NRG Energy Inc (NRG) 0 Q0 法說會逐字稿

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

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

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

Later we will conduct a question and answer session.

(Operator Instructions).

I would now like to turn the presentation over to your host for today, Ms.

Nahla Azmy, SVP, Investor Relations.

Good morning and welcome to our third 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 to the SEC through a link on the investor relations page of our website.

A replay of the call will also be available on our website.

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

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

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 our 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 October 29, 2009, and any forward-looking statement 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 our non-GAAP financial information, the most directly compared GAAP measures, and a quantitative reconciliation of those figures, please revert to today's press release and this presentation.

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

Good morning everyone.

I'm joined here today, as usual, by Bob Flexon, our Chief Financial Officer, and John Ragan, our Chief Operating Officer, both of who will be handling the lion's share of the presentation.

Other colleagues that I have with me who are available to answer questions today, Mauricio Gutierrez, who runs Commercial Operations, [Krishnan Kasi], who heads our risk group, Jason Few, who runs Reliant, and Jim Ingoldsby, who is our Chief Accounting Officer.

Finally, I'm joined by Gerry Luterman, who I think most of you know is going to be joining the company as our Interim Chief Financial Officer, succeeding Bob.

He is here as our special guest and observer, and as he is not on the payroll today, I don't really expect him to have to answer any questions.

But we want him here because as we say around here, and we actually talk like this, for reporting purposes Bob Flexon owns this quarter, the third quarter 2009 -- from a reporting perspective.

Gerry Luterman will own the fourth quarter of 2009 and the full year 2009, so next quarter -- and if all goes according to plan -- Gerry, as successor, will own the quarters thereafter.

So now to get going.

Today I'm going to focus more than usual on our actual third quarter and year-to-date 2009 financial performance and at describing our initial view for 2010, as reflected in our EBITDA and free cash flow guidance for next year, released today for the first time.

In terms of our various growth initiatives, the topic I usually cover, while we of course will happily answer any questions you might have about them, I intend to mention them only in passing during my prepared remarks.

I don't want you to misconstrue this as connoting pessimism on my part.

Quite to the contrary, all it indicates in fact is that I am trying to reserve on the growth discussion and our vision of the future of our company and the future of this industry until we have the opportunity for a more exhaustive discussion at our investor conference in Houston, which is now just three weeks away.

Getting started and turning to slide four for my part, the three topics I want to comment on before passing the mic over to John and Bob for a more detailed explanation -- our stellar 2009 performance, our cautious outlook for 2010, and our exceptional achievements on all levels with Reliant -- not only the deal itself or Reliant's financial performance, the success of which should be obvious to all, but the benefit of Reliant in the context of NRG.

As to 2009, by stepping up full year guidance to $2.575 billion, we are on track to achieve a 15% improvement in EBITDA year on year, making 2009 a record year for our company on top of a record financial performance in 2008.

The fact that the company achieved the results we did back in 2008, a year in which the second half was consumed by the global financial meltdown, and that we are on track to achieve the results we expect in 2009, a year that is being affected 100% by the first great recession of the 21st century, with both years being marked by a precipitous decline in the spot prices for our core commodities, provides total validation of the business model we have been pursuing consistently at NRG for the six years of our existence.

What is also important about our 2009 results is not only what we expect to achieve but how we expect to achieve it.

As you dissect our 2009 performance, you may conclude that the performance of our generation business was a little weak but that the performance of our Reliant and retail business has been substantially stronger than you expected.

We agree.

But as we articulated when we first purchased Reliant, we like the retail business in part because we expected its financial performance to be generally countercyclical to our generation business.

Now already in 2009 after only five months of ownership, we have had a vivid illustration of how real that benefit has been to our shareholders.

In 2009 almost 25% of our annual EBITDA is going to be derived from a business that we did not even contemplate owning at this time last year.

And that is why we believe that our baseload hedging business model is fundamentally more valuable to shareholders over the course of the full commodity price cycle than the non-hedging model that other companies follow.

And that's because more and better opportunities will arrive to enhance the business in the bottom of the price cycle than will arise at the top of the cycle.

But those opportunities will only be available to those with the nimbleness, resources and vision to act.

NRG was well-insulated from the downcycle when it began in the summer of 2008 as a result of both our baseload hedging strategy and our robust liquidity last year, and we are at least equally well positioned this year as John and Bob's presentation will so amply demonstrate.

As we turn our attention to 2010 initial guidance, I wish to start by assuring you that with us on track to achieve nearly $2.6 billion in adjusted EBITDA in 2009, no one in NRG management or on the NRG Board of Directors is complacent with an initial guidance of $2.2 billion.

But I also would remind you that our company's approach to initial guidance for the year ahead is to forecast based on the business as it is today.

We do not include any blue sky EBITDA in our guidance, and I can further assure you that NRG management and the entire NRG team is already hard at work on all fronts -- cost management, operational performance improvements, additional revenue opportunities, and intrinsic and extrinsic growth opportunities to improve our financial performance and create value for the shareholders in the near term, the medium term and the long term.

Finally, with respect to 2010 guidance, our projection for recurring free cash flow generation in 2010 remains robust -- almost $1.1 billion, representing $4 a share and a free cash flow yield of approximately 16%.

Not bad in my opinion for the bottom of the commodity price cycle.

Finally, in reference to the bottom bullet on slide four and all of slide five, let me return to the non-financial benefits that accrue to NRG shareholders through our ownership of Reliant Energy.

Obviously in 2009 we are enjoying the full benefit of being at the top of the cycle for retail margins.

But one minor downside to Reliant's spectacular financial performance, that it is acting like a kind of financial solar eclipse, obscuring the plethora of strategic benefits that we can realize by managing the generation and retail business in a manner that is optimized for both risk and reward.

In that regard I want to mention an important step forward that we took during the quarter with respect to the retail business that does not appear in our financials and which you otherwise may be unaware of.

This summer our colleague, Mauricio Gutierrez, and his commercial operations team, together with risk, insurance and the retail group itself, pioneered an innovative insurance product to mitigate the financial risk to our retail business during the 2009 hurricane season -- were a hurricane to hit in the Houston area.

Thankfully on all sorts of levels, the season has been mild and we have not had to call on that protection, but the fact that we had it significantly reduced our financial risk.

So I hope all of you will take that into account and change the beta that you are applying to our retail EBITDA.

I do want to say that, as has been so amply demonstrated to you by our extraordinarily effective initiation, negotiation, execution and integration of the Reliant transaction, we have a tremendous group of people at this company, and I am terribly proud of what they have accomplished in 2009, not only vis-a-vis Reliant, but across all phases of our business.

And you can expect more great things from this team in the months and years to come.

John?

Thank you David.

Good morning everyone.

During the third quarter NRG has continued to sustain the strong operating and commercial performance that it has achieved during the first two quarters of this year.

On slide seven we highlight some of these accomplishments.

Our focus on safety across the organization has remained consistent and is delivering results.

The year-to-date OSHA recordable rate improved to 1.29 in the third quarter from 1.31 in the second quarter.

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

Corporate and plant management continued to emphasize safety by making it a part of the daily observations and conversations that occur at all of our plants and by continuously developing a series of initiatives to help keep our employees safe.

Our baseload coal operations have had another solid quarter with our plant personnel delivering top quartile performance even as we continue to face challenging market conditions.

With gas generation being dispatched ahead of coal, we've experienced increased load cycling and periodic reserve shutdowns, especially in the Northeast.

As I mentioned during the second quarter call, our EPC group has successfully completed and delivered into operation the Huntley and Dunkirk 3 and 4 baghouses in New York and the Cedar Bayou 4 combined cycle unit in Texas.

The group is now close to delivering into operation the Dunkirk 1 and 2 baghouses with construction completing this fall.

Additionally, we have made substantial progress on the construction of our new peaking units at Devon plant in Connecticut.

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 providing more detail on the wholesale and retail performance metrics, on slide eight the chart on the top left illustrates that net generation was down for both the quarter and the year compared to 2008.

This was due to weaker market conditions stemming from low natural gas prices, coal to gas switching, and lower electricity demands.

The largest decrease was in the Northeast where the coal fleet was impacted by lower generation levels and reserve shutdowns across the region, even throughout the summer months.

Gas generation was higher by 6% year-over-year in Texas due to lower gas prices and the addition of Cedar Bayou 4.

We've continued to operate our baseload fleet very efficiently during the third quarter.

The top-right chart shows our equivalent availability factor was 92.6% during this period.

Although this is exceptionally strong performance, it is below the 95.8% EAF performance we achieved last year in the third quarter.

The slip in our Q3 availability is primarily due to additional downtime caused by unit trips associated with more frequent cycling event and starts.

We expect as gas prices increase in 2010 our coal units will be dispatched in a manner more similar to what we experienced in 2008, which will help us move back to the performance level we achieved in the third quarter of last year.

Additionally our baseload EAF was also impacted by a 10-day unplanned maintenance outage at STP unit 2 to repair a high-pressure steam leak.

This unit is now back in full operation.

As for retail, the chart on the bottom left shows customer sales by segment.

Reliant Energy continued to experience stronger residential demand, driven by warmer weather during July and August, and higher industrial demand across Texas on the same customer basis versus the second quarter of 2009.

Despite warmer weather and higher demand, power prices remained low, driving strong margins during the period.

During Q2 and Q3 Reliant announced and executed residential price reduction programs of up to 20% for certain customers.

Despite lower prices, we still experienced customer attrition as competitors took more aggressive pricing actions during the quarter.

Going forward we expect that Reliant's current acquisition campaign, retention program, and its top customer satisfaction ratings will reduce attrition.

On the C&I front Reliant has continued to regain its competitive footing since the slowing the growth of the business in the first five months of 2009.

As a result we've experienced improvements during the third quarter of renewing current customers and winning back previous ones.

Reliant C&I remains the largest commercial and industrial retail provider in Texas.

Finally, as seen in the bottom-right chart, we surpassed our full year FORNRG 2.0 ROIC target of 20 basis points during the second quarter.

At the end of the third quarter, we have posted a year-to-date ROIC improvement of 29.5 basis points, making further progress towards achieving our 2010 goal of 47 basis points.

This improvement in ROIC has come primarily through corporate cost reductions, increased cost efficiencies, and continued reliability improvements at our plants, and the sale of non-core assets.

Moving to our hedge profile and commodity sensitivities on slide nine, as we have reviewed with you on prior calls, we continuously seek opportunities to lock in additional hedgings.

Hedging power or power equivalents during the up cycles, and fuel during the down cycles.

Starting with the top-left chart, during the quarter we added 8.7 million megawatt hours of power or power equivalent hedges for 2010.

During the second and third quarters we took advantage of fleeting upward price movements to lock in our remaining baseload hedges for the prompt year.

With these additional hedges, our wholesale power portfolio is essentially 100% hedged for 2010 for expected baseload generation from the Northeast, South Central, and Texas.

On same chart we have now incorporated additional information concerning our Texas retail sales portfolio and related hedging activities.

In 2010 61% of our expected retail sales are contracted and fully hedged.

These hedged sales represent both commercial and industrial customers and term residential load.

The 39% unhedged and unpriced position in 2010 is comprised primarily of month-to-month residential load and incremental C&I sales.

As we have said in the past, we want to flat book associated with our retail business, and when the customer pricing becomes more certain, we will then hedge the price exposure.

Where it makes sense we match our generation length with our retail short position to maximize collateral efficiency and reduce transaction costs, while providing our customers with physical generation that backstops our retail commitment.

During the third quarter we began to cross some of our generation length to hedge the heat rate exposure associated with the retail load obligation.

This is apparent in the bottom-left chart illustrating the $24 million decrease in heat rate sensitivity between Q2 and Q3.

As we move forward in time we will continue to seek opportunities to cross the generation length with our retail load obligation and manage the gas price exposure using the most collaterally efficient method available.

Now for the chart on the top right, we show our coal and coal transportation hedges.

As illustrated, baseload coal fleet is well hedged through 2014 from a transportation perspective, and well hedged from a coal perspective through 2011.

Moving to the business fundamentals on slide 10, we continue to see a developing trend of industrial expansion throughout the US and specifically in Texas.

In the chart to the top left, both industrial production and ISM indices show a strengthening trend through the third quarter.

On the chart to the top right, in Texas, year on year weatherized -- whether normalized load has returned to 2008 levels and during Q3 has shown some modest growth.

We would expect this trend to continue as residential and industrial demand continues to increase as the state exits the current recession.

We believe the primary reason for the retrenchment in 2008 and 2009 in industrial demand was driven by the nature of manufacturing activity in the state, 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 to changing economic conditions.

These are the very industries we see returning and driving back some of the expansion trends over the last few months.

Staying with Texas for a moment, as we see in the chart to the bottom left, Texas forward heat rates have remained stable and well supported during the quarter primarily driven by expectations around economic expansion and recent load growth, the current impact of capital constraints that will affect future generation projects, and the uncertainty around future regulatory and legislative actions.

We will continue to monitor for opportunistic times in which we can convert some of our gas hedges into power, assuming that prices have reached levels in line with our fundamental outlook.

Finally, reflecting on gas prices and timing for potential recovery, one of the leading indicators for gas prices is related to the rig count.

As you can see by the chart to the bottom right, rig counts have materially dropped during the first half of 2009 as producers aggressively responded to lower prices.

We anticipate a gas market rebalance by mid-to-late 2010 as demand recovers and the impact of reduced rigs and lower supply allows for improving gas fundamentals.

In closing, our plant operations has continued to prudently manage the generation assets while achieving top quartile -- top decile performance during the first nine months of the year, while our EPC group has continued to complete our construction projects on time and within scope.

We've continue to execute our commercial plan around maximizing the value of both the wholesale and retail portfolios through 2009, and we have continued to look for opportunities to hedge the forward portfolios in the most collaterally efficient way.

Finally we are seeing indicators that the overall business fundamentals are beginning to improve, which will lead to a positive impact on our business portfolio going forward.

Now I'll turn it over to Bob.

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

Beginning with the financial highlight from slide 13, and as David expressed, the company continues to achieve record financial results during a time period where many companies are facing serious financial challenges.

Adjusted EBITDA for the third quarter and for the first nine months of 2009 was $906 million and $2.129 billion, respectively.

This represents the highest quarterly and nine-month results NRG has ever posted.

Cash for operations increased 18% to $1.28 billion for the first nine months of the year, while free cash flow from recurring operations was up over 19% to $1.09 billion compared to the first nine months of last year.

The increased cash performance is attributable to Reliant Energy, which in five months of ownership has generated more cash than the original purchase price.

Liquidity remains a very comfortable $3.9 billion with nearly $2.3 billion of that in cash.

We are raising our 2009 adjusted EBITDA guidance to $2.575 billion, and that excludes an expected $85 million negative impact in the fourth quarter of hedges that were terminated early as part of the credit sleeve unwind, which I will discuss shortly.

We are also initiating our 2010 full year guidance at $2.2 billion.

As a reminder, on the second quarter conference call I stated two high-level priorities for the second half of 2009, which were -- one, unwinding the credit sleeve supporting Reliant Energy, and second, the successful execution and completion of our capital allocation plan, specifically the planned $500 million in share repurchases.

On October 5 we successfully terminated the Merrill Lynch credit sleeve, one year earlier than originally planned.

In addition, during the third quarter we purchased $250 million of common shares through September 30, and an additional $250 million of shares are planned to be repurchased during the fourth quarter.

The quarter-over-quarter comparison on slide 14 clearly highlights the immediate benefit we have received from the addition of Reliant to the portfolio.

Reliant's exceptional performance contributed $306 million in adjusted EBITDA during the quarter, bringing their five-month EBITDA contribution to $536 million.

The mass and commercial and industrial business combined to provide $443 million in gross margin on 16 terawatt hours billed for an average customer margin of $27.69 -- $3.08 lower than Q2 2009 due to the price reductions enacted on June 1 and July 1.

Transaction and integration costs for the quarter totaled $6 million and are excluded from adjusted EBITDA.

The Texas region's results declined $61 million quarter-over-quarter from $465 million in the third quarter of 2008 to $404 million in the third quarter of 2009.

A 65% decline in natural gas prices resulted in Houston's own power prices that were less than half those in the third quarter of last year, leading to lower margins on our gas fleets.

Our baseload fleet, however, benefited from higher hedged power prices, which more than compensated for a 1.1 terawatt hour decline in coal and nuclear generation due to maintenance and unplanned outages.

Gas generation on the other hand increased approximately 768,000 megawatt hours, particularly due to 454 megawatt hours generated from Cedar Bayou 4, which came online in late June of this year.

The South Central region had adjusted EBITDA of $4 million during the quarter, a $43 million decrease from the third quarter of 2080 (sic - see presentation), but -- of $47 million.

The unfavorable quarter-over-quarter variance was largely driven by a third quarter 2008 unrealized gain related to physical power sales as the lower natural gas curve benefited the region's power positions.

However, these positions have since been delivered.

Excluding the benefit of these positions, regional performance was on par with 2008.

A $26 million decline in contract revenue due primarily to the expiration of a co-op contract, was more than offset by increased merchant activity of $17 million and $18 million in lower fuel costs.

Adjusted EBITDA for the Northeast region was $27 million higher, driven by $36 million in higher energy margins as lower cost to serve load contracts benefited margins.

The portfolio's hedge positions largely offset the 30% reduction in generation during the quarter.

Slide 15 outlines the company's liquidity position as of September 30, 2009.

Total liquidity excluding funds deposited by hedge counterparties stood at $3.9 billion, an increase of $572 million.

The increase in liquidity from year-end 2008 was largely driven by the $1.28 billion in cash from operations, $595 million in net debt issuance including the June issuance of the 8.5% senior notes for $678 million, offset by the term loan B payment of approximately $220 million and $260 million in net proceeds from the sale of MIBRAG.

Offsetting the inflows was the Reliant acquisition, our capital expenditures, and the share repurchases.

Letters of credit of approximately $200 million have been issued during the year, $92 million in support of the equity bridge loan associated with the GenConn joint venture project and a $59 million letter of credit in connection with a tax-exempt bond issued to help finance environmental CapEx at Dunkirk, with the remainder primarily in support of our commercial operation trade position.

Hedges under the first lien structure declined from Q2 2009 as a result of trade innovations and terminations in connection with the credit sleeve unwind and crossing generation supply to retail load.

As I noted a moment ago, amending the credit sleeve and reimbursement agreement, or the CSRA, was a top priority for us in the second half of 2009, and through the hard work of our treasury, risk, commercial operation, and legal teams combined with the excellent support of the Bank of America Merrill Lynch teams, the task was successfully completed on October 5, 2009.

Slide 16 provides the background on the CSRA and the impact of unwinding the credit sleeve.

The top half of the slide provides the background.

The sleeve provided credit support for Reliant.

It contained predetermined collateral exposure levels, and fees for the sleeve were 5 7/8% on an annual basis of the predetermined exposure levels.

The CSRA also required NRG to inject $200 million into Reliant on May 1, and there were potentially two additional contingent future capital contributions required of NRG.

The unwind of the sleeve, which is covered on the bottom half of the slide, accelerates the credit and commercial synergies of the retail and wholesale portfolios, and it increased our corporate level liquidity.

Furthermore, it allows unrestricted access to future cash flow generation from Reliant.

The financial movements of the sleeve unwind included $374 million in net cash outflows to post collateral for out of the money hedge positions.

$250 million in cash was returned for Merrill Lynch of previously posted cash.

$165 million net cash inflow for the settlement of offsetting trades, which in the aggregate were in the money to NRG.

In our full-year adjusted EBITDA guidance on slide 17, there is an $85 million charge related to settlements of net out of the money positions.

The remaining net in the money position amortizes to income in future periods under the original time frame of the underlying trades.

There were $206 million of LCs posted to counterparties, and $322 million of cash at Reliant is no longer encumbered by Merrill Lynch liens.

Overall, the unwind favorably impacts corporate liquidity, commercial operating synergies, and the covenants governing our first lien debt.

Slide 17 sets forth our full-year 2009 adjusted EBITDA guidance of $2.575 billion.

This increase, as I mentioned a moment ago, excludes the Q4 impact of the hedge termination, and it's driven by the $225 million improvement in Reliant as a result of higher summer demand and margins.

This is partially offset by a $150 million decline in the wholesale portfolio, reflecting the lower commodity price environment, lower plant availability, and higher than previously forecasted operating expenses.

Cash from operations guidance is being increased by $275 million to $1.65 billion, driven by Reliant's performance results and the net changes in the Reliant cash collateral postings, including the impact of the sleeve unwind.

Turning to our outlook for 2010 on slide 18, we're initiating our full-year adjusted EBITDA guidance of $2.2 billion.

The decline versus 2009 is roughly equally attributable to three primary reasons.

First, the overall lower hedge price in 2010 of the wholesale portfolio.

Second, higher coal transportation costs in 2010 as WA Parish has a new rail coal delivery contract.

And three, Reliant's EBITDA contribution is down $125 million due to lower prices, increased supply costs, and a normalized weather assumption.

My final slide, page 19, covers capital allocation.

While there are several significant accomplishments to date and more planned for the balance of the year, such as the orderly settlement of the CSFII structure, I'll limit my discussion on our share repurchase plans.

During my tenure at NRG we have continually purchased shares throughout the ups and downs of business cycles, always with an eye towards our view of fundamental value versus market price.

This approach has served us well, and since 2004 we have purchased approximately $2.2 billion of NRG shares at a weighted average price that's below $24 a share.

Looking at today's market price and comparing it to our fundamental view on value, the business case to repurchase shares is as compelling today as it has ever been during my tenure.

During the third quarter we repurchased 250 million common shares, and we will purchase another 250 during the fourth quarter.

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

Thank you Bob.

Our slide presentation concludes on page 21 where we have brought down our near-term objective scorecard from the second quarter call.

While several of our objectives remain uncompleted, every one remains on track or in progress, and I remain very confident that all will be achieved.

We hope and expect to be able to report further progress on these objectives when we meet in November, but even at our investor conference at a time when there will be six weeks remaining in 2009, there may be work that remains to be done on some or all of these objectives.

But I have every reason to believe that you will be pleased, as I am, with the present status and prospects for all the company's principal growth initiatives, and we very much look forward to walking you through them all in greater detail than is permitted by the 45 minute constraint of these quarterly calls.

Now, as this is the 23rd and unfortunately the last quarterly call that I will have handled alongside Bob Flexon, I would be remiss if I did not further address the topic of his recently announced departure.

As all of you know, over the past six years Bob has held at one time or another either the CFO title or the chief Operating Officer title at this company.

But in our fluidly organized, non-hierarchical company, what Bob really has been over the past six years is the co-CEO.

Indeed, over the past few years, whenever people ask me how NRG really is run, I tell them that they should consider me CEO 1A and Bob Flexon as CEO 1B.

I have been very pleased to effectively share this position with Bob over those years, because we have been able to accomplish each other and leverage off each other in a way that has enabled us to surmount every obstacle placed before us, starting with the abrupt and still inexplicable to me resignation of our auditor in Bob's second week of work in April 2004, and lasting through the Exelon episode this summer.

It has likewise enabled us to see some great opportunities that have presented themselves to us, like the Texas Genco acquisition, the hedge reset, the Reliant retail acquisition, and more.

Both Bob and I think that even though NRG stock is well below where it should be from a fundamental value perspective at this time, NRG shareholders nonetheless have benefitted from our partnership.

But now Bob and my long-standing partnership is about to end, and you, our long-term shareholders, have a right to be concerned about it.

But I ask you to think back to the first half-year during our investor outreach in regard to the Exelon situation.

During our multiple road shows many of you had an opportunity to spend time with some of the incredibly talented professionals and senior managers who report to Bob or me, and hopefully as a result you have a feeling for the depth and breadth of our management team.

The fact is that over time both Bob and I almost certainly have gotten too much credit for what has been accomplished at NRG, credit that really belongs to the strata of senior management that lays just below Bob and me, and to the professionals who report directly or indirectly to them.

That cadre of leadership at NRG is staying intact, and consistent with our core philosophy of turning every challenge into an opportunity, each of them is prepared collectively and individually to step up and help fill Bob's shoes.

As to Bob's replacement at CFO, I have every confidence that NRG in our present situation is an appealing employer.

And as such, we will be able to fill that position with a very highly qualified and capable person.

But I think it would be unrealistic for you or for us to think that from day one Bob's successor will immediately have the kind of impact at NRG that Bob has had.

That is up to those of us who are here now.

On a more personal note, for six and a half years I've had the privilege to work closely with Bob, not only due to the closeness of our positions in the so-called C suite, but also in our open office format due to the proximity of our desks.

Bob and I have sat at desks literally three feet apart for the better part of the last six years, and from that common perch we have jointly steered NRG to the enviably strong position which we occupy in our industry today.

Bob, in my opinion, is eminently well-prepared to be a CEO in his own right, and he goes to Foster Wheeler with the best wishes of all of us at NRG.

I speak not only for myself but for all 4,500 men and women who work at this company when I say, we will miss him.

So Kelly, we are happy to take any questions.

(Operator Instructions).

Neel Mitra, Simmons & Company International.

Can you comment on the implications of the recent merchant wind transmission line FPL brought into south Texas?

What are the shorter implications right now for off-peak power prices in ERCOT south or Houston?

And does this have any effect on how you view the CREZ buildout in terms of difficulties, building transmission into the south versus the north since the construction lead time was around 10 months?

To summarize, it's sort of a two-part question.

One is what's the direct impact of FPL's new transmission line on west to south and onto Houston?

And second, what does this mean about how quickly CREZ will be built out?

Is that right?

That's right.

Okay.

Mauricio, would you like to answer that question?

Sure.

Well, as you know, the -- FPL announced they energized a few days ago a 950 megawatt transmission line connecting four of their wind farms from the west zone into the south zone.

Our analysis indicates that it is going to have a larger impact on the west heat rate than it will on the south and the Houston zones.

Just the relative size of the line versus the markets between north -- between Houston and south, you are talking about a 35 gigawatt market.

So the impact of 900 megawatts in the west -- exporting from the west versus the impact on the south and Houston is significantly different.

Now, with respect to your second question about if this changes our view on CREZ, keep in mind that this is a merchant line.

It's very difficult to compare a merchant line versus a rate based project like CREZ.

We don't have enough information to know if FPL had any lead time in terms of securing rights-of-way.

It looks like there was 10 months of construction, but we don't know exactly what was the lead time to be able to get everything I guess ready.

With respect to CREZ, there is significant challenges.

First one is the finance-ability of the project and how are you going to distribute or socialize the transmission costs across the rate base.

And two, it's the question of the cost.

It has been said that the line is going to cost just shy of $5 billion.

I think there has been some additional discussion whether or not that's close to $10 billion.

So there is still some hurdles around the CREZ project, and we still believe that a 2013 timeline is aggressive.

I think the point there, and looking a little bit at FP&L's comments, we never thought the actual physical construction of transmission lines was the thing that takes a long time when it comes to CREZ.

It's the -- as you say, it's the other aspect, it's the regulatory aspects, and it's the right-of-way.

The permitting, the siting, and (technical difficulty)

Neel, do you have any follow-on on that, or are you good?

I'm good on that.

I just had a quick additional question.

I just wanted to know if you could comment on the EBITDA impact of the new coal transportation contract into Texas.

Also how does that compare to the current coal costs that you're reporting in your presentations?

Well, the way that I think about it, like there's three main reasons that drove our EBITDA down, and I said roughly they're about the same level of cost.

So we are down about $375 million or so year over year.

So you say about roughly 1/3 of it is roughly the rail.

Parish brings in roughly 12 million tons of coal, and that contract was repriced and begins on January 1.

That contract had been around for -- since 10 years, so the beginning of the decade.

So that basically puts it to the current market rates.

Great, thank you very much.

Lasan Johong, RBC Capital Markets.

Great quarter.

Bob, I'm going to miss you.

I think you're an excellent CFO, and I think you'll make a great CFO for Foster Wheeler USA.

Having said that, I need to ask you a clarification question on year 2010 guidance.

This is kind of more macro stuff.

Since you're hedged out on your wholesales, I'm assuming that there's going to be very little pricing -- price volatility due to natural gas, maybe a little to heat rates.

But you're exposed on the retail business.

So generally speaking, I would assume that if gas prices were going up as you forecast in your scenario, you've got very little upside gain from wholesale but potentially a relatively large loss on retail due to higher gas prices.

And so the $2.2 billion EBITDA guidance for next year I am assuming either incorporates that upside gas price move -- and if it doesn't then there is more risk to the downside to that guidance than there is upside to that guidance.

Am I understanding this correctly?

I'll expand on that a little bit.

I think there's really -- on the retail piece, first of all, as John went through his presentation and talked about what's hedged and what isn't hedged, the piece that's currently not hedged is the one also where the revenue is not locked in either, so they will generally move together.

So if you see gas prices suddenly going up, Jason will have to make a determination whether he raises those prices not at the retail level.

So that part will continue to float, so we are not wearing that risk at this point in time.

Anything that is fixed price on the retail side, as John mentioned, is basically a flat book.

So you don't have necessarily any downside or upside on that piece of the business.

On the wholesale side of it, I would agree with your comment that for your baseload generation it's pretty much hedged out.

It's going to be what it's going to be.

The one thing that's maybe a little bit different, '10 versus '09, I think we saw that the margins coming from the gas assets in '09 were quickly compressed as gas prices came down and like during the course of the year.

I think in 2010 if I look to where's the upside in the wholesale portfolio, I think our assumptions right now on some of the margins from the gas assets is conservative in our guidance.

So what you saying is that the upside potential exists on generation from more gas-fired generation.

But if gas prices are going up, that's not likely to materialize; correct?

Well, it depends on what happens with the heat rates, yes, again, so it's more of a spark spread discussion.

So that's fair.

I think the other thing, going back to retail as well, is what we've assumed this year, in 2010 is a normalized weather year, which is how we always prepare our budgets.

And that really even applies on the wholesale as well.

To the extent that you get hotter or colder will have some impact on that performance.

As you know, in 2009 on the retail side the summer in Houston was particularly warmer than normal, and we did have upside of roughly $80 million or so in 2009 from the Reliant piece.

So to the extent that weather -- weather will have some impact on both parts of the portfolio in '10.

I see.

Last question, the structure of the hurricane insurance sounds interesting.

Can you describe to me how that works and what it costs?

I am not sure.

Mauricio is going to tell you specifically what it costs, but I would ask Mauricio to try and explain it succinctly.

What we did is we -- we enter into an instrument that allowed us to hedge the gross margins that we would've lost due to our lower -- or lost loads on -- in the case of a hurricane event.

In addition, since we run a flat book, we buy the supply for that expected load, so any loss associated to the sell-back of that supply was also part of that instrument.

I will say that it was a -- it is not an insurance, it is a derivative product that is tied to the cap bond market, and we introduced price and load triggers that allowed us to lower the cost of that instrument for the business.

Was it a structured transaction?

Or did you just put it together using commonly available derivative products, options and forwards?

It was a structured product, but it was a derivative product.

It was not an insurance product.

Got it, thank you.

Michael Lapides, Goldman Sachs.

Just coming back to Texas on a little bit and the impact of wind, can you talk about how much wind and whether it's two years, five years, 15 years -- let's stay in the more near term, so let's say next five to seven years.

How much wind would it take to get -- if it came into South Texas before you would see coal on the margin in the off-peak hours?

How much wind to get to coal on the margin in the South Texas zone in the off-peak hours?

Yes.

Yes.

I'm not -- does anyone want to -- I don't have that answer off the top of my head.

I don't have it.

I don't have the numbers, but I can follow up with you later.

That would be great.

I would appreciate doing it off-line.

Michael, did you have another question?

No.

I'm okay, thanks.

Brandon Blossman, Tudor Pickering.

I think this will be for Mauricio.

ERCOT bilateral capacity market.

Can you kind of give some year-over-year '09 to '10 color and then describe particularly in the higher heat rate products what you have open for '10?

Or what you've locked down?

I think what you're referring to is the capacity pricing that was embedded on the old contracts that Texas Genco had.

There is no bilateral capacity market in Texas.

You see a pure energy balancing market.

So I want to make sure that I understand your question (multiple speakers)

Is that what you're talking about?

I guess I'm talking about both.

One, what was embedded in those old contracts?

And two, I do assume that you guys held some higher heat rate product as capacity on a month-to-month or quarter to quarter basis.

What I will say is the only capacity product that we have and that we report on our financials is the capacity component that was embedded on these old auctions that Texas Genco used to do.

Prospectively it's a pure energy market.

What we do is we structure our transactions with other counterparties in the form of tolling agreements or heat rate coal options.

But usually they are treated as energy [auctions], not as capacity.

Fair enough.

So not to prolong this, but can you comment on what the market looks like year over year for those products?

I don't want to get buried in the semantics, but for those tolls, if you will.

One of the benefits of combining retail and wholesale is that in the past we have -- Reliant was one of the large buyers of these products to manage their volumetric risk of load.

Now that it's a part of NRG, the monetizing the intrinsic value of our gas portfolio in the form of heat rates, it happens internally where wholesale will provide those insurance products to the retail group, and the retail will price it to the end customers.

What's the transition for that?

It's already happened.

We started in the summer of two thousand and -- of this year, and we already are matching the generation and the load books for 2010 actively.

Much of the wholesale position we inherited from Reliant is worked off now at this point, right.

So we can expect '10 essentially just to think about that as an integrated entity.

No residual supply book?

Right.

Think about the -- lowering the volatility around your gas portfolio gross margin.

The fact that you actually can now cross your gas portfolio with your load just is going to provide us a more stable view on the gross margin associated to the gas portfolio.

And just one more, switching topics here real quick.

Residential gross margins on the retail side?

I'm not -- I don't expect that you guys will comment on exactly what your target number is, but can you comment directionally where you'd be biased as far as attrition versus holding gross margin?

Jason, do you want to avoid answering that question?

Yes.

The way we think about margin for 2010 is we look at the current environment and you look at the forward curves.

We think that pricing is going to be relatively stable, and we think we are in a position to be competitive on price.

So right now, from an overall margin perspective, we don't see a big movements in price downward through 2010.

Okay, thank you.

Anthony Crowdell, Jefferies.

When I look at the 2010 guidance wholesale, it's about $1.7 billion.

And Bob had stated roughly about like $125 million of that or one third of the dropoff was from a rolloff in hedges.

You have another rolloff in hedges from '10 to '11.

Your weighted average price of hedges goes down, so I look at what you guys have hedged, roughly about like 48 million or 50 million megawatt hours.

That's another dropoff of about like $250 million of EBITDA.

Is that reasonable with what you've provided so far?

I think your math to re-disclose what the hedge prices are, and I think in 2011 I think what we disclosed, that 70% of the portfolio is hedged at about a gas price of about $7.27.

And if you look at 2009, we are about $8.37, so -- and 2010 is going to be somewhere in between the two.

So you're going to see those level of dropoffs on the 50 million megawatt hours.

So your math is fair.

You have to assume the right heat rate.

But it's not an unreasonable way to look at it.

Great, thank you.

[Litton Dahia], Nomura Securities.

Bob, congratulations and best of luck in your new role.

Just a maintenance question first.

What is the RP basket at the end of the third quarter?

At the end of the third quarter, once we file the Q, it will be about -- in round numbers about 750 million.

And then in the fourth quarter you'll have reductions to that for the 250 million in planned share repurchases and also the settlement of CSFII of 181 million.

So by the time you're at the end of the year, you'll be sitting around 400 to 450 million by the end of the year and before you file your K.

Great.

Now, obviously you have over $2 billion of cash on balance sheet, and as you look ahead 12 to 18 months, could you share some thoughts of potential uses for that?

Well, probably Bob is not the right person to ask.

I'll tell you what I would do (multiple speakers)

David, you can answer.

I would be fearful that he would tell you what he would do.

But I think the approach that we outlined, and we now -- to spice things up, we show it in a little different way.

But I was always -- preferred this sort of pie chart approach where we show that we maintain a pretty balanced approach in terms of paying down debt.

We continue to believe that the commitment, the undertaking that we made to the -- our shareholders a few years ago in terms of return of capital to shareholders, either through share buyback or possibly a dividend, but until we can fix the restricted payment basket thing for a few years out, and at these share price levels, we are very focused on continuing with share buybacks, so while we are not announcing a 2010 share buyback plan here when we still have a fair amount to do on 2009, we would certainly expect that to be part of the future.

And then in addition to the money we reinvest in the existing assets, we see a lot of growth opportunities, in fact in a lot of ways in which we are sort of uniquely advantaged, particularly around the renewable space where as we've mentioned in here, we not only have the liquidity, but unusual in this market, we also have tax equity capacity in 2010.

And we see tremendous opportunities in that area.

So I think a good wedge out of the pie will be reinvestment in the business.

Yes, I would add to that (multiple speakers)

Uh oh.

Here it comes.

This is not discretionary, so (laughter).

But I think it will look a lot like it has in the past between capital investments, share repurchase and debt reduction.

And on the debt reduction piece, under our first lien next year the cash sweep, the mandatory offer and probably what the take will end up being is somewhere in an order of magnitude of about 400 million -- between 400 and four hundred and say 30 million, paydown of term loan B under the mandatory offer that we have.

I see.

Okay.

And any thoughts on revisiting amending the covenants on the old bonds?

(multiple speakers)

I've been working and making sure I'm developing a good relationship with the bond group and the leader of the bond group, and I've been transitioning that to Chris Sotos, our Treasurer here.

I think what we want to do here as we look forward is look at various alternatives on how the covenants can be effectively addressed and then sit with the members of the bond group and review alternatives together and see what makes the most sense.

So I think we will continue -- I think the company will continue to work in that direction going into 2010.

And I think we've got some very good ideas on our side, and we are just looking for the cooperative dialogue between us and the bond holders to do what's in all of our interest, because there are certainly good reasons why the bond group should want to change the covenants because they don't effectively protect them right now the way the mark to market mechanism works in the covenant versus the way it works in the financial statement.

So there is good motivation on both sides of the table to get something that makes sense for both parties.

And I am optimistic that will happen in 2010.

As Bob suggests, there's going to be no hiatus in that work once Bob leaves.

We will begin after that sooner rather than later.

I think I agree.

Engaging with the bond holders on this makes a lot of sense.

But anyway, Bob, best of luck again, and talk to you soon.

Thank you.

I think we have time for one more question.

Angie Storozynski, Macquarie Capital.

Thank you.

Thanks for the last question.

I want to go back to the 2010 guidance -- surprise, surprise.

First of all, could you (inaudible - background noise) try to quantify for instance potential upside from your gas plants.

And I know it very much depends on the future spark spreads, but is it -- what's the range?

Is it say 100 million?

Or is it a 200 million range?

That's one.

Secondly, David, you mentioned some cost cutting measures or some additional revenues that your guys are working on to boost the 2010 results.

So any color on these would be awful.

And lastly, the 500 million EBITDA projected for the retail business -- any takeaways for the run rate?

Should we see the run rate for this business as rising?

Or is this just a function of your prospectus of weak gas prices and that the counter cyclicality of this businesses driving earnings up?

Wow Angie.

For that, that was a definitely multi-part last question.

Let me start with the part -- some of the parts that I could address before handing it to Bob.

I guess you guys are going to talk about maybe gas plant upside.

That basic point I made, Angie -- first of all, I think you have to recognize just the type of company we are, there's sort of conservativism sort of across our full range of forecasting.

But as we have every year in the past, we are constantly looking -- as people like -- as the old cliche, we are constantly looking at how to sweat the assets, what capital expenses really need to be done.

We have the FORNRG program, which has been successful.

There is an extension of the FORNRG program within Reliant, taking a careful look at the cost structure there.

There's a variety of ways that we have been looking at, very different and pretty micro at each of the plants, and within the Reliant business they're looking at different ways of enhancing revenues, but there's no sort of one general theme.

It's sort of across.

Each plant has sort of different ways.

But I would just also say that to the extent -- economic recovery, demand growth, natural gas prices increasing -- we are not forecasting for any weather event.

So there's just -- from our perspective, from my perspective, between sort of our natural conservatism in terms of the way we do this forecast on sort of a static basis and the work that we have repeatedly shown every year as a management team that we can do to outperform, I am confident that there's more conservativism in the number overall than there is aggressiveness.

So Bob, did you want (multiple speakers)

Yes Angie.

Just a general comment on the guidance, and this is just my own philosophy on doing guidance.

When you're doing 2010 and 2009, I always like to start with a number where we've got a very high confidence level.

And during the course of the year our challenge as a management team is now to -- is to beat that.

So I do -- consistently since I've been here have always put some level of contingency in there for the unknown to the downside, recognizing that our shareholders are much more comfortable living with the downside than the downside.

That said, now on the gas assets, specific to that question, Mauricio mentioned how we will have increased pointing of the gas generation to the retail assets.

So we'll be recognizing that value through the transfer of wholesale into retail.

But the way that I generally think about 2010 and the gas assets versus 2009, in 2009 we -- we'll -- historically we have always estimated that the gas assets generate somewhere between $100 million to $150 million of gross margin.

In '09 we are at the very low end of that range, and I think for '10, going to '10 we would see more towards the upper end of that range.

So I think that's also kind of the way you can think about the margin from the gas assets.

(multiple speakers)

So is this number already embedded in the guidance?

Sorry Angie.

Say that again?

Is it in the guidance?

Is the $150 million gross margin from gas already embedded in the guidance?

No.

We have some level of that in there.

Again, when we come up with a number, our number when you roll it all together, yes, total, more than 2.2.

We come out and then put a 2.2 number that's out there to keep some level of conservatism there.

So there's some shaving that happens across the board when we do it, and since the hedge portfolio is -- baseload portfolio is largely hedged, that haircut largely gets to the remaining open positions in wholesale, which is primarily gas and heat rate.

Any comments about the other retail business (multiple speakers)

Oh, the -- whether -- the retail business was, whether the -- our sort of 250 midcycle run rate, whether we were changing that?

Yes.

So Angie, no, we would not have a fundamental change in our view of the run rate for the retail business.

But when the market conditions sets itself up for us to overperform on that number, that's the way we run the business.

But you shouldn't fundamentally change your view on the run rate.

Or not on account of us at least.

(multiple speakers)

Anyway, well Angie, thank you for that.

Happy if you want to have further discussions to take it offline, but I know from the reporting calendar there are a lot of companies reporting today, so Kelly, I think we're going to call it a day.

I want to thank everyone for participating on the call.

We look forward to be seeing people down in Houston next month.

And thank you again to Bob Flexon.

So thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.