NRG Energy Inc (NRG) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen, Welcome to the NRG Energy third quarter earnings call.

I would now like to turn the meeting over to Ms.

Nahla Azmy.

Please proceed now.

Thank you.

Good morning and welcome to our third quarter 2008 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 podcast of the call will be posted on our website.

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

And now to 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 you our press release and other filings with the SEC that could cause actual results to differ materially from those in forward-looking statements in this press release and the conference call.

In addition, please note that the date of this conference call is October 30, 2008.

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 the mornings call, we'll refer to both GAAP and non-GAAP financial results of the Company's operating and financial results.

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

Finally, before we get started as you probably know, on October 19, we received an unsolicited proposal from Exelon Corporation to acquire NRG.

We issued a press release the following day confirming receipt of the proposal.

Stating that our Board of Directors will review it and determine the appropriate response in due course and advising our stockholders not to take any action pending that review.

Our Board is continuing to review the proposal.

With that said, please keep in mind the purpose of today's call is to discuss our third quarter performance and thus he will will not be making any formal remarks nor commenting on any aspects of Exelon's proposal until an official Board response has been issued.

We ask that questions be focused on third quarter performance.

With that, I would like to turn the call over to David Crane, NRGs President and Chief Executive Officer.

Today, I'm joined here by Bob Flexon, our Chief Operating Officer; and Clint Freeland, our Chief Financial Officer.

They'll both be giving part of today's presentation.

They'll be giving the lion's share of today's presentation.

Also, with me and available to answer questions or in the case of Mauricio Gutierrez, our Head of Commercial Operations, potentially not answer questions is Mauricio plus Drew Murphy, our General Counsel.

So, why don't we get started.

Ladies and gentlemen, in this world and a marketplace searching for good news, we're here today to bring you some.

Today, we're announcing record safety performance, record operating performance, record achievement by FORNRG which is our internal improvement program and what it all adds up to is record financial performance as manifested in a $100 million increase in full year 2008 EBITDA guidance.

And that also translates into record liquidity topping out at over $3 billion.

And again, Bob is going to talk about how we achieved all of this and I really have only one comment that I want to make before I hand it over to Bob.

And that's this.

This is the 20th quarterly earnings call in the history of the new NRG.

Many of you on the phone have been with us through the whole time.

However, as the result of the recent Exelon initiative, some of you may be getting acquainted with the Company.

What you need to know is that this company was born of the last downturn in the electric industry back in 2002, 2003.

That experience informs the type of Company that we set out to be.

We sought to build a Company that would be both nimble enough to capitalize on the extraordinarily attractive value-enhancing opportunities that periodically arise in our industry but also solid enough to withstand the downcycles that can do such damage in an industry which is both capital intensive and multicommodity price driven.

To a Company that gets it wrong.

By getting it wrong, I mean either getting your capital structure wrong or your commodity strategy wrong or worst of all, both.

As a result of who we are and where we came from, over the past five years, we have resisted the temptation to overlever our balance sheet as some called upon us to do particularly in the wake of the TXU going private transaction.

We've refused many times, in fact, to chase acquisitions at excessive price levels and we have rejected complaints by various observers during the last commodity price up cycle that we should reduce our base load hedging activity and stay open to the market.

An argument that was made to us on the basis that we would not realize the full benefit of the commodity price upswing.

Now, after a couple of years of relative plenty and by that, I mean rising gas prices, rising heat rates and cheap capital, we find ourselves in a challenging environment.

An environment which is fair to say is considerably more challenging than anything we or anyone else seems to have ever contemplated.

We obviously find the current market less attractive than 12 to 18 months ago for instance but it has provided a real life test of the robustness of our business model.

It is hard to recall now but fittingly, natural gas prices peaked on the last day of the second quarter this year.

So, the third quarter has been the first full quarterly test of our robustness.

As such, 'm extremely gratified by our quarterly results and the position we find ourselves in going to the balance of the year from the point of year of full year financial performance, liquidity and operating and commercial performance.

This exceptional Company performance is the direct result of and a tribute to the exceptional professionalism of all NRG operational and professional personnel in all functions and in all regions.

Now, as we all know, one successful quarter in a down market does not guarantee future success but I believe that vivid real life demonstration of the type of above expectation performance that we have delivered to our shareholders over the past 20 quarters and the type of performance we will continue to deliver in the future.

In my opinion, this is what makes NRG a breed apart.

Bob?

Thank you, David.

Beginning on slide seven, I've provided a summary of the primary highlights for both the quarter and year-to-date.

Following up on David's opening comments, and consistent with the Company's overall performance, results this quarter and year from our operations group and our commercial team is also their best ever all-around performance since our beginning in December of '03.

Our 2008 safety performance improved dramatically from 2007 which had already achieved a performance level significantly better than industry average.

Equivalence availability factors or EAF for the coal base load generation portfolio reached an all-time quarterly high at 95.4% bringing the year-to-date EAF up to 91.1%.

I also want to take this moment to recognize our world-class nuclear operating team at STP.

The STP facility which has earned more honors than any nuclear power plant has for the third time received the industry's top honor.

On May 7, 2008, STP received the industry's top honor to be the best of the best award.

STP is the only repeat winner of this award.

In addition during the past four years, STP's track record of avoiding unplanned shutdowns to its two units has allowed it to produce more power than any of the other 32 two reactor plants in the nation.

The other highlight I'll point out is the continued progress made in achieving our FORNRG $250 million pretax income improvement goal.

As of September 30, 2008, improvements realized to date combined with our completed initiative that will benefit the fourth quarter performance, will lead to our exceeding the $250 million goal by year end.

In a moment, I'll provide information and targets for FORNRG 2.0 which is scheduled to kick off on January 1, 2009.

Slide eight provides a further look at our year-to-date safety performance to coal inventory position at September 30, and the quarterly and year-to-date generation.

In addition to my opening comments on safety, our year-to-date performance as benchmarked to fossil fuel generators is just below our performance goal of top (inaudible).

Reportable incidents through September 30, were 22 versus 40 during the same period last year.

A 45% improvement.

While this clearly is exceptional performance, we're not stopping here and we'll continue to pursue an accident-free environment.

Coal inventories decline during the quarter to an average of 37 days on hand as of September 30.

Decline primarily relates back to the second quarter when lower inventory levels at Big Cajun two and WA Parish facility resulted from rail and barge disruptions during the quarter in connection with the Midwest floods and higher levels on the Mississippi and also supply interruptions in September caused by hurricane Gustav.

All shipping routes have returned to normal operation and inventory levels are building.

The generation decline in Texas and South Central regions was largely attributable to the impact of hurricanes Ike in Texas and Gustav in Louisiana during September.

Generation from the Texas gas plants was impacted by low demand resulting from widespread transmission outages.

The base load generation in South Central was lower in September was transmission out of the plant was restricted due to a line outage.

The financial impact to the Company of both storms resulted in lost revenues and opportunity costs as well as higher maintenance expenses in the 15 million to $20 million range.

Lower generations for the quarter in the northeast was a result of declining natural gas prices coupled with higher coal costs that led to reduced run times at our Indian River and Somerset plants.

Slide nine updates our commodity hedging position with high levels of commodity vice volatility during 2008, there have been opportunities throughout the year to have a significant amount of power and power equivalent hedges dating out through 2013.

During the third quarter, 18.3 tw hours of power hedges were added bringing the total for the year to 53.4 tw hours.

The addition of these hedges is in line with our hedge fuel position, appropriately locking in gross margin.

Additionally coal hedges have also been added during the course of 2008 for the forward five-year period.

The right-hand side of the slide provides the gross margin sensitivity, the portfolio will have changes in natural gas prices.

And heat rates on an equal probability basis through 2013 considering 2009 hedge levels, the variability of our base load fleet gross margin through 2009 is expected to be limited.

In executing our hedging strategy, our lean program remains the centerpiece that allows us to officially hedge longer term power and power equivalent positions without the liquidity risk traditional cash intensive hedging requires.

Slide ten illustrates the hedging capacity under the lean structure which is a function of available capacity rather than a dollar driven limitation.

The lean position against the assets for out of the money hedges at September 30, 2008, and October 23, 2008, was approximately 421 million and $187 million respectively.

On the right-hand side of the slide is our counterparty risk, grouped by ratings and type of counterparty.

We manage our credit risk by utilizing a number of different risk mitigation methods such as credit limits, netting agreements, collateral threshold, volumetric limits and counterparty diversification.

Counterparty interest in participating in our lean structure remains strong and we recently converted a second lean participant to first lean status that resulted in a $75 million letter of credit posting being returned to the Company.

Slide 11 provides a high level look at the market factors influencing natural gas, heat rates and coal.

While near term energy and natural gas prices have been under pressure of late, we remain bullish in our longer term outlook for natural gas prices.

Factors supporting our view include LNG imports to the US have declined significantly in 2008 compared to 2007 and 2006.

With global NRG prices significantly above U.S.

prices, we don't expect a shift in this trend in the year term.

Environmental and permitting trends are driving higher demand for natural gas as an energy source over coal and oil and the supply side is faced with rising exploration, production and financing costs.

Published reports put the marginal cost including capital returns for unconventional gas sources in excess of $8 per million BTU.

In addition, declining natural gas prices coupled with the ongoing seizure of credit markets has resulted in announcements from producers scaling back capital budgets for 2009 in excess of $6 billion.

Many of the unconventional producers are sub investment grade and rely heavily on capital markets to fund projects.

Heat rates and (inaudible) have been under pressure of late due to the combination of new generation and reduced liquidity in the marketplace.

This combined with the current state of the financial market is resulting in the delay or cancellation of new build projects including transmission that otherwise would increase supply.

Longer term and post-recession reserve margin should tighten quickly in a recovering market with a corresponding strengthening of heat rates.

PRB as our primary solid fuel source, continues to be a significant cost advantage for NRG as compared to the cost of other domestic coals.

Performance by our PRB coal and rail transportation providers has been excellent during 2008, reflecting the benefits from infrastructure investment made by all parties.

Our latest milestone as shown on slide 12 is the achievement of our performance improvement goal originally targeted for December 2009 subsequently accelerated to December 2008 and now virtually locked in at September 30.

FORNRG has improvements in place that brings our total contributions by December 2008 in excess of our $250 million goal.

The history of our progress is on the top left side of the slide.

While this has been a Companywide effort with contributions from our operations group, corporate and regional offices and procurement, I've highlighted a few of the operational improvements as examples of the accomplishments achieved under the banner of FORNRG 1.0.

Our drive and determination to improve how we operate has yielded valuable learning that will benefit our teams for years to come while contributing to the record setting year.

What's next with FORNRG is covered on slide 13.

We're preparing for the January 1, 2009, launch of FORNRG 2.0.

The goal of 2.0 is an increase to our return on invested capital by an incremental 100 basis points over the next four years.

This equates to approximately $150 million in higher free cash flows upon goal achievement.

In pursuing this goal, we'll use what we learn from our FORNRG 1.0 experience and capitalize on additional opportunities that remain.

Our scope will broaden to comprehensively address the primary growth drivers.

Revenues, expenses and invested capital.

Highlighted on the slide are the areas where our initial efforts will be directed.

Moving all of our base load plant performance levels to top decile and top quartile which FORNRG 1.0 accomplished will provide roughly one-third of the FORNRG 2.0 goal.

Finally, slide 14 details our operating mission in which we state our goal of being the premier merchant portfolio operator.

Our definition of premier is top decile safety and operating performance.

Add to that, our leading capabilities in commercial operations and risk management and the picture comes into focus of why we're able to deliver exceptional performance and record results during such a difficult economic climate.

At this time, I'll turn it to Clint for the third quarter financial review.

Thank you, Bob.

At no time during the almost five year history of the new NRG have we seen or experienced a more challenging, operating and financial environment than during the four-month period since the end of the second quarter.

Despite financial market dislocations, general economic slowing and major hurricanes hitting two of our core business regions, NRG's steadfast commitment to prudent balance sheet management, robust liquidity, risk management and operational excellence enabled the Company to deliver record quarterly adjusted EBITDA, record year-to-date adjusted EBITDA, record earnings, and a record level of total liquidity as outlined on slide 16.

NRG's previous record quarterly adjusted EBITDA was achieved during the third quarter of last year but results for this quarter exceeded it by 7% which, in turn, led to record year-to-date results as well.

At the same time, the Company's total liquidity rose by $432 million since June 2008 or over 17%.

As cash from operations and net counterparty collateral movement boosted total liquidity to over $3 billion.

Equivalent to almost 50% of NRG's current market capitalization on a fully diluted basis.

The exceptional financial performance during the first three quarters has put NRG on track to exceed previously-announced adjusted EBITDA guidance of $2.3 billion for the year.

Given the significant hedge position, and related earnings visibility for the fourth quarter, NRG is raising its full year adjusted EBITDA guidance by $100 million to $2.4 billion.

As has been customary for NRG on its third quarter earnings calls, we're also initiating adjusted EBITDA guidance for 2009 today at $2.2 billion.

While this is lower than what we ultimately anticipate for 2008, it is flat to our initial guidance provided to investors this time last year for full year 2008.

Additionally, today, we're providing an outline of NRG's 2009 capital allocation plan which is highlighted by further debt reduction, lower repair reinvestments than 2008 and continued return of capital to shareholders which, at this time, is targeted at $300 million.

So, the story for this quarter is simple.

NRG's unwavering commitment to prudent capital management, proactive hedging and safe and reliable plant performance demonstrated its value this quarter, enabling NRG to deliver record performance, even in the midst of dramatic financial market disruptions and economic deterioration.

Moving to slide 17, adjusted EBITDA for the third quarter totaled $758 million, a 7% increase over 2007's record quarter, primarily due to improved results in the Company's Texas region.

Despite flat base load and lower gas plant generation, energy margins in Texas actually rose by $62 million as the Company's hedged base load power prices in 2008 were higher than prices realized the previous year which included lower priced legacy power contracts inherited in the Texas Genco transaction that were not reset in 2006.

Capitalizing STP three and four costs in 2008 versus expensing them in 2007 resulted in a $35 million reduction in regional development expense during the quarter and this offset somewhat by higher O&M expenses accounted for the balance of the quarter over quarter improvement.

Despite being hit by hurricane Gustav in September, and seeing meaningful transmission disruptions as a result, NRGs South Central region recorded a $4 million increase in adjusted EBITDA from $42 million in 2007 to $46 million in 2008.

An increase in the value of power contracts in the region more than offset lower Big Cajun two generation resulting from transmission constraints after the hurricane.

Which limited the amount of power the facility could deliver to the grid.

Adjusted EBITDA for NRGs Northeast region decreased $11 million quarter over quarter from $204 million in 2007 to $193 million in 2008.

Lower base load generation at Indian River and Somerset, reduced gas plant generation across the fleet, lower contract margins and weaker capacity revenues during the period more than offset the benefit of higher emissions sales and operating cost reductions.

The $25 million unfavorable variance illustrated in the corporate column of the slide is mainly comprised of a $19 million write-down of two previously disclosed commercial paper investments which became distressed last year, one of which was restructured during the most recent quarter.

Before turning to the year-to-date results, you may recall that the Company reported a $713 million mark to market loss during the first half of the year as the sharp run up in natural gas prices adversely impacted the value of certain positions in our hedging program.

As shown on this slide, that mark to market loss more than reversed in the third quarter as natural gas prices retreated.

Leading to an $826 million mark to market gain.

For further detail on the various components of this gain, we have included a slide in the appendix of this presentation for your reference.

Slide 18 reflects NRG's year-to-date performance.

In reach of the first three quarters of the year, NRG reported year-over-year increases in adjusted EBITDA, resulting in a record year-to-date total of $1.966 billion, up 13% over 2007.

While each of the Company's regions stepped up and made a disproportionate contribution at different times throughout the year, the primary driver of this improvement is NRGs Texas region where adjusted EBITDA increased $261 million over the previous year.

While flat during the first quarter, the Texas region outperformed 2007 during the second and third quarters as exceptional base load plant performance, higher realized merchant energy prices and advantageous hedge positions came together to drive the region's results for the year.

The region also benefited from $22 million in emission sales in 2008 while development expenses decreased by $81 million as STP three and four costs were capitalized during 2008 instead of being expensed in 2007.

Slide 19 shows NRG's cash flow generation during the first nine months of 2008.

Cash flow from operations increased $65 million from $976 million in the first nine months of 2007 to $1.041 billion for the first nine months of 2008.

But if we net out the impact of cash collateral movements to see the true cash generation of the business, cash from operations rose 26% from $1.083 billion to $1.361 billion.

Virtually all of this year over year increase in cash from operations excluding collateral can be attributable to strong adjusted EBITDA results and improved working capital levels.

NRG's free cash flow for the nine months ended September 30, 2008, was $384 million, compared to $626 million in 2007.

As both environmental and repowering investments accelerated.

The year-over-year increase in environmental CapEx is related to the back end control projects at our Huntley and Dunkirk locations while the repowering investments were primarily focused on wind developments including the Sherbino one and Elbow Creek wind farms in Texas, Cedar Bayou four combined cycled gas plant outside of Houston and a Cos Cob peaking facility in Connecticut.

Repowering investments also include continued investment in the STP three and four initiative which is recorded net of the $50 million contribution received from our partner Toshiba.

Moving to slide 20, NRG's robust and diverse liquidity program remains a differentiating factor for the Company.

NRG is in the enviable position of having the liquidity and cash generation profile to be self-funding and therefore, self-sufficient, enabling the Company to continue executing its strategic plan during this period of financial market disruption.

As outlined here, total liquidity at the end of the third quarter stood at right over $3 billion, up $432 million since June 30.

This increase was attributable to a $222 million increase in cash balances, resulting from strong cash flow from operations and a $207 million increase in letter of credit capacity resulting from the return of LC's previously-posted in support of commercial operations activity.

As I mentioned earlier, NRG continued to perform exceptionally well through the third quarter and this, together with the earnings visibility associated with our hedge position for the rest of the year, enables us to increase our 2008 guidance by $100 million to $2.4 billion as outlined on slide 21.

Despite this improvement in adjusted EBITDA, cash flow from operations is expected to remain virtually flat as higher cash collateral requirements for the year offset the benefit of higher earnings.

I would note, however, that as commodity prices continue to weaken, this net collateral outflow may diminish which would, in turn, benefit cash flow.

Projected cash flow from operations, exclusive of collateral movement, increased by $114 million from our previous guidance.

We expect higher interest expense for 2008 as a result of the $45 million CSF one call option settlement during the quarter.

And anticipate higher cash taxes resulting from increased earnings.

The impact of these items to cash flow from operations should be minimal though due to offsetting improvements in working capital.

While projected cash flow from recurring operations remains virtually unchanged, we expect our free cash flow to increase approximately $82 million due to reductions in our repowering investments primarily related to delays in our El Segundo project.

So, as we look out to the rest of the year, we expect to see continued strong free cash flow from occurring operations before environmental and repowering CapEx.

And at yesterday's closing share price, a recurring free cash flow yield of approximately 24%.

As we move toward 2009, we have updated our forecasts and the results are outlined on slide 22.

Our initial adjusted EBITDA guidance for next year is $2.2 billion which is lower than expectations for full year 2008 primarily due to four factors.

Our expectation of less volatile natural gas and power prices, incremental costs related to RGGI compliance in the northeast, lower emission credit sales and weaker New York capacity prices.

As we have previously disclosed, NRG's cash tax rate is anticipated to rise to approximately 30% of forecasted pretax income.

Net of available tax loss carry-forwards which accounts for the meaningful increase in expected cash taxes for the year.

These factors, combined with slightly higher cash interest expense associated with the repayment of the CSF2 financing result in cash flow from operations guidance of $1.3 billion.

Given the volatility that we have seen this year in cash collateral postings, we have decided to remove collateral movements from our cash flow guidance and instead, focus on the underlying cash flow generation of the business absent the cash flow timing impacts of margin fluctuations.

Free cash flow from recurring operations after $255 million in maintenance CapEx and $33 million in preferred dividends remains strong at $1.012 billion and will provide the Company with the capital to internally fund $256 million in environmental CapEx primarily the completion of back end control projects at Huntley and Dunkirk and increased back end spending at Indian River.

Environmental capital projections may vary in response to changes in care litigation or other legislative actions.

The free cash flow from recurring operations will also fund NRG's $118 million in repowering investments, net of partner contributions, anticipated construction financing and equity selldowns.

Repowering investments include completion of Cedar Bayou four, initiation of the Connecticut peaker projects with our partner United Illuminating and final payments on one set of G.E.

wind turbines.

Our forecast assumes that continued investment in the STP three and four nuclear project will be managed on a cash neutral basis to NRG.

This repowering investment forecast includes only those projects that the Company is currently committed to.

Any other investments are considered discretionary at this point given the current state of the capital markets and will be carefully considered before adding them to the capital budget.

As slide 23 outlines, the robust cash flow generation of the Company coupled with the proceeds from the sale of our ITISA asset earlier this year, has enabled NRG to achieve record levels of liquidity while remaining on track with its capital application program.

In addition to the CapEx investments I spoke of a moment ago, NRG remained balance in its approach of returning capital to investors.

Returning $202 million to debt holders in 2008 and $270 million to shareholders as part of its $300 million repurchase commitment.

Additionally, NRG settled the call options related to the CSF one financing during the third quarter for a total of $45 million.

As we look forward to the rest of 2008, we intend to complete our capital allocation plan for the year with an additional $30 million in share repurchases, assuming we have an open window before year end.

As we look forward to 2009, we intend to pursue the investments in our existing fleet and repowering initiatives that I outlined a moment ago.

We also anticipate further delevering of the balance sheet in the first quarter of 2009 as we offer our first lean lenders as required under our existing credit agreement 50% of the excess cash flow generated by the Company in 2008.

Given the current trading level of that debt, we expect lenders to accept the entire amount which will be determined when we close the books for 2008.

Historically, when sizing our annual share repurchase programs, we have targeted 3% of the market capitalization of the Company which equated to approximately $250 to $300 million.

Given the significant decline in the Company's share price recently, however, the 3% target would be closer to $150 million.

Considering our current level of liquidity, projected cash flow in 2009 and compelling share price though, we intend to, again, target at least a $300 million buyback or 6% of current market cap in 2009.

We do, however, want to remind everyone that the commitment we have made is 3% and as such, reserve the right to return to the 3% target for periods beyond next year.

So, as we look forward to the remaining months of 2008, and full year 2009, the prospects for NRG remain solid.

While we expect financial market and general economic conditions to remain challenging for the foreseeable future, the Company's relentless focus on prudent balance sheet management, robust liquidity, strategic hedging and operational excellence has positioned the Company to deliver outstanding 2008 results in a solid 2009.

With that, I'll turn it back to you, David.

Thank you, Clint.

Just to finish with the final pages of the slide deck, in particular, slide 25 that goes back to the theme which I started which is the theme of differentiation.

I think this slide provides a fairly detailed review of what we believe differentiates us from other companies.

And I think this -- together with our track record as demonstrated by this exceptional third quarter and year-to-date performance.

When you put those two together, what it all adds up to, quite simply and to coin a phrase is that NRG is the best investment available in the power industry.

With that, before we open it for questions, I think Nahla has one more thing to say.

Then we'll answer your questions.

Once again, thank you for joining us on our call.

I would like to remind you the purpose of today's call is to talk about our financial results.

For the third quarter of 2008.

And to provide you with an update on our business and we ask that you keep your questions focused on these results.

We will not be taking questions on the Exelon proposal.

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

With that, we're ready to open up the line for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Nitin Dahiya from Barclays.

Good morning.

Good morning.

Clint, from a GAAP structure point of view, obviously you have pretty moderate leverage and solid liquidity which is great in this environment.

But as you mentioned, the market is pretty tough.

Could you share your updated thoughts on what your ideal cap structure looks like in terms of leverage and minimum desired liquidity and how that relates to any distressed opportunities that might come your way in terms of acquisitions?

Sure.

I think at this point, I don't know that we really view our optimal capital structure any differently than how we've expressed it in the past.

We've maintained target net debt to cap ranges of say 45% to 60%.

Obviously we're, around the 50% level now.

So, we're very happy with that.

On a debt to EBITDA basis, we look to target around 3.5 times, maybe a little bit lower.

That gives us optical pricing on our first win structure.

So, at this point, I think we're happy with our capital structure targets.

On the liquidity front, I think one of the things we've always said is that we believe for this business, given the capital intensity and given the collateral requirements and what have you, that our optimal liquidity and we tend to focus on cash balances, is somewhere between $500 million and $1 billion of cash on hand.

I would say that in the current environment though, I would say that I would tend to prefer to be on the upper end of that.

Which obviously we're very comfortably within this point and frankly a little bit over.

And at this time, in terms of any acquisition opportunities?

Well, let me -- acquisition, the present market environment in terms of the cost of debt is obviously one that's a factor in any acquisition opportunity.

I think presuming that you're talking about acquisition opportunities in the independent power space, I believe that every Company but one has changed its control clauses that would require their debt to be refinanced.

That's an expensive proposition you have to take into account.

In M&A activity.

Okay.

Thanks.

Our next question comes from Mr.

John Kiani of Deutsche Bank.

Please proceed with your question.

Good morning.

Good morning, John.

Wanted to ask a question on the 2009 guidance you provided of $2.2 billion.

Can you give some additional color on the level of conservatism you used in deriving that number?

Is that number a worst-case scenario?

Is it more of a base case?

How should we think about what you used in deriving that number?

Sure, John.

I guess I would note a couple of things.

First of all, as I mentioned a moment ago, the 2.2 is consistent with what we guided to for 2008.

We're having a terrific 2008 so I wouldn't view it as say a capper or what have you.

The way that I think about the assumptions that are going into our guidance are really in two buckets.

One is when we look out to 2009, relative to 2008, we're going to have additional RGGI compliance costs in the northeast.

We're also seeing weaker emissions prices so our expectations for lower emission sales in 2009.

We also see weakening New York capacity prices.

That also put some additional pressure versus 2008.

And then we do have some incremental planned outages next year.

That's not a big number year to year but it is a big number.

When you start to add up those items, they begin to add up.

But I would also say another thing we have to take into consideration is that we've got 10,000 megawatts of gas plants.

Mostly peakers.

And those facilities tend to do very well in times of high volatility, gas and power prices which frankly we saw in 2008.

So, as we look toward 2009 and guidance for 2009, I think there is a level of conservatism in the amount of volatility that we'll see in gas and power prices going forward.

And generally speaking, how much have the gas assets contributed?

What do they contribute in '08.

I know that second quarter was exceptionally strong because of the heat rate position of the Company and the gas assets but in general, what do they contribute in '07 and perhaps '08 as well.

Can you give us some color on that?

I don't know that we've actually been specific on the individual pieces of our fleet.

So, I'm not really sure that I can give you a specific number range.

Okay.

Then just a follow-up question on development costs.

Can you talk a little bit about how much development expense we see in either G&A or O&M on at least a near term basis and then how much development expense is capitalized as well?

Yes, I think, John, when we look to 2008 and 2009, our development expenses are pretty flat.

Call it around $50 million.

And really, half of that or about half is, actually very similar to G&A.

We have certain teams like our EPC team, our win team, we have some teams in our regions.

Those expenses are included in development.

So, I think just as a proxy for 2008 and 2009, call it somewhere in the neighborhood of $50 million, about half of that is related to labor.

That's in EBITDA?

Yes.

What about from capital perspective?

What's capitalized?

Well, the only portion that we're capitalizing on -- I guess what you would think of as development expenses are costs related or some of the G&A related to Nina or STP three and four development.

The rest of it, I guess would be related to project cost on projects that are already in process.

Okay.

And did you have a ballpark dollar amount for that?

I don't at this time, John.

I need to get back to you on that.

Okay, thanks, Clint.

Thank you.

Our next question comes from the office of [Anthony Cotto] of Jefferies.

Please proceed with your question.

Good morning.

Just two questions.

I think previously, you guys had given an open EBITDA slide base on the forward commodity curve.

I didn't see in the presentation, I didn't know if you had it.

Second, in all of the quarters, you've given a Houston zone to Henry Hub clearing rate and you have a graph of where they are.

Do you have the numbers of where the current heat rates are in the Houston zone?

Yes, Anthony.

Do you want a specific number for 2009 and 2010 or actual clearing heat rates?

Actual clearing heat rates would be great.

Okay.

For 2008 and this is normalized to Henry Hub, I'll give you around the clock heat rates.

Great.

So, for July, we saw an 807 heat rate.

August, 964 and September, 571.

Keep in mind that September has been affected by Ike and the lack of loads so you're going to have to normalize that number for normal weather conditions.

Again, this is Houston zone to Henry Hub around the clock.

And Clint is going to answer your question about the market EBITDA slide.

Anthony, we provided the open EBITDA analysis in the first part of the year, particularly at midyear because gas prices and commodity prices were so out of whack or so high relatively to where our hedges were that it actually became a meaningful analysis.

Now that commodity prices have come back.

You can see that in the kind of net derivative positions that we have on the balance sheet.

You can see that our mark to market has completely reversed since the second quarter.

I think a lot of our positions are now more in line with the market.

We haven't included an analysis of open EBITDA because we really didn't think that it was meaningfully different than what results and forecasts would show.

All right, thank you.

Thank you.

Our next question comes from the office of Elizabeth Parrella of Merrill Lynch.

Please proceed with your question.

Thank you, yes.

Clint, you mentioned several factors that are weighing on the 2009 outlook and then there's also the positives on the new projects coming on.

Can you give us some ballpark sense of how much each of those is worth in terms of the impact, negative positives on the '09 EBITDA?

I think, Elizabeth, when I think about the RGGI compliance, emissions sales, Northeast capacity prices and planned outage schedules, you might think on the order of I don't know, maybe 75 million to $100 million all totaled.

There are certain assumptions around all of those.

I think that's kind of ballpark.

I think historically, the estimate that's been out there for NRG's gas plant EBITDA has been somewhere on the order of 150.

I think that's the number that's been used out there before.

So, I think, kind of taking those two together would probably get you in the ballpark of what we're talking about.

Then you have, like you said, some uplift from say Cedar Bayou four coming online and Elbow Creek coming online.

So, that, I think would get you in the ballpark of kind of where we are.

It sounds like you're assuming a much lower EBITDA at the gas plants in '09 than what you've experienced in '08?

I think we're being very conservative.

Given the level of volatility we've seen in 2008, I certainly wouldn't want to guide to that similar level of volatility in 2009.

Fair enough.

On the repowering CapEx for '09, I think it was $118 million on a net basis.

You said there are some offsets in there in terms of project financing, sell downs, partner contributions, et cetera.

Given the capital market situation, could you talk to that on a gross basis, what are the bigger pieces that are getting the number down to 118?

Sure.

First of all, one of the meaningful assumptions here in just how we anticipate running our business and running the investment is that STP3 and 4 will be run on a cash neutral basis.

There's no meaningful impact on the cash side of our guidance related to that.

Taking that aside, there really are just a handful of projects given that we'll finish up with Elbow Creek at the end of this year.

That, going into 2009, we have Cedar Bayou four which we'll complete by midyear.

We have a 50/50 partnership on that.

So I think the partner contributions really relate to that investment.

On UI, we obviously have a partner there as well.

But we also anticipate, given that this is a quasi-regulated 30-year PPA contract, that the due diligence we've done to date and the financing sources that we've talked to today, we believe that even in the current environment, that reasonable financing will be available for that.

Then finally, the set of turbines that we have on order that we're making final payments on in 2009, that's just -- there's no financing associated with that.

So, I think when you total all of those projects up, that's where we've come out with a net of about $118 million for the year.

Okay.

One final question on the stock buyback.

You mentioned that in terms of the $30 million remaining that you would look to complete that this year.

That's respect to the '08 capital plan assuming there is a window.

Can we assume the window has closed as long as the Board is reviewing the Exelon offer?

And somewhat related question, anything to stop you from getting a head start on the '09 program given the size of the RP basket at the end of September?

Elizabeth, why don't we ask Drew to give you the official response on that.

Yes.

During the pendency of the Exelon offer while the Board is reviewing it, we would not anticipate being in the market for a share buyback.

And Elizabeth, to the second part of your question, there's nothing that would preclude us, assuming that we had an open period, there's nothing that would preclude us from beginning the 2009 capital allocation plan before year end.

One last question.

I apologize.

Clint, what is the RP capacity under the bank deal at the end of the quarter?

It's still $1.010 billion and the reason for that is that it is actually calculated once a year.

Although we have the option of doing it intrayear.

We haven't exercised that option.

So, as it stands right now, it is a little bit over $1 billion.

Thank you.

Thank you.

Our next question comes from Dan Eggers of Credit Suisse.

Good morning.

Good morning, Dan.

On the positive outlook for natural gas, particularly from these levels, and you have made that strong argument for that, can you just give a little thought on looking at the ledges where you guys had them today.

I know you want to keep visibility but the opportunity to maybe unwind some of those hedges and ideally reset them at a higher gas price environment?

Dan, it was a little bit difficult for us to hear you but we did hear the word where you asked us if we would be interested in unwinding our hedges.

I can assure you without even turning it over to Mauricio he absolutely is not going to answer that question.

So, if there was a second part of your question, we would be happy to answer that or you've got a freebie if you want to ask another one.

That was the bulk was whether you were looking at a hedge reset at this point in time.

Since I have got a freebie, can you walk through the thought process right now as you guys are evaluating future projects in repowering NRG as far as how you're thinking about the cost of capital and the needed returns on the projects today versus what we saw in the past and how you think about prioritizing use of cash particularly as we're still facing some limitations on the RP basket?

Dan, there are a couple of things because it is a very good question.

Obviously in light of the current environment, we've taken a long, hard look at the repowering program.

As Clint has mentioned.

One definite trend is to the extent we already had a heavy bias toward projects with long-term offtake agreements with load serving entities.

That bias is even far more pronounced now.

So, deals, we're definitely not cutting off deals like the one that we just won in Connecticut where Connecticut Line and Power is the offtaker, 30-year offtake, basically a cost to service recovery basis.

We would continue with that.

Certainly, anything that would just -- where we might have considered with the sort of small to medium sized projects in the past, getting started on the balance sheet, that's just not going to happen.

We've basically -- well we've killed that idea, choked off funding to that.

We would like to continue -- we would like to and continue and as Clint mentioned, have budgeted approximately $50 million for 2009 to continue with a wide range of developments around the industry, around the country and in various different technologies because certainly, one of the things that's happened because of this financial crisis is it is obviously killed off -- it will be killing off any supply side response, to what was a tightening in a reserve margin in the past.

There's going to come a time when this situation recovers where, there is going to be an even more immediate need for extra capacity.

We want to position this Company so we're ready to spring at that time.

The amount of money that's spent in terms of true development work, as long as you're not putting metal on the ground, to me, it is very much money well spent.

Getting prepared for that, what will be a sudden turnaround.

The final point, which is one that's been much discussed internally is in this new environment, what are we looking for in terms of hurdle rates, cost of capital and the like.

And in general terms, I don't know if Clint wants to be more specific to this, we have absolutely clearly increased our hurdle rate in terms of any types of new investment.

Have we actually ratcheted up to what it would actually cost right now on this day in October 2008 for this Company to go out and raise capital?

I think it is fair to say that when we think of the projects that will return money over the next 10, 20, 30 years, we're assuming some degree of normalization because if we actually looked at the true cost of capital right now for new money would be so high that -- that you just wouldn't do anything.

I guess I don't want to drag this out.

Clint, how much CapEx of projects under construction right now will need to be spent beyond 2009?

So, you have kind of the growth CapEx and the '09 budget, how much more is obligated to be spent to get those projects in service?

Yes, I think the only projects would be UI.

Excuse me.

The peaker projects in Connecticut.

In 2009, we have budgeted I think on an equity basis, about 7 million to $10 million in equity contributions.

You probably have another $40 million beyond that.

Thank you very much, guys.

Thanks, Dan.

Thank you.

Our next question comes from the office of Lasan Johong of RBC Capital Markets.

Please proceed.

Thank you.

Good morning.

Got a quick question on your '09 field position of base load.

It is 104% of expected production.

Wondering what you're going to do with that excess 4%?

Are you estimating or thinking there might be some upside potential base load or is that an initiative to take advantage of lower fuel prices?

Could you give us a little more color on that?

Lasan, the way you got to look at it, it is just building inventory at certain locations so, it is more just managing our inventory levels to where we want them.

It was an intentional build at at certain locations.

That's a physical accumulation of coal, not a financial contract?

It is physical.

Okay, good.

The other question real quick on was in the kind of environment where the financial players are dropping by the wayside in terms of hedging activities, are you seeing any increased spread due to counterparty risk/liquidity issues?

Lasan, this is Mauricio.

We haven't been in the markets executing any hedges so, the visibility that we have on actual execution, I can't talk about it.

What we have seen, is an increase in credit cost and just in general, transaction costs.

I think in this environment, these counterparties are increasing their risk premium to warehouse that -- the risk that we want to offload from our books.

In the short term, I'm going to say inside 12 to 18 months.

We have seen decreased liquidity.

But nonetheless, you know, the markets have not completely gone away.

We've been able to optimize our portfolio.

Thank you very much.

Thank you.

Our next question comes from the office of Michael Lapides of Goldman Sachs.

Hey, guys, congrats on a great quarter.

Capacity market questions.

First, can you just kind of give your view on what you see short term meaning 2009 for the New York capacity market and then long-term.

And then second, can you talk about the FERC decision this week on ISO New England and how it compensates some of the existing generators.

I remember that in the first round you had one or two assets that a lot of questions came up regarding how to be treated in FSM versus RMR.

Mauricio?

Sure, Michael.

Clint already talked about our expectation for New York City.

I think that's reflected on the guidance that we're providing today.

We expect to see some pressure on New York given the mitigation procedure or methodology that was instituted early this year.

So I would say that like with any other of our commodities, we actively manage the risk.

We are somewhat hedged in 2009 in New York City and somewhat in the rest of the states.

That should mitigate some of the downward pressure that we're seeing in New York City.

Okay.

And can you address the New England capacity market issues at the FERC, that the FERC addressed this week?

I mean, right now, we have a -- as you know, we're in a transition payment period through 2010.

After that, MCM kicks in.

I will have to get back to you on specifically what will be the impact on the FERC order.

Great.

I would be happy to set up a time off-line.

Appreciate it, guys.

Thank you, Michael.

Thank you.

Our next question comes from Annie Tsao of AllianceBernstein.

Good morning.

My question has to do with your CapEx program on slide 30.

If the financial crisis continue, how should we think about your '09 CapEx in terms of would you delay some of the CapEx that you have here?

Because I notice from the second quarter of your CapEx, you lay out, the total is about $1 billion in '08.

Now, you have I think it is about 9% decline in the repowering NRG program that you're trying to cut.

So, if prices continue, would you be decreasing your repowering program?

Or you'll be delaying other programs?

Well, I think that what you're seeing in terms of the repowering program is a slimmed down version in response to the current situation.

I don't think that continuation of the crisis at the current level would change that in any significant way.

In terms of the overall capital spend, particularly in this environment but really at all times at NRG, it is pretty much a continuous progress of reviewing all capital spend and doing what's necessary, obviously to be in environmental compliance and to maintain the plants in a way they can produce the type of operating performance that we produced this year.

So, I think, I welcome Clint or Bob to join this.

We don't see much room to reduce the CapEx below the level that we're showing here.

Yes, I think when you look at the projects, particularly environmental and all of them across the categories, environmental, repowering, these are projects underway so you wouldn't stop or slow down, particularly the environmental, which you have got consent decrees that you're working to meet.

These things are all under construction.

Unless there is a new project that comes forward that has a return profile that is very compelling, what you're seeing here is just a completion of what's been started.

And if I may, you raised $100 million for '08 EBITDA.

What are the drivers to that $100 million?

Annie, I think the way to think about it is the third quarter of the year is an all-time record for NRG and the second quarter before that is the third best quarter of the new NRG and I think when you take those together, it is just terrific performance, better than forecasted and so when you project out through the end of the year, we think we'll end up with a better year than our midyear forecasts.

Annie, just to add a little more color, I would also plant availability being higher and reliability being higher.

You're getting more opportunities for generation when you need it and then also as we went into the year, we left a little bit of length on our heat rate positions for peak periods during the summer months which was the right way to go into the year which was different from the prior year.

That was also a good contributor.

Thank you.

Thank you.

We've gone past the 10:00 hour.

Many of the people on the call are trying to cover other things today.

So, I think we should take one more call then wrap it up.

Absolutely, sir.

Thank you.

The final question comes from [Neil Mitra] of Simmons.

Please proceed, sir.

Thanks.

You talked about the increasing challenges of building transmission, capacity.

Can you provide any insight s to how you view the restrictive credit environment, impacting announced projects within ERCOT, specifically on proposed combined cycle plants in the south and Houston zones.

And land in the West, for example, what chance does announced wind project have of coming online in today's credit markets if it hasn't already secured a PPA or a long-term hedge?

Well, thanks.

I would say two things and of course, one of the things that makes the marketplace is that people differ but from my point of view, the idea that anyone would start a combined cycle power plant in Texas right now, or really, it is hard for me to imagine anywhere in the country where you would start building a combined cycle plant into a merging environment in the current commodity price environment and the current capital cost environment.

I think it is choked off totally.

It is just a question of how far you would be along if you already started before you stopped.

So, we think to the extent that there were a lot of combined cycle plants started if those people are going forward, they've got a very different view from us.

Certainly to the extent that we were looking at building additional combined cycle plants in Texas, we have absolutely stopped that effort.

Secondly, in terms of wind, I think what you're seeing right now and we went through this precise situation in 2002 where right now, we're sort of in the construction overhang period where people who are already a little bit too much pregnant with wind and it could be they spent so much money on sites or they've got so many turbines on order with cancellation fees or something.

You're going to see more wind farms started and finished given the short construction cycle in Texas.

But I think what you're going to see maybe is probably about 12 months from now.

Is an absolutely precipitous decline in the wind farm starts in West Texas and around the country.

Capital expenses, there's no offtake.

You've got the transmission congestion that's going to last until at least even if Kress goes forward, 2011, 2012.

At the earliest.

Yes, at the earliest.

You're probably not seeing it yet but you're going to see it very soon.

It seems like when the public utility commission approved the 18 gigawatts of transmission capacity, it assumed that more than enough capacity would be available in the credit designated zones.

Do you think the transmission capacity could be revised in light of project cancellations within the next year?

I don't want to speak for the Texas Regulatory Authorities but the cost of the credit system is a substantial cost.

The cost of capital, isn't just hitting all of us in the private sector.

It is going to hit the people who build transmission lines as well.

So, I don't want to get in front of the Texas authorities but would I be surprised if they slowed it down or reduced in size, I would not be surprised.

Okay, great.

One last question.

Last quarter, you provided a weather normalized demand update for Texas.

Do you have anything like that for this year?

We did.

Did we?

We don't have anything on the presentation, Neil.

But if you're interested, we can give it to you.

Just give us a call.

I'm sorry.

We don't have that with us today.

All right.

Thank you very much.

Okay.

And thank you all for participating.

We're sorry we took you over but again, we appreciate your interest in NRG.

Thank you very much.

This concludes the NRG Energy third quarter earnings call.

Thank you everyone, for joining.

You may now disconnect.