Post on 04-Jan-2016
transcript
First Quarter 2004 Financial Results First Quarter 2004 Financial Results
May 11, 2004May 11, 2004
2
Safe Harbor StatementSafe Harbor Statement
This Investor Presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to certain risks, uncertainties and assumptions and typically can be identified by the use of words such as “expect,” “estimate,” “anticipate,” “forecast,” “plan,” “believe” and similar terms. Such forward-looking statements include, but are not limited to, expected earnings, future growth and financial performance, timing of debt maturities, resolution of litigation and bankruptcy claims, the hiring of new independent auditors, the successful closing of announced transactions, the successful implementation of our acquisition and repowering strategy, the outcome of hearings on our RMR agreements and cost tracker for scheduled expenses, and FERC’s approval of the basic LICAP market design . Although NRG believes that its expectations are reasonable, it can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Factors that could cause actual results to differ materially from those contemplated above include, among others, general economic conditions, hazards customary in the power industry, competition in wholesale power markets, the volatility of energy and fuel prices, failure of customers to perform under contracts, changes in the wholesale power markets and related government regulation, the condition of capital markets generally, our ability to access capital markets, our substantial indebtedness and the possibility that we may incur additional indebtedness, adverse results in current and future litigation, delays in hiring new independent auditors, delays in or failure to meet closing conditions in announced transactions, failure to identify or successfully implement acquisitions and repowerings, adverse rulings on our RMR agreements and cost tracker for scheduled expenses, resulting in us refunding certain payments received to date, and FERC not approving the basic LICAP market design.
NRG undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG’s actual results to differ materially from those contemplated in the forward-looking statements included in this Investor Presentation should be considered in connection with information regarding risks and uncertainties that may affect NRG's future results included in NRG's filings with the Securities and Exchange Commission at www.sec.gov.
3
Progress Year-to-Date
Q1 Financial Results
Strategy
Progress Year-to-Date
Q1 Financial Results
Strategy
AgendaAgenda
4
Strong first quarter operating performanceStrong first quarter operating performance– $266 million in adjusted EBITDA$266 million in adjusted EBITDA– $316 million in Free Cash Flow$316 million in Free Cash Flow
Liquidity continues to strengthen – $1.4 billion at Liquidity continues to strengthen – $1.4 billion at end of Q1end of Q1
Post-Chapter 11 emergence plan solidly on track Post-Chapter 11 emergence plan solidly on track
Internal reorganization proceeding in Internal reorganization proceeding in accordance with planaccordance with plan
HighlightsHighlights
5
The First 100 Days’ ObjectivesThe First 100 Days’ Objectives
Financial Priorities
Organizational Priorities
4. Resolve commercial issues with Connecticut plants
1. Simplify capital structure
3. Reduce borrowing costs
2. Ensure our liquidity
1. Keep plants running safely, reliably and efficiently
Operational Priorities
2. Increase contracted portion of merchant generation
3. Maintain momentum in asset sale program
2. Expedited phase-out of external advisers
3. Redirected management team
4. Restructured corporate organization
1. New CFO
6
Operational Performance - Core RegionsOperational Performance - Core Regions
Our plants in the Northeast dealt successfully with periods of unusually Our plants in the Northeast dealt successfully with periods of unusually cold weathercold weather
Our fuel diverse fleet of generators in New York and Connecticut, Our fuel diverse fleet of generators in New York and Connecticut, helped maintain affordable electric prices during gas price spikeshelped maintain affordable electric prices during gas price spikes
The Western Region successfully completed thirteen planned outages The Western Region successfully completed thirteen planned outages at seven different plantsat seven different plants
1,321
2,469
7,884
Net ownedcapacity
MW
In-marketavailability
%
Net capacityfactor
%
Average heatrate
(Btu / kWh)
Equivalentavailability
%
Generation(MWh)
Region
11,600
10,700
11,400
9918720.9 millionWest
9857852.8 millionSouth Central
9538812.9 millionNortheast
7
0
2,000
4,000
6,000
8,000
10,000
Entergy New York PJM Nepool
GigaWatt hours
“In the money”Generation (1)
Fuel Hedges (3)
Energy Sales (2)
Operational – 2004 Hedging ActivityOperational – 2004 Hedging Activity
(1) ‘In the money’ generation is derived by multiplying the forward positive spark spread (on an hourly basis) by the available capacity of each unit and aggregating by region
(2) Energy sales are actual monthly forward sales, including load serving contract commitments
(3) Fuel Hedges are actual fuel purchases converted, according to each plant’s heat rate, to an equivalent amount of generation (MWh)
For the balance of 2004, the Company has hedged 48% of “In the money” For the balance of 2004, the Company has hedged 48% of “In the money” generation with forward energy commitments and has locked in the energy margin generation with forward energy commitments and has locked in the energy margin
from those sales by purchasing 80% of the forward fuel requirementsfrom those sales by purchasing 80% of the forward fuel requirements
8
We continue to make progress rationalizing the We continue to make progress rationalizing the Company’s non-core assets for value:Company’s non-core assets for value:
Asset Sales - 2004Asset Sales - 2004
NameName LocationLocation
Actual or expectedActual or expectedcash proceedscash proceeds
(Millions)(Millions)
Balance Balance Sheet Debt Sheet Debt
(Millions)(Millions) StatusStatus
Various $20 $45
Batesville
Others (4)
Mississippi $27 $292 Executed PSA
Loy Yang A Australia $27 N/A Completed
Cobee Bolivia $50 $24 Completed
Calpine Cogen Various, U.S. $3 N/A Completed
PERC Maine $17 $25 Completed
Executed PSAs
TOTAL $144 $386
RMR AgreementsRMR Agreements
FERC has approved, subject to hearing and refund, NRG’s RMR agreements for FERC has approved, subject to hearing and refund, NRG’s RMR agreements for Middletown, Montville and Devon units 11-14 (1,392 MW in total) Middletown, Montville and Devon units 11-14 (1,392 MW in total)
These RMR agreements will remain in effect until the LICAP market is implementedThese RMR agreements will remain in effect until the LICAP market is implemented
FERC has also approved, subject to hearing and refund, NRG’s Cost Tracker for FERC has also approved, subject to hearing and refund, NRG’s Cost Tracker for scheduled expenses incurred until LICAP implementation scheduled expenses incurred until LICAP implementation
The RMR Agreements, together with the Cost Tracker, will cover NRG’s cost of service for The RMR Agreements, together with the Cost Tracker, will cover NRG’s cost of service for Middletown, Montville and Devon 11-14 until the LICAP market is implementedMiddletown, Montville and Devon 11-14 until the LICAP market is implemented
FERC had previously approved, subject to hearing and refund, an RMR Agreement for FERC had previously approved, subject to hearing and refund, an RMR Agreement for Devon 7 & 8 although ISO-NE recently notified NRG that one unit is not needed for Devon 7 & 8 although ISO-NE recently notified NRG that one unit is not needed for reliability after April 2004 - as a result, NRG plans to retire Unit 8 in May.reliability after April 2004 - as a result, NRG plans to retire Unit 8 in May.
Locational Installed Capacity (LICAP) market Locational Installed Capacity (LICAP) market
Proposed LICAP market in New England that would pay Norwalk, Connecticut Jet Power, Proposed LICAP market in New England that would pay Norwalk, Connecticut Jet Power, Middletown, Montville and Devon 11-14 (1,812 MW in total) $5.34 per kW-monthMiddletown, Montville and Devon 11-14 (1,812 MW in total) $5.34 per kW-month
Should provide a positive cash flow for the Connecticut fleet as a wholeShould provide a positive cash flow for the Connecticut fleet as a whole
FERC is expected to approve the basic LICAP market design sometime this summerFERC is expected to approve the basic LICAP market design sometime this summer
Connecticut StatusConnecticut Status
** These RMR agreements are expected to contribute up to $30 million of revenue per quarter These RMR agreements are expected to contribute up to $30 million of revenue per quarter **
10
Current Objectives: ChecklistCurrent Objectives: Checklist
Financial Priorities
Organizational Priorities
4. Resolve commercial issues with Connecticut plants
1. Simplify capital structure
3. Reduce borrowing costs
2. Ensure our liquidity
1. Keep plants running safely, reliablyand efficiently
Operational Priorities
2. Increase contracted portion ofmerchant generation
3. Maintain momentum in assetsale program
2. Expedited phase-out ofexternal advisers
3. Redirected management team
4. Restructured corporate organization
1. New CFO
Corporate debt maturities of less than $53 million due over next six years
$2.7 billion refinanced two-tier security structure withweighted average cost of 6.8% (revolver undrawn)
Liquidity of nearly $1.4 billion
Bob Flexon appointed as CFO
Bankruptcy legal/financial advisers role severelycurtailed; positive 1Q ’04 cash flow impact
Corporate restructuring with regional emphasis
Streamlined HQ to be relocated in core region
$146 million in asset dispositions as of May 7, 2004 completed- $97 million in cash, $49 million in debt reduction
RMR agreements approved by FERC. LICAP expected summer or fall 2004
High percentage of coal requirements contracted andsubstantial portion of economic energy production sold forward
96% IMA from coal-fired fleet, safety record better than industry standard
11
Financial Results
Financial Results
12
Strong financial operating performance
Reported net income of $30 million or $0.30 per share
Net income of $34 million or $0.34 per share excluding non-recurring items
Improved liquidity
Net cash flow of $280 million
Liquidity increased by $188 million over last quarter
Strengthened financial position
Refinanced $503 million of senior credit facility
Executed interest rate swaps lowering interest expense by $20 million over the next two years
Strong financial operating performance
Reported net income of $30 million or $0.30 per share
Net income of $34 million or $0.34 per share excluding non-recurring items
Improved liquidity
Net cash flow of $280 million
Liquidity increased by $188 million over last quarter
Strengthened financial position
Refinanced $503 million of senior credit facility
Executed interest rate swaps lowering interest expense by $20 million over the next two years
First Quarter Financial HighlightsFirst Quarter Financial Highlights
13
Operating revenues
621
Operating income
125
Net income
30
EBITDA
259
Adjusted EBITDA
266
Operating revenues
621
Operating income
125
Net income
30
EBITDA
259
Adjusted EBITDA
266
$ millions$ millions
Key Financial HighlightsKey Financial Highlights
14
1st Quarter 2004 Spark Spreads -North America1st Quarter 2004 Spark Spreads -North America
Dark Gas Dual Fuel/Oil Spread1,2 Spread Spread
Spark Spread $99,813 $1,507 $31,013
(000s)
$/MWh $31.23 $10.44 $39.15
Dark Gas Dual Fuel/Oil Spread1,2 Spread Spread
Spark Spread $99,813 $1,507 $31,013
(000s)
$/MWh $31.23 $10.44 $39.15
1 Dark spread is the spread between energy prices and coal-fired generation costs2 Does not include LaGen
15
North American Generation by FuelNorth American Generation by Fuel
58.34
51.50
16.51
Fuel Cost$/MWh
208,725
46,302
70,689
91,734
Fuel Cost Q1’04 ($000)
7,721,015
793,684
1,372,617
5,554,714
MWh Q1 ‘04
694,066
106,038
259,725
328,303
Fuel Cost‘03 ($000)
59.86
47.41
15.65
Fuel Cost$/MWh
28,221,569
1,771,370
5,478,208
20,971,991
MWh ‘03Fuel
Total
Oil*
Gas*
Coal
* Gas and Oil MWh are estimated since certain assets are dual fuel* Gas and Oil MWh are estimated since certain assets are dual fuel
0% 20% 40% 60% 80% 100%
'03 MWh
'03 Fuel Cost
Q1 '04 MWh
Q1 '04 Fuel Cost
CoalGasOil
16
EBITDA by Operating SegmentEBITDA by Operating Segment
($ millions) EBITDA Adj Adj EBITDA
Northeast 114.5 0.3 114.8
South Central 29.0 0.7 29.7
West Coast 33.4 0.0 33.4
Other NA 20.7 (0.4) 20.3
International 55.1 (0.1) 55.0
Alt. Energy & Services 16.3 0.7 17.0
Corp – Unallocated (10.0) 5.5 (4.5)
Total 259.0 6.7 265.7
($ millions) EBITDA Adj Adj EBITDA
Northeast 114.5 0.3 114.8
South Central 29.0 0.7 29.7
West Coast 33.4 0.0 33.4
Other NA 20.7 (0.4) 20.3
International 55.1 (0.1) 55.0
Alt. Energy & Services 16.3 0.7 17.0
Corp – Unallocated (10.0) 5.5 (4.5)
Total 259.0 6.7 265.7
17
Adjusted EBITDAAdjusted EBITDA 266266
Interest PaymentsInterest Payments (43)(43)
Income Tax PaymentsIncome Tax Payments (3)(3)
Other funds used by operationsOther funds used by operations (20)(20)
FFOFFO 200200
Other working capital changesOther working capital changes 2525
Xcel settlement, netXcel settlement, net 125125
CFOCFO 350350
Asset SalesAsset Sales 33
CapExCapEx (35)(35)
Other Cash Used by InvestingOther Cash Used by Investing (2)(2)
FCFFCF 316316
Cash Used by FinancingCash Used by Financing (38)(38)
Other sources of cashOther sources of cash 22
Net Cash FlowNet Cash Flow 280280
First Quarter Cash FlowFirst Quarter Cash Flow
$ millions$ millions
18
($8.4) million($8.4) million100 bps100 bpsInterest ratesInterest rates
$39.0 million$39.0 million$1.00/mmbtu$1.00/mmbtuNatural GasNatural Gas
($0.2) million($0.2) million$1.00/ton$1.00/tonCoalCoal
($1.4) million($1.4) million$1.00/bbl$1.00/bblOilOil
Results in the Results in the following change tofollowing change to2004 pre-tax income2004 pre-tax income
Factor Factor Increased by:Increased by:FactorsFactors
Pricing as of 3/31/04, assuming current hedged positionsPricing as of 3/31/04, assuming current hedged positions
2004 Sensitivity Analysis2004 Sensitivity Analysis
19
LiquidityLiquidity
03/31/04 12/31/03
Unrestricted:
Domestic Unrestricted Cash 665 418
International Unrestricted Cash 168 134
Restricted Cash:
Domestic 123 111
International 52 46
Total Cash 1,008 709
Letter of Credit Availability 137 248
Revolver Availability 250 250
Total Current Liquidity $1,395 $1,207
03/31/04 12/31/03
Unrestricted:
Domestic Unrestricted Cash 665 418
International Unrestricted Cash 168 134
Restricted Cash:
Domestic 123 111
International 52 46
Total Cash 1,008 709
Letter of Credit Availability 137 248
Revolver Availability 250 250
Total Current Liquidity $1,395 $1,207
$ millions$ millions
20
March 31, 2004
Use of $250 million LC facility
Xcel Energy (Resource Recovery) 33
Bank of New York (Peaker facility) 36
PMI support 44
Total $113
Uses of Collateral supporting PMI
Letters of Credit* 49
Guarantees 56
Prepays/Deposits 28
Margin 24
Total $157
* Includes $5 million posted under separate LC facility
March 31, 2004
Use of $250 million LC facility
Xcel Energy (Resource Recovery) 33
Bank of New York (Peaker facility) 36
PMI support 44
Total $113
Uses of Collateral supporting PMI
Letters of Credit* 49
Guarantees 56
Prepays/Deposits 28
Margin 24
Total $157
* Includes $5 million posted under separate LC facility
Credit/CollateralCredit/Collateral
$ millions$ millions
21
Near-Term Corporate Debt MaturitiesNear-Term Corporate Debt Maturities
** Less than $53 million in corporate debt maturities Less than $53 million in corporate debt maturities in aggregate over remainder of decade in aggregate over remainder of decade **
0
5
10
15
20
2004 2005 2006 2007 2008 2009
$ millions
22
Independent Auditors
Staff Appointment– Controller – Chief Risk Officer– Director Internal Audit– Director Planning and Analysis– Treasurer
Independent Auditors
Staff Appointment– Controller – Chief Risk Officer– Director Internal Audit– Director Planning and Analysis– Treasurer
Other ItemsOther Items
23
ConclusionsConclusions
Strong financial results, cash flow and liquidity
Improving our reporting to enhance understanding of results
Building the team
Strong financial results, cash flow and liquidity
Improving our reporting to enhance understanding of results
Building the team
24
Strategy:
“Beyond Back to Basics”
Strategy:
“Beyond Back to Basics”
25
Corporate Strategy – Industry PerspectiveCorporate Strategy – Industry Perspective
Each wholesale power generation company represents a different commodity risk proposition but their overall strategies have stayed in lockstep with each other
Each wholesale power generation company represents a different commodity risk proposition but their overall strategies have stayed in lockstep with each other
MPoM MPoM BtB BtB BtBMPoMMPoM MPoM
“Asset-light”
19981998 19991999 20032003 2004200419971997 2001200120002000 20022002IPP IPP
Industry Industry StrategiesStrategies
Mothball marginal assetsMothball marginal assets
GreenfieldGreenfield
TradingTrading
Leverage off logistics platformLeverage off logistics platform(service provider)(service provider)
Fuel mismatchFuel mismatch
Economy–driven Economy–driven (demand side) price recovery(demand side) price recovery
Sell non-core assetsSell non-core assets
Cut G&ACut G&A
ReliantReliantAlleghenyAlleghenyWilliamsWilliamsEl PasoEl PasoCalpineCalpineDynegyDynegyCurrent Stated StrategiesCurrent Stated Strategies
Exit power businessExit power business
Trading
26
NRG – Back to BasicsNRG – Back to Basics
Our Back to Basics strategy is in full swing Our Back to Basics strategy is in full swing and visible progress is being made:and visible progress is being made:
Reduced corporate burdenReduced corporate burden 33% reduction in 33% reduction in corporate headcountcorporate headcount
Sale of non-core assetsSale of non-core assets $293 million in cash and $672 $293 million in cash and $672 million in debt reduction in 2003 million in debt reduction in 2003 and year to date 2004 with more and year to date 2004 with more to cometo come
Delevering of balance sheetDelevering of balance sheet In connection with asset sales In connection with asset sales and with mandatory offer and with mandatory offer
Optimizing plant operations /Optimizing plant operations / Investment in PRB conversion,Investment in PRB conversion,fuel handling processesfuel handling processes coal handling and environmental coal handling and environmental
remediationremediation
Fixing Connecticut and Fixing Connecticut and Connecticut on track; on to Connecticut on track; on to California California CaliforniaCalifornia
Our Back to Basics strategy is in full swing Our Back to Basics strategy is in full swing and visible progress is being made:and visible progress is being made:
Reduced corporate burdenReduced corporate burden 33% reduction in 33% reduction in corporate headcountcorporate headcount
Sale of non-core assetsSale of non-core assets $293 million in cash and $672 $293 million in cash and $672 million in debt reduction in 2003 million in debt reduction in 2003 and year to date 2004 with more and year to date 2004 with more to cometo come
Delevering of balance sheetDelevering of balance sheet In connection with asset sales In connection with asset sales and with mandatory offer and with mandatory offer
Optimizing plant operations /Optimizing plant operations / Investment in PRB conversion,Investment in PRB conversion,fuel handling processesfuel handling processes coal handling and environmental coal handling and environmental
remediationremediation
Fixing Connecticut and Fixing Connecticut and Connecticut on track; on to Connecticut on track; on to California California CaliforniaCalifornia
27
How are We Making Money: Diversified Asset Portfolio*How are We Making Money: Diversified Asset Portfolio*
Our Competitive AdvantagesOur Competitive Advantages
Sizeable asset base in the right marketsSizeable asset base in the right markets
Long term contracts / relationships with retail Long term contracts / relationships with retail cooperatives in South Centralcooperatives in South Central
Locational advantageLocational advantage
Healthy balance sheetHealthy balance sheet
Flexibility to act in best interest of stakeholdersFlexibility to act in best interest of stakeholders
Our Competitive AdvantagesOur Competitive Advantages
Sizeable asset base in the right marketsSizeable asset base in the right markets
Long term contracts / relationships with retail Long term contracts / relationships with retail cooperatives in South Centralcooperatives in South Central
Locational advantageLocational advantage
Healthy balance sheetHealthy balance sheet
Flexibility to act in best interest of stakeholdersFlexibility to act in best interest of stakeholders
South CentralSouth Central
WestWest
NortheastNortheast
Gas 980 MW
40% Coal 1,489 MW
60%
Gas 693 MW
56%
Dual Fuel 628 MW
44%
Relative WeaknessesRelative Weaknesses
Aging fleetAging fleet
Gaps in our ability to serve Gaps in our ability to serve load shaped contractsload shaped contracts
Relative WeaknessesRelative Weaknesses
Aging fleetAging fleet
Gaps in our ability to serve Gaps in our ability to serve load shaped contractsload shaped contracts
Core Regions:Core Regions:
• NortheastNortheast
• South CentralSouth Central
• WestWest
Fuel, dispatch Fuel, dispatch and market and market diversified diversified
asset portfolioasset portfolio
Our Competitive AdvantagesOur Competitive Advantages
Sizeable asset base in the right marketsSizeable asset base in the right markets
Long-term contracts / relationships with retail Long-term contracts / relationships with retail cooperatives in South Centralcooperatives in South Central
Locational advantageLocational advantage
Healthy balance sheetHealthy balance sheet
Flexibility to act in best interest of stakeholdersFlexibility to act in best interest of stakeholders
Our Competitive AdvantagesOur Competitive Advantages
Sizeable asset base in the right marketsSizeable asset base in the right markets
Long-term contracts / relationships with retail Long-term contracts / relationships with retail cooperatives in South Centralcooperatives in South Central
Locational advantageLocational advantage
Healthy balance sheetHealthy balance sheet
Flexibility to act in best interest of stakeholdersFlexibility to act in best interest of stakeholders* Other North America includes 4,172 MW outside of core regions
GasGas842 MW 842 MW
11%11%
Coal 2,407 MW
30%
Dual Fuel 2,284 MW
29%
Oil2,350 MW
30%
28
Market Environment in which We OperateMarket Environment in which We Operate
Deregulation / Deregulation / ReregulationReregulation
Industry StructureIndustry Structure
Market Market FundamentalsFundamentals
Role of FuelRole of Fuel
Deregulation / Deregulation / ReregulationReregulation
Industry StructureIndustry Structure
Market Market FundamentalsFundamentals
Role of FuelRole of Fuel
On the deregulation / reregulation spectrum, we are On the deregulation / reregulation spectrum, we are entering a period of stasis. The five ISOs will move entering a period of stasis. The five ISOs will move forward methodically to refine their market model. forward methodically to refine their market model. Other regions are static.Other regions are static.
Further utility disaggregation is unlikely. Industry Further utility disaggregation is unlikely. Industry consolidation, while desirable, necessary and inevitable, consolidation, while desirable, necessary and inevitable, will be delayed by the merchant generation industry’s will be delayed by the merchant generation industry’s current debt mountain.current debt mountain.
Supply-demand imbalance has peaked, but how long Supply-demand imbalance has peaked, but how long we remain in the commodity price cycle trough is an we remain in the commodity price cycle trough is an open issue. The timing of the correction depends much open issue. The timing of the correction depends much more on the actions of industry participants (supply) more on the actions of industry participants (supply) than on the strength of economic recovery (demand).than on the strength of economic recovery (demand).
While one can argue about the sustainability of While one can argue about the sustainability of currently high gas prices, higher gas volatility (on a currently high gas prices, higher gas volatility (on a delivered basis) is a near certainty. And now Eastern delivered basis) is a near certainty. And now Eastern coal has shown more volatility.coal has shown more volatility.
On the deregulation / reregulation spectrum, we are On the deregulation / reregulation spectrum, we are entering a period of stasis. The five ISOs will move entering a period of stasis. The five ISOs will move forward methodically to refine their market model. forward methodically to refine their market model. Other regions are static.Other regions are static.
Further utility disaggregation is unlikely. Industry Further utility disaggregation is unlikely. Industry consolidation, while desirable, necessary and inevitable, consolidation, while desirable, necessary and inevitable, will be delayed by the merchant generation industry’s will be delayed by the merchant generation industry’s current debt mountain.current debt mountain.
Supply-demand imbalance has peaked, but how long Supply-demand imbalance has peaked, but how long we remain in the commodity price cycle trough is an we remain in the commodity price cycle trough is an open issue. The timing of the correction depends much open issue. The timing of the correction depends much more on the actions of industry participants (supply) more on the actions of industry participants (supply) than on the strength of economic recovery (demand).than on the strength of economic recovery (demand).
While one can argue about the sustainability of While one can argue about the sustainability of currently high gas prices, higher gas volatility (on a currently high gas prices, higher gas volatility (on a delivered basis) is a near certainty. And now Eastern delivered basis) is a near certainty. And now Eastern coal has shown more volatility.coal has shown more volatility.
29
MUST have scale in key MUST have scale in key marketsmarkets
MUST develop and expand MUST develop and expand our route to marketour route to market
Four imperativesFour imperatives
MUST own a generation MUST own a generation portfolio at a competitive cost portfolio at a competitive cost relative to replacement costrelative to replacement cost
11
MUST be geographically MUST be geographically diversified, in multiple diversified, in multiple marketsmarkets
22
33
44
Highly cyclical, inelastic Highly cyclical, inelastic demand, supply drivendemand, supply driven
Pure commodity, but Pure commodity, but inability to store cause inability to store cause very high volatilityvery high volatility
Assets relatively illiquid Assets relatively illiquid and generally movableand generally movable
Four fundamentalsFour fundamentals
Capital intensive - yes;Capital intensive - yes;Labor intensive - noLabor intensive - no
Keys to Success in Merchant Generation Industry:Keys to Success in Merchant Generation Industry:
30
Relative to the Four ImperativesRelative to the Four Imperatives
Competitive GenerationCompetitive Generation Excellent. $350/kW enterprise value Excellent. $350/kW enterprise value across fleet – 50% discount to across fleet – 50% discount to replacement costreplacement cost
Geographic DiversityGeographic Diversity Excellent. Core – 3 domestic markets Excellent. Core – 3 domestic markets and 2 international marketsand 2 international markets
ScaleScale Better than average. One of the Better than average. One of the bigger generators in the Northeast; bigger generators in the Northeast; but not scale in the true sensebut not scale in the true sense
Route to MarketRoute to Market Average. No retail customers, Average. No retail customers, trading activity slowly expanding trading activity slowly expanding
Relative to the Four ImperativesRelative to the Four Imperatives
Competitive GenerationCompetitive Generation Excellent. $350/kW enterprise value Excellent. $350/kW enterprise value across fleet – 50% discount to across fleet – 50% discount to replacement costreplacement cost
Geographic DiversityGeographic Diversity Excellent. Core – 3 domestic markets Excellent. Core – 3 domestic markets and 2 international marketsand 2 international markets
ScaleScale Better than average. One of the Better than average. One of the bigger generators in the Northeast; bigger generators in the Northeast; but not scale in the true sensebut not scale in the true sense
Route to MarketRoute to Market Average. No retail customers, Average. No retail customers, trading activity slowly expanding trading activity slowly expanding
Assessing NRGAssessing NRGAssessing NRGAssessing NRG
--
31
Hedging – in the FutureHedging – in the Future
Generation which is price competitive on both a SRMC and LRMC basis;
Generation that competitively serves load-shaping requirements through base, intermediate and peaking capacity;
Generation, from various fuels, such that we can offer the retail load providers at least a partial hedge against gas price spikes
Generation which is price competitive on both a SRMC and LRMC basis;
Generation that competitively serves load-shaping requirements through base, intermediate and peaking capacity;
Generation, from various fuels, such that we can offer the retail load providers at least a partial hedge against gas price spikes
What are the elements of a successful strategy to hedge a substantial portion of our generation capacity with retail load providers?
What are the elements of a successful strategy to hedge a substantial portion of our generation capacity with retail load providers?
We must own . . .We must own . . . . . . plus it helps if we have . . .. . . plus it helps if we have . . .
The scale to negotiate as equals
Limited or no competitors with comparable capabilities
The scale to negotiate as equals
Limited or no competitors with comparable capabilities
32
0
10
20
30
40
50
60
70
Art
hur
Kill U
2
Art
hur
Kill U
3
Big
Caju
n I
I U
1,
U2
Big
Caju
n I
I U
3
Dunkirk U
1,U
2
Dunkirk U
3
Dunkirk U
4
El S
egundo U
3
El S
egundo U
4
Encin
a U
1
Encin
a U
2
Encin
a U
3
Encin
a U
4
Encin
a U
5
Huntley U
3
Huntley U
7,U
8
India
n R
iver
U1,U
2
India
n R
iver
U4
Osw
ego U
5
Osw
ego U
6
The redevelopment of brownfield coal sites using clean coal The redevelopment of brownfield coal sites using clean coal technology should be cheaper, quicker and cleanertechnology should be cheaper, quicker and cleaner
Age (years) Equivalent Operating Years
Years Typical life expectancy range of a steam boilerTypical life expectancy range of a steam boilerwith typical maintenance based on equivalent with typical maintenance based on equivalent operating years.operating years.
Our key assets, while not as old as they seem, are agingOur key assets, while not as old as they seem, are aging
Brownfield Development – an Opportunity and a NecessityBrownfield Development – an Opportunity and a Necessity
33
Brownfield sites provide a distinct advantage in siting new Brownfield sites provide a distinct advantage in siting new generation projects due to existing infrastructure and generation projects due to existing infrastructure and transmission access.transmission access.
Repowering Opportunities 2008 and BeyondRepowering Opportunities 2008 and Beyond
ConceptConcept400400810810Middletown Combined CycleMiddletown Combined Cycle
ConceptConcept00659659Norwalk Harbor Combined CycleNorwalk Harbor Combined Cycle
ConceptConcept112112250 - 450250 - 450Somerset RepoweringSomerset Repowering
ConceptConcept182 - 767182 - 767675 - 900675 - 900Indian River RepoweringIndian River Repowering
ConceptConcept700700675675Huntley Repowering Huntley Repowering
ConceptConcept300 - 900300 - 900880880Encina Combined CycleEncina Combined Cycle
ConceptConcept600600675675Dunkirk RepoweringDunkirk Repowering
ConceptConcept
Big Cajun RepoweringBig Cajun Repowering
ConceptConcept300300600600Arthur Kill Combined CycleArthur Kill Combined Cycle
PermittingPermittingNewNew675675Big Cajun Supercritical Coal-FiredBig Cajun Supercritical Coal-Fired
Planning & PermittingPlanning & Permitting350350618618El Segundo Combined Cycle El Segundo Combined Cycle
StatusStatusReplaceReplaced(MW)d(MW)
New CapacityNew Capacity(net MW)(net MW)ProjectProject
What are the What are the ingredients to ingredients to brownfield brownfield success?success?
• Advance Advance planning planning
• Cheaper, Cheaper, quicker, cleaner quicker, cleaner
• Immediate reliefImmediate relief
• Long-term PPALong-term PPA
34
Economies of scale (G&A, operations, procurement)Economies of scale (G&A, operations, procurement)
Average down portfolio LRMC recovery (EV/kW capacity)Average down portfolio LRMC recovery (EV/kW capacity)
Increase market diversityIncrease market diversity
Enhance ability to successfully contract with retail load Enhance ability to successfully contract with retail load providersproviders
Improve optionality in capacity marketsImprove optionality in capacity markets
Secure fuel supply for our plantSecure fuel supply for our plant
Grow earnings and earnings potential (but Grow earnings and earnings potential (but notnot at the expense at the expense of the balance sheet)of the balance sheet)
Why would a company that aggressively acquired its Why would a company that aggressively acquired its way into Chapter 11 consider an active acquisition way into Chapter 11 consider an active acquisition strategy just a few months after emergence?strategy just a few months after emergence?
Acquisitions - Why?Acquisitions - Why?
35
Select Acquisitions – Enhancing our Regional BusinessesSelect Acquisitions – Enhancing our Regional Businesses
MWs MWs
$/MWh
At a time when power plants are selling at a significant At a time when power plants are selling at a significant discount to replacement cost, we may have attractively priced discount to replacement cost, we may have attractively priced opportunities to fill out gaps in our regional line-ups.opportunities to fill out gaps in our regional line-ups.
= Our line-up range= Our line-up range
Upstate New York merit orderUpstate New York merit order Entergy merit orderEntergy merit order
0
20
40
60
80
100
120
0 10,000 20,000 30,000 40,000 50,000
$6.20/MMBtu gas$4.20/MMBtu gas
0
20
40
60
80
100
120
0 500 1,000 1,500 2,000 2,500
$6.20/MMBtu gas$4.20/MMBtu gas
$/MWh
36
NRG: Working Towards a Super-Regional Business ModelNRG: Working Towards a Super-Regional Business Model
We are transitioning NRG from a loose collection of power plants into three coherent regional businesses, each focused on developing as a foundation to their businesses, commercial relationships with the in-market retail load providers
We are transitioning NRG from a loose collection of power plants into three coherent regional businesses, each focused on developing as a foundation to their businesses, commercial relationships with the in-market retail load providers
Locational advantageLocational advantageBase load coal /Base load coal /long term contractslong term contracts
Base load coalBase load coalPrincipal StrengthPrincipal Strength
2% (4% gross)2% (4% gross)5%5%4%4%Market ShareMarket Share
1,321 (2,692 gross)1,321 (2,692 gross)2,4692,4697,8847,884Our MWsOur MWs
Lack of capacityLack of capacitymarketmarket
Shortfall of our Shortfall of our generation relative generation relative to load we serveto load we serve
Reduction inReduction intransmission transmission constraintsconstraints
PrincipalPrincipalVulnerabilityVulnerability
60,00060,00050,00050,000180,000180,000Total MWsTotal MWs
WestWestSouth CentralSouth CentralNortheastNortheastRegionRegion
37
Summary - The New NRGSummary - The New NRG
WestWestCoastCoast
SouthSouthCentralCentral
NortheastNortheast
Extracting Extracting maximum maximum value from value from existing fleetexisting fleet
Reinvestment Reinvestment in repowering in repowering life extension life extension of key assetsof key assets
Selective Selective acquisitions to fill acquisitions to fill
out regional line-upsout regional line-ups
Objective: To create a set of regional businesses with Objective: To create a set of regional businesses with sustainable low (total) cost, fuel diversified asset portfolio sustainable low (total) cost, fuel diversified asset portfolio
competitively positioned to secure their key customerscompetitively positioned to secure their key customers
38
39
Supplemental informationSupplemental information
40
Adjusted EBITDA ReconciliationAdjusted EBITDA ReconciliationThe following table summarizes the calculation of EBITDA and provides a reconciliation to net income/(loss) for the periods indicated:
Reorganized NRG Predecessor NRG
March 31, 2004 March 31, 2003
(Dollars in thousands)
Net Income / (Loss) $ 30,235 $ (12,632)
Plus:
Income Tax Expense 14,208 32,878
Interest expense, excluding amortization of
debt issuance costs and debt discount/
(premium) noted on the following page 78,543 169,345
Depreciation and amortization 58,637 64,071
WCP CDWR contract amortization (included in
equity in earnings of unconsolidated affiliates) 30,968 ----
Amortization of power contracts 16,477 ----
Amortization of emission credits 6,270 ----
Amortization of debt issuance costs
and debt discount/(premium) 23,639 6,732
EBITDA $ 258,977 $ 260,394
Plus:
(Income) on Discontinued Operations,
net of Income taxes (2,391) (161,550)
Corporate relocation charges 1,116 ----
Reorganization charges 6,250 ----
Restructuring and impairment charges ---- 22,136
Write downs and losses on sales of equity
method investments 1,738 16,591
Adjusted EBITDA $ 265,690 $ 137,571
41
Adjusted EBITDA Reconciliation (cont.)Adjusted EBITDA Reconciliation (cont.)
EBITDA, Adjusted EBITDA and adjusted net income are non-GAAP financial measures. These measurements are not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The presentation of Adjusted EBITDA and adjusted net income should not be construed as an inference that NRG’s future results will be unaffected by unusual or non-recurring items.
EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA is presented because NRG considers it an important supplemental measure of its performance and believe debt-holders frequently use EBITDA to analyze operating performance and debt service capacity. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are:
• EBITDA does not reflect cash expenditures, or future requirements for capital expenditures, or contractual commitments;• EBITDA does not reflect changes in, or cash requirements for, working capital needs;• EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or
principal payments, on debts;• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and• Other companies in this industry may calculate EBITDA differently than NRG does, limiting its usefulness as a comparative
measure.
Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to use to invest in the growth of NRG’s business. NRG compensates for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only supplementally. See the statements of cash flow included in the financial statements that are a part of this press release.
Adjusted EBITDA is presented as a further supplemental measure of operating performance. Adjusted EBITDA represents EBITDA adjusted for reorganization, restructuring, impairment and corporate relocation charges, discontinued operations, and write downs and losses on the sales of equity method investments; factors which we do not consider indicative of future operating performance. The reader is encouraged to evaluate each adjustment and the reasons NRG considers it appropriate for supplemental analysis. As an analytical tool, Adjusted EBITDA is subject to all of the limitations applicable to EBITDA. In addition, in evaluating Adjusted EBITDA, the reader should be aware that in the future NRG may incur expenses similar to the adjustments in this presentation.