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GenOn Energy, Inc. (



Q4 2011 Earnings Conference Call

February 29, 2012, 09:00 a.m. ET




Dennis Barber - IR

Ed Muller - Chairman and CEO

Bill Holden III - EVP and CFO

Rob Gaudette - SVP and CCO

Gary Garcia - Treasurer


Ameet Thakkar - Bank of America/Merrill Lynch

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Greetings and welcome to the GenOn Energy Fourth Quarter 2011 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Dennis Barber of GenOn Energy. Thank you Mr. Barber you may begin.

Dennis Barber

Thank you, Rob and good morning everyone. Thank you for participating in GenOn’s conference call. Leading the call this morning are Ed Muller, our Chairman and CEO; and Bill Holden, our Chief Financial Officer. Following our prepared remarks, we will have a question-and-answer session. Also in the room and available to answer questions are Rob Gaudette, our Chief Commercial Officer; and Gary Garcia, our Treasurer.

The earnings release as well as the slide presentation we’re using today is available on our website at in the Investor Relations section. And a replay of this call will be available on the website approximately two hours after the completion of the call.

Turning to Slide 2, any projections or forward-looking statements made today are based on our current expectations and are subject to the Safe Harbors contained in the slide. Actual results may differ materially from our projections or forward-looking statements as a result of many factors including those described in this slide and in our SEC filings. We are also using non-GAAP measures to provide additional insight into the operating results and guidance and reconciliations of the non-GAAP measures to GAAP figures are available on the website.

I'll now turn the call over to Ed.

Ed Muller

Thanks Dennis, and good morning everyone. I’ll start on Slide 4 with some updates. First, when we announced the merger of RRI and Mirant in April 2010, we committed to annual savings from the merger of $160 million by January 2012. We have met and we have exceeded our commitment. Starting last month, we are saving $160 million per year in costs. Second, I’m pleased to report that the construction of Marsh Landing in Northern California remains on schedule to be completed by mid 2013 and the project remains on budget. Third, we and others were successful in obtaining a stay on the last business day of 2011 of the Cross-State Air Pollution Rule or CSAPR. We see CSAPR as a significant negative for our business until compliance with what is now called Mercury and Air Toxics Standards or MATS begins in 2015. We see MATS as very positive for GenOn.

As a result of MATS and other environmental regulations we expect to deactivate 3,140 megawatts of generating capacity, because our forecasted returns on investments necessary to comply with the environmental regulations are insufficient. For units that we will not be deactivating, we expect to invest between approximately $586 million and $726 million over the next 10 years for major environmental controls. Overall, we expect higher earnings from price increases resulting from industry retirements will more than offset reduced turnings from GenOn unit deactivations.

Turning to slide 5, we laid out our updated guidance for adjusted EBITDA for 2012 and 2013. We have reduced our guidance for both years because of lower energy margins offset somewhat by higher realized value of hedges and reduced operating expenses. Bill Holden will provide more of the details on our guidance shortly.

Turning to Slide 6, we show our hedges as of January 24, both for the fleet and for our base load coal. For our base load coal, we are fully hedged for this year, heavily hedged for next year and less hedged but nevertheless, somewhat hedged from 2014 through 2016. You should expect us to maintain that general profile as we go forward.

On Slide 7, we lay our approach to capital expenditures for environmental controls required to comply with the environmental rules. We will invest only if we are confident that the expected return will exceed our cost of capital. We expect that industry retirements including those already announced will result in market prices rising sufficiently to justify investments of between approximately 586 and $726 million over the next 10 years. If prices improve even more than we expect, more investments could become economic.

On Slide 8, we lay out our expected deactivations. In the top box you can see the units totaling the 3,140 megawatts I mentioned earlier. We expect to deactivate the units over a periods starting later this year and ending in the middle of 2015. In the bottom box we have laid out other reductions in our fleet.

Let me speak for a moment about Avon Lake which is near Cleveland, Ohio. It's big unit, its 640 megawatts. Our analysis to-date indicates that the return on investment on required environmental control for that unit is insufficient. That’s why we expect to retire the unit in 2015. We are however, continuing our analysis of the sufficiency of the return on the required investments, which would total about $500 million between 2013 and 2020 for a scrubber, an SCR, and water intake screens.

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