GenOn Energy CEO Discusses Q2 2012 Results - Earnings Call Transcript

GenOn (GEN)

Q2 2012 Earnings Call

August 9, 2012 09:00 AM ET

Executives

Dennis Barber - IR

Ed Muller - Chairman, President & CEO

Bill Holden - EVP & CFO

Analysts

Neil Mehta - Goldman Sachs

Mark Barnett - Morningstar

Rob Gaudette - CCO

Robert Howard - Prospector Partners

Julien Dumoulin-Smith - UBS

Brian Chin - Citigroup

Greg Orrill - Barclays

Jon Cohen - ISI Group

Presentation

Operator

Greetings and welcome to the GenOn Energy Second Quarter 2012 Earnings Call. (Operator Instructions). It is now my pleasure to introduce your host Dennis Barber, with GenOn Energy. Thank you Mr. Barber. You may begin.

Dennis Barber

Thank you Claudia 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, the Treasurer.

In light of our pending merger with NRG we are suspending adjusted EBITDA guidance for GenOn and do not expect to provide the guidance while the transaction is pending. The earnings release as well as the slide presentation we are using today is available on our website at www.GenOn.com in the investor relation section. A replay of this call will also be available on our website about two hours after 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 this slide. Actual results may differ materially from our projections or forward-looking statements as a result of many factors, including those described in this slide and in our SEC filings.

The Safe Harbor in slide three describe how you may obtain copies of the SEC filed materials related to the proposed merger. Information regarding persons who may participants in the merger solicitation are also described in this slide. We urge you to read all these Safe Harbor and the reference materials.

Additionally, we are using non-GAAP measures to provide additional insight into the operating results and reconciliations of the non-GAAP measures to GAAP figures are also available on the website.

I will now turn the call over to Ed.

Ed Muller

Thanks Dennis and good morning everyone. I will start on slide five, and reiterate some of the highlights of our pending merger with NRG which we announced on July 22nd. Like the merger in 2010 of Mirant and RRI that created GenOn. The combination of GenOn and NRG will create substantial value for the stockholders of both companies. Key elements of that value creation will be $175 million of annual cost savings, $25 million of annual operation efficiency synergies and a $100 million of annual balance sheet efficiencies. On slide six, you can see the various approvals we will be obtaining and notices we had given. We continue to expect to close the merger by the first quarter of 2013.

Turning to slide 7, I will address several highlights for GenOn. Since it became clear that various environmental rules will lead us and others to deactivate plants, we have noted that a consequence of those deactivations will be a reduction of supply to meet demand. Reducing supply inexorably means higher prices and that is good news for supplier like GenOn.

One way to think about what is coming is to consider what happened during the recent heat waves in the east. Three of our plants which will be deactivated on October 1 ran hard to meet demand during those heat waves. The seven units of those plants collectively with 762 megawatts listed on slide seven. At times when those units were running most of our peaking units in the same areas were also running.

We think that as these seven units and units owned by others are deactivated as a result of environmental rules, events like the recent heat waves will result in high prices. Notwithstanding the heat wave and significant demand on our fleet. I am pleased to report that our plants ran well.

I am also pleased to report that the construction of Marsh Landing in Northern California continues to remain on schedule to be completed by mid-2013 and the project remains on budget. During more than a 1.5 of construction and with about 500 construction workers currently on-site, we have yet to have a single OSHA-reportable safety incident.

Turning to slide eight, I will address the recent capacity auction in PJM. Overall the $500 million of capacity revenue that we locked in fell within the range of our expectations, we think however that PJMs must offer price rule known as MOPR did function properly. New Jersey offered subsidized contracts for new plants which were permitted to bid prices well below their contractual prices. We don’t think it's appropriate for those new plants to have it in both ways to get rich capacity prices assured by the rate payers in New Jersey and then bid in the RPM auction at substantially lower prices.

We think this is nothing less than manipulation of the market, as a result of this manipulation we are pursuing vigorously various bright line tests for MOPR. We PJM recognizes that the problems with MOPR must be addressed.

Turning to slide nine, we show our hedges as of July 9, both for the fleet and for our baseload coal. For our baseload coal we are fully hedged for this year, heavily hedged for next year and less hedged but nevertheless somewhat hedged from 2014 through 2016. And with that I will turn things to Bill Holden to walk you through the numbers. Bill?

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