Executives
Steve Himes - Manager of IR
Ed Muller - Chairman and CEO
Jim Iaco - EVP and CFO
John O'Neal - Chief Commercial Officer
Analysts
Elizabeth Parrella - Merrill Lynch
Lee Cooperman - Omega Advisors
Angie Storozynski - Macquarie
Andrew Levi - Brencourt
Paul Patterson - Glenrock Associates
Zach Schreiber - Duquesne Capital
Alex Mazier - Sandell Asset Management
Neel Mitra - Simmons & Company
Mirant Corp. (MIR) Q2 2008 Earnings Call August 8, 2008 9:00 AM ET
Operator
Good day, everyone, and welcome to Mirant Corporation's second quarter 2008 earnings conference call. As a reminder, this meeting is being recorded. And for opening remarks and introductions, I'm pleased to turn the floor over to Mr. Steve Himes, Manager of Investor Relations. Please go ahead, sir.
Steve Himes
Thank you, Jim. Good morning and thank you for joining us today for Mirant's second quarter 2008 earnings call. If you do not already have a copy; the press release, financial statements and second-quarter filing with the SEC, are available on our website at www.mirant.com. Slide presentation is also available on our website 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 Jim Iaco, Chief Financial Officer. Also in the room and available to answer questions are Bob Edgell, Chief Operating Officer; Bill Holden, Treasurer; John O'Neal, Chief Commercial Officer and Paul Gillespie, Senior Vice President of Tax.
Moving to slide 1, 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. We 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.
And with that, I'll turn the call over to Ed Muller.
Ed Muller
Thanks, Steve, and good morning everyone. I'll try and remember to tell you what page I am on and I'll ask the folks here in Atlanta with me to remind me if I forget. We'll start on page 3, some highlights from recent times.
First, as I think has been in the press, we have after long efforts successfully reached a settlement on the issues at Potomac River. And, as a result, we will in September move forward with the merge of the stacks that we have closed for some time and have that completed by the end of January. So that, thereafter we will as we have said we would be able to run all five units at the Potomac River unconstrained.
Second, as we have said we would, we submitted in late July on schedule a response to the request for offers from Pacific Gas & Electric for new capacity. We've made bids that would cover both our Contra Costa and Pittsburg sites. This will be as such processes always are, long. We don't expect to hear anything back on a formal basis before October, but we are pleased with what we submitted and are hopeful that we will be able to move forward with some new capacity there in the Bay area.
And third, as everyone on this call I'm sure knows, we have experienced significant market volatility in our sector, not just for Mirant but for everyone, in the month of July, excuse me, gas falling some 30%; quite extraordinary. We'll talk some more about this as we go forward.
Let me turn to page 4 in this presentation and address the return of cash to stockholders. We announced in November 2007 that we would return $4.6 billion to cash. Through the end of July, we have returned just over $3 billion of that cash and reduced outstanding shares to $186 million. That's basic shares as you can see in this chart. We would have reduced slightly more but 34% of the outstanding warrants of Mirant were exercised recently, which added 8 million more shares to the basic count, had no impact however on diluted shares outstanding.
As we said in our earnings release this morning, at the end of June, a party approached us about a possible transaction which we thought had potential to add a significant value for the stockholders of Mirant and we decided to pursue it, and we did so rigorously. We have concluded that we will not pursue this transaction. While we were considering it and working on it, we suspended repurchasing shares in the market. Having concluded that we will not pursue the transaction, we will recommence purchasing our shares. We have $1.55 billion to return to shareholders and we intend to go back into the market as we have done in the past.
Turning to page 5, highlights on the company. You can see the results for the six months and the quarter; we are down compared to ‘07 but pretty much on track for where we expected to be this year. I'll speak to guidance in a moment. The change in adjusted EBITDA for the quarter, as you can see on page 5 is a result of lower realized gross margins from our fuel oil management and proprietary trading activities. I want to note, those remain positive. They are just less positive. Lower realized value from our hedges offset some by higher capacity revenues.
Turn to page 6, as I indicated, an update on our guidance. Jim Iaco later will go into this in detail. But we are increasing our guidance slightly for 2008 by $16 million from $861 million to $877 million and likewise increasing our guidance slightly for 2009 from $1,062 million to $1,096 million.
Turning to page 7, it has been our practice, which we continue to show you our hedge position, though we are providing more data than we have in the past. What you'll see, the last time we presented this a quarter ago we showed you five years. We are showing you seven years here to give you a better sense of where we stand. During the second quarter when prices were high, which I'll address further in a moment, we as you might expect, were in the market hedging our power sales further out and you can see we put on some significant hedges in 2013 and 2014.
The way to understand this chart is that the thatched or fuzzy looking portions of columns are what we added since April 30. And you can see, that's what I know is out there on the subject of coal for 2008 and 2009, we have all of our coal contracted and for 2010 we have about 70% of our coal contracted. For 2011, about 58% of our coal contracted.
Turning to page 8 and looking at the market, and this is a period largely when we were adding power hedges. During the quarter which ended June 30, we saw fuel prices marching upward, gas marched upward sharply, oil marched up sharply and as did coal prices.
Power prices responded as you would expect and were also up and they were also up we think based on our assessment of the market because of the anticipated cost of complying with carbon requirements. As I said, we were active in the market during this period adding power hedges. Heat rates generally were strengthened rather in the Northeast and remained basically flat in PJM. There were some expansion during the quarter in dark spreads in PJM.
Now turning to page 9, July was a bit of a roller-coaster. And as I suspect everyone knows and you can see from this graph on the left, gas prices fell sharply. It appears because of lower demand expectations, milder weather, concerns about the economy, I'd note fundamentals are still strong and long-term gas prices are still well in the above well, the upper $8 range, which on a historic basis is high.
Heat rates changed moderately. On peak heat rates in PJM declined a little, but off peak heat rates in fact expanded. Our coal prices did not decline, and that's resulted in the narrowing of dark spreads, which I realize has everyone very focused on what's going on here. I think it's worth pausing for a moment here and thinking about the entire sector and what we do here and asking ourselves this question. Have the laws of supply and demand changed? I know we're in a presidential campaign and listening to the candidates. One might think that the laws of supply and demand have evaporated and gone to Mars for a while. The laws of supply and demand in my judgment haven't gone anywhere. They are the same. We are in a business that has a number of commodities and commodities tend to be volatile. That's true for the fuels we use, gas, oil, coal. It's true for the product we produce electricity. And that volatility in the short-term we will see, we have seen and we will see again, up and down.
But for those who look at this business on a long-term basis, on its fundamentals, you can see nothing has changed and we'll see that when we look again at where reserve margins are going in a page or two. And that is, supply is not keeping up with demand and that isn't changing. And that means it was good to be in this business a quarter ago because it is good to be an incumbent in a marketplace where supply is not growing and demand is. And it's going to be hard to add supply, given particularly the political situation of the country. That was true a quarter ago, its true today and it's going to be true tomorrow.
It is that this volatility doesn't in my judgment affect the ultimate value of this enterprise. What it affects is the question of why it is whether a company in this sector should hedge. And we hedge not because we think we are geniuses at figuring out the right moment but because among other things, we have to manage our balance sheet and meet our obligations, which we are committed to always do. In sizing, how much cash we have to return? We have to look forward and be able to take the stress that comes in being in a business with commodities that jump around. And they had hell of a jump in July. And I predict we'll see other jumps in other directions. And so by hedging, we have more certainty of our cash flows and therefore we don't have to set aside big reserves of cash to meet this volatile situation in the market. But let me repeat, as to fundamentals of the business, nothing has changed in our judgment.
Turning to page 10, reserve margins, same graph we have been providing, updated some. I won't go through the particulars on it. But you can see the slope on these curves is all the same. And that was true a quarter ago and it's going to be true in 90 days, and it's going to be true in a year.
I'll turn to page 11 now and an update on Mid-Atlantic; two pages on this. First, our baseload coal units performed well in the first half. We had a 7% equivalent forced outage rate. As we've said before, this is an area of great focus for us. These are important assets, they are good assets and we are highly focused on making sure that when we want them to run, they will run.
I'm pleased to say that the barge unloader that we have worked on for some time and talked about at the Morgantown Station on the Potomac River went into service in the month of July and we unloaded a barge of coal from Colombia there.
Our realized gross margin was relatively flat for the reasons stated here. We had lower realized value from hedges, offset some by largely or largely by higher revenues in the PJM capacity market and higher energy gross margin.
Continuing on page 12, with the Mid-Atlantic, I mentioned at the beginning that we have reached an arrangement which involves a settlement with the City of Alexandria, permit from the Air Board of the Commonwealth of Virginia, which will permit us to move forward now with the stack merge. We are delaying it to September, only because we are in the peak season right now and we will march right along and are ready to do so. And starting as I said earlier, at the end of January, we will start running all five units unconstrained. Part of this settlement has us, in addition to doing the stack merge, setting aside $34 million, which will be used as we agree with the City of Alexandria in efforts to reduce fine particles of dust.
On the Maryland Healthy Air Act, this is our environmental construction program at our three Maryland stations, Morgantown, Chalk Point and Dickerson. We are marching along. We remain on budget and on schedule. We have extended cash out the door, nearly $700 million of the $1.6 billion. And as to the NOx portion, the nitrogen oxides portion, where the Act has us addressing principally nitrogen oxides and sulfur dioxide. And we address the nitrogen oxides largely with SCR, selective catalytic reduction. We are done. We have completed that portion of the program, putting in two SCRs at Morgantown, one of which went in during the second quarter and was commissioned, and one at Chalk Point, which likewise was commissioned at the same time.
We now have the scrubbers to go in, which will control sulfur dioxide and we are marching along with those. The so-called RGGI regulations, the Regional Greenhouse Gas Initiative in Maryland became effective in late July. It will be implemented in January of ‘09. There has been some market trading now in these, so we have better price information. Jim will address this when we go forward. I'd note that the regulations provide that for someone like us, half of our emissions credits are capped at $7. Right now, the trading price is above that $7.
And finally, adding somewhat to the volatility in our sector, the United States Court of Appeals for the District of Columbia Circuit vacated the Clean Air Interstate Rules or CAIR rules, surprising I think virtually everyone in the industry. This is not having any significant overall impact on us. It has caused sulfur dioxide credits which we hold in surplus to go down in the near term but it also means that what we thought was a declining asset in the future is now a larger asset because they will not be halved and so on. I suspect this will change, because it was an important program for dealing with air emissions and a program we supported; but now it is all in a cocked hat, and it will be what it will be when it gets there.
Moving to page 13 for the Northeast, no particular comments. If you are wondering about the drop, particularly for the six months, keep in mind that in May of 2007 we shut down one of the two coal units there. And then in April of 2008, we shut down the remaining coal unit and are in the process, as we have said we would, of bringing down to the ground of Lovett Station.
California, I mentioned, page 14, the response on the PG&E RFO. We will see what we learn in October. And then finally, there has been press coverage and I thought it might be useful to explain this without all of the hoorah that is often in the press. The City of San Francisco needs, in accordance with the specifications of the California Independent System Operator, ISO, to have generating capacity in the City, for liability reasons. And we provide that now at Potrero, through Potrero, our Potrero unit 3.
We also have units 4, 5, and 6 there which are peaking units, totaling 156 megawatts. There have been various proposals on how to meet that obligation to have a generating capacity in the city and we have been and continue to be in what I think are fruitful discussions to upgrade our three peaking units there, convert them from running on diesel to natural gas and put in excellent environmental controls. In any event whether now or in the future these units will run very little and run very little, but they are there when needed and we are hopeful that everyone will ultimately agree that this is the best solution both economically and environmentally for the citizens of San Francisco.
And with that, I'll turn to page 15 and turn this over to Jim Iaco. Jim?
Jim Iaco
Thank you, Ed. Good morning. As shown on slide 15, adjusted EBITDA for the second quarter of 2008 was $143 million as compared to $230 million for the second quarter of 2007 and $354 million for the six months ended June 30, 2008, as compared to $451 million for the comparable period of 2007. The decreases in adjusted EBITDA for both the second quarter and the year-to-date periods of 2008 as compared to 2007 were principally due to a decrease in realized gross margin, which I will cover in more detail on the next slide.
Adjusted net income which is adjusted EBITDA less interest, taxes, depreciation, and amortization, was $66 million for the second quarter of 2008 as compared to $162 million for the comparable period of 2007 and $224 million for the six months ended June 30, 2008, as compared to $291 million for the comparable period of 2007. Items that reconcile adjusted net income to loss from continuing operations, a GAAP measure, are, unrealized losses on derivatives, which principally reflect the mark-to-market net loss on our hedging activities, increased $783 million and $781 million in the second quarter of 2008 and the six months ended June 30, 2008 respectively.
This increase, which is primarily due to increases in coal, power and natural gas prices led to an increase in our net price risk management liability of approximately $875 million during the second quarter, which resulted in a net price risk management liability as of June 30, 2008 of $1,307 million. Due to the decline in power and natural gas prices during the month of July, our net price risk management liability declined approximately $1 billion to approximately $300 million as of July 31, 2008, thus more than eliminating all of the unrealized losses in the second quarter of 2008.
Furthermore, as of June 30, 2008, the net fair value of our coal contracts, which are not required to be mark-to-market under Generally Accepted Accounting Principles, were approximately $818 million. As of July 31, 2008, the net fair value of these contracts had increased to approximately $850 million.
Moving down the chart, next, in the second quarter of 2007 we recognized an impairment loss of $175 million on the Lovett facility. The postretirement benefit curtailment represents the 2007 first quarter gain related to certain changes made for our postretirement benefit plans. And finally, the benefit for income taxes relates to adjustments in the valuation allowance.
Our average share count is lower in the 2008 periods as compared to the 2007 periods due principally to share repurchases. And finally, our earnings per share based on adjusted net income was $0.29 for the second quarter of 2008 as compared to $0.57 for the second quarter of 2007, and $0.97 for the six months ended June 30, 2008 as compared to $1.03 for the comparable period of 2007. I will note that per share information for adjusted net income is based on diluted weighted average shares outstanding, whereas per share information for the 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-dilutive.
Turning now to slide 16. This slide presents the components of the company's realized gross margin for the second quarter of 2008 and the six months there ended to the comparable periods 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 and purchases at market prices, fuel handling, steam sales and our proprietary trading and fuel oil management activities.
The decreases of $78 million and $94 million for the second quarter of 2008 and for the six months ended June 30, 2008 respectively, were principally attributable to lower realized gross margins from fuel oil management and proprietary trading activities, partially offset by an increase in realized gross margins from our Mid-Atlantic operations, the result of an increase in power prices, net of an increase in fuel costs.
Let me take a minute and address the decrease in realized gross margins from our fuel oil management and proprietary trading activities. In the second quarter of 2008, fuel oil management and proprietary trading contributed $20 million of realized gross margins. In 2007, we provided guidance that 2007 would have higher than normal contributions from fuel oil management activities. Much of those higher than normal contributions were realized in the second quarter of 2007. And as I will discuss in coming slides, our 2008 and 2009 expectations for realized results for proprietary trading and fuel oil management activities are up $9 million and $27 million respectively from the guidance we gave on May 8.
Contracted and 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 included the back-to-back agreement which was terminated on August 10, 2007.
The $63 million increase for the second quarter of 2008 was due to an increase of $54 million in capacity revenues from the PJM-RPM capacity market and $9 million related to the back-to-back agreement. The $137 million increase for the six months ended June 30, 2008 was due to an increase of $121 million in capacity revenues from the RPM capacity market and $19 million related to the terminated back-to-back agreement. And finally, the realized value of hedges, the yellow bar, reflects the actual margin upon the settlement of our power and fuel hedging contracts, including coal supply contracts.
Turning now to slide 17, this slide presents cash flow information for the second quarter of 2008 and the six months ended June 30, 2008. The decreases in cash provided by or used in operating activities are principally due to an increase in cash collateral requirements as a result of rising commodity prices; the decrease in realized gross margins that I previously addressed on slide 16; and a slight decrease in working capital, principally attributable to increases in power and fuel prices.
Reducing adjusted net cash provided by or used in operating activities for total cash capital expenditures results in an adjusted free cash flow deficit of $449 million for the second quarter of 2008 and $339 million for the 2008 year-to-date period. Our Maryland Healthy Air Act capital expenditures, which are non-recurring in nature have been and will be funded by existing cash. I will discuss this in more detail when we get to slide 25. 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 that program results in an adjusted free cash flow deficit of $375 million or $1.67 per share for the second quarter of 2008, and $153 million or $0.66 per share for the 2008 year-to-date period.
Turning to slide 18, this slide presents our debt and liquidity as of June 30, 2008. Consolidated debt, which is $2.822 billion at June 30, 2008, is $273 million lower than consolidated debt at December 31, 2007. This is principally due to $135 million of repayments of the Mirant North America term loan and $134 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 $3.187 billion at June 30, 2008. At June 30, 2008, Mirant North America had distributed to its parent all available cash that was permitted to be distributed under the terms of its debt agreements, leaving approximately $119 million at Mirant North America and its subsidiaries. $57 million of that amount was held by Mirant Mid-Atlantic, which as of June 30, 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 six months ended June 30, 2008, we expect Mirant North America will be able to distribute to its parent, approximately $50 million in August.
Turning now to slide 19. As Ed previously mentioned, we are updating our guidance for 2008 and 2009. This update is based on forward market prices as of July 15, 2008. For 2008, we are raising our guidance from $861 million to $877 million; and for 2009, we are raising our guidance from $1.062 billion to $1.096 billion.
I will address the changes in realized gross margin, a comparison of today's update to our previous guidance given on May 8, 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 $725 million and $722 million for 2008 and 2009 respectively.
Income taxes paid in 2008 represent alternative minimum tax and a small amount of state taxes. The increase in income taxes paid in 2009 is due to a projected increase in federal income taxes. Let me take a minute and explain this. As a result of our previously announced and completed accelerated share repurchase program, our open market share repurchases and the exercise of a significant number of warrants for Mirant common stock, we think that during 2008, we will experience an ownership change within the meaning of the Internal Revenue Code.
Generally speaking, an ownership change occurs if there is an increase of more than 50 percentage points in the Mirant stock held by large stockholders. If an ownership change occurs, our annual use limitation on the amount of taxable income that can be offset by our then existing net operating losses must be re-determined as of the date that ownership change occurs. The recalculation of the annual use limitation is determined by among other things, the value of Mirant's stock and the date of the ownership change.
At this time, we are unable to determine if or when an ownership change may have occurred during 2008 and therefore, we cannot determine the future effect, if any on the amount or timing of our post-ownership change and a low utilization. The amount reflected as additional federal income taxes in 2009, assumes that a change in control occurs in 2008, on a date where the price of Mirant's stock is assumed to approximate the current per share market price. If an ownership change occurs in 2008 on a date where the per share price of Mirant's stock is greater than or less than the current per share price, the amount of taxes paid in 2009 could be less than or greater than the amounts included in our guidance today.
Reducing adjusted net cash flow from operations by projected cash capital expenditures of $861 million and $617 million for 2008 and 2009 respectively, arrives at an adjusted free cash flow deficit of $136 million for 2008 and adjusted free cash flow of $105 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, results in an adjusted free cash flow without the Maryland Healthy Air Act CapEx of $494 million for 2008 and $455 million for 2009.
Our adjusted free cash flow yield excluding the Maryland Healthy Air Act CapEx and based on the closing share price, diluted share count on July 31, was 8.2% for 2008 and 7.6% for 2009.
Our hedged realized gross margin for 2008 is $1.335 billion or 88% of our projected realized gross margin. For 2009 our hedged realized gross margin is $1.211 billion or 69% 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.
And finally, hedged adjusted EBITDA which is defined as hedged realized gross margin reduced by our projected operating expenses for a full calendar year is $699 million or 80% of our projected adjusted EBITDA for 2008 and $559 million or 51% of our projected adjusted EBITDA for 2009.
Turning to slide 20. This slide presents the components of realized gross margin included in our guidance for 2008 and 2009. Realized gross margin is projected to increase from $1.513 billion in 2008 to $1.748 billion in 2009. The $235 million increase is comprised of a $164 million increase in realized value of hedges, a $50 million increase in energy realized gross margins and a $21 million increase in contracted and capacity realized gross margins.
Turning to slide 21, this slide presents a bridge from our guidance for 2008 and 2009, given on May 8 to the update being provided today. For 2008, adjusted EBITDA is projected to increase by $16 million. This change is comprised of the following. First, an increase of $53 million due to changes in market prices; next, a decrease of $31 million in operating and other costs, primarily comprised of an increase in emission credit sales and a decrease in plant operating costs; next, a $9 million increase in anticipated realized gross margins from our proprietary trading and fuel oil management activities; next, an increase of $7 million in contracted and capacity gross margins, and finally a decrease of $84 million in the realized value of hedges.
For 2009, adjusted EBITDA is projected to increase by $34 million. This change is comprised of the following. First, a $48 million increase in the realized value of hedges; next, a $40 million increase due to changes in market price; next, a $27 million increase from our proprietary trading and fuel oil management activities; next, a $5 million decrease in operating and other costs, primarily due to an increase in emission credit sales partially offset by an increase in plant operating costs; next, an $8 million decrease in contracted and capacity gross margins, and finally, a $78 million increase in carbon credit costs reflect in an increase in market prices from $2.50 per ton to $8.35 per ton.
As we have moved closer to the initial RGGI auction for carbon credits scheduled for September, we've seen an increase in the number of trades for CO2 credits. Although the market is not deep, consistent with our practice of using market curves for our guidance, we have updated our price to reflect current trading activity. In addition, this increase reflects, as Ed mentioned earlier, the $7 per ton cap related to the Maryland RGGI regulations on 50% of our carbon credits.
Turning to slide 22, this slide presents a bridge from our 2008 guidance to our 2009 guidance. Our 2009 guidance is $219 million higher than our 2008 guidance. This increase is comprised of the following. First, a $164 million increase in the realized value of hedges; next; a $55 million increase from our proprietary trading and fuel oil management activities; next, a $54 million increase in our commercial availability, which reflects an overall improvement in commercial availability across the fleet, the largest single component being Potomac River; next, a $52 million increase due to changes in market prices; next, a $21 million increase in contracted and capacity gross margins; next, a $16 million increase in operating and other cost, primarily related to a decrease in emission credit sales and an increase in plant operating costs; and finally, a $111 million decrease related to carbon credit costs.
Turning to slide 23, 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 are as of July 15, and are $11.83 per mmbtu for the balance of 2008, and $11.35 per mmbtu for 2009.
Based upon our un-hedged adjusted EBITDA for 2008 and 2009, a $1 price move in natural gas will result in a change in adjusted EBITDA of approximately $1 million for the balance of 2008 and $19 million for all of 2009.
Energy price changes due to heat rate movements of 500 Btu per kilowatt hour will result in a change in adjusted EBITDA of approximately $5 million for the balance of 2008 and $39 million for all of 2009. The heat rates shown are 7x24 Pepco Forward Implied Market Heat Rates as of July 15.
As I have previously mentioned, we have included a carbon credit cost of $111 million in our 2009 guidance. The sensitivity to adjusted EBITDA for a $1 change in the price of credits is approximately $5 million. This sensitivity is based on our hedge position, and our view, that power prices will increase as the cost of complying with RGGI increases.
Turning now to slide 24, this slide presents a breakdown of our projected capital expenditures for 2008 through 2010. Our normalized maintenance CapEx approximates $100 million per year, but is shown in the chart as projected to be higher in the earlier years of our Maryland environmental CapEx program due to upgrades that will be timed in conjunction with our environmental retrofits. As Ed mentioned earlier, the total estimated cost for compliance with the Maryland Healthy Air Act remains at $1.6 billion. We have expended $686 million through June 30, 2008, of which $500 million was spent prior to this year.
Turning to slide 25, we have announced that 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 June 30, 2008, the remaining cash to be returned to stockholders as of June 30, 2008 amounted to $1.549 billion.
At June 30, 2008, cash and cash equivalents amounted to $2.699 billion, reducing that amount by the remaining cash to be returned to stockholders of $1.549 billion and by other unavailable cash. Cash available to fund projected expenditures at June 30, 2008 is $1.137 billion and exceeds the remaining Maryland Healthy Air Act expenditures by $223 million.
As you may recall, at March 31, 2008, cash available to fund projected expenditures in excess of the remaining Maryland Healthy Air Act capital expenditures, at that date, was $643 million. The $420 million decrease in the second quarter was primarily due to additional cash collateral requirements as a result of higher commodity prices and Mirant Americas Generation bond repurchases. As of July 31, cash available to fund projected expenditures in excess of the remaining Maryland Healthy Air Act expenditures was $452 million. The $229 million increase in the month of July was primarily due to a return of cash collateral as a result of a decrease in commodity prices.
And with that I will turn it back to Ed who will wrap up and open up the call for questions. Ed?
Ed Muller
Thanks very much Jim. I'm on page 26 with takeaways. As I said earlier and as I think everyone on this call must know, we've had significant volatility in the energy commodity markets, particularly in July. But, again repeating myself, strong fundamentals for an incumbent like Mirant continue and are going to continue out for many years. The incumbent generators like us are going to benefit from demand rising faster than supply. We have been focused on the operations of our facilities and are pleased with how that's coming along.
As Jim indicated, you can see, particularly once we strip out the Maryland Healthy Air Act, for which the work will be done by the end of ‘09 and for which the payments will be done by the end of the first quarter of 2010, that we will have good cash flow generation. These environmental upgrades are underway and we have the cash for them in hand. And as we've said in the past, we would like to invest our excess cash in the business. We think that's good for the business. We think that's good for the nation. But, we will only do so when it's prudent to do so. And if we can't, then we'll take that excess cash and as we are doing now, return it to our owners.
And with that, Steve, we are ready to take questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question this morning will come from the line of Elizabeth Parrella at Merrill Lynch.
Elizabeth Parrella - Merrill Lynch
Thank you. Ed, can you shed a little bit more light on this proposal that was put to you at the end of June? Would it have been conventional acquisition of the company? And was it from a company that looked at you during the strategic review process last year?
Ed Muller
Good morning, Elizabeth. All good questions and we're not in a position to respond and give any of the details. Among other reasons because of the confidentiality agreement into which we entered and with which we will of course religiously comply.
Elizabeth Parrella - Merrill Lynch
Okay, and if I could ask a different question. With regard to your coal hedges, you've got some coal hedged out into, if I'm reading the slide correctly into 2012, Ed, can you talk a little bit about the mix of your coal burn once the scrubbers are fully operational? How might that change and how that might affect the cost of your coal?
Ed Muller
John O'Neal, why don't you take?
John O'Neal
Sure. Good morning, Elizabeth. In fact, if you look at a chart on the right, you can see we do have some coal purchases out through now 2013. So in the second quarter we've extended the hedge program out that far. And as we described it before, our Maryland plants typically are burning 3 pound NGA spec and when we put the scrubbers on in Q4 of 2009 that will widen that spec and so we will be able to look at higher sulfur coals.
And I can tell you that as we look at our hedge program, we've taken that into consideration. So you could expect that we are typically still procuring most of our coal from the NGA mine. But we, because of the scrubbers are able to go to a higher sulfur specification. So, we are looking really for the best opportunity.
Combined with the scrubbers plus the pulverizer upgrades we've put in at the Morgantown station, we really have the ability to burn a much wider slate of coals than we have been able to in the past. So we look anywhere from the Central App, Northern App, all the way up through the NGA region and look for the best value to the facilities. So you could expect we are going to have some Central App purchases with a much lower SO2 spec, down around 1.5, 2 pound SO2 but we also, consistent with past practice, will buy a lot of coal from the NGA and that increasingly will have a higher sulfur than we've had in the past because of the scrubbers.
Elizabeth Parrella - Merrill Lynch
And if I could ask one other question. The fuel oil management proprietary trading obviously had a big impact in the Q2 results. Can you just walk through for everyone's benefit one more time, what is going on in the fuel oil management and proprietary trading? I assume these are all realized impacts on gross margin, not mark-to-market activity. But if we could go through that just one more time since it particularly had such a big impact on the quarter?
Ed Muller
Jim, why don't you take that?
Jim Iaco
Good morning Elizabeth. As I stated in there, we're down as compared to 2007. But as we said back in 2007, we expected higher than normal results from our fuel oil management activities in 2007. For the second quarter, our fuel oil management activities had a gross margin of around $20 million. I believe for the second quarter, I meant for the second quarter 2008. Second quarter of 2007 was up around $100 million. So, we knew that was going to be an unusual quarter. Those are all realized results. There are no mark-to-market activities.
If you looked at that activity on a performance basis, that being over the entire spectrum of the positions in there, as well as the oil in the tank, in other words, mark everything to market and look at it on a total performance basis, you wouldn't see a lot of fluctuations. But on a realized basis, you get a lot of fluctuations quarter-to-quarter. And that's just, because that's the way to do the reporting. But again, on a performance basis, you don't see a lot of fluctuations. John, you want to add anything to that?
John O'Neal
No, I think I don't.
Elizabeth Parrella - Merrill Lynch
Thank you.
Jim Iaco
You're welcome.
Operator
Anything further Ms. Parrella?
Elizabeth Parrella - Merrill Lynch
No, thank you.
Operator
Next we'll hear from Lee Cooperman with Omega Advisors.
Lee Cooperman - Omega Advisors
Ed, you and I have had innumerable discussions on the intelligence of stock repurchase. And in its most simplistic way, stock repurchase only makes sense under one condition; and that's you are buying back something that is significantly undervalued and you're thereby leveraging all the other shareholders that elect not to sell. You're leveraging their returns. We have spent a lot of data, which I have to digest over the weekend that you presented. But I think we spent $3 billion, it looks to me an average price of $38 or $39. We are seriously wrong so far in the valuation of our business.
So the question I would ask you is, as you continue on this repurchase program as opposed to returning the money to shareholders in the form of a dividend and we can make our own decisions on how to use the money, have we done the correct analysis, the detailed analysis to assure us that having bought back stock at $38 or $39 will be beneficial to all those shareholders like myself that have not sold?
So the way of asking that question is, if this party that approached you to do a transaction succeeded at the price they wanted to pay for the business, would your repurchases at $38 and $39 have turned out to be intelligent? I don't want to know the name of the party. I don't want to know the price they offered. But I want to know, if the price of $38 to $39 that we paid to buy back $3 billion worth of stock would have looked intelligent if you hit their bid?
Ed Muller
Lee, I'm not going to go into the terms of what they proposed and what we evaluated. You are correct. Of course that we've had many a discussion about the merits of stock repurchases and the analysis required. We have done that analysis, and as we have made these repurchases along the way, we have consistently used what I think is the appropriate analysis. And I'm comfortable with what we did and I'm comfortable with what we are going to do.
Lee Cooperman - Omega Advisors
So I see. So this is effectively saying that when you bought the stock back $3 billion at $38 to $39, is the belief of the Board and the management of the company that at the end of the day we will be proven right that paying $38 to $39 was a good investment for all the remaining shareholders?
Ed Muller
I have said exactly what I meant to say, Lee, which is, as we made each step of the way here, we have done an analysis, and we have made the decision that we think is the right decision. And we are comfortable with what we have done and we are comfortable with what we are going to do.
Lee Cooperman - Omega Advisors
That is my only question for the moment. I have other questions on this tax situation. I assume that you guys understood in the stock repurchasing that you may have triggered something like this.
Ed Muller
We have been aware of the tax implications of repurchasing the shares throughout.
Lee Cooperman - Omega Advisors
Right. Just a small little other point then I'll let other people take the floor. We initially engaged an outside adviser, who was allegedly not to have any kind of knowledge what was going on within the company to handle our repurchase program. So why would we have to withdraw from the market if an independent advisor was engaged to handle the program and they didn't know of anything that was going on? Just out of curiosity, I'm just going to learn something.
Ed Muller
Yes. We thought about this, Lee. It's a very good question and we thought about what was appropriate in the overall context, including being in the position of knowing some things that had the potential to be very material to the shareholders and buying from the shareholders. We did have an independent advisor or independent entity there. You are correct. But in the overall scheme in assessing this, and in how we like to deal with our shareholders, we didn't think it was appropriate.
Lee Cooperman - Omega Advisors
Thank you. I hope your judgment proves correct and we'd like to come down and visit, and say hello and get into more details. Thank you.
Ed Muller
Will be pleased to see you.
Operator
Next we'll hear from Angie Storozynski with Macquarie.
Angie Storozynski - Macquarie
Yes, thank you. I have two questions. First, looking at your hedge position and that you bought power forward for 2013 and 2014 and yet you don't have much of a coverage from your coal position there, should we believe that, but basically should imply that your belief is that by then, simply coal prices will be significantly below current levels? And so, you basically decided not to buy coal to match your power position simply because you're assuming that coal prices will come down? That is one question.
And secondly, if I understand correctly, your power plants fired by fuel oil are not really operating or barely operating. And I'm basically struggling to understand why would we assume that there should be any fuel oil management gain in the future when in fact you should not be purchasing any fuel oil for the purpose of burning it in your plants, because the presumption is, at least, that's actually my presumption that these plants will not be operating?
Ed Muller
Okay. We'll take your two questions. And I'll take one and I'll have John O'Neal take the second. On the hedging with coal or buying the coal in the out years, our approach is to hedge, as we've said and to do so regularly and when we think is an appropriate time and when market conditions make sense. We don't do it in some way that says to the minute, to the day or to the month we have to be hedged.
So it is not, and I don't think it would be fair for you to assume that we have got some bet, we are making on where coal prices go. We are just in the market all the time both in selling our power, whether through hedging the power itself with forward power sales or by shorting gas and we are in the market all the time in the coal markets and seeing what is occurring there and deciding what makes sense.
So, I wouldn't say that it is a fair notion to say we've got some view that is driving us not to buy coal out there. It is rather this is just part of the ordinary course. And you always if you look back, you will see there is always a slight mismatch from any time, at any particular time. But in an overall sense we match and we go forward.
So with that, let me turn to the fuel oil question. I will let John O'Neal take that.
John O'Neal
Sure. In reality the fuel oil plants are running less than they have in the past due to just the compression of the spread because of the very high fuel oil prices. Having said that we do continue to burn fuel oil and our expectation is that will continue to happen going forward. Our plants in the Northeast and our plants in the Mid-Atlantic do run on fuel oil at various times during the year.
Having said that, we also manage a storage position, so there is two components of the value to get created. There is the burns that materialize from the plants but there is also storage, some of which is discretionary that we manage. And so we're able to take advantage of the value of that storage.
So, we can, for example, put oil in the tanks in a Contango market and positions and allow us to take advantage of that. So, that's really somewhat independent of the burns from the plants. But I would just comment generally that we will expect burns to continue in the future, certainly as we see it here today at a lower level than we've seen in the past, but there are going to be some burns from those facilities.
Angie Storozynski - Macquarie
Okay, thank you. And also, I understand that the operating expenses and other expenses for 2008 guidance went down because you have some increase in emission credit sales. And then you mentioned some lower O&M for power plants. Why would you lower your expenses for power plants? Is it like time management of these expenses or you just figured it out that you don't need to spend money on plants?
Ed Muller
First of all, with respect to the emission credit sales, yes, that's the majority of the increase. The decrease in plant operating costs every quarter we take a look at that again or refresh in our guidance and we look at the current year and in this case 2008 and 2009, just a re-look at what we've estimated from the prior quarter.
Angie Storozynski - Macquarie
So it's a very small portion of this $31 million?
Jim Iaco
Yes, that is correct. Very small.
Angie Storozynski - Macquarie
Okay. Thank you.
Ed Muller
You are welcome.
Operator
Next we'll hear from the line of Andrew Levi with Brencourt.
Andrew Levi - Brencourt
I'm all set. Thank you.
Operator
Thank you, sir. Next we'll go to Paul Patterson at Glenrock Associates.
Paul Patterson - Glenrock Associates
Good morning guys.
Ed Muller
Good morning, Paul.
Jim Iaco
Good morning, Paul.
Paul Patterson - Glenrock Associates
Ed, one of the concerns that sort of shown up, sort of anecdotally is that there is demand destruction happening because of the economy and that there are plans to curtail demand vis-à-vis government policy and a desire for renewables and some regulated generation, etcetera, which isn't subject to necessarily wholesale market signals. And I'm looking at the reserve margin data, it looks pretty similar to what you guys have been presenting. What's your thoughts about what we're seeing with the economy; these goals or proposals that are put out with respect to demand reduction and stuff and how that might or might not impact you guys or just how you see that either coming about or not coming about?
Jim Iaco
Well, I'll take this, Paul. I think statements from political leaders about what's going to happen are interesting and motivational but I think the reality is that it is primarily price that has an impact on people. And with higher prices, I would expect that there would be some impact. But, unless you think that the economy of the United States is heading into some deep recession, which has not yet done, it's troubled, we all know that. Unless you think we are seeing some profound reduction in the size of this economy, I think we are inexorably moving up in demand. The rate may slow. It may move right a little bit. But talking about this isn't what's going to change it.
Paul Patterson - Glenrock Associates
Okay. So the weather adjusted reductions that we've seen in certain territories, you basically see it sort of being temporary and what have you? So the increase in bad debt expense or the weather adjusted declines in demand that we're encountering on these conference calls are what you see is being pretty much temporary in nature and changing?
Ed Muller
I think they are by and large temporary and even if you had a notion that prices caused some overall change. You still have an expanding economy. I don't think I need to or unable to tell you exactly when we'll have dealt with the sub-prime mortgage issues and the stuff on financial institutions balance sheets. But, we are going to deal with this. We have dealt with this before. This is a vibrant economy, and the end has not arrived.
Paul Patterson - Glenrock Associates
Okay.
Ed Muller
And when it grows, it needs energy. And it's nice to say we can grow an economy without energy, but you know it's ridiculous.
Paul Patterson - Glenrock Associates
I appreciate it. Thank you.
Operator
Zach Schreiber at Duquesne Capital, your line is open.
Zach Schreiber - Duquesne Capital
Hi, Ed. Hi Everyone. Hi, Jim. Can you guys hear me?
Ed Muller
Absolutely. Good morning, Zach. How are you?
Zach Schreiber - Duquesne Capital
Just following up on Lee's question, I just want to make sure I understood what you were saying. I thought that you said that, Lee said that, was every share that you bought back, for the $3 billion good, the $38 share and the $36 a share. And what you said was, at each point in time when we were buying back stock, we did the analysis, the appropriate analysis as to what we thought the forward value of the future cash flows were, and it made sense at the time. And we are comfortable with what we did and we are comfortable with what we plan on doing.
What I would like to ask you is, at each time when you bought back that stock, what was your view of dark spreads? What was your view of the appropriate relationship between coal and gas at that point in time? And how if at all, has your view evolved on that since then? Obviously, none of us have crystal balls. I'm just trying to understand if your view over the last year has changed on what the appropriate relationship is between coal and gas, at least for some intermediate period of time?
Ed Muller
Your question is a good one, Zach.
Zach Schreiber - Duquesne Capital
Yes, sir. Well, you are a very smart lawyer. I was trying to listen to what you were saying, it was very precise.
Ed Muller
Well, I consider myself a reformed and former lawyer. And all of the good lawyers around here shudder at the thought that I was ever a lawyer. I think this, we look at it and just as, when Jim was describing our guidance, we in the short term; we look at the curves. We don't think we are smarter than the market. We know that the curves are wrong. They are always wrong.
Zachary Schreiber - Duquesne Capital
Sure.
Ed Muller
Right? Which is, which direction and how much. But we start always looking at the curves. And so the near-term that has to be where you look at. But in the broad-term, the longer term, we are looking at the structure of the market and where we are in the market. Think for a moment about offshore drilling on the coast of the U.S., something I think makes a lot of sense, and it is appropriate that it be a subject of a political discourse right now. But, if we start tomorrow, we're not going to see anything flowing out of that for a number of years.
I think Exxon Mobil, when it started working on the Angola field, between starting and production was 12 years. So, we look at the curves to understand the near-term and see what we think about the market. But we also look at what we think is occurring overall in this market, which is part of the value proposition for anyone in this sector and certainly for Mirant.
Zach Schreiber - Duquesne Capital
I guess, what I'm asking you, is clearly the relationship between coal and gas, and then $1 per mmbtu has changed. It's compressed substantially. It's compressed substantially even since July 15. Clearly that's hit the stock a little bit. It's hurt the sector a little bit. If you looked at the forward curves following up on Lee's question, you could become concerned that actually buying back the stock today isn't the best return of value.
It's not the most efficient and you ought to move it into a special dividend, if you are not smarter than the curve. I mean is that kind of what you are hinting at in your comments that you may do a special dividend? Because the curve would say the compression is so substantial that; and we are not smarter than the market. We are just going to return it in a more direct way? I mean you put it there for a reason. I'm just following up.
Ed Muller
Well, what I have said, and it's exactly what we said in this news release and we have said consistently here, and we mean it. I'm not saying it lightly. We think that the best way to be returning, it is through open market purchases, returning the cash.
Zach Schreiber - Duquesne Capital
Okay.
Ed Muller
We continually evaluate all of the options available to us and we will continue to do that until this program is over.
Zach Schreiber - Duquesne Capital
And we've seen a big step change down in gas prices and we haven't seen, well, we've seen some in the paper markets in coal but nothing in the physical markets to really speak of step down in coal prices. Why is that? Is that just a lag? Gas is going to have to bring down coal? Or is it the strong international bid, the strong European bid, freight rate adjusted that's going to keep us up here?
We can import coal and we can export coal, whereas for gas, we can only import, so there is no export safety valve. I mean, on coal, why has it held up so well? And do you think it's just going to come back down to gas to give us the similar margins or are we in a new paradigm for some period of time? You have to have some view on that to basically run your business and how you hedge your portfolio and what you think about how you return value?
Ed Muller
Absolutely correct. We've seen some signs but it's too soon to know that some of the coal prices may begin to moderate. But, you're right on all those things. But I think it is important to remember and I appreciate you're using the term a new paradigm. In these commodity markets…
Zach Schreiber - Duquesne Capital
That was a new paradigm with a question mark.
Ed Muller
That's all right. I understand. But every time there is a movement, the question that comes up is, is this a new paradigm? When I was dealing with $8 a barrel oil the question was, is this a new paradigm? And when oil is at $140 bucks, is that a new paradigm? I think we have to always look in a broad sense, not like what's happened in the last 30 days, like the whole world woke up and has new information but rather the fact that people think and they are entitled to and they respond to in the oil markets the pipeline being on fire or something not being on fire and on gas, what the weather is like and the concerns and is there more gas coming and what are LNG prices going to be and how much is going to get landed.
And there is momentum that comes in a trading market by folks who trade on a very rapid and short-term basis to which they are entitled to do. But we are looking at a business where we've got large capital assets that are very hard to replicate in this market. To Paul Patterson's question, do we think demand is going away? No. And so, we look at the fundamentals and our view of the fundamentals has not changed.
Zach Schreiber - Duquesne Capital
And when you look at the fundamentals, do you factor in some assessment of what these new shale plays could do overtime and do you factor in what some of the transmission reconfiguration in your region could do?
Ed Muller
We are always looking at all of that, Zach. Absolutely.
Zach Schreiber - Duquesne Capital
Okay. Okay, great. Okay. Thank you.
Operator
Next question comes at Alex Mazier at Sandell Asset Management.
Alex Mazier - Sandell Asset Management
Hey guys. Following up on that line of questioning, if you are looking at everything and you think that fundamentals have not changed and you, back then in June you were approached by a company when your stock averaged a price of $40. Now your stock is around $29 and obviously you've bought about $3 billion worth of stock at much higher levels than where the stock trades now. I'm wondering why you wouldn't accelerate the rate of returning your cash to shareholders by doing a Dutch tender, given that your stock is at $29, if you think that it's fundamentally undervalued.
Ed Muller
Well, we continue to think that using open market share repurchases would be a very efficient way to return the cash. We evaluate all options. We'll continue to. But beyond that, I'd probably be repeating myself.
Operator
Anything further, sir?
Alex Mazier - Sandell Asset Management
Can you at least tell us whether, and I know you signed a CA and whatever. But, can you tell us at least the nature of the company that approached you? Was it a foreign company? Was it a domestic company? Or does the CA also prevent you from indicating that?
Ed Muller
I'm not going to identify anything about the nature of the party period.
Operator
And our last question today will come from the line of Neel Mitra at Simmons & Company.
Neel Mitra - Simmons & Company
Hi, thanks. It looks like you added some significant coal hedges for 2011 in the second quarter but didn't lock in a proportionate amount of power hedges along with it. What was your rationale behind locking in more coal but not the dark spread as well for that year?
Ed Muller
John, do you want to take this?
John O'Neal
Yeah, I think Ed described it earlier, Neel, that we are constantly in the market hedging both, patent gas, our fuel and our power. We generally look to have things on a somewhat balanced basis but we're not absolutely beholden to that. And as we look at the fuel markets right now, we thought it made some sense to go out and buy some coal.
As we've described it earlier, we're constantly in the market assessing the fuel markets. And during the second quarter, we saw some good opportunities to lock in some longer-dated coal. We again are constantly assessing the power markets. This happens in the period that we're reporting here. We did not lock any or very few incremental hedges in 2011. But again, we're providing you a snapshot in time and you can expect that that will change as time moves on.
Neel Mitra - Simmons & Company
Okay. One last question. Do you expect your oil-fired intermediate assets in the Northeast to have lower capacity factors for the rest of the year, given the widening spread between resid oil and nat gas, as natural gas price have come off about 30% in the last month and crude stayed pretty strong and would that be reflected in your guidance going forward?
John O'Neal
Yeah, our guidance is using four commodity prices of July 15, so that certainly would reflect the fact that, the oil-gas relationship, as you've described it. And yes, we generally don't see a lot of anticipated run from the oil units as we move forward because of the very high oil prices that we're seeing in the market right now.
I will say that, for example, several of our units, the Chalk Point units 3 and 4, which are large oil-fired units and the Bowline units in New York can run on natural gas, and those units have run this summer quite frequently on natural gas. So while they do burn oil in a lower gas price environment, we are running them on natural gas.
Neel Mitra - Simmons & Company
Okay, great. Thank you.
Steve Himes
We want to thank everyone for joining us today. If you have further questions, I'll be available by phone shortly.
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