Creating Shareholder Value

Transcription

1 Creating Shareholder Value Robert Flexon Executive Vice President and Chief Financial Officer Lehman Brothers CEO Energy/Power Conference September 6, 2007

2 Safe 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 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, should, anticipate, forecast, plan, guidance, believe and similar terms. Such forward-looking statements include our acquisition, hedging and repowering strategy, expected benefits and timing of the comprehensive capital allocation plan and Repowering NRG, expected impact of Repowering NRG on the Company s carbon emissions and the projected carbon intensity of NRG s fleet. 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, weather conditions, 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, changes in government regulation of markets and of environmental emissions, the condition of capital markets generally, our ability to access capital markets, unanticipated outages at our generation facilities, adverse results in current and future litigation, failure to identify or successfully implement acquisitions and repowerings, the inability to implement value enhancing improvements to plant operations and companywide processes, our ability to realize value through our hedging strategy, our ability to achieve the expected benefits of the comprehensive capital allocation plan and Repowering NRG, and our ability to realize the impact of Repowering NRG on the Company s carbon emissions and the projected carbon intensity of NRG s fleet. 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 2

3 Company Overview 3 rd Fastest Growing Co. in Fortune 500 Listed: NYSE (NRG) Market Cap.: ~$9 billion Employees: ~3,200 Generating Assets: ~23,000 MW, primarily in four domestic regions NRG: The center of the power industry value chain. NRG: Leading the Competitive Power Generation Business 3

4 Driving Shareholder Value OP Commercial Operations Portfolio Management Improving Returns on Invested Capital (ROIC) Value Creating Investments Capital Management Multiple avenues to drive growth at value 4

5 OP Commercial Ops: Optimizing Portfolio (OP) Gas 5,48 0 MW 51% Hedging Program Oil 3,555 MW 50% Risk Risk and Financial Reporting Structured Transactions Analytics Fundamental & Technical Analysis Economic Dispatch NRG s Portfolio Optimization and Risk Management Cycle Origination Trading Risk Management Tactical (Short Term) Focus: Baseload / Midmerit / Peaking assets Market interface & asset management Fuel supply and logistics Active risk management & trading Maximize value (Capture extrinsic) Strategic (Long Term) Focus: Baseload assets Market view of commodity prices Minimize credit requirements Reduce earnings volatility Commercial operations focuses on capturing full extrinsic value in addition to the intrinsic value of the portfolio 5

6 OP Opportunistically Hedging Baseload in the Medium Term 101% Baseload Power/Fuel Hedge Position 110% 91% 96% 75% 88% 64% 57% 60% 57% 23% 55% Q2 Hedged Energy Open Energy Hedged Fuel 1. Percentage hedges are based on total executed baseload hedges divided by forecasted baseload generation as of 7/12/2007. Forecasted baseload generation are subject to changes from market volatility, commodity prices, supply and demand conditions, planned and forced outage assumptions. 2. Includes financial gas swaps (reflected in equivalent MWh by taking the volume in MMbtu s and divided by the forward market implied heat rate in ERCOT) and gas collar structures which allow downside protection beyond a floor price while preserving market participation in an upside move beyond the capped price. 3. Includes Northeast, South Central and Texas portfolios within the U.S portfolio values reflect balance of year positions only. 5. Hedged fuel represents weighted average of coal and uranium; coal includes Westmoreland Jewett Mine volumes. 6. Percentage fuel hedge position in 2007 includes coal purchased forward for building additional inventory primarily to mitigate operational constrains related to coal delivery. Millions $400 $300 $200 $100 $0 ($100) ($200) ($300) ($400) NRG s gross margin exposure to $1/MMBTU Change in gas price 1,2 $41 ($39) $127 ($123) $218 ($214) $205 ($202) $395 ($395) Based on hedge positions as of 7/12/2007 and current market prices of gas and power and due to the asymmetric nature of some of the instruments used for hedging, the losses from a $1/MMbtu downward move in gas for years 2008 through 2011 will be lower relative to an upward move. 2. Gas sensitivities are derived by converting all the hedge positions and generation positions to net equivalent gas positions using a weighted average market implied heat rate against a $1/Mmbtu move in gas prices. Millions Heat Rate Sensitivity 1,2 Gross margin change from 1 mmbtu/mwh expansion in market heat rate $111 $249 $415 $386 $ Heat rate sensitivities are derived by taking the net of all power hedge positions and generation positions against a 1 MMbtu/MWh move in heat rates multiplied by the existing gas prices for each year. 2. The above sensitivities exclude impact from non baseload assets, which have a potential to add value as gas prices increase and as heat rates rise. Hedging targets to minimize earnings and cash flow volatility resulting from 6

7 OP Opportunistic Hedging ERCOT 7X24 Heat Rate Forward Gas and PRB Price Curves 11/1/2006 4/20/2007 9/4/ $/mmbtu /1/ /20/2007 9/4/2007 MMBtu/MWh /20/ Source: NYMEX Henry Hub and OTC PJM West Hub 5x16 Heat Rate 10.0 E 10/18/ NRG's Cedar Bayou Break Even Greenfield CCGT Break Even 1, Liquidation-Heatrates Market Heat Rates Source: NYMEX Henry Hub, OTC and NRG estimates Source: PJMISO, Henry Hub Gas Index and NRG estimates as of 8/31/ annual average heat rate reflects actual through 8/07 and balance of year forward. 1 Breakeven implies levelized gross margin (net of variable O&M) necessary over 30 years to recover capital investment and O&M cost at a 9% (unlevered) cost of capital. Estimate gross margin (net of VOM) requirement of $90/kw (in 2007 $) necessary for Greenfield CCGT breakeven (assuming capital cost of $725/kw). 2 Annual heat rate is transformed into hourly heat rate curve using NRG fundamental hourly curve estimates. Assumes annual peak heat rate (5x16) is 117% of the annual 7x24 heat rate and the annual off-peak heat rate (2x16 and 7x8) is 85% of 7x24 heat rate. gas prices and fuel components while capturing heat rate upside from tightening reserve margins in our core Northeast and Texas regions 7

8 OP Heat Rate Optionality Extends to Oil/Gas Fleet PJM Frequency of High Heat Rate Hours (MMBTU / MWH) ERCOT Frequency of High Heat Rate Hours (MMBTU / MWH) Year >8 >10 >15 Year >8 >10 > , , , ,182 1, , ,296 1, , Source: Transco Z6 NY Gas Index and NRG estimates; not weather normalized ,432 1, Source: HSC Gas Index and NRG estimates; not weather normalized Region ERCOT NEPOOL PJM NYC Tightening Reserve Margins Source: ISO estimates % 13.3% 21.8% (12.5%) % 5.2% 19.1% (24.2%) Northeast 37% (3% PJM, 60% NY and 37% NEPOOL) Gas/Oil Fleet: ~13,900 MW Central 10% Heat rate expansion due to tightening reserve margins expected to drive increased capacity utilization of our oil/gas fleet Gas/ Oil Gas Gas West 14% Gas Texas 39% Texas example: every ½ heat rate move means 1.5% to 2% improvement in gas fleet capacity factor 8

9 FORNRG: Focus on Return on Invested Capital (ROIC) Culture: Employees are engaged corporate-wide to focus on projects that drive bottom line results $250 FORNRG EBITDA ($mm) $235 $250 $200 $200 $150 $144 $100 $50 $35 1 $ A 2006A 2007E 2008E 2009E 1 Recurring Headquarters Operations Procurement Low Risk, low capital investments in existing fleet provide big returns in high gas, high heat rate environment 9

10 Example of Operational Improvement MWh LOST Due to Boiler Tube Failures 4,200 3,780 3,360 2,940 2,520 4,048 3,504 2,902 ~28% improvement in available MWh 2,100 1,680 1,954 1, JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Since 2004, low capital reinvestment in existing plants resulted in increased MWh available for commercial dispatch driving significant EBITDA value 10

11 Plant Operations, Corporate and Procurement Drive Solid Results 1. EFOR Reduction Comprehensive Boiler Tube Failure Reduction program is a key driver of the 23% reduction in NRG Classic coal EFOR from full year 2005 to 2Q YTD 2007 (from 8.1% to 6.2%)* 2. Capacity Recovery 3. Heat rate Plant Operations Air in Leakage repairs and unit optimization led to a 78MW recovery over the last two years Largely driven by 2007 Spring Outage work, Heat rates for the Classic Coal plants have improved 0.9% since Dec 2006 * Excluding Indian River 4, 2Q YTD EFOR was 5.0% Corporate 1. Dramatic reduction in insurance premium 2. Efficient cash management 3. More efficient property and income tax planning 1. Multi-year $1 billion maintenance and outage agreement with Fluor New corporate and procurement projects offer future year potential FORNRG upside (as of yet unquantified) Enhances and accelerates operating cost achievements of the FORNRG initiatives across fleet 2. Fleet-wide sourcing initiatives (e.g. ash handling, chemicals & gases, etc.) 3. Rationalizing number of suppliers Procurement Resulting in lower costs and improved services 11

12 First Mover Advantage to Value Creating Investments % Contribution by Technology 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% # of Projects MW MWh Invested Capital Avoided CO 2 Nuclear Clean Coal Wind Gas Coal A Comprehensive Development Program that Meets the Growing Energy Needs of our Domestic Markets 12

13 Projects Online and In Construction Long Beach Cedar Bayou Cos Cob Location Long Beach, CA Houston, TX Greenwich, CT Fuel Natural Gas Natural Gas Natural Gas & Jet Fuel MW COD August 1, 2007 Summer 2009 Summer 2008 Offtaker SCE Merchant Merchant Net Ownership 100% 50% 100% T. Capital Cost $289/KW ~$710/KW ~$450/KW T. NRG Net Cash Investment $75 million ~$105 million ~$18 million Credibility on Future Fast Tracks; Capability on Future Repowerings 13

14 Projects in Advanced Development Padoma Big Cajun 1 STP 3&4 Location Texas and California New Roads, LA Bay City, TX Fuel Wind Petcoke, Coal, Biomass Nuclear MW ~440 ~230 ~2,700 COD Spring Offtaker Long-term/Merchant Various Long-term Various Long-term Net Ownership ~50-100% ~50% 44% Repowering sites are cost advantaged due to existing infrastructure, sharing of common facilities and refurbishment of current equipment and material 14

15 Active Bids in Response to RFOs Encina 1 El Segundo Competitive Advantages: Location Carlsbad, CA El Segundo, CA Site control Fuel MW COD Natural Gas ~525 Summer 2010 Natural Gas ~525 Summer 2011 Transmission, gas pipeline and air emission credits in place Approval of El Segundo permit expected 1Q08 Offtaker Long-term Long-term Net Ownership TBD TBD 1 Gross of potential retirement of 315 MW Final project scope and timing of awards anticipated between fourth quarter 2007 and first quarter

16 Projects In Early Development Stage Plasma IGCC NEPOOL Gas NY Gas Location Somerset, MA Huntley, NY Various Astoria Fuel Gasified Coal/Biomass Coal Natural Gas Natural Gas MW ~130 ~755 ~1,240 ~500 COD Offtaker TBD NYPA Various Long-term / Merchant NYPA Net Ownership 100% 50% TBD TBD Projects largely dependent on timing and progress with offtakers 16

17 Capital Allocation Objectives Target BB Credit Profile Net debt to total capital FFO to debt Leverage Capital Project investments generating returns in excess of Weighted Average Cost of Capital (WACC) Return of capital to shareholders Targeting a balanced and disciplined approach to capital allocation that supports solid merchant business model 17

18 Capital Allocation Past and Future Capital Allocation Pay Down Debt Accomplished $400M pay down of senior secured debt in 4Q 2006 $273M cash used to offset additional debt financing for hedge reset $1.4B of non-recourse debt removed via non-core asset sales Planned Mandatory paydown Continue targeted debt reduction Return to Equity Holders $1.66B, or 75.3 million common shares, repurchased from 2004 to 2007 at $22.09 per share $0.50 per share dividend starting in Q Continue stock repurchase programs 1 Contingent on the completion of Holdco Reinvestment/ Repowering NRG $446M in maintenance capex 2004 to 2006 $75M for Long Beach refurbishment $1.0 - $1.5B in environmental capex Developing Repowering opportunities For 2008, if common share dividend is delayed, then share repurchases will be increased 18

19 Strong Cash Flow From Operations Anticipated Allocation of 2007 CFFO Total ~ $1.4 billion Anticipated Allocation of CFFO Total ~ $10 billion Dividends & Buybacks Buybacks ~30% Uncommitted and Available Pay down Debt 20% Uncommitted and Available Pay down Debt Environmental & Major Maintenance Capex Environmental & Major Maintenance Capex NRG s free cash flow profile continues to be one of the best in the power sector and supports balanced capital allocation approach and objectives 19

20 Delivering Value to Stakeholders Creating Shareholder Value Existing Fleet Operational excellence Active commercial management Improved market design Multi-region, multifuel, multi-dispatch Carbon friendly Responsive to customer needs Carbon Policy Shape policy Manage price risk Advance new technology A coordinated plan to provide for the present while preparing for the future 20

21 Questions and Answers

22 Appendix:

23 CAPEX Q1+Q2 & Forecast for 2007 In millions Maintenance Environmental Repowering NRG Total Q1+Q2 Northeast $ 17 $ 19 $ 1 $ 36 Texas South Central West Int'l/Padoma/Thermal $ 109 $ 19 $ 78 $ Guidance Northeast Texas South Central West Int'l/Padoma/Thermal $ 230 $ 120 $ 280 $ 630 Repowering spending for the first half of 2007 includes: Long Beach ($65M), Padoma Wind ($9M), Cedar Bayou ($3M), Cos Cob ($0.6M) 2007 Environmental CAPEX is primarily for bag houses at Dunkirk and Huntley and scrubbers at Indian River and Big Cajun II Guidance Repowering CAPEX of $280M includes: Padoma Wind ($177M), Long Beach ($75M), Cedar Bayou ($16M), Cos Cob ($6M), and STP ($4M) 23

24 Marginal Cost ($/MWh) $140 $120 $100 $80 $60 $20 Cedar Bayou: Significant Competitive Advantages $40 WA Parish 7 WA Parish 8 NRG Units on ERCOT Houston Zone Supply Curve Cedar Bayou marginal cost Current Average Load Average load in Cal 11* Cedar Bayou 1 TH Wharton CC & PH Robinson 2 WA Parish 5 WA Parish 6 $0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 * Assuming 2% annual load growth Source: Energy Velocity Cumulative Capacity (MWs) WA Parish 4 Current Max Load in Max Load Cal'11* WA Parish 1,2 WA Parish 3 & Cedar Bayou 2 & SR Bertron Greens Bayou TH Wharton CTs San Jacinto Low marginal cost Lower total cost than any other new entrant Monetize site values Advantages: Capitalize on existing interconnections and work force Deploy stranded equipment Share effort with aligned partner 24

25 Forecast Non-Cash Contract Amortization Schedules: ($ mm) 2007E E Increase Revenue Revenues Power contracts/gas swaps 1 Fuel Expense Fuel out-of market contracts 3 Fuel in-the market contracts 4 Emission Allowances (NOX & SO2) Q1A 52 Q1A Q2A 66 Q2A Q3E 65 Q3E Q4E 57 Q4E Year 240 Year Q1 74 Q Q2 85 Q Q3 83 Q Q4 48 Q Year 290 Year Reduce Cost Increase Cost Increase Cost Total Net Expense ($ mm) 2009E 2010E Increase Revenue Revenues Power contracts/gas swaps 1 Q1 37 Q2 27 Q3 27 Q4 22 Year 113 Q1 21 Q2 11 Q3 11 Q4 12 Year 55 Fuel Expense Fuel out-of market contracts 3 Fuel in-the market contracts 4 Q1A 5 5 Q2A 5 8 Q3E 5 5 Q4E 4 8 Year Q1 3 1 Q2 2 1 Q3 2 0 Q4 1 4 Year 8 6 Reduce Cost Increase Cost Emission Allowances (NOX & SO2) Increase Cost Total Net Expense Amortization of power contracts occurs in the revenue line. 2 Variance in 2007 between this slide and 10K are due primarily to actual results for the Q1 and Q vs. the full year forecast in the 10K. 2 Amortization of fuel contracts occurs in the fuel cost line; includes coal. 3 Amortization of fuel contracts occurs in the fuel cost line; includes coal, nuclear, gas and water. Note: Detailed discussion of these above reference in the money and out of the money contracts can be found in NRG K pages 154 and

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