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Executives

Edward R. Muller – Chairman and Chief Executive. Officer

James V. Iaco Jr – Executive Vice President and Chief Financial Officer

Robert M. Edgell – Executive Vice President and Chief Operating Officer

William Holden – Senior Vice President and Treasurer

John O’Neal – Senior Vice President and Chief Commercial Officer

Paul Gillespie – Senior Vice President of Tax

Mary Ann Arico – Director, Investor Relations

Analysts

Brian Chin - Citigroup

Brian Russo - Ladenburg Thalmann & Co.

Peter Monaco - Tudor Investment Corporation

[Deakus Dekade – Morgan Stanley]

Paul Patterson – Glenrock Associates

Mirant Corp. (MIR) Q1 2008 Earnings Call May 8, 2008 9:00 AM ET

Operator

Good day everyone and welcome to the Mirant Corporation’s first quarter 2008 earnings call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Mary Ann Arico, Director of Investor Relations. Please go ahead.

Presentation

Mary Ann Arico

Thank you. Good morning and thank you for joining us today for Mirant’s first quarter 2008 earnings call. If you do not already have a copy the press release, financial statements, and first quarter filing with the SEC are available on our website at www.mirant.com The slide presentation is also available on the website. A replay of our call will be available approximately two hours after we finish. Speaking today will be Ed Muller, Mirant Chairman and Chief Executive Officer, and Jim Iaco, Executive VP and Chief Financial Officer. Also in the room and available to answer questions are Bob Edgell, Executive VP and Chief Operating Office; Bill Holden, Senior VP and Treasurer; John O’Neal Senior VP and Chief Commercial Officer; and Paul Gillespie, Senior VP of Tax.

Moving now to the safe harbor. During the call we will make forward-looking statements 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. I encourage you to read them. 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 website or at the end of our slide presentation. I will now turn it over to Mr. Muller for opening remarks.

Edward R. Muller

Thanks Mary Ann and good morning everyone. I will try to remember to tell you what page I am on. We will start on page 3 of the presentation. This is the same page that we used in February. As you would expect, our strategy does not change from quarter to quarter and it remains the same. We focus on operational performance, cash generation, and prudent growth.

I would like before turning to the next slides here to give you a some sense of what that has meant for us in the past quarter as we will elaborate on shortly. For example, in the Mid-Atlanta we are pleased that our E4, our equivalent forced outage rate was 6%. Good performance for our base load coal plants and not something that happens by luck or just mere happenstance but because of the focus we have on it.

Likewise we have a major environmental capital expenditures program underway in Maryland where we are putting on SCR, selective catalytic reduction equipment to control NOx and scrubbers to control sulfur dioxide. And we are making good progress on those and we are in fact this month completing the SCRs for Morgantown Unit 2 and Chalk Unit 1. We completed Morgantown Unit 1 last year and with the completion of the SCRs for Morgantown Unit 2 and Chalk Unit 1 this month we will have completed the entire NOx program which is part of our Maryland environmental CapEx program. And these are coming along on schedule, on budget, as is the entire program. And as part of that at Morgantown for Unit 2, we have been upgrading the mills which we use to pulverize the coal into something that is akin to talcum powder. We did the same with Unit 1 last year; had some issues with them which caused us problems. We came back online and we think we have addressed those, learning constantly from what we do in the past. All of these things are positives that we think will improve and continue to improve our reliability as we go forward.

Focusing on cash generation, as we again will elaborate as we go later in the presentation, I think it noteworthy that from our operating activities we produced $249 million of net cash in the first quarter compared to $194 million in the same quarter last year.

In the terms of prudent growth, we stress the word prudent. We would like to grow the marketplace, inevitably we will require it. We are well situated to do it but we will do it only when it makes financial sense. With that said, PG&E in California has come out with its request for offers for up to 1200 megawatts and we will be responding to that in July as the request schedules.

So turning then to page 4, we have had and continue to have underway, a program to return $4.6 billion of cash to our stockholders. One billion of it through an accelerated share repurchase program which is still underway and which will be completed by its terms this month. And $3.6 billion of open market purchases by the company. As of May 2, we have returned approximately $1.9 billion to the stockholders, reducing outstanding shares to 207 million. If you look at the chart there you can see that the open market purchases, again as of May 2, were precisely $883 million.

Turning to page 5, for the quarter our adjusted EBITDA compared to last year is down some and this is principally attributable to lower incremental realized value of hedges, lower generation volumes in the northeast, and increased fuel costs; offset substantially by higher capacity revenues.

Turning to page 6, we are adjusting our guidance both for 2008 and 2009. Jim Iaco later will go over in detail the particulars for each. For 2008 we are reducing our guidance by $64 million to $861 million. And for 2009 we are increasing our guidance by $51 to $1 billion 62 million.

Page 7 is the same chart we had been using showing where our hedge levels are for this year and out through 2012. If you look and compare to what we publically disclosed in March when we were at the Morgan Stanley conference or in February when we last had an earnings call, you will see there are increases as you would expect, particularly for power in 2009 and for coal in 2010. And this is part of our approach. We will continue to hedge, we continue to look forward particularly given the volatile nature of the business we are in. Volatility particularly we had seen in the first quarter. We continue to think this is the appropriate way to run a business like this.

Turning to page 8 and speaking on that volatility. In the first quarter we saw a dramatic rise in the price of fuels. Things we have frankly never seen before. In terms of natural gas, prices going out are all for all years that we look forward to are above $9.20 per million BTUs. And as a result, during the first quarter we saw heat rates contract in PM, our very important market. This was mathematically a logical outcome that is as natural gas prices rise and gas is not on the margin all the time, mathematically heat rates will decline and that is exactly what happened. We have seen some recovery of that in the forward markets since the end of the quarter.

Coal prices have risen to all-time highs and because power prices have not yet caught up with that fully and we are seeing [inaudible] spreads having contracted some. And finally oil prices have hit all time highs rendering some of our oil fired units or units that fire on oil and gas largely uneconomic on oil right now.

So with that said that is what we saw in the quarter. It has been volatile and if anything persuades us that it is right we are right to be hedging this is it. When we look on longer term we continue to see exactly the same trends we have been seeing. Turning to page 9, charts we have used before but have updated. We are looking at an inexorable march of declining reserve margins. And declining reserve margins inevitably will lead to higher heat rates and they will lead to higher capacity prices. Simply put, supply and demand continue to tighten, that is supply is not keeping up with demand. Prices are going to rise. Whether that happens in a particular quarter with all of the things happening with fuel and so on is a very small slice of it. But in the fullness of time this is inevitable. This is what is coming and we continue to see nothing happening in the marketplace that will realistically will have supply meet rising demand at whatever rate demand is rising. It may slow with higher prices, it may slow some with the economy, but it is inexorably rising and supply is no where near coming to the point where it can meet it.

Turning to our Mid-Atlantic segment on page 10, in this segment our gross margin was up quarter over quarter a little over 7%. As I said in the beginning, our base load coal generating facilities performed well. We are extremely pleased with them. This is a result of the focus we have had on this. The increase in realized gross margin resulted principally from higher revenues in the capacity markets and offset some by lower incremental realized value from hedges.

Like all of you, we are waiting the outcome of the RPM option for which the results should be announced a week from tomorrow on May 16.

Turning to page 11 in our Mid-Atlantic region a number of major environmental matters and let me address them. First, as I said earlier, we have a very large capital expenditure program underway in Maryland to comply with the Maryland Health Air Act. The program for us as it has been at $1.6 billion. That remains unchanged. We are on schedule and on budget. Through the end of March we have paid out $612 million against that $1.6 billion leaving us about $1 billion to go. As I mentioned earlier we are completing this month two of the CSR installations and with their completion we will have completed the noxa portion of this program.

At the Potomac River we continue to operate up to three units. We continue to be at litigation and discussions with the Virginia regulators. We had hoped that we would be in a position to have part of the stack merge done for this summer. We will not be able to but we continue to expect we will be able to run all five units largely unconstrained in 2009.

And finally, the draft Regio-regulations issued by Maryland in February incorporate a $7.00 a ton cap on carbon emissions for half of the carbon emissions that in state generation would need. We will all see how this works. I think it is noteworthy that as you watch the public dialogue there is a growing realization of reality which is addressing carbon will not be free. And it will ultimately end up on the consumer. How much it will be, people are having great fun debating and modeling and so on but that is where this is all going. Given the state of the economy, I think it is as it ought to be in higher focus.

Turning to page 12 on the Northeast our gross margin was down here because of lower incremental realized value from hedges as well as lower generation volumes because of fuel costs, particularly here oil. And I am unhappy to say that we have shut down the Lovett station and am in the process of removing the facilities from the station.

California, the gross margins are basically flat year over year and the significant thing is what I mentioned before. We are pleased that PG&E has come out with it’s FRO. We think we are well situated to respond to this bid and intend to do so in July.

With that we will turn to page 14 and turn this over to Jim Iaco.

James V. Iaco

Thank you Ed and good morning. As shown on slide 14 adjusted EBITDA for the first quarter of 2008 was $211 million as compared to $221 million for the 2007 period. The $10 million decrease is principally due to a $16 million decrease in realized gross margin which I will discuss in more detail on the next slide. Partially offset by a $6 million decrease in miscellaneous costs. Adjusted net income which is adjusted EBITDA less interest, taxes, depreciation and amortization was $158 million for the first quarter of 2008 as compared to $129 million for the comparable period of 2007. The $29 million increase is principally due to an increase in interest income from higher cash balances as a result of the proceeds from dispositions completed in 2007. And reduced interest expense as a result of lower outstanding debt and higher capitalized interest as a result of our environmental capital expense program. Partially offset by the $10 million decrease in adjusted EBITDA.

Turning to items that reconcile adjusted net income to loss from continuing operations, a GAAP measure. Net unrealized losses on derivatives reflect the mark to market net loss on our hedging activities. The post retirement benefit curtailment represents the gain related to certain changes made to our post retirement benefit plans. And the benefit for income taxes relates to an adjustment in evaluation allowance.

Our average share count is lower in the first quarter of 2008 as compared to the first quarter in 2007 due principally to share repurchases.

And finally, our earnings per share based on adjusted net income was $0.66 for the first quarter of 2008 as compared to $0.46 for the comparable 2007 period. Per share information for adjusted net income is based on diluted weighted average shares outstanding. Per share information for loss from continuing operations is based on basic weighted average shares outstanding. Because the calculation based on diluted weighted average shares outstanding decreases the loss per share and is therefore anti-diluted.

Turning to slide 15. This slide presents the components of the company’s realized gross margin for the first quarter of 2008 as compared to the comparable period of 2007. Energy shown as the light blue bar represents gross margin from the generation of electricity at market prices, sales and purchases of emission allowances, fuel sales, purchasing and handling of fuel, steam sales and our proprietary trading and fuel oil management activities. A $16 million decrease was principally attributable to lower generation volumes in the Northeast and increased fuel costs.

Contracted in capacity, the dark blue bar, represents gross margin received from capacity sold in ISO administered capacity markets through RMR contracts and from ancillary services. 2007 results also include the back to back agreement which was terminated on August 10, 2007. The $74 million increase was principally due to an increase in capacity revenues from the PJM RPM capacity market.

And finally, the incremental realized value of hedges, the yellow bar, reflects the actual incremental margin realized in excess of market prices upon the settlement of our power and fuel hedging contracts including coal supply contracts.

Turning now to slide 16. Taking net cash provided by operating activities on a GAAP basis and adjusting it for bankruptcy payments which are non-recurring in nature and emission allowance sales proceeds and capitalized interests which are included in investing activities for GAAP financial statement presentation results in adjusted net cash provided by operating activities of $253 million for the first quarter of 2008 as compared to $194 million for the comparable period of 2007. Reducing these amounts for total cash capital expenditures results in free cash flow of $110 million for the first quarter of 2008 as compared to $118 million for the comparable period of 2007.

Our Maryland Healthy Air Act capital expenditures which are non-recurring nature have been and will be funded by existing cash. I will discuss this in more detail on slide 24. Therefore a more meaningful presentation of free cash flow is to use free cash flow adjusted for the expenditures related to this program. Accordingly, adding back actual expenditures under the Maryland Healthy Air Act program results in adjusted free cash flow of $222 million or 40.93 for the first quarter of 2008 and $167 million or $0.60 per share for the comparable period of 2007.

Turning to slide 17. This slide presents our debt and liquidity as of March 31, 2008. Consolidated debt which is $2.932 billion at March 31, 2008 is down $163 million since December 31, 2007 due to $135 million of repayments of the Mirant North America term loan and $26 million of purchases of Mirant America’s generation senior notes due in 2011. After subtracting reserve cash our available cash and cash equivalents including amounts available under the Mirant North America revolver and synthetic letter of credit facility amounted to $5.181 billion at March 31, 2008.

Let me take a moment to discuss the cash balances at Mirant North America and Mirant Mid-Atlantic. Mirant North America’s ability to pay dividends is restricted under the terms of its debt agreements. At March 31, 2008 Mirant North America had distributed to its parent all available cash that was committed to be distributed under the terms of its debt agreements. Leaving approximately $613 million at Mirant North America and its subsidiaries. $244 million of that amount was held by Mirant Mid-Atlantic which as of March 31, 2008 met the ratio test under the leverage lease documents for distribution to Mirant North America. After taking into account the financial results of Mirant North America for the three months ended March 31, 2008 we expect Mirant North America will be able to distribute to its parent approximately $78 million during this month.

Turning to slide 18. As I had mentioned earlier we are updating our guidance for 2008 and 2009. This update is based on forward market prices as of April 8, 2008. Since that date we have seen for 2009 an increase in gas prices, a slight expansion in implied market heat rates, and an increase in implied volatility. These market conditions suggest some additional upside to our business for 2009 though we are not yet prepared to quantify that additional upside. For 2008 we are lowering our guidance from $925 million to $861 million and for 2009 we are raising our guidance from $1.11 billion to $1.62 billion.

I will address the changes in realized gross margin, a comparison of today’s update to our previous update given on February 29, 2008, a comparison of adjusted EBITDA guidance for 2009 as compared to 2008 and guidance sensitivities in the coming slides.

Deducting projected net interest expenditures and income taxes paid and factoring in projected changes in working capital, adjusted net cash flow from operations is projected to be $707 million and $815 million for 2008 and 2009 respectively. Reducing adjusted net cash flow from operations by projected cash capital expenditures of $963 million and $520 million for 2008 and 2009 respectively derives an adjusted free cash flow deficit of $256 million for 2008 and adjusted free cash flow of $295 million for 2009.

Adding back in the Maryland Healthy Air Act capital expenditures for 2008 and 2009 which, as I stated earlier, are non-recurring in nature and will be funded by existing cash net of the return of $4.6 billion to our stockholders results in adjusted free cash flow without the Maryland Healthy Air Act CapEx of $446 million for 2008 and $572 million for 2009.

Our adjusted free cash flow yield excluding the Maryland Healthy Air Act CapEx and based on the closing share price and diluted share count on May 2 is 4.7% for 2008 and 6% for 2009. Our hedge realized gross margin for 2008 is $1.206 billion or 79% of our projected realized gross margin. For 2009 our hedge realized gross margin is $1.118 billion or 65% of our projected realized gross margin. Hedged realized gross margin is defined as hedged merchant generation and other contracted capacity which would include reliability must run agreements and capacity sold in ISO administered capacity markets.

Finally, hedged adjusted EBITDA which is defined as hedged realized gross margin reduced by our projected operating expenses for a full calendar year is $539 million or 63% of our projected adjusted EBITDA for 2008 and $461 million or 43% of projected adjusted EBITDA for 2009.

Turning to slide 19. This slide presents the components of realized gross margin included in our guidance for 2008 and 2009. Realized gross margin is projected to increase $1.528 billion in 2008 and $1.719 billion in 2009. The $191 million increase is comprised of a $123 million increase in energy realized gross margins, a $36 million increase in contracted and capacity realized gross margins, and a $32 million increase in the incremental realized value of hedges. I will discuss this in more detail on slide 21.

Turning to slide 20. This slide presents a comparison of our guidance for 2008 and 2009 given on February 29, 2008 to the update being provided today. For 2008 adjusted EBITDA is projected to decrease by $64 million. This change is comprised of the following: First, a decrease of $16 million in operating and other costs. Second, a $33 million decrease in anticipated revenues from our proprietary trading and fuel oil management activities. Let me take a minute and expand on this. In the first quarter of 2008 we had $11 million of realized gross margin from our proprietary trading and fuel oil management activities as compared to $17 million in the comparable period of 2007. Although we had positive results from these activities during the quarter, our 2008 expectations are down $33 million which reflects a decrease in 2008 results and a shift in value of $19 million from 2008 to 2009. Third, we have a decrease of $31 million in our commercial availability with the major contributing factor being a reassessment of our ability to secure flexible gas arrangements on our intermediate oil and gas units. Fourth, we have a decrease of $14 million due to changes in market prices. And finally a decrease of $2 million in the incremental realized value of hedges.

In 2009, adjusted EBITDA is projected to increase by $51 million. This change is comprised of the following: a $95 million increase in the incremental realized value of hedges, a $16 million decrease in operating and other costs, a $9 million increase from our proprietary trading and fuel oil management activities, a $47 million decrease due to changes in market prices, and finally, a $22 million decrease in our commercial availability. Again, the major contributing factor being a reassessment of our ability to secure flexible gas arrangements on our intermediate oil and gas units.

Turning to slide 21. This slide presents a bridge from our 2008 to our 2009 guidance. The 2009 guidance is $201 million higher than our 2008 guidance. This increase is comprised of the following: a $67 million increase due to changes in market prices, a $57 million increase in our commercial availability, a $36 million increase in contracted and capacity gross margin, a $36 million increase from our proprietary trading and fuel oil management activities, a $32 million increase in the incremental realized value of hedges, a $10 million decrease in operating and other costs, and finally, a $37 million decrease related to carbon credit costs based on our expected emissions at a cost of $2.50 per ton emitted.

Turning to slide 22. Let’s address some of the key sensitivities regarding the guidance for 2008 and 2009 that we are providing today. NYMEX gas prices utilized in our guidance or as of April 8 are $10.02 per mm BTU for the balance of 2008 and $9.54 per mm BTU for 2009. As I mentioned earlier, we have experienced a significant upward movement in gas prices since April 8. For example, the NYMEX gas prices as of yesterday were $11.65 for the balance of 2008 and $10.87 for 2009. Based upon our unhedged adjusted EBITDA for 2008 and 2009 a $1.00 price move in natural gas will result in a change in adjusted EBITDA of approximately $6 million for the balance of 2008 and $43 million for all of 2009.

Energy price changes due to heat rate movements of 500 BTU per kilowatt hour will result in a change of adjusted EBITDA of approximately $11 million for the balance of 2008 and $64 million for all of 2009. The heat rates shown are 7 x 24 Pepco forward implied market heat rates as of April 8. As I indicated on the previous slide we have included a carbon credit cost of $37 million in our 2009 guidance based on our expected emissions at a cost of $2.50 per ton. The sensitivity to adjusted EBITDA for a $1.00 change in the price of credits is approximately $6 million. This sensitivity is based on our hedge position and our view that power prices will increase as the cost of complying with the regional greenhouse gas initiative increases.

Turning to slide 23. This slide presents a breakdown of our projected capital expenditures for 2008 through 2010. Our normalized maintenance CapEx approximates $100 million per day. But as shown in the chart it is projected to be higher in the early years of our Maryland environmental CapEx program due to upgrades that will be timed in conjunction with our environment retrofits. As I had mentioned earlier the total estimated costs for compliance with the Maryland Healthy Air Act remains at $1.6 billion. We have expended $612 million through March 31, 2008 of which $500 million was spent prior to this year.

Turning to slide 24. We have announced we would be returning $4.6 billion to our stockholders through a $1 billion accelerated share repurchase program. Together with $3.6 billion in open market purchases reducing the $4.6 billion by the accelerated share repurchase program and open market purchases through March 31, 2008. The remaining cash to be returned to stockholders as of March 31, 2008 amounted to $2.87 billion. At that date cash and cash equivalents amounted to $4.517 billion reducing that amount by the remaining cash returned to stockholders and by other unavailable cash. Cash available to fund projected expenditures at March 31, 2008 is $1. 631 billion and exceeds the remaining Maryland Healthy Air Act expenditures by $643 million.

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

Edward R. Muller

Thanks Jim. I am on page 25 or slide 25. As I said earlier we see strong fundamentals that are going to get stronger and that are going to continue into at least the next decade. The reason why I refer to a decade is the reality of what it takes to add supply. Much talk of adding nuclear facilities which I think wise but I think is going to take a long time and come much more slowly than people think. New goal I do not think is coming any time soon. The result of all this is that incumbent generators like us are going to benefit from demand rising faster than supply. It is just basic economics.

We have as I have said before a targeted maintenance program to improve our availability and we are seeing results from it. We will continue to focus on it every day, every hour. As Jim described in more detail we have a business that generates strong cash flows that is masked somewhat right now because we have a lot of cash going out to our Maryland environmental CapEx program. We will be done funding that program by the end of the first quarter of 2010. The actual construction will be done by the end of 2009. And as Jim indicated we have the cash and we are moving right along with this.

We would like and will invest our excess cash in the business. Given the supply situation that is both inevitable and that is good. We have the right locations to do that but we will do so only when it is prudent. We are not in the business of investing for the joy of it but because it makes business sense for our owners. To the extent we can do that, that is what we would like to do. To the extent we cannot and have excess cash we will return to our owners that cash because it is theirs. And with that we will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go to Deakus Dewade [ph] with Morgan Stanley.

[Deakus Dewade – Morgan Stanley]

Good morning. Just a quick question on the commercial availability that you guys sited. Is there a limited amount of flexible GAAP supply or constraint on that type of commercial arrangement or is it more storage. Just trying to get a sense for the nature of the commercial part of the availability.

John O’Neal

Sure. Really most of this relates to our facilities in Southern Maryland at Chalk Point where we take gas off the Cove Point pipeline and we have over the last year just seen limited ability to get the gas -- to burn it the way we would like to. Obviously those units are very large units that come on only when demand is very high. They do not run in a base load fashion but typically the pipeline requires us to buy in a base load fashion. So as we have assessed our ability to get the gas in a way that is economic to us versus what the pipeline would want us to take we have modestly lowered our expectations for the balance of the year and for next year because of that situation.

[Deakus Dewade – Morgan Stanley]

Got it. And kind of as a general industry sense can you provide any color on if that is something that could be likely or at least a possibility in other areas. Not necessarily just for you but you know for intermediate generation actually having a little trouble getting interruptible or quick capability gas supply.

Edward R. Muller

The difficulty in answering that is that you have to be very specific to the units and the pipeline capacity and the storage capacity and I would not want to start down generalizing.

[Deakus Dewade – Morgan Stanley]

Okay fair enough. Thank you

Operator

We will go next to Paul Patterson with Glenrock Associates

Paul Patterson – Glenrock Associates

Just to sort of follow up on that. The decrease in the commercial availability was totally associated with Chalk Point and that Cove Point pipeline situation, is that right?

Edward R. Muller

No, as Jim said it is largely. We are constantly always as you would expect looking at all of our units and assessing them. But the most significant element is what John O’Neal described to you.

Paul Patterson – Glenrock Associates

Okay. And then with the fuel oil and trading; what is the total, if you could just remind me what the total expectation in terms of a contribution for 2008 is.

Edward R. Muller

We do not give that nor are were going to be giving that.

Paul Patterson – Glenrock Associates

Okay. Then just a $19 million shift into 2009. What caused that?

John O’Neal

Most of that Paul, there are two elements to it. The first in the proprietary trading activities. We will take spread positions between years and as you get price movements between years you can have changes in the realized gross margin just because of that. Just because of spread between calendar year. The other element of it in the fuel oil management activities was we just had less burn on our fuel oil units in the first quarter than we expected. And so we have a lot of very low priced oil in tank. The burns did not materialize as we expected they would in the first part of the year. That value obviously does not go away it just gets pushed to future periods. So we expect we will realize most of that in 2009.

Paul Patterson – Glenrock Associates

I got you. And just finally Ed. In terms of what you are talking about in terms of market dynamics and everything sort of makes a lot of sense but I am just wondering in Maryland there are several things that are sort of being thought about in terms of the future of the market structure. You are mentioning about what appears to be sort of the market not really responding in a way that perhaps people will feel comfortable with. Could you just elaborate a little bit on what you see happening in Maryland with your discussions there and what kind of opportunities or risks that you see associated with that?

Edward R. Muller

Well sure. I think the biggest the risk and frankly the one that worries me is not a Mirant risk it is a societal risk. And that is if you look at the Baltimore Washington corridor to put it in terms that we all know, there is not enough supply in that market and there are transmission constraints into the market. And that creates reliability problems. And so what do I worry about, what do we worry about? Because we have a responsibility to do our utmost to make sure that customers have, the ultimate customers have electricity when they need it or want it. I worry about what happens on a hot day in summer when there is not enough juice. And there is not enough juice just because demand outstrips supply or because there are some equipment issues somewhere in the system. The equipment, not just ours, but everybody in this industry is quite reliable, it is performing very well but it is not perfect. These are big machines with moving parts. So how does that all get addressed. It gets addressed ultimately by adding supply. And we can talk about it in a political sense of what is fair, what is not, what is feasible. But the reality is that supply has to be added. Now what is that supply going to be and who is going to be prepared to add it. Would we like to add, absolutely. And are we well situation in terms of geography and the size of our sites and existing infrastructure, absolutely. And it is appropriately that we add, absolutely. But to add it has to make business sense. And if we look for example at the capacity markets which I think are an excellent idea but they are new. And they are criticized. But at the same time they are not providing revenue streams thus far that justify adding capacity. And so we are in the business of running a business.

Paul Patterson – Glenrock Associates

So do you see an IRP process coming in place? I mean what do you see if that is the case and you are seeing that kind of situation I guess what I am asking is, what do you think Maryland is going to do? Do you think they are going to go for a sort of IRP process?

Edward R. Muller

I do not know what Maryland is going to do. I respect the fact that a variety of the officials elected and unofficial in Maryland are focusing on the problem, realize it is a problem, want to address it but are struggling with how best to do that. And I think to look for what the single answer for example in Maryland is would be nice but it does not exist yet. And that is not a criticism that is simply the reality as people struggle with it. One way would be for new capacity under contracts and we would be pleased to participate in such a process. But people have to decide what they are going to do. We recognize this is a politically changed arena as the Wall Street Journal had a piece within the last couple of days about how prices are rising to the ultimate consumer. Which makes sense. It is inevitable when you look at what the fuel inputs are. If coal has gone up from somewhere in the 50s a ton for Appalachian coal in January to somewhere in the 90s or north today, in a few short months there is an impact. And if oil is at $120 odd bucks a barrel there is an impact. And if gas today is what over 11 bucks on the spot market there is an impact and coming to grips with that and realizing this is not someone else’s problem. This is all of our problem and it is difficult. And everyone would like this to be somebody else’s problem. It is just going to take a while and I wish societally since we all live here today that we get to the answers sooner. And I have thought to myself on what those answers should be but this is going to take more than me or Mirant thinking of what the answer is though we are participating in this process and want to and will continue to. This is part of a broader difficulty across the country with which we are as a society only slowly coming to grips.

Paul Patterson – Glenrock Associates

Okay thanks Ed.

Operator

We will go next to Gregg Orrill with Lehman Brothers

Gregg Orrill - Lehman Brothers

Just going back to some of your guidance factors on page 20. Could you talk about what is behind the fact that the operating costs for the fleet seem to be going down?

James V. Iaco

Yes Greg. As you saw there is a $16 million decrease in our guidance from February related to that. I will give you the breakdown there. Part of it is a reduction in our incentive compensation and the balance of it is primarily related to a reduction in the cost of our own costs at the plant level. And in 2009 there was a similar $16 million decrease in those costs. And here again $8 million of that was related to a decrease in operating and O&M expenses at the plant level and the other $8 million was a decrease in our projected revenues gained. Let’s put it that way from the sale of excess emission credits in 2009.

Gregg Orrill - Lehman Brothers

Okay, thank you

James V. Iaco

You are welcome.

Operator

We will go next to Brian Russo with Ladenburg Thalmann & Co

Brian Russo - Ladenburg Thalmann & Co

Good morning. I believe there is a hearing scheduled with the Virginia Air Board on Potomac River permits. I think it is scheduled for May 22. Just can you convey your thoughts on that. And then how long will it take you to actually merge the stacks and have the plans up and running again.

Edward R. Muller

Sure. First so we are clear the plant is running but we are able to run only up to three units right now. We are hopeful we will find a path through the various issues that are out there that would enable us to go forward with the stack merge. And I think that is what you were referring to. And that is to remind everyone the Potomac River generating station is along the Potomac River and quite near Reagan National Airport and as a result when it was built its stacks are quite short. And as a result there has been concern that what properly is emitted through those stacks may under some circumstances come down to ground level in concentrations that are not safe.

One solution for that has been to make the stacks taller. And the stack merge is an alternative way of doing that without actually physically making the stacks taller and that is to combine the stacks of the five units into two stacks inside the plant which will then have greater uplift with the heat coming out of them and the fans to just make sure that what properly comes out of the stacks goes up to a higher level. We had hoped we would start that and do it in two phases so we would have one phase of it done for this summer when the demand is high. And back to Paul Patterson’s question the supply situation in the Mid-Atlantic is not one that makes me very comfortable. That is having enough supply to meet demand. We had hoped to be able to meet that because we do not have this sorted out yet we cannot and of course we will not take the station down during the summer. It would frankly just not be as a citizen the appropriate thing to do given the supply situation of the region. And so that delays us some. Assuming we can get this permission at the end of May, we would expect to have both stack merges done by the end of January 2009.

Brian Russo - Ladenburg Thalmann & Co

Okay and can you remind us what was the impact of those two units being down for the full year 2008?

Edward R. Muller

We do not specify by plant and obviously it has some impact but it is within the numbers you have seen.

Brian Russo - Ladenburg Thalmann & Co

Okay. Thank you very much.

Operator

We will go next with Peter Monaco with Tudor Investment Corporation

Peter Monaco – Tudor Investment Corporation

Good morning. Thanks for your time. Could you remind me please what you see as the normalized maintenance CapEx kind of down the road in 2010 once all of the environmental related CapEx is behind you. And secondly and related to that talk about the capital structure you see for the company in the future once the buyback is completed and the environmental CapEx program is completed.

Edward R. Muller

Okay what I will do is ask Jim Iaco to address the first one on the basic run rate for maintenance CapEx and when we are done the big program in Maryland and then I will ask Bill Holden to address the capital structure.

James V. Iaco

Peter good morning. As I indicated during my presentation and with the reference to slide 23 our normalized maintenance CapEx approximates $100 million a year and once we complete the program in 2010 that is what you should expect on an average basis per year. And Bill, do you want to address the second part of the question?

William Holden

Peter the way I think about a capital structure, we look at a lot of different credit metrics but I think you can distill that down to what is the appropriate debt to EBITDAR and I am drawing the distinction of EBITDAR not EBITDA because we have the leveraged leases in Mid-Atlantic. But I think given the characteristics of our business we are comfortable with a debt to EBITDAR ratio long term in say the four to four and a half times range. If you look at our guidance for the 2008 we are sort of sitting in that range so I think we are comfortable with where the capital structure sits today. Certainly if we move through time we have completed the capital expenditure program in Maryland and the business performs in line with our expectations that would imply that there is some additional debt capacity in the future.

Peter Monaco - Tudor Investment Corporation

Could you color that in just a little bit. The lease adjusted debt figure is what in excess of the 2.9?

William Holden

Yes the imputed debt from the leases is about a billion dollars.

Peter Monaco -Tudor Investment Corporation

Okay so you are 3.9 and roughly speaking you know if lickity split the buyback were done today you would be 1.8 of cash. So it is two-ish times net.

William Holden

Yes if you want to do it on a net debt. I think while we have the capital expenditure program underway since as Jim has mentioned a lot of the cash on hand will be used for that purpose I think the ratio is a little distorted on a net debt basis today. Although certainly once we have the CapEx behind us I think that is a fair way to look at it.

Peter Monaco - Tudor Investment Corporation

If you sort of look at that cash on the balance sheet as funding the CapEx program then effectively the cash account is being replenished by the cash you are generating from operations. So it does not really change much over the two year period. The bottom line.

William Holden

I think to some extent. I think if you look at this year’s CapEx it is in excess of this years free cash flows.

Peter Monaco - Tudor Investment Corporation

The bottom line down the road a ways for all intensive purposes you will still be somewhat under leveraged and all free cash can go for follow on buy back in the absence of a compelling new plant investment opportunity.

William Holden

I would say what I said earlier I think we certainly should see as the business performs over time and we complete the CapEx program there is additional debt capacity there. The uses of the discretionary cash I could leave that to Ed but I do not think we have said anything other than there would be extra cash potentially available for distribution.

Peter Monaco - Tudor Investment Corporation

Would you care to color in at all Ed. Understanding that it is down the road and has to be caveated.

Edward R. Muller

I think I will repeat what I have said Peter. If we can put the cash that is excess to work in the business which needs to get returns that are appropriate, I think that is the right thing to do for the business and that day will come. I just cannot tell you when it is given the political and regulatory climate in which we are operating. And if we cannot, we will have extra cash and we then we would find a way to distribute it.

Peter Monaco - Tudor Investment Corporation

Thanks a lot.

Edward R. Muller

Sure.

Operator

We will go next to Brian Chin with Citibank

Brian Chin – Citibank

Hello this is Carlos [inaudible], I am asking for Brian Chin. We wanted to understand in slide 20 how the $95 million of incremental realized value of hedges are composed?

James V. Iaco

Yes, it's Jim Iaco. It breaks down as follows. Our coal hedges are positive by about $126 million. In other words they are in the money above market costs by $126 million. And our power hedges are negative by $31 million.

Brian Chin – Citibank

Great thanks.

Operator

This will conclude our question and answer session. I would like to turn the conference back over to Mary Ann Arico for any additional or closing comments.

Mary Ann Arico

Thank you for joining us today. If you have any further questions Steve Heims and I will be available by phone in just a few minutes. Thank you.

Operator

This does concludes today’s conference. Thank you for your participation. You may now disconnect.

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Source: Mirant Corp., Q1 2008 Earnings Call Transcript
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