NRG Energy Inc (NRG) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the NRG Energy third quarter 2007 earnings results conference call.

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

Following the presentation, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Friday, November 2, 2007.

I will now turn the call over to Ms.

Nahla Azmy.

Please go ahead.

Thank you.

Good morning and welcome to our third quarter 2007 earnings call.

This call is being broadcast live over the phone and from our website 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 of our website.

A replay and a podcast of the call will be posted on our website.

This call, including the formal presentation and the question-and-answer session will be limited to one hour.

In the interest of time, we ask that you please limit yourself to one question with just one follow-up.

And now for the obligatory Safe Harbor statement.

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

These forward-looking statements are subject to material risks and uncertainties that 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 in the press release and this conference call.

In addition, please note that that date of this conference call is November 2, 2007, 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 a 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.

And now I'd like to turn the call over to David Crane, NRG's President and Chief Executive Officer.

Thank you, Nahla, and good morning, everyone.

I am joined here today by Bob Flexon, our Chief Financial Officer, who will be speaking to the Company's quarterly financial results.

Also I have with me Kevin Howell, who runs our Commercial Operations Group and who is here to answer or not answer, as the case may be, questions you might ask about the Company's Commercial Operations strategy.

And a special guest today, John Ragan, Head of our Northeast Region, who is here, given that we'll be talking in some length -- or in some detail about the Huntley IGCC project or if you have questions about the recent announcement we made with respect to peaking units in Connecticut, the joint venture with United Illuminating, he can answer those questions.

So I'm going to be referring to slides that appear on the website and I'm starting with slide three.

And this slide, which I insert into the slide deck which I got, because as usual, our slide deck is full of information about all that the Company is going and is part of Nahla's quest to make sure that the investors in this Company know every single last detail of what we're up to.

But I wanted to start with a very simple slide and use that as a backdrop.

Some of that was easy on the eyes, why I gave a bit of context to this call and to where the Company has been and where we're going.

And I wanted to do that on two levels -- first, operationally, And by that, in this case, I mean really what we've been doing in 2007 and looking forward to 2008.

And then strategically, covering 2008 and beyond.

So first, operationally.

Here we are in early November and as a Company I think we're in the process of wrapping up what we believe has been a highly successful year in terms of current operations.

Based on the strong performance of our plant and Commercial Operations Group year-to-date, we are increasing our full year adjusted EBITDA guidance by $100 million.

Our fully hedged position gives us a very high level of confidence that when the dust settles and the year is closed out, we will have met these revised financial targets.

Operationally, at this time we are also looking forward to 2008.

We are well placed in terms of our winter preparedness and we are pushing forward a series of operational initiatives, which we are planning for 2008.

Much of this is encompassed in our highly successful FORNRG program for which we are raising the bar again today.

In terms of positioning this Company for the future beyond 2008, we feel that with each day the path we are on and the direction which our business is headed and has been headed is the right one.

And that the principal task for us is not to deviate to the left or to the right of where we have been headed, but only to keep going faster, higher and stronger.

And what do I mean by this?

Well, we started out here at NRG four years ago with a business strategy focused on developing multifuel across the merit order of portfolios of low marginal cost-generating assets concentrated in a few competitive wholesale power generation markets in the United States.

Given what we own coming out of Chapter 11, that was undoubtedly the right strategy for NRG.

Aided in significant part by the Texas Genco acquisition, which was announced in late 2005, we have done well to date in terms of executing on our original course strategy.

Also in 2005, we accessed six principal long-term industry trends that were emerging at that time.

The seemingly permitted recalibration higher of the gas curve, the aging of our Company and the nation's power generation fleet, the virtual absence of new plant construction, the tightening of reserve margins, the ever-increasing environmental sensitivity with respect to the traditional regulated emissions, and the emergence of global warming -- which, during the past two years, has entered the national consciousness with the subtlety of a freight train -- bringing with it the virtual certainty of carbon constraints and regulations.

For NRG, all of these trends pointed in the same direction and led us to embark on a significant enhancement to our core strategy -- and that was re-powering NRG and ERCOT NRG.

They are aimed at revitalizing and enhancing NRG's existing generating fleet in a low to no-carbon way without excessive dependence on additional high-cost, natural gas-fired generation.

The twin centerpieces of both Repowering NRG and ERCOT NRG have been our attempts to secure first mover status in both of the emerging technologies which we consider to be the future of base load generation in the United States, advanced nuclear power and clean coal.

In this regard, I'm very pleased with where we are on both counts.

Certainly the biggest news for the quarter for us is that we filed our combined operating license application for two new nuclear units at South Texas with the Nuclear Regulatory Commission on September 24.

While the NRC continues to review our application to determine whether it qualifies for docketing, I would note that two days ago at a U.S.

Energy Association press briefing, NRC Chairman Klein stated that the NRG STP application appeared, quote, robust and complete, end quote.

So if anyone on this call tuned in, in the hopes that we would have a change of heart or a major shift in strategic direction, that we would be backing away from our hedging program, from our commitment to the regular return of capital to our shareholders, from our repowering program or from our advocacy of comprehensive and effective carbon regulation at the federal level, you will be disappointed by this call.

Going forward, our approach, as set forth on this slide, is quite simply citius, altius, fortius.

Now turning to slide four.

We provide our financial highlights for the quarter and year-to-date.

As I mentioned, Bob will be dissecting these numbers for you in great detail.

My only comment [risking] a blinding glimpse of the obvious -- we as a Company remain singularly focused on generating cash.

Thanks to the solid performance of the Plant Operations Group, the exceptional hedging work done by Commercial Operations, and the financial management activity of Bob's own Treasury and Risk Management groups, our cash position is as strong as it has ever been.

While this summer's credit crisis has receded to some extent, the fact that it occurred and that it had virtually no lasting impact on NRG reaffirms to me the soundness of our approach to balance sheet management which, while certainly active, remains always prudent.

Keep in mind that the liquidity number that you see on this slide is effectively understated by a significant amount.

If you add to the $2.3 billion shown, the $600 million of synthetic LCs being returned by our principal trading counterparties, our total liquidity approaches $3 billion.

If you permit me to digress for a moment with an editorial comment, I don't know whether the rating agencies are listening to this call, but what I see when I look at NRG is a company piling up liquidity, generating substantial free cash flow, and pre-paying debt at the same time we remain mired deeply in the effluvia of low sub-investment grade with a BA3 B-plus corporate credit rating.

So I don't know if the rating agencies are distracted with problems in the investment grade commercial paper market, but I mean, throw us a bone here; at least take us off negative outlook.

Well, let's turn to slide five before I continue with my executive temper tantrum here.

Let's talk about safety.

Our year-to-date OSHA recordable rate is 1.7 and is less than half of the 2006 industry average of 3.9.

This result is due to the strong performance in material year-on-year improvement across all plants in all regions, but particularly in the Northeast and the West.

We continue to make progress on our implementation of OSHA's Voluntary Protection Program at five NRG classic plants -- Montville, Encina, El Segundo, Big Cajun II and Saguaro.

These five plants already have reduced the number of injuries by 30% compared to last year.

In addition, [TH Warden] has been recommended for star status under their VPP program, which means that all of our Texas plants now have star status under the VPP program.

In terms of plant production, we posted yet another strong summer quarter on par with last summer with the sole exception that our Texas gas plants did not run nearly as much this summer due to the mild and wet weather in Texas.

We overcame that mild summer weather with an effective hedging strategy in ERCOT and as a result of good weather in the Northeast, which drove higher late-summer prices, if not higher production.

Again, there are many extraordinary achievements from around the Company on the operational level -- I mean they're -- which too many to mention, but I would mention the extraordinary reliability that Arthur Kill showed, so a great job by Tom Bishop and his team.

And I also wanted to mention the Encina plant in California where Jerry Carter and his team contributed to keeping the lights on in San Diego during the recent wildfires, even with a lot of the staff there distracted because their own families had been evacuated.

Still looking at this slide, on the bottom left we show our EFOR results, which exhibited some slippage relative to the very strong performance turned in last summer, particularly by our Texas coal units.

As we've mentioned on previous calls, we had recurring reliability issues with Indian River IV during the first half of 2007.

We've devoted a considerable amount of management and other resources to the unit and Indian River IV's recent performance has been very good.

Indian River units I, II and III are currently running at top quartile levels.

Finally, with respect to our coal inventory levels, they obviously remain in excess of our target range.

Recent capacity expansion on the joint line out of the Powder River Basin gives us confidence that we can move much more assertively to reduce our inventory levels.

As such, for this quarter our focus will be to decrease inventory to within a target range of 25 to 35 days.

Now switching to our hedge position on slide six.

You can see that we are now fully hedged in respect of our base load position for 2008.

In terms of the out years, the forward gas curve is healthy but not as robust as we expected to be from time to time in the future.

Indeed to me, it's a remarkable indication of the resilience of the gas curve that prices remain as strong as they are, notwithstanding the current gas inventory surplus, the demand inhibiting heavy rains in Texas this summer, and the lack of tropical activity in the Gulf.

We retain some gas length in the out years so that we can capitalize on opportunities which we expect to arise from time to time.

While we are neutral to mildly bearish on gas prices short-term and bullish medium to long-term, on heat rates we are bullish as far as the eye can see.

While heat rate forward curves have risen, the continued lack of new build and consequent declining reserve margins, particularly in Texas and the Northeast, plus the increased cost of adding new capacity cause us to continue to maintain a fairly open position with respect to heat rate expansion.

And finally, turning on slide seven, as I mentioned upfront I wanted to spend a little time on this call looking forward as well as looking back.

On this slide I wanted to give you some sense of what we are planning for 2008 in our principal operating functions.

We could consume the entire hour talking about any of these initiatives, but there is one general theme that cuts across all and that is this -- we absolutely do not believe that we have yet captured the full benefit of our scale or all the potential synergies arising out of last year's Texas Genco acquisition.

You might want to think about it as a set of initiatives that add up to a second stage integration of Texas Genco.

Now turning to slide eight.

And we're continuing our transition from slide seven, from reporting the past [of] looking at the future.

And slide eight re-introduces the four interrelated companywide initiatives upon which so much of our forward strategy is based.

Future NRG, which was initiated in the second half of 2006, Eco-NRG and Repowering NRG announced in the first half of 2006, and the granddaddy of them all, Focus on ROIC at NRG or FORNRG, which was introduced and began immediate implementation in the spring of 2005.

Starting with FORNRG on slide nine, today's news is that we are accelerating and concluding the FORNRG program in 2008 by bringing forward the 2009 recurring EBITDA target of $250 million to 2008.

Obviously, our willingness to do this is rooted in the success we have achieved in the program to date.

And indeed, we now expect to achieve $220 million this year, which exceeds the previously announced 2007 FORNRG target of $200 million.

The better-than-expected 2007 results are being driven by better overall plant performance, particularly in the area of the recapture of plant generating capacity, further penetration of the FORNRG program into the Texas region, and increased corporate contributions.

As we look forward to 2008, the 2007 results combined with additional FORNRG opportunities identified during the year, particularly in the area of procurement, give us confidence that we can achieve the overall program target of $250 million a year early.

But we know that your delight that the FORNRG program is being accelerated is tempered by the sense of emptiness that you must feel that come the end of 2008, we will no longer be reporting to you on this, the most cherished and venerable of our initiatives.

So I tell you, never fear.

Given that we believe that there is more gas in the tank and room for improvement across the Company in the areas such as those I mentioned on slide seven, we are re-badging the current FORNRG program as FORNRG 1.0 and we're reviewing our potential to launch a second phase of FORNRG covering 2009 and beyond, which we are quite creatively referring to as FORNRG 2.0.

So turning to slide 10, shifting to the Repowering NRG program, there remain many projects in this program more than appear on this slide and more than we can discuss.

But looking at the program as a whole, we remain principally in development mode.

By the end of 2008, we hope and expect to be much more significantly in construction mode, and under John Brewster and Dave Harris, over the past year we have developed the capability to manage multiple complex construction projects.

The other point I want to make in reference to this slide has to do with the projects that have failed along the way.

When we announced Repowering NRG in June 2006 with 18 projects encompassing the full range of technologies, we made it clear that the program was dynamic and that projects would be dropped.

That is what happens in development, particularly if you are intent upon being a disciplined developer.

And indeed, that it is what has happened in our program.

But what also has happened is that some projects have been replaced by or morphed into other projects.

For example, the three IGCC projects in New York, Connecticut and Delaware have transformed into one IGCC project in New York with CCS, as I mentioned before; a gas peaking initiative in Connecticut; and a gas firming project in Delaware, which may yet morph again into another type of project.

This, in my mind, is a very positive development, as in most cases, we are pursuing projects conceived directly in response to the stated needs of our customers.

The other general point that I wanted to make about the Repowering program which is shown on slide 11 -- and this is the point which also applies to Eco-NRG -- is that we see tremendous advantage in pursuing these projects in cooperation with capable and compatible partners.

And that's one of the big stories of this quarter.

And the reasons for partnering I think are fairly self-evident.

We've listed some of those on this slide for your ease of reference.

But we are extremely pleased with the partnerships that have been announced recently under both the Repowering NRG and our Eco-NRG programs.

And you should expect more partnership announcements in the future.

We have included slide 12 regarding South Texas III and IV since the nuclear plants are indeed the flagship of our Repowering NRG program and the filing of the COL application and the partnership with CPS.

Those were two of the three significant positive developments that I intimated on our last quarterly call.

Since I spoke at length about STP III and IV a few weeks ago at the Merrill Lynch conference in New York, I don't intend to devote significant additional time to it here, other than to say that we are convinced more than ever that our approach to new nuclear development -- which is centered around building the only advanced nuclear design which actually has been built on time and on budget -- is the best, most risk-mitigated approach to new nuclear construction in a non-rate based market.

As I said at the beginning, I remain exceedingly pleased with the progress of our nuclear development and am confident that in the months to come you will continue to receive from us announcements of material progress and success in connection with this project.

I remain equally convinced that the Company's efforts in the nuclear arena will significantly enhance our shareholder value and will do so long before STP III and IV actually begin to generate EBITDA in 2014.

Now moving to slide 13 and 14.

We haven't spent much time talking about Huntley since our announcement of the award of that project on December 19, 2006.

Again, that was the day that we received a conditional award from the state of New York.

Since that time, the project has evolved from IGCC with a promise of future carbon capture and sequestration -- or which I refer to as CCS -- to IGCC with CCS at or very near to its inception.

Indeed, one point I want to make is with respect to an industry environmental trend, and that is this -- at this point, our view is that there is no market for IGCC in this country without CCS.

And CCS effectively defines clean coal.

In my opinion, people in our industry who use the label clean coal to refer to anything other than coal-fired generation that captures and sequesters a substantial portion of the CO2 emissions, are misusing the term.

Our project, located at our Huntley facility in Tonawanda, New York, outside Buffalo, would be the largest IGCC with CCS facility in the U.S.

and possibly in the world.

We have spent much of the past year proving up the CCS end of the project and have determined that the geology of Western New York is highly attractive from a sequestration point of view with existing pipeline rights of way to the best sequestration areas.

Indeed, the largest impediment to this project at this point is not technical or even environmental, but rather legal, regulatory and particularly commercial.

At this point in time, custom-built IGCC plants are simply more expensive to build than mass-produced traditional pulverized coal plants.

Separating and sequestering millions of tons of CO2 adds a substantial additional layer of expense.

That additional layer of expense remains particularly hard to justify in an environment where it remains legal, simply to vent those millions of tons of carbon into the earth's atmosphere for free.

This is one of the reasons why, in our opinion, there must be federal carbon legislation putting a price on carbon.

And that legislation must include substantial support for multiple commercial scale CCS projects around the country, including but in no way limited to the Huntley IGCC project.

While slides 13 and 14 address the centerpiece of our efforts to get the carbon out of coal prior to combustion through IGCC technology, slide 15 highlights our efforts to mitigate carbon through post-combustion carbon capture.

Success in this area is, of course, essential to the retrofitting of carbon capture technologies on existing coal-fired facilities.

Previously we have referred to our continuing work with greenfields at our Big Cajun site.

We are working closely with greenfields to scale up their promising technology at Big Cajun, keeping in mind that the economic impetus for their carbon-eating algae project is primarily biofuels and secondarily carbon recycling.

The second post-combustion carbon capture initiative, which we are announcing today, is an agreement with Powerspan to jointly design, construct and operate a demonstration facility that will be among the largest post-combustion carbon-capturing sequestration projects in the world, and maybe the first to achieve commercial scale from an existing coal-fired power plant.

The project will be built at our W.A.

Parish plants near Sugarland, Texas and is designed to capture and sequester 90% of the carbon dioxide from flue gas equal in quantity to that of a 125 megawatt coal unit.

On slide 16 and the fourth and last of our companywide initiatives future NRG.

Much of what has been encompassed in this program is simply good corporate practice common in other industries but I think not so common in ours.

The investment community need not be concerned with it beyond ensuring that companies that they are investing in for the long-term need to be doing this; particularly in the industrial sector, where there is an aging workforce issue across the sector and in our particular subsector, where there has been little attention paid to management development over the past several years.

I simply want to assure our investors on this call that we are working these important long-term issues on all levels and that we had some notable if unseen successes during this past year; particularly in the area of management retention, where I have set as a personal goal the retention of what I believe is the strongest and deepest management team in the business.

While we indeed lost some key executives during the year, we succeeded through the 10b5-1 programs announced in August and through other means in keeping the core management team intact.

This remains a very high personal priority for me looking forward to 2008 and beyond.

Finally, on slide 17 and before I turn it over to Bob, I wanted to review our score card for the year.

We accomplished close to everything that we set out to do at the beginning of the year.

And hopefully, those of you who have been with us since the beginning four years ago, will agree that this is the hallmark of the new NRG.

We tell our investors what we intend to do in advance and then we go out and get it done.

This quarter and this year I'm confident that that is exactly what we did; we got it done.

Thank you.

Bob?

Thank you, David, and good morning.

Today in addition to our customary review of the third quarter and year-to-date financial performance, I will also cover our third consecutive quarter of improved outlook for 2007; our first comments on 2008 guidance; and finally, several significant events impacting the Company's liquidity and capital structure.

I'll begin with the third quarter results shown on slide 19.

Third quarter 2007 adjusted EBITDA, excluding mark-to-market, was $719 million versus $519 million for the same period last year, resulting in the second consecutive quarter where performance exceeded our forecasted expectations.

The current quarter benefited from the $180 million revenue increase in the Texas region from the November 2006 contract hedge reset.

Partially offsetting this was 1.1 million megawatt hours of lower Texas gas generation due to cool and wet weather which reduced demand for our gas peaking units.

This decline, accompanied by a 13% quarterly drop in average peak market power prices, although largely offset by our hedge positions in our costs, resulted in a $31 million decrease in energy margins for the quarter.

Development expenses this quarter, mostly in support of September's COLA submission, increased $40 million.

We will recover 40% to 50% of our development costs incurred to date from our partner in the project, CPS of San Antonio.

Demonstrating the value of our geographically diverse portfolio, the Texas region decline was offset by the improvement in the Northeast region results.

The current year's third quarter adjusted EBITDA versus 2006 improved by $95 million.

Quarterly adjusted EBITDA improved despite a 1% decrease in Northeast generation.

Our hedge positions in the Northeast also helped offset generation and pricing declines.

Northeast capacity revenues increased $28 million over the third quarter of last year as new capacity payment programs in [NEPO] and PJM went into effect this year.

Fuel mix led to a $12 million net decrease in the region's fuel costs.

A 31% increase in cash generation at our Arthur Kill plant led to higher natural gas expenses by $14 million, which was more than offset by the $26 million decline in oilfield expense as oil-fired generation declined 47%.

Our year-to-date earnings comparisons are illustrated on slide 20.

Our adjusted EBITDA, excluding mark-to-market activity, grew almost $600 million due to many of the same factors that influenced our three month comparison.

Again, these include the Texas revenues attributable to last November's hedge reset, the new Northeast capacity revenues, and the partial offset of increased development spending.

These and other key contributors to the year-over-year improvement include $123 million and $8 million of adjusted EBITDA respectively for the full year inclusion of Texas and West regional results; $425 million from the year-to-date impact of the hedge reset on Texas contract revenue; a $2.1 million megawatt hour decline in Texas gas generation largely offset by a successful hedging program; and $220 million of higher Northeast margins due to increased generation and realized pricing in the region, as well as increased capacity revenues.

These improvements were offset by development expenses that increased $93 million, mainly $75 million to support the STP COLA submission, and a $41 million decline in sales of emission allowances.

The cash flow for the first nine months of 2007 is shown on slide 21.

The $596 million improvement in adjusted EBITDA was offset by collateral postings, higher working capital and increased interest payments.

The majority of the free cash flow decrease is due to the $504 million year-over-year swing in collateral movements.

This year we paid out or returned $107 million in collateral to counterparties, while in the first nine months of 2006 we received a net of $397 million due to a decrease in gas prices and trade settlements during the first nine months of last year.

If collateral swings are excluded, adjusted cash from operations was $432 million higher than 2006, and free cash flow from recurring operations would have been $895 million, almost doubling the comparable 2006 nine month period.

Cash interest payments increased for 2007 versus 2006 due to a full nine months of interest related to debt incurred to finance the Texas Genco acquisition and additional debt associated with the hedge reset in November of 2006.

Cash flows to fund working capital increased by $97 million.

Accounts receivable balances increased by $186 million, mainly due to higher market and contract pricing.

Substantially all of the accounts receivable increase is current and has since been collected.

As shown on slide 22, with over $500 million of operating cash flow for the quarter -- for the third quarter of 2007, our liquidity has substantially strengthened since June 30 with a cash build of almost $400 million.

Liquidity at September 30, 2007 was approximately $2.3 billion, an increase of $444 million since the end of the second quarter.

Major cash uses during the quarter were $104 million for capital expenditures and $53 million for common share buybacks.

I'll provide more detail later on, on our liquidity today, giving effect for the changes in our hedging collateral structure has reached approximately $3 billion.

Moving to 2007 guidance, with their third quarter performance, we are increasing our 2007 full year outlook by $100 million to $2.3 billion in adjusted EBITDA as outlined on slide 23.

Operating cash flow guidance is being increased $80 million due to the increased EBIT expectation, partially offset by an increase in cash collateral postings.

Recurring free cash flow from our base business before repowering and environmental, capital expenditures is projected to be $1.2 billion for the full year; almost $100 million higher than our previous guidance.

This represents a recurring free cash flow yield of around 11%.

Total projected capital expenditures for maintenance, environmental and repowering is $569 million; a $61 million decline from the estimate we provided on the last earnings call, mainly due to a delay in timing in wind and environmental capital spending into 2008.

Our initial full year outlook for 2008 is $2.2 billion as provided on slide 24.

Next year is expected to be $100 million lower than this year, mainly due to a decline in the average prices of hedge generation.

Free cash flow from recurring operations, however, is expected to remain at the 2007 level of about $1.2 billion.

Also on slide 24, the primary differences between 2007 and 2008 have been listed.

Development spending is lower in 2008 versus 2007 as we expect to begin capitalizing STP costs in 2008.

The EBITDA benefit of FORNRG of approximately $30 million is expected to be offset by the inflationary impact on cost and wage and benefit increases.

Cash flow from operations for 2008 is expected to remain at the 2007 level of $1.5 billion.

The environmental and repowering CapEx numbers are before financing and are further discussed on slide 25.

Our environmental, repowering and maintenance forecasted capital expenditures for the balance of 2007 and for 2008 are shown by region on slide 25.

As mentioned earlier, the full year capital forecast, including repowering and environmental, is $569 million.

Capital expenditures for the nine months ending September 30, 2007 were $309 million, including $47 million for STP nuclear fuel and maintenance; $45 million in the Texas fossil plant's turbine and combustion systems; and $46 million for the Huntley & Dunkirk Baghouse emission project.

The principal investments to be made during the last three months of 2007 totaling $260 million include maintenance, with maintenance CapEx totaling $84 million for the fall outage season; environmental, the work continues on the flue gas desulfurization projects at Huntley & Dunkirk, and work will begin on the scrubber installation at Big Cajun II.

$40 million of environmental CapEx principally for back end controls in the Northeast region, originally scheduled for this year, will now begin after 2007.

On repowering, Cedar Bayou and three wind projects comprise the remaining 2007 expenditures.

Wind related capital amounting to $54 million projected for 2007 will now occur into 2008 for finance at the project level.

Our initial 2008 capital projection is $1.2 billion, which includes $251 million for major maintenance; $323 million for environmental remediation; and $626 million for repowering programs.

We estimate project level financing is available for at least $240 million for repowering energy and $60 million for environmental CapEx.

The financing alternatives associated with our capital spend include for the Huntley & Dunkirk environmental investments, we expect to pursue solid waste tax-exempt bonds during 2008, and for Padoma Wind, we're pursuing equipment and project level financing.

The financings are anticipated to occur throughout 2008 as we balance the economics of carrying costs versus delaying funding.

I will now shift the discussion to slide 26 to cover recent milestones and events affecting our liquidity and capital structure.

The first item is the third quarter completion of Phase II of our capital allocation plan.

This plan originally announced in August 2006, subsequently upsized the following November, consisted of two phases, each of which call for the purchase of $500 million of our common stock.

With the August 2007 purchase of 1.34 million shares for $53 million, the Company has completed in just one year the repurchase of $1 billion of common shares representing 36.6 million shares or approximately 15% of our outstanding shares, all at an average cost of $27.31 per share.

This outstanding accomplishment reflects exceptional execution and teamwork from our finance, accounting and legal departments in concert with our outside advisors.

The next significant accomplishment is the implementation of a first lien collateral structure which longer-term replaces our existing second lien structure.

During the refinancing of our senior secured credit facility last May, we obtained from our lenders the right to grant [to Perry Pursuit] first lien collateral position to NRG's hedging counterparties in support of our commercial operations and strategic hedging program.

The primary benefit of this is realized through the elimination of the posted LCs used to cover a portion of the existing second lien trading collateral requirement.

In a moment I'll cover this in more depth.

Today we are also announcing a next step in the implementation of our holding company structure or Holdco, which we originally launched in May of this year.

We have made considerable progress in obtaining the required regulatory approvals including the NRC.

Considering the recovery in the broader credit markets since our August 2nd earnings call, we are proceeding with the next step in the Holdco implementation plan, which I will describe in more detail momentarily.

The final capital allocation event I will cover today is our plan to prepay a portion of our term B loan to obtain a 25 basis point reduction in the interest rate spread for our term B loan at both the operating company level as well as the Holdco level in the synthetic LC facility.

This pre-payment, currently estimated at around $300 million, will result in the Company's achieving the corporate level debt to corporate level EBITDA ratio needed for a 25 basis point reduction beginning January 1, 2008.

Any pre-payment in the fourth quarter of 2007 will be credited against the mandatory offer and take we are required to make to our first lien lenders in the second quarter of 2008.

Now beginning on slide 27, I'll go over the second lien, the first lien change and the next step in the Holdco implementation.

Recently we reached agreement with several of our largest counterparties representing just under 60% of the notional hedges in the second lien structure to shift their collateral position to a first lien position.

As a result, the LC requirements are now eliminated and has resulted in the return of over $550 million in previously posted LCs, thereby significantly increasing the Company's liquidity.

Over the next several weeks, we will initiate discussions with the remaining second lien counterparties and attempt to convert their collateral programs to the first lien position in a similar fashion.

If successful, the remaining counterparties would return an additional $200 million plus of LCs currently held by them.

The migration of NRG's hedging counterparties to the first lien program has increased the Company's available liquidity to approximately $3 billion.

With this dramatic increase in liquidity, we are evaluating three alternatives, which include retaining the excess liquidity in its current form; downsizing the synthetic LC facility and eliminate the carrying cost; or converting up to $500 million of the synthetic facility to on balance sheet funded term B debt and use the proceeds as part of our Holdco strategy I'll discuss later.

The option selected will largely be dependent on the outcome of the Holdco conditional tender offer and alternative consent being launched today, which I'll now cover.

Slide 28 provides some background information on the Holdco transaction which we launched and described in detail on our May 2007 earnings call.

For today's discussion, the key elements of the Holdco structure to consider are as follows -- we have created, but not implemented, a holding company that holds a call right on $1 billion of term B financing that was obtained in our refinancing of the term B facility last May.

And the proceeds, if funded from the delayed draw term loan, will be contributed to NRG Energy or Opco as an equity contribution, and Opco will, in turn, use that capital to repay a portion of its existing term B loan.

This capital contribution from Holdco would result in the expansion of the restricted payments capacity under the bond indentures by nearly $1 billion.

The primary issues surrounding the Holdco structure is the changing control event that is triggered for the corporate bonds if implemented.

With the weakening credit markets during the third quarter and our bonds trading down below par, we expect that the Holdco implementation would have resulted in the vast majority of bonds being put to the Company at 101% of par, leaving us vulnerable to an unfavorable credit market.

With the credit markets improving since September and our bonds trading at or above par, the question now is how many bondholders would actually accept the 101% offer in the current environment, if made.

I'll cover how we will answer this question on slide 29.

Today's launch of the conditional tender offer and alternative consent to bondholders will provide the answer in 30 days.

Under the terms of our bond indentures, we have the right to make a change in control offer to our bondholders in advance of the actual change in control event.

With the obligation to accept any tender bonds condition on the consummation of that change in control.

In other words, the bondholders will have 30 days from today to notify the Company if they will accept the 101% offer if Holdco is implemented in December.

At that time, NRG will review the results of the process and decide whether or not to move forward with the Holdco formation.

Concurrent with the conditional tender offer, bondholders will receive an alternative consent solicitation to waive their right to the change in control offer in exchange for a nominal consent fee.

If the majority of bondholders within each class consent, NRG's obligation to repay the bonds tendered at 101% by holders in the class goes away.

Regardless of the outcome and whether or not Holdco is implemented, NRG retains the right to purchase any bonds tendered at 101%.

Along with the committed backstop facility of over $4 billion, NRG has the ability to convert excess synthetic LC capacity created by the second to first lien migration into a term B loan and use the proceeds to buy bonds tendered.

We're moving forward with the Holdco strategy with an approach that keeps us in complete control of our capital structure throughout the process.

If we're successful implementing Holdco, it will benefit our bondholders through a credit accretive event and it will benefit our shareholders by providing additional flexibility for returning capital to shareholders.

Later this morning, we will issue a more detailed press release that provides more specifics on the tender and consent process.

Slide 30 summarizes our 2007 financial objectives which we've shown throughout the year, which at this point in time, my confidence level is quite high on meeting or exceeding these goals.

As we began the last quarter of this year, our annual financial performance for earnings and cash flow will likely exceed our expectations set out at the beginning of 2007, aided by the four NRG achievements of our plant and corporate personnel, along with an outstanding performance from our commercial operations team.

We have demonstrated the value of past capital allocation programs, as discussed earlier, and while we remain confident and optimistic that the conditional tender offer and consent process launched today will accomplish this, we have identified additional ways to ensure we continue to fulfill our commitments in this area.

Finally, the successful movement to the first lien hedging program is a significant win for this Company and a materially positive liquidity event.

Ideas and efforts like this will continue to be reviewed and identified in order for us to continuously improve our capital structure.

I'll now turn it back to David for closing comments and questions.

Thanks, Bob.

We've taken a lot of time so, I mean, Jennifer, I'm going to turn it over to you to open the lines for some questions.

(OPERATOR INSTRUCTIONS).

John Kiani, Deutsche Bank.

Bob, you touched on this a little bit in your opening comments, but can you walk us through how the 50% CPS ownership in the STP development project, how that applies to cost-sharing of development costs?

And perhaps in conjunction with that, how much you're estimating for development costs in the '08 EBITDA guidance?

John, the way that will work is through October from inception to date, the CPS share of the development costs will be around $40 million to $45 million.

And that takes you through October.

And then in November and December, we estimate that their share, which they will be picking up, will be about another $6 million, say, for each month.

So, in round numbers that puts you to the $50 million/$55 million level.

So I think what you'll see is a lower development spend in November and December since we're only picking up, say, half of it.

And then we'll also have a credit coming in of about $40 million to $45 million for the inception to date costs that we've had.

For 2008, our intent at this point in time remains to start capitalizing.

So we don't have much of anything in the development expenses for 2008 for STP.

Included in our CapEx budget is about $75 million of CapEx related to STP in 2008.

Thanks, that's helpful.

And then one follow-up question on '08.

What contribution are you assuming from your gas and oil-fired assets in the '08 EBITDA guidance?

Generally, from a rule of thumb on how we view those assets, we look at the contributions from a margin standpoint to be roughly $100 million to $150 million kind of number.

And then there will be some variability around that depending on what's going on in the markets, fuel costs and the like.

So that's the order of magnitude.

Virtually all of our forecast is obviously heavily driven by base load.

So $100 million to $150 million for 6,000 or 7,000 megawatts of capacity?

Correct.

Dan Eggers, Credit Suisse.

David, you're talking about the carbon capture technology at the two facilities.

Can you talk to the Texas project?

Both by way of what kind of government support you are looking for to help develop that project?

How much capital NRG will be investing in this project?

And then what implication that could have as far as operating plant efficiency as far as energy losses, et cetera?

Well, let me -- in terms of the -- you're talking about the Powerspan project, is that right?

Yes.

On the Powerspan project, of the total spend about $150 million.

In terms of the type of support we're expecting for that project from federal or state sources and the form of that, there's always a wide range of different approaches to that.

But I mean, I think grants through the DOE program, there's money in the current energy bills that are before Congress.

Obviously, we'd like to get some money at the state level as well as the federal level.

But in terms of the type of a commitment that we would expect as a Company -- I mean, if it all proves out, you're talking about a total capital cost of about $150 million.

I would say that a rough number for where we would be investing would be in the $30 million to $40 million range.

That's sort of our operating assumption.

The technology that they have, it has current economic benefit now in that it -- to get to the point where you can capture the carbon, you actually have to take out even more SOX as well.

So to save SOX obviously has economic value in the market already, since there is a trade-in market for SOX, as you know.

The issue with anything that you're doing in terms of carbon capture, again, is that we're anticipating that the carbon will have a value.

And so how much we invest in it -- how it actually gets financed sort of depends on whether we continue to live in an environment where carbon emissions are going to be free and they're not going to have an economic value.

And then finally, the last thing we have to prove up is that the sequestration in the case of the Powerspan project we believe can be used for enhanced oil recovery in the area of the Parish plant.

And what value we can secure from that is also a question that we need to answer over the next several months.

Okay.

And then I guess one other question looking at the Repowering NRG program, particularly on the wind side for 2008 looks like about $390 million.

Can you just give a little color on size of projects, where you expect them to be, and when we should anticipate in-service date on (multiple speakers)?

Well, I think the lead projects will certainly be in West Texas.

They'll be in the 100 megawatts to 200 megawatts range and at least some of them are likely to be with significant partners.

We're also -- got some very active wind development in California but it takes longer in California.

So I think the first ones you'll hear from us about will be in Texas.

Elizabeth Parrella, Merrill Lynch.

Just following up on this $626 million gross CapEx this year.

You mentioned there's $75 million in there for STP.

And just looking at your slide 25, can we assume that the rest of the Texas spend, which would be about $100 million, is for Cedar Bayou?

Or is there --?

It's Cedar Bayou IV.

Cedar Bayou.

And then the $390 million is all wind?

Yes.

Now where is the -- this Powerspan project showing up?

Have you included that in the repowering or in the environmental bucket?

We don't have much -- we don't really have the Powerspan in there yet until we get more clarity around what the costs are going to be for '08.

Yes, I don't think that the -- Powerspan is going to be in the sort of design engineering stage in '08.

So that would be -- that would start to hit in '09 and beyond.

Okay.

And then a question in a different area.

What is your view on the outlook for New York City capacity prices near-term, medium-term, long-term?

Just in light of the [ISO'S] compliance filing and updated 3 year demand curve?

I think, Elizabeth, if we could broaden that question slightly to what's our point of view on capacity prices in the Northeast, I would say that we're bullish on capacity prices in Connecticut, rest-of-state and New York and PJM.

And we're bearish -- we think that the measures you're talking about will reduce capacity prices in New York City.

But the net effect in the capacity price area across those four areas we think are about neutral to us.

You're saying the reduction in New York City is offset by what you see as the uptick in those three other regions?

That's exactly what I am saying.

And of course you said it with much greater brevity and clarity than I did.

And over what time frame?

Is that just '08 or multi-year or --?

I would say that's from -- the time period we're looking at there is 2008 to 2011.

David Silverstein, Merrill Lynch.

Hey, just to clarify some of the comments you made about the backstop facility.

Can you give us some detail in terms of what the rate is?

It looked like your earnings release had alluded to some sort of a backstop facility being at a rate that was 1% above your existing non-callable bonds?

No, what the -- it's a $4.2 billion backstop.

And the pricing I believe is a LIBOR plus 250.

I believe we'll be filing the commitment letter?

No, we won't -- just we'll be filing an 8-K on the commitment letter.

So more details will be provided.

But it's a $4.2 billion facility.

The reason we sized it at that level, David, is with the liquidity we have on the synthetic LCs, we don't need a $4.7 billion backstop.

We've got the $500 million ready to go.

And so it's $4.2 billion backstop facility.

Okay.

So, just a backstop facility.

Not the 1% then that was alluded to in the press release?

No, I'm not sure what the 1% was.

I mean, obviously the call on the offer, on the bonds, is 101%.

There was something alluded to the fact that you had financing available that would cost only 1% above the bonds.

Just moving on then, in terms of the seniority of that facility, is that facility senior secured?

Yes, David, I mean on the press release, just to come back to that, all we were saying there is that we'd have the right to buy the bonds at 101% and we're saying it's 1% above par for the bonds.

And that's saying that we would use the liquidity facility.

So basically it's just exchanging the term B for the bonds.

And that the 1% represents the call price.

That's all we were trying to say in the press release.

Right.

Okay.

Thank you very much.

Gregg Orrill, Lehman Brothers.

Two quick questions.

The first on the various carbon control initiatives that you talked about.

David, do you have an ultimate goal that you can quantify in terms of tons reduced or offsets created for the Company?

Could it actually turn into a new business line for NRG?

Also on the offer to the bondholders to waive the change in control at 12.5 basis points, looks like a reasonable offer, maybe not full.

Maybe you could comment on your commitment level to the new Holdco structure.

Thank you.

Gregg, obviously I'll answer the first question and Bob will handle the second.

On the carbon control -- we haven't set a formal target, but if we did set a target, we're very aware of our carbon intensity as a company.

And it's pretty high.

We produce almost a ton of carbon.

I think we're 0.9 tons of carbon per megawatt hour of NRG output across the fleet.

Obviously we'd like that number as low as possible.

We could see the current repowering program taking us down towards the 0.6, 0.7.

Now obviously I'd like to be 0.3.

But we haven't set a target.

But that's the way we would look at it because obviously we're a growing company.

We'd be somewhat reluctant, at least at the company-wide level, to set a fixed, absolute level of carbon.

In terms of new business areas, Gregg, absolutely.

The one true growth area in this mature industry of ours is in the environmental area.

Carbon may be the biggest growth area, sort of superseding or supplementing renewables, but in both areas I think this is something that you should expect to hear more from our Company.

And particularly in those areas within renewables and in terms of environmental control, carbon controls that are very closely tied to what we're doing today.

Where we feel that we have a competitive advantage, we want to move very aggressively in this area.

We're very pleased with what Padoma is doing for us in the wind area but there's no question that if we -- you know, we don't want to be last mover in these other areas the way we were sort of at the tail end of the wind movement.

So, yes, you should expect to hear more from us in this area in the future.

Gregg, on the consent fee being an offer of the [ace].

And the way that it works for each class of bonds, there is an incentive fee on the pool of bonds.

So it would be one-eighth times the full amount of the pool.

And then for those that vote yes, they share in that entire pool.

So what we expect, say, just for the math purposes, if half of the bondholders accepted and half didn't, the incentive fee would go from one-eighth to one-quarter.

So there is an incentive there.

And we view that where the bonds are trading today at or slightly above par, the various credit accretive events that we've been doing as well as the strengthening that we expect the bonds to get with the Holdco, we're moving $1 billion behind them, it offers the appropriate incentive for us to get this thing across the line.

On the other hand, we will not be coming back and raising fees or anything of the like.

We have very solid alternatives to this if for some reason that this doesn't move forward.

So we think we've got the right balance out there on economics to make this attractive for the bondholders and good for shareholders.

So we are optimistic that this will get us there.

Jennifer, I think a lot of our listeners have another call to attend.

So we'll take one more question so that people can get off the phone.

Michael Lapides, Goldman Sachs.

Congratulations on a great quarter.

David, on the repairing initiatives, two questions.

One, can you give us just the latest status update on Carlsbad?

And then second, on Big Cajun in terms of the partnership in the offtake agreements?

Mike, I'm a little -- Kevin is sitting here a little disappointed that you didn't ask a question to him about our trading position.

But --

I learned my lesson -- eventually.

But let me on -- in terms of Carlsbad, you're talking about the current -- you're not talking about the existing plant; you're talking about our efforts to repower that and get a contract for that?

Yes.

I think we're in good shape and you should stay tuned in that regard.

I mean I don't know if there's going to be a -- I mean, we would certainly expect to be able to give you some news on that before the end of -- before the next quarterly call.

I'm just reluctant to say anything about that because the confidentiality arrangements around the bidding processes in California are very extreme.

But I certainly expect something before the next quarterly call.

And even if there is a little bit of a delay because of the distraction in terms of the companies -- all of the companies down there struggling with the wildfires situation.

But stay tuned.

As to Big Cajun I, we're actually in a very good position I think both with respect to partnership and offtake on that project.

What we're waiting for is for the air permit to clear the EPA.

And as soon as that happens you should be hearing from us something about that project as well.

And again, that's sort of in the same eminent basket as Carlsbad.

I may have missed this or it may not have been disclosed yet.

Have you all disclosed information that all about who the partners are?

Who the offtake agreements are with?

In --?

On Big Cajun I.

Have we?

No.

I don't think we have.

No.

No, we haven't.

Okay, great.

Thanks, guys.

Congrats on a good quarter.

Well, thank you, Jennifer, and thank all of you who listened.

We appreciate you joining us for this call and of course your continued support and interest in NRG.

Thank you.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for your participation and have a nice day.