NRG Energy Inc (NRG) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2009 NRG Energy earnings conference call.

My name is Erica and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn a presentation over to your host for today's call, Miss Nahla Azmy, Vice President of Investor Relations.

Please proceed.

Thank you Erica.

Good morning and welcome to our second-quarter 2009 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 of the call will be also available on our website.

This call, including the formal presentation and question-and-answer session, will be limited to 45 minutes.

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 the date of this conference call is July 30, 2009 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 except as required by law.

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

Now with that, I'm pleased to turn this over to David Crane, NRG's President and Chief Executive Officer.

Thank you Nahla and good morning everyone and welcome to our second-quarter earnings call.

This call is quite unusual in that it comes shortly after rather than just before both the provision of updated full-year guidance and an extensive investor outreach effort by the company.

What this means is that there's relatively little new information provided today.

And as many of you have been very generous in giving us your time over the past few weeks, we intend to partially repay that debt by keeping this call short and sweet and I do mean sweet.

If you're looking at the slides, you may want to be looking at slide four.

Because in our recent conversations with you, we have for obvious reasons been more focused on the long-term value proposition of the company.

The fact is that the company's also delivering absolutely extraordinary results right now in the depth of the first great recession of the 21st century.

And that performance should not be overlooked because as all of you know and as all of us at NRG are acutely aware, long-term value is created by a succession of strong quarterly performances.

So today we intend to shine the spotlight on our current performance.

Here to do that are John Ragan, our Chief Operating officer, who will review the performance of our plant and commercial operations groups; and Bob Flexon who will review our exceptional second quarter and first half 2009 financial results.

John?

Thank you David.

Good morning everyone.

During the second quarter of 2009 NRG continued to build on the strong operating performance that it achieved during the first quarter and was well positioned to enter into the critical summer months.

On slide six, we highlight some of our second quarter achievements.

Our focus on safety across the organization has remained strong with an OSHA recordable rate of 1.31 through the first half of 2009.

Our OSHA rate continues to exceed the top quartile benchmark for the industry of 1.52.

While this is a solid accomplishment for the company, safety continues to be a top priority for the management team and all of NRG's employees.

Some of the activities that we have undertaken during the second quarter to reinforce safe work practices have included a national safety standdown with all of our corporate employees, the implementation of our new safety work policy to strengthen our expectations with our contractors, and advancing our efforts to achieve OSHA's DPP status at three of our generating facilities.

Our baseload operations have had another solid quarter with our plant personnel delivering strong performance even though we continue to face challenging market conditions caused by cycling, an increase in reserve shutdowns and additional starts for our coal assets especially in the Northeast.

From a construction standpoint, our EPC group has continued to move forward with multiple projects across the fleet.

We completed the construction of Dunkirk 3 and 4 [backing controls] and delivered the system into successful operations at the end of May.

Construction will be completed this fall on the remaining two units, Dunkirk 1 and 2.

Additionally construction has begun on our peaking units in Connecticut at the Devon site.

These new units are part of Repowering NRG program.

I will review the Cedar Bayou 4 project a little later in my presentation.

Finally, our commercial operations group has continued to effectively manage the hedging and dispatch of our wholesale generation portfolio in addition to executing the integration and risk management requirements for the Reliant Energy retail supply portfolio.

Now, turning to more detail about our plants operations performance, slide seven illustrates that net generation was down for both the quarter and the year compared to 2008.

This was due to continuing weaker market conditions stemming from low natural gas prices that have led to coal-to-gas switching and lower electricity demands.

The largest decrease was in the Northeast where the coal fleet was impacted by reserve shutdowns across the region.

While our generation was below 2008 levels, availability of the baseload fleet improved in the second quarter and year to date driven by strong performance of the Texas coal and nuclear assets.

South Texas Nuclear Project has had a perfect operating year with 100% availability and 100% net capacity factors.

These two units are currently working on their fifth breaker-to-breaker run without an unplanned interruption.

This facility in 2008 also led the industry for the most electricity generated from any two reactor plants in the US and is currently ahead of this record as of June 30.

Additionally our two Texas coal plants, Limestone and Parish, have also had outstanding years so far with unplanned outage rates exceeding the top decile performance for the industry.

In fact, this is NRG's best second quarter DAF and best quarter ever for E4 for the Texas baseload fleet during the past 10 years.

During the second quarter we also achieved our full-year FORNRG 2.0 growth target.

This achievement was accomplished through corporate cost reductions, continued reliability improvements within our generating fleet and the sale of non-core assets.

We are now focusing our efforts to get an early start on delivering the 2010 target which is an additional 24 basis point improvement in ROIC.

In addition to this FORNRG savings, we have continued to look for ways to reduce our budgeted normal and major maintenance spending and have worked diligently to renegotiate purchasing and maintenance contracts with our top vendors in an effort to reduce price increases that we incurred during the past several years.

Moving to our hedge profile and commodity sensitivities on slide eight, as we have reviewed with you many times on prior calls, we continuously seek opportunities to lock in additional hedges; hedging power or power equivalents during the up cycles and coal during the down cycles.

On the top left chart, we show we are well hedged through 2011 timeframe for both power and fuel.

In the prior quarter, we had added substantially to our fuel needs for the 2010 through 2012 timeframe.

During the second quarter, we took advantage of the opportunity to add our power hedges in 2010 and we saw some strength in the market that was in line with our price targets and at prices materially higher than they are currently.

We will continue to look for these opportunities through the balance of the year.

In Texas, heat rates have remained stable and well supported during the quarter and we continue to monitor for opportunistic times for which we can convert some of our gas hedges into power assuming that prices have reached levels in line with our fundamental outlook.

On the top right chart, we have shown sensitivities for both gas price and heat rate changes to our baseload fleet through 2013.

Now moving to the retail business fundamentals, load in Texas for the first five months of the year on a weather normalized basis was down between 3.5 and 4%, driven primarily by weaker industrial demand with residential and commercial slightly higher.

We believe the primary reason for the retrenchment in industrial demand is the nature of manufacturing activity in the states which is concentrated primarily in petrochemicals and chemical manufacturing.

These industries are some of the most price elastic in terms of their ability to adjust output in changing economic conditions.

Once the recession ends and economic expansion begins, the elasticity of the industrial sector should drive a robust recovery in Texas.

June was the first month with better-than-expected demand on a weather normalized basis and was only down by approximately 0.5%.

While one month is not a trend, percent change between June and the prior month is fairly significant.

So we will continue to closely monitor the change in industrial activity going forward.

More specifically during May and June, we had unseasonably hot weather driving increased demand by our residential retail customers.

During each month, there were 22 days of above normal temperatures in the Houston area where a majority of our customers reside.

On the C&I front, we have launched sales campaigns across multiple marketing channels during May.

We've have already seen increased interest in our product offering and are experiencing profitable margins within this segment.

Now, turning to slide nine, our EPC group completed the construction of Cedar Bayou 4, a 550 MW combined cycle unit located outside of Houston and within ERCOT's Houston zone.

This unit was completed ahead of schedule, on budget and within design specifications.

In fact, the unit came on 22 days early, just in time for the significant heat wave that embraced Texas during the last week of June.

Since its commercial operations date on June 24, this unit operated extremely well during the balance of the month with an 82% net capacity factor, a 99% equivalent availability factor and a 100% starting reliability.

During the first quarter earnings call, I spoke about the seamless execution that occurred between our construction and plant operations teams in bringing the Huntley baghouse project online in Western New York.

The transition from construction to operations can sometimes be a significant hurdle in achieving solid execution during the final stages of a project.

[CBY4] illustrates yet another example of our teams working closely together to bring a new asset online in a flawless manner.

[CBY4] will be a valuable asset for energy and represents a very efficient approach to using existing equipment and plant sites to repower our fleet with more efficient generation.

This unit increases the diversity of our portfolio and will help serve the needs of our retail customers throughout Texas.

Now I will turn it over to Bob who will discuss our financial results.

Thank you, John.

Good morning and thank you for joining our call this morning.

Beginning with the financial highlights from slide 11, as David highlighted in his opening comments, the company is achieving record financial performance in 2009 due largely to the acquisition of Reliant Energy.

Adjusted EBITDA for the second quarter in the first half of 2009 came in at $747 million and $1.224 billion respectively.

Both the quarter and year-to-date performances are all-time highs for the company.

Cash from operations increased 66% to $722 million for the first half of the year while free cash flow from recurring operations was up over 94% compared to the first six months of last year.

Cash from operations was the single biggest contributor to the June 30 record liquidity level which exceeded $4 billion.

Liquidity also benefited from the high yield bond offering in June that raised $678 million in net proceeds and the MIBRAG sale which provided after-tax net proceeds of $260 million.

Our full year outlook was previously updated on July 8, 2009.

We raised our adjusted EBITDA guidance at that time by $325 million to $2.5 billion.

The wholesale business continues to be largely protected by our hedge positions offsetting weak commodity prices and generation demand while the retail business outlook continues to benefit from these weak commodity prices and the low demand within the ERCOT market currently being experienced due to warmer than normal weather.

A few high-level priorities for the second half of 2009 include successfully executing and completing our capital allocations plan by repurchasing $500 million of our common shares and unwinding the credit sleeve currently supporting the retail business.

The quarter-over-quarter comparison on slide 12 clearly highlights the exceptional performance of Reliant Energy, generating $230 million in adjusted EBITDA in its first two months of NRG ownership.

The mass and commercial industrial businesses combined to provide $320 million in gross margin on 10.4 TW hours billed for an average customer margin of $30.77 per megawatt hour.

Transaction and integration costs not included in adjusted EBITDA was $33 million and $2 million respectively year to date through June 30, 2009.

Total remaining integration expenses are expected to be approximately $16 million, the majority of which will be incurred during 2009.

The Texas region's results declined by $169 million quarter over quarter driven by lower realized power prices across the fleet as the 2008 results benefited from the higher power prices that were the result of transmission congestion and high natural gas prices as compared to the second quarter of 2009 where power and natural gas prices were significantly lower.

The decline in energy prices plus lower generation of 580,000 MWh had a combined negative impact of $235 million which was offset by $121 million decline in fuel costs, primarily natural gas.

In addition, the second quarter of 2008 benefited from the $7 million reimbursement from STP 3 and 4 development expenses from CPS, our partner in the project, plus higher [emission] sales of $10 million.

Adjusted EBITDA for the Northeast region was $4 million higher, driven by $13 million in higher energy margins as lower costs [to certain] load contracts benefited margins.

In addition, the portfolio's hedge position largely offset the 50% reduction in generation during the quarter.

Offsetting the margin benefit was higher emission expenses for RGGI compliance of approximately $3 million in lower emission sales during the quarter as compared to last year's second quarter where approximately $7 million of emission sales occurred.

The south-central region had adjusted EBITDA $24 million during the quarter, an increase of $6 million or 33% from the second quarter 2008 EBITDA of $18 million.

Driving the favorable quarter-over-quarter variance was major maintenance which declined $4 million primarily attributable to the planned spring outage being on unit three which is a jointly owned unit with Entergy versus the prior quarter's outage being on unit one which is wholly-owned by NRG.

Meanwhile, a 10% decline in generation at Big Cajun resulting from lower demand was offset by favorable purchase power prices averaging $33 per MW hour, 65% lower than 2008.

Slide 13 provides the year-over-year comparison.

Beginning with the Texas region, EBITDA declined $141 million $666 million for the first half of 2009, a 17% decline.

Similar to the second-quarter results, the decline is largely attributable to the market conditions that favorably impacted May and June of 2008 that were partially offset by the positive results of the first quarter of 2009 where the region EBITDA increased by $28 million over the prior year's first quarter due largely to a lower fuel costs.

Northeast year-to-date adjusted EBITDA was lower by approximately $22 million.

This was largely driven by a $15 million decrease in capacity revenues as a result of New York [ISO's] reduction in installed to serve margins and ICAP in city mitigation rules which became effective in March of 2008.

Also contributing to the region's lower results were the $6 million increase in property tax.

Turning to South Central for the first half of 2009, adjusted EBITDA declined $28 million to $53 million as there were a number of factors contributing to the decline, including 10% lower generation of Big Cajun, a 28% decline in contract revenue and an approximately 42% decline in the average merchant sales price.

The decline in the average merchant sales price from $89 per MWh in 2008 to $51 per MWh in 2009 was attributable to lower commodity prices, partially offset by a 51% increase in merchant volumes as the region sold 1.4 million MWh in the first six months of 2009 as compared to 918,000 MWh in 2008.

Meanwhile, higher capacity revenues and lower fuel and operating costs partially offset the decline.

Turning to the West, year-to-date adjusted EBITDA is down $19 million primarily due to a $16 million decline in economic gross margin as a result of the El Segundo tolling agreement that expired in April 2008.

Partially offsetting the declines were higher resource adequacy sales at El Segundo and Encina.

Operating and maintenance [is] unfavorable $10 million due to the major overhaul at El Segundo unit 4 and planned maintenance at Encina units 4 and 5.

Equity earnings from our Saguaro unit increased $7 million due to lower natural gas costs.

Cash flow from operations on slide 14 increased by $286 million over the same period in 2008 to $722 million.

The increase for the first half of 2009 versus 2008 was principally driven by the return of collateral posted last year as a result of the closeout of commercial trade positions and the return of posted collateral that built up in the first half of 2008 due to increased natural gas and power prices.

Cash interest payments declined approximately $8 million as a result of the $233 million lower debt balances, primarily term loan B, resulting from our yearly mandatory offer that occurred in the first quarter and lower interest rates.

Environmental CapEx increased $52 million compared to the first half of '08 primarily related to the baghouse projects at our Western New York plants.

Repowering investments of $199 million included $78 million of expenditures at STP 3 and 4, $62 million for the Langford wind project and $27 million related to the completion of Cedar Bayou unit 4.

In addition, the company contributed $35 million towards its GenConn joint venture with United Illuminating Company for the construction of the 200 MW Devon station.

Slide 15 outlines the company's liquidity position as of June 30.

Total financial liquidity excluding funds deposited by hedge counterparties reached a record level surpassing $4 billion at June 30.

The $662 million increase in liquidity from year end 2008 was largely driven by the $722 million cash from operations, $678 million in net proceeds from the June issuance of the 8.5% senior notes and $260 million in net proceeds from the sale of MIBRAG.

These increases were partially offset by the $288 million payment for the acquisition of Reliant Energy plus $63 million for the first installment payment on the net working capital required.

Letters of credit totaling approximately $135 million have been issued during the year, $81 million in support of the equity bridge loan associated with the GenConn joint venture project and $59 million in letters of credit in connection with tax exempt bonds issued at Dunkirk and to support the Reliant Energy working capital facility.

Slide 16 is a reprint from our call on July 8, 2009 where we increased our guidance to $2.5 billion.

Since the guidance was updated just three weeks back, we are not changing the previously announced numbers.

Overall, the wholesale portfolio continues to target $2.1 billion of adjusted EBITDA for the year and considering the hedge positions of our portfolio, we expect the variability around that number to be limited.

For Reliant, high demand in June and July along with the profitability outlook for the remainder of the year should result in the company comfortably exceeding the $400 million guidance target.

Slide 17 details how we approach our balance sheet management at NRG.

Maintaining ample liquidity to support our hedging program which S&P recently highlighted is the principal reason for the multiple upgrades received during the quarter, can only be accomplished with a multifaceted liquidity program that utilizes cash balances, liquidity facilities including the revolver in LCs and a first lien structure that enables our portfolio hedging multiple years into the future.

Our repowering projects such as GenConn utilize non-recourse financing structures to protect the corporate balance sheet.

In addition, we continuously review project related risk in relation to our corporate balance sheet.

Once the appropriate project risk profile is achieved, the enterprise is considered for migration back to the parent balance sheet which as an example is the plan for Reliant.

Our capital structure management has recently led to credit rating upgrades from both Standard & Poor's and Moody's.

Most recently, Moody's upgraded our first lien debt to BAA3, an investment grade rating.

As testament to our balance sheet management, these upgrades had been received during a severe downward commodity price environment.

In regards to our debt covenants, we have approximately $850 million of capacity available for share repurchases under both the credit agreement and the bond indentures and we expect both baskets will expand at a rate that won't constrain our capital allocation plans into the near future.

In addition to achieving our operational financial targets for 2009, the financial plan for the remainder of the year is to execute the 2009 capital allocation plan as outlined on slide 18.

The key elements of which are completing the $500 million of share purchases, unwinding the retail credit fleet at or around the end of the third quarter to allow for the free flow of cash generated by Reliant and full settlement of the $181 million CSF 2 structure.

With that, I'll turn it back to David for closing comments and questions.

Thank you Bob and thank you John.

As we look forward for the remainder of the third quarter, our intent quite simply is to focus on delivering the type of financial and operating performance for the balance of 2009 that we are reporting here today in respect to the first half.

If we perform at such a level, we will produce for our shareholders across the board absolute record full-year financial results.

This is in our opinion the quickest and most likely path to further correction in our share price performance.

Beyond our focus on current financial and operating performance, there are things we want to do as soon as possible and we have listed some of these on slide 20 -- both improve the core business platform and to demonstrate the value of certain elements.

Our sense of urgency in this regard is in part the product of us at NRG being an inherently impatient company and in part as a result of the consequences of the Exelon situation.

As a management team that's driven to move the company forward each and every day and each and every quarter, we feel that the second quarter of 2009 was a bit of a loss in this regard.

Certain aspects of some of our development projects essentially froze during the quarter as the proxy contest drew near; as some of our partners, suppliers and off-takers put pencils down to await the outcome.

With those clouds having parted over those projects, we want to push hard to make up for time lost.

The other part of our focus for the balance of the quarter can be generally described as concentrating on basic corporate blocking and tackling -- budgets, personnel, organizational improvements, procurement and major maintenance planning -- the type of things that do not necessarily make for exciting investor relations stories but do make for solid, well-managed companies.

In short, it is my sincerest objective and certainly it's my most profound expectation that all of you can get away for a well-deserved vacation sometime over the next several weeks and hopefully you'll go someplace where your Blackberry's don't work.

And wherever you go, you won't have to worry about hearing from NRG.

You'll be secure in the knowledge that you will not miss any announcement regarding the next chapter in the NRG story.

Having said this, one of our lessons learned over the past several weeks is that there are several important elements of the NRG value proposition, particularly around our growth initiatives, that are not fully understood by the investment community.

In many cases, this is because they are complicated, detailed and nuanced and just generally do not suit themselves to the type of cursory treatment that they receive in the typical broad ranging investor presentation.

The obvious example of such an issue is our nuclear development program.

What's the potential opportunity, how and when will it be realized and how will the risk be mitigated?

Another question which was repeatedly raised with us over the past several weeks was how will the hedge books of our generation business in Texas and Reliant's wholesale supply be synchronized with each other once each business's legacy hedges are worked off?

This is a very important question and as we see the two businesses forming an integrated whole, optimized for the benefit of the NRG shareholders, we want to spend some time with you outlining our plans in this area.

Toward that end, it's our intent to hold our second ever analyst day in Houston shortly after our third quarter call, either the second or third week of November, to explore in greater depth these and other important issues, to introduce you to more of the NRG people who are responsible for the success of this company in its most important areas of growth and to enable smaller groups of you to visit to the extent practical the many different types of NRG installations and projects which exist in the greater Houston area.

Please stay tuned.

You will be getting more details from Nahla in the near future and she and we would welcome any suggestions you would like to offer on what other topics you would like to see us cover on that day.

So as always, we want to thank you for your interest in NRG.

We want to thank you, those NRG shareholders on the phone who voted for the NRG board last week.

And we want to say to you and to the NRG shareholders who voted with Exelon, we are working hard to ensure that no NRG shareholder will be disappointed in either the financial or the share price performance of NRG in the weeks, months and years to come.

So with that, Erica, I think you can open -- we will be happy to take some questions.

(Operator Instructions) Ameet Thakkar, Deutsche Bank.

Just a quick question.

David, I think on the July 8 call, you alluded to that you were pretty confident you were going to be able to get something done as far as selling a portion of the equity in STP units 3 and 4 and then having the uncertainty of Exelon kind of prevented you guys from doing that.

Any update on that?

Or is it kind of too soon to kind of go there?

Well I would say that we are still highly confident.

I mean, yes, the update is that just a renewed sense of confidence that we will get that achieved before the end of 2009, before the end of this year.

I am reluctant to put a month on it because I don't want to compromise our own position in the discussions.

But that is obviously something that I am going to be focused on working with Steve Wynn and the NINA team.

So I think that is in the [offing].

I just don't want to be too specific on exactly when we will get there.

And if I could just ask one quick question on what you guys have seen as far as kind of demand in ERCOT.

It looks like in June demand was off kind of about 50 basis points on a year-on-year basis but we obviously had a lot of hot weather in Texas.

On a kind of weather adjusted basis, what are you guys seeing for demand?

That is a weather adjusted number.

I mean, in fact -- do we have a non-weather-adjusted number John or Mauricio?

I don't have (multiple speakers) that with us.

100% was the weather adjusted number (multiple speakers) 1% below year on year last year.

But those numbers are weather adjusted in the presentation and again, that's a contrast with other regions.

I think we see a positive situation now regarding Louisiana as well but not much signs of improvement in the Northeast.

Michael Lapides, Goldman Sachs.

Two questions about your Northeast gas units.

First on the new ones being developed in Connecticut.

Can you talk a little bit about the economics?

I think the contracts are publicly disclosed.

Just curious about kind of the capacity payments and whether there's any variability there.

And on the New York City power markets, kind of any updates on the Poletti retirement and what that would do to supply-demand fundamentals in the New York City market?

I think we will split that into two different speakers on that.

As far as the Connecticut contracts, they are long-term contracts with the host utilities in the area.

There is no variance in the way the capacity fees are paid.

They're very stable contracts over the 30 year life.

With respect to New York, what we have seen is a significant improvement in capacity prices from last summer to this summer.

Just to give you an order of magnitude, the (inaudible) have been clearing for this summer close to $4 per (inaudible)

Last summer we were about $2.50.

In New York City we're back up $8.60 per KW [month] versus $6.00.

So you have a summer-on-summer increase of close to 40 to 50%.

With respect to Poletti, we are tracking closely.

It should be retired next year.

And what that is going to do is it's another -- it's going to put some upward pressure on capacity prices in New York City.

Keep in mind that we also have a new power plant coming online next year around Albany, the Bessy Corp.

That's about 500 MW.

But we believe that the retirement of Poletti which is close to 850 MW is going to offset completely that.

Got it and just following up on Connecticut.

Have you guys ever disclosed what the capacity payment is for those plants, for the new ones?

The way that is structured is the contract for differences between the capacity price that's set by the New England ISO and what the market bears.

So that's -- I don't think it's a number that we've disclosed in the past.

Brian Russo, Ladenburg Thalmann.

Could you just talk a little bit about the downward sloping (inaudible) hedges you have at your Texas baseload and where that pricing might compare to where forward or spot prices are?

The downward sloping coal and lignite.

Mauricio?

Sure, well I mean what I will say is that those hedges are probably close to where current market is.

We haven't disclosed in the past the specific levels.

We try to be opportunistic about when to execute those hedges.

If you look at the coal markets, they have been in contango for a long period of time.

And we have been waiting patiently to see those prices come back to the price targets that we feel comfortable with and we execute.

So what I will say is the prices that we have on the hedges were not executed when the market was extremely high beginning of last year.

Great.

Just lastly, you guys reported about a $31 per MWh average margin in retail.

I think historically Reliant had kind of targeted about a $20 per MWh margin margin on the residential customer.

I'm just wondering is this kind of a -- these outsized margins sustainable or is it just a function of the rapidly declining supply costs relative to a more sticky retail rate?

Brian, I think sustainability is sort of in the eye of the beholder.

Would they be sustainable over 10 or 15 years?

I don't think we would be making that claim.

But I think the term that's usually used is sticky.

So as you know, we have -- Reliant has cut prices twice since we owned it.

So we think in a low commodity price environment, you probably can get a margin above the sort of mid-level margin for a good period of time.

But I think that we don't expect to keep that margin at that level continuously.

Okay, thanks.

And just one more question.

Cedar Bayou, is there an estimated full-year margin contribution from that JV?

Bob?

It's relatively small, Brian.

I'll estimate a little bit.

I'm going to assume for the balance of the year, it's probably a 15 to $20 million impact.

Lasan Johong, RBC Capital Markets.

Congratulations on a good quarter and beating back the barbarians at the gate.

Lasan, those are your words; not ours.

I understand, I'm not being derogatory in any way, shape or form.

Just borrowing the title from the book.

There is a pretty severe drought going on in Texas from what I understand.

Is this going to have an effect on operating any of your coal plants or STP in any way?

John?

No, we don't think limitations on water resource would have any impact on our plants in Texas.

That's great.

David, why don't we just simplify the argument?

I think you and I can both agree there's significant value in STP 3 and 4.

I have my views on what that is and I'm sure you have your views on what you think it is.

But can you give us a sense of kind of an MPV value or STP 3 and 4?

An MPV value, I mean -- Bob, do you want to take a --?

Well I think at this point it's still I think a bit early to come out with that.

We're still working through all the final pricing, final [off-take] contracts, loan guarantees, the cost of financing.

I think right now if we tried to come out with that number, we would probably would be a disservice to put it out there at this point.

We've looked at more from an option value perspective at this point in time.

And I think that -- let's try to create some suspense around the analyst day.

I think that's something that we would like to explore probably in greater depth at that time.

Fair enough, thank you very much.

Congratulations again.

Brian Chin, Citigroup.

Which is higher?

The average purchase power price embedded in Reliant's retail purchase power contracts or the power sales price embedded in your wholesale generation fleet [taxes] if we look at sort of contracts in say third and fourth quarter or so for the remainder of the year?

Brian, let me just give you a sense of order of magnitude.

Keep in mind that the retail business, the Reliant retail business tends to hedge their portfolio front-loaded.

If you look at what they have right now for 2009 and probably early part of 2010, they enter those hedges at relatively high prices.

So I would say that their average price is probably higher than our hedge price without having the numbers in front of me.

But just talking about it qualitatively, I would think that because of the front load characteristic of the retail portfolio and the fact that they are running up a completely hedged book, that those average hedges are higher.

And when you say front loaded as in they put on the hedges with a shorter duration than you guys put on your hedges on the generation side?

Correct.

On our generation portfolio strategic hedging program spans out five years.

The Reliant retail portfolio, when they hedge, they really hedge what they call the contracted load or the fixed-price load and that tends to be front loaded.

And then also when you're making that comparison, you're excluding the transmission line flow-through costs from Centerpoint or any of the other transmission wires, is that right?

Correct, I'm only talking energy and energy components only.

That's very helpful, thank you.

[Neil Riccio], Simmons & Co.

International.

I just wanted to understand some of the larger details in regards to how you plan to integrate the wholesale gas assets with the Reliant retail unit.

Will you be able to avoid putting on some of the expensive super peak hedges by contracting the gas assets with the retail unit even though you have a lot of gas plants that have some significant startup times?

If you do hedge retail with gas, what does this do to the historical range of EBITDA guidance that's been between about 100 to $150 million in the past?

Mauricio, again do you want to talk about the super peak and how we're going to handle that at Reliant?

Well I'm just going to give a just generality.

I think we are going to talk about that in specifics on our analyst day.

But I think you mentioned something about the long lead startup times that we have in our plants and I want to provide you some color on that.

First, our Reliant retail portfolio will continue to be hedged [I guess their] and we're going to match our gas portfolio demand as the whether variability and the super peak for Reliant retail.

With respect to the long-lead startup, keep in mind that we have a little over 5000 MW.

I will say that a good portion of that is our GP's can be online in less than an hour.

I would say that the vast majority, two-thirds of our fleet can be online in less than 12 hours and that's a cold start.

So if for any reason you had a warm or a hot start, can be online much faster than that.

Really just a small portion of our gas fleet has a 24 hour lead startup.

So I think we are very well positioned to manage the peaks, the load peaks if Reliant (inaudible)

That's really helpful, thanks.

And then how much was the retail EBITDA guidance for 2009?

It comes from the C&I segment.

How should we expect that to change in 2010 after you have had more time to relaunch the business?

We haven't split it publicly and at this point, I'm not prepared to do that.

I think the overall in the retail guidance, we guided out there 400.

We feel very comfortable that that number will exceed that.

And as we get further along in the business, whether or not we determine to split it out or not, we will make that call.

But right now we are keeping all the margins information like more of a blended type average rather than specific to segment at the moment.

Okay, thank you.

Ladies and gentlemen, thank you and we look forward to talking to you in the fall on the third quarter call and then at the analyst day.

So thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone have a great day.