GenOn Energy Executive Insights: Coal-Fired Generation Output, Coal Unit Capacity Factors

On Thursday, GenOn Energy Inc (NYSE:GEN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Coal-Fired Generation Output

Brandon Blossman – Tudor, Pickering, Holt & Co.: Well, not a whole lot of new news this quarter. I think that’s as neutral of a press release is possible, so that’s actually probably good news in the current circumstances. Question around Q1 baseload output and hedging really; was Q1 the total output on the coal-fired generation? Was that about what you were expecting or was it lower?

Edward R. Muller – Chairman and CEO: Rob, do you want to take that?

Robert Gaudette – SVP and Chief Commercial Officer: You know, Brandon, when we look at our expectations, we run a market-based simulation to back in, we did in our last guidance, we were already seeing the compressed dark spreads and our estimates already account for lower gas prices. If you recall, last quarter’s weather was record-type warm. So we saw a little bit more of a reduced run on our coal units, but nothing that the markets weren’t really telling us to begin with. Does that answer your question?

Brandon Blossman – Tudor, Pickering, Holt & Co.: It does. And I guess just a couple of follow-ons. One, were you out buying back hedges or were you essentially buying power to cover hedges and not generating, or were you truly hedged at the level that you generated at?

Edward R. Muller – Chairman and CEO: Brandon, we’re happy to disclose as we do our aggregate level of hedges, but our actual hedging activity; when we are in and out in the market, we’re not going to disclose for competitive reasons.

Brandon Blossman – Tudor, Pickering, Holt & Co.: Fair enough, Ed. I mean I guess the takeaway here is that the hedges were working quite well; you came in pretty much exactly where you expected to, and no reason to not expect that in the future?

Edward R. Muller – Chairman and CEO: I think that is a very much the point and that has been consistently our approach. We hedge regularly; the profile remains the same, and I think we do it very well.

Coal Unit Capacity Factors

Ameet Thakkar – Bank of America Merrill Lynch: I guess just a quick follow-up question to I guess Brandon’s question before on the run times for your coal assets. Could you actually tell us what the capacity factors were for the first quarter in 2012 for your PJM West and PJM East coal units?

Robert Gaudette – SVP and Chief Commercial Officer: If you look overall and you think about our coal plants in kind of two buckets when you look at last quarter we had some coal plants that their capacity factors were down in the 30 percentile range and where market – or even lower, but where market forces were keeping these units off consistently, but then you have in the second bucket units that you’d expect to run more and be more proficient in even these tough times, units that are like a Morgantown unit or a Keystone or (Conemaugh) and those capacity factors were in the 50 to 70 range, but depending on the unit and at the end of the day when you think about capacity factors in addition to price, overall natural gas prices, it’s also locational. If you think about it, a unit that’s extremely important for a particular part of the grid is going to have a capacity factor higher than others regardless of the price signals that we may see through the quarter. Did that help?

Ameet Thakkar – Bank of America Merrill Lynch: Okay. To the extent you had units that were running at I guess 30% or lower for the capacity factors, so wondering if you could provide us any kind of color on where your kind of coal inventory situation lies right now and do you anticipate or have you engaged in any sort of forced burns?

Edward R. Muller – Chairman and CEO: As you would expect, we have large coal inventories, but we have not engaged in any forced burns nor do we anticipate any.

Ameet Thakkar – Bank of America Merrill Lynch: Then just finally one last question, it looks like your projected volumes for 2013 are up a couple of terawatt hours, but your gross margin in your updated 2013 guidance was only up $7 million. I was wondering if you could kind of help us understand why it wasn’t up more kind of given a pretty decent uptick in the projected volumes you were showing here.

J. William Holden III – EVP and CFO: By adjusted gross margin I assume you’re referring to the total adjusted gross margin, which is net of the value of the hedges.

Ameet Thakkar – Bank of America Merrill Lynch: Yes.

J. William Holden III – EVP and CFO: And one of the dynamics we’re seeing is as we’ve seen lower runtimes in 2012, we’re deferring coal burns to 2013, and as you will recall, much of the coal that we have under contract is at prices that are above current market. As we defer those coal burns into 2013 that’s having a corresponding negative effect on the realized value of hedges in ’13.

Ameet Thakkar – Bank of America Merrill Lynch: But that’s not really the effect of any sorts of penalties that you’re incurring on from deferring those tonnes, is it?

J. William Holden III – EVP and CFO: It is just the timing of the burns.