NRG Energy Inc (NRG) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the NRG Energy 3rd quarter conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow formal presentation.

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It is now my pleasure to introduce Mr. David Crane, President, Chief Executive Officer and Director of NRG Energy.

Please stand by.

Your conference will begin momentarily.

Good morning, and welcome to NRG's 3rd quarter conference call.

Just a few housekeeping items before we begin.

First please turn off your cell phones and blackberries.

Second, during the Q&A session we'll begin by taking questions from the floor and then we will open up the lines.

In the interest of time and courtesy please limit your questions to one part.

This call is being broadcast live over the phone and from our webcast at www.NRGEnergy.com.

You can access the call, presentation and press release furnished with the SEC through a link on the Investor Relations page on our website.

The replay of the call will be posted on our website.

This call including the formal presentation and the question-and-answer session will end at 10:00 precisely.

And now for the obligatory Safe-Harbor statements.

During the course of this morning's presentation management will reiterate forward-looking statements made in today's press release regarding future evens and financial performance.

These forward-looking statements are subjects to material risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements.

We caution you to consider the important risk factors contained in our press release and other filings with the SEC that could cause actual results to differ materially from those in the forward-looking statements and the press release in this conference call.

In addition please note that the date of this conference call is November 9, 2004 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date.

We undertake no obligation to update these statements as the result of future events.

During this morning's call we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results.

For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of these figures, please refer to today's press release and this presentation.

With the formalities out of the way I'd like to turn the call over to David Crane, NRG's President and Chief Executive Officer.

David?

Thank you, Nalah, and good morning, everyone.

I'm going to begin with a brief review of the company's financial and operational results followed by a more detailed discussion of various notable activities that the company has been engaged in since the end of the 3rd quarter.

Bob Flexon, our Chief Financial Officer, is sitting here on my left, is then going to provide you with a more detailed analysis of the company's quarterly financial results and an update of the company's current liquidity position which given the fact that the company's sitting on $1.1 billion of cash will provide a natural segue into a discussion of the company's current thinking about capital allocation.

While Bob will begin the heavy lifting on the financials I want to provide you with one observation on our results.

From the first time we got together for our first earnings release last March and, in fact, as I look around the room and see certain people that I met during the exit financing road show in December I've stressed the fact that we're going to manage this business for cash and that's what we have done and I think that again, with these quarterly results the business has shown its potential. $284 million of quarterly net cash flow, $554 million year-to-date.

Even when adjusted for nonrecurring cash items, it's an impressive indication of the company's cash flow generating capability.

This robust cash generation combined with the elimination of debt associated with our asset disposition have greatly assisted us in reducing our net debt to total capital ratio to 50%.

As such we are squarely within our target leverage ratio of 45 to 55%.

Again as I've mentioned many difference in many different forums proven balance sheet management in the fundamental principles of the new NRG and it's a principle that we do not intend to deviate from.

Now our operating performance for the 3rd quarter remained good across the fleet although capacity factors were down in our key northeast region year-on-year due to the mild weather experienced in that part of the country.

What is hidden behind these statistics is that none of our facilities ran out of coal this summer and normally that would not be such a remarkable event, but this summer that was tremendous accomplishment and was a tremendous accomplishment that was achieved through the hard work, dedication and careful coordination of many people across our company.

And in this public forum I want to take the opportunity to thank all the people of the company, the people who will be calling late at night or on the weekends because the coal train had arrived so that we could turn the train around as quickly as possible.

Now, I wanted to provide you an update on where we stand in terms of the balance of our energy sales.

As we have described before, energy sales in our company are one of our three major components of gross margin.

The other two being contracted assets and capacity RMR payments.

We provide greater detail on energy sales because they are the most volatile element of our earnings.

What these numbers continue to demonstrate is that the earnings strength of our coal fired plant in a high gas price environment, indeed, the mild summer weather is reflected in these numbers principally in the modest 3rd quarter gross margin generation by our dual fuel plants which normally expect to run longer and higher margins than they did during the summer.

Another -- turning to the next slide there are three portfolio management issues which I'd like to touch upon.

Connecticut, California and noncore asset sales.

Starting with the last one first.

With respect to noncore asset sales certainly we have generated significant cash and eliminated a significant amount of balance sheet debt with more to come but what really pleases me about the noncore asset divestiture program is the way that the company's gone about it.

In each case we sold assets for more than we deemed them to be worth to us when valued on a risk adjusted BCF basis.

We did these transactions ourselves and we sold assets that are truly noncore and that none of the assets sold provide a logical fit within our core region strategy.

Once we had completed our -- the asset divestitures listed on this page our asset divestiture program will be complete which is not to say that obviously we will consider anyone who wants to, you know, walk across our threshold and offer us twice what an asset is worth.

We obviously will be listening but in terms of affirmative asset sales we will be done.

The strategic point is we're not in the process of slowly liquidating the company's portfolio one by one.

That is not an opinion of our management the best way to maximize the value of NRG long term.

Turning the next slide to Connecticut, we have spoken for some time about the provisional RMR arrangement under which we're operating in Connecticut or under which most of our plants are operating in Connecticut.

We are pleased to be able to announce a settlement with the Connecticut authorities which effectively removes the risk of a refund on that provisional RMR arrange.

Moreover, the deal has been negotiated effectively a two-year deal providing us with a high degree of revenue certainty until the scheduled introduction of light cap in January 2006.

Please keep in mind that Norwalk Harbor is not subject an RMR and is subject available to capture potential upside in the need pool energy market in the remainder of 2004 and into 2005.

Now turning to California, we continue to make progress in California.

We have successfully extended the RMR status of cab one and two for 2005.

And we continue to have discussions with the state and various load serving entities about contractual arrangements for El Segunda for 2005 and beyond.

Progress has been slower than we would have liked but regulatory developments continue to be positive.

First, [inaudible] decision to accelerate by 18 months to June '06 the requirement imposed on the load serving entities to contract for 15 days in December reserve margin is very helpful to us but please keep in mind that there is no realistic scenario under which west coast power earned in 2005 anything like it earned in 2004 under the CDWR contract.

Our 2005 objective is to ensure only the west coast power remains at least marginally cash positive but that our west coast assets can survive through the time when the California market is structured to enable our assets to achieve economic return on their assets consistent with their valued position inside the load pockets.

Now, turning to international, after we complete our current asset disposition program, our international businesses will be limited to Germany and Australia.

These portfolios have a lot in common with each other and operationally, a fair amount in common with our coal fired fleet in the United States.

Both the Australian and German portfolios consists of low in the merit order of black coal and brown coal plant respectively.

Both involve a high degree of vertical integration back toward the fuel sources.

NRG owns coal resources and transportation assets both in Germany and in Australia.

Somewhat different from the U.S., however, both these businesses are heavily contracted producing relatively predictable earnings and dividends.

Particularly notable in this regard is our Australia business which is highlighted here which recently entered into a substantial long term loss take agreement with a leading Australian retailer, Australia Gas and Light.

As we look ahead to 2005 we intend to seek to take advantage of the strong contract positions in both the German and the Australian portfolios in order to refinance our capital structures in a way which allows to us monetize a portion of our investments.

Now we'll turn the page and before we turn to commercial operations I wanted to give you some sense of what we have been up to during our first year in terms of general management.

This is our internal scorecard and I suspect that this may be a little bit too granular and mundane for most people's tastes so you'll be relieved to know that I don't plan on going through the items on this slide one by one.

In fact, I don't plan on going through any of them.

My only point is this.

In fact, we don't spend every moment of every day hobnobbing with elected officials developing long term theoretical strategy or hatching grand schemes.

We spend most of every day on these type of issues: basic blocking and tackling and to paraphrase the President, it's hard work, and we're going to continue to work at it.

Now turning to what's happening in our merchant markets, since our last earnings release, actually one of the reasons that we decided to have these presentations in in the 1st and 3rd quarter was because we thought this was the time where we could talk meaningfully about events in our marketplace that arose during the summer months.

When, in fact, what's interesting about this year is what has actually the most notable events that have occurred in our marketplace have actually occurred since the end of the summer as a result of external events in the gas market.

And during that time, since that time since the end of the summer there's been a significant upward movement in the forward curve for calendar year 2005.

This upward moment electricity prices is as usual, highly correlated with an equally strong upward movement in forward gas prices.

While we believe long-term natural gas prices remain well supported in the short term we expect gas prices to be highly volatile and extremely sensitive both to weather and to the occurrence or nonoccurrence of incremental disruptions in gas supply or transportation.

Nonetheless, with working gas and storage at historically high levels we have sought in recent months to take advantage of these high gas prices.

With this market situation in mind our commodity hedging activities are focused on four key areas: gas, spark spreads, oil spreads, dark spreads on coal and finally managing our coal and transportation portfolio.

As you consider the following slides illustrating oil dark and spark spreads, please keep in mind that these are true spreads as commonly defined.

Costs incurred in the course of physical generation are not included.

Such excluded cost include variable own and emissions and start-up costs.

In other words, do not assume that you can extrapolate our net margin for any of our plans directly from these price curves.

So looking at first at gas spark spreads what we've shown here is the trend of standard gas spark spreads in New York City against the price of delivered gas into that market.

While power prices have risen with gas prices this increase has not one for one and thus spark spreads remain compressed.

Indeed, this recent trend toward further compression of gas spark spreads has occurred in other U.S. regional markets as well.

Accordingly and in terms of our portfolio our gas plants remain essentially unhedged and represent upside -- potentially upside for NRG in 2005.

We turn next to oil spreads.

We show -- on this slide we show the recent trends of oil spark spreads in western New York where our giant seeping oil unit, Oswego, is located over the same period of time.

The message here is that oil spreads in recent months have widened while gas spreads have compressed.

Accordingly we have responded with increased hedging of our oil units while retaining a significant amount of capacity which would benefit from weather-related spot market volatility.

Now finally turning to what is the big earner for us in terms of -- is coal spreads.

On this slide we have shown the trend of dark spreads in west New York against delivered spot gas again into that market.

As you can see dark spreads have experienced a strong run up in recent months alongside natural gas prices.

We have taken this opportunity to increase substantially our hedge position of our coal fleet.

With the 2005 gas curve backward dated and gas and storage at record levels we have weighted our hedging to the 1st quarter.

Our objective has been to reduce our downside exposure to a drop in gas and power prices that we believe would result if we were to have a mild winter.

Turning to a longer term coal hedging, I'd like to provide you a little bit more detail on what our philosophy is in this regard.

You are all aware the dynamics that have overheated the market for eastern coal in 2004.

In fact, in response to these price movements there are now indications that high prices have encouraged the ramping up of production of substitute sources for eastern coal.

Nevertheless, we expect a strong pricing environment for eastern coal through all of 2005 and into 2006.

In contrast western coal has remained relatively stable.

Western coal physically will continue to move east but we believe the innate excess production capacity in the west combined with logistic and technical constraints on eastern consumption of western coal will limit the ability of western producers to support substantial and sustainable increases in western coal prices.

Our coal strategy for the short to medium term has been predicated on the transition of our eastern coal fleet from eastern to western coal to the he fullest extent possible.

In this regard we have achieved tremendous results.

For 2005 our plan is to reduce our reliance on eastern coal to less than 10% of our total consumption.

Right now conversion to western coal gives us both an environmental and economic advantage.

However, even in a normalized coal hedging environment we are positioning ourselves to be exceptionally competitive as our overall long term approach to coal hedging is based on an integrated approach to multi-source transportation infrastructure, transportation services, coal storage and coal supply.

Fully 77% of our coal-based megawatts have the optionality to source coal from multiple supply regions using multiple modes of transportation.

We believe this physical optionality will result in more competitive pricing and allows us to manage risks while leaving us open to capture upside potential arising out of the new volatility which is embedded, which is now embedded in the coal value chain.

The company during the 3rd quarter implemented a critical component of this strategy by ordering 1,500 new bulk coal rail cars from Johnstown, America.

These cars are for delivery beginning in the 1st quarter of next year.

In addition we hold contracts for transportation services with all four major railroads, multiple barge and vessel companies and three coal docks.

Coal, we're purchasing coal from a wide variety of coal producers and other credit worthy suppliers from multiple supply regions.

Our coal supply position in terms of our hedge position for 2004 and 2005 and I need to do a little bit of explanation here is for the 2004/2005 winter season we are 100% hedged.

For calendar year 2005, we're 52% hedged, and we're 41% hedged for 2006.

Now that's our position with respect to coal where this is actually under contract.

If we include coal which is either under contract or subject to agreements which are pending but to which the commercial terms have been agreed, we are 86% hedged for 2005, 84% hedged for 2006 and 49% hedged for 2007.

For inclusion in terms of our commercial operations before I hand it over to Bob, the most important point about our hedging position that is we have begun to develop the capability to take advantage of the physical optionalities of our asset position in order to capture multi-commodity opportunities that our markets have provided to us over the past few months.

As volatility in our input commodity seems likely to continue at the same or even higher level in the months or years to come it's important for you to think of our hedge positions as dynamic.

Our percent hedge may go down as well as up from time to time as we seek to balance upside potential against downside uncertainties and with that I'll hand it over to Bob.

Thank you, David, and good morning.

As David highlighted for you, we have another outstanding quarter both operationally and financially despite the mild summer.

I'll present more detail about these financial results and additionally I'll update our outlook for 2004 EBITDA and free cash flow.

As I have previously remarked during our prior calls the company's historic financial information is not comparable to get a fresh start accounting that was implemented upon emergence from bankruptcy as such the financial information for 2003 is limited.

Included in discontinued operations in the 3rd quarter are the following projects, McClain, Kirk, LSP Energy, also known as Base Fill and several neocorporation projects.

Kendale has been classified as an asset held for sale in the 3rd quarter and will be treated as a partial sale for accounting purposes.

On the next slide total operating revenues for the 3rd quarter were $607 million, net of $4 million of fresh start amortization.

Operating revenues were comprised of $346 million of energy revenues of which 66% were derived from merchant sales. $174 million of capacity revenues of which 61% were contracted and $90 million of other revenues primarily from our thermal and resource recovery operations.

Gross margin for the quarter totaled $342 million after total energy costs of $264 million of which fuel accounted for $214 million.

Cost of delivered coal for our North American generation fleet was $32.68 per ton for the 3rd quarter, while in the northeast the average cost was $45.78 per ton.

The northeast experienced nearly $1.00 increase in coal costs over the 2nd quarter primarily driven by higher average coal costs to Dunkirk in the 3rd quarter.

This increase was due to higher transportation costs through transshipping PRV coal to the plants first by rail and then by barge.

This seasonal transshipping improved cycle time in the use of our rail cars and allows us to move higher coal volumes into the plant in anticipation of the winter season.

Coal costs in the northeast reflected a blend for delivered PRV coal of $32.27 and delivered eastern coal of $55.72 per ton.

The overall lower cost for North America are due to LaGen's use of 100% PRV coal.

The average cost of gas burned across North American plants in the 3rd quarter was $6.01 per million btu versus $6.14 per million btu in the 2nd quarter.

Total operating expenses in the 3rd quarter decreased compared to the 2nd quarter.

During the peak summer season, less maintenance is typically performed at plants which resulted in a decrease in maintenance-related expenses of $14 million compared to the 2nd quarter.

Operating expenses also benefited from $11 million property tax credit associated with an enterprise tax zone program.

G&A expenses increased by $7.6 million in the 3rd quarter over the last quarter and totaled $54 million.

Of the $7.6 million increase, $4.5 million resulted from the establishment of a bad debt reserve associated with a note receivable that's not related to any of our operating assets.

The remaining increase is primarily attributable to higher labor costs associated with restaffing our corporate headquarters due to the relocation and costs associated with the implementation of Sarbanes-Oxley.

The company incurred $5.7 million of one-time related corporate relocation activities, these costs were primarily related to severance and termination benefits and are classified separately in our statement of operations in accordance with FASB 146.

Total cost for FASB 146 related corporate relocation costs will be approximately $25 million, $22.8 million of which will be expensed this year.

Total corporate relocation cash costs including capital are expected to be $42 million.

The breakdown of the $42 million is as follows. $3 million for capital, $12 million which is included in G&A and $27 million which relates to FASB 146.

Cash outlays associated with the corporate relocation for 2004 including CapEx are expected to be approximately $32 million.

Reorganization items are nonrecurring costs associated with activities during our bankruptcy.

This quarter a total of $5.2 million in net credits were recorded as a number of obligations reported on this fresh start were favorably settled.

Nonrecurring restructuring and impairment charges totaled $40.5 million during the quarter of which $24.5 million was a non-cash charge for Kendell and a $15 million impairment charge relating to turbines held for sale previously associated with the Meridan project.

We expect to close these transactions by year end.

Equity earnings increased $7.3 million compared to the prior quarter largely due to James River partnership and our Enfield investment which included an unrealized gain of $13 million in the quarter.

This gain was $3.3 million higher than the previous quarter and is associated in changes in the fair value of a natural gas supply contract not qualifying for hedge accounting under FASB 133.

West coast power, net of amortization had 3rd quarter earnings of $10 million, about $4.6 million lower than last quarter.

Other income and expense in the 3rd quarter included a one-time write-down for Cal and James River investments.

We've executed sales agreements in hand.

We've recorded net reliable value adjustments of $3.7 million and $6 million respectively.

Offsetting these write downs is approximately $5 million of other income, the majority of which is interest income.

The effective tax rate for the 3rd quarter is 31%, the 2004 forecast is 28% which are lower than our previous guidance due to the change in the proportion of domestic to foreign pretax income.

Net income for the 3rd quarter and year-to-date totaled $54 million and $167 million respectively, fresh start adjustments net of tax included net income for the three and nine months ended September 30, 2004 were $30 million and $109 million respective.

On slide 22 is how our total consolidated adjusted EBITDA breaks down by operating segments for the quarter and year to date.

While the northeast, where our generation is the greatest continues to be the biggest contributor, each region is contributing to the strong result.

Our other domestic and international assets nearly equally contributed to the favorable results for the quarter.

You'll find additional segment information within our 10-Q.

On slide 23 is our year-to-date free cash flow.

As expected, our free cash flow was strong in the quarter increasing by $284 million.

We saw the seasonal reversal of many of the increases from the 2nd quarter particularly in working capital.

Principal changes for this quarter included lower interest payments on the high yield notes which is paid semiannually and the accrual of interest associated with the peaker financing which is paid annually in December.

We have lower cash taxes and working capital reduction during the quarter of $137 million bringing the year-to-date reduction to approximately $4 million.

This working capital reduction was attributable to a decline in accounts receivable by over $70 million.

As mentioned during our last call, accounts receivable having included in the 2nd quarter $38.5 million from the settlement with Connecticut Light & Power contract.

That dispute for, for that dispute which was collected during the 3rd quarter.

The remaining reduction in receivables is primarily related to power marketing activity.

Prepayments and other current assets declined by nearly $30 million during the quarter primarily due to return of collateral associated with our fixed to floating interest rate swap.

Other current liabilities increased primarily due to the corporate relocation accruals and reserves associated with the RMR.

The asset divestitures and the cash used by financing reflects the $160 million of proceeds from the McClain sale that were collected and then used through -- to pay off the related debt.

With the strong free cash flow during the quarter the company's liquidity has grown by approximately $435 million during the 4th quarter, -- during the year, sorry.

It now stands at approximately $1.6 billion.

Unrestricted cash now exceed $1.1 billion and we posted an additional $16 million in letters of credit during the quarter to support our hedging and contracting activities leaving $97 million available under our LLC facility.

As we successfully reestablished the company in 2004 we're finalizing our 2005 planning which includes capital allocation.

The threshold capital allocation issue for NRG is the restrictive covenant of the current senior facility which severely limits our capital allocation alternatives.

Therefore, the first step in the company's capital allocation program is to replace or amend the existing covenants associated with the senior financial -- withe the senior facility making them more similar to the somewhat less restrictive covenants in the bond indenture.

For example, a restrictive covenant in the senior facility prevents the return of capital to shareholders.

By comparison to the bond indenture, dividends, special dividends and share repurchases are possible within predefined financial limitations.

The company is actively pursuing alternatives to address the existing covenant restrictions under the senior facility.

Refinancing the senior facility is likely, refinancing the senior facility is a likely outcome to address the covenant restrictions.

By comparison to other recent refinancing within the sector, we believe we can improve on our existing pricing of LIBOR by 400 basis points and obtain a covenant package more closely matched to our existing bond covenent which while restrictive in their own right, do provide greater flexibility compared to the senior facility.

Longer term our capital allocation plans will be managed within our targeted net debt-to-capital ratio band of 45 to 55%.

The capital allocation philosophy operating within these bands will optimize our weighted average cost of capital and, therefore, investment returns.

It also supports our belief that equity investors in one form or another desire a return of capital as well as a return on capital.

As of September 30, 2004, the company's net debt to total capital ratio was well within the band at approximately 50%.

Even with the mild summer we continued to be optimistic about our 2004 operating performance and cash flow.

Accordingly, we are raising our 2004 adjusted EBIT outlook from $850 million to $875 million and adjusted free cash flow from $304 million to $343 million.

Our forecast is based on our year to date results assuming normal weather patterns, no unforseen unusual events, or foreign exchange fluctuations and the successful closing of pending asset sales.

It does not include the cash impact of a refinancing.

The company has substantially hedged gross margin for the remainder of 2004 and coal prices and fluctuations in gas will not have a significant impact on 4th quarter results.

We continue to deliver on our promise to manage our balance sheet and decrease debt.

As you can see from this slide with the announced sale of Kendall, total consolidated debt excluding Kendall declined by approximately $450 million during the quarter.

This decrease is reflected in unsupported debt.

The other assets associated with the unsupported debt are Paul James, Sterling, Big Cajun One speaker and Bijou Cove and Rockford one and two.

Supported debt, defined as the corporate level debt and recourse debt, and project level debt of entities generating and distributing cash is relatively stable over the course of the quarter and totaled $3 billion as of September 30th.

As noted earlier our cash balances grew in Q3 and are reflected here.

That growth was solely due to our supported operations.

Cash associated with these entities and projects totaled nearly $1.2 billion.

With restricted cash our cash balance at September 30 totaled $1.25 billion.

Of our forecasted $875 million of consolidated EBITDA over 87% is from the supported projects.

Using Friday's closing price of $29.25 for our common stocks the company's total enterprise value is approximately $5.3 billion.

We continue to believe that the equity value of the company is entirely attributable to the supported projects with our adjusted EBIT outlook for the quarter and for the year.

We believe our stock currently trades at an enterprise price value to EBITDA multiple of about 6.3 times.

Finally our capital market performance reflects our capital allocation philosophy.

Generating shareholder returns and providing positive risk-adjusted returns for debt holders.

Since emerging from bankruptcy the company's stock has outperformed the key market indices and peer group performance by a significant margin.

On March 25 we began trading on the New York Stock Exchange and since that date NRG stock is up over 35%.

NRG's second priority high yield note has similarly outperformed the market index as shown in the upper right hand chart.

In December, these bonds were issued with a yield to maturity of 8%.

As of last Wednesday, these bonds were trading at a yield to maturity of 6.2%.

Our yield to worse that is the yield to the first day we can call the bonds in 2008 is 5.6%.

The return on NRG's bonds have been 15% better than the CSFB high yield index and the reflection of NRG's improved financial condition and outlook.

In terms of NRG's spread to 10 year treasury bonds when we issued our bonds we had a spread of approximately 370 basis points and that spread has improved by 150 basis points to approximately 220 points.

Again demonstrating the improved financial position and outlook for the company.

Overall the company has delivered another outstanding quarter.

The balance sheet continues to strengthen and the operations are generating impressive returns.

I'll now turn it back to David for final words on the quarter.

Thank you.

Thank you, Bob.

I'm going to be very brief because we've used a fair amount of time in the presentation.

And we want to have time for all your questions but I just really wanted to make one point which is that I hope you all sense that we're really at a watershed in the company in terms of, you know, in terms of where we have been.

We've slimmed down the company.

We've focused the business.

We've improved the capability of the company and continue to do so every day and we've achieved that through the hard work of everyone in the company, people who were at NRG when we arrived, you know, together with the new people that we have brought on board.

I think we've achieved a lot more than a lot more quickly than people would have thought in terms of executing in my view this excluding this back to basic stage of our strategy and now it's time to look forward and as we look forward, I mean, essentially what I want to say to you is that the next time we get together for our earnings release I'd like to think that the focus will be more, -- will be less on the success that we've had in terms of divesting fringe assets in distant places and more talking about the success that we are having in terms of capturing the opportunities that our marketplace is making available to us and we think will continue to make available to us and which we think we're in a unique position to capture given our balance sheet strength and given our physical assets and the optionalities that they provide us with and with that, I'd like to open the floor for questions.

Since, David, you decided to sit in the front row you get to go first.

So I think one of the ground rules is you have to say who who he is and --

David Silverstein with Merrill Lynch.

Thank you, David.

You mentioned dividends from Australia and Germany and you also mentioned opportunities maybe to pull more value out with refinancing.

Can you give us some ideas to the actual dividends you're seeing right now out of those countries?

Sure.

For Australia we're working on the refinancing now.

We have competitive bids out for that.

Assuming that that's successful we would expect cash flow coming from Australia in the order of magnitude of about $50 million up to corporate level.

That refinancing but on a recurring dividend basis?

I don't have the forecast for that.

Okay.

And Germany?

Right now I have no forecast information for that.

Okay.

And then you mentioned when you redo a bank deal to get more leniency in terms of dividends, where is your restricted basket today under the bond diventure, so, for instance, if you were able to eliminate debt what is the maximum amount of dividends you pay out today?

The way the indenture works on that, you can pay out 50% of your net income your your cumulative retained earnings.

Where we sit at the end of the quarter I think our net income is about 140, 150 so you can pay out 50% of that.

And just real quickly in Connecticut you were showing a material impact on EBITDA for 2004 which differed materially from what you had suggested back in March and I still think you had the RMR contracts as of the March earnings call.

Actually it's pretty much the same number because we talked about before about $7 million a quarter of the benefit of the -- I'm sorry per month of the RMR which is the $84 million it's a number that David showed up on the screen was an EBITDA impact for those assets with a settlement of about $90 million so it's roughly about the same amount.

Thanks.

Thank you.

Elizabeth Rowe of Merrill Lynch.

I think earlier this year you talked about West Coast Power accounting for about $160 million of this year's EBITDA and about $120 million of operating cash flow.

I just wanted to confirm those numbers for this year and then to ask if you could comment if all you had next year were the two RMR contracts on the cab units and other units were sold at market how should we be thinking about EBITDA and the operating cash flow for '05 from West Coast Power?

On the first half of that question regarding the EBITDA in 2004 included in our outlook is EBITDA of approximately $170 million for West Coast Power.

On the cash side it's still about the $120 million.

So slightly up from what we talked about at the last quarter.

You want me go and -- I mean, we -- Elizabeth, my problem with your question about, you know, what is the other assets that are in the market, to me that's the least likely of the three potential scenarios.

The most likely that is they also are RMR status.

The second most likely is that we do something else with the assets because our view under a normalized situation while there's, you know, there's potential and people talk about California being, you know, potentially 205 megawatts short for the summer of 2005, you know, rainfall could be a big swing factor, you know, we don't see the El Segundo as being cash positive in the market situation under the current forward prices, we think your scenario is the least likely but I guess with that last statement I just answered your question in terms of where we would be.

Maybe I can ask the question a little bit differently.

If we assume the other two units are at least sort of cash neutral how much does the two RMR contracts add in terms of in the meaning of the other two units are sort of zero to operating cash flow how much might these two RMR two units bring in from an operating cash flow perspective?

I mean, our -- I think that the way to look at it for the entire portfolio without -- is that really the range of what you're talking about for next year really almost under any reasonable scenario is basically between zero and 30 in terms of cash.

I mean that's the range that we're offering within and, quite frankly, there's such a wide range of my guess would only be a little bit better than your guess as to where it'll fall within that range.

Now, Bob, do you want to make your point about the timing on the --

The cash flow impact of West Coast will be positive to NRG in 2005 due to the lag between the earnings in 2004 versus the cash payout so it will be cash positive to us in 2005.

Meaning from kind of like a dividends payment standpoint.

Exactly.

From a GAAP standpoint zero to 30 is the number we ought to be thinking about for now.

Correct.

Thank you.

Hi, Vivian Wild from Goldman Sachs.

David, just wanted see if you could give us some color in terms of what price did you lock in the coal for '05, '06 and '07?

The price, I think for us obviously most that (inaudible) given our consumption is on western coal, and I think probably the best way to answer that would be that what we've been locking that coal price is consistent with the forward curve for western coal which actually rises over the next three years, but basically ranges between I believe $5.50 and $7.

So if you stay within that range, I think that's where we're at.

I think.

So we're going to have two more questions from the floor here and then we'll open: we have 280 people on the phone so we need -- if anyone on the phone has questions, but two more questions from the floor.

Who did you give the microphone?

I noticed on a slide you talked about 98%, or I'm sorry 75% hedged for calendar '05 vis-a-vis gas and then your dark spread I guess I just wanted to understand how you hedge that and if you can give us any pricing information there and just have you thought any at all about extending that further into the future beyond '05 given the currents gas curve?

I think it was page 15.

Page 15.

Did you keep your pages in order?

So the question has to do with the -- I'm sorry, which -- the -- you said 50% number?

75% calendar '05.

Oh, the hedged of our --.

Gas -- [ Indiscernible ]

Well, I mean, if I understand your question correctly obviously for us being a company that's essentially long gas we tend to hedge our gas exposure by selling our coal fire generation forward and we have some position beyond 2005 and that I would probably decline to give to you in part because I don't know exactly what the number is today.

But for the most part we principally see liquidity in these markets, you know, at this point through calendar '05 and to contract beyond that which is not to say we're doing a little bit of it, but basically you're giving up a liquidity discount to go into 2006 and 2007 so we've been much more focused on the 2005 position and I think the other point, Scott, that I would make here, is that you know, we are, you know, bullish on gas long term.

It's not to say, you know, we think it's going to stay, you know, right now I think it's in the $8 to $9 range for the winter strip for this winter.

I'm not saying we're that bullish long term but, you know, overall compared to gas going back to historical levels or even the readjusted, you know, sort of the price of landed L&G, you know, we're more bullish than and so our principal concern is this winter may be a little overdone, you know, coming out of hurricane Ivan and the like and we wanted to make sure that we protect ourselves on the downside so mainly 2005 at this point.

At this point again pretty straightforward selling our coal fire generation forward.

Now was there one more from here or were we going to go to open the phone lines?

Ladies and gentlemen, if you have a question from the phone lines please press star, 1 at this time.

Thanks.

I just wondered if you could give us some idea of what your capacity factors were on your core plants for the quarter.

The capacity factors on our coal plants, our capacity factors, they range, I mean, Big Cajun, I believe was above 90%.

For the 3rd quarter Huntley was 49%.

Dunkirk 72%.

Indian River 52% and Big Cajun 90%.

Given what it was versus last year?

No, we do not have that with us.

I mean, I think we have the statistics on one of the slides that indicates that actual production was higher at Big Cajun, certainly higher, I mean 90% is quite exceptional for a coal fire plant so I'm sure it's quite a bit higher in Louisiana, probably a little bit lower in western New York.

But we don't have that precise information.

Could you give, last, quick update on your transportation contracts?

Well, the transportation, our transportation arrangements, you know, I think I have to sort of, I have to hide behind the fact that we have transportation arrangements under negotiation and, you know, those negotiations are proceeding well but they're not complete yet so it'd be better for us not to comment specifically on them.

I think now we open the phone lines if there's anyone in the queue there?

As a reminder, ladies and gentlemen, if you have a question please press star, 1.

Is there any other questions from the floor, we'll take those or otherwise Elizabeth?

I think you mentioned in the press release that you're going to be buying a substantial number of rail cars next year.

Yes.

I assume that would be capitalized and how much does that add or was it in next year's CapEx budget?

Could you talk a little bit how much we should be thinking about for next year on that?

Elizabeth, when we do the rail cars we will lease them.

There's a purchase that'll be then sent to a third party to do the financing.

It'll be treated as an operating lease and I believe the terms of the lease are about 10 years.

That's still under.

Still under discussion.

Under competitive profession also but --

So it was not part of the 130.

So 130 is still a good number in terms of thinking about CapEx.

Yeah.

Thank you.

Hunter Poldabouts [ph] with Value Line.

For the plants in which you're still using eastern coal, are you facing any significant environmental upgrade?

Well, we have a continuous environmental remediation program because for all of our coal-fired plants and that's an integrated part of the whole coal strategy obviously in that, you know, you know, it's impossible to say that -- you can't divorce the eastern coal from the western coal because in all of our plants we're going to still be doing a fair amount of lending but we do have an environmental remediation plan underway and, you know, with a significant portion of the $130 million spend that Elizabeth referred to being attributed to environmental spend really across the coal fired fleet so the answer is yes.

Well, I think if there are no further questions, it's almost 10:00.

We just want to thank everyone for participating in this presentation, and we'll look forward to seeing you at the next quarter.

Thank you.

Ladies and gentlemen, thank you for your participation.

This does conclude teleconference.

You may disconnect your lines at this time and have a wonderful day.