Two troubled electricity generating companies have announced a merger that will create a new company, called GenOn, with a market cap of $3.1 billion and 24,700 megawatts of generation. The merger, between Mirant Corp. (MIR) and RRI Energy Inc. (RRI), has been approved by the boards of directors of both comapneis and will now go to a shareholder vote. The deal creates the largest independent power producer in the U.S.

Under the terms of the Mirant RRI Energy merger, MIR shareholders will receive 2.835 shares of RRI common stock for each share of Mirant stock they own. The deal is expected to close before December 2010, and will result in Mirant stockholders owning about 54% of GenOn and RRI stockholders 46%.

Mirant filed for bankruptcy protection in 2005, and emerged from it in 2006. The company considered putting itself up for sale then, but decided against it. It owns both baseload and peaking plants in the mid-Atlantic, Northeast, and northern California. The company has no retail operations.

RRI’s recent history is even more colorful. In 2008, the company agreed to sell its retail operations to NRG Energy Inc. (NRG) for about $287 million. At the same time, Exelon Corp. (EXC) made a $6.2 hostile offer for NRG, on condition that NRG forego its plans to purchase the retail business from RRI, which was then known as Reliant Energy. NRG thumbed its nose at Exelon, and went ahead with the purchase, after which Exelon withdrew its offer for NRG.

Since then, NRG shares are up about 15%, while Exelon shares have fallen about 5% and RRI shares have dropped more than 20%. Mirant shares are down close to 10% in the same period.

Today’s merger is expected to result in savings of $150 million in corporate overhead by 2012. The new company, GenOn, will have a cash balance of about $2.9 billion following the merger. The combined company’s fleet will include, in addition to Mirant’s assets listed earlier, RRI’s plants in southern California, the Midwest, the mid-Atlantic, and the Southeast. The plants burn coal, natural gas, and oil.

Shareholders in the combined company should realize higher earnings because both companies are merchant producers and not regulated utilities. The $150 million in cost savings will go directly to stockholders.

The new company now has to hope that demand for electricity gets a bump from the recovering economy. Electricity prices have been soft and remain so. But as the U.S. economy grows again, energy demand will rise, and, the utilities hope, so will prices. Mirant and RRI Energy are counting on this.

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