earnings contribution to address that part we did in our investor conference last summer provide some information on the relative earnings contribution from those [fears] obviously is commodity prices move around those contributions are going to move around. Just in light of the fact that we are not providing an updated outlook here, really wouldn’t be appropriate to comment further than that.

Operator

The next question comes from Mr. Lasan Johong from RBC Capital Markets. Please go ahead.

Lasan Johong - RBC Capital Markets

All things considered my following on the question that was previously asked. The net effect is that if you are wide about view going forward, then two things strike me is being very odd. One, why are increasing your level of hedges as suppose to decreasing your level of hedges. Two, if prices due into go up as much as you would expect and I agree, then doesn’t that mean that pretty much all of the Tier 2 plan should get environmental expenditures and then a large chunk of a Tier 3 would also get some investments.

Mark Jacobs

It was already addressed the hedging question and really what we’ve done here in this quarter. The additional actions is entirely consistent with the approach that we have talked about for the last couple of years here and that is to do some level of hedging that provides us a high confidence level that will be free cash flow breakeven or better in 2010 and 2011 year respective of market conditions.

The incremental hedging that we did in the third quarter here is consistent with the fact that we have now priced a significant additional portion of our coal procurement and so that has when we run our stress scenarios now that we have fixed a portion of the fuel input largely that had increased had we not done any additional power hedges.

We would have had additional earnings or cash flow risk in a stress scenario. Those incremental hedges that we put on are really design to continue to make sure that we are consistent with our stated objective of being free cash flow or breakeven.

Lasan Johong - RBC Capital Markets

Mark, could you talk about extending power prices, you’re really talking beyond 2011 to just 2011 added hedges.

Mark Jacobs

That’s the other point, again just to follow on less on the second part of your question of longer term investment proposition on environmental controls. Again, I think it’s difficult to address those as a hypothetical because we need to understand what those rules and regulations are going to be. Clearly one of the things that is also going to go into that calculation of does that environmental control make sense is our longer term fundamental view of what supply demand conditions are likely to be and is certainly shared with you the due here that yet and when we see tighter environmental rules and regulations we think that’s going to be a net positive for industry fundamentals.

Lasan Johong - RBC Capital Markets

Yes, but I’m having a little problem of understanding why you would have a mismatch in your coal hedging versus your energy hedging. If you really believe that upside and power prices comes beyond 2011 and not in 2011. Because by this definition, you are seeing that you’re more concerned about coal prices rising than you are about power pricing dropping and that is why you have this mismatching hedging. Yeah, how is that consistent?

Mark Jacobs

I wouldn’t describe less on that is a mismatch, again the way the coal market operates is generally that is a contract in advance for markets and so there are not volumes available to buy coal on a spot basis and as we described previous calls of the contracting we’ve done here in the third quarter is consistent with how we have typically gone about that.

The hedges we put on again we’ve really aren’t expressing a point of view on the fact that we think prices are going to go up or prices are going to go down. It’s really in keeping with the hedging philosophy of insuring that we have enough hedges that when we run the range of commodity price scenarios that we look at that we assure that in all instances we’re going to be a free cash flow positive or better.

Lasan Johong - RBC Capital Markets

Rick, could you summarize your hedging prices one more time you blew by a pretty quickly, I didn’t catch all of it.

Rick Dobson

Yes I can. Well, if you recall and you may not have this in our notes. I went thorough the kind of the gory details’10 and’11, quarter two ago. Let me say this and if you can’t find that I think it does a market and can help you with that offline. What we did incrementally this time. We added at the AEP Dayton Hub point. We had a on-peak 300 megawatts at 475 and we added off-peak 200 megawatts at $30.8, and that’s with the 13%.

Operator

The next question comes from Brandon Blossman from Tudor Pickering. Please go ahead.

Brandon Blossman - Tudor Pickering

Good morning guys. I guess let me start with an easy one. From page 18, looks like we put on a less capacity hedge or sales about 550 megawatts. I guess one is that the case and two is the math as easy as doing the delta between last quarter and this quarter for’11 capacity payments.

Rick Dobson

Brandon, there was some modest incremental volume there and again I don’t have the last quarters right in front of me right now. You could look at that and compare the change here that would be the incremental activity we did in the quarter.

Brandon Blossman - Tudor Pickering

I'll probably circle back for more details around that. Probably not a fair question, but I will go ahead and ask it, GenOn, when that closes will be well capitalized very clean balance sheet, nice cash balance, may be a comment specific to GenOn or just in general about the M&A landscape and how you feel directionally towards coal versus gas as we are kind of at the bottom of the cycle looking forward?

Rick Dobson

Well, I would absolutely agree with your comments that I think post closing the merger that GenOn is going to be well-positioned with manageable debt levels and adequate liquidity and attractive debt maturity profile.

Going forward, I think one of the things I will share with you is that Mirant in RRI have approached M&A, I believe very consistently, which is really is around a value opportunity and where we see value here and obviously our first priority right now is to get the merger with Mirant closed and get the integration done and get that value delivered to shareholders.

Clearly, I would expect GenOn will be looking for opportunities on the M&A front, but again it’s really going to be driven by where we see transactions that will create value for our shareholders.

Brandon Blossman - Tudor Pickering

Any comment on coal versus gas?

Rick Dobson

Well again, I think that all gets to a relative evaluation brand and as where we see the most value.

Operator

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

Ameet Thakkar - Bank of America

I think most of my questions is could have been asked and answered. Mark quick on, when you guys look at 2012 dark spread, when you factor in coal transportation where it is today and variable OEM.

It looks even without the environmental aspect is much longer term impact it looks like it’s not even sustainable here. Is that a fair way of looking at it, I mean you guys are obviously very hoping in 12, but could you talk just a little over fundamental views on towards outspread?

Mark Jacobs

Well again, that really tried to not express the fundamental point of view on commodities I’d say the things that makeup the dark spread each are individually commodities. They’re going to be driven by the forces that drive those, but in my experience commodities go up and down and we can all look at forward curve, but also tell you the forward curve is wrong. We just don’t know by what direction and by how much.

It’s certainly is an indicator that we look at and I would share your observations when you look out into the future. We’ve seen a significant compression in dark spreads going forward and that’s the market incorporating the information it has today into that price deck, but that’s going to change as we go forward. Again, I don’t know whether that’s going to go up or down, but it will be different.

Ameet Thakkar - Bank of America

On the coal hedges that you’ve added for 2011, it’s going to be a mixture of both cap and net coal, correct?

Mark Jacobs

That’s correct.

Ameet Thakkar - Bank of America

In relative to for the cap coal that you contract relative to what we see and NYMAX, would it be I guess fair to characterize where you’re able to achieve the pricing is kind of at market or below market?

Mark Jacobs

I think the market is what the market is we believe that we’ve contracted a fair price for that coal.

Operator

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

Michael Lapides - Goldman Sachs

Hey Mark, Rick, just quick question, just starting to make progress on cost efficiency over the last six months to nine months, two to three quarters, just curious, should we think of that is being incremental to the $150 million cost savings post merger?

Mark Jacobs

Well, Michael, I would think about it at this way. We’re always going to look for ways to be more efficient with the dollars we spend. I think write-down in a context to the merger. We believe and we have a high confidence level that we can deliver a $150 million of cost savings that are coming from corporate support in G&A functions.

We’ve done a lot of work. We’ve made all of the people decisions for the new company and we’ve dipped on cost rollups by functions. We know exactly where to go to get those savings and again have a high confidence level.

I’d say beyond that we’re always going to look for ways as the company to be more efficient. I wouldn’t try to interpret anything from the cost direction that RRI has had, more from the Mirant side. That’s really going to be as we put the combined company together something will be talking to you about this GenOn leadership team in terms of what to expect on the cost front going forward.

Operator

The next question comes from Gregg Orrill from Barclays Capital. Please go ahead.

Gregg Orrill - Barclays Capital

You’ve touched on this little bit earlier on in the call. After the closing, I guess you’ll comeback and talk to us about the merged guidance and maybe provide an update on what you’re seeing in synergies?

Mark Jacobs

Yeah, Gregg, I would expect preparing an outlook going forward is going to be one of our first priorities once the merger is completed just it said expectations I wouldn’t look for that kind of right after the transaction is closed because there’s going to be some work we’re going to want to do is a leadership team. I would think clearly as we get after reporting our year end results that would be type of timetable I would look forward for a an updated outlook.

I would expect is as we report our results as GenOn every quarter, I would expect that we’ll dedicate sometime to talking about exactly where we are on the realization of synergies.

Gregg Orrill - Barclays Capital

This was clear, but $47 a megawatt hour, you are talking about in terms of hedging that we would take that and then adjust that for basis for the two year plan?

Rick Dobson

Hey Gregg, it’s Rick. Like you said, when I answered the previous question, it’s the mixture here in that 47 and I covered a lot of detail in the mixture before, so we will go over that right now, but there is West Hub in there for like 3.9 kilowatt hours. There is AEP Dayton in there for about 4 kilowatt hours and that’s the mix of on and off-peak so it’s fairly complicated. You look at your notes, while you will see that the last time we hedged at Western AEP Dayton we had $63 West Hub prices and some off-peak at 42.

I said if you can’t find them in your notes, we can find the public information, when I talked about that and get you the detail. The incremental piece was about 4075 for the 300 megawatts at AEP Dayton and 3008 for the other 200 megawatts and then you put all the power hedges together on the total 8.2 terawatts, you get basically at $47 average. There is a number of components that equalize. I don’t want to just you to jump in, so let me talk some average basis because that those two different pricing points.

Gregg Orrill - Barclays Capital

That’s very helpful. The comment on Slide 7, we talked about forward dark spreads being around the same level in the first quarter, that was spot or?

Mark Jacobs

That was really the forward curves that I was referring to at that point Gregg. If you go out and look at 11, 12, 13 we have seen compression in the natural gas prices since Q1 and you also have seen about 1 point improvement in heat rates and so those are largely offset. Coal prices are pretty much on top, where they were in the first quarter of the year.

Rick Dobson

The reference points that Mark talking about is reference staff (inaudible) file the S4 those local projections, which is the March, 16th date and then you find now we are fast forwarding to now

Gregg Orrill - Barclays Capital

The idea being at the margin outlook really?

Rick Dobson

Haven’t changed since March 16th substantially.

Mark Jacobs

Again we are clear we are not providing.

Rick Dobson

Yes, not providing guidance, sorry.

Operator

The next question comes from Zakeeb Mirza from JP Morgan.

Zakeeb Mirza - JP Morgan

Hi guys, it seems like you’ve completed a lot of your integration planning and already just waiting for the DOJ to be able to start realizing some of that value. Is that any update on the efforts obtained on trust approval, you’ve had your second request for the last four months and this quite limited substantial issues on the ground.

I’m wondering was taken too long and why you have substantially complied with that second start the 30-day clock on the DOJ. It just seems like we’re incurring a necessary interest and delays in realizing the $150 million over run rate synergy. Thanks.

Mark Jacobs

I’m not going to get to the particular of the approval process other than say the Department of Justice has a job to do and reviewing the transaction and we are working very closely with them to assist them in that review. We are not aware of any material issues in that review and we would expect to have the transaction closed by the end of the year which is consistent with what we have felt from the day that we announced the transaction.

Operator

The next question comes from Nitin Dahiya from KLS Diversified. Please go ahead.

Nitin Dahiya - KLS Diversified

Most of my questions have been answered, but I just wanted to get back to the question around environmental spending and around the way you approach it in terms of once we have a set of fruits, when you look at the second and third quarter assets if you like.

Is your planning arisen say four, five years and the project forward five years and say this is what we expect that well to be and this investment is going to be MPV positive or when you look at it like these are the market conditions today or over the next year, year and half, and then is this investment going to be MPV positive so, we should go ahead with it or not.

Mark Jacobs

It’s a good question and ultimately this is going to be a decision that the GenOn management team in the GenOn Board of Directors will make, but my expectation is and analyzing these potential investments we will clearly look at market conditions that exist at the time. We will look at forward curves. Those are again as I mentioned earlier the markets best estimate.

I would expect we’ll also look at arrange different scenarios around those forward curves and all of those will be things that will be taken into consideration, you’re making a decision on whether to proceed with the investments or not, but it will be premature for me to say it will be a five year look or how many look at again that that are really a decision for the GenOn team going forward to make that decision.

Clearly as I said I think that reiterate is that we would only move forward with these investments in the situation circumstances where we had a high confidence level that we would earn a rate of return that exceeded our hurdle rate for the new capital we’re going to put in.

Nitin Dahiya - KLS Diversified

Okay, enough. I think that’s helpful. Sorry to beat dead horse on this antitrust issue, is there a particular bottleneck I mean there isn’t might much of a market power issue here I would take. What’s kind of taking the time?

Mark Jacobs

Yes, again I’m not going to get into this specific with that process again to say the Department of Justice has a job to do that we respect the job they have to do and we are working with them really we’re not aware of any issues and we expect the transaction to be closed by the end of the year.

Operator

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

Lasan Johong - RBC Capital Markets

Mark, a couple of follow-up questions on the synergy question, you mentioned that the $150 million is G&A and people in headquarters and things, but not the only thing you guys can work on.

Going forward once the merge happens and you are moving forward as one team. What are some of the other items that you will be working on to create more synergy value if any first of all. Second of all, how can back to your days as an MD at Goldman Sachs Investment Banking what percentage of operating and G&A cost were usually taken out once the merger was complete the general rule in the power/utility space.

Mark Jacobs

We saw on your first question, one of the principles we are using is we put together GenOn as identifying take the best operating practice from each of Mirant and RRI and certainly in the course of doing that. We are looking for other opportunities. Again I don’t think it makes sense for us to get out ahead ourselves on that what we have shared with the market is a number that we have a high confidence level that we can deliver on the corporate support G&A side. Again, clearly, we are going to look for other opportunities but until we find those and have a high confidence level we can deliver them we're really not going to be in a position to quote any numbers.

Lasan Johong - RBC Capital Markets

I am not asking for numbers, Mark. I'm just saying what are the items that you can possibly work on?

Mark Jacobs

The items are going to be, as I said, maintenance practices, O&M spending in plants, preventative maintenance programs again all the things commercially are we dispatched the units really kind of everything we do, in my mind, Lasan, a fair game that we are going to be looking at for what's the best way we can operate the GenOn combined fleet.

Lasan Johong - RBC Capital Markets

Procurement?

Rick Dobson

Of course.

Mark Jacobs

On the second question, I wouldn’t say that there is a rule of thumb on the operating synergies, just to give you some context around the 150, if you looked at Mirant and RRI on a standalone and added them together we have about $400 million just over line G&A corporate support (inaudible) or costs that are incurred by people outside of the power plants.

The $150 million, you can do the math, that represents a pretty significant chunk of that. It really recognizes that there is a lot of leverage and scalability in those G&A and corporate support functions in terms of if you add one more plant to the fleet you don’t need to add on a pro rate basis the same level of support.

Operator

Gentlemen, at this time there are no additional questions. Please go ahead with any final remarks.

Dennis Barber

Thank you, Christine. I thank all of you for participating in our conference call today. A replay of the webcast will be available in about two hours. Have a great day.

Operator

Thank you for participating in the RRI Energy third quarter 2010 earnings conference call. This concludes the conference for today. You may all disconnect at this time.

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