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Executives

Steve Himes – Director of Investor Relations

Ed Muller – Chairman, President and CEO

Bill Holden – SVP and CFO

Paul Gillespie – SVP, Tax

John O’Neal – SVP and Chief Commercial Officer

Analysts

Neel Mitra – Simmons International

Lasan Johong – RBC Capital Markets

Ali Agha – SunTrust Robinson Humphrey

Robert Howard – Prospector Partners

Brian Chin – Citigroup

Paul Patterson – Glenrock Associates

Brandon Blossman – Tudor, Pickering, Holt & Co.

Gregg Orrill – Barclays Capital

Clark Orsky – Standish Mellon

Nitin Dahiya – KLS Diversified

Mirant Corporation (MIR) Q3 2010 Earnings Call Transcript November 5, 2010 9:00 AM ET

Operator

Good day everyone, and welcome to the Mirant Corporation’s third 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 sir.

Steve Himes

Thank you, Barbara, and good morning, everyone. We want to thank you for joining us today for Mirant’s third quarter 2010 earnings call. If you don’t already have a copy, the press release, financial statements, and third 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 CFO. Also in the room and available to answer questions are John O’Neal, Mirant’s Chief Commercial Officer; Paul Gillespie, Senior Vice President of Tax; and Gary Garcia, Mirant’s Treasurer.

With regard to the Safe Harbor slides; during the call we will make 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 SEC filed materials related to the proposed merger. We encourage you to read all 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 are available at the end of our slide presentation, which is also available on our website.

And with that I like to turn it over to Ed.

Ed Muller

Thank you Steve, and good morning, everyone. I’ll start on page 4 of the presentation with a brief update on our impending merger with RRI to form GenOn Energy. With the approval of the stockholders of each of Mirant and RRI Energy on October 25, with our [ph] having put in place the financing for GenOn, the only remaining thing to be done is to receive approval clearance from the Department of Justice under the Hart-Scott-Rodino regime, and once that has been obtained, we will proceed to close. We expect and continue to expect to close the merger before the end of this year.

Moving to slide 5, our results for the quarter and the nine months, $190 million of adjusted EBITDA for the quarter, $501 million for the first nine months. Bill Holden will go through these numbers in greater detail. I think the salient fact is that hedging has continued to cushion Mirant from low prices in the marketplace, but as we go out in time the hedges from which we are benefiting, and which are providing this cushioning are hedges that were put on as the commodity prices were declining. So they were put on at lower prices than earlier dated hedges that we put on, and that explains largely why we are seeing the decline in our adjusted EBITDA.

Turning to slide 6, looking at how our operations have performed, we continue to have excellent safety performance and continue to have a high level of commercial availability. It will remind you that we focus on safety first because it is important, and ultimately my responsibility, but also because it is a direct correlation with how the actual units operate, our reliability and our efficiency.

Turning to number 7, market update since we last spoke in August, and both for the near term and the longer term the trends are the same, natural gas prices have decreased, power prices in PJM have decreased, though heat rates have expanded. Coal prices are relatively flat and our spreads have declined.

On slide 8, page 8, the same graph that we have been showing about reserve margins. The trends particularly in the east in PJM continue toward tighter margins, and toward levels that are not prudent for any electric system. The timing of how all this will play out is really dependent, I think on how the economy performance, to the extent the economy recovers and performs well, we would expect to see electric consumption – consumption of electricity go up, which would exacerbate the level of low reserve margins.

Also possibly exacerbating them, and now being discussed some is will there be retirements of older less efficient coal units. That too would tend to bring reserve margins down. Will that happen, we shall see. I think the primary factor affecting that is how the various and myriad environmental regulations that are being discussed and handed [ph] about will come into play, and when and if.

Turning to slide 9, the same chart we have shown you quarter after quarter, which is where do we stand on our hedge profile. As I said, when I discussed our results for the quarter and the first nine months, hedging has cushioned us. It is part of our strategy. It has been part of our strategy, and will continue to be. And the profile looking out over these years this pretty much the same profile we have had.

The significant changes that you can see since we last presented are that the hedge level from our base load coal or power is up some. Some of that is from adding hedge positions. Some of that is also from expected lower generation. On the whole [ph] front, we have added fairly significantly to our hedge position by contracting for coal. As I’ve said before, we tend to do this in lumpy purchases, and we have done so again. And you can see we pretty well matched up our profile here going out into 2013.

Turning to slide 10, an update on the Marsh Landing generating station. This will be a 760 megawatt natural gas fired peaking station at the site of our Contra Costa site in Northern California. In the photo, which I will address first, you can see the existing station, the redbrick building and the taller unit to the right of it, constitute the Contra Costa station today. And then you can see what we will be building there to the left with tentative [ph]. We brought it up some, so you can see it better, which will be four trains for the 760 megawatts.

Development is a complicated process. It takes a lot of time. Experience teaches us all, and certainly me that often projects do not come to fruition. It is a process that requires a lot of care to do it well, and I’m pleased to say we have done it well. We are moving forward to build the Marsh Landing station. It will operate pursuant to a ten-year power purchase agreement with PG&E. We have all of the requisite approvals. We have all of the requisite permits. We have the financing in place, and we have directed Kiewit, with which we have an EPC contract, a contract for engineering, procurement and construction to move forward. And we will begin physical construction before the end of this year. We are very pleased with this.

Turning to slide 11, at our Pittsburgh generating station down the road from Contra Costa, we’re pleased that just a few weeks ago, less than that, we entered into a new tolling arrangement again with Pacific Gas and Electric for the three units that are currently in operation at the Pittsburgh station units 5, 6, 7. They operate today under tolling agreements. Those agreements are set to expire at the end of 2010. We have entered into new agreements that for a total capacity of 1159 megawatts for three years, commencing on January 1, 2011, and we have provided Pacific Gas and Electric option to extend those agreements for the units for each of 2014 and 2015.

With that, we will turn to slide 11, I’ll turn this to Bill Holden.

Bill Holden

Thank you Ed, and good morning, everyone. I will start on slide 12, as shown on the slide, net income was $254 million for the third quarter of 2010 that is compared to net income of $55 million for the same period in 2009. The increase in net income of $199 million, primarily results from an increase of $341 million in unrealized gross margins, partially offset by a decrease of $105 million in realized gross margin, an increase of $22 million in operating expenses, and an increase of $18 million in interest expense.

The increase in operating expenses reflects $12 million primarily related to the scrubber operating cost and the Montgomery County CO2 levy, as well as $8 million of merger-related costs incurred in 2010. These were offset in part by a decrease of 14 million in impairment losses as a result of impairment charges on intangible assets taken in 2009. The increase in operating expense also includes $16 million higher depreciation, primarily related to the scrubbers on our Maryland plants that were placed in service in December of last year. Likewise, the increase in interest expense reflects lower capitalized interest in 2010 because the scrubbers were placed in service in December.

Net income was $398 million for the first nine months of 2010 as compared to $598 million for the same period last year. The decrease of $200 million, primarily results from a decrease of $185 million in realized gross margins, an increase of $90 million in operating expenses, and an increase of $48 million in net interest expense, all partially offset by an increase of $113 in unrealized gross margin, and a decrease of $10 million in the provision for income taxes.

The increase in operating expenses reflects the $52 million gain from the MC asset recovery settlement with Southern in 2009, partially offset by the $37 million postretirement healthcare benefits curtailment gain in 2010. the increase in operating expenses also include 48 million higher depreciation, primarily related to the scrubbers and $17 million lower gains on emission sales in the year-to-date 2010. The increase in interest expense reflects lower capitalized interest in 2010, because of the scrubbers replacement service in December last year.

Adjusted net income was $86 million for the third quarter 2010 as compared to $238 million for the same period in 2009, and $193 million for the first nine months of 2010 as compared to $484 million for the same period in 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 second quarter 2010 postretirement benefit for curtailment gain.

Unrealized gains on derivatives were $167 million for the third quarter 2010 as compared to net unrealized losses of $174 million for the same period in 2009. For the year-to-date, we had net unrealized gains of $179 million as compared to unrealized gains of $66 million for the same period last year.

The net unrealized gains for the quarter resulted primarily from decreases in forward power and natural gas prices and increases in forward coal prices, partially offset by unrealized losses 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 year-to-date reflects 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 $190 million for the third quarter of 2010 as compared to $311 million for the same period in 2009, and $501 million for the first nine months of 2010 as compared to $706 million for the same period in 2009. The decreases in adjusted EBITDA for the period 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 $16 million, and higher net interest expense of $18 million, offset by lower provision for income taxes of $3 million.

The increase in interest, taxes, depreciation and amortization for the year-to-date reflect higher depreciation expense of $48 million and higher net interest expense of $48 million offset by lower provision for income taxes of $10 million.

And finally, our earnings per share based on adjusted income decreased to $0.59 per share for the third quarter of 2010 from $1.63 per share for the third quarter of 2009, and decreased to $1.32 per share for the first nine months of 2010 from $3.34 per share for the same period last year.

Turning to slide 13, this slide presents the components of the company’s realized gross margin for the third quarter of 2010 and the nine months ended September 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 $99 million for the quarter and the increase of $123 million for the year-to-date were the result of higher energy gross margins from our Mid-Atlantic generating facilities, reflecting higher generation volumes and increase in the average settlement price for power and a decrease in the cost of emissions allowances, partially offset by an increase in the price of fuel. The higher energy gross margins from our mid-Atlantic generating facilities were partially offset by lower realized gross margins from our proprietary trading activities.

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 decrease of 12 million for the quarter and the decrease of 3 million for the year-to-date resulted primarily from lower capacity revenue in the mid-Atlantic, and to a lesser extent the North-east. The year-to-date also reflects an increase in ancillary services revenue.

And finally, realized value of hedges, the yellow bar, was down by $192 million for the quarter and was down by $305 million for the year-to-date. As the average contract price of our power hedges settled in 2010 was lower than the average contract price of our power hedges settled for the same period in 2009, while the average market price for power was higher during 2010 than the same periods during 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 14, this slide presents cash flow information for the third quarter of 2010 and the nine months ended September 30, 2010 and for the comparable periods for 2009. The decrease of $149 million in cash provided by operating activities for the quarter is principally related to lower realized gross margin of $110, excluding the effect of non-cash lower cost to market adjustments, primarily on fuel inventory, and increase of $96 million in funds on deposit, which includes an $80 million cash collateralized letter of credit in support of the Marsh Landing PPA.

And a decrease of $52 million related to the MC asset recovery settlement with Southern Company in 2009. All partially offset by an increase in cash provided of $81 million related to changes in collateral, primarily as a result of decreases in forward power prices, and an increase of $19 million related to the timing of property tax payments.

The decrease of $383 million in cash provided by operating activities for the year-to-date is principally related to lower realized gross margins of $192 million, excluding the effect of non-cash lower cost of market adjustments primarily on fuel inventory. An increase of $120 million in funds on deposits, which includes the $8 million cash collateralized letter of credit in support of the Marsh Landing PPA. An increase of 85 million in operating expenses, primarily as a result of scrubber operating costs in 2010, and the MC asset recovery settlement with Southern Company in 2009, and an increase of $48 million in net interest expense. All partially offset by an increase in cash provided of 38 million related to changes in collateral, again primarily as a result of decreases in forward power prices, and an increase of 24 million related to the timing of property tax payments.

Adjusting the year-to-date amount 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 provided by operating activities of $193 million for the quarter, and adjusted net cash provided by operating activities of $343 million for the year-to-date.

Reducing these amounts for total capital expenditures, excluding capitalized interest, results in adjusted free cash flow of $139 million for the quarter, and $132 million for the first nine 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 adjusted free cash flow of $253 million, or $1.73 per share for the third quarter of 2010, and adjusted free cash flow of $325 million, or $2.23 per share for the 2010 year-to-date period.

Turning to page 14, this slide presents our debt and liquidity as of September 30, 2010. Consolidated debt was $2.561 billion at September 30. As of September 30, Mirant had total cash and cash equivalents of $1.989 billion of which $518 million was restricted at Mirant North America and its subsidiaries, and was not available for distribution to Mirant.

Based on the results through September 30, 2010, Mirant North America will make a distribution of approximately $112 million later this month. And finally, our total available liquidity, including amounts available under the Mirant North America revolver and the synthetic LC facility was $2.69 billion.

Turning to slide 16, this slide presents a breakdown of our projected capital expenditures for 2010 and 2011. Expenditures related to the Maryland Healthy Air Act in 2010 are expected to be $176 million. Of this total, we paid $32 million in Q3 and have paid $109 million year-to-date. The remaining $93 million is expected to be paid in 2011.

Other environmental expenditures include amounts deposited into escrow in the third quarter of 2008, 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. Our equity contribution is estimated at approximately $200 million, which includes approximately 15 million spent since conception.

Other construction expenditures include (inaudible) and the coal blending facility at Morgantown.

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

Ed Muller

Thanks, Bill. I’m on slide page 17, and to summarize, we look forward before the end of this year to completing the merger with RRI to create GenOn, which we think will deliver significant value to the stockholders of both companies.

Second, as we said before, our strategy of hedging cushioned Mirant’s results in the third quarter from the effects of relatively low commodity prices. Third, as we have been seeing for a long time, Eastern markets continue to be forecasted to tighten because little generation is being built, and again how the economy moves forward will affect the timing on that, and what kind of retirements maybe caused by environmental rules and regulations may affect the timing of that.

And finally, to repeat, we are very pleased that we are moving forward to build the Marsh Landing generating facility. Kiewit is doing all the things it needs now to move forward and get that project completed by mid-2013, and we will expect physical construction to begin by the end of this year.

And with that operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) We will take our first question from Neel Mitra with Simmons International.

Neel Mitra - Simmons International

Hi, good morning.

Ed Muller

Good morning Neel. How are you?

Neel Mitra - Simmons International

Good. I just had a question on the coal hedges that were put on for the outer years, specifically 2012 and 2013. Is there a fundamental reason why you decided to put on the block at this time? And then second, what type of coal are you specifically hedging for now? Is it a Northern Appalachian higher-sulfur coal like 4.5 spec? Or are you using a blend of Northern App and Central App in those hedges?

Ed Muller

John, why don’t you take this?

John O'Neal

Neel, as you know, we have a normal course hedging program. We are in the market fairly actively. At a minimum, twice a year we will conduct an RFP where we will go to the market and seek offers from suppliers for long dated coal supply. We did that in the spring and as a result of that we made the decision to go out and buy some coal for 2012 and 2013.

As you can see, we think that the timing of that is we think that this is a – not a bad time to be buying the coal. We also think it lines up nicely with our hedge position on the power side. So all in all, we thought it made sense to go out and lock up those volumes now. With respect to what we are specifically buying, this is – it is a Northern App coal. It is essentially you could expect it is about a 4-pound [ph] sulfur coal. It is one of our go to coals that we have used and the plants in the Mid-Atlantic like a lot.

So, we are putting in the plant today they like a lot, and we thought it made sense to go ahead and lock that up now.

Neel Mitra - Simmons International

Can you describe maybe what a discount the Northern App high-sulfur coal is trading to versus Central App or a Northern App lower sulfur spec?

John O'Neal

On the – I guess on the – I will deal with the Northern App. I don’t have the numbers in front of me for the Central App, because we are primarily burning the Northern App coal. I mean there is probably a discount between the say the 3 and 4 pound, a couple of dollars a ton. Maybe a little bit more than that in the front end of the curve, but we expect that over time the difference is going to go away, as two things happen.

One, there is less of the lower sulfur coal available, and the homogenous spec will migrate to a higher sulfur, more like a 4-pound or 4.5 pound spec. So, over time we think that difference will be less than it is currently.

Neel Mitra - Simmons International

And the last question I had was on page 22, the Mid-Atlantic base load capacity factor was 67% off an availability factor of 92%. It seems like that number would be higher, just looking at the Northeast base load numbers, as well as the weather we had in the East this summer. Can you describe why the capacity factor was kind of in that range? Was it due to coal to gas switching, or any fundamental reason?

John O'Neal

Well. We are actually very pleased, and if you look at it year-over-year, our base load megawatts were up over 600,000 MWh. So the units ran a lot this year as you would expect because of the hot weather we had in the East. As you know, we get dispatched by PJM. So we are responding to dispatch signals provided by the marketplace. So, we think all in all our unit performed very well if you go into the back, you could see the forced outage rates for our base load units were very low for the quarter.

Our base load coal units had a 4% forced outage rate. So our units ran very, very well. They responded to just that signal and net of all that was a capacity factor of 67%, which was about 12% higher than the quarter prior.

Neel Mitra - Simmons International

Great. Thank you.

Operator

We will go next to Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Thank you. A couple of follow-up questions on the generation output, it looks like your output was up about 29%, but your margins were much lower because of hedged value. So could you give us kind of a sense of what kind of hedge values you realized in the quarter versus '09, let's say?

Ed Muller

Bill can you handle this?

Bill Holden

Yes, let me get this. On the realized value of hedges.

Lasan Johong - RBC Capital Markets

Yes.

Bill Holden

I think this is actually in the appendix to the presentation on page 21.

Lasan Johong - RBC Capital Markets

That gives you a net in million dollars; doesn't give you a price.

Bill Holden

Yes. I don’t think we have disclosed prices on hedges. So, what you can see is that the dollars that we realized on both power and fuel during the quarter and for the year-to-date.

Lasan Johong - RBC Capital Markets

Okay. The hedging situation with Mirant versus RRI Energy is very different if you look at the portfolio of what is hedged and what is not. '11 looks very similar; but '12 the disparity is pretty eye-catching. Once the merger occurs, is there an intention to either lower Mirant's hedging profile to match what Reliant has, or to raise RRI's hedging profile to meet what Mirant has?

Ed Muller

Well, Lasan, it is somewhat premature to say, and I will explain why. In general, we like the profile that you can see here in the presentation that we have just shown you. But to – that profile is not some theoretical profile in our minds. It is based on the assets that we have, and where they are located. And so, we will have to do the same kind of analysis for the combined GenOn fleet. We will be prepared to do that as GenOn, as soon as we complete the merger.

But as you would expect, because we do not yet have anti-trust clearance, we must religiously not share data that has a competitive aspect to it. So while we know a lot about the units, and the commercial organization is getting itself ready to do this, we cannot finally make those decisions until we have data that we cannot yet share. And those are the rules of the road, and we comply with the rules of the road.

Lasan Johong - RBC Capital Markets

I see. Okay. Thank you so much.

Ed Muller

Sure.

Operator

And we will go next to Ali Agha of SunTrust Robinson Humphrey.

Ali Agha - SunTrust Robinson Humphrey

Thank you. Good morning.

Ed Muller

Good morning Ali. How are you?

Ali Agha - SunTrust Robinson Humphrey

Good. Thanks. Ed, the new tolling contract at Pittsburg units with PG&E, should we assume that that is very similar to the contract that is expiring?

Ed Muller

Well, in general orders of magnitude, yes. As you know, we do not separate out results by unit, and don’t intend to. But in general you should assume that it is in the same order of magnitude.

Ali Agha - SunTrust Robinson Humphrey

Okay. And Ed, as you are looking at – as you said you're going to be looking at the combined portfolio of GenOn once the transaction is closed. And obviously as you take a closer look at your own portfolio, given the kind of forward curve scenarios that you are seeing out there, et cetera, is the potential shutdown of any of your units conceptually part of your plan? Or given your CapEx spending you don't believe that is a requirement, even in this low dark spread environment?

Ed Muller

We have no plans currently to shut any units down other than what we have announced for helping someone here for the two units at Contra Costa, when their current arrangements with PG&E terminate in ’13. Is it about the time Marsh Landing comes on, and we have agreed consistent with the California initiatives to reduce once-through cooling and the impacts on the Sacramento-San Joaquin Delta to shut those units down. Those we’ve already announced that we will shut down, and also as we have indicated as soon as the California independent system operator tells us that the Potrero Station in the city of San Francisco is no longer needed for reliability.

That station likewise will shut down. We would expect that to occur within a matter of a few months. But beyond that we have no plans to shut any units.

Ali Agha - SunTrust Robinson Humphrey

Okay. But might we expect in a combined portfolio you might take a new look, especially on the new assets that are going to be part of the GenOn portfolio coming from the other side?

Ed Muller

Well, we will always look at old units, and a particular time it will become very important is when there are significant capital expenditures required, and those capital expenditures have to be justified. And those capital expenditures can come about because of changes in the various environmental rules and regulations. They can also come about simply because of what it takes to keep an asset in good operating condition.

So that is just to me ordinary course of business, and that would be true – that was true a year ago. That is true today. That will be true in a year. But there is nothing special in this combination in the creation of GenOn that brings that to the fore.

Ali Agha - SunTrust Robinson Humphrey

All right. And finally, Ed, as you look at a pro forma portfolio, assuming GenOn closes as planned, are you comfortable now with your position in the specific markets that you are focused on? Do you believe there is need for more critical mass? Or how do you see that portfolio sort of strategically going forward?

Ed Muller

Well, there is of course always more work to do for assessing that for the same reasons that I discussed in the context of hedging. But we like in this transaction, particularly our position, the GenOn position in PJM, and we like very much the position of GenOn in the California market.

Ali Agha - SunTrust Robinson Humphrey

Thank you.

Operator

We will go next to Robert Howard of Prospector Partners.

Robert Howard - Prospector Partners

Good morning.

Ed Muller

Good morning Rob. How are you?

Robert Howard - Prospector Partners

Pretty good. One thing here on the hedging slide on slide 9, it seems like the last couple of presentations there has often been – you have had the empty white boxes, sort of showing that maybe a decrease; or sometimes there is a mix of everything. So I guess should I look at the lack of any open white boxes as something different either in your strategy or just a change in market conditions, or any thoughts there?

Ed Muller

John, why don’t you take this?

John O'Neal

Really no change Rob in our approach at all. I mean we opportunistically add hedges as we think it makes sense. Obviously as we get closer to the current delivery year, we look to get a little bit more hedge. We don’t have as much open exposure going into the year, but what we off late find is that price movements change our hedge positions quite dramatically.

And so when prices drop like they have period over period, we will lose our expected generation. So the fact that our existing hedges result in us being more hedged then we were in the past. Not certainly occurred this quarter, but the price dropped. Part of the change is due to incremental hedges, but part of the change is also due to the fact we have less expected generation going forward.

Robert Howard - Prospector Partners

Okay, great. Then, I just wanted to ask something, a little on the Maryland environmental spending. It seems to me that putting in the scrubbers to comply with the Maryland Healthy Air Act was a good idea. But with Mirant's current market cap smaller than the $1.6 billion that you spent on the upgrades, it kind of appears that the market thinks it was a mistake and that you should have just shut the plants down. So I know hindsight is 20/20, but assuming you knew then what you know now, would it have been better to close the plants instead of spending the $1.6 billion on the upgrades, as the market seems to be implying?

Ed Muller

Well, I think Rob I have to go and do some penciling, but what you really would be saying then is that would Mirant have been better off liquidating itself, then given how significant those Maryland plants are to Mirant’s performance and results. I think, broadly speaking it is important to remember, we are in a commodity business. And it is volatile, and in every point in the commodity cycle, in my adult life in it, everyone thinks we have reached a new paradigm.

It is often the phrase used. So we are now at natural gas wherever it is, and thus it shall be for the rest of our lives, and there is one thing of which I can assure you. That is not the case. There is no paradigm. And it is by definition a commodity, and when it is a commodity it means it is volatile. It changes, and it changes in ways that all of us can’t predict.

And if you think about it, we have lived – I have lived with gas way below $2, and I have lived with gas north of $14, and I have lived with oil at 8 bucks, and I have lived with oil at 147 bucks, and where it is today has no particular magic. It will change some more. So we have got by what we did in Maryland, we had some tiptop assets that are in terms of environment performance absolutely at the top of the industry. They are excellent assets. They will run well and they will run for a long time. And they will run through various iterations of this commodity cycle.

Robert Howard - Prospector Partners

Okay. Do you guys have a thought as to what – if you were to do that environmental work today as opposed to four years ago, how much the cost would be?

Ed Muller

I would think the cost would be approximately the same. I don’t think there have been real significant changes either in materials or labor in the last couple of years.

Robert Howard - Prospector Partners

Okay. And lastly, I was wondering if you could talk any about the sensitivity of Mirant's usable NOLs after the merger. You know, the stock price, is it sort of a straight-line relationship as Mirant's price increases toward the closing of the merger that it would be a straight-line percentage impact on the NOLs that would be retained? Or is there some kind of curve where there would be an inflection point somewhere?

Ed Muller

Let me ask Paul Gillespie, who is our Senior Vice President for Tax to address your question Rob.

Paul Gillespie

I don’t think that the NOLs will particularly have an effect on the price of the shares as we move towards the merger. I point out that the NOLs are subject to a full valuation allowance on our balance sheet. That means our ability to use them now we think is restricted. That restriction will continue after the merger.

Robert Howard - Prospector Partners

So I guess, so you're saying that if the stock went to $25 before the merger was completed that that wouldn't impact the amount of NOLs that would be retained?

Paul Gillespie

I am sorry. I need to make sure I understood your question. What you are saying is would the value of the stock change our ability to use the NOLs. Yes, if the stock price were to go to $25, the availability of the NOLs would increase somewhat.

Robert Howard - Prospector Partners

Okay, so that is and that is what I am trying – is it a linear relationship or is there more of an inflection point somewhere? Or how –?

Paul Gillespie

It is most probably a linear relationship, the higher the value of the stock, the greater our ability to use the NOLs.

Robert Howard - Prospector Partners

Okay, okay. So if the merger is completed on the current schedule is this the last Mirant call?

Ed Muller

If the merger has completed as we expect it today, before the end of the year, yes. This will be the last Mirant call.

Robert Howard - Prospector Partners

All right, well, it's been a pleasure and good luck with everything.

Ed Muller

I look forward to hearing you on the GenOn call.

Robert Howard - Prospector Partners

Yes, I plan on that, too.

Ed Muller

A fair guess [ph].

Operator

We will go next to Brian Chin with Citigroup.

Brian Chin - Citigroup

Hi, good morning.

Ed Muller

Good morning Brian.

Brian Chin - Citigroup

What is the sensitivity of EBITDA to a $1 change in gas now? Is it more or less than it was before? I know the last time you gave that update was the 4Q '09 slides. But can you give us just a general sense of where that sensitivity is now?

Ed Muller

Brian, as you will recall, we are not sensitive enough this impending merger. We have not been giving guidance, and we will not start again until the merger is completed. And so we won’t be providing sensitivities now and the sensitivities that we last provided were as of the time we provided taking into account a variety of factors, and they would – it would not be appropriate to try and apply those same factors today.

Brian Chin - Citigroup

Okay, second question. Is there a sense that we can get in terms of how much weather may have affected your numbers this year or for this last quarter?

Ed Muller

John.

John O'Neal

Well, I think the best way to look at it Brian, is to look at our dispatch on slide 22. And I think two things I would point out there that our base load units are going to run, primarily they are going to run pretty much all the time, especially in Q3 when they are relatively deep in the money. There were some times that they vary into September where some of those units, as gas prices started to get low got displaced somewhat.

But in general, you should expect in Q3 that base load units are going to run pretty consistently. Then what you look at is our intermediate and our peaking units. And as you can see, our actual generation from our intermediate units in the mid-Atlantic, and our peaking units in the mid-Atlantic was much greater in Q3 of 2010 than it was in Q3 of 2009. And that is almost entirely due to the much hotter weather we saw during the year, this year relative to last.

Brian Chin - Citigroup

Great. And then lastly for the Maryland Healthy Air Act CapEx, first got [ph] $176 million in 2010 and $93 million in 2011. When do you expect that CapEx spending to end?

Ed Muller

Well, there are two components ending, and there is still some work being done. And when that work is completed there are payments that we will make to Stone & Webster in accordance with the contract. And some of those will be made relatively shortly. And then we have the final close out and that will probably take us somewhere into next year.

Brian Chin - Citigroup

Okay, so after the $93 million for 2011, we are expecting Maryland Healthy Air Act CapEx spending to fall near to zero?

Ed Muller

Bill.

Bill Holden

Yes, that price – the amounts that we have shown for 2010 and 2011 would be the balance of the payments that we expect to make for Maryland Healthy Air Act compliance.

Brian Chin - Citigroup

Okay, great. Thank you.

Operator

We will go next to Paul Patterson of Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning, guys.

Ed Muller

Good morning Paul.

Paul Patterson - Glenrock Associates

I wanted just to follow up on Ali Agha's question. Did I understand it correctly that the transport rule and the mercury EPA stuff is not likely to impact any operations going forward?

Ed Muller

Paul, I think it is way premature to know about those various proposals. Frankly they were made before the election. Even before that, my view has been having lived through this many times, I know what the impacts will be and how the rules will work when they are finalized. And there is just a long distance between proposals and final rules, and there is a lot of complexity in them. They are going to change, I’m not yet ready to say.

Paul Patterson - Glenrock Associates

Okay. One of your competitors was indicating that they thought that there was going to be – that the forward curve was not fully reflecting the impact of these new rules. And I wanted to sort of get your perspective on the market, what you see going on there. I mean you mentioned the reserve margins that you see tightening. But there is also this – specifically what I wanted to ask you about was this FERC NOPR on the energy market and the compensation of full LMP, which has been I guess somewhat controversial. Do you guys have any projection or any sense? Could you share with us any modeling that you might have done in terms of what the impact of that full LMP pricing proposal might do if the FERC NOPR were to come to fruition?

Ed Muller

Well, first of all, first and foremost Paul, while we do a lot of modeling. What we do is proprietary. And different people have different views on how these things are going to come out, but I repeat, until things get finalized, it is very hard, and if you think of it in terms of a decision tree, there are many branches on the tree at this stage.

Paul Patterson - Glenrock Associates

Okay, okay. Well, I appreciate it. Thanks a lot, guys.

Ed Muller

Sure.

Operator

We will go next to Brandon Blossman of Tudor, Pickering, Holt & Co.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Good morning, guys.

Ed Muller

Good morning Brandon.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Let's say this is probably more of a conceptual question; but in light of your experience at Marsh Landing and given that you have continued to include a Brownfield expansion possibility slide in your deck for a while now, what kind of value do you see at a Brownfield site versus new build Greenfield?

Ed Muller

We see – I won’t give you a number for obvious reasons, but we see measurable value both in having the typical ground connection to the transmission system, connection to the natural gas pipeline system in this case. There is – and when we work on this and we bid in auctions as we did in responding to our request for proposals from Pacific Gas and Electric, we see measurable, real and noticeable value.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Would don’t you just maybe even give a range, a percentage of total construction costs?

Ed Muller

I would not.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Okay. Fair enough. Detail questions, sticking with California and Pittsburg. The option on the contract to extend out to 2015, how does that interact with the California once-through cooling requirements?

Ed Muller

We are able on those units to operate consistent with all of the plans that the state has.

Brandon Blossman - Tudor, Pickering, Holt & Co.

So Pittsburg through 2015 is not – a non-issue?

Ed Muller

Yes, that is correct.

Brandon Blossman - Tudor, Pickering, Holt & Co.

That's all I have. Thanks.

Ed Muller

Sure.

Operator

We will go next to Gregg Orrill of Barclays Capital.

Gregg Orrill - Barclays Capital

Thanks. Just on slide 20, I know it is not a new disclosure; but the second bullet there, around the idea that in the five years following the merger GenOn would be only an AMT, and certain state income tax entity. Certainly I don't expect them to – GenOn to lose money for the five years following the merger. Can you kind of refresh me on the thought process there?

Ed Muller

Paul, why don’t you take this?

Paul Gillespie

I mean, our forecast says – remember the computation of taxable income can be different from the computation of book income in most cases, in this business somewhat significantly. Our forecasts show that we will – that GenOn will over the five-year period basically have little or no taxable income, which is why we make the statement that we do here.

Gregg Orrill - Barclays Capital

But to the extent that towards the end of the five-year period that you do have – I guess does that statement take into account the potential for there to be some tax – some more material positive net income toward the end of the five years?

Paul Gillespie

Yes, it does.

Gregg Orrill - Barclays Capital

Okay, thanks.

Operator

We will go next to Clark Orsky of Standish Mellon.

Clark Orsky - Standish Mellon

Hi, I have a question on slide 16. The $407 million of projected CapEx for 2011, how does that relate to what was in the proxy? I think the number was $375 million for '11.

Ed Muller

Bill.

Bill Holden

Yes, I think it is primarily timing movements, where you would have some expenditures that we had forecast for ’10 that are now being forecast for ’11 that may be the other timing movements of ’10, ’11 and ’12 that would explain I think the most...

Clark Orsky - Standish Mellon

Okay. Does the proxy EBITDA forecast include your outlook for Marsh in EBITDA?

Bill Holden

I believe that Marsh Landing results were included in the proxy statement, yes.

Clark Orsky - Standish Mellon

Okay. And what was the assumption about the Pittsburg tolling agreement in that forecast?

Ed Muller

Go ahead, Bill.

Bill Holden

Well, we didn’t have the tolling agreement executed at that time. So we didn’t have the agreement that we’ve just announced in that forecast. I think we did have some assumptions that there would be some of the Pittsburg units contracted beyond the current contract period.

Clark Orsky - Standish Mellon

Okay, okay. Thanks very much.

Ed Muller

Certainly.

Operator

And we will go next to Nitin Dahiya of KLS Diversified.

Nitin Dahiya - KLS Diversified

Good morning.

Ed Muller

Good morning.

Nitin Dahiya - KLS Diversified

Ed, one question in terms of the environmental spend, you answered previously that obviously at the time you made the decision it needs to be a viable decision. But as we stand today and as you look at the combined GenOn fleet, obviously a part of it requires spending which would not be economical based on market conditions today. How do you look at that? Do you try and look out for five years and say, this is what I think the market would be on a region by region basis? Or are you saying, look, it is not going to make sense, so I would be okay shutting those plants down?

Ed Muller

Well, I think the analysis is like this, first of all, we can look out and see what the commodity curves are. And I think it is unwise in any time to think that we are smarter than the whole marketplace on anything. So the starting point has to be that which is known. Now, we are in these markets, and we do have some knowledge of what is occurring there, and so we have to use our – we develop our own models, again starting with the commodity curves, and assess any investments against that modeling, which is again has as its base the existing curves. And I believe it to make sense, but it won’t make sense.

Nitin Dahiya - KLS Diversified

Fair enough. In terms of when you look at those adjustments and really moving from a hedging perspective, as you layer in more hedges are you more or less hedged on heat rate than before? Say especially in the '11, '12 period, because the implied forward curves are fairly low on that. So when you are layering in more hedges, are you fairly consistent on heat rate as well? Or are you keeping some of that open in the outer years?

Ed Muller

Well, part of that depends on the instruments we use for hedging. Some of our hedges, particularly in the near term are hedges by selling power forward. Others of our hedges, particularly as we go out are by selling gas. And when we sell gas, we retain the adjustments that may come to heat rate. And how much we have in each, we don’t disclose.

Nitin Dahiya - KLS Diversified

No, I think my question was just compared to what, say, how you were hedged say a year ago versus now, are you more open on heat rate or less?

Ed Muller

John, do you want to address?

John O'Neal

The only thing I would say there is we have not added, if you go back even to a year ago, we have not had a tremendous number of hedges in the back of the curve. So I would say, in general the back of the curve were relatively unchanged. In the front of the curve, and when I say front of the curve, I am talking about now, 2011 and maybe even into 2012 a little bit. As we get closer to delivery, we roll out our natural gas hedges and convert those to power hedges.

So, we essentially lock in the head rate in the market at that time we do that conversion. And we do that because we don’t want to be exposed to intra-month or cash month heat rate moves. We want to be actually hedged against what it is we’re going to produce, which is power. So, as you would expect as we get closer, as we get into 2011, we would have rolled out most of our head rate and converted that to power. Again, that will be the main difference from whatever we showed you in prior periods.

Nitin Dahiya - KLS Diversified

Okay, maybe I will follow off-line on that. Lastly on Marsh Landing, is the right way to look at it – is that because it is – consolidated in the CapEx is the numbers, but the financing is non-recourse?

Ed Muller

The financing is non-recourse, and I will let Bill speak to this.

Bill Holden

And I will try. You will see the total capital expenditures for Marsh Landing, and then we have the project financing that is non-recourse to any of the myriad companies above the Marsh Landing Group.

Nitin Dahiya - KLS Diversified

All right. So from a parent liquidity point of view, looking at the $407 million number, that understates the parent liquidity because you would actually have a non-recourse funding for the Marsh Landing component of that. Is that the right way to look at it?

Bill Holden

Yes, that is right. And if you look at the equity requirement, we estimate that to be around $200 million, and that includes about $15 million that we spent since the inception of the development of the project.

Nitin Dahiya - KLS Diversified

Great. It could be helpful if you also give the equity component of the requirements as you give the CapEx forecast in the future. But that is very helpful. Thank you.

Ed Muller

Operator, are there any other questions?

Operator

No sir. No questions. At this time this does conclude the question-and-answer session, I like to turn it back to Steve Himes for closing comments.

Steve Himes

Thanks Barbara. We just want to thank everyone for joining us today and their interest in Mirant. If you have follow on questions, we will be available by phone, and have a great day.

Operator

And it does conclude today’s earnings call. Thank you for your participation.

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